<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 March 31, 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 -- 19,468,775 shares, as of April 29, 1994
<PAGE> 2
ST. PAUL BANCORP, INC.
AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
as of March 31, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income for the Three
Months Ended March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Stockholders' Equity for the
Three Months Ended March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 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 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
</TABLE>
2
<PAGE> 3
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
Dollars in thousands 1994 1993
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents
Cash and amounts due from depository institutions $ 102,213 $ 87,805
Federal funds sold 62,000 56,200
Short-term marketable-debt securities
(Market: March 31, 1994-$32,308; December 31, 1993-$192,326) 32,308 192,326
---------- ----------
Total cash and cash equivalents 196,521 336,331
Marketable-debt securities
(Market: March 31, 1994-$188,252; December 31, 1993-$142,876) 189,418 142,051
Mortgage-backed securities
(Market: March 31, 1994-$918,998; December 31, 1993-$733,314) 930,519 733,649
Loans receivable 2,304,043 2,350,893
Less: accumulated provision for loan losses 45,074 46,574
---------- ----------
Net loans receivable 2,258,969 2,304,319
Loans held-for-sale, at lower of cost or market
(Market: March 31, 1994-$18,659; December 31, 1993-$28,616) 18,599 28,497
Accrued interest receivable 21,572 20,247
Foreclosed real estate
(Net of accumulated provision for losses: March 31, 1994-$992;
December 31, 1993-$819) 25,512 19,105
Real estate held for investment 11,926 11,237
Investment in Federal Home Loan Bank stock 29,847 31,290
Office properties and equipment 40,282 40,865
Prepaid expenses and other assets 36,100 37,785
---------- ----------
TOTAL ASSETS $3,759,265 $3,705,376
---------- ----------
---------- ----------
LIABILITIES:
Deposits $3,251,680 $3,252,618
FHL Bank advances 57,220 7,219
Other borrowings 56,420 56,751
Advance payments by borrowers for taxes and insurance 18,780 19,513
Other liabilities 24,165 21,946
---------- ----------
Total liabilities 3,408,265 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 March 31, 1994-19,698,975 shares;
outstanding at March 31, 1994-19,498,625 shares,
issued and outstanding at December 31, 1993-19,683,981 shares) 197 197
Paid-in capital 136,823 136,609
Retained income, substantially restricted 216,952 210,215
Unrealized gain on securities, net of taxes 1,206 4,594
SFAS No. 87 adjustment, net of taxes (46) (46)
Borrowings by employee stock ownership plan (1,179) (4,240)
Unearned shares held by employee stock ownership plan (196,350 shares) (2,883) --
Treasury stock (4,000 shares) (70) --
---------- ----------
Total stockholders' equity 351,000 347,329
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,759,265 $3,705,376
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
<TABLE>
<CAPTION>
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three months ended March 31,
----------------------------
Dollars in thousands except per share amounts 1994 1993
- - ---------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Loans receivable $ 44,905 $ 50,267
Mortgage-backed securities 10,144 10,961
Marketable-debt securities 1,778 1,490
Trading account 1 30
Federal Funds 457 272
Other short-term investments 1,863 1,999
----------- ----------
Total interest income 59,148 65,019
INTEREST EXPENSE:
Deposits 28,208 30,890
Short-term borrowings 6 2,089
Long-term borrowings 1,416 1,337
----------- ----------
Total interest expense 29,630 34,316
----------- ----------
Net interest income 29,518 30,703
Provision for loan losses 1,950 4,000
----------- ----------
Net interest income after provision
for loan losses 27,568 26,703
OTHER INCOME:
Loan servicing fees 349 483
Other fee income 3,568 3,034
Net gain on assets sold 389 165
Net trading account gain (loss) (5) 5
Discount brokerage commissions 1,234 1,338
Income from real estate operations 667 563
Insurance and annuity commissions 956 879
Other 169 76
----------- ----------
Total other income 7,327 6,543
GENERAL AND ADMINISTRATIVE EXPENSE:
Salaries and employee benefits 11,956 10,120
Occupancy, equipment and other office expense 5,233 4,312
Advertising 1,126 1,237
Federal deposit insurance 2,240 2,203
Other 1,233 1,208
----------- ----------
General and administrative expense 21,788 19,080
Loss on foreclosed real estate 460 327
----------- ----------
Income before income taxes 12,647 13,839
Income taxes 4,449 4,596
----------- ----------
NET INCOME $ 8,198 $ 9,243
----------- ----------
----------- ----------
EARNINGS PER SHARE:
Primary $ 0.40 $ 0.47
Fully diluted 0.40 0.47
----------- ----------
----------- ----------
DIVIDENDS PER SHARE $ 0.075 $ 0.067
----------- ----------
----------- ----------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
ST. PAUL BANCORP,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Borrowing Unearned
Common Stock Paid-in Retained Unrealized FASB 87 By ESOP Treasury
----------------
Shares Amount Capital Income Gain/Loss Adjustment ESOP 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 1 799 -- -- -- -- -- -- 800
Issuance of common
stock to Elm
Financial 1,292,313 12 19,754 -- -- -- -- -- -- 19,766
Net Income -- -- -- 9,243 -- -- -- -- -- 9,243
Cash dividends paid
to shareholders
($0.067 per share) -- -- -- (1,220) -- -- -- -- -- (1,220)
---------------------------------------------------------------------------------------------------------------------------
Balance at
March 31, 1993 19,625,471 $196 $135,806 $181,999 $0 $0 ($2,071) $0 $0 $315,930
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1993 19,683,981 $197 $136,609 $210,215 $4,594 ($46) ($4,240) $ -- $ -- $347,329
Unearned ESOP
Shares (196,350) -- -- -- -- -- 2,833 (2,883) --
Issuance of common
stock under stock
option plan 14,994 -- 214 -- -- -- -- -- -- 214
Net Income -- -- -- 8,198 -- -- -- -- -- 8,198
Cash dividend paid
to shareholders
($0.075 per share) -- -- -- (1,461) -- -- -- -- -- (1,461)
Adjustment to
Unrealized Gain -- -- -- -- (3,388) -- -- -- -- (3,388)
Repayment of ESOP
Borrowing -- -- -- -- -- -- 178 -- -- 178
Treasury stock
purchases (4,000) -- -- -- -- -- -- -- (70) (70)
---------------------------------------------------------------------------------------------------------------------------
Balance at
March 31, 1994 19,498,625 $197 $136,823 $216,952 $1,206 ($46) ($1,179) ($2,883) ($70) $351,000
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 6
ST. PAUL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------
Dollars in thousands 1994 1993
--------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 8,198 $ 9,243
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,950 4,000
Provision for losses on foreclosed real estate 200 --
Provision for depreciation 1,215 1,115
Assets originated and acquired for sale (28,671) (13,365)
Sale of assets held for sale 38,949 14,147
Increase in accrued interest receivable (1,325) (216)
(Increase) decrease in prepaid expenses and other assets 1,584 (3,592)
Increase (decrease) in other liabilities 2,218 (856)
Net amortization of yield adjustments (1,757) (998)
Other items, net 1,277 (496)
--------------------------------------------------------------------------------------------
Net cash provided by operating activities 23,838 8,982
--------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Principal repayments on loans receivable 150,940 86,274
Loans originated and purchased for investment (114,055) (74,682)
Loans receivable sold 1,270 4,910
Principal repayment on available-for-sale mortgage-
backed securities 26,403 --
Principal repayment on held-to-maturity mortgage-
backed securities 40,445 55,387
Purchase of held-to-maturity mortgage-backed securities (277,279) (28,624)
Sale of available-for-sale mortgage-backed securities 9,941 --
Maturities of held-to-maturity marketable-debt securities -- 18,776
Maturities of available-for-sale marketable-debt securities 2,000 --
Purchase of available-for-sale marketable-debt securities (20,000) --
Purchase of held-to-maturity marketable-debt securities (30,695) (59,759)
Additions to real estate held for investment (2,604) (969)
Real estate sold 2,434 989
Decrease in investment in Federal Home
Loan Bank stock 1,443 1,897
Purchase of office properties and equipment (1,217) (1,579)
Proceeds from sales of office properties and equipment 585 499
Acquisition of Elm Financial, net of cash and
cash equivalents acquired of $11,002. -- (15,655)
--------------------------------------------------------------------------------------------
Net cash used by investing activities (210,389) (12,536)
--------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in checking and savings deposits 90,740 (15,138)
Proceeds from sales of certificates of deposit 67,141 70,308
Payments for maturing certificates of deposit (158,819) (63,905)
Net proceeds from issuance of subordinated notes -- 33,422
Repayment of FHL Bank advances -- (25,000)
Increase in FHL Bank advances 50,000 --
Decrease in other borrowings, net (192) (2,981)
Dividends paid to stockholders (1,461) (1,220)
Net proceeds from exercise of stock options 138 513
Purchase of Treasury Stock (70) --
Decrease in advance payments by borrowers
for taxes and insurance (733) (561)
--------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 46,744 (4,562)
--------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (139,807) (8,116)
Cash and cash equivalents at beginning of period 336,331 311,567
--------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 196,524 $ 303,451
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Interest credited on deposits $ 24,789 $ 28,150
Interest paid on deposits 2,523 2,930
--------------------------------------------------------------------------------------------
Total interest paid on deposits 27,312 31,080
Interest paid on borrowings 1,639 3,813
Income taxes paid, net (81) 1,342
Common stock issued in acquisition of Elm Financial -- 19,766
Real estate acquired through foreclosure 6,846 2,580
Loans originated in connection with real estate
acquired through foreclosure -- --
</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-month period ended March 31,
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 March 31, 1994 the Bank had outstanding commitments to originate 1-4
family, real estate loans of $49.3 million. Of these commitments, $38.3
million were for adjustable-rate loans and $11.0 million were for fixed-rate
loans. Most of these commitments expire after sixty days. Unused home equity
lines of credit totaled $36.2 million as of March 31, 1994. Also, the Bank had
commitments to purchase $226.9 million in mortgage-backed securities at March
31, 1994. The Bank anticipates funding origination and mortgage-backed
security purchase commitments with excess liquidity and $160.0 million of
Federal Home Loan Bank advances.
During April 1994, the Bank had a commitment to enter into an additional $83.8
million of notional amount interest rate exchange agreements to hedge the
interest rate risk associated with borrowing commitments referred to above.
At March 31, 1994 the Bank held commitments to sell $17.0 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>
-------------------------------------------------
<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. Also, SFAS No. 114
provides guidance on the classification of loans as real estate ("REO")
in-substance foreclosed.
The Company previously valued loans considered to be impaired under SFAS No.
114 based on the fair value of the collateral, and since all of the Company's
REO in-substance at December 31, 1993 continued to be classified as REO
in-substance under SFAS No. 114, the adoption of SFAS No. 114 had
no impact on the Consolidated Statement of Income or the Consolidated Statement
of Financial Condition.
The following schedule presents activity for impaired loans during the first
quarter of 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 3/31/94
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Performing loans 35,645,731 13,928,151 0 (2,213,982) (13,483,776) (1,331,374) 32,544,750
Non-performing loans 5,787,282 3,395,415 (2,100,000) (635,308) 0 (82) 6,447,307
-----------------------------------------------------------------------------------------------
Total impaired balance $41,433,013 $17,323,566 $(2,100,000) $(2,849,290) $(13,483,776) $(1,331,456) $38,992,057
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>
The following schedule provides a rollforward of specific valuation allowances
on impaired loans (see schedule above) during the first quarter of 1994.
Specific valuation allowances represent the amount of impairment on impaired
loans.
<TABLE>
<CAPTION>
Specific Valuation Allowance Activity
-----------------------------------------------------------------
Balance Decreases Improvements Balance
1/1/94 in Value in Value Charge-offs 3/31/94
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Performing loans 4,551,018 2,906,600 (472,802) (2,213,982) 4,770,834
Non-performing loans 487,282 495,415 (82) (635,308) 347,307
-----------------------------------------------------------------
Total impaired balance $5,038,300 $3,402,015 $(472,884) $(2,849,290) $5,118,141
-----------------------------------------------------------------
-----------------------------------------------------------------
</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 1,880 70 1,950
Charge offs ( 3,439) ( 27) ( 3,466)
Recoveries 1 15 16
Transfers 15 ( 15) ---
- - --------------------------------------------------------------------------
Balance at March 31, 1994 $44,439 $ 635 $45,074
- - --------------------------------------------------------------------------
- - --------------------------------------------------------------------------
</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. As
of March 31, 1994, $179,000 of this loan remains outstanding. 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, and as of March 31, 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 through borrowed funds are held by the
ESOP trustee as collateral for the related borrowings. As the loans are
repaid, shares held as collateral are released. The ESOP loans are being
repaid from Bank contributions and dividends received on St. Paul Bancorp stock
held by the ESOP. Payment of the ESOP loans is guaranteed by the Company. The
Company also has pledged $1.0 million in marketable debt securities as
collateral for the ESOP loan.
Contributions to the ESOP are made at the sole discretion of the Board of
Trustees of the ESOP, 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 provisions of
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 March 31, 1994, the ESOP had 196,350 of 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 the first quarter's net income. The effect of SOP 93-6
on net income in 1996 and beyond is non-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
first quarter of 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. Also, under SOP 93-6, $15,000 of dividends on the 196,350 of
unearned ESOP shares were reported as a reduction of accrued interest on the
ESOP borrowings rather than as a reduction of retained earnings during the
first quarter of 1994.
Contributions to the ESOP recorded as compensation expense totaled $78,000,
$846,000, and $1.1 million during the three months ended March 31, 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>
March 31, December 31,
1994 1993
--------------------------------------------------------------
<S> <C> <C>
Shares allocated to participants 701,745 710,670
Unallocated shares: 339,999
Grandfathered under SOP 93-6 143,649 N/A
Unearned ESOP shares 196,350 N/A
-------------------------------------------------------------
Total 1,041,744 1,050,669
Fair value of unearned ESOP shares $3,509,756 $ 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 home development in the Chicago metropolitan area.
The Bank is a consumer-oriented retail financial institution, operating 50
full service banking offices throughout the Chicago, Illinois metropolitan
area. Of these banking offices, 15 are located within OMNI(R) grocery
superstores and provide the Bank access to an expanded retail customer
base. The Bank uses its banking offices to attract retail deposits and
originate loans in the neighborhoods and surrounding suburbs of metropolitan
Chicago with favorable savings patterns and high levels of home ownership.
Deposit accounts in the Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC").
Funds obtained from the retail banking facilities are reinvested in a
variety of loan products and investment securities. Generally, the Bank
invests in loans secured by mortgages on real estate, securities, and to a
lesser extent, consumer and commercial 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. In addition to
originating loans in its local market area, the Bank utilizes a correspondent
loan program to originate 1-4 family mortgages in Illinois, Wisconsin, Indiana,
Michigan, and Ohio.
The Bank also offers mortgage loans secured by 5-35 unit apartment
buildings located in the Chicago Metropolitan area and financing to qualifying
borrowers to facilitate the sale of multi-family, and occasionally, commercial
real estate owned by the Bank. Prior to 1990, the Bank originated, on a
11
<PAGE> 12
nationwide basis (primarily in California), loans secured by multi-family real
estate and to a lesser extent, loans secured by commercial real estate. At
March 31, 1994, $1.01 billion or 26.9% of total assets were comprised of loans
secured by multi-family real-estate properties, of which $599.4 million or
15.9% of total assets represents multi-family loans secured by real estate
located in California. Also, $68.0 million or 1.8% of the Company's total
assets at March 31, 1994 included loans secured by commercial real estate,
other than multi-family. Periodically, the Bank will also repurchases
multi-family loans sold with recourse.
A variety of consumer loan products, including home equity loans, secured
lines of credit, and 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 high-quality, liquid securities.
Management's focus on retail operations includes significant
diversification of income sources beyond net interest income. The Bank
services approximately 152,000 checking accounts, which generate significant
fee income. The Bank engages in mortgage banking activities and operates 172
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) reprice on a
different basis and in different periods than its securities and loans. The
Bank tries to structure its balance sheet to reduce its exposure to interest
rate risk and to maximize its return on equity, commensurate with risk levels
that do not jeopardize the financial safety and soundness of the institution.
See "LIQUIDITY" for further discussion. The Bank's earnings are also affected
by changes in real estate market 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.
- - --------------
1 The credit card product is offered by the Bank through an agency
agreement with another lender.
12
<PAGE> 13
CAPITAL
Stockholders' equity of the Company was $351.0 million at March 31, 1994
or 9.47% of average assets during the first quarter 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, 1992. The growth in
stockholders' equity is primarily attributed to $8.2 million of net income
earned during the three months ended March 31, 1994, partially offset by a $3.4
million decline on the unrealized gains on available-for-sale securities and
the payment of $1.5 million of dividends. See "CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY" for further analysis.
In January 1994, the Company announced that it intends to acquire up
to 984,000 shares of its outstanding common stock (or approximately 5% of
shares outstanding) from time to time over the first six months of 1994 through
open market and privately negotiated transactions. The reacquired shares will
be held as treasury stock and will reduce the level of stockholders' equity in
future periods. Management's primary objectives in reacquiring the shares are
to increase return on equity and earnings per share for those shares of the
Company's stock that will remain outstanding. At March 31, 1994, only 4,000
shares had been acquired under this repurchase program.
Office of Thrift Supervision ("OTS") regulatory capital requirements
for federally-insured institutions such as the Bank include minimum ratios of
core and tangible capital to adjusted total assets of 3.0% and 1.5%,
respectively. Savings institutions also 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"), subject to certain limitations.
During the first quarter of 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
March 31, 1994 and December 31, 1993:
13
<PAGE> 14
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------
MARCH 31, 1994
- - -----------------------------------------------------------------------
Dollars in Core Tangible Risk-Based
Thousands Capital Capital Capital
- - -----------------------------------------------------------------------
<S> <C> <C> <C>
Actual percentage 9.27% 9.27% 17.00%
Required percentage 3.00 1.50 8.00
- - -----------------------------------------------------------------------
Excess percentage 6.27% 7.77% 9.00%
- - -----------------------------------------------------------------------
- - -----------------------------------------------------------------------
Actual capital $344,029 $344,029 $371,502
Required capital 111,317 55,659 174,876
- - -----------------------------------------------------------------------
Excess capital $232,712 $288,370 $196,626
- - -----------------------------------------------------------------------
- - -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
- - -----------------------------------------------------------------------
Dollars in Core Tangible Risk-Based
Thousands Capital Capital Capital
- - -----------------------------------------------------------------------
<S> <C> <C> <C>
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 March 31, 1994:
14
<PAGE> 15
<TABLE>
<CAPTION>
March 31,
Dollars in thousands 1994
- - -----------------------------------------------------------------------
<S> <C>
Stockholders' equity of the Company $351,000
Plus: borrowings by ESOP and unearned
ESOP shares 4,062
Less: capitalization of Company (8,180)
- - -----------------------------------------------------------------------
Shareholder's equity of the Bank 346,882
Less: investments in non-includable
subsidiaries(2) ( 786)
Less: intangible assets (2,067)
- - -----------------------------------------------------------------------
Tangible and core capital 344,029
Plus: allowable GVAs 27,473
- - -----------------------------------------------------------------------
Risk-based capital $ 371,502
- - -----------------------------------------------------------------------
- - -----------------------------------------------------------------------
</TABLE>
During the first quarter of 1994, the Bank's regulatory capital ratios
were reduced by the payment of a $9.0 million dividend to St. Paul Bancorp and
a reduction in unrealized gains on securities. The reduction in the regulatory
capital ratios associated with these items was partly offset by the Bank's net
income which totaled $8.2 million during the first quarter. Also, the
risk-based capital ratio benefited from the OTS' new rule which allows
additional multi-family loans to be risk-weighted in the 50% category.
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 March 31, 1994, its excess core capital
would have been $195.6 million versus $232.7 million under current
requirements.
In 1993, the OTS issued a regulation which adds an interest rate risk
component to the risk-based capital requirement associated with "excess
interest rate risk." Under the new regulation, an institution is considered to
have excess interest rate risk if, based upon a 200-basis point change in
market interest rates, the market value of an institution's capital changes by
more than 2%. 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
- - ---------------------
2 As of March 31, 1994, the Bank had an additional $372,000 invested
in non-includable subsidiaries which will be fully phased-out of tangible,
core, and risk-based capital for periods after June 30, 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
new regulation became effective on January 1, 1994.
At March 31, 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 subjected to a higher
risk-based capital requirement, it excess risk-based capital (which totaled
9.00% or $196.6 million at March 31, 1994) would have been reduced.
Additionally, 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 March 31, 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 9.27%,
15.65%, and 17.00% respectively.
16
<PAGE> 17
KEY CREDIT STATISTICS
<TABLE>
<CAPTION>
March 31, 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 $1,193,468 51.8% $1,187,210 50.5% $1,085,679 46.7%
5-35 units multi-family 35,345 1.5 38,460 1.6 46,771 2.0
> 35 unit multi-family 979,542 42.5 1,026,007 43.6 1,097,281 47.1
Commercial real estate 68,019 2.9 73,094 3.1 66,812 2.9
Land 10,071 0.4 10,307 0.4 3,126 0.1
- - ----------------------------------------------------------------------------------------------
Total real estate dependent loans
loans 2,286,445 99.1 2,335,078 99.2 2,299,669 98.8
Consumer loans 20,078 .9 19,572 0.8 27,517 1.2
- - ----------------------------------------------------------------------------------------------
Total loans $2,306,523 100.0% $2,354,650 100.0% $2,327,186 100.0%
- - ----------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------
NON-PERFORMING ASSETS
- - ----------------------------------------------------------------------------------------------
Real Estate Dependent Loans:
1-4 family $ 9,464 18.4% $ 11,202 22.6% $ 12,759 26.4%
5-35 family 3,208 6.2 1,970 4.0 1,994 4.1
> 35 unit multi-family 9,324 18.1 10,938 22.1 13,565 28.0
Commercial real estate 146 .3 2,597 5.2 --- --
Land 2,406 4.6 2,406 4.9 --- --
- - ----------------------------------------------------------------------------------------------
Subtotal 24,548 47.6 29,113 58.8 28,318 58.5
Consumer loans 519 1.0 555 1.1 1,041 2.2
Real Estate Owned:
1-4 family $ 4,602 8.9% $ 4,925 9.9% $ 2,776 5.7%
5-35 family --- -- --- -- 750 1.5
> 35 unit multi-family 19,367 37.6 14,998 30.2 14,133 29.2
Commercial real estate 2,535 4.9 --- -- 1,390 2.9
Land --- -- --- -- --- --
- - ----------------------------------------------------------------------------------------------
Subtotal 26,504 51.4 19,923 40.1 19,049 39.3
- - ----------------------------------------------------------------------------------------------
Total non-performing assets $ 51,571 100.0% $ 49,591 100.0% $ 48,408 100.0%
- - ----------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------
<CAPTION>
March 31, 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 0.59% 0.69% 0.41%
Net California charge-offs to average California
loans receivable and foreclosed real estate 2.04 2.01 0.32
Loan loss reserve to total loans 1.96 1.98 2.10
Loan loss reserve to non-performing loans 179.81 156.99 165.81
Non-performing assets to total assets 1.37 1.34 1.38
General valuation allowance to non-
performing assets 79.40 85.41 97.30
General valuation allowance to impaired
loans, net of specific valuation allowances 120.88 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 portfolios 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 March 31, 1994, the loans receivable portfolio was 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 loans
when they become 60 days or more delinquent. Certain non-performing loans are
also placed on a non- accrual status in accordance with the Bank's accounting
policy.
At March 31, 1994, non-performing loans totaled $25.1 million compared
to $29.7 million at December 31, 1993. Contributing to the slight decline in
non-performing loans were the following: 1) the transfer of $6.9 million of
delinquent loans to REO; 2) a $1.7 million or 15.5% reduction in delinquent
1-4 family loans; and 3) $1.2 million in charge-offs. Of the $25.1 million on
non- performing loans at March 31, 1994, $7.5 million were secured by real
estate located in California.
The following are descriptions of individual non-performing loans at
March 31, 1994 in which the Bank's net investment exceeds $2.0 million:
. A $3.0 million first mortgage loan (120 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 $3.1 million first mortgage loan (150 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 anticipates completing foreclosure during the second
quarter of 1994.
18
<PAGE> 19
. A $2.2 million first mortgage loan (150 days delinquent) secured
by 9.6 acre parcel of land located in Downers Grove, Illinois. The
Bank will be receiving a deed-in-lieu of foreclosure during the second
quarter of 1994. Currently, the Bank is negotiating the sale of the
property with a purchaser.
As of January 1, 1994, the Company adopted SFAS No. 114. See "NOTES
TO CONSOLIDATING FINANCIAL STATEMENTS" for listing of impaired loans and
related specific valuation allowances.
The following two tables summarize the components of classified assets and
substandard assets at March 31, 1994 and December 31, 1993 (dollars in
thousands):
<TABLE>
<CAPTION>
Classified Assets
-----------------
March 31, December 31,
1994 1993
------------ ------------
<S> <C> <C>
Substandard $ 226,362 $ 244,949
Doubtful 2,816 3,955
Loss(3) 5,697 6,058
------------ ------------
Total $ 234,875 $ 254,962
------------ ------------
------------ ------------
</TABLE>
- - ----------------------
3 Assets classified "loss" represents 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
------------------
March 31, December 31,
1994 1993
---------------- ----------------
<S> <C> <C> <C> <C>
Non-performing assets:
REO $ 20,530 9.07% $ 11,884 4.85%
REO "in-substance" 5,974 2.64 8,039 3.28
Delinquent/nonaccrual
loans 25,067 11.07 29,668 12.11
------ ------- ------ -----
51,571 22.78 49,591 20.24
Loans delinquent 30-59 days
In portfolio 12,420 5.49 16,812 6.86
Sold with recourse -- -- 1,766 0.72
------ ------ ------ -----
Subtotal 12,420 5.49 18,578 7.58
Loans current and performing:
In portfolio 142,382 62.90 153,540 62.68
Sold with recourse 19,989 8.83 23,240 9.49
------- ----- ------- -----
Subtotal 162,371 71.73 176,780 72.17
------- ----- ------- -----
Total substandard assets $226,362 100.00% $244,949 100.00%
Less: substandard loans
sold with recourse(4) 19,989 25,006
------- -------
Substandard assets
in portfolio $206,373 $219,943
-------- --------
-------- --------
Percent of Total Assets 5.49% 5.94%
-------- --------
-------- --------
</TABLE>
Of the $234.9 million of total classified assets at March 31, 1994,
$210.7 million or 89.7% represented multi-family assets, of which $136.3
million (or 58.0% of total classified assets) consisted of California
multi-family assets. Of the $226.4 million of substandard assets, $162.4
million or 71.7% 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 assets, of which $153.3 million (or
60.1% of total classified assets) consisted of California multi-family assets.
Of the $244.9 million 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.
- - -----------------
4 Total loans sold with recourse was $126.3 million; however,
maximum remaining loss exposure under these agreements is $25.5 million.
20
<PAGE> 21
The accumulated provision for loan losses at March 31, 1994 was $45.1
million compared to $46.6 million at December 31, 1993, a decrease of $1.5
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 carefully evaluates 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 coverage(5), 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 first quarter of 1994 was
$2.0 million compared to $1.5 million during the fourth quarter of 1993 and
$4.0 million during the first quarter of 1993. The lower provision recorded
during the first quarter of 1994 generally reflects the reduction in classified
loans and a lower multi-family portfolio balance. See "NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS" for further details. As a result of Management's
evaluation of the effect of the January 17, 1994 Southern California
earthquake, Management did not believe it was necessary to adjust its loan loss
reserves. 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 quarter of 1994
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
- - -------------
5 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 we believe mitigates some of the credit risk attendant to higher
interest rates.
21
<PAGE> 22
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 that impaired loans that are within the scope of the statement 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 with a corresponding charge to bad-debt expense or by adjusting an
existing valuation allowance for the impaired loan with a corresponding charge
or credit to bad debt expense. Because the Company previously carried those
loans that are 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. See "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS" for further details.
The Company recorded $3.5 million in net charge-offs during the first
quarter of 1994, equivalent to 0.59% 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.
The reduction in the 1994 charge-off ratio relative to the 1993 ratio is
consistent with improvements in the loan portfolio which also resulted in lower
first quarter 1994 provisions and classified loan balances. See "KEY CREDIT
STATISTICS" and "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for further
details.
Comprising the Bank's $3.5 million of net charge-offs in the first quarter
of 1994 were $2.8 million of charge-offs on impaired loans, $166,000 of early
prepayment inducements on California real estate loans, $110,000 of charge-offs
on 1-4 family and consumer loans not accounted for under SFAS No. 114 and
$152,000 of losses recorded in connection with foreclosure.
22
<PAGE> 23
OTHER REAL ESTATE OWNED ("REO")
REO totaled $26.5 million at March 31, 1994 compared to $19.9 million
at the end of 1993. The transfer of two multi-family loans totaling $4.3
million and a $2.5 million commercial real estate loan to REO during the quarter
produced most of the increase in REO balances in the current period. No REO
sales were completed during the first quarter of 1994. Of the $26.5 million of
REO at March 31, 1994, $15.9 million was located in California.
The following is a description of each individual multi-family or
commercial REO asset at March 31, 1994:
. A $10.2 million, first mortgage loan (210 days delinquent)
secured by a 435 unit apartment building located in Kent, Washington.
The Bank's net carrying amount of the loan is only $6.0 million since
a portion of the ownership interest in the loan was sold without
recourse to other institutions and $1.1 million of charge-offs have
been recorded. At March 31, 1994, the Bank classified this asset as
in-substance foreclosed real estate.
The property was removed from bankruptcy during the first quarter of
1994 and the Bank anticipates completing foreclosure during the second
quarter of 1994. The Bank had begun to make disbursements for capital
improvements to the properties which may total $2 million in the
aggregate. After improvements have been completed, the Bank will
market the property. The Bank will be reimbursed on a pro-rata basis
by the investing participants for the disbursements made for this
property. As of March 1994, the building is 25% occupied at an
average rent per unit of $425.
. A $5.0 million, 176 unit apartment building located in Riverside,
California. Bank Management is currently negotiating a sales contract
with a buyer and believes that this asset will be sold during the
second quarter of 1994. As of March 1994, the building is 78%
occupied at an average rent per unit of $517.
. A $2.5 million commercial real estate building (35,000 square
feet) located in Freeport, Illinois. Bank Management is currently
negotiating a sale or lease transaction with the current tenant. As
of March 1994, the building is 100% occupied at an average rent per
square foot of $10.70.
. A $2.2 million, 75 unit apartment building located in Panorama
City, California. Bank Management is currently negotiating a sales
contract with a buyer and believes that this asset will be sold during
the second quarter of 1994. As of March 1994, the building is 48%
occupied at an average rent per unit of $503.
. A $2.1 million, 108 unit apartment building located in Fontana,
23
<PAGE> 24
California. Bank Managementis currently negotiating a sales contract
with a buyer and believes that this asset will be sold during the
second quarter of 1994. As of March 1994, the building is 53%
occupied at an average rent per unit of $518.
. A $2.1 million, 84 unit apartment building located in Sacramento,
California. Bank Management is currently negotiating a sales contract
with a buyer and believes that this asset will be sold during the
second quarter of 1994. As of March 1994, the building is 76%
occupied at an average rent per unit of $458.
. A $2.0 million, 70 unit apartment complex located in Canoga Park,
California. This property sustained some damage in the January 17,
1994 earthquake. Repairs to the building, which are estimated to
total $330,000, will be completed during the second quarter of 1994.
Bank Management is currently negotiating a sales contract with a buyer
and believes that this asset will be sold during the second quarter of
1994. As of March 1994, the building is 51% occupied at an average
rent per unit of $480. See discussion above regarding the effect of
the January 17, 1994 earthquake on the loan loss provision and
discussion below regarding its effect on the REO provision.
The accumulated provision for real estate losses totaled $992,000 at
March 31, 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 specific valuation allowances 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. On January 17, 1994, the Bank sustained damage to a multi-family
and a single-family REO asset located in the Southern California region
affected by an earthquake. Total losses identified by the Bank in connection
with the earthquake are less than $300,000. Management does not expect to
incur any additional expense or losses in connection with this earthquake.
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) at March 31, 1994 totaled $196.5 million, or $139.8 million
lower than cash and cash equivalents at December 31, 1993 of $336.3 million.
24
<PAGE> 25
Average cash and cash equivalents were $327.6 million during the first quarter
of 1994, relatively unchanged from average cash and cash equivalents during the
first quarter of 1993 of $323.2 million.
During the first quarter 1994, Management reduced the cash and cash
equivalents in an effort to enhance investment earnings. The reduction in the
liquidity portfolio was accomplished through the purchase of $199.2 million of
adjustable-rate and $78.1 million of fixed-rate MBS. These purchases are
expected to add incremental interest income by providing a higher yield than
otherwise would be generated by federal funds or short-term marketable-debt
securities and supplement the Bank's $1.0 billion residential loan origination
goal.
The Bank's liquidity portfolio helps protect the Bank from
contracting margins during periods of rapidly rising interest rates. Also,
adjustable rate loans and MBS, subject to their periodic and lifetime caps,
provide significant interest rate risk protection against rising market rates.
At March 31, 1994, the Bank had a positive one year GAP of 15.90%. However,
interest rate floors in effect on $851.1 million of adjustable-rate loans at
March 31, 1994 may prevent rate sensitive assets from repricing as quickly as
rate sensitive liabilities despite the positive one-year GAP.
Sources of Funds. The major sources of funds during the first quarter of 1994
included $150.9 million of principal repayments on loans receivable, $66.8
million of principal repayments on MBS, $50.0 million of new FHLB advances, and
$40.2 million from the sale of loans receivable. In comparison, the major
sources of funds during the same period in 1993 included $86.2 million of
principal repayments on loans, $55.4 million of principal repayments on MBS,
$33.4 million from the issuance of subordinated notes, $18.8 million in
maturities on marketable-debt securities, and $19.1 million of proceeds from
the sale of loans receivable.
Long-term market interest rates dropped substantially from the end of
1992 to year-end 1993, causing the first quarter 1994 originations and loan
repayments to exceed those recorded during the first quarter of 1993. See
"USES OF FUNDS" for further discussion of loan originations. Loan repayments
in the latter half
25
<PAGE> 26
of the 1994 first quarter declined substantially from the first half, which
Management believes may be indicative of lower loan repayment trends for future
quarters in 1994.
Fixed rate loan originations increased approximately $27 million, or 47%
in 1994 compared to 1993, which provided for higher loan sales during the first
quarter of 1994 compared to the first quarter of 1993. Generally, the Bank's
policy is to sell conforming, fixed rate mortgage loans in the secondary
market.
The Company borrowed $50.0 million from the FHLB during the first quarter
of 1994 to acquire MBS. To mitigate interest rate risk on the matched funding,
the Bank has entered into a $50.5 million notional amount interest exchange
agreement. The Company intends to acquire MBS during 1994 with matched
borrowings and excess liquidity to enhance net interest income and supplement
the Bank's $1.0 billion residential loan origination goal for 1994. Generally,
the Bank's policy requires a 1% spread or better when acquiring assets with
borrowings. See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for further
details of borrowing commitments.
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.
Uses of Funds. The major uses of funds during the three months ended March 31,
1994 included $277.3 million for the acquisition of MBS, $142.7 million of loan
originations, and $50.7 million for the purchase of marketable-debt securities.
In comparison, the major uses of funds during the same period in 1993 included
$88.0 million of loan originations, $59.8 million for the purchase of
marketable-debt securities, $28.6 million of MBS purchases, $26.7 million of
the acquisition of Elm Financial, and a $25.0 million FHLB advance maturity.
As discussed above, the drop in long-term market interest rates from the
end of 1992 to year-end 1993 increased demand for the Bank's primary mortgage
products. This resulted in higher loan originations during the first quarter
of
26
<PAGE> 27
1994 compared to the same period in 1993. See "NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS" for further details of loan origination commitments.
During the first quarter of 1994, the Company used liquidity and new
borrowings to acquire $199.2 million of adjustable-rate and $78.1 million of
fixed rate MBS in order to add incremental interest income through extended
maturities and arbitrage transactions at profitable spreads. Also, MBS
purchased during the first quarter of 1994 supplement the Bank's $1.0 billion
residential loan origination goal.
New investments in MBS during the first quarter of 1994 exceeded that
of 1993. Asset growth provided by the acquisition of Elm Financial during the
first quarter of 1993 limited the Bank's demand for secondary market products.
See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for details of MBS purchase
commitments. New investment in marketable-debt securities were relatively
unchanged between the two first quarter periods. MBS and marketable-debt
securities are preferable investments because they have high credit quality,
low risk-based capital requirements and favorable yields (including the
adjustable rate characteristics of many investments and MBS). Also, MBS are
included in the qualified thrift lender test.
During the first quarter of 1993, the Bank also used liquidity generated
by loan repayments in excess of new loan originations to repay $25.0 million of
maturing FHLB advances. No debt was repaid during 1994.
See "CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)" for further detail.
Holding Company Liquidity. At March 31, 1994, St. Paul Bancorp had $23.7
million of cash and cash equivalents and $997,000 of marketable-debt
securities. A portion of St. Paul Bancorp's U.S. marketable-debt securities
were used to collaterize borrowings of the ESOP.
Sources of liquidity for St. Paul Bancorp during 1994 included $9.0
million of dividends from the Bank(6) and $400,000 of dividends from Annuity
Network, Inc.
- - -----------
6 In addition, the Bank received approval from the OTS to pay $8.1
million in dividends to St. Paul Bancorp on May 19, 1994.
27
<PAGE> 28
Uses of St. Paul Bancorp's liquidity during the first quarter of
1994 included $1.5 million to finance the activities of St. Paul Financial
Development, $1.5 million of dividends paid to shareholders, and $711,000 paid
to service the subordinated debt issued in February of 1993.
In January of 1994, the Company announced its intention to repurchase
up to 984,000 shares of its outstanding common stock during the first six
months of 1994. As of March 31, 1994, only 4,000 shares have been
repurchased.(7)
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 March 31, 1994,
the Bank had $361.5 million invested in liquid assets, which exceeded the
current regulatory liquidity requirement of 5% by $199.3 million.
- - -----------
7 During April 1994, an additional 271,950 shares were acquired under
this repurchase program.
28
<PAGE> 29
STATEMENT OF FINANCIAL CONDITION
St. Paul Bancorp reported total assets of $3.76 billion at March 31, 1994
compared to $3.71 billion at December 31, 1993, an increase of $53.9 million or
1.5%. Higher mortgage-backed securities ("MBS") balances of $196.8 and an
increase in marketable-debt security balances of $47.4 million contributed to
the growth in total assets during the first quarter of 1994. These increases
were partly offset by a $139.8 million reduction in cash and cash equivalents
and lower loans receivable of $46.9 million.
Cash and cash equivalents decreased $139.8 million or 41.6% during the
first three months of 1994 to total $196.5 million at March 31, 1994. During
the first quarter of 1994, the Bank extended the maturities of its investment
portfolio by using liquidity to acquire MBS and marketable-debt securities.
See "LIQUIDITY" for further discussion.
At March 31, 1994, marketable-debt securities totaled $189.4 million
compared to $142.1 million at December 31, 1993. The purchase of $50.0
million of marketable-debt securities during the first three months of 1994
produced the 35.3% increase in marketable-debt securities. At March 31, 1994,
44.6% 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 4.22% at March 31, 1994 compared to 4.21% at December 31, 1993.
MBS totaled $930.5 million at March 31, 1994, $196.8 million or 26.8%
higher than MBS $733.6 million at December 31, 1993. The purchase of $275.1
million of MBS partly offset by principal repayments of $66.9 million, produced
the growth in MBS during the first three months of 1994. At March 31, 1994,
62.5% of the MBS portfolio had adjustable-rate characteristics compared to
74.3% of the portfolio at December 31, 1993. The weighted average interest
rate earned on the MBS portfolio was 5.47% at March 31, 1994 compared to 5.91%
at December 31, 1993.
Loans receivable totaled $2.30 billion at March 31, 1994 compared to $2.35
billion at December 31, 1993, a decline of $46.9 million. Loan repayments of
29
<PAGE> 30
$150.9 million exceeded loans originated for portfolio which contributed to the
reduction in loans receivable at quarter end. At March 31, 1994, 73.1% of the
loan portfolio was adjustable-rate compared to 71.7% at December 31, 1993. The
weighted average interest rate earned on loans decreased to 7.70% at March 31,
1994 compared to 7.88% at December 31, 1993. See "GENERAL" for a discussion of
loan origination goals in 1994.
Deposits totaled $3.25 billion at March 31, 1994, relatively unchanged
from December 31, 1993. Certificate of deposit ("CDs") balances declined
during the quarter, while savings, checking, and money market account balances
increased. At March 31, 1994, 53.4% of the deposit portfolio was comprised of
CDs compared to 54.1% of the portfolio at December 31, 1993.
FHLB advances increased $50.0 million during the first three months of
1994 to total $57.2 million at March 31, 1994. During the first quarter of
1994, $50.0 million of new FHLB advances were used to purchase MBS. See
"LIQUIDITY" for further discussion.
Stockholders' equity totaled $351.0 million at March 31, 1994, $3.7
million higher than total equity of $347.3 million at December 31, 1993. The
growth in equity was produced by $8.2 million of net income, partly offset by a
$3.4 million reduction in the unrealized gain on securities and $1.5 million of
dividends paid to shareholders. See "CAPITAL" for further details.
See "REO" for discussion of the increase in 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 rate(8) for the three months ended March 31, 1994
and 1993:
<TABLE>
<CAPTION>
INCREASE/(DECREASE)
DUE TO
-----------------------------------
TOTAL
Dollars in thousands VOLUME RATE CHANGE
- - ------------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
CHANGE IN INTEREST INCOME:
Loans receivable $(1,528) $(3,834) $(5,362)
Mortgage-backed securities 1,646 (2,463) (817)
Marketable-debt securities 177 111 288
Trading accounts (27) (2) (29)
Federal funds 174 11 185
Other short-term investments (332) 196 (136)
----------
Total interest income (5,871)
CHANGE IN INTEREST EXPENSE:
Deposits 1,379 (4,061) (2,682)
Short-term borrowings (2,023) (60) (2,083)
Long-term borrowings (151) 230 79
----------
Total interest expense (4,686)
----------
NET CHANGE IN NET INTEREST INCOME
BEFORE PROVISION FOR LOAN LOSSES $(1,185)
----------
----------
</TABLE>
- - -----------
8 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 MARCH 31, 1994 AND 1993
General. Net income totaled $8.2 million or $0.40 per share during the first
quarter of 1994 compared to $9.2 million or $0.47 per share during the same
period in 1993. The lower level of income in 1994 compared to 1993 was
associated with a $2.7 million increase in general and administrative expenses,
a $1.2 million decrease in net interest income, and higher net expenses from
REO operations of $133,000. These reductions were partly offset by a $2.1
million decline in the provision of loan losses, a $784,000 improvement in
other income, and lower income tax expense of $147,000.
Comprising the $1.2 million reduction in net interest income was a
$5.9 million decline in interest income, partly offset by lower interest
expense of $4.7 million. The net interest margin ("NIM") declined 16 basis
points from 3.50% for the first quarter of 1993 to 3.34% for the first quarter
of 1994. Lower yields earned on loans and MBS caused a 72 basis point
reduction in the NIM while lower deposit costs benefited the NIM by 45 basis
points. The lower rates on loans and MBS were caused by originations and
purchases of assets at rates lower than the portfolio average and a continued
high level of principal repayments in older, higher yielding loans and MBS.
The lower deposits cost was associated with a 51 basis point drop in the
average deposit cost between the first quarter of 1994 and 1993. 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 3.19% at March 31, 1994 compared to 3.30% at
December 31, 1993 and 3.42% at March 31, 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 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 in this low interest rate environment, the Bank
faces the possibility of a
32
<PAGE> 33
narrowing interest rate spread. However, loan payments in the latter half of
the 1994 first quarter declined substantially from the first half, which
Management believes may be indicative of lower loan repayments for future
quarters in 1994. See "LIQUIDITY" and "ASSET/LIABILITY REPRICING TABLE" for
further detail.
Interest Income. Interest income declined $5.9 million or 9.0% to total $59.1
million during the first quarter of 1994. Lower interest income recorded on
loans receivable of $5.4 million and MBS of $817,000 contributed to the lower
income level during the current year while income earned on investments
increased $308,000.
Interest income on loans receivable declined $5.4 million or 10.7% during
the first quarter of 1994 compared to the same period in 1993. The most
significant factor contributing to the lower level of income was a 64 basis
point decline in loan yield from 8.29% recorded during the first quarter of
1993 to 7.65% recorded in the same period in 1994. The decline in loan yield
was associated with loan originations at rates below the portfolio's average
and payoffs of higher yielding loans.
Approximately 62 basis points of the 7.65% loan yield, or
approximately $3.6 million of interest income earned during the first quarter
of 1994, was attributable to interest rate floors on Nationwide and 1-4 family
loans. In comparison, during the first quarter of 1993, approximately 55 basis
points, or $3.4 million of interest income earned during the quarter was
attributed to interest rate floors. At March 31, 1994, approximately $722
million of the Bank's Nationwide loans and approximately $129 million of the
1-4 family loans were at their weighted average floor of 7.93%. Had the floors
not been in effect on these loans, their weighted average interest rate would
have been 6.26%, or 167 basis point lower, which would have lowered the Bank's
March 31, 1994 interest rate spread by 41 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 6.35%, or 172 basis point lower, which would have lowered
the Bank's interest rate spread by 42 basis points.
33
<PAGE> 34
Loans receivable averaged $2.35 billion during the first quarter of 1994
compared to $2.42 billion during the same period in 1993, a decrease of $75.4
million. A steady decline in the loan portfolio since March 1993 caused by
loan repayments in excess of loans originated for investment generated the
lower average loans receivable in the current period. The lower average loans
receivable reduced interest income in the first quarter of 1994 by $1.5
million.
Interest income on MBS was lower during the first quarter of 1994 compared
to 1993 primarily as a result of a drop in yield, partly offset by an increase
in average balances. The yield on MBS was 5.41% during the current quarter
compared to 6.81% during the same quarter in 1993, a decline of 140 basis
points. The lower yield resulted from the reinvestment of principal repayments
from relatively high rate MBS into lower yielding MBS during the past twelve
months. Offsetting lower yields was an increase in average MBS balances, which
totalled $749.8 million during the first quarter of 1994 compared to $643.4
million during the same period in 1993. The acquisition of $520.2 million of
MBS during the twelve months ended March 31, 1994 allowed average MBS balances
to increase despite the high level of loan refinancing activity experienced
within the industry during the past twelve months.
Interest income from investments, which includes marketable-debt
securities, trading account assets, federal funds and other short-term
investments, during the first quarter of 1994 increased $308,000 over income
recorded during the same period in 1993. Most of the increase was associated
with higher yields on marketable-debt securities, largely associated with an
increase in short-term market interest rates in 1994. The combined yield on
investments was 3.73% during the first quarter of 1994, or 30 basis points
higher than the 3.43% during the first quarter of 1993. Average investment
balances totaled $437.8 million during the first quarter of 1994, or relatively
unchanged from the average balance of $441.2 during the first quarter of 1993.
Interest Expense. Interest expense totaled $29.6 million during the three
months ended March 31, 1994, or $4.7 million or 13.7% lower than interest
expense recorded during the same period in 1993. A $2.7 million reduction in
interest expense on deposits and a $2.0 million reduction in interest expense
on borrowings produced the decline during the current quarter.
34
<PAGE> 35
A $4.1 million reduction in deposit interest expense associated with lower
rates paid to depositors and a $1.3 million increase in deposit interest
expense associated with higher average deposit balances produced the $2.7
million decrease in deposit interest expense. The rate paid on deposits
averaged 3.54% during the first quarter of 1994 compared to the average rate
during the first quarter of 1993 of 4.05%. Lower short-term market interest
rates allowed the Bank to reduce rates paid on all of its deposit products.
For example, the weighted average rate paid on certificates of deposit, which
constitute over half of the Bank's deposits, declined 32 basis points from
March 31, 1993 to March 31, 1994, while the weighted average rate paid on
checking and savings accounts declined 41 basis points during the same period.
Also, the Bank experienced a shift in the composition of its deposit products
away from certificates of deposit, the Bank's highest costing deposit, to
checking and savings accounts. This shift has allowed the Bank to reduce its
overall interest cost for deposits.
Deposit balances averaged $3.24 billion during the first quarter of 1994
compared to $3.09 billion during the first quarter of 1993, an increase of
$143.0 million. Carrying the deposit accounts acquired from Elm Financial for
a full quarter in 1994 compared to only about one-half of a quarter in 1993
largely generated the higher balances.
Most of the reduction in interest expense on borrowings is associated with
a $2.0 million drop in interest expense on short-term borrowings, largely as a
result of the elimination of all the Bank's short-term borrowings in 1993. The
average rate paid on short-term borrowings decreased 19 basis points during the
first quarter of 1994 to 6.51% from 6.70% during the first quarter of 1993.
Interest expense on long-term borrowings during the first quarter of 1994
increased slightly to $1.4 million from $1.3 million during the same period of
1993. Most of the increase in long-term borrowing expense resulted from the
recognition of a full quarter's expense during 1994 on the subordinated notes
issued in February of 1993, partly offset by the lower of long-term borrowings
in the current year. Average long-term borrowing balances were $63.5 million
during 1994 compared to $71.0 million during 1993 while the average rate paid
on long-term borrowings was 9.05% in 1994 compared to 7.64% in 1993. See
"LIQUIDITY" for further discussion of borrowing activity.
35
<PAGE> 36
Provision for Loan Losses. The Company recorded a $2.0 million provision for
loan losses during the first three months of 1994 compared to a $4.0 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 quarter 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 first quarter of
1994 compared to $6.5 million during the same period in 1993. Most of the
improvement was associated with higher checking and ATM transaction fees,
primarily due to an increase in checking accounts and expansion of ATM
operations, and higher gains on asset sales of $224,000. The improvement in
gains on asset sales mostly resulted for the disposition of an
available-for-sale security during the first quarter of 1994. The higher
volume of loan sales in 1994 also contributed to increased gains in the current
year. Management believes that rising interest rates may reduce the Bank's
gains on loan sales in future periods.
Other improvements which occurred during the first quarter of 1994
included a $104,000 increase in income from real estate operations, a $93,000
increase in "other" income, and a $77,000 increase in insurance and annuity
commissions. An increase in the volume of real estate sales, the recognition
of interest income on a tax refund received during the first quarter of 1994,
and higher annuity sales volumes during 1994 produced these improvements.
Loan servicing fees were $134,000 lower during the first quarter of 1994
compared to the same period in 1993, primarily as a result of a $176.6 million
drop in the average loan servicing portfolio. Discount brokerage commissions
were $104,000 lower in 1994 due to a decline in trading volumes.
General and Administrative Expense. General and administrative expenses
increased $2.7 million or 14.2% from the first quarter of 1993. Most of the
increase was associated with a $1.8 million or 18.1% increase in compensation
and
36
<PAGE> 37
benefits and a $921,000 or 21.4% increase in occupancy, equipment and other
office expense.
Most of these increases resulted from the expansion of the branch
network, including the 8 branches acquired in the acquisition of Elm Financial,
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.
Advertizing costs dropped $111,000 during the first quarter of 1993.
Lower planned marketing activities in 1994 compared to 1993 caused the
reduction in this expense.
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.
Operations of Foreclosed Real Estate. The Bank generated a net loss from its
foreclosed real estate operation of $460,000 during the first quarter of 1994
compared to a net loss of $327,000 during the same period in 1993. The net
loss recorded in 1994 was mostly associated with a $200,000 increase in the
provision for losses, partly offset by lower costs to operate Nationwide REO.
See "REO" for further discussion of REO.
Income Taxes. Income taxes totaled $4.4 million or 35.2% of pre-tax income
during the first quarter of 1994 compared to $4.6 million or 33.2% of pre-tax
income during the first quarter of 1993. A higher statutory federal income tax
rate and a change in certain state income tax planning strategies produced the
increase in the effective rate between the two periods.
37
<PAGE> 38
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
<TABLE>
<CAPTION>
At March 31, Three months ended March 31
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) $2,322,642 7.70% $2,349,415 $44,905 7.65% $2,424,819 $50,267 8.29%
Mortgage-backed securities 930,519 5.47 749,756 10,144 5.41 643,388 10,961 6.81
Marketable-debt securities 189,418 4.48 165,151 1,778 4.37 148,245 1,490 4.08
Trading account --- -- 111 1 3.65 3,089 30 3.94
Federal funds 62,000 3.33 58,578 457 3.16 36,247 272 3.04
Other investments (c) 62,154 4.31 213,939 1,863 3.53 253,600 1,999 3.20
- - ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $3,566,733 6.81% $3,536,950 $59,148 6.70% $3,509,388 $65,019 7.42%
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
Deposits $3,251,680 3.50% $3,235,814 $28,208 3.54% $3,092,843 $30,890 4.05%
Borrowings:
Short-term borrowings (d) 262 6.95 374 6 6.51 126,368 2,089 6.70
Long-term borrowings (d) 109,316 7.02 63,458 1,416 9.05 70,974 1,337 7.64
- - ----------------------------------------------------------------------------------------------------------------------------
Total borrowings 109,578 7.02 63,832 1,422 9.03 197,342 3,426 7.04
- - ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $3,361,258 3.62% $3,299,646 $29,630 3.64% $3,290,185 $34,316 4.23%
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
Excess of interest-earning assets
over interest-bearing liabilities $205,475 $237,304 $219,203
- - ----------------------------------------------------------------------------------------------------------------------------
Ratio of interest-earning assets over
interest-bearing liabilities 1.06 1.07 1.07
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
Net interest income - $29,518 $30,703
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.19% - -
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
"Average" interest rate spread - 3.06% 3.19%
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
Net yield on average earning assets - 3.34% 3.50%
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
</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.
38
<PAGE> 39
ASSET/LIABILITY REPRICING SCHEDULE
<TABLE>
<CAPTION>
at March 31, 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 3.67% $139,825 4% $130,212 $9,613 - - -
Fixed rate 4.66 173,747 5 49,390 2,005 59,437 33,068 29,847
Mortgage-backed securities:(b)
Adjustable rate 4.61 581,823 16 292,550 289,273 - - -
Fixed rate 6.93 348,696 10 28,873 18,521 99,023 61,403 140,876
Mortgage loans:(b)
Adjustable and renegotiable rate 7.42 1,670,140 46 1,168,719 271,125 173,913 56,383 -
Fixed rate 8.47 613,689 17 63,523 50,735 207,198 124,863 167,370
Consumer loans (b) 8.19 20,214 1 4,673 1,835 9,426 1,966 2,314
Assets held for sale 7.06 18,599 1 18,599 - - - -
-----------------------------------------------------------------------------------
Total rate sensitive assets 6.81% $3,566,733 100% $1,756,539 $643,107 $548,997 $277,683 $340,407
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES:
Deposits:
Checking accounts 1.11% $396,411 12% $106,092 $22,658 $74,276 $53,664 $139,721
Savings accounts 2.42 823,157 24 261,561 43,830 143,680 103,809 270,277
Money market deposit accounts 2.70 297,330 9 297,330 - - - -
Fixed-maturity certificates 4.70 1,734,782 52 759,835 261,318 494,428 151,638 67,563
-----------------------------------------------------------------------------------
3.50 3,251,680 97 1,424,818 327,806 712,384 309,111 477,561
Borrowings:(c)
FHL Bank advances 4.71 57,220 2 50,263 - 5,557 314 1,086
Other borrowings 9.88 35,962 1 - - 35,962 - -
Mortgage-backed note 8.80 16,396 * 16,396 - - - -
-----------------------------------------------------------------------------------
7.02 109,578 3 66,659 0 41,519 314 1,086
-----------------------------------------------------------------------------------
Total rate sensitive liabilities 3.62% $3,361,258 100% $1,491,477 $327,806 $753,903 $309,425 $478,647
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Excess (deficit) of rate sensitive assets
over rate sensitive liabilities (GAP) 3.19% $205,475 $265,062 $315,301 $(204,906) $(31,742) $(138,240)
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Cumulative GAP $265,062 $580,363 $375,457 $343,715 $205,475
Cumulative GAP to total assets without
regard to hedging transactions 7.05% 15.44% 9.99% 9.14% 5.47%
Cumulative GAP to total assets with
impact of hedging transactions 7.85% 15.90% 9.99% 9.14% 5.47%
</TABLE>
* Less than one percent.
(a) Includes investment in FHL Bank Stock.
(b) Excludes accrued interest and accumulated provisions for losses.
(c) Excludes ESOP borrowing
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.
39
<PAGE> 40
PART II. -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11, Statement re: Computation of Per Share Earnings
(b) (i) The Company filed a current report on Form 8-K on January 14, 1994
relating to the announcement of the Company's intent to repurchase
upto 984,000 shares of its outstanding common stock.
(ii) The Company filed a current report on Form 8-K on January 19,
1994 relating to the announcement of the death of Faustin A. Pipal,
the former Chairman of the Board of Directors.
(iii) The Company filed a current report on Form 8-K on March 16, 1994
relating to the scheduled date and the record date for the 1994 annual
meeting of stockholders'.
40
<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ST. PAUL BANCORP, INC.
(Registrant)
Date: May 13, 1994 By: /s/ Joseph C. Scully
Joseph C. Scully
Chairman of the Board and Chief Executive Officer
(Duly Authorized Officer)
Date: May 13, 1994 By: /s/ Robert N. Parke
Robert N. Parke
Senior Vice President and Treasurer
(Principal Financial Officer)
41
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three months ended
September 30, 1993
------------------
<S> <C> <C>
1. Net income $ 8,197,954
2. Weighted average common
shares outstanding 19,497,747
------------
3. Earnings per
common share $ 0.42
------------
------------
4. Weighted average common
shares outstanding 19,497,747
5. Common stock equivalents
due to dilutive
effect of stock options 948,934
------------
6. Total weighted average
common shares and
equivalents outstanding 20,446,681
------------
------------
7. Primary earnings per share $ 0.40
------------
------------
8. Total weighted average
common shares and
equivalents outstanding
(Line 6) 20,446,681
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 ---
------------
10. Total shares for fully
diluted earnings per share 20,446,681
------------
------------
11. Fully diluted earnings
per share $ 0.40
------------
------------
</TABLE>
42
