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 Mar. 31, 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 -- 18,585,920 shares, as of April 28, 1995
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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 Mar. 31, 1995 and Dec. 31, 1994 . . . . . . . . . . . . . 3
Consolidated Statements of Income for the Three
Months Ended Mar. 31, 1995 and 1994 . . . . . . . . . . . . . . 4
Consolidated Statements of Stockholders' Equity for the
Three Months Ended Mar. 31, 1995 and 1994 . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Three Months Ended Mar. 31, 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 . . . . . . . . . . . . . . . 33
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . 34
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
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ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
Mar. 31, Dec. 31,
Dollars in thousands 1995 1994
- -----------------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents
Cash and amounts due from depository institutions $ 89,060 $ 104,563
Federal funds sold 72,700 18,100
Short-term cash equivalent securities 35,923 37,285
-----------------------------
Total cash and cash equivalents 197,683 159,948
Marketable-debt securities
(Market: Mar. 31, 1995-97,991; Dec. 31, 1994-$95,773) 100,205 99,643
Mortgage-backed securities
(Market: Mar. 31, 1995-$1,016,421; Dec. 31, 1994-$1,066,793) 1,050,670 1,126,617
Loans receivable 2,619,822 2,610,577
Less: accumulated provision for loan losses 42,146 42,196
------------------------------
Net loans receivable 2,577,676 2,568,381
Loans held-for-sale, at lower of cost or market
(Market: Mar. 31, 1995-$12,527; Dec. 31, 1994-$10,157) 12,525 10,155
Accrued interest receivable 23,158 23,467
Foreclosed real estate
(Net of accumulated provision for losses: Mar. 31, 1995-$2,274;
Dec. 31, 1994-$2,019) 19,808 16,484
Real estate held for development or investment 16,548 16,694
Investment in Federal Home Loan Bank stock 29,847 29,847
Office properties and equipment 44,371 44,112
Prepaid expenses and other assets 34,883 36,189
------------------------------
TOTAL ASSETS $ 4,107,374 $ 4,131,537
==============================
LIABILITIES:
Deposits $ 3,199,924 $ 3,232,903
Short-term borrowings
(FHLB advances: Mar. 31, 1995-$120,275; Dec. 31, 1994-$120,275) 220,275 221,180
Long-term borrowings
(FHLB advances: Mar. 31, 1995-$211,684; Dec. 31, 1994-$216,684) 266,794 271,747
Advance payments by borrowers for taxes and insurance 21,423 21,842
Other liabilities 41,711 32,468
------------------------------
Total Liabilities 3,750,127 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 Mar. 31, 1995-19,798,992 shares;
outstanding at Mar. 31, 1995-18,563,067 shares;
issued at Dec. 31, 1994-19,785,405 shares; 198 198
outstanding at Dec. 31, 1994-18,781,480)
Paid-in capital 138,278 138,039
Retained income, substantially restricted 246,555 238,929
Unrealized loss on securities, net of taxes (1,300) (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 (Mar. 31, 1995-1,235,925 shares;
Dec. 31, 1994-1,003,925 shares) (22,601) (18,355)
------------------------------
Total stockholders' equity 357,247 351,397
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,107,374 $ 4,131,537
==============================
See notes to consolidated financial statements
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ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended Mar. 31,
------------------------------
Dollars in thousands except per share amounts 1995 1994
- ------------------------------------------------------------------------------------
INTEREST INCOME:
Loans receivable $ 49,170 $ 44,905
Mortgage-backed securities 17,184 10,144
Marketable-debt securities 1,269 1,778
Federal funds 443 457
Other investment income 986 1,864
-------------------------
Total interest income 69,052 59,148
INTEREST EXPENSE:
Deposits 31,289 28,208
Short-term borrowings 3,315 6
Long-term borrowings 4,829 1,416
-------------------------
Total interest expense 39,433 29,630
-------------------------
Net interest income 29,619 29,518
Provision for loan losses 650 1,950
-------------------------
Net interest income after provision for loan losses 28,969 27,568
OTHER INCOME:
Loan servicing fees 394 349
Other fee income 4,866 3,568
Net gain on assets sold 861 389
Discount brokerage commissions 708 1,234
Income from real estate development 446 667
Insurance and annuity commissions 714 956
Other 29 164
-------------------------
Total other income 8,018 7,327
GENERAL AND ADMINISTRATIVE EXPENSE:
Salaries and employee benefits 12,291 11,956
Occupancy, equipment and other office expense 5,704 5,233
Advertising 1,041 1,126
Federal deposit insurance 2,214 2,240
Other 1,311 1,233
-------------------------
General and administrative expense 22,561 21,788
Loss on foreclosed real estate 429 460
-------------------------
Income before income taxes 13,997 12,647
Income taxes 4,994 4,449
-------------------------
NET INCOME $ 9,003 $ 8,198
=========================
EARNINGS PER SHARE:
Primary $ 0.46 $ 0.40
Fully diluted 0.46 0.40
=========================
DIVIDENDS PER SHARE $ 0.075 $ 0.075
=========================
See notes to consolidated financial statements.
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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 Taxes Net of Taxes Plan Plan Shares Stock Equity
---------------------------------------------------------------------------------------------------------------
Balance at
Dec. 31, 1993 19,683,981 $197 $136,609 $210,215 $4,594 ($46) ($4,240) $ -- $ -- $347,329
Stock option
exercises 14,994 -- 214 -- -- -- -- -- -- 214
Net Income -- -- -- 8,198 -- -- -- -- -- 8,198
Cash dividends
paid to
stockholders
($0.075 per
share) -- -- -- (1,461) -- -- -- -- -- (1,461)
Change in
unrealized
gain/(loss) on
securities,
net of tax (3,388) -- -- -- -- (3,388)
Repayment of ESOP
borrowing -- -- -- -- -- -- 178 -- -- 178
Adoption of SOP
93-6 -- -- -- -- -- -- 2,883 (2,883) -- --
Treasury stock
purchases (4,000) -- -- -- -- -- -- -- (70) (70)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at
Mar. 31, 1994 19,694,975 $197 $136,823 $216,952 $1,206 ($46) ($1,179) ($2,883) ($70) $351,000
===============================================================================================================================
Balance at
Dec. 31, 1994 18,781,480 $198 $138,039 $238,929 ($3,531) $ -- ($1,000) ($2,883) ($18,355) $351,397
Stock option
exercises 13,587 -- 239 -- -- -- -- -- -- 239
Net Income -- -- -- 9,003 -- -- -- -- -- 9,003
Cash dividends
paid to
stockholders
($0.075 per
share) -- -- -- (1,377) -- -- -- -- -- (1,377)
Change in
unrealized
gain/(loss) on
securities,
net of tax -- -- -- -- 2,231 -- -- -- -- 2,231
Treasury stock
purchases (232,000) -- -- -- -- -- -- -- (4,246) (4,246)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at
Mar. 31, 1995 18,563,067 $198 $138,278 $246,555 ($1,300) $ -- ($1,000) ($2,883) ($22,601) $357,247
===============================================================================================================================
See notes to consolidated financial statements
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ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended Mar. 31
---------------------------
Dollars in thousands 1995 1994
- ------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 9,003 $ 8,198
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 650 1,950
Provision for losses on foreclosed real estate 256 200
Provision for depreciation 1,565 1,215
Assets originated and acquired for sale (4,991) (28,671)
Sale of assets held for sale 2,621 38,949
(Increase) decrease in accrued interest receivable 309 (1,325)
Decrease in prepaid expenses and other assets 1,306 1,584
Increase in other liabilities 9,243 2,218
Net amortization of yield adjustments 132 (1,757)
Other items, net (605) 1,201
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 19,489 23,762
- -----------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Principal repayments on loans receivable 68,440 150,940
Loans originated and purchased for investment (81,104) (114,055)
Loans receivable sold -- 1,270
Principal repayments on available-for-sale mortgage-
backed securities 5,986 26,403
Principal repayments on held-to-maturity mortgage-
backed securities 27,648 40,445
Purchase of available-for-sale mortgage-backed securities (12,240) --
Purchase of held-to-maturity mortgage-backed securities -- (277,279)
Sale of available-for-sale mortgage-backed securities 56,887 9,941
Maturities of available-for-sale marketable-debt securities -- 2,000
Purchase of available-for-sale marketable-debt securities -- (20,000)
Purchase of held-to-maturity marketable-debt securities -- (30,695)
Additions to real estate (2,612) (2,604)
Real estate sold 1,705 2,434
Sale of Federal Home Loan Bank stock -- 1,443
Purchase of office properties and equipment (1,826) (1,217)
Proceeds from sales of office properties and equipment 2 585
- -----------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 62,886 (210,389)
- -----------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from sales of certificates of deposit 93,139 67,141
Payments for maturing certificates of deposit (80,861) (158,819)
Net increase (decrease) in remaining deposits (45,257) 90,740
Increase in long-term borrowings -- 50,000
Repayment of long-term borrowings (4,953) --
Decrease in short-term borrowings, net (905) (192)
Dividends paid to stockholders (1,377) (1,461)
Net proceeds from exercise of stock options 239 214
Purchase of treasury stock (4,246) (70)
Decrease in advance payments by borrowers
for taxes and insurance (419) (733)
- -----------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (44,640) 46,820
- -----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 37,735 (139,807)
Cash and cash equivalents at beginning of period 159,948 336,331
- -----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 197,683 $ 196,524
=========================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest credited on deposits $ 24,301 $ 24,789
Interest paid on deposits 2,827 2,523
- ----------------------------------------------------------------------------------------
Total interest paid on deposits 27,128 27,312
========================================================================================
Interest paid on borrowings 8,333 1,639
Income taxes paid, net 1,449 (81)
Real estate acquired through foreclosure 1,800 6,846
========================================================================================
See notes to consolidated financial statements
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ST. PAUL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements have been prepared
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-month period ended Mar. 31,
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 Mar. 31, 1995, the Bank had outstanding commitments to originate 1-4
family real estate loans of $25.9 million. Of these commitments, $24.1 million
were for adjustable-rate loans and $1.8 million were for fixed-rate loans.
Most of these commitments expire after sixty days. Also, the Bank had
commitments to originate $1.2 million of adjustable rate 1-4 family
construction loans. In addition, the Bank had outstanding commitments to
originate $2.4 million of adjustable rate mortgage loans secured by multifamily
apartments. Unused home equity lines of credit totaled $45.1 million as of
Mar. 31, 1995. The Bank anticipates funding originations with liquidity.
At Mar. 31, 1995, the Bank held a commitment to purchase $27.9 million of
multifamily loan participations from the Resolution Trust Corporation.
The Bank held commitments, at Mar. 31, 1995, to sell $3.2 million of
fixed-rate, 1-4 family real estate loans. The consolidated financial
statements contain, market value losses, if any, related to these commitments.
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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 Mar. 31, 1995, the Company reported total assets of
$4.1 billion and the Bank operated 52 full-service branches in the Chicago
metropolitan area. The branch network comprises 35 full-size offices and 17
banking offices located in Omni(R) and Cub(R) supermarkets. In addition, the
Bank operated 178 automated teller machines (ATMs), the second largest network
in Chicago. The Bank also services 167,000 checking accounts and 28,000 loans
at Mar. 31, 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 Mar. 31, 1995, Investment Network, Inc. manages $351 million of investments
and Annuity Network, Inc. manages $297 million in annuity contracts.
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. The Bank
also utilizes a correspondent loan program to originate 1-4 family mortgages
outside the Chicago metropolitan area, primarily in the states of Illinois,
Wisconsin, Indiana, Michigan, Ohio, and Minnesota. The 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
apartment buildings with up to 120 units located within a 100 mile radius of
the Chicago metropolitan area. During 1995, the Bank began providing
construction financing to experienced residential land developers and home
builders in the
- ----------------------
(1) The credit card product is offered by the Bank through an agency
agreement with another lender.
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Chicago metropolitan area. 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 Mar. 31, 1995, $977.7 million or
23.8% of total assets were comprised of loans secured by multifamily real
estate properties, of which $542.8 million or 13.2% of total assets represents
multifamily loans secured by real estate located in California. Also, $62.9
million or 1.5% of the Company's total assets at Mar. 31, 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 Standard 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. 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 the forces of supply and demand for real estate, the
economic conditions of real estate markets, and interest rates, the risk of
actual losses in the Bank's loan portfolio will also change. See "CREDIT" for
further details.
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 scheduled drop in FDIC insurance rates for
commercial banks. Management's current intention is to operate a commercial
bank side by side with St. Paul Federal Bank For Savings. Management hopes
that legislative action will converge the FDIC premium rates for thrifts and
commercial banks making the commercial bank charter unnecessary.
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STATEMENT OF FINANCIAL CONDITION
St. Paul Bancorp reported total assets of $4.11 billion at Mar. 31, 1995
compared to $4.13 billion at Dec. 31, 1994, a decrease of $24.2 million or
0.6%. Lower MBS balances of $75.9 million were partly offset by a $37.7
million increase in cash and cash equivalents and a $9.3 million increase in
loans receivable.
Cash and cash equivalents totaled $197.7 million at Mar. 31, 1995 compared
to $159.9 million at Dec. 31, 1994, an increase of $37.7 million or 23.6%.
During March 1995, $56.9 million of available for sale MBS were sold which
provided most of the increase in cash and cash equivalents since year-end 1994.
The Bank invested proceeds from the sale into federal funds and other MBS
purchases. A portion of the proceeds will be used to fund the purchase of loan
participations in April 1995. See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS"
for further detail.
Marketable-debt securities, comprised of U.S. Treasury and agency
securities, totaled $100.2 million at Mar. 31, 1995, relatively unchanged from
Dec. 31, 1994. The weighted average yield earned on the marketable-debt
security portfolio was 5.11% at Mar. 31, 1995 compared to 5.04% at Dec. 31,
1994. Upward repricing on $20 million of medium term agency securities
produced the increase in the weighted average yield since year-end 1994. Most
of the marketable-debt securities are classified as held to maturity under SFAS
No. 115. At Mar. 31, 1995, the Company recorded an unrealized loss of $892,000
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 $1.05 billion at Mar. 31, 1995, $75.9 million or 6.7% 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 principal repayments of $33.6 million
during the first quarter of 1995 produced the decline in balance. The purchase
of $12.2 million of adjustable rate, available for sale securities partly
offset these decreases. See "COMPARISON OF THREE MONTHS ENDED MAR. 31, 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 6.13% at Mar. 31,
1995 compared to 6.02% at Dec. 31, 1994. Favorable repricing on adjustable
rate MBS produced
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the higher weighted average yield at Mar. 31, 1995.(2)
Similar to the marketable-debt securities portfolio, most of the MBS
portfolio is classified as held to maturity under SFAS No. 115. At Mar. 31,
1995, the Company recorded an unrealized loss on its available for sale MBS of
$1.3 million compared to an unrealized loss of $4.1 million at Dec. 31, 1994.
The decrease in the unrealized loss was associated with lower medium term
market interest rates at Mar. 31, 1995 compared to year-end 1994.
At Mar. 31, 1995, 67% 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 $2.62 billion at Mar. 31, 1995 compared to $2.61
billion at Dec. 31, 1994, an increase of $9.2 million or 0.4%. Loans
originated for investment outpaced loan repayments during the first three
months of 1995, allowing the slight increase in loans receivable balances since
Dec. 31, 1994. See "CASH FLOW ACTIVITY" for further discussion.
The weighted average yield on loans receivable was 7.52% at Mar. 31, 1995,
relatively unchanged from Dec. 31, 1994. A modest level of upward repricing in
the loan portfolio was offset by the origination of loans at weighted average
yields below the portfolio average and the repayment of older, higher yielding
loans. At Mar. 31, 1995, 75% of the loan portfolio had adjustable rate
characteristics, compared to 77% at Dec. 31, 1994.
Deposits totaled $3.20 billion at Mar. 31, 1995, $33.0 million or 1.0%
lower than the deposit balances of $3.23 billion at Dec. 31, 1994. At Mar. 31,
1995, the weighted average cost paid on deposits was 4.11% compared to 3.85% at
Dec. 31, 1994. As interest rates increased in recent months, many customers
pursued higher yielding investments. Management has balanced its efforts to
retain deposit balances while holding down deposit interest costs. Although
deposit interest costs have increased significantly since year-end 1994, the
Company's deposit costs are significantly below its competitors, according to
certain
- ----------------------
(2) The weighted average yield would have been 12 basis points higher if
not for the sale of fixed rate MBS.
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industry surveys.
Total borrowings, which include FHLB advances, totaled $487.1 million at
Mar. 31, 1995, or $5.9 million lower than the $492.9 million of balances at
Dec. 31, 1994. The composition of short-term versus long-term borrowings
remained relatively unchanged at Mar. 31, 1995 compared to Dec. 31, 1994. The
combined weighted average cost paid on borrowings was 6.77% at Mar. 31, 1995
compared to 6.68% at Dec. 31, 1994. See "CASH FLOW ACTIVITY" for further
discussion.
Stockholders' equity of the Company was $357.2 million at Mar. 31,
1995 or 8.70% of average assets during the first three 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 $5.9 million growth in
stockholders' equity during the three months ended Mar. 31, 1995 primarily
resulted from $9.0 million of net income and a $2.2 million improvement in
value on available for sale securities(3), partly offset by the acquisition of
$4.2 million of the Company's common stock and $1.4 million of dividend
payments. See "REGULATORY CAPITAL REQUIREMENT" and "CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY" for further analysis.
During the first three months of 1995, the Company acquired 232,000
shares of its outstanding common stock, at a weighted average cost per share of
$18.30. The Company acquired these shares under a stock repurchase program
that began in July 1994. As of Mar. 31, 1995, the Company had repurchased a
total of 959,975 shares under the July 1994 repurchase program(4), bringing the
total number of shares acquired under all repurchase programs to 1,235,925
shares. Management's primary objective in reacquiring its shares was to
increase return on equity and earnings per share for those shares that remain
outstanding. Management continues to evaluate the feasibility of additional
repurchase programs. See "CASH FLOW ACTIVITY -- HOLDING COMPANY LIQUIDITY" for
further details.
See "CREDIT" for discussion of foreclosed real estate balances.
- ----------------------
(3) Under SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities", which the Company adopted in 1993, adjustments to the
market value of available for sale securities are recorded directly to
stockholders' equity and are not recorded on the Consolidated Statements of
Income until the securities are sold.
(4) On April 5, 1995, the Company purchased an additional 4,447 shares of
its common stock to complete the July 1994 repurchase program.
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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.
During the first quarter of 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 Mar. 31,
1995 and Dec. 31, 1994:
=======================================================================
MAR. 31, 1995
- -----------------------------------------------------------------------
Dollars in Core Tangible Risk-Based
Thousands Capital Capital Capital
- -----------------------------------------------------------------------
Actual percentage 8.69% 8.69% 16.76%
Required percentage 3.00 1.50 8.00
- -----------------------------------------------------------------------
Excess percentage 5.69% 7.19% 8.76%
=======================================================================
Actual capital $352,881 $352,881 $381,427
Required capital 121,882 60,941 181,024
- -----------------------------------------------------------------------
Excess capital $230,999 $291,940 $199,403
=======================================================================
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
=======================================================================
13
14
The following schedule reconciles stockholders' equity of the Company to
the components of regulatory capital of the Bank at Mar. 31, 1995:
Mar. 31,
Dollars in thousands 1995
- -----------------------------------------------------------------------
Stockholders' equity of the Company $357,247
Less: capitalization of the Company's
subsidiaries other than the Bank (10,292)
Less: capitalization of the Company 7,720
- -----------------------------------------------------------------------
Stockholder's equity of the Bank 354,675
Plus: unrealized loss on
available for sale securities 1,297
Less: investments in non-includable
subsidiaries (1,477)
Less: intangible assets (1,614)
- -----------------------------------------------------------------------
Tangible and core capital 352,881
Plus: allowable GVAs 28,546
- -----------------------------------------------------------------------
Risk-based capital $ 381,427
=======================================================================
During the first three months of 1995, the Bank's core and tangible
capital ratios increased 18 basis points. The Bank's net income during the
first quarter of 1995, net of dividends paid to St. Paul Bancorp, produced
the increase in the ratios. A slight decrease in regulatory assets also
contributed to a higher ratio. The Bank's risk-based capital ratio increased
11 basis points during the first three months of 1995. The Bank's net income
during the first quarter of 1995, net of dividends paid to St. Paul Bancorp,
also improved the risk-based capital ratios. However, a small increase in
risk-weighted assets partly offset the growth in the risk-based capital ratio.
An increase in off-balance sheet commitments, which have no impact on
regulatory assets, caused risk-weighted assets to increase while total assets
actually declined.
The OTS has issued notice of a proposed regulation that would require
all but the most highly-rated savings institutions to maintain a ratio of core
capital to total assets of between 4% and 5%. The Bank's excess core capital
would have been $190.4 million, if it had to meet a 4% core capital ratio as of
Mar. 31, 1995, versus $231.0 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 Mar. 31, 1995, the Bank does not have
"excess interest rate
14
15
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
$199.4 million of excess risk-based capital at Mar. 31, 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 Mar. 31, 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 8.69%,
15.45%, and 16.76%, respectively.
CASH FLOW ACTIVITY
Sources of Funds. The major sources of funds during the three month period
ended Mar. 31, 1995 included $102.1 million of principal repayments on loans
receivable and MBS, $93.1 million from the issuance of certificates of
deposits ("CDs"), and $56.9 million from the sale of fixed rate available for
sale MBS.
Repayments of loans receivable and MBS were $102.1 million during the
first three months of 1995 compared to $217.8 million in the same period in
1994, a decline of $115.7 million or 53.1%. Loan refinancing slowed
significantly at the end of the first quarter of 1994 and remained low
throughout 1994 and the first quarter of 1995. Management believes the
repayment activity during 1995 will
15
16
continue to be less than that experienced in 1994.
Management relied heavily on CD sales as a funding source during the
first quarter of 1995. Promotional activities and the rise in market interest
rates since the first quarter of 1994 have attracted depositors to CDs. As a
result, proceeds from the sale of CDs totaled $93.1 million in the first
quarter of 1995, or $26.0 million higher than the $67.1 million of proceeds
received in the same period of 1994.(5)
The slow down in fixed rate lending since the first quarter of 1994
produced a decrease in loan sales, which totaled only $2.6 million in the first
quarter of 1995 compared to $38.9 million in the same period a year ago.
Higher demand for fixed rate loans at the end of 1993, associated with
historically low interest rate levels at that time, allowed fixed rate
originations and related sales to remain high in the first quarter of 1994.
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.
Uses of Funds. The major uses of funds during the three months ended Mar. 31,
1995 included $81.1 million of loans originated for investment, $80.9 million
of payments for maturing CDs, $45.3 million of net outflows for other deposit
accounts, and $12.2 million for the purchase of MBS.
Loans originated for investment were $81.1 million during the first
quarter of 1995, or approximately 29% less than the $114.1 million of loan
originations during the same period in 1994. Aggressive loan origination goals
in 1994 contributed to lower origination volumes in the first quarter of 1995.
Management expects loan origination volumes during 1995 to be less than 1994.
Payments for maturing CDs decreased $78.0 million during 1995 to total
$80.9 million for the three months ended Mar. 31, 1995. The Bank has
encouraged depositors to maintain CD deposits through promotions and by
increasing product offering rates.
- ----------------------
(5) While the Bank has emphasized the sales of CDs, balances in savings
and money market accounts have decreased, resulting in a $45.3 million net
outflow in other deposit accounts during the first quarter of 1995. In
contrast, the low interest rate environment of 1993 caused depositors to
withdraw balances from CDs in favor of savings and money market accounts,
resulting in a $90.7 million net inflow to other deposit products during the
first quarter of 1994.
16
17
MBS purchases during the first quarter of 1995 totaled $12.2 million,
far less than the $277.3 million purchased during the same period in 1994.
Management used liquidity that had accumulated during 1993(6) to acquire MBS
during the first quarter of 1994. The Bank acquired MBS to enhance investment
income and net interest income.
Holding Company Liquidity. At Mar. 31, 1995, St. Paul Bancorp, the holding
company, had $17.2 million of cash and cash equivalents, which included
amounts due from depository institutions, and marketable-debt securities with
original maturities of less than 90 days. St. Paul Bancorp also owned
$995,000 of marketable-debt securities at Mar. 31, 1995, which collaterize
borrowings of the ESOP.
Sources of liquidity for St. Paul Bancorp during the first three
months of 1995 included $4.3 million of dividends from the Bank and $100,000 of
dividends from Annuity Network, Inc. Uses of St. Paul Bancorp's liquidity
during the first three months of 1995 included the acquisition of $5.3 million
of St. Paul Bancorp common stock under the stock repurchase program, the
payment of $1.4 million of dividends to shareholders, and the payment of
$712,000 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 Mar. 31, 1995, the Bank had $280.0 million invested in liquid
assets, which exceeded the current requirement by $108.8 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.
- ----------------------
(6) Management also purchased $50.7 million of marketable-debt securities
during the first three months of 1994 in order to reduce liquidity and enhance
net interest income.
17
18
RATE/VOLUME ANALYSIS
The following table presents the components of the changes in net interest
income by volume and rate(7) for the three months ended Mar. 31, 1995 and 1994:
INCREASE/(DECREASE) DUE TO
----------------------------------
TOTAL
Dollars in thousands VOLUME RATE CHANGE
- ---------------------------------------------------------------------
CHANGE IN INTEREST INCOME:
Loans receivable $5,292 $(1,027) $4,265
Mortgage-backed securities 5,363 1,677 7,040
Marketable-debt securities (768) 259 (509)
Federal funds (291) 277 (14)
Other short-term investments (1,763) 885 (878)
--------
Total interest income 9,904
CHANGE IN INTEREST EXPENSE:
Deposits (341) 3,422 3,081
Short-term borrowings 3,309 0 3,309
Long-term borrowings 3,759 (346) 3,413
-------
Total interest expense 9,803
-------
NET CHANGE IN NET INTEREST INCOME
BEFORE PROVISION FOR LOAN LOSSES $101
=======
- ----------------------
(7) 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.
18
19
COMPARISON OF THREE MONTHS ENDED MAR. 31, 1995 AND 1994
General. Net income totaled $9.0 million compared to $8.2 million the same
period in 1994. The higher level of income in 1995 was associated with a $1.3
million decline in the provision for loan losses, a $691,000 increase in non-
interest income, and a $101,000 increase in net interest income. A $773,000
increase in general and administrative expenses partly offset these
improvements in income. The higher level of pre-tax earnings in 1995 also
produced a $545,000 increase in income tax expense.
While net income increased by 10% in the first quarter of 1995 as
compared to 1994, earnings per share increased 15% from $0.40 during the first
quarter of 1994 to $0.46 per share in 1995. Earnings per share would have been
$0.03 lower in 1995 if not for the 1.2 million shares of Company stock acquired
through stock repurchase programs.
Net Interest Income. Comprising the $101,000 increase in net interest income
was a $9.9 million increase in interest income, partly offset by higher
interest expense of $9.8 million. Interest earning assets levels expanded
between the two periods while the interest rate spread contracted. Average
interest earning assets increased from $3.54 billion in the first quarter of
1994 to $3.93 billion in the first quarter of 1995. Management leveraged the
balance sheet by acquiring loans and MBS with borrowings in 1994. Management's
goal was to preserve net interest income by expanding interest earning asset
levels during a period of higher interest rates and a contracting interest rate
spread. The net interest margin ("NIM") declined 33 basis points from 3.34%
for the first quarter of 1994 to 3.01% for the first quarter of 1995.
Interest income on loans receivable increased $4.3 million over the first
quarter of 1994. Higher loan balances, offset by lower yields, comprised the
increase. Average loan balances were $2.63 billion during the first quarter of
1995 up $282.2 million over $2.35 billion during the same period in 1994. A
record level of loan originations during 1994 and a significant decrease in
loan repayments since the first quarter of 1994 allowed the growth in the loan
portfolio. The effective yield earned on loans declined 18 basis points from
the first quarter of 1994 to the first quarter of 1995, which caused a 12 basis
point contraction in the NIM. The benefit to interest income provided by
upward repricing of adjustable rate loans was less than the contraction in
interest
19
20
income caused by the repayment of older, higher yielding loans.
Although short-term market interest rates have been rising since early
1994, the amount of repricing in the loan portfolio has been limited for
several reasons. First, approximately 30% of the loan portfolio was at their
floors during the first quarter of 1995. These assets will not reprice until
their fully-indexed rates exceed the floors. On average, the fully indexed
rates of these loans were below their floors by 100 basis points at Mar. 31,
1995.(8) Second, cost of funds indices comprise approximately 42% of the
adjustable rate loan portfolio or 30% of the total loan portfolio. The
movement in the cost of funds indices has lagged behind the movements in
short-term market interest rates. For example, the National Cost of Funds
index began moving upwards in June 1994, seven months after the rise in the
one year Treasury bill rate. Third, the adjustable rate portfolio includes
$531.0 million of loans (most of which were originated in 1994) with initial
fixed interest rate periods of three to five years; these loans are not
subject to repricing at this time. Finally, at Mar. 31, 1995 approximately
$1.0 billion of loans receivable contain interest rate cap provisions.
Interest rate caps can limit upward repricing on a periodic and life time
basis. Most of the periodic interest rate caps in the Bank's portfolio are
2%.
Interest income from MBS increased $7.0 million as a result of both
higher average MBS balances and yields. Average MBS balances increased $356.1
million during the first quarter of 1995 over the first quarter of 1994. The
increase
- ----------------------
(8) The Banks still derives 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 25 basis points of the 7.47%
effective loan yield, or approximately $1.7 million of interest income earned
during the first quarter of 1995, was attributable to interest rate floors on
Nationwide and 1-4 family loans. In comparison, during the first quarter of
1994, interest rate floors accounted for approximately 62 basis points, or
$3.6 million of interest income earned during the quarter.
At Mar. 31, 1995, approximately $547.7 million of the Bank's Nationwide
loans and approximately $33.1 million of the 1-4 family loans were at their
weighted average floor of 8.05%. Had the floors not been in effect on these
loans, their weighted average interest yield would have been 7.05%, or 100
basis point lower, which would have lowered the Bank's Mar. 31, 1995 interest
rate spread by 17 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.
20
21
in average balances was associated with the purchase of $644.2 million of MBS
since March of 1994. The average yield on MBS increased from 5.41% in 1994 to
6.22% in 1995 which improved the NIM by 18 basis points. Unlike, loans
receivable, repricing has been significant in the MBS portfolio. Most of the
adjustable rate MBS reprice with the six-month LIBOR and the one-year constant
maturity Treasury Bill. These indices track short-term interest rates better
than the lagging indices of the loans receivable portfolio.
Interest income from investments declined $1.4 million from 1994 as a
result of lower average balances, partly offset by higher average yields.
Average investment balances declined from $437.8 million in the first quarter
of 1994 to $196.4 million in 1995. The use of liquidity to acquire MBS and
loans and to fund net deposit outflows caused average balances to decline. The
yield on investment improved from 3.80% in the first quarter of 1994 to 5.57%
in 1995. Higher short-term market rates produced the higher yield, which
improved the NIM by 18 basis points.
Deposit interest expense increased $3.1 million, primarily as a result
of higher rates paid on deposits. The weighted average cost of deposits jumped
43 basis points over the first quarter of 1994 and was the single most
significant cause for the contraction in net interest income and the NIM.
Interest rate movements during the past several years have effected 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.
The use of borrowings to fund asset growth produced the $6.7 million
increase in interest expense on borrowings and diluted the NIM. Average
borrowing balances increased $426.4 million during the first quarter of 1995 as
compared to the first quarter of 1994. The use of short-term borrowings to
fund asset growth increased interest expense by $3.3 million between the two
periods, while the use of long-term borrowings to acquire MBS also added $3.4
million in
21
22
interest expense.(9)
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 2.58% at Mar. 31, 1995 compared to 2.76% at
Dec. 31, 1994 and 3.19% at Mar. 31, 1994. Rising interest costs of deposits
has produced the decline in the spread. Overall asset yields at Mar. 31, 1995
remain about level with Dec. 31, 1994 primarily because of nominal loan
repricing.
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.
Management believes that several product related factors may continue
to pressure the Company's interest rate spread in the future. First, periodic
and
- ----------------------
(9) 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 advances. Caps on those adjustable
rate MBS impact the spread earned by the Bank on this transaction.
During 1995, the matched funding transaction described in this footnote
generated $1.0 million of net interest income and contracted the Mar. 31, 1995
interest rate spread and NIM during 1995 by approximately 14 basis points.
22
23
lifetime interest rate caps on loans and MBS held in the Bank's portfolio may
limit repricing on loans and MBS. At. Mar. 31, 1995, approximately $1.0
billion of loans and $705 million of MBS contain interest rate cap provisions.
If interest rates remain at their current levels, approximately $484 million of
loans and $407 million of MBS are projected to hit their caps during the next
twelve months. Even more of these assets will become subject to their interest
rate caps if interest rates continue to rise. Most of the periodic interest
rate caps in the Bank's portfolio are 2%.
Second, the Bank has $531.0 million of "adjustable" rate loans that
have initial fixed interest periods ranging from three to five years. None of
these loans are scheduled to reprice during the next twelve months.
Third, in addition to adjustable rate loans performing at initial
fixed interest rates, approximately $580.7 million of adjustable rate single
family and multifamily loans were at their interest rate floors at Mar. 31,
1995. If rates continue to rise, the Bank's interest expense could rise
without a corresponding adjustment in interest income from these loans until
the floors are surpassed. These loans will not reprice until their fully
indexed weighted average rates, which was 7.05% at Mar. 31, 1995 exceeds their
weighted average floor of 8.05%.
Fourth, $841.6 million of the Company's assets, including $383.7
million of loans performing at their floors, are tied to indices whose
movements lag behind movements in market interest rates.
On the liability side, Management may continue to curtail net deposit
outflow by increasing the rate paid on savings accounts or promoting certain CD
products.(10) Similarly, $220.3 million of short-term borrowings used to fund
general operations of the Bank may become more expensive if interest rates rise
prior to the funds being repaid.
Provision for Loan Losses. The Company recorded a $650,000 provision for loan
losses during the first quarter of 1995 compared to a $2.0 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.
- ----------------------
(10) However, $348.4 million of checking account balances, which are mostly
noninterest bearing, help mitigate the overall effect of higher market interest
rates on the Bank's deposit interest costs.
23
24
Other Income. Other income totaled $8.0 million during the three month period
ended Mar. 31, 1995, $691,000 or 9.4% higher than other income of $7.3 million
recorded in the same period in 1994. Other servicing fees improved $1.3
million, primarily because of growth in the number of checking accounts, new
fees and general increases in existing fees, and the expansion of the ATM
network. Also, the sale $56.9 million of available for sale MBS during the
first quarter of 1995 resulted in the recording of an $837,000 gain. See "CASH
FLOW ACTIVITY" for additional discussion of securities sales activity.
Revenues produced by subsidiaries were down substantially in 1995, due
in large part to higher market interest rates. Revenues from discount
brokerage operations declined $526,000, primarily due to a 18% decrease in
trading volumes. Insurance and annuity commission decreased by $242,000,
mainly the result of 34% drop in transaction volumes. Revenues from real
estate development operations declined $221,000, due to a decline in sales
volume and a reduction in the gross margins earned on these sales.
Management plans to grow other income in 1995 through continued
emphasis on checking and other transaction fees. Also, Management will attempt
to improve annuity and discount brokerage fee income through enhanced training
and marketing.
General and Administrative Expense. General and administrative expenses
totaled $22.6 million during the first quarter of 1995, $773,000 or 3.60%
higher than the first quarter of 1994. Most of the increases were associated
with a $471,000 or 9.0% increase in occupancy, equipment and other office
expense, and a $335,000 or 2.8% increase in compensation and benefits. The
increase in these costs largely resulted from the expansion of the branch
network, annual salary increases, extended hours at many Bank's branch
facilities, and expansion of ATM operations.
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 income.
Operations of Foreclosed Real Estate. The Bank generated a net loss from its
foreclosed real estate operation of $429,000 during the first quarter of 1995,
24
25
$31,000 or 6.7% less than the loss during the same quarter in 1994. A
decrease in costs to operate the REO properties, partly offset by higher
provisions for REO losses, produced the decrease between the two periods. See
"CREDIT" for further discussion of REO.
Income Taxes. Income taxes totaled $5.0 million or 35.7% of pre-tax income
during the first three months of 1995 compared to $4.4 million or 35.2% of pre-
tax income during the same quarter in 1994. Most of the increase in income tax
expense was associated with the $1.4 million increase in pre-tax income between
the two periods.
25
26
KEY CREDIT STATISTICS
Mar. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
Dollars in thousands Dollar % Dollar % Dollar %
- ---------------------------------------------------------------------------------------------
LOAN PORTFOLIO
- ---------------------------------------------------------------------------------------------
MORTGAGE LOANS
1-4 family units $1,552,350 60% $1,530,132 59% $1,190,273 51%
Multifamily units 977,738 38 993,122 38 1,057,571 46
Commercial 62,878 2 63,983 3 73,029 3
Land and land development 2,945 * 224 * 10,307 *
- ---------------------------------------------------------------------------------------------
Total mortgage loans $2,595,911 100% $2,587,461 100% $2,331,180 100%
=============================================================================================
CONSUMER LOANS
Secured by deposits $ 2,186 9% $ 1,928 8% $ 2,300 11%
Education (guaranteed) 346 1 584 3 2,166 11
Home improvement 806 3 832 4 1,110 6
Auto 20,209 85 19,392 83 13,971 71
Personal 364 2 380 2 166 1
- ---------------------------------------------------------------------------------------------
Total consumer loans $ 23,911 100% $ 23,116 100% $ 19,713 100%
- ---------------------------------------------------------------------------------------------
Total loans held for investment $2,619,822 $2,610,577 $2,350,893
=============================================================================================
Weighted average rate 7.52% 7.51% 7.88%
=============================================================================================
*Less than 1%
NONPERFORMING ASSETS
- --------------------------------------------------------------------------------------------
MORTGAGE LOANS
1-4 family units $ 5,264 17% $ 5,584 21% $ 11,202 23%
Multifamily units 3,806 13 3,813 14 12,908 26
Commercial 189 1 437 1 2,597 5
Land and land development --- -- --- -- 2,406 5
- ---------------------------------------------------------------------------------------------
Total mortgage loans 9,259 31 9,834 36 29,113 59
CONSUMER LOANS 336 1 101 * 555 1
REAL ESTATE OWNED
1-4 family units 5,258 17 4,585 17 4,925 10
Multifamily units 13,660 45 10,753 40 14,998 30
Commercial 1,663 6 1,818 7 --- --
Land and land development --- -- --- -- --- --
- ---------------------------------------------------------------------------------------------
Total real estate owned 20,581 68 17,156 64 19,923 40
- ---------------------------------------------------------------------------------------------
Total nonperforming assets $ 30,176 100% $ 27,091 100% $ 49,591 100%
=============================================================================================
*Less than 1%
Mar. 31, Dec. 31, Dec. 31,
1995 1994 1993
- ---------------------------------------------------------------------------------------------
KEY CREDIT RATIOS
- ---------------------------------------------------------------------------------------------
Net loan charge-offs to average loans receivable 0.11% 0.39% 0.56%
Net California loan charge-offs to average California
loans receivable .50 1.21 1.52
Loan loss reserve to total loans 1.61 1.62 1.98
Loan loss reserve to nonperforming loans 439.25 424.72 156.99
Nonperforming assets to total assets 0.73 0.66 1.34
General valuation allowance to non-
performing assets 128.50 143.24 85.41
General valuation allowance to non-
performing assets, plus TDR's 128.50 143.24 64.92
- ---------------------------------------------------------------------------------------------
26
27
CREDIT
LENDING
At Mar. 31, 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 Mar. 31, 1995, non-performing loans totaled $9.6 million compared
to $9.9 million at Dec. 31, 1994.(11) The transfer of $1.8 million of
delinquent loans to REO, the repayments of $790,000 of delinquent loans, and
charge-offs of $561,000 on delinquent loans were mostly offset by $2.7 million
of new delinquencies.
At Mar. 31, 1995, the Bank had a net investment of $32.7 million in
loans considered impaired under the loan impairment accounting standards.(12) In
comparison, the Bank had a net investment of $24.8 million in impaired loans at
Dec. 31, 1994.(13) The Bank classified an additional $14.3 million of
performing multifamily loans as impaired during the first quarter of 1995.
Reductions in performing impaired loans consisted of 1) a recovery of equity
and removal from impaired loans of a $3.2 million multifamily loan, 2)
the transfer of $1.8 million of loans to REO, and 3) charge-offs on impaired
loans of $1.1 million. Of the $32.7 million of impaired loans at Mar. 31, 1995,
$30.9 million were performing loans. In comparison, of the $24.8 million of
impaired loans at Dec. 31, 1994, $22.9 million were performing. Of total
impaired loans at Mar. 31, 1995 and Dec. 31, 1994, $1.9 million were
non-performing loans.
- ----------------------
(11) Of the $9.6 million of non-performing loans at Mar. 31, 1995 and the
$9.9 million of non-performing loans at Dec. 31, 1994, $1.9 million were
secured by multifamily real estate located in California.
(12) Statement of Financial Accounting Standard ("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."
(13) Of the $32.7 million of loans considered impaired at Mar. 31, 1995,
$20.2 million were loans secured by real estate located in California. Of the
$24.8 million of loans considered impaired at Dec. 31, 1994, $11.3 million were
loans secured by real estate located in California.
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The accumulated provision for loan losses at Mar. 31, 1995 was $42.1
million compared to $42.2 million at Dec. 31, 1994, a decrease of $50,000. The
following table provides activity in the accumulated provision for loan losses
from Dec. 31, 1993 through Mar. 31, 1995:
1995 1994
-------------- ---------------------------
Three Months Three Months Year Ended
Dollars in thousands Ended March 31 Ended Mar. 31 Dec. 31
- -------------------- -------------- ---------------------------
Beginning of Period $42,196 $46,574 $46,574
Provision for losses 650 1,950 5,150
Charge-offs (2,008) (3,466) (10,243)
Recoveries 1,308 16 715
------- ----------------------------
End of Period $42,146 $45,074 $42,196
======= ============================
General valuation allowances are evaluated based on a careful
evaluation of the various risk components which 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 three months ended Mar.
31, 1995 was $650,000 compared to $2.0 million during the three months ended
Mar. 31, 1994. Recoveries of $1.3 million during the first quarter of 1995 as
well as a 42% reduction in 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 Mar. 31, 1995, the Bank's ratio of classified assets to tangible
capital and general valuation allowance was 55.0%, lower than the ratio
reported at Dec. 31, 1994 of 56.1%. The Bank has submitted a plan to the OTS
to reduce the ratio of classified assets to tangible capital and general loan
loss reserves to less than 50% by June 30, 1995.
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
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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.
Loan charge-offs declined during the current year. During the first
three months of 1995, $700,000 of net charge-offs were recorded compared to
$3.5 million during the same period in 1994. Most of these charge-offs related
to the Bank's nationwide multifamily and commercial real estate loan portfolio.
Net loan charge-offs to average loans receivable totaled 0.11% during the first
three months of 1995. In comparison, the Company's net charge-offs in 1994 and
1993 were equivalent to 0.39% and 0.56% of average loans and REO, respectively.
See "KEY CREDIT STATISTICS" for further details.
Comprising the Bank's $700,000 of net loan charge-offs in the first three
months of 1995 were $1.7 million of charge-offs on loans considered impaired
under SFAS No. 114. These items were partly offset by $1.3 million of
recoveries on multifamily loans located in Colorado and Washington.
OTHER REAL ESTATE OWNED ("REO")
REO totaled $20.6 million at Mar. 31, 1995 compared to $17.2 million
at the end of 1995.(14) The transfer of one loan secured by multifamily real
estate totaling $1.8 million to REO, capital additions to existing REOs
totaling $1.1 million, and higher 1-4 family REO assets produced the $3.4
million increase in REO during the first quarter of 1995.
The accumulated provision for real estate losses totaled $2.3 million
at Mar. 31, 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.
- ----------------------
(14) Of the $20.6 million of REO at Mar. 31, 1995, $5.9 million were
multifamily properties located in California. Of the $17.2 million of REO at
Dec. 31, 1994, $4.1 million were multifamily properties located in California.
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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.
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AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Three months ended Mar. 31,
Dollars in thousands At Mar. 31, 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) $100,205 5.11% $101,209 $1,269 5.09% $165,151 $1,778 4.37%
Trading account --- -- --- -- -- 111 1 3.65
Federal funds 72,700 6.27 30,180 443 5.95 58,578 457 3.16
Other investments (c) 65,769 6.06 65,012 986 6.15 213,939 1,863 3.53
- ----------------------------------------------------------------------------------------------------------------------------
Total investments 238,674 5.73 196,401 2,698 5.57 437,779 4,099 3.80
Mortgage-backed securities (b) 1,050,670 6.13 1,105,888 17,184 6.22 749,756 10,144 5.41
Loans receivable (d) 2,632,347 7.52 2,631,631 49,170 7.47 2,349,415 44,905 7.65
- ----------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $3,921,691 7.04% $3,933,920 $69,052 7.03% $3,536,950 $59,148 6.70%
============================================================================================================================
Deposits:
Interest bearing checking $237,113 1.79% $236,330 $1,065 1.83% $241,864 $1,113 1.87%
Noninterest bearing checking 111,303 -- 109,058 -- -- 96,685 -- --
Other noninterest bearing accounts 25,819 -- 28,439 -- -- 44,623 -- --
Money market accounts 222,372 3.12 234,774 1,804 3.12 298,988 1,992 2.70
Savings accounts 733,008 2.41 748,377 4,505 2.44 810,549 5,035 2.52
Certificates of deposit 1,870,309 5.48 1,840,220 23,915 5.27 1,743,105 20,068 4.67
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 3,199,924 4.11 3,197,198 31,289 3.97 3,235,814 28,208 3.54
Borrowings:
Short-term borrowings (e) 220,275 6.52 218,164 3,315 6.16 374 6 6.51
Long-term borrowings (e) 266,794 6.96 272,029 4,829 7.20 63,458 1,416 9.05
- ----------------------------------------------------------------------------------------------------------------------------
Total borrowings 487,069 6.77 490,193 8,144 6.74 63,832 1,422 9.03
- ----------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $3,686,993 4.46% $3,687,391 $39,433 4.34% $3,299,646 $29,630 3.64%
============================================================================================================================
Excess of interest earning assets
over interest bearing liabilities $234,698 $246,529 $237,304
============================================================================================================================
Ratio of interest earning assets over
interest bearing liabilities 1.06 1.07 1.07
============================================================================================================================
Net interest income - $29,619 $29,518
============================================================================================================================
Interest rate spread 2.58% - -
============================================================================================================================
"Average" interest rate spread - 2.69% 3.06%
============================================================================================================================
Net yield on average earning assets - 3.01% 3.34%
============================================================================================================================
(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. The ESOP loan is excluded in periods prior to
1994.
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ASSET/LIABILITY REPRICING SCHEDULE
at Mar. 31, 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 5.97% $94,824 2% $85,183 $9,641 - - -
Fixed rate 5.57 143,850 4 43,907 - 60,114 9,983 29,846
Mortgage-backed securities:(b)
Adjustable rate 5.64 703,444 18 336,200 367,244 - - -
Fixed rate 7.14 347,226 9 18,681 659 77,625 53,940 196,321
Mortgage loans:(b)
Adjustable and renegotiable rate 7.31 1,995,112 51 1,115,447 325,741 339,146 214,778 -
Fixed rate 8.24 600,799 15 45,464 41,110 178,140 106,769 229,316
Consumer loans (b) 7.33 23,911 1 3,841 2,239 7,165 5,342 5,324
Assets held for sale 8.04 12,525 * 12,525 - - - -
----------------------------------------------------------------------------------
Total rate sensitive assets 7.04% $3,921,691 100% $1,661,248 $746,634 $662,190 $390,812 $460,807
==================================================================================
RATE SENSITIVE LIABILITIES:
Deposits:
Checking accounts 1.14% $373,631 10% $100,048 $21,352 $69,994 $50,571 $131,666
Savings accounts 2.41 733,149 20 241,867 46,407 145,741 97,996 201,138
Money market deposit accounts 3.12 222,835 6 222,835 - - - -
Fixed-maturity certificates 5.48 1,870,309 51 1,054,006 297,511 319,908 133,629 65,255
---------------------------------------------------------------------------------
4.11 3,199,924 87 1,618,756 365,270 535,643 282,196 398,059
Borrowings:
FHLB advances 6.44 331,959 9 330,275 - 599 - 1,085
Other borrowings 7.31 138,710 4 103,883 33,543 1,284 - -
Mortgage-backed note 8.82 16,400 * - - - 16,400 -
--------------------------------------------------------------------------------
6.77 487,069 13 434,158 33,543 1,883 16,400 1,085
---------------------------------------------------------------------------------
Total rate sensitive liabilities 4.46% $3,686,993 100% $2,052,914 $398,813 $537,526 $298,596 $399,144
==================================================================================
Excess (deficit) of rate sensitive
assets over rate sensitive liabilities
(GAP) 2.58% $234,698 $(391,666) $347,821 $124,664 $92,216 $61,663
=================================================================================
Cumulative GAP $(391,666) $(43,845) $80,819 $173,035 $234,698
Cumulative GAP to total assets without
regard to hedging transactions 9.54% -1.07% 1.97% 4.21% 5.71%
Cumulative GAP to total assets with
impact of hedging transactions -5.94% 2.29% 5.14% 4.21% 5.71%
* 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 10% per year; adjustable rate mortgage
loans on single family residences and loan securities were estimated to prepay
at a rate of 10% per year; fixed rate loans and loan securities were estimated
to prepay at a rate of 8% 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 10% 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.
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PART II. -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11, Statement re: Computation of Per Share Earnings.
(b) Exhibit 27, Financial Data Schedule.
(c) (i) The Company filed a current report on Form 8-K on January 18, 1995
announcing the Company's intent to extend, until June 1995, its stock
repurchase program that allows the Company to repurchase up to 5%, or
964,422 shares, of its common stock outstanding at June 30, 1994.
(ii) The Company filed a current report on Form 8-K on March 14, 1995
related to the scheduled date and the record date for the 1995 annual
meeting of shareholders.
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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: May 12, 1995 By: /s/ Joseph C. Scully
------------------------------------
Joseph C. Scully
Chairman of the Board and Chief Executive Officer
(Duly Authorized Officer)
Date: May 12, 1995 By: /s/ Robert N. Parke
------------------------------------
Robert N. Parke
Senior Vice President and Treasurer
(Principal Financial Officer)
34