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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 June 30, 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 60707
- ---------------------------------------- ----------------------
(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 -- 18,002,571 shares, as of August 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 June 30, 1996 and Dec. 31, 1995 . . . . . . . . . . . . . . 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . 4
Consolidated Statements of Stockholders' Equity for the
Six Months Ended June 30, 1996 and 1995 . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 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 4 Submission of Matter to a Vote of Security Holder. . . . . . 43
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 43
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . 44
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
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ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
June 30, Dec. 31,
Dollars in thousands 1996 1995
- ----------------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents
Cash and amounts due from depository institutions $ 116,330 $ 111,736
Federal funds sold and interest bearing bank balances 51,220 41,706
Short-term cash equivalent securities 19,374 33,179
--------------------------
Total cash and cash equivalents 186,924 186,621
Marketable-debt securities
(Market: June 30, 1996-$82,002; Dec. 31, 1995-$92,778) 82,002 92,778
Mortgage-backed securities
(Market: June 30, 1996-$832,311; Dec. 31, 1995-$967,687) 843,821 975,422
Loans receivable, net of accumulated provision for loan losses
(June 30, 1996-$37,318; Dec. 31, 1995-$38,619) 3,045,578 2,683,890
Loans held-for-sale, at lower of cost or market
(Market: June 30, 1996-$13,352; Dec. 31, 1995-$15,638) 13,350 15,583
Accrued interest receivable 26,929 25,354
Foreclosed real estate
(Net of accumulated provision for losses: June 30,1996-$448;
Dec. 31, 1995-$1,974) 4,896 10,642
Real estate held for development or investment 17,195 13,191
Investment in Federal Home Loan Bank stock 35,211 36,304
Office properties and equipment 47,513 44,720
Prepaid expenses and other assets 34,127 32,174
--------------------------
Total Assets $4,337,546 $4,116,679
==========================
LIABILITIES:
Deposits $3,259,369 $3,231,810
Short-term borrowings 380,484 175,368
Long-term borrowings 260,760 266,059
Advance payments by borrowers for taxes and insurance 22,638 20,610
Other liabilities 38,753 38,635
--------------------------
Total Liabilities 3,962,004 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: June 30,1996-20,153,693 shares;
Dec. 31, 1995-19,990,106; Outstanding:
June 30, 1996-17,988,321 shares; Dec. 31, 1995-18,749,734 shares) 201 200
Paid-in capital 143,575 141,166
Retained income, substantially restricted 285,041 269,791
Unrealized loss on securities, net of taxes (4,789) (895)
Borrowings by employee stock ownership plan (485) (485)
Unearned employee stock ownership plan shares (196,350 shares) (2,883) (2,883)
Treasury stock (2,165,372 at June 30, 1996;
1,240,372 shares at Dec. 31, 1995) (45,118) (22,697)
--------------------------
Total stockholders' equity 375,542 384,197
--------------------------
Total liabilities and stockholders' equity $4,337,546 $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 Six months ended
June 30, June 30,
------------------ ---------------------
Dollars in thousands except per share amounts 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans receivable $57,788 50,463 $110,646 99,633
Mortgage-backed securities 13,728 16,416 28,709 33,600
Marketable-debt securities 1,125 1,260 2,266 2,529
Federal funds and interest-bearing bank balances 518 454 1,498 897
Other investment income 893 980 2,190 1,966
-------------------- ---------------------
Total interest income 74,052 69,573 145,309 138,625
INTEREST EXPENSE:
Deposits 34,309 33,155 68,996 64,444
Short-term borrowings 3,853 2,715 6,076 6,030
Long-term borrowings 4,121 4,743 8,788 9,572
-------------------- ---------------------
Total interest expense 42,283 40,613 83,860 80,046
-------------------- ---------------------
Net interest income 31,769 28,960 61,449 58,579
Provision for loan losses 500 450 1,000 1,100
-------------------- ---------------------
Net interest income after provision for loan losses 31,269 28,510 60,449 57,479
OTHER INCOME:
Loan servicing fees 318 433 803 827
Other fee income 5,485 5,577 10,430 10,443
Net gain on loan sales 116 15 436 39
Net gain on securities sales - - 855 837
Discount brokerage commissions 1,333 728 2,659 1,436
Income from real estate development 521 714 1,199 1,160
Insurance and annuity commissions 767 963 1,426 1,677
Other (22) (7) (65) 22
-------------------- ---------------------
Total other income 8,518 8,423 17,743 16,441
GENERAL AND ADMINISTRATIVE EXPENSE:
Salaries and employee benefits 12,809 12,139 25,643 24,430
Occupancy, equipment and other office expense 6,323 5,589 12,321 11,293
Advertising 1,292 1,054 2,462 2,095
Federal deposit insurance 2,004 2,220 3,972 4,434
Other 1,852 1,503 3,334 2,814
-------------------- ---------------------
General and administrative expense 24,280 22,505 47,732 45,066
Loss on foreclosed real estate 20 227 1,156 656
-------------------- ---------------------
Income before income taxes 15,487 14,201 29,304 28,198
Income taxes 5,298 5,172 10,361 10,166
-------------------- ---------------------
NET INCOME $10,189 9,029 $ 18,943 18,032
==================== =====================
EARNINGS PER SHARE:
Primary $ 0.54 0.46 $ 0.99 0.93
Fully diluted 0.54 0.46 0.99 0.93
==================== =====================
DIVIDENDS PER SHARE $ 0.100 0.075 $ 0.200 0.150
==================== =====================
See notes to consolidated financial statements.
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ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Borrowing Unearned
Unrealized by Employee Employee
Common Stock Loss on Stock Stock Total
------------------- Paid-In Retained Securities, Ownership Ownership Treasury Stockholders'
Shares Amount Capital Income Net of Tax Plan Plan Shares Stock Equity
-------------------------------------------------------------------------------------------------
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 68,362 1 1,033 - - - - - 1,034
Net Income - - - 18,032 - - - - 18,032
Cash dividends paid
to stockholders
($0.15 per share) - - - (2,757) - - - - (2,757)
Change in unrealized
loss on securities,
net of tax - - - - 3,262 - - - 3,262
Treasury stock
purchases (236,447) - - - - - - (4,342) (4,342)
--------------------------------------------------------------------------------------------------
Balance at
June 30, 1995 18,613,395 $199 $139,072 $254,204 $( 269) $(1,000) $(2,883) $(22,697) $366,626
==================================================================================================
Balance at
Dec. 31, 1995 18,749,734 $200 $141,166 $269,791 $( 895) $( 485) $(2,883) $(22,697) $384,197
Stock option
exercises 163,587 1 2,409 - - - - - 2,410
Net Income - - - 18,943 - - - - 18,943
Cash dividends paid
to stockholders
($0.20 per share) - - - (3,693) - - - - (3,693)
Change in unrealized
loss on
securities,
net of tax - - - - (3,894) - - - (3,894)
Treasury stock
purchases (925,000) - - - - - - (22,421) (22,421)
--------------------------------------------------------------------------------------------------
Balance at
June 30, 1996 17,988,321 $201 $143,575 $285,041 $(4,789) $( 485) $(2,883) $(45,118) $375,542
==================================================================================================
See notes to consolidated financial statements
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ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30
Dollars in thousands 1996 1995
- ------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 18,943 $ 18,032
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,000 1,100
Provision for losses on foreclosed real estate 943 312
Provision for depreciation 3,399 3,068
Assets originated and acquired for sale (25,889) (12,247)
Sale of assets held for sale 27,573 7,648
Increase in accrued interest receivable (1,575) (1,235)
(Increase) decrease in prepaid expenses and other assets (1,953) 3,318
Increase in other liabilities 118 77
Net amortization of yield adjustments 7,252 3,058
Other items, net (18,616) (8,661)
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,195 14,470
- ------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Principal repayments on loans receivable 302,142 145,858
Loans originated and purchased for investment (678,023) (170,359)
Loans receivable sold 12,320 133
Principal repayments on available for sale mortgage-
backed securities 38,483 8,446
Principal repayments on held to maturity mortgage-
backed securities 94,013 57,575
Purchase of available for sale mortgage-backed securities - (42,450)
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 20,250 6,000
Purchase of available for sale marketable-debt securities (10,190) (236)
Additions to real estate (11,195) (4,974)
Real estate sold 31,308 14,811
(Purchase) sale of Federal Home Loan Bank stock 1,093 (6,457)
Purchase of office properties and equipment (6,192) (3,400)
- ------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (216,490) 61,834
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FINANCING ACTIVITIES:
Proceeds from issuance of certificates of deposit 169,337 165,944
Payments for maturing certificates of deposit (177,756) (207,579)
Net increase (decrease) in remaining deposits 35,978 (12,197)
Increase in long-term borrowings 50,000 49
Repayment of long-term borrowings - (5,238)
Increase (decrease)in short-term borrowings, net 149,715 (20,895)
Dividends paid to stockholders (3,693) (2,757)
Net proceeds from exercise of stock options 2,410 1,034
Purchase of treasury stock (22,421) (4,342)
Decrease in advance payments by borrowers
for taxes and insurance 2,028 2,025
- ------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 205,598 (83,956)
- ------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 303 (7,652)
Cash and cash equivalents at beginning of period 186,621 159,948
- ------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 186,924 $ 152,296
==========================================================================================
See notes to consolidated financial statements
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest credited on deposits $ 58,307 $ 55,413
Interest paid on deposits 13,635 5,744
- ------------------------------------------------------------------------------------------
Total interest paid on deposits 71,942 61,157
Interest paid on borrowings 13,983 16,149
Income taxes paid, net 10,052 12,669
Real estate acquired through foreclosure 17,055 3,500
Loans originated in connection with real estate
acquired through foreclosure 17,066 6,248
==========================================================================================
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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- and six-month periods ended
June 30, 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 June 30, 1996, the Bank had outstanding commitments to originate 1-4
family real estate loans of $20.8 million. Of these commitments, $18.9 million
were for adjustable-rate loans and $1.9 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 $1.2
million of adjustable rate mortgage loans secured by multifamily apartments.
Unused home equity lines of credit totaled $66.4 million as of June 30, 1996.
The Bank also had $8.9 million of commitments to originate consumer loans,
which primarily consist of unsecured lines of credit and automobile loans. The
Bank anticipates funding originations with liquidity.
The Bank held commitments, at June 30, 1996, to sell $3.1 million of
fixed-rate, 1-4 family real estate loans. The consolidated financial
statements contain market value losses, if any, related to these commitments.
At June 30, 1996, the Company has issued $6.8 million of standby letters of
credit on behalf of its real estate development subsidiary and other borrowers
or customers to various counties and villages as a performance guarantee for
land development and improvements.
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 mortgage
servicing rights. Costs are allocated between the mortgage servicing rights
and the loan based upon their relative fair values. The 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 the first six months of 1996, the Company
capitalized $298,000
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as mortgage servicing rights.
5. During the first quarter of 1996, the Company adopted SFAS No. 123,
"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. Since Management will continue to use APB No. 25 for stock
options and provide the annual pro forma disclosures required, the adoption of
this 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 is
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 June 30, 1996, the Company reported total assets of
$4.3 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. During the second quarter,
the Bank increased the size of its automated teller machine (ATM) network to
424 by installing 241 ATMs in White Hen Pantry(R) food convenience stores in
the eight-county Chicago area, including stores in northwest Indiana. The Bank
also services 179,000 checking accounts and over 29,000 loans at June 30, 1996.
In addition to checking accounts, the Bank offers a variety of savings, money
market, and certificate of deposit products. 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., SPF Insurance Agency, Inc.(formerly known as St. Paul
Service, Inc.) and Investment Network, Inc. As of June 30, 1996, customers
maintain $486 million of investments through Investment Network, Inc. and $330
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 half of 1996, the
Bank's Treasury operation purchased $428.0 million of 1-4 family adjustable
rate mortgage loans in the market. These portfolios were priced to provide
better yields to the Bank than newly originated loans. 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 metropolitan area, and in states such as
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
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has entered into an agreement to sell lesser quality consumer loans to a third
party, rather than retaining them for portfolio. The Bank also offers mortgage
loans to qualifying borrowers to finance apartment buildings with up to 120
units located in Illinois, Wisconsin, and Northwestern Indiana. The Bank is
considering expanding the geographical area covered by this program to include
other Midwestern states.(1)
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 ("AFS") or held to maturity ("HTM")
under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
Earnings of the Bank are susceptible to interest rate risk to the
extent that the Bank's deposits and borrowings reprice on a different basis and
in different periods than its securities and loans. Prepayment options
embedded in loans and MBS and varying demand for loan products due to changes
in interest rates creates additional operating risk for the Bank in matching
the repricing of its assets and liabilities. The Bank tries to structure its
balance sheet to reduce its exposure to interest rate risk and to maximize its
return on equity, commensurate with risk levels that do not jeopardize the
financial safety and soundness of the institution.
Changes in real estate market values also affect the Bank's earnings.
As changes occur in interest rates, the forces of supply and demand for real
estate, and the economic conditions of real estate markets, the risk of actual
losses in
________________________
(1) 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 June 30, 1996, $972.8 million or
22.4% of total assets were comprised of loans secured by multifamily real estate
properties, of which $506.5 million or 11.7% of total assets represented
multifamily loans secured by real estate located in California. Also, $55.0
million or 1.3% of the Company's total assets at June 30, 1996 included loans
secured by commercial real estate, other than multifamily, located nationwide.
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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"). This 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 proposed
to Congress in 1995 would require SAIF members to pay a one-time special
assessment to recapitalize the SAIF of $0.80 to $0.85 per $100 of insured
deposits. This one-time assessment would result in a $26 million to $27
million pre-tax charge to earnings for the Bank. After the recapitalization,
SAIF premium rates would become the same as BIF rates. Various other proposals
have also been presented to Congress to address the insurance assessment
disparity. 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. In the event a
legislative solution to this disparity does not occur, the Bank will seek other
means of having its deposit portfolio insured by the lower costing BIF.
Congress has also discussed possible legislation that would require
the merger of the SAIF into the BIF and the elimination of thrift charter,
which would require the Bank to convert to a commercial bank charter at
sometime in the future. The elimination of the thrift charter would also
require the Bank to use the specific charge-off bad debt method for federal
income tax purposes. Currently, as a thrift, the Bank is allowed to use the
percentage-of-taxable income bad debt accounting method, if more favorable than
the specific charge-off method, for federal income tax purposes. The
elimination of the availability of the percentage-of-taxable income bad debt
method could increase the amount of current federal income taxes payable. The
conversion to a bank charter could also trigger the recapture of certain bad
debt reserves, unless specifically exempted in the legislative action. The
Bank is unable to predict whether this legislation will be enacted or when.
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STATEMENT OF FINANCIAL CONDITION
St. Paul Bancorp reported total assets of $4.3 billion at June 30, 1996, a
$220.9 million increase from the $4.1 billion of total assets reported at Dec.
31, 1995. Higher loans receivable balances were partly offset by lower MBS.
Cash and cash equivalents totaled $186.9 million at June 30, 1996,
relatively unchanged from Dec. 31, 1995. See "CASH FLOW ACTIVITY" for further
details.
Marketable-debt securities, comprised of U.S. Treasury and agency
securities, totaled $82.0 million at June 30, 1996, as compared to $92.8
million at Dec. 31, 1995. At both June 30, 1996 and Dec. 31, 1995, all of the
Company's marketable-debt securities were classified as AFS under SFAS No. 115.
The Company recorded an unrealized loss of $448,000 on AFS marketable-debt
securities at June 30, 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 $843.8 million at June 30, 1996, $131.6 million or 13.5% 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, HTM MBS partly offset these declines. The
weighted average yield on the MBS portfolio was 6.45% at June 30, 1996, or 4
basis points lower than the weighted average yield at Dec. 31, 1995. The
repayment of higher interest yielding MBS balances produced the slight decline
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 June 30, 1996, the Company reported an unrealized loss on its AFS
MBS of $7.3 million compared to an unrealized loss of $1.4 million at Dec. 31,
1995. The increase in the unrealized loss was associated with the 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 SIX MONTHS ENDED JUNE 30, 1996 AND 1995" for further details of
the $855,000
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gain recorded on the sale of MBS.
At both June 30, 1996 and Dec. 31, 1995, 66% of the MBS portfolio had
adjustable rate characteristics (although some may be performing at initial
fixed interest rates). Some securities may not fully reprice in response to
higher market interest rates because they contain periodic and lifetime
interest rate caps. See "RESULTS OF OPERATION -- COMPARISON OF THREE MONTHS
ENDED JUNE 30, 1996 AND 1995" for further details of interest rate caps on MBS.
Loans receivable totaled $3.0 billion at June 30, 1996, $361.7 million or
13.5% higher than the $2.7 billion of loans receivable at Dec. 31, 1995. The
purchase of $428.0 million of 1-4 family whole loans during the first half of
1996 primarily produced the increase. These purchases and $250.0 million of
loans originated for investment, were partly offset by $302.1 million of
principal payments received during the first six months of 1996. See "CASH
FLOW ACTIVITY" for further discussion.
The weighted average yield on loans receivable decreased slightly to 7.66%
at June 30, 1996 from 7.69% at Dec. 31, 1995. The repayment of higher interest
yielding loans, offset by a modest amount of repricing in the adjustable rate
portfolio, produced the slight decline in the weighted average rate. At June
30, 1996, 84% of the loan portfolio had adjustable rate characteristics as
compared to 81% at Dec. 31, 1995.
Deposits totaled $3.3 billion at June 30, 1996, $27.6 million or 0.9%
higher than the deposit balances of $3.2 billion at Dec. 31, 1995. Most of the
increase in deposit balances since year-end 1995 occurred in transaction and
savings accounts, while certificates of deposit ("CD") balances declined
slightly. During the first quarter of 1996, Management continued to promote
the issuance of short-term CDs. During the second quarter, Management replaced
some of the higher costing CD products with lower costing CDs, as well as money
market and savings account products. The decline in the weighted average cost
of CDs and the decline in the relative size of CDs, the highest costing deposit
product as compared to other deposit balances, caused the weighted average cost
of deposits to decrease from 4.29% at Dec. 31, 1995 to 4.19% at June 30, 1996.
The Company's deposit costs continue to be below certain of its competitors,
according to industry surveys.
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Total borrowings, which include FHLB advances, totaled $641.2 million at
June 30, 1996, $199.8 million or 45.3% higher than the $441.4 million of
balances at Dec. 31, 1995. During the first six months of 1996, the Bank used
short term borrowing balances to fund the acquisition of 1-4 family whole
loans. These new borrowings during 1996, which were at weighted average rates
below the rate of the overall borrowing portfolio, caused the combined weighted
average cost paid for borrowings to decline from 6.55% at Dec. 31, 1995 to
6.20% at June 30, 1996. See "CASH FLOW ACTIVITY" for further discussion.
Stockholders' equity of the Company was $375.5 million at June 30,
1996 or $20.88 per share. In comparison, stockholders' equity at Dec. 31, 1995
was $384.2 million or $20.49 per share. The $8.7 million decrease in
stockholders' equity during the six months ended June 30, 1996 primarily
resulted from the repurchase of $22.4 million of the Company's common stock, a
$3.9 million increase in the unrealized loss on investment securities, and
dividends paid to shareholders of $3.7 million. These decreases were partly
offset by $18.9 million of net income and $2.4 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 half of 1996, the Company completed the stock
repurchase program announced in January 1996. During the first six months of
1996, the Company repurchased 925,000 shares of its outstanding common stock at
a weighted average cost per share of $24.24. In July 1996, the Company
announced its intentions to acquire an additional 900,000 shares (or about 5%)
of its outstanding common stock during the last 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. In
July 1996, the Company also announced its intentions to increase the quarterly
dividend per share 20% from $0.10 per share to $0.12 per share. See "CASH FLOW
ACTIVITY -- HOLDING COMPANY LIQUIDITY" for further details.
See "CREDIT RISK MANAGEMENT" for discussion of foreclosed real estate
balances.
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REGULATORY CAPITAL REQUIREMENT
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements 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 June 30, 1996, Management believes that the Bank meets all
capital adequacy requirements to which it is subject.
As of June 30, 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 (2) as set forth in the
table below. The Bank's actual amounts and ratios are also presented in the
following table:
________________________
(2) 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 June 30, 1996,
the Bank's tangible capital ratio of 8.71% exceeded the minimum required ratio.
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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 June 30, 1996 -------------- ---------------------- ------------------------
(greater than or (greater than or
equal to) equal to)
Total Capital
(to Risk Weighted Assets) $ 404,753 17.06% > $ 189,794 > 8.00% > $ 237,242 > 10.00%
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 375,072 15.80% > $ 94,980 > 4.00% > $ 142,470 > 6.00%
- - - -
Tier I Capital (core)
(to Regulatory Assets) $ 375,072 8.71% > $ 172,287 > 4.00% > $ 215,359 > 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 June 30, 1996:
June 30,
Dollars in thousands 1996
- -----------------------------------------------------------------------
Stockholders' equity of the Company $375,542
Less: capitalization of the Company's
subsidiaries other than the Bank (10,869)
Plus: capitalization of the Company 8,487
- -----------------------------------------------------------------------
Stockholder's equity of the Bank 373,160
Plus: unrealized loss on
available for sale securities 4,789
Less: investments in non-includable
subsidiaries (1,532)
Less: intangible assets (1,345)
- -----------------------------------------------------------------------
Tangible and core capital 375,072
Plus: allowable GVAs 29,681
- -----------------------------------------------------------------------
Risk-based capital $ 404,753
=======================================================================
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
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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 June 30, 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 $215.0 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 six months ended June
30, 1996 included $434.6 million of principal repayments on loans receivable
and MBS, $199.7 million in additional borrowings, $169.3 million from the
issuance of CDs, a $36.0 million increase in other deposit balances, and $27.5
million from the sale of AFS MBS.
During the first half of 1996, repayments of loans receivable and MBS
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totaled $434.6 million, double the $211.9 million of repayments received during
the first six months of 1995. Repayments on loans and MBS increased steadily
during most of 1995 as market interest rates declined. The high level of
repayments has continued during 1996, despite the rise in interest rates since
the beginning of 1996. Management believes that repayments will moderate
through the end of 1996.
During the first half of 1996, short term borrowings increased by
$149.7 million and long term borrowings rose by $50.0 million. Both the
increase in short term and long term borrowings primarily resulted from the use
of borrowings to fund the acquisition of 1-4 family whole loans during the
first six months of 1996. In comparison, liquidity was used to reduce short
and long term borrowings by $17.4 million during the same period in 1995.
During the first six months of 1996, Management continued to rely on
the issuance of CDs as a funding source. The issuance of CDs during the first
half of 1996 totaled $169.3 million, compared to $165.9 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 products. However, during the second quarter, the
Bank allowed some of the CD balances attracted through these special
promotions, to mature. Many of these CD balances were replaced with other
short term, lower costing CD products. In addition, many of these balances
shifted into checking, savings and money market account balances, which also
increased by $36.0 million during the first six months of 1996. In comparison,
during the first half of 1995, these other deposit balances decreased by $12.2
million.
Also, during the first half of 1996, the Bank sold $27.5 million of
fixed rate AFS MBS. In comparison, the Bank sold $56.9 million of AFS MBS
during the first six months of 1995. The maturity of $20.0 million of
marketable debt securities also provided liquidity during 1996. In comparison,
$6.0 million of marketable debt securities matured during the first six months
of 1995.
Uses of Funds. The major uses of funds during the six months ended June 30,
1996 included $678.0 million of loans originated and purchased for investment,
$177.8 million of payments for maturing CDs, $38.0 million for the purchase of
HTM MBS, and $22.4 million for the purchase of treasury stock.
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19
Loans originated and purchased for investment totaled $678.0 million during
the first six months of 1996, compared to $170.4 million during the same period
of 1995. During the first half of 1996, the Bank purchased $428.0 million of
1-4 family whole loans in an effort to increase interest earning assets levels
and enhance interest income. Management will consider additional purchases of
1-4 family loans during 1996 to offset the effect of loan and MBS prepayments.
Loans originated from retail operations and correspondent operations were
$149.2 million and $106.8 million, respectively. The Bank has focused its
efforts on originating loans that yield higher spreads, such as home equity
loans. The total originations of home equity, other 1-4 family mortgage loan,
and consumer loan products have increased over the same period during 1995.
While originations under the Bank's 5 to 120 unit multifamily program have
slightly exceeded 1995, the originations are less than expected. In addition
to purchasing 1-4 family whole loans to expand interest earning asset levels,
the Bank purchased $38.0 million of HTM MBS. MBS purchases during the first
half of 1995 totaled $42.5 million.
Payments for maturing CDs decreased from $207.6 million during the six
months ended June 30, 1995 to $177.8 million during the first six months of
1996. The Bank has attempted to maintain CD balances through special
promotions and maintaining these balances in other deposit products.
The Company also used $22.4 million of funds to acquire 925,000 shares
of its own common stock. See "HOLDING COMPANY LIQUIDITY" following for further
details. In comparison, the Company purchased $4.3 million of its own common
stock in the same period in 1995.
Holding Company Liquidity. At June 30, 1996, St. Paul Bancorp, the holding
company, had $19.0 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 had $200,000 of
marketable-debt securities at June 30, 1996, which collateralize borrowings of
the employee stock ownership plan. The Company maintains a $20.0 million
revolving line of credit agreement from another financial institution. At June
30, 1996, no funds have been borrowed under this agreement.
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20
Sources of liquidity for St. Paul Bancorp during the first six months
of 1996 included $8.9 million of dividends from the Bank and $900,000 of
dividends from St. Paul Financial Development and Annuity Network, Inc. Uses
of St. Paul Bancorp's liquidity during the six months of 1996 included the
acquisition of $22.1 million of St. Paul Bancorp common stock under the stock
repurchase program, $3.7 million of dividends paid to stockholders, $3.5
million of advances to St. Paul Financial Development, and $1.4 million of
interest on the subordinated debt issued in February of 1993. See "STATEMENT
OF FINANCIAL CONDITION" for further discussion.
During July 1996, the Company announced another stock repurchase
program. Under this program, the Company would repurchase up to 900,000 shares
(or about 5%) of its outstanding common stock during the last six months of the
year. In addition, the Company announced a 20% increase in the quarterly
dividend per share from $0.10 to $0.12 per share.
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 June 30, 1996, the Bank had $247.1 million invested in liquid
assets, which exceeded the current requirement by $67.3 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.
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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 June 30, 1996 and 1995:
INCREASE/(DECREASE) DUE TO
-------------------------------
TOTAL
Dollars in thousands VOLUME RATE CHANGE
- ---------------------------------------------------------------------
CHANGE IN INTEREST INCOME:
Loans receivable $ 6,627 $ 698 $ 7,325
Mortgage-backed securities (2,379) (309) (2,688)
Marketable-debt securities (255) 120 (135)
Federal funds and interest-bearing
bank balances 139 (75) 64
Other short-term investments (5) (82) (87)
------- ------- -------
Total interest income 4,127 352 4,479
CHANGE IN INTEREST EXPENSE:
Deposits 887 267 1,154
Short-term borrowings 1,445 (307) 1,138
Long-term borrowings (545) (77) (622)
------- ------- -------
Total interest expense 1,787 (117) 1,670
------- ------- -------
NET CHANGE IN NET INTEREST INCOME
BEFORE PROVISION FOR LOAN LOSSES $ 2,340 $ 469 $ 2,809
======= ======= =======
- -------------------------
(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 JUNE 30, 1996 AND
1995
General. Net income totaled $10.2 million during the three month period ended
June 30, 1996, $1.2 million, or 12.9% higher than the $9.0 million of net
income during the same quarter in 1995. Primary earnings per share were $0.54
during the second quarter of 1996, compared to $0.46 per share during the same
period during 1995.(4) The higher level of net income was primarily produced
by a $2.8 million increase in net interest income and a $208,000 decline in the
net loss from foreclosed real estate. Partly offsetting these increases was a
$1.8 million increase in general and administrative expenses.
Net Interest Income. Net interest income totaled $31.8 million during the
second quarter of 1996, 9.7% or $2.8 million higher than the $29.0 million of
net interest income during the same quarter in 1995. The higher net interest
income was produced by a $4.5 million increase in interest income, partly
offset by a $1.7 million rise in interest expense between the two periods.
The net interest margin ("NIM") rose 15 basis points from 2.98%
during the second quarter of 1995 to 3.13% during the same quarter in 1996.
Between the two periods, Management focused on expanding interest earning asset
levels, primarily through the acquisition of 1-4 family whole loans. These
acquisitions were funded through liquidity, MBS repayments, and borrowings.
The increase in the NIM was primarily produced by higher average loan balances
from these purchases and an increase in the effective yield earned on these
balances.
Interest Income. Interest income on loans receivable rose $7.3 million, or
14.5%, during the three months ended June 30, 1996 as compared to the same
quarter in 1995. The higher level of income was associated with a $343.9
million increase in average balances and an 11 basis point increase in the
effective yield earned on these balances. The higher average balances, which
totaled $3.00 billion during the second quarter, primarily resulted from the
purchase of $626.3 million of 1-4 family whole loans since June 30, 1995, with
most of the purchases occurring during the last seven months of the period.
These purchases and loans originated from investment were partly offset by loan
repayments, which have
________________________
(4) The earnings per share comparison grew faster than net income due to
the stock repurchase program executed during the first six months of 1996.
22
23
steadily increased since the beginning of 1995. The effective yield earned on
loans, which was 7.72% during the second quarter of 1996 compared to 7.61%
during the same quarter a year ago, benefitted from favorable repricing on the
adjustable rate portion of the portfolio.
The $2.7 million decline in MBS interest income primarily resulted
from a $153.7 million decline in average MBS balances. Average MBS balances,
which totaled $888.7 million during the second quarter of 1996 compared to
$1.04 billion during the same quarter in 1995, 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, principal repayments have
increased steadily since the beginning of 1995 as interest rates declined.
While interest rates have moved upwards during 1996, the rates on some
financial instruments are still generally lower during 1996 than the same
period during 1995. The effective yield on MBS declined 12 basis points to
6.18% during the second quarter. The lower effective yield on the MBS
portfolio primarily resulted from the repayment of higher rate MBS balances and
increased premium amortization associated with the higher level of repayments.
Interest income from investments, which includes marketable-debt
securities, federal funds, interest bearing bank balances, and other short-term
investments, declined $158,000 during the second quarter of 1996 compared to
the second quarter 1995. The decline in income was produced by both a decline
in average balances and the effective yield earned on these balances. Average
investment balances declined $8.6 million from $189.7 million during the second
quarter of 1995 to $181.1 million during the current quarter. Most of the
decline was associated with the use of liquidity to help fund the acquisition
of 1-4 family whole loans. The effective yield earned on investments was 5.62%
during the three months ended June 30, 1996 compared to 5.70% during the same
period during 1995. The general decline in market interest rates since the
beginning of 1995 produced the lower effective yield.
Interest Expense. Deposit interest expense rose $1.2 million during the second
quarter of 1996 compared to the same quarter in 1995 primarily due to higher
average deposit balances. Average deposit balances increased $84.8 million
between the two periods, with most of the increase occurring in CD account
products. During 1995 and into the beginning of 1996, Management focused its
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24
attention on attracting and maintaining short-term CD balances with higher
offering rates and the use of special promotions. Through these efforts, the
Bank was able to increase average CD balances by $103.0 million during the
second quarter of 1996 compared to the second quarter of 1995, with most of the
increase occurring during the last half of 1995 and the first quarter of 1996.
The effective cost of deposits was 4.21% during the second quarter of 1996
compared to 4.22% during the second quarter of 1995. While the effective cost
between the two periods was relatively unchanged, the effective cost of
deposits increased during the latter half of 1995 and early 1996, but began to
decline during the second quarter of 1996.
Borrowing interest expense rose $516,000 during the current quarter
compared to the year ago quarter primarily due to a $70.0 million increase in
average borrowing balances, partly offset by a 53 basis point decline in the
effective cost of borrowings. Average borrowing balances rose to $509.8
million during the second quarter of 1996, as Management used borrowing
balances to help fund the acquisition of 1-4 family whole loans throughout
1996. These new borrowings, which were generally at rates below the weighted
average rate of the entire borrowing portfolio, and lower short-term borrowing
rates during the second quarter of 1996 compared to 1995 produced the decline
in the effective cost of borrowings.
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 June 30, 1996 and Mar. 31, 1996 and
2.58% at June 30, 1995. Several factors have led to the increase in the
interest rate spread since June 30, 1995. First, lower short-term borrowing
rates at June 30, 1996 compared to the same period in 1995 and a 9 basis point
decline in the weighted average cost of deposits produced the largest increase
in the interest rate spread. Second, favorable repricing in the loan and MBS
portfolios since the middle of 1995 also allowed the spread to expand. The
remainder of the increase in the spread resulted from a shift in interest
earning assets, as MBS repayments and liquidity were reinvested in higher
yielding loans.
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25
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 also believes that several product related factors will
continue to impact the interest rate spread. First, nearly all adjustable rate
loans and MBS contain periodic and lifetime interest rate caps, that limit the
amount of upward repricing on loans and MBS. At June 30, 1996, interest rate
caps on $146.1 million of originated loans have kept the adjustable rate on
these loans below their fully indexed rate.(5) In contrast, the Bank's MBS
portfolio was not adversely affected by any of the contractual periodic or
lifetime caps at June 30, 1996. Most of the annual interest caps in the Bank's
loan and MBS portfolio are 2%.
Second, the Bank has $896.8 million of 1-4 family "adjustable" rate
loans that have initial fixed interest rates periods ranging from three to five
years. At June 30, 1996, only a nominal amount of these loans are rescheduled
to reprice during the next twelve months. If interest rates remain at current
levels at the time of repricing, the Bank should experience an increase in the
yields, but could also experience higher prepayments.
Third, approximately $440.7 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
June 30, 1996, the weighted average fully indexed rate on these loans was 7.32%
and the weighted average floor was 8.05%. During the first half of 1996,
floors provided $1.4 million of interest income and added 10 basis points to
the loan yield and 7 basis points to the interest rate spread. (6)
________________________
(5) Had these loans been allowed to adjust to their fully indexed rate,
the loan yield at June 30, 1996 would have been 6 basis points higher and the
interest rate spread would have been 5 basis points higher.
(6) At June 30, 1995, the Bank had $565.1 million of adjustable rate
loans at their interest rate floors. These floors added $2.9 million to
interest income during the first six months of 1995 and 22 basis points and 15
basis points to the loan yield and interest rate spread, respectively.
25
26
Lastly, $1.1 billion of the Company's assets are tied to movements
that lag behind the movements in market interest rates. In general, this
condition will benefit the Bank's asset yields as rates decrease, but hinder
repricing as interest rates increase.
On the liability side, the Company has $380.5 million of short-term
borrowings that are sensitive to interest rate movements. Also, at June 30,
1996, the Bank had $180.0 million of noninterest bearing deposit account
balances.
Provision for Loan Losses. The Company recorded a $500,000 provision for loan
losses during the second quarter of 1996, compared to $450,000 during the same
quarter 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 $8.5 million during the three months ended
June 30, 1996, $95,000 or 1.1% higher than other income of $8.4 million during
the same period in 1995. The higher level of other income was primarily
associated with increases in discount brokerage commissions and gains on loan
sales. These increases were partly offset by lower income from real estate
development and annuity operations and a decline in other fee income.
The $605,000 increase in discount brokerage commissions was associated
with higher transaction volumes. The higher gain on loan sales of $101,000 was
produced by 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 "NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS" for further information.
Lower sales volumes produced the $196,000 decline in insurance and
annuity commissions and a decrease in residential lot and home sales activities
produced the $196,000 lower revenues from real estate development operations.
The decline in other servicing fees was largely due to an adjustment in the fee
structure that became effective in the fourth quarter of 1995.
While most of the growth in other income during 1995 resulted from
changes
26
27
to the fee structures, management anticipates growth in 1996 to come from
increased transaction volumes and greater contributions from discount brokerage
operations. The installation of over 240 ATMs in White Hen Pantry(R) food
stores during the second quarter of 1996 is expected to begin to contribute to
other fee income during the last half of the year.
General and Administrative Expense. General and administrative expenses
totaled $24.3 million during the three months ended June 30, 1996, $1.8 or 7.9%
higher than the same period in 1995. The higher level of expense was
associated with higher compensation and benefits of $670,000, occupancy,
equipment and office expense of $734,000, and advertising of $238,000.
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, the digital telephone system and the installation of White Hen ATMs.
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, Management remains committed to ongoing expense control. Despite
these measures, continued expansion of the ATM network, additional capital
investments, and general inflation will cause 1996 general and administrative
expense to exceed 1995 levels. At the same time, Management expects that 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 and enhancing other income.
Operations of Foreclosed Real Estate. The Bank generated a net loss from its
foreclosed real estate operation of $20,000 during the second quarter of 1996,
$207,000 lower than the net loss recorded during the same quarter a year ago.
Most of the decrease was produced by a lower provision for real estate owned
("REO") losses. See "CREDIT RISK MANAGEMENT" for further discussion of REO.
27
28
Income Taxes. The provision for income taxes totaled $5.3 million or 34.2% of
pre-tax income during the second quarter of 1996 compared to $5.2 million or
36.4% of pre-tax income during the same quarter in 1995. A $1.3 million
increase in pre-tax income was partly offset by a decline in the effective
income tax rate. Management has implemented certain tax planning strategies to
reduce the effective income tax rate. The effective income tax rate for 1996
is expected to be approximately 35%, and an adjustment was recorded during the
second quarter of 1996 to reduce the annual effective tax rate to the expected
effective rate.
28
29
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Three months ended June 30,
Dollars in thousands At June 30, 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) $82,002 5.48% $79,488 $1,125 5.68% $ 98,081 $1,260 5.15%
Federal funds/
interest bearing balances 51,220 5.06 40,349 518 5.15 30,093 454 6.05
Other investments (c) 54,585 6.15 61,258 893 5.85 61,554 980 6.39
- ----------------------------------------------------------------------------------------------------------------------------
Total investments 187,807 5.56 181,095 2,536 5.62 189,728 2,694 5.70
Mortgage-backed securities (b) 843,821 6.45 888,740 13,728 6.18 1,042,444 16,416 6.30
Loans receivable (d) 3,096,245 7.66 2,995,272 57,788 7.72 2,651,331 50,463 7.61
- ----------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $4,127,873 7.32% $4,065,107 $74,052 7.29% $3,883,503 $69,573 7.17%
============================================================================================================================
Deposits:
Interest bearing checking $240,662 1.74% $233,252 $1,029 1.77% $233,088 $1,069 1.86%
Noninterest bearing checking 142,334 -- 134,156 -- -- 118,788 -- --
Other noninterest bearing accounts 37,518 -- 33,629 -- -- 29,525 -- --
Money market accounts 209,078 3.41 203,538 1,636 3.22 217,535 1,687 3.15
Savings accounts 708,647 2.41 703,678 4,247 2.42 727,523 4,396 2.45
Certificates of deposit 1,921,130 5.63 1,961,733 27,397 5.60 1,858,752 26,003 5.67
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 3,259,369 4.19 3,269,986 34,309 4.21 3,185,211 33,155 4.22
Borrowings:(e)
Short-term borrowings 380,484 5.72 274,267 3,853 5.63 173,194 2,715 6.29
Long-term borrowings 260,760 6.89 235,543 4,121 7.02 266,621 4,743 7.14
- ----------------------------------------------------------------------------------------------------------------------------
Total borrowings 641,244 6.20 509,810 7,974 6.27 439,815 7,458 6.80
- ----------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $3,900,613 4.52% $3,779,796 $42,283 4.49% $3,625,026 $40,613 4.49%
============================================================================================================================
Excess of interest earning assets
over interest bearing liabilities $227,260 $285,311 $258,477
============================================================================================================================
Ratio of interest earning assets over
interest bearing liabilities 1.06 1.08 1.07
============================================================================================================================
Net interest income - $31,769 $28,960
============================================================================================================================
Interest rate spread 2.80% - -
============================================================================================================================
"Average" interest rate spread - 2.80% 2.67%
=============================================================================================================================
Net yield on average earning assets - 3.13% 2.98%
=============================================================================================================================
(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 FHLB Bank advances, securities sold under agreements to
repurchase, and other borrowings.
29
30
RATE/VOLUME ANALYSIS
The following table presents the components of the changes in net interest
income by volume and rate (7) for the six months ended June 30, 1996 and 1995:
INCREASE/(DECREASE) DUE TO
-------------------------------
TOTAL
Dollars in thousands VOLUME RATE CHANGE
- ---------------------------------------------------------------------
CHANGE IN INTEREST INCOME:
Loans receivable $ 8,783 $ 2,230 $11,013
Mortgage-backed securities (4,587) (304) (4,891)
Marketable-debt securities (448) 185 (263)
Federal funds and interest-bearing
bank balances 719 (118) 601
Other short-term investments 364 (140) 224
------- ------- -------
Total interest income 4,831 1,853 6,684
CHANGE IN INTEREST EXPENSE:
Deposits 1,424 3,128 4,552
Short-term borrowings 593 (547) 46
Long-term borrowings (650) (134) (784)
------- ------- -------
Total interest expense 1,367 2,447 3,814
------- ------- -------
NET CHANGE IN NET INTEREST INCOME
BEFORE PROVISION FOR LOAN LOSSES $ 3,464 $ (594) $ 2,870
======= ======= =======
- ------------------------
(7) 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.
30
31
RESULTS OF OPERATIONS -- COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 AND 1995
General. Net income totaled $18.9 million during the six month period ended
June 30, 1996, $911,000 or 5.1% higher than the $18.0 million of net income
during the same period in 1995. Primary earnings per share during the first
six months of 1996 were $0.99 or 6.5% higher than the $0.93 during the first
six months of 1995.(8) A $2.9 million increase in net interest income and a
$1.3 million increase in other income primarily produced the higher level of
income. Partly offsetting these increases were a $2.7 million increase in
general and administrative expenses and a higher loss on foreclosed real
estate of $500,000.
Net Interest Income. Net interest income totaled $61.4 million during the six
month period ended June 30, 1996, $2.9 million or 4.9% higher than net interest
income during the same period a year ago. A $6.7 million rise in interest
income, partly offset by higher interest expense of $3.8 million produced the
increase in net interest income.
The NIM increased 6 basis points from 3.00% during the first six
months of 1995 to 3.06% during the first half of 1996. Higher average loan
balances and an increase in the effective loan yield produced most of the
increase in the NIM. The acquisition of $626.3 million of 1-4 family whole
loans since June 30, 1995 allowed the Bank to increase average interest earning
asset levels and enhance net interest income. This increase in the NIM was
partly offset by a higher effective cost of deposits. The effective cost of
deposits rose during the last half of 1995 and into the first quarter of 1996,
causing the NIM to contract. See RESULTS OF OPERATIONS -- COMPARISON OF THREE
MONTHS ENDED JUNE 30, 1996 AND 1995 for a discussion of the interest rate
spread.
Interest Income. Interest income on loans receivable increased $11.0 million,
or 11.1%, during the first six months of 1996 compared to the same period in
1995. The higher level of income was associated with a $228.8 million increase
in average balances and a 17 basis point increase in the effective yield earned
on these balances. The higher average balances, which totaled $2.87 billion
during the first two quarters of 1996, primarily resulted from the recent
acquisitions of 1-4 family whole loans, with most of these purchases occurring
________________________
(8) The earnings per share comparison grew faster than net income due to
the stock repurchase program executed during the first six months of 1996.
31
32
since December 1995. These purchases and loans originated for investment were
partly offset by loan repayments. The effective yield earned on loans rose
from 7.54% during the first six months of 1995 to 7.71% during the same period
in 1996 primarily resulted from favorable repricing on the adjustable rate
portion of the portfolio.
The $4.9 million decline in MBS interest income primarily resulted
from a $147.9 million decline in average MBS balances and a 6 basis point
decline in the effective yield earned on the MBS. Average MBS declined to
$926.1 million during the first six months of 1996 compared to $1.07 billion
during the same period in 1995 Principal repayments and the sale of $27.5
million of MBS during the first quarter of 1996 produced the decline in average
balances. The average effective yield on MBS declined to 6.20% during the
first half of 1996 compared to 6.26% during the same period a year ago. The
repayment of higher interest earning MBS balances and an increased amount of
premium amortization during 1996 associated with the continued high level of
repayments, produced the decline in the effective yield. Favorable repricing
in the adjustable rate portion of the portfolio partly offset this decline.
Interest income from investments, which includes marketable-debt
securities, federal funds, interest bearing bank balances, and other short-term
investments, increased $562,000 over the first six months of 1995. Most of the
increase in interest income was associated with an increase in average
investment balances. Average balances totaled $215.6 million during the first
two quarters of 1996, or $22.6 million higher than the same period a year ago.
During the first half of 1996, Management was maintaining higher investment
balances to help fund the acquisition of whole loans, resulting in the increase
in average balances. The effective yield earned on investment balances
declined 6 basis points from 5.63% during the first half of 1996 to 5.57%
during the same period in 1996. The general decline in market interest rates
since the beginning of 1995 produced the lower effective yield.
Interest Expense. Deposit interest expense rose $4.6 million between the first
six months of 1995 and 1996 due to a 20 basis point increase in the effective
cost of deposits and a $69.5 million increase in average deposit balances. The
focus on shorter-term CDs during most of 1995 and into 1996 produced both the
increase in the effective cost of deposits and the higher average deposit
32
33
balances. The effective cost of deposits increased from 4.07% during the first
half of 1995 to 4.27% during the same period in the current year. 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. While the weighted average deposit rate increased through 1995 and
early 1996, the rate declined during the second quarter. Average deposit
balances totaled $3.26 billion during the first half of 1996 compared to $3.19
billion during the same period a year ago. While deposit costs have risen
between 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 $738,000 during the six month
period ended June 30, 1996 compared to the same period in 1995 primarily due to
a 35 basis point decline in the effective cost of borrowings. The effective
cost of borrowings was 6.42% for the first six months of 1996 compared to 6.77%
during the same six month period in 1995. Most of the decline occurred in
short-term borrowings that benefited from generally lower interest rates in
1996 compared to the same period during 1995. Average borrowing balances were
$466.6 million during the first half of 1996, only $1.7 million higher than in
the same period in 1995. While average balances have remained relatively
unchanged, period-end borrowing balances have increased significantly from June
30, 1995 to June 30, 1996. Since most of the additional borrowings to help
fund the acquisition of whole loans occurred during the second quarter of 1996,
these additional borrowings did not fully impact average balances.
Provision for Loan Losses. The Company recorded a $1.0 million provision for
loan losses during the first six months of 1996 compared to $1.1 million 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 $17.7 million during the first six months
of 1996, $1.3 million or 7.9% higher than other income of $16.4 million during
the same period in 1995. The higher level of other income was associated with
higher revenues from the Company's discount brokerage subsidiaries and higher
gains on loan sales.
Discount brokerage commissions improved $1.2 million between the two
year-to-date
33
34
periods, largely due to higher transaction volumes. The $397,000 increase in
gain on loan sales resulted from an increase in the sale of fixed rate loans as
well as 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 "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for further details.
Other income also included an $855,000 gain on the sale of AFS MBS
during the first half of 1996. In comparison, the Bank recorded an $837,000
gain on the sale of AFS MBS during the first half of 1995.
General and Administrative Expense. General and administrative expense
totaled $47.7 million during the first half of 1996, $2.7 million or 5.9%
higher than the same period in 1995. The higher level of expense was primarily
associated with higher compensation and benefits of $1.2 million, occupancy,
equipment and office expense of $1.2 million and increased advertising expense
of $367,000.
The increase in compensation and benefits is due to annual merit
increases and increased medical costs. Occupancy, equipment and office expense
increased due to the opening of the Telephone Banking Center and higher fixed
asset depreciation associated with capital expenditures made since the second
quarter of 1995. Higher advertising expense is related to increased planned
advertising expenditures.
Operations of Foreclosed Real Estate. The Bank generated a net loss from its
foreclosed real estate operation of $1.1 million during the first half of 1996,
$500,000 higher than the net loss recorded during the same period 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 $10.4 million or 35.4% of pre-tax income
during the first six months of 1996 compared to $10.2 million or 36.1% of
pre-tax income during the same quarter in 1995. A $1.1 million increase in
pre-tax income was partly offset by a lower effective income tax rate. The
implementation of certain tax planning strategies allowed the Company to reduce
its effective income tax rate during 1996.
34
35
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Six months ended June 30,
Dollars in thousands At June 30, 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) $ 82,002 5.48% $ 82,893 $ 2,266 5.51% $ 99,637 $ 2,529 5.12%
Federal funds/interest
bearing balances 51,220 5.06 57,133 1,498 5.29 30,136 897 6.00
Other investments (c) 54,585 6.15 75,609 2,190 5.84 63,273 1,966 6.27
- ---------------------------------------------------------------------------------------------------------------------------
Total investments 187,807 5.56 215,635 5,954 5.57 193,046 5,392 5.63
Mortgage-backed securities (b) 843,821 6.45 926,107 28,709 6.20 1,073,991 33,600 6.26
Loans receivable (d) 3,096,245 7.66 2,870,383 110,646 7.71 2,641,536 99,633 7.54
- ---------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $4,127,873 7.32% $4,012,125 $145,309 7.25% $3,908,573 $138,625 7.10%
===========================================================================================================================
Deposits:
Interest bearing checking $ 240,662 1.74% $ 235,250 $ 2,044 1.75% $ 234,360 $ 2,134 1.84%
Noninterest bearing checking 142,334 -- 128,239 -- -- 114,297 -- --
Other noninterest bearing accounts 37,518 -- 31,421 -- -- 28,984 -- --
Money market accounts 209,078 3.41 200,072 3,169 3.19 226,101 3,492 3.11
Savings accounts 708,647 2.41 698,081 8,416 2.43 737,892 8,900 2.43
Certificates of deposit 1,921,130 5.63 1,967,575 55,367 5.67 1,849,537 49,918 5.44
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 3,259,369 4.19 3,260,638 68,996 4.27 3,191,171 64,444 4.07
Borrowings:(e)
Short-term borrowings 380,484 5.72 215,738 6,076 5.68 195,555 6,030 6.22
Long-term borrowings 260,760 6.89 250,824 8,788 7.07 269,310 9,572 7.17
- ---------------------------------------------------------------------------------------------------------------------------
Total borrowings 641,244 6.20 466,562 14,864 6.42 464,865 15,602 6.77
- ---------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $3,900,613 4.52% $3,727,200 $ 83,860 4.54% $3,656,036 $ 80,046 4.42%
===========================================================================================================================
Excess of interest earning assets
over interest bearing liabilities $ 227,260 $ 284,925 $ 252,537
===========================================================================================================================
Ratio of interest earning assets over
interest bearing liabilities 1.06 1.08 1.07
===========================================================================================================================
Net interest income - $ 61,449 $ 58,579
===========================================================================================================================
Interest rate spread 2.80% - -
===========================================================================================================================
"Average" interest rate spread - 2.71% 2.68%
===========================================================================================================================
Net yield on average earning assets - 3.06% 3.00%
===========================================================================================================================
(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 FHLB Bank advances, securities sold under agreements to
repurchase, and other borrowings.
35
36
KEY CREDIT STATISTICS
June 30, 1996 Dec. 31, 1995 Dec. 31, 1994
Dollars in thousands Dollar % Dollar % Dollar %
- ---------------------------------------------------------------------------------------------
LOAN PORTFOLIO
- ---------------------------------------------------------------------------------------------
MORTGAGE LOANS
1-4 family units $2,034,602 66% $1,663,228 62% $1,530,132 59%
Multifamily units 972,807 32 979,017 36 993,122 38
Commercial 52,987 2 54,981 2 63,983 3
Land and land development 2,002 * 1,940 * 224 *
- ---------------------------------------------------------------------------------------------
Total mortgage loans $3,062,398 100% $2,699,166 100% $2,587,461 100%
=============================================================================================
CONSUMER LOANS
Secured by deposits $ 1,802 9% $ 2,307 10% $ 1,928 8%
Education (guaranteed) 72 * 261 1 584 3
Home improvement 377 2 576 2 832 4
Auto 17,872 87 20,034 86 19,392 83
Personal 375 2 165 1 380 2
- ---------------------------------------------------------------------------------------------
Total consumer loans $ 20,498 100% $ 23,343 100% $ 23,116 100%
- ---------------------------------------------------------------------------------------------
Total loans held for investment $3,082,896 $2,722,509 $2,610,577
=============================================================================================
Weighted average rate 7.66% 7.69% 7.51%
=============================================================================================
*Less than 1%
NONPERFORMING ASSETS
- --------------------------------------------------------------------------------------------
MORTGAGE LOANS
1-4 family units $ 7,396 35% $ 7,722 26% $ 5,584 21%
Multifamily units 8,510 40 8,665 30 3,813 14
Commercial --- -- 1,360 5 437 1
Land and land development --- -- --- -- --- --
- --------------------------------------------------------------------------------------------
Total mortgage loans 15,906 75 17,747 61 9,834 36
CONSUMER LOANS 17 * 81 * 101 *
REAL ESTATE OWNED
1-4 family units 1,193 6 2,174 8 4,585 17
Multifamily units 2,800 13 8,206 28 10,753 40
Commercial 1,351 6 997 3 1,818 7
Land and land development --- -- --- -- --- --
- ---------------------------------------------------------------------------------------------
Total real estate owned 5,344 25 11,377 39 17,156 64
- ---------------------------------------------------------------------------------------------
Total nonperforming assets $ 21,267 100% $ 29,205 100% $ 27,091 100%
=============================================================================================
*Less than 1%
June 30, Dec. 31, Dec. 31,
1996 1995 1994
- ---------------------------------------------------------------------------------------------
KEY CREDIT RATIOS
- ---------------------------------------------------------------------------------------------
Net loan charge-offs to average loans receivable 0.16% 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 1.21 1.42 1.62
Loan loss reserve to nonperforming loans 234.36 216.62 424.72
Loan loss reserve to impaired loans 90.17 120.37 170.03
Nonperforming assets to total assets 0.46 0.71 0.66
General valuation allowance to non-
performing assets 166.64 123.94 143.24
- --------------------------------------------------------------------------------------------
36
37
CREDIT RISK MANAGEMENT
LENDING
At June 30, 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 June 30, 1996, non-performing loans totaled $15.9 million compared
to $17.8 million at Dec. 31, 1995. (9) Since Dec. 31, 1995 $16.4 million of
delinquent loans were transferred to REO. For the first six months of 1996,
$16.3 million of loans went to the non-performing status, while charge-offs and
repayments totaled $1.8 million.
At June 30, 1996, the Bank had a net investment of $41.4 million of
impaired loans.(10) In comparison, the Bank had a net investment of $32.1
million in impaired loans at Dec. 31, 1995.(11) During the first half of 1996,
the addition of $28.8 million of loans to the impaired category, produced the
higher net impaired balances. Offsetting these additions was the transfer of
$15.1 million of impaired multifamily loans to REO and the improvement in value
of one multifamily property of $4.4 million. At June 30, 1996, of the total net
impaired loans, $3.2 million were non-performing and $38.2 million 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
__________________________________
(9) Of the $15.9 million of non-performing loans at June 30, 1996, $9.6
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.
(10) In accordance with 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."
(11) At June 30, 1996, of the $41.4 million of loans considered impaired,
$39.4 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.
37
38
$32.1 million of impaired loans at Dec. 31, 1995, $28.1 million were performing
and $4.0 million were non-performing loans.
The accumulated provision for loan losses at June 30, 1996 was $37.3
million compared to $38.6 million at Dec. 31, 1995, a decrease of $1.3 million.
The following table provides activity in the accumulated provision for loan
losses from Jan. 1, 1995 through June 30, 1996:
1996 1995
-------------- --------------------------
Six Months Six Months Year Ended
Dollars in thousands Ended June 30 Ended June 30 Dec. 31
- -------------------------------------------- --------------------------
Beginning of Period $38,619 $42,196 $42,196
Provision for losses 1,000 1,100 1,900
Charge-offs (2,659) (3,849) (7,879)
Recoveries 358 1,785 2,402
------- --------------------
End of Period $37,318 $41,232 $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 half of 1996 totaled $2.7 million, or
$1.1 million less than the same period a year ago.(12) Most of the charge-offs
during 1996 related to the Bank's nationwide multifamily and commercial real
estate loan portfolio. Although gross charge-offs declined, net charge-offs
(gross charge-offs net of recoveries) increased $237,000 over the same time
period due to the higher recoveries recorded during the first half of 1995.
Annualized net loan
- ---------------------------
(12) The $2.7 million of gross loan charge-offs in the first half of 1996
included $2.1 million of charge-offs on loans considered impaired under SFAS
No. 114, $211,000 of charge-offs on 1-4 family and consumer loans, $114,000
charge-off of interest on a delinquent multifamily loan serviced for others,
and $96,000 charge-off as an inducement for an early payoff of a multifamily
loan.
38
39
charge-offs to average loans receivable totaled 0.16% during the first half 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 six months ended June 30,
1996 was $1.0 million compared to $1.1 million during the six months ended June
30, 1995. The 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 have allowed the Bank to reduce
its level of valuation allowances by recording new loss provisions below net
charge-offs. See "KEY CREDIT STATISTICS" for further details.
As of June 30, 1996, the Bank's ratio of classified assets to tangible
capital and general valuation allowance was 37.0% compared to 42.2% at Dec. 31,
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 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.
During the first six months of 1996, the Bank purchased $428.0 million
of whole loans. All of these loans are secured by 1-4 family real estate
located nationally. Prior to purchasing these loans, the Bank performs due
diligence procedures. As a result of that process, Management believes that
the portfolios acquired present no greater risk than the Bank's own originated
1-4 family portfolio. These loans are subject to the Bank's quarterly review
of the adequacy of the general valuation allowance.
39
40
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.
Approximately $478 million of the Bank's nationwide multifamily and
commercial loan portfolio is scheduled to mature by the end of 1998.
Management is 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 $5.3 million at June 30, 1996 compared to $11.4 million at
the end of 1995.(13) The sale of seven REO assets totaling $23.6 million, $1.3
million of write downs of existing REO asset, and $1.0 million net decrease in
1-4 family REO balances produced the lower level of total REO assets. Partly
offsetting these decreases were new multifamily REOs of $16.4 million and the
repurchasing of $3.4 million of participating interests in an existing REO
asset.
The accumulated provision for real estate losses totaled $448,000 at
June 30, 1996 compared to $2.0 million at Dec. 31, 1995. During the first half
of 1996, the Bank recorded net charge-offs on REO properties of $2.5 million,
while $924,000 of net charge-offs were recorded during the same period in 1995.
The charge-offs primarily relate to the sale of an office building and a
multifamily
__________________________________
(13) Of the $5.3 million of REO at June 30, 1996, $2.8 million was a
multifamily property located in California. At Dec. 31, 1995, there were no
REO properties located in California.
40
41
property during 1996. The provision for REO losses was $943,000 during the
first half of 1996 compared to $311,000 in the first half of 1995. This
provision during 1996 was considered necessary to reflect an additional loss on
the multifamily property sold during the second quarter.(14) Since the loss on
the commercial building was primarily provided for during 1995, the provision
for losses during 1996 was less than net charge-offs.
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.
__________________________________
(14) The Bank had previously carried the REO at a value that was supported
by a current appraisal. The Bank entered into a subsequent sales contract with
a buyer at a lower value, principally due to high vacancy levels. Management
elected to accept the liquidation value rather than holding this asset in an
effort to achieve stabilization of occupancy.
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ASSET/LIABILITY REPRICING SCHEDULE(a)
at June 30, 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 5.10% $ 54,219 1% $ 54,219 - - - -
Fixed rate 5.75 133,588 3 39,445 16,313 32,648 - 45,182
Mortgage-backed securities:(c)
Adjustable rate 6.12 557,611 14 318,760 238,851 - - -
Fixed rate 7.09 286,210 7 21,834 9,126 76,446 51,690 127,114
Mortgage loans:(c)
Adjustable and renegotiable rate 7.54 2,561,904 62 1,344,136 455,400 678,059 84,309 -
Fixed rate 8.26 500,494 12 51,465 47,272 158,290 96,974 146,493
Consumer loans (c) 7.99 20,497 1 3,106 1,944 6,185 4,639 4,623
Assets held for sale 8.32 13,350 * 13,350 - - - -
--------------------------------------------------------------------------------
Total rate sensitive assets 7.32% $4,127,873 100% $1,846,315 $768,906 $951,628 $237,612 $323,412
================================================================================
RATE SENSITIVE LIABILITIES:
Deposits:
Checking accounts 1.00% $ 420,013 11% $ 113,821 $ 23,897 $ 78,337 $ 56,598 $147,360
Savings accounts 2.41 708,708 18 233,804 44,860 140,882 94,729 194,433
Money market deposit accounts 3.40 209,518 5 209,518 - - - -
Fixed-maturity certificates 5.63 1,921,130 49 1,107,558 398,218 277,346 75,085 62,923
--------------------------------------------------------------------------------
4.19 3,259,369 83 1,664,701 466,975 496,565 226,412 404,716
Borrowings:
FHLB advances 5.94 536,399 15 435,000 50,314 50,000 248 837
Other borrowings 7.29 88,445 2 88,445 - - - -
Mortgage-backed note 8.54 16,400 * - - - 16,400 -
--------------------------------------------------------------------------------
6.20 641,244 17 523,445 50,314 50,000 16,648 837
Total rate sensitive liabilities 4.52% $3,900,613 100% $2,188,146 $517,289 $546,565 $243,060 $405,553
================================================================================
Excess (deficit) of rate sensitive
assets over rate
sensitive liabilities (GAP) 2.80% $ 227,260 (341,831) $251,617 $405,063 $ (5,448) $(82,141)
================================================================================
Cumulative GAP $(341,831) $(90,214) $314,849 $309,401 $227,260
Cumulative GAP to total assets without
regard to hedging transactions -7.88% -2.08% 7.26% 7.13% 5.24%
Cumulative GAP to total assets with
impact of hedging transactions -5.47% 0.33% 7.26% 7.13% 5.24%
* 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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PART II. -- OTHER INFORMATION
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 15, 1996, the Company held an Annual Meeting of Shareholders
(the "Annual Meeting") to elect three directors for a term of three
years and to ratify the appointment of the Company's independent
auditors for the fiscal year ending December 31, 1996.
(b) Set forth below is a description of each matter voted upon at the
Annual Meeting and the number of votes cast for and the number of
votes withheld as to each such matter.
1. Three directors were elected for a term of three years, or
until their successors have been elected and qualified. A
list of such directors, including the votes for and withheld
is set forth below:
Withhold
Authority
Nominees For To Vote
-------- -----------------------------
[S] [C] [C]
John W. Croghan 15,302,378 602,997
Kenneth J. James 15,300,972 604,403
Michael R. Notaro 15,218,036 687,339
2. The appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31,
1996 was ratified. There were 15,506,147 votes cast for the
proposal, 293,972 votes against the proposal and 105,256
votes abstained.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10, Material Contracts.
(i) Revolving loan agreement, dated as of September 15, 1995
between St. Paul Bancorp, Inc. and LaSalle National Bank.
(b) Exhibit 11, Statement re: Computation of Per Share Earnings.
(c) Exhibit 27, Financial Data Schedule.
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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: August 14, 1996 By: /s/ Joseph C. Scully
--------------- ------------------------------------
Joseph C. Scully
Chairman of the Board and Chief Executive Officer
(Duly Authorized Officer)
Date: August 14, 1996 By: /s/ Robert N. Parke
--------------- ------------------------------------
Robert N. Parke
Senior Vice President and Treasurer
(Principal Financial Officer)
44