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, 1996
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
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Commission File Number 0-15580
St. Paul Bancorp, Inc.
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(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
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(Address of principal executive offices) (Zip Code)
(312) 622-5000
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(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 -- 18,515,071 shares, as of May 1, 1996
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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, 1996 and Dec. 31, 1995 . . . . . . . . . . . . . . 3
Consolidated Statements of Income for the Three
Months Ended Mar. 31, 1996 and 1995 . . . . . . . . . . . . . . . 4
Consolidated Statements of Stockholders' Equity for the
Three Months Ended Mar. 31, 1996 and 1995 . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Three Months Ended Mar. 31, 1996 and 1995 . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . . . . . . 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 36
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . 37
Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
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ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
Mar. 31, Dec. 31,
Dollars in thousands 1996 1995
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ASSETS:
Cash and cash equivalents
Cash and amounts due from depository institutions $ 93,853 $ 111,736
Federal funds sold and interest bearing bank balances 42,898 41,706
Short-term cash equivalent securities 63,195 33,179
--------------------------
Total cash and cash equivalents 199,946 186,621
Marketable-debt securities
(Market: Mar. 31, 1996-72,271; Dec. 31, 1995-$92,778) 72,271 92,778
Mortgage-backed securities
(Market: Mar. 31, 1996-$902,030; Dec. 31, 1995-$967,687) 911,133 975,422
Loans receivable, net of accumulated provision for loan losses
(Mar 31, 1996-$38,249; Dec. 31, 1995-$38,619) 2,765,039 2,683,890
Loans held-for-sale, at lower of cost or market
(Market: Mar. 31, 1996-$22,425; Dec. 31, 1995-$15,638) 22,425 15,583
Accrued interest receivable 25,498 25,354
Foreclosed real estate
(Net of accumulated provision for losses: Mar. 31, 1996-$1,684;
Dec. 31, 1995-$1,974) 16,878 10,642
Real estate held for development or investment 15,490 13,191
Investment in Federal Home Loan Bank stock 35,211 36,304
Office properties and equipment 44,515 44,720
Prepaid expenses and other assets 34,452 32,174
--------------------------
TOTAL ASSETS $ 4,142,858 $ 4,116,679
==========================
LIABILITIES:
Deposits $ 3,305,288 $ 3,231,810
Short-term borrowings 125,411 175,368
Long-term borrowings 266,066 266,059
Advance payments by borrowers for taxes and insurance 20,398 20,610
Other liabilities 42,844 38,635
--------------------------
Total Liabilities 3,760,007 3,732,482
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: Mar. 31, 1996-20,075,006 shares;
Dec. 31, 1995-19,990,106 shares; Outstanding:
Mar. 31, 1996-18,549,634 shares; Dec. 31, 1995-18,749,734) 201 200
Paid-in capital 142,421 141,166
Retained income, substantially restricted 276,684 269,791
Unrealized loss on securities, net of taxes (3,339) (895)
Borrowings by employee stock ownership plan (485) (485)
Unearned employee stock ownership plan shares (196,350 shares) (2,883) (2,883)
Treasury stock (1,525,372 shares at Mar. 31, 1996;
1,240,372 shares at Dec. 31, 1995) (29,748) (22,697)
--------------------------
Total stockholders' equity 382,851 384,197
--------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,142,858 $ 4,116,679
==========================
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 1996 1995
- ---------------------------------------------------------------------------------------
INTEREST INCOME:
Loans receivable $ 52,858 $ 49,170
Mortgage-backed securities 14,981 17,184
Marketable-debt securities 1,141 1,269
Federal funds and interest bearing bank balances 980 443
Other investment income 1,297 986
----------------------
Total interest income 71,257 69,052
INTEREST EXPENSE:
Deposits 34,687 31,289
Short-term borrowings 2,223 3,315
Long-term borrowings 4,667 4,829
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Total interest expense 41,577 39,433
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Net interest income 29,680 29,619
Provision for loan losses 500 650
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Net interest income after provision for loan losses 29,180 28,969
OTHER INCOME:
Loan servicing fees 485 394
Other fee income 4,945 4,866
Net gain on loan sales 320 24
Net gain on securities sales 855 837
Discount brokerage commissions 1,326 708
Income from real estate development 678 446
Insurance and annuity commissions 659 714
Other (43) 29
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Total other income 9,225 8,018
GENERAL AND ADMINISTRATIVE EXPENSE:
Salaries and employee benefits 12,834 12,291
Occupancy, equipment and other office expense 5,998 5,704
Advertising 1,170 1,041
Federal deposit insurance 1,968 2,214
Other 1,482 1,311
----------------------
General and administrative expense 23,452 22,561
Loss on foreclosed real estate 1,136 429
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Income before income taxes 13,817 13,997
Income taxes 5,063 4,994
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NET INCOME $ 8,754 $ 9,003
======================
EARNINGS PER SHARE:
Primary $ 0.45 $ 0.46
Fully diluted 0.45 0.46
======================
DIVIDENDS PER SHARE $ 0.100 $ 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 Borrowing Unearned
Gain/(Loss) by Employee Employee
Common Stock on Stock Stock Total
------------------- Paid-In Retained Securities, Ownership Ownership Treasury Stockholders'
Shares Amount Capital Income Net of Tax Plan Plan Shares Stock Equity
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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
loss on
securities,
net of tax -- -- -- -- 2,231 -- -- -- 2,231
Treasury stock
purchases (232,000) -- -- -- -- -- -- (4,246) (4,246)
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Balance at
Mar. 31, 1995 18,563,067 $198 $138,278 $246,555 ($1,300) ($1,000) ($2,883) ($22,601) $357,247
============================================================================================================
Balance at
Dec. 31, 1995 18,749,734 $200 $141,166 $269,791 ($895) ($485) ($2,883) ($22,697) $384,197
Stock option
exercises 84,900 1 1,255 -- -- -- -- -- 1,256
Net Income -- -- -- 8,754 -- -- -- -- 8,754
Cash dividends paid
to stockholders
($0.10 per share) -- -- -- (1,861) -- -- -- -- (1,861)
Change in unrealized
loss on
securities,
net of tax -- -- -- -- (2,444) -- -- -- (2,444)
Treasury stock
purchases (285,000) -- -- -- -- -- -- (7,051) (7,051)
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Balance at
Mar. 31, 1996 18,549,634 $201 $142,421 $276,684 ($3,339) ($485) ($2,883) ($29,748) $382,851
============================================================================================================
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 1996 1995
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OPERATING ACTIVITIES:
Net income $ 8,754 $ 9,003
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 500 650
Provision for losses on foreclosed real estate 993 256
Provision for depreciation 1,636 1,565
Assets originated and acquired for sale (14,490) (4,991)
Sale of assets held for sale 11,184 2,621
(Increase) decrease in accrued interest receivable (144) 309
(Increase) decrease in prepaid expenses and other assets (2,279) 1,306
Increase in other liabilities 4,210 9,243
Net amortization of yield adjustments 99 132
Other items, net (2,762) (605)
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Net cash provided by operating activities 7,701 19,489
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INVESTING ACTIVITIES:
Principal repayments on loans receivable 124,279 68,440
Loans originated and purchased for investment (220,939) (81,104)
Loans receivable sold 7,777 --
Principal repayments on available for sale mortgage-
backed securities 20,307 5,986
Principal repayments on held to maturity mortgage-
backed securities 49,009 27,648
Purchase of available for sale mortgage-backed securities -- (12,240)
Purchase of held to maturity mortgage-backed securities (38,041) --
Sale of available for sale mortgage-backed securities 27,542 56,887
Maturities of available for sale marketable-debt securities 20,000 --
Additions to real estate (7,873) (2,612)
Real estate sold 8,292 1,705
Sale of Federal Home Loan Bank stock 1,093 --
Purchase of office properties and equipment (1,431) (1,826)
Proceeds from sales of office properties and equipment -- 2
- ----------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (9,985) 62,886
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FINANCING ACTIVITIES:
Proceeds from sales of certificates of deposit 97,577 93,139
Payments for maturing certificates of deposit (65,424) (80,861)
Net increase (decrease) in remaining deposits 41,325 (45,257)
Repayment of long-term borrowings -- (4,953)
Decrease in short-term borrowings, net (50,000) (905)
Dividends paid to stockholders (1,861) (1,377)
Net proceeds from exercise of stock options 1,256 239
Purchase of treasury stock (7,051) (4,246)
Decrease in advance payments by borrowers
for taxes and insurance (213) (419)
- -----------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 15,609 (44,640)
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INCREASE IN CASH AND CASH EQUIVALENTS 13,325 37,735
Cash and cash equivalents at beginning of period 186,621 159,948
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 199,946 $ 197,683
========================================================================================
See notes to consolidated financial statements
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest credited on deposits $ 31,183 $ 24,301
Interest paid on deposits 2,803 2,827
- ----------------------------------------------------------------------------------------
Total interest paid on deposits 33,986 27,128
Interest paid on borrowings 7,484 8,333
Income taxes paid, net 1,190 1,449
Real estate acquired through foreclosure 8,595 1,800
Loans originated in connection with real estate
acquired through foreclosure 2,660 --
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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,
1996 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 1996 presentation.
3. At Mar. 31, 1996, the Bank had outstanding commitments to originate 1-4
family real estate loans of $27.7 million. Of these commitments, $22.4 million
were for adjustable-rate loans and $5.3 million were for fixed-rate loans.
Most of these commitments expire after sixty days. The Bank had commitments to
originate $503,000 of adjustable rate 1-4 family construction loans and $2.7
million of adjustable rate mortgage loans secured by commercial real estate. In
addition, the Bank had commitments to originate $30.7 million of mortgage loans
secured by multifamily apartments of which $29.6 million are adjustable rate.
Unused home equity lines of credit totaled $56.9 million as of Mar. 31, 1996.
The Bank also had $8.9 million of commitments to originate consumers loans,
which primarily consist of unsecured lines of credit and automobile loans. The
Bank anticipates funding originations with liquidity.
The Bank held commitments, at Mar. 31, 1996, to sell $17.3 million of
fixed-rate, 1-4 family real estate loans. The consolidated financial
statements contain market value losses, if any, related to these commitments.
4. In the first quarter of 1996, the Company adopted Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights." This
Statement requires the capitalization of the costs to originate loans, which
will be sold or securitized with servicing rights retained, as originated
mortgage servicing rights. Costs are allocated between the originated mortgage
servicing rights and the loan based upon their relative fair values. The
originated mortgage servicing rights will be amortized in proportion to, and
over the period of, estimated net servicing income. Previously, these costs
were included in the basis of the loans that were sold, thereby reducing the
net gain on asset sales included in other income. This Statement also requires
the Company to periodically assess the capitalized mortgage servicing rights
for impairment based upon the fair value of those rights. During 1996, the
Company capitalized $134,000 as originated mortgage servicing rights.
5. During the first quarter of 1996, the Company adopted SFAS No. 123,
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"Accounting for Stock-Based Compensation." This statement requires that
employers account for the issuance of stock-based compensation to employees,
such as employee stock options, based upon the fair value of the award at the
date of grant. The statement allows an employer to either continue to use
Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to
Employees" or use the fair value method under SFAS No. 123 for recording all
stock-based compensation. Under APB No. 25, compensation expense is recorded
for the difference, if any, between the exercise price of the stock-based award
and the market price of the underlying stock at date of grant. If the employer
continues to use APB No. 25, annual pro forma disclosure of the results of
operations must be made as if the fair value method of accounting for these
awards was used. Management will continue to use APB No. 25 for stock options
and provide the annual pro forma disclosures required. The adoption of the
statement will have no impact on the results of operations.
6. During the first quarter of 1996, the Company adopted SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," which requires impairment of losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cashflows estimated to be generated by those assets are
less than the assets' carrying amount. This statement also addresses the
accounting for long-lived assets that are expected to be disposed of. The
effect of the adoption of this Statement on the results of operation was
immaterial.
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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, 1996, the Company reported total assets of
$4.1 billion and the Bank operated 52 branches in the Chicago metropolitan
area. The branch network is comprised of 35 full-size offices and 17 banking
offices located in Omni(R) and Cub(R) superstores. In addition, the Bank
operated 187 automated teller machines ("ATMs"), the second largest network in
Chicago. In March of 1996, the Bank announced an agreement to install an
additional 256 ATMs in White Hen Pantry(R) food convenience stores in the
eight-county Chicago area, including stores in northwest Indiana. Installation
of these ATMs began in the second quarter of 1996. The Bank also services
176,000 checking accounts and over 29,000 loans at Mar. 31, 1996. The Bank
has also focused its attentions on increasing the number of checking account
through special promotions and product features. 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 1996, including St. Paul Financial Development Corporation,
Annuity Network, Inc., St. Paul Service, Inc. and Investment Network, Inc. As
of Mar. 31, 1996, customers maintain $468 million of investments through
Investment Network, Inc. and $319 million of annuity contracts through Annuity
Network, Inc.
In general, the business of the Bank is to reinvest funds obtained from
its retail banking facilities into interest yielding assets, such as loans
secured by mortgages on real estate, securities, and to a lesser extent,
consumer and commercial real estate loans. In the first quarter of 1996, the
Bank's Treasury operations produced most of the Bank's new assets by acquiring
$158.4 million of 1-4 family residential mortgage portfolios in the market.
These portfolios were priced to provide better yields to the Bank than
originated loans. Due diligence reviews indicated that credit quality was at
least as good as the Bank's own originations. The Bank has focused its direct
lending activities on the origination of various mortgage products secured by
1-4 family residential properties through its retail banking offices. The Bank
also uses a correspondent loan program to originate 1-4 family mortgages in the
Chicago
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metropolitan area, and in states such as Illinois, Wisconsin, Indiana, Michigan
and Ohio. During 1996, the Bank is continuing to emphasize a variety of
consumer loan products offered through the retail banking offices, including
home equity loans, secured lines of credit, education, automobile, and credit
card loans. The Bank has entered into an agreement to sell lesser quality
consumer loans to a third party, rather than retaining them for portfolio.
Management expanded its banking services through the introduction of a
telephone banking center in the fourth quarter of 1995. The center provides
telephone customer service, takes loan applications, transfers funds between
accounts and handles other banking transactions, improving customer convenience
and efficiency.
The Bank also offers mortgage loans to qualifying borrowers to finance
apartment buildings with up to 120 units located within a 150 mile radius of
the Chicago metropolitan area. In addition, the Bank will refinance
multifamily and commercial loans, depending on the credit characteristics,
which are maturing during 1996 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 Mar. 31, 1996, $968.9 million or
23.4% of total assets were comprised of loans secured by multifamily real
estate properties, of which $507.0 million or 12.2% of total assets represented
multifamily loans secured by real estate located in California. Also, $56.5
million or 1.4% of the Company's total assets at Mar. 31, 1996 included loans
secured by commercial real estate, other than multifamily, located nationwide.
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
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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 RISK
MANAGEMENT" for further details.
During 1995, the FDIC lowered the deposit insurance assessment for all
but the riskiest commercial banks that are members of the Bank Insurance Fund
("BIF"). The drop in premiums created a large disparity between premiums paid
by commercial banks and members of the Savings Association Insurance Fund
("SAIF"), such as the Bank. A legislative solution to the disparity was
proposed to Congress in 1995. The proposal would require SAIF members to pay a
one-time special assessment of $0.80 to $0.85 per $100 of insured deposits to
recapitalize the SAIF. The one-time assessment would result in a $26 million
to $27 million pre-tax charge to earnings for the Bank. After the special
assessment recapitalizes the SAIF to its designated reserve ratio, SAIF premium
rates would become the same as BIF rates. In addition, Congress has discussed
possible legislation that would require the merger of the SAIF into the BIF.
The Bank is unable to predict whether this legislation will be enacted; the
amount or applicable retroactive date of any one-time assessment; or the rates
that would then apply to SAIF-insured deposits.
Congress has also discussed the elimination of the section of the Internal
Revenue Code that allows certain thrifts, such as the Bank, to use a
percentage-of-taxable income bad debt accounting method, if more favorable than
the specific charge-off method, for federal income tax purposes. The Bank used
the percentage-of-taxable income method in 1995 for its federal income tax
return. Therefore, the elimination of the availability of the
percentage-of-taxable income bad debt method could increase the amount of
current federal income taxes payable.
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STATEMENT OF FINANCIAL CONDITION
St. Paul Bancorp reported total assets of $4.14 billion at Mar. 31, 1996,
a $26.2 million increase from the $4.12 billion of total assets reported at
Dec. 31, 1995. Higher loans receivable balances and cash and cash equivalents
were partly offset by lower MBS and marketable-debt securities.
Cash and cash equivalents totaled $199.9 million at Mar. 31, 1996, $13.3
million or 7.1% higher than the cash and cash equivalent balances of $186.6
million at Dec. 31, 1995. See "CASH FLOW ACTIVITY" for further detail.
Marketable-debt securities, comprised of U.S. Treasury and agency
securities, totaled $72.3 million at Mar. 31, 1996, $20.5 million or 22.1%
lower than at Dec. 31, 1995. The maturity of $20.0 million of government
agency securities produced the decline in balances. The maturity also caused
the weighted average yield earned on the marketable-debt security portfolio to
decline from 5.34% at Dec. 31, 1995 to 5.27% at Mar. 31, 1996. At Mar. 31,
1996 all of the Company's marketable-debt securities were classified as
available for sale ("AFS") under SFAS No. 115. The Company recorded an
unrealized loss of $406,000 on AFS marketable-debt securities at Mar. 31, 1996
compared to an unrealized loss of $62,000 at Dec. 31, 1995. An increase in
short term market interest rates since the beginning of 1996 produced the
increase in the unrealized loss. Under SFAS No. 115, unrealized gains and
losses on AFS securities are recorded as an adjustment to stockholders' equity,
net of related taxes.
MBS totaled $911.1 million at Mar. 31, 1996, $64.3 million or 6.6% less
than the $975.4 million of MBS at Dec. 31, 1995. Principal repayments and the
sale of $27.5 million of AFS MBS produced the decline in balance. The purchase
of $38.0 million of adjustable rate, held to maturity MBS partly offset these
declines. The weighted average yield on the MBS portfolio was 6.52% at Mar.
31, 1996, or 3 basis points higher than the weighted average yield at Dec. 31,
1995. Upward repricing on adjustable rate MBS produced the slight increase in
the weighted average yield since year end 1995.
Approximately one-third of the MBS portfolio is classified as AFS under SFAS
No. 115. At Mar. 31, 1996, the Company reported an unrealized loss on its AFS
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MBS of $4.9 million compared to an unrealized loss of $1.4 million at Dec. 31,
1995. The increase in the unrealized loss was associated with an increase in
market interest rates since year-end 1995 and the sale of $27.5 million of MBS
that previously had an unrealized gain. See "RESULTS OF OPERATION --
COMPARISON OF THREE MONTHS ENDED MAR. 31, 1996 AND 1995" for further details of
the $855,000 gain recorded on the sale of MBS.
At Mar. 31, 1996, 67% of the MBS portfolio had adjustable rate
characteristics (although some may be performing at initial fixed interest
rates). In comparison, 66% of the MBS portfolio had adjustable rate
characteristics at Dec. 31, 1995. 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 $2.80 billion at Mar. 31, 1996, $80.8 million or
3.0% higher than the $2.72 billion of loans receivable at Dec. 31, 1995. The
purchase of $158.4 million of 1-4 family whole loans during the first quarter
of 1996 primarily produced the increase. These purchases and $62.5 million of
loans originated for investment, were partly offset by principal payments
received during the first three months of 1996. See "CASH FLOW ACTIVITY" for
further discussion.
The weighted average yield on loans receivable remained relatively
unchanged at 7.68% at Mar. 31, 1996, compared to 7.69% at Dec. 31, 1995. At
both Mar. 31, 1996 and Dec. 31, 1995, 81% of the loan portfolio had adjustable
rate characteristics.
Deposits totaled $3.31 billion at Mar. 31, 1996, $73.5 million or 2.2%
higher than the deposit balances of $3.23 billion at Dec. 31, 1995. The Bank
continued to focus on the sale of short-term certificate of deposits ("CDs") to
attract deposit balances. At Mar. 31, 1996, the weighted average cost paid on
deposits was 4.25% compared to 4.29% at Dec. 31, 1995. The decline in the
weighted average cost was associated with the decrease in short-term market
rates during the last half of 1995, which allowed the Bank to replace the
maturing higher costing CDs with lower costing balances. The Company's
deposit costs continue to be below certain of its competitors, according to
certain industry surveys.
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Total borrowings, which include FHLB advances, totaled $391.5 million at
Mar. 31, 1996, $50.1 million or 11.3% lower than the $441.4 million of balances
at Dec. 31, 1995. During 1996, the Bank used liquidity to reduce short-term
borrowing balances. The combined weighted average cost paid for borrowings was
6.54% at Mar. 31, 1996 compared to 6.55% at Dec. 31, 1994. A decrease in the
short-term borrowing rates, due to market conditions, were mostly offset by the
$50.0 million repayment of borrowings which had a weighted average cost below
the overall weighted average cost of the entire borrowing portfolio. See "CASH
FLOW ACTIVITY" for further discussion.
Stockholders' equity of the Company was $382.9 million at Mar. 31,
1996 or $20.64 per share. In comparison, stockholders' equity at Dec. 31, 1995
was $384.2 million or $20.49 per share. The $1.3 million decrease in
stockholders' equity during the three months ended Mar. 31, 1996 primarily
resulted from the purchase of $7.1 million of the Company's common stock,
dividends paid to shareholders of $1.9 million, and a $2.4 million increase in
the unrealized loss on investment securities. These decreases were partly
offset by $8.8 million of net income and $1.3 million of capital provided by
the exercise of employee stock options. See "REGULATORY CAPITAL REQUIREMENT"
and "CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY" for further analysis.
During the first three months of 1996, the Company acquired 285,000
shares of its outstanding common stock (at a weighted average cost per share of
$24.74) under a stock repurchase program announced in January 1996. The
Company has announced its intentions to acquire up to 925,000 (or about 5%) of
its outstanding common stock during the first six months of 1996. Management's
primary objective in reacquiring its shares is 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 RISK MANAGEMENT" for discussion of foreclosed real estate
balances.
REGULATORY CAPITAL REQUIREMENT
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
14
15
can initiate certain mandatory (and possibly additionally discretionary)
actions by the regulators that, if undertaken, could have a direct material
effect on the Bank's financial statements (and the Company's). Under capital
adequacy guidelines and regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative measures
of the Bank's assets, liabilities, and certain off-balance-sheet items
calculated under regulatory accounting practices. The Bank's capital amounts
and classification also are subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets, and of Tier I capital to average assets. As
of Mar. 31, 1996, Management believes that the Bank meets all capital adequacy
requirements to which it is subject.
As of Mar. 31, 1996 the Bank meets the requirements of the Office of
Thrift Supervision ("OTS") to be categorized as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as "well
capitalized," the Bank must maintain minimum total risk-based capital ratios,
Tier I risk-based ratios, and Tier I leverage ratios(1) as set forth in the
table below. The Bank's actual amounts and ratios are also presented in the
table below:
- --------------
(1) In addition to the Tier I leverage ratio, the Bank must maintain a
ratio of tangible capital to regulatory assets of 1.50%. As of Mar. 31, 1996,
the Bank's tangible capital ratio of 9.00% exceeded the minimum required ratio.
15
16
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------------------- -------------------- --------------------
Dollars in thousands Amount Ratio Amount Ratio Amount Ratio
As of Mar. 31, 1996 ------------------- -------------------- --------------------
Total Capital
(to Risk Weighted Assets) $ 396,983 17.52% >$181,224 >8.00% >$ 226,530 >10.00%
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 368,614 16.24% >$ 90,781 >4.00% >$ 136,171 >6.00%
- - - -
Tier I Capital (core)
(to Regulatory Assets) $ 368,614 9.00% >$163,914 >4.00% >$ 204,893 >5.00%
- - - -
As of Dec. 31, 1995
Total Capital
(to Risk Weighted Assets) $ 392,033 17.47% >$179,527 >8.00% >$ 224,409 >10.00%
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 363,918 16.18% >$ 89,969 >4.00% >$ 134,954 >6.00%
- - -
Tier I Capital (core)
(to Regulatory Assets) $ 363,918 8.95% >$162,633 >4.00% >$ 203,291 >5.00%
- - -
The following schedule reconciles stockholders' equity of the Company to
the components of regulatory capital of the Bank at Mar. 31, 1996:
Mar. 31,
Dollars in thousands 1996
- ------------------------------------------------------------------------
Stockholders' equity of the Company $ 382,851
Less: capitalization of the Company's
subsidiaries other than the Bank (11,199)
Less: capitalization of the Company (3,492)
- -----------------------------------------------------------------------
Stockholder's equity of the Bank 368,160
Plus: unrealized loss on
available for sale securities 3,333
Less: investments in non-includable
subsidiaries (1,518)
Less: intangible assets (1,361)
- -----------------------------------------------------------------------
Tangible and core capital 368,614
Plus: allowable GVAs 28,369
- -----------------------------------------------------------------------
Risk-based capital $ 396,983
=======================================================================
In an attempt to address the interest rate risk inherent in the balance
sheets of insured institutions, the OTS proposed a regulation that adds an
interest rate risk component to the risk-based capital requirement for excess
interest rate risk. Under this proposed 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
16
17
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, 1996, the Bank did
not have "excess interest rate risk" for risk-based capital purposes and was
not subject to an additional capital requirement. In the event the Bank would
become subject to the additional capital requirement for excess interest rate
risk, it has $215.8 million of excess risk-based capital 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 the regulators to impose, on a case-by-case
basis, an additional capital requirement above the current requirements where
an institution has significant concentration of credit risk or risks from
nontraditional activities. The Bank is currently not subject to any additional
capital requirements under these regulations.
The OTS may establish capital requirements higher than the generally
applicable minimum for a particular savings institution if the OTS determines
the institution's capital was or may become inadequate in view of its
particular circumstances. Individual minimum capital requirements may be
appropriate where the savings institution is receiving special supervisory
attention, has a high degree of exposure to interest rate risk, or poses other
safety or soundness concerns. The Bank has no such requirements.
CASH FLOW ACTIVITY
Sources of Funds The major sources of funds during the three months ended Mar.
31, 1996 included $193.6 million of principal repayments on loans receivable
and MBS, $97.6 million from the issuance CDs, and $27.5 million from the sale
of AFS MBS.
During the first quarter of 1996, repayments of loans receivable and
MBS totaled $193.6 million, 89.7% higher than the $102.1 million of repayments
17
18
received during the first three months of 1995. Repayments on loans and MBS
increased steadily during 1995 as interest rates declined throughout much of
the year. While repayments slowed during the first quarter of 1996 as compared
to the fourth quarter of 1995 with the increase in market interest rates, the
levels are still higher than those experienced in the first quarter of 1995.
Management believes that repayments will continue to slow during the second
quarter of 1996.
Management continues to rely heavily on the issuance of CDs as a
funding source. The issuance of CDs during the first quarter of 1996 totaled
$97.6 million, compared to $93.1 million during the same quarter in 1995.
During 1995 and continuing into 1996, Management has emphasized the issuance of
shorter-term CD products by using attractive offering rates and special product
features to provide additional funds for asset expansion. In addition, the
Bank experienced a $41.3 million increase in transaction, savings, and money
market account deposit account balances during the first three months of 1996.
In comparison, during the first quarter of 1995, these other deposit balances
decreased by $45.3 million.
Also, during the first quarter of 1996, the Bank sold $27.5 million of
fixed rate, AFS MBS. The maturity of $20.0 million of marketable debt
securities also provided additional liquidity during the first quarter of 1996.
In comparison, the Bank sold $56.9 million of AFS MBS during the first three
months of 1995.
Uses of Funds. The major uses of funds during the three months ended Mar. 31,
1996 included $221.0 million of loans originated and purchased for investment,
$65.4 million of payments for maturing CDs, $50.0 million of repayments of
short-term borrowings, and $38.0 million for the purchase of held to maturity
MBS.
Loans originated and purchased for investment totaled $221.0 million during
the first three months of 1996, compared to $81.1 million during the same
quarter of 1995. During the first quarter of 1996, the Bank purchased $158.4
million of 1-4 family whole loans to maintain interest earning assets levels
and enhance interest income. During the due diligence procedures, the Bank
selects those loans with good credit quality that present no greater risks than
the Bank's own originated 1-4 family portfolio. Management plans to continue
to purchase 1-4 family loans during 1996 to offset the effect of heavy loan and
MBS prepayments.
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19
In addition to purchasing 1-4 family whole loans to maintain interest earning
asset levels, the Bank purchased $38.0 million of held to maturity MBS. MBS
purchases during the first quarter of 1995 totaled $12.2 million. Loans
originated from retail operations and correspondent operations were $50.1
million and $12.5 million, respectively.
Payments for maturing CDs decreased from $80.9 million during the three
months ended Mar. 31, 1995 to $65.4 million during the first three months of
1996. The Bank has increased offering rates on CDs since Mar. 31, 1995 to
retain maturing CD balances.
During the first quarter of 1996, the Company used excess liquidity to
repay $50.0 million of short-term borrowings. In comparison, during the same
quarter of 1995, the Company used liquidity to repay $5.1 million of
borrowings.
Holding Company Liquidity. At Mar. 31, 1996, St. Paul Bancorp, the holding
company, had $31.2 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 had $250,000 of
marketable-debt securities at Mar. 31, 1996, which collateralize borrowings of
the employee stock ownership plan.
Sources of liquidity for St. Paul Bancorp during the first three months
of 1996 included $4.5 million of dividends from the Bank and $400,000 of
dividends from St. Paul Financial Development and Annuity Network, Inc. Uses
of St. Paul Bancorp's liquidity during the first three months of 1996 included
the acquisition of $7.1 million of St. Paul Bancorp common stock under the
stock repurchase program, $1.9 million of dividends paid to stockholders, and
$712,000 of interest on the subordinated debt issued in February of 1993.(2)
See "STATEMENT OF FINANCIAL CONDITION" for further discussion.
Regulatory Liquidity Requirements. Savings institutions must maintain average
daily balances of liquid assets equal to a specified percentage of the
- -----------
(2) During the first quarter of 1996, the Company increased the quarterly
dividend per share from $0.075 to $0.10.
19
20
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, 1996, the Bank had $242.7 million invested in liquid
assets, which exceeded the current requirement by $74.4 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.
20
21
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 Mar. 31, 1996 and 1995:
INCREASE/(DECREASE) DUE TO
--------------------------
TOTAL
Dollars in thousands VOLUME RATE CHANGE
- ---------------------------------------------------------------------
CHANGE IN INTEREST INCOME:
Loans receivable $2,165 $ 1,523 $3,688
Mortgage-backed securities (2,214) 11 (2,203)
Marketable-debt securities (194) 66 (128)
Federal funds and interest-bearing
bank balances 584 (47) 537
Other short-term investments 362 (51) 311
------ ------- -------
Total interest income 703 1,502 2,205
CHANGE IN INTEREST EXPENSE:
Deposits 537 2,861 3,398
Short-term borrowings (875) (217) (1,092)
Long-term borrowings (104) (58) (162)
------ ------- -------
Total interest expense (442) 2,586 2,144
------ ------- -------
NET CHANGE IN NET INTEREST INCOME
BEFORE PROVISION FOR LOAN LOSSES $1,145 $(1,084) $ 61
====== ======= =======
- ----------
(3) This analysis allocates the change in interest income and expense
related to volume based upon the change in average balance and prior period's
applicable yield or rate paid. The change in interest income and expense
related to rate is based upon the change in yield or rate paid and the prior
period's average balances. Changes due to both rate and volume have been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each. The effect of nonperforming
assets has been included in the rate variance. Average balances exclude the
effect of unrealized gains and losses.
21
22
RESULTS OF OPERATIONS -- COMPARISON OF THREE MONTHS ENDED MAR. 31, 1996 AND
1995
General. Net income totaled $8.8 million during the three month period ended
Mar. 31, 1996, or $0.45 per primary share outstanding. In comparison, net
income for the same three month period in 1995 was $9.0 million, or $0.46 per
primary share outstanding. Higher general and administrative expenses of
$891,000 and loss on foreclosed real estate of $707,000 primarily produced the
3% decline in net income between the two periods. However, a $1.2 million
increase in other income and a $150,000 reduction in the provision for loan
losses partly offset these decreases in income.
Net Interest Income. Net interest income totaled $29.7 million during the
first three months of 1996, or relatively unchanged from the $29.6 million of
net interest income recorded during the first three months of 1995. Between
the two periods, a $2.2 million increase in interest income was mostly offset
by a $2.1 million rise in interest expense.
The net interest margin ("NIM") declined 1 basis point to 3.00%
during the first quarter of 1996 compared to 3.01% during the first quarter of
1995. Between the two periods, rising deposit costs, most of which occurred
during 1995, put downward pressure on the NIM, while upward repricing in the
adjustable rate portion of the loan portfolio and favorable loan yield
adjustments partially offset this decrease. Changes in the composition of
interest earning assets and interest bearing liabilities also impacted the NIM.
On the asset side, the NIM benefitted from the reinvestment of MBS repayments
and liquidity into higher yielding loans. On the liability side, the bank
replaced some of its higher costing borrowing balances with lower costing
deposit balances.
Interest Income. Interest income on loans receivable increased $3.7 million,
or 7.5%, during the first quarter of 1996 compared to the same quarter in 1995.
The higher level of income was associated with a $113.9 million increase in
average balances and a 23 basis point increase in the effective yield earned on
these balances. The higher average balances, which totaled $2.75 billion
during the three months ended Mar. 31, 1996, primarily resulted from the
purchase of $389.8 million of 1-4 family whole loans since Mar. 31, 1995, with
most of the purchases occurring since the fourth quarter of 1995. These
purchases and loans originated from investment were partly offset by loan
repayments, which steadily increased
22
23
throughout 1995, but leveled off during the first quarter of 1996. The
effective yield earned on loans, which rose from 7.47% during the first three
months of 1995 to 7.70% during the first three months of 1996, benefitted from
favorable repricing on the adjustable rate portion of the portfolio and higher
amortization of deferred fees.
The $2.2 million decline in MBS interest income primarily resulted
from a $142.4 million decline in average MBS balances, which totaled $963.5
million during the first quarter of 1996. This decline in the average balances
primarily resulted from principal repayments and the sale of $27.5 million of
MBS during the first quarter of 1996. As with the loan portfolio, a general
decline in interest rates since 1995 caused an increase in the level of
repayments. The average effective yield on MBS remained unchanged at 6.22%
during both the first quarter of 1996 and 1995, despite a 39 basis point
increase in the weighted average yield on MBS from Mar. 31, 1995 to Mar. 31,
1996. The effect on MBS interest income from upward repricing in the
adjustable rate portfolio was mostly offset by higher premium amortization, due
to the high level of repayments received. Management expects premium
amortization to slow as repayments speeds decelerate, which would enhance MBS
yields going forward.
Interest income from investments, which includes marketable-debt
securities, federal funds, interest bearing bank balances, and other short-term
investments, increased $720,000 over the first quarter 1995. Most of the
increase in interest income was associated with an increase in average
investment balances. Average balances totaled $250.2 million during the first
quarter of 1996, or $53.8 million higher than the same quarter a year ago. The
higher average balances was associated with the additional liquidity provided
by loan and MBS repayments and net deposit inflows. The effective yield earned
on investment balances declined 3 basis points to 5.54% as compared to the
first three months of 1995. The general decline in market interest rates since
the beginning of 1995 produced the lower effective yield.
Interest Expense. Deposit interest expense rose $3.4 million between the first
quarter of 1995 and 1996 due to a 36 basis point increase in the effective cost
of deposits and a $54.1 million increase in average deposit balances. The
focus on shorter-term CDs produced both the increase in the effective cost of
deposits and the higher average deposit balances. The effective cost of
deposits increased
23
24
from 3.97% during the first quarter of 1995 to 4.33% during the first quarter
of 1996. Higher offering rates on new CDs and an increase in the relative size
of CDs as compared to other deposit product balances caused the higher
effective cost of deposits. Average deposit balances totaled $3.25 billion
during the first quarter of 1996 compared to $3.20 billion during the same
period a year ago. 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.
Borrowing interest expense declined $1.3 million during the first three
months of 1996 compared to the same period in 1995 primarily due to a
$66.9 million decrease in average borrowing balances. During the first three
months of 1996, the Company used liquidity to reduce average borrowing
balances, which totaled $423.3 million during this period. The liquidity was
provided by net deposit inflows and loan and MBS repayments. In addition, a
decline in short-term interest rates since the first quarter of 1995, caused a
14 basis point decline in the effective cost of borrowings, which was 6.60%
during the first quarter of 1996 compared to 6.76% during the same period in
1995.
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 2.80% at Mar. 31, 1996 compared to 2.72% at
Dec. 31, 1995 and 2.58% at Mar. 31, 1995. Several factors have led to the
increase in the interest rate spread. First, favorable repricing on loans and
MBS have allowed the spread to expand. Second, the Company successfully
replaced some higher costing borrowing balances with lower costing deposit
balances. Lastly, the MBS repayments and sales have been reinvested in higher
yielding 1-4 family whole loans. However, rising deposit costs have limited
the improvement in the spread.
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
24
25
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 also believes that several product related factors will
continue to impact the interest rate spread. First, $946.1 million of loans and
$617.0 million of MBS contain periodic and lifetime interest rate caps, which
limit the amount of upward repricing on loans and MBS. At Mar. 31, 1996,
interest rate caps on $222.4 million of loans have kept the adjustable rate on
these loans below their fully indexed rate.(4) No MBS were at their periodic or
lifetime caps at Mar. 31, 1996. Most of the annual interest caps in the Bank's
loan and MBS portfolio are 2%.
Second, the Bank has $543.7 million of 1-4 family "adjustable" rate loans
that have initial fixed interest rates periods ranging from three to five
years. At Mar. 31, 1996, only a nominal amount of these loans are rescheduled
to reprice during the next twelve months.
Third, approximately $518.0 million of adjustable rate 1-4 family and
multifamily loans are at their interest rate floors. These loans will not
reprice until their fully indexed interest rate exceeds the floor rate. At.
Mar. 31, 1996, the weighted average fully indexed rate on these loans was 7.51%
and the weighted average floor was 8.07%. During the first quarter of 1996,
floors provided $740,000 of interest income and added 11 basis points to the
loan yield and 7 basis points to the interest rate spread.(5)
Lastly, $1.5 billion of the Company's assets are tied to movements that lag
behind the movements in market interest rates.
On the liability side, the Company has $125.4 million of short-term
- -----------
(4) Had these loans been allowed to adjust to their fully indexed rate, the
loan yield at Mar. 31, 1996 would have been 14 basis points higher and the
interest rate spread would have been 9 basis points higher.
(5) In comparison, at Mar. 31, 1995, the Bank had $580.7 million of
adjustable rate loans at their interest rate floors. These floors added $1.7
million to interest income during the first quarter of 1995 and 25 basis points
and 17 basis points to the loan yield and interest rate spread, respectively.
25
26
borrowings which are sensitive to interest rate movements. Also, at Mar. 31,
1996, $170.5 million of noninterest bearing deposit account balances helps
mitigate the overall effect of changing interest rates on the weighted average
cost of deposits.
Provision for Loan Losses. The Company recorded a $500,000 provision for loan
losses during the first quarter of 1996, $150,000 or 23% less than the
provision recorded during the same period a year ago. See "CREDIT RISK
MANAGEMENT" for further discussion of loss provisions and adequacy of the
accumulated provisions for losses.
Other Income. Other income totaled $9.2 million during the three months ended
Mar. 31, 1996, $1.2 million or 15% higher than other income of $8.0 million
recorded in the same period in 1995. The higher level of other income was
associated with higher revenues from the Company's discount brokerage and real
estate development subsidiaries and an increase in gains on loan sales.
Higher transaction volumes produced the $618,000 increase in revenues
from discount brokerage operations, while an increase in residential lot and
home sales activities produced the $232,000 rise in income from real estate
development operations. The higher gains on loan sales resulted from an
increase in the sale of fixed rate loans and the capitalization of certain
costs to originate mortgage loans held for sale in accordance with the first
quarter 1996 adoption of SFAS No. 122. See "NOTE TO CONSOLIDATED FINANCIAL
STATEMENTS" for further details.
Other income also included a $855,000 gain on the sale of AFS MBS during
the first quarter of 1996. In comparison, the Bank recorded a $837,000 gain
on the sale of AFS MBS during the first quarter of 1995.
Management anticipates that growth in other income during 1996 will
come from increased transaction volumes and increased contributions from
discount brokerage operations and insurance and annuity sales. Growth in other
income during 1995 primarily resulted from changes to the fee structure.
General and Administrative Expense. General and administrative expenses
totaled $23.5 million during the first quarter of 1996, $891,000 or 4% higher
than the
26
27
same quarter in 1995. The higher level of expense was associated with higher
compensation and benefits of $543,000, occupancy, equipment and office expense
of $294,000, and advertising of $129,000. The increase in compensation and
benefits was associated with annual merit increases, higher payroll taxes, and
increased medical costs. Higher occupancy, equipment, and office expense was
associated with the addition of the telephone banking center in the fourth
quarter of 1995 and higher fixed asset depreciation associated with capital
investments, such as the telephone banking center and the digital telephone
system. Higher planned advertising expenditures produced the increase in
advertising costs between the two periods.
Because of fee-based products and services offered, the Company's
general and administrative expenses may be higher than other institutions.
Nonetheless, the Company continued to tightly control these costs and
Management remains committed to ongoing expense control. Despite these
measures, continued expansion of the ATM network, more services offered, and
general inflation may cause 1996 general and administrative expense to exceed
1995 levels. At the same time, Management hopes the introduction of new
technology, such as check imaging, a digital phone system and the telephone
banking center, can provide a cost-effective means of handling more
transactions.
Operations of Foreclosed Real Estate. The Bank generated a net loss from its
foreclosed real estate operation of $1.1 million during the first quarter of
1996, $707,000 higher than the net loss recorded during the same quarter a year
ago. Most of the increase was produced by a higher provision for real estate
owned ("REO") losses. See "CREDIT RISK MANAGEMENT" for further discussion of
REO.
Income Taxes. Income taxes totaled $5.1 million or 36.6% of pre-tax income
during the first quarter of 1996 compared to $5.0 million or 35.7% of pre-tax
income during the same quarter in 1995. A higher effective tax rate during the
first quarter of 1996 offset by the $108,000 decrease in pre-tax income to
produce the increase in income tax expense between the two periods.
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28
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Three months ended Mar. 31,
Dollars in thousands At Mar. 31, 1996 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Weighted Effective Effective
Yield/ Average Yield/ Average Yield/
Balance Rate Balance(a) Interest Rate Balance(a) Interest Rate
- --------------------------------------------------------------------------------------------------------------------------------
Investments:
Marketable-debt securities (b) $ 72,271 5.27% $ 86,299 $ 1,141 5.36% $ 101,209 $ 1,269 5.09%
Federal funds/interest bearing balances 42,898 5.03 73,916 980 5.38 30,180 443 5.95
Other investments (c) 98,406 5.56 89,960 1,297 5.85 65,012 986 6.15
- --------------------------------------------------------------------------------------------------------------------------------
Total investments 213,575 5.35 250,175 3,418 5.54 196,401 2,698 5.57
Mortgage-backed securities (b) 911,133 6.52 963,474 14,981 6.22 1,105,888 17,184 6.22
Loans receivable (d) 2,825,713 7.68 2,745,493 52,858 7.70 2,631,631 49,170 7.47
- --------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $3,950,421 7.29% $3,959,142 $ 71,257 7.20% $3,933,920 $ 69,052 7.03%
================================================================================================================================
Deposits:
Interest bearing checking $ 247,200 1.72% $ 236,388 $ 1,016 1.74% $ 236,330 $ 1,065 1.83%
Noninterest bearing checking 131,753 -- 123,202 -- -- 109,058 -- --
Other noninterest bearing accounts 38,762 -- 29,210 -- -- 28,439 -- --
Money market accounts 198,856 3.25 196,590 1,532 3.16 234,774 1,804 3.12
Savings accounts 700,053 2.41 692,485 4,169 2.44 748,377 4,505 2.44
Certificates of deposit 1,988,664 5.67 1,973,415 27,970 5.75 1,840,220 23,915 5.27
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits 3,305,288 4.25 3,251,290 34,687 4.33 3,197,198 31,289 3.97
Borrowings:(e)
Short-term borrowings 125,411 5.54 157,209 2,223 5.73 218,164 3,315 6.16
Long-term borrowings 266,066 7.02 266,104 4,667 7.11 272,029 4,829 7.20
- --------------------------------------------------------------------------------------------------------------------------------
Total borrowings 391,477 6.54 423,313 6,890 6.60 490,193 8,144 6.74
- --------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $3,696,765 4.49% $3,674,603 $ 41,577 4.59% $3,687,391 $ 39,433 4.34%
================================================================================================================================
Excess of interest earning assets
over interest bearing liabilities $ 253,656 $ 284,539 $ 246,529
================================================================================================================================
Ratio of interest earning assets over
interest bearing liabilities 1.07 1.08 1.07
================================================================================================================================
Net interest income - $ 29,680 $ 29,619
================================================================================================================================
Interest rate spread 2.80% - -
================================================================================================================================
"Average" interest rate spread - 2.61% 2.69%
================================================================================================================================
Net yield on average earning assets - 3.00% 3.01%
================================================================================================================================
(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, securities sold under agreements to repurchase,
and other borrowings.
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KEY CREDIT STATISTICS
Mar. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
Dollars in thousands Dollar % Dollar % Dollar %
- --------------------------------------------------------------------------------------------------
LOAN PORTFOLIO
- --------------------------------------------------------------------------------------------------
MORTGAGE LOANS
1-4 family units $1,755,527 63% $1,663,228 62% $1,530,132 59%
Multifamily units 968,863 35 979,017 36 993,122 38
Commercial 54,189 2 54,981 2 63,983 3
Land and land development 2,293 * 1,940 * 224 *
- -------------------------------------------------------------------------------------------------
Total mortgage loans $2,780,872 100% $2,699,166 100% $2,587,461 100%
=================================================================================================
CONSUMER LOANS
Secured by deposits $ 2,406 11% $ 2,307 10% $ 1,928 8%
Education (guaranteed) 157 1 261 1 584 3
Home improvement 488 2 576 2 832 4
Auto 19,167 85 20,034 86 19,392 83
Personal 198 1 165 1 380 2
- -------------------------------------------------------------------------------------------------
Total consumer loans $ 22,416 100% $ 23,343 100% $ 23,116 100%
- -------------------------------------------------------------------------------------------------
Total loans held for investment $2,803,288 $2,722,509 $2,610,577
=================================================================================================
Weighted average rate 7.68% 7.69% 7.51%
=================================================================================================
*Less than 1%
NONPERFORMING ASSETS
- -------------------------------------------------------------------------------------------------
MORTGAGE LOANS
1-4 family units $ 7,949 26% $ 7,722 26% $ 5,584 21%
Multifamily units 3,792 12 8,665 30 3,813 14
Commercial 1,360 5 1,360 5 437 1
Land and land development --- -- --- -- --- --
- -------------------------------------------------------------------------------------------------
Total mortgage loans 13,101 43 17,747 61 9,834 36
CONSUMER LOANS 106 * 81 * 101 *
REAL ESTATE OWNED
1-4 family units 1,583 5 2,174 8 4,585 17
Multifamily units 15,797 52 8,206 28 10,753 40
Commercial --- -- 997 3 1,818 7
Land and land development --- -- --- -- --- --
- -------------------------------------------------------------------------------------------------
Total real estate owned 17,380 57 11,377 39 17,156 64
- -------------------------------------------------------------------------------------------------
Total nonperforming assets $ 30,587 100% $ 29,205 100% $ 27,091 100%
=================================================================================================
*Less than 1%
Mar. 31, Dec. 31, Dec. 31,
1996 1995 1994
- ---------------------------------------------------------------------------------------------
KEY CREDIT RATIOS
- ---------------------------------------------------------------------------------------------
Net loan charge-offs to average loans receivable 0.13% 0.21% 0.39%
Net California loan charge-offs to average California
loans receivable 0.64 0.48 1.21
Loan loss reserve to total loans 1.36 1.42 1.62
Loan loss reserve to nonperforming loans 289.61 216.62 424.72
Loan loss reserve to impaired loans 150.93 120.37 170.03
Nonperforming assets to total assets 0.74 0.71 0.66
General valuation allowance to non-
performing assets 115.14 123.94 143.24
- --------------------------------------------------------------------------------------------
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30
CREDIT RISK MANAGEMENT
LENDING
At Mar. 31, 1996, 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, 1996, non-performing loans totaled $13.2 million compared
to $17.8 million at Dec. 31, 1995.(6) The lower level of non-performing loans
resulted from the transfer of $8.5 million of delinquent loans to REO, offset
by the addition of $4.1 million of loans to a non-performing status.
At Mar. 31, 1996, the Bank had a net investment of $25.3 million in loans
considered impaired under the loan impairment accounting standards.(7) In
comparison, the Bank had a net investment of $32.1 million in impaired loans at
Dec. 31, 1995.(8) During the first quarter of 1996, the transfer of $8.5
million of impaired multifamily loans to REO and the improvement in value of a
$3.8 million multifamily loan generated the reduction in net impaired balances.
The classification of $5.6 million of loans as impaired, partly offset these
reductions. At Mar. 31, 1996, all of the $25.3 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 agreement. In
comparison, of the $32.1 million of impaired loans at Dec. 31, 1995, $28.1
- ----------
(6) Of the $13.2 million of non-performing loans at Mar. 31, 1996, $5.1
million was secured by real estate located in California. Of the $17.8 million
of non-performing loans at Dec. 31, 1995, $6.7 million was secured by real
estate located in California.
(7) 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."
(8) At Mar. 31, 1996, of the $25.3 million of loans considered impaired,
$23.3 million were loans secured by real estate located in California. At Dec.
31, 1995, of the $32.1 million of loans considered impaired, $30.0 million were
loans secured by real estate located in California.
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31
million were performing and $4.0 million were non-performing loans.
The accumulated provision for loan losses at Mar. 31, 1996 was $38.2
million compared to $38.6 million at Dec. 31, 1995, a decrease of $370,000.
The following table provides activity in the accumulated provision for loan
losses from Jan. 1, 1995 through Mar. 31, 1996:
1996 1995
---------------- ---------------------------
Three Months Three Months Year Ended
Dollars in thousands Ended Mar.31 Ended Mar.31 Dec. 31
- -------------------- ---------------- ---------------------------
Beginning of Period $38,619 $42,196 $42,196
Provision for losses 500 650 1,900
Charge-offs (1,128) (2,008) (7,879)
Recoveries 258 1,308 2,402
------- ------- -------
End of Period $38,249 $42,146 $38,619
======= ======= =======
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.
Gross charge-offs in the first three months of 1996 totaled $1.1 million,
or $880,000 less than the same period a year ago.(9) Most of the charge-offs
during 1996 related to the Bank's nationwide multifamily and commercial real
estate loan portfolio. However, although gross charge-offs declined, net
charge-offs (gross charge-offs net of recoveries) increased $170,000 over the
same time period due to the higher recoveries recorded during the first quarter
of 1995. Net loan charge-offs to average loans receivable totaled 0.13% during
the first
- -----------
(9) The $1.1 million of gross loan charge-offs in the first quarter of
1996 included $933,000 of charge-offs on loans considered impaired under SFAS
No. 114, $114,000 charge-off of interest on a delinquent multifamily loan
serviced for others, and $82,000 of net charge-offs on 1-4 family and consumer
loans.
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32
quarter of 1996. In comparison, the Company's net loan charge-offs in 1995 and
1994 were equivalent to 0.21% and 0.39% of average loans receivable,
respectively. See "KEY CREDIT STATISTICS" for further details.
The loan loss provision recorded during the three months ended Mar. 31,
1996 was $500,000 compared to $650,000 during the three months ended Mar.
31, 1995. The lower provision reflects a trend of lower classified loans, the
continued low level of non-performing assets, a smaller multifamily portfolio
balance, and the stabilization of certain real estate markets, allowing the
Bank to retain an adequate level of valuation allowances while maintaining a
level of loss provisions less than net charge-offs. See "KEY CREDIT
STATISTICS" for further details.
As of Mar. 31, 1996, the Bank's ratio of classified assets to tangible
capital and general valuation allowance was 43.6%, a slight increase from the
ratio reported at Dec. 31, 1995 of 42.2%.
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 weakness 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.
Over half of the Bank's nationwide multifamily and commercial loan
portfolio is scheduled to mature during the next three years. Management is
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33
actively working with borrowers whose loans mature in 1996 and 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. Depending on the strategies
deployed, the amount of the Bank's charge-offs, REO, and nonperforming assets
could be affected. Management believes that, based on economic conditions
known today, loan loss reserves of the Bank are adequate to absorb the inherent
losses in the portfolio as it relates to current plans to refinance or
liquidate the multifamily real estate portfolio as it matures.
OTHER REAL ESTATE OWNED
REO totaled $17.4 million at Mar. 31, 1996 compared to $11.4 million at
the end of 1995.(10) The higher level of REO assets at Mar. 31, 1996,
resulted from the foreclosure of four multifamily loans totaling $8.5
million and the repurchasing of $3.4 million of participating interests in an
existing REO asset. Partly offsetting these increases was the sale of two REO
assets totaling $4.1 million and a $1.2 million write down of REO assets to
reflect a decline in market value.
The accumulated provision for real estate losses totaled $1.7 million
at Mar. 31, 1996 compared to $2.0 million at Dec. 31, 1995. During the first
quarter of 1996, the Bank recorded net charge-offs on REO properties of $1.3
million, while no charge-offs were recorded during the same period in 1995.
The charge-offs relates to the sale of an office building in the first quarter.
The provision for REO losses was $993,000 during the first three months of 1996
compared to $255,000 in the first quarter of 1995. This provision during 1996
was considered necessary to reflect an additional loss on a multifamily
property expected to be sold in the second quarter. This additional loss was
incurred after contract negotiations with a prospective buyer failed.(11)
- -----------
(10) Of the $17.4 million of REO at Mar. 31, 1996, $2.4 million were
multifamily properties located in California. At Dec. 31, 1995, there were no
REO properties located in California.
(11) The Bank had previously carried the REO at a value that was supported
by a current appraisal. The Bank entered into a subsequent, pending sales
contract with another buyer at a lower value to be realized, principally due to
high vacancy levels. This quarter, Management elected to accept the liquidation
33
34
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.
- -----------
value rather than holding this asset in an effort to achieve stabilization of
occupancy.
34
35
ASSET/LIABILITY REPRICING SCHEDULE
at Mar. 31, 1996
---------------------------------------------------------------------------------
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:(b)
Adjustable rate 5.08% $ 45,891 1% $ 45,891 - - - -
Fixed rate 5.43 167,684 4 73,533 26,185 32,755 - 35,211
Mortgage-backed securities:(c)
Adjustable rate 6.26 614,777 16 329,257 285,520 - - -
Fixed rate 7.06 296,356 8 22,604 7,926 80,690 53,516 131,620
Mortgage loans:(c)
Adjustable and renegotiable rate 7.57 2,271,075 56 1,366,958 410,042 437,529 56,546 -
Fixed rate 8.22 509,797 13 87,686 36,816 148,176 91,709 145,410
Consumer loans (c) 7.59 22,416 1 3,465 2,119 6,738 5,056 5,038
Assets held for sale 7.96 22,425 1 22,425 - - - -
-------------------------------------------------------------------------------
Total rate sensitive assets 7.29% $3,950,421 100% $1,951,819 $768,608 $705,888 $206,827 $317,279
===============================================================================
RATE SENSITIVE LIABILITIES:
Deposits:
Checking accounts 1.02% $ 417,223 11% $ 111,483 $ 23,861 $ 78,219 $ 56,513 $147,147
Savings accounts 2.41 700,123 19 230,972 44,317 139,176 93,582 192,076
Money market deposit accounts 3.24 199,278 5 199,278 - - - -
Fixed-maturity certificates 5.67 1,988,664 54 1,257,757 322,118 257,630 88,168 62,991
-------------------------------------------------------------------------------
4.25 3,305,288 89 1,799,490 390,296 475,025 238,263 402,214
Borrowings:
FHLB advances 6.06 336,684 10 310,285 25,000 314 - 1,085
Other borrowings 9.80 38,393 1 37,077 1,316 - - -
Mortgage-backed note 8.82 16,400 * - - - 16,400 -
-------------------------------------------------------------------------------
6.54 391,477 11 347,362 26,316 314 16,400 1,085
-------------------------------------------------------------------------------
Total rate sensitive liabilities 4.49% $3,696,765 100% $2,146,852 $416,612 $475,339 $254,663 $403,299
===============================================================================
Excess (deficit) of rate sensitive assets
over rate sensitive liabilities (GAP) 2.80% $ 253,656 $ (195,033) $351,996 $230,549 $(47,836) $(86,020)
===============================================================================
Cumulative GAP $ (195,033) $156,963 $387,512 $339,676 $253,656
Cumulative GAP to total assets without
regard to hedging transactions -4.71% 3.79% 9.35% 8.20% 6.12%
Cumulative GAP to total assets with
impact of hedging transactions -1.94% 6.38% 11.94% 8.20% 6.12%
* Less than 1%.
(a) 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 1-4 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 12% 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.
(b) Includes investment in FHLB stock.
(c) Excludes accrued interest and accumulated provisions for loan losses.
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36
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,
1996 announcing the Company's intent to acquire up to 925,000 shares,
or about 5%, of its outstanding common stock during the first 6 months
of 1996.
(ii) The Company filed a current report on Form 8-K on March 26, 1996
related to the scheduled date and record date for the 1996 annual
meeting of shareholders.
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37
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 14, 1996 By: /s/ Joseph C. Scully
--------------------------------
Joseph C. Scully
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
Date: May 14, 1996 By: /s/ Robert N. Parke
--------------------------------
Robert N. Parke
Senior Vice President and Treasurer
(Principal Financial Officer)
37