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 September 30, 1994
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 60635
(Address of principal executive offices) (Zip Code)
(312) 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 -- 19,436,955 shares, as of October 31, 1994
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 September 30, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Stockholders' Equity for the
Nine Months Ended September 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 12
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
2
3
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
September 30, December 31,
Dollars in thousands 1994 1993
- - ----------------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents
Cash and amounts due from depository institutions $ 88,596 $ 87,805
Federal funds sold 10,000 56,200
Short-term marketable-debt securities
(Market: September 30, 1994-$31,290; December 31, 1993-$192,326) 31,290 192,326
------------- ------------
Total cash and cash equivalents 129,886 336,331
Marketable-debt securities
(Market: September 30, 1994-$99,147; December 31, 1993-$142,876) 102,068 142,051
Mortgage-backed securities
(Market: September 30, 1994-$1,131,025; December 31, 1993-$733,314) 1,169,088 733,649
Loans receivable 2,523,030 2,350,893
Less: accumulated provision for loan losses 42,409 46,574
------------ -------------
Net loans receivable 2,480,621 2,304,319
Loans held-for-sale, at lower of cost or market
(Market: September 30, 1994-$9,452; December 31, 1993-$28,616) 9,452 28,497
Accrued interest receivable 22,600 20,247
Foreclosed real estate
(Net of accumulated provision for losses: September 30, 1994-$1,739;
December 31, 1993-$819) 14,891 19,105
Real estate held for investment 13,808 11,237
Investment in Federal Home Loan Bank stock 29,847 31,290
Office properties and equipment 43,082 40,865
Prepaid expenses and other assets 33,747 37,785
------------ -------------
TOTAL ASSETS $ 4,049,090 $ 3,705,376
============ =============
LIABILITIES:
Deposits $ 3,163,774 $ 3,252,618
FHL Bank advances 336,959 7,219
Other borrowings 156,203 56,751
Advance payments by borrowers for taxes and insurance 9,431 19,513
Other liabilities 23,846 21,946
------------ -------------
Total liabilities 3,690,213 3,358,047
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-40,000,000 shares;
issued at September 30, 1994-19,782,905 shares;
outstanding at September 30, 1994-19,495,955 shares; issued and
outstanding at December 31, 1993-19,683,981 shares) 198 197
Paid-in capital 137,978 136,609
Retained income, substantially restricted 231,690 210,215
Unrealized gain (loss) on securities, net of taxes (1,926) 4,594
SFAS No. 87 adjustment, net of taxes (46) (46)
Borrowings by employee stock ownership plan (1,000) (4,240)
Unearned employee stock ownership plan shares (196,350 shares) (2,883) --
Treasury stock (286,950 shares) (5,134) --
------------- ------------
Total stockholders' equity 358,877 347,329
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,049,090 $ 3,705,376
============ =============
See notes to consolidated financial statements.
3
4
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
Three months ended Nine months ended
September 30 September 30
Dollars in thousands except per share amounts 1994 1993 1994 1993
- - -------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans receivable $ 45,861 $ 49,456 $ 134,696 $ 151,755
Mortgage-backed securities 16,718 10,371 41,997 32,526
Marketable-debt securities 1,334 1,436 4,736 4,760
Trading account 0 24 1 73
Federal funds 87 401 851 974
Other short-term investments 778 2,297 3,536 6,261
--------- --------- ---------- ----------
Total interest income 64,778 63,985 185,817 196,349
INTEREST EXPENSE:
Deposits 28,700 30,679 85,094 92,948
Short-term borrowings 1,619 803 1,956 4,420
Long-term borrowings 4,749 1,585 10,462 4,505
--------- --------- ---------- ----------
Total interest expense 35,068 33,067 97,512 101,873
--------- --------- ---------- ----------
Net interest income 29,710 30,918 88,305 94,476
Provision for loan losses 1,200 2,500 3,900 9,250
--------- --------- ---------- ----------
Net interest income after provision
for loan losses 28,510 28,418 84,405 85,226
OTHER INCOME:
Loan servicing fees 361 402 1,073 1,309
Other fee income 4,403 3,978 12,254 10,605
Net gain on assets sold 24 464 494 1,374
Net trading account gain (loss) -- 13 (5) 58
Discount brokerage commissions 811 1,549 2,978 4,507
Income from real estate operations 943 907 2,174 2,113
Insurance and annuity commissions 808 847 2,747 2,578
Other 115 539 364 717
--------- --------- ---------- ----------
Total other income 7,465 8,699 22,079 23,261
GENERAL AND ADMINISTRATIVE EXPENSE:
Salaries and employee benefits 11,800 10,831 35,462 31,792
Occupancy, equipment and other office expense 5,256 4,758 15,362 13,728
Advertising 1,180 1,427 3,499 4,019
Federal deposit insurance 2,232 2,512 6,710 7,001
Other 1,281 1,385 3,882 4,243
--------- --------- ---------- ----------
General and administrative expense 21,749 20,913 64,915 60,783
Loss on foreclosed real estate 347 318 1,588 989
--------- --------- ---------- ----------
Income before income taxes 13,879 15,886 39,981 46,715
Income taxes 4,867 4,781 14,151 14,845
--------- --------- ---------- ----------
NET INCOME $ 9,012 $ 11,105 $ 25,830 $ 31,870
========= ========= ========== ==========
EARNINGS PER SHARE:
Primary $ 0.44 $ 0.54 $ 1.27 $ 1.57
Fully diluted 0.44 0.54 1.27 1.56
========= ========= ========== ==========
DIVIDENDS PER SHARE $ 0.075 $ 0.067 $ 0.225 $ 0.200
========= ========= ========== ==========
See notes to consolidated financial statements.
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5
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Unrealized Borrowings Unearned
gain/(loss) SFAS No. by employee employee
Dollars in Common Stock on 87 adjust- stock stock
thousands, except ------------------- Paid-in Retained securities, ment, net ownership ownership Treasury
share data Shares Amount capital income net of tax of tax plan plan shares stock Total
--------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1992 18,258,158 $183 $115,253 $173,976 $ -- $ -- ($2,071) $ -- $ -- $287,341
Issuance of common
stock under stock
option plan 118,388 1 1,417 -- -- -- -- -- -- 1,418
Issuance of common
stock to
Elm Shareholders 1,292,313 12 19,754 -- -- -- -- -- -- 19,766
Retirement of
common stock
issued to Elm
shareholders (446) -- (7) (7)
Net income -- -- -- 31,870 -- -- -- -- -- 31,870
Cash dividends paid
to shareholders
($0.20 per share) -- -- -- (3,836) -- -- -- -- -- (3,836)
Repayment of ESOP
borrowing -- -- -- -- -- -- 536 -- -- 536
Additional
borrowings -- -- -- -- -- -- (2,616) -- -- (2,616)
------------------------------------------------------------------------------------------------------------------------------
BALANCE
SEPTEMBER 30, 1993 19,668,413 $196 $136,417 $202,010 $0 $0 ($4,151) $0 $0 $334,472
==============================================================================================================================
Balance at
December 31, 1993 19,683,981 $197 $136,609 $210,215 $4,594 ($46) ($4,240) $ -- $ -- $347,329
Unearned ESOP
shares -- -- -- -- -- -- 2,883 (2,883) -- --
Issuance of common
stock under stock
option plan 98,924 1 1,369 -- -- -- -- -- -- 1,370
Net income -- -- -- 25,830 -- -- -- -- -- 25,830
Cash dividends paid
to shareholders
($0.225 per share) -- -- -- (4,355) -- -- -- -- -- (4,355)
Adjustment to
unrealized
gain (loss) -- -- -- -- (6,520) -- -- -- -- (6,520)
Repayment of ESOP
borrowing -- -- -- -- -- -- 357 -- -- 357
Treasury stock
purchases (286,950) -- -- -- -- -- -- -- (5,134) (5,134)
------------------------------------------------------------------------------------------------------------------------------
BALANCE
SEPTEMBER 30, 1994 19,495,955 $198 $137,978 $231,690 ($1,926) ($46) ($1,000) ($2,883) ($5,134) $358,877
==============================================================================================================================
See notes to consolidated financial statements.
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ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30
------------------------------
Dollars in thousands 1994 1993
--------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 25,830 $ 31,870
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 3,900 9,250
Provision for losses on foreclosed real estate 1,458 804
Provision for depreciation 3,857 3,515
Assets originated and acquired for sale (42,640) (88,790)
Sale of assets held for sale 60,960 76,087
(Increase) decrease in accrued interest receivable (2,413) 1,839
(Increase) decrease in prepaid expenses and other assets 4,039 (5,535)
Increase (decrease) in other liabilities 1,899 (5,466)
Net amortization of yield adjustments (933) (1,055)
Other items, net (9,034) 2,271
------------------------------------------------------------------------------------------
Net cash provided by operating activities 46,923 24,790
------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Principal repayments on loans receivable 360,230 422,596
Loans originated and purchased for investment (539,556) (347,883)
Loans receivable sold 3,369 18,658
Principal repayments on available-for-sale mortgage-
backed securities 53,690 --
Principal repayments on held-to-maturity mortgage
backed securities 116,446 180,805
Purchase of available-for-sale mortgage-backed securities (27,127) --
Purchase of held-to-maturity mortgage-backed securities (604,834) (136,110)
Sale of available-for-sale mortgage-backed securities 15,459 --
Maturities of available-for-sale marketable-debt securities 19,000 --
Maturities of held-to-maturity marketable-debt securities -- 127,523
Purchase of available-for-sale marketable-debt securities (20,950) --
Purchase of held-to-maturity marketable-debt securities (30,695) (105,894)
Sale of available-for-sale marketable-debt securities 70,182 --
Additions to real estate held for investment (10,918) (3,447)
Real estate sold 24,344 13,199
Decrease in investment in Federal Home
Loan Bank stock 1,443 1,897
Purchase of office properties and equipment (6,680) (4,417)
Proceeds from sales of office properties and equipment 606 637
Acquisition of Elm Financial, net of cash and
cash equivalents acquired of $11,002. -- (15,655)
--------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (575,991) 151,909
--------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net decrease in checking and savings deposits (24,804) (25,723)
Proceeds from sales of certificates of deposit 272,074 212,258
Payments for maturing certificates of deposit (336,114) (231,861)
Net proceeds from issuance of subordinated notes -- 33,422
Increase in long-term borrowings 210,028 ---
Repayment of long-term borrowings (335) (114,732)
Increase in short-term borrowings, net 219,975 ---
Dividends paid to stockholders (4,355) (3,836)
Net proceeds from exercise of stock options 1,370 907
Purchase of Treasury Stock (5,134) --
Decrease in advance payments by borrowers
for taxes and insurance (10,082) (14,865)
--------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 322,623 (144,430)
--------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (206,445) 32,269
Cash and cash equivalents at beginning of period 336,331 311,567
--------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 129,886 $ 343,836
============================================================================================
SUPPLEMENTAL DISCLOSURES:
Interest credited on deposits $ 76,383 $ 82,941
Interest paid on deposits 8,026 8,661
--------------------------------------------------------------------------------------------
Total interest paid on deposits 84,409 91,602
Interest paid on borrowings 10,984 9,745
Income taxes paid, net 11,218 13,514
Common stock issued in acquisition of Elm Financial -- 19,766
Real estate acquired through foreclosure 11,807 24,821
Loans originated in connection with real estate
acquired through foreclosure 9,865 13,199
See notes to consolidated financial statements.
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ST. PAUL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements have been prepared in
accordance with 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 operation for the three- and nine-month period ended
September 30, 1994 are not necessarily indicative of the results that may be
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" or
"St. Paul Federal"), Annuity Network, Inc. and St. Paul Financial Development
Corporation. The financial statements of St. Paul Federal include the accounts
of its subsidiaries. Certain prior year amounts have been reclassified to
conform to the 1994 presentation.
3. At September 30, 1994, the Bank had outstanding commitments to originate
1-4 family, real estate loans of $64.8 million. Of these commitments, $61.3
million were for adjustable-rate loans and $3.5 million were for fixed-rate
loans. Most of these commitments expire after sixty days. In addition, the
Bank had outstanding commitments to originate $14.9 million of mortgage loans
secured by multi-family apartment buildings and commercial real estate. Of
these commitments, $8.7 million were adjustable-rate loans and $6.2 million
were fixed-rate loans. Unused home equity lines of credit totaled $41.3
million as of September 30, 1994. The Bank anticipates funding originations
with short-term borrowings.
At September 30, 1994 the Bank held commitments to sell $2.6 million of
fixed-rate, 1-4 family real estate loans. Market value losses, if any, related
to these commitments have been reflected in the consolidated financial
statements.
4. On February 23, 1993, the Company acquired ("the Acquisition") Elm
Financial Services, Inc. ("Elm Financial"). The following schedule details the
net effect during the first nine months of 1993 of the Acquisition on cash and
cash equivalents:
Dollars in thousands
=================================================
Purchase price $48,194
Less: issuance of St. Paul stock 19,766
Less: Elm stock acquired in 1992 1,771
-------------------------------------------------
Cash paid for Acquisition 26,657
Cash and cash equivalents acquired 11,002
-------------------------------------------------
Acquisition of Elm Financial, net of
cash and cash equivalents acquired $15,655
=================================================
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ST. PAUL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. As of January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan" and amended by SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosure". Loans accounted for under SFAS
No. 114 include multi-family and commercial real estate loans. SFAS No. 114
requires that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate. As a
practical expedient, impairment may be measured based on the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. When the measure of the impaired loan is less than the recorded
investment in the loan, the impairment should be recorded through a specific
valuation allowance ("SVA"). Also, SFAS No. 114 provides guidance on the
classification of loans as real estate ("REO") in-substance foreclosed.
The adoption of SFAS No. 114 had no impact on the Consolidated Statement of
Income or the Consolidated Statement of Financial Condition since loans
considered to be impaired under SFAS No. 114 were previously valued at the fair
value of the collateral and all of the Company's REO in- substance at December
31, 1993 continued to be classified as REO in-substance under SFAS No. 114.
Generally, interest income on an impaired loan is recognized when cash is
collected because the Bank carries the impaired loan at the fair value of the
underlying collateral. Also, multi-family and commercial loans are placed on a
cash-basis accounting method when they become 60 days delinquent. Any accrued,
but uncollected interest, on a loan placed on a cash-basis, is reserved against
interest income until the loan is current or no longer deemed impaired.
The following schedule provides a rollforward of the total recorded investment
in impaired loans during the nine months ended September 30, 1994, which is
comprised primarily of multi-family loans:
Dollars in thousands The Total Recorded Investment in the Impaired Loans
- - -------------------------------------------------------------------------------------------------------------------------------
Balance New Transfer Improvement Balance
1/1/94 Impairments to REO Charge-offs in Valuation Repayments 9/30/94
-----------------------------------------------------------------------------------------------
Performing loans $35,646 $27,122 $0 $(3,924) $(24,888) $(1,334) $32,622
Non-performing loans 5,787 22,622 (17,146) (2,945) -- (2) 8,316
-----------------------------------------------------------------------------------------------
Total impaired loans $41,433 $49,744 $(17,146) $(6,869) $(24,888) $(1,336) $40,938
===============================================================================================
The following schedule provides a rollforward of the recorded investment in
impaired loans for which there is no specific allowance for credit losses
determined in accordance with SFAS No. 114, as amended by SFAS No. 118:
8
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ST. PAUL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollars in thousands
The Amount of the Recorded Investment for Which There Is No Related "Specific" Allowance for Credit Loss
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance New Transfer Improvement Balance
01/01/94 Impairments to REO Charge-offs in Valuation Repayments 09/30/94
--------------------------------------------------------------------------------------------------
Performing loans $31,095 $22,924 $0 $0 $(23,969) $(1,334) $28,716
Non-performing loans 5,300 19,056 (17,286) 0 140 (2) 7,208
------------------------------------------------------------------------------------------------
Total impaired balance $36,395 $41,980 $(17,286) $0 $(23,829) $(1,336) $35,924
================================================================================================
The following schedule provides a rollforward of the amount of the recorded
investment in impaired loans for which there is a related SVA determined in
accordance with SFAS No. 114, as amended by SFAS No. 118. SVA represents the
amount of impairment on impaired loans.
Dollars in thousands The Amount of the Recorded Investment for Which There
Is a Related "Specific" Allowance for Credit Loss
-----------------------------------------------------------------
Balance Decreases Improvements Balance
1/1/94 in Valuation in Valuation Charge-offs 9/30/94
-----------------------------------------------------------------
Performing loans $4,551 $4,368 $(1,090) $(3,924) $3,905
Non-performing loans 487 3,707 (140) (2,945) 1,109
-----------------------------------------------------------------
Total impaired loans $5,038 $8,074 $(1,230) $(6,869) $5,014
==================================================================
The following table presents the average recorded investment in impaired loans
during the nine months ended September 30, 1994 and the amount of interest
income recorded on a cash-basis during that same period. All interest income
recorded on impaired loans was from cash received.
Dollars in thousands Average Interest Income
Recorded Recorded on a
Investment Cash-Basis
-----------------------------
Performing loans $34,593 $2,079
Non-performing loans 13,111 42
-----------------------------
Total impaired loans $47,704 $2,121
=============================
In addition, the Bank had $2.1 million of delinquent loans that Management did
not consider to be impaired under SFAS No. 114, but were accounted for on a cash
basis. None of the loans accounted for on a cash basis and subject to SFAS No.
114 constituted a trouble debt restructuring as interpreted under SFAS No. 15 or
SFAS No. 118. In addition, the Bank had $7.1 million of non-performing loans
that were not subject to the provisions of SFAS No. 114 because they were
considered part of large, homogeneous loan portfolios.
9
10
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table provides activity in the accumulated provision for loan
losses:
Real Estate Consumer Total
Dollars in thousands loans loans loans
- - --------------------------------------------------------------------------
Balance at December 31, 1991 $44,743 $1,421 $46,164
Provision for losses 9,425 1,200 10,625
Charge-offs (7,545) (695) (8,240)
Recoveries 127 5 132
Transfers 769 (769) ---
- - --------------------------------------------------------------------------
Balance at December 31, 1992 $47,519 $1,162 $48,681
Provision for losses 10,250 500 10,750
Acquired from Elm 929 --- 929
Charge-offs (14,050) (306) (14,356)
Recoveries 521 49 570
Transfers 813 (813) ---
- - --------------------------------------------------------------------------
Balance at December 31, 1993 $45,982 $ 592 $46,574
Provision for losses 3,830 70 3,900
Charge-offs ( 8,281) (204) ( 8,485)
Recoveries 381 39 420
Transfers (402) 402 ---
- - --------------------------------------------------------------------------
Balance at September 30, 1994 $41,510 $ 899 $42,409
=========================================================================
6. The Board of Directors of the Company has adopted an employee stock
ownership plan ("ESOP") designed to invest in the common stock of the Company
for the benefit of employees of the Company. All employees who have completed
at least one year of credited service at the Bank are eligible to participate
in the ESOP. The ESOP is subject to the Employee Retirement Income Security
Act of 1974 and is intended to constitute a qualified stock bonus plan for
income tax purposes.
The ESOP is authorized to borrow money to finance the acquisition of Company
common stock and to pledge the stock acquired to secure payment of the loan.
The Bank does not provide financing for the ESOP. During 1987, the ESOP
borrowed $5.0 million to purchase 750,000 shares of Company common stock. This
loan was repaid during 1994. During 1991, the ESOP obtained a $5.0 million
line of credit, which was increased to $18.0 million in 1993. This line of
credit was used to purchase 286,400 shares of Company common stock during 1992
and 1993, and as of September 30, 1994, $3.9 million of this line of credit is
outstanding. Outstanding ESOP borrowings are included in other borrowings in
the Consolidated Statements of Financial Condition.
St. Paul Bancorp stock that is acquired with borrowed funds is held by the ESOP
trustee as collateral for the related borrowings. As the loans are repaid,
shares held as collateral are released. The ESOP loan is being repaid from
Bank contributions and dividends received on St. Paul Bancorp stock held by the
ESOP. Payment of the ESOP loan is guaranteed by the Company. The Company also
has pledged $1.0 million in marketable-debt securities as additional collateral
for the ESOP loan.
10
11
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Contributions to the ESOP are made at the sole discretion of the Board of
Directors, but may not exceed 15% of the aggregate compensation of all
participants. Since the inception of the ESOP, contributions have been
sufficient to service the ESOP debt and, in certain years, have allowed the
ESOP to acquire additional shares of Company common stock.
Beginning January 1, 1994, the Company prospectively adopted the American
Institute of Certified Public Accountants ("AICPA") Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans." SOP 93-6 requires
the recognition of compensation expense for ESOP shares acquired after 1992 and
not committed to be released before the beginning of 1994, be measured based on
the fair value of those shares when committed to be released to employees,
rather than based on their original cost.
As of September 30, 1994, the ESOP had 196,350 shares acquired after January 1,
1993 that are committed to be released beginning in 1996. The adoption of SOP
93-6 had no impact on net income for the three- and nine-month periods ending
September 30, 1994. The effect of SOP 93-6 on net income in 1996 and beyond is
not determinable since it is based on future prices of St. Paul Bancorp stock.
Under SOP 93-6 the average number of ESOP shares considered outstanding for
earnings per share purposes during the third quarter of 1994 and the nine month
period ending September 30, 1994 was 196,350 lower than for the same periods in
1993 because unallocated shares are excluded from the calculation. The effect
of excluding these shares from the earnings per share computation was to
increase earnings per share by less than $0.01 for the three month period
ending September 30, 1994 and by approximately $0.01 for the nine month period
ending September 30, 1994. Also, under SOP 93-6, $15,000 of dividends during
the third quarter of 1994 and $44,000 of dividends during the nine month period
ending September 30, 1994 on the 196,350 unearned ESOP shares were reported as
a reduction of accrued interest on the ESOP borrowings rather than as a
reduction of retained earnings.
Contributions to the ESOP recorded as compensation expense totaled $217,000,
$846,000, and $1.1 million during the nine months ended September 30, 1994, the
year ended 1993 and the year ended 1992, respectively.
The following table summarizes shares of Company stock held by the ESOP:
September 30, December 31,
1994 1993
--------------------------------------------------------------
Shares allocated to participants 675,921 710,670
Unallocated shares: 339,999
Grandfathered under SOP 93-6 143,649 N/A
Unearned ESOP shares 196,350 N/A
-------------------------------------------------------------
Total 1,015,920 1,050,669
Fair value of unearned ESOP shares $4,074,263 $ N/A
===========================================================
11
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MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
St. Paul Bancorp, Inc. ("St. Paul Bancorp" or the "Company") is the
holding company for St. Paul Federal Bank For Savings (the "Bank"), the largest
independent savings institution headquartered in Illinois. The Company is
headquartered in Chicago, Illinois and its principal business currently consists
of the operations of its wholly-owned subsidiary, the Bank. The Company also
owns and operates two other subsidiaries, Annuity Network, Inc., ("Annuity
Network") which sells annuity products and St. Paul Financial Development
Corporation ("St. Paul Financial"), which primarily engages in single family
real estate development in the Chicago metropolitan area.
The Bank is a consumer-oriented retail financial institution, operating
52 full service banking offices throughout the Chicago metropolitan area. Of
these banking offices, 17 are located within large chain grocery superstores
which provide the Bank access to an expanded retail customer base. The Bank
uses its banking offices to attract retail deposits and originate loans in
neighborhoods of the Chicago metropolitan area with favorable savings patterns
and high levels of home ownership. Deposit accounts in the Bank are insured by
the Federal Deposit Insurance Corporation ("FDIC").
Generally, the Bank reinvests funds obtained from its retail banking
facilities in loans secured by mortgages on real estate, securities, and to a
lesser extent, consumer and commercial real estate loans. The Bank focuses
most of its current lending activities on the origination and purchase of
various mortgage products secured by 1-4 family residential properties. The
Bank utilizes a correspondent loan program to originate 1-4 family mortgages
outside the Chicago metropolitan area, primarily in the states of Illinois,
Wisconsin, Indiana, Michigan, Ohio, and Minnesota.
The Bank also offers mortgage loans to qualifying borrowers to finance
apartment buildings with up to 120 units located in the Chicago metropolitan
12
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area. The Bank also originates mortgage loans to facilitate the sale of
multi-family, and occasionally, commercial real estate owned by the Bank.
Periodically, the Bank will also repurchase multi-family loans sold with
recourse. Prior to 1990, the Bank originated, on a nationwide basis (primarily
in California), loans secured by multi-family real estate and to a lesser
extent, loans secured by commercial real estate. At September 30, 1994, $985.0
million or 24.3% of total assets were comprised of loans secured by multi-family
real estate properties, of which $564.4 million or 13.9% of total assets
represents multi-family loans secured by real estate located in California.
Also, $63.4 million or 1.6% of the Company's total assets at September 30, 1994
included loans secured by commercial real estate, other than multi-family.
During the fourth quarter of 1994, the Bank approved a plan to provide
construction financing, beginning in 1995, for residential home construction by
experienced developers in the Chicago metropolitan area.
A variety of consumer loan products, including home equity loans, secured
lines of credit, education, auto and credit card loans(1) are offered through
the retail banking offices. The Bank also invests in mortgage-backed
securities ("MBS"), government and other investment-grade, liquid securities.
Management's focus on retail operations includes significant
diversification of income sources beyond net interest income. The Bank
services approximately 162,000 checking accounts, which generate significant
fee income. The Bank engages in mortgage-banking activities and operates 176
automated teller machines ("ATMs") throughout the Chicago metropolitan area.
Through subsidiaries (Investment Network, Inc. and St. Paul Service, Inc.), the
Bank offers discount brokerage services and a full line of insurance products
in its banking offices. As of September 30, 1994, customers maintain
investments totaling $365 million through the Bank's discount brokerage
operations and $284 million in annuity contracts sold through the Company's
annuity subsidiary.
Earnings of the Bank are susceptible to interest rate risk to the extent
- - --------------------
(1) The credit card product is offered by the Bank through an agency
agreement with another lender.
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that the Bank's deposits and borrowings reprice on a different basis
and in different periods than its securities and loans. The Bank tries to
structure its balance sheet to reduce its exposure to interest rate risk and to
maximize its return on equity, commensurate with risk levels that do not
jeopardize the financial safety and soundness of the institution. See
"LIQUIDITY" for further discussion.
The Bank's earnings are also affected by changes in real estate market values.
As changes in the forces of supply and demand for real estate, economic
conditions of real estate markets and interest rates occur, the risk of actual
losses in the Bank's loan portfolio will change. See "CREDIT" for further
details.
CAPITAL
Holding Company. Stockholders' equity of the Company was $358.9 million
at September 30, 1994 or 9.26% of average assets during the first nine months
of 1994. In comparison, stockholders' equity at December 31, 1993 was $347.3
million or 9.27% of average assets for the year ended December 31, 1993. The
$11.5 million growth in stockholders' equity during the nine months ended
September 30, 1994 primarily resulted from $25.8 million of net income, partly
offset by $6.5 million of unrealized losses on available-for-sale securities,
(mostly associated with an increase in market interest rates during 1994), the
acquisition of $5.1 million of the Company's common stock under a stock
repurchase program, and the payment of $4.4 million of dividends. Under SFAS
No. 115 "Accounting for Certain Investments in Debt and Equity Securities",
which the Company adopted in 1993, adjustments to the market value of
available-for-sale securities are recorded directly to stockholders' equity and
are not recorded on the Consolidated Statements of Income until the securities
are sold. See "CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY" for further
analysis.
During the first nine months of 1994, the Company acquired 286,950 shares of
its outstanding common stock (or approximately 1.5% of shares outstanding) at a
weighted average cost per share of $17.90 under its stock repurchase programs
14
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announced in 1994. The Company intends to continue the stock repurchase
program by purchasing up to an additional 892,500 shares of its outstanding
common stock during the remainder of 1994. These shares will be acquired
through open market and privately-negotiated transactions. Management's
primary objective in reacquiring the shares is to increase return on equity and
earnings per share for those shares of the Company's stock that will remain
outstanding.
Bank. Office of Thrift Supervision ("OTS") regulatory capital requirements
for federally-insured institutions such as the Bank include minimum ratios of
core and tangible capital to adjusted total assets of 3.0% and 1.5%,
respectively. Savings institutions also are required to maintain a ratio of
total regulatory capital to risk-weighted assets of 8.0%. Total regulatory
capital for purposes of the risk-based capital requirements consists of core
capital and supplementary capital (to the extent supplementary capital does not
exceed core capital). Supplementary capital includes such items as general
valuation allowances ("GVAs") on loans receivable, subject to certain
limitations.
During 1994, the Bank continued to exceed the core, tangible, and risk-based
capital requirements by wide margins. The following table presents the Bank's
regulatory capital position as of September 30, 1994 and December 31, 1993:
========================================================================
SEPTEMBER 30, 1994
- - ------------------------------------------------------------------------
Dollars in Core Tangible Risk-Based
Thousands Capital Capital Capital
- - ------------------------------------------------------------------------
Actual percentage 8.57% 8.57% 16.60%
Required percentage 3.00 1.50 8.00
- - ------------------------------------------------------------------------
Excess percentage 5.57% 7.07% 8.60%
========================================================================
Actual capital $341,684 $341,684 $369,623
Required capital 119,650 59,825 178,080
- - ------------------------------------------------------------------------
Excess capital $222,034 $281,859 $191,543
========================================================================
DECEMBER 31, 1993
- - -----------------------------------------------------------------------
Dollars in Core Tangible Risk-Based
Thousands Capital Capital Capital
- - -----------------------------------------------------------------------
Actual percentage 9.50% 9.50% 16.67%
Required percentage 3.00 1.50 8.00
- - -----------------------------------------------------------------------
Excess percentage 6.50% 8.00% 8.67%
========================================================================
Actual capital $347,989 $347,989 $376,355
Required capital 109,875 54,938 180,490
- - -----------------------------------------------------------------------
Excess capital $238,114 $293,051 $195,964
========================================================================
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The following schedule reconciles stockholders' equity of the Company to
each of the components of regulatory capital of the Bank at September 30, 1994:
September 30,
Dollars in thousands 1994
- - -----------------------------------------------------------------------
Stockholders' equity of the Company $358,877
Plus: borrowings by ESOP and unearned
ESOP shares 3,883
Less: capitalization of Company (17,849)
- - -----------------------------------------------------------------------
Shareholder's equity of the Bank 344,911
Less: investments in non-includable
subsidiaries (1,428)
Less: intangible assets (1,799)
- - -----------------------------------------------------------------------
Tangible and core capital 341,684
Plus: allowable GVAs 27,939
- - -----------------------------------------------------------------------
Risk-based capital $ 369,623
=======================================================================
During the first nine months of 1994, the Bank's core and tangible capital
ratios decreased 93 basis points. The lower ratios were produced by a $325.8
million increase in regulatory assets, the payment of $25.7 million in
dividends to St. Paul Bancorp, and the recognition of $6.5 million of
unrealized losses on available-for-sale securities. The reduction in the core
and tangible capital ratios associated with these items was partly offset by
the Bank's net income which totaled $25.6 million during the first nine months
of 1994. The Bank's risk-based capital ratio decreased 8 basis points during
the first nine months of 1994, primarily due to the decline in total regulatory
capital.
The OTS has issued notice of a proposed regulation that would require all but
the most highly rated savings institutions to maintain a ratio of core capital
to total assets of between 4% and 5%. If the Bank were required to meet a 4%
core capital ratio as of September 30, 1994, its excess core capital would have
been $182.2 million versus $222.0 million under current requirements.
In 1993, the OTS issued a regulation which adds an interest rate risk
component to the risk-based capital requirement for "excess interest rate
risk." Under the new regulation, an institution is considered to have excess
interest rate risk if, based upon a 200-basis point change in market interest
rates, the market value of an institution's capital changes by more than 2%.
In this situation, the percent change in the market value of capital in excess
of 2% is
16
17
added to the institution's risk-based capital requirement. The new
regulation became effective on January 1, 1994.
At September 30, 1994, the Bank does not have "excess interest rate risk" as
defined in the OTS regulation and currently is not subject to an additional
risk-based capital requirement.
Under the Federal Deposit Insurance Corporation Improvement Act, the OTS
is required to publish regulations to ensure that its risk-based capital
standards take adequate account of concentration of credit risk, risk from
non-traditional activities, and actual performance and expected risk of loss on
multi-family mortgages. Although final rules have not been promulgated by the
OTS, current proposed rules would 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
non-traditional activities.
Capital requirements higher than the generally applicable minimum requirements
may be established for a particular savings institution if the OTS determines
that 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 other
safety or soundness concerns. No such requirements have been established for
the Bank.
At September 30, 1994, the Bank is considered "well capitalized" under the
OTS' prompt corrective action regulations based upon ratios of Tier 1 leverage
capital, Tier 1 risk-based capital and total risk-based capital of 8.57%,
15.29%, and 16.60%, respectively.
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KEY CREDIT STATISTICS
September 30, 1994 December 31, 1993 December 31, 1992
Dollars in thousands Dollar % Dollar % Dollar %
- - ----------------------------------------------------------------------------------------------
LOAN PORTFOLIO BY PRODUCT
- - ----------------------------------------------------------------------------------------------
Real estate dependent loans:
1-4 family $1,442,718 57.2% $1,187,210 50.5% $1,085,679 46.7%
5-35 unit multi-family 44,726 1.8 38,460 1.6 46,771 2.0
> 35 unit multi-family 942,903 37.3 1,026,007 43.6 1,097,281 47.1
Commercial real estate 63,371 2.5 73,094 3.1 66,812 2.9
Land 6,795 0.3 10,307 0.4 3,126 0.1
- - ----------------------------------------------------------------------------------------------
Total real estate dependent loans
loans 2,500,513 99.1 2,335,078 99.2 2,299,669 98.8
Consumer loans 22,525 0.9 19,572 0.8 27,517 1.2
- - ----------------------------------------------------------------------------------------------
Total loans $2,523,038 100.0% $2,354,650 100.0% $2,327,186 100.0%
==============================================================================================
NON-PERFORMING ASSETS
- - ----------------------------------------------------------------------------------------------
Real estate dependent loans:
1-4 family $ 6,884 21.5% $ 11,202 22.6% $ 12,759 26.4%
5-35 unit multi-family 1,953 6.1 1,970 4.0 1,994 4.1
> 35 unit multi-family 7,218 22.6 10,938 22.1 13,565 28.0
Commercial real estate 146 0.5 2,597 5.2 --- --
Land --- -- 2,406 4.9 --- --
- - ----------------------------------------------------------------------------------------------
Subtotal 16,201 50.7 29,113 58.8 28,318 58.5
Consumer loans 223 0.7 555 1.1 1,041 2.2
Real estate owned:
1-4 family 3,713 11.6% 4,925 9.9% 2,776 5.7%
5-35 unit multi-family --- -- --- -- 750 1.5
> 35 unit multi-family 9,853 30.8 14,998 30.2 14,133 29.2
Commercial real estate 1,973 6.2 --- -- 1,390 2.9
Land --- -- --- -- --- --
- - ----------------------------------------------------------------------------------------------
Subtotal 15,539 48.6 19,923 40.1 19,049 39.3
- - ----------------------------------------------------------------------------------------------
Total non-performing assets $ 31,963 100.0% $ 49,591 100.0% $ 48,408 100.0%
==============================================================================================
September 30, December 31, December 31,
1994 1993 1992
- - ----------------------------------------------------------------------------------------------
KEY CREDIT RATIOS
- - ----------------------------------------------------------------------------------------------
Net charge-offs to average loans receivable
and foreclosed real estate 0.48% 0.69% 0.41%
Net California charge-offs to average California
loans receivable and foreclosed real estate 1.39 2.01 0.32
Loan loss reserve to total loans 1.68 1.98 2.10
Loan loss reserve to non-performing loans 258.21 156.99 165.81
Non-performing assets to total assets 0.79 1.34 1.38
General valuation allowance to non-
performing assets 119.02 85.41 97.30
General valuation allowance to impaired
loans, net of SVA 105.90 N/A N/A
- - ---------------------------------------------------------------------------------------------
N/A Not applicable
18
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CREDIT
Since savings institutions are required by law to invest primarily in
loans secured by mortgages on real estate, the Bank's asset values and earnings
are exposed to risk associated with changes in real estate market values.
Generally, real estate values are specific to local real estate markets and are
based on the forces of supply and demand for real estate, the economic
conditions of the local real estate market, and interest rates. As changes in
real estate markets occur, the risk of actual losses in the Bank's loan
portfolio will change.
At September 30, 1994, the loans receivable portfolio was primarily comprised
of mortgages on 1-4 family residences and multi-family dwellings. The loan
portfolio also included, but to a much lesser extent, commercial real estate
loans, land loans and consumer loans. See "KEY CREDIT STATISTICS" for further
details.
The Bank reports 1-4 family and consumer loans as non-performing when they
become 90 days or more delinquent and multi-family and commercial real estate
loans when they become 60 days or more delinquent. Certain other loans are
also placed on a non-accrual status in accordance with the Bank's accounting
policy. The Bank also monitors the credit quality of its privately-issued MBS.
Generally, MBS are sold in the secondary market when the security is
down-graded below an investment grade.
At September 30, 1994, non-performing loans totaled $16.4 million compared to
$29.7 million at December 31, 1993. (2) Contributing to the $13.3 million
decline in non-performing loans were: 1) the transfer of $11.3 million of
delinquent loans to REO; 2) $4.7 million in charge-offs; and 3) a $4.3
million or 38.5% reduction in delinquent 1-4 family loans. During the nine
months ended September 30, 1994, $8.9 million of delinquent loans were added to
a non-
- - ---------------
(2) Of the $16.4 million of non-performing loans at September 30,
1994, $4.0 million were secured by multi-family real estate located in
California. Of the $29.7 million of non-performing loans at December 31,
1993, $7.5 million were secured by multi-family real estate located in
California.
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performing status.
The following are descriptions of individual non-performing loans at September
30, 1994 in which the Bank's net investment exceeds $2.0 million:
- A $3.2 million first mortgage loan (330 days delinquent) secured by a 128
unit apartment building located in Madison, Wisconsin. The Bank is
negotiating with the borrower to bring the loan current. If negotiations are
not successful, the Bank expects to complete foreclosure during the fourth
quarter of 1994.
- A $2.1 million first mortgage loan (300 days delinquent) secured by a 100
unit apartment building located in Colton, California. The Bank completed
foreclosure on the property during the fourth quarter of 1994.
- A $2.0 million first mortgage loan (180 days delinquent) secured by a
16 unit apartment building located in Chicago, Illinois. The property is
currently in bankruptcy and remitting cash flow payments to the Bank in
accordance with the bankruptcy agreement.
As of January 1, 1994, the Company adopted SFAS No. 114. See "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS" for summary of impaired loans and related
SVA.
The following tables summarize the components of classified and substandard
assets at September 30, 1994 and December 31, 1993 (dollars in thousands):
Classified Assets
-----------------
September 30, December 31,
1994 1993
------------ ------------
Substandard $ 208,021 $ 244,949
Doubtful 3,461 3,955
Loss(3) 6,702 6,058
------------ ------------
Total $ 218,184 $ 254,962
============ ============
- - ----------------
(3) Assets classified "loss" represent impaired amounts under SFAS
No. 114. Assets classified as loss are provided for through a specific
valuation allowance. These specific valuation allowances have not been
deducted in this schedule. See "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS" for further details.
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21
Substandard Assets
------------------
September 30, December 31,
1994 1993
---------------- ----------------
Non-performing assets:
REO $ 15,539 7.47% $ 11,884 4.85%
REO "in-substance" --- -- 8,039 3.28
Delinquent/nonaccrual
loans 16,424 7.90 29,668 12.11
------ ------- ------ -----
31,963 15.37 49,591 20.24
Loans delinquent 30-59 days
In portfolio 4,564 2.19 16,812 6.86
Sold with recourse --- -- 1,766 0.72
------ ------ ------ -----
Subtotal 4,564 2.19 18,578 7.58
Loans current and performing:
In portfolio 154,900 74.46 153,540 62.68
Sold with recourse 16,594 7.98 23,240 9.49
------- ----- ------- -----
Subtotal 171,494 82.44 176,780 72.17
------- ----- ------- -----
Total substandard assets $208,021 100.00% $244,949 100.00%
Less: substandard loans
sold with recourse(4) 16,594 25,006
------ -------
Substandard assets
in portfolio $191,427 $219,943
======== ========
Percent of Total Assets 4.73% 5.94%
======= =======
Of the $218.2 million of total classified assets at September 30, 1994, $195.0
million or 89.4% represented multi-family or commercial real estate assets, of
which $146.4 million (or 67.1% of total classified assets) consisted of
California multi-family or commercial real estate assets. Of the $208.0
million of substandard assets, $171.5 million or 82.4% were current and
performing in accordance with the mortgage notes but were deemed classified
pursuant to the Bank's credit rating system.
In comparison, at December 31, 1993, $228.4 million or 89.6% of the total
classified assets represented multi-family or commercial real estate assets, of
- - -----------------
(4) At September 30, 1994, total loans sold with recourse was $105.0
million with a maximum remaining loss exposure under these agreements of $27.3
million. At December 31, 1993, total loans sold with recourse was $214.8
million with a maximum remaining loss exposure under these agreements of $39.2
million.
21
22
which $153.3 million (or 60.1% of total classified assets) consisted of
California multi-family or commercial real estate assets. Of the $244.9
million of substandard assets at December 31, 1993, $176.8 million or 72.2%
were current and performing in accordance with the mortgage notes but were
deemed classified pursuant to the Bank's credit rating system.
The accumulated provision for loan losses at September 30, 1994 was $42.4
million compared to $46.6 million at December 31, 1993, a decrease of $4.2
million. See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for further detail.
On a quarterly basis, the Loan Loss Reserve Committee of the Board of Directors
("Reserve Committee") reviews the adequacy of the accumulated provision for
loan losses and the current loss provision after evaluating the results of the
loan loss reserve methodology. The Reserve Committee reviews the various risk
elements of credit which are inherent in each of the portfolios, including
loans sold with recourse. The risk components which are evaluated include the
results of individual credit reviews, the level of non-performing and
classified assets, geographic concentrations of credit, national economic
conditions, trends in real estate values, the impact of changing interest rates
on principal amortization and borrower debt service coverage(5), as well as
historical loss experience, peer group comparisons, and the regulatory guidance
issued by the OTS and other regulatory bodies.
The loan loss provision recorded during the nine months ended September 30,
1994 was $3.9 million compared to $9.3 million during the nine months ended
September 30, 1993. The lower provision recorded during 1994 generally
reflects a reduction in classified loans, lower non- performing assets, and a
lower multi-family portfolio balance. See "KEY CREDIT STATISTICS" and "NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS" for further details. The 1994 loan loss
provision was not affected by the January 17, 1994 Southern California
earthquake. Moreover, unlike many institutions, it was not necessary for the
- - -------------------
(5) Because the majority of multi-family and commercial real estate loans
are currently at their interest rate floors, increases in interest rates up to
the loan floors will have no impact on the required loan payments, which
mitigates some of the credit risk attendant to a moderate rise in interest
rates.
22
23
Bank to provide any payment or debt service relief to its borrowers in
connection with the California earthquake.
The loan loss provision recorded during the first nine months of 1994
maintains the accumulated provision for loan losses at levels considered
prudent by the Reserve Committee. Based on analysis of available information,
the Reserve Committee believes that the loan loss reserve methodology results
in accumulated provisions for loan losses which are adequate in view of the
risks inherent in the loan portfolio. The federal regulators have the
authority to order the Bank to establish additional reserves if they disagree
with the Reserve Committee's assessment of the adequacy of the accumulated
provision for loan losses.
The Company adopted SFAS No. 114 effective January 1, 1994. SFAS No. 114
requires impaired loans, that are within the scope of the statement, to be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral, if the loan is
collateral-dependent. The shortfall between the impaired loan's net carrying
amount and its computed value shall be provided for by creating a valuation
allowance (or by adjusting an existing valuation allowance), with a
corresponding charge to bad-debt expense. Because the Company previously
carried those loans considered "impaired" under SFAS No. 114 at the fair value
of the underlying collateral, the adoption of the new rules had no impact on
the Company's provision for loan losses. The Bank's accumulated provision for
loan losses account includes the valuation allowance required under SFAS No.
114; the Bank refers to these reserves as the "specific valuation allowances".
See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for further details.
The Company recorded $8.6 million in net loan and REO charge-offs during the
first nine months of 1994, equivalent to 0.48% of the average loans and REO on
an annualized basis. In comparison, the Company's net charge-offs in 1993 and
1992 were equivalent to 0.69% and 0.41% of average loans and REO, respectively.
See "KEY CREDIT STATISTICS" and "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS"
for
23
24
further details.
Comprising the Bank's $8.6 million of net loan and REO charge-offs in the
first nine months of 1994 were $6.9 million of charge-offs on impaired loans,
$809,000 of losses recorded in connection with foreclosure, $537,000 associated
with REO sales, $455,000 of charge-offs on 1-4 family and consumer loans not
accounted for under SFAS No. 114, and $253,000 of early prepayment inducements
on California real estate loans. These items were partly offset by recoveries
totaling $355,000.
OTHER REAL ESTATE OWNED ("REO")
REO totaled $15.5 million at September 30, 1994 compared to $19.9 million at
the end of 1993. (6) During the first nine months of 1994, seven loans (secured
by both multi-family and commercial real estate) totaling $12.8 million were
transferred to REO while eight REOs assets, including seven apartment buildings
and one parcel of land, totaling $13.5 million were sold.
The following is a description of individual REO assets in excess of $1.0
million at September 30, 1994:
- A $5.6 million, 435 unit apartment building located in Kent, Washington.
The Bank's investment in this property is net of ownership interests that were
sold without recourse to other institutions. The Bank has begun to make
disbursements for capital improvements to the properties, which may total
$2.50 million to $2.75 million in the aggregate. The Bank will be reimbursed
by the investing participants for 30.53% of disbursements made on this
property. After improvements have been completed, the Bank will market the
property. As of September 1994, the property is vacant while the improvements
are being completed.
- A $4.2 million, 176 unit apartment building located in Riverside,
California. Management is actively marketing this property. As of September
1994, the building is 75% occupied at an average rent per unit of $492.
- - ----------------
(6) Of the $15.5 million of REO at September 30, 1994, $4.2 million were
multi-family properties located in California. Of the $19.9 million of REO at
December 31, 1993, $9.0 million were multi-family properties located in
California.
24
25
- A $2.0 million, commercial real estate building (35,000 square feet)
located in Freeport, Illinois. Management is currently marketing the
property. As of September 1994, the building is fully occupied at an average
rent per square foot of $10.70.
The accumulated provision for real estate losses totaled $1.7 million at
September 30, 1994 compared to $819,000 at December 31, 1993. 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
accumulated provision for loan losses is charged for any excess of net book
value over fair value at the foreclosure, or in-substance foreclosure, date.
Subsequent to foreclosure, the accumulated provision for foreclosed real estate
losses is used to establish SVA on individual REO properties as declines in
market value occur and to provide general valuation allowances for possible
losses associated with risks inherent in the REO portfolio.
LIQUIDITY
Cash and cash equivalents (i.e., amounts due from depository institutions,
federal funds sold, and marketable-debt securities with original maturities of
less than 90 days) were dramatically reduced during the first nine months of
1994. At September 30, 1994, cash and cash equivalents totaled $129.9 million,
or $206.4 million lower than cash and cash equivalents at December 31, 1993 of
$336.3 million.
During the nine months ended September 30, 1994, the Bank acquired $396.4
million of adjustable-rate and $25.6 million of fixed-rate MBS using cash and
cash equivalents. Liquidity was also used during the current year to fund
$172.1 million of net loan growth and $88.8 million of net deposit outflows.
At September 30, 1994, the Bank had $127.0 million of FHLB advances and $100.0
million of borrowings under repurchase agreements outstanding to provide
liquidity for general retail operations.
Average cash and cash equivalents were $205.3 million during the first nine
months of 1994, compared to average cash and cash equivalents of $346.1 million
during the same period in 1993. Since most of the reduction in liquidity
occurred late in the first quarter and early in the second quarter of 1994,
25
26
average cash and cash equivalent balances were not reduced as much as the
period end balances.
As interest rates began to rise in early 1994, Management implemented an
aggressive strategy to build its earning asset base. This strategy
significantly affected the Bank's liquidity as well as the sources and uses of
funds during the first nine months of 1994.
As mentioned above, Management's strategy included the use of $421.9 million
of liquidity to acquire MBS. These MBS purchases were executed in an effort to
enhance investment earnings; generally, MBS earn higher yields than federal
funds and short-term marketable-debt securities. Also, $40.0 million of
adjustable-rate and $170.0 million of fixed-rate MBS were acquired with
proceeds from matched FHLB advances(7). These transactions are expected to
improve net interest income by approximately $1.5 million in 1994. Generally,
the Bank's policy requires a 1% spread or better when acquiring assets with
borrowings.
Further, Management has increased its residential loan originations in 1994
compared to 1993. During 1994, the increase in loan originations resulted from
greater consumer acceptance of adjustable-rate mortgages ("ARMs") which become
even more attractive as interest rates on long-term fixed-rate mortgages
increase. An expanded correspondent network, continued integration of the
Bank's 52 branches, a more competitive pricing structure, and stepped up sales
efforts contributed to the higher level of loan originations in the current
year. These changes allowed the Bank to originate $539.6 million of loans for
its loan
- - ------------------
(7) To mitigate interest rate risk on the matched funding, the Bank
has entered into a $130.3 million notional amount interest rate exchange
agreement with a primary dealer. Under this agreement, the Bank pays a
floating interest rate, based upon a referenced index, and receives a fixed
payment from the counterparty. The Bank reduced its credit risk by obtaining an
unconditional guarantee from the parent company of the counterparty, which is
an "A1/A+" rated securities dealer. The interest rate exchange agreement is
scheduled to amortize based upon the same assumptions used in pricing the
acquired MBS. If actual MBS prepayments vary significantly from anticipated
prepayments, the Bank can adjust the transaction by acquiring additional assets
or exercising an option to repay a portion of the debt.
26
27
receivable portfolio(8) during the first nine months of 1994 compared to $347.9
million during the same period in 1993. The Bank's 5/1 mortgage product, which
has a fixed rate for the first five years and then converts to an annual
adjustable-rate for the remaining term comprised $243.1 million of the 1994
originations. A slowdown in mortgage loan refinancing activity in the latter
half of 1993 complemented Management's loan origination strategy and
contributed to the net growth in the loans receivable portfolio in 1994.(9)
The Bank relies on adjustable-rate securities and mortgage loans receivable to
provide interest rate risk protection against further rises in market interest
rates. At September 30, 1994, approximately $2.1 billion or 57% of the Bank's
loans receivable and MBS portfolio is scheduled to reprice during the next
twelve months based upon contractual repricing terms and scheduled principal
amortization. However, interest rate floors in effect on $751.1 million of
adjustable-rate loans at September 30, 1994 may prevent rate sensitive assets
from repricing upward as quickly as rate sensitive liabilities.
See "CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)" for further details.
Sources of Funds. The major sources of funds during the nine month period
ended September 30, 1994 included $430.0 million of new borrowings, $360.2
million of principal repayments on loans receivable, $272.1 million from the
issuance of certificates of deposits("CDs"), $170.1 million of principal
repayments on MBS, $70.2 million from the sale of marketable-debt securities,
and $61.0 million from the sale of loans receivable. In comparison, the major
sources of funds during the nine month period in 1993 included $422.6 million
of principal repayments on loans, $212.3 million from the issuance of CDs,
$180.8 million of principal repayments on MBS, $127.5 million in maturities of
marketable-debt securities,
- - ------------------
(8) In addition, the Bank originated $42.6 million of loans for sale
in the secondary market.
(9) Although loan repayments slowed relative to the latter half of
1993, they did not decline as rapidly as Management expected. See
"LIQUIDITY -- SOURCES OF FUNDS" for further details.
27
28
$76.1 million of proceeds from the sale of loans receivable, and $33.4
million from the issuance of subordinated notes.
As discussed above, the Bank borrowed $210.0 million of FHLB advances to
fund MBS purchases during 1994 and relied upon $127.0 million of FHLB advances
and $100.0 million of borrowings under agreements to repurchase to fund
additional loan disbursements and deposit outflows. In comparison, in February
of 1993, St. Paul Bancorp issued $34.5 million of 8.25% subordinated debt. The
Company used a portion of the proceeds to acquire St. Paul Financial Development
from the Bank on June 30, 1993 and for general corporate purposes, such as
financing the operations of St. Paul Financial Development and financing
acquisitions of financial services companies.
Repayment of loans receivable and MBS were $530.4 million during the first
nine months of 1994 compared to $603.4 million in the same period in 1993, a
decline of $73.0 or 12.1%. Management believes this decline in repayment
activity is associated with higher market interest rates and may be indicative
of lower loan repayment trends for the remainder of 1994.
Loan sales during the first nine months of 1994 were $15.1 million less than
the same period in 1993. The lower sales volume was primarily due to a
reduction in the amount of loans originated for sale. During 1994, the Bank
has emphasized loan products with adjustable-rate characteristics, which has
allowed the Bank to retain a higher percentage of the originations for its
portfolio. As a result, the amount of fixed-rate loan originations has
decreased in 1994. Generally, the Bank's policy is to sell conforming,
fixed-rate mortgage loans in the secondary market. However, rather than
raising rates paid on deposits, the Bank is currently considering selling new
originations of the 5/1 ARM product into the secondary mortgage market as an
additional source of funds.
During 1994, the Bank used $70.2 million of proceeds from the sale of
available-for-sale marketable-debt securities and $19.0 million of proceeds
from maturities of marketable-debt securities to provide additional liquidity
for retail banking operations.
Proceeds from the issuance of CDs totaled $272.1 million in 1994, or $59.8
million higher than the $212.3 million of proceeds received in 1993. Higher
28
29
market interest rates produced the increase in the issuance of CDs.
Uses of Funds. The major uses of funds during the nine months ended September
30, 1994 included $632.0 million for the acquisition of MBS, $582.2 million of
loan originations, $336.1 million of payments for maturing CDs, and $51.6
million for the purchase of marketable-debt securities. In comparison, the
major uses of funds during the same period in 1993 included $436.7 million of
loan originations, $231.9 million of payments for maturing CDs, $136.1 million
of MBS purchases, $105.9 million for the purchase of marketable-debt
securities, $67.5 million decrease in other borrowings, $47.3 million of FHLB
advance maturities, and $26.7 million for the acquisition of Elm Financial.
Management's strategy to build interest earning assets in 1994 caused MBS
purchases in the current year to far exceed those of 1993.
Loans receivable originations were approximately 37% higher in 1994
compared to 1993. See discussion above for further details. See "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS" for further details of loan origination
commitments.
The growth in the MBS and loans receivable portfolio in 1994 limited the level
of funds available to purchase marketable-debt securities. As a result,
marketable-debt securities purchases in 1994 were below the level purchased in
1993.
Payments for maturing CDs increased $104.2 million during 1994 to total $336.1
million for the nine months ended September 30, 1994. During 1994, the Bank
allowed some of its higher rate CDs to run-off, while emphasizing the sale of
9-month CDs and other deposit products.
Holding Company Liquidity. At September 30, 1994, St. Paul Bancorp had $33.1
million of cash and cash equivalents and $968,000 of marketable- debt
securities. A portion of St. Paul Bancorp's U.S. marketable-debt securities
are used to collaterize borrowings of the ESOP.
Sources of liquidity for St. Paul Bancorp during the first nine months of 1994
included $25.7 million of dividends from the Bank and $1.0 million of dividends
from Annuity Network, Inc. Uses of St. Paul Bancorp's liquidity during
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30
the first nine months of 1994 included $5.1 million to acquire St. Paul
Bancorp common stock under the stock repurchase program, $4.4 million of
dividends paid to shareholders, $2.3 million to finance the activities of St.
Paul Financial Development, and $2.1 million paid to service the subordinated
debt issued in February of 1993. See "CAPITAL" for further discussion.
In July of 1994, the Company announced its intentions to acquire up to an
additional 5% or 964,000 shares of its outstanding common stock during the
second half of 1994 under a stock repurchase program. As of September 30,
1994, only 11,000 shares have been repurchased under this program.(10) The
Company anticipates using available liquidity to repurchase any additional
shares.
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, certain corporate debt securities, and securities of
specified United States government, state, or federal agency obligations. This
liquidity requirement may be changed from time to time by the Director of the
OTS to any amount within the range of 4% to 10% of average deposits and
short-term borrowings depending upon the economic conditions and the deposit
flows of savings institutions. The current liquidity requirement is 5% of
average deposits and short-term borrowings. At September 30, 1994, the Bank
had $198.6 million invested in liquid assets, which exceeded the current
requirement by $32.0 million. Up to certain limits, the Bank can use FHLB
advances, securities sold under agreements to repurchase, and the issuance of
mortgage-backed notes as additional sources of liquidity.
- - ------------------
(10) As of October 31, 1994, an additional 60,500 shares had been
acquired under this repurchase program.
30
31
STATEMENT OF FINANCIAL CONDITION
St. Paul Bancorp reported total assets of $4.05 billion at September 30,
1994 compared to $3.71 billion at December 31, 1993, an increase of $343.7
million or 9.3%. Higher MBS balances of $435.4 and an increase in loans
receivable of $172.1 million contributed to the growth in total assets during
the first nine months of 1994. These increases were partly offset by a $206.4
million reduction in cash and cash equivalents and lower marketable-debt
securities of $40.0 million.
Cash and cash equivalents totaled $129.9 million at September 30, 1994
compared to $336.3 million at December 31, 1993, a decline of $206.4 million or
61.4%. The Bank relied heavily on liquidity to acquire MBS, build the loans
receivable portfolio and fund deposit run-off. See "LIQUIDITY" for further
discussion.
At September 30, 1994, marketable-debt securities totaled $102.1 million,
or 28.2% lower than the December 31, 1993 balance of $142.1 million. At
September 30, 1994, 18.3% of the marketable-debt security portfolio had
adjustable-rate characteristics compared to 29.5% of the portfolio at December
31, 1993. The weighted average interest rate earned on the marketable-debt
security portfolio was 5.07% at September 30, 1994 compared to 4.21% at
December 31, 1993.
MBS totaled $1.17 billion at September 30, 1994, $435.4 million or 59.4%
higher than the $733.6 million of MBS at December 31, 1993. The purchase of
$632.0 million of MBS, partly offset by principal repayments of $170.1 million,
produced the growth in MBS during the first nine months of 1994. See
"LIQUIDITY" for further discussion. At September 30, 1994, 63.9% of the MBS
portfolio had adjustable-rate characteristics compared to 74.3% of the
portfolio at December 31, 1993. The weighted average interest rate on the MBS
portfolio was 5.76% at September 30, 1994 compared to 5.91% at December 31,
1993.
Loans receivable totaled $2.52 billion at September 30, 1994 compared to
$2.35 billion at December 31, 1993, an increase of $172.1 million or 7.3%.
Loan originations of $568.6 million outpaced loan repayments of $360.2 million
during
31
32
the first nine months of 1994. See "LIQUIDITY" for further discussion.
At September 30, 1994, 54.7% of the loan portfolio will reprice during the next
twelve months, based upon contractual repricing and scheduled principal
amortization, compared to 61.8% at December 31, 1993. The weighted average
interest rate on loans receivable decreased to 7.49% at September 30, 1994 from
7.88% at December 31, 1993.
Deposits totaled $3.16 billion at September 30, 1994, $88.8 million or 2.7%
lower than the deposit balances of $3.25 billion at December 31, 1993. CDs and
money market account balances declined during the first nine months of 1994,
while savings accounts and checking accounts increased slightly. In an effort
to control deposit costs in an increasing short- term interest rate
environment, the Bank has set pricing levels on deposits in order to allow
higher costing deposits to run-off, while attempting to attract new accounts.
At September 30, 1994, 54.5% of the deposit portfolio was comprised of CDs
compared to 54.1% of the portfolio at December 31, 1993. The weighted average
interest rate paid on deposits was 3.60% at September 30, 1994 compared to
3.56% at December 31, 1993.
FHLB advances totaled $337.0 million at September 30, 1994. In
comparison, the Bank had $7.2 million of FHLB advances outstanding at December
31, 1993. During 1994, the Bank used $210.0 million of new FHLB advances to
acquire MBS and $119.7 million to supplement its liquidity reserves. Other
borrowings increased $99.5 million during the first nine months of 1994, to
total $156.2 million at September 30, 1994 compared to $56.8 million at
December 31, 1993. Other borrowings were used to provide additional liquidity
to fund the retail banking operations. The weighted average interest rate paid
on borrowings was 6.02% at September 30, 1994 compared to 9.34% at December 31,
1993. See "LIQUIDITY" for further discussion.
Stockholders' equity totaled $358.9 million at September 30, 1994, $11.5
million higher than total equity of $347.3 million at December 31, 1993. See
"CAPITAL" and the "CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY" for further
details.
See "CREDIT" for discussion of foreclosed real estate balances.
32
33
RATE/VOLUME ANALYSIS
The following table presents the components of the changes in net interest
income by volume and rate(11) for the three months ended September 30, 1994 and
1993:
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1994 vs 1993
---------------------------------
INCREASE/(DECREASE)
DUE TO
---------------------------------
TOTAL
Dollars in thousands VOLUME RATE CHANGE
- - --------------------------------------------------------------------
CHANGE IN INTEREST INCOME:
Loans receivable $(182) $(3,413) $(3,595)
Mortgage-backed securities 7,503 (1,156) 6,347
Marketable-debt securities (329) 227 (102)
Trading accounts (12) (12) (24)
Federal funds (449) 135 (314)
Other short-term investments (2,381) 862 (1,519)
---------
Total interest income 793
CHANGE IN INTEREST EXPENSE:
Deposits (610) (1,369) (1,979)
Short-term borrowings 1,172 (356) 816
Long-term borrowings 3,319 (155) 3,164
---------
Total interest expense 2,001
---------
NET CHANGE IN NET INTEREST INCOME
BEFORE PROVISION FOR LOAN LOSSES $(1,208)
=========
- - ------------------
(11) This analysis allocates the change in interest income and expense
related to volume based upon the change in average balances and prior periods
applicable yields or rates paid. The change in interest income and expense
related to rate is based upon the change in yields or rates paid and the prior
period 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 non-performing assets has been included in the rate variance.
33
34
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
General. Net income totaled $9.0 million or $0.44 per share during the third
quarter of 1994 compared to $11.1 million or $0.54 per share during the same
period in 1993. The lower level of income in 1994 was associated with a $1.2
million decrease in net interest income, a $1.2 million decline in other
income, and a $836,000 increase in general and administrative expenses. These
reductions were partly offset by a $1.3 million decline in the provision for
loan losses. The lower level of pre-tax earnings in 1994 was further reduced
by a 3% increase in the Company's effective income tax rate.
Comprising the $1.2 million reduction in net interest income was a $2.0
million increase in interest expense, partly offset by higher interest income
of $793,000. The net interest margin ("NIM") declined 34 basis points from
3.44% for the third quarter of 1993 to 3.10% for the third quarter of 1994.
Lower yields earned on loans and MBS caused a 50 basis point contraction in the
NIM while lower deposit costs benefited the NIM by only 15 basis points. The
lower yields on loans and MBS were caused by originations and purchases of
assets at rates lower than the portfolio average and principal repayments of
older, higher yielding loans and MBS. Average deposit rates dropped 17 basis
points from the third quarter of 1993 compared to the third quarter of 1994.
Approximately three-quarters of the decline in deposit rates was associated
with lower rates paid on CDs and savings account products. The remainder the
decline in the deposit rate was produced by a shift in the composition of
deposits, which allowed the Bank to replace maturing CDs with lower interest
cost deposit products.
The Bank's ability to sustain the current level of net interest income during
future periods is largely dependent upon the maintenance of the interest rate
spread, the relative size of interest earning assets compared to interest
bearing liabilities, the level of loan repayments and originations, and asset
quality.
The interest rate spread was 2.93% at September 30, 1994 compared to 3.30%
at December 31, 1993 and 3.47% at September 30, 1993. Many forces influence
the magnitude of the Bank's interest rate spread, most notably: interest rate
floors
34
35
in effect on adjustable-rate loans, the Bank's ability to originate
loans and the availability of attractively priced loans and MBS in the
secondary market, the performance of the economy, the actions of the Board of
Governors of the Federal Reserve System, the Bank's asset/liability management
actions and market interest rates generally. See "LIQUIDITY" and
"ASSET/LIABILITY REPRICING TABLE" for further detail.
Interest Income. Interest income increased $793,000 or 1.2% to total $64.8
million during the third quarter of 1994. Higher income from MBS of $6.3
million, was partly offset by a $3.6 million decrease in income from loans
receivable and a $2.0 million decline in income from investments.
Interest income on loans receivable declined $3.6 million or 7.2% during
the third quarter of 1994 compared to the same period in 1993. Lower yields
earned on loans receivable balances produced most of the decrease in interest
income during third quarter of 1994. The loan yield was 7.45% during the third
quarter of 1994 compared to 8.00% during the same period in 1993, a decline of
55 basis points. The lower loan yield was associated with loan originations at
rates below the portfolio's average and payoffs of higher yielding loans.
Also, downward repricing in the adjustable-rate loan portfolio modestly
contributed to the decrease in the loan yield.
Approximately 48 basis points of the 7.45% loan yield, or approximately $2.9
million of interest income earned during the third quarter of 1994, was
attributable to interest rate floors on Nationwide and 1-4 family loans. In
comparison, during the third quarter of 1993, approximately 65 basis points, or
$4.0 million of interest income earned during the quarter was attributed to
interest rate floors. At September 30, 1994, approximately $702.2 million of
the Bank's Nationwide loans and approximately $48.9 million of the 1-4 family
loans were at their weighted average floor of 7.96%. Had the floors not been
in effect on these loans, their weighted average interest rate would have been
6.46%, or 150 basis point lower, which would have lowered the Bank's September
30, 1994 interest rate spread by 31 basis points. In comparison, at December
31, 1993, approximately $781.7 million of Nationwide loans and $112.5 million
of 1-4 family loans were at their weighted average floor of 8.07%. Had the
floors not been in effect on these loans, their weighted average interest rate
would have been
35
36
6.35%, or 172 basis point lower, which would have lowered the
Bank's interest rate spread by 42 basis points.
Approximately three-quarters of the loan receivable portfolio was comprised of
adjustable-rate products at September 30, 1994. Despite a 213 basis point
increase in the 1 year treasury bill rate since November of 1993, favorable
repricing on these assets has been nominal. First, 40% of the adjustable-rate
loans were at their floors at September 30, 1994. These assets will not
reprice until their fully-indexed rates exceed the floors. On average, the
fully indexed rates of these loans were below their floors by 150 basis points
at September 30, 1994. Second, approximately 45% of the adjustable-rate loan
portfolio is tied to cost of funds indices. Generally, the movement in the
cost of funds indices lags behind movements in short-term interest rates. For
example, the National Cost of Funds index began moving upwards in June 1994
compared to the 1 year treasury bill rate which began to increase in November
1993. Finally, the adjustable-rate portfolio includes $448.1 million of loans
with initial fixed interest rate periods of three to five years and are not
subject to repricing at this time.
Lower average loans receivable of $9.2 million produced a slight decrease
in interest income in the third quarter of 1994. Loans receivable averaged
$2.46 billion during the third quarter of 1994 compared to $2.47 billion during
the same period in 1993. During most of 1993 and early 1994, loan repayments
exceeded ARM originations, which produced the slightly lower average loans
receivable in 1994 relative to 1993. Despite a rise in market interest rates
during 1994, Management's strategy to increase loan originations in 1994 has
reversed this trend, allowing the Bank to rebuild its loan receivable portfolio
in recent months. See "LIQUIDITY" for further discussion.
Interest income on MBS was $6.3 million higher during the third quarter of
1994 compared to the third quarter of 1993. Higher average MBS balances caused
interest income to increase in 1994, while a decline in MBS yields adversely
impacted the level of interest income. Average MBS balances were $1.20 billion
during the third quarter of 1994, or $531.2 million higher than average
balances of $667.7 million during the same period in 1993. The acquisition of
$772.1 million of MBS during the twelve month period ended September 30, 1994
allowed
36
37
average MBS balances to increase despite the high level of loan
refinancing activity experienced within the industry during the same period.
See "LIQUIDITY" for further discussion. Offsetting the increase in average MBS
balances was a 63 basis point decrease in the MBS yield to 5.58% during the
current quarter compared to 6.21% during the same quarter in 1993. The
reinvestment of proceeds from higher yielding fixed-rate MBS into lower
yielding securities contributed to the lower yield in 1994, while downward
repricing in the adjustable-rate portfolio also contributed modestly to the
decline in yield.
Approximately 64% of the MBS portfolio was comprised of adjustable-rate
securities at September 30, 1994. Despite upward movements in the 30 year
treasury bond rate and the 5 year treasury note rate since the fourth quarter
of 1993, favorable repricing on the adjustable-rate MBS has been nominal. A
large percent of the adjustable-rate securities is tied to cost of fund
indices. As discussed above, movements in the cost of fund indices generally
lag behind movements in market interest rates and only recently are beginning
to rise.
Interest income from investments, which includes marketable-debt
securities, federal funds and other short-term investments, during the third
quarter of 1994 decreased $2.0 million compared to income recorded during the
same period in 1993. The decline in income was associated with lower average
investment balances, partly offset by a higher investment yield. Average
investment balances were $171.9 million during the third quarter of 1994, or
$285.2 million lower than the $457.1 million of average investment balances
during the same period in 1993. The reinvestment of proceeds from investment
maturities and sales into other interest earning assets and to help fund deposit
run-off produced the lower average investment balances. See "LIQUIDITY" for
further discussion. The combined yield on investments was 5.12% during the
third quarter of 1994, or 148 basis points higher than the 3.64% yield during
the third quarter of 1993. The higher yield was mostly associated with an
extension of average maturities on marketable-debt securities and an increase in
short-term market interest rates in 1994.
Interest Expense. Interest expense totaled $35.1 million during the three
months ended September 30, 1994, $2.0 million or 6.0% higher than interest
expense recorded during the same period in 1993. The higher level of interest
expense
37
38
was produced by a $4.0 million increase in interest expense on
borrowings, partly offset by a $2.0 million reduction in interest expense on
deposits.
The $2.0 million reduction in deposit interest expense resulted from both
lower rates paid to depositors and lower average deposit balances. The rate
paid on deposits averaged 3.57% during the third quarter of 1994 compared to
3.74% during the same period a year ago. Most of the lower deposit rate was
associated with lower rates paid on CDs and savings account products. Also,
contributing modestly to the decline in the deposit rate was a shift in the
composition of deposit products away from CDs, the Bank's highest rate deposit
product, to checking and savings accounts.
Although the Bank has been successful in reducing its average interest cost of
deposits in 1994 compared to the same periods in 1993, the rate paid on
deposits at September 30, 1994 is 10 basis points higher than the rate paid at
March 31, 1994. CD sales in the second and third quarters of 1994 contributed
to the increase in the deposit rate at September 30, 1994. If short-term
market interest rates continue to increase, it may be necessary for Management
to increase rates paid on all of its deposit products.
Deposit balances averaged $3.19 billion during the third quarter of 1994
compared to $3.26 billion during the third quarter of 1993, a decrease of $65.8
million. The lower average balances during the third quarter of 1994 was
largely produced by lower CDs and money market balances, partly offset by
higher average savings and checking account balances.
The $4.0 million increase in interest expense on borrowings was the net
result of higher average borrowing balances and lower rates paid on borrowings.
Average borrowing balances were $404.2 million in the third quarter of 1994, or
$278.5 higher than average balances during the same period of 1993. The use of
FHLB advances to fund the acquisition of MBS and the reliance on FHLB advances
and borrowings under agreements to repurchase to provide liquidity for retail
banking operations caused the increase in average balances during the current
year. See "LIQUIDITY" for further discussion. Lower rates on new borrowings
during 1994 compared to the rates paid on the borrowings outstanding during the
third quarter of 1993 produced the decrease in the average borrowing rate. The
38
39
average rate paid on borrowings was 6.25% during the third quarter of 1994
compared to 7.54% during the same period in 1993.
Provision for Loan Losses. The Company recorded a $1.2 million provision for
loan losses during the third quarter of 1994 compared to a $2.5 million
provision recorded during the same period in 1993. Effective January 1, 1994,
the Company adopted SFAS No. 114. Since the Company previously valued loans
considered to be impaired under SFAS No. 114 at the fair value of the loan's
collateral, the adoption of SFAS No. 114 had no impact on the Company's
provision for loan losses during the first nine months of 1994. See "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS" for further details. See "CREDIT" for
further discussion of loss provisions and adequacy of the accumulated
provisions for losses.
Other Income. Other income totaled $7.5 million during the third quarter of
1994 compared to $8.7 million during the same period in 1993, a $1.2 million or
14.2% decline. During 1994, revenues from discount brokerage operations
decreased $738,000, primarily as a result of a 22% decrease in trading volumes.
Also, lower gains recorded on the sale of "conversion" loans contributed to a
$440,000 decline in gains on asset sales, and interest recorded on federal
income tax refunds received in the third quarter of 1993 caused the $424,000
decrease in other income. See "LIQUIDITY" for additional discussion of loan
sales activity.
These declines were partly offset by higher other fee income of $425,000,
primarily associated with an increase in the number of checking accounts and
the expansion of ATM operations.
General and Administrative Expense. General and administrative expenses
increased $836,000 or 4.0% from the third quarter of 1993. Most of the
increase was associated with a $969,000 or 9.0% increase in compensation and
benefits and a $498,000 or 10.5% increase in occupancy, equipment and other
office expense. The increase in these costs mostly resulted from the expansion
of the branch network, annual salary increases, extended hours at many of the
Bank's branch facilities, and expansion of ATM operations. Approximately 60%
of the increase in compensation was attributed to expansion of the branch
network and extended hours, while the remainder was due to annual salary
increases. Higher pension
39
40
costs, payroll taxes, and medical insurance premiums were also experienced
in 1994. These increases in general and administrative expenses were offset
by lower advertising and deposit insurance premiums.
Management of the Company is committed to controlling general and
administrative costs in order to help protect against declines in net income.
During 1994, Management has taken steps to reduce general and administrative
expenses from levels originally targeted for 1994. As a result, general and
administrative costs are about level with those recorded during the first and
second quarters of 1994.
Operations of Foreclosed Real Estate. The Bank generated a net loss from its
foreclosed real estate operation of $347,000 during the third quarter of 1994
compared to a net loss of $318,000 during the same period in 1993. The higher
net loss during 1994 was primarily associated with the increase in costs to
operate the REO properties, partly offset by higher gains on the sale of REO
and lower provisions for losses. See "CREDIT" for further discussion of REO.
Income Taxes. Income taxes totaled $4.9 million or 35.1% of pre-tax income
during the third quarter of 1994 compared to $4.8 million or 30.1% of pre-tax
income during the third quarter of 1993. A higher effective federal and state
income tax rate produced the increase in the rate between the two periods.
40
41
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
At September 30, Three months ended September 30
Dollars in thousands 1994 1994 1993
- - ----------------------------------------------------------- ---------------------------------------------------------------
Average Average Average Average Average
Balance Rate Balance(a) Interest Yield Balance(a) Interest Yield
- - ---------------------------------------------------------------------------------------------------------------------------
Loans receivable (b) $2,532,482 7.49% $2,463,666 $45,861 7.45% $2,472,817 $49,456 8.00%
Mortgage-backed securities 1,169,088 5.76 1,198,922 16,718 5.58 667,737 10,371 6.21
Marketable-debt securities 102,068 5.00 105,840 1,334 5.00 133,870 1,436 4.26
Trading account --- -- --- -- -- 2,416 24 3.94
Federal funds 10,000 5.00 7,622 87 4.53 52,326 401 3.04
Other investments (c) 61,137 5.21 58,462 778 5.28 268,502 2,297 3.39
- - ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $3,874,775 6.86% $3,834,512 $64,778 6.76% $3,597,668 $63,985 7.11%
============================================================================================================================
Deposits $3,163,774 3.60% $3,192,934 $28,700 3.57% $3,258,708 $30,679 3.74%
Borrowings:
Short-term borrowings (d) 220,275 5.42 131,243 1,619 4.89 42,779 803 7.45
Long-term borrowings (d) 272,887 6.52 272,929 4,749 6.90 82,870 1,585 7.59
- - ----------------------------------------------------------------------------------------------------------------------------
Total borrowings 493,162 6.02 404,172 6,368 6.25 125,649 2,388 7.54
- - ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $3,656,936 3.93% $3,597,106 $35,068 3.87% $3,384,357 $33,067 3.88%
============================================================================================================================
Excess of interest-earning assets
over interest-bearing liabilities $217,839 $237,406 $213,311
============================================================================================================================
Ratio of interest-earning assets over
interest-bearing liabilities 1.06 1.07 1.06
============================================================================================================================
Net interest income - $29,710 $30,918
============================================================================================================================
Interest rate spread 2.93% - -
============================================================================================================================
"Average" interest rate spread - 2.89% 3.23%
============================================================================================================================
Net yield on average earning assets - 3.10% 3.44%
============================================================================================================================
(a) All average balances based on daily balances.
(b) Includes loans held for sale and loans placed on nonaccrual.
(c) Includes investment in Federal Home Loan Bank stock, deposits at Federal
Home Loan Bank, and other short-term investments.
(d) Includes FHL Bank advances, floating rate notes, other borrowings,
subordinated capital notes. Excludes ESOP loan for 1993 periods.
41
42
RATE/VOLUME ANALYSIS
The following table presents the components of the changes in net interest
income by volume and rate(12) for the nine months ended September 30, 1994 and
1993:
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1994 vs 1993
----------------------------------
INCREASE/(DECREASE)
DUE TO
-------------------------------------
TOTAL
Dollars in thousands VOLUME RATE CHANGE
- - ----------------------------------------------------------------------
CHANGE IN INTEREST INCOME:
Loans receivable $(5,015) $(12,044) $(17,059)
Mortgage-backed securities 15,624 (6,153) 9,471
Marketable-debt securities (547) 523 (24)
Trading accounts (73) 1 (72)
Federal funds (250) 127 (123)
Other short-term investments (4,033) 1,308 (2,725)
----------
Total interest income (10,532)
CHANGE IN INTEREST EXPENSE:
Deposits 90 (7,944) (7,854)
Short-term borrowings (1,387) (1,077) (2,464)
Long-term borrowings 6,328 (371) 5,957
----------
Total interest expense (4,361)
----------
NET CHANGE IN NET INTEREST INCOME
BEFORE PROVISION FOR LOAN LOSSES $(6,171)
==========
- - -----------------
(12) This analysis allocates the change in interest income and expense
related to volume based upon the change in average balances and prior periods
applicable yields or rates paid. The change in interest income and expense
related to rate is based upon the change in yields or rates paid and the
prior period 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 non-performing assets has been included in the rate variance.
42
43
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
General. Net income totaled $25.8 million or $1.27 per share during the nine
months ended September 30, 1994 compared to $31.9 million or $1.57 per share
during the same period in 1993. The lower level of income in 1994 compared to
1993 was associated with a $6.2 million decrease in net interest income, a $4.1
million increase in general and administrative expenses, a $1.2 million
decrease in other income, and higher net expenses from REO operations of
$599,000. These reductions were partly offset by a $5.4 million decline in the
provision for loan losses and lower income tax expense of $694,000. The lower
level of pre-tax earnings in 1994 was further reduced by a higher effective
income tax rate.
Comprising the $6.2 million reduction in net interest income was a $10.5
million decline in interest income, partly offset by lower interest expense of
$4.4 million. The net interest margin ("NIM") for the first nine months of
1994 was 3.18%, or 33 basis points lower than the NIM of 3.51% during the same
period of 1993. Contributing to the decrease in NIM was lower yields earned on
loans and MBS, which caused a 60 basis point contraction in the NIM, partly
offset by lower deposit costs, which benefited the NIM by 29 basis points.
Lower yields on loans and MBS were caused by originations and purchases of
assets at rates lower than the portfolio average and principal repayments of
older, higher yielding loans and MBS. Lower average rates paid on deposits
primarily resulted from lower rates on CDs and savings account products.
The Bank's ability to sustain the current level of net interest income during
future periods is largely dependent upon the maintenance of the interest rate
spread, the relative size of interest earning assets compared to interest
bearing liabilities, the level of loan repayments and originations, and asset
quality. See "COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993"
for discussion of interest rate spread.
Interest Income. Interest income declined $10.5 million or 5.4% to total
$185.8 million during the first nine months of 1994. Contributing to the lower
level of interest income was a decrease in income from loans receivable of
$17.1 million and investments of $2.9 million, partly offset by higher income
from MBS of $9.5 million.
43
44
Interest income on loans receivable totaled $134.7 million for the nine
month period ended September 30, 1994, or 11.2% lower than the same period in
1993. Approximately two-thirds of the lower level of income from loans
receivable was associated with a 67 basis point drop in the loan rate between
the two periods. The yield on loans receivable was 7.52% during the first nine
months of 1994 compared to 8.19% during the same period in 1993. The decline in
loan yield resulted from loan originations at rates below the portfolio's
average rate and payoffs of higher yielding loans. Downward repricing in the
adjustable-rate portfolio also contributed modestly to the lower loan yield.
Approximately 55 basis points of the 7.52% loan yield during 1994, or $9.9
million of interest income, was attributable to interest rate floors on
Nationwide and 1-4 family loans. In comparison, during the first nine months of
1993, approximately 60 basis points of the loan yield, or $11.1 million of
interest income was attributable to interest rate floors on Nationwide and 1-4
family loans.
The remaining decline in interest income from loans receivable was caused
by lower average loan receivable balances. Loans receivable averaged $2.39
billion during the nine month period ended September 30, 1994, or $83.7 million
lower than the average balances during the same period in 1993 of $2.47
million. During most of 1993 and early 1994, loan repayments exceeded ARM
originations, which produced the lower average loans receivable balances in
1994 relative to 1993. Despite a rise in market interest rates during 1994,
Management's strategy to increase loan originations during 1994 has reversed
this trend, allowing the Bank to rebuild its loans receivable portfolio in
recent months. See "LIQUIDITY" for further discussion.
The $9.5 million increase in interest income on MBS during the first nine
months of 1994 compared to the same period in 1993 was largely associated with
the acquisition of $772.1 million of MBS during the twelve months ended
September 30, 1994. These acquisitions, partly offset by principal repayments,
caused average MBS balances to total $1.03 billion during the first nine months
of 1994, or $366.8 million higher than the same period in 1993. See
"LIQUIDITY" for further discussion. The MBS yield was 5.43% during the first
nine months of 1994, or 109 basis points lower than the yield of 6.52% during
the first nine months of 1993. The purchase of MBS securities at rates below
the portfolio's average contributed to the lower yield in the first nine months
of 1994. Also,
44
45
contributing modestly to the decline in yield was downward
repricing in the adjustable-rate portfolio.
Interest income from investments, which includes marketable-debt
securities, federal funds and other short-term investments, was $2.9 million
lower during the first nine months of 1994 compared to the same period in 1993.
The lower level of income was associated with a $171.4 million decrease in
average balances, partly offset by 74 basis point increase in the investment
yield. Average investments balances totaled $285.0 during the nine month period
ended September 30, 1994 compared to $456.4 million in the same period a year
earlier. The reinvestment of proceeds from investment maturities into other
interest earning assets produced the lower average balances. See "LIQUIDITY"
for further discussion. The yield earned on investments increased from 3.53%
during the first nine months of 1993 to 4.27% during the same period in the
current year. An extension of the average maturities on marketable-debt
securities, which increased from an average maturity of 30 months at September
30, 1993 to 40 months at September 30, 1994, and an increase in short-term
interest rates during 1994 produced the higher yield on investments.
Interest Expense. Interest expense totaled $97.5 million during the nine
months ended September 30, 1994, $4.4 million or 4.3% lower than the same
period in 1993. The lower interest expense was produced by a $7.9 million
reduction in interest expense on deposits, partly offset by a $3.5 million
increase in borrowing expense.
The $7.9 million reduction in deposit interest expense was mostly
associated with a 33 basis point drop in the rates paid to depositors, partly
offset by a slight increase in average balances. The average rate paid to
depositors was 3.54% during the first nine months of 1994 compared to 3.87%
during the same period in 1993. The lower rates paid on deposits was caused by
a decrease in market interest rates during 1993, which allowed the Bank to
reduce the rates paid on all of its deposit products. The lower rates paid on
CDs and savings account products primarily contributed to the overall lower
rate. Also contributing modestly to the lower rate paid on deposits was a
shift in the composition of deposit from higher rate CDs to lower rate savings
and checking accounts.
45
46
Average deposit balances increased $3.1 million to total $3.22 billion during
the nine month period ended September 30, 1994. The growth in average savings
and checking balances was partly offset by lower average CD balances.
Interest expense on borrowings increased $3.5 million during the nine
month period ended September 30, 1994 compared to the same period in 1993. The
increase in expense was associated with a higher average borrowing balances,
partly offset by lower average rates paid on these borrowings. Average
borrowing balances increased $88.4 million to average $252.8 million during the
first nine months of 1994 compared to $165.6 during the same period a year
earlier. During the first nine months of 1994, the Bank used new borrowings to
fund MBS acquisitions and to provide liquidity for lending. See "LIQUIDITY"
for further discussion. The average rate paid on borrowings was 6.57% during
the first nine months of 1994, or 64 basis points lower than the 7.21% average
rate paid on borrowing during the same period in 1993. The lower rates on new
borrowings during 1994 compared to the rate on the borrowings outstanding
during the first nine months of 1993 produced the lower average rate.
Provision for Loan Losses. The Company recorded a $3.9 provision for
loan losses during the first nine months of 1994, or $5.4 million lower than the
provision recorded during the same period of 1993. Effective January 1, 1994,
the Company adopted SFAS No. 114. Since the Company previously valued loans
considered to be impaired under SFAS No. 114 at the fair value of the loan's
collateral, the adoption of SFAS No. 114 had no impact on the Company's
provision for loan losses during the first nine months of 1994. See "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS" for further details. See "CREDIT" for
further discussion of loss provisions and adequacy of the accumulated provisions
for losses.
Other Income. Other income totaled $22.1 million during the first nine months
of 1994, $1.2 million or 5.1% lower than other income recorded in the same
period in 1993. Lower discount brokerage commissions and gains on asset sales,
were partly offset by higher other fee income.
A decrease in transaction volumes caused the $1.5 million decrease in revenues
from discount brokerage operations. Lower gains recorded on the sale of
"conversion" loans produced most of the $880,000 decline in gains on asset
46
47
sales. See "LIQUIDITY" for additional discussion of loan sales activity. The
$1.6 million increase in other fee income was primarily associated with an
increase in the number of checking accounts and an expansion of ATM operations.
General and Administrative Expense. General and administrative expenses
increased $4.1 million or 6.8% during the first nine months of 1994 compared to
the same period in 1993. The increase was largely associated with a $3.7
million increase in compensation and benefits and a $1.6 million increase in
occupancy, equipment, and other office expense. The expansion of the branch
network, including 8 branches obtained in the Elm Financial acquisition in
February 1993, extension of hours at many of the branch facilities, and higher
pension, payroll taxes, and medical costs produced the increase. These
increases in expenses were partly offset by lower advertising costs, deposit
insurance premiums, and other costs.
Management was successful in controlling other general and administrative
costs during 1994 and remains committed to on-going expense control.
Operations of Foreclosed Real Estate. The Bank generated a net loss from its
foreclosed real estate operation of $1.6 million during the first nine months
of 1994 compared to a $990,000 net loss during the same period in 1993. The
higher net loss during the current period was associated with an increase in
the provision for losses. See "CREDIT" for further discussion of REO.
Income Taxes. Income taxes totaled $14.2 million or 35.4% of pre-tax income
during the nine month period ended September 30, 1994 compared to $14.8 million
or 31.8% of pre-tax income during the same period in 1993. A higher effective
federal and state income tax rate produced the increase in the rate between the
two periods.
47
48
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
At September 30, Nine months ended September 30
Dollars in thousands 1994 1994 1993
- - ----------------------------------------------------------- -------------------------------- ------------------------------
Average Average Average Average Average
Balance Rate Balance(a) Interest Yield Balance(a) Interest Yield
- - ---------------------------------------------------------------------------------------------------------------------------
Loans receivable (b) $2,532,482 7.49% $2,388,038 $134,696 7.52% $2,471,726 $151,755 8.19%
Mortgage-backed securities 1,169,088 5.76 1,032,140 41,997 5.43 665,384 32,526 6.52
Marketable-debt securities 102,068 5.00 135,604 4,736 4.67 152,180 4,760 4.18
Trading account --- -- 37 1 3.61 2,753 73 3.55
Federal funds 10,000 5.00 32,841 851 3.46 42,936 974 3.03
Other investments (c) 61,137 5.21 116,558 3,536 4.06 258,537 6,261 3.24
- - ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $3,874,775 6.86% $3,705,218 $185,817 6.69% $3,593,516 $196,349 7.29%
=============================================================================================================================
Deposits $3,163,774 3.60% $3,215,690 $85,094 3.54% $3,212,589 $92,948 3.87%
Borrowings:
Short-term borrowings (d) 220,275 5.42 54,120 1,956 4.83 86,624 4,420 6.82
Long-term borrowings (d) 272,887 6.52 198,636 10,462 7.04 78,965 4,505 7.63
- - ----------------------------------------------------------------------------------------------------------------------------
Total borrowings 493,162 6.03 252,756 12,418 6.57 165,589 8,925 7.21
- - ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $3,656,936 3.93% $3,468,446 $97,512 3.76% $3,378,178 $101,873 4.03%
=============================================================================================================================
Excess of interest-earning assets
over interest-bearing liabilities $217,839 $236,772 $215,338
=============================================================================================================================
Ratio of interest-earning assets over
interest-bearing liabilities 1.06 1.07 1.06
=============================================================================================================================
Net interest income - $88,305 $94,476
=============================================================================================================================
Interest rate spread 2.93% - -
=============================================================================================================================
"Average" interest rate spread - 2.93% 3.26%
=============================================================================================================================
Net yield on average earning assets - 3.18% 3.51%
=============================================================================================================================
(a) All average balances based on daily balances.
(b) Includes loans held for sale and loans placed on nonaccrual.
(c) Includes investment in Federal Home Loan Bank stock, deposits at Federal
Home Loan Bank, and other short-term investments.
(d) Includes FHL Bank advances, floating rate notes, other borrowings,
subordinated capital notes. Excludes ESOP loan.
48
49
ASSET/LIABILITY REPRICING SCHEDULE
at September 30, 1994
----------------------------------------------------------------------------------
Weighted More than 6
Average % of 6 Months months to Over
Rate Balance Total or less 1 year 1-3 years 3-5 years 5 years
- - ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
RATE SENSITIVE ASSETS:
Investments:(a)
Adjustable-rate 4.73% $31,704 1% $22,380 $9,324 - - -
Fixed-rate 5.16 141,501 3 33,290 7,947 50,444 19,974 29,846
Mortgage-backed securities:(b)
Adjustable-rate 4.87 747,512 19 463,914 283,598 - - -
Fixed-rate 7.32 421,575 11 31,441 10,074 113,166 75,004 191,890
Mortgage loans:(b)
Adjustable and renegotiable-rate 7.22 1,892,665 49 1,112,757 358,101 266,192 155,615 -
Fixed-rate 8.29 607,709 16 54,221 41,383 202,099 106,578 203,428
Consumer loans (b) 7.95 22,656 1 4,434 2,040 6,463 4,868 4,851
Assets held for sale 7.83 9,453 * 9,453 - - - -
----------------------------------------------------------------------------------
Total rate sensitive assets 6.86% $3,874,775 100% $1,731,890 $712,467 $638,364 $362,039 $430,015
==================================================================================
RATE SENSITIVE LIABILITIES:
Deposits:
Checking accounts 1.16% $371,954 10% $99,607 $21,255 $69,678 $50,342 $131,072
Savings accounts 2.42 802,806 22 255,095 42,746 140,128 101,242 263,595
Money market deposit accounts 2.80 264,549 8 264,549 - - - -
Fixed-maturity certificates 4.81 1,724,465 47 624,467 477,992 385,623 164,128 72,255
----------------------------------------------------------------------------------
3.60 3,163,774 87 1,243,718 541,993 595,429 315,712 466,922
Borrowings:
FHL Bank advances 5.82 336,959 9 295,000 35,275 5,599 - 1,085
Other borrowings 6.27 139,803 4 103,883 - 35,920 - -
Mortgage-backed note 8.70 16,400 * - - - 16,400 -
----------------------------------------------------------------------------------
6.02 493,162 13 398,883 35,275 41,519 16,400 1,085
----------------------------------------------------------------------------------
Total rate sensitive liabilities 3.93% $3,656,936 100% $1,642,601 $577,268 $636,948 $332,112 $468,007
==================================================================================
Excess (deficit) of rate sensitive assets
over rate sensitive liabilities (GAP) 2.93% $217,839 $89,289 $135,199 $1,416 $29,927 $(37,992)
==================================================================================
Cumulative GAP $89,289 $224,488 $225,904 $255,831 $217,839
Cumulative GAP to total assets without
regard to hedging transactions 2.21% 5.54% 5.58% 6.32% 5.38%
Cumulative GAP to total assets with
impact of hedging transactions 5.85% 9.19% 8.80% 6.32% 5.38%
* Less than one percent.
(a) Includes investment in FHL Bank Stock.
(b) Excludes accrued interest and accumulated provisions for losses.
The mortgage loan repricing/maturity projections were based upon
principal repayment percentages in excess of the contractual amortization
schedule of the underlying mortgages. Multi-family mortgages were
estimated to be prepaid at a rate of approximately 10% per year;
adjustable-rate mortgage loans on one- to four- family residences and
loan securities were estimated to prepay at a rate of 15% per year;
fixed-rate loans and loan securities were estimated to prepay at a rate
of 12% per year. Checking accounts were estimated to be withdrawn at
rates between 15% and 21% per year depending on the age of the accounts.
Regular savings accounts were estimated to be withdrawn at rates between
15% and 26% per year depending on the age of the accounts. Except for
multi-family loans, the prepayment assumptions included in the
Asset/Liability Repricing Schedule are based upon the Bank's actual
prepayment experience over the past year as well as management's future
expectations of prepayments. The Bank assumed a prepayment percentage of
10% because of current market conditions and the nature of the Bank's
multi-family portfolio. The new decay assumption on passbook and
checking accounts is based on a historical regression analysis of the
Bank's growth in these accounts.
49
50
PART II. -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11, Statement re: Computation of Per Share Earnings.
(b) Exhibit 27, Financial Data Schedule.
(c) The Company filed a current report on Form 8-K on July 13, 1994 relating to
the announcement of the Company's intent to continue to repurchase up to
5%, or 964,000 shares of its outstanding common stock.
50
51
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: November 10, 1994 By: /s/ Joseph C. Scully
-----------------------------------
Joseph C. Scully
Chairman of the Board and Chief Executive Officer
(Duly Authorized Officer)
Date: November 10, 1994 By: /s/ Robert N. Parke
-----------------------------------
Robert N. Parke
Senior Vice President and Treasurer
(Principal Financial Officer)
51