SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-24082
STANDARD FINANCIAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3941870
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
ORGANIZATION OR INCORPORATION)
4192 SOUTH ARCHER AVENUE 60632-1890
CHICAGO, ILLINOIS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(773) 847-1140
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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.
(1) Yes x No
--------- ---------
(2) Yes x No
--------- ---------
The number of shares outstanding of each of the issuer's classes of common
stock was 16,172,116 shares of common stock, $0.01 par value, as of
October 31, 1996.
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I. Financial Information Page
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Item 1 Financial Statements
Consolidated Statements of Condition as of
September 30, 1996 (unaudited) and December 31, 1995 2
Consolidated Statements of Income for the
Three Months and Nine Months Ended
September 30, 1996 and 1995 (unaudited) 3
Consolidated Statement of Stockholders'
Equity for the Nine Months Ended
September 30, 1996 (unaudited) 4
Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1996 and
1995 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings 23
Item 2 Changes in Securities 23
Item 3 Defaults upon Senior Securities 23
Item 4 Submission of Matters to a Vote of Security Holders 23
Item 5 Other Information 23
Item 6 Exhibits and Reports on Form 8-K 24, 25 & 26
Signature Page 27
1
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands)
September 30, December 31,
1996 1995
- ------------------------------------------------------------------------------------------------------------
ASSETS:
Cash $ 18,567 $ 22,620
Interest-bearing deposits at depository institutions 16,081 46,951
------------------------------------
Cash and cash equivalents 34,648 69,571
Investment securities 147,984 137,807
Mortgage-backed and related securities 690,395 804,010
Loans receivable, net 1,398,688 1,010,777
Real estate held for sale 70 180
Investment in Federal Home Loan Bank stock 18,527 12,802
Office properties and equipment 27,859 28,468
Deferred tax and income tax receivable 2,622 524
Accrued interest receivable 13,721 13,754
Other assets 4,740 3,222
Excess of cost over net assets of acquired
association, less accumulated amortization 477 113
------------------------------------
Total assets $2,339,731 $2,081,228
------------------------------------
------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits $1,686,740 $1,538,546
Advances from Federal Home Loan Bank of Chicago 360,000 235,000
Advance payments by borrowers for taxes and insurance 5,644 7,854
Federal & state income taxes payable 75 4,044
Miscellaneous liabilities 23,943 14,898
------------------------------------
Total liabilities 2,076,402 1,800,342
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized;
none outstanding 0 0
Common stock, $0.01 par value; 25,000,000 shares authorized,
19,091,466 shares issued, 16,197,116 shares outstanding at
September 30, 1996; and 25,000,000 shares authorized, 19,082,089
shares issued, 17,608,089 outstanding at December 31, 1995 191 191
Additional paid-in capital 189,126 188,443
Unrealized gain, net of income taxes,
on securities available-for-sale 1,051 3,581
Retained income 127,568 123,841
Treasury stock, at cost (2,894,350 shares at September 30, 1996;
1,474,000 shares at December 31, 1995) (40,677) (19,411)
ESOP shares (9,928) (10,880)
MRP shares (4,002) (4,879)
------------------------------------
Total stockholders' equity 263,329 280,886
------------------------------------
Total liabilities and stockholders' equity $2,339,731 $2,081,228
------------------------------------
------------------------------------
See notes to unaudited consolidated financial statements.
2
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $24,726 $15,749 $67,612 $42,249
Mortgage-backed and related securities 12,333 14,794 39,082 42,612
Investments and interest-bearing deposits 3,179 3,209 9,485 12,010
------------------------------------------------------------
Total interest income 40,238 33,752 116,179 96,871
INTEREST EXPENSE:
Deposits 18,900 16,706 54,520 47,558
Borrowings 5,261 2,177 13,919 4,094
------------------------------------------------------------
Total interest expense 24,161 18,883 68,439 51,652
------------------------------------------------------------
Net interest income before provision for loan losses 16,077 14,869 47,740 45,219
Provision for loan losses 450 525 2,050 1,295
------------------------------------------------------------
Net interest income after provision for loan losses 15,627 14,344 45,690 43,924
NON-INTEREST INCOME:
Fees for customer services 912 837 3,138 2,528
Net gain (loss) on sales of investments and mortgage-
backed securities (150) 379 1,441 928
Net gain on sales of loans 1,136 0 1,206 0
Other 228 (37) 783 376
------------------------------------------------------------
Total non-interest income 2,126 1,179 6,568 3,832
NON-INTEREST EXPENSE:
Compensation and benefits 5,009 4,740 14,957 13,234
Occupancy 2,428 2,085 6,615 6,262
Federal deposit insurance premiums 10,601 913 12,516 2,633
Marketing 455 378 1,373 1,127
Other general and administrative expenses 1,657 1,539 5,306 4,798
Amortization of excess of cost over net assets of
acquired association 45 23 90 68
------------------------------------------------------------
Total non-interest expense 20,195 9,678 40,857 28,122
------------------------------------------------------------
Income (loss) before federal and state income taxes (benefit) (2,442) 5,845 11,401 19,634
Federal and state income taxes (benefit) (1,436) 2,099 3,668 7,094
------------------------------------------------------------
Net income (loss) ($1,006) $3,746 $7,733 $12,540
------------------------------------------------------------
------------------------------------------------------------
Primary earnings (loss) per share ($0.07) $0.22 $0.49 $0.73
Fully dilutted earnings (loss) per share ($0.07) $0.22 $0.49 $0.73
Dividends declared per share $0.08 $0.00 $0.24 $0.00
See notes to unaudited consolidated financial statements.
3
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996
(In thousands)
(Unaudited)
Unrealized
Gain (Loss) Total
Common Common Add'l on Sec. Stock-
Stock Stock at Paid-in Available- Retained Treasury ESOP MRP holders'
Issued Par Value Capital for-Sale Income Stock Shares Shares Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1996 19,082 $191 $188,443 $3,581 $123,841 ($19,411) ($10,880) ($4,879) $280,886
Net income for the period 0 0 0 0 7,733 0 0 0 7,733
Dividends paid 0 0 0 0 (4,006) 0 0 0 (4,006)
Change in unrealized gain (loss),
net of income taxes, on securities
available-for-sale 0 0 0 (2,530) 0 0 0 0 (2,530)
Purchase of treasury stock 0 0 0 0 0 (21,266) 0 0 (21,266)
Options Exercised 19 0 229 0 0 0 0 0 229
Tax benefit from options exercised 0 0 24 0 0 0 0 0 24
ESOP shares earned 0 0 511 0 0 0 952 0 1,463
MRP shares forfeited (23) (1) (294) 0 0 0 0 295 0
Issuance of MRP shares 13 1 213 0 0 0 0 (214) 0
MRP shares earned, net 0 0 0 0 0 0 0 796 796
----------------------------------------------------------------------------------------------------
Balance at September 30, 1996 19,091 $191 $189,126 $1,051 $127,568 ($40,677) ($9,928) ($4,002) $263,329
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
See notes to unaudited consolidated financial statements.
4
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1996 1995
- -----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $7,733 $12,540
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for depreciation 2,479 2,396
Provision for loan losses 2,050 1,295
Amortization of other intangibles 88 43
Amortization of cost over net assets of acquired association 90 68
Amortization of premiums and discounts 896 (432)
Amortization of net deferred loan fees (433) (635)
Release of ESOP shares 1,463 0
Release of MRP shares 796 340
Deferred income taxes (4,393) (1,075)
Gain on sale of loans (1,206) (8)
Proceeds from loan sales 44,725 205
Loans originated for sale (8,522) (197)
Gain on sale of securities available-for-sale (1,441) (920)
(Increase) decrease in interest receivable 33 (2,393)
Increase in interest payable 1,760 2,854
Increase decrease in miscellaneous liabilities 9,045 2,756
Other, primarily other assets (1,175) 1,586
---------- ----------
Net cash provided by operating activities 53,988 18,423
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale 84,481 106,847
Proceeds from maturity and repayment of investment securities available-for-sale 302,268 65,025
Purchases of investment securities available-for-sale (396,616) (159,261)
Purchases of investment securities held to maturity 0 (157,065)
Proceeds from maturity and repayment of investment securities held to maturity 0 242,114
Repayments of mortgage-backed and related securities held to maturity 0 115,327
Purchases of mortgage-backed and related securities held to maturity 0 (199,665)
Repayments of mortgage-backed and related securities available-for-sale 170,592 0
Purchases of mortgage-backed and related securities available-for-sale (59,825) 0
Loan principal repayments 167,703 106,403
Loans originated and purchased (593,565) (383,022)
Office property and equipment, net (1,950) (2,171)
Purchase of Federal Home Loan Bank stock (5,725) (870)
---------- ----------
Net cash used by investing activities (332,637) (266,338)
FINANCING ACTIVITIES:
Net decrease in passbook, NOW, and money market deposit accounts (14,888) (36,882)
Net increase in certificates of deposit 161,321 143,584
Premium paid on purchased deposits (454) 0
Proceeds of advances from Federal Home Loan Bank 137,000 100,000
Repayments of advances from Federal Home Loan Bank (12,000) 0
Net increase (decrease) in advance payments by borrowers (2,210) 15,580
Options exercised 229 0
Purchase of treasury stock (21,266) (12,638)
Dividends paid (4,006) 0
---------- ----------
Net cash provided by financing activities 243,726 209,644
---------- ----------
Decrease in cash and cash equivalents (34,923) (38,271)
Cash and cash equivalents at beginning of period 69,571 76,097
---------- ----------
Cash and cash equivalents at end of period $34,648 $37,826
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for interest on:
Deposits $52,760 $44,755
Borrowings 13,502 2,634
---------- ----------
$66,262 $47,389
---------- ----------
---------- ----------
Income taxes $5,299 $7,476
---------- ----------
---------- ----------
Transfer of loans to real estate held for sale $240 $422
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---------- ----------
See notes to unaudited consolidated financial statements.
5
STANDARD FINANCIAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) necessary for a fair presentation of the
results for the interim periods presented have been included.
The results of operations and other data for the three and nine months ended
September 30, 1996 are not necessarily indicative of results that may be
expected for the entire fiscal year ending December 31, 1996.
The consolidated financial statements include the accounts of Standard
Financial, Inc. (the "Company") and its wholly-owned subsidiaries, Standard
Federal Bank for savings (the "Bank"), and Capitol Equities Corporation, and the
Bank's wholly-owned subsidiaries SFB Insurance Agency, Inc., and Standard
Financial Mortgage Corporation (the "Mortgage Company").
(2) EARNINGS PER SHARE
Earnings per share are computed based on the weighted average number of common
shares and equivalents outstanding utilizing the treasury stock method. Stock
options and shares granted under the Management Recognition and Retention Plan
(the "MRP") represent the common stock equivalents of the Company.
The weighted average number of common shares and equivalents outstanding for the
third quarters of 1996 and 1995 were 15,373,883 and 16,887,919, respectively.
The weighted average number of common shares and equivalents outstanding for the
first nine months of 1996 and 1995 were 15,651,465 and 17,194,865 respectively.
(3) COMMITMENTS
The Bank had outstanding lending commitments at September 30, 1996 and December
31, 1995 comprised of the following (in thousands):
September 30, 1996 December 31, 1995
------------------ -----------------
Unused credit card lines . . . . . . $ 0 $ 39,929
Mortgage loans . . . . . . . . . . . 87,116 40,523
Equity lines . . . . . . . . . . . 6,790 4,229
----- -----
$ 93,906 $ 84,681
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-------- --------
6
(4) LOANS RECEIVABLE
Loans receivable at September 30, 1996 and December 31, 1995 consisted of the
following:
September 30, December 31,
1996 1995
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Mortgage loans originated:
One-to-four family $1,305,114 $906,766
Multifamily 12,994 11,160
Commercial 7,115 6,666
Loans and participations purchased,
primarily one-to-four family 61,530 73,371
--------------------------
Total mortgage loans 1,386,753 997,963
Consumer loans 20,649 21,538
--------------------------
Total gross loans 1,407,402 1,019,501
Less:
Allowance for losses 6,559 5,048
Undisbursed portion of loan proceeds 425 1,951
Unearned discounts on loans 1,004 905
Net deferred loan fees 726 820
--------------------------
Loans receivable, net $1,398,688 $1,010,777
--------------------------
--------------------------
7
ITEM 2 STANDARD FINANCIAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Standard Financial, Inc. (the "Company") was organized as the holding company
for Standard Federal Bank for savings (the "Bank") in connection with the Bank's
conversion from the mutual to stock form of ownership. On July 28, 1994, the
Company issued and sold 18,630,000 shares of its common stock at an issuance
price of $10.00 per share to complete the conversion. Net proceeds to the
Company were $182.5 million after deduction of conversion expenses and
underwriting fees of $3.8 million. The Company used $91.3 million of the net
proceeds to acquire all of the stock of the Bank. The Bank owns a mortgage
banking subsidiary which is in the wholesale mortgage business throughout the
Chicago metropolitan area, and an insurance subsidiary which sells insurance and
brokerage services.
The Company's primary business is offering residential first mortgage loans and
consumer financing and providing conveniently located deposit facilities with
transaction, savings and certificate accounts. The Bank's deposit gathering and
lending markets are primarily concentrated in the communities surrounding its
full service offices located in the southwestern and western part of the city of
Chicago and neighboring suburbs in Cook and DuPage counties, Illinois. At
September 30, 1996, the Bank had fourteen full service offices, three of which
are located on the southwest side of the City of Chicago and eleven of which are
located in Chicago's western and southwestern suburbs, and two limited service
offices.
As a result of legislation signed into law on September 30, 1996, the Company
accrued $9.6 million, to recognize a one-time charge in the third quarter to
recapitalize the Savings Association Insurance Fund ("SAIF"). This charge
reduced earnings per share by $0.38 during the third quarter of 1996.
Excluding the effect of the one-time SAIF provision, net income for the first
nine months of 1996 would have been $13.5 million, an 8.0% or $1.0 million
increase over the first nine months of 1995. This would have equated to $0.86
per share compared to $0.73 per share for the first nine months of 1996 and
1995, respectively. After the effect of the one-time SAIF provision, net income
the first nine months of 1996, declined to $7.7 million, a 38.4% or $4.8 million
decrease over the same period in 1995. This equated to $0.49 per share for the
first nine months of 1996 compared to $0.73 per share for the same period in
1995. Capital remained strong at $263.3 million at September 30, 1996, a
decrease of $17.6 million from December 31, 1995 as the Company repurchased
1,420,350 shares of its stock during the nine months ended September 30, 1996.
The Company paid cash dividends of $0.24 cents per share during this same
period.
At September 30, 1996, total assets of the Company reached $2.340 billion, an
increase of 12.5% from December 31, 1995. During this same period, loans grew
to $1.399 billion or by 38.4%, and deposits grew to $1.687 billion or by 9.6%.
While net interest income for the first nine months of 1996 was up 5.5% from the
same period in 1995 because of volume growth, the net interest margin dropped to
2.42% from 2.78% in the previous year. The high level of pre-payments from
mortgage related products and higher rates paid on the Company's growing deposit
portfolio caused this tightening of the margin.
During the first nine months of 1996, the Company repurchased approximately 1.4
million shares of its common stock, at an average cost of $14.98. During the
third quarter, the Company sold its credit card operations at a gain of $1.1
million, adding approximately four cents per share to third quarter 1996
revenues.
8
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
AND SEPTEMBER 30, 1995
GENERAL
The Company's results of operations depend primarily on its level of net
interest income, which is the difference between interest earned on interest-
earning assets, and the interest paid on interest-bearing liabilities. The
Company's earnings also are affected by the level of its other income, including
loan servicing, commitment and origination fees, gains and losses on sale of
loans and investments, as well as its level of non-interest expenses, including
employee compensation and benefits, occupancy and equipment costs, federal
deposit insurance premiums and other general and administrative expenses. The
Company's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities.
Excluding the effect of the one-time SAIF provision, net income for the quarter
ended September 30, 1996, increased 29.7% to $4.8 million compared to $3.7
million for the quarter ended September 30, 1995. Excluding the SAIF provision,
earnings per share for the 1996 quarter would have been $0.31 compared to $0.22
in the third quarter of 1995. After the effect of the one-time SAIF provision,
the Company had a loss of $1.0 million for the quarter, or a loss per share of
$0.07. The weighted average number of common shares and equivalents outstanding
for the third quarters of 1996 and 1995 were 15,373,883 and 16,887,919 shares,
respectively. Net interest income before provision for loan losses increased
$1.2 million or 8.1% to $16.1 million in 1996 compared to $14.9 million in 1995.
The provision for loan losses remained flat for both periods at $0.5 million.
Non-interest income increased by $0.9 million or 75.0% to $2.1 million in 1996
from $1.2 million in 1995. Non-interest expense increased by $10.5 million or
108.2% to $20.2 million in 1996 from $9.7 million in 1995. Excluding the effect
of the one-time SAIF provision, non-interest expense would have increased by
$0.9 million or 9.3% to $10.6 million in 1996, compared to $9.7 million in 1995.
INTEREST INCOME
Total interest income increased $6.4 million or 18.9% to $40.2 million for 1996
from $33.8 million for 1995. The increase in interest income was the result of
average earning assets increasing to $2.235 billion in 1996 from $1.855 billion
in 1995. Interest income on loans increased $9.0 million or 57.3% to $24.7
million in 1996 from $15.7 million in 1995. The increase was the result of
growth in average loans outstanding of $539.7 million or 66.8% from
$808.3 million in 1995 to $1,348.0 million in 1996. This was partially
offset by a decline in the portfolio yield from 7.79% in 1995 to 7.34% in 1996.
Interest income on mortgage-backed and related securities decreased $2.5 million
or 16.9% to $12.3 million in 1996 from $14.8 million in 1995. This decrease was
due to a decline in the average volume. Interest on investment securities
decreased by $0.1 million or 3.7% to $2.6 million in 1996 from $2.7 million in
1995. Short-term investment interest income remained flat at $0.3 million.
INTEREST EXPENSE
Total interest expense increased by $5.3 million or 28.0% to $24.2 million in
1996 from $18.9 million in 1995. The increase in interest expense was the
result of a 23.9% increase in the average amount of those liabilities to
$2.000 billion in 1996 from $1.614 billion in 1995 and an increase in the rates
paid on interest-bearing liabilities to 4.83% in 1996 from 4.68% in 1995.
The increase in the rates paid on interest-bearing funds was primarily due to
the growth in higher costing borrowings.
9
PROVISION FOR LOAN LOSSES
The quarterly provision for loan losses was $0.5 million in both 1996 and
1995. The allowance for loan losses at September 30, 1996 was $6.6 million or
0.47% of gross loans outstanding, compared to $4.9 million or 0.56% of gross
loans outstanding at September 30, 1995. Based on management's evaluation of
the loan portfolio, sale of the credit card portfolio, past loan loss
experience and known inherent risks in the portfolio, management believes
that the allowance is adequate.
NON-INTEREST INCOME
Non-interest income increased $0.9 million to $2.1 million in 1996 from $1.2
million in 1995. The increase was due to gains on the sale of the Company's
credit card portfolio in 1996 of $1.1 million. The Company expects an
increase in mortgage loan sales in the future due to increased mortgage loan
originations which may result in greater fluctuations in non-interest income.
NON-INTEREST EXPENSE
Non-interest expense increased by $10.5 million or 108.2% to $20.2 million in
1996 from $9.7 million in 1995. Compensation and employee benefits expense
increased by $0.3 million or 6.4% to $5.0 million in 1996 from $4.7 million
in 1995, as a result of regular salary increases as well as increased
staffing in the Company's mortgage origination area, the consumer loan
department, and the Company's new Naperville Branch.
Occupancy was $2.4 million in 1996, an increase of $0.3 million from 1995.
Included in this increase were expenses associated with the Company's new
branch in Naperville, which was acquired in June.
Federal insurance premiums were $10.6 million in 1996 and $0.9 million in
1995. Included in the 1996 amount is an accrual of $9.6 million to recognize
a one-time charge to recapitalize the SAIF.
Other general and administrative expenses increased to $1.7 million in 1996
from $1.5 million in 1995. A variety of professional fees and outside
services accounted for these increased expenses.
INCOME TAX EXPENSE
The Company had an income tax benefit in 1996 of $1.4 million as compared to
an expense of $2.1 million in 1995. The one-time SAIF provision contributed
$3.8 million to this benefit. Without the effect of the SAIF provision,
income taxes would have been $2.4 million in 1996.
10
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND SEPTEMBER 30, 1995
GENERAL
Excluding the effect of the one-time SAIF provision, net income for
the first nine months of 1996, increased 8.0% to $13.5 million compared to
$12.5 million for the nine months ended September 30, 1995. Excluding the
SAIF provision, earnings per share for the 1996 period would have been $0.86
compared to $0.73 for the year ago period. After the effect of the one-time
SAIF provision, net income for the nine months ended September 30, 1996,
decreased 38.4% to $7.7 million compared to $12.5 million for the nine months
ended September 30, 1995. Earnings per share for the 1996 period decreased to
$0.49 compared to $0.73 for 1995. The weighted average number of common
shares and equivalents outstanding for the third quarters of 1996 and 1995
were 15,651,465 and 17,194,865 shares, respectively. Net interest income
before provision for loan losses increased $2.5 million or 5.5% to $47.7
million in 1996 compared to $45.2 million in 1995. The provision for loan
losses increased $0.8 million to $2.1 million in 1996 from $1.3 million in
1995. Non-interest income increased by $2.8 million or 73.7% to $6.6 million
in 1996 from $3.8 million in 1995. Non-interest expense increased by $12.8
million or 45.6% to $40.9 million in 1996 from $28.1 million in 1995.
Excluding the effect of the one-time SAIF provision, non-interest expense
would have increased by $3.2 million or 11.4% to $31.3 million in 1996
compared to $28.1 million in 1995.
INTEREST INCOME
Total interest income increased $19.3 million or 19.9% to $116.2 million for
1996 from $96.9 million for 1995. The increase in interest income was the
result of average earning assets increasing to $2.151 billion in 1996 from
$1.780 billion in 1995. Interest income on loans increased $25.4 million or
60.2% to $67.6 million in 1996 from $42.2 million in 1995. The increase was
the result of growth in average loans outstanding of $507.2 million or 70.9%
from $714.9 million in 1995 to $1.222 billion in 1996. This was partially
offset by a decline in the portfolio yield from 7.88% in 1995 to 7.38% in
1996. Interest income on mortgage-backed and related securities decreased
$3.5 million or 8.2% to $39.1 million in 1996 from $42.6 million in 1995.
This decrease was due to the average balance of mortgage-backed securities
decreasing $66.9 million or 8.2% to $752.3 million in 1996 from $819.2
million 1995. Interest on investment securities decreased by $2.6 million or
25.0% to $7.8 million in 1996 from $10.4 million in 1995. The decrease was
due to the average balance of investment securities decreasing $68.8 million
or 32.9% to $140.4 million in 1996 from $209.2 million in 1995. Short-term
investment interest income declined to $0.8 million in 1996 from $1.0 million
in 1995.
INTEREST EXPENSE
Total interest expense increased by $16.7 million or 32.3% to $68.4 million
in 1996 from $51.7 million in 1995. The increase in interest expense was
the result of a 24.3% increase in the average amount of interest-bearing
liabilities to $1.910 billion in 1996 from $1.537 billion in 1995 and an
increase in the rates paid on those liabilities to 4.78% in 1996 from 4.48%
in 1995. The increase in the rates paid on interest-bearing funds was
primarily due to the growth in higher costing borrowings and certificate of
deposit portfolios.
PROVISION FOR LOAN LOSSES
The nine month provision for loan losses increased to $2.1 million in 1996
from $1.3 million in 1995, an increase of $0.8 million or 61.5%. This
increase was primarily caused by growth in the mortgage loan portfolio and
charge-offs in the credit card portfolio, a line of business that the Company
sold during the third quarter of 1996.
11
NON-INTEREST INCOME
Non-interest income increased $2.8 million or 73.7% to $6.6 million in 1996
from $3.8 million in 1995. The increase was due to gains of $1.4 million on
the sale of securities which were sold to provide liquidity for the
repurchase of shares of the Company's outstanding stock and mortgage loan
originations. In addition, the Company recorded a gain of $1.1 million from
the sale of its credit card portfolio.
NON-INTEREST EXPENSE
Non-interest expense increased by $12.8 million or 45.6% to $40.9 million in
1996 from $28.1 million in 1995. Compensation and employee benefits expense
increased by $1.8 million to $15.0 million in 1996 from $13.2 million in
1995. Normal salary increases and the absence of a mortgage banking
subsidiary for the full year in 1995, accounted for much of this increase. In
addition, the expense related to the Management Recognition and Retention Plan
was for the full year in 1996, versus a little over four months in 1995.
Federal insurance premiums were $12.5 million in 1996 and $2.6 million in
1995. Included in the 1996 amount is an accrual of $9.6 million, to recognize
a one-time charge to recapitalize the SAIF.
Other general and administrative expenses increased to $5.3 million in 1996
from $4.8 million 1995. A variety of professional fees and outside services
accounted for these increased expenses.
INCOME TAX EXPENSE
Income tax expense decreased $3.4 million to $3.7 million in 1996 from $7.1
million in 1995. Without the one-time SAIF provision, the effective tax rate
for 1996 would have been 35.6% compared with 36.1% for 1995.
12
COMPARISON OF CHANGES IN FINANCIAL CONDITION
At September 30, 1996, total consolidated assets of the Company were $2.340
billion, an increase of $258.5 million or 12.4% as compared to assets of
$2.081 billion at December 31, 1995.
Cash and cash equivalents decreased $35.0 million or 50.3% from $69.6 million
at December 31, 1995, to $34.6 million at September 30, 1996. The decrease
was due to investing the funds in higher yielding mortgage loans.
Investment securities increased $10.2 million or 7.4% from $137.8 million at
December 31, 1995, to $148.0 million at September 30, 1996.
Mortgage-backed and related securities decreased $113.6 million or 14.1% from
$804.0 million at December 31, 1995, to $690.4 million at September 30, 1996,
primarily because proceeds were used to fund the growth of the Company's
mortgage loan portfolio.
Loans receivable increased $387.9 million or 38.4% from $1.011 billion at
December 31, 1995, to $1.399 billion at September 30, 1996. The increase in
loans receivable was due to the expansion of the Company's correspondent
mortgage loan origination network during the period. During the first three
quarters of 1996, the Company originated or purchased $602.1 million in loans
compared to $383.2 million during the first three quarters of 1995. The
Company purchases loans from correspondents. Correspondents are mortgage
bankers and brokers that originate loans for the Company using rates and
underwriting guidelines that the Company sets. The correspondents are paid a
fee for loans that are acquired. The Company underwrites all loans and only
funds those that meet its underwriting standards. As mortgage loan
production grows, the Company intends to increase the amount of loans sold
and will retain the loan servicing to generate additional fee income.
Deposits increased by $148.2 million or 9.6% from $1.539 billion at
December 31, 1995 to $1.687 billion at September 30, 1996. This increase was
the result of growth in the certificate of deposit portfolio. The Company
continues to utilize various marketing strategies to promote specific deposit
products and to acquire or expand targeted customer deposits.
Borrowings increased 53.2% to $360.0 million at September 30, 1996, from
$235.0 million at December 31, 1995. The Company's increased borrowings from
the Federal Home Loan Bank (the "FHLB") were utilized to fund the growth of
loans.
INTEREST RATE SENSITIVITY
The Company manages its exposure to interest rate risk by emphasizing the
origination or purchase of adjustable rate mortgage ("ARM") loans and
mortgage-backed securities and the purchase of investments with a short term
to maturity for its portfolio. The Company also seeks to match the
maturities of assets with deposits and FHLB borrowings. Management believes
that investing in ARM loans and mortgage-backed securities, although possibly
sacrificing short-term profits compared to the yields obtainable through
fixed rate investments, reduces the Company's exposure to the risk of
interest rate fluctuations and thereby enhances long-term profitability. The
Company's portfolio of mortgage-backed and related securities had net
unamortized premiums of $4.9 million at September 30, 1996. If prepayments
accelerate, the amortization of the premium will increase and lower the net
yield of the securities over its remaining life. The majority of the
collateralized mortgage obligation ("CMO") portfolio was purchased at a
discount and therefore does not have the risk of acceleration of premium
amortization.
At September 30, 1996, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same time period by $72.1 million. This represented a
negative cumulative one year gap ratio of 3.08%. Thus, during periods of
falling interest rates, it is expected that the cost of interest-bearing
liabilities would fall
13
more quickly than the yield on interest-earning assets, which would
positively affect net interest income. In periods of rising interest rates,
the opposite affect on net interest income is expected. The Company's
one-year gap ratio at December 31, 1995, was a negative 2.3%.
Certain shortcomings are inherent in the method of analysis presented in the
following table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as ARM loans and
mortgage-backed and related securities, have features which restrict changes
in interest rates on a short-term basis and over the life of the asset. In
addition, the proportion of ARM loans and mortgage-backed and related
securities in the Company's portfolio could decrease in future periods if
market interest rates remain at or decrease below current levels due to
refinance activity. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly
from those assumed in the table. Finally, the ability of many borrowers to
service their debt may decrease in the event of an interest rate increase.
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
INTEREST EARNING ASSETS AND INTEREST BEARING
LIABILITIES RATE SENSITIVITY
SEPTEMBER 30, 1996
-------------------------------------------------------------------
More Than More Than
Within Four to One Year Three Years
Three Twelve To Three To Five Over Five
Months Months Years Years Years Total
-------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets (1):
Mortgage loans (2):
Fixed $6,461 $19,422 $52,320 $54,637 $65,633 $198,473
Variable 27,031 134,321 392,786 581,860 59,498 1,195,496
Consumer loans (2) 277 968 3,458 4,990 3,740 13,433
Mortgage-backed and related securities:
Fixed 786 2,357 6,286 6,328 8,463 24,220
Variable 175,578 400,881 89,334 382 0 666,175
Investment securities and other assets (3) 92,808 34,864 21,308 32,934 678 182,592
-------------------------------------------------------------------
Total 302,941 592,813 565,492 681,131 138,012 2,280,389
Interest-bearing liabilities:
Deposits (4):
Now accounts 4,325 12,974 34,598 34,598 17,092 103,587
Passbook savings accounts 15,048 45,145 120,387 120,387 59,472 360,439
Money market deposit accounts 75,429 0 0 0 0 75,429
Certificates of deposit 227,852 562,055 313,610 27,291 179 1,130,987
Borrowings (5) 25,000 0 175,000 135,000 25,000 360,000
-------------------------------------------------------------------
Total 347,654 620,174 643,595 317,276 101,743 2,030,442
-------------------------------------------------------------------
Excess (deficiency) of interest-earning assets
over interest-bearing liabilities ($44,713) ($27,361) ($78,103) $363,855 $36,269 $249,947
-------------------------------------------------------------------
-------------------------------------------------------------------
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities ($44,713) ($72,074) ($150,177) $213,678 $249,947
-------------------------------------------------------------------
-------------------------------------------------------------------
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities as a % of total assets -1.91% -3.08% -6.42% 9.13% 10.68%
14
1) Adjustable and floating rate assets are included in the earlier of the
period in which interest rates are next scheduled to adjust or the period in
which they are due, and fixed rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization. For
fixed rate mortgage loans and mortgage-backed and related securities, an
annual prepayment rate of 13% was used, which management believes accurately
reflects the Company's historical experiences.
2) Balances have been reduced for unearned discounts.
3) Amounts shown reflect the repricing of inverse floating rate securities
during the indicated period. Such securities have rates which reset in the
opposite direction of interest rates and thus are reflected as a reduction in
total assets repricing in that period. When inverse floating rate securities
mature, the amount shown for such period reflects the principal amount of
such security plus the negative effect of repricing in prior periods.
4) Although the Company's NOW accounts and passbook savings accounts
generally are subject to immediate withdrawal, management considers a certain
amount of such accounts to be core deposits having significantly longer
effective maturities based on the Company's retention of such deposits in
changing interest rate environments. NOW accounts and passbook savings
accounts are assumed to be withdrawn at annual rates of 16.7%, which
management believes accurately reflects the Company's expected historical
experience. If all of the Company's NOW accounts and passbook savings
accounts had been assumed to be subject to repricing within one year, the
one-year cumulative deficiency of interest-earning assets to interest-bearing
liabilities would have been $458.6 million or 19.6% of total assets.
5) Adjustable and floating rate borrowings are included in the period in
which their interest rates are next scheduled to adjust rather than in the
period in which they are due.
15
ASSET QUALITY
The Company regularly reviews its assets to determine that the allowance for
loan losses is adequate. The review consists of a comparison of the
allowance for loan losses to historical loss experience while incorporating
the impact of any classified loan. Management also reviews its allowance
adequacy in light of the outlook for the general economy and regulatory
environment.
The following table sets forth information regarding non-performing loans,
investments and real estate owned at the dates indicated.
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
NON-PERFORMING ASSETS
(Dollars in thousands)
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
1996 1996 1996 1995 1995
- ------------------------------------------------------------------------------------------------------------------------
Non-accrual mortgage loans $3,649 $2,556 $2,417 $2,795 $3,566
Non-accrual consumer loans 0 358 367 411 416
----------------------------------------------------------------------
Total non-performing loans 3,649 2,914 2,784 3,206 3,982
Net real estate held for sale 70 0 170 180 392
Non-accrual mortgage-backed and related securities 12,123 7,373 7,877 8,508 9,164
----------------------------------------------------------------------
Total non-performing assets $15,842 $10,287 $10,831 $11,894 $13,538
----------------------------------------------------------------------
----------------------------------------------------------------------
Allowance for loan losses $6,559 $6,218 $5,589 $5,048 $4,862
Total non-performing assets to total assets 0.68% 0.45% 0.50% 0.57% 0.69%
Total non-performing loans to gross loans 0.26% 0.22% 0.24% 0.31% 0.46%
Allowance for loan losses to total non-
performing loans 179.75% 213.38% 200.75% 157.45% 122.10%
Total non-performing mortgage-backed and
related securities to gross mortgage-backed
and related securities 1.76% 1.01% 0.99% 1.06% 1.09%
16
AVERAGE BALANCE SHEET
The following tables set forth certain information relating to the Company's
consolidated average statements of condition and the consolidated statements
of income for the periods indicated and reflects the average yield on assets
and average cost of liabilities for those periods. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown. Average balances are
derived principally from average daily balances and include non-accruing
loans. The yields and costs include fees which are considered adjustments to
yields. Interest income on non-accruing loans is reflected in the period it
is collected and not in the period it is earned. In the opinion of
management, such amounts are not material to net interest income or net
change in net interest income in any period. Non-accrual loans are included
in the average balances and do not have a material effect on the average
yield.
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
NET INTEREST MARGIN
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
1996 1995
--------------------------------- ---------------------------------
Average Average Average Average
(Dollars In thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS:
Interest-earning assets:
Short term investments $20,667 $287 5.55% $21,788 $314 5.76%
Investment securities 142,321 2,621 7.37% 166,613 2,677 6.43%
Mortgage-backed and related securities 705,646 12,333 6.99% 845,760 14,794 7.00%
Loans receivable 1,348,002 24,726 7.34% 808,256 15,749 7.79%
Investment in Federal Home Loan Bank stock 18,527 271 5.85% 12,807 218 6.81%
--------------------------------- ---------------------------------
Total interest-earning assets 2,235,163 40,238 7.20% 1,855,224 33,752 7.28%
Non-interest-earning assets 65,518 74,534
----------- -----------
Total assets $2,300,681 $1,929,758
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
NOW accounts $110,455 $538 1.95% $97,086 $493 2.03%
Money market deposit accounts 78,084 606 3.10% 80,864 679 3.36%
Passbook savings accounts 367,257 2,325 2.53% 382,874 2,421 2.53%
Certificates of deposit 1,109,381 15,431 5.56% 914,591 13,113 5.74%
Borrowings 335,027 5,261 6.28% 138,222 2,177 6.30%
--------------------------------- ---------------------------------
Total interest-bearing liabilities 2,000,204 24,161 4.83% 1,613,637 18,883 4.68%
Non-interest-bearing liabilities 36,787 34,170
----------- -----------
Total liabilities 2,036,991 1,647,807
Stockholders' equity 263,690 278,951
----------- -----------
Total liabilities and stockholders' equity $2,300,681 $1,926,758
----------- -----------
----------- -----------
Net interest income before provision for loan losses $16,077 2.37% $14,869 2.60%
---------------------- ----------------------
---------------------- ----------------------
Net yield on earning assets 2.88% 3.21%
Ratio of interest-earning assets to interest-bearing liabilities 1.12 x 1.15 x
17
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
NET INTEREST MARGIN
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
1996 1995
--------------------------------- ------------------------------
Average Average Average Average
(Dollars In thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS:
Interest-earning assets:
Short term investments $19,624 $808 5.49% $24,085 $1,046 5.79%
Investment securities 140,420 7,826 7.43% 209,156 10,358 6.60%
Mortgage-backed and related securities 752,334 39,082 6.93% 819,185 42,612 6.94%
Loans receivable 1,222,075 67,612 7.38% 714,874 42,249 7.88%
Investment in Federal Home Loan Bank stock 16,777 851 6.76% 12,443 606 6.49%
---------------------------------- --------------------------------
Total interest-earning assets 2,151,230 116,179 7.20% 1,779,743 96,871 7.26%
Non-interest-earning assets 62,363 71,663
---------- ----------
Total assets $2,213,593 $1,851,406
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
NOW accounts $102,537 $1,543 2.01% $94,776 $1,439 2.02%
Money market deposit accounts 79,549 1,852 3.10% 82,095 2,027 3.29%
Passbook savings accounts 368,692 6,950 2.51% 389,649 7,310 2.50%
Certificates of deposit 1,059,690 44,175 5.56% 882,112 36,782 5.56%
Borrowings 299,181 13,919 6.20% 88,199 4,094 6.19%
---------------------------------- --------------------------------
Total interest-bearing liabilities 1,909,649 68,439 4.78% 1,536,831 51,652 4.48%
Non-interest-bearing liabilities 35,624 34,319
---------- ----------
Total liabilities 1,945,273 1,571,150
Stockholders' equity 268,320 280,256
---------- ----------
Total liabilities and stockholders' equity $2,213,593 $1,851,406
---------- ----------
---------- ----------
Net interest income before provision for loan losses $47,740 2.42% $45,219 2.78%
----------------- ------------------
----------------- ------------------
Net yield on earning assets 2.96% 3.39%
Ratio of interest-earning assets to interest-bearing liabilities 1.13 x 1.16 x
18
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
NET INTEREST MARGIN
AT SEPTEMBER 30, 1996
(Dollars In thousands) Balance Yield/Cost
- --------------------------------------------------------------------------------
ASSETS:
Interest-earning assets:
Short term investments $16,081 5.77%
Investment securities 147,985 6.39%
Mortgage-backed and related securities 690,394 7.00%
Loans receivable 1,407,402 7.43%
Investment in Federal Home Loan Bank stock 18,527 6.75%
----------------------
Total interest-earning assets 2,280,389 7.22%
Non-interest-earning assets 59,342
-----------
Total assets $2,339,731
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
NOW accounts $103,587
2.13%
Money market deposit accounts 75,429 3.14%
Passbook savings accounts 360,439 2.53%
Certificates of deposit 1,130,987 5.67%
Borrowings 360,000 6.07%
----------------------
Total interest-bearing liabilities 2,030,442 4.91%
Non-interest-bearing liabilities 45,960
-----------
Total liabilities 2,076,402
Stockholders' equity 263,329
-----------
Total liabilities and stockholders' equity $2,339,731
===========
Net interest income before provision for loan losses 2.31%
===========
19
CAPITAL COMPLIANCE
Office of Thrift Supervision (the "OTS") regulations require the Bank to
comply with the following minimum capital standards: a leverage (or core
capital) requirement consisting of a minimum ratio of core capital (which, as
defined by the OTS, is comprised primarily of stockholders' equity) to total
assets of 3.0%; a tangible capital requirement consisting of a minimum ratio
of tangible capital (defined as core capital minus all intangible assets
other than a specified amount of purchased mortgage servicing rights) to
total assets of 1.5% and a risk-based capital requirement, consisting of a
minimum ratio of total capital to total risk-weighted assets of 8.0%, with at
least 50% of total capital consisting of core capital.
At September 30, 1996, the Bank exceeded all regulatory minimum capital
requirements. The following table sets forth information relating to the
Bank's regulatory capital compliance at that date.
Excess of
Bank Actual
Regulatory Actual Bank Capital Over
Requirements Capital Regulatory
Amount Percent Amount Percent Requirements
- --------------------------------------------------------------------------------
Risk-based $73,784 8.00% $199,731 21.66% $125,947
Leverage (core) 68,583 3.00 193,172 8.45 124,589
Tangible 34,284 1.50 193,127 8.45 158,843
The capital requirements described above are minimum requirements. Higher
capital requirements will be required by the OTS if warranted by the
particular circumstances or risk profile of an individual institution. For
example, OTS regulations provide that additional capital may be required to
take adequate account of the risks posed by concentrations of credit,
nontraditional activities and the institution's ability to manage such risks.
Further, the OTS may require an institution to maintain additional capital
to account for its interest rate risk ("IRR") exposure. Under OTS
regulations, the OTS quantifies each institution's level of IRR exposure
based on data reported by the institution to the OTS, using a model designed
to measure the change in the net present value of the institution's assets,
liabilities and off-balance sheet positions resulting from a hypothetical 200
basis point increase or decrease in interest rates. IRR exposure, as
measured by the OTS, is used as the basis for determining whether the
institution must hold additional risk-based capital to account for IRR. The
Bank has not been required by the OTS to maintain capital in excess of the
minimum regulatory requirements set forth above.
LIQUIDITY
The Company's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed and related securities and investment
securities, and advances from the FHLB and other borrowed funds. While
scheduled maturities of investments and amortization of loans are predictable
sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The Bank is required to maintain an average daily balance of liquid assets
and short-term liquid assets as a percentage of net withdrawable deposits
plus short-term borrowings as defined by OTS regulations. This requirement
which may vary at the direction of the OTS depending upon economic conditions
and deposit flows, is based upon a percentage of deposits and short-term
borrowings. The minimum required liquidity and short-term liquidity ratios
are currently 5.00% and 1.00%, respectively. The Bank's liquidity ratios
were 6.94% at September 30, 1996 and 8.92% at December 31, 1995. The Bank's
short-term liquidity ratios were 4.12% at September 30, 1996 and 5.28% at
December 31, 1995. Excess funds are generally invested in high quality,
short-term marketable investments and federal funds. In the event that the
Bank should require funds beyond its ability to generate them internally,
additional sources of funds are available through the use of advances from
the Company, the FHLB, and other commercial banking sources.
20
The Company's cash flows are comprised of three primary classifications: cash
flows from operating activities, investing activities and financing
activities. Net cash provided by operating activities, consisting of the
results of operations of the Company, adjusted primarily for non-cash
amortization of expenses and changes in assets and liabilities were, $54.0
million and $18.4 million for the first nine months of 1996 and 1995,
respectively. Net cash used in investing activities, consisting of purchases
and maturities of investments, changes in the level of mortgage loans, and
payment for property and equipment, were $332.6 million and $266.3 million
for the first nine months of 1996 and 1995, respectively. Net cash provided
by financing activities, consisting primarily of changes in deposit and
escrow accounts and changes in borrowed funds, were $243.7 million and $209.6
million for the first nine months of 1996 and 1995, respectively.
At September 30, 1996, the Company had outstanding loan commitments of $93.9
million and anticipates that it will have sufficient funds available to meet
these commitments. Certificates of deposit which are scheduled to mature in
one year or less from September 30, 1996, totaled $789.9 million. Management
believes that a significant portion of such deposits will remain with the
Company based upon prior experience with such deposits.
RECENT REGULATORY DEVELOPMENTS
On September 30, 1996, President Clinton signed into law the "Economic
Growth and Regulatory Paperwork Reduction Act of 1996" (the "Regulatory
Reduction Act"). Subtitle G of the Regulatory Reduction Act consists of the
"Deposit Insurance Funds Act of 1996" (the "DIFA"). The DIFA provides for a
one-time special assessment on each depository institution holding deposits
subject to assessment by the FDIC for the SAIF in an amount which, in the
aggregate, will increase the designated reserve ratio of the SAIF (I.E., the
ratio of the insurance reserves of the SAIF to total SAIF-insured deposits)
to 1.25% on October 1, 1996. Subject to certain exceptions, the special
assessment is payable in full on November 27, 1996. As a SAIF-member, the
Bank is subject to the special assessment.
Under the DIFA, the amount of the special assessment payable by an
institution is to be determined on the basis of the amount of SAIF-assessable
deposits held by the institution on March 31, 1995, or acquired by the
institution after March 31, 1995 from another institution which held the
deposits as of that date but is no longer in existence on November 27, 1996.
The DIFA provides for a 20% discount in calculating the SAIF-assessable
deposits of certain "Oakar" banks (I.E., Bank Insurance Fund ("BIF") member
banks that hold deposits acquired from a SAIF member that are deemed to
remain SAIF insured) and certain "Sasser" banks (I.E., banks that converted
from thrift to bank charters but remain SAIF members). The DIFA also exempts
certain institutions from payment of the special assessment (including
institutions that are undercapitalized or that would become undercapitalized
as a result of payment of the special assessment), and allows an institution
to pay the special assessment in two installments if there is a significant
risk that by paying the special assessment in a lump sum, the institution or
its holding company would be in default under or in violation of terms or
conditions of debt obligations or preferred stock issued by the institution
or its holding company and outstanding on September 13, 1995.
On October 8, 1996, the FDIC adopted a final regulation implementing the
SAIF special assessment. In that regulation, the FDIC set the special
assessment rate at 0.657% of SAIF-assessable deposits held on March 31, 1995.
The FDIC has notified the Bank that the dollar amount of the special
assessment payable by the Bank is estimated to be $9.6 million. As a result
of the special assessment, the Bank has taken a charge against earnings for
the quarter ended September 30, 1996, in the amount of $9.6 million. As
discussed below, however, the recapitalization of the SAIF resulting from the
special assessment should significantly reduce the Bank's ongoing deposit
insurance expense.
In light of the recapitalization of the SAIF pursuant to the special
assessment authorized by the DIFA, the FDIC, on October 8, 1996, issued a
proposed rule that would reduce regular semi-annual SAIF assessments from the
current range of 0.23% - 0.31% of deposits to a range of 0% - 0.27% of
deposits. Under the proposal, the new rates would be effective October 1,
1996 for Oakar and Sasser banks, but would not take affect for other
SAIF-assessable institutions until January 1, 1997. From October 1, 1996
through December 31, 1996, SAIF-assessable institutions other than Oakar and
21
Sasser banks would, under the proposal, be assessed at rates ranging from
0.18% to 0.27% of deposits, which represents the amount the FDIC calculates
as necessary to cover the interest due for that period on outstanding
obligations of the Financing Corporation (the "FICO"), discussed below.
Because SAIF-assessable institutions have already been assessed at current
rates (I.E., 0.23% - 0.31% of deposits) for the semi-annual period ending
December 31, 1996, the proposal contemplates that the FDIC will refund the
amount collected from such institutions for the period from October 1, 1996
through December 31, 1996 which exceeds the amount due for that period under
the reduced assessment schedule. Assuming the proposal is adopted as proposed,
and assuming the Bank retains its current risk classification under the FDIC's
risk-based assessment system, the deposit insurance assessments payable by the
Bank will be reduced significantly effective January 1, 1997, to the same level
currently paid by the Bank's BIF-member competitors.
Prior to the enactment of the DIFA, a substantial amount of the SAIF
assessment revenue was used to pay the interest due on bonds issued by the
FICO, the entity created in 1987 to finance the recapitalization of the Federal
Savings and Loan Insurance Corporation, the SAIF's predecessor insurance fund.
Pursuant to the DIFA, the interest due on outstanding FICO bonds will be
covered by assessments against both SAIF and BIF member institutions beginning
January 1, 1997. Between January 1, 1997 and December 31, 1999, FICO
assessments against BIF-member institutions cannot exceed 20% of the FICO
assessments charged SAIF-member institutions. From January 1, 2000 until the
FICO bonds mature in 2019, FICO assessments will be shared by all FDIC-insured
institutions on a PRO RATA basis. The FDIC estimates that the FICO assessments
for the period January 1, 1997 through December 31, 1999 will be approximately
0.013% of deposits for BIF members versus approximately 0.064% of deposits for
SAIF members, and will be less than 0.025% of deposits thereafter.
The DIFA also provides for a merger of the BIF and the SAIF on January 1,
1999, provided there are no state or federally chartered, FDIC-insured savings
associations existing on that date. To facilitate the merger of the BIF and
the SAIF, the DIFA directs the Treasury Department to conduct a study on the
development of a common charter and to submit a report, along with appropriate
legislative recommendations, to the Congress by March 31, 1997.
In addition to the DIFA, the Regulatory Reduction Act includes a number of
statutory changes designed to eliminate duplicative, redundant or unnecessary
regulatory requirements. Further, the Regulatory Reduction Act removes the
percentage of assets limitations on the aggregate amount of credit card and
education loans that may be made by a savings association, such as the Bank;
increases from 10% to 20% of total assets the aggregate amount of commercial
loans that a savings association may make, provided that any amount in excess
of 10% of total assets represents small business loans; allows education,
small business and credit card loans to be counted in full in determining a
savings association's compliance with the qualified thrift lender ("QTL")
test; and provides that a savings association may be deemed to meet the QTL
test if it qualifies as a domestic building and loan association under the
Internal Revenue Code. The Regulatory Reduction Act also clarifies the
liability of a financial institution, when acting as a lender or in a
fiduciary capacity, under the federal environmental clean-up laws. Although
the full impact of the Regulatory Reduction Act on the operations of the
Company and the Bank cannot be determined at this time, management believes
that the legislation will reduce compliance costs to some extent and allow the
Company and the Bank somewhat greater operating flexibility.
On August 10, 1996, President Clinton signed into law the Small Business
Job Protection Act of 1996 (the "Job Protection Act"). Among other things, the
Job Protection Act eliminates the percent-of-taxable-income method for
computing additions to a savings association's tax bad debt reserves for tax
years beginning after December 31, 1995, and requires all savings associations
to recapture, over a six year period, all or a portion of their tax bad debt
reserves added since the last taxable year beginning before January 1, 1988.
The Job Protection Act allows a savings association to postpone the recapture
of bad debt reserves for up to two years if the institution meets a minimum
level of mortgage lending activity during those years. The Bank believes that
it will engage in sufficient mortgage lending activity during 1996 and 1997 to
be able to postpone any recapture of its bad debt reserves until 1998. As a
result of these provisions of the Job Protection Act, the Bank will determine
additions to its tax bad debt reserves using the same method as a commercial
bank of comparable size, and, if the Bank were to decide to convert to a
commercial bank charter, the changes in the bad debt recapture rules enacted
in the Job Protection Act should make such conversion less costly.
22
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
or its subsidiaries are a party other than ordinary routine litigation
incidental to their respective businesses.
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULT UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STANDARD FINANCIAL, INC.
------------------------
(Registrant)
Date: November 8, 1996 /s/ David H. Mackiewich
--------------------------------------
DAVID H. MACKIEWICH
Chairman of the Board,
President and Chief Executive Officer
(Duly Authorized Officer)
Date:November 8, 1996 /s/ Thomas M. Ryan
-------------------------------------
THOMAS M. RYAN
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
27