1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _________________
Commission File Number: 1-13734
STANDARD FEDERAL BANCORPORATION, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2899274
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2600 West Big Beaver Road, Troy, Michigan 48084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 810-643-9600
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
----- -----
The number of shares outstanding of the registrant's $1.00 par value
common stock as of May 3, 1996, was 31,301,195.
2
STANDARD FEDERAL BANCORPORATION, INC.
INDEX
PAGE
- - -----------------------------------------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
March 31, 1996, December 31, 1995, and March 31, 1995 1
Consolidated Statements of Income - Three Months Ended
March 31, 1996 and 1995 2
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1996 and 1995 3-4
Notes to Consolidated Financial Statements 5-9
Independent Accountants' Report 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Three Months Ended March 31, 1996 and 1995 11-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 5. Other Information - Dividend Declaration and Payment
on Common Stock 23
Item 6. Exhibits and Reports on Form 8-K 23-24
Signatures 25
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANDARD FEDERAL BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
March 31, December 31, March 31,
1996 1995 1995
------------ ------------ ------------
(unaudited) (unaudited)
ASSETS
Cash $ 88,554 $ 90,789 $ 111,038
----------- ----------- -----------
Cash equivalents 664 16,029 78,546
Term federal funds sold and securities purchased under
resale agreements 10,800 -- 175,000
Investment securities held to maturity 206,931 211,745 314,261
Mortgage-backed securities held for trading 54,229 224,843 --
Mortgage-backed securities available for sale 717,423 689,432 --
Mortgage-backed securities held to maturity 2,169,647 2,275,158 2,456,330
Loans receivable available for sale 967,297 902,816 222,616
Loans receivable 8,699,215 8,294,909 8,598,850
----------- ----------- -----------
Total earning assets 12,826,206 12,614,932 11,845,603
Accrued interest receivable 73,397 69,147 62,824
Real estate and other repossessed assets 6,892 5,764 9,368
Premises and equipment 195,548 191,988 189,351
Cost in excess of fair value of net assets acquired 137,813 135,874 147,696
Capitalized loan servicing rights 100,049 97,555 67,640
Other assets 76,968 69,559 36,478
----------- ----------- -----------
Total assets $13,505,427 $13,275,608 $12,469,998
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 9,449,204 $ 9,151,929 $ 8,484,960
FHLB advances and other long-term borrowings 1,877,329 1,973,797 2,007,688
Federal funds purchased and reverse repurchase agreements 759,375 844,420 805,182
----------- ----------- -----------
Total interest-bearing liabilities 12,085,908 11,970,146 11,297,830
Accrued interest payable 44,367 58,430 50,506
Undisbursed payments on participations sold 107,675 98,798 40,508
Advance payments by borrowers for taxes and insurance 130,769 75,767 111,626
Federal income taxes payable 64,429 66,245 44,657
Liability for checks and money orders issued 86,051 50,785 61,432
Other liabilities 46,985 39,174 26,694
----------- ----------- -----------
Total liabilities 12,566,184 12,359,345 11,633,253
----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Serial preferred stock, no par value per share;
50,000,000 shares authorized; none issued -- -- --
Common stock, no par value per share: 150,000,000
shares authorized; 31,289,495 shares issued and
outstanding at March 31, 1996; 31,185,175 shares
issued and outstanding at December 31, 1995; and
31,528,350 shares issued and outstanding at March 31,
1995 234,401 231,884 246,896
Retained earnings, partially restricted 689,910 663,655 589,849
Unrealized gain on mortgage-backed securities available for sale 14,932 20,724 --
----------- ----------- -----------
Total stockholders' equity 939,243 916,263 836,745
----------- ----------- -----------
Total liabilities and stockholders' equity $13,505,427 $13,275,608 $12,469,998
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
1
4
STANDARD FEDERAL BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
Three Months Ended
March 31,
----------------------------
1996 1995
---------- ---------
INTEREST INCOME: (unaudited)
Investment securities $ 5,922 $ 7,550
Mortgage-backed securities 61,383 45,053
Loans receivable 175,182 162,758
-------- --------
Total 242,487 215,361
-------- --------
INTEREST EXPENSE:
Deposits 112,095 92,348
FHLB advances and other long-term borrowings 29,213 31,218
Federal funds purchased and reverse repurchase agreements 13,053 13,049
-------- --------
Total 154,361 136,615
-------- --------
Net interest income 88,126 78,746
Provision for (Recovery of) losses 605 (1,025)
-------- --------
Net interest income after provision for (recovery of) losses 87,521 79,771
-------- --------
NON-INTEREST INCOME:
Loan fees and charges 2,067 1,631
Deposit-related fees and charges 6,402 5,784
Loan servicing fee income, net 2,991 3,785
Gain on the sale of earning assets 5,681 1,571
Gain (Loss) on the sale of real estate owned (113) 529
Other 1,207 2,609
-------- --------
Total 18,235 15,909
-------- --------
OTHER EXPENSES:
Compensation and benefits 21,345 21,344
Occupancy and equipment 12,190 11,677
Federal insurance premium 5,607 4,705
General and administrative 4,382 3,868
Advertising 2,474 2,485
Other taxes 2,271 1,242
Other 1,814 1,047
-------- --------
Total operating and administrative expenses 50,083 46,368
Amortization of cost in excess of fair value of net
assets acquired 4,082 3,958
-------- --------
Total 54,165 50,326
-------- --------
Income before provision for federal income taxes 51,591 45,354
Provision for federal income taxes 19,400 16,300
-------- --------
NET INCOME $ 32,191 $ 29,054
======== ========
EARNINGS PER SHARE $1.00 $0.90
======== ========
DIVIDENDS PER COMMON SHARE $0.19 $0.17
======== ========
See accompanying Notes to Consolidated Financial Statements.
2
5
STANDARD FEDERAL BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31,
1996 1995
------------ ------------
OPERATING ACTIVITIES: (unaudited)
Interest received on earning assets $ 240,096 $ 211,242
Loan and other fees received 28,067 14,251
Proceeds from the sale of mortgage-backed securities held for trading 170,614 --
Cash disbursed for real estate loans available for sale (2,156,056) (476,588)
Proceeds from the sale of real estate loans available for sale 2,097,256 389,829
Other operating income, net 1,083 2,439
Interest paid on interest-bearing liabilities (169,125) (128,952)
Operating and administrative expenses (72,639) (59,375)
Federal income taxes paid (16,940) --
----------- ---------
Net cash provided by (used in) operating activities 122,356 (47,154)
----------- ---------
INVESTING ACTIVITIES:
Net increase in term federal funds sold and securities purchased under resale
agreements (10,800) (175,000)
Proceeds from the sale of investment securities available for sale 35,945 --
Purchases of investment securities held to maturity -- (79,704)
Maturities and partial repayments of investment securities held to maturity 8,660 37,878
Disbursements of real estate loans (863,967) (455,197)
Principal repayments of real estate loans, net 570,062 214,057
Principal repayments of mortgage-backed securities held to maturity 76,822 68,579
Net increase (decrease) in consumer and commercial loans (3,920) 496
Proceeds from the disposition of real estate and other repossessed assets 2,007 3,729
Capital expenditures, net (4,598) (981)
Net cash used to acquire FSB Financial Corporation (23,788) --
----------- ---------
Net cash used in investing activities (213,577) (386,143)
----------- ---------
FINANCING ACTIVITIES:
Net increase in deposit accounts, excluding sale of deposits
and deposits acquired through merger 174,511 355,336
Cash transferred to the acquiror of deposit liabilities -- (19,858)
Net increase (decrease) in federal funds purchased and reverse repurchase
agreements (85,045) 53,719
Proceeds from FHLB advances 150,000 --
Repayments of FHLB advances (265,010) (13,825)
Net proceeds from the exercise of common stock options 2,516 224
Dividends paid to stockholders (5,936) (5,358)
Net change in retail transactions in process 39,853 (49,288)
Net receipts of advance payments by borrowers for taxes and insurance 54,777 33,541
Net receipts of payments due on participations sold 7,955 51
----------- ---------
Net cash provided by financing activities 73,621 354,542
----------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (17,600) (78,755)
BEGINNING CASH AND CASH EQUIVALENTS 106,818 268,339
----------- ---------
ENDING CASH AND CASH EQUIVALENTS $ 89,218 $ 189,584
=========== =========
3
6
STANDARD FEDERAL BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Three Months Ended March 31,
1996 1995
------------ ------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net income $ 32,191 $ 29,054
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,495 3,520
Amortization of cost in excess of fair value of net assets acquired 4,082 3,958
Provision for (Recovery of) losses 605 (1,025)
Gain on the sale of branches -- (710)
Provision for deferred federal income taxes 686 1,094
Increase (Decrease) in federal income taxes payable, net (2,502) 15,161
Decrease in mortgage-backed securities held for trading 170,614 --
Increase in loans receivable available for sale (64,481) (88,331)
Increase in accrued interest interest receivable (3,244) (2,301)
Increase (Decrease) in accrued interest payable (14,368) 7,707
Accretion of loan fees and other discounts and premiums, net (550) (1,160)
Deferral of loan origination fees (costs), net 2,517 (4,105)
Net change in accrued and prepaid expenses (6,689) (10,016)
---------- --------
Net cash provided by (used in) operating activities $ 122,356 $(47,154)
========== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Loans receivable transferred to real estate and other repossessed assets $2,925 $2,036
Loans receivable exchanged for mortgage-backed securities $2,002,356 $369,779
SUPPLEMENTAL SCHEDULE OF ACQUISITIONS:
The Company acquired FSB Financial Corporation of
Kalamazoo, Michigan, on January 12, 1996.
January 12, 1996
----------------------------
FSB FINANCIAL CORPORATION ACQUISITION:
Cash paid for common stock and stock options $ 24,726
Fair value of assets acquired $ 165,778
Fair value of liabilities assumed (145,813)
-----------
Fair value of net assets acquired 19,965
--------
Core deposit premium and cost in excess of fair value of net assets acquired $ 4,761
========
See accompanying Notes to Consolidated Financial Statements.
4
7
STANDARD FEDERAL BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE (1) - PRINCIPLES OF CONSOLIDATION
Standard Federal Bancorporation, Inc. (the "Company"), is the holding company
for Standard Federal Bank (the "Bank"). The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary, the Bank.
Significant intercompany balances and transactions have been eliminated.
NOTE (2) - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation. The results of operations for the three
months ended March 31, 1996, are not necessarily indicative of the results that
may be expected for the entire year. The interim financial information should
be read in conjunction with the consolidated financial statements and notes
included in Appendix A of the 1995 Notice of Annual Meeting and Proxy Statement
of the Company. Certain reclassifications have been made in the 1995
Consolidated Financial Statements and accompanying Notes thereto, in order to
conform with the 1996 presentation.
NOTE (3) - EARNINGS PER SHARE
Refer to Exhibit 11, on pages 23 - 24, for the computations of primary and
fully diluted earnings per share.
NOTE (4) - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments and mortgage-backed securities ("MBS") are recorded at cost on a
trade date. Discounts and premiums are amortized using the effective interest
method over the estimated lives of the assets. Investments and MBS determined
to be trading securities are reported at fair value with unrealized gains and
losses included in earnings. Investments and MBS which the Company has the
positive intent and ability to hold to maturity are reported at amortized cost.
All other investments and MBS are classified as available for sale, and are
reported at fair value with unrealized gains and losses reported in
stockholders' equity. Sales of investments and MBS are based on the specific
identification method. The MBS held for trading at March 31, 1996, consist of
certain of the Company's recent loan originations that were securitized during
the month of March 1996 as a part of the Company's on-going mortgage banking
activities, but which were not sold until the month of April 1996.
5
8
STANDARD FEDERAL BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE (4) - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (CONTINUED)
Investment securities and MBS held to maturity are summarized as follows:
March 31, 1996 December 31, 1995
--------------------------- ---------------------------
Carrying Market Carrying Market
Value Value Value Value
---------- ---------- ---------- ----------
(In thousands)
Investment securities held to maturity: (unaudited)
Collateralized mortgage
obligations $ 23,271 $ 23,373 $ 25,642 $ 25,837
Investment-grade corporate
debt securities 125 125 125 125
FHLB stock - at cost 104,149 104,149 102,427 102,427
Certificates of deposits 831 831 831 831
U.S. government and agency
obligations 76,988 75,521 81,082 80,346
Other 1,567 1,310 1,638 1,369
---------- ---------- ---------- ----------
Total $ 206,931 $ 205,309 $ 211,745 $ 210,935
========== ========== ========== ==========
Mortgage-backed securities held
to maturity $2,169,647 $2,196,783 $2,275,158 $2,329,546
========== ========== ========== ==========
Grand total $2,376,578 $2,402,092 $2,486,903 $2,540,481
========== ========== ========== ==========
The investment securities portfolio reflects gross unrealized gains of $0.6
million and gross unrealized losses of $2.2 million at March 31, 1996. The MBS
reflects gross unrealized gains of $34.9 million and gross unrealized losses of
$7.8 million at March 31, 1996.
NOTE (5) - LOANS RECEIVABLE
Loans receivable available for sale are carried at the lower of cost or market
determined on an aggregate basis. All loans held in portfolio are carried at
amortized cost. The Company has both the intent and the ability to hold all
loans in portfolio, for investment purposes, for the foreseeable future.
Discounts and premiums are amortized using the interest method over the
estimated lives of the assets.
As part of its management of assets and liabilities, the Company has, from time
to time, sold retail single-family loans. In addition, through its wholesale
mortgage banking division, the Company routinely sells loans primarily to the
secondary market agencies. The Company has identified a population of loans as
being available for sale at March 31, 1996. The Company intends to sell all of
this portfolio, primarily during the second quarter of 1996. Gains or losses
resulting from the sale of loans are based on the specific identification
method and recorded on a settlement date basis, and reflect the extent that the
sales proceeds exceed the Company's investment in the loans, which includes an
allocation of the proceeds to both the book value of the loans and the related
servicing rights based on their relative fair market values at the time of the
sale.
Loans receivable available for sale are summarized as follows:
March 31, 1996 December 31, 1995
--------------------------- ---------------------------
Carrying Market Carrying Market
Value Value Value Value
---------- ---------- ---------- ----------
(In thousands)
(unaudited)
Loans receivable available for sale $967,297 $967,392 $902,816 $909,533
======== ======== ======== ========
6
9
STANDARD FEDERAL BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE (6) - LOAN ORIGINATION FEES
All loan origination fees and certain loan origination costs are deferred and
amortized as an adjustment of yield over the life of the loan using the
interest method. This method of amortization is based upon contractual payment
terms adjusted for actual prepayments. Unamortized net deferred fees (costs)
are taken into income, as a gain or a loss on the sale, at the time of the loan
sale in proportion to the percentage of the loan sold or into interest income
upon prepayment by the borrower.
NOTE (7) - ALLOWANCE FOR LOSSES
A provision for possible losses is charged to operations based on management's
evaluation of the potential losses in its various loan and investment
portfolios. The major factors considered in evaluating potential losses and
the adequacy of total allowances are historical charge-off experience,
delinquency, general economic conditions and the fair value of any related
collateral.
NOTE (8) - INTEREST RATE EXCHANGE AGREEMENTS
The Company utilizes interest rate exchange agreements ("swaps") to hedge
interest rate risk. Under the contractual terms of the swap outstanding at
March 31, 1996, the Company agreed to pay interest at an effective fixed rate
of 9.99% on notional principal totaling $10.0 million, and to receive interest
at a variable rate of 5.81% determined by independent indices at March 31,
1996. This swap matures during November 1997. The Company is exposed to
credit loss in the unanticipated event of nonperformance by the counterparties
to the swaps primarily if the Company is in a net accrued interest receivable
position at the time of default by the counterparties. However, at March 31,
1996, the Bank was in a net accrued interest payable position. Notional
principal amounts often are used to express the volume of these transactions,
but the amounts potentially subject to credit risk are much smaller.
NOTE (9) - PLEDGED ASSETS
At March 31, 1996, real estate loans totaling $3.0 billion, certain MBS
totaling $963.5 million, investment securities totaling $1.5 million and the
Company's FHLB stock totaling $104.1 million were pledged to secure FHLB
advances, securities sold under agreements to repurchase, other long-term
borrowings and interest rate exchange agreements.
NOTE (10) - COMMITMENTS
At March 31, 1996, the Company had commitments to fund approximately $1.1
billion of mortgage loans and $11.9 million of consumer loans. The vast
majority of these commitments are expected to settle during the next four
months. Additionally, at March 31, 1996, the Company had firm forward
commitments to sell $1.3 billion of recently closed or committed single-family
loans, including the $54.2 million of MBS held for trading identified in the
Consolidated Statement of Financial Condition. These sales, which will
primarily occur during the second quarter of 1996, are not expected to produce
any material gain or loss to the Company. The Company's exposure to credit
loss in the event of nonperformance by the counterparty to the financial
instrument for commitments to extend credit is represented by the contractual
notional amount of those instruments. The Company uses the same credit
policies in making these commitments as those involved in extending loans to
customers.
Total commercial and other standby letters of credit amounting to $9.0 million
were issued and outstanding at March 31, 1996. Unused lines of credit provided
to consumers (generally, open-ended lines of credit which are funded on demand)
totaled $815.3 million at March 31, 1996. Unused lines of credit provided to
commercial customers (generally, open-ended lines of credit which are funded on
demand) totaled $92.4 million at March 31, 1996.
7
10
STANDARD FEDERAL BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE (11) - MORTGAGE SERVICING RIGHTS
Mortgage servicing rights ("MSR") represent the cost of acquiring the right to
service mortgage loans. These costs are initially capitalized and subsequently
amortized in proportion to, and over the period of, estimated net loan
servicing income. The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights ("SFAS 122")" during May 1995. SFAS 122 requires that a mortgage
banking enterprise recognize as separate assets rights to service mortgage
loans for others that have been acquired through either the purchase or
origination of a loan. A mortgage banking enterprise that sells or securitizes
those loans with servicing rights retained should allocate the total cost of
the mortgage loans to the mortgage servicing rights and the loans based on
their relative fair values. Additionally, SFAS 122 requires that MSR be
reported on the Consolidated Statement of Financial Condition at the lower of
cost or fair value. The Company adopted SFAS 122 during May 1995, effective as
of January 1, 1995. The Company's adoption of SFAS 122 resulted in an increase
to the first quarter of 1995 net earnings of approximately $1.8 million, or
$0.05 per share ($2.7 million, or $0.08 per share, for the year ended December
31, 1995). The on-going impact of SFAS 122 is dependent upon, among other
things, the volume of loan originations, the general levels of market interest
rates and the rate of estimated loan prepayments. Accordingly, the Company's
management is unable to predict with any reasonable certainty what effect SFAS
122 will have on its future results of operations or its financial condition.
The activity of capitalized MSR is summarized below:
Three Months Ended March 31,
1996 1995
-------- -------
(unaudited)
Beginning balance $ 97,555 $59,134
Additions through wholesale mortgage banking operations 29,597 9,959
Additions through retail lending operations 4,327 8
Value of MSR acquired through mergers 421 --
Sales of MSR (1) (27,453) --
Amortization (4,398) (1,461)
-------- -------
Ending balance $100,049 $67,640
======== =======
(1) The Company sold $2.0 billion of loans serviced for the benefit of others
during the first quarter of 1996.
The fair value of capitalized MSR is calculated, on a disaggregated basis, by
discounting estimated expected future cash flows using a discount rate
commensurate with the risk involved. The aggregate fair value of the Company's
MSR that is subject to the provisions of SFAS 122 totaled approximately $109.3
million at March 31, 1996. In using this valuation method, the Company used
assumptions that market participants would use in estimating future net
servicing income which included estimates of the cost of servicing per loan,
the discount rate, float value, inflation rate, ancillary income per loan,
prepayment speeds and default rates. The Company conducts its periodic
impairment analyses using a disaggregated method, based on the underlying
loans' interest rates and loan type. An impairment-based valuation allowance
for capitalized MSR of $3.8 million is outstanding as of March 31, 1996, a $2.8
million decrease from the $6.6 million allowance outstanding as of December 31,
1995. This decrease is solely attributable to the sale of $2.0 billion of
loans serviced for the benefit of others noted above.
NOTE (12) - COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED
Since 1980, the Company has expanded its branch network geographically by
merging with 18 savings institutions and purchasing three branches from other
savings institutions. All but one of these acquisitions were accounted for
using the purchase method of accounting. Under the purchase method of
accounting, the Company's Consolidated Statements of Income reflect the income
of the acquired institutions only since the respective dates of acquisition.
In addition, all assets acquired and liabilities assumed are adjusted to fair
value as of the dates of acquisition. Goodwill and other intangible assets
area reviewed for possible impairment when events or changed circumstances may
affect the underlying basis of the assets.
8
11
STANDARD FEDERAL BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE (13) - COMPLETED ACQUISITION
On January 12, 1996, the Company completed its acquisition of FSB Financial
Corporation ("FSB"). The purchase price, including payments made with respect
to outstanding stock options, amounted to $24.7 million. FSB, through its
principal operating subsidiary, Fidelity Savings Bank, operated four
full-service branch offices within the Company's operating area in Kalamazoo,
Michigan. FSB had total assets of $163.3 million and deposits of $122.8
million at the date of acquisition.
NOTE (14) - PENDING ACQUISITION
On December 14, 1995, the Company and Bell Bancorp, Inc. ("Bell"), executed a
definitive merger agreement. The purchase price, including payments made with
respect to outstanding stock options, will approximate $354.5 million. Bell,
through its principal subsidiary, Bell Federal Savings and Loan Association,
operates 14 full-service branch offices in the Chicago, Illinois, market. Bell
had total assets of $1.9 billion, total deposits of $1.6 billion and
stockholders' equity of $307.4 million at March 31, 1996. The acquisition is
subject to approval by the stockholders of Bell. The acquisition is scheduled
to be completed on June 7, 1996. The transaction will be accounted for as a
purchase and is anticipated to result in goodwill (excess of purchase price
over the underlying market value of assets and liabilities) of approximately
$57.0 million to $62.0 million. The addition of the asset base along with the
related intangibles will reduce the Bank's various capital ratios. However, on
a pro-forma basis, the Company's management believes it will continue to meet
all regulatory requirements. The Bell acquisition could cause the Bank to
temporarily fall slightly below the minimum levels of capital necessary to be
categorized as "well-capitalized" by the federal banking agencies (refer to
detailed discussion of the Bank's capital requirements in the Financial
Condition section of Management's Discussion and Analysis on pages 12-13
herein). In the event the Company deems it desirable to increase its capital
position to partially offset the effects of the merger and maintain its
"well-capitalized" categorization, it may consider the issuance of medium-term
debt and/or reductions in the size of its existing balance sheet.
9
12
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT ACCOUNTANTS' REPORT
Standard Federal Bancorporation, Inc. and Subsidiaries:
We have reviewed the accompanying consolidated statement of financial condition
of Standard Federal Bancorporation, Inc. and Subsidiaries (the "Bank") as of
March 31, 1996 and 1995, and the related consolidated statements of income and
cash flows for the three month periods ended March 31, 1996 and 1995. These
consolidated financial statements are the responsibility of the Bank's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the consolidated financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial condition of Standard
Federal Bancorporation, Inc. as of December 31, 1995, and the related
consolidated statements of income, cash flows and stockholders' equity for the
year then ended (not presented herein); and in our report dated January 18,
1996, we expressed an unqualified opinion on those consolidated financial
statements.
Deloitte & Touche LLP
April 18, 1996
10
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
The primary operating objective of Standard Federal Bancorporation, Inc. (the
"Company"), and its wholly owned subsidiary Standard Federal Bank (the "Bank")
is to maximize net interest income over the long term, while taking into
consideration both credit risk and interest rate risk. In pursuit of this
objective, the Company follows the strategy of acquiring assets for investment
purposes and retaining portions of its loan production. The Company attempts
to achieve reasonable spreads through matching such assets with deposits and a
number of other funding sources. The Company has never made any foreign loans,
nor does it participate as an investor in high-yield financing, highly
leveraged transactions or non-investment grade securities.
As part of its strategy for the management of assets and liabilities, the
Company has, from time to time, sold retail single-family loans. In addition,
the Company's wholesale mortgage-banking division routinely sells wholesale
loans primarily to the secondary market agencies. At March 31, 1996, the
Company had identified $967.3 million of single-family loans as available for
sale. These loans, primarily all of which were acquired by the Company's
wholesale mortgage-banking division, are recorded at the lower of cost or
market. While the Company intends to sell all of this portfolio, the level of
gains or losses, if any, to be recognized in subsequent periods is anticipated
to be insignificant.
The Company's total mortgage-backed securities ("MBS") portfolio, including MBS
held for trading and available for sale, decreased by $248.1 million during the
first three months of 1996, due to principal repayments and sales of certain
MBS which had been classified as either held for trading or available for sale
as of December 31, 1995.
During the first three months of 1996, loans receivable (including loans
available for sale), net of sales and repayments, increased $468.8 million, or
5%. During the first quarter of 1996, the Company originated $3.0 billion of
single-family home mortgage loans, compared to $918.4 million during the same
period last year. Approximately $1.5 billion, or 50%, of total loan
originations for the first three months of 1996 were refinances of either
existing Company mortgages or mortgages from other financial institutions.
Mortgages for the purchase of single-family residences totaled $1.5 billion
for the period, an increase of $724.1 billion, or 93%, over the $777.2 million
in purchase money mortgage loans originated during the first three months of
1995.
The Company's capitalized mortgage servicing rights ("MSR") increased by $2.5
million during the first three months of 1996. This increase is attributable
to the recognition of MSR from the Company's on-going mortgage banking
activities. The Company capitalized $33.9 million of MSR during the three
months ended March 31, 1996, amortized $4.4 million of MSR and sold $2.0
billion of loans serviced for the benefit of others with $27.5 million of
associated MSR.
During the first three months of 1996, deposits increased $297.3 million, or
3%. This increase in deposits is attributable to the $122.8 million of
deposits acquired in the merger with FSB Financial Corporation on January 12,
1996, and to various deposit account promotions and competitive interest rates
offered by the Company for certain retail certificate of deposit and public
unit accounts.
From time to time, the Bank uses Federal Home Loan Bank ("FHLB") advances as a
source of longer-term, fixed-rate funds for purposes of investing in loans and
mortgage-backed securities. During the first three months of 1996, the Bank
decreased its level of FHLB advances by $96.5 million, net.
During the first three months of 1996, securities sold under agreements to
repurchase decreased by $85.0 million, principally in response to the increase
in deposits. The Company uses either this funding source or FHLB advances
depending on its overall asset/liability position and related interest rate
risk management objectives. Recent borrowings under reverse repurchase
agreements have included longer-term borrowings with maturities of up to three
years. From time to time, this source of longer-term borrowings is priced more
competitively than FHLB advances.
Advance payments by borrowers for taxes and insurance ("escrow") increased
$55.0 million during the first three months of 1996 due to the continued growth
in the Company's loan portfolio. Additionally, escrow balances accumulate
throughout each calendar year but decrease significantly, primarily in August
and December, due to semiannual property tax payments.
11
14
FINANCIAL CONDITION (CONTINUED)
Table 1 below presents the Bank's position relative to the three current
regulatory capital requirements. The Bank meets all of the capital
requirements mandated by the Office of Thrift Supervision (the "OTS") at March
31, 1996.
TABLE 1
SUMMARY OF CAPITAL REQUIREMENTS - STANDARD FEDERAL BANK
MARCH 31, 1996
(In thousands)
Stated Required
Capital Capital Excess
Stated As a % of Required As a % of Excess Capital
Capital Assets (1) Capital Assets (1) Capital Percentage
----------- ---------- ---------- ---------- ------- -----------
Total stockholders' equity $ 927,616 6.87%
Adjustments for tangible, core
and total capital:
Goodwill, net of deferred tax
liability on core deposit premium (114,137)
Core deposit premium (18,714)
Valuation adjustment for
mortgage servicing rights (9,626)
Unrealized net gain on mortgage-backed
securities available for sale (14,932)
Investments in non-includable
subsidiaries (4,265)
---------
Total tangible capital 765,942 5.75% $199,888 1.50% $566,054 4.25%
Qualifying core deposit premium 18,714
---------
Total core capital 784,656 5.88% $400,337 3.00% $384,319 2.88%
(Tier 1 capital)
General allowance for loan
losses 33,918
---------
Total capital (risk based) $ 818,574 12.43% $526,746 8.00% $291,828 4.43%
=========
1) The regulatory capital requirements are calculated as a percentage of
adjusted assets, as defined by OTS regulation.
Pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of
1989, the OTS has prescribed three separate minimum capital-to-assets
requirements which must be met by the Bank: (1) a risk-based capital
requirement that "total capital" be at least equal to 8% of "risk-weighted
assets"; (2) a tangible capital requirement that "tangible capital" be at least
equal to 1.5% of "adjusted total assets"; and (3) a leverage ratio requirement
that "core capital" be at least equal to 3.0% of "adjusted total assets."
Capital standards for thrift institutions must be "no less stringent" than
those applicable to national banks. The capital standards applicable to
national banks require a leverage ratio equal to 4% of adjusted assets in order
for an entity to be categorized as at least being adequately capitalized. As
such, the general minimum requirement of core capital at least equal to 3% of
adjusted total assets, which has been de facto superseded, was applicable only
to those institutions that received a composite rating of one, which is the
highest rating under the "CAMEL" rating system for financial institutions, and
those which were, in general, considered strong organizations having
well-diversified risks, including no undue interest rate risk exposure,
excellent control systems, good earnings, high asset quality and liquidity and
well managed on- and off-balance sheet assets. All other thrift institutions
must maintain core capital of 3% plus an additional 1% to 2%, as established by
the OTS on a case-by-case basis. Therefore, Standard Federal Bank believes
that it is required to maintain core capital of at least 4% of adjusted total
assets.
12
15
FINANCIAL CONDITION (CONTINUED)
The various federal banking agencies have formally implemented the Prompt
Corrective Action ("PCA") provisions contained in the Federal Deposit Insurance
Corporation Improvement Act of 1991. The specified capital categories and
management's calculations of the Bank's ratios at March 31, 1996, are
summarized as follows:
Tangible Total Tier 1 Tier 1
Capital Risk-based Risk-based Leverage
Capital Category Ratio Ratio Ratio (1) Ratio
---------------- ---------- ------------ ------------ ----------
Well-capitalized N/A >10% >6% >5%
- - -
Adequately capitalized N/A >8% >4% >4%
- - -
Undercapitalized N/A <8% <4% <4%
Significantly undercapitalized N/A <6% <3% <3%
Critically undercapitalized <2% N/A N/A N/A
-
Standard Federal Bank at
------------------------
March 31, 1996:
---------------
Stated capital (in thousands) $765,942 $818,574 $784,656 $784,656
======== ======== ======== ========
As a percentage of adjusted assets 5.75% 12.43% 11.98% 5.88%
======== ======== ======== ========
(1) The Tier 1 Risk-based ratio is defined as total core capital (Tier 1
capital) divided by risk-adjusted assets minus general allowances for
losses.
N/A - Not Applicable
Notwithstanding the above ratios, the OTS may deem a financial institution to
be classified one category lower than the above guidelines would otherwise
indicate. The Bank was categorized for purposes of PCA as a well-capitalized
institution by the OTS as of their completion of the Bank's 1995 Safety and
Soundness Examination and the Company's management believes the Bank remains so
categorized at March 31, 1996.
As a function of its regulatory oversight efforts, the OTS has also defined an
interest rate risk ("IRR") component. Initially proposed as an additional
component of risk-based capital requirements, it is now likely that the IRR
component will be used by the OTS only as a supervisory tool. The results
derived from the OTS' IRR model indicate that the Bank was exposed to IRR at a
level higher than the regulatory benchmark. The Bank's March 31, 1996 IRR
component was $32.9 million; such amount equaling the Bank's IRR component as
of September 30, 1995. Because the Bank had $291.8 million of excess
risk-based capital as of March 31, 1996, this IRR component will neither affect
the Bank's continued compliance with applicable regulatory capital
requirements, nor will it likely result in any increased regulatory oversight.
Various Committees of Congress and various federal regulatory banking agencies,
including the Federal Deposit Insurance Corporation ("FDIC"), are currently
discussing changes to the federal deposit insurance system to narrow or
eliminate the difference in financial characteristics between the Bank
Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF").
One of the proposals being discussed would, among other things, assess thrifts,
such as the Bank, a one-time fee to bring the SAIF fund into parity with the
BIF fund. In the event that such proposal was to become law, the Bank would be
required to record a one-time charge to earnings of approximately $48.2
million, or $1.50 per share, after-tax, based on March 31, 1995 balances and a
fee of 85 basis points. Thereafter, the Bank's annual deposit insurance
expense would be reduced for the foreseeable future by approximately 80% to
100% of current premiums. A premium reduction of this magnitude would
represent annual after-tax cost savings to the Bank of approximately $10.1
million to $12.6 million, or $0.31 per share to $0.39 per share, based upon the
actual 1995 deposit insurance premiums incurred by the Bank. If such proposal
is enacted during the second quarter of 1996 and the Bank, therefore,
recognizes this one-time charge to its earnings during that quarter, the Bank
could temporarily fall slightly below the minimum levels of capital necessary
to be categorized as well-capitalized for PCA purposes. In the event the
Company deems it desirable to increase its capital position to partially offset
the effects of the merger and maintain its well-capitalized categorization, it
may consider the issuance of medium-term debt and/or reductions in the size of
its existing balance sheet.
13
16
RESULTS OF OPERATIONS
The Company's net income totaled $32.2 million, or $1.00 per share, during the
three months ended March 31, 1996. This represents an annualized return on
average assets ("ROA") of 0.95% and an annualized return on average
stockholders' equity ("ROE") of 13.89%. This earnings performance represents
an increase of 11% when compared to the $29.1 million, or $0.90 per share,
recorded during the same period in 1995 (ROA of 0.95% and ROE of 14.10%).
Table 2 below presents an analysis of the results of operations for the
three-month periods ended March 31, 1996 and 1995. Pretax operating earnings
totaled $45.9 million for the first quarter of 1996, compared to prior-year
first quarter pretax operating earnings of $43.8 million. The increased level
of operating earnings for the three-month period in 1996 versus 1995 is
primarily attributable to comparatively higher net interest income, offset by
somewhat higher provisions for losses. The higher provisions for losses are
attributable to the significant loan growth during the first quarter of 1996,
while in the first quarter of 1995 the Company recorded a one-time recovery of
a prior-year commercial real estate loan charge-off in the amount of $1.7
million.
The following chart presents an analysis of the results of operations for the
three months ended March 31, 1996 and 1995:
Three Months Ended
March 31, 1996
---------------------- Percent
TABLE 2 1996 1995 Change
-------- ------ -------
CONDENSED STATEMENTS OF INCOME DATA: (unaudited)
(In millions, except share data)
Pretax operating earnings $ 45.9 $ 43.8 4.8 %
Pretax net gains 5.7 1.6 100.0 %
------ ------ -----
Pretax earnings 51.6 45.4 13.7 %
Provision for federal income taxes (19.4) (16.3) (19.0)%
------ ------ -----
Net income $ 32.2 $ 29.1 10.7 %
====== ====== =====
Earnings per share $ 1.00 $ 0.90 11.1 %
====== ====== =====
NET INTEREST INCOME
Net interest income increased 12% during the first quarter of 1996, totaling
$88.1 million, compared to $78.7 million recorded in the same period last year.
The Company's net interest margin was 2.73% of average earning assets during
the first quarter of 1996, compared to 2.75% during the same period in 1995,
and 2.61% during the fourth quarter of 1995.
While the Company's net interest margin remained virturally unchanged during
the first quarter of 1996 compared to the same period in 1995, it has increased
markedly when compared to the immediately preceeding quarter. The Company's
gradually improving net intrest margin and a 12% increase in total average
earning assets ($12.9 billion during the current quarter versus $11.5 billion
during the first quarter of 1995) produced the increased level of net interest
income noted above.
Like most thrift institutions, the Company has generally recorded higher levels
of net interest income during relatively low and falling interest rate
environments and has generally experienced a declining net interest margin
during periods of relatively high and/or rising interest rate environments. In
order to moderate the impact of a rising interest rate environment on the
Company's operations, the Company's earning assets and interest-bearing
liabilities have been configured such that, at various time horizons,
differences between the amounts of assets and liabilities that either reprice
or mature are minimized to the extent possible. Any difference between the
amount of assets and liabilities repricing within one year is referred to as
the "one-year-repricing gap." At March 31, 1996, the Bank had $357.7 million
more in liabilities expected to mature or reprice within one year than assets.
This $357.7 million "negative" repricing gap represented -2.65% of total assets
at March 31, 1996, compared to a "positive" one-year repricing gap of $22.7
million, representing +0.17% of total assets at December 31, 1995.
14
17
NET INTEREST INCOME (CONTINUED)
While gap analysis is the most commonly used indicator of interest rate risk in
the thrift industry, there is no single interest rate risk measurement system
that takes into consideration all of the factors which influence the net
interest margin. Other significant factors which impact reported net margins
include changes in the shape of the U.S. Treasury yield curve, the volume and
composition of loan originations and repayment rates on fixed-rate loans.
A method by which the Company has lengthened the maturity and fixed the cost of
interest-bearing liabilities is by the use of interest rate exchange agreements
("swaps"). The Company's net pretax expense relating to swaps amounted to $0.8
million for the three months ended March 31, 1996, compared to $3.8 million for
the same period in 1995. This decrease in net expense is attributable to the
recent maturities of substantial portions of the Company's swaps. As described
further in Note 8 of the Notes to Consolidated Financial Statements, the
Company pays interest on its swaps at fixed rates and it receives interest at
rates which are periodically adjusted to reflect changes in short-term interest
rates. See Table 3, Average Yields Earned and Rates Paid, Table 4, Rate/Volume
Analysis and Table 5, Asset/Liability Repricing Schedule, which follow.
The table on the following page presents interest income from average earning
assets, expressed in dollars and yields, and interest expense on average
interest-bearing liabilities, expressed in dollars and rates. Interest income
from earning assets includes the accretion/amortization of unearned
discounts/premiums and the accretion of net deferred loan origination fees.
Interest expense on interest-bearing liabilities includes the impact of
interest rate exchange agreements (see Note 8 of Notes to Consolidated
Financial Statements), and the accretion/amortization of unearned purchase
accounting discounts/premiums.
15
18
NET INTEREST INCOME (CONTINUED)
TABLE 3
AVERAGE YIELDS EARNED AND RATES PAID
Three Months Ended March 31,
---------------------------------------------------------------------
1996 1995
------------------------------------ -----------------------------
Average Yield/ Average Yield/
(In millions) Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------
ASSETS:
Real estate loans $ 8,430.5 $157.2 7.46% $ 7,904.7 $146.7 7.42%
Consumer loans 567.3 15.1 10.68 495.8 13.2 10.79
Commercial loans 131.7 2.9 8.85 121.9 2.9 9.57
------------ ------ ---- ---------- ------ -----
Total loans 9,129.5 175.2 7.68 8,522.4 162.8 7.65
Mortgage-backed securities 3,319.8 61.4 7.40 2,540.3 45.0 7.09
Investment securities 423.6 5.9 5.56 456.6 7.5 6.61
------------ ------ ---- ---------- ------ ----
Total earning assets $ 12,872.9 $242.5 7.55% $ 11,519.3 $215.3 7.50%
============ ====== ==== ========== ====== ====
Other assets 650.5 693.3
------------ ----------
Total assets $ 13,523.4 $ 12,212.6
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $ 9,420.8 $112.1 4.79% $ 8,196.4 $ 92.3 4.57%
FHLB advances and other long-term borrowings 1,965.4 29.2 5.98 2,013.1 31.2 6.20
Federal funds purchased and reverse repurchase
agreements 784.8 13.1 6.69 799.6 13.1 6.53
------------ ------ ---- ---------- ------ ----
Total interest-bearing liabilities $ 12,171.0 $154.4 5.09% $ 11,009.1 $136.6 5.00%
============ ====== ==== ========== ====== ====
Other liabilities 425.3 379.2
Stockholders' equity 927.1 824.3
------------ ----------
Total liabilities and stockholders' equity $ 13,523.4 $ 12,212.6
============ ==========
EXCESS OF AVERAGE EARNING ASSETS OVER AVERAGE INTEREST-
BEARING LIABILITIES $ 701.9 $ 510.2
============ ==========
INTEREST RATE SPREAD 2.46% 2.50%
==== ====
INTEREST INCOME/EARNING ASSETS $242.5 7.55% $215.3 7.50%
INTEREST EXPENSE/EARNING ASSETS 154.4 4.82 136.6 4.75
------ ---- ------ ----
NET INTEREST MARGIN $ 88.1 2.73% $ 78.7 2.75%
====== ==== ====== ====
16
19
NET INTEREST INCOME (CONTINUED)
The following table presents the dollar amount of changes in interest income
and interest expense for major components of earning assets and
interest-bearing liabilities which are presented in Table 3 herein. The table
distinguishes between the changes related to average outstanding balances
(changes in volume while holding the initial rate constant) and the changes
related to average interest rates (changes in average rates while holding the
initial balance constant). Changes attributable to both volume and rates have
been allocated proportionately.
TABLE 4
RATE/VOLUME ANALYSIS
Three Months Ended
March 31,
1996 Versus 1995
----------------------------------
Increase (Decrease) Due To:
Volume Rate Total
-------- ---------- ---------
(In millions)
EARNING ASSETS:
Real estate loans $ 9.7 $ 0.8 $ 10.5
Consumer loans 2.0 (0.1) 1.9
Commercial loans 0.2 (0.2) --
----- ------ ------
Total loans 11.9 0.5 12.4
Mortgage-backed securities 14.3 2.1 16.4
Investment securities (0.5) (1.1) (1.6)
----- ------ ------
Total $25.7 $ 1.5 $ 27.2
===== ====== ======
INTEREST-BEARING LIABILITIES:
Deposits $15.0 $ 4.8 $ 19.8
FHLB advances and other
long-term borrowings (0.8) (1.2) (2.0)
Federal funds purchased and
reverse repurchase agreements (0.2) 0.2 --
----- ------ ------
Total $14.0 $ 3.8 $ 17.8
===== ====== ======
NET INTEREST INCOME $11.7 ($ 2.3) $ 9.4
===== ====== ======
17
20
NET INTEREST INCOME (CONTINUED)
The following table sets forth the repricing of the Company's earning assets
and interest-bearing liabilities at March 31, 1996, based upon a flat interest
rate scenario. The principal amounts of each asset and liability are shown in
the period in which they are anticipated to mature or reprice. The rates
indicated represent the effective yield or cost, on a bond equivalent basis, on
the principal balances.
TABLE 5
ASSET/LIABILITY REPRICING SCHEDULE MATURING/REPRICING IN:
March 31, 1996 1-3 3-5 5-10
(In millions) RATE 1 YEAR YEARS YEARS YEARS THEREAFTER TOTAL
-------- ------ ----- ----- ----- ---------- -----
EARNING ASSETS:
Investment Portfolio 6.75% $ 153 $ 50 $ 10 $ 5 $ -- $ 218
Mortgage-backed securities 7.47 1,039 548 684 415 255 2,941
Loans Receivable
Real Estate:
Adjustable-rate 7.39 3,036 -- -- -- -- 3,036
Fixed-rate 7.42 1,422 1,145 1,365 1,209 785 5,926
Commercial and Consumer 10.19 547 65 50 37 6 705
----- ------- ------ ------ ------ ------ -------
Total 7.56% $6,197 $1,808 $2,109 $1,666 $1,046 $12,826
===== ======= ====== ====== ====== ====== =======
INTEREST-BEARING LIABILITIES:
Deposits:
NOW, checking, money market
checking, and passbook
savings 1.79% $ 270 $ 423 $ 302 $ 433 $ 339 $ 1,767
Money market deposits 4.10 556 648 309 236 44 1,793
Certificates:
Under $100,000 5.81 2,823 870 177 238 -- 4,108
Over $100,000 5.52 1,712 46 13 10 -- 1,781
----- ------- ------ ------ ------ ------ -------
Subtotal 4.68 5,361 1,987 801 917 $ 383 $ 9,449
----- ------- ------ ------ ------ ------ -------
BORROWINGS:
FHLB advances and other
long-term borrowings 5.94 909 926 28 14 -- 1,877
Federal funds purchased and
reverse repurchase
agreements 6.51 295 465 -- -- -- 760
----- ------- ------ ------ ------ ------ -------
Subtotal 6.10 1,204 1,391 28 14 -- 2,637
----- ------- ------ ------ ------ ------ -------
Impact of interest rate swaps 4.19 (10) 10 -- -- -- --
----- ------- ------ ------ ------ ------ -------
Total 5.00% $6,555 $3,388 $ 829 $ 931 $ 383 $12,086
===== ======= ====== ====== ====== ====== =======
Interest rate spread 2.56%
=====
Excess (Deficiency) of earning
assets over (to) interest-
bearing liabilities ($ 358) ($1,580) $1,280 $ 735 $ 663 $ 740(1)
======= ====== ====== ====== ====== =======
(1) The excess of $740 million noted above has the effect of increasing the
indicated spread by 0.27%.
18
21
NONPERFORMING ASSETS - PROVISION FOR LOSSES
A very high percentage of the Company's assets are secured by first mortgages
on single-family homes which have historically resulted in low exposure to loss
for the Company. An important measure of asset quality in the financial
services industry is the ratio of nonperforming assets to total assets. At
both March 31, 1996, and December 31, 1995, the Bank's nonperforming asset
ratios were significantly below the industry average. The Bank's management
believes that the allowance for losses is adequate to cover currently estimated
losses in the various portfolios.
The Company's nonperforming assets are summarized in Table 6 below:
TABLE 6
NONPERFORMING ASSETS
March 31, 1996 December 31, 1995
-------------- -----------------
(In thousands)
Nonaccrual loans $ 15,713 $ 13,643
Past due loans 31,568 24,242
Renegotiated loans 8,765 9,236
-------- --------
Total nonperforming loans 56,046 47,121
Real estate and other repossessed assets ("REO") 5,105 5,006
-------- --------
Total nonperforming assets 61,151 52,127
Less allowance for losses (36,400) (35,400)
-------- --------
Total nonperforming assets (net of allowances) $ 24,751 $ 16,727
======== ========
Ratio of nonperforming assets to total assets 0.45% 0.39%
======== ========
Ratio of nonperforming assets to total loans and REO 0.63% 0.56%
======== ========
Allowance coverage of nonperforming loans 64.95% 75.13%
======== ========
Ratio of allowances to total loans 0.38% 0.38%
======== ========
Ratio of allowances to total loans and REO 0.38% 0.39%
======== ========
The activity in the allowance for losses on the Company's loan portfolios is
summarized in Table 7 below:
TABLE 7
ALLOWANCE FOR LOSSES
Three Months Ended
March 31,
----------------------------------
(In thousands)
1996 1995
-------- --------
Beginning balance $35,400 $35,000
Provision for losses 605 (1,025)
Allowances of acquired institutions 763 --
Recoveries 366 2,017
Realized losses (734) (1,542)
------- -------
Ending balance $36,400 $34,450
======= =======
Ratio of net charge-offs to average
loans (annualized) (0.02%) (0.02%)
======= =======
During the first three months of 1996, the Bank's provision for losses totalled
$0.6 million. During this same time period, the Company's population of
nonperforming assets increased by $9.0 million, or 17%, while its allowances
for loan losses increased by 3%. This increase in nonperforming assets is
primarily attributable to increasing consumer delinquenicies for all types of
loans nationwide. Nonetheless, the Company's nonperforming assets remain well
below industry averages.
19
22
NON-INTEREST INCOME
During the three months ended March 31, 1996, the Company earned $6.4 million
in deposit-related fees and charges, compared to the $5.8 million earned during
the comparable period in 1995. The 11% increase resulted from the Company's
expanding retail customer deposit base and certain fee increases implemented in
early 1996.
Approximately $2.1 billion of the Company's recently acquired, single-family
loans were sold during the first three months of 1996. Such sales occurred in
the normal course of business, including the operations of its wholesale
mortgage-banking division, and resulted in gains totaling approximately $5.7
million, compared to $1.6 million in gains recorded on sales of $385.3 million
of single-family loans and certain mortgage loan servicing rights during the
same period in the prior year. The amount and timing of such gains are subject
to fluctuations based upon loan volume, the general levels of interest rates
and other factors.
The Company recorded net loan servicing fee income of $3.0 million for the
three months ended March 31, 1996, compared to income of $3.8 million recorded
during the comparable periods in 1995. At March 31, 1996, loans serviced for
the benefit of others totaled $8.1 billion, compared to $8.5 billion at
December 31, 1995, and $6.0 billion at March 31, 1995. The comparatively lower
level of loan servicing income recorded during the three months ended March 31,
1996, was due to the significantly higher amounts of MSR amortization in the
current year's comparatively lower interest rate environment, which has
produced higher levels of loan prepayments.
OTHER EXPENSES
Table 8 below presents information concerning the Company's operating and
administrative expenses.
TABLE 8
OPERATING AND ADMINISTRATIVE EXPENSES
Change from
Three Months Ended Prior Year:
March 31, Increase
1996 1995 (Decrease)
-------- -------- --------------
(In thousands)
Compensation and benefits $ 33,210 $ 26,155 $7,055
Occupancy and equipment 12,190 11,677 513
Federal insurance premium 5,607 4,705 902
General and administrative 7,348 5,071 2,277
Advertising 2,474 2,485 (11)
Other taxes 2,271 1,242 1,029
Other 1,814 1,047 767
-------- -------- -------
Gross operating and administrative
expenses 64,914 52,382 12,532
Less: Capitalized direct costs of
loan originations (14,831) (6,014) (8,817)
-------- -------- -------
Total, net $ 50,083 $ 46,368 $3,715
======== ======== =======
Gross operating expense ratio 64.40% 58.22%
======== ========
Net operating expense ratio (1) 49.69% 50.10%
======== ========
(1) Total operating and administrative expenses divided by the sum of net
interest income and other recurring income (primarily fees and charges).
This ratio is often referred to as an efficiency ratio.
20
23
OTHER EXPENSES (CONTINUED)
The operating and administrative expenses of the Company totaled $50.1 million
for the three months ended March 31, 1996, an 8% increase over the $46.4
million incurred during the same period in 1995. The sources of this increase
are discussed in the following paragraphs.
The Company's gross compensation and benefits expense, before the
capitalization of direct costs of loan originations, during the three months
ended March 31, 1996, totaled $33.2 million, representing a 27% increase over
the $26.2 million recorded during the same period in 1995. This increase is
attributable to greater staffing levels in the Company's wholesale lending
division, its new mutual fund and annuities sales program and its commercial
business lending function, as well as normal salary increases for the Bank's
workforce, greater use of temporary employment services and increased overtime
and commission expenses related to the record loan production during these
periods.
The Company paid Federal Deposit Insurance Corporation ("FDIC") premiums
totaling $5.6 million for the three months ended March 31, 1996, compared to
$4.7 million during the same period in 1995. The higher level of expense
recorded during 1996 is primarily attributable to a $1.2 billion, or 15%,
increase in the average balance of deposits outstanding during the first three
months of 1996 compared to the year-earlier period.
The Company's general and adminstrative expenses, before the capitalization of
direct costs of loan originations, during the three months ended March 31,
1996, totaled $7.3 million, representing a 45% increase over the $5.1 million
recorded during the same period in 1995. This increase is due to the
comparatively higher lending volumes during the first quarter of 1996. Certain
volume-related costs such as contract underwriting, fee appraisals and credit
reports are recorded in this expense category.
During the first quarter of 1996, the Company's other tax expense totaled $2.3
million, an 83% increase when compared to the other tax expense incurred in the
year-earlier period. This increase is primarily attributable to the Company's
recognition of a one-time benefit during the first quarter of 1995, which was
the result of favorable Michigan state tax legislation that had been enacted.
Certain direct costs of originating loans are capitalized and amortized over
the lives of the related loans. Various expense categories are reduced as
these costs are capitalized. Consequently, the level of loan originations
during a period impacts the nominal amount of expenses reported in the
Company's Consolidated Statements of Income. Expenses totaling $14.8 million
were capitalized during the three months ended March 31, 1996, compared to $6.0
million recorded during the comparable period in 1995. This 147% increase is
due to the dramatically higher lending volumes during the first quarter of
1996.
FEDERAL INCOME TAXES
The Company's statutory tax rate was 35% for both periods presented. The
Company's effective tax rate for each of the periods presented differs from
each period's statutory rate due primarily to the nondeductibility of goodwill
amortization.
The Company and its consolidated subsidiaries are currently undergoing IRS
examinations of the consolidated federal income tax returns for the years ended
December 31, 1988 through 1992. The final determination of tax liability for
these taxable years has not been completed. In the opinion of the Company's
management, any such final determination or examination of still open returns,
including returns of subsidiaries and predecessors of or entities merged into
the Company, would not result in a deficiency which would have a material
adverse effect on the financial condition or results of operations of the
Company and its consolidated subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Federal regulations currently require that savings institutions maintain an
average daily balance, for each calendar month, of cash, cash equivalents and
certain marketable securities which are not committed as collateral under
secured borrowing arrangements equal to 5.0% of net withdrawable accounts and
borrowings payable in one year or less ("liquidity ratio"). At March 31, 1996,
the Bank's liquidity ratio was 7.0%. Liquidity levels will vary depending upon
savings flows, future loan fundings and sales and operating needs. The Bank
does not foresee any difficulty in meeting its liquidity requirements.
21
24
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company's primary sources of funds are customer deposits, loan principal
repayments, sales of loans, repayments of mortgage-backed and investment
securities, advances from the Federal Home Loan Bank of Indianapolis ("FHLB"),
securities sold under agreements to repurchase with primary dealers and cash
generated from operations.
On December 14, 1995, the Company and Bell Bancorp, Inc. ("Bell"), executed a
definitive merger agreement. The purchase price, including payments made with
respect to outstanding stock options, will approximate $354.1 million. The
funding sources for the consummation of the transaction will most likely be a
combination of the liquid resources available to the Company and medium-term
debt financing. Bell, through its principal operating subsidiary, Bell Federal
Savings and Loan Association, operates 14 full-service branch offices in the
Chicago, Illinois, market. Bell had total assets of $1.9 billion, total
deposits of $1.6 billion and stockholders' equity of $307.4 million at March
31, 1996. The acquistion is subject to approval by the stockholders of Bell.
The acquisition is scheduled to be completed on June 7, 1996. The transaction
will be accounted for as a purchase and is anticipated to result in goodwill
(excess of purchase price over the underlying market value of assets and
liabilities) of approximately $57.0 million to $62.0 million. The addition of
the asset base along with the related intangibles will reduce the Bank's
various regulatory capital ratios. However, on a pro forma basis, the
Company's management believes it will continue to meet all regulatory
requirements. In the event the Company deems it desirable to increase its
capital position to partially offset the effects of the merger, it may consider
the issuance of medium-term debt or reductions in the size of its existing
balance sheet.
Under Federal Reserve Board regulations, the Bank is required to maintain
specified levels of reserve balances with the Federal Reserve Bank. Such
balances are based upon the composition of the Bank's deposit base and other
specified liabilities. At March 31, 1996, the Bank was required to maintain
net reserve balances of $20.6 million. The Bank is in compliance with such
regulations.
22
25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 25, 1995, the Company filed a claim in the United States Court of
Claims to recover funds lost as a result of the enactment of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA").
Under FIRREA, the Company was forced to accelerate the rate of exclusion
from qualifying regulatory capital of approximately $120.5 million of
supervisory goodwill arising out of the acquisition of seven troubled
savings and loan associations from 1980 through 1983.
While the Company, along with many other financial institutions, has
decided to pursue a claim against the United States government, neither the
likelihood of success nor the potential amount of recovery can be
determined at this time.
ITEM 5. OTHER INFORMATION - DIVIDEND DECLARATION AND PAYMENT ON COMMON STOCK
On March 1, 1996, the Company paid a cash dividend of $0.19 per share to
stockholders of record on February 16, 1996. The declaration of the
dividend reduced retained earnings/stockholders' equity by approximately
$5.9 million during January 1996.
On April 18, 1996, the Company's Board of Directors declared a regular
quarterly dividend of $0.19 per share, payable on May 31, 1996, to
stockholders of record on May 17, 1996. The Company plans to continue to
pay dividends on a quarterly basis. The declaration and amount of such
dividends will be based upon future earnings and capital levels. The
declaration of this dividend reduced retained earnings/stockholders' equity
by approximately $5.9 million during April 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT 11. EARNINGS PER SHARE
Earnings per share computations are based on the weighted average number of
common shares outstanding during each period, including common stock
equivalents. Earnings per share were not materially diluted by outstanding
stock options during any of the periods. The following table presents
information necessary for the computation of earnings per share, on both
primary and fully diluted bases, for the three months ended March 31, 1996.
23
26
Three Months
Ended March 31,
-------------------------
1996 1995
---------- ----------
(In thousands, except per share data)
Primary and fully diluted (unaudited)
earnings per share:
Net income applicable to
common stock and common
stock equivalents $ 32,191 $ 29,054
======== ========
Average number of common
shares outstanding 31,239 31,521
Common stock equivalents on
stock options 911 724
-------- --------
Total 32,150 32,245
======== ========
Primary earnings per share $ 1.00 $ 0.90
======== ========
Fully diluted earnings per share $ 1.00 $ 0.90
======== ========
EXHIBIT 15. INDEPENDENT ACCOUNTANTS' REPORT
Such report is incorporated herein by reference to Part I, page 10 of this
Form 10-Q.
(B) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed during the three months ended March
31, 1996.
24
27
SIGNATURES
Pursuant to the requirement 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 Federal Bancorporation, Inc.
(Registrant)
Date May 2, 1996 Thomas R. Ricketts
----------------------- ------------------------
Thomas R. Ricketts
Chairman of the Board and President
(Principal Executive Officer)
Date May 2, 1996 Joseph Krul
----------------------- ------------------------
Joseph Krul
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
25
28
Exhibit Index
Exhibit
Number Description
- - --------- -----------
27 Financial Data Schedule