<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1994
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number 0-15580
St. Paul Bancorp, Inc.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3504665
- - -------------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6700 W. North Avenue
Chicago, Illinois 60635
- - ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
(312) 622-5000
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES __X__ NO ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value -- 19,491,742 shares, as of August 1, 1994
1
<PAGE> 2
ST. PAUL BANCORP, INC.
AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
as of June 30, 1994 and December 31, 1993 . . . . . . . . . . . . . 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1994 and 1993 . . . . . . . . . . . . . . . . 4
Consolidated Statements of Stockholders' Equity for the
Six Months Ended June 30, 1994 and 1993 . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1994 and 1993 . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . 48
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 48
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
2
<PAGE> 3
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
Dollars in thousands 1994 1993
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents
Cash and amounts due from depository institutions $ 97,600 $ 87,805
Federal funds sold 12,300 56,200
Short-term marketable-debt securities
(Market: June 30, 1994-$25,578; December 31, 1993-$192,326) 25,578 192,326
-------------------------
Total cash and cash equivalents 135,478 336,331
Marketable-debt securities
(Market: June 30, 1994-$108,049; December 31, 1993-$142,876) 110,391 142,051
Mortgage-backed securities
(Market: June 30, 1994-$1,186,194; December 31, 1993-$733,314) 1,215,053 733,649
Loans receivable 2,393,175 2,350,893
Less: accumulated provision for loan losses 41,707 46,574
-------------------------
Net loans receivable 2,351,468 2,304,319
Loans held-for-sale, at lower of cost or market
(Market: June 30, 1994-$10,419; December 31, 1993-$28,616) 10,419 28,497
Accrued interest receivable 22,823 20,247
Foreclosed real estate
(Net of accumulated provision for losses: June 30, 1994-$1,541;
December 31, 1993-$819) 19,268 19,105
Real estate held for investment 12,186 11,237
Investment in Federal Home Loan Bank stock 29,847 31,290
Office properties and equipment 41,453 40,865
Prepaid expenses and other assets 33,692 37,785
-------------------------
TOTAL ASSETS $ 3,982,078 $3,705,376
=========================
LIABILITIES:
Deposits $ 3,218,825 $3,252,618
FHL Bank advances 256,865 7,219
Other borrowings 106,290 56,751
Advance payments by borrowers for taxes and insurance 20,432 19,513
Other liabilities 27,659 21,946
-------------------------
Total liabilities 3,630,071 3,358,047
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock (par value $.01 per share: authorized-10,000,000
shares; none issued) -- --
Common stock (par value $.01 per share: authorized-40,000,000 shares;
issued at June 30, 1994-19,760,755 shares;
outstanding at June 30, 1994-19,484,805 shares;
issued and outstanding at December 31, 1993-19,683,981 shares) 198 197
Paid-in capital 137,640 136,609
Retained income, substantially restricted 224,124 210,215
Unrealized gain (loss) on securities, net of taxes (1,115) 4,594
SFAS No. 87 adjustment, net of taxes (46) (46)
Borrowings by employee stock ownership plan (1,000) (4,240)
Unearned employee stock ownership plan shares (196,350 shares) (2,883) --
Treasury stock (275,950 shares) (4,911) --
-------------------------
Total stockholders' equity 352,007 347,329
-------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,982,078 $3,705,376
=========================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
Dollars in thousands except per share amounts 1994 1993 1994 1993
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 43,930 $ 52,032 $ 88,835 $ 102,299
Mortgage-backed securities 15,135 11,194 25,279 22,155
Marketable-debt securities 1,624 1,834 3,402 3,324
Trading account -- 19 1 49
Federal funds 307 301 764 573
Other short-term investments 895 1,965 2,758 3,964
-------- -------- -------- --------
Total interest income 61,891 67,345 121,039 132,364
INTEREST EXPENSE:
Deposits 28,186 31,379 56,394 62,269
Short-term borrowings 331 1,528 337 3,617
Long-term borrowings 4,297 1,583 5,713 2,920
-------- -------- -------- --------
Total interest expense 32,814 34,490 62,444 68,806
-------- -------- -------- --------
Net interest income 29,077 32,855 58,595 63,558
Provision for loan losses 750 2,750 2,700 6,750
-------- -------- -------- --------
Net interest income after provision
for loan losses 28,327 30,105 55,895 56,808
OTHER INCOME:
Loan servicing fees 363 424 712 907
Other fee income 4,283 3,593 7,851 6,627
Net gain on assets sold 81 745 470 910
Net trading account gain (loss) -- 40 (5) 45
Discount brokerage commissions 933 1,620 2,167 2,958
Income from real estate operations 564 643 1,231 1,206
Insurance and annuity commissions 983 852 1,939 1,731
Other 80 102 249 178
-------- -------- -------- --------
Total other income 7,287 8,019 14,614 14,562
GENERAL AND ADMINISTRATIVE EXPENSE:
Compensation and employee benefits 11,706 10,841 23,662 20,961
Occupancy, equipment and other office expense 4,873 4,658 10,106 8,970
Advertising 1,193 1,355 2,319 2,592
Federal deposit insurance 2,238 2,286 4,478 4,489
Other 1,368 1,650 2,601 2,858
-------- -------- -------- --------
General and administrative expense 21,378 20,790 43,166 39,870
Loss on foreclosed real estate 781 344 1,241 671
-------- -------- -------- --------
Income before income taxes 13,455 16,990 26,102 30,829
Income taxes 4,835 5,468 9,284 10,064
-------- -------- -------- --------
NET INCOME $ 8,620 $ 11,522 $ 16,818 $ 20,765
======== ======== ======== ========
EARNINGS PER SHARE:
Primary $ 0.42 $ 0.56 $ 0.82 $ 1.03
Fully diluted 0.42 0.56 0.82 1.03
========= ======== ======== ========
DIVIDENDS PER SHARE $ 0.075 $ 0.067 $ 0.150 $ 0.133
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
ST. PAUL BANCORP,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Unrealized Borrowing Unearned
gain/(loss) SFAS No. by employee employee
Common Stock on 87 adjust- stock stock
------------------- Paid-in Retained securities, ment, net ownership ownership Treasury
Shares Amount capital income net of tax of tax plan plan shares stock Total
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1992 18,258,158 $183 $115,253 $173,976 $ -- $ -- ($2,071) $ -- $ -- $287,341
Issuance of common
stock under stock
option plan 75,000 1 819 -- -- -- -- -- -- 820
Issuance of common
stock under to
Elm Shareholders 1,292,313 12 19,754 -- -- -- -- -- -- 19,766
Retirement of
common stock
issued to Elm
shareholders (446) -- (7) (7)
Net income -- -- -- 20,765 -- -- -- -- -- 20,765
Cash dividends paid
to Shareholders
($0.13 per share) -- -- -- (2,527) -- -- -- -- -- (2,527)
Repayment of
principal -- -- -- -- -- -- 357 -- -- 357
Additional
borrowings -- -- -- -- -- -- (2,616) -- -- (2,616)
-------------------------------------------------------------------------------------------------------------------------------
BALANCE
JUNE 30, 1993 19,625,025 $196 $135,819 $192,214 $0 $0 ($4,330) $0 $0 $323,899
==============================================================================================================================
Balance at
December 31, 1993 19,683,981 $197 $136,609 $210,215 $4,594 ($46) ($4,240) $ -- $ -- $347,329
Unearned ESOP
shares -- -- -- -- -- -- 2,883 (2,883) -- --
Issuance of common
stock under stock
option plan 76,774 1 1,031 -- -- -- -- -- -- 1,032
Net income -- -- -- 16,818 -- -- -- -- -- 16,818
Cash dividends paid
to Shareholders
($0.15 per share) -- -- -- (2,909) -- -- -- -- -- (2,909)
Adjustment to
unrealized gain -- -- -- -- (5,709) -- -- -- -- (5,709)
Repayment of ESOP
borrowing -- -- -- -- -- -- 357 -- -- 357
Treasury stock
purchases (275,950) -- -- -- -- -- -- -- (4,911) (4,911)
-------------------------------------------------------------------------------------------------------------------------------
BALANCE
JUNE 30, 1994 19,484,805 $198 $137,640 $224,124 ($1,115) ($46) ($1,000) ($2,883) ($4,911) $352,007
==============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------------
Dollars in thousands 1994 1993
--------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 16,818 $ 20,765
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,700 6,750
Provision for losses on foreclosed real estate 1,122 412
Provision for depreciation 2,516 2,293
Assets originated and acquired for sale (37,181) (44,271)
Sale of assets held for sale 54,534 34,784
(Increase) decrease in accrued interest receivable (2,636) 1,085
(Increase) decrease in prepaid expenses and other assets 3,893 (1,813)
Increase (decrease) in other liabilities 5,712 (2,733)
Net amortization of yield adjustments (571) 35
Other items, net (6,803) 6,157
--------------------------------------------------------------------------------------------
Net cash provided by operating activities 40,104 23,464
--------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Principal repayments on loans receivable 279,020 254,857
Loans originated and purchased for investment (330,191) (207,621)
Loans receivable sold 3,191 14,220
Principal repayments on available-for-sale mortgage-
backed securities 42,550 --
Principal repayments on held-to-maturity mortgage
backed securities 83,400 111,366
Purchase of available-for-sale mortgage-backed securities (27,127) --
Purchase of held-to-maturity mortgage-backed securities (604,834) (79,618)
Sale of available-for-sale mortgage-backed securities 15,459 --
Maturities of available-for-sale marketable-debt securities 11,000 --
Maturities of held-to-maturity marketable-debt securities -- 122,024
Purchase of available-for-sale marketable-debt securities (20,950) --
Purchase of held-to-maturity marketable-debt securities (30,695) (90,812)
Sale of available-for sale marketable-debt securities 70,182 --
Additions to real estate held for investment (5,276) (2,077)
Real estate sold 15,083 4,584
Sale of Federal Home Loan Bank stock 1,443 1,897
Purchase of office properties and equipment (3,710) (2,848)
Proceeds from sales of office properties and equipment 606 333
Acquisition of Elm Financial, net of cash and
cash equivalents acquired of $11,002. -- (15,655)
--------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (500,849) 110,650
--------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in checking and savings deposits 63,355 21,441
Proceeds from sales of certificates of deposit 143,257 529,488
Payments for maturing certificates of deposit (240,405) (571,092)
Net proceeds from issuance of subordinated notes -- 33,422
Increase in long-term borrowings 210,017 ---
Repayment of long-term borrowings (200) (83,086)
Increase in short-term borrowings, net 89,737 ---
Dividends paid to stockholders (2,909) (2,527)
Net proceeds from exercise of stock options 1,032 513
Purchase of Treasury Stock (4,911) --
Increase (decrease) in advance payments by borrowers
for taxes and insurance 919 (742)
--------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 259,892 (72,583)
--------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (200,853) 61,531
Cash and cash equivalents at beginning of period 336,331 311,567
--------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 135,478 $ 373,098
===========================================================================================
SUPPLEMENTAL DISCLOSURES:
Interest credited on deposits $ 49,562 $ 56,580
Interest paid on deposits 4,998 5,871
--------------------------------------------------------------------------------------------
Total interest paid on deposits 54,560 62,451
Interest paid on borrowings 4,021 6,993
Income taxes paid, net 5,612 11,293
Common stock issued in acquisition of Elm Financial -- 19,766
Real estate acquired through foreclosure 12,795 19,803
Loans originated in connection with real estate
acquired through foreclosure 7,840 2,978
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of Management all necessary adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation have been
included. The results of operation for the three- and six-month period ended
June 30, 1994 are not necessarily indicative of the results that may be
expected for the entire fiscal year.
2. The accompanying consolidated financial statements include the accounts of
St. Paul Bancorp, Inc. (the "Company" or "St. Paul Bancorp") and its
wholly-owned subsidiaries, St. Paul Federal Bank For Savings (the "Bank" or
"St. Paul Federal"), Annuity Network, Inc. and St. Paul Financial Development
Corporation. The financial statements of St. Paul Federal include the accounts
of its subsidiaries. Certain prior year amounts have been reclassified to
conform to the 1994 presentation.
3. At June 30, 1994 the Bank had outstanding commitments to originate 1-4
family, real estate loans of $98.5 million. Of these commitments, $91.7
million were for adjustable-rate loans and $6.8 million were for fixed-rate
loans. Most of these commitments expire after sixty days. In addition, the
Bank had outstanding commitments to originate $6.6 million of mortgage loans
secured by 5-35 family apartment buildings. Of these commitments, $4.3 million
were adjustable-rate loans and $2.3 million were fixed-rate loans. Unused home
equity lines of credit totaled $39.3 million as of June 30, 1994. The Bank
anticipates funding origination with excess liquidity and borrowings.
At June 30, 1994 the Bank held commitments to sell $4.5 million of fixed-rate,
1-4 family real estate loans. Market value losses, if any, related to these
commitments have been reflected in the consolidated financial statements.
4. On February 23, 1993, the Company acquired ("the Acquisition") Elm
Financial Services, Inc. ("Elm Financial"). The following schedule details the
net effect during the first half of 1993 of the Acquisition on cash and cash
equivalents:
<TABLE>
<CAPTION>
=================================================
<S> <C>
Purchase price $48,194
Less: issuance of St. Paul stock 19,766
Less: Elm stock acquired in 1992 1,771
-------------------------------------------------
Cash paid for Acquisition 26,657
Cash and cash equivalents acquired 11,002
-------------------------------------------------
Acquisition of Elm Financial, net of
cash and cash equivalents acquired $15,655
=================================================
</TABLE>
7
<PAGE> 8
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. As of January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan". Loans accounted for under SFAS No. 114 include multi-family and
commercial real estate loans. SFAS No. 114 requires that impaired loans be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate. As a practical expedient, impairment may
be measured based on the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the impairment
should be recorded through a specific valuation allowance ("SVA"). Also, SFAS
No. 114 provides guidance on the classification of loans as real estate ("REO")
in-substance foreclosed.
The adoption of SFAS No. 114 had no impact on the Consolidated Statement of
Income or the Consolidated Statement of Financial Condition since loans
considered to be impaired under SFAS No. 114 were previously valued at the fair
value of the collateral and all of the Company's REO in-substance at December
31, 1993 continue to be classified as REO in-substance under SFAS No. 114.
The following schedule presents activity for impaired loans during the six
months ended June 30, 1994, which is comprised primarily of multi-family
loans:
<TABLE>
<CAPTION>
Impaired Loan Activity
- - -------------------------------------------------------------------------------------------------------------------------------
Eliminations
------------------------------------------------------
Balance New Transfer Improvement Balance
1/1/94 Impairments to REO Charge-offs in Valuation Repayments 6/30/94
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Performing loans $35,645,731 $12,253,277 $0 $(3,664,123) $(18,830,270) $(1,407,614) $23,997,001
Non-performing loans 5,787,282 21,173,659 (14,868,816) (2,705,308) (968,091) 602 8,419,328
-----------------------------------------------------------------------------------------------
Total impaired loans $41,433,013 $33,426,936 $(14,868,816) $(6,369,431) $(19,798,361) $(1,407,012) $32,416,329
===============================================================================================
</TABLE>
The following schedule provides a rollforward of SVA on impaired loans (see
schedule above) during the first six months of 1994. SVA represent the amount
of impairment on impaired loans.
<TABLE>
<CAPTION>
SVA Activity
-----------------------------------------------------------------
Balance Decreases Improvements Balance
1/1/94 in Value in Value Charge-offs 6/30/94
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Performing loans $4,551,018 $3,387,969 $(1,039,411) $(3,664,123) $3,235,453
Non-performing loans 487,282 2,566,182 (140,165) (2,705,308) 207,991
-----------------------------------------------------------------
Total impaired loans $5,038,300 $5,954,151 $(1,179,576) $(6,369,431) $3,443,444
=================================================================
</TABLE>
8
<PAGE> 9
The following table provides activity in the accumulated provision for loan
losses:
<TABLE>
<CAPTION>
Real Estate Consumer Total
Dollars in thousands loans loans loans
- - --------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1991 $44,743 $1,421 $46,164
Provision for losses 9,425 1,200 10,625
Charge offs (7,545) (695) (8,240)
Recoveries 127 5 132
Transfers 769 (769) ---
- - --------------------------------------------------------------------------
Balance at December 31, 1992 $47,519 $1,162 $48,681
Provision for losses 10,250 500 10,750
Acquired from Elm 929 --- 929
Charge offs (14,050) (306) (14,356)
Recoveries 521 49 570
Transfers 813 (813) ---
- - --------------------------------------------------------------------------
Balance at December 31, 1993 $45,982 $ 592 $46,574
Provision for losses 2,630 70 2,700
Charge offs (7,687) (56) (7,743)
Recoveries 146 30 176
Transfers (301) 301 ---
- - --------------------------------------------------------------------------
Balance at June 30, 1994 $40,770 $ 937 $41,707
=========================================================================
</TABLE>
6. The Board of Directors of the Company has adopted an employee stock
ownership plan ("ESOP") designed to invest in the common stock of the Company
for the benefit of employees of the Company. All employees who have completed
at least one year of credited service at the Bank are eligible to participate
in the ESOP. The ESOP is subject to the Employee Retirement Income Security
Act of 1974 and is intended to constitute a qualified stock bonus plan for
income tax purposes.
The ESOP is authorized to borrow money to finance the acquisition of Company
common stock and to pledge the stock acquired to secure payment of the loan.
The Bank does not provide financing for the ESOP. During 1987, the ESOP
borrowed $5.0 million to purchase 750,000 shares of Company common stock. This
loan has been repaid in full during 1994. During 1991, the ESOP obtained a
$5.0 million line of credit, which was increased to $18.0 million in 1993.
This line of credit was used to purchase 286,400 shares of Company common stock
during 1992 and 1993, and as of June 30, 1994, $3.9 million of this line of
credit is outstanding. Outstanding ESOP borrowings are guaranteed by the
Company and are included in other borrowings in the Consolidated Statements of
Financial Condition.
St. Paul Bancorp stock that is acquired with borrowed funds is held by the ESOP
trustee as collateral for the related borrowings. As the loans are repaid,
shares held as collateral are released. The ESOP loan is being repaid from
Bank contributions and dividends received on St. Paul Bancorp stock held by the
ESOP. Payment of the ESOP loan is guaranteed by the Company. The Company also
has pledged $1.0 million in marketable-debt securities as additional collateral
for the ESOP loan.
Contributions to the ESOP are made at the sole discretion of the Board of
Directors, but may not exceed 15% of the aggregate compensation of all
participants. Since the inception of the ESOP, contributions have been
sufficient to service the ESOP debt and, in certain years, have allowed the
ESOP to acquire additional shares of St. Paul Bancorp stock.
9
<PAGE> 10
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Beginning January 1, 1994, the Company prospectively adopted the American
Institute of Certified Public Accountants ("AICPA") Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans." SOP 93-6 requires
the recognition of compensation expense for ESOP shares acquired after 1992 and
not committed to be released before the beginning of 1994, be measured based on
the fair value of those shares when committed to be released to employees,
rather than based on their original cost.
As of June 30, 1994, the ESOP had 196,350 shares acquired after January 1, 1993
that are committed to be released beginning in 1996. The adoption of SOP 93-6
had no impact on net income for the three- and six-month periods ending June
30, 1994. The effect of SOP 93-6 on net income in 1996 and beyond is not
determinable since it is based on future prices of St. Paul Bancorp stock.
Under SOP 93-6 the average number of ESOP shares considered outstanding for
earnings per share purposes during the second quarter of 1994 and the six-month
period ending June 30, 1994 was 196,350 lower than for 1993 because unallocated
shares are excluded from the calculation. The effect of excluding these shares
from the earnings per share computation was to increase earnings per share by
less than $0.01 for the three- and six-month periods ending June 30, 1994.
Also, under SOP 93-6, $15,000 of dividends during the second quarter of 1994
and $29,000 of dividends during the six-month period ending June 30, 1994 on
the 196,350 unearned ESOP shares were reported as a reduction of accrued
interest on the ESOP borrowings rather than as a reduction of retained
earnings.
Contributions to the ESOP recorded as compensation expense totaled $150,000,
$846,000, and $1.1 million during the six months ended June 30, 1994, the year
ended 1993 and the year ended 1992, respectively.
The following table summarizes shares of Company stock held by the ESOP:
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
---------------------------------------------------------------
<S> <C> <C>
Shares allocated to participants 683,445 710,670
Unallocated shares: 339,999
Grandfathered under SOP 93-6 143,649 N/A
Unearned ESOP shares 196,350 N/A
---------------------------------------------------------------
Total 1,023,444 1,050,669
Fair value of unearned ESOP shares $4,344,244 $ N/A
===============================================================
</TABLE>
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
St. Paul Bancorp, Inc. ("St. Paul Bancorp" or the "Company") is the
holding company for St. Paul Federal Bank For Savings (the "Bank"), the largest
independent savings institution headquartered in Illinois. The Company is
headquartered in Chicago, Illinois and its principal business currently consists
of the operations of its wholly-owned subsidiary, the Bank. The Company also
owns and operates two other subsidiaries, Annuity Network, Inc., ("Annuity
Network") which sells annuity products and St. Paul Financial Development
Corporation ("St. Paul Financial"), which primarily engages in single family
real estate development in the Chicago metropolitan area.
The Bank is a consumer-oriented retail financial institution, operating
52 full service banking offices throughout the Chicago metropolitan area. Of
these banking offices, 17 are located within large chain grocery superstores
which provide the Bank access to an expanded retail customer base. The Bank
uses its banking offices to attract retail deposits and originate loans in
neighborhoods of the Chicago metropolitan area with favorable savings patterns
and high levels of home ownership. Deposit accounts in the Bank are insured by
the Federal Deposit Insurance Corporation ("FDIC").
Generally, the Bank reinvests funds obtained from its retail banking
facilities in loans secured by mortgages on real estate, securities, and to a
lesser extent, consumer and commercial real estate loans. The Bank focuses most
of its current lending activities on the origination and purchase of various
mortgage products secured by 1-4 family residential properties. The Bank
utilizes a correspondent loan program to originate 1-4 family mortgages outside
the Chicago metropolitan area, primarily in the states of Illinois, Wisconsin,
Indiana, Michigan, and Ohio.
The Bank also offers mortgage loans to qualifying borrowers to finance
apartment buildings with up to 35 units located in the Chicago metropolitan
area. Beginning in the third quarter of 1994, the Bank expanded this
origination program to include loans secured by up to 120 unit apartment
buildings. The Bank
11
<PAGE> 12
also originates mortgage loans to facilitate the sale of multi-family, and
occasionally, commercial real estate owned by the Bank. Prior to 1990, the
Bank originated, on a nationwide basis (primarily in California), loans secured
by multi-family real estate and to a lesser extent, loans secured by commercial
real estate. At June 30, 1994, $985.0 million or 24.7% of total assets were
comprised of loans secured by multi-family real estate properties, of which
$583.1 million or 14.6% of total assets represents multi-family loans secured
by real estate located in California. Also, $64.5 million or 1.6% of the
Company's total assets at June 30, 1994 included loans secured by commercial
real estate, other than multi-family. Periodically, the Bank will also
repurchase multi-family loans sold with recourse.
A variety of consumer loan products, including home equity loans,
secured lines of credit, education, auto and credit card loans1 are offered
through the retail banking offices. The Bank also invests in mortgage-backed
securities ("MBS"), government and other investment-grade, liquid securities.
Management's focus on retail operations includes significant
diversification of income sources beyond net interest income. The Bank services
approximately 157,000 checking accounts, which generate significant fee income.
The Bank engages in mortgage-banking activities and operates 173 automated
teller machines ("ATMs") throughout the Chicago metropolitan area. Through
subsidiaries (Investment Network, Inc. and St. Paul Service, Inc.), the Bank
offers discount brokerage services and a full line of insurance products in its
banking offices.
Earnings of the Bank are susceptible to interest rate risk to the extent
that the Bank's funding (i.e., deposits and borrowings) reprices on a different
basis and in different periods than its securities and loans. The Bank tries to
structure its balance sheet to reduce its exposure to interest rate risk and to
maximize its return on equity, commensurate with risk levels that do not
jeopardize the financial safety and soundness of the institution. See
"LIQUIDITY" for further discussion.
The Bank's earnings are also affected by changes in real estate market
- - ---------------
1 The credit card product is offered by the Bank through an agency
agreement with another lender.
12
<PAGE> 13
values. As changes in the forces of supply and demand for real estate,
economic conditions of real estate markets and interest rates occur, the risk
of actual losses in the Bank's loan portfolio will change. See "CREDIT" for
further details.
CAPITAL
Holding Company. Stockholders' equity of the Company was $352.0 million
at June 30, 1994 or 9.24% of average assets during the first six months of
1994. In comparison, stockholders' equity at December 31, 1993 was $347.3
million or 9.27% of average assets for the year ended December 31, 1993. The
$4.7 million growth in stockholders' equity during the six months ended June 30,
1994 primarily resulted from $16.8 million of net income, partly offset by $5.7
million of unrealized losses on available-for-sale securities, primarily
associated with an increase in market interest rates during 1994, the
acquisition of $4.9 million of the Company's common stock under a stock
repurchase program, and the payment of $2.9 million of dividends. Under SFAS
No. 115 "Accounting for Certain Investments in Debt and Equity Securities",
which the Company adopted in 1993, adjustments to the market value of
available-for-sale securities are recorded directly to stockholders' equity and
are not recorded on the Consolidated Statements of Income until the securities
are sold. See "CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY" for further
analysis.
During the first six months of 1994, the Company acquired 275,950 shares
of its outstanding common stock (or approximately 1.4% of shares outstanding)
under its stock repurchase program announced in January of 1994. In July of
1994, the Company announced that it intends to continue the stock repurchase
program by purchasing up to an additional 5% (or approximately 964,000 shares)
of its outstanding common stock. These shares will be acquired during the
second half of 1994 through open market and privately-negotiated transactions.
Management's primary objective in reacquiring the shares is to increase return
on equity and earnings per share for those shares of the Company's stock that
will remain outstanding.
Bank. Office of Thrift Supervision ("OTS") regulatory capital
requirements for federally-insured institutions such as the Bank include minimum
ratios of
13
<PAGE> 14
core and tangible capital to adjusted total assets of 3.0% and 1.5%,
respectively. Savings institutions also are required to maintain a ratio of
total regulatory capital to risk-weighted assets of 8.0%. Total regulatory
capital for purposes of the risk-based capital requirements consists of core
capital and supplementary capital (to the extent supplementary capital does not
exceed core capital). Supplementary capital includes such items as general
valuation allowances ("GVAs") on loans receivable, subject to certain
limitations.
During 1994, the Bank continued to exceed the core, tangible, and
risk-based capital requirements by wide margins. The following table presents
the Bank's regulatory capital position as of June 30, 1994 and December 31,
1993:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------
- - -----------------------------------------------------------------------
JUNE 30, 1994
- - -----------------------------------------------------------------------
Dollars in Core Tangible Risk-Based
Thousands Capital Capital Capital
- - -----------------------------------------------------------------------
<S> <C> <C> <C>
Actual percentage 8.71% 8.71% 16.86%
Required percentage 3.00 1.50 8.00
- - -----------------------------------------------------------------------
Excess percentage 5.71% 7.21% 8.86%
- - -----------------------------------------------------------------------
- - -----------------------------------------------------------------------
Actual capital $342,605 $342,605 $370,183
Required capital 117,947 58,974 175,673
- - -----------------------------------------------------------------------
Excess capital $224,658 $283,631 $194,510
- - -----------------------------------------------------------------------
- - -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
- - -----------------------------------------------------------------------
<S> <C> <C> <C>
Dollars in Core Tangible Risk-Based
Thousands Capital Capital Capital
- - -----------------------------------------------------------------------
Actual percentage 9.50% 9.50% 16.67%
Required percentage 3.00 1.50 8.00
- - -----------------------------------------------------------------------
Excess percentage 6.50% 8.00% 8.67%
- - -----------------------------------------------------------------------
- - -----------------------------------------------------------------------
Actual capital $347,989 $347,989 $376,355
Required capital 109,875 54,938 180,490
- - -----------------------------------------------------------------------
Excess capital $238,114 $293,051 $195,964
- - -----------------------------------------------------------------------
- - -----------------------------------------------------------------------
</TABLE>
The following schedule reconciles stockholders' equity of the Company to
each of the components of regulatory capital of the Bank at June 30, 1994:
14
<PAGE> 15
<TABLE>
<CAPTION>
June 30,
Dollars in thousands 1994
- - -----------------------------------------------------------------------
<S> <C>
Stockholders' equity of the Company $352,007
Plus: borrowings by ESOP and unearned
ESOP shares 3,883
Less: capitalization of Company (10,500)
- - -----------------------------------------------------------------------
Shareholder's equity of the Bank 345,390
Less: investments in non-includable
subsidiaries2 (873)
Less: intangible assets (1,912)
- - -----------------------------------------------------------------------
Tangible and core capital 342,605
Plus: allowable GVAs 27,578
- - -----------------------------------------------------------------------
Risk-based capital $ 370,183
- - -----------------------------------------------------------------------
- - -----------------------------------------------------------------------
</TABLE>
During the first six months of 1994, the Bank's core and tangible
capital ratios were reduced 79 basis points by the payment of $17.1 million in
dividends to St. Paul Bancorp and the recognition of $5.7 million of unrealized
losses on available-for-sale securities. The reduction in the core and
tangible capital ratios associated with these items was partly offset by the
Bank's net income which totaled $16.8 million during the first half of 1994. In
contrast, the Bank's risk-based capital ratio improved 19 basis points during
the first six months of 1994. The implementation of the OTS' revised
regulations on the risk-weighting of certain multi-family loans in the 50%
category allowed the Bank's risk-based capital ratio to improve, despite the
decline in total regulatory capital.
The OTS has issued notice of a proposed regulation that would require
all but the most highly rated savings institutions to maintain a ratio of core
capital to total assets of between 4% and 5%. If the Bank were required to meet
a 4% core capital ratio as of June 30, 1994, its excess core capital would have
been $185.4 million versus $224.7 million under current requirements.
In 1993, the OTS issued a regulation which adds an interest rate risk
component to the risk-based capital requirement for "excess interest rate
risk." Under the new regulation, an institution is considered to have excess
interest
- - ------------------
2 As of June 30, 1994, the Bank had an additional $429,000 invested in
non-includable subsidiaries which will be fully phased-out of
tangible, core, and risk-based capital beginning in the third quarter of 1994.
St. Paul Service, Inc. and EFS San Diego (acquired from Elm Financial) are
treated as non-includable subsidiaries for purposes of the regulatory capital
computation.
15
<PAGE> 16
rate risk if, based upon a 200-basis point change in market interest
rates, the market value of an institution's capital changes by more than 2%.
In this situation, the percent change in the market value of capital in excess
of 2% is added to the institution's risk-based capital requirement. The new
regulation became effective on January 1, 1994.
At June 30, 1994, the Bank does not have "excess interest rate risk" as
defined in the OTS regulation and currently is not subject to an additional
risk-based capital requirement. Had the Bank been subject to a higher
risk-based capital requirement, its excess risk-based capital (which totaled
8.86% or $194.5 million at June 30, 1994) would have been reduced.
Under the Federal Deposit Insurance Corporation Improvement Act, the OTS
is required to publish regulations to ensure that its risk-based capital
standards take adequate account of concentration of credit risk, risk from
non-traditional activities, and actual performance and expected risk of loss on
multi-family mortgages. Although final rules have not been promulgated by the
OTS, current proposed rules would allow the regulators to impose, on a case by
case basis, an additional capital requirement above the current requirements
where an institution has significant concentration of credit risk or risks from
non-traditional activities.
Capital requirements higher than the generally applicable minimum
requirements may be established for a particular savings institution if the OTS
determines that the institution's capital was or may become inadequate in view
of its particular circumstances. Individual minimum capital requirements may be
appropriate where the savings institution is receiving special supervisory
attention, has a high degree of exposure to interest rate risk, or poses other
safety or soundness concerns. No such requirements have been established for
the Bank.
At June 30, 1994, the Bank is considered "well capitalized" under the
OTS' prompt corrective action regulations based upon ratios of Tier 1 leverage
capital, Tier 1 risk-based capital and total risk-based capital of 8.71%,
15.53%, and 16.86%, respectively.
16
<PAGE> 17
KEY CREDIT STATISTICS
<TABLE>
<CAPTION>
June 30, 1994 December 31, 1993 December 31, 1992
Dollars in thousands Dollar % Dollar % Dollar %
- - ----------------------------------------------------------------------------------------------
LOAN PORTFOLIO BY PRODUCT
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate dependent loans:
1-4 family $1,313,119 54.8% $1,187,210 50.5% $1,085,679 46.7%
5-35 unit multi-family 32,616 1.4 38,460 1.6 46,771 2.0
> 35 unit multi-family 955,081 39.9 1,026,007 43.6 1,097,281 47.1
Commercial real estate 64,474 2.7 73,094 3.1 66,812 2.9
Land 7,139 0.3 10,307 0.4 3,126 0.1
- - ----------------------------------------------------------------------------------------------
Total real estate dependent loans
loans 2,372,429 99.1 2,335,078 99.2 2,299,669 98.8
Consumer loans 21,609 .9 19,572 0.8 27,517 1.2
- - ----------------------------------------------------------------------------------------------
Total loans $2,394,038 100.0% $2,354,650 100.0% $2,327,186 100.0%
- - ----------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------
NON-PERFORMING ASSETS
- - ----------------------------------------------------------------------------------------------
Real estate dependent loans:
1-4 family $ 7,072 18.1% $ 11,202 22.6% $ 12,759 26.4%
5-35 unit multi-family 2,924 7.5 1,970 4.0 1,994 4.1
> 35 unit multi-family 8,214 21.0 10,938 22.1 13,565 28.0
Commercial real estate 146 .4 2,597 5.2 --- --
Land 206 .5 2,406 4.9 --- --
- - ----------------------------------------------------------------------------------------------
Subtotal 18,562 47.5 29,113 58.8 28,318 58.5
Consumer loans 476 1.2 555 1.1 1,041 2.2
Real estate owned:
1-4 family 4,351 11.1% 4,925 9.9% 2,776 5.7%
5-35 unit multi-family --- -- --- -- 750 1.5
> 35 unit multi-family 11,395 27.2 14,998 30.2 14,133 29.2
Commercial real estate 2,108 5.4 --- -- 1,390 2.9
Land 2,200 5.6 --- -- --- --
- - ----------------------------------------------------------------------------------------------
Subtotal 20,054 51.3 19,923 40.1 19,049 39.3
- - ----------------------------------------------------------------------------------------------
Total non-performing assets $ 39,092 100.0% $ 49,591 100.0% $ 48,408 100.0%
- - ----------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1994 1993 1992
- - ----------------------------------------------------------------------------------------------
KEY CREDIT RATIOS
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net charge-offs to average loans receivable
and foreclosed real estate 0.67% 0.69% 0.41%
Net California charge-offs to average California
loans receivable and foreclosed real estate 1.87 2.01 0.32
Loan loss reserve to total loans 1.74 1.98 2.10
Loan loss reserve to non-performing loans 219.07 156.99 165.81
Non-performing assets to total assets 0.98 1.34 1.38
General valuation allowance to non-
performing assets 99.89 85.41 97.30
General valuation allowance to impaired
loans, net of SVA 134.78 N/A N/A
- - ---------------------------------------------------------------------------------------------
</TABLE>
N/A Not applicable
17
<PAGE> 18
CREDIT
Since savings institutions are required by law to invest primarily in
loans secured by mortgages on real estate, the Bank's asset values and earnings
are exposed to risk associated with changes in real estate market values.
Generally, real estate market values are specific to local real estate markets
and are based on the forces of supply and demand for real estate, the economic
conditions of the local real estate market, and interest rates. As changes in
real estate markets occur, the risk of actual losses in the Bank's loan
portfolio will change.
At June 30, 1994, the loans receivable portfolio was primarily comprised
of mortgages on 1-4 family residences and multi-family dwellings. The loan
portfolio also included, but to a lesser extent, commercial real estate loans,
land loans and consumer loans. See "KEY CREDIT STATISTICS" for further details.
The Bank reports 1-4 family and consumer loans as non-performing when
they become 90 days or more delinquent and multi-family and commercial real
estate loans when they become 60 days or more delinquent. Certain other loans
are also placed on a non-accrual status in accordance with the Bank's accounting
policy. The Bank also monitors the credit quality of its privately-issued MBS.
Generally, MBS are sold in the secondary market when the security is down-graded
below an investment grade.
At June 30, 1994, non-performing loans totaled $19.0 million 3 compared
to $29.7 million at December 31, 1993. Contributing to the $10.7 million
decline in non-performing loans were: 1) the transfer of $10.3 million of
delinquent loans to REO; 2) $4.6 million in charge-offs; and 3) a $4.2 million
or 35.8% reduction in delinquent 1-4 family loans. The addition of $8.4
million of delinquent loans to a non-performing status partly offset these
improvements.
The following are descriptions of individual non-performing loans at
June 30, 1994 in which the Bank's net investment exceeds $2.0 million:
- - ----------------
3 Of the $19.0 million of non-performing loans at June 30,
1994, $6.9 million were secured by real estate located in California.
18
<PAGE> 19
* A $3.2 million first mortgage loan (240 days delinquent)
secured by a 128 unit apartment building located in Madison, Wisconsin.
The property was removed from bankruptcy during the first quarter of
1994 and the Bank is negotiating with the borrower to bring the loan
current.
* A $3.0 million first mortgage loan (240 days delinquent)
secured by a 100 unit apartment building located in Colton, California.
The property was removed from bankruptcy during the second quarter of
1994 and the Bank anticipates completing foreclosure during the third
quarter of 1994.
* A $2.0 million first mortgage loan (150 days delinquent)
secured by a 16 unit apartment building located in Chicago, Illinois.
The property is currently in bankruptcy and remitting cash flow payments
to the Bank in accordance with the bankruptcy agreement.
* A $2.0 million first mortgage loan (90 days delinquent)
secured by a 98 unit apartment building located in Fontana, California.
The Bank is currently negotiating a payoff with the second lien holder.
If no agreement is reached with the second lien holder, the Bank
anticipates completing foreclosure during the third quarter of 1994.
As of January 1, 1994, the Company adopted SFAS No. 114. See "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS" for listing of impaired loans and related
SVA.
The following tables summarize the components of classified and
substandard assets at June 30, 1994 and December 31, 1993 (dollars in
thousands):
<TABLE>
<CAPTION>
Classified Assets
-----------------
June 30, December 31,
1994 1993
------------ ------------
<S> <C> <C>
Substandard $ 216,810 $ 244,949
Doubtful 2,611 3,955
Loss4 4,559 6,058
------------ ------------
Total $ 223,980 $ 254,962
============ ============
</TABLE>
- - ---------------
4 Assets classified "loss" represent impaired amounts
under SFAS No. 114. Assets classified as loss are provided for through a
specific valuation allowance. These specific valuation allowances have
not been deducted in this schedule. See "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS" for further details.
19
<PAGE> 20
<TABLE>
<CAPTION>
Substandard Assets
------------------
June 30, December 31,
1994 1993
---------------- ----------------
<S> <C> <C> <C> <C>
Non-performing assets:
REO $ 20,054 9.25% $ 11,884 4.85%
REO "in-substance" --- -- 8,039 3.28
Delinquent/nonaccrual
loans 19,038 8.78 29,668 12.11
------ ------- ------ -----
39,092 18.03 49,591 20.24
Loans delinquent 30-59 days
In portfolio --- -- 16,812 6.86
Sold with recourse --- -- 1,766 0.72
------ ------ ------ -----
Subtotal --- -- 18,578 7.58
Loans current and performing:
In portfolio 157,432 72.61 153,540 62.68
Sold with recourse 20,286 9.36 23,240 9.49
------- ----- ------- -----
Subtotal 177,718 81.97 176,780 72.17
------- ----- ------- -----
Total substandard assets $216,810 100.00% $244,949 100.00%
Less: substandard loans
sold with recourse5 20,286 25,006
------- -------
Substandard assets
in portfolio $196,524 $219,943
======== ========
Percent of Total Assets 4.94% 5.94%
======= =======
</TABLE>
Of the $224.0 million of total classified assets at June 30, 1994,
$201.5 million or 90.0% represented multi-family or commercial real estate
assets, of which $131.1 million (or 58.5% of total classified assets) consisted
of California multi-family or commercial real estate assets. Of the $216.8
million of substandard assets, $177.7 million or 82.0% were current and
performing in accordance with the mortgage notes but were deemed classified
pursuant to the Bank's credit rating system.
In comparison, at December 31, 1993, $228.4 million or 89.6% of the
total classified assets represented multi-family or commercial real estate
assets, of which $153.3 million (or 60.1% of total classified assets) consisted
of California multi-family or commercial real estate assets. Of the $244.9
million
- - -------------
5 At June 30, 1994, total loans sold with recourse was
$109.9 million with a maximum remaining loss exposure under these agreements of
$27.9 million. At December 31, 1993, total loans sold with recourse was
$214.8 million with a maximum remaining loss exposure under these agreements
of $39.2 million.
20
<PAGE> 21
of substandard assets at December 31, 1993, $176.8 million or 72.2% were
current and performing in accordance with the mortgage notes but were deemed
classified pursuant to the Bank's credit rating system.
The accumulated provision for loan losses at June 30, 1994 was $41.7
million compared to $46.6 million at December 31, 1993, a decrease of $4.9
million. See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for further detail.
On a quarterly basis, the Loan Loss Reserve Committee of the Board of Directors
("Reserve Committee") reviews the adequacy of the accumulated provision for loan
losses and the current loss provision after evaluating the results of the loan
loss reserve methodology. The Reserve Committee reviews the various risk
elements of credit which are inherent in each of the portfolios, including loans
sold with recourse. The risk components which are evaluated include the results
of individual credit reviews, the level of non-performing and classified assets,
geographic concentrations of credit, national economic conditions, trends in
real estate values, the impact of changing interest rates on principal
amortization and borrower debt service coverage6, as well as historical loss
experience, peer group comparisons, and the regulatory guidance issued by the
OTS and other regulatory bodies.
The loan loss provision recorded during the six months ended June 30,
1994 was $2.7 million compared to $6.8 million during the six months ended June
30, 1993. The lower provision recorded during 1994 generally reflects a
reduction in classified loans, lower non-performing assets, and a lower
multi-family portfolio balance. See "KEY CREDIT STATISTICS" and "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS" for further details. The 1994 loan loss
provision was not affected by the January 17, 1994 Southern California
earthquake. Moreover, unlike many institutions, it was not necessary for the
Bank to provide any payment or debt service relief to its borrowers in
connection with the California earthquake.
The loan loss provision recorded during the first six-months of 1994
- - ---------------
6 Because the majority of multi-family and commercial real
estate loans are currently at their interest rate floors, increases in
interest rates up to the loan floors will have no impact on the required
loan payments, which mitigates some of the credit risk attendant to a moderate
rise in interest rates.
21
<PAGE> 22
maintains the accumulated provision for loan losses at levels considered
prudent by the Reserve committee. Based on analysis of available information,
the Reserve Committee believes that the loan loss reserve methodology results
in accumulated provisions for loan losses which are adequate in view of the
risks inherent in the loan portfolio. The federal regulators have the
authority to order the Bank to establish additional reserves if they disagree
with the Reserve Committee's assessment of the adequacy of the accumulated
provision for loan losses.
The Company adopted SFAS No. 114 effective January 1, 1994. SFAS No.
114 requires impaired loans, that are within the scope of the statement, to be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral, if the loan is
collateral-dependent. The shortfall between the impaired loan's net carrying
amount and its computed value shall be provided for by creating a valuation
allowance (or by adjusting an existing valuation allowance), with a
corresponding charge to bad-debt expense. Because the Company previously
carried those loans considered "impaired" under SFAS No. 114 at the fair value
of the underlying collateral, the adoption of the new rules had no impact on the
Company's provision for loan losses. The Bank's accumulated provision for loan
losses account includes the valuation allowance required under SFAS No. 114;
the Bank refers to these reserves as the "specific valuation allowances". See
"NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for further details.
The Company recorded $8.0 million in net loan and REO charge-offs during
the first six-months of 1994, equivalent to 0.67% of the average loans and REO
on an annualized basis. In comparison, the Company's net charge-offs in 1993
and 1992 were equivalent to 0.69% and 0.41% of average loans and REO,
respectively. See "KEY CREDIT STATISTICS" and "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS" for further details.
Comprising the Bank's $8.0 million of net loan and REO charge-offs in
the first half of 1994 were $6.4 million of charge-offs on impaired loans,
$821,000 of early prepayment inducements on California real estate loans,
$799,000 of losses recorded in connection with foreclosure, $400,000 associated
with REO
22
<PAGE> 23
sales, and $255,000 of charge-offs on 1-4 family and consumer loans not
accounted for under SFAS No. 114.
OTHER REAL ESTATE OWNED ("REO")
REO totaled $20.1 million 7 at June 30, 1994 compared to $19.9 million
at the end of 1993. During the first six months of 1994, six loans (secured by
both multi-family commercial real estate) totaling $11.7 million were
transferred to REO while five multi-family REOs assets totaling $9.0 million
were sold.
The following is a description of individual real estate REO assets in
excess of $1.0 million at June 30, 1994:
* A $5.5 million, 435 unit apartment building located in Kent,
Washington. The Bank's carrying amount for this property is net of
ownership interests that were sold without recourse to other
institutions. The Bank has begun to make disbursements for capital
improvements to the properties which may total $2.5 million in the
aggregate. The Bank will be reimbursed for 30.53% of these
disbursements made on this property by the investing participants. After
improvements have been completed, the Bank will market the property. As
of June 1994, the building is 17% occupied at an average rent per unit
of $425.
* A $4.4 million, 176 unit apartment building located in
Riverside, California. Management is actively marketing this property.
As of June 1994, the building is 69% occupied at an average rent per
unit of $517.
* A $2.2 million, 9.6 acre parcel of land, located in Downers
Grove, Illinois. This asset will be sold by the Bank to St. Paul
Financial Development in the third quarter of 1994 and will be held for
investment and future development.
* A $2.1 million, commercial real estate building (35,000
square feet) located in Freeport, Illinois. Management is currently
marketing the property. As of June 1994, the building is fully occupied
at an average rent per square foot of $10.70.
* A $1.4 million, 77 unit apartment building located in
Sacramento, California. Bank Management has an interested buyer and
believes that this asset will be sold during the third quarter of 1994.
As of June 1994, the building is 77% occupied at an average rent per
unit of $370.
The accumulated provision for real estate losses totaled $1.5 million at
- - ---------------
7 Of the $20.1 million of REO at June 30, 1994, $5.8 million were
multi-family properties located in California.
23
<PAGE> 24
June 30, 1994 compared to $819,000 at December 31, 1993. In accordance with
the Company's accounting policy, REO assets are initially recorded at the lower
of their net book value or fair value, less estimated selling costs. The
accumulated provision for loan losses is charged for any excess of net book
value over fair value at the foreclosure, or in-substance foreclosure, date.
Subsequent to foreclosure, the accumulated provision for foreclosed real estate
losses is used to establish SVA on individual REO properties as declines in
market value occur and to provide general valuation allowances for possible
losses associated with risks inherent in the REO portfolio.
LIQUIDITY
Cash and cash equivalents (i.e., amounts due from depository
institutions, federal funds sold, and marketable-debt securities with original
maturities of less than 90 days) were dramatically reduced during the first six
months of 1994. At June 30, 1994, cash and cash equivalents totaled $135.5
million, or $200.8 million lower than cash and cash equivalents at December 31,
1993 of $336.3 million.
During the six months ended June 30, 1994, the Bank acquired $396.4
million of adjustable-rate and $25.6 million of fixed-rate MBS with cash and
cash equivalents. Liquidity was also used during the current year to fund $33.8
million of net deposit outflows and $42.3 million of net loan growth. At June
30, 1994, the Bank had $46.9 million of FHLB advances and $50.0 million of
borrowings under repurchase agreements outstanding to provide liquidity for
general retail operations.
Average cash and cash equivalents were $247.1 million during the first
six months of 1994, compared to average cash and cash equivalents of $332.1
million during the first six months of 1993. Since most of the reduction in
liquidity occurred during March and April of 1994, average cash and cash
equivalent balances were not reduced as dramatically as the period end balances.
As interest rates began to rise in early 1994, Management implemented an
aggressive strategy to build its earning asset base. This strategy
significantly affected the Bank's liquidity as well as the sources and uses of
funds during the first six months of 1994.
24
<PAGE> 25
As mentioned above, Management's strategy included the use of $421.9
million of liquidity to acquire MBS. These MBS purchases were executed in an
effort to enhance investment earnings; generally, MBS earn higher yields than
federal funds and short-term marketable-debt securities. Also, $40.0 million of
adjustable-rate and $170.0 million of fixed-rate MBS were acquired with proceeds
from matched FHLB advances8. These purchases are expected to improve net
interest income by approximately $1.5 million in 1994. Generally, the Bank's
policy requires a 1% spread or better when acquiring assets with borrowings.
Further, Management has set as its goal in 1994 the origination of $1.0
billion in residential loans. In order to achieve this goal, the Bank revised
its pricing of adjustable-rate loan products and stepped up its loan origination
sales effort. These changes, combined with increased consumer preference for
adjustable-rate mortgages ("ARMs") in the rising interest rate environment,
allowed the Bank to originate $330.2 million9 of loans for its loan receivable
portfolio in 1994. A slowdown in mortgage loan refinancing activity relative to
the latter half of 1993 complemented Management's loan origination strategy and
contributed to the net growth in the loans receivable portfolio in 1994.10
The Bank's heavy reliance on adjustable-rate securities and mortgage
loans receivable provides significant interest rate risk protection against
further rises in market interest rates. However, interest rate floors in effect
on $770.6 million of adjustable-rate loans at June 30, 1994 may prevent rate
- - ---------------
8 To mitigate interest rate risk on the matched funding, the Bank has
entered into a $134.3 million notional amount interest rate exchange agreement
with a primary dealer. Under this agreement, the Bank pays a floating
interest rate, based upon a referenced index, and receives a fixed payment
from the counterparty. The Bank reduced its credit risk by obtaining an
unconditional guarantee from the parent company of the counterparty, which is
an "A1/A+" rated securities dealer. The interest rate exchange agreement is
scheduled to amortize based upon the same assumptions used in pricing the
acquired MBS. If actual MBS prepayments vary significantly from anticipated
prepayments, the Bank can adjust the transaction by acquiring additional assets
or exercising an option to repay a portion of the debt.
9 In addition, the Bank originated $37.2 million of loans for sale in the
secondary market.
10 Although loan repayments slowed relative to the latter half of 1994,
they did not decline as rapidly as Management expected. See "LIQUIDITY --
SOURCES OF FUNDS" for further details.
25
<PAGE> 26
sensitive assets from repricing upward as quickly as rate sensitive
liabilities, despite the Bank's positive one-year GAP of 12.92% at June 30,
1994.
See "CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)" for further
details.
Sources of Funds. The major sources of funds during the six month period ended
June 30, 1994 included $309.5 million of new borrowings, $279.0 million of
principal repayments on loans receivable, $126.0 million of principal
repayments on MBS, $70.2 million from the sale of marketable- debt securities,
and $57.7 million from the sale of loans receivable. In comparison, the major
sources of funds during the six month period in 1993 included $254.9 million of
principal repayments on loans, $122.0 million in maturities on marketable-debt
securities, $111.4 million of principal repayments on MBS, $49.0 million of
proceeds from the sale of loans receivable, and $33.4 million from the issuance
of subordinated notes.
As discussed above, the Bank borrowed $210.0 million of FHLB advances to
fund MBS purchases during 1994 and relied upon $49.6 million of FHLB advances
and $50.0 million of borrowings under agreements to repurchase to fund
additional loan disbursements and savings outflows. In comparison, in February
of 1993, St. Paul Bancorp issued $34.5 million of 8.25% subordinated debt. The
Company used a portion of the proceeds to acquire St. Paul Financial Development
from the Bank on June 30, 1993 and for general corporate purposes, such as
financing the operations of St. Paul Financial Development and financing
acquisitions of financial services companies.
Repayment of loans receivable and MBS were approximately the same during
the first six months of 1994 and 1993. However, principal repayments have
slowed considerably in the second quarter of 1994 compared to first quarter of
1994. Management believes this decline in repayment activity is associated with
higher market interest rates and may be indicative of lower loan repayment
trends for the second half of 1994.
Loan sales during the first six months of 1994 were $8.7 million higher
than 1993. A reduction in the loans held-for-sale inventory from $28.5 million
26
<PAGE> 27
at December 31, 1993 to $10.4 million at June 30, 1994 contributed to the higher
sales volume in 1994. The Bank anticipates a slow down in its loan sales volume
and gains on loan sales for the remainder of 1994. Commitments to originate
fixed-rate loans at June 30, 1994 total only $9.2 million. Also, the Bank has
experienced a curtailment in the conversion of ARMs to fixed-rate mortgages.
Historically, the sale of these "conversion" loans have generated significant
gains. Generally, the Bank's policy is to sell conforming, fixed-rate mortgage
loans in the secondary market.
In 1993, the Bank extended the maturities of its marketable-debt
securities in order to improve net interest income. As a result, only a nominal
amount of marketable-debt securities were scheduled to mature in 1994, requiring
the Bank to sell available-for-sale marketable-debt securities to meet liquidity
needs.
Uses of Funds. The major uses of funds during the six months ended June 30,
1994 included $632.0 million for the acquisition of MBS, $367.4 million of loan
originations, $51.6 million for the purchase of marketable-debt securities, and
$10.0 million in FHLB advance maturities. In comparison, the major uses of
funds during the same period in 1993 included $251.9 million of loan
originations, $90.8 million for the purchase of marketable-debt securities,
$79.6 million of MBS purchases, $45.4 million decrease in other borrowings,
$37.7 million FHLB advance maturities, and $26.7 million for the acquisition of
Elm Financial.
Management's strategy to build interest earning assets in 1994 caused
MBS purchases in the current year to far exceed those of 1993. See discussion
above for further details.
Loans receivable originations were close to 50% higher in 1994 compared
to 1993. The increase in loan originations resulted from greater consumer
acceptance of adjustable-rate mortgages which become even more attractive as
interest rates on long-term fixed-rate mortgages increase. An expanded
correspondent network, a more competitive pricing structure, along with stepped
up sales efforts at the Bank's 52 branches also contributed to the high level
of loan originations in the current year. See discussion above for further
details. See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for further details
of loan origination commitments.
27
<PAGE> 28
The growth in the MBS and loans receivable portfolio in 1994 limited the
level of funds available to purchase marketable-debt securities. As a result,
marketable-debt securities purchases in 1994 were below the level purchased in
1993.
Holding Company Liquidity. At June 30, 1994, St. Paul Bancorp had $28.6
million of cash and cash equivalents and $956,000 of marketable-debt
securities. A portion of St. Paul Bancorp's U.S. marketable-debt securities
continue to be used to collaterize borrowings of the ESOP.
Sources of liquidity for St. Paul Bancorp during 1994 included $17.1
million of dividends from the Bank and $700,000 of dividends from Annuity
Network, Inc. Uses of St. Paul Bancorp's liquidity during the first six months
of 1994 included $4.9 million to acquire St. Paul Bancorp common stock under the
stock repurchase program, $2.9 million of dividends paid to shareholders, $1.4
million paid to service the subordinated debt issued in February of 1993, and
$500,000 to finance the activities of St. Paul Financial Development. See
"CAPITAL" for further discussion.
In July of 1994, the Company announced its intentions to acquire up to
964,000 shares of its outstanding common stock during the second half of 1994
under a stock repurchase program. Also, the Company will provide $2.5 million
in debt and equity financing to St. Paul Financial Development during the third
quarter of 1994 to acquire and develop an REO property from the Bank. The
Company anticipates using liquidity to meet both of these funding needs. See
"CREDIT" for further details.
Regulatory Liquidity Requirements. Savings institutions are required to
maintain average daily balances of liquid assets equal to a specified
percentage of the institution's average net withdrawable deposits plus
short-term borrowings. Liquid assets include cash, certain time deposits,
federal funds sold, certain corporate debt securities, and securities of
specified United States government, state, or federal agency obligations. This
liquidity requirement may be changed from time to time by the Director of the
OTS to any amount within the range of 4% to 10% depending upon the economic
conditions and the deposit flows of savings institutions. At June 30, 1994,
the Bank had $212.8 million invested in liquid assets, which exceeded the
current regulatory liquidity requirement of 5% by $50.4 million.
28
<PAGE> 29
STATEMENT OF FINANCIAL CONDITION
St. Paul Bancorp reported total assets of $3.98 billion at June 30, 1994
compared to $3.71 billion at December 31, 1993, an increase of $276.7 million or
7.5%. Higher MBS balances of $481.4 and an increase in loans receivable of
$42.3 million contributed to the growth in total assets during the first half of
1994. These increases were partly offset by a $200.9 million reduction in cash
and cash equivalents and lower marketable-debt securities of $31.7 million.
Cash and cash equivalents totaled $135.5 million at June 30, 1994
compared to $336.3 million at December 31, 1993, a drop of $200.8 million or
59.7%. The Bank relied heavily on liquidity to acquire MBS, build the loans
receivable portfolio and fund deposit run-off. See "LIQUIDITY" for further
discussion.
At June 30, 1994, marketable-debt securities totaled $110.4 million, or
22.3% lower than the December 31, 1993 balance of $142.1 million. Proceeds from
the maturity and sales of marketable-debt securities were used to build
liquidity during 1994. At June 30, 1994, 19.2% of the marketable-debt security
portfolio had adjustable-rate characteristics compared to 29.5% of the portfolio
at December 31, 1993. The weighted average interest rate earned on the
marketable-debt security portfolio was 4.79% at June 30, 1994 compared to 4.21%
at December 31, 1993.
MBS totaled $1.22 billion at June 30, 1994, $481.4 million or 65.6%
higher than the $733.6 million of MBS at December 31, 1993. The purchase of
$632.0 million of MBS, partly offset by principal repayments of $126.0 million,
produced the growth in MBS during the first six months of 1994. See "LIQUIDITY"
for further discussion. At June 30, 1994, 63.2% of the MBS portfolio had
adjustable-rate characteristics compared to 74.3% of the portfolio at December
31, 1993. The weighted average interest rate on the MBS portfolio was 5.49% at
June 30, 1994 compared to 5.91% at December 31, 1993.
Loans receivable totaled $2.39 billion at June 30, 1994 compared to
$2.35 billion at December 31, 1993, an increase of $42.3 million or 1.8%. Loan
originations of $330.2 million outpaced loan repayments of $279.0 million during
29
<PAGE> 30
the first half of 1994. See "LIQUIDITY" for further discussion. At June 30,
1994, 73.7% of the loan portfolio was adjustable-rate compared to 71.7% at
December 31, 1993. The weighted average interest rate on loans receivable
decrease to 7.51% at June 30, 1994 from 7.88% at December 31, 1993.
Deposits totaled $3.22 billion at June 30, 1994, $33.8 million or 1.0%
lower than the deposit balances of $3.25 billion at December 31, 1993.
Certificate of deposit ("CDs") and money market account balances declined during
the first six month of 1994, while savings and checking account balances
increased. In an effort to control deposit costs in an increasing short-term
interest rate environment, the Bank has set pricing levels on deposits in order
to allow higher costing deposits to run-off, while attempting to attract new
accounts. At June 30, 1994, 53.2% of the deposit portfolio was comprised of
CDs compared to 54.1% of the portfolio at December 31, 1993. The weighted
average interest rate paid on deposits was 3.53% at June 30, 1994 compared to
3.56% at December 31, 1993.
FHLB advances totaled $256.9 million at June 30, 1994. In comparison,
the Bank had virtually no FHLB advances outstanding at December 31, 1993.
During 1994, the Bank used $210.0 million of new FHLB advances to acquire MBS
and $39.6 million to supplement its liquidity reserves. Other borrowings
increased $49.5 million during the first half of 1994, to total $106.3 million
at June 30, 1994 compared to $56.8 million at December 31, 1993. Borrowings
under repurchase agreements were used to provide additional liquidity to fund
the retail banking operations. The weighted average interest rates paid on
borrowings was 5.77% at June 30, 1994 compared to 9.34% at December 31, 1993.
See "LIQUIDITY" for further discussion.
Stockholders' equity totaled $352.0 million at June 30, 1994, $4.7
million higher than total equity of $347.3 million at December 31, 1993. See
"CAPITAL" and the "CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY" for further
details.
See "CREDIT" for discussion of foreclosed real estate balances.
30
<PAGE> 31
RATE/VOLUME ANALYSIS
The following table presents the components of the changes in net
interest income by volume and rate11 for the three months ended June 30, 1994
and 1993:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------------
1994 vs 1993
----------------------------------
INCREASE/(DECREASE)
DUE TO
----------------------------------
TOTAL
Dollars in thousands VOLUME RATE CHANGE
- - ---------------------------------------------------------------------
<S> <C> <C> <C>
CHANGE IN INTEREST INCOME:
Loans receivable $(3,324) $(4,778) $(8,102)
Mortgage-backed securities 6,381 (2,440) 3,941
Marketable-debt securities (433) 223 (210)
Trading accounts (9) (10) (19)
Federal funds (60) 66 6
Other short-term investments (1,726) 656 (1,070)
- - -----------------------------------------------------------------------
Total interest income (5,454)
CHANGE IN INTEREST EXPENSE:
Deposits (617) (2,576) (3,193)
Short-term borrowings (812) (385) (1,197)
Long-term borrowings 2,927 (213) 2,714
- - -----------------------------------------------------------------------
Total interest expense (1,676)
- - -----------------------------------------------------------------------
NET CHANGE IN NET INTEREST INCOME
BEFORE PROVISION FOR LOAN LOSSES $(3,778)
- - -----------------------------------------------------------------------
- - -----------------------------------------------------------------------
</TABLE>
- - -----------
11 This analysis allocates the change in interest income and expense
related to volume based upon the change in average balances and prior periods
applicable yields or rates paid. The change in interest income and expense
related to rate is based upon the change in yields or rates paid and the
prior period average balances. Changes due to both rate and volume have been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each. The above allocation
procedures have been applied consistently in 1994 and 1993.
The effect of nonperforming assets has been included in the rate variance.
31
<PAGE> 32
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1994 AND 1993
General. Net income totaled $8.6 million or $0.42 per share during the second
quarter of 1994 compared to $11.5 million or $0.56 per share during the same
period in 1993. The lower level of income in 1994 was associated with a $3.8
million decrease in net interest income, a $732,000 decline in other income, a
$588,000 increase in general and administrative expenses, and higher net
expenses from REO operations of $437,000. These reductions were partly offset
by a $2.0 million decline in the provision for loan losses and lower income tax
expense of $633,000.
Comprising the $3.8 million reduction in net interest income was a $5.5
million decline in interest income, partly offset by lower interest expense of
$1.7 million. The net interest margin ("NIM") declined 47 basis points from
3.58% for the second quarter of 1993 to 3.11% for the second quarter of 1994.
Lower yields earned on loans and MBS caused a 77 basis point contraction in the
NIM while lower deposit costs benefited the NIM by 29 basis points. The lower
yields on loans and MBS were caused by originations and purchases of assets at
rates lower than the portfolio average and principal repayments of older, higher
yielding loans and MBS. Average deposit rates dropped 32 basis points from the
six month period ended June 30, 1993 compared to the same period in 1994.
Approximately three-quarters of the decline in deposit rates was primarily
associated with lower rates paid on CDs and savings account products. The
remainder the decline in the deposit rate was produced by a shift in the
composition of deposits, which allowed the Bank to replace maturing CDs with
lower interest cost deposit products. The Bank's ability to sustain the current
level of net interest income during future periods is largely dependent upon the
maintenance of the interest rate spread, the relative size of interest earning
assets compared to interest bearing liabilities, the level of loan repayments
and originations, and asset quality.
The interest rate spread was 2.98% at June 30, 1994 compared to 3.30% at
December 31, 1993 and 3.50% at June 30, 1993. Many forces influence the
magnitude of the Bank's interest rate spread, most notably: interest rate
floors in effect on adjustable-rate loans, the Bank's ability to originate loans
and the availability of attractively priced loans and MBS in the secondary
market, the
32
<PAGE> 33
performance of the economy, the actions of the Board of Governors of the
Federal Reserve System, the Bank's asset/liability management actions and
market interest rates generally. As higher interest rate loans and MBS
continued to be repaid, the Bank faces the possibility of a further narrowing
in the interest rate spread. See "LIQUIDITY" and "ASSET/LIABILITY REPRICING
TABLE" for further detail.
Interest Income. Interest income declined $5.5 million or 8.0% to total $61.9
million during the second quarter of 1994. Lower interest income recorded on
loans receivable of $8.1 million and investments of $847,000 was partially
offset by higher income from MBS of $3.9 million.
Interest income on loans receivable declined $8.1 million or 15.6%
during the second quarter of 1994 compared to the same period in 1993. Lower
average balances and yields contributed to the decrease in interest income
during 1994. The loan yield was 7.48% during the second quarter of 1994 compared
to 8.27% during the same period in 1993, a decline of 79 basis points. The
lower loan yield was associated with loan originations at rates below the
portfolio's average and payoffs of higher yielding loans. Also, downward
repricing in the adjustable-rate loan portfolio modestly contributed to the
decrease in the loan yield.
Approximately 56 basis points of the 7.48% loan yield, or approximately
$3.3 million of interest income earned during the second quarter of 1994, was
attributable to interest rate floors on Nationwide and 1-4 family loans. In
comparison, during the second quarter of 1993, approximately 59 basis points, or
$3.7 million of interest income earned during the quarter was attributed to
interest rate floors. At June 30, 1994, approximately $710.9 million of the
Bank's Nationwide loans and approximately $59.7 million of the 1-4 family loans
were at their weighted average floor of 7.98%. Had the floors not been in
effect on these loans, their weighted average interest rate would have been
6.31% or 167 basis point lower, which would have lowered the Bank's June 30,
1994 interest rate spread by 34 basis points. In comparison, at December 31,
1993, approximately $781.7 million of Nationwide loans and $112.5 million of 1-4
family loans were at their weighted average floor of 8.07%. Had the floors not
been in effect on these loans, their weighted average interest rate would have
been
33
<PAGE> 34
6.35%, or 172 basis point lower, which would have lowered the Bank's interest
rate spread by 42 basis points.
Approximately three-quarters of the loan receivable portfolio was
comprised of adjustable-rate products at June 30, 1994. Despite a 176 basis
point increase in the 1 year treasury bill rate since November of 1993,
favorable repricing on these assets has been nominal. First, 41% of the
adjustable-rate loans were at their floors at June 30, 1994. These assets will
not reprice until their fully-indexed rates exceed the floors. On average, the
fully indexed rates of these loans were below their floors by 167 basis points
at June 30, 1994. Second, approximately 52% of the adjustable-rate loan
portfolio is tied to cost of funds indices. Generally, the movement in the cost
of funds indices lags behind movements in short-term interest rates. For
example, June 1994 was the first month that the National Cost of Funds index
increased since the 1 year treasury bill rate began to increase in November
1993.
Lower average loans receivable reduced interest income in the first
quarter of 1994 by $3.3 million. Loans receivable averaged $2.35 billion
during the second quarter of 1994 compared to $2.52 billion during the same
period in 1993, a decrease of $167.4 million. During most 1993, loan
repayments exceeded ARM originations, and produced the lower average loans
receivable in 1994 relative to 1993. The rise in market interest rates during
1994 and Management's strategy to originate $1.0 billion in loans in 1994 has
reversed this trend, allowing the Bank to rebuild its loan receivable portfolio
in recent months. See "LIQUIDITY" for further discussion.
Interest income on MBS was $3.9 million higher during the second
quarter of 1994 compared to the second quarter of 1993. Higher average MBS
balances caused interest income to increase in 1994, while a decline in MBS
yields adversely impacted the level of interest income. Average MBS balances
were $1.14 billion during the second quarter of 1994, or $458.1 million higher
than average balances of $684.8 million during the same period in 1993. The
acquisition of $826.8 million of MBS during the twelve month period ended June
30, 1994 allowed average MBS balances to increase despite the high level of
loan refinancing activity experienced within the industry during the same
period. See "LIQUIDITY" for further discussion. Offsetting the increase in
average MBS balances was a 124
34
<PAGE> 35
basis point decrease in the MBS yield to 5.30% during the current quarter
compared to 6.54% during the same quarter in 1993. The reinvestment of
proceeds from higher yielding fixed-rate MBS into lower yielding securities
contributed to the lower yield in 1994, while downward repricing in the
adjustable-rate portfolio also contributed modestly to the decline in yield.
Approximately 63% of the MBS portfolio was comprised of adjustable-rate
securities at June 30, 1994. Despite upward movements in the 30 year treasury
bond rate and the 5 year treasury note rate since the fourth quarter of 1993,
favorable repricing on the adjustable-rate MBS has been nominal. A large
percent of the adjustable-rate securities is tied to cost of fund indices. As
discussed above, movements in the cost of fund indices generally lag behind
movements in market interest rates and only now are beginning to rise.
Interest income from investments, which includes marketable-debt
securities, federal funds and other short-term investments, during the second
quarter of 1994 decreased $847,000 from income recorded during the same period
in 1993. The decline in income was associated with lower average investment
balances, partly offset by a higher investment yield. Average investment
balances were $248.4 million during the second quarter of 1994, or $222.4
million lower than the $470.8 million of average investment balances during the
same period in 1993. The reinvestment of proceeds from investment maturities
into other interest earning assets (primarily MBS) produced the lower average
investment balances. See "LIQUIDITY" for further discussion. The combined
yield on investments was 4.54% during the second quarter of 1994, or 104 basis
points higher than the 3.50% yield during the second quarter of 1993. The
higher yield was mostly associated with an extension of average maturities on
marketable-debt securities and an increase in short-term market interest rates
in 1994.
Interest Expense. Interest expense totaled $32.8 million during the three
months ended June 30, 1994, $1.7 million or 4.9% lower than interest expense
recorded during the same period in 1993. The lower level interest expense was
produced by a $3.2 million reduction in interest expense on deposits, partly
offset by a $1.5 million increase in interest expense on borrowings.
The $3.2 million reduction in deposit interest expense resulted from
both
35
<PAGE> 36
lower rates paid to depositors and lower average deposit balances. The rate
paid on deposits averaged 3.51% during the second quarter of 1994 compared to
3.83% during the second quarter of 1993. Most of the lower deposit rate was
associated with lower rates paid on CDs and savings accounts. Also,
contributing modestly to the decline in the deposit rate was a shift in the
composition of its deposit products away from CDs, the Bank's highest rate
deposit product, to checking and savings accounts.
Although the Bank has been successful in reducing its average interest
cost of deposits in 1994 compared to the same periods in 1993, the rate paid on
deposits at June 30, 1994 is slightly higher than the rate paid at March 31,
1994. CD sales in the second quarter of 1994 contributed to the increase in
the deposit rate at June 30, 1994. If short-term market interest rates
continue to increase, it may be necessary for Management to increase rates paid
on all of its deposit products.
Deposit balances averaged $3.22 billion during the second quarter of
1994 compared to $3.28 billion during the second quarter of 1993, a decrease of
$65.6 million. The lower average balances during the second quarter of 1994
was largely produced by the continued decline in CDs balances, partly offset by
higher average savings and checking account balances.
The $1.5 million decrease in interest expense on borrowings was the net
result of higher average borrowing balances and lower rates paid on borrowings.
Average borrowing balances were $282.3 million in the second quarter of 1994,
or $110.7 higher than average balances during the same period of 1993. The use
of FHLB advances to fund the acquisition of MBS and the reliance on FHLB
advances and borrowings under agreements to repurchase to provide liquidity for
retail banking operations caused the increase in average balances during the
current year. See "LIQUIDITY" for further discussion. Lower rates on new
borrowings during 1994 compared to the rates paid on the borrowings outstanding
during the second quarter of 1993 produced the decrease in the average
borrowing rate. The average rate paid on borrowings was 6.51% during the
second quarter of 1994 compared to 7.15% during the same period in 1993.
Provision for Loan Losses. The Company recorded a $750,000 provision for loan
36
<PAGE> 37
losses during the second quarter of 1994 compared to a $2.8 million provision
recorded during the same period in 1993. Effective January 1, 1994, the
Company adopted SFAS No. 114. Since the Company previously valued loans
considered to be impaired under SFAS No. 114 at the fair value of the loan's
collateral, the adoption of SFAS No. 114 had no impact on the Company's
provision for loan losses during the first half of 1994. See "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS" for further details. See "CREDIT" for
further discussion of loss provisions and adequacy of the accumulated
provisions for losses.
Other Income. Other income totaled $7.3 million during the second quarter of
1994 compared to $8.0 million during the same period in 1993, a $732,000, or
9.1% decline. During 1994, revenues from discount brokerage operations
decreased $687,000, primarily as a result of a 22% decrease in trading volumes.
Also, lower gains recorded on the sale of "conversion" loans contributed to a
$664,000 decline in gains on asset sales. See "LIQUIDITY" for additional
discussion of loan sales activity.
These declines were partly offset by higher other fee income of
$690,000, primarily associated with an increase in the number of checking
accounts and the expansion of ATM operations.
General and Administrative Expense. General and administrative expenses
increased $588,000 or 2.8% from the second quarter of 1993. Most of the
increase was associated with a $865,000 or 8.0% increase in compensation and
benefits and a $215,000 or 4.6% increase in occupancy, equipment and other
office expense. The increase in these costs mostly resulted from the expansion
of the branch network, annual salary increases, extended hours at many of the
Bank's branch facilities, and expansion of ATM operations. Higher pension
costs, payroll taxes, and medical insurance premiums were also experienced in
1994. These increases in general and administrative expenses were offset by
lower advertising, legal and foreclosure expenses.
Management of the Company is committed to controlling general and
administrative costs in order to help protect against declines in net income.
During 1994, Management has taken steps to reduce general and administrative
expenses from levels originally targeted for 1994. General and administrative
37
<PAGE> 38
costs in the second quarter of 1994 were below those of the first quarter by
$410,000 or 2%.
Operations of Foreclosed Real Estate. The Bank generated a net loss from its
foreclosed real estate operation of $781,000 during the second quarter of 1994
compared to a net loss of $344,000 during the same period in 1993. The higher
net loss during 1994 was primarily associated with the increase in the
provision for losses, partly offset by lower costs to operate the REO
properties. See "CREDIT" for further discussion of REO.
Income Taxes. Income taxes totaled $4.8 million or 35.9% of pre-tax income
during the second quarter of 1994 compared to $5.5 million or 32.2% of pre-tax
income during the second quarter of 1993. A higher statutory federal income
tax rate and effective state income tax rate produced the increase in
the effective rate between the two periods.
38
<PAGE> 39
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
<TABLE>
<CAPTION>
At June 30, Three months ended June 30
Dollars in thousands 1994 1994 1993
- - ----------------------------------------------------------- ---------------------------------------------------------------
Average Average Average Average Average
Balance Rate Balance(a) Interest Yield Balance(a) Interest Yield
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (b) $2,403,595 7.51% $2,349,659 $43,930 7.48% $2,517,015 $52,032 8.27%
Mortgage-backed securities 1,215,053 5.50 1,142,855 15,135 5.30 684,759 11,194 6.54
Marketable-debt securities 110,391 4.88 136,483 1,624 4.77 174,582 1,834 4.21
Trading account -- -- -- -- -- 2,764 19 2.76
Federal funds 12,300 4.17 32,884 307 3.74 40,057 301 3.01
Other investments (c) 55,424 4.74 78,985 895 4.54 253,347 1,965 3.11
- - ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $3,796,763 6.74% $3,740,866 $61,891 6.62% $3,672,524 $67,345 7.34%
============================================================================================================================
Deposits $3,218,825 3.53% $3,218,816 $28,186 3.51% $3,284,393 $31,379 3.83%
Borrowings:
Short-term borrowings (d) 90,275 5.02 29,304 331 4.53 91,645 1,528 6.69
Long-term borrowings (d) 272,881 6.02 255,993 4,297 6.73 82,920 1,583 7.66
- - ----------------------------------------------------------------------------------------------------------------------------
Total borrowings 363,156 5.77 285,297 4,628 6.51 174,565 3,111 7.15
- - ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $3,581,981 3.76% $3,504,113 $32,814 3.76% $3,458,958 $34,490 4.00%
============================================================================================================================
Excess of interest-earning assets
over interest-bearing liabilities $214,782 $236,753 $213,566
============================================================================================================================
Ratio of interest-earning assets over
interest-bearing liabilities 1.06 1.07 1.06
============================================================================================================================
Net interest income -- $29,077 $32,855
============================================================================================================================
Interest rate spread 2.98% -- --
============================================================================================================================
"Average" interest rate spread -- 2.86% 3.34%
============================================================================================================================
Net yield on average earning assets -- 3.11% 3.58%
============================================================================================================================
</TABLE>
(a) All average balances based on daily balances.
(b) Includes loans held for sale and loans placed on nonaccrual.
(c) Includes investment in Federal Home Loan Bank stock, deposits at Federal
Home Loan Bank, and other short-term investments.
(d) Includes FHL Bank advances, floating rate notes, other borrowings,
subordinated capital notes. Excludes ESOP loan for 1993 periods.
39
<PAGE> 40
RATE/VOLUME ANALYSIS
The following table presents the components of the changes in net
interest income by volume and rate12 for the six months ended June 30, 1994 and
1993:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1994 vs 1993
-----------------------------------
INCREASE/(DECREASE)
DUE TO
----------------------------------
TOTAL
Dollars in thousands VOLUME RATE CHANGE
- - ---------------------------------------------------------------------
<S> <C> <C> <C>
CHANGE IN INTEREST INCOME:
Loans receivable $(4,875) $(8,589) $(13,464)
Mortgage-backed securities 8,160 (5,036) 3,124
Marketable-debt securities (230) 308 78
Trading accounts (52) 4 (48)
Federal funds 121 70 191
Other short-term investments (1,913) 707 (1,206)
- - ---------------------------------------------------------------------
Total interest income (11,325)
CHANGE IN INTEREST EXPENSE:
Deposits 736 (6,611) (5,875)
Short-term borrowings (2,393) (887) (3,280)
Long-term borrowings 2,990 (197) 2,793
- - ---------------------------------------------------------------------
Total interest expense (6,362)
- - ---------------------------------------------------------------------
NET CHANGE IN NET INTEREST INCOME
BEFORE PROVISION FOR LOAN LOSSES $(4,963)
- - ---------------------------------------------------------------------
- - ---------------------------------------------------------------------
</TABLE>
12 This analysis allocates the change in interest income and
expense related to volume based upon the change in average balances and prior
periods applicable yields or rates paid. The change in interest income and
expense related to rate is based upon the change in yields or rates paid
and the prior period average balances. Changes due to both rate and volume
have been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each. The
above allocation procedures have been applied consistently in 1994 and
1993.
The effect of nonperforming assets has been included in the rate variance.
40
<PAGE> 41
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1994 AND 1993
General. Net income totaled $16.8 million or $0.82 per share during the six
months ended June 30, 1994 compared to $20.8 million or $1.03 per share during
the same period in 1993. The lower level of income in 1994 compared to 1993
was associated with a $5.0 million decrease in net interest income, a $3.3
million increase in general and administrative expenses, and higher net
expenses from REO operations of $570,000. These reductions were partly offset
by a $4.1 million decline in the provision for loan losses and lower income tax
expense of $780,000.
Comprising the $5.0 million reduction in net interest income was a
$11.3 million decline in interest income, partly offset by lower interest
expense of $6.4 million. The net interest margin ("NIM") for the first six
months of 1994 was 3.22%, or 32 basis points than the NIM of 3.54% during the
same period of 1993. Contributing to the decrease in NIM was lower yields
earned on loans and MBS, which caused a 74 basis point contraction in the NIM,
partly offset by lower deposit costs, which benefited the NIM by 36 basis
points. Lower yields on loans and MBS were caused by originations and
purchases of assets at rates lower than the portfolio average and principal
repayments in older, higher yielding loans and MBS. Lower average rates paid
on deposits primarily resulted from lower rates on CDs and savings products.
The Bank's ability to sustain the current level of net interest income during
future periods is largely dependent upon the maintenance of the interest rate
spread, the relative size of interest earning assets compared to interest
bearing liabilities, the level of loan repayments and originations, and asset
quality. See "COMPARISON OF THREE MONTHS ENDED JUNE 30, 1994 AND 1993" for
discussion of interest rate spread.
Interest Income. Interest income declined $11.3 million or 8.6% to total
$121.0 million during the first half of 1994. Contributing to the lower level
of interest income was a decrease in income from loans receivable of $13.5
million and investments of $1.4 million, partly offset by higher income from
MBS of $3.1 million.
Interest income on loans receivable totaled $88.8 million for the six
month period ended June 30, 1994, or 13.2% lower than the same period in 1993.
41
<PAGE> 42
Approximately two-thirds of the lower level of income from loans receivable was
associated with a 72 basis point drop in the loan rate between the two periods.
The yield on loans receivable was 7.56% during the first half of 1994 compared
to 8.28% during the first half of 1993. The decline in loan yield resulted
from loan originations at rates below the portfolio's average rate and payoffs
of higher yielding loans. Downward repricing in the adjustable-rate portfolio
also contributed modestly to the lower loan yield. Approximately 61 basis
points of the 7.56% loan yield during 1994, or $7.2 million of interest income,
was attributable to interest rate floors on Nationwide and 1-4 family loans.
In comparison, during the first six months of 1993, approximately 57 basis
points of the loan yield, or $7.1 million of interest income was attributable
to interest rate floors on Nationwide and 1-4 family loans.
The remaining decline in interest income from loans receivable was
caused by lower average loan receivable balances. Loans receivable averaged
$2.35 billion during the first six-months of 1994, or $121.6 million lower than
the average balances during the same period in 1993 of $2.47 million. During
most of 1993, loan repayments exceeded ARM originations, which produced the
lower average loans receivable balances in 1994 relative to 1993. See
"LIQUIDITY" for further discussion.
The $3.1 million increase in interest income on MBS during the first
six months of 1994 compared to the same period in the previous year was largely
associated with the acquisition of $826.8 million of MBS during the twelve
months ended June 30, 1994. These acquisitions, partly offset by principal
repayments, caused average MBS balances to total $947.4 million during the
first half of 1994, or $283.2 million higher than the first half of 1993. See
"LIQUIDITY" for further discussion. The MBS yield was 6.67% during the first
six months of 1993, or 133 basis points lower than the yield of 5.34% during
the first six months of 1994. The reinvestment of proceeds from higher
yielding fixed rate MBS into lower yielding securities contributed to the lower
yield in the second quarter of 1994. Also, contributing modestly to the
decline in yield was downward repricing in the adjustable-rate portfolio.
Interest income from investments, which includes marketable-debt
securities, federal funds and other short-term investments, was $1.4 million
lower during the
42
<PAGE> 43
first half of 1994 compared to the same period in 1993. The lower level of
income was associated with a $113.5 million decrease in average balances,
partly offset by 56 basis point increase in the investment yield. Average
investments balances totaled $342.5 during the six month period ended June 30,
1994 compared to $456.0 million in the same period a year earlier. The
reinvestment of proceeds from investment maturities into other interest earning
assets (primarily MBS) produced the lower average balances. See "LIQUIDITY"
for further discussion. An extension of the average maturities on
marketable-debt securities and an increase in short-term interest rates during
1994 produced the higher yield on investments, which increased from 3.47%
during the first half of 1993 to 4.03% during the same period in the current
year.
Interest Expense. Interest expense totaled $62.4 million during the six-months
ended June 30, 1994, $6.4 million or 9.3% lower than the same period in 1993.
The lower interest expense was produced by a $5.9 million reduction in interest
expense on deposits and a $487,000 decrease in borrowing expense.
The $5.9 million reduction in deposit interest expense was largely
associated with a 42 basis point drop in the rates paid to depositors, partly
offset by a $38.1 million increase in average balances. The average rate paid
to depositors was 3.52% during the first half of 1994 compared to 3.94% during
the same period in 1993. The lower rates paid on deposits was caused by a
decrease in market interest rates during 1993, which allowed the Bank to reduce
the rates paid on all of its deposit products. The lower rates paid on CDs
savings products primarily contributed to the overall lower rate. Also
contributing modestly to the lower rate paid on deposits was a shift in the
composition of deposit from higher rate CDs to lower rate savings and money
market accounts.
Average deposit balances increased $38.1 million to total $3.23 billion
during the six month period ended June 30, 1994 compared to $3.19 billion
during the same period in 1993. The growth in average savings and checking
balances was partly offset by lower average CD balances.
Interest expense on borrowings decreased $487,000 during the six month
period ended June 30, 1994 compared to the same period in 1993. The decrease
in
43
<PAGE> 44
expense was associated with a lower average rate paid on borrowings and lower
average borrowing balances. The average rate paid on borrowings was 6.94%
during the first half of 1994, or 15 basis points lower than the 7.09% average
rate paid on borrowing during the same period in 1993. The lower rates on new
borrowings during 1994 compared to the rate on the borrowings outstanding the
first six months of 1993 produced the lower average rate. Average borrowing
balances decreased $10.1 million to average $175.8 million during the first six
months of 1994 compared to $185.9 during the same period a year earlier. Since
most of the Bank's new borrowings to fund MBS acquisitions and to provide
liquidity were not executed until the second quarter, average borrowing
balances were only partly affected. See "LIQUIDITY" for further discussion.
Provision for Loan Losses. The Company recorded a $2.7 provision for loan
losses during the first half of 1994, or $4.1 million lower than the provision
recorded during the same period of 1993. Effective January 1, 1994, the
Company adopted SFAS No. 114. Since the Company previously valued loans
considered to be impaired under SFAS No. 114 at the fair value of the loan's
collateral, the adoption of SFAS No. 114 had no impact on the Company's
provision for loan losses during the first half of 1994. See "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS" for further details. See "CREDIT" for
further discussion of loss provisions and adequacy of the accumulated
provisions for losses.
Other Income. Other income totaled $14.6 million during the first six-months
of 1994, relatively unchanged from the same period in 1993. Improvements in
other fee income were mostly offset by lower discount brokerage commissions and
gains on asset sales.
The $1.2 million increase in other fee income was primarily associated with
an increase in the number of checking accounts and an expansion of ATM
operations. A decrease in transaction volumes caused the $791,000 decrease in
revenues from discount brokerage operations. Lower gains recorded on the sale
of "conversion" loans produced most of the $440,000 decline in gains on asset
sales. See "LIQUIDITY" for additional discussion of loan sales activity.
General and Administrative Expense. General and administrative expenses
increased $3.3 million or 8.3% during the first six months of 1994 compared to
44
<PAGE> 45
the same period in 1993. The increase was largely associated with a $2.7
million increase in compensation and benefits and a $1.1 million increase in
occupancy, equipment, and other office expense. The expansion of the branch
network, including 8 branches obtained in the Elm Financial acquisition in
February 1993, extension of hours at many of the branch facilities, and higher
pension, payroll taxes, and medical costs produced the increase.
Management was successful in controlling other general and
administrative costs during 1994 and remains committed to on-going expense
control.
Operations of Foreclosed Real Estate. The Bank generated a net loss from its
foreclosed real estate operation of $1.2 million during the first half of 1994
compared to a $671,000 net loss during the same period in 1993. The higher net
loss during the current period was associated with an increase in the provision
for losses, partly offset by lower costs to operate the REO properties. See
"CREDIT" for further discussion of REO.
Income Taxes. Income taxes totaled $9.3 million or 35.6% of pre-tax income
during the six-month period ended June 30, 1994 compared to $10.1 million or
32.6% of pre-tax income during the same period in 1993. A higher statutory
federal income tax rate and effective state income tax rate produced the
increase in the effective rate between the two periods.
45
<PAGE> 46
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
<TABLE>
<CAPTION>
At June 30, Six months ended June 30
Dollars in thousands 1994 1994 1993
- - ----------------------------------------------------------- ---------------------------------------------------------------
Average Average Average Average Average
Balance Rate Balance(a) Interest Yield Balance(a) Interest Yield
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (b) $2,403,595 7.51% $2,349,597 $88,835 7.56% $2,471,172 $102,299 8.28%
Mortgage-backed securities 1,215,053 5.50 947,367 25,279 5.34 664,188 22,155 6.67
Marketable-debt securities 110,391 4.88 150,733 3,402 4.55 161,487 3,324 4.15
Trading account --- -- 55 1 3.67 2,925 49 3.38
Federal funds 12,300 4.17 45,660 764 3.37 38,162 573 3.03
Other investments (c) 55,424 4.74 146,089 2,758 3.81 253,473 3,964 3.15
- - ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $3,796,763 6.74% $3,639,501 $121,039 6.65% $3,591,407 $132,364 7.37%
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
Deposits $3,218,825 3.53% $3,227,256 $56,394 3.52% $3,189,147 $62,269 3.94%
Borrowings:
Short-term borrowings (d) 90,275 5.02 14,919 337 4.56 108,910 3,617 6.70
Long-term borrowings (d) 272,881 6.02 160,874 5,713 7.16 76,981 2,920 7.65
- - ----------------------------------------------------------------------------------------------------------------------------
Total borrowings 363,156 5.77 175,793 6,050 6.94 185,891 6,537 7.09
- - ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $3,581,981 3.76% $3,403,049 $62,444 3.70% $3,375,038 $68,806 4.11%
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
Excess of interest-earning assets
over interest-bearing liabilities $214,782 $236,452 $216,369
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
Ratio of interest-earning assets over
interest-bearing liabilities 1.06 1.07 1.06
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
Net interest income - $58,595 $63,558
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.98% - -
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
"Average" interest rate spread - 2.95% 3.26%
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
Net yield on average earning assets - 3.22% 3.54%
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) All average balances based on daily balances.
(b) Includes loans held for sale and loans placed on nonaccrual.
(c) Includes investment in Federal Home Loan Bank stock, deposits at Federal
Home Loan Bank, and other short-term investments.
(d) Includes FHL Bank advances, floating rate notes, other borrowings,
subordinated capital notes. Excludes ESOP loan.
46
<PAGE> 47
ASSET/LIABILITY REPRICING SCHEDULE
<TABLE>
<CAPTION>
at June 30, 1994
-----------------------------------------------------------------------------------
Weighted More than 6
Average % of 6 Months months to Over
Rate Balance Total or less 1 year 1-3 years 3-5 years 5 years
- - ----------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE ASSETS: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments:(a)
Adjustable-rate 4.38% $34,141 1% $15,263 $9,475 9,403 - -
Fixed-rate 4.89 143,974 4 35,596 5,976 39,508 33,048 29,846
Mortgage-backed securities:(b)
Adjustable-rate 4.68 767,920 20 465,717 302,203 - - -
Fixed-rate 6.89 447,133 12 39,574 27,021 131,619 81,945 166,974
Mortgage loans:(b)
Adjustable- and renegotiable-rate 7.23 1,763,382 46 1,197,502 247,545 232,109 86,226 -
Fixed-rate 8.30 608,054 16 62,587 47,562 207,214 115,784 174,907
Consumer loans (b) 7.94 21,740 1 4,729 1,904 6,039 4,542 4,526
Assets held for sale 7.67 10,419 * 10,419 - - - -
-----------------------------------------------------------------------------------
Total rate sensitive assets 6.74% $3,796,763 100% $1,831,387 $641,686 $625,892 $321,545 $376,253
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES:
Deposits:
Checking accounts 1.12% $394,205 11% $105,048 $22,567 $73,979 $53,450 $139,161
Savings accounts 2.42 828,325 23 263,204 44,105 144,582 104,461 271,973
Money market deposit accounts 2.80 284,716 8 284,716 - - - -
Fixed-maturity certificates 4.75 1,711,579 48 735,973 334,132 407,100 162,661 71,713
-----------------------------------------------------------------------------------
3.53 3,218,825 90 1,388,941 400,804 625,661 320,572 482,847
Borrowings:
FHL Bank advances 5.28 256,865 7 229,947 20,240 5,593 - 1,085
Other borrowings 6.64 89,891 3 53,883 - 36,008 - -
Mortgage-backed note 8.70 16,400 * 16,400 - - - -
-----------------------------------------------------------------------------------
5.771 363,156 10 300,230 20,240 41,601 0 1,085
-----------------------------------------------------------------------------------
Total rate sensitive liabilities 3.76% $3,581,981 100% $1,689,171 $421,044 $667,262 $320,572 $483,932
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Excess (deficit) of rate sensitive assets
over rate sensitive liabilities (GAP) 2.98% $214,782 $142,216 $220,642 $(41,370) $973 $(107,679)
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Cumulative GAP $142,216 $362,858 $321,488 $322,461 $214,782
Cumulative GAP to total assets without
regard to hedging transactions 3.57% 9.11% 8.07% 8.10% 5.39%
Cumulative GAP to total assets with
impact of hedging transactions 7.38% 12.92% 11.45% 8.10% 5.39%
</TABLE>
* Less than one percent.
(a) Includes investment in FHL Bank Stock.
(b) Excludes accrued interest and accumulated provisions for losses.
The mortgage loan repricing/maturity projections were based upon
principal repayment percentages in excess of the contractual amortization
schedule of the underlying mortgages. Multi-family mortgages were estimated to
be prepaid at a rate of approximately 10% per year; adjustable-rate mortgage
loans on one- to four- family residences and loan securities were estimated to
prepay at a rate of 18% per year; fixed-rate loans and loan securities were
estimated to prepay at a rate of 15% per year. Checking accounts were estimated
to be withdrawn at rates between 15% and 21% per year depending on the age of
the accounts. Regular savings accounts were estimated to be withdrawn at rates
between 15% and 26% per year depending on the age of the accounts. Except for
multi-family loans, the prepayment assumptions included in the
Asset/Liability Repricing Schedule are based upon the Bank's actual
prepayment experience over the past year as well as management's future
expectations of prepayments. The Bank assumed a prepayment percentage of 10%
because of current market conditions and the nature of the Bank's
multi-family portfolio. The new decay assumption on passbook and checking
accounts is based on a historical regression analysis of the Bank's growth in
these accounts.
47
<PAGE> 48
PART II. -- OTHER INFORMATION
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 4, 1994, the Company held an Annual Meeting of Shareholders (the
"Annual Meeting") to elect three directors for a term of three years,
ratify the appointment of the Company's independent auditors for the
fiscal year ending December 31, 1994, and approve and ratify an amendment
to the Registrant's Stock Option Plan to increase by 175,000 the number of
shares of common stock reserved for the issuance thereunder and permit the
grant of stock options to newly-elected directors at the time of election.
(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 if
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
--------- ----------------------------------
Joseph Scully 16,461,389 183,991
John J. Viera 16,463,821 181,559
James B. Wood 16,452,940 192,440
2. The appointment of Ernst & Young as the Company's independent
auditors for the fiscal year ending December 31, 1994 was
ratified. There were 16,374,132 votes cast for the proposal,
164,523 votes against the proposal, and 106,725 votes
abstained.
3. The proposed amendment to the Registrant's Stock Option Plan
to increase by 175,000 the number of shares of the
Registrant's common stock, par value $0.01 per share, reserved
for the issuance thereunder and permit the grant of options to
newly elected directors, was ratified. There were 15,671,672
votes were cast in favor of the amendment, 745,661 votes in
opposition to the amendment, and 228,047 votes abstained.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11, Statement re: Computation of Per Share Earnings
(b) The Company did not file any Reports on Form 8-K during the second
quarter of 1994.
48
<PAGE> 49
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 12, 1994 By: /s/ Joseph C. Scully
---------------------
Joseph C. Scully
Chairman of the Board and Chief Executive Officer
(Duly Authorized Officer)
Date: August 12, 1994 By: /s/ Robert N. Parke
---------------------
Robert N. Parke
Senior Vice President and Treasurer
(Principal Financial Officer)
49
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1994 June 30, 1994
----------------- -----------------
<S> <C> <C> <C>
1. Net income $ 8,619,636 $16,817,588
2. Weighted average common
shares outstanding 19,321,178 19,408,975
----------- ----------
3. Earnings per
common share $ 0.45 $ 0.87
=========== ===========
4. Weighted average common
shares outstanding 19,321,178 19,408,975
5. Common stock equivalents
due to dilutive
effect of stock options 1,012,746 983,568
----------- ----------
6. Total weighted average
common shares and
equivalents outstanding 20,333,924 20,392,543
=========== ==========
7. Primary earnings per share $ 0.42 $ 0.82
============ ===========
8. Total weighted average
common shares and
equivalents outstanding
(Line 6) 20,333,924 20,392,543
9. Additional dilutive shares
using end of period market
value versus average market
value for the computation of
stock options under the
treasury stock method 48,266 92,544
----------- -----------
10. Total shares for fully
diluted earnings per share 20,382,190 20,485,087
=========== ===========
11. Fully diluted earnings
per share $ 0.42 $ 0.82
=========== ===========
</TABLE>
50
