CHICAGO -- Is there a place in the world for a traditional thrift? Joseph C. Scully certainly hopes so.

Chairman and chief executive of the $4 billion-asset St. Paul Bancorp, Mr. Scully is among an elite group of thrift operators emerging from the turbulent 1980s with careers and charters intact.


As the government winds down a staggeringly expensive industry cleanup and finishes escorting certain thrift outlaws to penitentiaries, Mr. Scully delights in the 105-year heritage of his healthy institution, which opened in 1889 in the basement of St. Paul's Catholic Church.

What is more, the executive has molded St. Paul into a distinguished corporate citizen. Winning two successive "outstanding" ratings on its compliance with the Community Reinvestment Act, plus recognition from the Federal Home Loan Bank of Chicago for its community involvement, St. Paul clearly is something more than an impassive financial intermediary.

Financial tempests again are buffeting the thrift industry and St. Paul Bancorp. But Mr. Scully remains firmly focused. He's not straying from residential lending. Nor is he the least bit interested in selling the store.

"We are very comfortable with home finance," says Mr. Scully, whose salary and bonuses totaled $506,074 in 1993. "There is a place for residential lenders that are efficient, have good market share, and can make a difference in communities."

Analysts say it is an open question whether Mr. Scully's cherished notions about housing finance and autonomy will hold up much longer.

Skyrocketing rates are crunching St. Paul's earnings, freshly illustrating the perils of residential lending. The thrift suffered a 20% earnings slump in the first nine months of 1994, as net income fell $6 million from the prior-year period, to $25.8 million. Annualized, year-to-date 1994 returns equaled 0.89% on average assets.

And Mr. Scully's prized franchise, which sports 52 branches, seems a delectable takeover target -- especially, analysts say, because of its deep roots in the attractive suburban Chicago banking market.

"I don't think Joe can resist much longer," said John Snow, a banking analyst at Rodman & Renshaw Inc. "St. Paul is the biggest available property in town, and any number of predators could put it into play."

St. Paul Bancorp is not alone in this regard. As the ranks of midsize bank takeover targets dwindle and superregional acquirers gain thrift takeover expertise, thrifts are becoming prime acquisition targets in a number of U.S. markets.

And many thrifts are throwing up their hands in the face of ever-stiffening competition from banks, and from government-sponsored enterprises such as the Federal National Mortgage Association.

St. Paul's stock has been trading near a 52-week low. Changing hands at slightly more than $17 per share, the issue's market value equals 10 times earnings of the last 12 months, or about 94% of book value.

To be sure, St. Paul's managers acknowledge an "obligation to shareholders." Says Mr. Scully: "If somebody submitted an offer, we would take it to the board and consider it."

But in the same breath, Mr. Scully energetically voices a belief that St. Paul is a survivor. He has spent his entire 31-year banking career at St. Paul -- beginning as a realty appraiser and becoming CEO in 1982 -- and clearly isn't ready to throw in the towel.

Stung by a rate-driven refinancing spree that saw customers prepay $600 million worth of lucrative residential loans in 1993, Mr. Scully rallied to deliver a 36% increase in loan originations during the 12 months ended Sept. 30, 1994.

Part of this surge stemmed from St. Paul's reentry into apartment lending in Chicago. Mr. Scully foresees further growth of this sort in 1995 but cautions the market won't support a torrent of multifamily projects.

With the help of president and chief operating officer Patrick J. Agnew, Mr. Scully also is overhauling St. Paul's retail systems.

Branch employees are getting new desktop computers designed to speed transactions and enhance marketing. A new digital phone system soon will begin handling a variety of call-routing and account query responsibilities.

St. Paul now has 17 branches in Chicago grocery stores; Mr. Scully sees those units as key building blocks in consumer banking and is scouting for more sites.

He reports particular success in gaining auto finance credits through these outlets.

Shedding excess capital, Mr. Scully has repurchased about 600,000 shares of stock this year. And he has leveraged the hefty equity still on the books with a 55% year-to-year expansion of mortgage-backed securities, to $1 billion at Sept. 30.

As is the case with many lenders, Mr. Scully has seen loan yields decline even as market rates have soared. He holds out hope for improved yields next year, when a vast pool of new mortgages reprice from initial "teaser" rates.

Acquisition price tags remain steep in Illinois, at least temporarily icing down Mr. Scully's own takeover plans. More than 18 months have passed since St. Paul's last acquisition, the $366 million-asset Elm Financial Services Inc., parent of Elmhurst Federal Savings Bank.

St. Paul still is holding about $600 million of California loans -- the lingering product of a controversial 1980s expansion that prompted the Office of Thrift Supervision to place St. Paul under a supervisory agreement for three years. Special regulatory oversight was lifted in 1993.

Mr. Scully says the California portfolio has stabilized and that St. Paul won't seek more growth in the Golden State.

On a proportionate basis, it appears Mr. Scully has a long way to go in building consumer credits. That hurts. The thrift's pronounced lack of asset diversification makes it all the more vulnerable to the volatility of mortgage finance.

According to Sheshunoff Information Services Inc., St. Paul had a trifling 0.77% ratio of consumer loans to total assets at June 30. That compared with 7.17% among its Midwest peers.

On the efficiency front, Mr. Scully acknowledges losing ground this year. Expenses rose mildly, and rising rates put a dent in fee revenues.

The executive does not envision any sort of wholesale expense cuts, however. He instead aims to boost efficiency by limiting expense growth and lifting revenues.

One takeover insulation for Mr. Scully is the collapse of bank stock trading multiples. It crimped the ability of many institutions to make stock-swap acquisitions.

To the extent the broad trading malaise persists, Mr. Scully might evade pursuit, despite the weaknesses of his own institution's earnings and stock trading multiple.

But analysts certainly aren't letting Mr. Scully forget about the possibilities.

Portraying St. Paul as "the largest independent acquirable organization in this highly sought-after market," Howe Barnes Investments analyst Daniel L. Westrope recently wrote: "It can be argued that the quickest route to Chicago market presence lies through St. Paul Bancorp."

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