1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _________ to __________
Commission File Number 0-15580
St. Paul Bancorp, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3504665
- -------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6700 W. North Avenue
Chicago, Illinois 60707
- --------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
(773) 622-5000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value - 40,110,245 shares, as of July 30, 1999
- ---------------------------------------------------------------------
1
2
ST. PAUL BANCORP, INC.
AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
as of June 30, 1999 and December 31, 1998....................3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1999 and 1998..........................4
Consolidated Statements of Stockholders' Equity for the
Six Months Ended June 30, 1999 and 1998......................5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998......................6
Notes to Consolidated Financial Statements...................7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................13
PART II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders.........42
Item 6 Exhibits and Reports on Form 8-K............................42
Signature Page..............................................43
Exhibits....................................................44
2
3
- --------------------------------------------------------------------------------------------------------
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
June 30, Dec. 31,
Dollars in thousands 1999 1998
- --------------------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents
Cash and amounts due from depository institutions $ 136,826 $ 128,958
Federal funds sold and interest-bearing bank balances 6,483 83,300
Short-term cash equivalent securities 99,306 227,062
------------ -----------
Total cash and cash equivalents 242,615 439,320
Trading account assets 18,983 -
Investment securities
(Market: June 30, 1999-$196,736; Dec. 31, 1998-$214,227) 196,646 213,882
Mortgage-backed securities
(Market: June 30, 1999-$655,391; Dec. 31, 1998-$525,774) 654,616 522,423
Securities due from brokers
(Market: June 30, 1999-$198,240; Dec. 31, 1999-$79,679) 198,240 79,679
Loans receivable (Net of allowance for loan losses:
June 30, 1999-$39,697; Dec. 31, 1998-$40,423) 4,455,779 4,477,581
Loans held for sale, at lower of cost or market
(Market: June 30, 1999-$41,901; Dec. 31, 1998-$66,241) 41,411 65,354
Accrued interest receivable 33,970 35,048
Foreclosed real estate (Net of allowance for losses:
June 30, 1999-$155; Dec. 31, 1998-$155) 974 1,942
Real estate held for development or investment 5,452 12,552
Investment in Federal Home Loan Bank stock 70,304 66,304
Office properties and equipment 73,018 75,020
Prepaid expenses and other assets 40,769 45,011
------------ -----------
Total Assets $ 6,032,777 $ 6,034,116
============ ===========
LIABILITIES:
Deposits $ 3,757,789 $ 3,894,971
Short-term borrowings 651,234 395,318
Long-term borrowings 1,025,896 1,125,361
Advance payments by borrowers for taxes and insurance 15,014 14,484
Other liabilities 80,309 94,058
------------ -----------
Total Liabilities 5,530,242 5,524,192
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock (par value $.01 per share: authorized-10,000,000
shares; none issued) - -
Common stock (par value $.01 per share: Authorized: 80,000,000 shares;
Issued: June 30, 1999-41,588,589 shares;
Dec. 31, 1998-41,592,023 shares;
Outstanding: June 30, 1999-40,019,551 shares; 416 416
Dec. 31, 1998-40,724,824 shares)
Paid-in capital 158,387 158,764
Retained income, substantially restricted 378,623 363,931
Accumulated other comprehensive income:
Unrealized gain (loss) on securities net of taxes ($1,126 at
June 30, 1999 and $1,234 at Dec. 31, 1998) (1,887) 2,138
Treasury stock (June 30, 1999-1,569,038 shares; (33,004) (15,325)
Dec. 31, 1998-867,199 shares)
------------ -----------
Total stockholders' equity 502,535 509,924
------------ -----------
Total Liabilities and Stockholders' Equity $ 6,032,777 $ 6,034,116
============ ===========
See notes to consolidated financial statements.
3
4
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
Dollars in thousands except per share amounts 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 78,924 $ 70,355 $ 158,839 $ 138,121
Mortgage-backed securities 10,112 13,021 20,350 28,190
Taxable investment securities 3,863 4,556 8,061 10,941
Nontaxable investment securities 518 514 1,059 911
Equity investment securities 1,430 942 2,765 1,840
----------- ---------- ---------- ----------
Total interest income 94,847 89,388 191,074 180,003
INTEREST EXPENSE:
Deposits 33,117 38,001 68,064 76,510
Short-term borrowings 4,868 4,115 9,475 7,756
Long-term borrowings 15,179 7,955 30,252 17,188
----------- ---------- ---------- ----------
Total interest expense 53,164 50,071 107,791 101,454
----------- ---------- ---------- ----------
Net interest income 41,683 39,317 83,283 78,549
Reversal of provision for loan losses - (320) - (640)
----------- ---------- ---------- ----------
Net interest income after provision for loan losses 41,683 39,637 83,283 79,179
OTHER INCOME:
Loan servicing fees 116 27 217 206
Other fee income 5,198 5,886 10,054 11,330
ATM operations 3,493 3,295 6,485 6,148
Net gain on loan sales 356 1,495 695 2,742
Net gain/(loss) on securities (351) 103 (351) 149
Discount brokerage commissions 2,059 2,119 3,884 3,814
Income from real estate operations 2,364 614 3,638 1,923
Insurance and annuity commissions 634 712 1,449 1,376
Trust revenues 583 586 1,193 1,199
----------- ---------- ---------- ----------
Total other income 14,452 14,837 27,264 28,887
GENERAL AND ADMINISTRATIVE EXPENSE:
Salaries and employee benefits 15,843 18,424 32,093 36,792
Occupancy, equipment and other office expense 11,675 11,095 22,725 20,944
Advertising 1,857 1,958 3,585 3,662
Federal deposit insurance 704 726 1,423 1,452
Other 2,842 2,857 5,702 5,538
----------- ---------- ---------- ----------
General and administrative expense 32,921 35,060 65,528 68,388
Loss on foreclosed real estate (60) (43) (176) (79)
----------- ---------- ---------- ----------
Income before income taxes 23,154 19,371 44,843 39,609
Income tax expense 7,279 6,002 14,157 12,393
----------- ---------- ---------- ----------
NET INCOME $ 15,875 $ 13,369 $ 30,686 $ 27,216
=========== ========== ========== ==========
NET INCOME PER SHARE:
Basic $ 0.40 $ 0.33 $ 0.76 $ 0.68
Diluted 0.39 0.32 0.74 0.65
=========== ========== ========== ==========
DIVIDENDS PER SHARE $ 0.20 $ 0.10 $ 0.40 $ 0.20
=========== ========== ========== ==========
See notes to consolidated financial statements.
4
5
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
Borrowings Unearned
By Employee
Accumulated Employee Stock Total
Common Stock Other Stock Option Stock-
------------------- Paid-in Retained Comprehsive Option Plan Treasury holders'
Shares Amount Capital Income Income Plan Shares Stock Equity
------------------------------------------------------------------------------------------------------------
Dec. 31, 1997 40,337,423 $415 $152,353 $354,797 $ 2,680 $(221) $(2,858) $(20,835) $486,331
Comprehensive Income:
Net Income - - - 27,216 - - - - 27,216
Change in
unrealized gain/
(loss) on
securities (net of
tax of $610) - - - - 1,612 - - - 1,612
--------
Comprehensive Income 28,828
Issuance of common
stock 164,085 - 3,208 - - - - 2,027 5,235
Cash Dividends ($0.20
per share) - - - (7,517) - - - - (7,517)
Repayment of ESOP
Principal - - - - - 100 - - 100
Treasury Stock
Purchases - - - - - - - - -
------------------------------------------------------------------------------------------------------------
June 30, 1998 40,501,508 $415 $155,561 $374,496 $ 4,292 $(121) $(2,858) $(18,808) $512,977
============================================================================================================
Dec. 31, 1998 40,724,824 $416 $158,764 $363,931 $ 2,138 $ - $ - $(15,325) $509,924
Comprehensive Income:
Net Income - - - 30,686 - - - - 30,686
Change in unrealized
gain/ (loss) on
securities (net of
tax of $1,523) - - - - (4,025) - - - (4,025)
--------
Comprehensive Income 26,661
Issuance of common
stock 396,285 - (330) - - - - 6,898 6,568
Cash Dividends ($0.40
per share) - - - (15,994) - - - - (15,994)
Treasury Stock
Purchases (1,032,000) - - - - - - (22,688) (22,688)
Treasury Stock Held
in Employee Benefit
Plans (69,558) (47) (1,889) (1,936)
------------------------------------------------------------------------------------------------------------
June 30, 1999 40,019,551 $416 $158,387 $378,623 $ (1,887) $ - $ - $(33,004) $502,535
============================================================================================================
See notes to consolidated financial statements
5
6
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30
Dollars in thousands 1999 1998
- ---------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 30,686 $ 27,216
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Reversal of provision for loan losses - (640)
Provision for depreciation 5,299 5,230
Decrease (increase) in assets held for sale 23,943 (37,003)
Decrease (increase) in accrued interest receivable 1,078 (346)
Decrease (increase) in prepaid expenses and other assets 4,242 (1,002)
(Decrease) increase in other liabilities (13,749) 2,546
Net amortization of yield adjustments 4,300 (1,813)
Increase in trading account assets (18,983) -
Other items, net 61 1,746
- ---------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 36,877 (4,066)
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase in loans receivable 16,979 23,853
Principal repayments on available for sale mortgage-
backed securities 82,784 122,256
Principal repayments on held to maturity mortgage-
backed securities 73,468 88,405
Purchase of available for sale mortgage backed securities (210,000) (19,650)
Sale of available for sale mortgage backed securities - 9,470
Maturities of available for sale investment securities 79,854 36,518
Maturities of held to maturity investment securities 230 180
Purchase of available for sale investment securities (277,849) (117,135)
Purchase of held to maturity investment securities (725) -
Sale of available for sale investment securities 11,687 500
Additions to real estate (1,141) (2,314)
Real estate sold 10,893 4,189
Purchase of Federal Home Loan Bank stock (4,000) (1,932)
Additions to office properties and equipment (3,355) (10,747)
Sale of office properties and equipment 58 1
- ---------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (221,117) 133,594
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
(Decrease) increase in deposits (137,182) 10,790
New long-term borrowings 205,000 275,000
Repayment of long-term borrowings (154,615) -
Increase (decrease) in short-term borrowings, net 105,916 (270,000)
Dividends paid to stockholders (15,994) (7,517)
Net proceeds from issuance of common stock 6,568 5,235
Purchase of treasury stock (22,688) -
Increase in advance payments by borrowers
for taxes and insurance 530 258
- ---------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (12,465) 13,766
- ---------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (196,705) 143,294
Cash and cash equivalents at beginning of period 439,320 238,133
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 242,615 $ 381,427
===============================================================================================================
See notes to consolidated financial statements.
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid on deposits $ 73,538 $ 76,775
Interest paid on borrowings 40,333 26,173
Income taxes paid, net 13,441 1,504
Real estate acquired through foreclosure 2,023 1,275
Loans originated in connection with real estate
acquired through foreclosure - -
6
7
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements have been prepared
according to generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of Management, all necessary adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation have been
included. The results of operations for the three- and six-month periods ended
June 30, 1999 are not necessarily indicative of the results expected for the
entire fiscal year.
2. The accompanying consolidated financial statements include the accounts
of St. Paul Bancorp, Inc. (the "Company" or "St. Paul Bancorp") and its
wholly-owned subsidiaries, St. Paul Federal Bank For Savings (the "Bank"),
Annuity Network, Inc., St. Paul Financial Development Corporation and St.
Paul Trust Company. The financial statements of the Bank include the
accounts of its subsidiaries.
On July 1, 1998, the Company completed a merger with Beverly Bancorporation,
Inc. that was accounted for as a pooling-of-interests. As a result, all
financial statements and analyses have been restated on a historical basis. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS - GENERAL" for further details. The
following table shows condensed statements of operations for the separate
companies for the three- and six-month periods ended June 30, 1998. The merger
was completed on July 1, 1998.
For three months ended For six months ended
June 30, 1998 June 30, 1998
------------- -------------
Beverly St. Paul Combined Beverly St. Paul Combined
---------------------------- ------------------------------
Interest income $11,850 $77,538 $89,388 $23,554 $156,449 $180,003
Interest expense 5,454 44,617 50,071 10,917 90,537 101,454
---------------------------- ------------------------------
Net interest income 6,396 32,921 39,317 12,637 65,912 78,549
Provision (reversal) for
loan losses 180 (500) (320) 360 (1,000) (640)
---------------------------- -------------------------------
Net interest income after
provision for loan losses 6,216 33,421 39,637 12,277 66,912 79,189
Other operating income 2,800 12,037 14,837 5,294 23,593 28,887
Other operating expense 7,853 27,207 35,060 13,928 54,460 68,388
Gain (loss) from foreclosed
real estate 7 (50) (43) 5 (84) (79)
---------------------------- ------------------------------
Net operating income 1,170 18,201 19,371 3,648 35,961 39,609
Income taxes 317 5,685 6,002 1,086 11,307 12,393
---------------------------- -------------------------------
Net income $ 853 $12,516 $13,369 $ 2,562 $ 24,654 $ 27,216
============================ ===============================
3. At June 30, 1999, the Company had the following outstanding commitments to
originate loans (dollars in thousands):
1-4 Family Mortgage Loans $103,010
Commercial and Commercial Real Estate Loans 37,149
Consumer Loans 12,410
Unused Lines of Credit 134,450
7
8
The Company anticipates funding these origination commitments with cash flows
from operations and incremental borrowings as necessary.
The Company had forward contracts at June 30, 1999, to sell $35.7 million of 1-4
family mortgage loans. The consolidated financial statements contain market
value losses, if any, related to these contracts.
At June 30, 1999, the Company has outstanding $7.6 million of standby letters of
credit on behalf of St. Paul Financial Development Corporation and other
commercial customers to various counties and villages as a performance guarantee
for land development and improvements.
4. The following table sets forth the computation for basic and diluted earnings
per share for the three and six months ended June 30, 1999 and 1998 (Dollars in
thousands, except per shares):
Three months ended Six months ended
----------------------------------------------------
1999 1998 1999 1998
----------------------------------------------------
Net Income $15,875 $13,369 $30,686 $27,216
======================================================================================
Denominator for basic
earnings per share-
weighted average shares 39,968,895 40,122,460 40,188,897 40,086,898
Effect of diluted securities:
Stock options issued to
employees and directors 1,131,573 1,388,608 1,091,706 1,735,232
- --------------------------------------------------------------------------------------
Denominator for diluted
earnings per share-
adjusted weighted
average shares and
assumed conversions 41,100,468 41,511,068 41,280,603 41,822,130
======================================================================================
Net Income per share:
Basic $ 0.40 $ 0.33 $ 0.76 $ 0.68
======================================================================================
Diluted $ 0.39 $ 0.32 $ 0.74 $ 0.65
======================================================================================
5. The following table presents comprehensive income from the three month and
six month periods ending June 30, 1999 and 1998.
Three Months Ended Six Months Ended
---------------------------- -------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---------------------------- -------------------------------
Net income $15,875 $13,369 $30,686 $27,216
Other comprehensive income (3,556) 1,932 (4,025) 1,612
---------------------------- -------------------------------
Total comprehensive income $12,319 $15,301 $26,661 $28,828
============================ ===============================
8
9
6. 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 does not
impact the primary financial statements.
The Company operates many different businesses in the financial
services sector. For Segment Reporting, the Company has organized these
businesses into four distinct segments.
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 Company ).
COMMERCIAL AND MULTIFAMILY LENDING This segment is comprised of the multifamily,
commercial real estate, and business lending portfolios and related activities
of the Bank, activities of the real estate development company (St. Paul
Financial Development), and investments in low-income housing with tax credits
(Community Finance Corp.).
COMMUNITY LENDING This segment includes the company originated 1-4 family loan
portfolio including MBS swaps and gains on sales, all consumer loan activities,
loan originations and gains on sales from mortgage brokerage (Serve Corps
Mortgage Corp.), and loan servicing for these portfolio loans and loans sold
with servicing retained.
MONEY MANAGEMENT This segment is comprised of the wholesale acquisitions of 1-4
family mortgage portfolios, investment portfolios, wholesale financing
activities, internal funds transfer pricing allocations, holding company
activities and tax management.
9
10
FINANCIAL RESULTS: FOR THREE MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------
Dollars in Thousands
Consumer Commercial/ Consolidated
Financial Multifamily Community Money Financial
Services Lending Lending Mgmt. Elim. Statements
-------- ------- ------- ----- ----- ----------
Interest
Income $ 58,529 $ 21,904 $ 27,749 $ 72,157 $ (85,492) $ 94,847
Interest
Expense 35,520 15,715 22,301 65,119 (85,492) 53,164
---------- ---------- ---------- ---------- ----------- ----------
NII 23,009 6,189 5,448 7,038 0 41,683
Provisions 0 0 0 0 0 0
NII After
Provisions 23,009 6,189 5,448 7,038 0 41,683
Other Income 11,976 2,189 431 (143) 0 14,452
Other Expense 25,596 2,006 5,001 318 0 32,921
---------- ---------- ---------- ---------- ----------- ----------
Net Operating
Income 9,389 6,372 877 6,577 0 23,214
REO 0 8 52 0 0 60
Net Income
Before Tax 9,389 6,365 824 6,577 0 23,154
Income Taxes 3,773 2,350 328 828 0 7,279
---------- ---------- ---------- ---------- ----------- ----------
Net Income 5,615 4,014 497 5,749 0 15,875
========== ========== ========== ========== =========== ==========
ACTUAL
ASSETS $4,246,416 $1,208,847 $1,629,616 $4,699,295 $(5,751,397) $6,032,777
========== ========== ========== ========== =========== ==========
10
11
FINANCIAL RESULTS: FOR THREE MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------
Dollars in Thousands
Consumer Commercial/ Consolidated
Financial Multifamily Community Money Financial
Services Lending Lending Mgmt. Elim. Statements
-------- ------- ------- ----- ----- ----------
Interest
Income $ 60,732 $ 25,033 $ 29,706 $ 53,083 $ (79,166) $ 89,388
Interest
Expense 40,423 17,399 23,701 47,714 (79,166) 50,071
---------- ---------- ---------- ---------- ----------- ----------
NII 20,309 7,634 6,005 5,369 0 39,317
Provisions 0 (300) 40 ( 59) 0 (320)
NII After
Provisions 20,309 7,934 5,965 5,429 0 39,637
Other Income 12,492 313 1,714 318 0 14,837
Other Expense 25,625 2,272 5,643 1,520 0 35,060
---------- ---------- ---------- ---------- ----------- ----------
Net Operating
Income 7,177 5,975 2,036 4,226 0 19,414
REO 0 43 0 0 0 43
Net Income
Before Tax 7,177 5,932 2,036 4,226 0 19,371
Income Taxes 2,899 2,262 848 (7) 0 6,002
---------- ---------- ---------- ---------- ----------- ----------
Net Income 4,278 3,670 1,188 4,233 0 13,369
========== ========== ========== ========== =========== ==========
ACTUAL
ASSETS $4,180,313 $1,248,620 $1,620,793 $3,208,533 $(4,987,190) $5,271,069
========== ========== ========== ========== =========== ==========
In the segment reporting process, balance sheets are created for each segment,
allocating assets, liabilities and equity based on the business lines contained
in the segment. The development of the balance sheets for each segment also
includes the effects of allocations of capital using a risk-adjusted method, and
the balances allocated from a central funding center in connection with internal
transfer pricing. The "eliminations" category adjusts for the consolidated
effects of the internal allocations.
An Internal ("transfer") pricing mechanism is used to value financial assets and
liabilites for each segment. Market yield curves are used to assign rates to
various balance sheet items which 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.
The $2.7 million increase in the Consumer Financial Services segment's net
11
12
interest income was due to an expansion in the segment's spread. The decline
in the average cost of funds was substantially larger than the decline in
the average internal funding rate. The Company uses the Federal Home Loan
Bank yield curve for internal transfer pricing; this curve generally follows
the treasury yield curve movements.
The $1.7 million increase in net interest income for the Money Management
segment was due to the leveraging of the segment's borrowings to purchase whole
loans. Average interest earning asset balances increased $661 million, while
average interest bearing liabilities increased $625 million. The segment was
able to replace higher cost FHLB advances with lower cost advances, resulting in
a 37 basis point decline in the average cost of funds, while the average yield
on interest earning assets experienced only a slight decline.
The Second Quarter 1998 results for Beverly Bancorp are included in the segment
report.
7. 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. SFAS NO. 137 "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133", deferred the effective date for this Statement to fiscal
years beginning after June 15, 2000. SFAS No. 133 provides a standard for the
recognition and measurement of derivatives and hedging activities. Because of
the Company's minimal use of derivatives, Management does not anticipate that
this new Statement will have significant impact on earnings or the financial
position of the Company. However, the Statement is complex and defines
derivatives broadly and will require an extensive accounting analysis to
determine if the Bank's instruments and contracts are subject to the Standard.
8. In 1999, the Company adopted SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Entity - An amendment of FASB No. 65." This Statement
requires that after the securitization of mortgage loans, an entity classify the
resulting mortgage-backed securities or other retained interest based on its
ability and intent to sell or hold those securities in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities"(i.e.,
trading, available for sale, or held to maturity). This Statement does not have
a material impact on the Bank's existing operations.
9. In January 1999, the Company adopted Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The SOP provides guidance on accounting for the costs related to
developing, obtaining, modifying and/or implementing internal use software. The
implementation of this SOP should not have a material impact on the Company.
12
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
GENERAL
- -------
St. Paul Bancorp, Inc. (the "Company") is the holding company for St.
Paul Federal Bank For Savings (the "Bank"), the largest independent savings
institution in the State of Illinois. At June 30, 1999, the Company had $6.0
billion in total assets.
On May 17, 1999, the Company agreed to merge with Charter One
Financial, Inc.("Charter One"), the holding company of Charter One Bank, F.S.B.
The merger, which would be accounted for as a pooling of interests, is expected
to close early in the fourth quarter of 1999, subject to the approval of the
Office of Thrift Supervision, the Federal Reserve Board, the State of Illinois
and both companies' shareholders. Under terms of the agreement, shareholders of
the Company would receive 0.945 of a share of Charter One common stock for each
share of Company stock. The exchange ratio will be adjusted to 0.99225 of a
share following Charter One's 5 percent stock dividend to be paid to
shareholders on September 30, 1999.
Charter One has approximately $25 billion in assets, making it the 32nd
largest bank holding company in the country. Charter One Bank, F.S.B. has 340
branch locations in Ohio, Michigan, New York, Massachusetts and Vermont.
Additionally, Charter One Mortgage Corp., the Charter One's mortgage banking
subsidiary, operates 40 loan production offices across 14 states, and Charter
One Auto Finance, Charter One's indirect auto financing subsidiary, generates
loans in nine states. The combined Charter One/St. Paul entity will have
approximately 400 banking locations, 900 automated teller machines ("ATMs") and
nearly 7,000 employees serving 1.4 million households in several states. The
combined company will have over $30 billion in total assets and approximately
$19 billion in deposits.
On July 1, 1998, the Company merged with Beverly Bancorporation, Inc.
("Beverly"), the bank holding company of Beverly National Bank. Beverly National
Bank, with total assets of $705 million at June 30, 1998, operated 12 branches
primarily in the south and southwestern suburbs of Chicago. The Company issued
1.063 shares of its common stock in exchange for each outstanding common share
of Beverly. The merger was accounted for as a pooling-of-interests transaction.
13
14
Accordingly, the Company has restated all financial information and analyses to
incorporate Beverly's results on a historical basis.
At June 30, 1999, the Bank's branch network consisted of 60 locations,
including freestanding branches, banking offices located in grocery supermarkets
and two "Money Connection Centers."(1) The Bank closed four of its in-store
banking offices in 1999 when the grocery stores in which they are located also
closed. The Bank combined the operations of these locations with nearby
branches. The Bank also operates one of the largest networks of ATMs in the
Chicagoland area with approximately 550 machines. This network includes
approximately 250 ATMs located in White Hen Pantry convenience stores and
additional ATMs in grocery stores, gas stations, and other convenience stores.
Both the Company and the Bank operated other wholly owned financial
services companies in 1999, including Investment Network, Inc., Annuity Network,
Inc., SPF Insurance Agency, Inc., St. Paul Financial Development Corporation
("SPFD"), Serve Corps Mortgage Corporation ("Serve Corps"), ATM Connection,
Inc., and St. Paul Trust Company. At June 30, 1999, customers maintained $745
million of investments through Investment Network, Inc. and $348 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 June 30, 1999, SPFD had $16.4 million in real estate equity and financing
investments. Serve Corps originates 1-4 family residential mortgages primarily
for sale, with servicing released, to third party investors. The Bank purchases
loans for its portfolio from Serve Corps. During 1999, Serve Corps originated
$193 million of 1-4 family loans, including $132 million of loans originated for
the Bank's portfolio. ATM Connection, Inc. owns and operates the ATM network of
the Bank. St. Paul Trust Company provides a variety of trust and fund management
services to customers and at June 30, 1999 had $340 million of assets under
management.
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
- --------
(1) The Bank's two Money Connection Centers were opened in late 1997 and early
1998. These locations were designed to leverage a smaller space by combining
self-service banking options with branch personnel to deliver a full line of
banking services.
14
15
originated through its mortgage brokerage operations, retail banking offices,
and telephone banking facility. The Bank eliminated its 1-4 family correspondent
lending unit in 1998. The Bank also originates a variety of consumer loan
products, including home equity loans, secured lines of credit, education,
automobile, and credit card loans through the retail banking offices. During the
first half of 1999, the Bank (including Serve Corps) originated $259 million of
1-4 family loans, including home equity/line of credit loans, and $19 million of
other consumer loans. These amounts include loans originated and sold to third
party investors.
The Bank offers mortgage loans to qualifying borrowers to finance
apartment buildings and commercial real estate, as well as other commercial loan
products. During the first six months of 1999, the Bank originated $190 million
of commercial and commercial real estate loans. The commercial real estate loan
portfolio is mainly comprised of loans secured by multifamily real estate. In
addition to multifamily real estate, a small portion of the Bank's commercial
real estate portfolio is secured by industrial, retail, and office properties.
The Bank acquired a commercial lending department and commercial and commercial
real estate loan portfolio of approximately $188 million in connection with the
Beverly merger. Most of Beverly's commercial loan portfolio was secured by real
estate. At June 30, 1999, approximately $53 million of commercial and commercial
real estate portfolio included other commercial loans, such as business lines of
credit, term loans, letters of credit, equipment lease financing, municipal
financing, overdrafts, receivable financing, SBA loans, and agricultural loans.
This commercial loan portfolio is primarily located in Illinois and Indiana. In
recent years, the Bank made commercial real estate loans only in specific
Midwestern states, such as Illinois, Indiana, Wisconsin, Minnesota, and Ohio. In
1997, the Bank resumed its nationwide commercial real estate lending program in
selected markets, to help offset repayments in its existing portfolio.
Currently, the Company is only offering to refinance existing mortgages on
commercial real estate located outside the Midwest. 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 purchased 1-4 family adjustable rate whole
loans for its portfolio. During 1998, the Bank purchased over $1.6 billion of
1-4 family adjustable rate loans, and during the first two quarters of 1999, the
Bank purchased $355 million of 1-4 family whole loans. The Bank currently does
not have any outstanding commitments to purchase additional whole loans. The
Bank
15
16
also invests in mortgage-backed securities ("MBS"), U. S. government and agency
securities. During 1999, the Company has increased MBS purchases to help offset
prepayments and has purchased investment securities with borrowed funds to help
enhance net interest income. The Company may purchase additional MBS and acquire
additional investment securities with borrowed funds, during the remainder of
1999, to help build assets and enhance interest income. The Bank also assumed a
state, municipal and corporate bond portfolios from Beverly. The Bank classifies
investment securities as either available for sale ("AFS") or held to maturity
("HTM"). Unrealized gains and losses on AFS securities are recorded as an
adjustment to stockholders' equity, net of related taxes.
The Bank offers a variety of deposit products including checking,
savings, money market accounts, and certificates of deposit ("CDs"). The Bank
also relies on borrowings to help finance operations and fund growth of interest
earning assets.
Earnings of the Bank are susceptible to interest rate risk to the
extent that the Bank's deposits and borrowings reprice on a different basis and
in different periods than its securities and loans. Prepayment options embedded
in loans and MBS and varying demand for loan products, due to changes in
interest rates, create additional operating risk for the Bank in matching the
repricing of its assets and liabilities. The Bank tries to structure its balance
sheet to reduce exposure to interest rate risk and to maximize its return on
equity, commensurate with risk levels that do not jeopardize the financial
safety and soundness of the institution.
Changes in real estate market values also affect the Bank's earnings.
As changes occur in interest rates, the forces of supply and demand for real
estate, and the economic conditions of real estate markets, the risk of actual
losses in the Bank's loan portfolio will also change. Changing economic
conditions, market interest rates, and the overall business environment could
also affect the risk of actual loss in the Bank's commercial loan portfolio.
This report contains certain "forward-looking statements." The Company
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protection of the safe harbor with
respect to all of such forward-looking statements. These forward-looking
statements describe future plans or strategies and include the Company's
16
17
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 the actual results include but are not
limited to: i) general market rates, ii) changes in market interest rates and
the shape of the yield curve, iii) general economic conditions, iv) real estate
markets, v) legislative/regulatory changes, vi) monetary and fiscal policies of
the U.S. Treasury and the Federal Reserve, vii) changes in the quality or
composition of the Company's loan and investment portfolios, viii) demand for
loan products, ix) the level of loan and MBS repayments, x) deposit flows, xi)
competition, xii) demand for financial services in the Company's markets, xiii)
changes in accounting principles, policies or guidelines, xiv) unanticipated
costs or expenses, xv) projections of capital expenditures and costs associated
with correction and testing of systems in connection with the Year 2000 issue,
xvi) unanticipated delays or difficulties in completing the merger with Charter
One. These factors should be considered in evaluating the forward-looking
statements, and undue reliance should not be placed on such statements.
The Company does not undertake and specifically disclaims any
obligation to update any forward-looking statements to reflect occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
17
18
STATEMENT OF FINANCIAL CONDITION
- --------------------------------
St. Paul Bancorp reported total assets of $6.0 billion at June
30, 1999, about level with total assets at December 31, 1999. On the asset side,
investment securities increased by $181.0 million, while MBS increased $52.5
million.(2) Offsetting these increases were lower cash and cash equivalents of
$196.7 million and loans receivable of $21.8 million. On the liability side,
total borrowings increased by $156.5 million, while deposits shrank by $134.2
million.
Cash and cash equivalents totaled $242.6 million at June 30,
1999 compared to $439.3 million at year-end 1998.(3)
Investment securities comprised of U.S. Treasury and agency
debt securities, municipal and corporate bonds and other marketable equity
securities, totaled $394.9 million at June 30, 1999, as compared to $213.9
million at December 31, 1998.(4) The increase was due to the purchase of
securities at the end of the second quarter of 1999. At June 30, 1999, 97
percent of the Company's investment securities were classified as AFS as
compared to 95 percent at December 31, 1998. The Company recorded an unrealized
loss on AFS investment securities of $3.0 million at the end of the second
quarter 1999, and $2.5 million at December 31, 1998.
MBS totaled $654.6 million at June 30, 1999, compared to
$602.1 million at the end of 1998.(5) Purchases of MBS totaling $210 million,
offset by MBS repayments produced the increase in balances. The weighted average
yield on the MBS portfolio declined 14 basis points to 6.57 percent at June 30,
1999 from 6.71 percent at year-end 1998. The repayment of higher rate MBS and
the purchase of the new securities at a weighted average rate less than the rate
on the entire portfolio primarily generated the slight decline in the weighted
average yield. Approximately 71 percent of the MBS portfolio is classified as
AFS, and at June 30, 1999, the Company reported an unrealized loss on its AFS
MBS of $35,000 compared to an unrealized gain of $740,000 at December 31, 1998.
- ---------------------------
(2) Amounts include $198.2 million of investment securities
classified as due from broker at June 30, 1999 and $79.7 million of MBS
classified as due from broker at December 31, 1998.
(3) See "CASH FLOW ACTIVITY" for further details.
(4) Includes investment securities classified as due from
broker at June 30, 1999.
(5) At December 31, 1998, MBS includes $79.7 million of
MBS classified as securities due from brokers.
18
19
Net loans receivable declined by $21.8 million to $4.46
billion at June 30, 1999, as compared to December 31, 1998. Principal
repayments, partly offset by the purchase of $355.4 million of whole loans and
loans originated for portfolio produced the slight decrease in loans receivable
balances. While loan repayment activity has remained high over the past several
quarters the amount of repayments experienced in the second quarter of 1999 has
declined from the levels experienced in the first quarter of 1999 and fourth
quarter of 1998. The weighted average loan yield declined 9 basis points to 7.05
percent at June 30, 1999 from 7.14 percent at the end of 1998. The repayment of
higher rate loans and the purchase and origination of lower rate loans has led
to the continued trend of a declining weighted average loan rate.
Loans held for sale decreased $23.9 million during the
first half of 1999 to $41.4 million at June 30, 1999. Loan sales in excess of
loans originated for sale produced the decrease.
Deposits declined $134.2 million during the first six months
of 1999 to total $3.76 billion at June 30, 1999. Lower CD balances of $134.9
million largely produced the decline in deposits. A decline in checking account
balances also contributed to the decrease. The weighted average deposit rate
decreased by 24 basis points over the first half of 1999 to 3.55 percent. A
decline in the weighted average rate paid on CD balances and a decline in CD
balances, the highest-cost deposit product, mostly caused this decrease in the
weighted average rate.
Total borrowings, which include FHLB advances, totaled $1.7
billion at June 30, 1999 or $156.5 million higher than at December 31, 1998. The
Company has used borrowing balances as a source of funds for whole loan
purchases, new investment securities, and to fund net deposit outflows. The
weighted average rate paid on borrowings increased 1 basis point to 5.38 percent
at June 30, 1999 from December 31, 1998. See "CASH FLOW ACTIVITY" for further
discussion.
Stockholders' equity of the Company totaled $502.5 million
($12.56 per share outstanding) at June 30, 1999, down $7.4 million from year-end
1998. The decrease in stockholders' equity during the first two quarters of 1999
was largely due to the Company's common stock repurchase program. During 1999,
the Company spent $22.3 million to repurchase 1,032,000 shares of its common
stock(6). See "CASH FLOW ACTIVITY - HOLDING COMPANY" for further details. In
addition, the payment of $16.0 million of quarterly dividends to shareholders
also contributed to the decrease in stockholders' equity. These decreases were
partly offset by
- ------------------------
(6) The stock repurchase program was rescinded in May 1999. The program was
originally to run for the first six months of 1999.
19
20
net income of $30.7 million and $6.6 million of capital provided by the issuance
of common stock. See "CAPITAL" and "CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY" for further analysis.
See "CREDIT RISK MANAGEMENT" for discussion of foreclosed real
estate balances.
CAPITAL
- -------
The Bank is subject to various capital requirements of the
federal government. Failure to meet minimum capital requirements can initiate
certain mandatory (and possibly additionally discretionary) actions by the
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements and therefore the Company's financial statements.
Under capital adequacy guidelines and regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance sheet items
calculated under regulatory accounting practices. The Bank's capital amounts and
classification also are subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts and ratios of
total and Tier I capital to risk-weighted assets, and of Tier I capital to
average assets. Tier I capital equals the capital of the Bank less certain
intangible assets and the net assets of non-includable subsidiaries. Total
capital equals Tier I capital plus the Bank's general allowance for loan losses,
up to certain limits. As of June 30, 1999, the Bank meets all capital adequacy
requirements to which it is subject.
As of June 30, 1999 and December 31, 1998, the Bank meets the
requirements of the Office of Thrift Supervision ("OTS") to be categorized as
"well capitalized" under the regulatory framework for prompt corrective action.
To be categorized as "well capitalized," the Bank must maintain minimum total
risk-based capital ratios, Tier I risk-based ratios, and Tier I leverage
ratios(7) as set forth in the table below.
- -------------------------
(7) Under separate OTS regulations, the Bank is required to maintain minimum
capital level ratios of core and tangible capital to adjusted assets and total
regulatory capital to risk-weighted assets. At June 30, 1999, the Bank's
tangible and core capital ratio of 7.68 percent and risk-based capital of 15.79
percent exceed required capital levels.
20
21
The Bank's actual amounts and ratios are also presented in the following
table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
--------------- ------------------- -------------------
Dollars in thousands Amount Ratio Amount Ratio Amount Ratio
--------------- ------------------- -------------------
As of June 30, 1999
Total Capital
(to Risk Weighted Assets) $ 490,527 15.79% >$ 248,536 >8.00% >$ 310,670 >10.00%
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 451,683 14.54% >$ 124,268 >4.00% >$ 186,402 > 6.00%
- - - -
Tier I Capital (core)
(to Regulatory Assets) $ 451,683 7.68% >$ 235,144 >4.00% >$ 293,930 > 5.00%
- - - -
As of December 31, 1998
Total Capital
(to Risk Weighted Assets) $ 486,590 15.62% >$ 249,195 >8.00% >$ 311,494 >10.00%
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 447,635 14.37% >$ 124,597 >4.00% >$ 186,896 > 6.00%
- - - -
Tier I Capital (core)
(to Regulatory Assets) $ 447,635 7.62% >$ 234,935 >4.00% >$ 293,668 > 5.00%
- - - -
The following schedule reconciles stockholders' equity of the
Company to the components of regulatory capital of the Bank at June 30, 1999:
June 30,
Dollars in thousands 1999
- ------------------------------------------------------------------------
Stockholders' equity of the Company $502,535
Less: capitalization of the Company
and non-Bank subsidiaries (51,539)
- ------------------------------------------------------------------------
Stockholder's equity of the Bank 450,996
Plus: unrealized loss on
available for sale securities 1,990
Less: investments in non-includable
subsidiaries (568)
Less: intangible assets and other non-includable assets (735)
- ------------------------------------------------------------------------
Tangible and core capital 451,683
Plus: allowable GVAs 38,844
- ------------------------------------------------------------------------
Risk-based capital $ 490,527
========================================================================
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.
21
22
The OTS may establish capital requirements higher than the generally
applicable minimum for a particular savings institution if the OTS determines
the institution's capital was or may become inadequate in view of its particular
circumstances. Individual minimum capital requirements may be appropriate where
the savings institution is receiving special supervisory attention, has a high
degree of exposure to interest rate risk, or poses safety or soundness concerns.
The Bank has no such requirements.
Regulatory rules currently impose limitations on all capital
distributions by savings institutions, including dividends, stock repurchase and
cash-out mergers. Under current OTS capital distribution regulations, as long as
the Bank meets the OTS capital requirements before and after the payment of
dividends and meets the standards for expedited treatment of applications
(including having certain regulatory composite, compliance and Community
Reinvestment Act ratings), the Bank may pay dividends to the Company without
prior OTS approval equal to the net income to date over the calendar year, plus
retained net income over the preceding two years. In addition, the OTS has the
discretion to prohibit any otherwise permitted capital distribution on general
safety and soundness grounds, and must be given 30 days' advance notice of all
capital distributions during which time it may object to any proposed
distribution.
During 1999, the Bank plans to pay dividends to the Company equal to
100 percent of Bank's prior quarter's net income.
22
23
CASH FLOW ACTIVITY
- ------------------
Cash and cash equivalent balances at June 30, 1999 totaled
$242.6 million, down $196.7 million from December 31, 1998. During the first six
months of 1999, the major sources of funds included new borrowings, loan and MBS
repayments, and a decrease in the amount of loans held for sale. The Company's
major uses of funds included purchases and origination of loans for portfolio,
purchases of MBS and investment securities, funding net deposit outflows, and
the repurchase of Company common stock.
As part of Management's strategy to expand interest earning
assets, the Company purchased $355.5 million of whole 1-4 family loans during
1999. These purchases, along with loans originated for portfolio, produced the
net increase in loans receivable balance and were a major use of funds during
1999.(8) Loan repayments partly offset these increases. Loan repayments during
the first two quarters of 1999 were approximately $757 million. The low interest
rate environment has produced a significant amount of repayment activity in the
Company's loan portfolio. While the amount of repayments in the second quarter
was high in historical terms, the level has decreased from the amount of loan
repayments experienced in the third and fourth quarters of 1998. The Company
currently does have any commitments outstanding to purchase additional whole
loans. Whole loan purchases in 1998 generally produced the $24 million net
increase in loans receivable in the first half of 1998.
During the first six months of 1999, the Company also used
funds to purchase $210 million of MBS. This purchase was partly offset by
repayments in the MBS portfolio totaling $156 million. The Company may purchase
additional MBS during 1999 to help offset principal repayments. In comparison,
during the same six month period in 1998, the Company purchased $20 million of
MBS and received $211 million of MBS repayments.
The Company used $279 million of funds to purchase investment
securities during the first half of 1999.(9) Maturities and sales of investments
of $92 million partly offset these purchases. The Company increased investment
balances to enhance interest income with funds provided by borrowings and excess
liquidity. During the remainder of 1999, the Company expects to acquire
additional investment securities with borrowed funds to increase interest
income.
- -----------------------------
(8) See "CREDIT RISK MANAGEMENT" for further details.
(9) During the second quarter of 1999, the Company purchased approximately $200
million of investment securities, funded with borrowings. During the third
quarter of 1999, the Company entered into a similar transaction of the purchase
of approximately $290 million of investment securities funded with borrowings.
23
24
In comparison, the Company purchased $117 million of investment securities
during the same six months in 1998. Maturities and sales of $37 million partly
offset these 1998 purchases.
A $23.9 million decrease in assets held for sale was also a
source of funds during the first six months of 1999. The decrease in assets held
for sale was largely due to a decrease in the origination volumes at Serve
Corps, the Bank's mortgage loan broker subsidiary. In addition, the Bank
increased the amount of Serve Corps' production purchased for its own portfolio.
In comparison, during the first six months of 1998, the amount of assets held
for sale increased by $37.0 million. The Bank purchased the operations of Serve
Corps during January of 1998, resulting in the increase in assets held for sale
during 1998.
New borrowings were a significant source of funds during the
first six months of 1999. During 1999, the Company increased net borrowing
balances by $156.3 million, with most of the increase occurring in long-term
borrowings. These new borrowings replaced other short-term borrowings, and
provided liquidity for asset growth and net deposit outflows. During the first
six months of 1998, the Company increased borrowing balances by $75.0 million,
largely to fund whole loan acquisitions and investment securities purchases.
During the first half of 1999, the Company also funded a
$137.2 million net outflow in deposits. Most of the decline in deposit balances
occurred in CD products. The Company has lowered the offering rates on new CD
products in response to market conditions and in an effort to lower its cost of
funds. In comparison, deposit balances increased by $10.8 million during the
same six month period in 1998.
The Company also used $22.7 million of funds during the first
half of 1999 to repurchase over 1 million shares of its own common stock. These
repurchases were part of a share repurchase program announced in January 1999.
This program was rescinded in May 1999. See "HOLDING COMPANY LIQUIDITY"
following for further details. The Company made no similar repurchases during
the first half months of 1998.
Holding Company Liquidity. At June 30, 1999, the holding company had $92 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 $25.5 million of investment securities
classified as AFS. The Company also maintains a $20.0 million revolving line of
24
25
credit agreement from another financial institution. At June 30, 1999, no funds
have been borrowed under this agreement.
Sources of liquidity for St. Paul Bancorp during the first six
months of 1999 included $26.4 million of dividends from the Bank, $1.1 million
in dividends from the holding company's other subsidiaries, and a $1.0 million
decrease in intercompany borrowings. Uses of holding company liquidity during
the first quarter of 1999 included $22.7 million to repurchase shares of common
stock, the purchase of $25.0 million of investment securities, and $16.0 million
of dividends paid to stockholders.
In January, the Company announced its intentions to repurchase
up to 2 million (or about 5 percent) of its outstanding common stock over the
first six months of 1999. In May 1999, the Company's Board of Directors
rescinded this current stock repurchase program. The Company had repurchased
1,032,000 of its shares in open market or privately negotiated transactions
before the program was terminated.
Regulatory Liquidity Requirements. Savings institutions are required to maintain
average daily balances of liquid assets equal to a specified percentage of the
institution's average net withdrawable deposits plus short-term borrowings.
Liquid assets include cash, certain time deposits, federal funds sold, and
certain securities. This liquidity requirement may be changed from time to time
by the Director of the OTS to any amount within the range of 4 percent to 10
percent, depending upon economic conditions and the deposit flows of savings
institutions. In 1997, the OTS revised its liquidity requirement to 4 percent
from 5 percent and expanded the asset types that qualify as liquid assets. The
OTS also added a qualitative liquidity requirement so the Bank must maintain
liquidity to ensure safe and sound operations. At June 30, 1999, the Bank's
liquid assets substantially exceeded the 4 percent requirement of $167 million.
Because of the change in regulation, Management's regulatory liquidity
compliance focus has shifted from quantitative measures to qualitative safety
and soundness concerns.
25
26
RATE/VOLUME ANALYSIS
The following tables present the components of the changes in net interest
income by volume and rate(10) for the three and six months ended June 30, 1999
and 1998:
Three months ended June 30, 1999 and 1998 Six months ended June 30, 1999 and 1998
INCREASE/(DECREASE) DUE TO INCREASE/(DECREASE) DUE TO
----------------------------------------- ---------------------------------------
TOTAL TOTAL
Dollars in thousands VOLUME RATE CHANGE VOLUME RATE CHANGE
- ---------------------------------------------------------------------------------------------------------------
CHANGE IN INTEREST AND DIVIDEND INCOME(11):
Loans receivable $14,199 $(5,630) $ 8,569 $31,281 $(10,563) $ 20,718
Mortgage-backed securities (2,838) (71) (2,909) (7,471) (369) (7,840)
Taxable investment securities (825) 132 (693) (2,189) (691) (2,880)
Non-taxable investment securities 41 (37) 4 165 (17) 148
Dividends on equity investment
securities 605 (117) 488 1,159 (234) 925
------- -------- -------- ------- --------- ---------
Total interest and dividend income 11,182 (5,723) 5,459 22,945 (11,874) 11,071
CHANGE IN INTEREST EXPENSE:
Deposits (627) (4,257) (4,884) (577) (7,869) (8,446)
Short-term borrowings 1,669 (916) 753 2,556 (837) 1,719
Long-term borrowings 7,317 (93) 7,224 14,338 (1,274) 13,064
------- -------- -------- -------- -------- --------
Total interest expense 8,359 (5,266) 3,093 16,317 (9,980) 6,337
------- -------- -------- -------- -------- --------
NET CHANGE IN NET INTEREST AND DIVIDEND
DIVIDEND INCOME BEFORE PROVISION
FOR LOAN LOSSES $2,823 $ (457) $ 2,366 $ 6,628 $(1,894) $ 4,734
======= ======== ======== ======== ======== ========
- --------------------------------
(10) This analysis allocates the change in interest and dividend income and
expense related to volume based upon the change in average balance and prior
period's applicable yield or rate paid. The change in interest and dividend
income and expense related to rate is based upon the change in yield or rate
paid and the prior period's average balances. Changes due to both rate and
volume have been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each. The effect of
nonperforming assets has been included in the rate variance. Average balances
exclude the effect of unrealized gains and losses.
(11) Income from investment securities and MBS classified as securities due from
brokers are included in either income from MBS or investment securities.
26
27
RESULTS OF OPERATIONS
General. Net income for the second quarter of 1999 was $15.9 million or $0.39
per diluted share outstanding, compared to $13.4 million, or $0.32 per diluted
share in the same quarter a year ago. Net income for the first six months of
1999 rose to $30.7 million, or $0.74 per share, from $27.2 million, or $0.65 per
share, during the same six month period a year ago. An increase in net interest
income combined with lower general and administrative expenses produced the
increase in net income during both the quarterly and year-to-date comparisons.
These increases were partly offset by a decline in other income.
Net Interest Income. Net interest income totaled $41.7 million during the second
quarter of 1999, compared to $39.3 million of net interest income recorded
during the same quarter in 1998. Year-to-date net interest income rose to $83.3
million in 1999 from $78.5 million during the same six month period in 1998.
Higher interest earning assets largely produced the increase in net interest
income. Average interest earning asset levels increased by $603 million and $612
million during the quarterly and year-to-date comparisons, respectively. The
increase in interest earning assets was largely produced by the purchase of 1-4
family loans. A declining cost of funds, mainly in the deposit portfolio, also
contributed to the increase in net interest income. These increases in net
interest income were partly offset by the greater reliance on borrowings to fund
the asset growth.
The net interest margin ("NIM"), on a tax-equivalent basis,
was 2.98 percent during the second quarter of 1999, compared to 3.15 percent
during the second quarter of 1998. The NIM for the first six months of 1999
declined to 2.96 percent from 3.14 percent during the same six month period in
1998. Declining asset yields, caused by the repayment of higher rate loans and
MBS and the purchase or origination of lower yielding assets, and a greater
reliance on borrowings as a source of funds produced the decline in the NIM.
However, a decrease in the cost of deposits partly offset these decreases in the
NIM.
Interest Income. Interest income on loans receivable increased $8.6 million to
$78.9 million during the second quarter of 1999, and $20.7 million to $158.8
million during the first six months of 1999 as compared to same periods in 1998.
Higher average balances produced the increase in loan interest income. Average
loan balances increased $803 million to $4.6 billion in the second quarter of
1999 as compared to the same quarter a year ago. Year-to-date 1999 average loan
balances increased by $886 million over 1998. Most of the growth in loans
27
28
receivable was accomplished through the purchase of 1-4 family loans. The
increase to interest income from higher average balances was partly offset by a
lower effective loan yield. The effective loan yield was 6.92 percent during the
second quarter of 1999, down 57 basis points over the same quarter last year,
while the year-to-date effective loan yield declined 59 basis points to 6.94
percent. The lower effective loan yield was produced by the repayment of higher
rate loans and the purchase and origination of loans at weighted average rates
less than the portfolio average.
MBS interest income decreased $2.9 million during the second
quarter to $10.1 million, compared to $13.0 million during the same quarter a
year ago. MBS interest income for the first six months of 1999 was $20.4
million, a decline of $7.8 million over the same period in 1998. The decline in
MBS interest income was primarily related to lower average balances due to MBS
prepayments. Average balances declined by $179.3 million during the second
quarter of 1999 compared to the same quarter in 1998, while year-to-date 1999
average balances declined by $233.2 million over the same period in 1998. The
effective MBS yield was 6.33 percent in the second quarter of 1999, or 4 basis
points less than the same quarter a year ago. The effective MBS yield was 6.40
percent for the first six months of 1999 compared to 6.49 percent during the
same period last year. The lower effective MBS yield was associated with higher
amortization of net purchase premiums and the repayment of higher rate assets.
Interest income from investments decreased $201,000 during the
second quarter of 1999 compared to the same period in 1998. Year-to-date
interest income declined $1.8 million over the same six month period in 1998. In
both the quarterly and year-to-date comparisons, slightly lower average balances
and a lower effective yield produced the decline in investment interest income.
Lower yields earned on new investment securities and the maturities of some
higher rate securities produced a lower overall investment yield. Average
investment balances declined $21 million during the second quarter of 1999 and
$41 million during the first six months of the year as compared to the same
period a year ago.
Interest Expense. Deposit interest expense declined by $4.9 million to $33.1
million during the second quarter of 1999 compared to $38.0 million during the
same quarter in 1998. Deposit interest expense also declined $8.4 million during
the first six months of 1999 to $68.1 million. The decline in expense was due to
a lower effective cost of deposits. The effective cost of deposits declined
28
29
45 basis points to 3.50 percent during the second quarter of 1999, while the
effective cost of deposits declined by 41 basis points over the first six months
of 1999 compared to the same period in 1998. A decline in effective cost of CDs
and a decline in average CD balances largely produced the lower effective yield.
Average deposit balances decreased $65 million during the second quarter of 1999
to $3.8 billion. Similarly, average deposit balances declined by $29 million
during the year-to-date 1999 period.
Borrowing interest expense increased by $8.0 million and $14.8
million during the quarterly and year-to-date 1999 periods as compared to the
same periods in 1998. The increase in expense was due to higher average
borrowing balances, partly offset by a lower average borrowing cost. Average
balances rose by $667 million during the second quarter of 1999 over the same
quarter a year ago, while average borrowings increased by $634 million during
the first six months of the year. Management has primarily relied on borrowings
to fund whole loan acquisition growth. The effective cost of borrowings was 5.34
percent during the second quarter of 1998, or 45 basis points less than the
second quarter in 1998. The effective cost of borrowings also declined by 49
basis points in the year-to-date comparison. In addition to new borrowings,
which were at lower rates, Management refinanced some of the short-term
borrowings with lower costing long-term borrowings, contributing to the lower
average interest cost.
Interest Rate Spread. The Bank's ability to sustain current net interest income
levels during future periods is largely dependent, not only on the level of
interest earning assets, but also the size of the interest rate spread. The
interest rate spread was 2.76 percent at June 30, 1999, compared to 2.69 percent
at December 31, 1998, and 2.87 percent at June 30, 1998. As with the NIM,
declining asset yields and a greater reliance on borrowings caused the decline
in the interest rate spread since June 30, 1998. However, a declining cost of
funds in recent periods, mainly in the deposit portfolio offset these decreases
and accounted for most of the increase in the interest rate spread since
year-end 1998.
External forces, such as the performance of the economy,
actions of the Board of Governors of the Federal Reserve System, and market
interest rates, can significantly influence the size of the interest rate spread
and are beyond the control of Management. In response to these forces,
Management evaluates
29
30
market conditions and deploys strategies that it believes will produce a
sustainable and profitable interest rate spread.
Provision for Loan Losses. The Company recorded no provision for loan loss
during the second quarter of 1999 or in the year-to-date period. In comparison,
the Company reversed $320,000 of previous loan loss provisions in the second
quarter of 1998 and $640,000 during the first six months of 1998. See "CREDIT
RISK MANAGEMENT" for further discussion of loss provisions and the adequacy of
the accumulated provisions for losses.
Other Income. Other income declined in both the quarterly and year-to-date
comparisons. Other income in the second quarter of 1999 was $14.5 million
compared to $14.8 million during the same quarter a year ago. Year-to-date other
income totaled $27.3 million, $1.6 million or 5.6 percent less than during the
same six month period in 1998. Lower gains on loan sales and other fee income
produced the decrease in other income. Greater revenues from the Company's real
estate development subsidiary partly offset these decreases.
The decrease in gains on loan sales was caused by a decrease in loan sales
volumes at Serve Corps, the Bank's mortgage loan brokerage subsidiary. In
addition, the Bank purchased a large portion of Serve Corps' originations(12).
The decrease in other service fees related to lower transaction accounts and fee
waivers associated with the conversion to new data processing systems.
Revenues from real estate development operations increased $1.8 million
during the second quarter and $1.7 million during the first six months of 1999
as compared to the same period in 1998. Higher sales volumes, mainly due to a
second quarter 1999 bulk land sale of approximately $1.9 million, produced the
increase in revenues.
General and Administrative Expense. General and administrative expenses ("G&A")
totaled $32.9 million during the second quarter of 1999, $2.1 million or 6.1
percent less than during the same quarter in 1998. G&A expense for the first six
months of 1999 was $65.5 million, or $2.9 million less than during the same
period in 1998. A decline in compensation and benefits produced most of the
decline in G&A expense in both the quarterly and year-to-date periods. This
decline was partly offset by higher occupancy, equipment and other office
expense.
30
31
Compensation and employee benefits totaled $15.8 million during the second
quarter of 1999, or $2.6 million less than the same quarter a year ago.
Year-to-date compensation and employee benefit expense was $32.1 million
compared to $36.8 million during the same period in 1998, a decline of $4.7
million. This decrease was mostly attributed to a reduction in the number of
employees through the elimination of duplicative positions in connection with
the July 1998 merger with Beverly Bancorporation, Inc., an early retirement
opportunity given to certain employees in connection with the cost reduction
plan announced in August 1998 and certain other staff reductions. In addition,
the suspension of the incentive bonus program for officers of the Company and
other modifications to employee benefit programs also contributed to the
reduction in compensation and benefits expense.
Occupancy, equipment, and other office expenses totaled $11.7 million
during the second quarter of 1999 compared to $11.1 million in the same quarter
a year ago. Year-to-date occupancy, equipment, and other office expense
increased $1.8 million over the same six month period of 1998. Higher systems
costs primarily relate to the initiatives to replace core transaction processing
systems implemented during the fourth quarter of 1998 and first quarter of 1999.
In addition, the Company also experienced higher occupancy and maintenance
costs.
Year 2000 Readiness Disclosure The Company incurred G&A costs in 1999 related to
the systems requirements to ensure that the Bank can process transactions
subsequent to January 1, 2000. The Year 2000 compliance issues result from both
certain computer programs and certain hardware recognizing only the last two
digits of the year instead of four digits. As a result, transactions processed
beginning in Year 2000 may not be recognized by the systems in the correct
period. This issue could result in system failures and miscalculations causing a
disruption of operations, and among other things, the inability to process
transactions. In order to address the Year 2000 issue, the Company established a
Year 2000 project in 1996.
Based upon initial assessments, the Company determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems can properly process transactions beginning on
January 1, 2000. The Company subsequently decided to replace some of these
systems, including the core transaction processing systems, and implemented
these new systems during the first quarter of 1999. The Company currently
believes
- ------------------------------------------------------------------------------
(12) Gains are not recorded for loans transferred to the Bank.
31
32
that with these modifications and the replacement of certain software and
hardware components, the Year 2000 compliance issue will be mitigated. However,
if such modifications and upgrades do not succeed, or are not made in a timely
fashion, the Year 2000 compliance issue could have a material impact on the
Company. Furthermore, there can be no assurances that the Company's assessment
has uncovered each possible Year 2000 issue that could affect the Company.
Failure by the Company and/or its major vendors, third-party network service
providers, and other material service providers and customers to adequately
address their respective Year 2000 issues in a timely manner (insofar as they
relate to the Company's business) could have a material adverse effect on the
Company's business, results of operations, and financial condition. Potential
worst case scenarios include the inability to process customer deposit
transactions, ATM service outages, ACH and payroll deposit file transmission
difficulties, inability to service the loan portfolio, disruption of customer
service, and inability to produce accurate financial statements. The amount of
the potential liability, if any, that relates to these risks, cannot be
reasonably estimated at this time.
The Company has divided work on the Year 2000 project into four phases:
assessment, correction, testing, and implementation. The Company began the
assessment of the Year 2000 issue in 1996. Critical risk elements were
identified and an inventory of computer hardware, software applications, Bank
vendors and available internal resources was prepared. From this work, a plan
was prepared and approved by the Bank's Board of Directors in early 1997. The
plan focused on transaction processing applications, mainframe computer systems,
mid-range computer systems, networks, personal computers, and operational
systems. The Company also identified key third party vendors and customers to
assess their state of readiness on the Year 2000 issue. The assessment phase of
the plan has been completed. With the Beverly merger, the Company's Year 2000
plan has been expanded to incorporate Beverly.
Work on the correction phase began in 1997 and continued in 1998. In the
third quarter of 1998, Management decided to replace its core transaction
processing systems. While Management believed it could make its mission critical
systems Year 2000 compliant within the required timeframe, Management
nevertheless decided to replace all of its systems to allow the Company to adapt
more quickly to technological advances and to assimilate acquisitions, such as
Beverly.
32
33
The Company converted its residential loans to the Alltel loan servicing
system in the fourth quarter of 1998. The other major business applications and
interfaces were converted to the EDS/Miser system in the first quarter of 1999,
running under a new Unisys operating environment. The teller platform system was
also replaced. Management believes that these new systems are Year 2000
compliant and has received assurances from its vendors concerning Year 2000
compliance. The Company has taken steps to confirm the vendors' compliance. The
conversions to the new systems required new mainframe hardware, as well as new
interfaces to other systems and personal computer hardware. The Company is
making initial capital investments of approximately $10.0 million associated
with the new replacement systems. Testing of all mission critical applications
was completed during the second quarter or 1999.
Management currently estimates that completion of the Year 2000 project
will cost $3.7 million. Of this total cost, approximately $3.1 million had
already been incurred by the end of the second quarter of 1999. The above
expenses only include amounts spent on external consultants, replacement
hardware and software, and other incremental costs. The amounts do not include
the cost of internal resources devoted to the project. The Company accounts for
these costs as expense when incurred, and intends to fund these costs from
operations and excess liquidity.
The Company has completed written contingency plans for business resumption
in the event of a Year 2000 interruption for its mission critical applications.
These plans include, among other things, plans for recovering data and
mobilization of resources to resume core operations. The Company's board of
directors has approved the contingency plan. The Company will continue to refine
and enhance these contingency plans throughout the remainder of 1999.
Operations of Foreclosed Real Estate. The net loss generated from foreclosed
real estate operations was $61,000 during the second quarter of 1999, compared
to $43,000 for the same quarter in 1998. Year-to-date net loss from foreclosed
real estate operations totaled $176,000 during 1999 compared to $79,000 during
the same six month period in 1998. See "CREDIT RISK MANAGEMENT" for further
discussion of REO.
Income Taxes. A higher level of pretax income produced an increase in income tax
expense during the second quarter and year-to-date 1999 periods as compared
33
34
to the same periods in 1998. The effective income tax rate was 31.6 percent for
the first half of 1999 compared to 31.3 percent in the same period in 1998.
34
35
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Three months ended June 30,
Dollars in thousands At June 30, 1999 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Weighted Effective Effective
Yield/ Average Yield/ Average Yield/
Balance Rate Balance(a) Interest Rate Balance(a) Interest Rate
- -------------------------------------------------------------------------------------------------------------------------
Investments (b):
Taxable investment securities $ 432,412 5.76% $ 302,968 $ 3,863 5.11% $ 367,944 $ 4,556 4.97%
Non-taxable investment securities (c) 42,801 6.91 43,001 518 7.43 40,806 514 7.77
Equity investment securities (d) 95,766 5.79 99,500 1,430 5.76 58,097 942 6.50
- -------------------------------------------------------------------------------------------------------------------------
Total investments 570,979 5.85 445,469 5,811 5.48 466,847 6,012 5.40
Mortgage-backed securities 654,616 6.57 638,735 10,112 6.33 818,005 13,021 6.37
Loans receivable (e) 4,536,887 7.05 4,561,790 78,924 6.92 3,758,319 70,355 7.49
- -------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $5,762,482 6.87% $5,645,994 $94,847 6.74% $5,043,171 $89,388 7.11%
=========================================================================================================================
Total deposits $3,757,789 3.55% $3,793,974 $33,117 3.50% $3,858,544 $38,001 3.95%
Borrowings (f):
Short-term 651,234 5.35 348,823 4,868 5.60 237,163 4,115 6.96
Long-term 1,025,896 5.40 1,152,948 15,179 5.28 597,212 7,955 5.34
- -------------------------------------------------------------------------------------------------------------------------
Total borrowings 1,677,130 5.38 1,501,771 20,047 5.35 834,375 12,070 5.80
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $5,434,919 4.11% $5,295,745 $53,164 4.03% $4,692,919 $50,071 4.28%
=========================================================================================================================
Excess of interest-earning assets
over interest-bearing liabilities $ 327,563 $ 350,249 $ 350,252
=========================================================================================================================
Ratio of interest-earning assets to
interest-bearing liabilities 1.06x 1.07x 1.07x
=========================================================================================================================
Interest income $41,683 $39,317
=========================================================================================================================
Interest rate spread (tax equivalent yield) 2.76%
=========================================================================================================================
"Average" interest rate spread
(tax equivalent yield) 2.71% 2.83%
=========================================================================================================================
Net yield on average earning assets
(tax equivalent yield) 2.98% 3.15%
=========================================================================================================================
(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.
35
36
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Six months ended June 30,
Dollars in thousands At June 30, 1999 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Weighted Effective Effective
Yield/ Average Yield/ Average Yield/
Balance Rate Balance(a) Interest Rate Balance(a) Interest Rate
- -------------------------------------------------------------------------------------------------------------------------
Investments (b):
Taxable investment securities $ 432,412 5.76% $ 324,072 $ 8,061 5.02% $ 410,604 $ 10,941 5.37%
Non-taxable investment securities (c) 42,801 6.91 42,937 1,059 7.65 36,584 911 7.73
Equity investment securities (d) 95,766 5.79 95,651 2,765 5.83 56,295 1,840 6.59
- -------------------------------------------------------------------------------------------------------------------------
Total investments 570,979 5.85 462,660 11,885 5.43 503,483 13,692 5.68
Mortgage-backed securities 654,616 6.57 635,685 20,350 6.40 868,892 28,190 6.49
Loans receivable (e) 4,536,887 7.05 4,579,231 158,839 6.94 3,693,472 138,121 7.48
- -------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $5,762,482 6.87% $5,677,576 $191,074 6.75% $5,065,847 $180,003 7.13%
=========================================================================================================================
Total deposits $3,757,789 3.55% $3,826,436 $ 68,064 3.59% $3,855,693 $ 76,510 4.00%
Borrowings (f):
Short-term 651,234 5.35 333,196 9,475 5.73 245,470 7,756 6.37
Long-term 1,025,896 5.40 1,159,619 30,252 5.26 612,980 17,188 5.65
- -------------------------------------------------------------------------------------------------------------------------
Total borrowings 1,677,130 5.38 1,492,815 39,727 5.37 858,450 24,944 5.86
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $5,434,919 4.11% $5,319,251 $107,791 4.09% $4,714,143 $101,454 4.34%
=========================================================================================================================
Excess of interest-earning assets
over interest-bearing liabilities $ 327,563 $ 358,325 $ 351,704
=========================================================================================================================
Ratio of interest-earning assets to
interest-bearing liabilities 1.06x 1.07x 1.07x
=========================================================================================================================
Interest income $83,283 $78,549
=========================================================================================================================
Interest rate spread (tax equivalent yield) 2.76%
=========================================================================================================================
"Average" interest rate spread
(tax equivalent yield) 2.66% 2.79%
=========================================================================================================================
Net yield on average earning assets
(tax equivalent yield) 2.96% 3.14%
=========================================================================================================================
(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.
36
37
KEY CREDIT STATISTICS
June 30, 1999 Dec. 31, 1998 Dec. 31, 1997
Dollars in thousands Dollar % Dollar % Dollar %
- ----------------------------------------------------------------------------------------------
LOAN PORTFOLIO
- ----------------------------------------------------------------------------------------------
1-4 family units $3,223,836 72% $3,272,839 73% $2,283,982 63%
Commercial real estate 1,031,840 23 997,588 22 1,105,191 30
Commercial/industrial 52,494 1 47,731 1 55,309 1
Equity/Line of Credit 154,945 3 155,079 3 159,153 4
Land and land development 624 * 910 * 1,467 *
CONSUMER 31,737 1 43,857 1 60,000 2
- ----------------------------------------------------------------------------------------------
Total loans held for investment $4,495,476 100% $4,518,004 100% $3,665,102 100%
==============================================================================================
Weighted average rate 7.05% 7.14% 7.57%
==============================================================================================
*Less than 1%
June 30, 1999 Dec. 31, 1998 Dec. 31, 1997
Dollars in thousands Dollar % Dollar % Dollar %
- -------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
- -------------------------------------------------------------------------------------------------
MORTGAGE AND COMMERCIAL LOANS:
1-4 family units $ 14,691 71% $ 12,282 62% $9,458 74%
Commercial/Commercial real estate 3,200 15 3,794 19 1,129 8
Equity/LOC 1,163 6 1,223 6 378 3
CONSUMER 669 3 512 2 259 2
- -------------------------------------------------------------------------------------------------
Total mortgage and Commercial loans 19,723 95 17,811 89 11,224 87
REAL ESTATE OWNED:
1-4 family units 882 4 2,097 11 1,515 12
Commercial/Commercial real estate 246 1 --- -- 82 1
- -------------------------------------------------------------------------------------------------
Total real estate owned 1,128 5 2,097 11 1,597 13
- -------------------------------------------------------------------------------------------------
Total nonperforming assets $ 20,851 100% $ 19,908 100% $ 12,821 100%
=================================================================================================
June 30, Dec. 31, Dec. 31,
1999 1998 1997
- --------------------------------------------------------------------------------------------
KEY CREDIT RATIOS
- --------------------------------------------------------------------------------------------
Net loan charge-offs to average loans receivable 0.03% *% 0.05%
Loan loss reserve to total loans 0.88 0.89 1.05
Loan loss reserve to nonperforming loans 201.27 226.96 343.63
Loan loss reserve to impaired loans 3,913.69 1,234.50 197.90
Nonperforming assets to total assets 0.35 0.33 0.25
General valuation allowance to non-
performing assets 190.82 203.83 290.51
- --------------------------------------------------------------------------------------------
* Less than 0.01%
37
38
CREDIT RISK MANAGEMENT
- ----------------------
LENDING
- -------
At June 30, 1999, the loans receivable portfolio was comprised of 1-4
family mortgage loans, loans secured by commercial real estate, commercial loans
and, to a lesser extent, consumer loans. See "KEY CREDIT STATISTICS" for further
details.
Non-performing loans totaled $19.7 million at June 30, 1999, up $1.9
million from December 31, 1998. Of the increase, $2.3 million related to 1-4
family loans, while a $600,000 decline related to commercial and commercial real
estate loans partly offset this increase. Total non-performing assets (including
real estate owned) were $20.9 million at June 30, 1999, or 0.35 percent of total
assets. In comparison, non-performing assets were $19.9 million, or 0.33 percent
of total assets at the end of 1998.
At June 30, 1999, the Bank had a net investment in impaired loans of $1.0
million. Of the $1.0 million of impaired loans, $788,000 were performing but
considered impaired. (13) As anticipated by Management, the level of impaired
loans has been reduced significantly over the past several years.
The allowance for loan losses at June 30, 1999 was $39.7 million compared
to $40.4 million at December 31, 1998, a decrease of $726,000. The following
table provides a rollforward of the allowance for loan losses from January 1,
1998 through June 30, 1999:
1999 1998
-------------- -------------------------
Six Months Six Months Year Ended
Dollars in thousands Ended June 30 Ended June 30 Dec. 31
- -------------------- -------------- -------------------------
Beginning of Period $40,423 $38,569 $38,569
Provision for losses -- (640) 1,860
Charge-offs (899) (361) (1,134)
Recoveries 173 705 1,128
-------------- -------------------------
End of Period $39,697 $38,273 $40,423
============== =========================
- ------------------------
(13) "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.
38
39
The level of net charge-offs in recent years has declined due the continued
trend of the low level of non-performing loans and the continued reductions in
balances in the Company's commercial real estate portfolio located outside the
Midwest. Net loan charge-offs were $726,000 during the first six months of 1999.
In comparison, net charge-offs were only $6,000 during the year of 1998 and $1.8
million during 1997. The gross charge-offs during the first six months of 1999
were $900,000 while recoveries were $173,000. Approximately one half of the
gross charge-offs related to the commercial portfolio. The remainder of the
charge-offs were in the 1-4 family and consumer loan portfolios. The recoveries
during the first six months of 1999 were mostly in the 1-4 family portfolio. The
ratio of net charge-offs to average loans receivable was 0.03 percent during the
first six months of 1999. This ratio was less than 0.01 percent in 1998 and 0.05
percent during 1997. See "KEY CREDIT STATISTICS" tables for further detail.
The Company recorded no provision for loan losses during the first six
months of 1999 compared to the reversal of $640,000 of previous loan loss
provisions during the first six months a year ago. The general trend of improved
credit quality, the decrease in the size of the Bank's commercial real estate
portfolio located outside of the Midwest, declining classified assets, and the
low level of non-performing assets, as well as the decrease in the net
charge-offs, has caused the allowance for loan losses to decrease in recent
years. The future level of loan loss provisions will be subject to careful
review of the risk elements of the portfolio by Management. See "KEY CREDIT
STATISTICS" for further details.
The general valuation allowance is evaluated based on a careful review of
the various risk components that are inherent in each of the loan portfolios.
The risk components that are evaluated include the level of non-performing and
classified assets, geographic concentrations of credit, economic conditions,
trends in real estate values, the impact of changing interest rates on borrower
debt service, as well as historical loss experience, peer group comparisons, and
regulatory guidance.
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
39
40
economic conditions. In addition, federal regulators periodically review the
Bank's allowance for losses on loans. Such regulators have the authority to
require the Bank to recognize additions to the allowance at the time of their
examinations.
In addition to originating loans secured by 1-4 family mortgages and a
variety of consumer loans, the Company originates loans secured by commercial
real estate and commercial loans. Currently, the Company's commercial real
estate loan origination efforts focus on the Midwestern states. The Company will
refinance existing mortgages on commercial real estate located outside the
Midwest. The Bank's current commercial loan portfolio was mainly acquired
through the Beverly merger. The types of commercial loans originated includes
business lines of credit, term loans, letters of credit, equipment lease
financing, municipal financing, overdrafts, receivable financing, SBA loans, and
agricultural loans. The commercial loan portfolio is concentrated in the area
surrounding the Company's banking offices.
During 1998 and the first half of 1999, the Bank purchased 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 currently has not commitments to
purchase additional whole loans. The Bank applies its own loan origination
underwriting standards as part of the due diligence efforts in connection with
the purchase of these loans. All purchased loans are subject to the Bank's
quarterly review of the adequacy of the general valuation allowance.
Management continues to monitor events in the submarkets in which the Bank
has substantial loan concentrations, particularly California. The Bank's largest
concentration of commercial and commercial real estate loans outside Illinois
are California and Washington.
As of June 30, 1999, the Bank's ratio of classified assets to tangible
capital and general valuation allowance was 7.9 percent. Classified assets
include REO and loans considered "substandard," "doubtful," or "loss" under
regulatory accounting purposes and the Bank's loan rating system.
OTHER REAL ESTATE OWNED
- -----------------------
REO totaled $1.1 million at June 30, 1999 compared to $2.1 million at the
end of 1998. At June 30, 1999 there was one commercial property totaling
$246,000 with 1-4 family properties accounting for the remainder of the balance.
In comparison, at December 31, 1998 all REO assets were 1-4 family properties.
40
41
The allowance for real estate losses totaled $155,000 at both June 30,
1999 and December 31, 1998. See "RESULTS OF OPERATIONS" for further details on
REO provision.
In accordance with the Company's accounting policy, REO assets are
initially recorded at the lower of their net book value or fair value, less
estimated selling costs. The allowance for loan losses is charged for any excess
of net book value over fair value at the foreclosure, or in-substance
foreclosure, date. After foreclosure, the allowance for foreclosed real estate
is used for losses associated with risks inherent in the REO portfolio.
41
42
PART II. -- OTHER INFORMATION
- -------- -----------------
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
(a) On May 26, 1999, the Company held an Annual Meeting of Shareholders
(the "Annual Meeting") to elect three directors for a term of three
years and to vote on a shareholder proposal to request the Board of
Directors to take action to effect a sale or merger of the Company.
(b) Set forth below is a description of each matter voted upon at the
Annual Meeting and the number of votes cast for and the number of votes
withheld as to each such matter.
1. Three directors were elected for a term of three years, or
until their successors have been elected and qualified. A list
of such directors, including the votes for and withheld is set
forth below:
Withhold
Authority
Nominee For To Vote
--------------------------------------------------------------
John W. Croghan 31,280,832 4,933,359
Kenneth J. James 31,378,923 4,935,268
Anthony R. Pasquinelli 31,202,511 5,011,680
2. A proposal brought forth by a shareholder to cause the Board
of Directors to effect a sale or merger of the Company was
rejected. There were 20,222,439 votes cast against the
proposal, 10,466,419 votes for the proposal, 433,552 votes
abstained, and 5,091,781 broker non-votes.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(a) The Company filed a Report on Form 8-K on April 9, 1999 announcing
that the Annual Meeting of Shareholders would be held on May 26,
1999.
(b) The Company filed a Report on Form 8-K on May 17, 1999 announcing
its agreement to merge with Charter One Financial, Inc.
(c) The Company filed a Report on Form 8-K on May 27, 1999 announcing the
re-election of three directors and the rejection of a shareholder
proposal brought before the Annual Meeting of Shareholders. In
addition, the Company also announced that it had rescinded its share
repurchase program previously announced in January 1999.
42
43
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ST. PAUL BANCORP, INC.
-------------------------------------------------
(Registrant)
Date: August 13, 1999 By: /s/ Joseph C. Scully
--------------- ---------------------------------------------
Joseph C. Scully
Chairman of the Board and Chief Executive Officer
(Duly Authorized Officer)
Date: August 13, 1999 By: /s/ Robert N. Parke
--------------- ---------------------------------------------
Robert N. Parke
Senior Vice President and Treasurer
(Principal Financial Officer)
43