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 Sept. 30, 1995
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 -- 18,740,634 shares, as of Nov. 1, 1995
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 Sept. 30, 1995 and Dec. 31, 1994.......................... 3
Consolidated Statements of Income for the Three and Nine
Months Ended Sept. 30, 1995 and 1994............................ 4
Consolidated Statements of Stockholders' Equity for the
Nine Months Ended Sept. 30, 1995 and 1994....................... 5
Consolidated Statements of Cash Flows for the
Nine Months Ended Sept. 30, 1995 and 1994....................... 6
Notes to Consolidated Financial Statements...................... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 8
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K................................ 40
Signature Page.................................................. 41
Exhibits........................................................ 42
2
3
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
Sept. 30, Dec. 31,
Dollars in thousands 1995 1994
- -----------------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents
Cash and amounts due from depository institutions $ 106,039 $ 104,563
Federal funds sold and interest-bearing bank balances 42,794 18,100
Short-term cash equivalent securities 26,370 37,285
-----------------------------
Total cash and cash equivalents 175,203 159,948
Marketable-debt securities
(Market: Sept. 30, 1995-92,102; Dec. 31, 1994-$95,773) 92,768 99,643
Mortgage-backed securities
(Market: Sept. 30, 1995-$1,007,672; Dec. 31, 1994-$1,066,793) 1,022,764 1,126,617
Loans receivable 2,595,978 2,610,577
Less: accumulated provision for loan losses 38,914 42,196
------------------------------
Net loans receivable 2,557,064 2,568,381
Loans held-for-sale, at lower of cost or market
(Market: Sept. 30, 1995-$18,577; Dec. 31, 1994-$10,157) 18,575 10,155
Accrued interest receivable 24,662 23,467
Foreclosed real estate
(Net of accumulated provision for losses: Sept. 30, 1995-$1,653;
Dec. 31, 1994-$2,019) 10,194 16,484
Real estate held for development or investment 13,241 16,694
Investment in Federal Home Loan Bank stock 36,304 29,847
Office properties and equipment 44,551 44,112
Prepaid expenses and other assets 35,272 36,189
------------------------------
TOTAL ASSETS $ 4,030,598 $ 4,131,537
==============================
LIABILITIES:
Deposits $ 3,196,602 $ 3,232,903
Short-term borrowings
(FHLB advances: Sept. 30, 1995-$100,285; Dec. 31, 1994-$120,275) 125,285 221,180
Long-term borrowings
(FHLB advances: Sept. 30, 1995-$211,399; Dec. 31, 1994-$216,684) 266,609 271,747
Advance payments by borrowers for taxes and insurance 26,731 21,842
Other liabilities 39,664 32,468
------------------------------
Total Liabilities 3,654,891 3,780,140
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 Sept. 30, 1995-19,946,081 shares;
outstanding at Sept. 30, 1995-18,705,709 shares;
issued at Dec. 31, 1994-19,785,405 shares; 199 198
outstanding at Dec. 31, 1994-18,781,480)
Paid-in capital 140,427 138,039
Retained income, substantially restricted 261,880 238,929
Unrealized loss on securities, net of taxes (219) (3,531)
Borrowings by employee stock ownership plan (1,000) (1,000)
Unearned employee stock ownership plan shares (196,350 shares) (2,883) (2,883)
Treasury stock (Sept. 30, 1995-1,240,372 shares;
Dec. 31, 1994-1,003,925 shares) (22,697) (18,355)
------------------------------
Total stockholders' equity 375,707 351,397
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,030,598 $ 4,131,537
==============================
See notes to consolidated financial statements
3
4
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended Nine months ended
Sept. 30, Sept. 30,
------------------ -------------------
Dollars in thousands except per share amounts 1995 1994 1995 1994
- --------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans receivable $ 50,648 $ 45,861 $ 150,281 $ 134,696
Mortgage-backed securities 16,150 16,718 49,750 41,997
Marketable-debt securities 1,238 1,334 3,767 4,736
Federal funds and interest-bearing bank balances 830 87 1,727 851
Other investment income 962 778 2,928 3,537
------------------- -------------------
Total interest income 69,828 64,778 208,453 185,817
INTEREST EXPENSE:
Deposits 33,911 28,700 98,355 85,094
Short-term borrowings 2,503 1,619 8,533 1,956
Long-term borrowings 4,766 4,749 14,338 10,462
------------------- -------------------
Total interest expense 41,180 35,068 121,226 97,512
------------------- -------------------
Net interest income 28,648 29,710 87,227 88,305
Provision for loan losses 300 1,200 1,400 3,900
------------------- -------------------
Net interest income after provision for loan losses 28,348 28,510 85,827 84,405
OTHER INCOME:
Loan servicing fees 374 361 1,201 1,073
Other fee income 5,821 4,403 16,264 12,254
Net gain on assets sold 91 24 967 494
Discount brokerage commissions 809 811 2,245 2,978
Income from real estate development 909 943 2,069 2,174
Insurance and annuity commissions 678 808 2,355 2,747
Other 31 115 53 359
------------------- -------------------
Total other income 8,713 7,465 25,154 22,079
GENERAL AND ADMINISTRATIVE EXPENSE:
Salaries and employee benefits 11,918 11,800 36,348 35,462
Occupancy, equipment and other office expense 5,913 5,256 17,206 15,362
Advertising 1,036 1,180 3,131 3,499
Federal deposit insurance 2,229 2,232 6,663 6,710
Other 1,368 1,281 4,182 3,882
------------------- -------------------
General and administrative expense 22,464 21,749 67,530 64,915
Loss on foreclosed real estate 312 347 968 1,588
------------------- -------------------
Income before income taxes 14,285 13,879 42,483 39,981
Income taxes 5,225 4,867 15,391 14,151
------------------- -------------------
NET INCOME $ 9,060 $ 9,012 $ 27,092 $ 25,830
=================== ====================
EARNINGS PER SHARE:
Primary $ 0.46 $ 0.44 $ 1.39 $ 1.27
Fully diluted 0.46 0.44 1.38 1.27
=================== ====================
DIVIDENDS PER SHARE $ 0.075 $ 0.075 $ 0.225 $ 0.225
=================== ====================
See notes to consolidated financial statements.
4
5
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Unrealized Borrowings Unearned
Gain/(Loss) by Employee Employee
Common Stock on Pension Stock Stock Total
----------------- Paid-In Retained Securities, Adjustment, Ownership Ownership Treasury Stockholders'
Shares Amount Capital Income Net of Tax Net of Tax Plan Plan Shares Stock Equity
----------------------------------------------------------------------------------------------------------
Balance at
December 31, 1993 19,683,981 $197 $136,609 $210,215 $4,594 ($46) ($4,240) $ -- $ -- $347,329
Stock option
exercises 98,924 1 1,369 -- -- -- -- -- -- 1,370
Net Income -- -- -- 25,830 -- -- -- -- -- 25,830
Cash dividends paid
to stockholders
($0.225 per share) -- -- -- (4,355) -- -- -- -- -- (4,355)
Change in unrealized
gain/(loss) on
securities,
net of tax -- -- -- -- (6,520) -- -- -- -- (6,520)
Repayment of ESOP
borrowing -- -- -- -- -- -- 357 -- -- 357
Adoption of SOP
93-6 -- -- -- -- -- -- 2,883 (2,883) -- --
Treasury stock
purchases (286,950) -- -- -- -- -- -- -- (5,134) (5,134)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE
SEPT. 30, 1994 19,495,955 $198 $137,978 $231,690 ($1,926) ($46) ($1,000) ($2,883) ($5,134) $358,877
============================================================================================================================
Balance at
December 31, 1994 18,781,480 $198 $138,039 $238,929 ($3,531) $ -- ($1,000) ($2,883)($18,355) $351,397
Stock option
exercises 160,676 1 2,388 -- -- -- -- -- -- 2,389
Net Income -- -- -- 27,092 -- -- -- -- -- 27,092
Cash dividends paid
to stockholders
($0.225 per share) -- -- -- (4,141) -- -- -- -- -- (4,141)
Change in unrealized
gain/(loss) on
securities,
net of tax -- -- -- -- 3,312 -- -- -- -- 3,312
Treasury stock
purchases (236,447) -- -- -- -- -- -- -- (4,342) (4,342)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE
SEPT. 30, 1995 18,705,709 $199 $140,427 $261,880 ($219) $ -- ($1,000) ($2,883)($22,697) $375,707
===========================================================================================================================
See notes to consolidated financial statements
5
6
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended Sept. 30,
---------------------------
Dollars in thousands 1995 1994
- ------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 27,092 $ 25,830
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,400 3,900
Provision for losses on foreclosed real estate 568 1,458
Provision for depreciation 4,782 3,857
Assets originated and acquired for sale (32,944) (42,640)
Sale of assets held for sale 24,999 60,960
Increase in accrued interest receivable (1,195) (2,413)
Decrease in prepaid expenses and other assets 918 4,039
Decrease in other liabilities 7,195 1,899
Net amortization of yield adjustments 4,353 (933)
Other items, net (14,586) (9,034)
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 22,582 46,923
- -----------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Principal repayments on loans receivable 268,114 360,230
Loans originated and purchased for investment (258,226) (539,556)
Loans receivable sold 2,984 3,369
Principal repayments on available for sale mortgage-
backed securities 13,452 53,690
Principal repayments on held to maturity mortgage-
backed securities 99,984 116,446
Purchase of available for sale mortgage-backed securities (65,139) (27,127)
Purchase of held to maturity mortgage-backed securities -- (604,834)
Sale of available for sale mortgage-backed securities 56,887 15,459
Maturities of available for sale marketable-debt securities 8,000 19,000
Purchase of available for sale marketable-debt securities (236) (20,950)
Purchase of held to maturity marketable-debt securities -- (30,695)
Sale of available for sale marketable-debt securities -- 70,182
Additions to real estate (7,790) (10,918)
Real estate sold 24,860 24,344
(Purchase) sale of Federal Home Loan Bank stock (6,457) 1,443
Purchase of office properties and equipment (5,221) (6,680)
Proceeds from sales of office properties and equipment -- 606
- -----------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 131,212 (575,991)
- -----------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from sales of certificates of deposit 234,809 272,074
Payments for maturing certificates of deposit (262,709) (336,114)
Net decrease in remaining deposits (8,401) (24,804)
Increase in long-term borrowings 100 210,028
Repayment of long-term borrowings (5,238) (335)
Increase (decrease) in short-term borrowings, net (95,895) 219,975
Dividends paid to stockholders (4,141) (4,355)
Net proceeds from exercise of stock options 2,389 1,370
Purchase of treasury stock (4,342) (5,134)
Increase (decrease) in advance payments by borrowers
for taxes and insurance 4,889 (10,082)
- -----------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (138,539) 322,623
- -----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,255 (206,445)
Cash and cash equivalents at beginning of period 159,948 336,331
- -----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $175,203 $129,886
=========================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest credited on deposits $ 83,289 $ 76,383
Interest paid on deposits 8,704 8,026
- -----------------------------------------------------------------------------------------
Total interest paid on deposits 91,993 84,409
Interest paid on borrowings 24,093 10,984
Income taxes paid, net 16,006 11,218
Real estate acquired through foreclosure 8,505 11,807
Loans originated in connection with real estate
acquired through foreclosure 11,885 9,865
=========================================================================================
See notes to consolidated financial statements
6
7
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements have been prepared
according to generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of Management, all necessary adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation have been
included. The results of operation for the three- and nine-month periods ended
Sept. 30, 1995 are not necessarily indicative of the results expected for the
entire fiscal year.
2. The accompanying consolidated financial statements include the accounts of
St. Paul Bancorp, Inc. (the "Company" or "St. Paul Bancorp") and its
wholly-owned subsidiaries, St. Paul Federal Bank For Savings (the "Bank"),
Annuity Network, Inc. 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 1995 presentation.
3. At Sept. 30, 1995, the Bank had outstanding commitments to originate 1-4
family real estate loans of $21.8 million. Of these commitments, $17.4 million
were for adjustable-rate loans and $4.4 million were for fixed-rate loans.
Most of these commitments expire after sixty days. The Bank also had
commitments to originate $897,000 of adjustable rate 1-4 family construction
loans and $7.1 million of adjustable rate mortgage loans secured by multifamily
real estate. At Sept. 30, 1995, the Bank had commitments to purchase $18.9
million of adjustable rate mortgage-backed securities. Unused home equity lines
of credit totaled $52.2 million as of Sept. 30, 1995. The Bank anticipates
funding originations with liquidity.
The Bank held commitments, at Sept. 30, 1995, to sell $10.2 million of
fixed-rate, 1-4 family real estate loans. The consolidated financial
statements contain market value losses, if any, related to these commitments.
7
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
St. Paul Bancorp, Inc. (the "Company") is the holding company for St.
Paul Federal Bank For Savings (the "Bank"), Illinois' largest independent
savings institution. At Sept. 30, 1995, the Company reported total assets of
$4.0 billion and the Bank operated 52 full-service branches in the Chicago
metropolitan area. The branch network comprises of 35 full-size offices and 17
banking offices located in Omni(R) and Cub(R) superstores. In addition, the
Bank operated 178 automated teller machines (ATMs), the second largest network
in Chicago. The Bank also services 174,000 checking accounts and 27,000 loans
at Sept. 30, 1995. The Federal Deposit Insurance Corporation ("FDIC") insures
the deposit accounts of the Bank.
Both the Company and the Bank continued to operate other wholly owned
subsidiaries during 1995, including St. Paul Financial Development Corporation,
Annuity Network, Inc., St. Paul Service, Inc. and Investment Network, Inc. As
of Sept. 30, 1995, customers maintain $355 million of investments through
Investment Network, Inc. and $312 million of annuity contracts through Annuity
Network, Inc.
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 through
its retail banking offices and local loan origination correspondents. During
1995, the Bank began taking loan applications, on a test basis, through its
telephone banking program. Management expanded its banking services through
the introduction of a telephone banking center in October of 1995. The Bank
also uses a correspondent loan program to originate 1-4 family mortgages
outside the Chicago metropolitan area, primarily in the states of Illinois,
Wisconsin, Indiana, Michigan, and Ohio. The retail banking offices offer a
variety of consumer loan products, including home equity loans, secured lines
of credit, education, auto and credit card loans.(1)
The Bank also offers mortgage loans to qualifying borrowers to finance
- ---------------
(1) The credit card product is offered by the Bank through an agency
agreement with another lender.
8
9
apartment buildings with up to 120 units located within a 100 mile radius of
the Chicago metropolitan area. During 1995, the Bank provided construction
financing to experienced residential land developers and home builders in the
Chicago metropolitan area, however, due to market conditions, this program was
recently discontinued. In addition, the Bank has refinanced multifamily and
commercial loans which have matured during 1995 or are scheduled to mature in
the near future. The Bank also originates mortgage loans to facilitate the
sale of multifamily, and occasionally, commercial real estate owned by the
Bank. Periodically, the Bank will also repurchase multifamily loans sold with
recourse.
Prior to 1990, the Bank originated, on a nationwide basis (primarily in
California), loans secured by multifamily real estate and to a lesser extent,
loans secured by commercial real estate. At Sept. 30, 1995, $1.0 billion or
24.9% of total assets were comprised of loans secured by multifamily real
estate properties, of which $545.0 million or 13.5% of total assets represented
multifamily loans secured by real estate located in California. Also, $52.3
million or 1.3% of the Company's total assets at Sept. 30, 1995 included loans
secured by commercial real estate, other than multifamily.
The Bank also invests in mortgage-backed securities ("MBS"), government
and other investment-grade, liquid securities. The Bank classifies investment
securities as either available for sale or held to maturity under Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Earnings of the Bank are susceptible to interest rate risk to the
extent that the Bank's deposits and borrowings reprice on a different basis and
in different periods than its securities and loans. Prepayment options
embedded in loans and MBS and varying demand for loan products due to changes
in interest rates creates additional operating risk for the Bank in matching
the repricing of its assets and liabilities. The Bank tries to structure its
balance sheet to reduce 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.
Changes in real estate market values also affect the Bank's earnings.
As changes occur in interest rates, the forces of supply and demand for real
estate, and the economic conditions of real estate markets, the risk of actual
losses in the Bank's loan portfolio will also change. See "CREDIT" for further
details.
9
10
In April 1995, St. Paul Bancorp filed an application with the Office
of the Comptroller of the Currency for a de novo commercial bank charter. This
application was precipitated by the decline in FDIC insurance rates for members
of the Bank Insurance Fund ("BIF"). Management would operate the national bank
side by side with its federal savings bank. Management hopes that legislative
action will cause the FDIC premium rates for the Savings Association Insurance
Fund ("SAIF") and BIF to converge, thus rendering the additional bank charter
unnecessary.
During the Third Quarter of 1995, a solution to the disparity between
premium rates paid by SAIF and BIF institutions was proposed by the Treasury
Department to Congress. The proposal would require SAIF members, such as St.
Paul Federal Bank, to pay a special assessment of $0.85 to $0.90 per $100 of
insured deposits at Mar. 31, 1995 to recapitalize the SAIF. Annual premiums
would then be reduced to a level that would approximate the premiums paid by
BIF members, with the SAIF and BIF insurance funds possibly merging at some
time in the future. Legislative action is anticipated during the Fourth
Quarter of 1995, and would result in a $27 million to $29 million pretax charge
during that quarter. However, the lower rate that would be paid during 1996
and beyond would result in an annual pretax savings of $7 million.
Congress has also discussed the elimination of the separate thrift
charter and may require thrifts, such as St. Paul Federal Bank, to convert to a
national bank charter. Such a merger, without revisions to existing federal
income tax provisions relating to bad debt reserves, could result in a
recapture of the federal tax bad debt reserve and trigger an income tax
liability of approximately $18.6 million for St. Paul Federal Bank. Action on
the thrift charter issue and modification of federal income tax provisions to
prevent the recapture of the bad debt reserve is not expected until 1996.
During the Fourth Quarter of 1995, the Financial Accounting Standards
Board is expected to announce that it will grant a brief holiday from the
provisions of SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities." In accordance with SFAS No 115, the Bank classifies
investment securities as either available for sale or held to maturity, and
transfers between categories is allowed in only very limited circumstances.
The holiday would permit the movement of investment securities from category to
category without calling into question prior portfolio classifications until
Dec. 31, 1995.
10
11
STATEMENT OF FINANCIAL CONDITION
St. Paul Bancorp reported total assets of $4.03 billion at Sept. 30, 1995
compared to $4.13 billion at Dec. 31, 1994, a decrease of $100.9 million or
2.4%. Lower MBS balances of $103.9 million and loans receivable of $14.6
million were partly offset by higher cash and cash equivalents of $15.3
million.
Cash and cash equivalents totaled $175.2 million at Sept. 30, 1995
compared to $159.9 million at Dec. 31, 1994, an increase of $15.3 million or
9.5%. See "CASH FLOW ACTIVITY" for further detail.
Marketable-debt securities, comprised of U.S. Treasury and agency
securities, totaled $92.8 million at Sept. 30, 1995, $6.9 million or 6.9% lower
than Dec. 31, 1994. Proceeds from maturities provided additional liquidity
during the first nine months of 1995. The weighted average yield earned on the
marketable-debt security portfolio was 5.34% at Sept. 30, 1995 compared to
5.04% at Dec. 31, 1994. A step up in rate of tiered, fixed rate securities
produced the increase in the weighted average yield since year-end 1994. At
September 30, 1995 three-quarters of the Company's marketable-debt securities
are classified as held to maturity under SFAS No. 115. At Sept. 30, the
Company recorded an unrealized loss of $236,000 on available for sale
marketable-debt securities compared to an unrealized loss of $1.6 million at
Dec. 31, 1994. A decline in medium term market interest rates since Dec. 31,
1994 provided most of the improvement in value on the available for sale
marketable-debt securities.
MBS totaled $1.02 billion at Sept. 30, 1995, $103.9 million or 9.2% lower
than the $1.13 billion of MBS at Dec. 31, 1994. The sale of $56.9 million of
fixed rate, available for sale MBS and receipt of principal repayments produced
the decline in balance. The purchase of $65.1 million of adjustable rate,
available for sale MBS partly offset these declines. See "COMPARISON OF NINE
MONTHS ENDED SEPT. 30, 1995 AND 1994" for further discussion of the $837,000
gain recorded on the sale of MBS. The weighted average yield on the MBS
portfolio was 6.33% at Sept. 30, 1995 compared to 6.02% at Dec. 31, 1994.
Upward repricing on adjustable rate MBS produced the higher weighted average
yield at Sept. 30, 1995.
Similar to the marketable-debt securities portfolio, most of the MBS
portfolio is classified as held to maturity under SFAS No. 115. At Sept. 30,
1995, the Company recorded an unrealized loss on its available for sale MBS of
$133,000 compared to an unrealized loss of $4.1 million at Dec. 31, 1994. The
decrease
11
12
in the unrealized loss was associated with lower market interest rates at Sept.
30, 1995 compared to year-end 1994.
At Sept. 30, 1995, 66% of the MBS portfolio had adjustable rate
characteristics (although some may be performing at initial fixed interest
rates). In comparison, 63% of the MBS portfolio had adjustable rate
characteristics at Dec. 31, 1994. Some securities may not fully reprice in
response to higher market interest rates because they contain periodic and
lifetime interest rate caps.
Loans receivable totaled $2.60 billion at Sept. 30, 1995 compared to $2.61
billion at Dec. 31, 1994, a decrease of $14.6 million or 0.6%. Loan repayments
slightly outpaced loans originated and purchased for investment during the
first nine months of 1995. See "CASH FLOW ACTIVITY" for further discussion.
The weighted average yield on loans receivable was 7.77% at Sept. 30,
1995, compared to 7.51% at Dec. 31, 1994, largely as a result of upward
repricing of adjustable rate mortgages. At Sept. 30, 1995, 79% of the loan
portfolio had adjustable rate characteristics, compared to 77% at Dec. 31,
1994.
Deposits totaled $3.20 billion at Sept. 30, 1995, $36.3 million or 1.1%
lower than the deposit balances of $3.23 billion at Dec. 31, 1994. At Sept.
30, 1995, the weighted average cost paid on deposits was 4.29% compared to
3.85% at Dec. 31, 1994. Although deposit interest costs have increased
significantly since year-end 1994 in response to higher short-term market
interest rates, the rate of increase has slowed during the recent quarter. The
Company's deposit costs continue to be below certain of its competitors,
according to certain industry surveys.
Total borrowings, which include FHLB advances, totaled $391.9 million at
Sept. 30, 1995, $101.0 million or 20.5% lower than the $492.9 million of
balances at Dec. 31, 1994. During 1995, the Bank used liquidity to reduce
borrowing balances, with most of the reduction occurring in short-term
borrowing which decreased by $95.9 million. The combined weighted average
cost paid on borrowings was 6.75% at Sept. 30, 1995 compared to 6.68% at Dec.
31, 1994. A large amount of the Bank's adjustable rate FHLB advances are tied
to lagging indices, which produced the increase in the borrowing weighted
average cost during 1995 despite generally lower short-term market interest
rates. See "CASH FLOW ACTIVITY" for further discussion.
12
13
Stockholders' equity of the Company was $375.7 million at Sept. 30,
1995 or 9.24% of average assets during the first nine months of 1995. In
comparison, stockholders' equity at Dec. 31, 1994 was $351.4 million or 8.95%
of average assets for the year-ended Dec. 31, 1994. The $24.3 million growth
in stockholders' equity during the nine months ended Sept. 30, 1995 primarily
resulted from $27.1 million of net income, a $3.3 million improvement in value
of available for sale securities(2), and $2.4 million of equity provided by the
exercise of employee stock options. The growth in equity was partly offset by
the addition of $4.3 million of treasury stock and $4.1 million of dividend
payments to shareholders. See "REGULATORY CAPITAL REQUIREMENT" and
"CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY" for further analysis.
During 1995, the Company acquired 236,447 shares of its outstanding
common stock (at a weighted average cost per share of $18.36) to complete a
stock repurchase program that began in July 1994. As of Sept. 30, 1995, the
number of shares acquired under all repurchase programs totaled 1,240,372
shares (at a weighted average cost per share of $18.30). Management's primary
objective in reacquiring its shares was to increase return on equity and
earnings per share for those shares that remain outstanding. See "CASH FLOW
ACTIVITY -- HOLDING COMPANY LIQUIDITY" for further details.
See "CREDIT" for discussion of foreclosed real estate balances.
REGULATORY CAPITAL REQUIREMENT
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 must 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 consist 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.
- ---------------
(2) 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, net of taxes.
13
14
During 1995, 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 Sept. 30, 1995 and Dec. 31, 1994:
=======================================================================
SEPT. 30, 1995
- -----------------------------------------------------------------------
Dollars in Core Tangible Risk-Based
Thousands Capital Capital Capital
- -----------------------------------------------------------------------
Actual percentage 9.12% 9.12% 17.71%
Required percentage 3.00 1.50 8.00
- -----------------------------------------------------------------------
Excess percentage 6.12% 7.62% 9.71%
=======================================================================
Actual capital $362,598 $362,598 $390,206
Required capital 119,315 59,657 176,228
- -----------------------------------------------------------------------
Excess capital $243,283 $302,941 $213,978
=======================================================================
DEC. 31, 1994
- -----------------------------------------------------------------------
Dollars in Core Tangible Risk-Based
Thousands Capital Capital Capital
- -----------------------------------------------------------------------
Actual percentage 8.51% 8.51% 16.65%
Required percentage 3.00 1.50 8.00
- -----------------------------------------------------------------------
Excess percentage 5.51% 7.01% 8.65%
=======================================================================
Actual capital $347,837 $347,837 $376,201
Required capital 122,654 61,327 180,786
- -----------------------------------------------------------------------
Excess capital $225,183 $286,510 $195,415
=======================================================================
The following schedule reconciles stockholders' equity of the Company to
the components of regulatory capital of the Bank at Sept. 30, 1995:
Sept. 30,
Dollars in thousands 1995
- -----------------------------------------------------------------------
Stockholders' equity of the Company $375,707
Less: capitalization of the Company's
subsidiaries other than the Bank (10,788)
Less: capitalization of the Company 355
- -----------------------------------------------------------------------
Stockholder's equity of the Bank 365,274
Plus: unrealized loss on
available for sale securities 217
Less: investments in non-includable
subsidiaries (1,464)
Less: intangible assets (1,429)
- -----------------------------------------------------------------------
Tangible and core capital 362,598
Plus: allowable GVAs 27,608
- -----------------------------------------------------------------------
Risk-based capital $ 390,206
=======================================================================
During the first nine months of 1995, the Bank's core and tangible
capital ratios increased 61 basis points, while the risk-based capital ratio
increased 106 basis points. The Bank's net income during the first nine months
of 1995, net of dividends paid to St. Paul Bancorp, produced a majority of the
improvement in the ratios. A decrease in regulatory assets and risk-weighted
assets also contributed to the higher ratios.
The OTS has issued notice of a proposed regulation that would require
all
14
15
but the most highly-rated savings institutions to maintain a ratio of core
capital to total assets of between 4% and 5%. The Bank's excess core capital
would have been $203.5 million, if it had to meet a 4% core capital ratio as of
Sept. 30, 1995, versus $243.3 million of excess core capital under current
requirements.
In 1993, the OTS issued a regulation that 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%.
If a change greater than 2% occurs, one-half of the percent change in the
market value of capital in excess of 2% is added to the institution's
risk-based capital requirement. At Sept. 30, 1995, 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. If the Bank would
become subject to an additional capital requirement for "excess interest rate
risk", then it has $214.0 million of excess risk-based capital at Sept. 30,
1995 available to meet the higher capital requirement.
Under the Federal Deposit Insurance Corporation Improvement Act, the
OTS recently published regulations to ensure that its risk-based capital
standards take adequate account of concentration of credit risk, risk from
nontraditional activities, and actual performance and expected risk of loss on
multifamily mortgages. These rules allow regulators to impose, on a case by
case basis, an additional capital requirement above the current requirements
where an institution has significant concentration of credit risk or risks from
nontraditional activities.
The OTS may establish capital requirements higher than the generally
applicable minimum 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. The Bank has no such requirements.
At Sept. 30, 1995, 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 9.12%,
16.42%, and 17.71%, respectively.
15
16
CASH FLOW ACTIVITY
Sources of Funds. The major sources of funds during the nine months ended
Sept. 30, 1995 included $381.6 million of principal repayments on loans
receivable and MBS, $234.8 million from the issuance of certificates of
deposit("CDs"), and $56.9 million from the sale of fixed rate available for
sale MBS.
Repayments of loans receivable and MBS were $381.6 million during the
first nine months of 1995 compared to $530.4 million during the same period in
1994, a decline of $148.8 million or 28.1%. The rise in market interest rates
during 1994 curtailed the level of loan refinancing activity, resulting in a
steady decline in loan repayments throughout 1994 and into early 1995. While
Management believes the repayment activity during 1995 will continue to be less
than that experienced in 1994, loan and MBS repayments have been increasing
since the first quarter of 1995.
Management relied on CD sales as a funding source during the first
nine months of 1995. Promotional activities and an increase in offering rates
on new CD products have attracted depositors to CDs resulting in $234.8 million
of proceeds from the sale of CDs received during the first nine months of 1995.
However, CD sales during 1995 were still $37.3 million or 14% less than the
proceeds received from CD sales during 1994. During 1994, the Bank relied
heavily on CD sales to provide liquidity to fund loan originations.
The slow down in fixed rate lending since the beginning of 1994
produced a decrease in loan sales, which totaled only $25.0 million in the
first nine months of 1995 compared to $61.0 million in the same period a year
ago. A rise in interest rates during 1994 curtailed the demand for fixed rate
loans. The demand has remained low during 1995, and combined with the Bank's
emphasis on adjustable rate loans, caused the decline in fixed rate
originations and related sales during the first nine months of 1995 as compared
to the same period a year ago. Generally, the Bank's policy is to sell
conforming, fixed rate mortgage loans in the secondary market. See "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS" for further details of loan origination and
sale commitments.
During 1995, the Bank sold $56.9 million of fixed rate, available for
sale MBS to provide additional liquidity. In comparison, during the first nine
months of 1994, the Bank sold $15.5 million of available for sale MBS and $70.2
million of available for sale marketable-debt securities, which provided
additional liquidity for MBS acquisitions and loan originations.
16
17
Uses of Funds. The major uses of funds during the nine months ended Sept. 30,
1995 included $262.7 million of payments for maturing CDs, $258.2 million of
loans originated and purchased for investment, $101.1 million of repayments of
short-term and long-term borrowings, and $65.1 million for the purchase of
available for sale MBS.
Payments for maturing CDs decreased $73.4 million during 1995 to total
$262.7 million for the nine months ended Sept. 30, 1995. The Bank attempted to
retain more of its maturing CD balances by offering depositors higher rates and
other special promotions.
Loans originated for investment were $258.2 million during the first
nine months of 1995, or approximately 52% below the $539.6 million of loan
originations during the same period in 1994. The Bank benefited from the
consumer market demand for adjustable rate mortgages in 1994 that resulted from
the increase in long-term market interest rates. Management expects loan
origination volumes during 1995 to be less than 1994. Although loan
origination volumes have declined, the origination of home equity and consumer
loans during the first nine months of 1995 increased to $56.8 million, or 13%
higher than during the same period in 1994. Management hopes to continue to
increase these originations through the Bank's new telephone banking center.
MBS purchases during the first nine months of 1995 totaled $65.1
million, far less than the $632.0 million purchased during the same period in
1994. The Bank also purchased $51.6 million of marketable-debt securities
during the first nine months of 1994 compared to only $236,000 in 1995.
Management used borrowings and liquidity to acquire MBS during the first nine
months of 1994 in order to enhance investment income and net interest income.
During the first nine months of 1995, liquidity was used to reduce
borrowing balances, as short-term and long-term borrowings were reduced by
$101.0 million. In contrast, during the first nine months of 1994, borrowing
balances increased by $429.7 million. These borrowings were used to acquire
MBS and fund loan originations. See "COMPARISON OF THREE MONTHS ENDED SEPT.
30, 1995 AND 1994 -- INTEREST EXPENSE" for further details.
Holding Company Liquidity. At Sept. 30, 1995, St. Paul Bancorp, the holding
company, had $27.7 million of cash and cash equivalents, which included
amounts due from depository institutions, and marketable-debt securities with
original
17
18
maturities of less than 90 days. St. Paul Bancorp also owned $243,000 of
marketable-debt securities at Sept. 30, 1995, which collaterize borrowings of
the ESOP.
Sources of liquidity for St. Paul Bancorp during the first nine months
of 1995 included $13.3 million of dividends from the Bank, $400,000 of
dividends from Annuity Network, Inc., and $2.4 million of cash provided by the
issuance of common stock from the exercise of employee stock options. Uses of
St. Paul Bancorp's liquidity during the first nine months of 1995 included the
acquisition of $5.4 million of St. Paul Bancorp common stock under the stock
repurchase program, the payment of $4.2 million of dividends to shareholders,
and the payment of $2.1 million of interest on the subordinated debt issued in
February of 1993. See "STATEMENT OF CONDITION" for further discussion.
Regulatory Liquidity Requirements. Savings institutions must 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. The Director of the OTS can
change this liquidity requirement from time to time 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 Sept. 30, 1995, the Bank had $240.7 million invested in liquid
assets, which exceeded the current requirement by $73.7 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.
18
19
RATE/VOLUME ANALYSIS
The following table presents the components of the changes in net interest
income by volume and rate(3) for the three months ended Sept. 30, 1995 and 1994:
INCREASE/(DECREASE) DUE TO
---------------------------------
TOTAL
Dollars in thousands VOLUME RATE CHANGE
- ---------------------------------------------------------------------
CHANGE IN INTEREST INCOME:
Loans receivable $3,002 $ 1,785 $4,787
Mortgage-backed securities (2,476) 1,908 (568)
Marketable-debt securities (153) 57 (96)
Federal funds and interest-bearing
bank balances 713 30 743
Other short-term investments 8 176 184
--------
Total interest income 5,050
CHANGE IN INTEREST EXPENSE:
Deposits (229) 5,440 5,211
Short-term borrowings 460 424 884
Long-term borrowings (112) 129 17
-------
Total interest expense 6,112
-------
NET CHANGE IN NET INTEREST INCOME
BEFORE PROVISION FOR LOAN LOSSES $(1,062)
========
- --------------------
(3) 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.
19
20
COMPARISON OF THREE MONTHS ENDED SEPT. 30, 1995 AND 1994
General. Net income totaled $9.1 million during the three month period ended
Sept. 30, 1995, an increase of 1% compared to the $9.0 million of net income
recorded during the same period in 1994. An improvement of $1.2 million in
other income and a $900,000 reduction in the provision for loan losses was
mostly offset by lower net interest income of $1.1 million and general and
administrative expenses of $715,000. The higher level of pretax earnings in
1995 and an increase in the effective income tax rate produced the $358,000
increase in income tax expense.
While net income increased by 1% between the two quarters, earnings
per share increased by 5% from $0.44 during the third quarter of 1994 to $0.46
per share in 1995. Earnings per share benefited from the acquisition of 1.2
million shares of Company stock through stock repurchase programs during 1994
and early 1995.
Net Interest Income. Net interest income totaled $28.6 million during the
three months ended Sept. 30, 1995, $1.1 million or 3.6% less than net interest
income recorded during the same period in 1994. Between the two periods,
interest expense rose $6.1 million while interest income improved by $5.1
million.
Despite a modest growth in average interest earning asset levels,
which were $3.86 billion during the third quarter of 1995 compared to $3.83
billion during the third quarter of 1994, net interest income declined due to
contracting spreads. The net interest margin ("NIM") declined 13 basis points
from 3.10% for the third quarter of 1994 to 2.97% for the third quarter of
1995.(4) Much of the decline in the NIM was associated with an increase in
deposit costs, as the Bank raised new offering rates on CDs in order to
maintain deposit balances. This decline was partly offset by favorable
repricing on MBS and loans. Also, Management leveraged the balance sheet in
recent periods by acquiring loans and MBS with borrowings. Management's goal
for these leveraged transactions was to preserve net interest income and return
on equity by expanding interest earning asset levels as the interest rate
spread contracted.
Interest Income. Interest income on loans receivable increased $4.8 million
over the third quarter of 1994. Both higher average loan balances and
effective yield
- ----------------------
(4) The NIM for the third quarter of 1995 was about level with the NIM of
2.98% reported during the second quarter of 1995.
20
21
produced the increase in interest income. Average loan balances were $2.62
billion during the three months ended Sept. 30, 1995 up $157.5 million over
$2.46 billion during the same period in 1994. A record level of loan
originations during 1994 and lower loan repayments during 1995 produced the
higher average balance in the loan portfolio. The effective yield earned on
loans increased 28 basis points to 7.73% during the third quarter of 1995 from
7.45% during the third quarter of 1994. The higher effective yield was produced
by upward repricing of adjustable rate loans and lower interest reserves on
delinquent loans.
Despite higher short-term interest rates since the beginning of 1994,
several characteristics of the loan portfolio impact the weighted average loan
rate. First, interest rate caps have kept interest rates on $310 million of
adjustable rate loans below their fully-indexed rates.(5) These interest rate
caps can limit the amount of upward repricing on a periodic and life time
basis. Most of the periodic interest rate caps in the Bank's portfolio are 2%.
Second, $556 million of the loan portfolio was at their floors at Sept. 30,
1995. The Bank currently benefits from these floors as it sets the minimum
interest rate for a loan, however, in periods of rising interest rates, these
assets will not reprice upwards until their fully-indexed rates exceed the
floors. On average, the fully indexed rates of these loans were below their
floors by 58 basis points at Sept. 30, 1995.(6) Third, cost of funds indices
comprise approximately 43% of the
- -------------------------
(5) At Sept. 30, 1995, had these loans been allowed to adjust to their fully
indexed rate, the loan yield would have been 27 basis points higher and the
net interest margin would have been 18 basis points higher.
(6) The Bank has derived a significant benefit from these interest rate
floors, although the size of the benefit has been substantially reduced as
market interest rates moved upward. Approximately 13 basis points of the 7.73%
effective loan yield, or approximately $860,000 of interest income earned during
the third quarter of 1995, was attributable to interest rate floors on
Nationwide and 1-4 family loans. In comparison, during the third quarter of
1994, interest rate floors added 48 basis points to the loan yield, or $2.9
million to interest income.
At Sept. 30, 1995, approximately $528.7 million of the Bank's
nationwide loans and approximately $27.6 million of the 1-4 family loans were
at their weighted average floor of 8.08%. Had the floors not been in effect on
these loans, their weighted average interest yield would have been 7.50%, or 58
basis points lower, which would have lowered the Bank's Sept. 30, 1995 interest
rate spread by 8 basis points. In comparison, at Dec. 31, 1994, approximately
$613.4 million of nationwide loans and $41.9 million of 1-4 family loans were
at their weighted average floor of 7.94%. Had the floors not been in effect on
these loans, their weighted average interest yield would have been 6.65%, or 129
basis points lower, which would have lowered the Bank's interest rate spread by
21 basis points.
21
22
adjustable rate loan portfolio, or 34% of the total loan portfolio. The
movement in the cost of funds indices lags behind movements in short-term
market interest rates. Management attempts to have a balance of lagging
indices and market indices. Also, the adjustable rate portfolio includes $547
million of loans with initial fixed interest rate periods of three to five
years; most of these loans were originated in 1994, and therefore not subject
to repricing at this time.
The $568,000 decrease in interest income from MBS during the third
quarter of 1995 as compared to the same period in 1994 resulted from lower
average balances, partly offset by a higher effective yield. Average MBS
balances were $1.03 billion during the third quarter, or $166.8 million lower
than the same period in 1994. The lower average MBS balances were effected by
principal repayments and the sale of $56.9 million of MBS during the first
quarter of 1995. These reductions in MBS balances were partly offset by the
purchase of $65.1 million of MBS during 1995. The average yield on MBS
increased 68 basis points from 5.58% in the third quarter of 1994 to 6.26% in
third quarter of 1995. In contrast to the loan portfolio, MBS yields benefited
more substantially from favorable repricing in the MBS portfolio. Most of the
adjustable rate MBS reprice with either the six-month LIBOR or the one-year
constant maturity Treasury Bill index. These indices track short-term interest
rates better than the lagging indices of the loans receivable portfolio.
Interest income from investments, which includes marketable-debt
securities, federal funds, interest bearing bank balances, and other short-term
investments, increased $831,000 from the third quarter 1994. Both higher
average balances and a higher average yield contributed to the improvement in
interest income. Average investment balances increased from $171.9 million in
the third quarter of 1994 to $210.1 million during the third quarter of 1995.
MBS and loans receivable repayments help provide the additional liquidity
during the current quarter. The yield on investments improved from 5.07% in
the third quarter of 1994 to 5.72% in the third quarter of 1995. Higher
short-term market rates produced the higher yield.
Interest Expense. Deposit interest expense increased $5.2 million, primarily
because of higher rates paid on deposits. The weighted average cost of
deposits jumped 69 basis points over the third quarter of 1994 and was the
single most
22
23
significant reason for the contraction in net interest income and the NIM.(7)
Interest rate movements during the past several years have affected the Bank's
current deposit interest costs. When interest rates declined in 1993, many
depositors "parked" investment funds in savings accounts to wait for more
favorable rates for longer term investment. As expected, deposit balances
began to decline in 1994 as market interest rates increased, a trend that
continued into 1995. To help maintain deposit balances, Management focused its
marketing efforts on CDs. While special promotions and generally higher
offering rates on new CDs have limited the disintermediation of deposits to
other non-insured investments, it increased the relative size of the Bank's CD
portfolio and contributed to the increase in the weighted average cost of
deposits. While deposit costs have risen over recent periods, the Bank's
deposit costs are still lower than the costs of certain of its competitors,
according to certain surveys.
The use of borrowings to fund asset growth generated an additional
$901,000 of interest expense on borrowings during the third quarter as compared
to the same quarter a year ago. Average borrowing balances increased $26.9
million to total $431.0 million during the third quarter of 1995 as compared to
$404.2 million during the third quarter of 1994. The use of short-term
borrowings to fund loan originations and deposit runoff produced most of the
increase in interest expense. Most of the new borrowings were with the FHLB.(8)
- ---------------
(7) Although the weighted average cost of deposits increased
significantly from Sept. 30, 1994, the rate of increase has slowed
considerable in recent months. The weighted average cost of deposits at Sept.
30, 1995 was 19 basis points higher than at Mar. 31, 1995, but only 1 basis
point higher than at June 30, 1995.
(8) To mitigate the interest rate risk on approximately $170 million
of fixed rate MBS, the Bank borrowed approximately $35 million of fixed rate
FHLB advances with put options and $135 million of floating rate borrowings
hedged by a $130 million notional amount interest rate exchange agreement with
a primary dealer. Under this agreement, the Bank receives a variable interest
rate, based upon a referenced index, and pays a fixed amount to the
counterparty. The Bank attempted to reduce its credit risk by obtaining an
unconditional guarantee from the parent company of the counterparty, which is
an A1/A+ rated securities dealer. The transaction was structured so as to
provide the Bank with an amortizing liability (comprised of specific borrowings
and the related interest rate exchange agreement) to match the duration of the
MBS, at a profitable spread for five years. If interest rates rise
significantly, the Bank may experience some contraction in the expected spread
on the transaction as discount accretion would slow. Any resultant imbalance
in funding would be provided by liquidity. If interest rates fall
significantly, the Bank should experience better than expected net interest
income on the transaction. The Bank can adjust the transaction by acquiring
additional assets or exercising its options to repay a portion of the debt
without penalty. In addition, the Bank acquired approximately $40 million of
adjustable rate MBS with variable rate FHLB
23
24
Interest Rate Spread. 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 (i.e., the difference between weighted average
rates on interest bearing assets and liabilities), the relative size of
interest earning assets compared to interest bearing liabilities, and asset
quality.
The interest rate spread was 2.72% at Sept. 30, 1995 compared to 2.76% at
Dec. 31, 1994 and 2.93% at Sept. 30, 1994. Rising interest costs of deposits,
partly offset by an increase in overall asset yields associated with favorable
repricing in the MBS and loan portfolios, produced the decline in the spread.
While the interest rate spread has decreased over the last twelve months, the
interest rate spread at Sept. 30, 1995 was 14 basis points higher than at June
30, 1995. Management believes that the interest rate spread is a precursor to
the NIM.
External forces, such as the performance of the economy, the actions
of the Board of Governors of the Federal Reserve System, and market interest
rates can significantly influence the size of the interest rate spread and are
beyond the control of Management. In response to these forces, Management
evaluates market conditions and deploys strategies that it believes will
produce a sustainable and profitable interest rate spread.
While the interest rate spread has improved since June 30, 1995,
Management believes that several product related factors may continue to impact
the Company's interest rate spread in the future. On the asset side, several
characteristics of the loan portfolio impact the interest rate spread,
including interest rate cap and floor provisions, adjustable rate loans tied to
lagging indices, and adjustable rate loans with initial fixed interest rate
periods. See the "INTEREST INCOME" discussion above for further details. In
addition to loans, approximately $689 million of MBS contain interest rate cap
provisions at Sept. 30, 1995. Of these of MBS, $99 million are currently at
their interest rate caps.
On the liability side, the recent declines in market interest rates
has
- ---------------
advances. Caps and prepayment rates experienced on those adjustable rate MBS
(which were acquired at a premium) impact the spread earned by the Bank on this
transaction.
During 1995, the matched funding transaction described in this footnote
generated $3.0 million of net interest income and reduced the Sept. 30, 1995
interest rate spread and NIM by approximately 6 basis points.
24
25
slowed net deposit outflows and decelerated the rise in deposit costs, allowing
deposit balances and costs to stabilize.(9)
Provision for Loan Losses. The Company recorded a $300,000 provision for loan
losses during the third quarter of 1995 compared to a $1.2 million provision
recorded during the same period in 1994. See "CREDIT" for further discussion
of loss provisions and adequacy of the accumulated provisions for losses.
Other Income. Other income totaled $8.7 million during the three months ended
Sept. 30, 1995, $1.2 million or 17% higher than other income of $7.5 million
recorded in the same period in 1994. Other servicing fees improved $1.4
million, primarily because of growth in the number of checking accounts,
introduction of new fees and general increases in existing fees, and the
expansion of the ATM network. Management expects other income in 1995 to
continue to exceed 1994.
Total revenues provided by the Company's other subsidiaries were less
in the third quarter of 1995 as compared to the same period a year earlier.
Revenues from real estate development operations was level. Revenues from
discount brokerage activities declined $34,000 due to a lower average
commission per transaction and lower volumes. Also, lower transaction volumes,
associated with an increase in competition from other investment products, such
as CDs, contributed to the $130,000 decrease in insurance and annuity revenues.
General and Administrative Expense. General and administrative expenses
totaled $22.5 million during the third quarter of 1995, $715,000 or 3% higher
than the same quarter in 1994. Most of the increases were associated with a
$657,000 or 13% increase in occupancy, equipment and other office expense, and
a $118,000 or 1% increase in compensation and benefits. The increase in these
costs largely resulted from annual salary increases, extended hours at many of
the Bank's branch facilities, and the expansion of the ATM network.
As a retail depository institution emphasizing transaction accounts,
the Company's general and administrative expenses may be higher than other
institutions that do not provide such products. Nonetheless, Management of the
Company remains committed to controlling general and administrative costs to
help protect against declines in net interest income. The Company was
successful in
- ---------------
(9) In addition, the Bank has $401.2 million of checking account
balances, which are mostly noninterest bearing, that help mitigate the overall
effect of higher market interest rates on deposit interest costs.
25
26
holding third quarter general and administrative expense at about the same
level as the second quarter expenses. Also, Management expects that the
telephone banking center will be a cost effective way of providing financial
products to consumers.
Operations of Foreclosed Real Estate. The Bank generated a net loss from its
foreclosed real estate operation of $312,000 during the third quarter of 1995,
compared to a net loss of $347,000 during the same quarter in 1994. Lower
provisions for REO losses primarily produced the decrease between the two
periods. See "CREDIT" for further discussion of REO.
Income Taxes. Income taxes totaled $5.2 million or 36.6% of pretax income
during the third quarter of 1995 compared to $4.9 million or 35.1% of pretax
income during the same quarter in 1994. A higher effective tax rate during the
third quarter of 1995 and a $406,000 increase in pre-tax income produced the
increase in income tax expense between the two periods.
26
27
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Three months ended Sept. 30,
Dollars in thousands At Sept. 30, 1995 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Weighted Effective Effective
Yield/ Average Yield/ Average Yield/
Balance Rate Balance(a) Interest Rate Balance(a) Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------
Investments:
Marketable-debt securities (b) $92,768 5.34% $94,086 $1,238 5.22% $105,840 $1,334 5.00%
Federal funds/interest-bearing
balances 42,794 6.23 56,929 830 5.78 7,622 87 4.53
Other investments (c) 62,674 6.22 59,054 962 6.46 58,462 778 5.28
- ----------------------------------------------------------------------------------------------------------------------------
Total investments 198,236 5.81 210,069 3,030 5.72 171,924 2,199 5.07
Mortgage-backed securities (b) 1,022,764 6.33 1,032,161 16,150 6.26 1,198,922 16,718 5.58
Loans receivable (d) 2,614,553 7.77 2,621,175 50,648 7.73 2,463,666 45,861 7.45
- ----------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $3,835,553 7.28% $3,863,405 $69,828 7.23% $3,834,512 $64,778 6.76%
============================================================================================================================
Deposits:
Interest bearing checking $239,232 1.73% $228,466 $1,046 1.82% $241,521 $1,127 1.85%
Noninterest bearing checking 125,700 -- 125,900 -- -- 104,976 -- --
Other noninterest bearing accounts 36,827 -- 29,314 -- -- 35,391 -- --
Money market accounts 203,549 3.12 209,112 1,639 3.11 277,367 1,955 2.80
Savings accounts 706,172 2.41 715,366 4,361 2.42 815,083 5,146 2.50
Certificates of deposit 1,885,122 5.82 1,859,508 26,865 5.73 1,718,596 20,472 4.73
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 3,196,602 4.29 3,167,666 33,911 4.25 3,192,934 28,700 3.57
Borrowings:
Short-term borrowings (e) 125,285 5.94 164,470 2,503 6.04 131,243 1,619 4.89
Long-term borrowings (e) 266,609 7.12 266,576 4,766 7.09 272,929 4,749 6.90
- ----------------------------------------------------------------------------------------------------------------------------
Total borrowings 391,894 6.75 431,046 7,269 6.69 404,172 6,368 6.25
- ----------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $3,588,496 4.56% $3,598,712 $41,180 4.54% $3,597,106 $35,068 3.87%
============================================================================================================================
Excess of interest earning assets
over interest bearing liabilities $247,057 $264,693 $237,406
============================================================================================================================
Ratio of interest earning assets over
interest bearing liabilities 1.07 1.07 1.07
============================================================================================================================
Net interest income -- $28,648 $29,710
============================================================================================================================
Interest rate spread 2.72% -- --
============================================================================================================================
"Average" interest rate spread -- 2.69% 2.89%
============================================================================================================================
Net yield on average earning assets -- 2.97% 3.10%
============================================================================================================================
(a) All average balances based on daily balances.
(b) Average balances exclude the effect of unrealized gains or losses.
(c) Includes investment in Federal Home Loan Bank stock, deposits at Federal
Home Loan Bank, and other short-term investments.
(d) Includes loans held for sale and loans placed on nonaccrual.
(e) Includes FHL Bank advances, floating rate notes, other borrowings,
subordinated capital notes, ESOP loan.
27
28
RATE/VOLUME ANALYSIS
The following table presents the components of the changes in net interest
income by volume and rate(10) for the nine months ended Sept. 30, 1995 and 1994:
INCREASE/(DECREASE) DUE TO
----------------------------------
TOTAL
Dollars in thousands VOLUME RATE CHANGE
- ---------------------------------------------------------------------
CHANGE IN INTEREST INCOME:
Loans receivable $14,053 $ 1,532 $15,585
Mortgage-backed securities 1,155 6,598 7,753
Marketable-debt securities (1,421) 452 (969)
Federal funds and interest-bearing
bank balances 189 687 876
Other short-term investments (2,084) 1,476 (609)
-------
Total interest income 22,636
CHANGE IN INTEREST EXPENSE:
Deposits (866) 14,127 13,261
Short-term borrowings 5,905 672 6,577
Long-term borrowings 3,724 152 3,876
-------
Total interest expense 23,714
-------
NET CHANGE IN NET INTEREST INCOME
BEFORE PROVISION FOR LOAN LOSSES $(1,078)
=======
- ---------------
(10) 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.
28
29
COMPARISON OF NINE MONTHS ENDED SEPT. 30, 1995 AND 1994
General. Net income for the first nine months of 1995 totaled $27.1 million,
or 5% higher than the $25.8 million of net income reported during the same
period in 1994. The increased level of income in 1995 was associated with
higher other income of $3.1 million, a $2.5 million lower provision for loan
losses, and a $620,000 reduction in operating expenses for foreclosed real
estate. These increases in income were partly offset by higher general and
administrative expenses of $2.6 million and lower net interest income of $1.1
million. The $1.2 million increase in income tax expense was produced by the
higher level of pre-tax income and a higher effective tax rate during 1995.
While net income increased by 5% in the first nine months of 1995 as
compared to the same period in 1994, primary earnings per share increased 9%
from $1.27 during the first nine months of 1994 to $1.39 per share in 1995.
Earnings per share benefited from the acquisition of 1.2 million shares of
Company stock through stock repurchase programs during 1994 and early 1995.
Net Interest Income. Net interest income declined $1.1 million between the two
year to date periods at $58.6 million. A $23.7 million increase in interest
expense was partly offset by a $22.6 million increase in interest income.
Although average interest earning assets levels expanded by $188.1 million
between the two periods to total $3.9 billion during the first nine months of
1995, contracting spreads caused net interest income to decline. The net
interest margin ("NIM") declined 19 basis points from 3.18% for the first nine
of 1994 to 2.99% during the same period in 1995. Much of the decline in NIM
was associated with an increase in deposit costs, as the Bank raised new
offering rates on CDs to maintain deposit balances. Also, Management leveraged
the balance sheet in recent periods by acquiring loans and MBS with borrowings.
Management's goal for these leveraged transactions was to preserve net interest
income and return on equity by expanding interest earning asset levels as the
interest rate spread contracted. See "COMPARISON OF THREE MONTHS ENDED SEPT.
30, 1995 AND 1994" for discussion of the interest rate spread.
Interest Income. Interest income on loans receivable increased $15.6 million
during the nine month period ended Sept. 30, 1995 compared to the same period
in 1994, primarily due to higher average loan balances. Average loan balances
rose $246.6 million to total $2.63 billion for the nine months ended Sept. 30,
1995.
29
30
The record level of loan originations during 1994 produced the higher average
balances in the loan portfolio. The effective yield earned on loans increased
9 basis points from 7.52% in the first nine months of 1994 to 7.61% during the
same period in 1995. Upward repricing on the adjustable rate portfolio and
lower interest reserves on delinquent loans contributed to the higher effective
loan yield during 1995.
Interest income from MBS increased $7.8 million because of both higher
effective yields and average balances. The average yield on MBS was 6.26%
during the first nine months of 1995, or 83 basis points higher than the same
period in 1994. Upward repricing of adjustable rate securities generated most
of the improvement in yield. Average MBS balances increased $27.8 million
during the first nine months of 1995 over the same period in 1994. The
purchase of $632.0 million of MBS during 1994 (primarily in March and April of
1994), partly offset by principal repayments and the sale of $56.9 million of
MBS during 1995 produced the higher average balances.
Interest income from investments declined $702,000 over the first nine
months of 1994 as a result of lower average balances, partly offset by higher
average yields. Average investment balances dropped $86.3 million from $285.0
million during the first nine months of 1994 to $198.8 million during the same
period in the current year. The use of liquidity to acquire MBS, originate
loans, and fund net deposit outflows caused average balances to decline. The
yield on investment improved to 5.66% in the nine month period ended Sept. 30,
1995 from 4.28% in the same period in 1994. The higher effective yield was
produced by an increase in short-term market rates since the beginning of 1994.
Interest Expense. Deposit interest expense rose $13.3 million during the first
nine months of 1995, due to higher rates paid on deposits. The weighted
average cost of deposits increased 69 basis points since Sept. 30, 1994 and was
the single most significant cause for the contraction in net interest income
and the NIM.(11) Management has used special promotions and higher offering
rates on new CDs to limit the disintermediation of deposits to other
non-insured investments. As a result, the relative size of the Bank's CD
portfolio has increased, which also has increased the weighted average cost of
deposits.
- -----------------------
(11) Although the weighted average cost of deposits increased significantly
from Sept. 30, 1994, the rate of increase has slowed considerable in recent
months, as the weighted average cost of deposits at Sept. 30, 1995 is only 1
basis point higher than the average cost at June 30, 1995.
30
31
The use of borrowings to fund asset growth during 1994 produced the
$10.5 million increase in interest expense on borrowings. Average borrowing
balances rose $200.7 million to total $453.5 million during the first nine
months of 1995 as compared $252.8 million during the same period in 1994. The
use of short-term borrowings to fund loan originations and deposit outflows
produced a $6.8 million increase in interest expense, while the use of
long-term borrowing balances to fund MBS acquisitions contributed $3.9 million
toward the increase in borrowing interest expense. While average borrowing
balances have increased between the two nine month periods, period-end
borrowing balances have decreased $101.0 million from Dec. 31, 1994 to Sept.
30, 1995. Most of the decline was in short-term borrowing balances and
occurred during the third quarter of 1995. See "CASH FLOW ACTIVITY" for
further details.
Provision for Loan Losses. The Company recorded a provision for loan losses of
$1.4 million during the nine month period ended Sept. 30, 1995 compared to a
$3.9 million provision recorded during the same period in 1994. See "CREDIT"
for further discussion of loss provisions and adequacy of the accumulated
provisions for losses.
Other Income. Other income totaled $25.2 million during the first nine months
of 1995, $3.1 million or 14% higher than other income of $22.1 million recorded
in the same period in 1994. Other servicing fees improved $4.0 million,
primarily because of the growth in the number of checking accounts,
introduction of new fees and general increases in existing fees, and the
expansion of the ATM network. Gains on asset sales increased $473,000 during
the first nine months of 1995 as compared to the same period in 1994. Gains
recorded in 1995 resulted from the sale of $56.9 million of available for sale
MBS. In comparison, gains recorded in 1994 resulted from the sale of $15.5
million of available for sale MBS. See "CASH FLOW ACTIVITY" for further
details.
Revenues from other subsidiaries were down substantially during the
nine months ended Sept. 30, 1995 as compared to the same period a year ago.
Revenues from discount brokerage operations declined $733,000, largely due to
decrease in transaction volume and lower average commission per transaction.
Insurance and annuity revenues declined $392,000 in 1995 as a result of a 20%
decrease in transaction volumes. Lower gross margins earned on lot and home
sales produced the $105,000 decrease in revenues from real estate development
operations.
31
32
The $306,000 decline in other income was primarily associated with
interest on income tax refunds received during 1994.
General and Administrative Expense. General and administrative expenses
totaled $67.5 million during the first nine months of 1995, $2.6 million or 4%
higher than the same period in 1994. A $1.8 million or 12% increase in
occupancy, equipment and other office expense and an $886,000 or 3% increase in
compensation and benefits produced most of the increase in general and
administrative expenses. The increase in these costs largely resulted from two
additional branch locations, annual salary increases, extended hours at many of
the branch facilities, and the expansion of the ATM operation.
Operations of Foreclosed Real Estate. The Bank generated a net loss from its
foreclosed real estate operation of $968,000 during the first nine of 1995,
$620,000 or 39% less than the net loss recorded during the same period in 1994.
Lower provisions for REO losses produced the decrease between the two periods.
See "CREDIT" for further discussion of REO.
Income Taxes. Income taxes totaled $15.4 million or 36.2% of pretax income
during the first nine months of 1995 compared to $14.2 million or 35.4% of
pretax income during the same nine month period in 1994. Most of the higher
level of income tax expense was associated with the $2.5 million increase in
pretax income between the two periods and a higher effective tax rate used
during 1995.
32
33
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Nine months ended Sept. 30,
Dollars in thousands At Sept. 30, 1995 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Weighted Effective Effective
Yield/ Average Yield/ Average Yield/
Balance Rate Balance(a) Interest Rate Balance(a) Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------
Investments:
Marketable-debt securities (b) $92,768 5.34% $97,766 $3,767 5.15% $135,604 $4,736 4.67%
Federal funds/interest-bearing balances 42,794 6.23 39,165 1,727 5.90 32,841 851 3.46
Other investments (c) 62,674 6.22 61,852 2,928 6.33 116,595 3,537 4.06
- ----------------------------------------------------------------------------------------------------------------------------
Total investments 198,236 5.81 198,783 8,422 5.66 285,040 9,124 4.28
Mortgage-backed securities (b) 1,022,764 6.33 1,059,894 49,750 6.26 1,032,140 41,997 5.43
Loans receivable (d) 2,614,553 7.77 2,634,674 150,281 7.61 2,388,038 134,696 7.52
- ----------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $3,835,553 7.28% $3,893,351 $208,453 7.14% $3,705,218 $185,817 6.69%
============================================================================================================================
Deposits:
Interest bearing checking $239,232 1.73% $232,316 $3,180 1.83% $242,456 $3,372 1.86%
Noninterest bearing checking 125,700 -- 118,266 -- -- 101,057 -- --
Other noninterest bearing accounts 36,827 -- 29,094 -- -- 39,721 -- --
Money market accounts 203,549 3.12 220,375 5,131 3.11 289,402 5,921 2.74
Savings accounts 706,172 2.41 730,302 13,261 2.43 818,153 15,366 2.51
Certificates of deposit 1,885,122 5.82 1,852,897 76,783 5.54 1,724,901 60,435 4.68
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 3,196,602 4.29 3,183,250 98,355 4.13 3,215,690 85,094 3.54
Borrowings:
Short-term borrowings (e) 125,285 5.94 185,079 8,533 6.16 54,120 1,956 4.83
Long-term borrowings (e) 266,609 7.12 268,389 14,338 7.14 198,636 10,462 7.04
- ----------------------------------------------------------------------------------------------------------------------------
Total borrowings 391,894 6.75 453,468 22,871 6.74 252,756 12,418 6.57
- ----------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $3,588,496 4.56% $3,636,718 $121,226 4.46% $3,468,446 $97,512 3.76%
============================================================================================================================
Excess of interest earning assets
over interest bearing liabilities $247,057 $256,633 $236,772
============================================================================================================================
Ratio of interest earning assets over
interest bearing liabilities 1.07 1.07 1.07
============================================================================================================================
Net interest income -- $87,227 $88,305
============================================================================================================================
Interest rate spread 2.72% -- --
============================================================================================================================
"Average" interest rate spread -- 2.68% 2.93%
============================================================================================================================
Net yield on average earning assets -- 2.99% 3.18%
============================================================================================================================
(a) All average balances based on daily balances.
(b) Average balances exclude the effect of unrealized gains or losses.
(c) Includes investment in Federal Home Loan Bank stock, deposits at Federal
Home Loan Bank, and other short-term investments.
(d) Includes loans held for sale and loans placed on nonaccrual.
(e) Includes FHL Bank advances, floating rate notes, other borrowings,
subordinated capital notes, ESOP loan.
33
34
KEY CREDIT STATISTICS
Sept. 30, 1995 Dec. 31, 1994 Dec. 31, 1993
Dollars in thousands Dollar % Dollar % Dollar %
- ---------------------------------------------------------------------------------------------
LOAN PORTFOLIO
- ---------------------------------------------------------------------------------------------
MORTGAGE LOANS
1-4 family units $1,515,683 59% $1,530,132 59% $1,190,273 51%
Multifamily units 1,002,181 39 993,122 38 1,057,571 46
Commercial 52,322 2 63,983 3 73,029 3
Land and land development 2,332 * 224 * 10,307 *
- ---------------------------------------------------------------------------------------------
Total mortgage loans $2,572,518 100% $2,587,461 100% $2,331,180 100%
=============================================================================================
CONSUMER LOANS
Secured by deposits $ 2,330 10% $ 1,928 8% $ 2,300 11%
Education (guaranteed) 200 1 584 3 2,166 11
Home improvement 665 3 832 4 1,110 6
Auto 20,094 85 19,392 83 13,971 71
Personal 171 1 380 2 166 1
- ---------------------------------------------------------------------------------------------
Total consumer loans $ 23,460 100% $ 23,116 100% $ 19,713 100%
- ---------------------------------------------------------------------------------------------
Total loans held for investment $2,595,978 $2,610,577 $2,350,893
=============================================================================================
Weighted average rate 7.77% 7.51% 7.88%
=============================================================================================
*Less than 1%
NONPERFORMING ASSETS
- ---------------------------------------------------------------------------------------------
MORTGAGE LOANS
1-4 family units $ 9,323 38% $ 5,584 21% $ 11,202 23%
Multifamily units 3,134 13 3,813 14 12,908 26
Commercial 1,360 5 437 1 2,597 5
Land and land development -- -- -- -- 2,406 5
- ---------------------------------------------------------------------------------------------
Total mortgage loans 13,817 56 9,834 36 29,113 59
CONSUMER LOANS 91 * 101 * 555 1
REAL ESTATE OWNED
1-4 family units 1,406 6 4,585 17 4,925 10
Multifamily units 8,206 33 10,753 40 14,998 30
Commercial 1,252 5 1,818 7 -- --
Land and land development -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------
Total real estate owned 10,864 44 17,156 64 19,923 40
- ---------------------------------------------------------------------------------------------
Total nonperforming assets $ 24,772 100% $ 27,091 100% $ 49,591 100%
=============================================================================================
*Less than 1%
Sept. 30, Dec. 31, Dec. 31,
1995 1994 1993
- ---------------------------------------------------------------------------------------------
KEY CREDIT RATIOS
- ---------------------------------------------------------------------------------------------
Net loan charge-offs to average loans receivable 0.24% 0.39% 0.56%
Net California loan charge-offs to average California
loans receivable 0.47 1.21 1.52
Loan loss reserve to total loans 1.50 1.62 1.98
Loan loss reserve to nonperforming loans 279.80 424.72 156.99
Nonperforming assets to total assets 0.61 0.66 1.34
General valuation allowance to non-
performing assets 145.81 143.24 85.41
- --------------------------------------------------------------------------------------------
34
35
CREDIT
LENDING
At Sept. 30, 1995, the loans receivable portfolio was primarily
comprised of mortgages on 1-4 family residences and multifamily 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.
At Sept. 30, 1995, non-performing loans totaled $13.9 million compared
to $9.9 million at Dec. 31, 1994.(12) The higher level of non-performing loans
was produced by the addition of $13.1 million of loans to a non-performing
status. Partly offsetting this increase were the following: 1) the transfer of
$4.6 million of delinquent loans to REO, 2) the repayment of $3.6 million of
delinquent loans, and 3) charge-offs of $1.3 million.
At Sept. 30, 1995, the Bank had a net investment of $32.0 million in
loans considered impaired under the loan impairment accounting standards.(13) In
comparison, the Bank had a net investment of $24.8 million in impaired loans at
Dec. 31, 1994.(14) During the first nine months of 1995, the Bank classified an
additional $32.2 million of multifamily loans as impaired. Offsetting this
increase were the following reductions: 1) the repayment of two loans totaling
$8.7 million, 2) the transfer of $8.5 million of multifamily loans to REO, and
3) the recovery of equity and removal from impaired loans of three multifamily
loans totaling of $8.4 million. At Sept. 30, 1995, all of the $32.0 million of
impaired loans were performing loans, but were considered impaired because it
is probable, based upon current information and events, that the Bank will be
unable to collect all amounts due in accordance with the original contractual
- ---------------
(12) Of the $13.9 million of non-performing loans at Sept. 30, 1995,
$3.1 million was secured by multifamily real estate located in California. Of
the $9.9 million of non-performing loans at Dec. 31, 1994, $1.9, million was
secured by multifamily real estate located in California.
(13) SFAS No. 114 "Accounting by Creditors for Impairment of a Loan",
as amended by SFAS No. 118 "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosure."
(14) At Sept. 30, 1995, of the $32.0 million of loans considered
impaired, $27.4 million were loans secured by real estate located in
California. At Dec. 31, 1994, of the $24.8 million of loans considered
impaired, $11.3 million were loans secured by real estate located in
California.
35
36
agreement. In comparison, of the $24.8 million of impaired loans at Dec. 31,
1994, $22.9 million were performing and $1.9 million were non-performing loans.
The accumulated provision for loan losses at Sept. 30, 1995 was $38.9
million compared to $42.2 million at Dec. 31, 1994, a decrease of $3.3 million.
The following table provides activity in the accumulated provision for loan
losses from Jan. 1, 1994 through Sept. 30, 1995:
1995 1994
------------- ---------------------------
Nine Months Nine Months Year Ended
Dollars in thousands Ended Sept.30 Ended Sept. 30 Dec. 31
- -------------------- ------------- ---------------------------
Beginning of Period $42,196 $46,574 $46,574
Provision for losses 1,400 3,900 5,150
Charge-offs (6,693) (8,485) (10,243)
Recoveries 2,012 420 715
------- ---------------------
End of Period $38,915 $42,409 $42,196
======= =====================
General valuation allowances are evaluated based on a careful
evaluation of the various risk components that are inherent in each of the loan
portfolios, including off-balance sheet items. The risk components which are
evaluated include the level of non-performing and classified assets, geographic
concentrations of credit, economic conditions, trends in real estate values,
the impact of changing interest rates on borrower debt service, as well as
historical loss experience, peer group comparisons, and regulatory guidance.
The loan loss provision recorded during the nine months ended Sept.
30, 1995 was $1.4 million compared to $3.9 million during the nine months ended
Sept. 30, 1994. Recoveries of $2.0 million during the first nine months of
1995 as well as a lower level of total charge-offs allowed the Bank to retain
an adequate level of valuation allowances while reducing provisions. The lower
provision also reflects a reduction in classified loans, lower non-performing
assets, and a lower multifamily portfolio balance. See "KEY CREDIT
STATISTICS" for further details.
As of Sept. 30, 1995, the Bank's ratio of classified assets to
tangible capital and general valuation allowance was 43.9%, a significant drop
from the ratio reported at Dec. 31, 1994 of 56.1%.
36
37
The adequacy of the accumulated provision for loan losses is approved on a
quarterly basis by the Loan Loss Reserve Committee ("Reserve Committee") of the
Bank's Board of Directors. The accumulated provision for loan losses reflects
Management's best estimate of the reserves needed to provide for impairment of
multifamily and commercial real estate loans as well as other perceived credit
risks of the Bank. However, actual results could differ from this estimate and
future additions to the reserves may be necessary based on unforeseen changes
in economic conditions. In addition, federal regulators periodically review
the Bank's accumulated provision for losses on loans. Such regulators have the
authority to require the Bank to recognize additions to the reserves at the
time of their examinations.
Management continues to monitor events in the submarkets in which the
Bank has substantial loan concentrations, particularly California. Although
some softness persists in certain areas, Management is not aware of any changes
in those economies that would have a significant adverse effect on the Bank's
loan portfolio.
Approximately 60% of the Bank's multifamily and commercial loan
portfolio is scheduled to mature during the next three years. Management is
actively working with borrowers whose loans mature in 1995 to 1997 to either
refinance or repay the mortgage loans, depending upon the credit
characteristics. Management is also pursuing strategies for ensuring repayment
of those mortgage loans maturing after 1997.
Net loan charge-offs declined $3.4 million during the current year as
compared to the same nine month period in 1994. During the first nine months
of 1995, $4.7 million of net charge-offs were recorded compared to $8.1 million
during the same period in 1994. Of total charge-offs, $3.1 million relates to
the sale of a purchased loan participation secured by two high-rise office
buildings located in New York. Most of the remaining charge-offs during 1995
related to the Bank's nationwide multifamily and commercial real estate loan
portfolio. Net loan charge-offs to average loans receivable totaled 0.24%
during the first nine months of 1995. In comparison, the Company's net loan
charge-offs in 1994 and 1993 were equivalent to 0.39% and 0.56% of average
loans receivable, respectively. See "KEY CREDIT STATISTICS" for further
details.
The $6.7 million of gross loan charge-offs in the first nine months of
1995 included $6.0 million of charge-offs on loans considered impaired under
SFAS No.
37
38
114, $255,000 of net charge-offs on 1-4 family and consumer loans, and $187,000
of early prepayment inducements. These charge-offs were partly offset by $1.9
million of recoveries on multifamily loans located in Colorado, Washington, and
California.
OTHER REAL ESTATE OWNED ("REO")
REO totaled $10.9 million at Sept. 30, 1995 compared to $17.2 million
at the end of 1994.(15) The lower level of REO assets at Sept. 30, 1995, was
produced by the sale of five multifamily properties totaling $12.2 million.
Partly offsetting this decrease was the addition of four multifamily loans
totaling $8.5 million to REO and $1.5 million of capital improvements made on
existing REO assets.
The accumulated provision for real estate losses totaled $1.7 million
at Sept. 30, 1995 compared to $2.0 million at Dec. 31, 1994. 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.
After 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.
- ---------------
(15) At Sept. 30, 1995, there were no properties located in California
included in REO. Of the $17.2 million of REO at Dec. 31, 1994, $4.1 million
were multifamily properties located in California.
38
39
ASSET/LIABILITY REPRICING SCHEDULE
at Sept. 30, 1995
----------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE ASSETS: (Dollars in thousands)
Investments:(a)
Adjustable rate 6.02% $65,552 2% $65,552 - - - -
Fixed rate 5.71 132,684 3 26,370 10,512 59,498 - 36,304
Mortgage-backed securities:(b)
Adjustable rate 5.94 688,548 18 399,647 288,901 - - -
Fixed rate 7.14 334,216 9 21,475 4,508 82,768 56,206 169,259
Mortgage loans:(b)
Adjustable and renegotiable rate 7.64 2,043,257 53 1,147,131 411,522 404,997 79,607 -
Fixed rate 8.24 529,261 14 50,481 68,874 140,887 94,431 174,588
Consumer loans (b) 7.99 23,460 1 3,653 2,212 7,057 5,278 5,260
Assets held for sale 8.93 18,575 * 18,575 - - - -
--------------------------------------------------------------------------------
Total rate sensitive assets 7.28% $3,835,553 100% $1,732,884 $786,529 $695,207 $235,522 $385,411
================================================================================
RATE SENSITIVE LIABILITIES:
Deposits:
Checking accounts 1.04% $401,173 11% $106,828 $22,972 $75,306 $54,409 $141,658
Savings accounts 2.41 706,295 20 233,007 44,707 140,403 94,407 193,771
Money market deposit accounts 3.12 204,012 6 204,012 - - - -
Fixed-maturity certificates 5.82 1,885,122 53 1,033,594 408,264 271,205 109,986 62,073
--------------------------------------------------------------------------------
4.29 3,196,602 90 1,577,441 475,943 486,914 258,802 397,502
Borrowings:
FHLB advances 6.40 311,684 8 310,000 285 314 - 1,085
Other borrowings 8.01 63,810 2 62,508 - 1,302 - -
Mortgage-backed note 8.54 16,400 * - - - 16,400 -
--------------------------------------------------------------------------------
6.75 391,894 10 372,508 285 1,616 16,400 1,085
--------------------------------------------------------------------------------
Total rate sensitive 4.56% $3,588,496 100% $1,949,949 $476,228 $488,530 $275,202 $398,587
liabilities ================================================================================
Excess (deficit) of rate sensitive
assets over rate sensitive
liabilities (GAP) 2.72% $247,057 $(217,065) $310,301 $206,677 $(39,680) $(13,176)
================================================================================
Cumulative GAP $(217,065) $93,236 $299,913 $260,233 $247,057
Cumulative GAP to total assets without
regard to hedging transactions -5.39% 2.31% 7.44% 6.46% 6.13%
Cumulative GAP to total assets with
impact of hedging transactions -2.29% 5.41% 10.35% 6.46% 6.13%
* Less than one percent.
(a) Includes investment in FHLB stock.
(b) Excludes accrued interest and accumulated provisions for loan losses.
The mortgage loan repricing/maturity projections were based upon
principal repayment percentages in excess of the contractual amortization
schedule of the underlying mortgages. Multifamily mortgages were
estimated to be prepaid at a rate of approximately 8% per year;
adjustable rate mortgage loans on single family residences and loan
securities were estimated to prepay at a rate of 20% per year; fixed rate
loans and loan securities were estimated to prepay at a rate of 10% per
year. Loans with an adjustable rate characteristic, including loans with
initial fixed interest rate periods, are considered by Management
to have an adjustable rate. Checking accounts were estimated to be
withdrawn at rates between 15% and 21% per year. Most of the regular
savings accounts were estimated to be withdrawn at rates between
18% and 26% per year, although for some of the accounts, Management
assumed an even faster rate. Except for multifamily loans, the
prepayment assumptions included in this schedule are based upon the
Bank's actual prepayment experience over the past year, as well as
Management's future expectations of prepayments. The Bank assumed a
prepayment percentage of 8% because of current market conditions and
the nature of the Bank's multifamily portfolio. The new decay
assumption on passbook and checking accounts is based on a historical
regression analysis of the Bank's growth in these accounts.
39
40
PART II. -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10, Material Contracts.
(i) Amendments to Severance Payment Agreements, dated as of August
28, 1995, among St. Paul Bancorp, Inc., St. Paul Federal Bank
For Savings, and Thomas J. Rinella, Donald G. Ross, Clifford
M. Sladnick, and Robert N. Parke, respectively.
(ii) Amendments to Employment Agreements, dated as of August 28,
1995, among St. Paul Bancorp, Inc., St. Paul Federal Bank For
Savings, and Joseph C. Scully and Patrick J. Agnew,
respectively.
(b) Exhibit 11, Statement re: Computation of Per Share Earnings.
(c) Exhibit 27, Financial Data Schedule.
(d) The Company did not file a current report on Form 8-K during the Third
Quarter of 1995.
40
41
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 14, 1995 By: /s/ Joseph C. Scully
----------------- ---------------------------------
Joseph C. Scully
Chairman of the Board and Chief Executive Officer
(Duly Authorized Officer)
Date: November 14, 1995 By: /s/ Robert N. Parke
----------------- ---------------------------------
Robert N. Parke
Senior Vice President and Treasurer
(Principal Financial Officer)
41