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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1993
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 No. 0-15580
St. Paul Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 36-3504665
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6700 West North Avenue, Chicago, Illinois 60635
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(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (312) 622-5000.
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Preferred Stock Purchase Rights
--------------------------------
(Title of Class)
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 12 months (or for 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x].
Based upon the market price of the registrant's common stock as of March
18, 1994, the aggregate market value of the voting stock held by non-affiliates
of the registrant is $326,842,109.*
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date, is:
Class: Common Stock, par value $0.01 per share.
Outstanding at March 18, 1994: 19,696,331 shares.
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Documents Incorporated By Reference:
PARTS I, II, AND IV:
Portions of the Annual Report to Shareholders for the fiscal year ended
December 31, 1993.
PART III:
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 4, 1994. Notwithstanding anything to the
contrary set forth herein, the Report of the Organizational Planning and Stock
Option Committees on Executive Compensation and the Corporate Performance Graph
contained in the proxy statement shall not be incorporated by reference.
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* Solely for purposes of this calculation, all executive officers and
directors of the registrant are considered to be affiliates. Also
included are shares held by various employee benefit plans where trustees are
directors of the registrant.
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PART I
ITEM 1. BUSINESS
GENERAL
St. Paul Bancorp, Inc. (the "Company") was incorporated under the laws of
the State of Delaware in February 1987 by authorization of the Board of
Directors of St. Paul Federal Bank For Savings ("St. Paul Federal" or the
"Bank") for the purpose of becoming the holding company of St. Paul Federal
upon the Bank's conversion from federal mutual to federal stock form.
As a Delaware corporation, the Company is authorized to engage in any
activity permitted by the Delaware General Corporation Law. The Company is
presently conducting business as a non-diversified unitary thrift holding
company. The holding company structure allows the Board of Directors greater
flexibility to diversify and expand its business activities, through newly
formed subsidiaries or through acquisitions of insured depository institutions
and other companies. See "Regulation -- Thrift Holding Company Regulation."
At present, the primary business of the Company is the business of St. Paul
Federal, a federally chartered stock savings bank.
St. Paul Federal is a consumer oriented retail financial institution,
operating 50 banking offices throughout the Chicago, Illinois metropolitan
area, including 15 "in-store" full-service offices located in OMNI(R) grocery
superstores. The in-store banking offices provide the Bank access to an
expanded retail customer base. Through each of its banking offices, the Bank
attracts retail deposits from the general public in the neighborhoods and
surrounding suburbs of metropolitan Chicago with high levels of home ownership
and favorable savings patterns. Deposit accounts in the Bank are insured by
the Federal Deposit Insurance Corporation ("FDIC").
The Bank focuses its current lending activities on the origination and
purchase of mortgages secured by 1-4 family residential properties and the
purchase of mortgage-backed securities ("MBS"). In addition to originating
loans its local market area, the Bank utilizes a correspondent loan program to
originate 1-4 family loans in the states of Illinois, Wisconsin, Indiana,
Michigan, and Ohio. The Bank also offers a variety of consumer loan products.
The Bank's focus on retail operations includes significant diversification
of income sources beyond net interest income. The Bank has approximately
146,000 checking accounts, which generate significant fee income. The Bank
engages in mortgage banking activities and operates approximately 174 automated
teller machines ("ATMs") throughout the Chicago metropolitan area.
In 1994, the Bank plans to originate mortgage loans secured by 5 to 35
unit apartment buildings located in the Chicago metropolitan area. Management
has targeted the origination of $50 million of loans under this new
multi-family lending program in 1994.
On February 23, 1993, the Company acquired Elm Financial Services, Inc.,
the holding company for Elmhurst Federal Savings Bank, an FDIC insured savings
bank
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(the "Elm Acquisition"). The acquisition of Elm Financial added 8 offices to
the Bank's branch network and significantly expanded the Bank's presence in
eastern Du Page County, Illinois. For further discussion see "Acquisition
Activities" in Management's Discussion and Analysis and "NOTE Y -Acquisition of
Elm Financial" to the Consolidated Financial Statements contained in the 1993
annual report to shareholders filed as an exhibit hereto.
The Bank is a member of the Federal Home Loan Bank ("FHLB") System. The
Bank is subject to comprehensive examination, supervision and regulation by the
Office of Thrift Supervision (the "OTS") and the FDIC. The Bank is also
regulated by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). Regulation of the Bank by the FDIC, the OTS and the Federal
Reserve Board is intended primarily for the protection of depositors. See
"Regulation."
The Bank controls three principal subsidiaries: Investment Network,
Inc., which engages in the discount brokerage business; St. Paul Service, Inc.
("SPSI"), which operates an insurance brokerage business; and Managed
Properties, Inc., which manages foreclosed real estate.
During 1991, the Company established a second wholly-owned subsidiary,
Annuity Network, Inc. ("ANI"), which began operations on November 1, 1991. The
business activity of ANI is the sale of annuity products. Prior to the
incorporation of ANI, annuity products had been sold by SPSI, a subsidiary of
the Bank. The earnings and cash flows of ANI are affected by the revenue lease
sharing arrangement with SPSI which was entered into on June 30, 1993. This
agreement was designed to compensate SPSI for providing ANI access to its
customers. While the agreement impacts the earnings and cash flows of the two
companies, it has no impact on the consolidated results of operations.
During 1993, the Company acquired St. Paul Financial Development
Corporation ("St. Paul Financial") from the Bank at its fair market value. St.
Paul Financial primarily engages in single family real estate development in
the Chicago metropolitan area.
The Company's executive offices are located at 6700 West North Avenue,
Chicago, Illinois 60635, telephone (312) 622-5000. Financial information
contained in this Form 10-K concerning the Company is presented on a
consolidated basis with its subsidiaries, unless otherwise indicated.
See page 21 of Management's Discussion and Analysis contained in the 1993
annual report to shareholders filed as an exhibit hereto for an overview of the
Bank's investing and financing activities.
MARKET AREA
St. Paul Federal is based in Chicago, Illinois, the third largest
metropolitan area in the United States. Based on total assets of $3.7 billion
at December 31, 1993, St. Paul Federal was the largest independent savings
institution headquartered in Illinois. The Bank's deposits are primarily
derived from the areas where its 50 banking offices are located. The Bank does
not
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actively solicit deposits outside the Chicago metropolitan area and does not
use brokers to obtain deposits.
St. Paul Federal strives for the betterment of the greater Chicago area
and particularly those communities and neighborhoods it serves directly. The
Bank attempts to serve the credit needs of the communities where its offices
are located. In fulfilling the credit needs in its principal lending
communities, the Bank funded over $1.7 billion in 1-4 family residential
mortgage loans in the metropolitan area from 1989 through 1993.
See "Liquidity" and "Credit" in Management's Discussion and Analysis and
"NOTE W - Concentration of Credit Risk" to the Consolidated Financial
Statements contained in the 1993 annual report to shareholders filed as an
exhibit hereto and "Multi-Family and Commercial Real Estate Loans" below, for a
discussion of asset origination and purchases beyond the Chicago area market.
INVESTMENTS
Federally chartered savings banks have authority to invest in various
types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit at
insured depository institutions, certain bankers' acceptances and Federal
funds. Subject to various restrictions, federally chartered savings
institutions may also invest a portion of their assets in commercial paper and
corporate debt securities and in mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly. Historically, the Bank has limited its
investments to United States Treasury obligations, securities of various
federal agencies, and federal funds.
The Bank is required to maintain liquid assets at minimum levels which
vary from time to time. St. Paul Federal's liquid investments primarily
include United States government and agency securities and federal funds sold.
See "Liquidity" in Management's Discussion and Analysis, and "NOTE B - Cash and
Cash Equivalents," "NOTE C - Marketable-Debt Securities," and "NOTE K - Federal
Home Loan Bank Stock" contained in the 1993 annual report to shareholders filed
as an exhibit hereto. See "Regulation" following.
The Bank's investment policy allows the Bank to deal only with primary
government securities dealers. The Bank's policy permits investment in
corporate bonds of at least "AA" or equivalent rating but limits investments to
no more than $5.0 million in bonds of any one corporate issuer. The policy
permits investments in United States Treasury and government securities with
terms up to five years, negotiable certificates of deposit, bankers'
acceptances, commercial paper with terms up to nine months, and federal
funds with terms of no more than one year. The amount of the Bank's
investments in term federal funds, negotiable certificates of deposit and
commercial paper are limited by Bank policy based on a specified percentage of
liquidity. The Bank places overnight federal funds with large commercial banks
in the United States, based upon periodic review of the financial condition of
these institutions. Based upon the results of this review, the Bank limits
investments in overnight federal funds with these financial institutions at
predetermined levels, approved by the Board of Directors.
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The following table sets forth the carrying amounts of investment
securities on a consolidated basis at December 31:
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<CAPTION>
Dollars in Thousands
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1993 1992 1991
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<S> <C> <C> <C>
Federal funds sold $ 56,200 $ 49,000 $ 15,800
Cash equivalent marketable-debt
securities:
U. S. Treasury securities 15,503 7,048 5,834
U. S. Agency securities 176,823 182,579 247,355
Other marketable debt-securities
of the U.S. Government 142,051 107,732 25,410
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$ 390,577 $ 346,359 $ 294,399
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Weighted average interest rate 3.54% 3.63% 4.81%
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</TABLE>
Of the $390.6 million of investment securities at December 31, 1993,
$269.7 million at a weighted average rate of 3.16% will mature within one year
and $120.8 million at a weighted average rate of 4.38% will mature between one
and five years.
Trading Account. Prior to 1994, the Bank maintained a trading account
which was used to buy and sell specifically identified assets for market gains.
Beginning in 1994, the Bank discontinued these trading account activities in
order to focus more attention on other investment activities. The Bank had no
securities in its trading portfolio at December 31, 1993, 1992 and 1991.
See "RESULTS OF OPERATIONS - COMPARISON OF YEARS ENDED DECEMBER 31, 1993
AND 1992. Other Income" in Management's Discussion and Analysis in the 1993
annual report to shareholders filed as an exhibit hereto for a discussion of
the classification of MBS originated through mortgage banking operations as
trading account assets in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 65, "Accounting for Certain Mortgage Banking
Activities," as amended by SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
MORTGAGE-BACKED SECURITIES
The Bank purchases and holds for investment MBS which are backed by 1-4
family mortgage loans. The MBS portfolio includes both purchased securities
and swapped mortgages that are held as long-term investments. This portfolio
includes both fixed- and adjustable-rate securities backed by the Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association
("FNMA"), and Government National Mortgage Association ("GNMA") as well as
privately issued securities. MBS qualify as mortgage loans for income tax
purposes (see "Regulation - Taxation"). See "Liquidity" in "Management's
Discussion and Analysis," contained in the 1993 annual report to shareholders
filed as an exhibit hereto, for discussion of other attributes of MBS.
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The following table summarizes MBS portfolio held for investment at
December 31, 1989 through 1993 (dollars in thousands):
<TABLE>
<CAPTION>
At December 31
1993 % 1992 % 1991 % 1990 % 1989 %
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FHLMC $189,789 26% $ 83,352 13% $120,953 17% $136,720 20% $151,245 24%
FNMA 167,480 23 121,331 19 163,920 23 184,688 27 204,247 32
GNMA 2,312 0 6,368 1 7,465 1 8,433 1 9,452 1
Privately issued 374,068 51 432,890 67 425,016 59 359,225 52 277,216 43
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Total MBS $733,649 100% $643,941 100% $717,354 100% $689,066 100% $642,159 100%
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Weighted average rate 5.91% 7.26% 8.61% 9.09% 8.99%
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</TABLE>
<TABLE>
<CAPTION>
At December 31
1993 % 1992 % 1991 % 1990 % 1989 %
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable rate $539,486 74% $328,422 51% $281,616 39% $251,049 36% $177,834 28%
Fixed rate 194,163 26 315,519 49 435,738 61 438,017 64 464,325 72
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Total MBS $733,649 100% $643,941 100% $717,354 100% $689,066 100% $642,159 100%
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</TABLE>
Of the $733.6 million of MBS held at December 31, 1993, $10.6 million at
a weighted average rate of 5.82% is contractually scheduled to mature within one
year, $50.3 million at a weighted average rate of 5.85% is contractually
scheduled to mature in one to five years, $85.4 million at a weighted average
rate of 5.90% is contractually scheduled to mature in five to ten years, and
$587.3 million at a weighted average rate of 5.92% is contractually scheduled to
mature after 10 years.
The Bank purchases MBS issues of government sponsored enterprises (i.e.
FNMA, FHLMC, GNMA) or private labels rated at least "AA" by a major rating
agency. If, subsequent to purchase, a security is downgraded below "AA" by a
nationally recognized rating agency, the Bank reevaluates the credit
worthiness of the security to determine whether it should be sold. See "NOTE A
- - Summary of Significant Accounting Policies" contained in the 1993 annual
report to shareholders filed as an exhibit hereto.
St. Paul Federal also acquires MBS under matched funding arrangements
whereby the Bank can enhance its net interest income with profitable spread
opportunities and low costs of execution and servicing. The Bank also owns MBS
that relate to 1-4 family mortgages originated by St. Paul Federal that were
swapped with FNMA or FHLMC for their government sponsored agency certificates.
As of December 31, 1993, 16.5% of the Bank's MBS were acquired as a
result of such swaps. All of the MBS created through the securitization of 1-4
family loans during 1993 and 1992 were sold during each of the respective
years. See "Sale of Mortgages and MBS" following.
The following table summarizes MBS purchases for the years ending
December 31, 1989 through 1993 (dollars in thousands):
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<TABLE>
<CAPTION>
MBS Purchases
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At December 31
1993 % 1992 % 1991 % 1990 % 1989 %
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FHLMC $113,118 34 % $ - - % $ - - % $ - - % $ - - %
FNMA 79,747 24 - - - - - - - -
Privately issued $ 82,996 25 218,224 100 217,697 100 130,269 100 264,914 100
Acquired from Elm
Financial 57,192 17 - - - - - - - -
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Total $333,053 100% 218,224 100% $217,697 100% $130,269 100% $264,914 100%
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Adjustable rate $332,873 100% $168,989 78% $194,632 89% $114,907 88% $157,108 59%
Fixed rate 180 * 49,235 22 23,065 11 15,362 12 107,806 41
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Total $333,053 100% $218,224 100% $217,697 100% $130,269 100% $264,914 100%
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</TABLE>
* Less than one percent.
LENDING
1-4 Family Mortgage Loans. At December 31, 1993, St. Paul Federal held in
its loan portfolio $1.1 billion of first mortgage loans secured by 1-4 family
residential housing, or 95.2% of its total 1-4 family mortgages. The
remaining 4.8% of 1-4 family mortgage loans held in portfolio as of December
31, 1993 represented junior mortgages.
The Bank's loans are predominately "conventional" loans, i.e., loans that
are not insured by the Federal Housing Administration ("FHA") or guaranteed by
the Veterans Administration ("VA"). As of December 31, 1993, the Bank's 1-4
family mortgage loan portfolio was comprised of $1.0 billion of individual
loans originated by St. Paul Federal (including loans acquired from Elm
Financial) and $177.7 million of loans purchased from other institutions.
Purchased loans have included mortgages with servicing retained and with
servicing released. Also, purchased mortgage servicing rights have been
acquired.
During 1993, the Bank originated adjustable-rate mortgage loans ("ARMs"),
ARMs with initial fixed-interest rate periods of 3-5 years and fixed rate
mortgage loans. All ARM loans (including those loans with initial
fixed-interest rate periods ranging from 3-5 years) fully amortize over a 30
year period and have interest rate and payment adjustments made at regular
intervals based on various rate indices. During 1993, the majority of ARMs
originated were tied to the national cost of funds, the 11th district cost of
funds, or the one-year constant maturity treasury bill. Fixed rate loans were
originated for 10-, 15- and 30 year periods. The 15 and 30 year fixed-rate
mortgage loans fully amortize at their maturity while the 10-year fixed-rate
mortgage loan requires both monthly amortization based upon a 30-year
amortization schedule and a balloon payment upon maturity. In the past, the
Bank also originated a 7 year balloon mortgage, which provided for monthly
amortization based upon a 30-year amortization period. Although the Bank
currently does not originate this product, $39.2 million of these mortgages
were held at December 31, 1993. Generally, the Bank's policy is to sell
conforming 15 and 30 year fixed rate loans in the secondary market. See "Sales
of Mortgages and Mortgage Backed Securities" discussion following.
The Bank achieved record origination volumes in 1993 due to record mortgage
refinancings caused by the lowest mortgage rates in over twenty years. The
Bank
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originated $172.2 million of ARMs, $151.8 million of ARMs with initial
fixed-interest rate periods of 3-5 years, and $211.6 million of fixed-rate
loans in 1993. See Management's Discussion and Analysis - "Credit" and
"Results of Operations - Comparison of Years Ended December 31, 1993 and 1992"
contained in the 1993 annual report to shareholders filed as an exhibit hereto.
At December 31, 1993, 63% of the Bank's 1-4 family loan portfolio was
comprised of adjustable rate loans (including ARMs with initial fixed-interest
rate periods of 3-5 years) and 37% of the portfolio was comprised of fixed rate
loans. Of the adjustable rate products held in the Bank's portfolio, the
majority reprice based upon one of the following three indices: the national
cost of funds, the 11th district cost of funds, or the one year constant
maturity treasury bills. Original repricing intervals range from one month to
five years, with the majority of the adjustable rate mortgage loans repricing
on an annual basis. The weighted average lifetime caps on the Bank's
adjustable rate 1-4 family mortgage loans at December 31, 1993 approximated
13%. At December 31, 1993, $112.5 million of 1-4 family loans were at their
weighted average floor rate of 8.24%. This weighted average floor was 158
basis points higher than the fully-indexed loan rate at December 31, 1993.
The Bank's primary method of originating 1-4 family mortgages is through
applications taken in its retail branches and servicing departments. Demand
for 1-4 family loans is created through both advertisement and promotion and
referrals from builders and real estate brokers.
The Bank's secondary method of originating 1-4 family mortgages is through
loan correspondents (mortgage brokers and other financial institutions)
primarily located in Illinois. In addition, the Bank has developed
correspondent lending relationships to originate loans in selected areas of
surrounding states, which include Wisconsin, Indiana, southwest Michigan, and
Ohio. During 1993, $110.8 million of 1-4 family mortgage loans were originated
through correspondents in Illinois and $66.0 million of mortgage loans were
originated through brokers in surrounding states. At December 31, 1993, $203.1
million of the Bank's 1-4 family mortgage loan portfolio had been originated
through Illinois brokers and $97.8 million had been originated through brokers
in surrounding states.
The Bank's loan approval process assesses both the prospective borrower's
ability to repay and the adequacy of the property as collateral for the loan
requested. Detailed residential loan applications are submitted to salaried,
full-time employees of the Bank with designated credit approval dollar limits.
Where the loan approval exceeds an employee's authority, the credit is reviewed
by increasingly higher levels of management. The Bank generally requires that
borrowers obtain mortgage insurance on the portion of the loan which exceeds
80% of the value of the real estate and improvements. St. Paul Federal does
not fund conventional mortgage loans which exceed 95% of the value of the real
estate securing the loan.
St. Paul Federal's mortgage lending is subject to prescribed loan
origination procedures which are based upon the standards of the FNMA, FHLMC
and other institutional investors. Property appraisals on the real estate
collateral securing St. Paul Federal's 1-4 family mortgage loans are made by
staff appraisers and by independent appraisers approved by the Bank's Board of
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Directors. Appraisals of 1-4 family properties by independent appraisers are
reviewed by the Bank's staff appraisers.
Loan packages received from correspondents are underwritten before
disbursement in accordance with the same guidelines the Bank applies to its
direct originations. Appraisals are obtained from approved appraisers and are
subject to further evaluation by outside consultants or by the Bank's own
Appraisal Department.
The Bank obtains title insurance policies on first mortgage real estate
loans. Borrowers also must obtain hazard insurance prior to closing and, when
required by the United States Department of Housing and Urban Development,
flood insurance. Borrowers may be required to advance funds to a mortgage
escrow account from which the Bank makes disbursements for items such as real
estate taxes, hazard insurance premiums and mortgage insurance premiums as
they become due.
Mortgage loans funded by St. Paul Federal include a "due-on-sale" clause,
which is a provision giving the Bank the right to declare a loan immediately
due and payable in the event, among other things, that the borrower sells or
otherwise disposes of the real property subject to the mortgage and the loan is
not repaid. Due-on-sale clauses are an important means of speeding the
repayment of low interest-rate loans in high interest-rate environments. It is
St. Paul Federal's policy to actively enforce such clauses. The average life
of the Bank's one-to-four family loans varies from year to year with changes in
interest rates but has generally ranged from six to nine years.
The Bank also accesses the secondary market to purchase 1-4 family
mortgage loans to supplement its loan originations. Under the Bank's 1-4
family loan acquisition program, St. Paul Federal emphasizes adjustable rate,
first mortgages that are also owner occupied. The Bank reviews the reputation
of each of the sellers, and servicers if applicable, and generally uses
sampling methods to evaluate the quality of the seller's underwriting. In
addition, depending on the representations and warranties obtained and other
factors, the Bank may review each loan presented in a pool prior to purchase.
The Bank only purchases whole loans that meet its established underwriting and
pricing requirements. Purchases of 1-4 family mortgage loans have been minimal
in recent years. See Management's Discussion and Analysis - "Credit" contained
in the 1993 annual report to shareholders filed as an exhibit hereto.
Multi-Family and Commercial Real Estate Loans. At December 31,1993, the
Bank had approximately $1.14 billion in multi-family commercial real-estate and
land loans outstanding, constituting 48.5% of the Bank's loan portfolio, which
were originated through a "Nationwide" lending program.(a) Of this amount,
$1.06
- -------------------------------
(a) The Bank also originated multi-family and commercial real estate
loans prior to the establishment of the Nationwide lending program. The
remaining loan balance for these assets was assets was $4.8 million at December
31, 1993. Also, the Bank acquired 82 multi-family and commercial real
estate loans totaling $29.3 million during 1993 as part of the Elm
Financial acquisition.
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billion represented multi-family loans, $73.0 million represented commercial
real estate loans, and $10.3 million represented land loans. For a discussion
of geographic concentration risk associated with the Nationwide lending
program, see "NOTE W - Concentration of Credit Risk" to the Consolidated
Financial Statements and "Credit" in Management's Discussion and Analysis
contained in the 1993 annual report to shareholders filed as an exhibit hereto.
Since 1990, the Bank's only multi-family or commercial lending activity
outside of the Chicago metropolitan area has been limited to financing
arrangements provided to facilitate real estate owned ("REO") sales or to
reacquire loans that had been sold with recourse provisions. See "NOTE U -
Financial Instruments With Off- Balance Sheet Credit Risk" to the audited
financial statements contained in the 1993 annual report to shareholders filed
as an exhibit hereto.
At the time of originations, all of the properties securing the loans
that were originated under the "Nationwide" lending program were inspected by
the Bank's loan underwriters. The Bank obtained appraisals of each property
in accordance with federal regulations. Appraisals used in connection with
underwriting were performed by independent appraisers who were members of the
American Institute of Real Estate Appraisers (MAI) and were approved by the
Bank's Board Of Directors. The Bank's original underwriting policy for
multi-family and commercial loans required debt service coverage ratios of
1.10:1, using the midpoint of the interest rate ceilings and floors.
Appraisals performed by independent appraisers during original underwriting
indicated loan-to-value ratios for the Bank's multi-family and commercial loans
that ranged from 25% to 86% with an average loan-to-value ratio of 71.5% at the
time of origination. To minimize the risks involved in originating these
loans, Management considered, among other things, the creditworthiness of
borrowers (although most of the Nationwide loans have been without recourse
against the borrowers), the location of the real estate, the condition and
occupancy levels of the real estate collateral, as well as the competitive
marketplace and operating results of the property. To ensure that the loan
documents complied with applicable state laws, all transactions were reviewed
and closed by local law firms. Most of the loans were referred to the Bank by
mortgage brokerage firms. Referring mortgage brokers were paid by the
borrowers.
All multi-family and commercial real estate loans were approved by the
loan committee of the board of directors. Any loan of $5.0 million or more was
reviewed and approved by the entire Board of Directors.
The Bank has implemented new credit administration procedures for its
Nationwide loans in recent years. The credit administration procedures require
annual inspections of the real estate serving as collateral for such loans (or
more frequent if the Bank deems warranted) and an analysis of the borrowers'
operating statements. Also, each Nationwide loan is assigned to a portfolio
administrator who has responsibility to monitor and analyze specific geographic
areas of the country. The Bank's credit administration procedures require
preparation and maintenance of comprehensive credit analyses on all Nationwide
loans. Independent appraisals are obtained in accordance with federal
regulations or as deemed warranted by Management.
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The Bank's multi-family loans are secured by apartment buildings and
complexes. These loans range in amount from $20,000 to $26.6 million, and the
apartment complexes securing the loans contain from five to 600 units.
Borrowers are individuals or partnerships with substantial experience in real
estate investment and generally, the loans were made on a non-recourse basis.
Loan proceeds have been used to purchase the collateral or to refinance existing
loans from other financial institutions.
Of the multi-family and commercial real estate loans, 91.1% were first
mortgage liens and 8.9% were second mortgages as of December 31, 1993. Second
mortgages were underwritten on the basis of the total outstanding indebtedness,
including the senior mortgages.
The Bank holds sixty commercial real estate loans which are either secured
by office buildings, shopping centers, or industrial buildings. The total
amount of such loans outstanding at December 31, 1993 was $73.0 million or
3.1.% of the Bank's total loan portfolio. The loans ranged in principal amount
from $32,000 to $7.9 million as of December 31, 1993. These loans have been
made under similar terms and underwriting criteria as the Bank's multi-family
loans.
Multi-family and commercial real estate loans have been made for up to
fifteen-year terms, in most cases with only interest payable during the first
five years. Amortization of principal on multi-family and commercial loans
generally begins in the sixth year and is based on a 25-year amortization
schedule. As of December 31, 1993, approximately 75% or $858.4 million of the
Multi-Family, Commercial Real Estate and Commercial Land portfolio is in its
amortization term. Prepayment is permitted without penalty in most cases. The
initial interest rate generally has been fixed from 8% to 13.5%, depending on
the prevailing rates at the time the loan was originated, for initial periods
ranging from three months to one year. Following such initial period, the
interest rate typically adjusts either quarterly or semiannually, although
annual or monthly adjustments have been established in certain instances.
Adjustments are made to a level that is a percentage above a specified index.
As of December 31, 1993, approximately 90.9% of the Bank's multi-family and
commercial mortgage loan portfolio contains adjustable-rate mortgages that
reprice based on a variety of indices including: the FHLB National Cost Of
Funds Index, the FHLB 11th District Cost Of Funds Index, the U.S. Treasury Bill
Index, and the Prime Rate. Interest rate ceilings and floors have been
established on the multi-family and commercial loans and, except for loans tied
to the Treasury Bill Index, the loans typically do not contain limits
on the interest-rate adjustments that may occur in any one adjustment period.
The remaining 9.1% of the Bank's multi-family and commercial mortgage loans
portfolio contain fixed interest rates.
At December 31, 1993, $781.7 million, or approximately 81.8%, of
Nationwide multi-family and commercial loans were at their weighted average
floor rate of 8.05%. This weighted average floor was 174 basis points higher
than the fully-indexed loan rate at December 31, 1993. The majority of these
loans reprice quarterly and are adjusted to the FHLB National Cost Of Funds
Index or the 11th District Cost Of Funds Index. See "Interest Rate Risk" in
Management's Discussion and Analysis contained in the 1993 annual report to
shareholders filed as an exhibit hereto.
12
<PAGE> 13
In certain other instances, the mortgage notes permit the deferral of
interest payments (i.e.., negative amortization) in the event that the
applicable interest rate increases above a specified percentage, during the
first five years of the loan. In 1993, there were no instances of negative
amortization due to market interest rates declining throughout the year. Such
deferrals are not permitted to exceed 10% of the original loan amount. At
December 31, 1993, total negative amortization on the Nationwide portfolio
recorded as income was $204,000.
The Bank plans to originate loans secured by existing 5-35 unit apartment
buildings located in the six county Chicago metropolitan area in 1994. Site
inspections and environmental questionnaires will be performed for every
property, with a full Phase I environmental investigation and report required
for all properties securing loans in excess of $1.0 million. The Bank's
internal Commercial Real Estate Review Committee will approve all loan
applications. Applications for loans in excess of $1.0 million will also be
approved by the Loan Committee of the Board of Directors. The loans originated
under this 5-35 unit loan program will be administered under the existing
multi-family and commercial Loan Servicing Department of the Bank. Management
hopes to originate $50 million of loans under this new program in 1994. See
Management's Discussion and Analysis "Credit" contained in the 1993 annual
report to shareholders for a discussion of underwriting standards for these
loans.
The Bank encounters certain environmental risks in its lending activities.
Under federal and state environmental laws, lenders may become liable for the
costs of cleaning up hazardous materials found on security properties. Certain
states may also impose liens with higher priorities than first mortgages on
properties to recover funds used in such efforts. Although the foregoing
environmental risks are more usually associated with industrial and commercial
loans, environmental risks may be substantial for residential lenders, like St.
Paul Federal, since environmental contamination may render the security
property unsuitable for residential use. In addition, the value of residential
properties may become substantially diminished by contamination of nearby
properties. In accordance with the guidelines of FNMA and FHLMC, appraisals
for 1-4 family homes on which the Bank lends include comment on environmental
influences and conditions. St. Paul Federal attempted to control its exposure
to environmental risks with respect to multi-family, commercial and land loans
originated under the Nationwide lending program by utilizing one or more of
the following techniques: requiring borrowers to agree not to cause or permit
the storage, disposal or presence of hazardous substances; by training its
lending personnel to recognize the signs of environmental problems when they
inspect properties; by requiring borrowers to represent and warrant that
properties securing loans do not contain hazardous waste, asbestos or other
such substances; by requiring borrowers to indemnify St. Paul Federal, with
personal recourse, against environmental losses; by obtaining reports from
consulting engineers on all loans to facilitate the sale of real estate owned
or secured by non-residential properties and on 5-35 unit residential
properties or where the loan exceeds $1 million; and by obtaining further
environmental reviews and tests where indicated by information obtained
from borrowers or from property inspections or otherwise. No assurance can be
given, however, that the value of properties securing loans in the Bank's
portfolio will not be adversely affected by the presence of
13
<PAGE> 14
hazardous materials or that future changes in federal or state laws will not
increase St. Paul Federal's exposure to liability for environmental cleanup.
Consumer Loans. Federal regulations permit federally chartered savings
institutions to make secured and unsecured consumer loans up to 30% of the
institution's total assets. In addition, a federal savings institution has
lending authority above the 30% limitation for certain consumer loans, such as
home equity loans (loans secured by equity in the borrower's residence but not
necessarily for the purpose of improvement), property improvement loans and
deposit account secured loans. At December 31, 1993, the Bank's consumer loans
totaled $19.7 million, or 0.53% of assets. St. Paul Federal originates
automobile loans, home improvement loans, education loans, and personal loans
that are made to depositors on the security of their deposit accounts. The
Bank also offers credit card services through an agency agreement with another
financial institution. Beginning in 1993, the Bank no longer owns credit card
loans.
Loans Held For Investment
The following table summarizes loans receivable portfolio held for
investment at December 31, 1989 through 1993 (dollars in thousands):
<TABLE>
<CAPTION>
At December 31
1993 % 1992 % 1991 % 1990 % 1989 %
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
1-4 family units $1,190,273 51% $1,080,374 47% $1,145,898 47% $1,093,571 45% $ 923,585 40%
Multi-family units 1,057,571 46 1,141,002 50 1,223,759 50 1,257,101 52 1,318,159 57
Commercial 73,029 3 66,725 3 65,129 3 71,758 3 69,897 3
Land and land development 10,307 * 3,126 * 2,304 * 2,400 * - -
- --------------------------------------------------------------------------------------------------------------------------------
Total mortgage loans $2,331,180 100% $2,291,227 100% $2,437,090 100% $2,424,830 100% $2,311,641 100%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
CONSUMER LOANS:
Secured by deposits $ 2,300 11% $ 2,374 9% $ 3,664 15% $ 4,203 16% $ 4,686 20%
Education (guaranteed) 2,166 11 2,194 8 2,620 11 2,802 11 1,001 5
Home improvement 1,110 6 1,589 6 2,367 10 2,735 10 3,444 15
Auto 13,971 71 9,704 35 5,198 21 6,062 23 6,571 28
Credit card and personal 166 1 11,791 43 10,765 43 10,365 40 7,447 32
- --------------------------------------------------------------------------------------------------------------------------------
Total consumer loans $ 19,713 100% 27,652 100% $ 24,614 100% $ 26,167 100% $ 23,149 100%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment $2,350,893 $2,318,879 $2,461,704 $2,450,997 $2,334,790
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average rate 7.88% 8.53% 9.52% 10.07% 10.12%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
* Less than one percent
</TABLE>
<TABLE>
<CAPTION>
At December 31
1993 % 1992 % 1991 % 1990 % 1989 %
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Adjustable $1,688,278 72% $1,708,346 74% $1,957,306 80% $2,081,832 85% $1,960,157 84%
Fixed 662,615 28 610,533 26 504,398 20 369,165 15 374,633 16
- --------------------------------------------------------------------------------------------------------------------------------
Total loans receivable $2,350,893 100% 2,318,879 100% $2,461,704 100% $2,450,997 100% $2,334,790 100%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
Loan Origination and Purchases
The following tables sets forth loan origination and purchases for the
years ended December 31, 1989 through 1993 (dollars in thousands).
<TABLE>
<CAPTION>
1993 % 1992 % 1991 % 1990 % 1989 %
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
1-4 family units:
Originations $ 535,574 61% $ 520,572 85% $ 283,492 58% $ 175,047 38% $ 226,215 57%
Purchases 13,860 2 7,194 1 151,625 31 189,835 41 1,979 *
Acquired from Elm Financial 229,083 26 --- - --- -- --- -- --- -
Multi-family units* 69,962 8 48,847 8 29,623 6 64,248 15 141,422 36
Commercial 1,300 * 5,651 1 - - 2,650 1 7,768 2
Land loans --- - 1,590 * - - 2,400 * - -
Consumer 25,016 3 32,322 5 24,495 5 25,142 5 21,224 5
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 874,795 100% $ 616,176 100% $ 489,235 100% $ 459,322 100% $ 398,608 100%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Adjustable rate $ 402,169 46% $ 248,277 40% $ 241,644 49% $ 371,507 81% $ 339,634 85%
Fixed 472,626 54 367,899 60 247,591 51 87,815 19 58,974 15
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 874,795 100% $ 616,176 100% $ 489,235 100% $ 459,322 100% $ 398,608 100%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average rate 7.40% 7.83% 9.61% 10.12% 10.06%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
* Less than one percent
</TABLE>
Scheduled Loan Principal Repayments
The following table sets forth as of December 31, 1993 information
regarding the dollar amount of loans receivable maturing in the Bank's
portfolio, including assets held for sale, based on either their contractual
terms to the maturity or scheduled principal amortization.
<TABLE>
<CAPTION>
Periods During Multi- Total
Which Loans 1-4 Family/ for Percentage
Mature Family Commercial Consumer Period of Total
- ----------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
1994 $ 48,266 $ 55,297 $13,937 $ 117,500 4.9%
1995-1998 100,406 813,403 11,077 924,886 38.9
1999 and
thereafter 1,062,623 272,207 2,174 1,337,004 56.2
-------------------------------------------------------
Total $1,211,295 $1,140,907 $27,188 $2,379,390 100.0%
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
Loan Repricing
The following table sets forth certain information at December 31, 1993
regarding the dollar amount of loans receivable maturing in the Bank's
portfolio, including assets held for sale, based on their scheduled principal
amortization, maturity or scheduled interest-rate repricing. See Management
Discussion and Analysis "Interest Rate Risk" and "GAP Table" following.
- -----------------
(a) 1993, 1992 and 1991 primarily includes loans to facilitate the sale
of foreclosed real estate assets and repurchases of assets under recourse
arrangements.
15
<PAGE> 16
<TABLE>
<CAPTION>
Periods During
Which Loans Multi- Total
Mature or 1-4 Family/ for Percentage
Are Repriced(a) Family Commercial Consumer Period of Total
- ------------ --------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
1994 $ 534,302 $ 923,078 $13,937 $1,471,317 61.8%
1995-1998 352,528 145,130 11,077 508,735 21.4
1999 and
thereafter 324,465 72,699 2,174 399,338 16.8
-------------------------------------------------------
Total $1,211,295 $1,140,907 $27,188 $2,379,390 100.0%
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
The following table sets forth as of December 31, 1993 the dollar amount
of loans receivable in the Bank's portfolio due after December 31, 1994
categorized by either fixed interest rates or floating and adjustable interest
rates.
<TABLE>
<CAPTION>
Loans Due After
December 31, 1994
Fixed Floating and
Rates Adjustable Rates
-------- ----------------
(In thousands)
<S> <C> <C>
Real estate mortgage loans:
1-4 family........................... $403,117 $ 759,912(b)
Multi-family and other............... 197,658 887,952
-------- ----------
Total real estate mortgage loans..... 600,775 1,647,864
Consumer loans........................... 13,251 ---
-------- ----------
Total............................... $614,026 $1,647,864(a)
-------- ----------
-------- ----------
</TABLE>
Sales of Mortgages and MBS. While the Bank seeks adjustable-rate loans
for its own portfolio, most fixed-rate loans are originated with terms that
permit their sale in the secondary market. St. Paul Federal participates in
secondary market activities by selling whole loans and participations in loans
to FNMA, FHLMC and various other institutional investors. This practice
enables the Bank to satisfy the demand for such loans in its local communities,
to meet asset and liability objectives of Management and to develop a source of
fee income through loan servicing. In 1993, 1992, and 1991, the Bank arranged
for "swap" transactions with FNMA and FHLMC which involved the exchange of
- ----------------------------
(a) Subject to limit of rate caps and floors.
(b) Includes $235.4 million of 1-4 family adjustable-rate mortgage loans
that have initial fixed interest rate terms of three- to five-years and
$20.6 million of renegotiable rate mortgages which adjust every three or five
years. Also includes $64.6 million in five-, seven- and ten-year
multi-family loans which adjust after their respective initial terms, and
which are matched to FHL Bank advances having identical terms.
16
<PAGE> 17
approximately $146.4 million, $208.6 million and $86.9 million, respectively,
of fixed-rate mortgage loans held for sale for MBS, which were subsequently
sold.
As the Bank commits to fund fixed-rate 1-4 family loans, it typically
secures commitments, approximately sixty days in advance, to securitize and
sell such loans into the secondary market. The amounts of the commitments to
sell are based on the Bank's estimates of the fixed-rate loans it will fund
given then-current interest rates, anticipated rate movements and the Bank's
asset/liability needs. In general, loans are sold without recourse and
servicing is retained by the Bank.
The Bank's Credit Review Department in 1994 has begun to perform
quality control in-house for agencies purchasing single family loans.
Previously, the Bank relied upon the use of consultants to perform these
procedures.
See "NOTE U - Financial Instruments With Off-Balance Sheet Credit Risk"
in the 1993 annual report to shareholders filed as an exhibit hereto for a
discussion of loans sold with recourse and forward loan sale commitments.
The following table summarizes mortgage servicing statistics at
December 31, 1989 through 1993 (dollars in thousands):
<TABLE>
<CAPTION>
Years ended December 31
Dollars in thousands 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Number of mortgage loans owned 15,215 23,548 21,541 19,591 18,729
Number of mortgage loans
serviced for others 10,874 12,959 14,168 12,921 13,311
Mortgage loans serviced
for others $719,747 $894,400 $939,424 $891,881 $943,963
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes loans held-for-sale as of December 31, 1989
through 1993 (dollars in thousands):
<TABLE>
<CAPTION>
At December 31
1993 % 1992 % 1991 % 1990 % 1989 %
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1-4 family units $21,022 74% $12,801 67% $24,319 80% $ 875 13% $22,137 75%
Education loans 7,475 26 6,218 33 6,126 20 5,695 87 7,573 25
- ---------------------------------------------------------------------------------------------------------
Total $28,497 100% $19,019 100% $30,445 100% $ 6,570 100% $29,710 100%
- ---------------------------------------------------------------------------------------------------------
Weighted average rate 6.97% 7.88% 8.86% 10.32% 9.98%
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
CREDIT
See Management's Discussion and Analysis and Management's Discussion and
Analysis "Credit" contained in the 1993 annual report to shareholders filed as
an exhibit hereto for a discussion of credit issues affecting the Company.
At December 31, 1993, the Bank's non-performing assets totaled $49.6
million compared to $48.4 million at December 31, 1992. Non-performing
multi-family and commercial real estate assets totaled $32.9 million (a) at year
end 1993 compared to $32.0 million at December 31, 1992. Of the $32.9 million
of non-performing multi-family and commercial real estate assets, $16.5 million
represented real estate or real estate collateral located in the state of
California. In
- ------------------------
(a) including $2.4 million of land loans.
17
<PAGE> 18
comparison, $17.8 million of the non-performing multi-family and commercial
real estate assets represented real estate or real estate collateral located
in the state of California at December 31, 1992.
The following are descriptions of individual non-performing assets as of
December 31, 1993 in which the Company's carrying amount exceeded $3.0 million:
- 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
December 31, 1993, the Bank classified this asset as in-substance
foreclosed real estate.
This 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 $1 million in the
aggregate. The Bank will be reimbursed on a pro-rata basis by the
investing participants for all disbursements made for this property.
- A $5.0 million, 176 unit apartment building located in Riverside,
California. The Bank is currently marketing the property. To date, no
charge-offs have been recorded against this loan.
- A $3.4 million first mortgage loan (90 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.
During 1993, approximately $1.9 million of charge-offs were recorded on
this loan.
- A $3.0 million first mortgage loan (60 days delinquent) secured by a 100
unit apartment building located in Colton, California. The property is
currently in bankruptcy and the Bank anticipates completing foreclosure
during the second quarter of 1994. During 1993, the Bank recorded a
$500,000 charge-off on the loan and, at December 31, 1993, approximately
$50,000 of the loan was classified as "loss" for which the Bank provided
a specific valuation allowance.
See Management's Discussion and Analysis "Credit" and "NOTE W -
Concentration of Credit Risk" to the consolidated financial statements
contained in the 1993 annual report to shareholders filed as an exhibit hereto
for additional discussion of non-performing assets.
The Bank had an aggregate recorded investment in troubled-debt
restructurings of $15.6 million at December 31, 1993 compared to $25.0 million
at December 31, 1992. The $15.6 million of troubled-debt restructurings
represent first mortgage loans secured by three multi-family apartment
buildings located in the state of Washington which are owned by the same
borrower. The Bank has entered into an agreement with the borrower concerning
the restructuring of these loans. The properties have undergone substantial
construction rehabilitation to rectify building defects. A substantial
insurance settlement
18
<PAGE> 19
was reached between the developer and its insurance agencies, which funded
some of the new construction costs. The rehabilitation project was completed
during 1993.
The Bank in 1984 purchased a participation with an original face amount of
$10 million in an approximately $970 million amortizing note issued by certain
partnerships, the general partner of each of which is an affiliate of Olympia
and York Developments Limited. At December 31, 1993, the Bank's net carrying
amount in the loan was $8.0 million, net of the $1.5 million portion of the
loan that the Bank classifies as loss and against which the Bank provides a
specific valuation. In addition, the Bank has allocated $930,000 of its
general valuation allowance for potential losses on this loan. The note is
secured by three large office buildings located in New York City, one of
which is currently being prepared for sale. While there has not been a
bankruptcy of the borrowers, the fact that they are engaged in the commercial
real estate development, ownership, and management business throughout the
United States, the fact that commercial real estate values in New York City
have been declining for sometime, and the fact that affiliates of the borrowers
have gone through bankruptcy or similar proceedings in the United Kingdom and
Canada or otherwise have experienced debt payment problems have caused the Bank
to view the note as a potential non-performing loan. Because current and
anticipated cash flows from the property provide sufficient anticipated debt
service coverage to make scheduled interest and principal payments on the note
through May 31, 1994, at the very earliest, the note is currently treated as
performing by the Bank. However, a higher than normal risk exists that such
note could become non-performing in the future, unless a restructure currently
under negotiation is agreed to. The Bank is a member of a noteholders steering
committee that actively monitors the performance of the borrower under the loan
documents, including the occurrence and continuance of any defaults,
continually assesses the situation, and considers asset management alternatives
with respect to such notes.
See "NOTE A - Summary of Significant Accounting Policies" contained in
the 1993 annual report shareholders filed as an exhibit hereto for a discussion
of the Bank's policy for placing loans on a non-accrual status.
19
<PAGE> 20
The following table sets forth certain information regarding non-accrual
loans and troubled debt restructurings at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
- -----------------------------------------------------------------------------
1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a
nonaccrual basis:
Residential real estate:
1-4 family............... $ 6,045 $ 5,343 $ 4,988 $ 2,617 $ 3,105
Multi-family............. 12,907 15,559 33,712 10,547 4,167
Commercial real estate... 2,598 --- 1,582 2,282 ---
Consumer................. 480 270 371 --- ---
Other.................... 2,406 --- 60 973 ---
----------------------------------------------
Subtotal.............. 24,436 21,172 40,713 16,419 7,272
Loans delinquent 90 days or
more accounted for on
an accrual basis:
1-4 family............... 5,157 7,416 3,895 3,419 3,129
Consumer................. 75 771 878 577 121
----------------------------------------------
Subtotal.............. 5,232 8,187 4,773 3,996 3,250
----------------------------------------------
Nonperforming loans........... $29,668 $29,359 $45,486 $20,415 $10,522
-----------------------------------------------
-----------------------------------------------
Troubled debt restructurings.. $15,646 $25,043 $25,976 $22,046 $19,522
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
The reversal of interest on non-accrual loans resulted in a reduction in
interest income of $2.8 million, $1.7 million, and $3.3 million in 1993, 1992
and 1991, respectively. Interest on delinquent 1-4 family loans that was not
collected but was accrued as income because their loan-to-value ratio was less
than 80%, totaled $400,000, $425,000, and $539,000 at December 31, 1993, 1992
and 1991, respectively. See "NOTE E - Loans Receivable" to the Consolidated
Financial Statements contained in the 1993 annual report to shareholders filed
as an exhibit hereto, for SFAS #15," Accounting by Debtors and Creditors for
Troubled Debt Restructurings" disclosure related to modified loan interest.
20
<PAGE> 21
The following table sets forth information on delinquent loans for which
the Bank has accrued interest income.
<TABLE>
<CAPTION>
At December 31,
(Dollars in Thousands)
% of % of % of % of % of
Mortgage loans Mortgage Mortgage Mortgage Mortgage Mortgage
delinquent for: 1993 Loans 1992 Loans 1991 Loans 1990 Loans 1989 Loans
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30 to 59 days $51,732 2.20% $39,469 1.72% $67,004 2.72% $33,983 1.40% $33,788 1.45%
60 to 89 days 12,279 0.52 10,237 0.45 10,745 0.44 10,158 0.42 6,887 0.30
- --------------------------------------------------------------------------------------------------------------------------
Total $64,011 2.72% $49,706 2.17% $77,749 3.16% $44,141 1.82% $40,675 1.75%
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of % of % of % of % of
Consumer loans Consumer Consumer Consumer Consumer Consumer
delinquent for: 1993 Loans 1992 Loans 1991 Loans 1990 Loans 1989 Loans
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30 to 59 days $ 327 1.20% $ 585 1.74% $ 896 2.91% $ 926 2.91% $ 864 2.81%
60 to 89 days 103 0.38 141 0.42 211 0.69 340 1.07 317 1.03
- --------------------------------------------------------------------------------------------------------------------------
Total $ 430 1.58% $ 726 2.16% $ 1,107 3.60% $ 1,266 3.98% $ 1,181 3.84%
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Bank's Credit Review Department evaluates the risk ratings of all
multi-family, commercial and 1-4 family mortgage assets on a 9-class scale and,
in 1994, will begin to risk rate home equity and other consumer loans. The
thirty-two factors in the multi-family and commercial rating system are
evaluated under one of the five categories following: property management,
financial risks, operating risks, the competitiveness of the marketplace and
the condition of the collateral. The 1-4 family rating system uses a matrix
with 9 risk factors, heavily weighted toward borrower creditworthiness.
The Bank risk rates all geographic areas in which it does business both
in-state and out-of-state, and attempts to detect and report on early warning
signs of potentially troubled loans. In addition, credit review creates
reports on geographic and other concentrations on a bi-monthly basis, reviews
all multi-family credits for upgrade and downgrade, develops "early warning
systems" to identify credits for downgrade prior to the normal review cycle and
develops profiles of potentially troubled loans.
Management has integrated the regulatory classification system for problem
assets, which requires that such assets be classified as "substandard,"
"doubtful" or "loss" into its credit rating system. The Bank believes the
credit rating system results in loan classifications consistent with applicable
regulatory standards. Under the regulations, an asset is considered
"substandard" if inadequately protected by the current net worth and paying
capacity of the obligor or by the collateral pledged, if any. Assets will also
be classified "substandard" if characterized by the "distinct possibility" that
the insured institution will sustain "some loss" if the deficiencies are not
corrected. Assets so classified must have a well defined weakness or
weaknesses. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard" with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified "loss" are those considered "uncollectible" and
of such little value that their continuance as assets is not warranted. The
Bank charges-off or provides a specific valuation allowance to assets
classified as loss. See "Credit" in "Management's Discussion and Analysis"
contained in the 1993 annual report to shareholders filed as an exhibit hereto.
21
<PAGE> 22
The Bank's credit review function also evaluates off-balance sheet credit
risk using the Bank's credit rating system and the Bank includes these credits
in its loss reserve methodology.
At December 31, 1993 the Bank had total classified assets, including
off-balance sheet items, of $255.0 million compared to $249.1 million at
December 31, 1992. The following table details the components of substandard
assets at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
December 31, December 31,
1993 1992
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-performing assets:
REO $ 11,884 4.85% $ 5,166 2.15%
REO "in substance" 8,039 3.28 13,883 5.76
Delinquent/nonaccrual
loans 29,668 12.11 29,359 12.19
----------------- -----------------
Subtotal 49,591 20.24 48,408 20.10
<CAPTION>
Loans delinquent 30-59 days:
<S> <C> <C> <C> <C>
In portfolio 16,812 6.86 9,093 3.78
Sold with recourse 1,766 0.72 --- ---
----------------- -----------------
Subtotal 18,578 7.58 9,093 3.78
Loans current and
performing:
In portfolio 153,540 62.68 143,044 59.39
Sold with recourse 23,240 9.49 40,303 16.73
----------------- -----------------
Subtotal 176,780 72.17 233,137 72.97
----------------- -----------------
Total substandard assets $244,949 100.00% $240,848 100.00%
----------------- -----------------
Less: Substandard loans
sold with recourse 25,006 40,303
----------------- -----------------
Substandard assets in
portfolio $219,943 $200,545
----------------- -----------------
----------------- -----------------
Percent of Total Assets 5.94% 5.73%
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
Assets classified as doubtful totaled $4.0 million at December 31, 1993
compared to $4.3 million at December 31, 1992. Assets classified as loss
totaled $6.1 million at December 31, 1993 and $4.0 million at December 31,
1992.
Of total classified assets at December 31, 1993, $228.4 million or
89.6% represented Nationwide assets, of which $153.3 million (or 60.1% of total
classified assets) consisted of California multi-family assets(a). See
"Credit" in Management's Discussion and Analysis contained in the 1993 annual
report to shareholders filed as an exhibit hereto. Of the $228.4 million of
classified multi-family assets, $26.5 million were multi-family loans sold with
recourse (i.e. off-balance sheet credit risk) which were performing in
accordance with the mortgage notes but were deemed classified pursuant to the
Bank's credit rating system. Also included in substandard assets were $153.5
million of loans held
- -----------------
a Also includes a $7.9 million commercial real-estate loan.
22
<PAGE> 23
in the Bank's portfolio which were performing in accordance with
the mortgage notes, but were deemed classified pursuant to the Bank's credit
rating system.
St. Paul Federal has submitted a plan to the OTS to maintain the ratio of
classified assets to tangible capital and general loan loss reserves at less
than 70%. As of December 31, 1993, the Bank's ratio of classified assets to
tangible capital and general valuation allowances was 65.3%, considerably lower
than the ratio reported at December 31, 1992 of 79.1%. See "Regulation --
Safety and Soundness Regulations" for additional discussion.
The following is a summary of activity in the accumulated provision for
loan and REO losses for the periods indicated. See also "NOTE F - Accumulated
Provision for Loan Losses" and "NOTE I - Foreclosed Real Estate" to the
Consolidated Financial Statements contained in the 1993 annual report to
shareholders filed as an exhibit hereto.
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------
1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period..................... $51,085 $48,392 $46,798 $18,334 $ 6,818
Charge-offs:
Residential real estate:
1-4 family.............. 187 52 282 34 ---
Multi-family............ 13,863 6,393 9,885 5,877 12,075
Commercial real estate.. --- 1,100 530 --- 1,000
Consumer................... 306 695 507 61 45
Land and land development.. --- --- --- --- ---
Real estate owned.......... 3,510 1,777 661 5,310 1,804
---------------------------------------------------
Total charge-offs.......... 17,866 10,017 11,865 11,282 14,924
Recoveries:
Residential real estate:
1-4 family.............. 9 --- 1 --- ---
Multi-family ........... 512 127 28 1,638 ---
Commercial real estate.. --- --- --- --- ---
Consumer................... 49 5 2 --- ---
Land and land development.. --- --- --- --- ---
Real estate owned.......... 46 125 428 132 129
--------------------------------------------------
616 257 459 1,770 129
--------------------------------------------------
Net charge-offs........... 17,250 9,760 11,406 9,512 14,795
Acquired from Elm Financial. 929 --- --- --- ---
Provisions for losses charged
to operations.............. 12,629 12,453 13,000 37,976 26,311
---------------------------------------------------
Balance at end of period.... $47,393 $51,085 $48,392 $46,798 $18,334
---------------------------------------------------
---------------------------------------------------
Ratio of net charge-offs to
average loans and REO.... .69% .41% .46% .40% .59%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
The following table presents an allocation of St. Paul Federal's
accumulated provisions for loan and REO losses as of the dates indicated:
<TABLE>
<CAPTION>
At December 31
- ------------------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------
% of Total % of Total % of Total % of Total % of Total
Loans and Loans and Loans and Loans and Loans and
Amount REO Amount REO Amount REO Amount REO Amount REO
----------------- ----------------- ----------------- ----------------- -----------------
Balance at end of period (Dollars in thousands)
applicable to:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate:
1-4 family. . . . . . . . $ 2,354 50.5% $ 2,501 46.4% $4,108 46.4% $ 2,709 44.2% $ 311 39.8%
Multi-family, land &
commercial. . . . . . . 43,628 47.6 45,018 51.4 40,575 51.1 42,316 53.8 14,259 58.4
Consumer. . . . . . . . . . 592 1.1 1,162 1.4 1,481 1.2 1,212 1.3 349 1.3
Real estate owned:
1-4 family. . . . . . . . 28 0.2 48 0.1 3 0.1 39 0.1 376 0.1
Multi-family & commercial 791 0.6 2,356 0.7 2,225 1.2 522 0.6 3,039 0.4
- ------------------------------------------------------------------------------------------------------------------------------
$47,393 100.0% $51,085 100.0% $48,392 100.0% $46,798 100.0% $18,334 100.0%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1993, St. Paul's GVA for loans and REO was $42.4
million, compared to $47.1 million reported at December 31, 1992. Although the
actual content of the GVA differs between institutions, St. Paul Federal's GVA
represents that part of the accumulated loss provisions for loans and REO in
excess of asset balances classified as loss for regulatory reporting. In
addition to the GVA, the Bank had $5.0 million of specific reserves on loans
at December 31, 1993 compared to specific reserves of $2.7 million on loans and
$1.3 million on REO at December 31, 1992. See "NOTE A - Summary of Significant
Accounting Policies" and "Credit" in Management's Discussion and Analysis
contained in the 1993 annual report to shareholders filed as an exhibit hereto.
The following table summarizes net mortgage loan and REO charge-offs by
state for the year ended December 31, 1993:
<TABLE>
<CAPTION>
1-4
DOLLARS IN FAMILY REAL MULTI-FAMILY
THOUSANDS ESTATE LOANS REAL ESTATE LOANS(a) TOTAL
---------------------------------------------------------- ------------------------
STATE AMOUNT % AMOUNT % AMOUNT %
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California $ 89 51.1 % $ 14,269 84.8 % $ 14,358 84.5 %
Colorado --- --- --- --- --- ---
Connecticut --- --- 177 1.1 177 1.1
Florida --- --- (31) (.2) (31) (.2)
Georgia --- --- --- --- --- ---
Illinois 64 36.8 (107) (.6) (43) (.2)
Louisiana --- --- 5 .0 5 .0
Massachusetts --- --- 41 .2 41 .2
Minnesota --- --- 148 .9 148 .9
Pennsylvania --- --- 170 1.0 170 1.0
Texas 21 12.1 80 .5 101 .6
Utah --- --- 124 .7 124 .7
Washington --- --- 1,121 6.7 1,121 6.6
Wisconsin --- --- 635 3.8 635 3.7
Other --- --- 187 1.1 187 1.1
-------------------------------------------------------------------------------------
TOTAL $ 174 100.0 % $ 16,819 100.0 % $ 16,993 100.0 %
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
- ----------------
(a) Also includes commercial real estate and land loans. See "NOTE
E - Loans Receivable" contained in the 1993 annual report to shareholders
filed as an exhibit hereto.
24
<PAGE> 25
The following table summarizes net mortgage loan and REO charge-offs by state
for the year ended December 31, 1992:
<TABLE>
<CAPTION>
1-4
DOLLARS IN FAMILY REAL MULTI-FAMILY(a)
THOUSANDS ESTATE LOANS REAL ESTATE LOANS TOTAL
------------------------------------------------------------------------------------
STATE AMOUNT % AMOUNT % AMOUNT %
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California $ 17 18.3 % $ 2,441 27.2 % $ 2,458 27.1 %
Colorado --- --- (62) (0.7) (62) (0.7)
Connecticut --- --- 800 8.9 800 8.8
Florida --- --- 373 4.2 373 4.1
Georgia --- --- 563 6.3 563 6.2
Illinois 69 74.2 286 3.2 355 3.9
Louisiana --- --- 237 2.6 237 2.6
Massachusetts --- --- 306 3.4 306 3.4
Minnesota --- --- 871 9.7 871 9.6
Pennsylvania --- --- 250 2.8 250 2.8
Texas 7 7.5 1,434 16.0 1,441 15.9
Utah --- --- 600 6.7 600 6.6
Washington --- --- 866 9.6 866 9.6
Wisconsin --- --- 12 0.1 12 0.1
Other --- --- --- --- --- ---
---------------------------------------------------------------------------------
TOTAL $ 93 100.0 % $ 8,977 100.0 % $ 9,070 100.0
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
The following table summarizes cumulative net mortgage loan and REO
charge-offs by state from 1982(b) through December 31, 1993:
<TABLE>
<CAPTION>
1-4
DOLLARS IN FAMILY REAL MULTI-FAMILY(a)
THOUSANDS ESTATE LOANS REAL ESTATE LOANS TOTAL
------------------------------------------------------------------------------------
STATE AMOUNT % AMOUNT % AMOUNT %
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California $ 106 2.8 % $ 18,947 30.8 % $ 19,053 29.2 %
Colorado --- --- 11,446 18.6 11,446 17.5
Connecticut --- --- 2,022 3.3 2,022 3.1
Florida --- --- 2,822 4.6 2,822 4.3
Georgia --- --- 4,280 7.0 4,280 6.6
Illinois 3,442 90.3 286 .5 3,728 5.7
Louisiana --- --- 5,679 9.2 5,679 8.7
Massachusetts --- --- 1,988 3.2 1,988 3.0
Minnesota --- --- 2,718 4.4 2,718 4.2
Pennsylvania --- --- 420 .7 420 0.6
Texas 28 .7 4,752 7.7 4,780 7.3
Utah --- --- 1,146 1.9 1,146 1.8
Washington --- --- 3,457 5.6 3,457 5.3
Wisconsin --- --- 1,347 2.2 1,347 2.1
Other 235 6.2 187 .3 422 0.6
------------------------------------------------------------------------------------
TOTAL $ 3,811 100.0 % $ 61,497 100.0 % $ 65,308 100.0 %
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
See "Management's Discussion and Analysis - Credit and - Results of
Operations - Provision for Loan Losses," "NOTE E - Loans Receivable," "NOTE F
- -Accumulated Provision for Loan Losses," "NOTE I - Foreclosed Real Estate,"
"NOTE W - Concentration of Credit Risk," and "NOTE U - Financial Instruments
- --------------------------
(a) Also includes commercial real estate and land loans. See "NOTE
E - Loans Receivable" contained in the 1993 annual report to shareholders
filed as an exhibit hereto.
(b) The Bank began its nationwide multi-family and commercial real
estate lending program during 1982; however, the first loss experienced on loans
originated through this lending program did not occur until 1986.
25
<PAGE> 26
With Off-Balance Sheet Credit Risk" contained in the 1993 annual report to the
shareholders filed as an exhibit hereto.
SOURCES OF FUNDS
See "Liquidity" in Management's Discussion and Analysis contained in the
1993 annual report to shareholders filed as an exhibit hereto, for a discussion
of the Bank's sources of funds.
Deposits. St. Paul Federal offers a variety of checking, savings, and
time deposit accounts having a wide range of interest rates and terms. Average
balances of and rates paid on such deposits at December 31, 1993 and 1992 are
set forth in "NOTE N - Deposits" to the Consolidated Financial Statements
contained in the 1993 annual report to shareholders filed as an exhibit hereto.
Interest rates on all deposit accounts are reviewed at weekly meetings of the
Bank's Liability Pricing Committee, which is comprised of certain managers of
the Bank.
The Bank attempts to control the flow of funds in its deposit accounts
according to its need for funds and the cost of alternative sources of funds.
St. Paul Federal controls the flow of funds primarily by the pricing of
deposits to take advantage of opportunities for profitable investment of the
funds. In connection with an ongoing review of the Bank's deposit product
composition and fee schedule, the Bank initiated a new checking account
campaign in the first quarter of 1992. The Bank pays interest rates comparable
to those paid on deposits by other insured-depository institutions in its
market area. Interest rate increases are also influenced by the Bank's
liquidity needs and by competitive factors.
See "Liquidity" and "Results of Operations-Comparison of Years Ended
December 31, 1993 and 1992" in Management's Discussion and Analysis contained
in the 1993 annual report to shareholders filed as an exhibit hereto.
Many of the checking account products offered by the Bank bear interest.
Checking accounts are assessed fees of varying amounts, depending upon the
product type, the balance maintained in the account and the number of monthly
transactions executed on the account. Each of the checking accounts have
access to an electronic banking system using an ATM card. Over 1,800 banking
locations are available in the Chicago metropolitan area (65,000 locations
worldwide) through a shared electronic network of ATMs. In addition to
checking accounts offered to retail bank customers, the Bank also offers a
commercial checking account product.
The Bank offers several types of passbook and statement savings
accounts. Some of these accounts feature electronic banking access using an ATM
card. The rate paid on savings accounts is reviewed on a quarterly basis. As
of December 31, 1993, passbook and statement accounts earned 2.42% interest.
The Bank also offers a money market account which is an insured investment
account that pays market rates with no withdrawal penalty.
26
<PAGE> 27
The Bank also issues fixed and variable rate certificates of deposit
("CDs") of varying maturities. Short-term CDs with maturities of three months
can be opened for $500 or more and six-month CDs can be opened for $2,000 or
more. The variable-rate CDs have a maturity of eighteen-months and the
interest rate earned on the accounts changes weekly throughout the
eighteen-month term. There is a substantial penalty for early withdrawal on
all CDs offered by the Bank.
St. Paul Federal's deposit base at December 31, 1993 included $1.8
billion of CDs with a weighted average rate of 4.75%. Of these CDs,
approximately $1.1 billion will mature during the twelve months ending December
31, 1994. The Bank will seek to retain these deposits to the extent consistent
with its long-term objective of maintaining positive interest rate spreads.
See "Borrowings" discussion following. Depending upon interest rates existing
at the time such CDs mature, the Bank's cost of funds may be significantly
affected by the rollover of these funds.
The following table presents the amount of the Bank's time deposits in
amounts of $100,000 or more at December 31, 1993 maturing during the periods
indicated.
<TABLE>
<CAPTION>
Maturing: Amount
-------- ------
(In thousands)
<S> <C>
January 1, 1994 to March 31, 1994........ $ 36,180
April 1, 1994 to June 30, 1994........... 22,507
July 1, 1994 to December 31, 1994........ 34,402
After December 31, 1994.................. 56,595
--------
$149,684
--------
--------
</TABLE>
27
<PAGE> 28
The following table summarizes the average balance and rate paid on
deposits during the three years ended December 31, 1993, 1992, and 1991
(dollars in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
- -----------------------------------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest bearing
checking $ 214,201 2.27% $ 162,281 2.83% $ 135,932 5.34%
Non-interest bearing
checking 90,161 --- 72,328 --- 62,316 ---
Other non-interest
bearing accounts 43,923 --- 43,000 --- 29,507 ---
Money Market Accounts 296,818 3.40 257,520 3.92 221,887 5.49
Savings Accounts 770,183 2.66 600,534 3.80 469,789 6.15
Certificates of
Deposits 1,804,386 4.81 1,852,196 5.82 1,942,722 7.14
- -----------------------------------------------------------------------------
$3,219,672 3.80% $2,987,859 4.86 $2,862,153 6.54%
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
Individual retirement accounts can be opened using the passbook savings
account or any of the CD accounts described above.
28
<PAGE> 29
Borrowings. The following table presents certain information regarding
short-term borrowings. For a description of the general terms of such
borrowings see "NOTE O - FHL Bank Advances" and "NOTE P - Other Borrowings" to
the Consolidated Financial Statements contained in the 1993 annual report to
shareholders filed as an exhibit hereto.
<TABLE>
<CAPTION>
At December 31,
- --------------------------------------------------------------------------------
1993 1992 1991
- ---------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Aggregate Short-term Borrowings:
Balance at end of period...................... $ 620 $134,509 $135,060
Interest rate at end of period................ 6.98% 6.82% 7.55%
Highest month end balance during the period... 133,419 190,679 392,660
Average balance during the period............. 58,712 148,117 208,193
Average interest rate during the period....... 7.21% 7.65% 7.90%
- ---------------------------------------------------------------------------------
Securities Sold Under Agreements to Repurchase:
Balance at end of period...................... $ --- $ 45,400 $ 78,000
Interest rate at end of period................ ---% 5.57% 6.57%
Highest month end balance during the period... 44,310 78,000 200,050
Average balance during the period............. 22,746 43,540 139,217
Average interest rate during the period....... 5.67% 6.06% 7.75%
- ---------------------------------------------------------------------------------
Floating Rate Notes:
Balance at end of period...................... $ --- $ 20,000 $ ---
Interest rate at end of period................ ---% 4.50% ---%
Highest month end balance during the period... 20,000 20,000 100,000
Average balance during the period............. 5,000 13,389 21,370
Average interest rate during the period....... 4.03% 5.09% 8.12%
- ---------------------------------------------------------------------------------
Borrowings From Federal Home Loan Bank
of Chicago:
Balance at end of period...................... $ 263 $ 67,279 $ 57,060
Interest rate at end of period................ 6.95% 8.36% 8.90%
Highest month end balance during the period... 67,279 124,279 92,623
Average balance during the period............. 28,991 90,718 47,009
Average interest rate during the period....... 8.20% 8.80% 8.31%
- ----------------------------------------------------------------------------------
Other short-term borrowings
Balance at end of period...................... $ 357 $ 1,830 $ ---
Interest rate at end of period................ 7.00% 7.00% ---%
Highest month end balance during the period... 2,544 1,830 ---
Average balance during the period............. 1,975 470 597
Average interest rate during the period....... 7.00% 7.23% 4.19%
- ----------------------------------------------------------------------------------
</TABLE>
As a member of the FHLB System, the FHLB of Chicago generally is allowed
to extend credit to St. Paul Federal through advances and letters of credit up
to 20% of St. Paul Federal's total assets. As of December 31, 1993, the Bank
also had approximately $925.0 million of unused credit lines available to
borrow under agreements to repurchase.
In February 1993, the Company issued $34.5 million of subordinated notes.
The Company used the proceeds for general corporate purposes, including the
acquisition of St. Paul Financial from St. Paul Federal on June 30, 1993. See
"Liquidity" in Management's Discussion and Analysis contained in the 1993
annual report to shareholders filed as an exhibit hereto.
29
<PAGE> 30
Asset/Liability Management
See "Interest Rate Risk" section of Management's Discussion and Analysis
to the Consolidated Financial Statements contained in the 1993 annual report to
shareholders filed as an exhibit hereto.
The GAP Table, set forth on the following page, identifies the projected
maturity/repricing structure of the Company's interest-earning assets and
interest-bearing liabilities at December 31, 1993. The GAP Table does not use
the contractual maturities of certain categories of assets and liabilities.
Because prepayments of loans and withdrawals of deposits are determined by
changing economic circumstances and customer behavior, adjustments to
contractual terms were needed to obtain a more accurate measure of the
repricing of certain asset and liability categories. See Note A to the GAP
Table appearing on the following page.
Management also must adhere to interest-rate risk exposure limits
established in June 1990 by the Board of Directors in compliance with Thrift
Bulletin ("TB") 13. TB 13 requires that Management measure and report to the
Board of Directors the effect that immediate increases and decreases of 100,
200, 300 and 400 basis points in market rates have upon net interest income and
market value of portfolio equity.
30
<PAGE> 31
GAP TABLE(a)
<TABLE>
<CAPTION>
at December 31, 1993
- -----------------------------------------------------------------------------------------------------------------------------
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(b) 3.68% $ 421,867 12% $ 327,950 $ 10,138 $ 22,726 $ 29,763 $ 31,290
Mortgage-backed securities:
Adjustable rate 4.88 416,037 12 260,218 155,819 - - -
Fixed rate 7.29 317,612 9 35,049 24,515 103,648 59,148 95,252
Mortgage loans:
Adjustable and renegotiable rate 7.59 1,686,112 47 1,165,963 317,021 146,762 56,366 -
Fixed rate 8.62 645,068 18 69,380 60,838 224,364 129,868 160,618
Consumer loans 8.40 19,713 1 4,737 1,725 8,728 1,847 2,676
Assets held for sale 7.17 28,497 1 28,497 - - - -
- -----------------------------------------------------------------------------------------------------------------------------
Total rate sensitive assets 6.96% $3,534,906 100% $1,891,794 $570,056 $ 506,228 $276,992 $ 289,836
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES:
Deposits:
Checking accounts 1.17% $ 385,664 12% $ 103,858 $ 21,994 $ 72,098 $52,091 $ 135,623
Savings accounts 2.42 802,025 24 254,847 42,705 139,991 101,144 263,338
Money market deposit accounts 2.71 301,416 9 301,416 - - - -
Fixed-maturity certificates 4.75 1,763,513 54 741,874 372,249 453,497 134,931 60,962
- -----------------------------------------------------------------------------------------------------------------------------
3.56 3,252,618 99 1,401,995 436,948 665,586 288,166 459,923
Borrowings:(c)
FHLB advances 7.93 7,219 * 263 - 5,558 314 1,085
Other borrowings 9.87 36,119 1 - 1,520 34,598 - -
Mortgage-backed note 8.80 16,392 * - 16,392 - - -
- ------------------------------------------------------------------------------------------------------------------------------
9.34 59,730 1 263 17,912 40,156 314 1,085
- -----------------------------------------------------------------------------------------------------------------------------
Total rate sensitive liabilities 3.66% $3,312,348 100% $1,402,258 $454,860 $ 705,742 $288,480 $ 461,008
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Excess (deficit) of rate sensitive assets
over rate sensitive liabilities (GAP) 3.30% $ 222,558 $ 489,536 $115,196 $(199,514) $(11,488) $(171,172)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative GAP $ 489,536 $604,732 $ 405,218 $393,730 $ 222,558
Cumulative GAP to total assets without
regard to hedging transactions 13.21% 16.32% 10.94% 10.63% 6.01%
Cumulative GAP to total assets with
impact of hedging transactions 14.02% 16.79% 10.94% 10.63% 6.01%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------
(a) 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 5% per year; adjustable-rate mortgage
loans on 1-4 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 20% 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. Except for multi-family
loans, the prepayment and withdrawal assumptions included in the
Asset/Liability Repricing Schedule applied the most recently available
quarterly national interest rate risk assumptions distributed by the OTS.
The Bank assumed a prepayment percentage of 5% instead of the 12% suggested by
the OTS because of current market conditions and the nature of the Bank's
multi-family portfolio.
(b) Includes investment in FHLB Stock and other stock.
(c) Excludes borrowings by the employee stock ownership plan.
31
<PAGE> 32
SERVICE CORPORATION ACTIVITIES
The Bank has six wholly owned subsidiaries; St. Paul Service, Inc.
("St. Paul Service"), St. Paul Securities, Inc., Managed Properties, Inc.,
Community Finance Corporation, EFS Service Corporation and EFS/San Diego
Service Corporation. These subsidiaries are incorporated in the state of
Illinois.
St. Paul Service is an insurance agency providing a variety of
insurance coverage including homeowners, automobile, life, disability income,
special multi-peril, commercial automobile, dwelling, fire and allied lines,
liability, bonds, workers compensation, and group health plans. The Bank
Credit Review Department risk rates all annuity insurance companies with which
it does business or is contemplating doing business.
The Bank offers discount brokerage services directly to its customers
through Investment Network, Inc, a wholly owned subsidiary of St. Paul
Securities, Inc. Investment Network, Inc., provides a full line of investment
brokerage services through 52 of the Bank's branches and employs 15 registered
principals and 91 registered representatives. As a registered broker/dealer
the company is subject to regulation under the Securities Exchange Act of 1934.
The Bank Credit Review Department risk rates all broker-dealers and mutual fund
seller companies with which it does business or is contemplating doing
business.
Managed Properties, Inc. is engaged in the management of real estate
acquired by the Bank through foreclosure of multi-family and commercial real
estate loans.
Community Finance Corporation holds investments in a general
partnership which acquires limited partnership interests in low income building
development projects to help comply with the Community Reinvestment Act.
EFS Service Corporation, a subsidiary acquired from Elm Financial, was
established to, from time to time, participate in real estate joint venture
activities.
EFS/San Diego Service Corporation, a subsidiary acquired from Elm
Financial, owns assets which are leased to others.
At December 31, 1993, the total amount the Bank was authorized to
invest in subsidiary service corporations, not including amounts authorized for
investment in conforming loans, was 2% of its total assets, or approximately
$74.1 million. At that date, the Bank's direct investment (consisting of
capital stock and nonconforming loans) in its service corporations was $14.6
million.
During 1991, the Company established ANI whose business consists of the
sale of annuity products. Prior to the incorporation of ANI, annuity products
had been sold by St. Paul Service. During 1993, ANI and St. Paul Service
executed a percentage lease revenue sharing arrangement whereby ANI pays St.
Paul Service a portion of its commission on the sale of annuity products for
use of St. Paul Service's facilities and access to its customers.
On June 30, 1993, the Company purchased St. Paul Financial Development
Corporation ("Development Corporation") from the Bank. The purchase price of
the transaction was $9.2 million and represented the fair market value of the
Development Corporation at that date (as determined by an independent
valuation).
32
<PAGE> 33
EMPLOYEES
At December 31, 1993 St. Paul Federal had 1,046 full-time equivalent
employees. The 1,046 consists of 917 full-time employees and 246 part-time
employees and 81 reserve employees. The St. Paul Federal employee benefit
program includes, among other benefits, an educational assistance program to
encourage ongoing employee development. In 1993, 84 employees were involved in
undergraduate, graduate and management certificate programs. In addition, 190
employees have become Illinois Life Producers Representatives and 91 employees
have become registered with the National Association of Securities Dealers,
Inc. ("NASD"), with 91 becoming registered securities representatives of the
Bank's discount brokerage subsidiary and 21 becoming registered agents for the
Bank.
In connection with the Elm acquisition, in which the Bank acquired 8
full-service branch facilities, the Bank added 73 full time equivalents,
consisting of 60 full-time employees and 13 part-time employees.
COMPETITION
St. Paul Federal experiences substantial competition in attracting and
retaining deposit accounts and in making mortgage and other loans. The primary
factors in competing for deposit accounts are interest rates, the quality and
range of financial services offered, convenience of office locations and office
hours. Competition for deposit accounts comes primarily from other federally
insured depository institutions such as other savings institutions, commercial
banks and credit unions, money market funds and other investment alternatives.
Additional competition for deposits comes from various types of corporate and
government borrowers and insurance companies.
The primary factors in competing for loans are interest rates, loan
origination fees, customer relationships, reputation, market presence and the
quality and range of lending services offered. Competition for origination of
first mortgage loans comes primarily from mortgage brokers, other savings
institutions, mortgage banking firms, commercial banks, insurance companies and
real estate investment trusts.
The OTS's statement of policy on branching by federally chartered
savings institutions generally permits nationwide branching. However,
nationwide branching is not permitted to the extent that it would result in
formation of a multiple savings and loan holding company controlling savings
institutions in more than one state. Generally, the formation of multi-state,
multiple savings and loan holding companies is prohibited unless one of three
exemptions exists. The first exemption authorizes a savings and loan holding
company or any of its savings institution subsidiaries to acquire an
institution or operate branches in another state following a supervisory
acquisition. The second exemption relates to grandfathered branching rights
and the third exemption relates to specific approvals under the law of the
state in which the acquired institution or branches are located. Additionally,
OTS regulations allow a federal savings institution to establish, in any state
in which the institution has its home or branch office, agency offices which
only service and originate (but do not approve) loans and contracts, manage or
sell real estate owned by the institution or engage in such other activities
(other than accepting payments on savings accounts or approving loans) as may
be approved by the OTS.
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St. Paul Federal's market area is experiencing increased competition from
the acquisition of local financial institutions by out-of-state commercial
banks. In addition, recent changes in Illinois branch banking laws may make
Illinois savings institutions more attractive acquisition candidates for
out-of-state commercial banks.
Usury Limitations.
Federal legislation has permanently pre-empted all state interest ceilings
applicable to residential first mortgage loans unless the state legislature
acted to override the pre-emption by April 1, 1983. The Illinois State
Legislature did not act to override the federal pre-emption. At present,
Illinois law imposes no ceiling on interest rates for residential real estate
loans, including junior mortgage loans. Additionally, federal law permits
federally insured savings institutions to charge the highest rate permitted to
lenders in Illinois. The Illinois State Legislature has allowed state banks to
charge any interest rate on any type of loan, and thus, there are effectively
no ceilings on the interest rates which a federal savings bank may charge on a
loan in Illinois.
Other states in which St. Paul Federal acquires loans through its
correspondent lending program have varying laws concerning usury. Management
believes that all loans acquired by the Bank in other states are in compliance
with applicable usury limitations.
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REGULATION
GENERAL
The Company, as a savings institution holding company (a "thrift
holding company"), and St. Paul Federal, as a federally chartered savings bank,
are subject to extensive regulation, supervision and examination by the OTS as
their primary federal regulator. The Bank also is subject to regulation,
supervision and examination by the FDIC and as to certain matters by the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board").
In recent years there have been a significant number of changes in the
manner in which insured depository institutions and their holding companies are
regulated. Such changes have imposed additional regulatory restrictions on the
operations of insured depository institutions and their holding companies. In
particular, regulatory capital requirements for insured depository institutions
have increased significantly. The Federal Deposit Insurance Corporation
Improvement Act of 1991 (the "FDICIA") requires the bank regulatory agencies to
impose certain sanctions on insured depository institutions which fail to meet
minimum capital requirements. In addition, the deposit premiums paid by
insured depository institutions have increased significantly in recent years
and will most likely increase in the future.
THRIFT HOLDING COMPANY REGULATION
General. Under the Home Owners' Loan Act (the "HOLA"), the Company, as
a thrift holding company, is subject to regulation, supervision and examination
by, and the reporting requirements of, the Director of the OTS.
The HOLA permits, subject to a number of conditions, the acquisition by
a thrift holding company, such as the Company, of control of another savings
institution or thrift holding company with prior written approval of the
Director of the OTS, including in certain situations an acquisition that would
result in the creation of a multiple thrift holding company controlling savings
institutions located in more than one state. No director, officer, or
controlling shareholder of the Company may, except with the prior approval of
the Director of the OTS, acquire control of any savings institution which is
not a subsidiary of the Company. Restrictions relating to service as an
officer or director of an unaffiliated holding company or savings institution
are applicable to the directors and officers of the Company and its savings
institution subsidiaries under the Depository Institutions Management
Interlocks Act.
Under HOLA, transactions engaged in by a savings institution or one of
its subsidiaries with affiliates of the savings institution generally are
subject to the affiliate transaction restrictions contained in Sections 23A and
23B of the Federal Reserve Act. Section 23A of the Federal Reserve Act imposes
both quantitative and qualitative restrictions on transactions with an
affiliate, while Section 23B of the Federal Reserve Act requires, among other
things that all transactions with affiliates be on terms substantially the
same, and at least as favorable, as the terms that would apply to, or would be
offered in, a comparable transaction with an unaffiliated party. Exemptions
from, and waivers of, the provisions of Sections 23A and 23B of the Federal
Reserve Act may be granted only by the Federal Reserve Board. HOLA contains
certain other restrictions on loans and extension of credit to affiliates, and
authorizes the
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Director of the OTS to impose additional restrictions on transactions with
affiliates if the Director determines such restrictions are necessary to ensure
the safety and soundness of any savings institution. Current OTS regulations
are similar to Sections 23A and 23B of the Federal Reserve Act.
As a unitary savings institution holding company (i.e., a holding
company with only one savings institution subsidiary), the Company is not
currently subject to any additional statutory or regulatory restrictions on the
types of activities in which it and its non-savings institution subsidiaries
may engage, provided that St. Paul Federal continues to qualify as a qualified
thrift lender ("QTL"). If, however, the Company were to acquire control of
another savings institution (other than in a supervisory transaction or by
merger or consolidation with St. Paul Federal) or if St. Paul Federal were to
fail to maintain its status as a QTL, (see "Regulation - Savings Institution
Regulation - Qualified Thrift Lender Requirement"), the Company and its
subsidiaries, other than its savings institution subsidiary or subsidiaries,
would become subject to restrictions on the activities permitted to them.
SAVINGS INSTITUTION REGULATION
General. St. Paul Federal is subject to supervision and regulation by
the Director of the OTS. Under OTS regulations, St. Paul Federal is required
to obtain an annual audit by an independent accountant and to be examined
periodically by the Director of the OTS. St. Paul Federal is subject to
assessments by the OTS and FDIC to cover the costs of such examinations. The
OTS may revalue assets of the Bank, based upon appraisals, and require the
establishment of specific reserves in amounts equal to the difference between
such revaluation and the book value of the assets. The Director is authorized
to promulgate regulations to ensure the safe and sound operation of savings
institutions and may impose various requirements and restrictions on the
activities of savings institutions. Additionally, under the FDICIA, the OTS
has recently proposed safety and soundness regulations relating to (i) internal
controls, information systems, and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate exposure; (v)
asset growth; and (vi) compensation and benefit standards for officers,
directors, employees and principal shareholders. The HOLA requires that all
regulations and policies of the Director of the OTS for the safe and sound
operation of savings institutions are to be no less stringent than those
established by the Office of the Comptroller the Currency (the "OCC") for
national banks. The Bank, as a member of the SAIF, also is subject to
regulation and supervision by the FDIC, in its capacity as administrator of the
SAIF, to ensure the safety and soundness of the SAIF. See "-- Insurance of
Deposits."
Effective July 21, 1993, the Bank's Supervisory Agreement entered into
with the OTS in July 1990 was terminated. In connection with such termination,
the Bank indicated to the OTS that it has no immediate plans to re-enter the
multi-family lending business on a nationwide basis and remains committed to
reduce the level of the Bank's classified assets as well as to reduce
multi-family and commercial loan concentrations outside the State of Illinois.
Capital Requirements. Under OTS regulations, savings institutions must
maintain (i) "core capital" in an amount of not less than 3% of total assets,
(ii) "tangible capital" in an amount not less than 1.5% of total assets and
(iii) a level of risk-based capital equal to 8% of risk- weighted assets.
Capital requirements higher than the generally applicable minimum requirement
may be
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established for a particular savings institution if the OTS determines that the
institution's capital is or may become inadequate in view of the 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.
Capital standards established by the OTS for savings institutions must
generally be no less stringent than those applicable to national banks. Under
OTS regulations, the term "core capital" generally includes common
stockholders' equity, noncumulative perpetual preferred stock and related
surplus, and minority interests in the equity accounts of consolidated
subsidiaries less unidentifiable intangible assets (other than certain amounts
of supervisory goodwill) and certain investments in subsidiaries plus 90% of
the fair market value of readily marketable purchased mortgage servicing rights
("PMSRs") (subject to certain conditions).
"Tangible capital" is core capital minus intangible assets and certain
investments in subsidiaries, provided, however, that savings institutions may
include 90% of the fair market value of readily marketable PMSRs as tangible
capital (subject to certain conditions, including any limitations imposed by
the FDIC on the maximum percentage of the tangible capital requirement that may
be satisfied with such servicing rights).
In establishing risk-based capital requirements for savings
institutions, the Director of the OTS may deviate from the risk-based capital
standards applicable to national banks to reflect interest-rate risk or other
risks so long as such deviations, in the aggregate, do not result in a
materially lower risk-based capital requirement for savings institutions than
would be required under the national bank standards.
In determining total risk-weighted assets for purposes of the
risk-based requirement, (i) each off-balance sheet asset must be converted to
its on-balance sheet credit equivalent amount by multiplying the face amount of
each such item by a credit conversion factor ranging from 0% to 100% (depending
upon the nature of the asset), (ii) the credit equivalent amount of each
off-balance sheet asset and each on-balance sheet asset must be multiplied by a
risk factor ranging from 0% to 200% (again depending upon the nature of the
asset) and (iii) the resulting amounts are added together and constitute total
risk-weighted assets. Total capital, for purposes of the risk-based capital
requirement, equals the sum of core capital plus supplementary capital (which,
as defined, includes the sum of, among other items, perpetual preferred stock
not counted as core capital, limited life preferred stock, subordinated debt,
and general loan and lease loss allowances up to 1.25% of risk-weighted
assets) less certain deductions. The amount of supplementary capital that may
be counted towards satisfaction of the total capital requirement may not exceed
100% of core capital, and OTS regulations require the maintenance of a minimum
ratio of core capital to total risk-weighted assets of 4%.
At December 31, 1993, the Bank met all applicable OTS capital
requirements on a fully phased-in basis and continues to have capital in excess
of OTS regulatory capital requirements on a fully phased-in basis. See "NOTE R
- - Stockholders' Equity" contained in the 1993 annual report to shareholders
filed as an exhibit hereto for the Bank's regulatory capital levels at December
31, 1993.
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Under an OCC rule, all national banks must maintain "core" or "Tier 1"
capital of at least 3% of total assets. The rule further provides that a
national bank operating at or near the 3% capital level is expected to have
well-diversified risks, including no undue interest rate risk exposure;
excellent control systems; good earnings; high asset quality; high liquidity;
well-managed on and off-balance sheet activities; and in general be considered
a strong banking organization with a composite 1 rating under the CAMEL rating
system for banks. For all but the most highly rated banks meeting the above
conditions, the minimum leverage requirement will be 4% to 5% of total assets.
The OTS is required to issue capital standards that are no less stringent than
those applicable to national banks. The OTS has issued notice of a proposed
regulation that would require all but the most highly rated savings
institutions to maintain a minimum leverage ratio (defined as the ratio of core
capital to total assets) of between 4% and 5%.
In August 1993, the OTS issued new regulations, effective January 1,
1994, which add an interest-rate risk component to the risk-based capital
requirement. 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%. This new requirement is not expected to have any material effect on
the Bank's ability to meet the risk-based capital requirement. The OTS is
required to revise its risk-based capital standards to ensure that its
standards provide adequately for concentration of credit risk, risk from
non-traditional activities and actual performance and expected risk of loss on
multi-family mortgages. Further increases in capital requirements are possible
in future periods.
Capital requirements higher than the generally applicable minimum
requirement 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.
Prompt Corrective Action. Pursuant to FDICIA, the federal banking
agencies are required to establish, by regulation, for each capital measure,
the levels at which an insured institution is well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized, and to take prompt corrective action with respect to insured
institutions which fall below minimum capital standards. The degree of
regulatory intervention mandated by FDICIA is tied to an insured institution's
capital category, with increasing scrutiny and more stringent restrictions
being imposed as an institution's capital declines. Any insured depository
institution which falls below the minimum capital standards must submit a
capital restoration plan. FDICIA requires any company that controls an
undercapitalized savings institution, in connection with the submission of a
capital restoration plan by the savings institution, to guarantee that the
institution will comply with the plan and to provide appropriate assurances of
performance. The aggregate liability of any such controlling company under
such guaranty is limited to the lesser of (i) 5% of the savings institution's
assets at the time it became undercapitalized; or (ii) the amount necessary to
bring the savings institution into capital compliance at the time the
institution fails to comply with the
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terms of its capital plan. If St. Paul Federal were to become
undercapitalized, the Company would be required to provide such a guarantee.
Pursuant to the FDICIA provisions, undercapitalized institutions are
precluded from increasing their assets, acquiring other institutions,
establishing additional branches, or engaging in new lines of business without
an approved capital plan and an agency determination that such actions are
consistent with the plan. Savings institutions that are significantly
undercapitalized may be required to take one or more of the following actions:
(i) raise additional capital so that the institution will be adequately
capitalized; (ii) be acquired by, or combined with, another institution if
grounds exist for appointing a receiver; (iii) refrain from affiliate
transactions; (iv) limit the amount of interest paid on deposits to the
prevailing rates of interest in the region where the institution is located;
(v) further restrict asset growth; (vi) hold a new election for directors,
dismiss any director or senior executive officer who held office for more than
180 days immediately before the institution became undercapitalized, or employ
qualified senior executive officers; (vii) stop accepting deposits from
correspondent depository institutions; and (viii) divest or liquidate any
subsidiary which the OTS determines poses a significant risk to the
institution. Any company which controls a significantly undercapitalized
savings institution may be required to: (i) divest or liquidate any affiliate
other than an insured depository institution; (ii) divest the institution if
the OTS determines that divestiture would improve the institution's financial
condition and future prospects; and (iii) if such company is a bank holding
company, refrain from making any capital distribution without the prior
approval of the Federal Reserve Board.
Critically undercapitalized institutions are subject to additional
restrictions. No later than 90 days after a savings institution becomes
critically undercapitalized, the Director of the OTS is required to appoint a
conservator or receiver for the institution, unless the Director determines,
with the concurrence of the FDIC, that other action would better achieve the
purpose of FDICIA. The Director must make periodic redeterminations that the
alternative action continues to be justified no less frequently than every 90
days. The Director is required to appoint a receiver if the institution
remains critically undercapitalized nine months later, unless the institution
is in compliance with an approved capital plan and the OTS and FDIC certify
that the institution is viable.
Under prompt corrective action regulations adopted by the OTS, an
institution will be considered (i) "well capitalized" if the institution has a
total risk-based capital ratio of 10% or greater, a Tier 1 or core capital to
risk-weighted assets ratio of 6% or greater, and a leverage ratio of 5% or
greater (provided that the institution is not subject to an order, written
agreement, capital directive or prompt corrective action directive to meet and
maintain a specific capital level for any capital measure); (ii) "adequately
capitalized" if the institution has a total risk-based capital ratio of 8% or
greater, a Tier 1 or core capital to risk-weighted assets ratio of 4% or
greater, and a leverage ratio of 4% or greater (3% or greater if the
institution is rated composite 1 in its most recent report of examination);
(iii) "undercapitalized" if the institution has a total risk-based capital
ratio that is less than 8%, a Tier 1 or core capital to risk-weighted assets
ratio of less than 4%, or a leverage ratio that is less than 4% (3% if the
institution is rated composite 1 in its most recent report of examination);
(iv) "significantly undercapitalized" if the institution has a total risk-based
capital ratio that is less than 6%, a
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Tier 1 or core capital to risk-weighted assets ratio that is less than 3%, or a
leverage ratio that is less than 3%; and (v) "critically undercapitalized" if
the institution has a ratio of tangible equity to total assets that is less
than or equal to 2%. The regulation also permits the OTS to determine that a
savings institution should be classified in a lower category based on other
information, such as the institution's examination report, after written
notice. Under the OTS's prompt corrective action regulations, at December 31,
1993, St. Paul Federal qualified as a well capitalized institution based on its
capital ratios as of such date.
FDICIA prohibits any depository institution that is not well
capitalized from accepting deposits through a deposit broker. Previously, only
troubled institutions were prohibited from accepting brokered deposits. The
FDIC may allow adequately capitalized institutions that apply for a waiver to
accept brokered deposits. Institutions that receive a waiver are subject to
limits on the rates of interest they may pay on brokered deposits. FDICIA also
prohibits undercapitalized institutions from offering rates of interest on
insured deposits that significantly exceed the prevailing rate in their normal
market area or the area in which the deposits would otherwise be accepted.
Safety and Soundness Regulations. Under FDICIA, the OTS is required to
prescribe safety and soundness regulations relating to (i) internal controls,
information systems, and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate exposure; (v) asset growth; and (vi)
compensation and benefit standards for officers, directors, employees and
principal shareholders. In November 1993, the OTS, along with the other
federal banking agencies, published revised proposed regulations for the
purpose of implementing this provision of FDICIA. As proposed, savings
institutions, such as St. Paul Federal, would be required, among other things,
to maintain a ratio of classified assets to total risk-based capital and
allowances for loan losses not eligible for inclusion in risk-based capital
that is no greater than 1.0. At December 31, 1993, St. Paul Federal had a
ratio of classified assets to total risk-based capital and ineligible
allowances of 65.6%. The proposed regulations also would impose safety and
soundness standards on holding companies such as the Company. Under the
proposed regulations, an institution or holding not meeting one or more of the
safety and soundness standards would be required to file a compliance plan with
the appropriate federal banking agency. In the event that an institution or
holding company fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan within the time
allowed by the agency, the institution or holding company would be required to
correct the deficiency and the appropriate federal agency would also be
authorized to: (1) restrict asset growth; (2) require the institution or
holding company to increase its ratio of tangible equity to assets; (3)
restrict the rates of interest that the institution may pay; or (4) take any
other action that would better carry out the purpose of the corrective action.
Until adopted in final form, the Company is unable to predict the precise
effect of these regulations on the Company or the Bank.
Qualified Thrift Lender Requirement. In order for St. Paul Federal to
exercise the powers granted to a federally chartered savings bank and maintain
full access to FHLB advances, it must meet the definition of a QTL. A savings
institution will be a QTL if the savings institution's qualified thrift
investments continue to equal or exceed 65% of the institution's portfolio
assets on a monthly average basis in nine out of every 12 months. Subject to
certain
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exceptions, qualified thrift investments generally consist of housing related
loans and investments, certain obligations of federal instrumentalities and
certain groups of assets, such as consumer loans, to a limited extent. The
term "portfolio assets" means the savings institution's total assets minus
goodwill and other intangible assets, the value of property used by the savings
institution to conduct its business, and liquid assets held by the savings
institution in an amount up to 20% of its total assets.
OTS regulations provide that any savings institution that fails to
meet the definition of a QTL must either convert to a bank charter, other than
a savings bank charter, or limit its future investments and activities
(including branching and payments of dividends) to those permitted for both
savings institutions and national banks. Additionally, any such savings
institution that does not convert to a bank charter will be ineligible to
receive further FHLB advances and beginning three years after the loss of QTL
status, will be required to repay all outstanding FHLB advances and dispose of
or discontinue any preexisting investment or activities not permitted for both
savings institutions and national banks. Further, within one year of the loss
of QTL status, the holding company of a savings institution that does not
convert to a bank charter must register as a bank holding company and will be
subject to all statutes applicable to bank holding companies.
St. Paul Federal is a QTL under the current test, having investments
in qualified thrift investments in excess of required limits.
Liquidity. Under applicable federal regulations, savings institutions
are required to maintain an average daily balance of liquid assets (including
cash, certain time deposits, certain bankers' acceptances, certain corporate
debt securities and highly rated commercial paper, securities of certain mutual
funds and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than a specified percentage
of the average daily balance of the savings institution's net withdrawable
deposits plus short-term borrowings. Under the HOLA, 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 economic conditions and the
deposit flows of member institutions, and currently is 5%. Savings
institutions are also required to maintain an average daily balance of
short-term liquid assets at a specified percentage (currently 1%) of the total
of the average daily balance of its net withdrawable deposits and short-term
borrowings. The Bank is in compliance with these liquidity requirements.
Loans to One Borrower Limitations. The HOLA generally requires
savings institutions to comply with the loans to one borrower limitations
applicable to national banks. National banks generally may make loans to a
single borrower in amounts up to 15% of their unimpaired capital and surplus,
plus an additional 10% of capital and surplus for loans secured by readily
marketable collateral. FIRREA provides exceptions under which a savings
institution may make loans to one borrower in excess of the generally
applicable national bank limits. Under the HOLA, savings institution may make
loans to one borrower in excess of such limits under one of the following
circumstances: (i) for any purpose, in any amount not to exceed $500,000; (ii)
to develop domestic residential housing units, in an amount not to exceed the
lesser of $30 million or 30% of the savings institution's unimpaired capital
and unimpaired surplus, provided other conditions are satisfied; or (iii) to
finance the sale of real property acquired in satisfaction of debts previously
contracted in good faith in amounts up to 50%
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of the savings institution's unimpaired capital and unimpaired surplus.
However, the OTS has modified the third standard by limiting loans to one
borrower to finance the sale of real property acquired in satisfaction of debts
to 15% of unimpaired capital and surplus. That rule provides, however, that
purchase money mortgages received by a savings institution to finance the sale
of such real property do not constitute "loans" (provided the savings
institution is not placed in a more detrimental position holding the note than
holding the real estate) and, therefore, are not subject to the loans to one
borrower limitations. The Bank does not have any loans to any one borrower in
violation of these regulations.
Commercial Real Estate Loans. HOLA limits the aggregate amount of
commercial (i.e. non-residential) real estate loans that a federal savings
institution may make to an amount not in excess of 400% of the savings
institution's capital. The Bank has no loans in excess of this limit.
Limitation on Capital Distributions. Applicable rules and regulations
of the OTS impose limitations on capital distributions by savings institutions
such as the Bank. Within these limitations, certain "safe harbor" capital
distributions are permitted, subject to providing the OTS at least 30 days'
advance notice. The safe harbor amount is based upon an institution's
regulatory capital level. Savings institutions which have capital in excess of
all fully phased-in capital requirements before and after the proposed capital
distribution ("Tier 1 Institutions") may make capital distributions during a
calendar year up to the greater of (i) 100% of net income to date during the
calendar year, plus the amount that would reduce by one-half its "surplus
capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year, or (ii) 75% of its net
income over the most recent four-quarter period. Institutions which meet
minimum regulatory capital requirements, but not fully phased-in requirements,
before or after a proposed capital distribution ("Tier 2 Institutions"), may
make distributions of up to 75% of net income over the most recent four-quarter
period. Savings institutions that do not meet minimum regulatory capital
requirement prior to or after the proposed capital distribution ("Tier 3
Institutions") may not make any capital distributions without prior approval of
the OTS Savings institutions may apply to the OTS to make capital distributions
in excess of the safe harbor amount. The OTS also may prohibit a proposed
capital distribution by an institution if the OTS determines that such
distribution would constitute an unsafe or unsound practice. The Bank
currently has capital in excess of fully phased-in requirements such that it
meets the Tier 1 institutions criteria. See "Regulation - Savings Institution
Regulation -General."
FDICIA prohibits an insured depository institution from declaring any
dividend, making any other capital distribution, or paying a management fee to
a controlling person if, following the distribution or payment, the institution
would be classified as undercapitalized, significantly undercapitalized or
critically undercapitalized. The OTS had indicated that it intends to review
its existing capital distribution regulations to determine whether amendments
are necessary based on FDICIA. In the interim, the OTS has indicated that it
intends for the permissibility of capital distributions to be determined by the
prompt corrective action regulations recently adopted under FDICIA. A savings
institution permitted to make a capital contribution under the prompt
corrective action regulation may do so only if the amount and type would also
be permitted under the OTS's existing capital distribution regulation.
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Limitation on Equity Risk Investments. The Bank is generally
prohibited from investing directly in equity securities and real estate (other
than that used for offices and related facilities or acquired through, or in
lieu of, foreclosure or on which a contract purchaser has defaulted). In
addition, existing regulations limit the aggregate investment by savings
institutions in certain equity risk investments, including equity securities,
real estate, service corporations and operating subsidiaries and loans for the
purchase of land and construction loans made after February 27, 1987 on
non-residential properties with loan-to-value ratios exceeding 80%. The Bank
is in compliance with the requirements of the equity risk investment
limitations.
Activities of Subsidiaries. FIRREA requires a savings institution
seeking to establish a new subsidiary, acquire control of an existing company
(after which it would be a subsidiary), or conduct a new activity through a
subsidiary, to provide 30 days' prior notice to the FDIC and the Director of
the OTS and conduct any activities of the subsidiary in accordance with
regulations and orders of the Director of the OTS. The Director of the OTS has
the power to require a savings institution to divest any subsidiary or
terminate any activity conducted by a subsidiary that the Director of the OTS
determines is a serious threat to the financial safety, soundness or stability
of such savings institution or is otherwise inconsistent with sound banking
practices.
Insurance of Deposits. Federal deposit insurance is required for all
federally chartered savings institutions. Savings institutions' deposits are
insured to a maximum of $100,000 for each insured depositor by the SAIF. As a
SAIF-insured institution, St. Paul Federal is subject to regulation and
supervision by the FDIC, to the extent deemed necessary by the FDIC to ensure
the safety and soundness of the SAIF. The FDIC is entitled to have access to
reports of examination of St. Paul Federal made by the Director of the OTS and
all reports of condition filed by St. Paul Federal with the Director of the
OTS, and may require the Bank to file such additional reports as the FDIC
determines to be advisable for insurance purposes. The FDIC may determine by
regulation or order that any specific activity poses a serious threat to the
SAIF and that no SAIF member may engage in the activity directly. The FDIC is
also authorized to issue and enforce such regulations or orders as it deems
necessary to prevent actions of savings institutions that pose a serious threat
to SAIF.
Under the FDICIA, the FDIC was required to promulgate regulations
establishing a risk-based assessment system. Furthermore, effective January
1, 1998, the FDIC is required to set SAIF semiannual assessment rates in an
amount sufficient to increase the reserve ratio of the SAIF to 1.25% of insured
deposits over no more than a 15-year period. The FDICIA also gives the FDIC
the authority to establish a higher reserve ratio.
As part of the risk-based deposit insurance system, the deposit
insurance assessment rate was increased from .23% of an institution's assessed
deposits for 1992 to an assessment rate within the range of .23% to .31% for
all SAIF members, depending on the assessment risk classification assigned to
each institution, effective January 1, 1993. Each SAIF member is assigned to
one of three capital groups: "well capitalized," "adequately capitalized," or
"less than adequately capitalized." Such terms are defined in the same manner
as under the OTS's prompt corrective action regulation (discussed above),
except that "less than adequately capitalized" includes any institution that is
not well capitalized or adequately capitalized. Within each capital group,
institutions are assigned to one of three supervisory subgroups -- "healthy"
(institutions
43
<PAGE> 44
that are financially sound with only a few minor weaknesses), "supervisory
concern" (institutions with weaknesses which, if not corrected, could result in
significant deterioration of the institution and increased risk to SAIF) or
"substantial supervisory concern" (institutions that pose a substantial
probability of loss to SAIF unless corrective action is taken). The FDIC
places each institution into one of nine assessment risk classifications based
on the institution's capital group and supervisory subgroup classification. As
a result of implementation of the risk-based deposit insurance system, the
Bank's federal deposit insurance premiums for 1993 increased by approximately
$1.8 million over such premiums paid during 1992. FDIC premiums in 1994 should
be approximately $1.0 million lower in 1994 as a result of lower premiums
assessed to the Bank.
During the five-year period ending on August 9, 1994, savings
institutions are precluded from engaging in any transaction which would result
in a conversion from SAIF to Bank Insurance Fund ("BIF") insurance (subject to
certain exceptions for limited branch sales and supervisory transactions).
FDICIA expands the list of permitted conversion transactions that may be
effected during the five-year moratorium. Under FDICIA, BIF and SAIF insured
institutions may merge, consolidate or engage in asset transfer and liability
assumption transactions. The resulting institution will continue to be subject
to BIF and SAIF assessments in relation to that portion of its combined deposit
base which is attributable to the deposit base of its respective predecessor
BIF and SAIF institutions. After August 9, 1994, the resulting institution may
apply to the FDIC to convert all of its deposits to either insurance fund upon
payment of the then applicable entrance and exit fees for each fund.
Insurance of deposits may be terminated by the FDIC after notice and
hearing, upon a finding by the FDIC that the savings institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, rule, regulation, order or
condition imposed by, or written agreement with, the FDIC. Additionally, if
insurance termination proceedings are initiated against a savings institution,
the FDIC may temporarily suspend insurance on new deposits received by an
institution under certain circumstances. The Bank is not aware of any activity
or condition which could result in a termination of its deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Bank System consists of 12 regional FHLBs, each
subject to supervision and regulation by the Federal Housing Finance Board (the
"FHFB"). The FHLBs provide a central credit facility for member savings
institutions. St. Paul Federal, as a member of the FHLB of Chicago, is
required to own shares of capital stock in the FHLB of Chicago in an amount at
least equal to 1% of the aggregate principal amount of unpaid residential
mortgage loans, home purchase contracts and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the FHLB,
whichever is greater. St. Paul Federal is in compliance with this requirement.
The maximum amount which the FHLB of Chicago will advance fluctuates from time
to time in accordance with changes in policies of the FHFB and the FHLB of
Chicago, and the maximum amount generally is reduced by borrowings from any
other source. In addition, the amount of FHLB advances that a savings
institution may obtain will be restricted in the event the institution fails to
constitute a QTL. See "Regulation-- Qualified Thrift Lender Requirement."
44
<PAGE> 45
FEDERAL RESERVE SYSTEM
The Federal Reserve Board has adopted regulations that require savings
institutions to maintain nonearning reserves of 3% on the first $46.8 million
and 10% on the remaining balance of net transaction accounts (primarily
checking accounts). St. Paul Federal is in compliance with these requirements.
These reserves may be used to satisfy liquidity requirements imposed by the
Director of the OTS. Because required reserves must be maintained in the form
of cash or a noninterest-bearing account at a Federal Reserve bank, the effect
of this reserve requirement is to reduce the amount of the institution's
interest-earning assets.
Savings institutions also have the authority to borrow from the
Federal Reserve "discount window." Federal Reserve Board regulations, however,
require savings institutions to exhaust all FHLB sources before borrowing from
a Federal Reserve bank.
TAXATION
Federal. The Bank and the Company file a calendar tax year consolidated
federal income tax return and report their income and expenses using the
accrual method of accounting.
Savings institutions are generally taxed in the same manner as other
corporations. Unlike other corporations, however, qualifying savings
institutions such as St. Paul Federal that meet certain definitional tests
relating to the nature of their supervision, income, assets and business
operations are allowed to establish reserves for bad debts for both
"qualifying" and "non-qualifying loans" each tax year and are permitted to
deduct additions to the reserve on "qualifying real property loans" using the
more favorable of the following two alternative methods: (i) a method based on
the institution's actual loss experience (the "experience method") or (ii) a
method based on a specified percentage of an institution's taxable income (the
"percentage of taxable income method"). "Qualifying real property loans" are,
in general, loans secured by interests in improved real property. The addition
to the reserve for nonqualifying loans must be computed under the experience
method.
St. Paul Federal (except for 1989, 1992 and 1993, in which the experience
method was used) generally computes the addition to its reserve for losses on
qualifying real property loans using the percentage of taxable income method.
Under this method a qualifying institution generally may deduct 8% of its
separate taxable income after certain adjustments, subject to the limitations
discussed below. Under the experience method, a savings institution is
permitted to compute its addition to its reserve for loss in an amount equal to
the greater of the amount necessary to increase its reserve to (i) an amount
determined by multiplying the ratio of its total loan losses sustained during
the current and preceding five years to the sum of its loans outstanding at the
close of each of those six years by the loans outstanding at the end of the
current year or (ii) the balance of its reserve as of the end of the last tax
year beginning before 1988.
The amount of the bad debt deduction that a savings institution may claim
with respect to additions to its reserve for bad debts is subject to certain
45
<PAGE> 46
limitations. First, the deduction may be eliminated entirely (regardless of
the method of computation) if at least 60% of the savings institution's assets
do not fall within certain designated categories. Second, the bad debt
deduction attributable to "qualifying real property loans" cannot exceed the
greater of (i) the amount deductible under the experience method or (ii) the
amount which, when added to the bad debt deduction for nonqualifying loans,
equals the amount by which 12% of the sum of the total deposits and the advance
payments by borrowers for taxes and insurance at the end of the taxable year
exceeds the sum of the surplus, undivided profits, and reserves at the
beginning of the taxable year. Third, the amount of the bad debt deduction
attributable to qualifying real property loans computed using the percentage of
taxable income method is permitted only to the extent that the institution's
reserve for losses on qualifying real property loans at the close of the
taxable year, taking into account the addition to the reserve for that taxable
year, does not exceed 6% of such loans outstanding at such time. Fourth, the
amount of the percentage of taxable income bad debt deduction is reduced, but
not below zero, by the amount of the addition to reserves for losses on
nonqualifying loans for the taxable year. Finally, a savings institution that
computes its bad debt deduction using the percentage of taxable income method
and files its federal income tax return as part of a consolidated group, as St.
Paul Federal does, is required to reduce proportionately its bad debt deduction
for losses attributable to activities of nonsavings institution members of the
consolidated group that are "functionally related" to the savings institution
member. (The savings institution member is permitted, however, to
proportionately increase its bad debt deduction in subsequent years to recover
any such reduction to the extent the nonsavings institution members realize
income in future years from their "functionally related" activities.) St. Paul
Federal does not expect that the amount of its otherwise allowable bad debt
deductions will be reduced as a result of these limitations for the foreseeable
future.
As of December 31, 1993, St. Paul Federal's tax bad debt reserves totaled
approximately $51.1 million. To the extent that (i) St. Paul Federal's reserve
for losses on qualifying real property loans plus its supplemental reserve for
losses on loans exceeds the amount that would have been allowed under the
experience method and (ii) St. Paul Federal makes distributions to the Company
that are considered to result in withdrawals from this excess bad debt reserve,
then the amounts withdrawn will be included in the Bank's taxable income. The
amount considered to be withdrawn by a distribution will be the amount of the
distribution plus the amount necessary to pay the tax with respect to the
withdrawal. Dividends paid out of St. Paul Federal's current or accumulated
earnings and profits as calculated for federal income tax purposes, however,
will not be considered to result in withdrawals from its bad debt reserves.
Distributions in excess of St. Paul Federal's current and accumulated earnings
and profits, distributions in redemption of stock, and distributions in partial
or complete liquidation of St. Paul Federal will be considered to result in
withdrawals from its bad debt reserves.
Savings institutions, such as St. Paul Federal, are also entitled to
limited special tax treatment with respect to the deductibility of interest
expense relating to certain tax-exempt obligations and the carryback and
carryforward periods for certain net operating losses. Savings institutions
are entitled to deduct 100% of their interest expense allocable to the
purchase or carrying of tax exempt obligations acquired before 1983. The
deduction is reduced to 80% with respect to obligations acquired after 1982.
For taxable years ending after 1986, however, the Tax Reform Act of 1986 (the
"Tax Act") eliminates the
46
<PAGE> 47
deduction entirely for obligations purchased after August 7, 1986 (except for
certain issues by small municipal issuers). St. Paul Federal does not own any
obligations that are exempt for federal income tax purposes. Savings
institutions are subject to the same carryover rules as regular corporations
(i.e., they are able to carry net operating losses back for only three years
but forward for 15 years) for losses incurred in the tax years beginning after
1986.
Depending on the composition of its items of income and expense, a
savings institution may be subject to the alternative minimum tax. For tax
years beginning after 1986, a thrift institution must pay an alternative
minimum tax equal to the amount (if any) by which 20% of alternative minimum
taxable income ("AMTI"), as reduced by an exemption varying with AMTI, exceeds
the regular tax due. AMTI equals regular taxable income increased or decreased
by certain adjustments and increased by certain tax preferences, including
depreciation deductions in excess of that allowable for alternative minimum tax
purposes, tax-exempt interest on most private activity bonds issued after
August 7, 1986 (reduced by any related interest expense disallowed for regular
tax purposes), the amount of the bad debt reserve deduction claimed in excess
of the deduction based on the experience method and, for tax years after 1989,
75% of the excess of adjusted current earnings over AMTI. AMTI may be reduced
only up to 90% by alternative minimum tax net operating loss carryovers. The
payment of alternative minimum tax will give rise to a minimum tax credit which
will be available with an indefinite carryforward period, to reduce the federal
income taxes of the institution in future years (but not below the level of
alternative minimum tax arising in each of the carryforward years).
St. Paul Federal has been audited or its books have been closed without
audit by the Internal Revenue Service (the "IRS") with respect to tax returns
filed through December 31, 1989.
State. The State of Illinois imposes a corporate income tax of 4.8% and
a replacement tax of 2.5% on the Illinois net taxable income of savings banks.
For tax years beginning after June 30, 1993, the corporate income tax rate will
be 4.4%. Illinois taxable income is substantially similar to federal taxable
income with certain adjustments (including the addition of interest income on
state and municipal obligations and the exclusion of interest on United States
Treasury obligations). In 1993, 1992, and 1991, the exclusion of income on
United States Treasury obligations had the effect of reducing significantly the
Illinois taxable income of St. Paul Federal.
St. Paul Federal has been audited or its books have been closed without
audit by the Illinois Department of Revenue with respect to tax returns filed
through 1990. No outstanding deficiencies in tax payments have been proposed
or assessed by Illinois or other state taxing authorities.
See Management's Discussion and Analysis - "Comparison of Years Ended
December 31, 1993 and 1992 - Income Taxes" and "Comparison of Years Ended
December 31, 1992 and 1991 - Income Taxes" and "NOTE Q - Income Taxes"
contained in the Company's 1993 annual report to shareholders filed as an
exhibit hereto.
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<PAGE> 48
Item 2. Properties
The Company neither owns nor leases any real property. For the present,
it uses the premises, equipment and furniture of St. Paul Federal without
direct payment of any rental fees to St. Paul Federal.
As of December 31, 1993, St. Paul Federal has 50 banking offices located
throughout the greater Chicago metropolitan area. All branch locations, except
three drive-up facilities, are full-service offices and provide a full range of
banking services. Fifteen of the branches are located in OMNI(R) food stores
in the Chicago area with at least one additional store scheduled to be opened
in 1994.
St. Paul Federal supplies its own data processing facilities. The primary
internal data processing equipment at St. Paul Federal consists of desk-top and
teller terminals which are both leased and owned and mainframe hardware
components and ATMs which are owned. At December 31, 1993, the equipment owned
had a net book value of approximately $9.3 million. ATMs are located at all of
the Bank's offices. The Bank also has installed ATMs at 116 locations which
are not St. Paul offices.
The following table sets forth certain information concerning the home
office and each branch of the Bank at December 31, 1993. Additionally, the
Bank owns five administrative buildings, one of which is utilized by three of
its service corporations, and leases administrative office space in a nearby
office complex. The aggregate net book value of St. Paul Federal's banking and
administrative offices owned and the net book value of leasehold improvements
at the offices leased at December 31, 1993 was approximately $22.8 million.
The amount of annual lease expenses is not considered material. Management
believes that all of these properties are in good condition.
<TABLE>
<CAPTION>
Lease Expiration
Owned or Date (Including
Location Leased Renewal Options)
- -------- -------- ----------------
<S> <C> <C>
Home Office
6700 W. North Avenue
Chicago, IL 60635................. Owned
2854 W. Cermak Road
Chicago, IL 60623................. Owned
2811 N. Naragansett
Chicago, IL 60634................. Owned
600 37th Street
Chicago, IL 60609.................. Owned
2263 S. Wentworth Avenue
Chicago, IL 60616.................. Leased June 30, 1995
</TABLE>
48
<PAGE> 49
<TABLE>
<CAPTION>
Lease Expiration
Owned or Date (Including
Location Leased Renewal (Options)
- -------- -------- -----------------
<S> <C> <C>
2131 S. China Place
Chicago, IL 60616................. Owned
2748 W. 63rd Street
Chicago, IL 60629................. Owned
540 W. Lake Street
Addison, IL 60101................. Owned
5401 St. Charles Road
Berkeley, IL 60163................ Owned
6201 W. Cermak Road
Berwyn, IL 60402................... Owned
11960 S. Western Avenue
Blue Island, IL 60406............. Owned
1 W. Dundee Road
Buffalo Grove, IL 60089........... Owned
451 Schmale Road
Carol Stream, IL 60188............ Leased October 9, 2007
400 W. 75th Street
Downers Grove, IL 60516........... Owned
100 Addison Street
Elmhurst, IL 60126................ Owned
590 S. York Road
Elmhurst, IL 60126................ Owned
7312 W. Grand Avenue
Elmwood Park, IL 60635............ Owned
7360 W. Grand Avenue
Elmwood Park, IL 60635 (a)........ Owned
1325 Howard
Evanston, IL 60201................ Leased October 11, 2016
1355 Howard
Evanston, IL 60201 (a)............ Leased October 11, 2016
10035 W. Grand Avenue
Franklin Park, IL 60131............ Owned
</TABLE>
49
<PAGE> 50
<TABLE>
<CAPTION>
Lease Expiration
Owned or Date (Including
Location Leased Renewal Options)
- -------- -------- ----------------
<S> <C> <C>
1301 Irving Park Road
Hanover Park, IL 60103.............. Owned
4777 N. Harlem Avenue
Harwood Heights, IL 60656......... Leased October 31, 1998
45 W. Roosevelt Road
Lombard, IL 60148................. Owned
8930 Waukegan Road
Morton Grove,IL 60053............ Leased May 31, 2009
940 E. Rand Road
Mount Prospect, IL 60056......... Leased February 28, 2006
9401 S. Cicero Avenue
Oak Lawn, IL 60453................ Owned
6020 W. Roosevelt Road
Oak Park, IL 60304................ Owned
6733 W. North Avenue
Oak Park, IL 60302 (a)............ Owned
3901 Kirchoff Road
Rolling Meadows, IL 60008......... Owned
4450 Golf Road
Skokie, IL 60076.................. Leased March 10, 2032
320 E. St. Charles Road
Villa Park, IL 60181.............. Owned
1844 S. Mannheim Road
Westchester, IL 60153............. Owned
333 E. Irving Park Road
Wood Dale, IL 60191............... Owned
7460 Woodward, IL 60517........... Owned
- ---------------
(a) Drive-up facility.
</TABLE>
50
<PAGE> 51
<TABLE>
<CAPTION>
OMNI(R) Super Store Branches
- -------------------------
Lease Expiration
Owned or Date (Including
Location Leased Renewal Options)
- -------- -------- ----------------
<S> <C> <C>
4779 W. Cermak Road
Cicero, IL 60650.................. Leased September 30, 2008
2000 Richmond Road
McHenry, IL 60050................. Leased October 31, 2008
151 E. North Avenue
Glendale Heights, IL 60139......... Leased November 30, 2008
722 E. Rollins Road
Round Lake Beach, IL 60073......... Leased December 31, 2008
15854 S. LaGrange Road
Orland Park, IL 60462............. Leased January 31, 2009
2550 N. Clybourn
Chicago, IL 60614.................. Leased June 30, 2009
801 Civic Center Plaza
Niles, IL 60648................... Leased October 31, 2009
539 Illinois Route 59
Aurora,IL 60504................... Leased December 31, 2009
1245 North Rand Road
Arlington Heights,IL 60004........ Leased December 31, 2010
3178 S. Cicero Avenue
Crestwood, IL 60445............... Leased April 30, 2011
8317 W. North Avenue
Melrose Park, IL 60160............. Leased May 31, 2011
4500 S. Damen
Chicago, IL 60609.................. Leased February 28, 2012
7755 S. Harlem Avenue
Bridgeview, IL 60455............... Leased March 31, 2012
3250 W. 87th Street
Chicago, IL 60652.................. Leased September 30, 2012
252 S. Randall
Elgin, IL 60652.................... Leased June 30, 2013
</TABLE>
51
<PAGE> 52
Item 3. LEGAL PROCEEDINGS
As of December 31, 1993, there were no material pending legal proceedings
to which the Company, St. Paul Federal or any of St. Paul Federal's
subsidiaries was a party or of which any of their property was subject.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1993, no
matters were submitted to a vote of security holders through a solicitation of
proxies or otherwise.
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<PAGE> 53
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information as to the principal market on which the Company's common stock
is traded, the approximate number of holders of record as of December 31, 1993,
and the Company's dividend record, and the high and low sales prices for each
fiscal quarter is incorporated herein by reference from the inside back cover
of the Company's 1993 Annual Report to Shareholders filed as an exhibit hereto.
As of the close of business on March 18, 1994, St. Paul Bancorp stock
price was $18 1/2.
Under Delaware law, the Company may pay dividends out of surplus or, in
the event there is no surplus, out of net profits for the fiscal year in which
the dividend is declared and/or the preceding fiscal year. Dividends may not
be paid out of net profits, however, if the capital of the Company has been
diminished to an amount less than the aggregate amount of capital represented
by all classes of preferred stock. Dividends and other distributions of the
Company's stock are subject to restrictions agreed upon by the Company in
connection with the issuance of $34.5 million of subordinated notes in
February, 1993 - See "NOTE R- Stockholders' Equity" in the 1993 Annual Report
to Shareholders filed as an exhibit hereto.
There are various restrictions on the ability of the Bank to pay dividends
to the Company. See Item 1. -- "Regulation -- Savings Institutions" and "NOTE
R - Stockholders' Equity" and Management's Discussion and Analysis "Capital"
incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA
Selected consolidated financial data for the five years ended December 31,
1993, consisting of data captioned "Five Year Summary" on page 18 of the 1993
Annual Report to Shareholders filed as an exhibit hereto, is incorporated
herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Management's Discussion and Analysis" on pages 19 to 37 of the Company's
1993 Annual Report to Shareholders filed as an exhibit hereto is incorporated
herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Statements of Financial Condition of the Company and its
subsidiaries as of December 31, 1993 and 1992, and the related Consolidated
Statements of Income, Stockholders' Equity and Cash Flows for each of the years
in the three-year period ended December 31, 1993, together with the related
notes
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<PAGE> 54
and the report of Ernst & Young, independent auditors are incorporated herein
by reference from pages 38 to 63 of the Company's 1993 Annual Report to
Shareholders filed as an exhibit hereto.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE> 55
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to
non-director officers of the Company, all of whom also currently hold positions
with the Bank:
<TABLE>
<CAPTION>
Age at
December 31, Position with
Name 1993 the Company Position with the Bank
---- ------------ ------------------- ----------------------
<S> <C> <C> <C>
Robert N. Parke....... 49 Senior Vice President, Senior Vice President,
Finance and Chief Finance and Chief
Financial Officer Financial Officer
Thomas J. Rinella..... 48 Senior Vice President, Senior Vice President,
Marketing and Marketing and Community
Community Lending Lending
Clifford M. Sladnick.. 37 Senior Vice President, Senior Vice President,
General Counsel and General Counsel and
Corporate Secretary Corporate Secretary
</TABLE>
The principal occupation or business experience during the past five
years of each non-director officer of the Company is set forth below.
Robert N. Parke, Senior Vice President--Finance and Chief Financial
Officer, joined the Bank in 1977. He was elected Treasurer in 1978 and
promoted to his present position in 1981. Prior to joining St. Paul Federal,
Mr. Parke, a Certified Public Accountant, was with the firm of Ernst and Young
and specialized in the audit of the real estate, savings and loan and mortgage
banking industries. Mr. Parke is a member of the American Institute of
Certified Public Accountants and the Financial Managers Society, Inc. He is a
former member of The Savings and Loan Associations Committee of the American
Institute of Certified Public Accountants and is the past chairman of the
Finance Industry Accounting Committee of the Financial Managers Society. Mr.
Parke holds an undergraduate degree from Knox College and a graduate degree
from the Amos Tuck Graduate School of Business at Dartmouth College.
Thomas J. Rinella, Senior Vice President--Marketing and Community
Lending, has responsibility for administration of the Bank's marketing, public
relations, residential mortgage originations, and consumer lending activities.
Mr. Rinella joined the Bank in 1968 as a Loan Officer. Subsequently, he has
held positions in the Bank as a Systems Analyst, Loan Department Manager, Human
Resources Director, and Marketing Director. He was promoted to Senior Vice
President in 1980 and assumed his present position in 1987. Mr. Rinella serves
on the Board of Directors of Cash Station, Inc., Community Investment Corp.,
and the Savings and Loan Network, Inc. He also serves on the Business Advisory
Council of the College of Business Administration, University of Illinois at
Chicago and the Board of Trustees and Executive Committee of the Illinois
Council on Economic Education. He holds an undergraduate degree from the
University of Illinois at Chicago and an MBA from DePaul University.
55
<PAGE> 56
Clifford M. Sladnick, Senior Vice President--General Counsel and
Corporate Secretary, joined the Bank in 1990 as First Vice President, Corporate
Secretary, and Securities Counsel. He was appointed General Counsel in
December 1990 and was promoted to Senior Vice President in July, 1991. Prior
to joining the Bank, he was a partner in the corporate department of the law
firm of McDermott, Will & Emery. Mr. Sladnick is also a Certified Public
Accountant. He holds a degree in accounting from the University of Illinois
and a juris doctor degree from the College of Law at the University of
Illinois. Mr. Sladnick is on the Board of Directors of the Montessori School
in Niles, Illinois.
Information regarding the directors of the Company is omitted from this
Report as the Company intends to file a definitive proxy statement not later
than 120 days after the end of the fiscal year covered by this Report, and the
information to be included therein is incorporated herein by reference.
Item 11. OFFICER AND DIRECTOR COMPENSATION
Information regarding compensation of officers and directors is omitted
from this Report as the Company intends to file a definitive proxy statement
not later than 120 days after the end of the fiscal year covered by this
Report, and the information included therein is incorporated herein by
reference. Not withstanding anything to the contrary set forth herein, the
Report of the Organizational Planning and Stock Option Committees on Executive
Compensation and the Corporate Performance Graph contained in the proxy
statement shall not be incorporated by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is omitted from this Report as the
Company intends to file a definitive proxy statement not later than 120 days
after the end of the fiscal year covered by this Report, and the information to
be included therein is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
omitted from this Report as the Company intends to file a definitive proxy
statement not later than 120 days after the end of the fiscal year covered by
this Report, and the information included therein is incorporated herein by
reference.
56
<PAGE> 57
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of the Registrant
and its subsidiaries included in the Annual Report to Shareholders for the year
ended December 31, 1993, are incorporated herein by reference in Item 8. The
remaining information appearing in the Annual Report to Shareholders is not
deemed to be filed as part of this Report, except as expressly provided herein.
Consolidated Statements of Financial Condition - December 31, 1993 and
1992.
Consolidated Statements of Stockholders' Equity - Years Ended December 31,
1993, 1992 and 1991.
Consolidated Statements of Income - Years Ended December 31, 1993, 1992
and 1991.
Consolidated Statements of Cash Flows - Years Ended December 31, 1993,
1992 and 1991.
Notes to the Consolidated Financial Statements.
(a)(2) Not applicable.
(a)(3) The following exhibits are either filed as part of this Report or
are incorporated herein by reference:
Exhibit No. 3. Certificate of Incorporation and By-laws.
<TABLE>
<S> <C>
(i) Restated Certificate of Incorporation, (incorporated herein by reference to Exhibit 3(a) to
Pre-effective Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No.
33-11890) filed on March 19, 1987).
(ii) Bylaws of Registrant, as amended, (incorporated herein by reference to Exhibit No. 3(ii) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989).
(iii) Amendment to bylaws of Registrant, (incorporated herein by reference to Exhibit No. 3(iii) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989).
(iv) Amendment to bylaws of Registrant dated as of July 18, 1992, (incorporated herein by reference to
Exhibit 3 (iv) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).
(v) Amendment to Bylaws of Registrant dated as of September 27, 1993.
(vi) Amendment to Bylaws of Registrant dated as of October 25, 1993.
</TABLE>
57
<PAGE> 58
<TABLE>
<S> <C>
(vii) Amendment to Bylaws of Registrant dated as of February 28, 1994.
<CAPTION>
Exhibit No. 10. Material Contracts.
<S> <C>
(i) Stock Option Plan, as amended, (incorporated herein by reference to Exhibit 10 (i) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987).*
(ii) Form of Non-incentive Stock Option Agreement for Non-employee Directors, (incorporated herein by reference
to Exhibit 10 (ii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987).*
(iii) Form of Non-incentive Stock Option Agreement for Employees, (incorporated herein by reference to
Exhibit 10 (iii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987).*
(iv) Employment Agreement dated May 18, 1987 between St. Paul Bancorp, Inc., St. Paul Federal Bank For Savings
and Joseph C. Scully, (incorporated herein by reference to Exhibit 10 (v) to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1987).*
(v) Amendment to Employment Agreement, dated as of December 18, 1989, among St. Paul Bancorp, Inc., St. Paul
Federal Bank For Savings and Joseph C. Scully, (incorporated herein by reference to Exhibit No. 10 (xxii) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989).*
(vi) Employment Agreement dated as of December 18, 1989 among St. Paul Bancorp., St. Paul Federal Bank For
Savings and Patrick J. Agnew, (incorporated herein by reference to Exhibit No. 10 (xx) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989).*
(vii) St. Paul Federal Bank For Savings Deferred Compensation Trust Agreement dated April 21, 1987, (incorporated
herein by reference to Exhibit 10 (xi) to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1987).*
(viii) Repurchase Agreement and Credit Agreement dated as of December 12, 1984, (incorporated herein by reference
to Exhibit 10 (xii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988).
(ix) Issuing and Paying Agency and Security Agreement dated as of December 12, 1984, (incorporated herein by
reference to Exhibit 10 (xiii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1988).
</TABLE>
58
<PAGE> 59
<TABLE>
<S> <C>
(x) Indenture dated as of March 1, 1988 among St. Paul Federal Bank For Savings and the First National
Bank of Chicago, and the Federal Home Loan Bank of Chicago which has joined the Indenture as a Consenting Party,
(incorporated herein by reference to Exhibit 10 (xiv) to Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1988).
(xi) Letter of Credit Reimbursement Agreement dated as of March 23, 1988 between St. Paul Federal Bank For
Savings and the Federal Home Loan Bank of Chicago, (incorporated herein by reference to Exhibit 10 (xv) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988).
(xii) First Amendment to Agreement in Trust dated as of December 31, 1989 by and between St. Paul Federal Bank For
Savings; and Alan J. Fredian, Michael R. Notaro and Faustin A. Pipal, as trustees, (incorporated herein by
reference to Exhibit No. 10 (xvi) to Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1989).*
(xiii) Indenture dated as of July 1, 1989 between St. Paul Federal Bank For Savings and Bankers Trust Company,
Trustee, (incorporated herein by reference to Exhibit No. 10 (xvii) to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1989).
(xiv) St. Paul Federal Bank For Savings and St. Paul Bancorp, Inc. Nonqualified Retirement Plan for Directors,
(incorporated herein by reference to Exhibit No. 10 (xviii) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989).*
(xv) Amendment to Employment Agreement, dated as of April 5, 1990, among St. Paul Bancorp, Inc., St. Paul Federal
Bank For Savings and Patrick J. Agnew, (incorporated herein by reference to Exhibit No. 10 (xxi) to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1990).*
(xvi) Amendment to Employment Agreement, dated as of April 5, 1990, among St. Paul Bancorp, Inc., St. Paul Federal
Bank For Savings and Joseph C. Scully, (incorporated herein by reference to Exhibit No. 10 (xxii) to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1990).*
(xvii) Amendment to Employment Agreement, dated as of January 28, 1991 among St. Paul Bancorp, Inc., St. Paul
Federal Bank For Savings and Patrick J. Agnew, (incorporated herein by reference to Exhibit No. 10 (xxvi) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990).*
(xviii) Amendment to Employment Agreement, dated as of January 28, 1991 among St. Paul Bancorp, Inc., St. Paul
Federal Bank For
</TABLE>
59
<PAGE> 60
<TABLE>
<S> <C>
Savings and Joseph C. Scully, (incorporated herein by reference to Exhibit No. 10 (xxvii) to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1990).*
(xix) Agreement in Trust, dated as of January 28, 1991 between St. Paul Federal Bank For Savings; and Alan J.
Fredian, Michael R. Notaro and Joseph C. Scully, as trustees, (incorporated herein by reference to Exhibit No. 10
(xxx) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990).*
(xx) St. Paul Federal Bank For Savings Supplemental Retirement Plan and Excess Benefit Plan, (incorporated herein
by reference to Exhibit No. 10 (xxxii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1990).*
(xxi) St. Paul Federal Bank For Savings Supplemental Retirement Trust, (incorporated herein by reference to
Exhibit No. 10 (xxxiii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990).*
(xxii) St. Paul Federal Bank For Savings and St. Paul Bancorp, Inc. Nonqualified Retirement Plan for Directors, as
amended and restated as of January 28, 1991, (incorporated hererin by reference to Exhibit No. 10 (xxxiv) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990).*
(xxiii) Advances, Collateral Pledge and Security Agreement dated March 25, 1991, between St. Paul Federal Bank For
Savings and the Federal Home Loan Bank of Chicago, (incorporated herein by reference to Exhibit 10 (xxxvi) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990).
(xxiv) Term Loan Agreement, dated as of November 21, 1991, among St. Paul Federal Bank For Savings Employee Stock
Ownership Trust, St. Paul Bancorp, Inc. and Nationar, (incorporated herein by reference to Exhibit 10 (xxxvii) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991).
(xxv) Amendment to Stock Option Plan dated May 13, 1992 (incorporated herein by reference to Exhibit No. 10
(xxxviii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).*
(xxvi) Amendment to St. Paul Federal Bank For Savings and St. Paul Bancorp, Inc. Nonqualified Retirement Plan for
Directors dated as of August 24, 1992 (incorporated herein by reference to Exhibit No. 10 (xxxix) to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1992).*
(xxvii) Amendment to Employment Agreement, dated as of October 26, 1992 among St. Paul Bancorp, Inc., St. Paul
Federal Bank For Savings and Patrick J. Agnew (incorporated herein by reference
</TABLE>
60
<PAGE> 61
<TABLE>
<S> <C>
to Exhibit No. 10 (xl) to Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1992).*
(xxviii) Amendment to Employment Agreement, dated as of October 26, 1992 among St. Paul Bancorp, Inc., St.
Paul Federal Bank For Savings and Joseph C. Scully (incorporated herein by reference to Exhibit No. 10
(xli) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).
(xxix) Shareholders rights plan dated October 26, 1992, (incorporated herein by reference to Registrant's
Form 8-K filed on October 26, 1992).
(xxx) Amendment to Employment Agreement, dated as of December 21, 1992 among St. Paul Bancorp, Inc., St.
Paul Federal Bank For Savings and Patrick J. Agnew (incorporated herein by reference to Exhibit No. 10
(xliv) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).*
(xxxi) Amendment to Employment Agreement, dated as of December 21, 1992 among St. Paul Bancorp, Inc., St.
Paul Federal Bank For Savings and Joseph C. Scully (incorporated herein by reference to Exhibit No. 10
(xlv) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).*
(xxxii) Severance Agreement dated December 21, 1992 between St. Paul Bancorp, Inc., St. Paul Federal Bank
For Savings and Thomas J. Rinella (incorporated herein by reference to Exhibit No. 10 (xlvi) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).*
(xxxiii) Severance Agreement dated December 21, 1992 between St. Paul Bancorp, Inc., St. Paul Federal Bank
For Savings and Robert N. Parke (incorporated herein by reference to Exhibit No. 10 (xlvii) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).*
(xxxiv) Severance Agreement dated December 21, 1992 between St. Paul Bancorp, Inc., St. Paul Federal Bank
For Savings and Clifford M. Sladnick (incorporated herein by reference to Exhibit No. 10 (xlviii) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).*
(xxxv) Indenture for Subordinated Notes dated February 1, 1993 between St. Paul Bancorp, Inc. and Harris
Trust and Savings Bank, (incorporated herein by reference to Exhibit No. 4.2 to Registrant's Registration
Statement on Form S-3 (Registration No. 33- 55850) filed on December 17, 1992) (incorporated herein by
reference to Exhibit No. 10() to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992).
(xxxvi) St. Paul Bancorp, Inc and St. Paul Federal Bank For Savings Employee Severance Compensation Plan,
executed December 20, 1993.*
</TABLE>
61
<PAGE> 62
<TABLE>
<S> <C>
(xxxvii) First Amendment to Term Loan Agreement, dated as of June 30, 1993 (but effective as of May 5, 1993)
by and among St. Paul Federal Bank For Savings Employee Stock Ownership Trust, St. Paul Bancorp, Inc., and
Nationar.
</TABLE>
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit.
Exhibit No. 13. 1993 Annual Report to Shareholders.
Management's Discussion and Analysis and the audited financial
statements, including footnotes, contained in the 1993 Annual
Report to Shareholders is attached as an exhibit to this
Report. Portions of the Annual Report to Shareholders have
been incorporated herein by reference into this Form 10-K.
Exhibit No. 21. Subsidiaries of the Registrant.
A list of the Company's and St. Paul Federal's subsidiaries is
included as an exhibit to this report.
Exhibit No. 23. Consent of Ernst & Young.
(b) The Company filed a current report on Form 8-K on December 6,
1993 relating to the announcement by St. Paul Bancorp of a
three-for-two stock split issued to shareholders on January 4,
1994.
(c) Exhibits to this Form 10-K are either filed as part of this
Report or are incorporated herein by reference.
(d) Not Applicable.
62
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) 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
By: /s/ Joseph C. Scully
--------------------------
Joseph C. Scully
Chairman of the Board
March 30, 1994
--------------------------
Date
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Joseph C. Scully March 30, 1994
- ------------------------------------------------- --------------
Joseph C. Scully Date
Chairman of the Board and Chief Executive Officer
By: /s/ Patrick J. Agnew March 30, 1994
- ------------------------------------------------- --------------
Patrick J. Agnew Date
President and Chief Operating Officer
By: /s/ William A. Anderson March 30, 1994
- ------------------------------------------------- --------------
William A. Anderson Date
Director
By: /s/ John W. Croghan March 30, 1994
- ------------------------------------------------- --------------
John W. Croghan Date
Director
63
<PAGE> 64
By: /s/ Alan J. Fredian March 30, 1994
- ------------------------------------------------- --------------
Alan J. Fredian Date
Director
By: /s/ Kenneth J. James March 30, 1994
- ------------------------------------------------- --------------
Kenneth J. James Date
Director
By: /s/ Jean C. Murray March 30, 1994
- ------------------------------------------------- --------------
Jean C. Murray Date
Director
By: /s/ Michael R. Notaro March 30, 1994
- ------------------------------------------------- --------------
Michael R. Notaro Date
Director
By: /s/ John J. Viera March 30, 1994
- ------------------------------------------------- --------------
John J. Viera Date
Director
By: /s/ James B. Wood March 30, 1994
- ------------------------------------------------- --------------
James B. Wood Date
Director
By: /s/ Robert N. Parke March 30, 1994
- ------------------------------------------------- --------------
Robert N. Parke Date
Senior Vice President and Treasurer
(Principal Financial Officer)
By: /s/ Paul J. Devitt March 30, 1994
- ------------------------------------------------- --------------
Paul J. Devitt Date
First Vice President and Controller
(Principal Accounting Officer)
64
<PAGE> 65
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Sequential
Exhibit Numbering
Number System Identity of Exhibit
- ------- ---------- ---------------------------------------------
<S> <C> <C>
3 (i) Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3(a) to
Pre-effective Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No.
33-11890) filed on March 19, 1987).
3 (ii) Bylaws of Registrant, as amended (incorporated herein by reference to Exhibit No. 3(ii) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989).
3 (iii) Amendment to bylaws of Registrant (incorporated herein by reference to Exhibit No. 3(iii) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989).
3 (iv) Amendment to bylaws of Registrant dated as of July 18, 1992, (incorporated herein by reference to
Exhibit No. 3(iv) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).
3 (v) Amendment to Bylaws of Registrant dated as of September 27, 1993.
3 (vi) Amendment to Bylaws of Registrant dated as of October 25, 1993.
3 (vii) Amendment to Bylaws of Registrant dated as of February 28, 1994.
10 (i) Stock Option Plan, as amended, (incorporated herein by reference to Exhibit 10 (i) to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1987).*
10 (ii) Form of Non-incentive Stock Option Agreement for Non-employee Directors, (incorporated herein by
reference to Exhibit 10 (ii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1987).*
10 (iii) Form of Non-incentive Stock Option Agreement for Employees, (incorporated herein by reference to Exhibit
10 (iii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987).*
10 (iv) Employment Agreement dated May 18, 1987 between St. Paul Bancorp, Inc., St. Paul Federal Bank For
Savings and Joseph C. Scully, (incorporated herein by reference to Exhibit 10 (v) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987).*
</TABLE>
65
<PAGE> 66
<TABLE>
<S> <C> <C>
10 (v) Amendment to Employment Agreement, dated as of December 18, 1989, among St. Paul Bancorp, Inc., St.
Paul Federal Bank For Savings and Joseph C. Scully, (incorporated herein by reference to Exhibit No. 10
(xxii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989).*
10 (vi) Employment Agreement dated as of December 18, 1989 among St. Paul Bancorp., St. Paul Federal Bank
For Savings and Patrick J. Agnew, (incorporated herein by reference to Exhibit No. 10 (xx) to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1989).*
10 (vii) St. Paul Federal Bank For Savings Deferred Compensation Trust Agreement dated April 21, 1987,
(incorporated herein by reference to Exhibit 10 (xi) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987).*
10 (viii) Repurchase Agreement and Credit Agreement dated as of December 12, 1984, (incorporated herein by
reference to Exhibit 10 (xii) to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988).
10 (ix) Issuing and Paying Agency and Security Agreement dated as of December 12, 1984, (incorporated herein
by reference to Exhibit 10 (xiii) to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988).
10 (x) Indenture dated as of March 1, 1988 among St. Paul Federal Bank For Savings and the First National
Bank of Chicago, and the Federal Home Loan Bank of Chicago which has joined the Indenture as a Consenting
Party, (incorporated herein by reference to Exhibit 10 (xiv) to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1988).
10 (xi) Letter of Credit Reimbursement Agreement dated as of March 23, 1988 between St. Paul Federal Bank
For Savings and the Federal Home Loan Bank of Chicago, (incorporated herein by reference to Exhibit 10
(xv) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988).
10 (xii) First Amendment to Agreement in Trust dated as of December 31, 1989 by and between St. Paul Federal
Bank For Savings; and Alan J. Fredian, Michael R. Notaro and Faustin A. Pipal, as trustees, (incorporated
herein by reference to Exhibit No. 10 (xvi) to Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989).*
10 (xiii) Indenture dated as of July 1, 1989 between St. Paul Federal Bank For Savings and Bankers Trust Company,
</TABLE>
66
<PAGE> 67
<TABLE>
<S> <C> <C>
Trustee, (incorporated herein by reference to Exhibit No. 10 (xvii) to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1989).
10 (xiv) St. Paul Federal Bank For Savings and St. Paul Bancorp, Inc. Nonqualified Retirement Plan for
Directors, (incorporated herein by reference to Exhibit No. 10 (xviii) to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1989).*
10 (xv) Amendment to Employment Agreement, dated as of April 5, 1990, among St. Paul Bancorp, Inc., St. Paul
Federal Bank For Savings and Patrick J. Agnew, (incorporated herein by reference to Exhibit No. 10 (xxi)
to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990).*
10 (xvi) Amendment to Employment Agreement, dated as of April 5, 1990, among St. Paul Bancorp, Inc., St. Paul
Federal Bank For Savings and Joseph C. Scully, (incorporated herein by reference to Exhibit No. 10 (xxii)
to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990).*
10 (xvii) Amendment to Employment Agreement, dated as of January 28, 1991 among St. Paul Bancorp, Inc., St.
Paul Federal Bank For Savings and Patrick J. Agnew, (incorporated herein by reference to Exhibit No. 10
(xxvi) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990).*
10 (xviii) Amendment to Employment Agreement, dated as of January 28, 1991 among St. Paul Bancorp, Inc., St.
Paul Federal Bank For Savings and Joseph C. Scully, (incorporated herein by reference to Exhibit No. 10
(xxvii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990).*
10 (xix) Agreement in Trust, dated as of January 28, 1991 between St. Paul Federal Bank For Savings; and Alan
J. Fredian, Michael R. Notaro and Joseph C. Scully, as trustees, (incorporated herein by reference to
Exhibit No. 10 (xxx) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1990).*
10 (xx) St. Paul Federal Bank For Savings Supplemental Retirement Plan and Excess Benefit Plan,
(incorporated herein by reference to Exhibit No. 10 (xxxii) to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1990).*
10 (xxi) St. Paul Federal Bank For Savings Supplemental Retirement Trust, (incorporated herein by reference
to Exhibit No. 10 (xxxiii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1990).*
</TABLE>
67
<PAGE> 68
<TABLE>
<S> <C> <C>
10 (xxii) St. Paul Federal Bank For Savings and St. Paul Bancorp, Inc. Nonqualified Retirement Plan for
Directors, as amended and restated as of January 28, 1991, (incorporated hererin by reference to Exhibit
No. 10 (xxxiv) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990).*
10 (xxiii) Advances, Collateral Pledge and Security Agreement dated March 25, 1991, between St. Paul Federal
Bank For Savings and the Federal Home Loan Bank of Chicago, (incorporated herein by reference to Exhibit
10 (xxxvi) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990).
10 (xxiv) Term Loan Agreement, dated as of November 21, 1991, among St. Paul Federal Bank For Savings
Employee Stock Ownership Trust, St. Paul Bancorp, Inc. and Nationar, (incorporated herein by reference to
Exhibit 10 (xxxvii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1991).
10 (xxv) Amendment to Stock Option Plan dated May 13, 1992 (incorporated herein by reference to Exhibit No.
10 (xxxviii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).*
10 (xxvi) Amendment to St. Paul Federal Bank For Savings and St. Paul Bancorp, Inc. Nonqualified Retirement
Plan for Directors dated as of August 24, 1992 (incorporated herein by reference to Exhibit No. 10 (xxxix)
to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).*
10 (xxvii) Amendment to Employment Agreement, dated as of October 26, 1992 among St. Paul Bancorp, Inc., St.
Paul Federal Bank For Savings and Patrick J. Agnew (incorporated herein by reference to Exhibit No. 10
(xl) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).*
10 (xxviii) Amendment to Employment Agreement, dated as of October 26, 1992 among St. Paul Bancorp, Inc., St.
Paul Federal Bank For Savings and Joseph C. Scully (incorporated herein by reference to Exhibit No. 10
(xli) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).
10 (xxix) Shareholders rights plan dated October 26, 1992, (incorporated herein by reference to Registrant's
Form 8-K filed on October 26, 1992).
10 (xxx) Amendment to Employment Agreement, dated as of December 21, 1992 among St. Paul Bancorp, Inc., St.
Paul Federal Bank For Savings and Patrick J. Agnew (incorporated
</TABLE>
68
<PAGE> 69
<TABLE>
<S> <C> <C>
herein by reference to Exhibit No. 10 (xliv) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992).*
10 (xxxi) Amendment to Employment Agreement, dated as of December 21, 1992 among St. Paul Bancorp, Inc., St.
Paul Federal Bank For Savings and Joseph C. Scully (incorporated herein by reference to Exhibit No. 10
(xlv) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).*
10 (xxxii) Severance Agreement dated December 21, 1992 between St. Paul Bancorp, Inc., St. Paul Federal Bank
For Savings and Thomas J. Rinella (incorporated herein by reference to Exhibit No. 10 (xlvi) to
Registrant's Annual Report on Form 10- K for the fiscal year ended December 31, 1992).*
10 (xxxiii) Severance Agreement dated December 21, 1992 between St. Paul Bancorp, Inc., St. Paul Federal Bank
For Savings and Robert N. Parke (incorporated herein by reference to Exhibit No. 10 (xlvii) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).*
10 (xxxiv) Severance Agreement dated December 21, 1992 between St. Paul Bancorp, Inc., St. Paul Federal Bank
For Savings and Clifford M. Sladnick (incorporated herein by reference to Exhibit No. 10 (xlviii) to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).*
10 (xxxv) Indenture for Subordinated Notes dated February 1, 1993 between St. Paul Bancorp, Inc. and Harris
Trust and Savings Bank, (incorporated herein by reference to Exhibit No. 4.2 to Registrant's Registration
Statement on Form S-3 (Registration No. 33-55850) filed on December 17, 1992) (incorporated herein by
reference to Exhibit No. 10() to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992).
10 (xxxvi) St. Paul Bancorp, Inc and St. Paul Federal Bank For Savings Employee Severance Compensation Plan,
executed December 20, 1993.*
10 (xxxvii) First Amendment to Term Loan Agreement, dated as of June 30, 1993 (but effective as of May 5, 1993)
by and among St. Paul Federal Bank For Savings Employee Stock Ownership Trust, St. Paul Bancorp, Inc., and
Nationar.
</TABLE>
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit.
69
<PAGE> 70
<TABLE>
<S> <C>
13 Management's Discussion and Analysis and the audited financial statements, including footnotes,
contained in the 1993 Annual Report to Shareholders.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young.
</TABLE>
70
<PAGE> 1
Exhibit 3.5
Effective September 27, 1993, the first sentence of Section 1, Article III of
the Bylaws of St. Paul Bancorp, Inc. was amended in its entirety to read as
follows:
"The number of directors shall be eleven."
<PAGE> 1
Exhibit 3.6
Effective October 25, 1993, 2, the last sentence of Section I, Article III of
the Bylaws of St. Paul Bancorp, Inc. was amended in its entirety to read as
follows:
"Each director is required to beneficially own not less than 1,000 shares of
the common stock of the Corporation, unless and to the extent that such
requirement is waived or modified, with respect to any individual director,
by the affirmative vote of at least two-thirds of the other directors then in
office."
<PAGE> 1
Exhibit 3.7
Effective February 28, 1994, the first sentence of Section 1, Article III of
the Bylaws of St. Paul Bancorp, Inc. was amended in its entirety to read as
follows:
"The number of directors shall be ten."
<PAGE> 1
Exhibit 10.36
ST. PAUL BANCORP, INC.
ST. PAUL FEDERAL BANK FOR SAVINGS
EMPLOYEE SEVERANCE COMPENSATION PLAN
<PAGE> 2
ST. PAUL BANCORP, INC.
ST. PAUL FEDERAL BANK FOR SAVINGS
EMPLOYEE SEVERANCE COMPENSATION PLAN
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I Establishment and Purpose................. 1
<CAPTION>
ARTICLE II Definitions
<S> <C> <C>
2.1 "Act"..................................... 1
2.2 "Administrator"........................... 1
2.3 "Affiliate................................ 1
2.4 "Authorized Leave of Absence"............. 2
2.5 "Bank".................................... 2
2.6 "Beneficiary"............................. 2
2.7 "Benefits"................................ 2
2.8 "Board of Directors" or "Board"........... 2
2.9 "Change in Control"....................... 2
2.10 "Compensation"............................ 4
2.11 "Date of Transaction"..................... 4
2.12 "Effective Date".......................... 4
2.13 "Eligible Employee"....................... 4
2.14 "Employee................................. 4
2.15 "Employer"................................ 4
2.16 "Holding Company"......................... 4
2.17 "Named Fiduciary"......................... 4
2.18 "Notice of Termination"................... 4
2.19 "Participant"............................. 4
2.20 "Plan".................................... 4
2.21 "Years of Benefit Service."............... 4
<CAPTION>
ARTICLE III Eligibility for Benefits
<S> <C> <C>
3.1 Termination Following Change in Control... 5
3.2 Disability................................ 5
3.3 Cause..................................... 5
3.4 Good Reason............................... 6
3.5 Requirement of Notice of Termination...... 6
3.6 Duration of Participation................. 6
3.7 Reemployment.............................. 7
3.8 Transfer of Employment.................... 7
3.9 Authorized Leave of Absence............... 7
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
ARTICLE IV Benefits
<S> <C> <C>
4.1 Severance Compensation Upon Termination... 7
4.2 Duty to Mitigate Damages.................. 8
4.3 Allocation to Employer.................... 9
4.4 Deduction of Taxes from Amounts Payable... 9
4.5 Facility of Payment....................... 9
4.6 Payment of Benefit Conditional
on Execution of Release................... 9
<CAPTION>
ARTICLE V Administration
<S> <C> <C>
5.1 Authority and Responsibility of
the Administrator........................ 10
5.2 Administrator Duties...................... 10
5.3 Records................................... 11
5.4 Administrator Decisions Final............. 11
5.5 Administrator as Agent.................... 11
5.6 Plan Expenses............................. 11
5.7 Correction of Error....................... 11
5.8 Allocations and Delegations of
Responsibility........................... 11
5.9 Misrepresentations........................ 12
<CAPTION>
ARTICLE VI Claims Procedure
<S> <C> <C>
6.1 Initial Claim for Payment................. 12
6.2 Review of Claim Denial.................... 12
<CAPTION>
ARTICLE VII Adoption and Withdrawal from Plan
<S> <C> <C>
7.1 Procedure for Adoption.................... 13
7.2 Procedure for Withdrawal.................. 13
<CAPTION>
ARTICLE VIII Duration, Amendment and Termination
<S> <C> <C>
8.1 Duration.................................. 13
8.2 Amendment and Termination................. 14
8.3 Form of Amendment......................... 14
<CAPTION>
ARTICLE IX Miscellaneous Provisions
<S> <C> <C>
9.1 Successor to the Holding Company or the
Bank .................................... 14
9.2 Liquidation............................... 14
9.3 Indemnification........................... 15
9.4 Nonalienation of Payment.................. 15
9.5 Contract of Employment.................... 15
9.6 No Effect on Other Contractual Rights..... 15
9.7 Regulatory Considerations................. 15
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
9.8 Source of Payment......................... 16
9.9 Headings.................................. 17
9.10 Invalidity of Certain Provisions.......... 17
9.11 Law Governing............................. 17
9.12 Limitation on Liability................... 17
9.13 Prior Benefits............................ 17
9.14 Notices................................... 17
9.15 Destruction of Records.................... 18
9.16 Gender and Number......................... 18
9.17 Arbitration............................... 18
</TABLE>
<PAGE> 5
ST. PAUL BANCORP, INC.
ST. PAUL FEDERAL BANK FOR SAVINGS
EMPLOYEE SEVERANCE COMPENSATION PLAN
ARTICLE I
ESTABLISHMENT AND PURPOSE
WHEREAS, the Boards of Directors of St. Paul Bancorp, Inc. and St.
Paul Federal Bank For Savings have established, effective on the Effective
Date, this Employee Severance Compensation Plan for the purpose of providing
severance benefits to eligible employees upon their termination of employment
following a Change in Control of the Holding Company or the Bank.
NOW, THEREFORE, the Holding Company and the Bank hereby create this
separate Plan document for the purpose of providing Eligible Employees of the
Employer with severance benefits in the event of a Change in Control. Any
prior oral or written declarations of this Plan or predecessor plans or
portions thereof are hereby expressly amended, restated or revoked, as
appropriate, in order to effectuate the Holding Company's and the Bank's intent
that this written instrument (as may be amended from time to time) shall be the
sole embodiment of the Plan. No covered individual shall have any right or
claim with respect to the severance benefits provided under this Plan other
than in accordance with this Plan document.
ARTICLE II
DEFINITIONS
When used herein in a capitalized form, the following words shall be
deemed to have the following meanings unless the context clearly indicates
otherwise:
2.1 "Act" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations promulgated thereunder.
2.2 "Administrator" of the Plan within the meaning of the Act
shall be those individuals constituting the Organizational Planning Committee
of the Board of Directors of the Bank immediately prior to the occurrence of
the Change in Control.
2.3 "Affiliate" means the Holding Company, the Bank, any future
parent of the Bank, each of the present or future
<PAGE> 6
subsidiaries of the Holding Company and the Bank in which the Holding Company
or the Bank has or acquires a controlling interest by reason of stock
ownership, membership or otherwise, and each of the present or future trades or
businesses, other than a subsidiary, in which the Holding Company or the Bank
has or acquires a direct or indirect controlling interest, and any subsidiaries
or other trades or businesses of any future parent of the Bank in which the
parent holds a controlling interest.
2.4 "Authorized Leave of Absence" means an absence, with or
without compensation, authorized by the Employer or the Affiliate under its
standard personnel practices, provided the Employee returns to employment with
the Employer or the Affiliate within the period specified for the absence.
2.5 "Bank" means St. Paul Federal Bank For Savings. The Bank is a
wholly-owned subsidiary of the Holding Company.
2.6 "Beneficiary" means the Participant's spouse on his date of
death or, if none, the Participant's estate.
2.7 "Benefits" means the employee welfare or severance benefits
described in Article IV herein. The Benefits described in Article IV which
represent a severance benefit are unfunded commitments of the Employer.
2.8 "Board of Directors" or "Board" means, collectively, the Board
of Directors of the Holding Company and the Bank and, individually, each of its
directors or such officer or officers of the Holding Company and the Bank to
whom the Board may delegate its duties hereunder.
2.9 "Change in Control" shall be deemed to have occurred, for
purposes of the Plan, if (i) any person becomes the beneficial owner of
twenty-five percent (25%) or more of the total number of voting shares of the
Holding Company; (ii) any person has received the approval of the Office of
Thrift Supervision ("OTS") under Section 10 of the Home Owners' Loan Act, as
amended, or regulations issued thereunder, to acquire control of the Holding
Company; (iii) any person has received approval of the OTS under Section 7(j)
of the Federal Deposit Insurance Act, as amended, or regulations issued
thereunder, to acquire control of the Holding Company; (iv) any person has
entered into a binding agreement to acquire (by means of stock purchase, cash
tender or exchange offer, merger or other business combination) beneficial
ownership of twenty-five percent (25%) or more of the total number of voting
shares of the Holding Company, whether or not the requisite approval for such
acquisition has been received under the Home Owners' Loan Act, as amended, the
Federal Deposit Insurance Act, as amended, or the respective regulations issued
thereunder, provided that a Change in Control will not be deemed to have
occurred under this clause (iv) unless the Board of Directors of the Holding
Company has made a
2
<PAGE> 7
determination that such action constitutes or will constitute a change in
control, and further provided that a Change in Control shall no longer be
deemed to have occurred upon the termination of such agreement for any reason
whatsoever; (v) any person becomes the beneficial owner of ten percent (10%) or
more, but less than twenty-five percent (25%), of the total number of voting
shares of the Holding Company, provided that the OTS has made a determination
that such beneficial ownership constitutes a change of control of the Holding
Company under the Home Owners' Loan Act, as amended, or the regulations
promulgated thereunder; (vi) any person (other than persons named as proxies
solicited on behalf of the Board of Directors of the Holding Company) holds
irrevocable proxies for twenty-five percent (25%) or more of the total number
of voting shares of the Company, provided that a Change in Control will not be
deemed to have occurred under this clause (vi) unless the Board of Directors of
the Holding Company has made a determination that such action constitutes or
will constitute a Change in Control; or (vii) as the result of, or in
connection with, any cash tender or exchange offer, merger, or other business
combination, sale of assets or contested proxy solicitation or election, or any
combination of the foregoing transactions, the persons who were directors of
the Holding Company before such transaction shall cease to constitute at least
two-thirds of the Board of Directors of the Holding Company or any successor
institution. For purposes of this Section, a "person" includes an individual,
corporation, partnership, trust or group acting in concert. A person for these
purposes shall be deemed to be a beneficial owner as that term is used in Rule
13d-3 under the Securities Exchange Act of 1934. A Change in Control of the
Bank, for purposes of this Plan, shall be deemed to have taken place if the
Holding Company's beneficial ownership of the total number of voting shares of
the Bank is reduced to less than fifty percent (50%).
Notwithstanding anything to the contrary contained herein, a Change in
Control shall no longer be deemed (as of the time of the determination of the
Board referred to below) to have occurred for the purposes of this Plan by
virtue of any transaction or event which terminates or ceases to exist, with
respect to which the Board of Directors of the Holding Company, by resolution
adopted by the affirmative vote of at least two-thirds (2/3's) of the members
of the Board of Directors of the Holding Company in office immediately prior to
such transaction or event, shall specify that such transaction or event shall
no longer be deemed to constitute a Change in Control of the Holding Company
for purposes of this Agreement; provided that at the time of making a
determination under this subsection the Board of Directors may attach such
terms and conditions to its determination as it shall, in its discretion, deem
appropriate; and provided further that the provisions of this paragraph shall
not be applicable to any transaction or event pursuant to which any person
becomes the beneficial owner of fifty percent (50%) or more of the total number
of voting shares of the Holding Company.
3
<PAGE> 8
2.10 "Compensation" means the sum of (i) the Eligible Employee's
salary or wages at the annual rate in effect at the time of his termination,
but not less than the amount paid to the Eligible Employee during the
twelve-month period preceding his termination; plus (ii) any commissions and/or
bonuses paid to the Eligible Employee during the twelve-month period prior to
his termination.
2.11 "Date of Termination" shall mean, if an Eligible Employee's
employment is terminated, the date on which a Notice of Termination is given.
2.12 "Effective Date" means the date of any Change in Control
occurring on or after January 1, 1994.
2.13 "Eligible Employee" means any Employee who has completed
at least five (5) Years of Benefit Service, excluding any person who is a party
to a written employment agreement or termination or severance agreement with the
Employer.
2.14 "Employee" means any person who is a common-law employee of
an Employer on or after the Effective Date and employed by an Employer on a
full-time basis.
2.15 "Employer" means the Bank and, on and after its designation
as an "Employer" pursuant to Article VII of this Plan, any Affiliate which has
been designated as such.
2.16 "Holding Company" means St. Paul Bancorp, Inc., a
corporation organized under the laws of the State of Delaware.
2.17 "Named Fiduciary" of the Plan within the meaning of Section
402(a) of the Act shall be the Administrator.
2.18 "Notice of Termination" means a written notice which shall
indicate the specific termination provision of Section 3.2, 3.3 or 3.4 relied
upon and which sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Eligible Employee's
employment under the provision so indicated.
2.19 "Participant" means an Eligible Employee who is entitled
to receive Benefits under the Plan, as provided in Article III.
2.20 "Plan" means the Employee Severance Compensation Plan, as
stated herein, and as hereafter may be amended from time to time.
2.21 "Years of Benefit Service" means an Employee's period of
continuous, uninterrupted full-time employment by an Employer or an Affiliate,
including Authorized Leaves of Absence, beginning on the Employee's most
recent date of hire and ending on the Employee's Date of Termination. Any of
an Employee's Years of Benefit Service
4
<PAGE> 9
applied to calculate Benefits paid pursuant to this Plan shall be disregarded
if such Employee is again employed and becomes a Participant pursuant to
Article III.
ARTICLE III
ELIGIBILITY FOR BENEFITS
3.1 Termination Following Change in Control. If a Change in
Control shall have occurred while the Eligible Employee is still an Employee of
an Employer, the Eligible Employee shall be entitled to the Benefits described
in Article IV upon the subsequent termination of the Eligible Employee's
employment with the Bank within one (1) year of the date upon which the Change
in Control shall have occurred unless such termination is as a result of (i)
the Eligible Employee's death; (ii) the Eligible Employee's Disability (as
defined in 3.2); (iii) the Eligible Employee's termination by the Employer for
Cause (as defined in Section 3.3); or (iv) the Eligible Employee's decision to
terminate employment other than for Good Reason (as defined in Section 3.4).
3.2 Disability. If, as a result of the Eligible Employee's
incapacity due to physical or mental illness, the Eligible Employee shall
qualify for benefits under his Employer's short-term disability plan or
long-term disability plan and shall have been absent from his duties with the
Employer on a full-time basis for a continuous period of six (6) months,
commencing with the date of Change in Control or the first day of such absence
(whichever is later) and if, within thirty (30) days after written notice of
termination is thereafter given by the Employer, the Eligible Employee shall
not have returned to the full-time performance of the Eligible Employee's
duties, the Employer may terminate the Eligible Employee's employment for
"Disability" without the Eligible Employee's being entitled to the Benefits
described in Article IV.
3.3 Cause. An Employer may terminate the Eligible Employee's
employment for Cause without the Eligible Employee's being entitled to the
Benefits described in Article IV. An Employer shall have "Cause" to terminate
the Eligible Employee's employment under the Plan only on the basis of (a)
personal dishonesty, (b) incompetence, (c) reckless, willful or grossly
negligent misconduct, (d) breach of fiduciary duty involving personal profit,
(e) the Eligible Employee's continued failure substantially to perform his
duties with an Employer (other than any such failure resulting from his
incapacity due to physical or mental illness or any such failure resulting from
the Eligible Employee's termination for Good Reason), (f) the Eligible
Employee's willful engagement in conduct materially and demonstrably injurious
to the Employer, or (g) willful violations of any law, rule or regulation
(other than traffic violations or similar offenses) or any final cease-and-
5
<PAGE> 10
desist order. In determining incompetence, the acts or omissions shall be
measured against standards generally prevailing in the financial institutions
industry; provided, that it shall be the Holding Company's or the Bank's burden
to prove by clear and convincing evidence the alleged acts and omissions and
the prevailing nature of the standards the Holding Company or the Bank have
alleged are violated by such acts and/or omissions.
3.4 Good Reason. The Eligible Employee may terminate the Eligible
Employee's employment for Good Reason within one (1) year after a Change in
Control and during the term of this Plan and become entitled to the Benefits
described in Article IV. For purposes of the Plan, "Good Reason" shall mean any
of the following events, unless it occurs with the Eligible Employee's prior
consent:
(a) the material reduction of the Eligible Employee's duties
and responsibilities with the Employer immediately prior to a Change in
Control, or any removal of the Eligible Employee from, or any failure to
reelect the Eligible Employee to, any position having such duties and
responsibilities, except in connection with the termination of the Eligible
Employee's employment for Disability or Cause or as a result of the Eligible
Employee's death or by the Eligible Employee other than for Good Reason;
(b) a material reduction by the Employer in the Eligible
Employee's base salary or hourly wage as in effect immediately prior to the
Change in Control, other than a reduction of the Eligible Employee's base
salary or hourly wage pursuant to the terms of the Employer's short-term
disability plan or long-term disability plan during a period in which the
Eligible Employee is disabled (within the meaning of such plan or plans) and
qualifies for benefits under such plan or plans; or
(c) a relocation of the Eligible Employee's principal place of
employment by more than fifty (50) miles from its location immediately prior to
a Change in Control, except for required travel to an extent substantially
consistent with the Eligible Employee's business travel obligations immediately
prior to the Change in Control.
3.5 Requirement of Notice of Termination. Subsequent to any
Change in Control, any termination by an Employer pursuant to Section 3.2 or
3.3 or by an Eligible Employee pursuant to Section 3.4 shall be communicated to
the other party by a Notice of Termination. For purposes of this Plan,
subsequent to any Change in Control no such purported termination by the
Employer shall be effective without such Notice of Termination.
3.6 Duration of Participation. Subject to Article VIII, a
Participant shall cease to be a Participant on the date the
6
<PAGE> 11
Participant or his Beneficiary receives the total distribution of his Benefits
under the Plan.
3.7 Reemployment. Reemployment of a former Participant by an
Employer shall not entitle such individual to participate hereunder unless and
until the individual again becomes an Eligible Employee in accordance with
Section 2.13. A former Participant who is reemployed subsequent to receiving
his Benefits shall have any Years of Benefit Service accrued prior to the Date
of Termination disregarded.
3.8 Transfer of Employment. An Eligible Employee who transfers
from employment with one Employer to employment with another Employer or
Affiliate shall not be entitled to receive any Benefits under Article IV as a
result of such transfer.
3.9 Authorized Leave of Absence. An otherwise Eligible Employee
who is on an Authorized Leave of Absence must complete two consecutive weeks of
employment with the Employer (in any position) upon return from the Authorized
Leave of Absence in order to be eligible to participate in the Plan.
ARTICLE IV
BENEFITS
4.1 Severance Compensation upon Termination.
(a) If, within one (1) year following a Change in Control,
the Eligible Employee's employment by the Eligible Employee's Employer is
terminated (i) by the Employer pursuant to Section 3.2 or 3.3 or by reason
of death or (ii) by the Eligible Employee other than for Good Reason, the
Eligible Employee shall not be entitled to any severance compensation under the
Plan, but the absence of the Eligible Employee's entitlement to any benefits
under the Plan shall not prejudice the Eligible Employee's right to the full
realization of any and all other benefits to which the Eligible Employee shall
be entitled pursuant to the terms of any employee benefit plans or other plans,
arrangements, or agreements of the Employer in which the Eligible Employee is a
participant or to which the Eligible Employee is a party.
(b) If, within one (1) year following a Change in Control,
the Eligible Employee's employment by the Eligible Employee's Employer is
terminated (a) by the Employer (other than pursuant to Section 3.2 or 3.3 or by
reason of death) or (b) by the Eligible Employee for Good Reason, then the
Eligible Employee shall be entitled to the severance compensation provided
below:
7
<PAGE> 12
(i) The Employer shall pay as severance compensation to
the Eligible Employee at the time specified in subsection (iii) below,
a lump sum severance payment equal to (X) in the case of any officer of an
Employer, 2/12 multiplied by the Eligible Employee's Compensation paid during
the twelve (12) months ended on the Date of Termination, for each full Year of
Benefit Service earned by the Eligible Employee, up to a maximum of twenty-four
(24) months or (Y) in the case of any other Eligible Employee, 1/12 multiplied
by the Eligible Employee's Compensation paid during the twelve (12) months
ended on the Date of Termination, for each full Year of Benefit Service earned
by the Eligible Employee, up to a maximum of twelve (12) months.
(ii) Notwithstanding the provisions of Subsection (i), if
the Eligible Employee's proceeds of the Benefits payable under this Article IV
includes an Excess Parachute Payment and the Eligible Employee is a
Disqualified Individual, the Benefits payable hereunder shall be reduced to the
largest amount that will result in no Excess Parachute Payment. The terms
"Disqualified Individual" and "Excess Parachute Payment" shall have the same
meaning as defined in Section 28OG of the Internal Revenue Code of 1986, as
amended (the "Code"), or any successor section of similar import.
(iii) The severance compensation provided for in
subsection (i) above shall be made not later than the tenth (10th) day
following the Date of Termination; provided, however, that, if the amount of
such compensation cannot be finally determined on or before such day, the
Employer shall pay to the Eligible Employee on such day an estimate, as
determined in good faith by the Employer but subject to the provisions of
Subsection (ii), of the minimum amount of such compensation and shall pay the
remainder of such compensation (together with interest at the rate provided in
Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be
determined, but in no event later than the thirtieth (30th) day after the Date
of Termination. In the event that the amount of the estimated payment exceeds
the amount subsequently determined to have been due, such excess shall
constitute a loan by the Employer to the Eligible Employee payable on the fifth
(5th) day after demand by the Employer (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code). If a Participant shall die
before all Benefits have been paid, any unpaid Benefits shall be paid to the
Participant's Beneficiary, if living, otherwise to the personal representative
of the Participant's estate.
4.2 Absence of Duty to Mitigate Damages. The Eligible Employee
shall not be obligated to mitigate damages by exercising reasonable efforts to
seek other employment and no portion of the severance compensation benefits
described in Article IV hereof shall be reduced by any compensation earned by
the Eligible Employee as a result of employment after termination of employment
by an Employer.
8
<PAGE> 13
4.3 Allocation to Employer. The Administrator shall, if
necessary, determine each Employer's allocation of the obligations to which the
Participant is entitled pursuant to this Article IV. If allocation is
necessary, the Employer will pay such portion of the benefits payable hereunder
as may be allocated to it. Such determination shall be binding on all
Participants, Beneficiaries and the Employer. Under no circumstances shall any
Participant or Beneficiary have any right to examine the books and records of
any Employer other than those records of the Administrator relating only to the
Benefit of the Participant.
Notwithstanding any other provisions of this Plan, the obligations of
the Bank or any other Employer to make payments hereunder shall be limited to
the amount of such payments permitted by Regulatory Bulletin 27a issued by the
OTS or any other applicable law or regulation in effect from time to time
during the term of this Plan. All additional payments contemplated under the
terms of this Plan in excess of the amount indicated in the preceding sentence
shall be an obligation of the Holding Company.
4.4 Deduction of Taxes from Amounts Payable. The Employer may
deduct from the amounts to be distributed such amount as the Employer, in its
sole discretion, deems proper to protect itself against liability for the
payment of death, succession, inheritance, income, employment or other taxes or
withholdings, and out of the money so deducted the Employer may discharge any
such liability and pay the amount remaining to the Participant or the
Participant's Beneficiary, as the case may be.
4.5 Facility of Payment. If a Participant or Beneficiary is
declared an incompetent or is a minor and a conservator, guardian, or other
person legally charged with such person's care has been appointed, any benefits
to which such Participant or Beneficiary is entitled shall be payable to such
conservator, guardian or other person legally charged with such person's care.
The decision of the Administrator in such matters shall be final, binding and
conclusive upon the Employer and upon each Employee, Participant, Beneficiary,
and every other person or party interested or concerned. Neither an Employer
nor the Administrator shall be under any duty to see to the proper application
of such payments.
4.6 Payment of Benefit Conditional on Execution of Release.
Notwithstanding anything contained herein to the contrary, no Benefit will be
paid under the Plan unless the Eligible Employee executes a formal release on a
release form provided by the Administrator and such release is acknowledged by
the Administrator.
9
<PAGE> 14
ARTICLE V
ADMINISTRATION
5.1 Authority and Responsibility of the Administrator. The
Administrator shall have overall responsibility for the establishment,
amendment, termination, administration and operation of the Plan. The
Administrator may discharge its duty by appointment and removal (with or
without cause) of individuals or of a committee or committees to whom shall be
delegated those responsibilities determined by the Administrator.
5.2 Administrator Duties. The Administrator, on behalf of the
Participants and all Beneficiaries, will enforce the Plan in accordance with
its terms and will have all powers necessary to accomplish that purpose,
including, but not limited to, the following:
(a) To adopt and issue rules and regulations necessary
for the proper conduct and administration of the Plan and to change, alter, or
amend such rules and regulations;
(b) To construe and enforce the Plan in accordance with
its terms and any policy and regulations it establishes;
(c) To determine all questions arising in its
administration, including those relating to the eligibility of persons to
become Participants, and the rights of Participants and their Beneficiaries,
and its decision thereon shall be final and binding upon all persons hereunder;
(d) To authorize all disbursements of Benefits in
accordance with the provisions of the Plan;
(e) To keep records relating to Participants and other
matters applicable to this Plan;
(f) To make available to Participants upon request, for
examination during business hours, such records as pertain exclusively to the
examining Participant;
(g) To prescribe procedures to be followed by
Participants and Beneficiaries in claiming benefits;
(h) To make available for inspection and to provide upon
request at such charge as may be permitted and determined by the Administrator,
documents and instruments required to be disclosed by the Act;
(i) To designate Participants;
10
<PAGE> 15
(j) To prescribe and adopt the use of necessary forms;
and
(k) To appoint such agents and other specialists to aid
it in the administration of the Plan as it deems necessary.
5.3 Records. The regularly kept records of the Administrator and
any Employer shall be conclusive evidence as to all matters contained therein
applicable to this Plan. An Employee or other interested individual may
request a correction in the record of any fact relevant for purposes of the
Plan and such correction shall be made if he furnishes in support thereof
documentary proof of the fact satisfactory to the Administrator.
5.4 Administrator Decisions Final. The decision of the
Administrator in matters within its jurisdiction shall be final, binding, and
conclusive upon the Employer, Employees, Participants, Beneficiaries and any
other person or party interested or concerned.
5.5 Administrator as Agent. The Administrator shall act as agent
for the Employers in the administration of the Plan.
5.6 Plan Expenses. All clerical, legal and other expenses of the
Plan and the Administrator's fees shall be paid by the Employer. Expenses of
administering the Plan, including the fees and expenses of the Administrator,
shall be borne by each Employer in such proportions as the Administrator shall
determine.
5.7 Correction of Error. In the event of an error in the
adjustment of a Participant's Benefit, the Administrator will correct such
error by crediting or charging the adjustment required to make such correction.
5.8 Allocations and Delegations of Responsibility.
(a) Delegations. The Administrator shall have the
authority to delegate, from time to time, all or any part of its
responsibilities under the Plan to such person or persons as it may deem
advisable and in the same manner to revoke any such delegation of
responsibility. Any action of the delegate in the exercise of such delegated
responsibilities shall have the same force and effect for all purposes
hereunder as if such action had been taken by the Administrator. The Employer,
the Board of Directors or the Administrator shall not be liable for any acts or
omissions of any such delegate. The delegate shall report periodically to the
Administrator concerning the discharge of the delegated responsibilities.
(b) Allocations. The Administrator shall have the
authority to allocate, from time to time, all or any part of its
11
<PAGE> 16
responsibilities under the Plan to one or more of the Employer's officers as it
may deem advisable, and in the same manner to revoke such allocation of
responsibilities. Any action of the officers to whom responsibilities are
allocated in the exercise of such allocated responsibilities shall have the
same force and effect for all purposes hereunder as if such action had been
taken by the Administrator. The Employer, the Board of Directors or the
Administrator shall not be liable for any acts or omissions of such officer.
Any officer to whom responsibilities have been allocated shall report
periodically to the Administrator concerning the discharge of the allocated
responsibilities.
(c) Limit on Liability. Duties and responsibilities
which have been allocated or delegated pursuant to the terms of the Plan or
Subsections (a) or (b) of this Section 5.8, are intended to limit the liability
of the Employer, the Holding Company, the Bank, the Board of Directors or the
Administrator.
5.9 Misrepresentations. The Administrator may (but shall not be
required to) rely upon any certificate, statement or other representation made
to it by an Employee, Participant or Beneficiary with respect to any fact
regarding any of the provisions of the Plan. Any such certificate, statement
or other representation shall be conclusively binding upon such Employee,
Participant or Beneficiary or his personal representative, heir, or assignee
(but not upon the Administrator), and any such person shall thereafter be
estopped from disputing the truth of any such certificate, statement or other
representation.
ARTICLE VI
CLAIMS PROCEDURE
6.1 Initial Claim for Payment. Each Participant or Beneficiary
shall submit a claim for payment to the Administrator (or to such other person
as may be designated by the Administrator) in such manner as is prescribed by
the Administrator. A Participant shall have no right to seek review of a
denial of payment or to bring any action in any court to enforce a claim for
payment prior to filing a claim for payment and exhausting the rights to review
delineated under Section 6.2.
6.2 Review of Claim Denial. If a claim is denied, in whole or in
part, the claimant shall have the right to request that the Administrator
review the denial, provided that the claimant files a written request for
review with the Administrator within sixty (60) days after the date on which
the claimant received written notification of the denial. A claimant (or a
claimant's duly authorized representative) may review pertinent documents and
submit issues and comments in writing to the Administrator. Within
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<PAGE> 17
sixty (60) days after a request for review is received, the review shall be
made and the claimant shall be advised in writing of the decision on review,
unless special circumstances require an extension of time for processing the
review, in which case the claimant shall be given a written notification within
such initial sixty (60) day period specifying the reasons for the extension and
when such review shall be completed (provided that such review shall be
completed within one hundred twenty (120) days after the date on which the
request for review was filed). The decision on review shall be forwarded to
the claimant in writing and shall include specific reasons for the decision and
references to Plan provisions upon which the decision is based. A decision on
review shall be final and binding on all persons for all purposes. If a
claimant shall fail to file a request for review in accordance with the
procedures herein outlined, such claimant shall have no rights to review and
shall have no right to bring action in any court and the denial of the claim
shall become final and binding on all persons for all purposes.
ARTICLE VII
ADOPTION AND WITHDRAWAL FROM PLAN
7.1 Procedure for Adoption. An Affiliate shall become an Employer
for purposes of this Plan upon being designated as such by the Administrator
and the Board of Directors of the Holding Company and the Bank. Upon
designation as an Employer, the Employer shall be given notice of the
designation by the Administrator's delivery of written notice of such to the
Employer's chief executive officer. If the Administrator desires to amend this
Plan as to its application to the employees of any Employer, it may do so by
use of an Appendix. Notwithstanding any term or provision of this Plan, the
terms and provisions as may be imposed by the Administrator and attached hereto
in an Appendix shall govern.
7.2 Procedure for Withdrawal. Any Employer (other than the Bank)
may, subject to such conditions and procedures as may be imposed by the
Administrator, cease to be an Employer for purposes of this Plan.
ARTICLE VIII
DURATION, AMENDMENT AND TERMINATION
8.1 Duration. If a Change in Control has not occurred, the Plan
shall expire fifteen (15) years from the Effective Date, unless sooner
terminated as provided in Section 8.2, or unless extended for an additional
period or periods by resolution adopted by the Board of Directors of the
Holding Company and the Bank at
13
<PAGE> 18
any time during the fifteenth (15th) year. If a Change in Control occurs, the
Plan shall continue in full force and effect notwithstanding the expiration of
the fifteenth (15th) year, and shall not terminate or expire until after all
Participants or Beneficiaries who become entitled to receive Benefits pursuant
to Article IV shall have received payment of such Benefits in full.
8.2 Amendment and Termination. The Plan may be terminated or
amended in any respect by resolution adopted by two-thirds (2/3's) of the Board
of Directors, unless a Change in Control has previously occurred. If a Change
in Control occurs, the Plan shall no longer be subject to amendment, change,
substitution, deletion, reciprocation or termination in any respect whatsoever.
8.3 Form of Amendment. The form of any amendment or termination
of the Plan shall be a written instrument signed by a duly authorized officer
or officers of the Holding Company and the Bank, certifying that the amendment
or termination has been approved by the Board of Directors. An amendment of
the Plan shall automatically effect a corresponding amendment to all
Participants' rights hereunder. A termination of the Plan shall automatically
effect a termination of all Participants' rights and benefits hereunder.
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.1 Successor to the Holding Company or the Bank. The Holding
Company and the Bank will require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all the business and/or assets of the Holding Company or the
Bank, expressly, absolutely and unconditionally to assume and agree to maintain
this Plan in the same manner and to the same extent that the Holding Company
and the Bank would be required to perform it if no such succession or
assignment had taken place. As used in this Section 9.1, the terms "Holding
Company" and "Bank" shall mean the Holding Company and the Bank as hereinbefore
defined and any successor or assign to either of their business and/or assets
as aforesaid which executes and delivers the agreement provided for in this
Section 9.1 or which otherwise becomes bound by all the terms and provisions of
this Plan by operation of law.
9.2 Liquidation. Subject to Section 8.2, in the event that the
Holding Company or the Bank is liquidated, pursuant to a transaction whereby no
successor company assumes the assets and liabilities of the Holding Company or
the Bank, the Participant's Benefit shall be paid to the Participant, or to the
Participant's Beneficiary, in one single sum.
14
<PAGE> 19
9.3 Indemnification. To the extent allowed by law, the Holding
Company, the Bank, and each Employer shall indemnify and hold harmless each
Administrator, each member of the Board of Directors, and each officer and
employee of an Employer to whom are delegated duties, responsibilities, and
authority with respect to the Plan against all claims, liabilities, fines and
penalties, and all expenses reasonably incurred by or imposed upon such
delegate or agent (including but not limited to reasonable attorney fees) which
arise as a result of actions or failure to act in connection with the operation
and administration of the Plan and to the extent that such claim, liability,
fine, penalty, or expense is not paid for by liability insurance purchased or
paid for by an Employer. Notwithstanding the foregoing, an Employer shall not
indemnify any person for any such amount incurred through any settlement or
compromise of any action unless the Employer consents in writing to such
settlement or compromise.
9.4 Nonalienation of Payment. This Plan shall be binding upon and
inure to the benefit of the Employer, its successors and assigns and the
Participant and the Participant's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. Benefits payable under the Plan shall not be subject in any manner
to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
charge, garnishment, execution or levy of any kind, either voluntary or
involuntary, including any such liability which is for alimony or other
payments for the support of a spouse, former spouse or children of the
Participant or Beneficiary, or for any other relative of a Participant or
Beneficiary prior to actually being received by the person entitled to the
benefit under the terms of the Plan; and any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, charge, garnish, execute or levy
upon, or otherwise dispose of any right to benefits payable hereunder, shall be
void. No Employer shall in any manner be liable for, or subject to the debts,
contracts, liabilities, engagements or torts of any person entitled to benefits
hereunder.
9.5 Contract of Employment. Nothing contained herein shall be
construed to constitute a contract of employment between an Employer and any
Employee, Participant or Beneficiary.
9.6 No Effect on Other Contractual Rights. The provisions of the
Plan, and any payment provided for hereunder, shall not reduce any amounts
otherwise payable, or in any way diminish the Eligible Employee's existing
rights, or rights which would accrue solely as a result of the passage of time,
under any Benefit Plan, employment agreement or other contract, plan or
arrangement of the Eligible Employee's Employer.
9.7 Regulatory Considerations. Notwithstanding anything herein
contained to the contrary, the Plan shall be subject to the following
additional terms and conditions:
15
<PAGE> 20
(a) If the Eligible Employee is suspended from office and/or
temporarily prohibited from participating in the conduct of the Employer's
affairs by a notice served under Section 8 (e) (3) (12 USC Section 1818 (e)(3))
or 8 (g) (12 USC Section 1818 (g)) of the Federal Deposit Insurance Act, as
amended by the Financial Institutions Reform, Recovery and Enforcement Act of
1989, the Employer's obligations under this Plan shall be suspended as of the
date of service, unless stayed by appropriate proceedings. If the charges in
the notice are dismissed, the Employer may in its discretion (i) pay the
Eligible Employee all or part of the compensation withheld while their
obligations were suspended and (ii) reinstate (in whole or in part) any of the
obligations which were suspended;
(b) If the Eligible Employee is removed and/or
permanently prohibited from participating in the conduct of the Employer's
affairs by an order issued under Section 8(e) (12 USC Section 1818(e)) or 8(g)
(12 USC Section 1818(g)) of the Federal Deposit Insurance Act, as amended by
the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all
obligations of the Employer under this Plan shall terminate as of the effective
date of the order, but vested rights of the parties shall not be affected;
(c) If the Employer is in default as defined in Section
3(x) (12 USC Section 1813(x)(1)) of the Federal Deposit Insurance Act, as
amended by the Financial Institutions Reform, Recovery and Enforcement Act of
1989, all obligations of the Employer under this Plan shall terminate as of the
date of default, but this paragraph shall not affect any vested rights of the
parties; and
(d) All obligations of the Employer under this Plan shall
be terminated, except to the extent determined that continuation of the
contract is necessary for the continued operation of the institutions, (i) by
the Federal Deposit Insurance Corporation (the "FDIC"), at the time FDIC enters
into an agreement to provide assistance to or on behalf of the Employer under
the authority contained in Section 13(c) (12 USC Section 1823(c)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1982; or (ii) by the OTS, at the time the OTS
or its District Director approves a supervisory merger to resolve problems
related to the operations of the Employer or when the Employer is determined by
the OTS or FDIC to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by such
action.
9.8 Source of Payment. All payments under this Plan shall be from
the general funds of the Employer, and no special or separate fund shall be
established and no other segregation of assets shall be made to assure payment.
No Participant or Beneficiary shall have any right, title, or interest whatever
in or to any
16
<PAGE> 21
investments which the Employer may make to the Employer in meeting its
obligations hereunder. Nothing contained in this Plan, and no action taken
pursuant to its provisions, shall create or be construed to create a trust of
any kind, or a fiduciary relationship, between an Employer and any Participant
or Beneficiary. To the extent that any person acquires a right to receive
payments from the Employer hereunder, such right shall be no greater than the
right of an unsecured creditor of the Employer.
9.9 Headings. The headings of Articles and Sections are included
solely for convenience of reference, and if there is any conflict between such
headings and the text of this Plan, the text shall control.
9.10 Invalidity of Certain Provisions. If any provision of this
Plan shall be held invalid or unenforceable, such invalidity or
unenforceability shall not affect any other provisions hereof and the Plan
shall be construed and enforced as if such provisions, to the extent invalid or
unenforceable, had not been included.
9.11 Law Governing. The Plan shall be construed and enforced
according to the laws of the State of Illinois (other than its laws respecting
choice of law) to the extent not preempted by ERISA.
9.12 Limitation on Liability. No Administrator, Employer nor any
agent or representative of any Employer who is an employee, officer, or
director of an Employer in any manner guarantees the payments to be made under
this Plan against loss or depreciation, and to the extent not prohibited by
federal law, none of them shall be liable (except for his own gross negligence
or willful misconduct), for any act or failure to act, done or omitted in good
faith, with respect to the Plan. No Administrator or Employer shall be
responsible for any act or failure to act of any agent appointed to administer
the Plan.
9.13 Prior Benefits. This Plan amends, restates and supersedes any
plan, arrangement, agreement or obligation of the Employer to a Participant
respecting the provision of each and any severance benefit or payment.
9.14 Notices. Whenever any notice may be or is required to be
given under the Plan, such notice shall be deemed to have been duly given by
United States registered mail, return receipt requested, postage prepaid, as
follows:
If to the Holding Company, Bank, Administrator or any Employer:
St. Paul Federal Bank For Savings
6700 West North Avenue
Chicago, IL 60635
Attention of: Chairman, Organizational Planning Committee
17
<PAGE> 22
If to any person:
His last address appearing in the records of the Administrator
or Employer, or such other address as either party may have
furnished to the other in writing in accordance herewith,
except that notices of change of address shall be effective
only receipt.
9.15 Destruction of Records. The Administrator is authorized to
cremate or otherwise destroy correspondence, or other files, including but not
limited to, correspondence of transmittal for checks, statements and account
analyses and correspondence with terminated Employees, after a period of six
(6) years.
9.16 Gender and Number. Except where the context indicates to the
contrary, when used herein, masculine terms shall be deemed to include the
feminine, singular the plural, and plural the singular.
9.17 Arbitration. Any dispute or controversy arising under or in
connection with this Plan shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
Executed this 20th day of December, 1993.
ST. PAUL BANCORP, INC.
ATTEST:
By:
Secretary
ST. PAUL FEDERAL BANK FOR SAVINGS
ATTEST:
By:
Secretary
18
<PAGE> 1
Exhibit 10.37
THIS FIRST AMENDMENT TO TERM LOAN AGREEMENT, dated as
of June 30, 1993 (but effective as of May 5, 1993), by and among (i) the ST.
PAUL FEDERAL BANK FOR SAVINGS EMPLOYEE STOCK OWNERSHIP TRUST (hereinafter
called the "Borrower"), created by the Trust Agreement entered into on March
26, 1987 between St. Paul Federal Bank for Savings, a federal savings bank, and
Patrick J. Agnew, Joseph C. Scully, Michael R. Notaro, Faustin A. Pipal and
Alan J. Fredian, as trustees, (ii) ST. PAUL BANCORP, INC., a Delaware
corporation (hereinafter called the "Holding Company"), and (iii) NATIONAR, a
trust company organized under the laws of the State of New York (hereinafter
called the "Lender"),
W I T N E S S E T H:
WHEREAS, the Borrower, the Holding Company and the
Lender are parties to a Term Loan Agreement, dated as of November 21, 1991 (the
"Agreement"), pursuant to which the Lender agreed to lend to the Borrower the
aggregate principal sum of up to Five Million Dollars ($5,000,000), which
principal sum was subject to increase, in certain circumstances as described in
the Agreement, up to an aggregate principal sum of Six Million Dollars
($6,000,000), for the purpose of providing the funds necessary for the Borrower
to purchase shares of Holding Company Stock (as defined in the Agreement), from
time to time, in open market purchases; and
WHEREAS, the Borrower, the Holding Company and the
Lender desire to amend the terms and provisions of the Agreement in certain
respects as hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and of
the transactions contemplated by the Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereby agree as follows:
1. Amendment to Term Loan Agreement. The
Agreement is hereby amended in the following respects:
(a) Definitions.
A new definition of "Annual Period" is hereby
added to Article I of the Agreement to read in full as follows:
"Annual Period" means the period commencing on
May 5, 1993 and expiring on June 30, 1994 and,
if the Loan Commitment period is extended by
the Lender in its discretion as hereinafter
<PAGE> 2
2
provided, each successive one-year period
thereafter commencing July 1 and expiring June
30."
The definition of the term "Available
Commitment" in Article I of the Agreement is hereby amended to read in full as
follows:
"Available Commitment" means the difference
between $15,000,000 and the aggregate
outstanding principal amount of the Term Loan
as of the date such difference is to be
calculated."
The definition of the term "Balloon Payment" in
Article I of the Agreement is hereby amended to read in full as follows:
"Balloon Payment" means the amount of the
principal payment which would be required to
amortize the Term Loan advanced during each
Annual Period in full on the fourteenth
anniversary of the termination of such Annual
Period, in excess of one forty-eighth (1/48) of
the aggregate principal amount of the Term Loan
advanced during such Annual Period and
outstanding on the second anniversary of the
termination of such Annual Period (including
any interest added to such principal amount
pursuant to subparagraph (b) of Section 2.4)."
The definition of the term "Loan Commitment
Period" in Article I of the Agreement is hereby amended to read in full as
follows:
"Loan Commitment Period" means the period
commencing on May 5, 1993 and expiring on June
30, 1994 during which the Lender is obligated
to make loans to the Borrower pursuant to
Section 2.1 hereof in the amount referred to
therein, which period is subject to extension
for successive one-year periods in the
discretion of the Lender on the basis of the
Lender's credit review of the Borrower, the
Bank and the Holding Company. If the Lender
elects to extend the duration of the Loan
Commitment Period as aforesaid it will so
notify the Borrower and the Holding Company of
such election not later than May 30th of each
year during the Loan Commitment Period."
<PAGE> 3
3
A new definition of "Federal Funds Rate" is
hereby added to Article I of the Agreement to read in full as follows:
"Federal Funds Rate" means the average of the
high and low "federal funds" rates as published
in the New York edition of The Wall Street
Journal from time to time reflecting the rates
charged on overnight loans of reserves of
$1,000,000 or more among commercial banks. In
the event of any change in the Federal Funds
Rate, the rate of interest on the Term Loan
shall be changed accordingly as of the date of
change in the Federal Funds Rate, without
notice to the Borrower."
The definition of the term "Term Note" in Article I of
the Agreement is hereby amended to read in full as follows:
"Term Note" means the Amended and Restated Term
Note, dated as of June 30, 1993 (but effective
as of May 5, 1993), in the principal amount of
Eighteen Million Dollars ($18,000,000), made by
the Borrower in favor of the Lender."
(b) Amendment to Section 2.1. Section 2.1 of the
Agreement is hereby amended to read in full as follows:
"SECTION 2.1. Term Loan. Subject to the terms
and conditions of this Agreement, the Lender
agrees to make one or more loans to the
Borrower up to the aggregate principal amount
of Fifteen Million Dollars ($15,000,000),
subject to adjustment in such principal amount
to an aggregate principal amount of Eighteen
Million Dollars ($18,000,000) as provided in
Section 2.4 (the "Term Loan"). The Lender
shall make the principal amount of the Term
Loan available to the Borrower during the Loan
Commitment Period."
(c) Amendment to Section 2.2. Section 2.2 of the
Agreement is hereby amended to read in full as follows:
"SECTION 2.2 Term Note.
(a) The Term Loan shall be evidenced by an
Amended and Restated Term Note (the "Term
Note") which shall be payable to the order of
<PAGE> 4
4
the Lender and represent the obligation of the
Borrower to pay the amount of the Term Loan
with interest thereon as prescribed in Section
2.4. The Term Note shall: (i) be dated as of
June 30, 1993 (but effective as of May 5,
1993), (ii) bear interest at a rate per annum
determined as set forth in Section 2.4, payable
in arrears on each Payment Date as set forth in
Section 2.4 and upon payment in full of the
unpaid principal amount thereof and (iii) be
payable with respect to the principal amount
thereof advanced during each Annual Period and
all interest thereon commencing after the
second anniversary of the termination of such
Annual Period as hereinafter provided in
subparagraphs (b) and (c) below. Promptly
following the end of each Annual Period the
Lender shall deliver to the Borrower and the
Holding Company a schedule which reflects the
principal amount of the Term Loan advanced
during such Annual Period.
(b) Commencing with the first Payment Date
next succeeding the second anniversary of the
termination of each Annual Period, principal
and interest with respect to the Term Loan
advanced during such Annual Period shall be
payable on each Payment Date in forty eight
(48) equal payment installments (consisting of
principal and interest), each of which shall be
in an amount which would be sufficient to
amortize the aggregate principal amount of the
Term Loan advanced during such Annual Period
and outstanding on the second anniversary of
the date of the termination of such Annual
Period (including any interest added to the
principal amount of the Term Note pursuant to
subparagraph (b) of Section 2.4) fully on the
fourteenth anniversary of the termination of
such Annual Period, assuming, solely for
purposes of calculating the size of the payment
installments required pursuant to this
subparagraph (b) of Section 2.2, that interest
was payable with respect to the Term Loan
advanced during such Annual Period (including
any interest added to the principal amount of
the Term Note pursuant to subparagraph (b) of
Section 2.4) as provided in the first sentence
of subparagraph (a) of Section 2.4 but using
7.5% as the assumed interest rate payable with
<PAGE> 5
5
respect to the Term Loan. Such payment
installments will, upon receipt by the Lender,
be applied first to the payment of accrued
interest and second to the payment of principal
with respect to the Term Loan advanced during
such Annual Period (including any interest
added to the principal amount of the Term Note
pursuant to subparagraph (b) of Section 2.4) in
accordance with the amortization schedule
described in the immediately preceding
sentence; provided, however, that (i) during
any period in which the actual interest rate
payable with respect to the Term Loan pursuant
to subparagraph (a) of Section 2.4 is less than
7.5% at any time after the second anniversary
of the termination of such Annual Period, the
Lender shall apply any amount of a payment
installment received, in excess of (y) the
regularly scheduled principal payment and (z)
interest on the outstanding principal amount of
the Term Loan advanced during such Annual
Period (including any interest added to the
principal amount of the Term Note pursuant to
subparagraph (b) of Section 2.4) computed in
accordance with subparagraph (a) of Section
2.4, as a prepayment of the principal amount of
the Term Loan advanced during such Annual
Period (including any interest added to the
principal amount of the Term Note pursuant to
subparagraph (b) of Section 2.4) and (ii)
during any period in which the actual interest
rate payable with respect to the Term Loan
pursuant to paragraph (a) of Section 2.4) is
greater than 7.5% at any time after the second
anniversary of the termination of such Annual
Period, the Lender shall apply any payment
installment received first to interest on the
outstanding principal amount of the Term Loan
advanced during such Annual Period (including
any interest added to the principal amount of
the Term Note pursuant to subparagraph (b) of
Section 2.4) computed in accordance with
subparagraph (a) of Section 2.4 and the balance
of such installment, if any, after the payment
of interest as aforesaid, shall be applied to
reduce the outstanding principal amount of the
Term Loan advanced during such Annual Period
(including any interest added to the principal
amount of the Term Note pursuant to
subparagraph (b) of Section 2.4).
<PAGE> 6
6
(c) Notwithstanding anything in
subparagraph (b) above to the contrary, from
and after the date that the aggregate amount of
the Balloon Payment equals or exceeds Three
Million Dollars ($3,000,000), the amount of the
remaining payment installments with respect to
the Term Loan for each Annual Period referred
to in subparagraph (b) above will be subject to
adjustment with the result that (x) the
remaining outstanding principal amount of the
Term Loan will be fully amortized over the
remainder of the maturity of the Term Loan
without the requirement of any Balloon Payment
on the fourteenth anniversary of the
termination of each Annual Period and (y)
interest shall be payable currently on the
principal balance of the Term Loan from time to
time outstanding as provided in subparagraph
(a) of Section 2.4."
(d) Amendment to Section 2.4. Section 2.4 of the
Agreement is hereby amended to read in full as follows:
"SECTION 2.4. Interest
(a) At the option of the Borrower, the
Term Note shall bear interest from the date
thereof until payment in full of the unpaid
principal amount thereof at a rate per annum
equal (i) to the Bank Prime or (ii) the Federal
Funds Rate plus two hundred and fifty basis
points (2.50%), in either case subject to
adjustment as hereinafter provided in
subsection (b) of this Section 2.4. The
Borrower shall select the rate of interest
which shall initially be applicable to the Term
Note by giving written notice of its election
with respect thereto to the Lender on or before
the termination of each Annual Period.
Thereafter, on each anniversary of the
termination of the Annual Period the Borrower
shall be permitted to make a new election with
respect to the rate of interest applicable to
the Term Note by giving the Lender notice of
its election with respect thereto not less than
thirty (30) days prior to each such anniversary
date. Each such subsequent election, if any,
shall be effective from and after the
anniversary of the termination of the Annual
Period to which it relates and in the absence
of such an election the rate of interest with
respect to the
<PAGE> 7
7
Term Note shall be determined pursuant to the
most recent effective interest rate election.
Interest shall be payable quarterly in arrears
on each Payment Date to occur after the date
hereof, commencing September 30, 1993, with a
final payment of interest being due and payable
on the fourteenth anniversary of the
termination of the last Annual Period
hereunder. Any change in the interest rate on
the Term Note resulting from a change in the
Bank Prime or Federal Funds Rate shall become
effective as of the date of change in the Bank
Prime or Federal Funds Rate without prior
notice to the Borrower.
(b) Notwithstanding anything in
subparagraph (a) above to the contrary, during
the period prior to the second anniversary of
the termination of each Annual Period and
except as otherwise set forth below, the
Borrower will make current payments of interest
on the unpaid principal amount of the Term Loan
advanced during such Annual Period at the rate
determined as provided in the first sentence of
subparagraph (a) above but using 7.5% as the
assumed interest rate payable with respect to
the Term Note. During such period, the excess
(the "Excess"), if any, of the interest with
respect to the Term Loan as provided in the
first sentence of subparagraph (a) above
(without regard to the provisions of the
immediately preceding sentence) and the
interest with respect to the Term Loan which is
currently payable as provided in the
immediately preceding sentence shall be added
to the outstanding principal amount of the Term
Loan advanced during such Annual Period as of
each Payment Date; provided, however, that in
no event shall such Excess exceed Three Million
Dollars ($3,000,000) with respect to all such
Annual Periods in the aggregate. From and
after the date that the Excess equals or
exceeds Three Million Dollars ($3,000,000),
interest shall be payable with respect to the
Term Loan without regard to the provisions of
this subparagraph (b). During the period prior
to the second anniversary of the termination of
each Annual Period, the surplus, if any, of the
interest with respect to the Term Loan advanced
during such Annual Period which is currently
payable as provided in the first
<PAGE> 8
8
sentence of this subparagraph (b) and the
interest with respect to the Term Loan advanced
during such Annual Period as provided in the
first sentence of subparagraph (a) above
(without regard to the provisions of the first
sentence of this subparagraph (b)) shall be
applied as a prepayment of the principal amount
of the Term Loan advanced during such Annual
Period. Each of the Lender, the Borrower and
the Holding Company acknowledges and agrees
that the provisions of this subparagraph (b)
relate solely to the determination of the
amount which is currently payable with respect
to the Term Loan during the periods set forth
herein and do not modify or alter in any
respect the provisions of subparagraph (a)
above which shall at all times govern the rate
of interest payable with respect to the Term
Loan.
(c) Interest shall be calculated on the
basis of the actual number of days elapsed over
a three hundred sixty-five (365) day year."
(e) Amendment to Section 2.5. Section 2.5 of the
Agreement is hereby amended to read in full as follows:
"SECTION 2.5 Prepayment. Subject to the
conditions and restrictions contained herein
and except as otherwise provided in Sections
2.2 and 2.4, the Borrower may prepay the Term
Note at any time after the date hereof, in
whole or in part, on at least three Business
Days' prior written notice to the Lender,
specifying the date and the amount of
prepayment, and upon the payment of accrued but
unpaid interest on the amount prepaid to the
date of such prepayment. Partial prepayments
on the Term Note shall be in an aggregate
principal amount of at least Ten Thousand
Dollars ($10,000) and shall be applied on
account of the installments of principal of the
Term Note in the order of their stated
maturities. During the period prior to May 5,
1995, any prepayment, in whole or in part, of
the Term Note shall be accompanied by a
prepayment premium equal to two percent (2%) of
the outstanding principal amount of the Term
Loan, as adjusted from time to time.
Prepayments on the Term Note shall not in any
way alter or suspend any obligation of the
Borrower under this Agreement except to
<PAGE> 9
9
the extent that such prepayments result in a
credit against payments on the Term Note, as
provided above, and the Borrower shall continue
to perform and be responsible for the
performance of all of the terms and provisions
of this Agreement."
2. Conditions Precedent.
(a) The obligation of the Lender to consummate the
transactions contemplated by this First Amendment to Term Loan Agreement shall
be subject to the satisfaction of the following conditions precedent:
(i) Documents. The Lender shall have
received executed counterparts of the documents annexed hereto as Exhibit A
through G.
(ii) Interest. All accrued but unpaid
interest with respect to the Term Loan as of the date of the Term Note shall
have been paid to the Lender.
(b) The obligation of the Borrower to consummate
the transactions contemplated by this First Amendment to Term Loan Agreement
shall be subject to the Borrower's receipt of the executed original promissory
note made by the Borrower in favor of the Lender at the time of and in
connection with the Agreement.
3. Ratification of Agreement. Each of the
Borrower, the Holding Company and the Lender hereby ratifies and confirms all
of the terms and provisions of the Agreement as amended hereby.
4. Applicable Law. This First Amendment to
Agreement shall be governed by, construed and enforced in accordance with the
laws of the State of New York without regard to the choice of law provisions
thereof, except to the extent that the laws of the State of New York are
superseded by mandatory provisions of applicable federal law.
5. Counterparts. This First Amendment to
Agreement may be executed in one or more counterparts and by different parties
hereto in separate counterparts, each of which when so executed and delivered
shall be deemed to be an original and all of which counterparts shall taken
together constitute but one and the same instrument.
6. Headings. Section headings in this First
Amendment to Agreement are included herein for convenience of reference only
and shall not constitute a part of the Agreement for any other purpose.
<PAGE> 10
10
IN WITNESS WHEREOF, the parties hereto have caused this
First Amendment to Term Loan Agreement to be executed by their respective
officers thereunto duly authorized as of the day and year first above written.
ST. PAUL FEDERAL BANK FOR SAVINGS
EMPLOYEE STOCK OWNERSHIP TRUST
By:_________________________________
Patrick J. Agnew, Trustee
By:_________________________________
Alan J. Fredian, Trustee
By:_________________________________
Michael R. Notaro, Trustee
By:_________________________________
Faustin A. Pipal, Trustee
By:_________________________________
Joseph C. Scully, Trustee
ST. PAUL BANCORP, INC.
By: ________________________________
Name:
Title:
NATIONAR
By: ________________________________
Name:
Title:
By: ________________________________
Name:
Title:
<PAGE> 11
EXHIBIT A
AMENDED AND RESTATED
TERM NOTE
Up to $18,000,000.00 New York, New York
As of June 30, 1993
(but effective as of
May 5, 1993)
FOR VALUE RECEIVED, ST. PAUL FEDERAL BANK FOR SAVINGS
EMPLOYEE STOCK OWNERSHIP TRUST (the "Borrower"), hereby promises to pay to the
order of NATIONAR, a trust company organized under the laws of the State of New
York (the "Lender"), the principal sum of Eighteen Million Dollars
($18,000,000.00) or, if less, the aggregate outstanding principal amount of all
loans (the "Loans") which are made by the Lender to the Borrower and which are
intended to be evidenced by this Note pursuant to and in accordance with the
provisions of the Term Loan Agreement, dated as of November 21, 1991, as
amended by a First Amendment to Term Loan Agreement, dated as of the date
hereof (but effective as of May 5, 1993) (as so amended, the "Loan Agreement"),
by and among the Borrower, the Lender and St. Paul Bancorp, Inc., a Delaware
corporation (the "Guarantor"), by written endorsement with respect thereto by
any officer of the Lender upon Schedule A annexed hereto, in quarterly
installments, commencing September 30, 1996, pursuant to Section 2.2 of the
Loan Agreement. The Borrower also promises to pay interest on the unpaid
principal amount hereof, pursuant to Sections 2.2 and 2.4 of the Loan
Agreement, from time to time outstanding (computed on the basis of the actual
number of days elapsed in a year of 365 days), from the date of the initial
advance pursuant to the Loan Agreement until payment in full of the principal
amount hereof, quarterly in arrears on the last Business Day of each March,
June, September and December during the term hereof, commencing September 30,
1993, at a fluctuating rate of interest equal to the rate of interest computed
pursuant to Sections 2.2 and 2.4 of the Loan Agreement. The Loan Agreement
sets forth further terms and conditions upon which the entire unpaid principal
amount hereof and all interest hereon may become due and payable prior to the
stated maturity hereof, and generally as to further rights of the Lender and
duties of the Borrower and the Guarantor, and is incorporated herein by
reference.
This Note is the Term Note referred to in, and is
entitled to the benefits of, the Loan Agreement. This Note
<PAGE> 12
2
may not be voluntarily prepaid except as provided in Sections 2.2, 2.4 and 2.5
of the Loan Agreement and is subject to acceleration and mandatory prepayment
as provided in Section 7.2 of the Loan Agreement. If the Borrower should fail
to make any payment of the principal amount hereof or any interest thereon, as
and when the same shall be due and payable, the amount so due shall bear
interest from the due date thereof to the date of actual payment at the rate of
interest set forth in Section 2.8 of the Loan Agreement, but in no event shall
interest be payable hereunder at a rate higher than the highest rate permitted
by applicable law. The obligation of the Borrower to the Lender hereunder is
secured pursuant to the terms of a Pledge and Security Agreement, dated as of
November 22, 1991, as amended by a First Amendment to Pledge and Security
Agreement, dated as of the date hereof (but effective as of May 5, 1993) (as so
amended, the "Pledge Agreement"), made by the Borrower in favor of the Lender.
In addition, the obligation of the Borrower to the Lender hereunder is
guaranteed pursuant to the terms of a Guaranty, dated as of November 22, 1991,
as amended by a First Amendment to Guaranty, dated as of the date hereof (but
effective as of May 5, 1993), made by the Guarantor in favor of the Lender (as
so amended, the "Guaranty") and such Guaranty is secured pursuant to the terms
of a Pledge and Security Agreement, dated as of November 22, 1991, as amended
by a First Amendment to Pledge and Security Agreement, dated as of the date
hereof (but effective as of May 5, 1993) (as so amended, the "Guarantor
Security Agreement"), made by the Guarantor in favor of the Lender. Upon the
occurrence of an Event of Default (as defined in the Loan Agreement), the
Lender shall have all of the rights set forth in the Pledge Agreement, the
Guaranty and the Guarantor Security Agreement.
The remedies of the holder hereof against the Borrower
hereunder upon the occurrence of an Event of Default specified in the Loan
Agreement are limited to the extent and in the manner set forth in Sections 2.7
and 7.6 of the Loan Agreement; reference is made thereto for a full statement
of the provisions thereof.
Both the principal amount hereof, together with all
interest thereon, shall be payable in Immediately Available Funds in lawful
money of the United States of America to the Lender at its office located at
1000 Woodbury Road, Woodbury, New York 11797 (or such other location as shall
be specified by Lender). As used herein, the term Immediately Available Funds
shall mean funds which are available for immediate use by the Lender not later
than the due date of such payment.
Presentment and demand for payment, notice of dishonor,
protest and notice of protest of this Note are hereby
<PAGE> 13
3
waived by the Borrower. The Borrower agrees to pay all reasonable
out-of-pocket expenses (including, but not limited to, reasonable attorneys'
fees) incurred by the holder hereof in connection with the enforcement of this
Note.
As further described in Section 9.14 of the Loan
Agreement, the loan evidenced hereby is intended to be an "exempt loan" for
purposes of the "prohibited transaction" provisions of the Employee Retirement
Income Security Act of 1974, as amended and Section 4975 of the Internal
Revenue Code of 1986, as amended, and all terms in the Loan Agreement or other
Loan Documents shall be construed in a manner consistent with such intent.
All capitalized terms used herein and not otherwise
defined are used with the meanings given to such terms in the Loan Agreement.
This Note and the rights and obligations of the Lender
and the Borrower hereunder shall be governed by, interpreted and construed in
accordance with the laws of the State of New York.
This Note is the Term Note dated November 22, 1991 made
by the Borrower in favor of the Lender which has been amended and restated in
its entirety as of the day and year first above written.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 14
4
IN WITNESS WHEREOF, the Borrower has executed and delivered this Note
as of the day and year first above written.
ST. PAUL FEDERAL BANK FOR
SAVINGS EMPLOYEE STOCK
OWNERSHIP TRUST
By: __________________________
Patrick J. Agnew, Trustee
By: __________________________
Alan J. Fredian, Trustee
By: __________________________
Michael R. Notaro, Trustee
By: __________________________
Faustin A. Pipal, Trustee
By: __________________________
Joseph C. Scully, Trustee
<PAGE> 15
Schedule A
Schedule of Loans and Payments
<TABLE>
<CAPTION>
Amount Amount of Unpaid Name and
of Principal Principal Signature of Person
Date Loan Paid Balance Making Notation
- ---- ------ --------- --------- -------------------
<S> <C> <C> <C> <C>
</TABLE>
<PAGE> 16
EXHIBIT B
FIRST AMENDMENT TO
PLEDGE AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO PLEDGE AND SECURITY AGREEMENT,
dated as of June 30, 1993 (but effective as of May 5, 1993), by and between (i)
ST. PAUL FEDERAL BANK FOR SAVINGS EMPLOYEE STOCK OWNERSHIP TRUST (the
"Pledgor"), a trust created by the Trust Agreement entered into on March 26,
1987, between St. Paul Federal Bank For Savings, a federal savings bank (the
"Bank"), and Patrick J. Agnew, Joseph C. Scully, Michael R. Notaro, Faustin A.
Pipal and Alan J. Fredian, as trustees, and (ii) NATIONAR, a trust company
organized under the laws of the State of New York (the "Secured Party");
W I T N E S S E T H:
WHEREAS, the Pledgor, the Secured Party and St. Paul
Bancorp, Inc., a Delaware corporation which is the bank holding company of the
Bank (the "Holding Company"), are parties to a Term Loan Agreement, dated as of
November 21, 1991, as amended by a First Amendment to Term Loan Agreement (the
"First Amendment"), dated as of the date hereof (but effective as of May 5,
1993) (as so amended, the "Agreement"), pursuant to which the Secured Party has
agreed to make one or more loans to the Pledgor in the aggregate amount of up
to Eighteen Million Dollars (the "Loans") for the purpose of enabling the
Pledgor to purchase, from time to time, in open market purchases, shares of the
common stock, par value $.01 per share, of the Holding Company (the "Pledged
Shares");
WHEREAS, in connection with the transactions
contemplated by the Agreement, the Pledgor and the Secured Party have entered
into a Pledge and Security Agreement, dated as of November 22, 1991 (the
"Pledge Agreement"); and
WHEREAS, in connection with the transactions
contemplated by the First Amendment, the Pledgor and the Secured Party desire
to amend the terms and provisions of the Pledge Agreement in certain respects
as hereinafter set forth;
NOW, THEREFORE, in consideration of the Loans and the
transactions contemplated by the Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, it
is agreed as follows:
<PAGE> 17
2
1. Amendment to the Pledge Agreement. The Pledge
Agreement is hereby amended in the following respects:
a. Definitions.
A new definition of "Term Note" is hereby added
at the end of Section 1 of the Pledge Agreement to read in full as follows:
"Term Note" means the Amended and Restated Term
Note, dated as of the date hereof (but
effective as of May 5, 1993), in the principal
amount of Eighteen Million Dollars
($18,000,000), made by the Pledgor in favor of
the Secured Party."
All references in the Pledge Agreement to the
Agreement shall be deemed to refer to the Agreement as amended by the First
Amendment.
All references in the Pledge Agreement to Loans
shall be deemed to refer to the loans made by the Secured Party to the Pledgor
pursuant to the Term Note.
b. Amendment to Section 2. Section 2 of
the Pledge Agreement is hereby amended to read in full as follows:
"2. Secured Obligations. This Pledge
Agreement secures, and the Pledged Collateral
is collateral security for, the prompt payment
in full when due, whether by acceleration or
otherwise, of (i) the principal of and interest
on the Term Note and (ii) all other obligations
and liabilities of the Pledgor to the Secured
Party pursuant to the provisions of, or arising
on account or as a result of the breach of, the
Agreement and this Pledge Agreement, in each
case as amended by a First Amendment thereto,
dated as of the date hereof. All such
obligations are hereinafter collectively
referred to as the "Secured Obligations."
(c) Amendment to Section 14. The second
sentence of Section 14 of the Pledge Agreement is hereby amended to read in
full as follows:
"As of December 31 of each year, the Secured
Party agrees to release its security interest
in a number of whole Pledged Shares equal to
the number of Pledged Shares held immediately
<PAGE> 18
3
prior to such release, multiplied by a fraction
the numerator of which shall be the aggregate
amount of principal and interest paid under the
Term Note (as defined in the Agreement) during
such year and the denominator of which shall be
the sum of the numerator plus all principal and
interest to be paid under the Term Note for all
future years through the fourteenth anniversary
of the termination of the Loan Commitment
Period (as defined in the Agreement), assuming
for this purpose only that the Loan Commitment
Period was terminated as of the end of the
Annual Period (as defined in the Agreement)
during which such release occurs."
3. Ratification of Agreement. Each of the Pledgor
and the Secured Party hereby ratifies and confirms all of the terms and
provisions of the Pledge Agreement as amended hereby.
4. Applicable Law. This First Amendment to Pledge
Agreement shall be governed by, construed and enforced in accordance with the
laws of the State of New York without regard to the choice of law provisions
thereof, except to the extent that the laws of the State of New York are
superseded by mandatory provisions of applicable federal law.
5. Counterparts. This First Amendment to Pledge
Agreement may be executed in one or more counterparts and by different parties
hereto in separate counterparts, each of which when so executed and delivered
shall be deemed to be an original and all of which counterparts shall taken
together constitute but one and the same instrument.
6. Headings. Section headings in this First
Amendment to Pledge Agreement are included herein for convenience of reference
only and shall not constitute a part of the Pledge Agreement for any other
purpose.
<PAGE> 19
4
IN WITNESS WHEREOF, the Pledgor and the Secured Party
have caused this First Amendment to Pledge Agreement to be executed by their
respective officers thereunto duly authorized as of the day and year first
above written.
ST. PAUL FEDERAL BANK FOR SAVINGS
EMPLOYEE STOCK OWNERSHIP TRUST
By:_______________________________
Patrick J. Agnew, Trustee
By:_______________________________
Alan J. Fredian, Trustee
By:_______________________________
Michael R. Notaro, Trustee
By:_______________________________
Faustin A. Pipal, Trustee
By:_______________________________
Joseph C. Scully, Trustee
NATIONAR
By: _____________________________
Name:
Title:
By: _____________________________
Name:
Title:
<PAGE> 20
SCHEDULE I
Attached to and forming a part of that certain First
Amendment to Pledge and Security Agreement, dated as of June 30, 1993 (but
effective as of May 5, 1993) by and between St. Paul Federal Bank For Savings
Employee Stock Ownership Trust, as pledgor, and Nationar, as secured party.
<TABLE>
<CAPTION>
Class Stock Number
of Certificate of
Stock Number Shares
- ----- ----------- ------
<S> <C> <C>
</TABLE>
Date:
<PAGE> 21
EXHIBIT C
FIRST AMENDMENT TO
GUARANTY
THIS FIRST AMENDMENT TO GUARANTY, dated as of June 30,
1993 (but effective as of May 5, 1993), is made by ST. PAUL BANCORP, INC., a
Delaware corporation (the "Guarantor"), in favor of NATIONAR, a trust company
organized under the laws of the State of New York (the "Lender");
W I T N E S S E T H:
WHEREAS, the St. Paul Federal Bank For Savings Employee
Stock Ownership Trust (the "Trust"), the Guarantor and the Lender are parties
to a Term Loan Agreement, dated as of November 21, 1991, as amended by a First
Amendment to Term Loan Agreement (the "First Amendment"), dated as of the date
hereof (but effective as of May 5, 1993) (as so amended, the "Agreement"),
pursuant to which the Lender has agreed to lend the aggregate sum of up to
Eighteen Million Dollars ($18,000,000) (collectively, the "Loan") to the Trust
for the purpose of enabling the Trust to purchase shares of common stock, par
value $.01 per share, of the Guarantor from time to time in open market
purchases;
WHEREAS, in connection with the transactions
contemplated by the Agreement, the Guarantor executed and delivered a Guaranty,
dated as of November 22, 1991 (the "Guaranty"), in favor of the Lender; and
WHEREAS, in connection with the transactions
contemplated by the First Amendment, the Guarantor desires to amend the terms
and provisions of the Guaranty in certain respects as hereinafter set forth;
NOW, THEREFORE, in consideration of the Loan and the
transactions contemplated by the Agreement and in order to provide the Lender
with assurance of the repayment of the Loan, the Guarantor hereby agrees for
the benefit of the Lender as follows:
1. Amendment to Section 2. Section 2 of the
Guaranty is hereby amended to read in full as follows:
"2. Definitions. All capitalized terms
used herein and not otherwise defined have the
meanings given to such terms in the Agreement."
<PAGE> 22
2
A new definition of "Term Note" is hereby added
at the end of Section 2 to read in full as follows:
"Term Note" means the Amended and Restated Term
Note, dated as of the date hereof (but
effective as of May 5, 1993), in the principal
amount of Eighteen Million Dollars
($18,000,000), made by the Trust in favor of
the Lender."
All references in the Guaranty to the Agreement
shall be deemed to refer to the Agreement as amended by the First Amendment.
All references in the Guaranty to a Loan shall
be deemed to refer to a loan made by the Lender to the Trust pursuant to the
Term Note.
All references in the Guaranty to the Guarantor
Security Agreement shall be deemed to refer to the Guarantor Security Agreement
(as defined in Section 4 of the Guaranty) as amended by the First Amendment to
Guarantor Security Agreement, dated as of the date hereof (but effective as of
May 5, 1993), by and among the Guarantor and the Lender.
2. Ratification of Guaranty. The Guarantor hereby
ratifies and confirms all of the terms and provisions of the Guaranty as
amended hereby.
3. Applicable Law. This First Amendment to
Guaranty, the obligations of the Guarantor and the rights of the Lender and all
subsequent holders of the Term Note hereunder shall be governed by, construed
and enforced in accordance with the laws of the State of New York without
regard to the choice of law provisions thereof.
4. Headings. Section headings in this First
Amendment to Guaranty are included herein for convenience of reference only and
shall not constitute a part of the Guaranty for any other purpose.
<PAGE> 23
3
IN WITNESS WHEREOF, this First Amendment to Guaranty
has been executed and delivered on behalf of the Guarantor by an officer
thereunto duly authorized as of the day and year first above written.
ST. PAUL BANCORP, INC.
By: _________________________
Name:
Title:
<PAGE> 24
EXHIBIT D
FIRST AMENDMENT TO
PLEDGE AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO PLEDGE AND SECURITY AGREEMENT,
dated as of June 30, 1993 (but effective as of May 5, 1993), by and between (i)
ST. PAUL BANCORP, INC., a Delaware corporation (the "Pledgor"), and (ii)
NATIONAR, a trust company organized under the laws of the State of New York
(the "Secured Party");
W I T N E S S E T H:
WHEREAS, the Pledgor, the Secured Party and St. Paul
Federal Bank For Savings Employee Stock Ownership Trust (the "Trust") are
parties to a Term Loan Agreement, dated as of November 21, 1991, as amended by
a First Amendment to Term Loan Agreement (the "First Amendment"), dated as of
the date hereof (but effective as of May 5, 1993), (as so amended, the
"Agreement"), pursuant to which the Secured Party has agreed to make one or
more loans to the Trust in the aggregate principal amount of up to Eighteen
Million Dollars ($18,000,000.00) (the "Loans") for the purpose of enabling the
Trust to purchase from time to time, in open market purchases, shares (the
"Pledged Shares") of the common stock, par value $.01 per share, of the
Pledgor;
WHEREAS, in connection with the transactions
contemplated by the Agreement, the Pledgor and the Secured Party have entered
into a Pledge and Security Agreement, dated as of November 22, 1991 (the
"Pledge Agreement"); and
WHEREAS, in connection with the transactions
contemplated by the First Amendment, the Pledgor and the Secured Party desire
to amend the terms and provisions of the Pledge Agreement in certain respects
as hereinafter set forth;
NOW, THEREFORE, in consideration of the Loans and the
transactions contemplated by the Agreement and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Pledgor hereby agrees for the benefit of the Secured Party as follows:
1. Amendment to Pledge Agreement. The Pledge
Agreement is hereby amended in the following respects:
<PAGE> 25
2
a. A new clause (c) is hereby added at
the end of Section 1 of the Pledge Agreement to read in full as follows:
"(c) Definitions. Unless otherwise defined
herein, all capitalized terms used herein are
used with the meanings given to such terms in
the Agreement."
A new definition of the term "Term Note" is
hereby added at the end of clause (c) of Section 1 to read in full as follows:
"Term Note" means the Amended and Restated Term
Note, dated as of the date hereof (but
effective as of May 5, 1993), in the principal
amount of Eighteen Million Dollars
($18,000,000), made by the Trust in favor of
the Secured Party."
All references in the Pledge Agreement to the
Agreement shall be deemed to refer to the Agreement as amended by the First
Amendment.
All references in the Pledge Agreement to Loans
shall be deemed to refer to loans made by the Secured Party pursuant to the
Term Note.
All references in the Pledge Agreement to the
Guaranty shall be deemed to refer to the Guaranty, as amended by the First
Amendment to Guaranty, dated as of the date hereof (but effective as of May 5,
1993), made by the Pledgor in favor of the Secured Party.
b. Amendment to Section 2. Section 2 of
the Pledge Agreement is hereby amended to read in full as follows:
"2. Secured Obligations. This Pledge
Agreement secures, and the Pledged Collateral
is collateral security for, the prompt payment
in full when due, whether by acceleration or
otherwise, of (i) the principal of and interest
on the Term Note, (ii) all other obligations
and liabilities of the Trust to the Secured
Party pursuant to the provisions of, or arising
on account or as a result of the breach of, the
Agreement and (iii) all obligations and
liabilities of the Pledgor to the Secured Party
pursuant to the provisions of, or arising on
account of or as a result of the breach
<PAGE> 26
3
of, the Agreement, this Pledge Agreement and
the Guaranty, dated as of November 22, 1991, as
amended by a First Amendment to Guaranty, dated
as of the date hereof (but effective as of May
5, 1993) (as so amended, the "Guaranty"), made
by the Pledgor in favor of the Secured Party
pursuant to the provisions of the Agreement.
All such obligations are hereinafter
collectively referred to as the "Secured
Obligations."
c. Amendment to Section 3. Clause (b) of
Section 3 of the Pledge Agreement is hereby amended to read in full as follows:
"(b) Except as provided in clauses (d), (e)
and (f) of this Section 3, at all times prior
to indefeasible payment in full of all Secured
Obligations, the Pledgor agrees to maintain
with the Secured Party Pledged Collateral with
an aggregate fair market value equal to not
less than the minimum percentages of the
outstanding principal amount of the Loans
(including the amount of all interest which is
added to the outstanding principal amount of
the Loans pursuant to the terms of the
Agreement) set forth below:
(i) As long as the aggregate fair
market value of the Pledged Shares is greater
than ninety five percent (95%) of the
outstanding principal amount of the Loans, the
aggregate fair market value of the Pledged
Collateral held by the Secured Party hereunder
shall be not less than fifteen percent (15%) of
the outstanding principal amount of the Loans;
(ii) In the event that the
aggregate fair market value of the Pledged
Shares is equal to or less than ninety five
percent (95%) of the outstanding principal
amount of the Loans but greater than ninety
percent (90%) of the outstanding principal
amount of the Loans for a period of five
consecutive business days, the aggregate fair
market value of the Pledged Collateral held by
the Secured Party hereunder shall be not less
than twenty percent (20%) of the outstanding
principal amount of the Loans;
(iii) In the event that the
aggregate fair market value of the Pledged
Shares is equal to
<PAGE> 27
4
or less than ninety percent (90%) of the
outstanding principal amount of the Loans but
greater than eighty five percent (85%) of the
outstanding principal amount of the Loans for a
period of five consecutive business days, the
aggregate fair market value of the Pledged
Collateral held by the Secured Party hereunder
shall be not less than twenty-five percent
(25%) of the outstanding principal amount of
the Loans;
(iv) In the event that the
aggregate fair market value of the Pledged
Shares is equal to or less than eighty five
percent (85%) of the outstanding principal
amount of the Loans but greater than eighty
percent (80%) of the outstanding principal
amount of the Loans for a period of five
consecutive business days, the aggregate fair
market value of the Pledged Collateral held by
the Secured Party hereunder shall be not less
than thirty percent (30%) of the outstanding
principal amount of the Loans;
(v) In the event that the aggregate
fair market value of the Pledged Shares is
equal to or less than eighty percent (80%) of
the outstanding principal amount of the Loans
but greater than seventy five percent (75%) of
the outstanding principal amount of the Loans
for a period of five consecutive business days,
the aggregate fair market value of the Pledged
Collateral held by the Secured Party hereunder
shall be not less than thirty-five percent
(35%) of the outstanding principal amount of
the Loans;
(iv) In the event that the
aggregate fair market value of the Pledged
Shares is equal to or less than seventy five
percent (75%) of the outstanding principal
amount of the Loans but greater than seventy
percent (70%) of the outstanding principal
amount of the Loans for a period of five
consecutive business days, the aggregate fair
market value of the Pledged Collateral held by
the Secured Party hereunder shall be not less
than forty percent (40%) of the outstanding
principal amount of the Loans;
(vii) In the event that the
aggregate fair market value of the Pledged
Shares is equal to
<PAGE> 28
5
or less than seventy percent (70%) of the
outstanding principal amount of the Loans but
greater than sixty five percent (65%) of the
outstanding principal amount of the Loans for a
period of five consecutive business days, the
aggregate fair market value of the Pledged
Collateral held by the Secured Party hereunder
shall be not less than forty five percent (45%)
of the outstanding principal amount of the
Loans;
(viii) In the event that the
aggregate fair market value of the Pledged
Shares is equal to or less than sixty five
percent (65%) of the outstanding principal
amount of the Loans but greater than sixty
percent (60%) of the outstanding principal
amount of the Loans for a period of five
consecutive business days, the aggregate fair
market value of the Pledged Collateral held by
the Secured Party hereunder shall be not less
than fifty percent (50%) of the outstanding
principal amount of the Loans;
(ix) In the event that the
aggregate fair market value of the Pledged
Shares is equal to or less than sixty percent
(60%) of the outstanding principal amount of
the Loans but greater than fifty five percent
(55%) of the outstanding principal amount of
the Loans for a period of five consecutive
business days, the aggregate fair market value
of the Pledged Collateral held by the Secured
Party hereunder shall be not less than fifty
five percent (55%) of the outstanding principal
amount of the Loans;
(x) In the event that the aggregate
fair market value of the Pledged Shares is
equal to or less than fifty five percent (55%)
of the outstanding principal amount of the
Loans but greater than fifty percent (50%) of
the outstanding principal amount of the Loans
for a period of five consecutive business days,
the aggregate fair market value of the Pledged
Collateral held by the Secured Party hereunder
shall be not less than sixty percent (60%) of
the outstanding principal amount of the Loans;
and
(xi) In the event that the
aggregate fair market value of the Pledged
Shares is equal to
<PAGE> 29
6
or less than fifty percent (50%) of the
outstanding principal amount of the Loans for a
period of five consecutive business days, the
aggregate fair market value of the Pledged
Collateral held by the Secured Party hereunder
shall be not less than the amount required so
that the total fair market value of the Pledged
Shares and the Pledged Collateral held by the
Secured Party hereunder shall be not less than
one hundred and fifteen percent (115%) of the
outstanding principal amount of the Loans.
The fair market value of the Pledged Shares and
the Pledged Collateral described above in each
instance is referred to as the "Minimum
Collateral Requirement." As used herein, the
term "fair market value" shall mean (a) with
respect to bonds or obligations described in
subclauses (i), (ii) or (iii) of Section 2(b)
hereof, the aggregate outstanding principal
balance of the respective bond or obligation as
of the applicable Valuation Date multiplied by
the average bid price for such bond or
obligation, as of the close of business on the
Business Day next preceding such valuation
date, as quoted in writing to the Secured
Party, with a copy to the Pledgor, by three
nationally recognized securities dealers
selected by the Secured Party and reasonably
satisfactory to the Pledgor, which make a
market in such bond or obligation as of the
applicable valuation date, (b) with respect to
any certificate of deposit or other obligation
described in subclause (iv) of Section 2(b)
hereof, the face amount represented by such
certificate and (c) with respect to the Pledged
Shares, the average of the closing price per
share on the National Association of Securities
Dealers Automated Quotation System -- National
Market System or the principal securities
exchange on which the Pledged Shares are
traded, in either case for the five consecutive
trading days immediately preceding the date of
determination. If at any time prior to
indefeasible payment in full of all Secured
Obligations the aggregate fair market value of
the Pledged Collateral and the Pledged Shares
held by the Secured Party is less than the
Minimum Collateral Requirement, the Pledgor
shall within five Business Days
<PAGE> 30
7
(as defined in the Agreement) after written
request by the Secured Party (accompanied by a
computation of such fair market value for each
individual item of Pledged Collateral and for
the Pledged Shares) deliver and pledge to the
Secured Party hereunder and grant to the
Secured Party a first priority security
interest hereunder in and to items of
additional Acceptable Collateral with a fair
market which is sufficient, when added to the
fair market value of the Pledged Collateral and
Pledged Shares then held by the Secured Party,
to satisfy the Minimum Collateral Requirement.
If at any time any item of Pledged Collateral
held by the Secured Party hereunder shall no
longer constitute Acceptable Collateral, the
Pledgor shall within five Business Days after
written request by the Secured Party
(accompanied by a computation of fair market
value for each individual item of Pledged
Collateral and for the Pledged Shares) deliver
and pledge to the Secured Party hereunder and
grant to the Secured Party a first priority
security interest hereunder in and to items of
substitute Acceptable Collateral with a fair
market value which is sufficient, when added to
the fair market value of the Pledged Collateral
and Pledged Shares then held by the Secured
Party which constitutes Acceptable Collateral,
to satisfy the Minimum Collateral Requirement."
Clause (e) of Section 3 of the Pledge Agreement
is hereby amended to read in full as follows:
"(e) Notwithstanding clause (b) of this
Section 3, in the event that for a continuous
period of six months the aggregate fair market
value of the Pledged Shares is greater than or
equal to one hundred and twenty percent (120%)
of the outstanding principal amount of the
Loans measured at any time after April 29, 1993
(which period may be measured prospectively or
retrospectively from such date), the Pledgor
shall be permitted during the continuance of
such event to maintain with the Secured Party
Pledged Collateral with an aggregate fair
market value equal to not less than ten percent
(10%) of the outstanding principal amount of
the Loans. Provided that
<PAGE> 31
8
the provisions of this clause (e) are satisfied
for the time periods set forth herein, the
Secured Party will release designated
individual items of Pledged Collateral to the
Pledgor within five Business Days of the
Pledgor's written request therefor (accompanied
by a computation which demonstrates
satisfaction of the provisions set forth in
this clause (e)), subject to the Secured
Party's right to require the delivery of
additional items of Pledged Collateral in the
future in accordance with the terms of this
Agreement."
Clause (f) of Section 3 of the Pledge Agreement
is hereby amended to read in full as follows:
"(f) Notwithstanding clause (b) of this
Section 3, in the event that for a continuous
period of six months the aggregate fair market
value of the Pledged Shares is greater than or
equal to one hundred and twenty-five percent
(125%) of the outstanding principal amount of
the Loans measured at any time after April 29,
1993 (which period may be measured
prospectively or retrospectively from such
date), the Pledgor shall be permitted during
the continuance of such event to maintain with
the Secured Party Pledged Collateral with an
aggregate fair market value equal to not less
than five percent (5%) of the outstanding
principal amount of the Loans. Provided that
the provisions of this clause (f) are satisfied
for the time periods set forth herein, the
Secured Party will release designated
individual items of Pledged Collateral to the
Pledgor within five Business Days of the
Pledgor's written request therefor (accompanied
by a computation which demonstrates
satisfaction of the provisions set forth in
this clause (f)), subject to the Secured
Party's right to require the delivery of
additional items of Pledged Collateral in the
future in accordance with the terms of this
Agreement."
2. Ratification of Agreement. Each of the Pledgor
and the Secured Party hereby ratifies and confirms all of the terms and
provisions of the Pledge Agreement as amended hereby.
<PAGE> 32
9
3. Applicable Law. This First Amendment to Pledge
Agreement shall be governed by, construed and enforced in accordance with the
laws of the State of New York without regard to the choice of law provisions
thereof.
4. Counterparts. This First Amendment to Pledge
Agreement may be executed in one or more counterparts and by different parties
hereto in separate counterparts, each of which when so executed and delivered
shall be deemed to be an original and all of which counterparts shall taken
together constitute but one and the same instrument.
5. Headings. Section headings in this First
Amendment to Pledge Agreement are included herein for convenience of reference
only and shall not constitute a part of the Pledge Agreement for any other
purpose.
<PAGE> 33
10
IN WITNESS WHEREOF, the Pledgor and the Secured Party
have caused this First Amendment to Pledge Agreement to be executed by their
respective officers thereunto duly authorized as of the day and year first
above written.
ST. PAUL BANCORP, INC.
By: ___________________________
Name:
Title:
NATIONAR
By: ___________________________
Name:
Title:
By: ___________________________
Name:
Title:
<PAGE> 34
SCHEDULE I
Attached to and forming a part of that certain First
Amendment to Pledge and Security Agreement, dated as of June 30, 1993 (but
effective as of May 5, 1993), by and between St. Paul Bancorp, Inc., as
pledgor, and Nationar, as secured party.
Description of Pledged Collateral
Date: ____________, 1993
<PAGE> 35
EXHIBIT E
FIRST AMENDMENT TO
REGISTRATION RIGHTS AGREEMENT
THIS FIRST AMENDMENT TO REGISTRATION RIGHTS AGREEMENT,
dated as of June 30, 1993 (but effective as of May 5, 1993), by and between ST.
PAUL BANCORP, INC., a Delaware corporation (the "Issuer"), and NATIONAR, a
trust company organized under the laws of the State of New York (the "Holder"),
W I T N E S S E T H:
WHEREAS, the Issuer, the Holder and St. Paul Federal
Bank For Savings Employee Stock Ownership Trust (the "Borrower") are parties to
a Term Loan Agreement, dated as of November 21, 1991, as amended by a First
Amendment to Term Loan Agreement (the "First Amendment), dated as of the date
hereof (but effective as of May 5, 1993) (as so amended, the "Agreement"),
pursuant to which the Holder has agreed to make loans to the Borrower in the
aggregate amount of up to Eighteen Million Dollars ($18,000,000.00)
(collectively, the "Loan") for the purpose of enabling the Borrower to purchase
shares (the "Shares") of common stock, par value $.01 per share, of the Issuer,
from time to time, in open market purchases;
WHEREAS, in connection with the transactions
contemplated by the Agreement the Borrower has entered into a Pledge and
Security Agreement, dated as of November 22, 1991, as amended by a First
Amendment to Pledge Agreement, dated as of the date hereof (but effective as of
May 5, 1993) (as so amended, the "Pledge Agreement"), in favor of the Holder
pursuant to which the Borrower has pledged and delivered the Shares purchased
with the proceeds of the Loan to the Holder and granted the Holder a perfected
first priority security interest in and to the Shares to secure the obligations
of the Borrower to the Holder pursuant to the Agreement;
WHEREAS, in connection with the transactions
contemplated by the Agreement, the Issuer and the Holder have entered into a
Registration Rights Agreement, dated as of November 22, 1991 (the "Registration
Rights Agreement"); and
WHEREAS, in connection with the transactions
contemplated by the First Amendment, the Issuer and the Holder desire to amend
the terms and provisions of the Registration
<PAGE> 36
2
Rights Agreement in certain respects as hereinafter set forth;
NOW, THEREFORE, in consideration of the Loan and the
transactions contemplated by the Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, it
is agreed as follows:
1. Amendment to Registration Rights Agreement.
The Registration Rights Agreement is hereby amended in the following respects:
All references to the Pledge Agreement in the
Registration Rights Agreement shall be deemed to refer to the Pledge Agreement
as amended by the First Amendment to Pledge Agreement, dated as of the date
hereof (but effective as of May 5, 1993), by and between the Borrower and the
Holder.
All references to the Agreement in the
Registration Rights Agreement shall be deemed to refer to the Agreement as
amended by the First Amendment.
All references to the Loan in the Registration
Rights Agreement shall be deemed to refer to loans made by the Holder to the
Borrower pursuant to the Amended and Restated Term Note, dated as of the date
hereof (but effective as of May 5, 1993), referred to in the First Amendment.
2. Ratification of the Registration Rights
Agreement. Each of the Issuer and the Holder hereby ratifies and confirms all
of the terms and provisions of the Registration Rights Agreement as amended
hereby.
3. Applicable Law. This First Amendment to
Registration Rights Agreement shall be governed by, construed and enforced in
accordance with the laws of the State of New York without regard to the choice
of law provisions thereof.
4. Counterparts. This First Amendment to
Registration Rights Agreement may be executed in one or more counterparts and
by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts shall taken together constitute but one and the same instrument.
5. Headings. Section headings in this First
Amendment to Registration Rights Agreement are included herein for convenience
of reference only and shall not constitute a part of the Registration Rights
Agreement for any other purpose.
<PAGE> 37
3
IN WITNESS WHEREOF, the Issuer and the Holder have
caused this First Amendment to Registration Rights Agreement to be executed by
their respective officers thereunto duly authorized as of the day and year
first above written.
ST. PAUL BANCORP, INC.
By: ___________________________
Name:
Title:
NATIONAR
By: ___________________________
Name:
Title:
By: ___________________________
Name:
Title:
<PAGE> 38
EXHIBIT F
[Letterhead of Clifford M. Sladnick]
June __, 1993
Nationar
330 Madison Avenue
New York, New York 10017
Attention: Mr. George Scott, Jr.
Senior Vice President and
Chief Administrative Officer
Dear Sirs:
I have acted as counsel to Patrick J. Agnew, Joseph C. Scully,
Michael R. Notaro, Faustin A. Pipal and Alan J. Fredian (collectively, the
"Trustees") in their capacities as trustees of the St. Paul Federal Bank For
Savings Employee Stock Ownership Trust (the "Borrower"), a trust organized
under the Trust Agreement, dated March 26, 1987, between St. Paul Federal Bank
For Savings, a federal savings bank (the "Bank"), and the Trustees, in
connection with the execution and delivery of (i) a First Amendment to Term
Loan Agreement, dated as of the date hereof (but effective as of May 5, 1993)
(the "First Amendment to Term Loan Agreement"), by and between the Borrower,
St. Paul Bancorp, Inc., a Delaware corporation which is the bank holding
company of the Bank (the "Holding Company"), and you, (ii) an Amended and
Restated Term Note, dated as of the date hereof (but effective as of May 5,
1993), made by the Borrower in favor of you (the "Amended and Restated Term
Note") and (iii) a First Amendment to Pledge and Security Agreement, dated as
of the date hereof (but effective as of May 5, 1993), by and between the
Borrower and you (the "First Amendment to Pledge Agreement") and the
consummation of the transactions contemplated thereby. This opinion is being
delivered to you pursuant to Section 2(a) of the First Amendment to Term Loan
Agreement. All capitalized terms used herein and not otherwise defined herein
are used with the meanings given to such terms in the Term Loan Agreement,
dated as of November 21, 1991, by and among the Borrower, St. Paul Bancorp,
Inc., a Delaware corporation (the "Holding Company"), and you, as amended by
the First Amendment to Term Loan Agreement.
<PAGE> 39
-2-
For purposes of rendering this opinion, I have examined the
First Amendment to Term Loan Agreement, the Amended and Restated Term Note, the
First Amendment to Pledge Agreement and such other documents and laws as I have
deemed necessary or appropriate. In rendering the opinion set forth below, I
have assumed the genuineness of all signatures on documents (other than the
signatures of the Trustees), the authenticity of all documents submitted to me
as originals, the conformity with the originals of all documents submitted to
me as copies and the valid authorization, execution and delivery of the First
Amendment to Term Loan Agreement and the First Amendment to Pledge Agreement by
you; I have no reason to believe that any such assumption is not reasonable.
Based upon the foregoing, I advise you that in my opinion:
1. The Trustees have all requisite legal capacity, power
and authority to execute and deliver the First Amendment to Term Loan
Agreement, the Amended and Restated Term Note and the First Amendment to Pledge
Agreement (collectively, the "Amended Documents") on behalf of the Borrower and
to perform its obligations thereunder in accordance with the terms thereof.
2. The Borrower is a trust duly organized and validly
existing under the laws of the State of Illinois.
3. The execution and delivery by the Trustees of the
Amended Documents on behalf of the Borrower and the consummation by the
Trustees of the transactions contemplated thereby have been duly authorized by
all requisite action on the part of the Trustees and no other proceedings on
the part of the Trustees are necessary or required under any law (other than
ERISA and the Code) to which the Trustees are subject, or any regulation
promulgated under any such law, for such execution, delivery and consummation.
4. Neither the execution, delivery or performance by the
Trustees of the Amended Documents on behalf of the Borrower, the consummation
by the Trustees of the transactions contemplated thereby, nor compliance by the
Trustees with the terms and conditions thereof will (i) violate any material
provision of any law or regulation, any order of any court or other agency of
government applicable to the Trustees, (ii) violate any provision of the ESOP
Plan or the ESOP Trust Agreement, (iii) violate any material provision of any
other indenture, agreement or other instrument to which the Trustees or the
Borrower is a party or by which the Trustees or the Borrower or any of the
properties or assets of the Trustees or the Borrower are bound, (iv) conflict
with, result in a breach of or constitute (with notice, lapse of time or both)
a default under the ESOP Plan or the ESOP Trust Agreement, (v) materially
conflict with, result in a material breach of, or constitute (with notice,
lapse of time or both) a material default under any other indenture, agreement
or other instrument to which the Trustees or the Borrower is a party or by
which the Trustees
<PAGE> 40
-3-
or the Borrower or any of the properties or assets of the Trustees or the
Borrower are bound or (vi) result in the creation or imposition of any material
lien, charge or encumbrance of any nature whatsoever upon any of the properties
and assets of the Trustees or the Borrower in favor of any Person other than
you.
5. All authorizations, consents or approvals from any
federal, state or local governmental, regulatory or administrative agency or
body and all filings with any such governmental, regulatory or administrative
agency or body required in connection with the execution and delivery by the
Trustees of the Amended Documents on behalf of the Borrower or the consummation
by the Trustees of the transactions contemplated thereby in accordance with the
terms thereof have been obtained or made, as the case may be.
6. Each of the Amended Documents has been duly and validly
authorized, executed and delivered by the Trustees on behalf of the Borrower
and constitutes the legal, valid and binding obligation of the Trustees,
enforceable against the Trustees in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium or
other similar laws now or hereafter enacted affecting the enforceability of
creditors' rights generally.
7. Upon delivery of the Pledged Collateral by the Trustees
to you pursuant to the First Amendment to Pledge Agreement, you will have a
valid, enforceable and fully perfected lien on and security interest in the
Pledged Collateral prior to all other claims, liens or security interests
therein.
8. The transactions contemplated by the Amended Documents
are exempt from the provisions of Regulation G promulgated by the Board of
Governors of the Federal Reserve System, except for Section Section 207.3(a)
and 207.3(o) thereof.
9. There is no action, suit, inquiry, investigation or
proceeding pending or, to the best of my knowledge, threatened against or
affecting the Trustees, the Borrower or any of their respective properties or
assets.
Very truly yours,
_________________________
Clifford M. Sladnick
<PAGE> 41
EXHIBIT G
[Letterhead of Clifford M. Sladnick]
June __, 1993
Nationar
330 Madison Avenue
New York, New York 10017
Attention: Mr. George Scott, Jr.
Senior Vice President and
Chief Administrative Officer
Dear Sirs:
I have acted as counsel to St. Paul Bancorp, Inc., a Delaware
corporation (the "Holding Company"), in connection with the execution and
delivery by the Holding Company of (i) a First Amendment to Term Loan
Agreement, dated as of the date hereof (but effective as of May 5, 1993) (the
"First Amendment to Term Loan Agreement"), by and between the St. Paul Federal
Bank For Savings Employee Stock Ownership Trust (the "Borrower"), the Holding
Company and you, (ii) a First Amendment to Guaranty, dated as of the date
hereof (but effective as of May 5, 1993), made by the Holding Company in favor
of you (the "First Amendment to Guaranty"), (iii) a First Amendment to Pledge
and Security Agreement, dated as of the date hereof (but effective as of May 5,
1993), by and between the Holding Company and you (the "First Amendment to
Guarantor Security Agreement") and (iv) a First Amendment to Registration
Rights Agreement, dated as of the date hereof (but effective as of May 5,
1993), by and between the Holding Company and you (the "First Amendment to
Registration Rights Agreement") and the consummation of the transactions
contemplated thereby. This opinion is being delivered to you pursuant to
Section 2(a) of the First Amendment to Term Loan Agreement. All capitalized
terms
<PAGE> 42
-2-
used herein and not otherwise defined herein are used with the meanings given
to such terms in the Term Loan Agreement, dated as of November 21, 1991, by and
among the Borrower, the Holding Company and you, as amended by the First
Amendment to Term Loan Agreement.
For purposes of rendering this opinion, I have examined the
First Amendment to Term Loan Agreement, the First Amendment to Guaranty, the
First Amendment to Guarantor Security Agreement, the First Amendment to
Registration Rights Agreement, the Certificate of Incorporation and Bylaws of
the Holding Company, the corporate records and proceedings of the Holding
Company, certificates of the Holding Company and public officials and such
other documents and such laws as I have deemed necessary or appropriate. In
rendering the opinion set forth below, I have assumed the genuineness of all
signatures on documents (other than signatures on behalf of the Holding
Company), the authenticity of all documents submitted to me as originals, the
conformity with the originals of all documents submitted to me as copies and
the valid authorization, execution and delivery of the First Amendment to Term
Loan Agreement, the First Amendment to Guarantor Security Agreement and the
First Amendment to Registration Rights Agreement by you; I have no reason to
believe that any such assumption is not reasonable.
Based upon the foregoing, I advise you that in my opinion:
1. The Holding Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite power and authority to execute and deliver the First
Amendment to Term Loan Agreement, the First Amendment to Guaranty, the First
Amendment to Guarantor Security Agreement and the First Amendment to
Registration Rights Agreement (collectively, the "Amended Documents") and to
perform its obligations thereunder.
2. The execution and delivery by the Holding Company of
the Amended Documents and the consummation by the Holding Company of the
transactions contemplated thereby have been duly authorized by all requisite
corporate action on the part of the Holding Company. No other proceedings on
the part of the Holding Company are necessary or required under any law to
which the Holding Company is subject, or any rule or regulation promulgated
under any such law, for such execution, delivery and consummation.
3. Neither the execution, delivery or performance by the
Holding Company of the Amended Documents, the consummation by the Holding
Company of the transactions contemplated thereby, nor compliance by the Holding
Company with the terms and conditions thereof will (i) violate any material
provision of any law or regulation, any order of any court or other agency of
government
<PAGE> 43
-3-
applicable to the Holding Company or the Certificate of Incorporation or Bylaws
of the Holding Company, (ii) violate any material provision of any indenture,
agreement or other instrument to which the Holding Company is a party or by
which the Holding Company or any of its properties or assets are bound, (iii)
materially conflict with, result in a material breach of or constitute (with
notice, lapse of time or both) a material default under any such indenture,
agreement or other instrument or (iv) result in the creation or imposition of
any material lien, charge or encumbrance of any nature whatsoever upon any of
the properties and assets of the Holding Company in favor of any Person other
than you.
4. Except for the filings required upon the delivery of a
registration notice pursuant to the provisions of the Registration Rights
Agreement and pursuant to Section 4 of the Registration Rights Agreement, all
authorizations, consents or approvals from any federal, state or local
governmental, regulatory or administrative agency or body and all filings with
any such agency or body required in connection with the execution and delivery
by the Holding Company of the Amended Documents or the consummation by the
Holding Company of the transactions contemplated thereby in accordance with the
terms thereof have been obtained or made, as the case may be.
5. Each of the Amended Documents has been duly and validly
authorized, executed and delivered by the Holding Company and constitutes the
legal, valid and binding obligation of the Holding Company, enforceable against
the Holding Company in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency, moratorium or other similar
laws now or hereafter enacted affecting the enforceability of creditors' rights
generally.
6. There is no action, suit, inquiry, investigation or
proceeding pending or, to the best of my knowledge, threatened against or
affecting the Holding Company or any of its properties or assets wherein an
unfavorable decision, ruling or finding could (i) impair in any material
respect the right or ability of the Holding Company or any Subsidiary to carry
on its business substantially as now conducted, (ii) result in any material
adverse change in the business, prospects, properties, rights, assets or
operations or in the condition (financial or otherwise) of the Holding Company
or any Subsidiary or (iii) adversely affect the validity or enforceability of
the Amended Documents or any of the other Loan Documents or the transactions
contemplated thereby.
7. The execution and delivery of the Amended Documents by
the parties thereto and the performance by the parties thereto of the
transactions contemplated thereby are exempt from being "prohibited
transactions" under the Code and ERISA.
8. Neither the Borrower nor the Bank is in breach of any
of its respective obligations under, or in violation of any
<PAGE> 44
-4-
provision of ERISA or the Code with respect to, the ESOP Trust Agreement or the
ESOP Plan.
9. The Shares purchased with the proceeds of the Term Loan
will be "qualifying employer securities" within the meaning of Section
4975(e)(8) of the Code for the Borrower.
10. The consideration paid by the Borrower for the Shares
purchased with proceeds of the Term Loan will not exceed "adequate
consideration" as defined in Section 3(18) of ERISA. No purchases of shares of
Holding Company Stock have been made by the Borrower from a person who is a
"party in interest" or a "disqualified person" as such terms are defined in
Section 3(14) of ERISA and Section 4975(e)(2) of the Code, respectively, in
which purchases the Borrower was charged any "commission" as defined in
Department of Labor regulation 29 C.F.R. Section 2550.408e-(e).
11. The authorized capital stock of the Holding Company
consists of 40,000,000 shares of common stock, par value $.01 per share, of
which _______________ shares are issued and outstanding as of the date hereof
and 10,000,000 shares of serial preferred stock, par value $.01 per share, none
of which are issued and outstanding as of the date hereof. All shares of
capital stock of the Holding Company outstanding on the date hereof are validly
issued, fully paid and nonassessable.
12. The transactions contemplated by the Amended Documents
do not violate Regulation T or Regulation U promulgated by the Board of
Governors of the Federal Reserve System and are exempt from the provisions of
Regulation G promulgated by the Board of Governors of the Federal Reserve
System, except for Section Section 207.3(a) and 207.3(o) thereof.
Very truly yours,
_____________________________
Clifford M. Sladnick
<PAGE> 1
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AT OR FOR THE YEARS ENDED DECEMBER 31 -- DOLLARS IN THOUSANDS EXCEPT PER
SHARE AMOUNTS
<TABLE>
<CAPTION>
Exhibit 13
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
EARNINGS AND DIVIDENDS
Net interest income before provision for loan losses. . . . . . $ 123,955 $ 112,843 $ 98,804
Provision for loan losses . . . . . . . . . . . . . . . . . . . 10,750 10,625 11,100
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . 41,387 37,685 27,192
Earnings per share: (1)
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.03 2.00 1.48
Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . 2.03 1.98 1.48
Dividends per share (1) . . . . . . . . . . . . . . . . . . . . 0.27 0.27 0.27
PERFORMANCE RATIOS
Net yield on average earning assets . . . . . . . . . . . . . . 3.46% 3.27% 2.84%
Return on average assets . . . . . . . . . . . . . . . . . . . 1.10 1.05 0.76
Return on average equity . . . . . . . . . . . . . . . . . . . 12.77 13.88 11.15
Interest rate spread at end of period . . . . . . . . . . . . . 3.30 3.48 2.95
One-year gap to total assets. . . . . . . . . . . . . . . . . . 16.79 16.84 12.47
AVERAGE BALANCES
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,748,798 $ 3,586,412 $ 3,599,824
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,219,672 2,987,859 2,862,153
Loans receivable (including loans held for sale) . . . . . . . 2,455,559 2,400,233 2,465,436
MBS (including MBS held for sale) . . . . . . . . . . . . . . . 664,812 657,331 743,164
Earning assets . . . . . . . . . . . . . . . . . . . . . . . . 3,581,613 3,448,896 3,483,467
Loan servicing portfolio . . . . . . . . . . . . . . . . . . . 811,203 931,670 917,670
LENDING AND FUNDING ACTIVITIES
Increase (decrease) in deposits . . . . . . . . . . . . . . . . $ 267,494 $ (19,295) $ 338,686
Loans originated and acquired . . . . . . . . . . . . . . . . . 846,659 591,332 490,813
Principal repayments on loans . . . . . . . . . . . . . . . . . 628,353 531,958 336,226
Loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . 153,448 212,491 92,939
ASSET QUALITY
Non-performing loans . . . . . . . . . . . . . . . . . . . . . . $ 29,667 $ 29,359 $ 45,486
Real estate owned . . . . . . . . . . . . . . . . . . . . . . 19,924 19,049 34,046
Non-performing assets (2) . . . . . . . . . . . . . . . . . . . 49,591 48,408 79,532
Non-performing assets to total assets . . . . . . . . . . . . . 1.34% 1.38% 2.17%
Loan loss reserves . . . . . . . . . . . . . . . . . . . . . . . $ 46,574 $ 48,681 $ 46,164
Loan loss reserves to total loans . . . . . . . . . . . . . . . 1.98% 2.10% 1.88%
Loan loss reserves to non-performing loans . . . . . . . . . . . 156.99 165.81 101.49
STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL RATIOS
Stockholders' equity (3) . . . . . . . . . . . . . . . . . . . $ 347,329 $ 287,341 $ 252,888
Shares outstanding (1) . . . . . . . . . . . . . . . . . . . . 19,683,981 18,258,158 18,057,833
Stockholders' equity per share (1) . . . . . . . . . . . . . . $ 17.65 $ 15.74 $ 14.00
Stockholders' equity to average assets . . . . . . . . . . . . 9.27% 8.01% 7.03%
Tangible capital . . . . . . . . . . . . . . . . . . . . . . . . 9.50 7.71 6.52
Core capital . . . . . . . . . . . . . . . . . . . . . . . . . . 9.50 7.71 6.52
Core capital to risk-weighted assets . . . . . . . . . . . . . . 15.33 11.47 9.30
Risk-based capital . . . . . . . . . . . . . . . . . . . . . . . 16.67 12.82 11.00
STOCK PRICE INFORMATION (1)
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20 5/8 $ 15 3/4 $ 10 7/8
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1/4 8 5/8 4 3/4
Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3/4 15 3/8 8 7/8
P/E Ratio (4) . . . . . . . . . . . . . . . . . . . . . . . . . 9.24x 7.67x 5.97x
(1) Restated for the three-for-two stock split on January 4, 1994. (2) Excluded from non-performing assets are troubled-debt
restructured loans, which totaled $15.6 million, $25.0 million and $26.0 million at December 31, 1993, 1992 and 1991, respectively.
(3) See Note R - Stockholders' Equity for a reconciliation of St.Paul Bancorp stockholders equity to regulatory capital. (4)
Based upon primary earnings per share.
1
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
FIVE YEAR SUMMARY
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS - AT OR FOR THE YEAR ENDED
DECEMBER 31
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
SUMMARY OF FINANCIAL CONDITION:
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 336,331 $ 311,567 $ 314,623 $ 168,411 $ 241,544
Marketable-debt securities 142,051 107,732 25,410 40,435 691
Mortgage-backed securities 733,649 643,941 717,354 689,066 643,870
Loans receivable-net of accumulated provision 2,304,319 2,270,198 2,415,540 2,404,760 2,320,371
Other assets 189,026 166,822 190,316 143,561 166,205
---------- ---------- ---------- ---------- ----------
Total Assets $3,705,376 $3,500,260 $3,663,243 $3,446,233 $3,372,681
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Liabilities and Stockholders' Equity:
Deposits $3,252,618 $2,985,124 $3,004,419 $2,665,733 $2,581,769
Borrowings 63,970 186,408 334,528 497,471 483,282
Other liabilities 41,459 41,387 59,232 41,744 68,594
Subordinated capital notes - - 12,176 11,951 14,745
Stockholder's equity 347,329 287,341 252,888 229,334 224,291
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $3,705,376 $3,500,260 $3,663,243 $3,446,233 $3,372,681
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS:
Interest income $ 256,937 $ 278,687 $ 321,291 $ 316,275 $ 302,308
Interest expense 132,982 165,844 222,487 227,661 221,239
---------- ---------- ---------- ---------- ----------
Net interest income 123,955 112,843 98,804 88,614 81,069
Provision for loan losses 10,750 10,625 11,100 35,652 21,656
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 113,205 102,218 87,704 52,962 59,413
Net gain on assets sold 2,150 3,024 2,680 473 1,589
Income from real estate operations 2,969 2,442 2,037 6,525 3,188
Other income 27,387 22,882 17,930 15,285 12,835
General and administrative expense 82,747 71,240 64,754 62,797 56,309
Loss on foreclosed real estate 2,516 1,316 1,898 2,266 4,631
Income taxes 19,061 20,325 16,507 3,252 5,450
---------- ---------- ---------- ---------- ----------
Income before extraordinary items 41,387 37,685 27,192 6,930 10,635
Extraordinary items, net of income taxes - - - 1,470 -
---------- ---------- ---------- ---------- ----------
Net income $ 41,387 $ 37,685 $ 27,192 $ 8,400 $ 10,635
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Earnings before extraordinary item per share: (1)
Primary $ 2.03 $ 2.00 $ 1.48 $ 0.38 $ 0.57
Fully diluted 2.03 1.98 1.48 0.38 0.57
---------- ---------- ---------- ---------- ----------
Earnings per share: (1)
Primary $ 2.03 $ 2.00 $ 1.48 $ 0.46 $ 0.57
Fully diluted 2.03 1.98 1.48 0.46 0.57
---------- ---------- ---------- ---------- ----------
SELECTED FINANCIAL AND OTHER DATA:
Stockholders' equity $ 347,329 $ 287,341 $ 252,888 $ 229,334 $ 224,291
Earning assets to interest bearing liabilities 1.07% 1.06% 1.06% 1.06% 1.05%
Weighted average rate on loans, MBS and investments 6.96 7.74 8.91 9.72 9.75
Weighted average cost of money 3.66 4.26 5.96 7.24 7.50
Interest rate spread 3.30 3.48 2.95 2.48 2.25
Return on average assets (2) 1.10 1.05 0.76 0.25 0.33
Average equity as a percentage of average assets (2) 8.64 7.57 6.78 6.80 6.76
Return on average stockholders' equity (net worth) (2) 12.77 13.88 11.15 3.66 4.82
Dividends per share (1) $ 0.27 $ 0.27 $ 0.27 $ 0.27 $ 0.25
Dividend payout ratio (3) 13.15% 13.35% 18.04% 58.01% 44.16%
Number of full-time equivalent employees 1,046 883 829 804 845
Number of office locations 50 40 37 34 33
</TABLE>
(1) Restated for the three-for-two stock split on January 4, 1994. (2) Average
balances for the year ended December 31, 1989 based on monthly balances. All
others based on daily balances. (3) Based upon primary earnings per share.
18
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, ("St.Paul Financial"), which primarily engages in single-family
real estate development in the Chicago metropolitan area.
The Bank is a consumer-oriented retail financial institution, operating
50 banking offices throughout the Chicago metropolitan area, including 15 "in
store" full-service offices located in OMNI grocery superstores. The in-store
banking offices provide the Bank access to an expanded retail customer base.
Through each of its banking offices, the Bank attracts retail deposits in the
neighborhoods and surrounding suburbs of metropolitan Chicago with high levels
of home ownership and favorable savings patterns. Deposit accounts in the Bank
are insured by the Federal Deposit Insurance Corporation ("FDIC").
Funds obtained from the retail banking facilities are invested in a
variety of loan products and investment securities. The Bank focuses its
current lending activities on the origination and purchase of mortgages 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. Prior
to 1990, the Bank also originated, on a nationwide basis (primarily in
California), loans secured by multi-family real estate and, to a lesser extent,
loans secured by commercial real estate. At December 31, 1993, $1.06 billion,
or 28.6% of total assets, were comprised of loans secured by multi-family
real-estate properties, of which $632.4 million, or 17.2% of total assets,
represented multi-family loans secured by real estate located in California.
Also, $73.0 million or 2.0% of the Company's total assets at December 31, 1993
included loans secured by commercial real estate, other than multi-family. The
Bank does not currently originate multi-family or commercial real estate loans,
except to facilitate the sale of real estate owned ("REO"). The Bank also
repurchases loans sold with recourse in certain circumstances. The Bank plans
to originate mortgage loans secured by 5-35 unit apartment buildings in the
Chicago area in 1994. See "NOTE U - FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET CREDIT RISK" and "CREDIT."
A variety of consumer loan products, including home equity loans,
secured lines of credit, and education, auto and credit card loans (1) are
offered through the retail banking offices. The Bank also invests in
mortgage-backed securities ("MBS"), government and government agency
securities 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 146,000 checking accounts, which generate significant fee income.
The Bank engages in mortgage banking activities and operates 174 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. Prior to June 30, 1993, the Bank also owned St.Paul Financial.
Effective June 30, 1993, St.Paul Financial was sold at its fair market value by
the Bank to its parent company, St.Paul Bancorp, in order to provide more
flexibility to St.Paul Financial.
By law, the Bank is substantially limited in its investment choices. In
general, the Bank is permitted to invest in loans secured by mortgages on real
estate, securities, and, to a lesser extent, consumer and commercial loans.
Presently, the Bank is primarily exposed to portfolio credit risks associated
with residential real estate, both
__________
(1) ALTHOUGH THE BANK DISPOSED OF ITS CREDIT CARD PORTFOLIO DURING 1993, A
CREDIT CARD PRODUCT IS STILL OFFERED BY THE BANK THROUGH AN AGENCY AGREEMENT
WITH ANOTHER LENDER.
19
<PAGE> 4
single-family and multi-family. Naturally, as real estate market values decline,
the risk of actual losses in the mortgage loan portfolio increases. See
"CREDIT" for additional discussion.
Management generally relies on deposits, loan repayments and borrowings
to finance the lending and investing activities of the Bank. Earnings of the
Bank are susceptible to interest rate risk to the extent that deposits and
borrowings reprice on a different basis and in different periods than 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 "INTEREST RATE RISK" for further discussion.
STATEMENT OF CONDITION
St.Paul Bancorp reported total assets of $3.7 billion at December 31,
1993 compared to $3.5 billion at December 31, 1992, an increase of $205.1
million or 5.86%. Generally, the growth in the Company s balance sheet during
the year was attributable to the acquisition of Elm Financial in February 1993.
See "ACQUISITION ACTIVITIES" for further details.
Cash and cash equivalents totaled $336.3 million at year end, compared
to $311.6 million at the end of 1992. See "LIQUIDITY" for further discussion.
Marketable-debt securities (consisting of U.S. government and government
agency securities at December 31, 1993 and 1992. See "NOTE B - CASH AND CASH
EQUIVALENTS" and "NOTE C - MARKETABLE-DEBT SECURITIES" for further detail.)
totaled $142.1 million at December 31, 1993 compared to $107.7 million at
December 31, 1992, an increase of $34.3 million. During 1993, $115.9 million of
marketable-debt securities were purchased, $55.9 million were acquired through
the Elm acquisition, and $137.5 million of securities matured. At December 31,
1993, 48.6% of the marketable-debt security portfolio had adjustable-interest
rate characteristics. The weighted average interest rate earned on the
marketable-debt security portfolio was 4.21% at December 31, 1993 compared to
4.35% at the end of the prior year.
MBS increased $89.7 million during 1993 to total $733.6 million at year
end. Activity in the MBS portfolio during 1993 included the purchase of $282.9
million of securities, the acquisition of $57.2 million of securities from Elm
Financial and principal repayments totaling $252.8 million. At December 31,
1993, 74.3% of the MBS had an adjustable interest rate (a portion of which had
initial fixed interest rates for periods ranging from one to five years)
compared to 50.7% at December 31, 1992. At December 31, 1993, the weighted
average rate earned on the MBS portfolio was 5.91% compared to 7.26% at December
31, 1992.
Loans receivable totaled $2.35 billion at December 31, 1993 compared to
$2.32 billion at December 31, 1992, an increase of $32.0 million or 1.38%.
Affecting loan receivable balances during 1993 were the origination and purchase
of $476.5 million of loans, the acquisition of $228.8 million of loans
receivable from Elm Financial, and principal repayments of $628.4 million. At
year end, 71.7% of the loan portfolio was comprised of adjustable-rate loans (a
portion of which have initial fixed interest rates for periods ranging from one
to five years) compared to 73.6% at December 31, 1992. The weighted average
interest rate earned on loans receivable was 7.88% at the end of the current
year, compared to 8.52% at December 31, 1992. See "RESULTS OF OPERATIONS -
COMPARISON OF YEARS ENDED DECEMBER 31, 1993 AND 1992 - INTEREST INCOME" for
discussion of floors on adjustable-rate loans.
The acquisition of Elm Financial also contributed $6.2 million of office
properties and equipment, $3.3 million of additional real estate held for
investment and $1.4 million of accrued interest receivable.
Deposits increased 9.0% or $267.5 million during 1993 to total $3.25
billion at year end. The growth in the deposit portfolio during the year was
attributable to the acquisition of $312.2 million of deposits from Elm
Financial, partly offset by $44.7 million of net withdrawals (including $17.2
million of withdrawals from accounts acquired from Elm Financial). At December
31, 1993, 54.1% of the deposit portfolio was comprised of certificates of
deposit ("CDs") compared to 58.5% at December 31, 1992.
The issuance of $34.5 million of subordinated debt by St.Paul Bancorp in
1993 represented the only significant new borrowing during the year, while
almost $158 million of debt was repaid.
Stockholders' equity increased $60.0 million or 20.9% during 1993. The
issuance of 1,292,313 of shares in connection with the acquisition of Elm
Financial and $41.4 million of net income recorded for the year generated
20
<PAGE> 5
most of the increase in stockholders' equity. Also during 1993, the
Company paid $5.1 million of dividends on its common stock compared to $4.8
million in 1992. See "CAPITAL" for further discussion.
See "LIQUIDITY" and "INTEREST RATE RISK" discussions following for
further details.
ACQUISITION ACTIVITIES
On February 23, 1993, the Company acquired Elm Financial Services, Inc.
("Elm Financial"), the holding company for Elmhurst Federal Savings Bank
("Elmhurst Federal"), an FDIC-insured savings bank, for approximately $49.2
million. The purchase price was comprised of cash payments totaling $26.7
million and 1,292,313 shares of Company stock (as adjusted for the three-for-two
stock split on January 4, 1994). At February 23, 1993, Elm Financial reported
total assets of $366.2 million, total deposits of $311.4 million, and
stockholders' equity of $47.6 million.
The acquisition of Elm Financial added eight full service offices to the
Bank's branch network and significantly expanded the Bank's presence in eastern
Du Page County, Illinois. The increased market exposure from Elmhurst Federal's
banking offices supports and enhances the Bank's deposit and residential lending
activities on a cost efficient basis. The acquired offices also are used to
originate loans and sell annuity products, insurance and discount brokerage
services.
See "NOTE Y - ACQUISITION OF ELM FINANCIAL" for further detail.
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 December 31, 1993 totaled $336.3 million,
slightly higher than cash and cash equivalents at December 31, 1992 of $311.6
million. Average cash and cash equivalents were $355.4 million during 1993,
relatively unchanged from average cash and cash equivalents during 1992 of
$348.5 million. In addition to providing liquidity for operations, a high level
of short-term marketable-debt securities has traditionally provided protection
against contracting margins during periods of rapidly rising interest rates.
In 1994, Management intends to reduce cash and cash equivalents in an
effort to enhance investment earnings. Although some extension in the average
duration of the liquidity portfolio is expected, the reduction in excess
liquidity will primarily result from increased loan originations and the
purchase of adjustable-rate or balloon MBS.
Management has targeted as its goal in 1994 the origination of $1.0
billion in residential mortgage loans. However, Management is prepared to
acquire MBS or whole loans if the goal cannot be obtained.
These originations and purchases are expected to add incremental
interest income by providing a higher yield than otherwise would be generated by
short-term marketable-debt securities. Subject to their periodic and lifetime
caps, adjustable-rate loans and MBS also provide significant interest rate risk
protection against rising market rates. Since interest rate floors are currently
in effect on $894.2 million of adjustable-rate loans, rate-sensitive assets may
not reprice as quickly as rate-sensitive liabilities, despite the current
positive one-year GAP of 16.79%. See "INTEREST RATE RISK" discussion following.
Sources of Funds. The major sources of funds during 1993 were $628.4 million of
principal repayments on loans receivable, $252.8 million of principal repayments
on MBS, $137.5 million of maturities in the marketable-debt securities portfolio
and proceeds from the sale of mortgage loans of $153.4 million. In comparison,
the major sources of funds during 1992 were $532.0 million of principal
repayments on loans receivable, $290.9 million of principal repayments on MBS,
proceeds from the sale of loans receivable totaling $212.5 million, and
marketable-debt security maturities of $82.4 million.
The low interest rate environment experienced during 1993 and 1992
spurred high levels of refinancing activity during both the current and prior
year, resulting in high levels of loan and MBS repayments. The high level of
refinancing activity also allowed the Company to originate a high volume of
mortgage loans during those same periods. Since the Company's policy is to sell
conforming, fixed-rate mortgage loans to the secondary market, the Company
executed an unusually high level of loan sales in both 1993 and 1992. Included
in the loan sales activity for both 1993 and 1992 were the sale of $25.2 million
and $50.0 million, respectively, of adjustable-rate loans (previously held for
investment) that borrowers converted to fixed interest rates.
During 1993, Management emphasized the origination of adjustable-rate
loans, which allowed the Company to
21
<PAGE> 6
retain a higher percentage of its loan originations for portfolio rather
than for sale in the secondary market. This contributed to the $48.4 million
reduction in mortgage loan sales in 1993 relative to 1992.
An increase in the level of marketable-debt securities held in the
investment portfolio corresponded with the increase in marketable-debt security
maturities during 1993 compared to 1992.
The Company issued $34.5 million of subordinated capital notes during
1993. See "HOLDING COMPANY LIQUIDITY" discussion on page 23 for further details.
At December 31, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under SFAS No. 115, Management will have greater
flexibilty in selling securities classified as available-for-sale. At December
31, 1993, $485.5 million of marketable-debt securities and MBS were classified
as available for sale. See "NOTE A - SIGNIFICANT ACCOUNTING POLICIES," "NOTE B -
CASH AND CASH EQUIVALENTS," "NOTE C - MARKETABLE-DEBT SECURITIES," and "NOTE D -
MORTGAGE-BACKED SECURITIES" for further detail.
Sources of funds and liquidity in future periods may be reduced by a
curtailment of mortgage loan refinancing activity associated with a rise in
market interest rates. However, looking forward into 1996 and beyond, the
balloon maturities of multi-family and commercial real estate loans may
significantly increase sources of funds and liquidity. See "Credit" for further
discussion of these balloon maturities.
See also "CONSOLIDATED STATEMENTS OF CASH FLOWS" for further details.
Uses of Funds. The major uses of funds in 1993 include loan originations and
purchases of $617.8 million, MBS purchases of $282.9 million, $115.9 million of
marketable-debt security purchases, and the repayment of $155.8 million of
borrowings. Also, $44.7 million was used to fund withdrawals from the deposit
portfolio during 1993. In comparison, the major uses of funds in 1992 included
$591.3 million of loan originations and purchases, $218.2 million for the
purchase of MBS, marketable-debt security purchases totaling $164.6 million,
and the repayment of $161.5 million of borrowings. Also, $19.3 million of funds
were used for net withdrawals from the deposit portfolio during 1992.
Despite the high level of loan originations in 1993 and 1992 (see
discussion above), the aggregate loan portfolio continued to shrink as repayment
activity outpaced originations. Liquidity generated from the declining loan
receivable portfolio was used during 1993 and 1992 to repay debt and acquire
securities that have high credit quality, low risk-based capital requirements,
favorable yields (including the adjustable-rate characteristics of many
investments and MBS), and are includable in the qualified thrift lender test.
Management anticipates that it will continue to rely on the acquisition of
adjustable-rate and balloon MBS in 1994 to supplement loan originations. The
level of new investment in these securities will depend upon demand for the
Bank's loan products and the extent that Management chooses to reduce
liquidity.
Liquidity generated by loan repayments in excess of new loan
originations allowed the Company to repay $92.3 million of FHLB advances, $20.0
million of floating rate notes and $43.5 million of other borrowings during
1993. In comparison, excess liquidity during 1992 was used to repay $57.1
million of FHLB advances, $12.4 million of subordinated capital notes, and $92.0
million of other borrowings.
Net deposit outflows were relatively low during both 1993 and 1992.
Certificates of deposit ("CDs") declined $124.5 million during 1993(2) compared
to a $240.6 million decline in 1992. Savings and checking accounts increased
$89.6 million during the current year(2) compared to a $221.3 million increase
during 1992. Management believes that the lack of consumer demand for CDs in
this low interest rate environment caused the decline in the CD portfolio and
the accumulation of funds in savings accounts. If interest rates begin to rise,
a portion of the savings account balances may be quickly withdrawn, which may
impact liquidity in future periods. Higher checking account balances during 1993
are primarily attributable to an increase in the number of checking account
relationships from 110,000 at December 31, 1992 to 146,000 at December 31, 1993.
See "CONSOLIDATED STATEMENTS OF CASH FLOWS" for further details.
- ------------
(2) EXCLUDING BALANCE ACQUIRED FROM ELM FINANCIAL.
22
<PAGE> 7
Holding Company Liquidity. At December 31, 1993, St.Paul Bancorp had $17.6
million of cash and cash equivalents and $989,000 of marketable-debt
securities. Most of St.Paul Bancorp's U.S. government agency securities were
used to collateralize borrowings for the Employee Stock Ownership Plan. See
"NOTE P - OTHER BORROWINGS" for further detail.
St.Paul Bancorp's sources of liquidity include dividends received from
its three subsidiaries (the Bank, Annuity Network, and St.Paul Financial (3)),
borrowings obtained in the securities market, and proceeds from the issuance of
Company stock. During 1993, St.Paul Bancorp received dividends from the Bank
and Annuity Network totalling $25.9 million (4) and $300,000, respectively, and
received $33.4 million of proceeds from the issuance of $34.5 million of
subordinated debt. The Company also received $1.0 million for the issuance of
134,513 shares of common stock under the stock option plan. See "NOTE S - STOCK
OPTION PLAN" for further details. Applicable rules and regulations of the OTS
impose limitations on capital distributions by the Bank to St.Paul Bancorp.
Currently, the Bank is treated as a "Tier 1 Institution" for purposes of paying
dividends. A Tier 1 Institution may make capital distributions during a
calendar year up to the greater of (i) 100% of net income to date during the
calendar year, plus the amount that would reduce by one-half its "surplus
capital ratio" (the excess capital over its fully phased-in requirement) at the
beginning of the calendar year, or (ii) 75% of its net income over the most
recent four-quarter period. Earnings and cash flows of Annuity Network
available for dividends to St.Paul Bancorp are affected by a revenue lease
sharing arrangement with St.Paul Service, Inc., an insurance brokerage
subsidiary of the Bank. This agreement was designed to compensate St.Paul
Service, Inc. for providing Annuity Network access to its customers.
Uses of liquidity for St.Paul Bancorp include the payment of dividends,
debt service for its subordinated debt, funds required for the operations of
its non-bank subsidiaries, the acquisition of St.Paul Financial and other
general corporate purposes. During 1993, St.Paul Bancorp paid $5.1 million of
dividends to shareholders and $2.6 million of interest on its subordinated
debt. The Company also used $16.4 million to acquire(5) and fund the
operations of St.Paul Financial. Beginning in 1994, St.Paul Bancorp will
increase its dividend payment per share from $0.27 per share to $0.30 per share
on an annual basis. This increase in the dividend will increase dividends paid
to shareholders by approximately $650,000 during 1994 compared to 1993. On
January 13, 1994, St.Paul Bancorp also announced its intention 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.
Dividends and other distributions on St.Paul Bancorp stock are subject
to restrictions agreed upon by the Company in connection with the issuance of
$34.5 million of subordinated notes in 1993. See "NOTE R - STOCKHOLDERS
EQUITY" and "NOTE X - PARENT COMPANY ONLY FINANCIAL INFORMATION" for further
detail.
Regulatory Liquidity Requirement. 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, securities of the United States
government, and specified state and 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. During 1993, the Bank held average
regulatory liquidity of $482.8 million which ranged between a low of $412.3
million and a high of $512.3 million during 1993. At December 31, 1993, the
Bank's regulatory liquidity of 14.1% or $460.7 million, exceeded the current
regulatory liquidity requirement of 5% by $296.9 million or 9.1%. Management
expects that the Bank's excess liquidity in 1994 will be significantly lower
than in 1993.
CAPITAL
Stockholders' equity of St.Paul Bancorp was $347.3 million at December 31, 1993
or 9.27% of average assets for the year ended December 31, 1993. In comparison,
stockholders' equity at December 31, 1992 was $287.3 million or 8.01% of
average assets for the year ended
- --------------
(3) CURRENTLY, ST.PAUL FINANCIAL REDEPLOTS ALL OF ITS CASH FLOW INTO ITS
OPERATIONS. THE COMPANY DOES NOT ANTICIPATE RECEIVING DIVIDENDS FROM ST.PAUL
FINANCIAL IN THE NEAR FUTURE. (4) DIVIDENDS RECEIVED FROM THE BANK DURING
1993 WERE USED TO ACQUIRE ELM FINANCIAL. (5) $9.2 MILLION OF THE $16.4
MILLION WAS PAID TO THE BANK FOR THE ACQUISITION OF ST.PAUL FINANCIAL.
23
<PAGE> 8
December 31, 1992. The growth in stockholders' equity in 1993 primarily
resulted from $41.4 million of net income, the issuance of 1,292,313 shares of
common stock to shareholders of Elm Financial, and $4.6 million of unrealized
gains on marketable-debt securities (net of taxes) recorded in connection with
the adoption of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." These increases were partly offset by the payment of $5.1
million of dividends to shareholders and a $2.2 million net increase in
borrowings by the Employee Stock Ownership Plan. See "CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY," "NOTE A - SIGNIFICANT ACCOUNTING POLICIES," "NOTE B -
CASH AND CASH EQUIVALENTS," "NOTE C - MARKETABLE-DEBT SECURITIES," "NOTE D -
MORTGAGE-BACKED SECURITIES," "NOTE R - STOCKHOLDERS' EQUITY," "NOTE T - EMPLOYEE
BENEFIT PLANS" AND "NOTE Y - ACQUISITION OF ELM FINANCIAL" for further detail.
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.
During 1993, the Bank continued to exceed the core, tangible, and
risk-based regulatory capital requirements by wide margins. See "NOTE R -
STOCKHOLDER'S EQUITY" for further details. 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.
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 December 31, 1993, its excess core capital would
have been $201.5 million versus $238.1 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 new regulation became effective on January 1, 1994.
At December 31, 1993, the Bank does not have "excess interest rate
risk" as defined in the OTS regulation and currently would not be subject to an
additional risk-based capital requirement. Had the Bank been subjected to a
higher risk-based capital requirement, its excess risk-based capital (which
totaled 8.68% or $195.9 million at December 31, 1993) 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. The proposed OTS regulations have not
yet been issued.
Capital requirements higher than the generally applicable minimum
requirement 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 December 31, 1993, the Bank is considered "well capitalized" under
the OTS' prompt corrective action reg-
24
<PAGE> 9
ulations based upon ratios of Tier 1 leverage capital, Tier 1 risk-based capital
and total risk-based capital of 9.50%, 15.33%, and 16.67%, respectively.
INTEREST RATE RISK
The Company's asset/liability program includes strategies that maximize
net interest income while managing the sensitivity of earnings to interest rate
fluctuations. The purpose of the asset/liability management plan is to promote
the following objectives:
> attain consistently strong net interest margins;
> preserve the capital of the Bank;
> match maturities and repricing characteristics of assets and liabilities
within a specified range;
> diversify sources and uses of funds; and
> respond effectively to the product needs of customers.
Applying a combination of interest-rate risk management techniques such
as simulation and GAP analysis, Management assesses the effects of changes in
interest rates upon net interest income and the market value of portfolio
equity. Management's ability to successfully manage interest rate risk is, in
part, reflected in the consistent growth of net interest income as presented in
the "FIVE YEAR SUMMARY" shown on page 18.
In order to prepare for various interest rate scenarios, Management
monitors interest rate risk on an ongoing basis through financial simulation
models. The internal financial simulations project that the Company s net
interest income should remain relatively stable in periods of either sharp
declines or sharp increases in market interest rates. While simulations are
useful interest rate risk tools, their results only represent forecasts and
consequently may not be indicative of actual financial performance in the
future.
"GAP" is the ratio of interest-rate sensitive assets to interest-rate
sensitive liabilities over a period, expressed as a percent of total assets.
The historical trend of the GAP at one, three and five years is presented
below. A positive GAP indicates that cumulative interest-rate sensitive assets
exceed cumulative interest-rate sensitive liabilities at the dates indicated,
and suggests that net interest income would increase if market rates increased.
A negative GAP would suggest the reverse effect. The following schedule
presents the ratio of cumulative GAP to total assets as of December 31 (6):
<TABLE>
1993 1992 1991 1990 1989
- ----------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
One year 16.79% 16.84% 12.4% 6.51% (0.55)%
Three years 10.94 4.06 2.02 8.50 7.77
Five years 10.63 5.68 1.83 7.03 1.92
----- ----- ----- ----- -----
</TABLE>
Generally, the Company's policy is to maintain a balanced GAP.
Management considers a range of plus or minus 15% to be a desirable one-year GAP
position. Theoretically, this GAP position will provide a consistent net
interest margin, while minimizing risks associated with changes in market
interest rates. Due to the relatively low level of market interest rates,
Management allowed the positive GAP position to exceed the desired range during
the past several years.
Additionally, interest rate floors are in effect on $894.2 million of
adjustable-rate 1-4 family and multi-family loans at December 31, 1993. Floors
establish a minimum rate for ARMs, even though the fully indexed rate on ARMs
may be lower. As a result, these loans will not reprice until the fully-indexed
ARM rate exceeds the existing floor rate. At December 31, 1993, the weighted
average difference between the fully-indexed rate and the loan floors was 172
basis points. Under GAP analysis, these loans are treated as if they are
repricing when contractually scheduled. Despite their treatment under GAP, rates
in these loans will not actually adjust until the underlying indices increase an
average of 172 basis points. The floors create an artificial fixed-rate loan for
a period of time and, consequently, overstate the positive GAP results unless
interest rates were to increase precipitously. See "RESULTS OF OPERATIONS -
COMPARISON OF YEARS ENDED DECEMBER 31, 1993 AND 1992-INTEREST INCOME." During
1993, the earnings of the Company benefitted from rate floors on most of its
ARMs; in the event that short-term interest rates increase, the yield on the ARM
portfolio will not increase until the fully-indexed ARM rates surpass existing
floors. See "CREDIT" for a discussion of the future balloon maturities of
multi-family and commercial real estate loans.
GAP analysis has other inherent problems. For example, despite a
positive one-year GAP position during 1993 and 1992, the net interest margin
improved significantly during those two years even though interest rates
declined. Theoretically, a declining interest rate environment should have
reduced the net interest margin. Also,
- -----------
(6) PRIOR TO 1993, OTS ASSUMPTIONS FOR PREPAYMENT AND WITHDRAWAL RATES WERE
USED. ASSUMPTIONS USED FOR 1993'S GAP WERE BASED UPON MANAGEMENT ESTIMATES.
25
<PAGE> 10
an institution's assets could theoretically reprice on the first day of
the year and the institution's liabilities could reprice on the last day of the
year but be perfectly matched under GAP. In this example, the institution
actually would be exposed to interest rate risk the entire year because of the
repricing differences. Additionally, in accordance with SFAS No.115, the
contractual maturity of available-for-sale securities may not be indicative of
the securities repricing since these securities can be sold prior to maturity.
As a result, the OTS has been searching for an interest rate risk
management technique that goes beyond GAP
KEY CREDIT STATISTICS
At or For the Year Ended December 31 - Dollars in thousands
<TABLE>
<CAPTION>
1993 1992 1991
--------------------- ------------------- ---------------------
LOAN PORTFOLIO BY PRODUCT
<S> <C> <C> <C> <C> <C> <C>
Real Estate Dependent Loans:
1-4 family ......................................... $ 1,187,210 50.5% $ 1,085,679 46.7% $ 1,154,058 46.7%
5-35 family ........................................ 38,460 1.6 46,771 2.0 58,680 2.4
Other multi-family ................................. 1,026,007 43.6 1,097,281 47.1 1,167,888 47.2
Commercial real estate ............................. 73,094 3.1 66,812 2.9 65,134 2.6
Land ............................................... 10,307 0.4 3,126 0.1 2,304 0.1
----------- ----- ----------- ----- ----------- -----
Total real estate dependent loans .................. 2,335,078 99.2 2,299,669 98.8 2,448,064 99.0
Consumer loans ..................................... 19,572 0.8 27,517 1.2 24,535 1.0
----------- ----- ----------- ----- ----------- -----
Total loans ........................................ $ 2,354,650 100.0% $ 2,327,186 100.0% $ 2,472,599 100.0%
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
REAL ESTATE DEPENDENT LOANS BY STATE
Illinois ........................................... $ 1,069,735 45.8% $ 939,293 40.8% $ 991,597 40.5%
California ......................................... 748,445 32.1 847,966 36.9 967,453 39.5
Other (7) .......................................... 516,898 22.1 512,410 22.3 489,014 20.0
----------- ----- ----------- ----- ----------- -----
Total .............................................. $ 2,335,078 100.0% $ 2,299,669 100.0% $ 2,448,064 100.0%
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
NON-PERFORMING ASSETS
Real Estate Dependent Loans:
1-4 family ....................................... $ 11,202 22.6% $ 12,759 26.4% $ 8,943 11.2%
5-35 family ...................................... 1,970 4.0 1,994 4.1 - -
Other multi-family ............................... 10,938 22.1 13,565 28.0 33,712 42.4
Commercial real estate ........................... 2,597 5.2 - - 1,582 2.0
Land ............................................. 2,406 4.9 - - - -
----------- ----- ----------- ----- ----------- -----
Subtotal ......................................... 29,113 58.8 28,318 58.5 44,237 55.6
Consumer loans ..................................... 555 1.1 1,041 2.2 1,249 1.6
Real Estate Owned:
1-4 family ....................................... $ 4,925 9.9% $ 2,776 5.7% $ 3,185 4.0%
5-35 family ...................................... - - 750 1.5 750 0.9
Other multi-family ............................... 14,998 30.2 14,133 29.2 28,428 35.8
Commercial real estate ........................... - - 1,390 2.9 1,683 2.1
Land ............................................. - - - - - -
----------- ----- ----------- ----- ----------- -----
Subtotal ......................................... 19,923 40.1 19,049 39.3 34,046 42.8
----------- ----- ----------- ----- ----------- -----
Total non-performing assets ........................ $ 49,591 100.0% $ 48,408 100.0% $79,532 100.0%
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
</TABLE>
<TABLE>
<CAPTION>
KEY CREDIT RATIOS 1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Net charge-offs to average loans receivable and foreclosed real estate ............................... 0.69% 0.41% 0.46%
Net California charge-offs to average California loans receivable and foreclosed real estate ......... 2.01 0.32 0.26
Loan loss reserve to total loans ..................................................................... 1.98 2.10 1.88
Loan loss reserve to non-performing loans ............................................................ 156.99 165.81 101.49
Non-performing assets to total assets ................................................................ 1.34 1.38 2.17
General valuation allowance to non-performing assets ................................................. 85.41 97.30 58.65
General valuation allowance to non-performing assets, plus TDRs ...................................... 64.92 64.13 44.21
</TABLE>
- --------------------
(7) NO CONCENTRATION IN ANY OTHER STATE EXCEEDED 5% OF THE LOAN PORTFOLIO. SEE
"NOTE W - CONCENTRATION OF CREDIT RISK" FOR FURTHER DETAILS.
26
<PAGE> 11
analysis. The OTS has developed a Net Portfolio Value analysis which
involves simulating the market value of an institution's interest-bearing assets
and liabilities under various rate shocks. The OTS has developed a complex model
to compute each institution's Net Portfolio Value under the prescribed rate
shocks. The regulatory agency also requires that each thrift use its own net
portfolio value model and monitor its market value position on a quarterly
basis. The Bank has been in full compliance with this regulation and has been
monitoring Net Portfolio Value for the past several years. See "CAPITAL" for
further discussion.
CREDIT
At December 31, 1993, the loans receivable portfolio was primarily
comprised of mortgages on 1-4 family residences and multi-family dwellings.
The loan portfolio also included, but to a much lesser extent, multi-family
loans secured by 5-35 unit apartment buildings, commercial real estate loans,
land loans and consumer loans. For 1994, Management hopes to produce a total of
$1.0 billion of new loans. See "LIQUIDITY" for further detail.
During 1993, Management continued to concentrate on 1-4 family mortgage
loan originations, while reducing multi-family loan balances. Origination of
1-4 family loans totaled $535.6 million during the year, while $228.2 million of
1-4 family loans were acquired from Elm Financial. Currently, the Company does
not originate or purchase multi-family or commercial real estate loans secured
by collateral located outside the state of Illinois, except to facilitate the
sale of REO, or in connection with the repurchase of loans sold with recourse.
The multi-family loan portfolio was reduced by $79.6 million during 1993. Since
the Company does not currently originate new multi-family loans outside of
Illinois or commercial real estate loans, principal payments should continue to
reduce the balances in these portfolios. When these loans mature, the mortgages
will either be repaid or, depending upon the economic advantages to the Company
at that time, be refinanced or foreclosed. In evaluating whether to refinance an
existing multi-family loan, Management will consider the current economic
climate, portfolio risks, prevailing real estate market conditions, and
underwriting standards. Approximately 75% of the multi-family and commercial
loan portfolio matures in years 1996 through 1998.
In addition to its emphasis on originating 1-4 family real estate loans
during 1994, Management also plans to originate loans secured by 5-35 unit
apartment buildings in the Chicago metropolitan area. Generally, loans
originated through this new apartment loan origination program will be first
mortgage loans, will have a loan to value ratio no higher than 80% and a debt
cover ratio of at least 120%, will be personally guaranteed by the borrowers,
and will not exceed $2.0 million. Independent appraisals will be obtained in
accordance with federal regulations or as deemed warranted by Management. The
Loan Servicing Department of the Bank will conduct annual inspections of the
real estate serving as collateral and an annual analysis of the borrowers'
operating statements will be performed. Management's goal for 1994 originations
under this new real estate lending program is approximately $50 million and
Management intends to retain these assets in its loan portfolio.
To supplement its direct 1-4 family loan production, the Bank continued
to expand its Illinois correspondent business as well as its out-of-state
correspondent lending during 1993. The out-of-state correspondents are active in
states near Illinois, including Wisconsin, Indiana, Michigan and Ohio. At
December 31, 1993, $300.9 million of loans held in the loan portfolio were
originated through correspondents, of which $203.1 million were secured by real
estate located in Illinois. Of the $97.8 million of loans secured by real estate
outside of Illinois, the majority (or 70.0%) were secured by real estate located
in the state of Wisconsin. Management uses the established underwriting
standards of the Bank to originate correspondent loans and utilizes its credit
review function to monitor the credit quality of these loans.
Most of the correspondent loans were originated with the intent to hold
for investment. During 1993, 92.9% of loans originated through correspondents
had an adjustable-interest rate (although some of the adjustable-rate products
may have an initial fixed-rate term from one to five years). A significant
percent of the loans originated through correspondents were in excess of
$200,000 and were considered "non-conforming" to government sponsored agencies
(i.e., FNMA and FHLMC). Management believes that these non-conforming loans
present a higher degree of risk than the conforming 1-4 family residential loan
portfolio, because a larger loan could become more
27
<PAGE> 12
costly to liquidate upon foreclosure, depending upon the depth of the
particular real estate market.
The Bank has purchased 1-4 family ARM mortgage loans when either the
demand for primary adjustable-rate mortgage products is low or when attractively
priced, adjustable-rate products are available in the secondary market.
Occasionally, the loans acquired through wholesale transactions were originated
in real estate markets other than the Chicago metropolitan area. Loan purchases
have been infrequent in recent years. Purchased loans held in the loan portfolio
at December 31, 1993, totaled $188.6 million, of which $57.5 million were fully
serviced by Bank personnel. In comparison, $259.2 million of purchased loans
were held in the loan portfolio at December 31, 1992, of which $86.4 million
were fully serviced by Bank personnel.
In addition to originating loans to be held to maturity, the Company
participates in secondary market activities by securitizing fixed-rate whole
loans with FNMA and FHLMC and selling the MBS/participation certificate to
various institutional investors. This practice enables the Company to satisfy
the demand for such loans in its local communities, to meet asset and liability
objectives of Management, and to develop a source of fee income through loan
servicing. In prior years, some of the loan sales were enhanced through recourse
provisions. At December 31, 1993, the Company serviced $138.6 million of
multi-family and commercial real estate loans and $76.2 million of 1-4 family
loans that were sold subject to recourse provisions. All loans sold with
recourse are evaluated for credit risk on the same basis as if the loans were
held in the loan portfolio. See "NOTE U -- FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET CREDIT RISK" for further details.
Real estate market values are specific to local real estate markets and
are based on the economic climate and the forces of supply and demand for
property. As changes in real estate markets occur, the risk of actual losses in
the loan portfolio will change. At December 31, 1993, the largest concentration
of collateral supporting 1-4 family loans was located in Illinois, while the
largest concentrations of collateral supporting multi-family real estate loans
were located in California (57.7%), Washington State (8.3%), and Illinois
(7.9%). See "NOTE W - CONCENTRATION OF CREDIT RISK" for further detail. The Bank
sustained only minimal losses as a result of the earthquake in Southern
California on January 17, 1994. See "NOTE Z - SUBSEQUENT EVENTS" for further
detail.
California contains many distinct real estate markets. Changing
demographics, the defense industry restructuring, high unemployment and other
weaknesses in the California economy have adversely influenced, to varying
degrees, recent valuations of real estate throughout California. To date, the
southern California loan portfolio has been adversely impacted to a far greater
extent than the northern California portfolio.
The Company recorded $17.2 million in net charge-offs on loans and REO
during 1993, compared to $9.8 million during 1992 and $11.4 million during 1991.
Of the $17.2 million of charge-offs in 1993, $1.7 million represented specific
reserves established prior to 1993. Net charge-offs to average loans receivable
and foreclosed real estate (8) totaled 0.69% during the current year,
substantially higher than the ratios for 1992 and 1991 of 0.41% and 0.46%,
respectively. Included in the 1993 charge-offs and charge-off ratio were $14.2
million of losses from California loans. The continued economic slump in
California adversely affected the level of net charge-offs and the charge-off
ratio in the current year.
In general, the California real estate markets where the loan portfolio
has been the most adversely affected by the weak economy encompass Riverside and
San Bernardino counties (the "Inland Empire"). In the aggregate, the remaining
multi-family real estate loan exposure in these markets totals $25.9 million and
represents approximately 0.7% of total assets. Most of the California
charge-offs in 1993 related to loans secured by real estate located in the
Inland Empire. Management believes that the significant deterioration of the
assets located in the Inland Empire has been addressed through charge-offs,
specific valuation allowances, and foreclosures during 1993.
The Company also recognized losses on loans in the San Fernando Valley
region related to recent declines in real estate values in that market; and
Management believes that this market could still be vulnerable to further
economic declines. Multi-family real estate loans secured by
___________
(8) $6.1 MILLION OR ONE-THIRD OF CHARGE-OFFS RECORDED DURING 1993 RELATED TO
ASSETS THAT WERE PREVIOUSLY SOLD BUT WERE REPURCHASED IN CONNECTION WITH
RECOURSE PROVISIONS.
28
<PAGE> 13
assets in the San Fernando Valley totaled only $17.7 million or 0.5% of
total assets at December 31, 1993. All of the loans in this market are
classified; however, the Company received a $475,000 principal repayment in
1994 on an $8 million loan secured by collateral located in this market.
Management continues to monitor all of its California markets closely
and, although market conditions can change, Management believes it has provided
adequate reserves for the inherent risks in the portfolio at this time. The
Bank's experience in California will be affected by the timing of the economic
recovery in the state. Many economists have indicated that a full recovery in
California is likely to occur in late 1994 or early 1995. Management does not
believe it is feasible to predict which regions will recover earliest or to know
the pace and timing of the real estate recovery there. Though Management
believes that reserves are adequate, Management expects to recognize additional
charge-offs on California loans until that economy recovers.
Non-performing assets (9) totaled $49.6 million at December 31, 1993
compared to $48.4 million at December 31, 1992. Non-performing assets include
both non-performing loans and real estate owned ("REO"). See "NOTE A -
SIGNIFICANT ACCOUNTING POLICIES" for a description of non-performing loans.
See "NOTE E - LOANS RECEIVABLE" and "NOTE W - CONCENTRATION OF CREDIT RISK"
for further details.
Non-performing loans totaled $29.7 million at December 31, 1993
compared to $29.4 million at December 31, 1992. Non-performing multi-family and
commercial real estate loans totaled $17.9 million at the end of the current
year compared to $15.6 million at the end of the prior year. Contributing to
the slight increase in multi-family and commercial real estate loan
delinquencies during the year was the net effect of $49.2 million of new
delinquencies, $25.5 million of foreclosures (including in-substance
foreclosures), payoffs or other payments to cure $14.6 million of delinquencies
and $6.2 million of charge-offs. $7.5 million of non-performing loans were
secured by real-estate located in California at December 31, 1993, compared to
$13.6 million at December 31, 1992.
The accumulated provision for loan losses at December 31, 1993 was $46.6
million compared to $48.7 million at December 31, 1992, a decrease of $2.1
million. See "NOTE F - ACCUMULATED PROVISION FOR LOAN LOSSES" 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 current loss provision after evaluating the
results of the loan loss reserve methodology. The Reserve Committee carefully
evaluates the various risk components which are inherent in each of the
portfolios, including off-balance sheet items. 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 (10), 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 1993 maintains the accumulated
provision for loan losses at levels considered prudent by the Reserve Committee.
The level of provision recorded during the current year was significantly
affected by the level of charge-offs in the Inland Empire, as well as the
remaining uncertainties surrounding the anticipated recovery of the California
economy. Based on analysis of available information, the Reserve Committee
believes that the loan loss reserve methodology results in accumulated
provisions for loan losses which are adequate in view of the risks inherent in
the loan portfolio. The federal regulators have the authority to order the Bank
to establish additional reserves if they disagree with the Reserve Committee's
assessment of the adequacy of the accumulated provision for loan losses.
During 1993, Management adjusted its loan loss methodology to conform to
the OTS Regulatory Bulletin
- -------------------
(9) EXCLUDED FROM NON-PERFORMING ASSETS ARE TROUBLED-DEBT RESTRUCTURINGS
PERFORMING IN ACCORDANCE WITH THE RESTRUCTURED MORTGAGE NOTES, WHICH TOTALED
$15.6 MILLION AT DECEMBER 31, 1993 AND $25.0 MILLION AT DECEMBER 31, 1992.
(10) 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.
SEE "INTEREST RATE RISK" FOR FURTHER DETAIL.
29
<PAGE> 14
("RB") No. 31, "Classification of Assets." This bulletin represents
examiner guidance for classifying and valuing impaired loans. Generally, the
loan loss reserve methodology already conformed with the guidance established
under the bulletin.
In May 1993, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." 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. Management plans to adopt the new rules beginning
in 1994. Because the Company currently carries those loans that would be
considered "impaired" under SFAS No. 114 at the fair value of the underlying
collateral, the effect of the adoption of the new rules will not have an adverse
impact on the results of operation. Upon adoption of SFAS No. 114, the Bank will
no longer account for REO in-substance in accordance with Financial Reporting
Release No. 28. Instead, loans will be classified as REO when the Bank receives
physical possession of the debtor's assets regardless of whether formal
foreclosure proceedings take place.
Other Real Estate Owned ("REO"). REO totaled $19.9 million at the end of
1993 compared to $19.0 million at the end of the prior year. At December 31,
1993, $9.0 million of REO was located in California compared to $4.2 million at
December 31, 1992. $15.0 million of the REO balances at December 31, 1993 were
comprised of multi-family and commercial real estate loans while $16.3 million
of REO was comprised of multi-family and commercial real estate loans at the end
of the prior year. During 1993, the Company foreclosed on $37.7 million of loans
receivable and posted charge-offs and valuation allowances against multi-family
and commercial REO totaling $3.0 million. The Company successfully reduced REO
balances through the sale of 11 properties totaling $31.8 million during 1993.
In connection with these sales in 1993, the Company provided $26.5 million of
loans. These financings were provided at market interest rates and generally
included at least a 20% cash down payment. See "NOTE W - CONCENTRATION OF CREDIT
RISK" for further details.
The accumulated provision for real estate losses totaled $819,000 at
December 31, 1993 compared to $2.4 million at December 31, 1992. See "NOTE I -
FORECLOSED REAL ESTATE" for further detail. 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.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED
DECEMBER 31, 1993 AND 1992.
General. Net income during 1993 totaled $41.4 million or $2.03 per share
compared to $37.7 million or $2.00 per share recorded in 1992. The benefit
provided by an $11.1 million improvement in net interest income and higher other
income of $4.2 million was partly offset by an $11.5 million increase in general
and administrative ("G&A") expenses and a $1.2 million increase in foreclosed
real estate losses. A decline in the effective income tax rate from 35.0% in
1992 to 31.5% in 1993 also contributed to the higher level of net income in
1993.
The $11.1 million improvement in net interest income was produced by a
$32.9 million reduction in interest expense, partly offset by a $21.8 million
decline in interest income. The higher level of net interest income corresponded
with an expansion of the net interest margin ("NIM") from 3.27% in 1992 to 3.46%
in 1993. The growth in the NIM is not surprising since the interest rate spreads
reported in 1993 were among the highest spreads ever reported by the Company.
See discussion of interest rate floors below. The most significant factors that
contributed to the decline in interest expense during the year
30
<PAGE> 15
were a drop in deposit rates from 4.10% at December 31, 1992 to 3.56% at
December 31, 1993 and the "parking" of funds by consumers in low-cost regular
savings accounts during this low interest rate environment. On the asset side,
most of the reduction in interest income was associated with a 64-basis point
reduction in loan rates and a 134-basis point reduction in MBS rates. These
declines were caused by both the origination and purchases of assets at rates
lower than the portfolio average, the repayment of relatively high rate loans
and MBS, and downward repricing of adjustable-rate assets held in portfolio. The
Company's ability to sustain the current level of net interest income in future
periods is largely dependent upon the maintenance of the interest rate spread,
the relative size and interest rate repricing characteristics of interest
earning assets compared to interest bearing liabilities, and asset quality.
The Company's interest rate spread was 3.30% at December 31, 1993, 18
basis points lower than the interest rate spread at December 31, 1992 of 3.48%.
Many forces influence the magnitude of the interest rate spread, most notably:
interest rate floors in effect on adjustable-rate loans; the Company'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 Company's asset/liability
management actions; and market interest rates generally. As higher interest rate
loans continue to be prepaid in this low interest rate environment, or if there
is a moderate increase in market interest rates such that loans at their floors
do not reprice, the Company faces the possibility of a continued contraction in
its interest rate spread.
Interest Income. Interest income totaled $256.9 million in 1993 compared
to $278.7 million during the prior year, a decline of $21.8 million. Most of
the reduction in income was caused by a $14.8 million decline in interest income
on loans receivable and an $8.2 million decrease in interest income from MBS,
although lower interest income earned on investments contributed $1.2 million to
the decline.
Lower interest income on loans receivable of $14.8 million resulted from
a $19.6 million decline associated with lower yields, partly offset by a $4.8
million increase produced by higher loans receivable balances. The yield on the
loan portfolio declined 80 basis points from 8.87% during 1992 to 8.07% in the
current year. A large portion of the decline in loan yield was associated with
downward repricing of adjustable-rate loans and, to a lesser extent, the
reinvestment of proceeds from the repayment of relatively high interest rate
loans into lower yielding loans receivable.
Although the yield on loans receivable was adversely affected by
downward repricing on adjustable-rate loans, the yield on loans receivable would
have been lower if not for interest rate floors in effect on most of the
adjustable-rate mortgages held in portfolio. Approximately 61-basis points of
the 8.07% loan yield, or approximately $15.0 million of interest income earned
during the year, was attributable to interest rate floors on loans receivable.
At December 31, 1993, approximately $894.2 million of 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
points lower.
Loans receivable averaged $2.46 billion during the current year compared
to $2.40 billion in 1992, an increase of $55.3 million. The acquisition of
approximately $228.8 million of loans from Elm Financial, partly offset by loan
repayments in excess of loans originated for portfolio, produced the growth in
average loans receivable.
Interest income earned on MBS declined $8.2 million during 1993
primarily as a result of a 132-basis point decline in yield. The yield on MBS
totaled 7.68% during 1992 compared to only 6.36% during 1993. Consistent with
the Company's experience with loans receivable, the decline in yield resulted
from downward repricing of adjustable-rate securities held in portfolio and, to
a lesser extent, the reinvestment of principal repayments from relatively
high-rate MBS into lower-yielding MBS.
MBS balances averaged $664.8 million during 1993, up slightly from
average balances in 1992 of $657.3 million. The increase in average balances
associated with the acquisition of $57.2 million of MBS from Elm Financial and
1993 MBS purchases was mostly offset by principal repayments. The small increase
in average MBS balances produced an additional $568,000 of income in the current
year.
The increase in interest income from investments was primarily generated
by a $3.1 million increase in income
31
<PAGE> 16
from marketable-debt securities, partly offset by lower income generated
by cash equivalents. Liquidity provided by loan repayments in excess of
origination were reinvested in marketable-debt securities, causing interest
income from marketable-debt securities to increase in 1993. Lower short-term
market interest rates and, to a lesser extent, lower cash equivalent balances
caused the reduction in interest income from cash and cash equivalents. See
"LIQUIDITY" for a discussion of Management's 1994 investment plans for cash and
cash equivalents and marketable-debt securities.
Interest Expense. Interest expense totaled $133.0 million during 1993
compared to $165.8 million during the prior year, a decline of $32.9 million or
19.8%. Approximately two-thirds of the lower interest expense was associated
with lower expense on deposits, and the remaining decline was associated with
lower interest expense on borrowings.
The $23.0 million reduction in interest expense on deposits was produced
by a $33.6 million decline associated with lower deposit rates, partly offset by
a $10.6 million increase associated with higher average deposit balances. The
average rate paid on deposits dropped 106 basis points during the year from
4.86% for 1992 compared to 3.80% for 1993. Lower short-term market interest
rates allowed Management to reduce the rate paid on all of its deposit products.
The average rate also benefits, but to a much lesser extent, from the change in
the composition of deposits away from CDs to lower cost savings and checking
accounts. Deposit balances averaged $3.22 billion during the current year,
compared to $2.99 billion in 1992. Most of the increase in average balances is
attributable to the acquisiton of approximately $312.2 million of deposits from
Elm Financial in February 1993.
Most of the reduction in interest expense on borrowings was
associated with the reduction in average borrowing balances of $123.3 million.
Excess liquidity provided by loan repayments in excess of originations in 1993
allowed Management to reduce its reliance on borrowed funds to support
operations. A 91-basis point reduction in short-term borrowing rates, from 7.65%
during 1992 to 6.74% in 1993 also produced a $1.2 million decline in interest
expense.
Provision for Loan Losses. The Company recorded a provision for loan
losses of $10.8 million during 1993, relatively unchanged from the provision
recorded during the prior year. See "CREDIT" for further discussion of loss
provisions and the adequacy of the accumulated provision for loan losses. In May
1993, SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" was
issued. See "CREDIT" and "NOTE A - SIGNIFICANT ACCOUNTING POLICIES" for further
discussion of the adoption of SFAS No. 114.
Other Income. Other income totaled $32.5 million in 1993 compared to
$28.3 million in 1992, an increase of $4.2 million or 14.7%. The most
significant improvement in other income in 1993 occurred in other fee income
(including checking and ATM fees), which increased $4.5 million or 44.2%.
Increases in both the number of transactions and fees charged per transaction
contributed to the improvement. Higher discount brokerage commissions,
associated with higher trading volumes and the expansion of Investment Network
into all of the Bank's branches in 1992, and interest income received on a tax
refund produced most of the remaining increase in other income.
Net gains on asset sales totaled $2.1 million during 1993 compared to
$3.0 million during 1992. Approximately two-thirds of the lower gains was
associated with a reduction in the sale of adjustable-rate loans (previously
held by the Company for investment) that converted to a fixed interest rate. The
remaining decline in gains is primarily associated with lower originations of
fixed-rate loans that are sold in the secondary market. Effective December 31,
1993, the Company adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," and $485.5 million of securities were classified as
available-for-sale. Gains and losses on assets sold may be impacted in future
periods as the available-for-sale portfolio is actively managed. At December 31,
1993, the Company had $7.4 million (or $4.6 million on an after-tax basis) of
unrealized gains on securities classified as available for sale. See "NOTE A -
SIGNIFICANT ACCOUNTING POLICIES," "NOTE B - CASH AND CASH EQUIVALENTS,"
"NOTE C - MARKETABLE-DEBT SECURITIES," and "NOTE D - MORTGAGE-BACKED
SECURITIES" for further detail.
The low interest rate environment experienced during 1993 and the recent
stock market performance encouraged retail investors to pursue alternatives to
traditional investments, which produced most of the growth in discount brokerage
commissions. Demand for discount
32
<PAGE> 17
brokerage services in future periods may change in response to
interest rate movements, performance of the stock market and consumer
preferences.
Beginning in 1994, the Company discontinued its trading account
activities. Revenues generated by the trading account in 1993 were immaterial.
Under SFAS No. 115, MBS acquired through mortgage banking operations will be
held by the Bank as trading account assets. Since the Bank's policy generally is
to dispose of these securities shortly after securitization, under forward sell
commitments, Management does not anticipate recording significant trading
account gains or losses on these assets.
General & Administrative Expenses. General & Administrative ("G&A")
expenses increased $11.5 million or 16.2% during 1993. Most of the increase in
costs during the current year was associated with the acquisition of eight
branch offices from Elm Financial, the opening of two additional branches, the
installation of 25 ATMs during 1993, additional costs associated with OMNI
facilities opened during 1992, and a 36,000 increase in the number of checking
accounts serviced from 110,000 at December 31, 1992 to 146,000 at December 31,
1993. Additional compensation and benefit costs were also incurred in 1993 as a
result of expanded hours and services provided by other branches and support
departments of the Bank.
The growth in G&A expenses experienced in 1993 and 1992 will likely
continue into 1994. Since the acquisition of Elm Financial occurred on February
23, 1993, only about ten months of expenses for the newly acquired branches were
reflected in operations in 1993. Additionally, the assumption of an obligation
to service additional ATMs during 1993 should cause ATM servicing costs
(including compensation, benefits, and occupancy, equipment and other office
expense) to increase in 1994. However, 1994's operations should benefit by close
to $1.0 million from lower premiums on FDIC insurance in 1994 compared to
1993.
The FASB has issued several accounting standards in recent years,
primarily related to recognition of expense for compensation and benefits. SFAS
No. 106, "Employers' Accounting for Post-Retirement Benefits Other Than
Pensions," was adopted on a prospective basis during 1993. This statement
requires that the projected future cost of providing post-retirement benefits,
such as health care and life insurance, be recognized as an expense as employees
render service, instead of when the benefits are paid. The impact of the
adoption of this standard on G&A expenses in 1993 was $125,000 and is expected
to be even lower in future periods. SFAS No. 112, "Employers' Accounting for
Post-Employment Benefits," was issued in November 1992. This statement requires
that the projected future cost of providing post-employment benefits (other than
retirements), such as medical insurance, be recognized as an expense as
employees render service, instead of when the benefits are paid. Management
estimates that the adoption of SFAS No. 112 will have a minimal impact on G&A
expenses and expects to apply the new rules on a prospective basis beginning in
the first quarter of 1994.
In addition to accounting standards issued by the FASB, the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
93-6, "Employers' Accounting for Employee Stock Ownership Plans," in November
1993. Under this accounting guidance, compensation expense is charged for the
fair value of shares released to employee accounts in the period in which the
shares are committed to be released. Management estimates that this SOP will
have a minimal impact on G&A expenses and expects to apply the new rules on a
prospective basis beginning in the first quarter of 1994.
Loss on Foreclosed Real Estate. The Company recorded a loss on
foreclosed real estate of $2.5 million during 1993 compared to $1.3 million
during 1992. Provisions for foreclosed real estate losses were relatively level
between the two periods. Generally, the higher loss in 1993 resulted from lower
gains on the sale of real estate. See "CREDIT" and "NOTE I - FORECLOSED REAL
ESTATE" for further details.
Income Taxes. Despite higher pre-tax earnings of $2.4 million and a 1%
increase in the federal statutory rate in 1993, income taxes declined by $1.3
million. The recognition of $1.1 million of tax refunds and an increase in the
statutory rates used to value deferred tax assets allowed the effective tax rate
to decline from 35.0% in 1992 to 31.5% in 1993. The Company anticipates that its
effective tax rate will more closely approximate the blended statutory federal
and state rates in future periods.
33
<PAGE> 18
RATE/VOLUME ANALYSIS (11)
- --------------------------------------------------------------------------------
YEAR ENDING DECEMBER 31 - DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
1993 VS 1992 1992 VS 1991
INCREASE/(DECREASE) DUE TO INCREASE/(DECREASE) DUE TO
TOTAL TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
---------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN INTEREST INCOME:
Loans receivable ............................ $ 4,819 $ (19,600) $ (14,781) $ (6,228) $ (21,207) $ (27,435)
Mortgage-backed securities .................. 568 (8,752) (8,184) (7,009) (6,921) (13,930)
Marketable-debt securities .................. 3,143 (27) 3,116 2,014 (1,079) 935
Trading accounts ............................ 58 (19) 39 (41) (107) (148)
Federal funds ............................... 578 (145) 433 (922) (918) (1,840)
Other short-term investments ................ (939) (1,434) (2,373) 4,501 (4,687) (186)
----------- ----------
Total interest income .................... (21,750) (42,604)
CHANGE IN INTEREST EXPENSE:
Deposits .................................... 10,623 (33,583) (22,960) 7,907 (49,722) (41,815)
Short-term borrowings ....................... (5,313) (1,218) (6,531) (4,613) (503) (5,116)
Long-term borrowings ........................ (3,656) 285 (3,371) (7,916) (1,796) (9,712)
----------- ----------
Total interest expense .................... (32,862) (56,643)
----------- ----------
NET CHANGE IN NET INTEREST INCOME
BEFORE PROVISION FOR LOAN LOSSES ............ $ 11,112 $ 14,039
----------- ----------
----------- ----------
</TABLE>
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED
DECEMBER 31, 1992 AND 1991.
General. Net income was $37.7 million during 1992 compared to $27.2 million
during 1991, a $10.5 million or 38.6% improvement. An expansion in net interest
income of $14.0 million and other income of $5.7 million contributed to the
improvement. These benefits were partly offset by higher general and
administrative expenses of $6.5 million and higher income taxes of $3.8 million.
Lower interest income of $42.6 million was more than offset by a $56.6
million decline in interest expense during 1992, which caused net interest
income to improve by $14.0 million. The net interest income to improve by $14.0
million. The net interest margin ("NIM") also improved 43-basis points from
2.84% during 1991 to 3.27% during 1992. A drop in the average rate paid on
deposits of 168-basis points during 1992 generated most of the improvement.
Approximately two-thirds of the lower deposit costs were associated with lower
rates paid on CDs and the remaining decline was associated with lower rates paid
on checking, savings and money market accounts. On the asset side, downward
repricing of adjustable rate loans and MBS and the reinvestment of funds in
earning assets at substantially lower rates offset the benefit provided by
lower average deposit rates, which limited the improvement in the NIM to only
43-basis points.
At December 31, 1992, the Company achieved an interest rate spread of
3.48%, well in excess of its interest rate spread of 2.95% at December 31,
1991. A 166-basis point decline in the rate paid on deposits from December 31,
1991 to December 31, 1992, partly offset by a 116-basis point decline in asset
yields during 1992, generated the 53-basis point expansion in the interest
rate spread.
Interest Income. Interest income was $42.6 million lower during 1992 compared
to 1991, primarily as a result of the decline in market interest rates.
- -------------
(11) THIS ANALYSIS ALLOCATES THE CHANGE IN INTEREST INCOME AND EXPENSE RELATED
TO VOLUME BASED UPON THE CHANGE IN AVERAGE BALANCES AND PRIOR PERIODS
APPLICABLE YIELDS OR RATES PAID. THE CHANGE IN INTEREST INCOME AND EXPENSE
RELATED TO RATE IS BASED UPON THE CHANGE IN YIELDS OR RATES PAID AND THE PRIOR
PERIOD AVERAGE BALANCES. CHANGES DUE TO BOTH RATE AND VOLUME HAVE BEEN
ALLOCATED TO VOLUME AND RATE CHANGES IN PROPORTION TO THE RELATIONSHIP OF THE
ABSOLUTE DOLLAR AMOUNTS OF THE CHANGE IN EACH. THE ABOVE ALLOCATION PROCEDURES
HAVE BEEN APPLIED CONSISTENTLY IN 1993, 1992 AND 1991. THE EFFECT OF
NON-PERFORMING LOANS AND AN ADDITIONAL DAY IN 1992 HAVE BEEN INCLUDED IN THE
RATE VARIANCE.
34
<PAGE> 19
Interest income from loans receivable was $27.4 million lower during
1992 compared to 1991, primarily as a result of an 88-basis point decline in
loan yield to 8.87% during 1992. Approximately two-thirds of the lower loan
yield was associated with downward repricing of adjustable-rate loans in the
loan portfolio. The remaining decline was primarily associated with asset
originations at lower rates. Lower average loan receivable balances of $65.2
million also caused a decline in interest income of $6.2 million. Loan
repayments outpaced the origination of loans retained for portfolio during most
of 1992, which caused average loans receivable balances to decline.
Interest income from MBS declined $13.9 million during 1992.
Approximately of the reduction was associated with lower average MBS balances
of $85.8 million and the remaining decline was associated with a 98-basis point
lower yield. The decline in average MBS balances reflected both the lack of
availability of attractively priced MBS and the high level of loan refinancing
activity during the year. The reduction in MBS yield from 8.66% in 1991 to
7.68% in 1992 was largely attributable to the acquisition of MBS at lower rates
during the year. The lower rates on 1992 purchases reflected the general
decline in market interest rates on high quality MBS.
Investment interest income was $15.2 million during 1992 compared to
$16.5 million during 1991. The benefit provided to investment interest income
by higher average investment balances of $116.5 million was more than offset by
a 210-basis point reduction in investment yield. The decline in investment
yield from 6.00% during 1991 to 3.90% during 1992 reflected a general decline
in market rates during 1992. Higher average investment balances during 1992
reflected the accumulation of liquidity during 1992 and the latter part of
1991.
See "RATE/VOLUME ANALYSIS" and "AVERAGE BALANCES, INTEREST AND AVERAGE
YIELDS" for further detail.
Interest Expense. Interest expense was $56.6 million lower during 1992
compared to 1991 as a result of reductions in interest expense on deposits of
$41.8 million and interest expense on borrowings of $14.8 million.
A decline in average rates paid on deposits from 6.54% during 1991 to
4.86% during 1992 primarily caused the lower interest expense on deposits.
1992's deposit rates benefitted from a 161-basis point reduction in rates paid
on CDs from December 31, 1991 to December 31, 1992 and a reduction in rates paid
on core accounts (i.e., checking, savings and money market accounts) from 3.94%
to 2.67% during the same period. An increase in average deposits from $2.86
billion during 1991 to $2.99 billion in 1992 partly offset the benefit to
interest expense provided by lower average rates. Average balances during 1992
benefitted more than average balances during 1991 from deposit growth occurring
in the last half of 1991.
Interest expense on borrowings was $14.8 million lower during 1992 as a
result of lower average borrowing balances of $161.5 million. The high level of
loan and MBS repayments during 1992 and deposit growth during the latter half
of 1991 allowed the Company to repay FHLB advances and obligations arising from
the sale of assets under repurchase agreements during those same periods. These
repayments contributed to lower average borrowing balances in 1992. Also, lower
average rates paid on borrowings of 57-basis points resulted in a $2.3 million
reduction in borrowing expense during 1992. Lower rates on borrowings were
reflective of steadily declining market interest rates during most of 1992.
Of the $14.8 million decrease in interest expense on borrowings, $9.7
million was associated with long-term borrowings and $5.1 million was
associated with short-term borrowings. Lower average long-term borrowing
balances of $101.4 million and lower average long-term borrowing rates of
88-basis points contributed to the decline in long-term expense. Most of the
reduction in long-term borrowing balances was associated with the
reclassification of FHLB advances and reverse repurchase agreements from
long-term to short-term. The average rate paid on long-term borrowings declined
from 8.52% during 1991 to 7.64% during 1992, which provided a $1.8 million
benefit to interest expense in 1992.
Short-term borrowing expense was $5.1 million lower during 1992
primarily as a result of a $60.1 million reduction in average short-term
borrowing balances. The average rate paid on short-term borrowings was 7.65%
during 1992 compared to 7.90% during 1991. The rate paid on short-term
borrowings declined by only 25-basis points compared to an 88-basis point
reduction in long-term rates because relatively high-cost FHLB advances
migrated from long-term to short-term during 1992.
35
<PAGE> 20
See "RATE/VOLUME ANALYSIS" and "AVERAGE BALANCES, INTEREST AND AVERAGE
YIELDS" for further detail.
Provision for Loan Losses. Provisions for loan losses totaled $10.6
million during 1992, or $475,000 lower than loan loss provisions recorded in
1991 of $11.1 million. During 1992, the Company recorded net loan charge-offs of
$8.1 million compared to $11.2 million during 1991. The net effect of 1992's
provision for loan losses and net charge-offs was to increase the accumulated
provision for loan losses by $2.5 million over amounts reported at December 31,
1991.
Other Income. The Company increased other income from $22.6 million
during 1991 to $28.3 million during 1992. Most of the improvement was associated
with higher other fee income of $2.0 million, higher discount brokerage fees of
$1.8 million, and higher commissions on annuity sales.
Approximately one-half of the improvement in other fee income was
associated with improvements in ATM revenues and the remaining improvement was
caused by higher fees on checking accounts resulting from both higher volumes
and charges. The lower interest rate environment encouraged retail investors to
pursue non-traditional deposit products in order to obtain higher return,
resulting in higher revenue from discount brokerage activities and annuity
sales. During 1992, Management completed the opening of discount brokerage
operations (Investment Network) in all of its stand-alone branch offices.
Net gains on asset sales were $344,000 higher during 1992 compared to
1991. Also, mortgage-banking operations generated loan servicing fees
equivalent to 39-basis points of its average loan servicing portfolio during
1992 and 1991. The relatively low carrying amount of the purchased mortgage
servicing rights and excess loan servicing fee receivable allowed the Company
to earn loan servicing fees in excess of a "normal" level for the industry.
An increase in the number of lots sold by St.Paul Financial generated a
$405,000 improvement in income from real estate operations in 1992.
General and Administrative Expenses. The Company incurred an additional
$6.5 million of general and administrative expenses during 1992 compared to
1991. The most significant increases in general and administrative expenses
occurred in compensation and benefits and other expenses. An increase in the
number of employees associated with the opening of five OMNI in-store branches
between April 1991 and September 1992 and additional pension expense caused most
of the $3.0 million increase in compensation and benefit costs in 1992. Other
expenses were $1.5 million higher during 1992 as a result of additional
consulting, insurance and lending expenses.
An increase in the Bank's deposit base caused FDIC insurance premiums
to increase by $739,000 during 1992. Occupancy, data processing and other
office expense, and advertising expense all increased during 1992. The
expansion of the branch network during 1992 contributed to the increase in
these expenses.
Loss on Foreclosed Real Estate. The Company incurred a $1.3 million loss
on foreclosed real estate during 1992, compared to a $1.9 million loss during
1991. The lower loss during 1992 resulted from higher gains on REO sales of $1.6
million, partly offset by additional net foreclosed real estate operating
expenses of $1.1 million. REO loss provisions, representing declines in the fair
value of REO, were $1.8 million during 1992, slightly more favorable than the
$1.9 million of provisions recorded during 1991.
Income Taxes. Income taxes totaled $20.3 million or 35.0% of pre-tax income
during 1992 compared to $16.5 million or 37.8% of pre-tax income during 1991.
The lower effective income tax rate during 1992 resulted from a decline in the
effective state income tax rate.
36
<PAGE> 21
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
At or for the year ending December 31 - Dollars in thousands
<TABLE>
<CAPTION>
1993 1993 1992 1991
--------------- ----------------------------- -------------------------- ---------------------------
Average Average Average
Balance Rate Balance(a) Interest Yield Balance(a) Interest Yield Balance(a) Interest Yield
--------------- ----------------------------- -------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments:
Marketable-debt
securities.......... $ 142,051 4.21% $ 147,546 $ 6,222 4.22% $ 73,025 $ 3,106 4.25% $ 31,475 $ 2,171 6.90%
Trading account..... 5,122 117 2.28 2,695 78 2.89 3,450 226 6.55
Federal funds ...... 56,200 2.93 49,360 1,491 3.02 30,685 1,058 3.45 50,837 2,898 5.70
Other
investments (b) .... 223,616 3.52 259,214 8,630 3.33 284,927 11,003 3.86 189,105 11,189 5.92
---------- ---- ---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total investments .... 421,867 3.68 461,242 16,460 3.57 391,332 15,245 3.90 274,867 16,484 6.00
Mortgage-backed
securities ......... 733,649 5.91 664,812 42,269 6.36 657,331 50,453 7.68 743,164 64,383 8.66
Loans receivable (c) . 2,379,390 7.87 2,455,559 198,208 8.07 2,400,233 212,989 8.87 2,465,436 240,424 9.75
---------- ---- ---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-earning
assets ............ $3,534,906 6.96% $3,581,613 $256,937 7.17% $3,448,896 $278,687 8.08% $3,483,467 $321,291 9.22%
---------- ---- ---------- -------- ---- ---------- -------- ---- ---------- -------- ----
---------- ---- ---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Deposits (d) ......... $3,252,618 3.56% $3,219,672 $122,273 3.80% $2,987,859 $145,233 4.86% $2,862,153 $187,048 6.54%
Borrowings:
Short-term
borrowings (e) ..... 263 6.95 71,264 4,805 6.74 148,117 11,336 7.65 208,193 16,452 7.90
Long-term
borrowings (e) ..... 59,467 9.35 74,894 5,904 7.88 121,381 9,275 7.64 222,815 18,987 8.52
---------- ---- ---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total borrowings ..... 59,730 9.34 146,158 10,709 7.33 269,498 20,611 7.65 431,008 35,439 8.22
---------- ---- ---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-bearing
liabilities ........ $3,312,348 3.66% $3,365,830 $132,982 3.95% $3,257,357 $165,844 5.09% $3,293,161 $222,487 6.76%
---------- ---- ---------- -------- ---- ---------- -------- ---- ---------- -------- ----
---------- ---- ---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Excess of
interest-earning
assets over
interest-bearing
liabilities ........ $ 222,558 $ 215,783 $ 191,539 $ 190,306
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Ratio of
interest-earning
assets over
interest-bearing
liabilities ........ 1.07 1.06 1.06 1.06
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net interest income .. $123,955 $112,843 $ 98,804
-------- -------- --------
-------- -------- --------
Interest rate spread . 3.30%
----
----
"Average" interest
rate spread ........ 3.22% 2.99% 2.46%
---- ---- ----
---- ---- ----
Net yield on average
earning assets ..... 3.46% 3.27% 2.84%
---- ---- ----
---- ---- ----
</TABLE>
(A) ALL AVERAGE BALANCES BASED ON DAILY BALANCES. (B) INCLUDES INVESTMENT IN
FEDERAL HOME LOAN BANK STOCK, DEPOSITS AT FEDERAL HOME LOAN BANK, AND OTHER
SHORT-TERM INVESTMENTS. (C) INCLUDES LOANS HELD FOR SALE AND LOANS PLACED ON
NON-ACCRUAL. (D) PRIOR YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM TO THE
1993 PRESENTATION. (E) INCLUDES FHL BANK ADVANCES, FLOATING-RATE NOTES, OTHER
BORROWINGS, AND SUBORDINATED CAPITAL NOTES. EXCLUDES ESOP LOAN.
37
<PAGE> 22
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
DOLLARS IN THOUSANDS - AT DECEMBER 31
<TABLE>
<CAPTION>
1993 1992
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents-Note B
Cash and amounts due from depository institutions......................... $ 87,805 $ 72,940
Federal funds sold ....................................................... 56,200 49,000
Short-term marketable-debt securities
(Market: December 31, 1993-$192,326; December 31, 1992-$189,618)........ 192,326 189,627
------------ ------------
Total cash and cash equivalents........................................... 336,331 311,567
Marketable-debt securities-Notes C and P
(Market: December 31, 1993-$142,876; December 31, 1992-$107,367).......... 142,051 107,732
Mortgage-backed securities-Notes D and P
(Market: December 31, 1993-$733,314; December 31, 1992-$654,411).......... 733,649 643,941
Loans receivable-Notes E and O............................................. 2,350,893 2,318,879
Less: accumulated provision for loan losses-Note F......................... 46,574 48,681
------------ ------------
Net loans receivable ..................................................... 2,304,319 2,270,198
Loans held-for-sale, at lower of cost or market-Note G
(Market: December 31, 1993-$28,616; December 31, 1992-$19,090)............ 28,497 19,019
Accrued interest receivable-Note H......................................... 20,247 22,059
Foreclosed real estate-Note I
(Net of accumulated provision for losses: December 31, 1993-$819;
December 31, 1992-$2,404)............................................... 19,105 17,945
Real estate held for investment-Note J..................................... 11,237 10,497
Investment in Federal Home Loan Bank Stock-Note K.......................... 31,290 30,720
Office properties and equipment-Note L..................................... 40,865 33,526
Prepaid expenses and other assets-Note M................................... 37,785 33,056
------------ ------------
Total assets................................................................. $ 3,705,376 $ 3,500,260
------------ ------------
------------ ------------
LIABILITIES:
Deposits-Note N............................................................ $ 3,252,618 $ 2,985,124
FHL Bank advances-Note O................................................... 7,219 99,501
Other borrowings-Note P.................................................... 56,751 86,907
Advance payments by borrowers for taxes and insurance...................... 19,513 19,467
Other liabilities-Note Q................................................... 21,946 21,920
------------ ------------
Total liabilities.......................................................... 3,358,047 3,212,919
COMMITMENTS-NOTES U AND V
STOCKHOLDERS' EQUITY:-NOTES R, S AND Z
Preferred stock (par value $0.01 per share: authorized-10,000,000
shares; none issued)...................................................... - -
Common stock (par value $0.01 per share: authorized-40,000,000 shares;
outstanding at December 31, 1993-19,683,981 shares,
outstanding at December 31, 1992-18,258,158 shares)....................... 197 183
Paid-in capital............................................................ 136,609 115,253
Retained income, substantially restricted 210,215 173,976
Unrealized gain on securities, net of taxes-Notes B, C and D............... 4,594 -
SFAS No. 87 adjustment, net of taxes-Note T................................ (46) -
Borrowings by employee stock ownership plan-Notes P and T.................. (4,240) (2,071)
------------ ------------
Total stockholders' equity................................................. 347,329 287,341
------------ ------------
Total liabilities and stockholders' equity................................... $ 3,705,376 $ 3,500,260
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
38
<PAGE> 23
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31 - DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
SFAS BORROWINGS
COMMON STOCK NO. 87 BY EMPLOYEE TOTAL
------------------ PAID-IN RETAINED UNREALIZED ADJUST- STOCK OWNER- STOCKHOLDERS
SHARES AMOUNT CAPITAL INCOME GAINS MENT SHIP PLAN EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1990............... 11,993,205 $120 $112,975 $118,739 $ - $ - $ (2,500) $229,334
Three-for-two
stock split-Note Z.............. 5,996,603 60 (60) - - - - -
Issuance of common stock
under stock option
plan-Note S..................... 68,025 1 452 - - - - 453
Net income........................ - - 27,192 - - - 27,192
Cash dividends paid to stock-
holders ($0.27 per share)...... - - - (4,805) - - - (4,805)
Repayments of
principal Note P................ - - - - - - 714 714
----------- ---- -------- --------- ------- ------- -------- --------
Balance at
December 31, 1991............... 18,057,833 $181 $113,367 $141,126 - - (1,786) $252,888
----------- ---- -------- --------- ------- ------- -------- --------
----------- ---- -------- --------- ------- ------- -------- --------
Issuance of common stock
under stock option plan-
Note S......................... 200,325 2 1,886 - - - - 1,888
Net income........................ - - - 37,685 - - - 37,685
Cash dividends paid to
stock holders
($0.27 per share)............... - - - (4,835) - - - (4,835)
Repayments of
principal-Note P................ - - - - - - 715 715
Additional
borrowings-Note P............... - - - - - - (1,000) (1,000)
----------- ---- -------- --------- ------- ------- -------- --------
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-Note S.. 134,513 1 1,625 - - - - 1,626
Issuance of common stock to
Elm Financial -
shareholders-Note Y............ 1,292,313 13 19,753 - - - - 19,766
Net income........................ - - - 41,387 - - - 41,387
Retirement of fractional
shares.......................... (1,003) - (22) - - - (22)
Cash dividends paid to stock-
holders ($0.27 per share)....... - - - (5,148) - - - (5,148)
Unrealized gain on
securities, net of taxes-
Notes B, C and D................ - - - - 4,594 - - 4,594
SFAS No. 87 adjustment, net of
taxes-Note T.................... - - - - - (46) - (46)
Repayments of
principal-Note P................ - - - - - - 714 714
Additional
borrowings-Note P............... - - - - - - (2,883) (2,883)
----------- ---- -------- --------- ------- ------- -------- --------
Balance at
December 31, 1993............... 19,683,981 $197 $136,609 $210,215 $4,594 $ (46) $ (4,240) $347,329
----------- ---- -------- --------- ------- ------- -------- --------
----------- ---- -------- --------- ------- ------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
39
<PAGE> 24
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31 DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable.............................................. $198,208 $212,989 $240,424
Mortgage-backed securities.................................... 42,269 50,453 64,383
Marketable-debt securities.................................... 6,222 3,106 2,171
Trading account............................................... 117 78 226
Federal funds................................................. 1,491 1,058 2,898
Other short-term investments.................................. 8,630 11,003 11,189
-------- -------- --------
Total interest income....................................... 256,937 278,687 321,291
INTEREST EXPENSE:
Deposits...................................................... 122,273 145,233 187,048
Short-term borrowings......................................... 4,805 11,336 16,452
Long-term borrowings.......................................... 5,904 9,275 18,987
-------- -------- --------
Total interest expense...................................... 132,982 165,844 222,487
-------- -------- --------
Net interest income......................................... 123,955 112,843 98,804
Provision for loan losses Note-F.............................. 10,750 10,625 11,100
-------- -------- --------
Net interest income after provision for loan losses........... 113,205 102,218 87,704
OTHER INCOME:
Loan servicing fees........................................... 1,694 3,643 3,544
Other fee income.............................................. 14,794 10,258 8,274
Net gain on assets sold....................................... 2,150 3,024 2,680
Net trading account gain (loss)............................... 65 (20) (3)
Discount brokerage commissions................................ 6,298 4,935 3,129
Income from real estate operations............................ 2,969 2,442 2,037
Insurance and annuity commissions............................. 3,408 3,643 2,706
Other......................................................... 1,128 423 280
-------- -------- --------
Total other income.......................................... 32,506 28,348 22,647
GENERAL AND ADMINISTRATIVE EXPENSE:
Salaries and employee benefits................................ 42,551 36,989 33,949
Occupancy, equipment and other office expense................. 19,097 15,573 14,872
Advertising................................................... 5,184 4,015 3,501
Federal deposit insurance..................................... 9,521 7,317 6,578
Other......................................................... 6,394 7,346 5,854
-------- -------- --------
General and administrative expense.......................... 82,747 71,240 64,754
Loss on foreclosed real estate-Note I......................... 2,516 1,316 1,898
-------- -------- --------
Income before income taxes.................................... 60,448 58,010 43,699
Income taxes-Note Q........................................... 19,061 20,325 16,507
-------- -------- --------
Net income.................................................. $ 41,387 $ 37,685 $ 27,192
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE:
Primary .................................................... $ 2.03 $ 2.00 $ 1.48
Fully diluted............................................... 2.03 1.98 1.48
--------- --------- ---------
--------- --------- ---------
DIVIDENDS PER SHARE........................................... $ 0.27 $ 0.27 $ 0.27
--------- --------- ---------
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
40
<PAGE> 25
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31 DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
1993 1992 1991
OPERATING ACTIVITIES:
---------- ---------- ----------
<S> <C> <C> <C>
Net income $ 41,387 $ 37,685 $ 27,192
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses.......................................................... 10,750 10,625 11,100
Provision for losses on foreclosed real estate..................................... 1,879 1,828 1,900
Provision for depreciation......................................................... 4,719 4,138 3,827
Assets originated and acquired for sale............................................ (141,261) (164,039) (76,150)
Sale of assets held for sale....................................................... 128,203 162,508 72,482
Decrease in accrued interest receivable ........................................... 3,229 2,877 3,260
Increase in prepaid expenses and other assets...................................... (4,047) (3,698) (8,294)
Increase (decrease) in other liabilities........................................... (4,102) (15,705) 14,549
Net amortization of yield adjustments.............................................. (757) (5,434) (1,386)
Other items, net................................................................... (15,391) 641 1,145
---------- ---------- ----------
Net cash provided by operating activities 24,609 31,426 49,625
---------- ---------- ----------
INVESTING ACTIVITIES:
Principal repayments on loans receivable............................................. 628,353 531,958 336,226
Loans originated and purchased for investment........................................ (476,549) (427,293) (414,663)
Loans receivable sold................................................................ 35,866 49,983 20,457
Principal repayments on mortgage-backed securities................................... 252,826 290,912 148,768
Mortgage-backed securities purchased for investment.................................. (282,896) (218,224) (217,697)
Sale of mortgage-backed securities held for investment............................... 2,940 - 41,244
Maturities of marketable-debt securities ............................................ 137,523 82,399 35,010
Purchase of marketable-debt securities............................................... (115,946) (164,588) (19,827)
Additions to real estate held for investment......................................... (6,053) (6,824) (5,233)
Real estate sold..................................................................... 18,749 17,841 3,414
(Increase) decrease in investment in Federal Home Loan Bank stock.................... 1,897 (171) (1,744)
Purchase of office properties and equipment (6,669) (5,076) (5,446)
Proceeds from sales of office properties and equipment............................... 819 58 809
Acquisition of Elm Financial, net of cash and cash equivalents acquired of $11,002... (15,655) - -
---------- ---------- ----------
Net cash provided (used) by investing activities 175,205 150,975 (78,682)
---------- ---------- ----------
FINANCING ACTIVITIES:
Net increase in checking and savings deposits........................................ (20,402) 55,131 91,158
Proceeds from sales of certificates of deposit....................................... 279,581 305,712 570,797
Payments for maturing certificates of deposit........................................ (303,906) (380,138) (323,269)
Net proceeds from issuance of subordinated notes..................................... 33,422 - -
Repayment of FHL Bank advances....................................................... (92,279) (57,061) (92,623)
Increase in FHL Bank advances........................................................ - 638 26,637
Decrease in other borrowings, net.................................................... (63,505) (91,982) (96,243)
Repayment of subordinated capital notes.............................................. - (12,434) -
Interest credited on subordinated capital notes...................................... - 146 225
Redemption bonus on subordinated capital notes....................................... - 144 -
Dividends paid to stockholders....................................................... (5,148) (4,835) (4,805)
Net proceeds from exercise of stock options.......................................... 1,021 1,362 453
Decrease in advance payments by borrowers for taxes and insurance.................... (3,834) (2,140) 2,939
---------- ---------- ----------
Net cash provided (used) by financing activities.................................. (175,050) (185,457) 175,269
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... 24,764 (3,056) 146,212
Cash and cash equivalents at beginning of period..................................... 311,567 314,623 168,411
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................... $ 336,331 $ 311,567 $ 314,623
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
41
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements are
comprised of the accounts of St. Paul Bancorp, Inc. (the "Company") and its
wholly-owned subsidiaries, St. Paul Federal Bank For Savings (the "Bank"), St.
Paul Financial Development, Inc. ("St. Paul Financial"), and Annuity Network,
Inc ("Annuity Network, Inc."). The financial statements of St. Paul Federal
Bank For Savings include the accounts of its subsidiaries.
Cash and Cash Equivalents: Cash and cash equivalents in the
Consolidated Statements of Financial Condition and Cash Flows include cash,
amounts due from depository institutions, federal funds sold, and marketable
debt securities with original maturities of three months or less.
Marketable-Debt Securities and Mortgage-Backed Securities ("MBS"): On
December 31, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." In accordance with the statement, prior period financial
statements have not been restated to reflect the change in accounting
principle. The ending balances of stockholders' equity was increased by $4.6
million (including a $2.8 million deferred income tax adjustment) to reflect
the net unrealized holding gains on securities classified as available-for-sale
previously carried at amortized cost.
Under SFAS No. 115, the carrying amount of securities is dependent upon
their classification as held-to-maturity, trading, or available for sale. The
accounting for securities in each of the three categories is as follows:
Held-to-Maturity: Investment securities that are classified as held-to-maturity
are recorded at cost, net of unamortized premiums and discounts. Discounts and
premiums are amortized using the interest method over the remaining contractual
life of the assets, adjusted for actual prepayments as appropriate. Interest
income is charged or credited for any remaining unamortized discounts and
premiums when MBS are repaid prior to their contractual maturities. Declines in
value judged to be other than temporary are included in gains on asset sales.
At December 31, 1993, Management classified only those securities that
it had the positive intent and ability to hold to maturity in this category.
Prior to the adoption of SFAS No. 115, all investments were classified as
held-to-maturity and accounted for on an amortized cost basis.
Trading Account: Trading account assets are carried at fair value, with
any unrealized gains and losses included in earnings. The Company has not
transferred assets between the trading account, held-to-maturity, and available
for sale categories. At December 31, 1993 and 1992, the Company had no open
trading account positions. The adoption of SFAS No. 115 had no impact on the
accounting for trading account assets since the prior accounting policy
conformed to the new statement.
Available-For-Sale: Investment securities classified as
available-for-sale are recorded at fair value, with the unrealized gains and
losses included as a separate component of stockholders equity. Discounts and
premiums are amortized using the interest method over the remaining contractual
life of the assets, adjusted for actual prepayments as appropriate. Interest
income is charged or credited for any remaining unamortized discounts and
premiums when MBS are repaid prior to their contractual maturities. Realized
gains and losses and declines in value judged to be other than temporary are
included in gains on asset sales. The cost of securities sold is based on a
specific identification method. Prior to the adoption of SFAS No. 115,
investments that were considered to be held-for-sale were recorded at the lower
of cost or market value. At December 31, 1992, the Company had no investments
classified as held-for-sale.
Loans Receivable: Loans receivable held to maturity are recorded at
cost, net of unamortized discounts and premiums and net deferred loan
origination fees. Net deferred loan origination fees are comprised of loan
origination and commitment fees and certain direct origination costs which are
deferred when loans are originated. Discounts, premiums, and deferred loan
origination fees are amortized using the interest method over the remaining
contractual life of the assets, adjusted for actual prepayments as appropriate.
Interest income is charged or credited for any unamortized discounts, premiums,
and net deferred loan origination fees when loans receivable are repaid prior
to their contractual maturities.
Interest income on loans is credited to income when earned. The Bank
provides an allowance for accrued interest on loans deemed potentially
uncollectible. The provision is accounted for as a reduction of interest income
and the allowance is netted against accrued interest receivable. Whenever the
accrual of interest is stopped, previously accrued but uncollected interest
income is reversed. Thereafter, interest is recognized only as cash is received
until the loan is reinstated. 1-4 family and consumer loans generally are
placed on non-accrual status when they become 90 days delinquent. Multi-family
and commercial real estate loans are placed on non-accrual status when they
become 60 days delinquent. The accrual of interest on government insured loans
and single-family mortgages with original loan to value ratios of 80% or less
is not discontinued regardless of delinquency.
Interest income on troubled debt restructured loans ("TDRs") is
recorded as actual interest payments are collected. Interest added to loan
balances reflects the terms of the loan restructurings; any interest
capitalized to the balances of these loans is fully reserved by reducing
interest income.
42
<PAGE> 27
Any reserves for uncollectible loan principal is provided for through
the Bank's loan loss allowance. See discussion following.
Accumulated Provision for Loan Losses: The accumulated provision for loan
losses is evaluated on a quarterly basis by the Loan Loss Reserve Committee
(the "Reserve Committee") of the Board of Directors based upon the Company's
loan loss reserve methodology. The accumulated provision for loan losses
reflects the Reserve Committee's best estimate of the reserves needed against
the perceived credit risks of the Bank. However, actual results could differ
from this estimate. The Reserve Committee carefully evaluates the various risk
components which are inherent in each of the portfolios, including off-balance
sheet items. 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, as well as historical loss
experience, peer group comparisons, and regulatory guidance issued by the
Office of Thrift Supervision and other regulatory bodies. Additions to the
reserve are reflected in current operations. Charge-offs to the accumulated
provision for loan losses are made when loan principal is considered
uncollectible. The Bank also establishes specific reserves on individual loans
when a portion of an asset is classified as "loss" for regulatory accounting
purposes. Recoveries are credited to the accumulated provision for loan losses
when realized.
While the Reserve Committee uses available information to recognize
losses on loans, future additions to the reserves may be necessary based on
changes in economic conditions. In addition, various regulatory agencies
periodically review the Bank's accumulated provision for losses on loans. Such
agencies have the authority to require the Bank to recognize additions to the
reserves at the time of their examination.
In May 1993, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." 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 for the "impaired" loan with a corresponding charge to bad debt
expense or by adjusting the existing valuation allowance for the "impaired"
loan with a corresponding charge or credit to bad debt expense. The Company
plans to adopt the new rules beginning in 1994. Because the Bank currently
carries those loans that would be considered "impaired" under SFAS No. 114 at
the fair value of the underlying collateral, the effect of the adoption of
the new rules will not have an adverse impact on the Company s results of
operations. Upon adoption of SFAS No. 114, the Bank will no longer account for
REO in-substance in accordance with Financial Reporting Release No. 28.
Instead, loans will be classified as REO when the Bank receives physical
possession of the debtor s assets regardless of whether formal foreclosure
proceedings take place.
Loans Held-For-Sale: Loans held-for-sale are comprised of 1-4 family
real estate loans originated for resale in the secondary market and certain
education loans. Loans are identified as held-for-sale before or soon after
origination or purchase and are caused at the lower of cost or market value on
an individual basis.
Loans held-for-sale are recorded at the lower of cost or market, with
the lower of cost or market adjustment included in earnings. The lower of cost
or market values are determined on an individual loan basis. The fair value of
loans held-for-sale are based on actual sales contracts and bids published by
the secondary market.
Real Estate Owned ("REO") and REO In-Substance Foreclo-sures: REO and
REO in-substance foreclosures initially are recorded at the lower of net book
value or fair value, less estimated costs to sell. 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 reserves for possible
losses associated with risks inherent in the REO portfolio. In evaluating the
adequacy of the accumulated provision for foreclosed real estate losses,
Management considers the market value of specific real estate assets in
relationship to their book values, economic conditions, local trends in real
estate value, historical loss experience, property management and the
regulatory climate.
Loan Servicing Fees and Related Receivables: The Bank services mortgage loans
that have been sold to investors. Fees earned for servicing loans owned by
investors are reported as income when the related mortgage loan payments are
collected. Loan servicing costs are charged to expense as incurred.
When mortgage loans are sold, the gain or loss on the transaction is
adjusted to recognize an excess service fee receivable. In general, the excess
service fee receivable represents the present value of the interest rate spread
(net of normal servicing fees) inherent in the future payments to be serviced
by the Company over the estimated life of the underlying mortgage loans. The
excess service fee receivable is amortized as an adjustment to loan servicing
fee income using the interest method over the remaining contractual term.
The Bank also owns the right to service loans for others. Capitalized
purchased mortgage servicing rights are amortized in proportion to, and over
the period of, estimated net servicing income.
Office Properties and Equipment: Office properties and equipment,
including assets under capital leases, are carried at cost.
43
<PAGE> 28
Depreciation and amortization are computed principally using the
straight-line method over estimated useful lives of the assets and the
remaining term of capital leases, respectively.
"Employee Benefits: Net pension costs are based on the provisions of
SFAS No. 87, Employers' Accounting for Pensions." The actuarially determined
pension benefits are based on the projected unit credit method.
The Company adopted SFAS No. 106, "Employers' Accounting for
Post-Retirement Benefits Other than Pensions," during 1993. This statement
requires that the projected future cost of providing post-retirement benefits,
such as health care and life insurance, be recognized as an expense as
employees render service, instead of when the benefits are paid. The impact of
the adoption of this standard on the results of operations in 1993 was $125,000
and is expected to be even lower in future periods.
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting
for Post-Employment Benefits." This statement requires that the projected
future cost of providing post-employment benefits (other than retirement), such
as medical insurance, be recognized as an expense as employees render service,
instead of when the benefits are paid. Management estimates that the adoption
of SFAS No. 112 will have a minimal impact on the results of operations and
expects to apply the new rules on a prospective basis beginning in the first
quarter of 1994.
The Company has established an Employee Stock Ownership Plan ("ESOP")
for its employees. Currently, the Company accounts for the ESOP borrowings and
Company stock acquired by the ESOP in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") No. 76-3,
"Accounting Practices for Certain Employee Stock Ownership Plans." Compensation
expense is charged for the contributions made by the Bank to service the ESOP
borrowing and other contributions approved by the Company. In November 1993,
the AICPA issued SOP 93-6, "Employers' Accounting for Employee Stock Ownership
Plans." Under this accounting guidance, compensation expense is charged for the
fair value of shares released to employee accounts in the period in which the
shares are committed to be released. The Company estimates that this SOP will
have a minimal impact on the results of operations and expects to apply the new
rules on a prospective basis beginning in the first quarter of 1994.
Income Taxes: The Company files a consolidated tax return with its
wholly-owned subsidiaries. The Company provides for income taxes based upon the
provisions of SFAS No. 109, "Accounting for Income Taxes." The provision for
income tax expense is determined using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Deferred taxes arise because certain
transactions affect the determination of taxable income for financial reporting
purposes in periods different from the period in which the transactions affect
taxable income for tax return purposes. Current tax expense is provided based
upon the actual tax liability incurred for tax return purposes.
Earnings Per Share: Earnings per share are based on the weighted
average number of shares outstanding. Primary and fully diluted earnings per
share are computed using the treasury stock method. Stock options represent the
only common stock equivalent of the Company. Earnings per share for all periods
presented have been restated for the three-for-two stock split issued to
stockholders on January 4, 1994.
Fair Value of Financial Instruments: SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based upon
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including discount rates
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
SFAS No. 107 excludes certain financial instruments and all non-financial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts reported do not represent the underlying value of the Bank.
Reclassifications: Certain prior year amounts have been reclassified to conform
to the 1993 presentation.
NOTE B
Cash and Cash Equivalents
The following tables present the amortized cost and market values of cash and
short-term investments as of December 31, 1993 and 1992. At December 31, 1993,
all of the short-term investments are classified as available-for-sale and
mature within 90 days.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS DECEMBER 31, 1993
- ----------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
By Type:
Cash and amounts
due from depository
institutions.............. $ 87,805 $ - $ - $ 87,805
Federal funds sold......... 56,200 - - 56,200
Short-term marketable-debt
securities:
U.S. Treasury securities... 15,502 1 - 15,503
U.S. agency securities..... 176,839 - 16 176,823
-------- ------- --------- --------
Total cash and cash
equivalents $336,346 $ 1 $ 16 $336,331
-------- ------- --------- --------
-------- ------- --------- --------
</TABLE>
44
<PAGE> 29
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS DECEMBER 31, 1992
- ----------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
By Type:
Cash and amounts
due from depository
institutions.............. $ 72,940 $ - $ - $ 72,940
Federal funds sold......... 49,000 - - 49,000
Short-term marketable-debt
securities:
U.S. Treasury securities... 7,048 - - 7,048
U.S. agency securities..... 182,579 - 9 182,570
-------- ------- --------- --------
Total cash and cash
equivalents............... $311,567 $ - $ 9 $311,558
-------- ------- --------- --------
-------- ------- --------- --------
</TABLE>
The fair value of cash and amounts due from depository institutions
approximates their carrying amount. The fair value of short-term investments
were determined based on bid prices published in financial newspapers or bid
quotations received from securities dealers. The net adjustment to unrealized
holding losses on short-term marketable-debt securities classified as available
for sale at December 31, 1993 totaled $15,000 and was included in stockholders
equity as "unrealized gain on securities, net of taxes."
Included in "cash and amounts due from depository institutions" at December 31,
1993 is a $29.4 million reserve requirement maintained with the Federal Reserve
Bank of Chicago.
NOTE C
Marketable-Debt Securities
The following tables present the amortized cost and market values of
marketable-debt securities at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS DECEMBER 31, 1993
- ----------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Available-for-Sale:
U.S. Treasury securities... $ 33,418 $ 106 $ 60 $ 33,464
U.S. agency securities..... 68,205 150 14 68,341
-------- ------- --------- --------
101,623 256 74 101,805
-------- ------- --------- --------
Held-to-Maturity:
U.S. Treasury securities... 19,542 272 34 19,780
U.S. agency securities..... 20,704 587 - 21,291
-------- ------- --------- --------
40,246 859 34 41,071
-------- ------- --------- --------
Total marketable-debt
securities $141,869 $1,115 $ 108 $142,876
-------- ------- --------- --------
-------- ------- --------- --------
</TABLE>
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS DECEMBER 31, 1992
- ----------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Agency securities $107,732 $ 89 $ 454 $107,367
-------- ------- --------- --------
-------- ------- --------- --------
</TABLE>
The fair value of marketable-debt securities was determined based on bid prices
published in financial newspapers or bid quotations received from securities
dealers. The net adjustment to unrealized holding gains on marketable-debt
securities classified as available-for-sale at December 31, 1993 totaled
$182,000 and was included in stockholders' equity as "unrealized gain on
securities, net of taxes."
No marketable-debt securities were sold in 1993, 1992 or 1991.
The following table summarizes, by amortized cost and market value, the
maturity distribution of marketable-debt securities at December 31, 1993 based
upon contractual maturities:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS MATURITY SCHEDULE AS OF DECEMBER 31, 1993
- -------------------------------------------------------------------------------
1 YEAR 1 YEAR TO
OR LESS 5 YEARS TOTAL
<S> <C> <C> <C>
Amortized Cost:
Available-for-sale............... $ 21,254 $ 80,369 $101,623
Held-to-maturity................. - 40,246 40,246
-------- -------- --------
Total amortized costs............ $ 21,254 $120,615 $141,869
-------- -------- --------
-------- -------- --------
Market Value:
Available-for-sale............... $ 21,220 $ 80,585 $101,805
Held-to-maturity................. - 41,071 41,071
-------- -------- --------
Total market value............... $ 21,220 $121,656 $142,876
-------- -------- --------
-------- -------- --------
</TABLE>
At December 31, 1993, $989,000 of the short-term U.S. Treasury
securities are pledged as collateral for an ESOP borrowing.
NOTE D
Mortgage-Backed Securities
The following tables present the amortized cost and market values of MBS at
December 31, 1993 and 1992:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS DECEMBER 31, 1993
- ----------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Available-for-Sale:
FHLMC................. $ 54,964 $ 2,525 $ - $ 57,489
FNMA.................. 71,999 3,433 49 75,383
GNMA.................. 2,283 32 3 2,312
Privately issued...... 54,885 1,330 43 56,172
-------- ------- --------- --------
184,131 7,320 95 191,356
Held-to-Maturity:
FHLMC................. $132,300 $ 204 $ 233 $132,271
FNMA.................. 92,097 2 361 91,738
Privately issued...... 317,896 640 587 317,949
-------- ------- --------- --------
542,293 846 1,181 541,958
-------- ------- --------- --------
Total MBS.............. $726,424 $ 8,166 $ 1,276 $ 733,314
-------- ------- --------- --------
-------- ------- --------- --------
</TABLE>
45
<PAGE> 30
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS DECEMBER 31, 1992
- ----------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
FHLMC................... $ 83,352 $ 2,655 $ 7 $ 86,000
FNMA.................... 121,331 4,423 63 125,691
GNMA.................... 6,368 133 84 6,417
Privately issued........ 432,890 7,086 138 439,838
-------- ------- --------- --------
Total MBS............... 643,941 14,297 292 657,946
-------- ------- --------- --------
-------- ------- --------- --------
</TABLE>
The market values of MBS were determined based on bid quotations received from
securities dealers. The net adjustment to unrealized holding gains on MBS
classified as available-for-sale at December 31, 1993 totaled $7.2 million and
was included in stockholders' equity as "unrealized gain on securities, net of
taxes."
The amortized cost of MBS used to collateralize certain deposits,
securities sold under agreements to repurchase, recourse arrangements, and
various other borrowings was $56.6 million at December 31, 1993 and $110.4
million at December 31, 1992.
$81.1 million and $139.3 million of MBS held at December 31, 1993 and
1992, respectively, are loans securitized and serviced by the Bank.
The following table summarizes, by amortized cost and market value, contractual
maturities of MBS held as of December 31, 1993:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS MATURITY SCHEDULE AS OF DECEMBER 31, 1993
- ------------------------------------------------------------------------------
1 YEAR 1 YEAR TO 5 YEARS TO MORE THAN
OR LESS 5 YEARS 10 YEARS 10 YEARS TOTAL
<S> <C> <C> <C> <C> <C>
Amortized Cost:
Available-
for-sale.......... $ 2,660 $ 12,626 $ 21,443 $147,402 $184,131
Held-to-
maturity.......... 7,834 37,185 63,153 434,121 542,293
------- -------- -------- --------- --------
$10,494 $ 49,811 $ 84,596 $581,523 $726,424
------- -------- -------- --------- --------
------- -------- -------- --------- --------
Market Value:
Available-for-
sale.............. $ 2,764 $ 13,122 $ 22,284 $153,186 $191,356
Held-to-
maturity.......... 7,829 37,162 63,114 433,853 541,958
------- -------- -------- --------- --------
$10,593 $ 50,284 $ 85,398 $587,039 $733,314
------- -------- -------- --------- --------
------- -------- -------- --------- --------
</TABLE>
During 1993, $3.0 million of MBS were sold resulting in a net gain of
$167,000 and a tax liability of $53,000. No sales of MBS occurred during 1992.
During 1991, $41.2 million of MBS were sold resulting in a net gain of $443,000
and a tax liability of $172,000.
NOTE E
Loans Receivable
Loans receivable as of December 31, 1993 and 1992 are summarized as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
<S> <C> <C> <C> <C>
REAL ESTATE LOANS:
1-4 family units:
Adjustable-rate.................................................................... $ 515,062 $ 528,180 $ 544,030 $ 550,475
Adjustable-rate with initial fixed period of 3-5 years............................. 235,357 236,654 150,803 152,241
Fixed-rate......................................................................... 436,791 459,580 390,846 400,507
5-35 family units................................................................... 38,460 38,125 46,771 46,360
Other multi-family units............................................................ 1,026,007 1,046,993 1,097,281 $1,086,251
Commercial.......................................................................... 73,094 70,871 66,812 64,707
Land and land development........................................................... 10,307 10,307 3,126 3,126
---------- ---------- ---------- ----------
Real estate loans................................................................... 2,335,078 2,390,710 2,299,669 2,303,668
---------- ---------- ---------- ----------
CONSUMER LOANS:
Secured by deposits................................................................. 2,300 2,300 2,374 2,374
Education (guaranteed).............................................................. 2,171 2,171 2,131 2,131
Home improvement.................................................................... 1,118 1,118 1,601 1,601
Automobile.......................................................................... 13,816 13,816 9,621 9,621
Credit card and personal............................................................ 167 167 11,790 11,790
---------- ---------- ---------- ----------
Consumer loans................................................................... 19,572 19,572 27,517 27,517
---------- ---------- ---------- ----------
Contract amount of loans receivable................................................. 2,354,650 2,410,282 2,327,186 2,331,185
DEDUCT:
Unearned discounts.................................................................. (452) - (4,860) -
Deferred loan fees.................................................................. (3,305) - (3,447) -
---------- ---------- ---------- ----------
Loans receivable.................................................................... 2,350,893 - 2,318,879 2,331,185
Allowance for loan losses........................................................... (46,574) - (48,681) -
---------- ---------- ---------- ----------
Net loans receivable................................................................ $2,304,319 $2,410,282 $2,270,198 2,331,185
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Combined weighted average interest rate of loans receivable......................... 7.88% 8.52%
---------- ----------
---------- ----------
</TABLE>
46
<PAGE> 31
The fair value of 1-4 family mortgages was based upon quotes received
from the secondary market.
The fair value of multi-family and commercial real estate and land loans
was calculated based on an estimate of the timing of future cash flows,
discounted at a rate that reflects an estimate of current market rates for these
types of loans. The discount rate for the Bank's classified loans was adjusted
for the inherent credit risk in those assets. The estimate of the timing of cash
flows was based on the same prepayment assumptions used for regulatory interest
rate risk reporting. Most of the Bank's multi-family and commercial real estate
and land loans are adjustable-rate mortgages, and currently benefit from rate
floors considerably above existing market rates.
The Bank's current accounting policy is to reduce the carrying amount of
certain classified loans to the fair value of the underlying collateral through
charge-offs. The Bank's $46.6 million and $48.7 million of allowance for loan
losses at December 31, 1993 and 1992, respectively, are in addition to those
fair value adjustments. See "Note F - Accumulated Provision for Loan Losses."
The fair value of consumer loans approximates their market values since
the loans generally reprice frequently at market interest rates.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS TDRS
- ----------------------------------------------------------------------------
DECEMBER 31
1993 1992
-------------------
<S> <C> <C>
Aggregate recorded investment....................... $15,646 $25,043
Interest collected and recorded as income........... - 1,155
Total interest in accordance with original terms.... 1,203 2,428
------- --------
------- --------
</TABLE>
All loans reported as TDRs at December 31, 1993 and December 31, 1992 were
performing in accordance with the terms of the debt restructurings.
At December 31, 1993, the Bank had a $1.4 million commitment to lend
additional funds to one borrower in connection with TDRs.
NOTE F
Accumulated Provision for Loan Losses
Activity in the accumulated provision for loan losses is summarized as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
- -------------------------------------------------------------------------------
REAL ESTATE CONSUMER TOTAL
LOANS LOANS LOANS
<S> <C> <C> <C>
Balance at December 31, 1990.................. $45,025 $ 1,212 $ 46,237
Provision for losses......................... 10,386 714 11,100
Charge-offs.................................. (10,697) (507) (11,204)
Recoveries................................... 29 2 31
------- ------- --------
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 Financial.................. 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
------- ------- --------
------- ------- --------
</TABLE>
NOTE G
Loans Held-for-Sale
Loans held-for-sale as of December 31, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
DOLLARS IN THOUSANDS 1993 1992
- --------------------------------------------------------------------------
COST MARKET COST MARKET
<S> <C> <C> <C> <C>
1-4 family real
estate loans......................... $ 21,022 $ 21,141 $ 12,801 $ 12,872
Education loans....................... 7,475 7,475 6,218 6,218
-------- -------- -------- --------
Loans held-for-sale................... $ 28,497 $ 28,616 $ 19,019 $ 19,090
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The following are related mortgage servicing portfolio statistics at and for
the years ended December 31, 1993, 1992, and 1991:
<TABLE>
<CAPTION>
DECEMBER 31
DOLLARS IN THOUSANDS 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Mortgage
servicing portfolio................... $2,933,865 $3,030,096 $ 3,162,043
Loans serviced for others.............. 719,747 894,400 939,424
Loans serviced and
held in MBS portfolio................ 109,000 179,000 246,000
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
47
<PAGE> 32
NOTE H
Accrued Interest Receivable
Accrued interest receivable as of December 31, 1993 and 1992 consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31
DOLLARS IN THOUSANDS 1993 1992
- -----------------------------------------------------------------------------
<S> <C> <C>
Accrued Interest Receivable:
Investments...................................... $ 2,068 $ 1,390
MBS.............................................. 4,493 5,079
Loans receivable................................. 13,686 15,590
------- -------
Total accrued interest receivable................ $20,247 $22,059
------- -------
------- -------
</TABLE>
Accrued interest receivable is considered a financial instrument under SFAS No.
107, "Disclosures about Fair Value of Financial Instruments." Because this
receivable is highly liquid and potentially uncollectible accrued interest is
reserved, its fair value approximates its carrying amount.
NOTE I
Foreclosed Real Estate
The components of foreclosed real estate are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
DOLLARS IN THOUSANDS 1993 1992
- --------------------------------------------------------------------------
<S> <C> <C>
REO........................................... $ 8,295 $ 3,519
Loans recharacterized as REO.................. 11,629 16,830
------- -------
19,924 20,349
Less accumulated provision for REO losses..... (819) (2,404)
------- -------
$19,105 $17,945
------- -------
------- -------
</TABLE>
The following schedule provides a roll-forward of the accumulated provision for
REO losses:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1993 1992 1991
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1..................... $ 2,404 $ 2,228 $ 561
Provision for losses..................... 1,879 1,828 1,900
Charge-offs.............................. (3,510) (1,777) (661)
Recoveries............................... 46 125 428
------- ------- ------
Balance at December 31................... $ 819 $ 2,404 $2,228
------- ------- ------
------- ------- ------
</TABLE>
The following schedule provides details of the results of operations on
foreclosed real estate for the years ending December 31, 1993, 1992, and 1991.
The schedule summarizes operating revenues and expense for each foreclosed real
estate property on a gross basis for 1993 and 1992 and on a net basis for 1991:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1993 1992 1991
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Income on foreclosed
real estate............................ $ 1,749 $ 2,868 $ 693
Expense on foreclosed
real estate............................ 2,573 4,026 730
------- ------- -------
Net operating loss
on foreclosed real estate.............. (824) (1,158) (37)
Gains on sale of
foreclosed real estate................. 187 1,670 39
Provision for losses on REO............. (1,879) (1,828) (1,900)
------- ------- -------
Loss on foreclosed real estate.......... $(2,516) $(1,316) $(1,898)
------- ------- -------
------- ------- -------
</TABLE>
NOTE J
Real Estate Held for Investment
Income from real estate development operations is summarized as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1993 1992 1991
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Sale of real estate..................... $11,326 $ 6,843 $ 4,827
Cost of sales........................... 8,357 4,401 2,790
------- ------- -------
Gross margin on
real estate operations................. 2,969 2,442 2,037
Other income............................ 97 139 162
General and administrative
expense................................ (1,096) (1,000) (846)
Interest income, net
of interest expense.................... 300 198 153
------- ------- -------
Income before income taxes.............. $ 2,270 $ 1,779 $ 1,506
------- ------- -------
------- ------- -------
</TABLE>
Interest capitalized to the balance of real estate held for investment amounted
to $570,000, $218,000 and $11,000 during 1993, 1992, and 1991, respectively.
NOTE K
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank ("FHLB") system, the Bank is
required to maintain a specified level of investment in FHLB stock. The capital
stock is issued at $100 par, and the required amount of ownership is generally
calculated as a percentage of aggregate outstanding mortgages. The investment
in FHLB stock is carried on the Consolidated Statements of Financial Condition
at cost. The market value of FHLB stock equals its book value since the shares
can be resold to the FHLB or other member banks at its par value of $100 per
share.
Dividends earned on FHLB stock were $1.9 million, $1.7 million, and
$2.0 million in 1993, 1992, and 1991, respectively. Dividend income has been
classified as investment interest income on the Consolidated Statements of
Income.
FHLB stock is used as collateral for FHLB advances.
48
<PAGE> 33
NOTE L
Office Properties and Equipment
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
DOLLARS IN THOUSANDS 1993 1992
- -----------------------------------------------------------------------
<S> <C> <C>
Cost:
Land...................................... $ 8,521 $ 6,978
Buildings and improvements................ 35,608 29,567
Furniture, fixtures and equipment......... 23,410 20,896
Leasehold improvements.................... 2,305 2,141
------ ------
69,844 59,582
Less allowances for
depreciation and amortization............ 28,979 26,056
------ ------
$ 40,865 $ 33,526
------ ------
------ ------
</TABLE>
In connection with a branch acquisition in 1991, the Bank entered into a
capital lease agreement for the use of the branch facility. Although the lease
has a term of 25 years, the Bank has the option to purchase the facility during
1996, or any time after October 1999. The Bank also has operating leases on
certain office properties. Rent expense incurred in connection with these
leases was $2.0 million, $1.7 million, and $1.5 million for 1993, 1992, and
1991, respectively.
Minimum future capital and operating lease commitments are summarized
as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS YEAR ENDING DECEMBER 31
CAPITAL OPERATING
LEASES LEASES
- ---------------------------------------------------------------------------
<S> <C> <C>
1994.......................................... $ 443 $ 1,484
1995.......................................... 458 1,441
1996.......................................... 459 1,265
1997.......................................... 436 1,113
1998.......................................... 468 976
Later years................................... 16,125 5,895
-------- -------
Total........................................ $ 18,389 $12,174
-------- -------
-------- -------
Less amount representing interest............. (17,147)
--------
--------
Present value of net minimum lease
payments under capital lease............... $ 1,242
--------
--------
</TABLE>
NOTE M
Prepaid Expenses and Other Assets
Prepaid expenses and other assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
DOLLARS IN THOUSANDS 1993 1992
- ---------------------------------------------------------------------------
<S> <C> <C>
Deferred tax asset (net)-Note Q...................... $10,658 $18,951
Excess of purchase price over fair value
of assets acquired................................ 1,792 2,377
Excess servicing fee receivable...................... 1,348 1,290
Purchased mortgage servicing rights.................. 99 207
Other prepaid assets and deferred charges............ 23,888 10,231
------- -------
$37,785 $33,056
------- -------
------- -------
</TABLE>
The amortization of the excess of purchase price over fair value of assets
acquired (i.e., goodwill) amounted to $270,000, $308,000, and $169,000 for
1993, 1992 and 1991, respectively.
The Company estimates the fair market value of its excess servicing fee
receivable to be $1.3 million at both December 31, 1993 and 1992. The fair
value of this asset was determined based upon the present value of anticipated
loan servicing cashflows, discounted at a market rate of interest for assets
with similar risk.
49
<PAGE> 34
Note N
Deposits
Deposit balances are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
INTEREST RATE AS OF
DECEMBER 31
DOLLARS IN THOUSANDS 1993 1992 1993 1992
AMOUNT % AMOUNT %
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CORE ACCOUNTS:
Interest bearing checking.............................................. 1.78% 2.47% $ 252,854 7.8% $ 182,995 6.1%
Non-interest bearing checking.......................................... 0.00 0.00 81,579 2.5 82,182 2.8
Other non-interest bearing accounts.................................... 0.00 0.00 51,811 1.6 41,329 1.4
Savings accounts....................................................... 2.42 3.04 801,868 24.7 665,303 22.3
Money market accounts.................................................. 2.71 3.14 300,994 9.3 265,290 8.9
----- ----- ---------- ----- ---------- ------
Core accounts.......................................................... 2.16 2.67 1,489,106 45.9 1,237,099 41.5
CERTIFICATES OF DEPOSIT:*
3 months and under..................................................... 2.75 3.20 59,015 1.8 92,903 3.1
6 months............................................................... 3.06 3.60 262,855 8.1 299,339 10.0
7 months............................................................... 3.00 3.30 5,962 0.2 8,032 0.3
9 months............................................................... 3.30 3.97 22,702 0.7 51,086 1.7
12 months.............................................................. 3.47 4.12 315,380 9.7 302,547 10.1
15 months.............................................................. 4.50 5.08 23,948 0.7 42,284 1.4
18 months.............................................................. 3.95 4.68 144,615 4.4 233,684 7.8
24 months.............................................................. 4.89 5.24 137,864 4.2 132,924 4.5
30 months.............................................................. 4.80 5.34 196,376 6.0 97,894 3.3
36 months.............................................................. 5.85 6.78 162,607 5.0 144,068 4.8
48 months.............................................................. 6.85 7.31 16,558 0.5 12,802 0.4
60 months.............................................................. 7.01 7.75 292,146 9.0 237,872 8.0
84-120 months.......................................................... 6.53 6.94 45,342 1.4 20,001 0.7
Jumbo accounts......................................................... 3.38 3.81 27,828 0.9 37,249 1.2
Other.................................................................. 7.74 9.39 50,314 1.5 35,340 1.2
----- ----- ---------- ----- ---------- ------
Certificates of deposit ............................................... 4.73% 5.09% $1,763,512 54.1% $1,748,025 58.5%
----- ----- ---------- ----- ---------- ------
Total deposits......................................................... 3.56% 4.10% $3,252,618 100.0% $2,985,124 100.0%
----- ----- ---------- ----- ---------- ------
----- ----- ---------- ----- ---------- ------
Accrued interest....................................................... $ 3,057 $ 3,451
---------- ----------
---------- ----------
Total deposit-related liabilities...................................... $3,255,675 $2,988,575
---------- ----------
---------- ----------
</TABLE>
*Based upon original maturities.
The following table presents the carrying amount and fair value of core
accounts and certificates of deposits ("CDs") at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
DECEMBER 31
DOLLARS IN THOUSANDS 1993 1992
- ------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Core accounts
with no stated
maturities................... $1,489,106 $1,489,106 $1,237,099 $1,237,099
CDs........................... 1,763,512 1,784,205 1,748,025 1,766,164
---------- ---------- ---------- ----------
$3,252,618 $3,273,311 $2,985,124 $3,003,263
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Under SFAS No. 107, the fair value of core deposit accounts with no
stated maturity, such as savings, checking, and money market accounts, is
considered to be equal to the amount payable on demand. The fair value of CDs
was computed as the present value of future cash outflows, based on contractual
maturities, discounted at rates equivalent to those offered by the Bank at
December 31, 1993 and 1992 for CDs with similar maturities.
Accrued interest payable on deposits was reported in other liabilities
on the Consolidated Statements of Financial Condition. The fair value of accrued
interest payable on deposits at December 31, 1993 and 1992 is equal to its $3.1
million and $3.5 million carrying amounts, respectively.
Interest expense by category of deposit is summarized as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1993 1992 1991
<S> <C> <C> <C>
Checking accounts................... $ 4,853 $ 4,585 $ 7,252
Savings accounts.................... 20,521 22,828 28,896
Money market accounts............... 10,102 10,104 12,178
Certificates of deposit............. 86,797 107,716 138,722
--------- -------- --------
$ 122,273 $145,233 $187,048
--------- -------- --------
--------- -------- --------
</TABLE>
50
<PAGE> 35
NOTE O
FHL Bank Advances
Notes payable to the Federal Home Loan Bank consisted of the following:
<TABLE>
<CAPTION>
DOLLARS
IN THOUSANDS DECEMBER 31, 1993 DECEMBER 31, 1992
- --------------------------------------------------------------------------------
AMOUNT BORROWED WEIGHTED AMOUNT BORROWED WEIGHTED
---------------- AVERAGE ------------------- AVERAGE
FAIR INTEREST FAIR INTEREST
BALANCE VALUE RATE BALANCE VALUE RATE
<S> <C> <C> <C> <C> <C> <C>
1993 maturity $ - $ - -% $67,279 $ 68,708 8.36%
1994 maturity 263 265 6.95 25,263 25,272 4.33
1995 maturity 275 285 7.14 275 287 7.14
1996 maturity 5,282 5,738 8.39 5,285 5,678 8.37
1997 maturity 314 337 7.35 314 328 7.35
2001 maturity 248 282 8.30 248 268 8.30
2005 maturity 200 159 3.90 200 145 3.90
2008 maturity 637 633 6.22 637 581 6.22
------ ------- ---- ------- -------- ----
$ 7,219 $ 7,699 7.93% $99,501 $101,267 7.31%
------ ------- ---- ------- -------- ----
------ ------- ---- ------- -------- ----
</TABLE>
The fair values of FHLB advances were determined based on
a discounted cash flow analysis using a discount rate commensurate with rates
currently offered by the FHLB for similar remaining maturities.
Accrued interest on FHLB advances is reported in other liabilities on
the Consolidated Statements of Financial Condition. The fair value of accrued
interest payable on FHLB advances at December 31, 1993 and 1992 is equal to its
$49,000 and $811,000 carrying amounts, respectively.
The Bank maintains qualifying loans in its portfolio of at least 170%
of outstanding advances, as collateral for notes payable to the FHLB of
Chicago. The FHLB stock is also pledged as collateral.
NOTE P
Other Borrowings
Other borrowings consisted of the following:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS DECEMBER 31, 1993 DECEMBER 31, 1992
- ---------------------------------------------------------------------------------------------------------------------------------
AMOUNT BORROWED WEIGHTED AMOUNT BORROWED WEIGHTED
--------------- AVERAGE --------------- AVERAGE
FAIR INTEREST FAIR INTEREST
BALANCE VALUE RATE BALANCE VALUE RATE
<S> <C> <C> <C> <C> <C> <C>
Securities sold under agreements to repurchase.................... $ - $ - -% $45,400 $46,125 5.57%
St. Paul Bancorp employee stock ownership plan (ESOP)............. 4,240 4,240 6.08 2,071 2,074 6.88
Floating-rate notes............................................... - - - 20,000 19,950 4.50
Mortgage-backed medium term notes................................. 16,392 18,276 8.80 16,400 17,615 9.00
Subordinated notes (net of $1,143 unamortized discount)........... 33,357 34,024 8.95 - - -
Mortgage note..................................................... 1,520 1,520 7.00 1,830 1,830 7.00
-------- ------- ----- ------- ------ -----
55,509 58,060 8.63 85,701 87,594 6.04
------- ------
------- ------
Capital lease obligations......................................... 1,242 37.95 1,206 33.83
-------- ----- ------- -----
Total other borrowings........................................... $ 56,751 9.28% $86,907 6.42%
-------- ----- ------- -----
-------- ----- ------- -----
</TABLE>
The fair value of the subordinated notes and the mortgage-backed note were
based upon quotes received from securities dealers. The fair value of the ESOP
borrowing was determined based on a discounted cash flow analysis using a
discount rate commensurate with rates the ESOP would pay to obtain similar
funds.
Accrued interest payable was reported in other liabilities on the
Consolidated Statements of Financial Condition. The fair value of accrued
interest payable on other borrowings at December 31, 1993 and 1992 is equal to
its $634,000 and $680,000 carrying amounts, respectively.
Securities Sold Under Agreements To Repurchase: The Bank enters into
sales of securities under agreements to repurchase with nationally-recognized
primary securities dealers and financial institutions. During 1993, the average
month-end balance of these borrowings was $22.7 million with an average
month-end rate of 5.67%. The highest month-end balance during the year was $44.3
million. Securities sold under agreements to repurchase can have varying
maturities and are secured by designated MBS which are held by an independent
trustee. Short-term agreements generally fund cash management activities. The
51
<PAGE> 36
proceeds from long-term agreements are generally used to match lending and
investing opportunities at profitable spreads. At December 31, 1992, the
collateral securing these borrowings had a carrying value of $48.4 million and
a market value of $49.0 million.
ESOP Borrowings: A non-contributory, leveraged employee stock ownership
plan was established by the Bank in April 1987. The defined benefit plan was
originally funded by a $5.0 million loan at an interest rate of 7%, maturing in
May 1994. The loan is secured by the shares of Company stock that were acquired
with the proceeds of the loan. Shares of Company stock are released from
collateral when principal and interest payments are made. The loan is guaranteed
by the Company.
In 1991, the ESOP obtained a $5.0 million line of credit through another
financial institution that was increased to $18.0 million in 1993. During 1993
and 1992, the ESOP borrowed $2.9 million and $1.0 million, respectively, under
the line of credit to purchase Company stock. The line of credit is guaranteed
by the Company and amounts drawn under the arrangement are secured by shares of
Company stock and partially secured by marketable-debt securities held by
St.Paul Bancorp.
At December 31, 1993 and 1992, Company stock securing both borrowings
had carrying values of $4.2 million and $1.7 million and market values of $6.3
and $3.8 million, respectively. At December 31, 1993, the carrying and market
value of marketable-debt securities securing the borrowings was $989,000. At
December 31, 1992, the carrying and market values of marketable-debt securities
securing the borrowings was $515,000.
Floating-Rate Notes: The Bank assumed $20.0 million of floating-rate
notes in 1991 which were originally issued by Arlington Heights Federal Savings
and Loan Association of Chicago in 1988. These notes matured in April 1993.
Mortgage-Backed Notes: The Bank had $16.4 million of mortgage-backed
notes outstanding as of December 31, 1993 and 1992. The mortgage-backed notes
are secured by MBS held by an independent trustee. Collateral requirements are
based on a collateral maintenance test assuring an aggregate market value of not
less than the amount necessary to effect a maturity collateral substitution if
necessary. At December 31, 1993, the collateral securing these notes had a
carrying and market value of $22.0 million. At December 31, 1992, the collateral
securing these notes had a carrying value of $24.2 million and a market value of
$25.0 million. As of December 31, 1993, these notes had a "AAA" rating from
Moody's Investor Services. The Bank may issue up to an additional $400.0 million
of such notes with varying terms through an existing underwriting agreement,
subject to market conditions.
Mortgage Note: During 1992, St.Paul Financial obtained a $2.0 million
mortgage note from another institution. The note initially matured on December
31, 1993, but was extended during the year to mature on December 31, 1995. At
December 31, 1993 and 1992, real estate serving as collateral for the mortgage
note had carrying values of $2.5 million and $2.8 million, respectively.
Capital Lease Obligations: In 1991, the Bank entered into a capital
lease for the use of a branch facility. While the term of this lease extends to
2016, the Bank has the option to purchase the related facility at the end of
year five or any time after October 1999.
Subordinated Notes: In February 1993, the Company issued $34.5 million
of 8.25% subordinated notes that was used by the Company for general corporate
purposes, including the purchase of St.Paul Financial from the Bank. The Notes
will mature on January 31, 2000, but may be redeemed without penalty any time
after January 31, 1996. The Notes are unsecured general obligations of the
Company and are subordinated to all senior indebtedness. The notes limit the
amount of indebtedness the Company may incur in future periods as well as the
payment of dividends and other capital distributions. See "Note R -
Stockholders' Equity" for description of dividend and capital distribution
limitations.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS YEAR-END 1993 BORROWINGS BY MATURITY
- --------------------------------------------------------------------------------------------------------
AFTER
1994 1995 1996 1997 1998 1998 TOTAL
--------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
Mortgage-backed notes.................. $ - $ - $ - $ - $ - $16,392 $16,392
Capital lease obligations.............. - - - - - 1,242 1,242
St.Paul Bancorp ESOP................... 357 21 203 324 324 3,011 4,240
Subordinated notes..................... - - - - - 33,357 33,357
Mortgage note.......................... - 1,520 - - - - 1,520
---- ------ ------ ------ ------ ------- -------
</TABLE>
52
<PAGE> 37
NOTE Q
Income Taxes
The following schedule summarizes the components of income tax expense
for 1993, 1992, and 1991. The amounts reported as current and deferred income
tax expense for 1992 have been restated to conform to the 1992 tax return which
was filed several months after the end of the fiscal year. Total income tax
expense is not affected by the reclassification of current and deferred taxes.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
DOLLARS IN THOUSANDS 1993 1992 1991
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Income Tax Expense:
Current provision......................... $ 15,671 $ 21,099 $ 17,141
Deferred expense (benefit)................ 2,903 (932) (3,537)
-------- -------- --------
18,574 20,167 13,604
-------- -------- --------
State income tax expense:
Current provision......................... 110 225 3,013
Deferred expense (benefit)................ 377 (67) (110)
-------- -------- --------
487 158 2,903
-------- -------- --------
Total Income Tax Expense:
Current provision ........................ 15,781 21,324 20,154
Deferred expense (benefit) ............... 3,280 (999) (3,647)
-------- -------- --------
Income taxes $ 19,061 $ 20,325 $ 16,507
-------- -------- --------
-------- -------- --------
</TABLE>
A reconciliation from expected federal income tax expense to consolidated
effective income tax expense for the periods indicated is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
DOLLARS IN THOUSANDS 1993 1992 1991
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income
tax rate................................. 35% 34% 34%
-------- -------- --------
-------- -------- --------
Federal income tax expense at
statutory rate......................... $ 21,157 $ 19,724 $ 14,858
State tax expense, net of
federal tax benefit.................... 317 665 1,916
1% change in deferred
tax rate................................. (426) - -
Federal income tax refunds................ (1,141) - -
Other..................................... (846) (64) (267)
-------- -------- --------
Income taxes.............................. $ 19,061 $ 20,325 $ 16,507
-------- -------- --------
-------- -------- --------
</TABLE>
Deferred income taxes result from temporary differences in the recognition of
income and expense for tax and financial statement purposes. The sources of
these temporary differences and their resulting effect on income tax expense
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
DOLLARS IN THOUSANDS 1993 1992 1991
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
General loan loss allowance............... $ 2,154 $ (393) $ (1,935)
Excess of tax accumulated
provision for losses over
base year amount......................... (823) (1,779) (1,360)
Yield adjustments on interest
earning assets and interest
bearing liabilities...................... 1,141 822 (999)
Tax depreciation in excess
of book depreciation..................... (1) (208) 33
State income taxes........................ (140) 293 200
Section 461 expenses...................... 34 220 -
Accrued compensation...................... 139 (194) 33
Stock dividends on
FHLB stock............................... 57 432 504
Change in deferred tax rates.............. 426 - -
Other, net................................ 293 (192) (123)
------- ------- --------
Total..................................... $ 3,280 $ (999) $ (3,647)
------- ------- --------
------- ------- --------
</TABLE>
The following schedule summarizes current income tax liabilities and assets and
deferred income tax assets as of December 31, 1993 and 1992, as restated to
conform with tax returns filed for the respective years.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1993 1992
- --------------------------------------------------------------------------
<S> <C> <C>
Income Tax Liabilities and (Assets):
Income taxes currently payable
included in "Other Liabilities" ............. $ 906 $ 3,766
--------- --------
Deferred income tax assets.................... $(18,598) $(21,817)
Deferred income tax liabilities............... 7,940 2,866
--------- --------
Net deferred income tax assets
included in "Other Assets"................. $ (10,658) $(18,951)
--------- --------
--------- --------
</TABLE>
The sources of the deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1993 1992
- -------------------------------------------------------------------------
<S> <C> <C>
General loan loss allowance................. $ (16,702) $ (18,976)
Yield adjustments on interest-earning assets
and interest-bearing liabilities........... (387) (1,256)
Accrued compensation........................ (1,009) (1,130)
Other....................................... (500) (455)
-------- ---------
Total deferred assets....................... (18,598) (21,817)
Depreciation for tax purposes in
excess of book............................. 3,576 1,564
Stock dividends on FHLB stock............... 1,454 1,294
Unrealized gain on assets available-for-sale 2,797 -
Other....................................... 113 8
-------- ---------
Total deferred liabilities.................. 7,940 2,866
-------- ---------
Net deferred asset.......................... $(10,658) $ (18,951)
-------- ---------
-------- ---------
</TABLE>
53
<PAGE> 38
Savings banks that meet certain definitions and other conditions prescribed by
the Internal Revenue Code are allowed to deduct, within limitations, earnings
appropriated to tax bad debt reserves in arriving at federal taxable income.
Retained earnings at December 31, 1993 and 1992, included approximately $51.1
million and $38.9 million, respectively, of income for which no deferred
federal income tax liability has been recognized. This amount is not available
for payment of cash dividends or other distributions to shareholders, including
distributions on redemption, dissolution, or liquidation of the Bank without
incurring a tax liability. If triggered, the tax liability related to the
appropriated earnings would have been $19.3 million and $15.1 million at
December 31, 1993 and 1992, respectively.
The Company and its subsidiaries file a consolidated Federal income tax
return. The intercompany settlement of taxes paid is based on a tax sharing
agreement which allocates taxes to each entity based upon a separate return
basis.
NOTE R
Stockholders' Equity
Holding Company: The Company's Certificate of Incorporation authorizes
up to 40 million shares of common stock and up to 10 million shares of preferred
stock. Such preferred stock may rank prior to the common stock as to dividend
rights, liquidation preferences, or both, and may have full or limited voting
rights.
In 1992, the Company's Board of Directors adopted a Shareholder Rights
Plan which is designed to strengthen the Board's ability to act for the
stockholders in the event of an unsolicited bid to acquire control of the
Company. Each outstanding share of common stock currently is attached to one
Right under the Plan. If the Rights become exercisable, each Right initially
would entitle the holder (except the acquiring person or entity referred to
below) to purchase from the Company 0.7% of a share of Series A junior
participating preferred stock, par value $0.01 per share, at a price of $80.00,
subject to adjustment as provided in the Plan. If a person or entity becomes a
10% beneficial owner of the Company's common stock (other than through the
acquisition of newly issued shares directly from the Company), each holder of a
Right would be entitled to receive, in lieu of the preferred stock, at the
then-current exercise price of the Right, common stock (or, in certain
circumstances, cash, property, or other securities of the Company) having a
value equal to two times the exercise price.
In general, the Rights become exercisable if another person or entity
without Board approval acquires 10% or more of the Company s outstanding common
stock, makes a tender offer for that amount of stock, or files a regulatory
application for approval of a change in control of the Company. The acquiring
person or entity would not be entitled to exercise the Rights. These Rights
expire at the earliest of November 13, 2002, redemption of the Rights by the
Company at a price of $0.01 per Right, or exchange of the Rights in accordance
with the Plan. The Rights will cause substantial dilution to a person or entity
attempting to acquire the Company without conditioning the offer on the Rights
being redeemed or a substantial number of Rights being acquired.
At December 31, 1993 and 1992, 144,551 and 135,943 shares of preferred
stock, respectively, were reserved for future exercise of the Rights.
Dividends and other distributions of St.Paul Bancorp stock are subject
to restrictions agreed upon by the Company in connection with the issuance of
$34.5 million of subordinated notes in 1993. Cumulative dividends and other
distributions subsequent to December 31, 1992 are limited to the sum of: (a)
$22.0 million plus (b) 75% of the Company's aggregate consolidated net income
subsequent to December 31, 1992, less (c) 100% of the amount of consolidated net
loss incurred by the Company during any fiscal year subsequent to December 31,
1992 plus (d) 100% of the net proceeds received by the Company from any equity
securities issued by the Company (other than to a subsidiary) subsequent to
December 31, 1992.
On January 13, 1994, St.Paul Bancorp announced its intention 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.
Bank: New capital standards were imposed on all federally-insured depository
institutions as a result of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989. Regulatory standards impose the following capital
requirements: a risk-based capital standard expressed as a percent of
risk-adjusted assets, a leverage ratio of core capital to total adjusted
assets, and a tangible capital ratio expressed as a percent of total adjusted
assets. As of December 31, 1993, the Bank exceeded all regulatory capital
standards.
The following schedule presents the Bank's regulatory capital ratios as
of December 31, 1993:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
- --------------------------------------------------------------------------
CORE TANGIBLE RISK-BASED
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 54,938 180,491
--------- --------- ---------
Excess capital...................... $ 238,114 $ 293,051 $ 195,864
--------- --------- ---------
--------- --------- ---------
</TABLE>
54
<PAGE> 39
The following schedule reconciles stockholders' equity of the Company to each
of the components of regulatory capital of the Bank at December 31, 1993 and
1992:
<TABLE>
<CAPTION>
1993 1992
- --------------------------------------------------------------------
<S> <C> <C>
Stockholders equity of
the Company.............................. $347,329 $287,341
Plus: borrowings by employee stock
ownership plan......................... 4,240 2,071
Less: capitalization of the Company....... (477) (9,200)
-------- --------
Shareholder s equity of the Bank.......... 351,092 280,212
Less: investment in non-includable
subsidiaries........................... (880) (9,286)
Less: intangible assets................... (2,223) (3,220)
-------- --------
Tangible and core......................... 347,989 267,706
Plus: allowable general
valuation allowances..................... 28,366 29,173
-------- --------
Risk-based capital........................ $376,355 $296,879
-------- --------
-------- --------
</TABLE>
Applicable rules and regulations of the OTS impose limitations on capital
distributions by savings institutions such as the Bank. Within these
limitations, certain capital distributions are permitted, subject to providing
the OTS at least 30 days advance notice. The permitted amount is based upon an
institution s regulatory capital level. Savings institutions which have capital
in excess of all fully phased-in capital requirements before and after the
proposed capital distributions ("Tier 1 Institutions") may make capital
distributions during a calendar year up to the greater of (i) 100% of net
income to date during the calendar year, plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess of capital over its
fully-phased-in capital requirements) at the beginning of the calendar year, or
(ii) 75% of its net income over the most recent four-quarter period.
Institutions which meet minimum regulatory capital requirements, but not fully
phased-in requirements, before or after a proposed capital distribution ("Tier
2 Institutions"), may make distributions of up to 75% of net income over the
most recent four-quarter period. Savings institutions that do not meet minimum
regulatory capital requirements prior to or after the proposed capital
distribution ("Tier 3 Institutions") may not make any capital distributions
without prior approval of the OTS. Savings institutions may apply to the OTS to
make capital distributions in excess of the safe harbor amount. The OTS also
may prohibit a proposed capital distribution by an institution if the OTS
determines that such distribution would constitute an unsafe or unsound
practice.
The Bank currently has capital in excess of fully phased-in requirements
such that it meets the Tier 1 institution criteria.
Effective December 19, 1992, recently enacted legislation prohibits an
insured depository institution from declaring any dividends, making any other
capital distribution, or paying a management fee to a controlling person if,
following the distribution or payment, the institution would be classified as
"undercapitalized ".
The OTS has indicated that it intends to review its existing capital
distribution regulations to determine whether amendments are necessary based on
such legislation. In the interim, the OTS has indicated that it intends to
determine the permissibility of capital distributions consistent with its
recently adopted prompt corrective action regulations. Under the prompt
corrective action regulations, a savings institution would be
"undercapitalized" if the institution has a core to risk-weighted asset ratio
of less than 4%, or a leverage ratio that is less than 4% (3% if the
institution is rated Composite 1 in its most recent report of examination).
At December 31, 1993, the Bank qualified as a "well capitalized" institution.
A savings institution permitted to make a capital distribution under the
prompt corrective action regulations may do so only if the amount and type
also would be permitted under the OTS existing capital distribution
regulations discussed above.
NOTE S
Stock Option Plan
The Board of Directors of the Company has a stock option plan (the
"Option Plan") for the benefit of directors, officers, and other key employees
ofthe Company or its subsidiaries. The Option Plan was approved by the Company's
shareholders at it 1988 annual meeting. Under the original term of the Option
Plan, 1,770,000 shares of authorized but unissued common stock were reserved for
issuance. At the 1992 annual shareholders meeting, an additional 750,000 of
authorized but unissued common stock was added to the Option Plan.
The Option Plan authorizes the Stock Option Committee of the Board of
Directors to administer the plan and make recommendations to award stock
options to key officers, directors and employees. Stock options are granted at
the discretion of the Stock Option Committee with grants generally made based
upon individual performance and upon promotions. Stock options are granted at
an option price equal to the fair market value of the Company s common stock on
the date of grant and have a ten-year term. The amount of stock option grants
increases according to salary and position within the Company. Options granted
under the Option Plan are exercisable in respect of 50% of the number of shares
on the first anniversary of the date of grant and are exercisable in respect of
an additional 12.5% on each of the second, third, fourth, and fifth
anniversaries of the date of grant, provided that the options are 100%
exercisable for any employee who has completed five years of employment with
the Company. The options also become exercisable upon any merger or
consolidation of the Company in which the Company is not the surviving entity.
55
<PAGE> 40
The following table sets forth activity
relating to the number of shares covered by stock options:
<TABLE>
<CAPTION>
1993 1992 1991
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding
at January 1 ................... 1,868,925 1,543,425 1,493,325
Granted ........................... 217,500 526,500 127,500
Exercised ......................... (134,513) (200,325) (66,525)
Canceled .......................... (1,574) (675) (10,875)
--------- --------- ---------
Options outstanding
at December 31 ................. 1,950,338 1,868,925 1,543,425
--------- --------- ---------
--------- --------- ---------
Options exercisable
at December 31 ................. 1,814,400 1,737,225 1,463,738
Shares available for future
grant at December 31 ........... 48,374 264,300 40,125
Weighted average option price
of options exercised during
the year ....................... $ 7.59 $ 6.81 $ 6.64
Weighted average option price
of options outstanding
at December 31 ................. 9.47 8.51 6.87
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE T
Employee Benefit Plans
Pension Plans: The Bank has a defined benefit pension plan ("the Plan")
covering substantially all employees of the Bank and its subsidiaries.
Benefits are based on years of service and the employee's final 60 months of
compensation. Contributions to the Plan from the Bank are designed to fund
current service costs on a current basis and to fund, over 30 years, the
estimated accrued benefit cost arising from qualifying service prior to January
1, 1976, adjusted for subsequent amendments.
Additionally, the Bank sponsors a supplemental retirement plan ("the
Supplemental Plan"). The Supplemental Plan is a non-qualified, defined benefit
plan established to provide retirement benefits (as determined by provisions of
the Plan) that would otherwise be limited by the Internal Revenue Code Sections
415 and 401(a). In connection with a cash distribution provision of the
Supplemental Plan, $80,000 of settlement losses were incurred in 1991. The Bank
also sponsors a non-qualifying, defined benefit, retirement plan for its
directors ("the Directors' Plan"). The Bank intends to fund the Supplemental
Plan and the Directors' Plan in amounts sufficient to cover benefit payments
when payable.
Total pension cost for 1993, 1992, and 1991 was $2.7 million, $2.1
million, and $1.5 million, respectively. Pension expense was comprised of the
following components:
<TABLE>
<CAPTION>
DECEMBER 31
DOLLARS IN THOUSANDS 1993 1992 1991
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
THE PLAN
Service cost benefits earned
during the period ................. $ 1,399 $ 1,130 $ 801
Interest cost on projected
benefit obligation ................ 1,509 1,310 1,091
Return on plan assets ................ (1,225) (964) (766)
Net amortization and deferral ........ 219 147 24
------- -------- --------
Pension cost ......................... $ 1,902 $ 1,623 $ 1,150
------- -------- --------
------- -------- --------
THE SUPPLEMENTAL PLAN
Service cost benefits earned
during the period ................. $ 215 $ 150 $ 60
Interest cost on projected
benefit obligation ................ 269 186 93
Loss on plan settlement .............. - - 80
Net amortization and deferral ........ 183 133 54
------- -------- --------
Pension cost ......................... $ 667 $ 469 $ 287
------- -------- --------
------- -------- --------
THE DIRECTORS' PLAN
Service cost benefits earned
during the period ................. $ 34 $ 33 $ 27
Interest cost on projected
benefit obligation ................ 31 7 4
Net amortization and deferral ........ 32 - -
------- -------- --------
Pension cost ......................... $ 97 $ 40 $ 31
------- -------- --------
------- -------- --------
TOTAL
Service cost benefits earned
during the period ................. $ 1,648 $ 1,313 $ 888
Interest cost on projected
benefit obligation ................ 1,809 1,503 1,188
Return on plan assets ................ (1,225) (964) (766)
Loss on plan settlement .............. - - 80
Net amortization and deferral ........ 434 280 78
------- -------- --------
Total pension cost ................ $ 2,666 $ 2,132 $ 1,468
------- -------- --------
------- -------- --------
</TABLE>
56
<PAGE> 41
The following table sets forth the plans' funded status and amounts recognized
in the Company's Consolidated Statements of Financial Condition at December 31:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1993 1992
SUPPLEMENTAL DIRECTORS' SUPPLEMENTAL DIRECTORS'
PLAN PLAN PLAN PLAN PLAN PLAN
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Plan assets at fair value ............. $ 16,797 $ - $ - $ 13,656 $ - $ -
--------- --------- -------- -------- --------- ---------
Accumulated Benefit Obligation (ABO):
Vested ................................ $ 12,461 $ 1,288 $ 414 $ 8,083 $ 687 $ 262
Non-vested ............................ 1,569 459 - 880 257 -
--------- --------- -------- -------- --------- ---------
--------- --------- -------- -------- --------- ---------
$ 14,030 $ 1,747 $ 414 $ 8,963 $ 944 $ 262
--------- --------- -------- -------- --------- ---------
--------- --------- -------- -------- --------- ---------
Overfunded (unfunded) ABO ............. $ 2,767 $ (1,747) $ (414) $ 4,693 $ (944) $ (262)
--------- --------- -------- -------- --------- ---------
--------- --------- -------- -------- --------- ---------
Projected benefit obligation (PBO) .... $ 22,910 $ 4,108 $ 452 $ 18,676 $ 2,735 $ 279
--------- --------- -------- -------- --------- ---------
--------- --------- -------- -------- --------- ---------
Unfunded PBO .......................... $ (6,113) $ (4,108) $ (452) $ (5,020) $ (2,735) $ (279)
--------- --------- -------- -------- --------- ---------
--------- --------- -------- -------- --------- ---------
Comprised of:
Accrued pension cost .................. $ (415) $ (1,747) $ (413) $ (164) $ (944) $ (262)
Unrecognized net loss ................. (5,611) (2,264) (113) (4,764) (1,507) (16)
Unrecognized prior service costs ...... (649) (224) (135) (723) (250) (157)
Unrecognized net obligation (asset) at
January 1, 1987, net of
amortization ......................... 562 (194) - 631 (219) -
--------- --------- -------- -------- --------- ---------
Adjustment required to recognize
minimum liability ................... $ - $ 321 $ 209 $ - $ 185 $ 156
--------- --------- -------- -------- --------- ---------
--------- --------- -------- -------- --------- ---------
</TABLE>
The following actuarial assumptions were used in calculating net pension cost
and benefit obligations:
<TABLE>
<CAPTION>
1993 1992 1991
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate .................. 7.50% 8.25% 9.00%
Long-term rate of
return on assets .............. 8.50 8.00 8.00
Rate of increase in
future compensation levels .... 5.50 7.50 7.50
----- ----- -----
----- ----- -----
</TABLE>
At December 31, 1993, the Plan's assets consisted of short-term treasury notes
and bonds, long-term corporate and government bonds, and various equity
securities. Included in the equity securities is $3,342,000 of Company stock.
Pension cost for the Plan is calculated using the expected return on plan
assets. The difference between the actual return and expected return is
included in unrecognized gains and losses and is reflected in pension cost in
future periods as amortization occurs.
Employee Stock Ownership Plan: 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
December 31, 1993, $357,000 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. As of December 31, 1993, $3.9 million of this line of credit is
outstanding. Outstanding ESOP borrowings are guaranteed by the Company and are
included in other borrowings and stockholders' equity in the Consolidated
Statements of Condition.
In addition to the acquisition of Company stock through proceeds from
borrowings, the ESOP also purchases additional shares with ESOP contributions in
excess of debt service requirements.
Leveraged shares of Company stock are held by the ESOP trustee as
collateral on the loan. As the loans are repaid, shares held as collateral are
released. The ESOP loans are being repaid from Bank contributions and dividends
on Company stock. Payment of the ESOP loans is guaranteed by the Company. The
ESOP borrowings are also partially secured by marketable-debt securities held by
St.Paul Bancorp.
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 Company stock. ESOP expense totaled $846,000,
$1.1 million, and $980,000 for 1993, 1992, and 1991, respectively.
The following table presents ESOP contributions and loan activity :
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1993 1992 1991
- ----------------------------------------------------------------
<S> <C> <C> <C>
Total contributions to ESOP ........ $ 844 $ 1,075 $ 805
Less: contributions used to
purchase stock .................. 170 425 142
------ ------- -----
Contributions used to
repay loan ........................ 674 650 663
Dividends received on company
stock ........................... 262 224 210
------ ------- -----
Total ESOP loan payments ........... 936 874 873
Less: interest ..................... 222 160 159
------ ------- -----
Amortization on ESOP borrowing ..... $ 714 $ 714 $ 714
------ ------- -----
------ ------- -----
</TABLE>
57
<PAGE> 42
NOTE U
Financial Instruments With Off-Balance
Sheet Credit Risk
Loans Sold With Recourse: At December 31, 1993 and 1992, the Bank serviced
$138.6 million and $202.0 million, respectively, of multi-family loans sold
with recourse. The Bank s credit exposure with respect to these loans sold with
recourse totaled $37.9 million and $42.0 million, respectively, and was
collateralized by MBS and letters of credit.
The multi-family loans were originated by the Bank based upon its normal
underwriting standards and continue to be serviced and analyzed by the Bank. The
maximum loss related to multi-family loans sold with recourse which would be
recognized by the Bank in the event of complete default by the borrowers and
worthlessness of the collateral at December 31, 1993 and 1992 is $37.9 and $42.0
million, respectively.
The following schedule presents the geographical distribution of the
real estate collateral of multi-family loans sold with recourse as of December
31, 1993 and 1992:
<TABLE>
<CAPTION>
Dollars in thousands 1993 1992
- ----------------------------------------------------------------------------
Amount % Amount %
<S> <C> <C> <C> <C>
California .............. $ 60,885 43.9% $ 102,901 50.9%
Washington .............. 36,030 26.0 40,375 20.0
Minnesota ............... 19,543 14.1 19,745 9.8
Illinois ................ 2,108 1.5 4,742 2.3
Other ................... 20,034 14.5 34,243 17.0
--------- ----- --------- -----
$ 138,600 100.0% $ 202,006 100.0%
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
Management evaluates loans sold with recourse in connection with its
review of the adequacy of the general valuation allowance to insure that
reserves are adequate to absorb potential losses on these loans. For further
discussion, which is not included as part of these financial statements, see
"Credit" section in "Management's Discussion and Analysis."
It is not practicable to estimate the fair value of the Company's
liability with respect to loans sold with recourse because of the significance
of the cost to obtain external quotes. The fair value of the liability for loans
sold with recourse would represent the amount the Bank would have to pay a third
party to assume the recourse obligation.
Loan Origination Commitments: At December 31, 1993, the Bank had outstanding
loan commitments to originate 1-4 family, first mortgage loans of $52.4
million. These commitments consisted of adjustable-rate loan commitments
totaling $26.3 million and fixed-rate loan commitments of $26.1 million. Most of
these commitments expire after 60 days. As of December 31, 1993, the Bank had
forward sales contracts for $17.5 million of the $26.1 million of fixed-rate
loan commitments. See "Forward Commitments" following.
At December 31, 1992, the Bank had outstanding loan commitments to
originate 1-4 family, first mortgage loans of $50.8 million. These commitments
consisted of adjustable-rate loan commitments totaling $31.1 million and
fixed-rate loan commitments of $19.7 million. As of December 31, 1992, the Bank
had forward sales contracts for $4.6 million of the $19.7 million of fixed-rate
loan commitments. See "Forward Commitments" following.
The Bank enters loan commitments after a determination is made regarding the
borrower's ability to repay the loan and the adequacy of the property as
collateral. Generally, loan commitments are limited to 80% of the collateral
value unless private mortgage insurance is obtained. The Bank attempts to
fulfill loan commitments as long as no violations of conditions established in
the contract occur. Historically, approximately 90% of the loan commitments have
been fulfilled.
The fair value of commitments to originate mortgage loans was $526,000 and
$256,000 at December 31, 1993 and 1992, respectively. The fair value of forward
commitments represents the amount the Bank would have to pay a third party to
assume the credit extension commitment and was estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
borrowers. For fixed-rate loan commitments, fair value also considers the
difference between current interest rates and the committed rates. See "Forward
Commitments" for fair value of forward sale commitments.
Forward Commitments: As of December 31, 1993, the Bank had forward loan
sale commitments of $38.1 million, including $17.5 million of forward contracts
on loan disbursement commitments. As of December 31, 1992, the Bank had forward
loan sale commitments of $15.6 million, including $4.6 million of forward
contracts on loan disbursement commitments. All market value losses on forward
commitments have been reflected in the consolidated financial statements.
At December 31, 1993, the fair value of these forward loan sale
commitments was $70,000. The 1993 fair value represents the loss the Bank would
incur to enter into an offsetting agreement and was determined from quotes
received from securities dealers. At December 31, 1992, the fair value of these
forward loan sale commitments was $188,000. The 1992 fair value represents the
gain the Bank would incur to enter into an off-setting agreement and was
determined from quotes received from securities dealers.
Unused Credit Lines: The Bank had unused home equity lines of credit of $33.5
million and $29.0 million, respectively, as of December 31, 1993 and 1992.
The Bank had unused credit card lines of credit of $21.0 million as of December
31, 1992. The Bank had no unused credit card lines of credit as the credit card
portfolio was sold in 1993. Home equity lines of credit represent junior
mortgages. The Bank applies similar underwriting standards to equity lines of
credit as it does on first mortgage loans. Home equity lines of credit have
fixed expiration dates. Since many of the line of credit commitments will
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The maximum loss that would be recognized by
the Bank as of December 31, 1993, in the event that borrowers used 100% of their
outstanding credit limits and, subsequently, a complete default by the borrowers
58
<PAGE> 43
and worthlessness of underlying collateral occurred is $33.5 million. As of
December 31, 1992, the maximum loss that would have been recognized by the Bank
in the event that borrowers used 100% of their outstanding credit limits and,
subsequently, a complete default by the borrowers and worthlessness of
underlying collateral occurred was $50.0 million.
At December 31, 1993, there was no fair value gain or loss on the home equity
lines of credit. At December 31, 1992, the fair value loss on home equity and
credit card lines of credit was $230,000 and $140,000, respectively. The fair
value represents the amount the Bank would be required to pay a third party to
assume the credit extension commitment and was estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
borrowers. For fixed-rate lines of credit and credit card commitments, fair
value also considers the difference between current interest rates and committed
rates.
Letters of Credit: At December 31, 1993 and 1992, the Company had issued $6.1
million and $4.1 million, respectively, of standby letters of credit. The
Company has issued letters of credits to various counties and villages as a
performance guarantee of land development and improvements by St.Paul
Financial, and to a commercial bank as collateral for a loan on a land
development project. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending credit. As
of December 31, 1993 and 1992, the maximum loss that would be recognized by the
Company in the event of a complete default by the creditors and worthlessness
of the underlying collateral was $6.1 million and $4.1 million, respectively.
The fair value of the letters of credit was $41,000 and $38,000 at December
31, 1993, and 1992, respectively, which represents the amount the Company would
have to pay a third party to assume the letter of credit liability.
Interest Rate Swaps: The Bank used interest rate swap agreements in 1993 and
1992 to help manage its interest rate exposure. At December 31, 1993 and 1992,
the Bank had $30.0 million and $50.0 million, respectively, in notional amount
interest rate swaps outstanding on which the Bank pays a fixed interest rate
and receives a floating interest rate, based on a referenced index, from the
counterparty. The Bank minimized credit and market risk by receiving an
unconditional guarantee from the parent company of the counterparty.
At December 31, 1993 and 1992, the fair value of the Bank's interest rate
swap was $1.3 million and $1.6 million, respectively. The value was obtained
from a dealer quote and represents the estimated amount the Bank would pay to
terminate the contract, taking into account current interest rates and the
creditworthiness of the counterparties.
NOTE V
Legal Proceedings
Although the Bank is a defendant in various legal proceedings arising in the
ordinary course of its business, there are no legal proceedings which, in the
opinion of Management and counsel, may result in a material loss to the Bank.
NOTE W
Concentration of Credit Risk
The Bank's loans receivable portfolio is primarily comprised of
residential mortgage loans, both 1-4 family and multi-family dwellings. By law,
savings institutions are required to concentrate their lending primarily in
residential real estate.
Although most of the loans are secured by first mortgages, the Bank also
carries some junior mortgages in its portfolios. Consumer loans are secured by
savings accounts maintained at the Bank, automobiles, or contain guarantees of
the federal government.
The following schedule presents the geographical distribution of the Bank's
collateral on real estate loans as of December 31, 1993 and 1992:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1993
- ------------------------------------------------------------------------------
1-4 ALL OTHER
FAMILY REAL REAL ESTATE
ESTATE LOANS LOANS TOTAL
-------------------- ------------------ ---------------------
AMOUNT % AMOUNT % AMOUNT %
-------------------- ------------------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
California $ 86,175 7.3% $ 662,270 57.7% $ 748,445 32.1%
Colorado 377 0.1 53,423 4.7 53,800 2.3
Florida 2,086 0.2 20,807 1.8 22,893 1.0
Illinois 978,607 82.4 91,128 7.9 1,069,735 45.8
Maryland - - 22,153 1.9 22,153 0.9
Michigan 6,798 0.6 19,504 1.7 26,302 1.1
Minnesota 478 0.1 23,761 2.1 24,239 1.0
Nevada - - 23,295 2.0 23,295 1.0
Washington - - 95,788 8.3 95,788 4.1
Wisconsin 70,362 5.9 43,507 3.8 113,869 4.9
Other 42,327 3.4 92,232 8.1 134,559 5.8
----------- ----- ----------- ----- ---------- -----
Total $ 1,187,210 100.0% $ 1,147,868 100.0% $2,335,078 100.0%
----------- ----- ----------- ----- ---------- -----
----------- ----- ----------- ----- ---------- -----
</TABLE>
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1992
- ------------------------------------------------------------------------------
1-4 ALL OTHER
FAMILY REAL REAL ESTATE
ESTATE LOANS LOANS TOTAL
------------------ -------------------- --------------------
AMOUNT % AMOUNT % AMOUNT %
------------------ -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
California $ 120,788 11.1% $ 727,178 59.9% $ 847,966 36.9%
Colorado 638 0.1 52,889 4.4 53,527 2.3
Florida 353 0.1 17,385 1.4 17,738 0.8
Illinois 865,081 79.7 74,212 6.1 939,293 40.8
Maryland - - 22,463 1.9 22,463 1.0
Michigan 5,595 0.5 20,231 1.7 25,826 1.1
Minnesota - - 24,242 2.0 24,242 1.1
Nevada - - 23,365 1.9 23,365 1.0
Washington - - 102,061 8.4 102,061 4.4
Wisconsin 54,543 5.0 50,413 4.2 104,956 4.6
Other 38,681 3.5 99,551 8.1 138,232 6.0
----------- ----- ----------- ----- ---------- -----
Total $ 1,085,679 100.0% $ 1,213,990 100.0% $2,299,669 100.0%
----------- ----- ----------- ----- ---------- -----
----------- ----- ----------- ----- ---------- -----
</TABLE>
59
<PAGE> 44
The following schedule presents the geographical distribution of the collateral
on the Bank's TDRs and non-performing assets as of December 31:
<TABLE>
<CAPTION>
1993 1992
---------------------------------------------------------------------------
NON-PERFORMING NON-PERFORMING
DOLLARS IN THOUSANDS TDRs Assets TDRs Assets
------------------ ---------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California $ - -% $18,043 36.4% $ - -% $19,589 40.5%
Colorado - - - - 8,748 34.9 - -
Florida - - - - 2,675 10.7 3,600 7.4
Illinois - - 21,343 43.1 - - 16,220 33.5
Louisiana - - - - - - 2,500 5.2
Massachusetts - - - - 1,996 8.0 - -
Texas - - 151 0.3 - - 2,055 4.2
Washington 15,646 100.0 5,974 12.0 11,624 46.4 - -
Wisconsin - - 3,409 6.9 - - 1,000 2.1
Other - - 116 0.2 - - 2,403 4.9
Consumer loans - - 555 1.1 - - 1,041 2.2
------- ----- ------- ----- ------- ----- ------- -----
Total $15,646 100.0% $49,591 100.0% $25,043 100.0% $48,408 100.0%
------- ----- ------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- ----- ------- -----
</TABLE>
See "Note U - Financial Instruments With Off-Balance Sheet Credit Risk" for
geographical concentration of loans sold with recourse.
NOTE X
Parent Company Only Financial Information
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
December 31
DOLLARS IN THOUSANDS 1993 1992
- ----------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 17,628 $ 7,268
Marketable-debt securities 989 1,774
Investment in subsidiaries 359,486 280,500
Advances to subsidiaries 7,200 -
Prepaid expenses and other assets 57 75
-------- --------
$385,360 $289,617
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Borrowings by employee stock
ownership plan $ 4,240 $ 2,071
Other borrowings 33,357 -
Other liabilities 434 205
Total liabilities 38,031 2,276
Preferred stock - -
Common stock 197 183
Paid in capital 136,675 115,315
Retained earnings 210,149 173,914
Unrealized gain on securities, net of taxes 4,594 -
SFAS No. 87 adjustment, net of taxes (46) -
Borrowings by employee
stock ownership plan (4,240) (2,071)
-------- --------
Total stockholders' equity 347,329 287,341
-------- --------
$385,360 $289,617
-------- --------
-------- --------
<CAPTION>
STATEMENTS OF OPERATIONS
December 31
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in earnings of
subsidiaries $42,773 $38,003 $27,230
St. Paul Bancorp loss (1,386) (318) (38)
------- ------- -------
Net income $41,387 $37,685 $27,192
------- ------- -------
------- ------- -------
Earnings per share:
Primary $ 2.03 $ 2.00 $ 1.48
Fully diluted 2.03 1.98 1.48
------- ------- -------
------- ------- -------
</TABLE>
60
<PAGE> 45
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
December 31
DOLLARS IN THOUSANDS 1993 1992 1991
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $41,387 $37,685 $27,192
Earnings of subsidiaries
not providing cash (42,773) (38,003) (27,230)
Other sources (uses), net 77 316 (611)
------- ------- -------
Net cash used in
operating activities (1,309) (2) (649)
INVESTING ACTIVITIES:
Maturities of marketable-debt
securities 13,250 - -
Purchase of marketable-debt
securities (14,062) (1,774) -
Dividends received from
subsidiaries 26,210 6,350 -
Acquisition of Elm Financial (26,104) - -
Investments in subsidiaries (9,720) - (10)
Advances made to subsidiaries (7,200) 50 (50)
------- ------- -------
Net cash provided (used) by
investing activities (17,626) 4,626 (60)
Financing Activities:
Dividends paid (5,148) (4,835) (4,805)
Net proceeds from issuance of
subordinated notes 33,422 - -
Net proceeds from
issuance of stock 1,021 1,362 453
------- ------- -------
Net cash provided (used) by
financing activities 29,295 (3,473) (4,352)
Total cash provided (used) 10,360 1,151 (5,061)
------- ------- -------
Cash and cash equivalents
at beginning of year 7,268 6,117 11,178
Cash and cash equivalents
at end of year $17,628 $ 7,268 $ 6,117
------- ------- -------
------- ------- -------
</TABLE>
The parent company's current primary activity is that of a unitary,
non-diversified savings and loan holding company.
NOTE Y
Acquisition of Elm Financial
On February 23, 1993, the Company acquired ("the Acquisition") Elm Financial
Services, Inc. ("Elm Financial"). The operations of Elm Financial are
included in the Company's Consolidated Statements of Income from the
acquisition date and reflect the application of the purchase method of
accounting. Under this method of accounting, the aggregate cost to the Company
of the Acquisition was allocated to the assets acquired and liabilities
assumed, based on their estimated fair values as of February 23, 1993. No
goodwill was recorded by the Bank in connection with the Acquisition. The cost
to the Company for the Acquisition was $48.2 million, which included the
payment of cash and the issuance of 1,292,313 shares (as adjusted for the
three-for-two stock split on January 4, 1994) of the Company's common stock.
The following schedule details the net effect during 1993 of the Acquisition on
cash and cash equivalents:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
- ----------------------------------------------------------------------------
<S> <C>
Purchase price $48,194
Less: issuance of St.Paul stock 19,766
Less: Elm Financial 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>
The unaudited pro forma condensed combined statements of income presented below
report the combined results of operations of the Company and Elm Financial for
the years ended December 31, 1993 and 1992 as if the Acquisition had been
effective on January 1, 1993 and January 1, 1992, respectively, after giving
effect to the purchase accounting adjustments.
The unaudited pro forma condensed combined statements of income are intended
for informational purposes and are not necessarily indicative of the future
results of operations of the combined company, or results of operations of the
combined company that would have actually occurred had the Acquisition been
consummated as of the periods presented.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF INCOME
December 31
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS 1993 1992
- ------------------------------------------------------------------------------
<S> <C> <C>
Interest income $260,895 $308,065
Interest expense 134,828 182,028
-------- --------
Net interest income 126,067 126,037
Provision for loan
losses 11,176 10,865
-------- --------
Net interest income after
provision for loan losses 114,891 115,172
Other income 32,255 29,277
General and administrative expense 83,942 79,431
Loss on foreclosed
real estate 2,516 1,316
-------- --------
Pre-tax income 60,688 63,702
Income taxes 19,149 22,378
-------- --------
Net income $ 41,539 $ 41,324
-------- --------
-------- --------
Earnings Per Share:
Primary $ 2.02 $ 2.05
Fully diluted 2.01 2.04
-------- --------
-------- --------
</TABLE>
61
<PAGE> 46
NOTE Z
Subsequent Events
On December 6, 1993, the Board of Directors declared a three-for-two stock
split which was issued to shareholders on January 4, 1994. The result of the
split was to increase the number of shares outstanding by 6,561,327.
Stockholders' equity, total shares outstanding, the market price of the
Company's common stock, book value per share, and dividends per share have been
retroactively restated for all periods presented.
On January 17, 1994, the Bank sustained damage to two of its REO assets
located in the Southern California region affected by an earthquake. Total
losses expected to be recognized by the Bank in connection with the earthquake
are less than $300,000.
<TABLE>
<CAPTION>
NOTE AA
Selected Quarterly Information (unaudited)
INCOME STATEMENT For the quarters ended
- ------------------------------------------------------------------------------------------------------------------------------------
December 31 September 30 June 30 March 31
------------------ ------------------ ------------------ ----------------------
Dollars in thousands except per share amounts 1993 1992 1993 1992 1993 1992 1993 1992
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $60,588 $65,714 $63,985 $67,228 $67,345 $71,138 $65,019 $74,607
Interest expense 31,109 36,006 33,067 39,538 34,490 42,839 34,316 47,461
Net interest income 29,479 29,708 30,918 27,690 32,855 28,299 30,703 27,146
------- ------- ------- ------- ------- ------- ------- -------
Provision for loan losses 1,500 3,000 2,500 3,750 2,750 2,175 4,000 1,700
Net gain on assets sold 776 841 464 546 745 482 165 1,155
Other income 8,469 6,771 8,235 6,647 7,274 6,427 6,378 5,479
G&A expense 21,964 19,104 20,913 17,711 20,790 17,484 19,080 16,941
Gain (loss) on foreclosed real estate (1,527) (283) (318) 508 (344) (682) (327) (859)
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 13,733 14,933 15,886 13,930 16,990 14,867 13,839 14,280
Income taxes 4,216 5,278 4,781 4,894 5,468 5,119 4,596 5,034
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 9,517 $ 9,655 $11,105 $ 9,036 $11,522 $9,748 $ 9,243 $ 9,246
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Earnings per share:
Primary $ 0.46 $ 0.51 $ 0.54 $ 0.48 $ 0.56 $ 0.52 $ 0.47 $ 0.50
Fully diluted 0.46 0.51 0.54 0.48 0.56 0.52 0.47 0.50
------- ------- ------- ------- ------- ------- ------- -------
Cash dividends per share $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.07
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
<CAPTION>
AVERAGE BALANCE SHEET For the quarters ended
- ------------------------------------------------------------------------------------------------------------------------------------
December 31 September 30 June 30 March 31
----------------------- ----------------------- ---------------------- -----------------------
DOLLARS IN THOUSANDS 1993 1992 1993 1992 1993 1992 1993 1992
---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total assets $3,722,444 $3,537,023 $3,779,587 $3,553,647 $3,843,479 $3,603,045 $3,648,523 $3,653,809
MBS 663,115 635,468 667,737 639,063 684,759 661,011 643,388 694,223
Loans receivable 2,411,138 2,351,055 2,472,817 2,375,168 2,517,015 2,402,280 2,424,819 2,473,247
Deposits 3,240,690 2,973,816 3,258,708 2,957,749 3,284,393 3,009,120 3,092,843 3,011,047
Borrowings 88,497 235,211 125,649 261,161 174,565 265,147 197,342 317,553
Stockholders equity 340,570 284,166 330,790 275,728 321,889 266,928 301,108 259,049
One year GAP to total assets 16.79% 16.84% 15.06% 15.04% 19.38% 14.02% 16.64% 12.67%
---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
NOTE BB
Supplemental Cash Flow Disclosures
1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest credited on deposits $108,832 $132,100 $161,967
Interest paid on deposits 11,336 14,371 20,161
-------- -------- --------
Total interest paid on deposits 120,168 146,471 182,128
Interest paid on borrowings 11,232 21,345 34,436
Income taxes paid, net 17,141 22,247 18,374
Common stock issued in acquisition of Elm Financial 19,766 - -
Real estate acquired through foreclosure 42,770 36,494 25,043
Loans originated in connection with real estate acquired through foreclosure 26,491 34,581 6,781
</TABLE>
62
<PAGE> 47
REPORT OF INDEPENDENT AUDITORS
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Board of Directors and Stockholders
St.Paul Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of St.Paul Bancorp, Inc. as of December 31, 1993 and 1992, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
St.Paul Bancorp, Inc. at December 31, 1993 and 1992, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1993 in conformity with generally accepted
accounting principles.
As disclosed in Note A, the Company changed its method of accounting
for investment securities at December 31, 1993.
/s/ ERNST & YOUNG
Ernst & Young
Chicago, Illinois
January 21, 1994
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CORPORATE INFORMATION
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St. Paul Federal Bank is a federal savings bank, wholly owned by its holding
company, St. Paul Bancorp, Inc. (the "Company"). The Company converted to
public ownership on May 15, 1987, and, at December 31, 1993 had 19,683,981
shares of common stock outstanding. The shares of common stock, $0.01 par
value, are traded over-the-counter on The NASDAQ Stock Market (NASDAQ) under
the symbol SPBC. Newspaper stock tables often list the stock at "St Paul B" or
"St Paul Bncp."
The table below shows the reported high and low sale prices of
the common stock during the periods indicated as well as dividends paid.
As of December 31, 1993, St.Paul Bancorp had 7,595 shareholders of
record. This number does not reflect the number of persons or entities which
hold their common stock in nominee or "street" name through various brokerage
firms.
<TABLE>
<CAPTION>
1993* 1992*
--------------------------------------------------------------
Stock Prices Dividends Stock Prices Dividends
----------------------- -----------------
High Low paid High Low paid
<S> <C> <C> <C> <C> <C> <C>
First Quarter $19 $14 7/8 $.067 $11 1/8 $ 8 5/8 $.067
Second Quarter 19 1/8 13 1/4 $.067 13 10 5/8 $.067
Third Quarter 20 5/8 13 1/4 $.067 14 5/8 12 1/8 $.067
Fourth Quarter 20 3/8 17 $.067 15 3/4 12 1/2 $.067
</TABLE>
*Restated for three-for-two stock split on January 4, 1994
STOCKHOLDER INQUIRIES AND FINANCIAL INFORMATION
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A copy of the Company's annual report to the Securities and Exchange
Commission, Form 10-K, is available to shareholders without charge upon written
request. Requests should be addressed to: Shareholder Services, St.Paul
Bancorp, Inc., 6700 West North Avenue, Chicago, IL 60635.
Transfer Agent and Registrar Independent Auditors
First National Bank of Boston Ernst & Young
Mail Stop: 45-02-09 233 South Wacker Drive
P.O. Box 644 Chicago, IL 60606-6301
Boston, MA 02102-0644
800/442.2001 (toll-free)
Analysts, shareholders and investors interested in additional information may
contact: Investor Relations Department at (312) 804-2283; or Robert N. Parke,
Senior Vice President and Chief Financial Officer at (312) 804-2360.
Corporate Counsel Corporate Offices
Clifford M. Sladnick St.Paul Bancorp, Inc.
Senior Vice President, 6700 West North Avenue
General Counsel and Chicago, IL 60635
Corporate Secretary 312/622.5000
St.Paul Bancorp, Inc.
6700 West North Avenue
Chicago, IL 60635
DIVIDEND REINVESTMENT
- ---------------------
The Company provides a Dividend Reinvestment and Optional Cash Purchase Plan
for individuals holding their shares in record name. For further information,
please contact the stock transfer agent, First National Bank of Boston, at the
address or telephone number listed above.
ANNUAL MEETING OF SHAREHOLDERS
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The Annual Meeting of Shareholders will be held at the Drury Lane Oakbrook, 100
Drury Lane, Oakbrook Terrace, Illinois, at 10:00 a.m., Wednesday, May 4, 1994.
66
<PAGE> 1
Exhibit 21
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of
Name of Subsidiary Incorporation
- ------------------ ---------------
<S> <C>
St. Paul Federal Bank for Savings United States
Annuity Network, Inc. Illinois
St. Paul Financial Development Corporation (a) Illinois
Custom Source Realty Corporation (b) Illinois
St. Paul Service, Inc. (c) Illinois
St. Paul Securities, Inc. (c) Illinois
Community Finance Corporation (c) Illinois
Managed Properties, Inc. (c) Illinois
EFS/San Diego Service Corporation (c) Illinois
EFS Service Corporation (c) Illinois
Investment Network, Inc. (d) Illinois
</TABLE>
(a) Prior to June 30, 1993, this company was a subsidiary of St. Paul
Federal Bank For Savings. On June 30, 1993, this company was sold by
St. Paul Federal Bank to the Company at its fair market value.
(b) Subsidiary of St. Paul Financial Development Corporation.
(c) Subsidiary of St. Paul Federal Bank For Savings.
(d) Subsidiary of St. Paul Securities, Inc.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of St. Paul Bancorp, Inc. of our report dated January 21, 1994, included in the
1993 Annual Report to Shareholders of St. Paul Bancorp, Inc.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-11890) pertaining to the St. Paul Federal Bank For Savings
Profit Sharing and Savings Plan of our report dated January 21, 1994, with
respect to the consolidated financial statements of St. Paul Bancorp, Inc.
incorporated by reference in the Annual Report (Form 10-K) for the year ended
December 31, 1993.
Ernst & Young
Chicago, Illinois
March 28, 1994
