<PAGE>
VISION STRATEGY RESULTS.
ANNUAL REPORT
1996
[LOGO]
<PAGE>
[ART]
<PAGE>
CORPORATE VISION
TO ENSURE THE COMPANY'S GROWTH INTO THE NEXT CENTURY AND BEYOND, WE WILL
CONTINUE TO IMPLEMENT WINNING STRATEGIES THAT HAVE GARNERED RECORD RESULTS FOR
CONSECUTIVE YEARS. THROUGH THE ONGOING DEVELOPMENT OF OUR UNIQUE FRANCHISE,
STOCKHOLDERS WILL CONTINUE TO SHARE IN THE STRONG PERFORMANCE OF STANDARD
FINANCIAL, INC.
CONTENTS
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . .3
Letter to Our Stockholders . . . . . . . . . . . . . . . . . . . . . .4
Vision...Strategy...Results . . . . . . . . . . . . . . . . . . . . . .6
Financial Review . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Officers and Board of Directors . . . . . . . . . . . . . . . . . . . 43
<PAGE>
OUR SUPERIOR RESULTS DIRECTLY CORRELATE WITH THE COMPANY'S CLEAR VISION AND
STRATEGIES.
<PAGE>
FINANCIAL HIGHLIGHTS
Standard Financial, Inc.
At December 31, 1996 1995 1994
- ----------------------------------------------------------------------------
Selected financial data:
(IN THOUSANDS)
Total assets $2,405,221 $2,081,228 $1,739,363
Loans receivable, net $1,485,459 $1,010,777 $ 593,047
Deposits $1,719,300 $1,538,546 $1,392,558
Stockholders' equity $ 268,078 $ 280,886 $ 276,659
- ----------------------------------------------------------------------------
Selected operating data:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (excluding one-time
SAIF assessment) $ 17,683 $ 16,717 $ 11,055
Net income $ 11,912 - -
Net interest income after provision
for loan losses $ 61,061 $ 58,611 $ 48,911
Total non-interest income $ 8,880 $ 5,306 $ 3,750
Total non-interest expense
(excluding SAIF) $ 42,388 $ 37,692 $ 34,813
Total non-interest expense $ 51,965 - -
Book value per share $ 16.58 $ 15.95 $ 14.85
Earnings per share (excluding SAIF) $ 1.13 $ 0.98 $ 0.37(1)
Earnings per share $ 0.76 - -
(1) Based on net income of $6,468,000 from July 28, 1994 (date of conversion to
stock form of ownership) through December 31, 1994
[GRAPH] [GRAPH] [GRAGPH]
3
<PAGE>
[PHOTO]
David Mackiewich
President,
Chief Executive Officer &
Chairman of the Board
LETTER TO OUR STOCKHOLDERS:
Vision...Strategy...Results.
These three simple words are carefully considered concepts that Standard
Financial, Inc. has focused on since becoming a public company in 1994. We
believe our continued commitment to these concepts is the best way to further
enhance stockholder value.
Our vision is to continue our impressive growth into the next century and
beyond. This vision has its origins in our earliest days as a savings and loan
on the southwest side of Chicago. Later, as our customers migrated throughout
the Chicagoland region, we expanded to those new areas. This gives us a unique
franchise that has now served five generations of customers in the city and the
southwest and west suburbs.
To fulfill our vision, Standard Financial has developed and is executing a
dependable, multi-faceted growth strategy. We are creating internal growth of
both deposits and mortgages at greater-than-industry averages by marketing our
competitive rate CDs, home mortgages and other banking services to a larger
market beyond our core franchise. With the acquisition of a new branch in
Naperville and plans to start construction on additional branches, we are
further expanding our franchise in very promising areas.
[GRAPH]
Because of the proven, ongoing success of our strategy, I am pleased to
report to you that Standard Financial, Inc. has reported a second consecutive
year of impressive results in 1996. As we did in 1995, Standard Financial
outperformed the thrift industry by posting double-digit growth in total
deposits (11.7%) and loans (47.0%). Our total assets climbed to $2.4 billion.
Interest income for the year ended December 31, 1996 increased 19.3%, to more
than $157 million, compared to 1995.
As we indicated in last year's report, a federally mandated one-time charge
was paid this year to recapitalize the Savings Association Insurance Fund
(SAIF). Excluding the charge for SAIF, our net income increased to $17.7 mil-
lion, or $1.13 per share, compared to $16.7 million, or $0.98 per share last
year, proving emphatically the profitability of our business strategy. With the
SAIF
4
<PAGE>
charge factored in, net income for 1996 was $11.9 million, or $0.76 per share.
Return on equity for the year improved to 6.60% excluding SAIF, compared to
5.97% in 1995. After the SAIF charge, ROE was 4.45%.
IT IS OUR STATED GOAL TO CONTINUE TO PAY -- AND INCREASE -- A QUARTERLY
DIVIDEND AS THE COMPANY CONTINUES TO IMPROVE ITS FINANCIAL PERFORMANCE.
With this long-awaited recapitalization of SAIF behind us, we anticipate
that we will save approximately 11 cents per share per year on our deposit
insurance costs. And if we continue to grow deposits at the above-industry
average rates we have in 1995 and 1996, we could realize even greater savings on
our insurance costs.
Stockholder value was further enhanced in 1996 when our growth and
profitability enabled our Board of Directors to declare the first-ever quarterly
dividends for Standard Financial stockholders. It is our stated goal to continue
to pay -- and increase -- a quarterly dividend as the company continues to
improve its financial performance.
While we have achieved this significant growth, we have again managed to
improve our already excellent asset quality. Our non-performing loans improved
to 0.30% of loans, compared to an already enviable 0.32% for 1995, and our 1996
net charge-offs improved to 0.04% of loans, from 0.15% a year ago.
[GRAPH]
Let me state now that we could not have achieved this second consecutive
year of impressive growth without the dedicated efforts of our employees. Their
commitment to both our everyday focus on superior customer service and our
vision for Standard Financial's growth continues to be a major factor in our
success, and for which they deserve the thanks of all stockholders.
Our next major, long-term goal will be to reach $3 billion in assets. That
will not be easy, but we have a strategy in place to ensure that we continue to
build upon the strong growth patterns we already achieved in 1995 and 1996.
To maintain our position in 1997 as Chicago's fastest-growing thrift
institution, we will need to generate deposit, mortgage and revenue increases
by: expanding our branch network, both through acquisitions like our new
Naperville office and construction of our newly announced facilities; cross-
selling our full range of services to our core depositors, as well as to new
families drawn to us by our innovative CD, IRA and ARM products; and
aggressively marketing our consumer loans, as well as our rapidly growing
wholesale mortgage operations.
We have outlined, in more detail, the elements of our strategy in the
following pages. Please take the time to read it so that you, too, can further
understand the substantial growth opportunities senior management envisions for
Standard Financial, Inc.
Finally, I would like to express my gratitude to company stockholders for
your loyalty and continued support. Our primary commitment, through our vision
and strategy, is to achieve the consistently impressive results that provide
enhancement of your investment in our company.
Sincerely,
/s/ David Mackiewich
David Mackiewich
President, Chief Executive Officer
and Chairman of the Board
5
<PAGE>
VISION... STRATEGY... RESULTS.
Standard Financial, Inc. is a community-oriented thrift institution offering an
increasing variety of financial services to the communities it serves through a
14-branch network of full service offices on the southwest side of Chicago and
the nearby western and southwestern suburbs. For the second consecutive year,
Standard Financial has outperformed the thrift industry in total deposit
growth and mortgage growth, solidifying its position as a leader among
Chicagoland thrifts. With assets of $2.4 billion, Standard Financial is the
Chicago area's third-largest publicly owned thrift institution.
Standard Financial's enviable results directly correlate with the
Company's vision for the expansion opportunities of its unique, 87-year-old
banking franchise and the strategic plan enacted to realize that vision.
Central to the strategy has been a significant commitment of market
research time and resources to more fully understand the Company's five
generations of customers, how that customer base is evolving, and planning to
develop new products and services to meet the anticipated needs of that changing
client base.
RESEARCH HELPS FORM THE STRATEGY
FOR 1996, THE PLAN WAS ENHANCED BY INCLUDING INCREASED WHOLESALE MORTGAGE
BUSINESS AND A GREATER CONSUMER LOAN OPERATION.
Research indicated that Standard Financial's core customer base wanted basic
banking services like checking and savings accounts, adjustable rate mortgages
(ARMs), flexible-term certificates of deposit (CDs) and individual retirement
accounts (IRAs) offered with high levels of customer service. Just as the core
customer base had done for the previous 87 years, research was showing that the
Company's customers were continuing to migrate from the traditional franchise
area to suburbs further southwest and west, in DuPage and Will Counties.
Finally, it was determined that the broader Chicago marketplace, in general,
offered growth possibilities for these and other products and services.
The basic tenets of Standard's growth strategy as established in 1995
were: to grow deposits and loans by introducing innovative, flexible term ARMs
and CDs with competitive rates, to market those innovative products to the
broader Chicago market, to cross-sell other banking services to core and new
depositors, and to grow the branch network following customer migration. That
plan resulted in one of the greatest years of internal growth in Standard's
history. For 1996, the plan was enhanced by including increased emphasis on the
wholesale mortgage business through the Company's Standard Financial Mortgage
subsidiary, and to establish a greater consumer loan operation.
STANDARD FINANCIAL OUTPERFORMS THE INDUSTRY AGAIN
Standard's strategy has worked so well, that the Company has been a performance
leader in the thrift industry for a second consecutive year.
6
<PAGE>
Drawn to Standard Financial by its innovative CD products, new
customers helped total deposits grow by more than 11%, far better than the
thrift industry average. The Company's CD deposits jumped 20.95%, while thrift
industry certificate growth was flat.
Equally as important, these flexible-term CDs helped Standard retain a
high percentage of previous deposits. And, Standard's IRA growth was 6.90%,
again bettering the thrift industry average.
Acquisition of the Company's newest branch office in Naperville
(see separate story) was also a significant contributor to deposit growth.
Besides giving Standard Financial its entry position into one of the new
suburban Chicago population centers, the branch also had $14.7 million in
existing deposits.
CONSUMER LENDING
SHOWS EXCITING POTENTIAL
Standard Financial's consumer loan portfolio has significant expansion
potential. By aggressively marketing both home equity products and indirect and
direct auto loans, consumer loans increased to $35 million in just 5 months of
accelerated operations, from $8 million at July 31, 1996.
"We have developed an experienced full-time staff of 15 people working
on a six-day-per-week basis," says James Chippas, vice president, consumer
lending. "By blending direct and secondary auto loan selling, we are finding a
very receptive market without compromising asset quality for volume."
In just half a year, Standard has already established financing
referral relationships with 40 auto dealers, after having had no such prior
relationships. Additionally, Chippas and his staff are also marketing
attractively priced home equity loans and lines of credit to Standard's core
base of 15,000 mortgage holders.
"With our new marketing and sales strategies, combined with our
dedication to superior customer service, I believe we can reasonably expect to
generate $100 million in consumer loan receivables within a year," says Chippas.
[PHOTO]
[PHOTO]
[PHOTO]
CUSTOMERS
RECOGNIZE STANDARD
AS A DEDICATED,
LOCAL LENDER
Standard Financial's growing reputation as a dedicated Chicago-area lender,
headquartered locally,
7
<PAGE>
with superior customer service and fast application approvals has been a
competitive advantage in retail mortgage operations this year.
Even as many thrifts continued to focus on fixed-rate loans in 1996,
Standard Financial still finds considerable demand, throughout the entire
Chicago market, for shorter-term adjustable rate mortgages (ARMs). ARMs for one-
to-four family homes, featuring such traditionally shorter terms and competitive
rates, have been the dominant mortgage product offered by Standard Financial. As
marketing efforts have expanded the Company's outreach, Standard Financial is
increasingly viewed as the expert provider of competitive rate, 3-5 year ARMs in
greater Chicagoland. With both current customer and professional realtor
referrals on the rise for the second year, ARMs accounted for 96% of the $734
million of new mortgage business.
WHOLESALE MORTGAGE EXCEEDS EXPECTATIONS; CONSUMER LENDING PROMISING
NEW CUSTOMERS HELPED TOTAL DEPOSITS GROW BY MORE THAN 11%, FAR BETTER THAN THE
THRIFT INDUSTRY AVERAGE.
In 1995, the Company's wholesale mortgage subsidiary, Standard Financial
Mortgage (SFM), was operating for only six months but produced impressive
numbers. After a full year of operations in 1996, SFM (see separate story)
exceeded all internal expectations by generating nearly 2,800 applications and
$436 million in loan volume.
Standard's expanded consumer loan operation (see separate story) was
in a similar position in 1996. Beginning in August, as an extension of the
Company's growth strategy, the consumer loan operation has done more automobile
finance business in five months -- $25 million -- than the Company did in the
past five years.
Similar to the strong results achieved by the wholesale mortgage
business, management believes equally aggressive consumer lending efforts can
produce loan volumes approaching $100 million in 1997 without compromising
asset quality. The consumer loan operation will emphasize auto loans,
including Standard's entry into indirect auto lending, as well as home equity
lending.
STRATEGY FOR ENHANCING STOCKHOLDER VALUE
The first priority in Standard Financial's ongoing growth strategy must be core
customer base retention. Standard must continue to offer those basic banking
products and high levels of customer service that originally attracted
generations of existing depositors, while cross selling them additional accounts
and services. Integral to this core retention will be development of more
innovative CD and ARM products.
STANDARD FINANCIAL'S MORTGAGE SUBSIDIARY EXCEEDED ALL EXPECTATIONS BY GENERATING
NEARLY 2,800 APPLICATIONS AND $436 MILLION IN LOAN VOLUME.
After two exceptional years of deposit growth, however, it might not
be realistic for Standard to expect substantial deposit growth from core
customers in 1997. That's why expansion of the branch network -- either by
acquisition or construction -- to broaden the number of customer households will
be another primary focal point in the coming year.
8
<PAGE>
EXPANSION OF THE BRANCH NETWORK WILL BE A ANOTHER PRIMARY FOCAL POINT IN THE
COMING YEAR.
Continuing customer migration into far southwestern Cook County and
DuPage and Will Counties, all among the fastest growing areas in Illinois, has
made those venues the logical places for Standard's expansion plans. Besides the
new Naperville branch, agreements are in place for additional branch locations,
with construction to begin as early as this spring. Standard Financial
management is continually examining acquisition possibilities in current or
adjacent markets, with particular attention to a proper operating fit, as well
as service territory and customer profile. A feasibility study on branch
expansion coincidental with customer movement and overall Chicago-area
population growth projections has identified a number of other viable branch
sites and it is management's goal to open at least two additional branches by
the end of 1997.
Equally as important will be the growth of the Company's mortgage and
consumer lending business in the year to come.
MORTGAGE SUBSIDIARY EXPANDS TRADITIONAL MARKET
Standard Financial Mortgage Corporation, the Company's new mortgage
subsidiary, has become a key component of the bank's potential growth -- in
only 1-1/2 years of operation.
"This year we closed $436 million in loans," says Robert Harring
III, president of SFM. "More importantly, we expanded our reach to include the
entire greater Chicagoland area."
SFM has established important relationships with mortgage brokers and
small banks throughout Chicago. According to Harring, the subsidiary's success
comes from two primary factors: outstanding customer service and loan products
that the public wants.
"Our research has proven that consumers want 3-5 year, adjustable rate
mortgages at competitive rates," notes Harring."And SFM will attract top quality
loans because of highly competitive products and incomparable professional
attention."
The proven expertise of SFM is even more important as it assumes
responsibility for all retail mortgage lending in 1997, aiding the Company's
goal to aggressively expand mortgage lending. "We'll be able to market a wider
variety of products while ensuring the service people expect and deserve," says
Harring. Through SFM, the Company remains dedicated to helping people achieve
their dream of home ownership, just as it has for nearly nine decades.
"With all of Chicagoland to serve, we are excited by the tremendous
opportunities to expand our wholesale effort and increase retail sales,"
concludes Harring.
[PHOTO]
[PHOTO]
[PHOTO]
9
<PAGE>
NAPERVILLE IS
FIRST STEP IN
BRANCH EXPANSION
"In only six months, we increased deposits at our new Naperville office by over
$5 million," says branch manager Joe Katauskas. "This kind of growth opportunity
is why we'll expand to areas with the same kind of exciting potential."
Standard Financial's new office -- its 14th branch -- was acquired
in June and represents the Company's furthest expansion to date from its
traditional franchise area. "We have historically expanded to areas where our
customers have migrated, and we are seeing the same positive results at this new
office,"explains Katauskas, who previously managed two other established
branches for the Company.
The market for the Naperville office is mostly a residential
neighborhood, with condominiums, younger families and significant drive-up
business. As anticipated, customers are responding very well to Standard's
innovative products and focus on customer service.
Katauskas explains that competitive-rate CDs with popular short- and
mid-length terms are attracting new customers. From there, the challenge is to
cross sell the Company's full range of deposit and loan products. "Then we
cement those relationships with our superior service," he says.
In addition to Naperville and other previously announced new branch
locations, the Company plans to open two additional offices in 1997. To ensure
similarly positive results, Standard will aggressively market a strong and
evolving line-up of products and services, while providing the outstanding
customer focus now given throughout the branch network.
[PHOTO]
[PHOTO]
The retail mortgage operation has plans to make even greater inroads
to area realtors, with an aim of increased professional referrals. That will
complement the historically strong number of current customer referrals, which
has been a key component of Standard's past retail mortgage growth. Aided by
the Company's broader marketing outreach, Standard Financial Mortgage expects to
make even greater market share gains in Chicago's wholesale mortgage business
during the next 12 months.
Finally, the Company will continue to look for new ways to improve its
expense structure. Thanks to additional efficiencies identified during 1996,
Standard Financial achieved a reduction in operating expense as a percentage of
average assets, excluding the one-time SAIF asseeement, to 1.88%, compared with
1.99% in 1995 and 2.14% in 1994.
10
<PAGE>
OFFICES
BRIGHTON PARK OAK LAWN ORLAND PARK
4192 S. Archer Ave. 10350 S. Pulaski Rd. Orland Greens Shopping
Chicago, IL 60632 Oak Lawn, IL 60453 15014 S. LaGrange Rd.
Orland Park, IL 60462
47TH STREET 98TH STREET
2555 W. 47th St. 9801 S. Cicero Ave. ORLAND PARK
Chicago, IL 60632 Oak Lawn, IL 60453 (Drive-Up Location Only)
15255 S. 94th Ave.
GARFIELD RIDGE PALOS HEIGHTS Orland Park, IL 60462
6141 S. Archer Ave. 6410 W. 127th St.
Chicago, IL 60638 Palos Heights, IL 60463 Corporate Headquarters
800 Burr Ridge Parkway
DOWNERS GROVE EVERGREEN PARK Burr Ridge, IL 60521
5100 Forest Ave. 3960 W. 95th St.
Downers Grove, IL 60515 Evergreen Park, IL 60805
LOMBARD
23 N. Main St.
Lombard, IL 60148
WILLOWBROOK
715 Plainfield Rd.
Willowbrook, IL 60521
NAPERVILLE
425 W. Ogden Ave.
Naperville, IL 60563 [MAP]
HICKORY HILLS
9357 S. Roberts Rd.
Hickory Hills, IL 60457
HILL CREEK
Hill Creek Shopping Center
8653 W. 95th St.
Hickory Hills, IL 60457
11
<PAGE>
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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. The Bank also owns an insurance subsidiary which
sells brokerage and insurance 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 December 31, 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.
The Company experienced significant growth during 1996. Total assets
of the organization rose by 15.6% to $2.405 billion at the end of December,
1996. Deposits increased by 11.7% to $1.719 billion at year end. Loans grew to
$1.485 billion at the end of the year, an increase of 47.0%. As a result of the
Company's expansion of its correspondent loan origination network, loan
originations and purchases rose to $807.6 million, an increase of $248.6 million
or 44.5% over 1995. Capital remained strong at $268.1 million at year end 1996,
a decrease from December 31, 1995, as the Company repurchased 1.4 million shares
of its stock during the year. The Company paid cash dividends of $0.32 cents
per share during this same period.
Net income declined to $11.9 million, a 28.7% or $4.8 million decrease
from 1995's results. This equated to $0.76 per share for 1996. As a result of
legislation signed into law on September 30, 1996, the Company recorded $9.6
million, to recognize a one-time charge in the third quarter to recapitalize the
Savings Association Insurance Fund ("SAIF"), of the Federal Deposit Insurance
Corporation (the "FDIC"). This charge reduced earnings per share by $0.38 in
1996. The recapitalization of SAIF in 1996 is expected to add earnings in
future years in the form of reduced deposit insurance costs. The reduction in
cost is expected to be approximately 11 cents per share in 1997. The Company's
net income excluding the one-time SAIF charge increased to $17.7 million from
$16.7 million.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND DECEMBER 31, 1995
GENERAL
Net income for the year ended December 31, 1996, decreased 28.7% to $11.9
million compared to $16.7 million for the year ended December 31, 1995.
Earnings per share for 1996 was $0.76 compared to $0.98 in 1995. The weighted
average number of common shares and equivalents outstanding for the years 1996
and 1995 were 15,635,000 and 17,044,000 shares, respectively. Net interest
income before provision for loan losses increased $3.3 million or 5.5% to $63.6
million in 1996 compared to $60.3 million in 1995. The provision for loan
losses increased $0.8 million to $2.5 million in 1996 from $1.7 million in 1995.
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. Non-interest
income increased by $3.6 million or 67.9% to $8.9 million in 1996 from $5.3
million in 1995. Non-interest expense increased by $14.3 million or 37.9% to
$52.0 million in 1996 from $37.7 million in 1995.
Excluding the effect of the one-time SAIF provision, net income for
the year increased 6.0% to $17.7
12
<PAGE>
million compared to $16.7 million for 1995. Excluding the one-time SAIF
provision, earnings per share for 1996 would have been $1.13 compared to $0.98
in 1995. After the effect of the one-time SAIF provision, the Company had net
income of $11.9 million for the year, or earnings per share of $0.76. Excluding
the effect of the one-time SAIF provision, non-interest expense would have
increased by $4.7 million or 12.5% to $42.4 million in 1996, compared to $37.7
million in 1995.
INTEREST INCOME
Total interest income increased $25.5 million or 19.3% to $157.5 million for
1996 from $132.0 million for 1995. The increase in interest income was the
result of average earning assets increasing to $2.191 billion in 1996 from
$1.819 billion in 1995. This was slightly offset by a decrease in the yield on
earning assets from 7.25% in 1995 to 7.19% in 1996. Interest income on loans
increased $33.6 million or 55.6% to $94.0 million in 1996 from $60.4 million in
1995. The increase was the result of growth in average loan outstandings of
$506.1 million or 65.3% from $775.4 million in 1995 to $1.281 billion in 1996.
Offsetting this was a decline in the portfolio yield on loans from 7.80% in 1995
to 7.34% in 1996, as the result of the large volume of new loans having lower
rates than the yield on the beginning of the year portfolio. A majority of
these loans have an adjustable rate, and would reprice upward if interest rates
rose. Interest income on mortgage-backed and related securities decreased $6.2
million or 10.9% to $50.7 million in 1996 from $56.9 million in 1995. This was
the result of a decrease in the average balance of mortgage-backed and related
securities of $85.1 million or 10.4% to $731.0 million in 1996 from $816.1
million in 1995. Interest on investment securities decreased by $2.1 million or
16.7% to $10.5 million in 1996 from $12.6 million in 1995. The decrease was due
to the average balance of investment securities decreasing $51.8 million or
26.7% to $142.1 million in 1996 from $193.9 million in 1995. Short-term
investment interest income decreased by $0.2 million to $1.0 million in 1996
from $1.2 million in 1995. The decrease was due to a decrease in the average
balance of short-term investments to $19.1 million in 1996 from $21.3 million in
1995.
INTEREST EXPENSE
Total interest expense increased by $22.2 million or 31.0% to $93.9 million in
1996 from $71.7 million in 1995. The increase in interest expense was the
result of a 23.7% increase in the average amount of those liabilities to $1.951
billion in 1996 from $1.577 billion in 1995 and an increase in the average rates
paid on interest-bearing liabilities to 4.82% in 1996 from 4.54% in 1995. The
increase in the average rate paid on interest-bearing funds was primarily due to
the growth in the certificate of deposit portfolio and borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased to $2.5 million in 1996 from $1.7
million in 1995, an increase of $0.8 million or 47.1%. 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 in 1996. The
allowance for loan losses at December 31, 1996 was $7.0 million or 0.48% of
gross loans outstanding, compared to $5.0 million or 0.50% of gross loans
outstanding at December 31, 1995. The allowance for loan loss to total non-
performing loans increased to 160.20% at December 31, 1996, compared to 157.45%
at December 31, 1995. Total non-performing loans as a percent of total gross
loans decreased to 0.30% from 0.32% at year end 1996 compared to year end 1995.
Based on management's evaluation of the loan portfolio, past loan loss
experience and known inherent risks in the portfolio, management believes that
the allowance was adequate.
NON-INTEREST INCOME
Non-interest income increased $3.6 million to $8.9 million in 1996 from $5.3
million in 1995. The 67.9% increase was due to a number of factors. In 1996,
the Company recorded a gain of $1.4 million from the sale of loans, of which
$1.1 million was from the sale of its credit card portfolio. The Company
expects an increase in loan sales due to increased mortgage loan originations
which may result in greater fluctuations in non-interest income in future years.
Fees from customer services increased $1.3 million to $4.6 million in 1996 from
$3.3 million in 1995. Gains from the sales of investments and mortgage-backed
securities increased $0.6 million to $1.6 million in 1996 from $1.0 million in
1995.
NON-INTEREST EXPENSE
Non-interest expense increased by $14.3 million or 37.9% to $52.0 million in
1996 from $37.7 million in 1995. Federal insurance premiums were $13.6 million
in 1996 and $3.6 million in 1995. Included in the 1996 amount is the one-time
charge of $9.6 million to recapitalize the SAIF. Compensation and employee
benefits expense increased by $2.5 million to $20.6 million in 1996 from $18.1
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 expenses related to the Management Recognition and Retention Plan
(the "MRP") were for the full year in 1996, versus a little over four months in
1995. These amounts were $1.1 million and $0.6 million respectively. Also, the
Employee Stock Ownership Plan (the "ESOP") expense was $2.1 million in 1996
versus $1.9 million in 1995. Occupancy expense increased to $8.7 million in
1996 from $8.3 million in 1995.
Marketing expense increased to $1.7 million in 1996 from $1.2 million
in 1995, which resulted in the Bank successfully promoting new products and
increasing aware-
13
<PAGE>
ness of existing products. Other general and administrative expenses increased
to $7.3 million in 1996 from $6.5 million in 1995. A variety of professional
fees and outside services accounted for these increased expenses. Amortization
of cost in excess of net assets acquired increased to $135,000 in 1996, from
$90,000 in 1995, due to the Naperville Branch acquisition. The Company has
addressed the issue of management information systems and the impact of the
effects of software changes necessitated by the year 2000. As a result, no
significant expenses are anticipated as a result of the new millenium.
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. The Statement is
effective for the Company as of January 1, 1996. The Statement recommends, but
does not require, a change in the accounting for stock-based employee
compensation plans (i.e. stock option plans) to recognize compensation expense
based upon the estimated fair value of the stock-based compensation at the time
it is granted. A company may continue to account for stock-based compensation
under current accounting principles, which do not require expense recognition,
although disclosure must be made of pro forma net income and earnings per share
as if the fair value based method had been applied in measuring compensation
cost. The Company retained its current method of accounting for stock options
and provided the required disclosure in 1996.
INCOME TAX EXPENSE
Income tax expense decreased $3.4 million to $6.1 million in 1996 from $9.5
million in 1995. The primary reason for the decrease was the decrease of pre-
tax income from $26.2 million to $18.0 million. The effective tax rate for 1996
was 33.7% compared with 36.3% for 1995, primarily due to the decrease in state
income tax expense.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1995 AND DECEMBER 31, 1994
GENERAL
Net income for the year ended December 31, 1995, increased 50.5% to $16.7
million compared to $11.1 million for the year ended December 31, 1994.
Earnings per share for 1995 was $0.98 compared to $0.37 in 1994. The weighted
average number of common shares and equivalents outstanding for 1995 was
17,044,000. Earnings per share for 1994 was computed based on the weighted
average number of common shares outstanding of 17,382,000 and net income of
$6,468,000 from July 28, 1994 (date of conversion to stock form of ownership)
through December 31, 1994. Net interest income before provision for loan losses
increased $10.7 million or 21.6% to $60.3 million in 1995 compared to $49.6
million in 1994. The provision for loan losses increased $1.0 million to $1.7
million in 1995 from $0.7 million in 1994. 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. Non-interest income increased by $1.5 million or
39.5% to $5.3 million in 1995 from $3.8 million in 1994. Non-interest expense
increased by $2.9 million or 8.3% to $37.7 million in 1995 from $34.8 million in
1994.
INTEREST INCOME
Total interest income increased $31.1 million or 30.8% to $132.0 million for
1995 from $100.9 million for 1994. The increase in interest income was the
result of average earning assets increasing to $1.819 billion in 1995 from
$1.554 billion in 1994. Interest income on loans increased $19.4 million or
47.3% to $60.4 million in 1995 from $41.0 million in 1994. The increase was the
result of growth in average loan outstandings of $240.9 million or 45.1% from
$534.5 million in 1994 to $775.4 million in 1995. Interest income on mortgage-
backed and related securities increased $10.9 million or 23.7% to $56.9 million
in 1995 from $46.0 million in 1994. This increase was the result of an increase
in the average yield to 6.97% in 1995 from 5.94% in 1994 and an increase in the
average balance of mortgage-backed and related securities of $41.3 million or
5.3% to $816.1 million in 1995 from $774.8 million in 1994. Interest on
investment securities increased by $1.8 million or 16.7% to $12.6 million in
1995 from $10.8 million in 1994. The increase was due to the average balance of
investment securities increasing $18.6 million or 10.6% to $193.9 million in
1995 from $175.3 million in 1994. Short-term investment interest income
decreased by $1.2 million to $1.2 million in 1995 from $2.4 million in 1994.
The decrease was due to a decrease in the average balance of short-term
investments of $36.2 million.
14
<PAGE>
INTEREST EXPENSE
Total interest expense increased by $20.3 million or 39.5% to $71.7 million in
1995 from $51.4 million in 1994. The increase in interest expense was the
result of an increase in the rates paid on interest-bearing liabilities to 4.54%
in 1995 from 3.62% in 1994, and an 11.1% increase in the average amount of those
liabilities to $1.577 billion in 1995 from $1.420 billion in 1994. The increase
in the rate paid on interest-bearing funds was primarily due to the growth in
the certificate of deposit portfolio and borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased to $1.7 million in 1995 from $0.7
million in 1994, an increase of $1.0 million or 142.9%. This increase was
primarily caused by charge-offs in the credit card portfolio. The allowance for
loan losses at December 31, 1995 was $5.0 million or 0.50% of gross loans
outstanding, compared to $4.5 million or 0.75% of gross loans outstanding at
December 31, 1994. Based on management's evaluation of the loan portfolio, past
loan loss experience and known inherent risks in the portfolio, management
believes that the allowance was adequate.
NON-INTEREST INCOME
Non-interest income increased $1.5 million to $5.3 million in 1995 from $3.8
million in 1994. The increase was due to gains on the sale of securities which
were sold to provide liquidity for the repurchase of shares of the Company's
outstanding stock. Fees from customer services of $3.3 million in 1995 remained
constant.
NON-INTEREST EXPENSE
Non-interest expense increased by $2.9 million or 8.3% to $37.7 million in 1995
from $34.8 million in 1994. Compensation and employee benefits expense
increased by $1.9 million to $18.1 million in 1995 from $16.2 million in 1994.
The Company accrued $1.9 million in expense relating to the ESOP in 1995 as
compared to the $1.1 million expended for the Money Purchase Plan and the ESOP
in 1994. The Money Purchase Plan was discontinued in May 1994, and replaced by
the ESOP in August 1994. ESOP expense was $1.9 million in 1995 and $0.5 million
in 1994. Under GAAP, expense under the ESOP reflects the market value of shares
released to participants. The difference between the market value and the cost
of shares released, which equaled $0.6 million in 1995, was reflected as an
increase in additional paid-in capital. The MRP, which was approved by the
shareholders in 1995, was $0.6 million in that year. Occupancy expense
increased to $8.3 million in 1995 from $7.1 million in 1994, as the result of
placing in service the Company's new operations center in January, 1995.
Federal insurance premiums were $3.6 million in 1995 and 1994. Other
general and administrative expenses increased to $6.5 million in 1995 from $6.3
million 1994. A variety of professional fees and outside services accounted for
these increased expenses. Amortization of cost in excess of net assets
acquired, decreased to $90,000 in 1995, from $840,000 in 1994, due to a portion
of goodwill being fully amortized in August, 1994.
INCOME TAX EXPENSE
Income tax expense increased $2.7 million to $9.5 million in 1995 from $6.8
million in 1994. The primary reason for the increase was the increase of pre-
tax income from $17.8 million to $26.2 million. The effective tax rate for 1995
was 36.3% compared with 38.1% for 1994. The decrease in the effective tax rate
was primarily the result of the reduction in nondeductible goodwill.
COMPARISON OF CHANGES IN FINANCIAL CONDITION
At December 31, 1996, total consolidated assets of the Company were $2.405
billion, an increase of $0.324 billion or 15.6% as compared to assets of $2.081
billion at December 31, 1995. The growth in assets is part of the Company's
plan to more fully leverage the additional capital raised in 1994. The growth
in assets helped reduce the Company's equity to assets ratio from 13.50% at
December 31, 1995 to 11.15% at December 31, 1996.
As the growth of the Company's asset base continues, management has
attempted to implement its strategy of reconfiguring the asset mix to a larger
proportion of loans as compared to investment and mortgage-backed and related
securities. The Company's lending focus is primarily 1 to 4 family mortgage
loans in the Chicagoland area. In 1996, the Company also expanded the consumer
loan department into indirect auto loans to diversify its lending portfolio both
in collateral and in maturity as automobile loans are much shorter in average
life than mortgages, and also have higher yields than mortgages.
Cash and cash equivalents decreased $26.3 million or 37.8% from $69.6
million at December 31, 1995, to $43.3 million at December 31, 1996. The
decrease was due to investing the funds in higher yielding mortgage loans.
Investment securities increased $15.7 million or 11.4% from $137.8
million at December 31, 1995, to $153.5 million at December 31, 1996, primarily
because a portion of the proceeds from the maturities of mortgage-backed and
related securities were reinvested in investment securities.
Mortgage-backed and related securities decreased $152.6 million or
19.0% from $804.0 million at December 31, 1995, to $651.4 million at December
31, 1996. During 1996, the Company primarily used the proceeds from
maturities in its mortgage-backed securities and related securities portfolio
to fund loan growth.
15
<PAGE>
The Company also invests in mortgage-related securities consisting of
Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment
Conduits ("REMICs"). At December 31, 1996, the Company had $26.7 million in
CMOs and REMICs as compared to $45.9 million at December 31, 1995. At December
31, 1996, this portfolio consisted of $10.2 million in inverse floating rate
REMICs; $3.7 million in fixed rate REMICs; $0.8 million in inverse floating rate
CMOs; and $12.0 million in fixed rate CMOs. In addition to the general risk of
mortgage-backed and related securities, the primary risk associated with the
Company's portfolio of CMOs and REMICs is that of prepayment and reinvestment
risk because the majority of such securities are fixed rate securities bearing
interest at rates substantially above prevailing market rates and interest rate
risk relative to the inverse floaters in the event of a general increase in
interest rates.
Loans receivable increased $474.7 million or 47.0% from $1.011 billion
at December 31, 1995, to $1.485 billion at December 31, 1996. The increase in
loans receivable was due to the expansion of the Company's correspondent loan
origination network and an increased emphasis on consumer lending in 1996. In
1996, of the Company's $807.6 million of originations, $671.9 were originated by
correspondents while in 1995, $368.4 million of the Company's $559.0 million of
originations were originated by 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 only funds those loans that meet
its underwriting standards. As mortgage loan production grows, the Company
intends to increase the amount of loans sold, but plans to retain the servicing
to generate future additional fee income.
Deposits increased by $180.8 million or 11.7% from $1.539 billion at
December 1995 to $1.719 billion at December 31, 1996. The growth in deposits
was a result of the Company's efforts to promote certificates of deposit that
had terms, features and rates that were attractive to existing customers as well
as new customers. The Company then took advantage of the opportunity of having
the additional customer relationships to sell those customers other products and
services offered by the Company. The result of this cross-selling can be seen
in the fact that the average NOW account balance for 1996 increased 6.37% over
the average balance for 1995.
Borrowings increased 63.8% to $385.0 million at December 31, 1996,
from $235.0 million at December 31, 1995. The Bank's increased borrowings from
the Federal Home Loan Bank of Chicago (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 has net unamortized premiums of $4.6 million. If
prepayments accelerate, the amortization of the premium will increase and lower
the net yield of the securities over their remaining lives. The majority of the
mortgage related securities portfolio was purchased at a discount and therefore
does not have the risk of acceleration of premium amortization. The Company
also invests in inverse floating rate securities. These securities, which have
been purchased at a discount in the aggregate, have yields that move opposite to
the direction of interest rates. In periods of falling interest rates and the
resulting accelerated prepayments of loans and mortgage-backed securities,
inverse floating rate securities will provide higher yields to help offset the
falling yields on other assets.
At December 31, 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 $188.9 million. This represented a negative
cumulative one year gap ratio of 7.9%. Thus, during periods of falling interest
rates, it is expected that the cost of interest-bearing liabilities would fall
more quickly than the yield on interest-earning assets, which would positively
affect net interest income. In periods of rising interest rates, the opposite
effect 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
16
<PAGE>
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.
<TABLE>
<CAPTION>
More Than More Than
Within Four To One Year Three Years
Three Twelve To Three To Five Over Five
At December 31, 1996 Months Months Years Years Years Total
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Mortgage loans :
Fixed $ 6,303 $ 18,839 $ 50,808 $ 53,499 $ 57,932 $ 187,381
Variable 61,809 120,009 459,986 574,155 46,223 1,262,182
Consumer loans 398 1,165 5,055 20,029 8,864 35,511
Mortgage-backed and related securities (2):
Fixed 689 2,067 5,512 5,578 7,419 21,265
Variable 148,882 417,993 63,303 - - 630,178
Investment securities and other assets (3) 88,187 36,928 16,856 43,323 10,571 195,865
- ----------------------------------------------------------------------------------------------------------------------------------
Total 306,268 597,001 601,520 696,584 131,009 2,332,382
Interest-bearing liabilities:
Deposits (4):
NOW accounts 4,186 12,558 33,487 33,487 16,542 100,260
Passbook savings accounts 14,879 44,636 119,030 119,030 58,801 356,376
Money market deposit accounts 74,959 - - - - 74,959
Certificates of deposit 317,847 623,145 205,046 26,605 147 1,172,790
Borrowings - - 200,000 160,000 25,000 385,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total 411,871 680,339 557,563 339,122 100,490 2,089,385
- ----------------------------------------------------------------------------------------------------------------------------------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $(105,603) $ (83,338) $ 43,957 $357,462 $ 30,519 $ 242,997
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $(105,603) $(188,941) $(144,984) $212,478 $242,997
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a %
of total assets (4.39%) (7.86%) (6.03%) 8.83% 10.10%
</TABLE>
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 increased for unamortized premiums and 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.
Balances have been reduced for discounts.
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 $569.3
million or 23.7% of total assets.
17
<PAGE>
ASSET QUALITY
The Company regularly reviews its assets to determine that the allowance for
loss is adequate. The review consists of a comparison of the allowance for loss
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. It is the
Company's policy to stop accruing interest and to reverse any previously
recorded but uncollected interest on loans delinquent 90 days or more. On
nonaccrual mortgage-backed securities, interest is recognized on a cash basis.
There were no restructured loans within the meaning of Statement of Financial
Accounting Standards ("SFAS") 15 at December 31, 1996, or any prior indicated
dates.
Loan quality has remained at an excellent level with non-performing
loans to gross loans decreasing to 0.30% at December 31, 1996 from 0.32% at
December 31, 1995. Net real estate held for sale also decreased during the same
period from $180,000 to $70,000.
Private mortgage-backed securities generally provide higher yields
than mortgage-backed securities issued by government agencies. Management
believes that private mortgage-backed securities are a good source of adjustable
rate securities. Although many private mortgage-backed securities have
contractual credit-enhancements protection, there is still a greater risk of
loss of principal and interest compared to mortgage-backed securities issued and
guaranteed by a federal agency. All securities in the Company's private
mortgage-backed securities portfolio were rated A or better by Moody's at the
time of purchase. At December 31, 1996, the securities in the Company's private
mortgage-backed securities portfolio totaled $267.2 million, of which $13.3
million in securities were rated below A; as compared to a total of $304.1
million, of which $16.9 million in securities were rated below A at December 31,
1995. The increase in non-accrual mortgage-backed securities during 1996 was
due to a decrease in remaining credit enhancement and a down-grade in credit
rating relative to three private-issue mortgage-backed securities. These
securities as well as all the other private mortgage-backed securities are being
monitored on at least an annual basis for credit problems with the securities on
non-accrual analyzed monthly. The three securities added to non-accrual status
in 1996 had fair values at December 31, 1996 of $3.2 million compared to
amortized cost of $4.8 million. If these securities were to experience
additional credit deterioration to the point where the Company would consider an
impairment to be other than temporary, additional writedowns to fair value would
be required at that time. It is management's opinion that no additional
writedown on the non-accrual mortgage-backed securities or any other mortgage-
backed security is necessary at this time.
On January 1, 1995, the Bank adopted SFAS No. 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN as amended by SFAS No. 118, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN - INCOME RECOGNITION AND DISCLOSURE. The
adoption had no effect on the financial position of the Company and no effect on
the results of operations for the years ended December 31, 1996 or 1995. There
were no impaired loans as defined by SFAS No. 114 at December 31, 1996 or 1995.
December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Non-accrual mortgage loans $ 4,362 $ 2,795 $ 3,853 $ 3,948 $ 3,234
Non-accrual consumer loans 0 411 375 224 169
- --------------------------------------------------------------------------------
Total non-performing loans 4,362 3,206 4,228 4,172 3,403
Net real estate held for sale 70 180 100 55 354
Non-accrual mortgage-backed and
related securities 11,138 8,508 10,547 5,296 -
- --------------------------------------------------------------------------------
Total non-performing assets $15,570 $11,894 $14,875 $ 9,523 $ 3,757
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total non-performing assets to
total assets 0.65% 0.57% 0.86% 0.63% 0.25%
Total non-performing loans to
gross loans 0.30% 0.32% 0.71% 0.77% 0.67%
Allowance for loan losses to
total non-performing loans 160.20% 157.45% 106.50% 103.55% 53.60%
Total non-performing
mortgage-backed and related
securities to gross
mortgage-backed and related
securities 1.71% 1.06% 1.39% 0.70% 0.00%
Interest on non-performing
loans and mortgage-backed
and related securities in
accordance with original
terms $ 1,811 $ 1,403 $ 1,335 $ 183 $ 176
Interest income included in
net income 1,306 1,220 881 45 78
- --------------------------------------------------------------------------------
Net reduction of interest income $ 505 $ 183 $ 454 $ 138 $ 98
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
18
<PAGE>
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Company's
consolidated average statements of condition and the consolidated statements of
income for the years ended December 31, 1996, 1995 and 1994 and reflects the
average yield on assets and average cost of liabilities for the periods
indicated. 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 assets. The yields and costs include fees which are
considered adjustments to yields. Interest income on non-accruing assets 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 assets are
included in the average balances and do not have a material effect on the
average yield.
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) December
Average Average Average 31, 1996
Average Yield/ Average Yield/ Average Yield/ Weighted
Balance Interest Cost Balance Interest Cost Balance Interest Cost Rate
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Short term investments $ 19,102 $ 1,049 5.49% $ 21,340 $ 1,214 5.69% $ 57,489 $ 2,425 4.22% 6.50%
Investment securities 142,078 10,541 7.42% 193,852 12,624 6.51% 175,297 10,761 6.14% 6.60%
Mortgage-backed and
related securities 731,035 50,724 6.94% 816,141 56,860 6.97% 774,825 46,017 5.94% 7.22%
Loans receivable 1,281,458 94,023 7.34% 775,381 60,443 7.80% 534,497 41,021 7.67% 7.22%
Investment in FHLB stock 17,529 1,159 6.61% 12,533 832 6.64% 11,921 708 5.94% 7.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 2,191,202 157,496 7.19% 1,819,247 131,973 7.25% 1,554,029 100,932 6.49% 7.17%
Non-interest-earning
assets 63,032 71,638 69,917
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $2,254,234 $1,890,885 $1,623,946
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
liabilities
NOW accounts $ 102,972 $ 2,105 2.04% $ 96,807 $ 2,006 2.07% $ 92,496 $ 1,991 2.15% 2.00%
Money market deposit
accounts 78,665 2,440 3.10% 82,031 2,693 3.28% 102,710 2,800 2.73% 3.15%
Passbook savings
accounts 366,828 9,199 2.51% 385,897 9,632 2.50% 451,604 11,809 2.61% 2.53%
Certificates of
deposit 1,080,361 60,211 5.57% 898,708 50,213 5.59% 714,876 32,768 4.58% 5.70%
Borrowings 321,859 19,980 6.21% 113,649 7,123 6.27% 26,575 1,207 4.54% 6.11%
Stock subscriptions - - - - - - 31,435 786 2.50% -
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,950,685 93,935 4.82% 1,577,092 71,667 4.54% 1,419,696 51,361 3.62% 4.97%
Non-interest-bearing
liabilities 35,792 33,752 27,113
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,986,477 1,610,844 1,446,809
Stockholders' equity 267,757 280,041 177,137
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities
and stockholders'
equity $2,254,234 $1,890,885 $1,623,946
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income
before provision for
loan losses and net
interest spread $ 63,561 2.37% $ 60,306 2.71% $ 49,571 2.87% 2.20%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Net yield on earning
assets 2.90% 3.31% 3.19%
Ratio of
interest-earning assets
to interest-bearing
liabilities 1.12X 1.15x 1.09x
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (change
in rate multiplied by prior volume) and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year ended December 31, 1996 Year ended December 31, 1995
Compared to Compared to
Year ended December 31, 1995 Year ended December 31, 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
In Net Interest Income In Net Interest Income
Due To Due To
- --------------------------------------------------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Short term investments $ (127) $ (38) $ (165) $ (1,525) $ 314 $ (1,211)
Investment securities (3,370) 1,287 (2,083) 1,139 724 1,863
Mortgage-backed and related securities (5,932) (204) (6,136) 2,454 8,389 10,843
Loans receivable 39,474 (5,894) 33,580 18,476 946 19,422
Investment in FHLB stock 332 (5) 327 36 88 124
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 30,377 (4,854) 25,523 20,580 10,461 31,041
INTEREST-BEARING LIABILITIES:
NOW accounts 128 (29) 99 93 (78) 15
Money market deposit accounts (110) (143) (253) (565) 458 (107)
Passbook savings accounts (477) 44 (433) (1,715) (462) (2,177)
Certificates of deposit 10,154 (156) 9,998 8,420 9,025 17,445
Borrowings 13,055 (198) 12,857 3,953 1,963 5,916
Stock subscriptions - - - (786) - (786)
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 22,750 (482) 22,268 9,400 10,906 20,306
- ---------------------------------------------------------------------------------------------------------------------------------
Net change in interest income $ 7,627 $(4,372) $ 3,255 $11,180 $ (445) $10,735
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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%;
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%, with at least 50% of total capital
consisting of core capital.
At December 31, 1996, the Bank exceeded all regulatory minimum capital
requirements. The table on the next page sets forth information relating to the
Bank's regulatory capital compliance at December 31, 1996.
The capital requirements described below 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 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
20
<PAGE>
required by OTS to maintain capital in excess of the minimum regulatory
requirements set forth above.
Excess of
Actual Bank
Regulatory Actual Bank Capital Over
Requirements Capital Regulatory
Amount Percent Amount Percent Requirements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Risk-based $76,930 8.00% $206,386 21.46% $129,456
Leverage (core) 70,464 3.00 199,398 8.49 128,934
Tangible 35,225 1.50 198,966 8.47 163,741
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 scheduled 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 the 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 7.46%
and 8.92% at December 31, 1996 and 1995, respectively. The Bank's short-term
liquidity ratios were 4.50% and 5.28% at December 31, 1996 and 1995,
respectively. 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.
The Company's most liquid assets are cash and investments in highly
liquid short-term investments. The level of these assets is dependent on the
Company's operating, financing, lending and investing activities during any
given period. At December 31, 1996 and 1995, assets qualifying for short-term
investment totaled $94.2 million and $89.6 million, respectively.
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 $8.8
million and $22.2 million for 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 $342.7 million and $341.8 million for 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 $307.6 million
and $313.0 million for 1996 and 1995, respectively.
At December 31, 1996, the Company had outstanding loan commitments of
$60.7 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 December 31, 1996, totaled $941.0 million. Management
believes that a significant portion of such deposits will remain with the
Company based upon prior experience with such deposits.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This annual report, including the Chairman's Letter to Stockholders, contains
certain forward looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. The Company intends such forward-looking statements to
be covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Reform Act of 1995, and is including this
statement for purposes of these safe harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe future plans,
strategies and expectations of the Company, are generally identifiable by use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project" or
similar expressions. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse affect on the operations and future prospects of
the Company and its subsidiaries include, but are not limited to, changes in:
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles, policies and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements. Further information concerning the
Company and its business, including additional factors that could materially
affect the Company's financial results, is included in the Company's filings
with the Securities and Exchange Commission.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
FOR STANDARD FINANCIAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
At December 31, 1996 1995 1994(1) 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets $2,405,221 $2,081,228 $1,739,363 $1,508,840 $1,506,132
Cash and cash equivalents 43,298 69,571 76,097 66,843 45,027
Loans receivable, net 1,485,459 1,010,777 593,047 525,969 505,550
Investment securities 153,501 137,807 253,604 101,861 98,235
Mortgage-backed and related securities 651,443 804,010 759,860 754,781 811,023
Deposits 1,719,300 1,538,546 1,392,558 1,371,214 1,379,605
Borrowings 385,000 235,000 50,000 25,000 10,000
Retained income/stockholders' equity 268,078 280,886 276,659 96,069 92,201
SELECTED OPERATING DATA:
Total interest income $ 157,496 $ 131,973 $ 100,932 $ 98,399 $ 109,098
Total interest expense 93,935 71,667 51,361 52,839 65,479
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 63,561 60,306 49,571 45,560 43,619
Provision for loan losses 2,500 1,695 660 3,053 390
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 61,061 58,611 48,911 42,507 43,229
NON-INTEREST INCOME (LOSS):
Net gain (loss) on sales of investments, mortgage-
backed securities and loans 2,964 1,132 (763) 617 474
Write-down of mortgage-backed securities - - - (6,767) -
Fees for customer services 4,631 3,263 3,241 3,422 3,509
Other income 1,285 911 1,272 1,518 1,739
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest income (loss) 8,880 5,306 3,750 (1,210) 5,722
NON-INTEREST EXPENSE:
Compensation and benefits 20,629 18,056 16,190 16,644 14,715
Occupancy 8,728 8,335 7,112 7,237 5,547
Marketing 1,745 1,198 1,630 1,477 1,166
Federal insurance premiums 13,569 3,564 3,590 3,075 3,177
Amortization of cost in excess of net assets
acquired 135 90 840 1,208 1,185
Other operating expenses 7,159 6,449 5,451 5,233 6,336
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 51,965 37,692 34,813 34,874 32,126
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 17,976 26,225 17,848 6,423 16,825
Federal and state income taxes 6,064 9,508 6,793 2,555 6,818
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 11,912 $ 16,717 $ 11,055 $ 3,868 $ 10,007
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Per Share Data:
Earnings $ 0.76 $ 0.98 $ 0.37(2) n/a n/a
Cash dividends 0.32 - - n/a n/a
Book value at year end 16.58 15.95 14.85 n/a n/a
Market price at year end 19.63 14.63 9.50 n/a n/a
</TABLE>
(1) Standard Financial, Inc. (the "Company") was organized as the holding
company for Standard Federal Bank for savings in connection with the Bank's
conversion from 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. Net proceeds to the Company were $182.5 million
after deduction of conversion expenses and underwriting fees of $3.8 million.
(2) Earnings per share for 1994 are computed based on the weighted average
number of common shares outstanding of 17,382,000 and net income of $6,468,000
from July 28, 1994 (date of conversion to stock form of ownership) through
December 31, 1994.
22
<PAGE>
SELECTED FINANCIAL RATIOS AND OTHER DATA
FOR STANDARD FINANCIAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
At or for the Year Ended December 31, 1996 1995 1994 1993 1992
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS
Return on average assets 0.53% 0.88% 0.68% 0.26% 0.68%
Return on average assets excluding
one-time SAIF provision 0.78 - - - -
Return on average equity 4.45 5.97 6.24 3.88 11.29
Return on average equity excluding
one-time SAIF provision 6.60 - - - -
Dividend payout ratio 44.63 - - - -
Equity to total assets 11.15 13.50 15.91 6.37 6.12
Average equity to average assets 11.88 14.81 10.91 6.64 6.04
Core deposits to total deposits 31.76 36.95 43.85 48.34 46.11
Interest spread during period 2.37 2.71 2.87 2.98 2.87
Net interest margin 2.90 3.31 3.19 3.17 3.10
Non-interest expenses to average assets 2.31 1.99 2.14 2.32 2.19
Net interest income to operating expenses 1.22x 1.60x 1.42x 1.31x 1.36x
Average interest-earning assets to average
interest-bearing liabilities 1.12x 1.15x 1.09x 1.05x 1.05x
ASSET QUALITY RATIOS
Non-performing assets to total assets 0.65% 0.57% 0.86% 0.63% 0.25%
Non-performing loans to gross loans 0.30 0.32 0.71 0.77 0.67
Non-performing mortgage-backed and
related securities to gross mortgage-backed
and related securities 1.71 1.06 1.39 0.70 -
Allowance for loan losses to gross loans 0.48 0.50 0.75 0.80 0.36
Allowance for loan losses to
non-performing loans 160.20 157.45 106.50 103.55 53.60
Net charge-offs to average loans 0.04 0.15 0.09 0.11 0.10
REGULATORY CAPITAL RATIOS
Tangible ratio 8.47 9.94 11.12 6.26 5.91
Core ratio 8.49 9.95 11.14 6.37 6.12
Total risk-based ratio 21.46 25.22 29.21 16.74 15.46
OTHER DATA
Number of deposit accounts 183,260 172,048 162,473 160,755 163,767
Number of real estate loans in portfolio 15,295 11,031 9,118 9,357 9,683
Number of real estate loans serviced
(in portfolio and sold) 16,780 11,888 10,321 10,668 11,059
Loan originations (in thousands) $807,598 $559,003 $204,299 $294,338 $258,737
Full service customer facilities 14 13 13 13 12
</TABLE>
23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Standard Financial, Inc.
We have audited the accompanying consolidated statements of condition of
Standard Financial, Inc. and Subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Standard Financial, Inc. and Subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 27, 1997
24
<PAGE>
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31, 1996 1995
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
ASSETS
<S> <C> <C>
Cash $ 17,464 $ 22,620
Interest-bearing deposits at depository institutions 25,834 46,951
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 43,298 69,571
Investment securities 153,501 137,807
Mortgage-backed and related securities 651,443 804,010
Loans receivable, net 1,466,541 1,010,777
Loans held for sale 18,918 -
Investment in Federal Home Loan Bank stock, at cost 20,500 12,802
Office properties and equipment, at cost 27,267 28,468
Accrued interest receivable 15,015 13,754
Other assets 8,738 4,039
- --------------------------------------------------------------------------------------------------------------------
Total assets $2,405,221 $2,081,228
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $1,719,300 $1,538,546
Advances from Federal Home Loan Bank of Chicago 385,000 235,000
Advance payments by borrowers for taxes and insurance 11,470 7,854
Federal and state income taxes payable 1,270 4,044
Miscellaneous liabilities 20,103 14,898
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 2,137,143 1,800,342
Stockholders' equity:
Preferred stock, $.01 par value; 1,000 shares authorized; none outstanding - -
Common stock, $.01 par value; 25,000 shares authorized; 1996 - 19,093 shares issued,
16,174 shares outstanding; 1995 - 19,082 shares issued, 17,608 shares outstanding 191 191
Additional paid-in capital 189,459 188,443
Unrealized net gain on securities available-for-sale net of income taxes 2,431 3,581
Retained income, substantially restricted 130,437 123,841
Treasury stock, at cost (1996 - 2,920 shares; 1995 - 1,474 shares) (41,085) (19,411)
MRP shares (3,745) (4,879)
ESOP shares (9,610) (10,880)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 268,078 280,886
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $2,405,221 $2,081,228
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
25
<PAGE>
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 94,023 $ 60,443 $ 41,021
Mortgage-backed and related securities 50,724 56,860 46,017
Investment securities and interest-bearing deposits 12,749 14,670 13,894
- ----------------------------------------------------------------------------------------------------------------
Total interest income 157,496 131,973 100,932
INTEREST EXPENSE
Deposits 73,955 64,544 49,368
Borrowings 19,980 7,123 1,207
Deposits on stock subscriptions - - 786
- ----------------------------------------------------------------------------------------------------------------
Total interest expense 93,935 71,667 51,361
- ----------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 63,561 60,306 49,571
Provision for loan losses 2,500 1,695 660
- ----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 61,061 58,611 48,911
NONINTEREST INCOME
Fees for customer services 4,631 3,263 3,241
Net gain (loss) on sales of investments and mortgage-backed securities 1,578 1,009 (669)
Net gain (loss) on sales of loans 1,386 123 (94)
Other 1,285 911 1,272
- ----------------------------------------------------------------------------------------------------------------
Total noninterest income 8,880 5,306 3,750
NONINTEREST EXPENSE
Compensation and benefits 20,629 18,056 16,190
Occupancy 8,728 8,335 7,112
Federal insurance premiums 3,992 3,564 3,590
Special SAIF assessment 9,577 - -
Marketing 1,745 1,198 1,630
Other general and administrative expenses 7,294 6,539 6,291
- ----------------------------------------------------------------------------------------------------------------
Total noninterest expense 51,965 37,692 34,813
- ----------------------------------------------------------------------------------------------------------------
Income before federal and state income taxes 17,976 26,225 17,848
Federal and state income taxes 6,064 9,508 6,793
- ----------------------------------------------------------------------------------------------------------------
Net income $ 11,912 $ 16,717 $ 11,055
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Earnings per share $ 0.76 $ 0.98 $ 0.37
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
26
<PAGE>
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss) on
Additional Securities
Common Stock Paid-in Available- Retained Treasury MRP ESOP
Issued Amount Capital For-Sale Income Stock Shares Shares Total
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Balance at January 1, 1994 - $ - $ - $ - $ 96,069 $ - $ - $ - $ 96,069
Net income for the year - - - - 11,055 - - - 11,055
Net proceeds from stock
offering 18,630 186 182,336 - - - - - 182,522
Unrealized loss, net of
income taxes, on securities
available-for-sale - - - (837) - - - - (837)
Common stock acquired by ESOP - - - - - - - (12,696) (12,696)
ESOP shares released - - - - - - - 546 546
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 18,630 186 182,336 (837) 107,124 - - (12,150) 276,659
Net income for the year - - - - 16,717 - - - 16,717
Change in unrealized gain
(loss), net of income taxes,
on securities
available-for-sale - - - 4,418 - - - - 4,418
Purchase of treasury stock - - - - - (19,411) - - (19,411)
Issuance of MRP shares 452 5 5,519 - - - (5,524) - -
MRP shares earned, net - - - - - - 645 - 645
ESOP shares released - - 588 - - - - 1,270 1,858
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 19,082 191 188,443 3,581 123,841 (19,411) (4,879) (10,880) 280,886
Net income for the year - - - - 11,912 - - - 11,912
Dividends declared
($0.32 per share) - - - - (5,316) - - - (5,316)
Change in unrealized
net gain on securities
available-for-sale net
of income taxes - - - (1,150) - - - - (1,150)
Purchase of treasury stock - - - - - (21,674) - - (21,674)
Options exercised 21 - 243 - - - - - 243
Tax benefit from options
exercised - - 27 - - - - - 27
ESOP shares released - - 799 - - - - 1,270 2,069
MRP shares forfeited (23) - (281) - - - 281 - -
Issuance of MRP shares 13 - 228 - - - (228) - -
MRP shares earned, net - - - - - - 1,081 - 1,081
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 19,093 $191 $189,459 $2,431 $130,437$(41,085) $(3,745) $ (9,610) $268,078
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
27
<PAGE>
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 11,912 $ 16,717 $ 11,055
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for depreciation 3,288 3,127 2,659
Provision for loan losses 2,500 1,695 660
Amortization of premiums and discounts
and net deferred loan fees 849 (192) (1,707)
ESOP and MRP expense 3,150 2,503 546
Deferred income taxes (1,009) 798 (322)
Proceeds from sales of loans 42,219 2,751 9,440
Loans originated for sale (42,061) (2,628) (9,534)
Net (gain) loss on sale of securities available-for-sale (1,578) (1,009) 669
(Increase) decrease in current income taxes (1,001) (464) 2,352
Increase in interest receivable (1,261) (2,327) (2,990)
Increase in miscellaneous liabilities 5,205 2,360 3,688
Other (13,408) (1,136) 3,334
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,805 22,195 19,850
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale 105,682 116,906 39,248
Proceeds from maturity and repayment of investment securities
available-for-sale 399,874 336,920 55,613
Purchases of investment securities available-for-sale (519,994) (330,034) (173,121)
Purchases of investment securities held to maturity - - (485,926)
Proceeds from maturity and repayment of investment securities
held to maturity - - 413,166
Proceeds from maturity and repayment of mortgage-backed
and related securities held to maturity - 171,555 211,559
Purchases of mortgage-backed and related securities held to maturity - (215,523) (218,192)
Proceeds from maturity and repayment of mortgage-backed
and related securities available-for-sale 210,961 - -
Purchases of mortgage-backed and related securities available-for-sale (59,826) - -
Loan principal repayments 288,370 137,846 137,760
Loan originations (765,537) (538,387) (167,733)
Loans purchased - (17,988) (27,032)
Office property and equipment, net (2,200) (3,054) (10,563)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (342,670) (341,759) (225,221)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
FINANCING ACTIVITIES
<S> <C> <C> <C>
Net decrease in passbook, NOW, and money market accounts $ (22,430) $ (42,162) $ (52,086)
Net increase in certificates of deposit 203,126 187,956 73,393
Proceeds of advances from Federal Home Loan Bank 194,500 210,000 50,000
Proceeds from maturity and repayment of advances
from Federal Home Loan Bank (44,500) (25,000) (25,000)
Net increase (decrease) in advance payments by borrowers 3,616 1,655 (1,508)
Net proceeds from stock offering - - 182,522
Common stock acquired by ESOP - - (12,696)
Stock options exercised 270 - -
Dividends paid (5,316) - -
Purchase of treasury shares (21,674) (19,411) -
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 307,592 313,038 214,625
- ------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (26,273) (6,526) 9,254
Cash and cash equivalents at beginning of year 69,571 76,097 66,843
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 43,298 $ 69,571 $ 76,097
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during year for interest on:
Deposits $ 73,897 $ 64,350 $ 49,477
Borrowings 19,101 6,159 1,050
- ------------------------------------------------------------------------------------------------------
$ 92,998 $ 70,509 $ 50,527
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Income taxes $ 8,075 $ 8,659 $ 8,030
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Transfer of loans to real estate held for sale $ 240 $ 422 $ 100
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Transfer of loans to loans held for sale $ 17,690 $ - $ -
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
29
<PAGE>
STANDARD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND BUSINESS
Standard Financial, Inc. (the Company) is a non-diversified savings and loan
holding company headquartered in Chicago, Illinois, which wholly owns Standard
Federal Bank for savings (the Bank) and Capitol Equities Corporation. The
Company operates 14 full-service banking offices on the southwest side of
Chicago and nearby suburbs. The Company was organized in connection with the
Bank's conversion from 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. Net proceeds to the Company were $182.5 million
after deducting conversion and offering expenses and underwriting fees of $3.8
million. The Bank's subsidiary, Standard Financial Mortgage Corporation,
purchases, originates, sells, and services mortgage loans.
The Company offers a variety of retail deposit and lending services and
is principally engaged in attracting retail deposits from the general public and
investing the funds in residential mortgage loans and mortgage-backed
securities. The Company's lending activities are concentrated primarily in the
Chicago metropolitan area it serves.
The Company is subject to the regulations of certain federal agencies and
undergoes periodic examinations by those regulatory authorities.
2. SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and results of
operations of the Company and its wholly owned subsidiaries, the Bank and
Capitol Equities Corporation, and the Bank's subsidiaries, Standard Financial
Mortgage Corporation and SFB Insurance Agency, Inc. All significant
intercompany balances have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents represent highly liquid assets with a maturity of three months
or less when purchased.
INVESTMENT AND MORTGAGE-BACKED AND RELATED SECURITIES
The carrying amount of securities is dependent upon their classification as held
to maturity, trading, or available-for-sale. The accounting for securities in
each of the three categories is as follows:
HELD TO MATURITY
Debt securities for which the Company has the positive intent and ability
to hold to maturity are classified as held to maturity and are recorded at
cost, net of unamortized premiums and discounts. Discounts and premiums
are amortized using the interest method over the estimated remaining
contractual life of the assets. Declines in value judged to be other than
temporary by management are included in the statement of income. At
December 31, 1996 and 1995, the Company did not have any securities
classified as held to maturity.
TRADING
Trading account assets are carried at fair value, with any unrealized gains
and losses included in earnings. At December 31, 1996 and 1995, the
Company did not have any securities classified as trading.
AVAILABLE-FOR-SALE
Debt securities not classified as held to maturity and all equity
securities are classified as available-for-sale and are recorded at fair
value, with unrealized gains and losses included as a separate component of
stockholders' equity. Discounts and premiums are amortized using the
interest method over the estimated remaining contractual life of the
assets. Realized gains and losses and declines in value judged to be other
than temporary are included in the statement of income. The cost of
securities sold is based on specific identification.
On November 15, 1995, the FASB staff issued a Special Report, A
GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. In accordance with provisions
in that Special Report, the Company chose to reclassify all securities from
held to maturity to available-for-sale. At the date of transfer, December
31, 1995, the amortized cost of those securities was $872,383,000 and the
net unrealized gain on those securities was $2,067,000, which was included
in stockholders' equity, net of tax.
30
<PAGE>
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, net of undisbursed
proceeds, the allowance for loan losses, net deferred loan origination fees, and
unearned premiums and discounts.
Interest on loans receivable is recorded as income as required monthly
payments become due. Allowances are established for uncollected interest on
loans and mortgage-backed securities on which any payments are more than 90 days
past due at which time previously accrued but uncollected interest is reversed
from income. Interest thereafter is recognized on a cash basis until such time
the loan is again contractually current.
LOAN FEES
Loan origination fees and direct costs related to processing successful mortgage
loan applications or acquiring servicing rights are deferred and amortized as an
adjustment of the related loan's yield. Costs associated with processing
unsuccessful mortgage loan applications are charged directly to expense.
LOANS HELD FOR SALE
Loans held for sale consist of the principal balance outstanding on loans
secured by first mortgage liens on one-to-four family homes. Loan origination
fees and direct origination costs are deferred and included in the carrying
amount of the loans. Loans held for sale are generally sold within 30 to 90
days of funding and are carried at the lower of cost or market value determined
on an aggregate basis.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by
management to absorb losses in the loan portfolio. Management's determination
of the adequacy of the allowance is based on an evaluation of the portfolio and,
among other things, growth and composition of the portfolio, general economic
conditions, prior loss experience, and collateral value. Future additions to
the allowance may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for losses and may require
modifications to the allowance based on their judgments of information available
at the time of the examination.
SFAS No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, as amended
by SFAS No. 118, was adopted by the Company as of January 1, 1995. Under SFAS
No. 114, a loan is impaired when it is probable that all principal and interest
amounts due will not be collected in accordance with its contractual terms.
Pursuant to SFAS No. 114, to the extent the recorded investment of an impaired
loan exceeds the present value of the loan's expected future cash flows or other
measures of value, a valuation allowance is established for the difference. In
making such determination of impairment and amount of loss as permitted by the
Statement, loans with homogeneous characteristics (including one-to-four family
mortgages and consumer loans) are excluded from this measurement.
The Company did not have any impaired loans at December 31, 1996 and 1995.
MORTGAGE SERVICING RIGHTS
In May 1996, the Financial Accounting Standards Board issued SFAS No. 122,
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS. The Statement provides guidance for
the recognition of loan servicing rights as an asset and the measurement of
impairment of those rights. The Company adopted the Statement on January 1,
1996. Such adoption did not have a material effect on financial position or
results of operation.
The cost of mortgage servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the predominant risk characteristics of the underlying loans which
includes loan product type (i.e., fixed or adjustable rate) and interest rate
bands. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights for a stratum exceed their fair value.
PENDING ACCOUNTING CHANGE
The FASB issued SFAS No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, which requires the Company
to recognize the financial and servicing assets it controls and the liabilities
it has incurred and to derecognize financial assets when control has been
surrendered in accordance with the criteria provided in the Statement. The
Company will apply the new rules prospectively to transactions beginning in the
first quarter of 1997. Based on current circumstances, the Company believes the
application of the new rules will not have a material impact on the financial
statements.
DEPRECIATION
Depreciation of office properties and equipment is computed on a straight-line
basis over the estimated useful lives of the related assets.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
Compensation expense under the ESOP is equal to the fair value of common shares
released or committed to be released to participants in the ESOP. Common stock
purchased by the ESOP and not committed to be released to participants is
included in the statement of condition at cost as a reduction to stockholders'
equity.
31
<PAGE>
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board (APB) Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and the related Interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB Opinion No. 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
MANAGEMENT RECOGNITION AND RETENTION PLAN (MRP)
The cost of shares granted under the MRP is recognized as compensation expense
over the vesting period. Granted awards under the MRP that have not vested are
included in the statement of condition, at cost, as a reduction to stockholders'
equity.
INCOME TAXES
The Company follows the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
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 MRP represent the common stock equivalents
of the Company. ESOP shares not committed to be released to participants are
not considered outstanding for purposes of computing earnings per share amounts.
The weighted average number of common shares and equivalents deemed
outstanding for 1996 and 1995 were 15,635,000 and 17,044,000, respectively.
Earnings per share for 1994 was computed based on the weighted average number of
common shares deemed outstanding of 17,382,000 and net income of $6,468,000 from
July 28, 1994 (date of conversion to stock form of ownership) through December
31, 1994.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 consolidated financial statements have been
reclassified to conform with the 1996 presentation.
3. INVESTMENT SECURITIES
The amortized cost and fair values of investment securities follows:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
- --------------------------------------------------------------------------------
(IN THOUSANDS)
AVAILABLE-FOR-SALE
U.S. government and
agency securities $115,271 $886 $55 $116,102
Corporate obligations 37,402 39 42 37,399
- --------------------------------------------------------------------------------
$152,673 $925 $97 $153,501
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
- --------------------------------------------------------------------------------
(IN THOUSANDS)
AVAILABLE-FOR-SALE
U.S. government and
agency securities $100,810 $3,102 $19 $103,893
Corporate obligations 33,606 309 1 33,914
- --------------------------------------------------------------------------------
$134,416 $3,411 $20 $137,807
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The amortized cost and fair values of investment securities at December 31,
1996, by contractual maturity, are shown below.
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
(IN THOUSANDS)
AVAILABLE-FOR-SALE
Due in one year or less $ 76,751 $ 76,842
Due after one year through five years 65,510 66,096
Due after five years through 10 years 601 604
Due after 10 years 9,811 9,959
- --------------------------------------------------------------------------------
$152,673 $153,501
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The change in unrealized holding gains (losses), net of income taxes, on
available-for-sale securities included as a separate component of stockholders'
equity totaled $1,150,000 and $4,418,000 during 1996 and 1995, respectively.
Proceeds from the sale of investment securities available-for-sale totaled
$105,682,000, $116,906,000, and $39,248,000 for the years ended December 31,
1996, 1995, and 1994, respectively. Gross gains and gross losses of $1,770,000
and $192,000, respectively, were realized on the sale of investment securities
available-for-sale in 1996. Gross gains and gross losses of $1,350,000 and
$341,000, respectively, were realized on the sale of investment securities
available-for-sale in 1995. Gross gains and gross losses of $0 and $669,000,
respectively, were realized on the sale of investment securities available-for-
sale in 1994.
32
<PAGE>
The Company invests in corporate obligations of issuers with a Moody's
Investors Service rating of A/P2 or better at date of purchase.
4. MORTGAGE-BACKED AND RELATED SECURITIES
The amortized cost and fair values of mortgage-backed and related securities
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
- --------------------------------------------------------------------------------
(IN THOUSANDS)
AVAILABLE-FOR-SALE
Mortgage-backed securities $623,072 $7,983 $6,306 $624,749
Collateralized mortgage
obligations and REMICs 25,211 1,507 24 26,694
- --------------------------------------------------------------------------------
$648,283 $9,490 $6,330 $651,443
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
- --------------------------------------------------------------------------------
(IN THOUSANDS)
AVAILABLE-FOR-SALE
Mortgage-backed securities $758,140 $ 9,327 $9,362 $758,105
Collateralized mortgage
obligations and REMICs 43,359 2,556 10 45,905
- --------------------------------------------------------------------------------
$801,499 $11,883 $9,372 $804,010
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Inverse floating collateralized mortgage obligations with an amortized cost
of $10,730,000 and $11,067,000, with fair values of $11,010,000 and $11,455,000,
were held at December 31, 1996 and 1995, respectively. These securities were
primarily collateralized by Federal Home Loan Mortgage Corporation (FHLMC) and
Federal National Mortgage Association (FNMA) mortgage-backed securities.
The mortgage-backed and related securities portfolio included $4,552,000
and $5,368,000 in net unamortized purchase premiums at December 31, 1996 and
1995, respectively.
Mortgage-backed and related securities by issuer are summarized at December
31, 1996 and 1995, as follows:
1996 1995
- --------------------------------------------------------------------------------
FNMA 31% 30%
FHLMC 26 27
Government National Mortgage
Association (GNMA) - 1
Private issuers 43 42
- --------------------------------------------------------------------------------
100% 100%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Mortgage-backed securities issued by FNMA, FHLMC, and GNMA are either
directly or indirectly guaranteed by the U.S. Treasury. Private issuer
securities are not guaranteed and expose the Company to credit risk. Although
all securities are of investment grade at the time of purchase, at December 31,
1996, private issuer securities with a carrying value of $13,322,000 were below
investment grade.
Interest income on private issuer mortgage-backed securities with an
amortized cost of $11,138,000 and $8,508,000 was recognized on a cash basis at
December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, the investment and mortgage-backed
securities with an amortized cost of $47,373,000 and $49,478,000, respectively,
were pledged to depositors with large deposit accounts at the Bank.
5. LOANS RECEIVABLE, NET
Loans receivable, net, at December 31 consisted of the following:
1996 1995
- --------------------------------------------------------------------------------
(In Thousands)
Mortgage loans originated:
One-to-four family $1,352,858 $ 902,186
Multifamily 12,634 11,160
Commercial 7,322 6,666
Mortgage loans and participations
purchased, primarily
one-to-four family 57,831 73,371
- --------------------------------------------------------------------------------
1,430,645 993,383
Consumer loans 35,511 21,538
- --------------------------------------------------------------------------------
1,466,156 1,014,921
Allowance for losses (6,988) (5,048)
Undisbursed portion of loan proceeds (805) (1,951)
Unearned premiums on loans 10,130 4,580
Unearned discounts on loans (1,247) (905)
Net deferred loan origination fees (705) (820)
- --------------------------------------------------------------------------------
$1,466,541 $1,010,777
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Activity in the allowance for loan losses is summarized as follows:
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
(IN THOUSANDS)
Balance at beginning of year $5,048 $4,503 $4,320
Provision for loan losses 2,500 1,695 660
Charge-offs (605) (1,241) (522)
Recoveries 45 91 45
- --------------------------------------------------------------------------------
Balance at end of year $6,988 $5,048 $4,503
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
33
<PAGE>
6. LOAN SERVICING
Mortgage loans serviced for others are not included in the consolidated
statements of condition. The unpaid principal balances of mortgage loans
serviced for others were $109,012,000 and $53,584,000 at December 31, 1996 and
1995, respectively.
Funds held in trust for borrowers and investors maintained in connection
with the foregoing loan servicing, and included in demand deposits, were
approximately $1,175,000 and $599,000 at December 31, 1996 and 1995,
respectively.
Mortgage servicing rights, included in other assets, of $614,000 were
capitalized in 1996. A valuation reserve of $13,000 has been recorded at
December 31, 1996, for mortgage servicing right strata in which amortized cost
exceeded their fair value. Amortization of mortgage servicing rights was
$58,000 in 1996.
7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31 are summarized as follows:
1996 1995
(IN THOUSANDS)
COST
Land $ 6,073 $ 5,623
Buildings 28,321 27,457
Parking lot improvements 477 477
Automobiles 230 212
Furniture and equipment 10,232 9,670
- --------------------------------------------------------------------------------
45,333 43,439
Less: Allowance for depreciation 18,066 14,971
- --------------------------------------------------------------------------------
$27,267 $28,468
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8. DEPOSITS
Deposits at December 31 are summarized as follows:
1996 1995
- --------------------------------------------------------------------------------
Passbook savings accounts $ 356,376 $ 370,935
Negotiable Order of Withdrawal accounts 114,657 115,804
Money market deposit accounts 74,959 81,683
Certificates of deposit 1,172,790 969,664
- --------------------------------------------------------------------------------
1,718,782 1,538,086
Accrued interest 518 460
- --------------------------------------------------------------------------------
$1,719,300 $1,538,546
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As of December 31, 1996, certificates of deposit had scheduled maturity
dates as follows:
Amount Percent
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
1997 $ 940,992 80.2%
1998 172,305 14.7
1999 32,741 2.8
2000 19,391 1.7
Thereafter 7,361 0.6
- --------------------------------------------------------------------------------
$1,172,790 100.0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The aggregate amount of certificates of deposit in excess of $100,000 was
approximately $23,692,000 and $20,193,000 at December 31, 1996 and 1995,
respectively.
9. ADVANCES FROM FEDERAL HOME LOAN BANK
OF CHICAGO
Advances from the Federal Home Loan Bank of Chicago (FHLB) consisted of the
following at December 31:
1996 1995
- --------------------------------------------------------------------------------
Year of Maturity Amount Fixed Rate Amount Rate
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
1996 $ - -% $ 25,000 5.92%
1998 125,000 6.09 75,000 5.99
1999 75,000 6.20 - -
2000 135,000 6.25 135,000 6.25
2001 25,000 6.15 - -
2003 25,000 5.70 - -
- --------------------------------------------------------------------------------
$385,000 $235,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Bank is required to maintain unencumbered loans in its portfolio of at least
167% of outstanding amounts as collateral for advances from the FHLB. The
investment in Federal Home Loan Bank stock also serves as collateral.
10. INCOME TAXES
The provision for income taxes consisted of the following:
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
(IN THOUSANDS)
Current federal $7,338 $8,273 $6,768
Current state (265) 437 347
Deferred expense (benefit) (1,009) 798 (322)
- --------------------------------------------------------------------------------
$6,064 $9,508 $6,793
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
34
<PAGE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
(IN THOUSANDS)
Statutory rate 35.0% 35.0% 35.0%
Additions (subtractions):
State income taxes (1.3) 1.3 1.1
Low income housing credit (0.7) (0.5) (0.7)
Non-deductible amortization
of excess of cost over net
assets of acquired - - 1.5
Other 0.7 0.5 1.2
- --------------------------------------------------------------------------------
Effective rate 33.7% 36.3% 38.1%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Bank qualified under provisions of the Internal Revenue Code that
permitted it to deduct from taxable income an allowance for bad debts that
differed from the provision for such losses charged to income. Such amounts
accumulated prior to 1988 qualify for a permanent deferral. Accordingly,
retained income at December 31, 1996, included approximately $24,500,000 for
which no provision for federal income taxes had been made. If in the future
this portion of retained income is distributed or the Bank no longer qualifies
for tax purposes as a bank, federal and state income taxes may be imposed at the
then-applicable rates. If incurred, the tax liability related to this balance
would approximate $9,700,000.
Significant components of deferred tax liabilities and assets at December
31, 1996 and 1995 were as follows:
1996 1995
- --------------------------------------------------------------------------------
(IN THOUSANDS)
Deferred tax liabilities:
Loan fees deferred for
income tax purposes $ 553 $ 396
Depreciation - 324
FHLB stock dividends 720 676
Other 485 385
Unrealized gain due to market value
increase in securities 1,557 2,321
- --------------------------------------------------------------------------------
3,315 4,102
Deferred tax assets:
Depreciation 66 -
General valuation allowance 2,072 1,310
Other 348 187
- --------------------------------------------------------------------------------
2,486 1,497
- --------------------------------------------------------------------------------
Net deferred tax liability $ 829 $2,605
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
11. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
The Bank established a liquidation account for the benefit of eligible
depositors as of September 30, 1993 (the eligibility record date) who continue
to maintain their deposit accounts in the Bank after the Bank's conversion to
stock ownership. In the unlikely event of a liquidation, each eligible
depositor will be entitled to receive a liquidation distribution from the
liquidation account in an amount proportionate to current adjusted qualifying
balances before any liquidation distribution may be made with respect to the
stockholders. The balance of the liquidation account approximates $62.7 million
(unaudited) at December 31, 1996.
The Bank may not declare or pay a cash dividend on, or repurchase any of,
its capital stock if the effect thereof would cause stockholders' equity of the
Bank to be reduced below either the amount required for the liquidation account
or if such declaration and payment would otherwise violate regulatory
requirements.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory-and possibly additional discretionary-actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of core, tangible, and
risk-based capital. Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the framework
for prompt corrective action. To be categorized as well capitalized the Bank
must maintain minimum core, tangible, and risk-based capital ratios as set forth
in the subsequent table. There have been no conditions or events since that
notification that management believes have changed the Bank's category. The
qualification results in a lower assessment of FDIC Premiums and other benefits.
These amounts, as well as the Bank's actual capital amounts and ratios, are
shown on the following page.
35
<PAGE>
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
- ----------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 1996
Risk-based $206,386 21.46% $76,930 8.00% $ 96,163 10.00%
Core 199,398 8.49 70,464 3.00 117,439 5.00
Tangible 198,966 8.47 35,225 1.50 58,709 2.50
AS OF DECEMBER 31, 1995
Risk-based 205,365 25.22 65,133 8.00 81,416 10.00
Core 200,317 9.95 60,466 3.00 100,777 5.00
Tangible 200,204 9.94 30,203 1.50 50,338 2.50
</TABLE>
12. RETIREMENT AND SAVINGS PLANS
The Bank sponsors a defined-contribution plan (the 401(k) Plan) covering
substantially all employees. Employees are eligible to participate in the
401(k) Plan after completing a 12-month period of service and attaining the age
of 21 years. The 401(k) Plan permits participants to elect to have salary
deferral contributions made in amounts between 1% and 12% of their annual
compensation. The Bank makes matching contributions to the 401(k) Plan at 50%
of the first 6% of salary deferral contributions. The expense relating to this
plan was approximately $226,000, $227,000, and $223,000 for the years ended
December 31, 1996, 1995, and 1994, respectively.
The Bank adopted an employee stock ownership plan (the ESOP) on July 28,
1994, for the benefit of employees of the Bank. The ESOP invests in the common
stock of the Company. All employees who have completed at least one year of
credited service at the Company and have attained the age of 21 are eligible to
participate in the ESOP. All eligible employees receive an allocation of common
stock in the ratio that the compensation, as defined, of each eligible employee
for the plan year bears to the total compensation of all eligible employees for
the plan year. Under the ESOP, 1,269,600 shares are to be distributed over the
10-year period beginning in 1994.
In 1994, the ESOP obtained a term loan (the Loan) of $12,696,000 from the
Company and utilized the proceeds to acquire shares of common stock. The Loan
bears interest at the prime rate and is payable to the Company in annual
installments of principal and interest commencing December 31, 1994. The Bank,
to the extent permissible by law and regulatory authority, has guaranteed
repayment of the Loan.
In fiscal 1996, 1995, and 1994, total compensation expense under the ESOP
was $2,069,000, $1,857,000, and $546,000, respectively. Total expense under the
Company's money purchase pension plan, which was terminated upon inception of
the ESOP, equaled $352,000 in 1994.
The following table summarizes shares of Company common stock held by the
ESOP:
December 31, 1996 1995
- -----------------------------------------------------------------------------
Shares allocated to participants 302,522 181,570
Unallocated and unearned shares 961,070 1,088,030
- -----------------------------------------------------------------------------
1,263,592 1,269,600
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Fair value of unearned ESOP shares $18,861,000 $15,912,000
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
13. STOCK OPTION PLANS
The Company has two stock option plans: the Option Plan is for the benefit of
officers and other key employees of the Company or its subsidiaries, while the
Option Plan for Outside Directors is for the benefit of the outside directors.
Both plans were approved by the Company's stockholders on May 19, 1995. Under
the original terms of the Option Plan and the Option Plan for Outside Directors,
1,522,000 and 341,000 shares of authorized but unissued common stock,
respectively, were reserved for issuance.
The Option Plan and the Option Plan for Outside Directors authorize the
Stock Incentive Compensation Committee of the Board of Directors to administer
the respective plans and make recommendations to award stock options to
officers, key employees, and outside directors, as applicable. Stock options
are granted at the discretion of the Stock Incentive Compensation Committee.
Stock options must be granted at an option price equal to the fair market value
of the Company's common stock on the date of grant and have a maximum 10-year
term. Options granted are exercisable in increments of 20% per year commencing
one year after the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be determined
as if the Company had accounted for its stock options granted subsequent to
December 31, 1994, under the fair value method of SFAS No. 123. The fair value
of these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:
1996 1995
- --------------------------------------------------------------------------------
Risk-free interest rates 6.37% 6.60%
Dividend yields 2.11% 2.48%
Volatility factors of the expected market
price of common stock 0.14 0.21
Weighted-average estimated life of the
options in years 7.0 7.0
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of
36
<PAGE>
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting period. The Company's
pro forma information is as follows:
1996 1995
- -----------------------------------------------------------------------------
Pro forma net income $11,294,000 $16,324,000
Pro forma earnings per share 0.72 0.96
The following table sets forth activity relating to stock options under the
Option Plan for the years ended December 31:
1996 1995
- --------------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
- --------------------------------------------------------------------------------
Outstanding at beginning
of year 1,365,578 $12.19 - $ -
Granted 36,647 15.61 1,365,578 12.19
Exercised (20,244) 12.00 - -
Forfeited (75,044) 12.00 - -
Outstanding at end
of year 1,306,937 12.30 1,365,578 12.19
Exercisable at end of year 251,695 12.21 - -
Weighted-average fair
value of options granted
during the year $4.12 $3.42
The exercise prices for Option Plan options outstanding as of December 31,
1996, ranged from $12.00 to $15.75. The weighted-average remaining contractual
life of those options is 8.5 years.
The following table sets forth activity relating to stock options under
the Option Plan for Outside Directors for the years ended December 31:
1996 1995
- --------------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
- --------------------------------------------------------------------------------
Outstanding at beginning
of year 248,000 $12.00 - $ -
Granted 62,000 16.38 248,000 12.00
Exercised - - - -
Forfeited (24,800) 12.00 - -
Outstanding at end
of year 285,200 12.95 248,000 12.00
Exercisable at end of year 49,600 12.00 - -
Weighted-average fair
value of options granted
during the year $3.87 $3.39
The exercise prices for Option Plan for Outside Directors options outstanding as
of December 31, 1996, ranged from $12.00 to $17.88. The weighted-average
remaining contractual life of those options is 8.6 years.
14. MANAGEMENT RECOGNITION AND
RETENTION PLAN (MRP)
The Company has a MRP for the benefit of officers and key employees of the
Company that was approved by the Company's stockholders on May 19, 1995. Under
the original terms of the MRP, 745,200 shares of authorized but unissued stock
were reserved for issuance.
The MRP authorizes the Stock Incentive Compensation Committee to administer
and make recommendations to award stock to participants. Stock awards granted
under the MRP vest at a rate of 20% per year commencing one year after the date
of grant. For the years ended December 31, 1996 and 1995, 13,472 and 452,089
shares, respectively, were granted. Expense under the MRP equaled $1,081,000
and $645,000 for the years ended December 31, 1996 and 1995, respectively.
The following table sets forth activity relating to the MRP for the years
ended December 31:
1996 1995
- --------------------------------------------------------------------------------
MRPs outstanding on January 1 452,089 -
Granted 13,472 452,089
Issued (89,775) -
Forfeited (23,420) -
- --------------------------------------------------------------------------------
MRPs outstanding at December 31 352,366 452,089
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
37
<PAGE>
15. FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
In the normal course of business, the Company is party to financial instruments
with off-balance-sheet risk. These financial instruments consist of commitments
to extend credit and forward commitments to sell mortgage loans. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated statements of
condition. The contract amounts reflect the extent of involvement the Company
has in particular classes of financial instruments.
The Company's maximum exposure to credit loss for commitments to extend
credit and unused equity lines of credit is represented by the contract amount
of those instruments. Forward commitments to sell loans do not represent
exposure to credit loss.
Financial instruments whose contract amounts represent credit and interest
rate risk at December 31 are as follows:
1996 1995
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
COMMITMENTS TO EXTEND CREDIT
Fixed rate (weighted-average interest
rate: 8.00% in 1996 and 1995) $ 2,039 $ 1,776
Adjustable rate 51,170 38,747
Equity lines of credit 7,459 4,229
Unused credit card lines - 39,929
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and generally require payment of a fee. As some commitments expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates the credit-worthiness of each
customer on a case by case basis. The Company extends credit only on a secured
basis. Collateral obtained varies, but consists primarily of one- to four-
family residences.
Commitments to extend credit on a fixed rate basis expose the Company to
interest rate risk if market rates of interest substantially increase during the
commitment period.
The Company had forward commitments to sell mortgage loans totaling
$18,918,000 at December 31, 1996. The Company did not have any forward
commitments to sell mortgage loans at December 31, 1995. Commitments to sell
loans expose the Company to market risk if rates of interest decrease during the
commitment period. Commitments to sell loans are made to mitigate interest rate
risk on commitments to originate mortgage loans and loans held for sale. All
loans are sold on a nonrecourse basis and the servicing of these loans may or
may not be retained by the Company.
Except for the above-noted commitments to originate and/or sell mortgage
loans in the normal course of business, the Company has not undertaken the use
of off-balance-sheet derivative financial instruments for any purpose.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure of fair value information about financial instruments, whether or not
recognized in the statement of condition, for which it is practicable to
estimate that value follows. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash flow.
In that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized on
immediate settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
38
<PAGE>
The following table presents the carrying amount and fair values of financial
instruments as defined by SFAS No. 107:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
December 31, Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
FINANCIAL ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 43,298 $ 43,298 $ 69,571 $ 69,571
Investment securities 153,501 153,501 137,807 137,807
Mortgage-backed and related securities 651,443 651,443 804,010 804,010
Loans receivable, net 1,466,541 1,460,032 1,010,777 1,040,255
Loans held for sale 18,918 18,918 - -
Investment in Federal Home Loan Bank stock 20,500 20,500 12,802 12,802
Mortgage servicing rights 543 624 - -
Accrued interest receivable 15,015 15,015 13,754 13,754
- -------------------------------------------------------------------------------------------------------------
Total financial assets $2,369,759 $2,363,331 $2,048,721 $2,078,199
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES
Deposits without stated maturities $ 545,992 $ 545,992 $ 568,422 $ 568,422
Deposits with stated maturities 1,172,790 1,179,286 969,664 973,176
Advances from Federal Home Loan Bank 385,000 382,255 235,000 237,849
Advance payments by borrows for taxes and insurance 11,470 11,470 7,854 7,854
Accrued interest payable 518 518 460 460
- -------------------------------------------------------------------------------------------------------------
Total financial liabilities $2,115,770 $2,119,521 $1,781,400 $1,787,761
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Off-balance-sheet instruments $ - $ 110 $ - $ -
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used by management in estimating
the fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amounts reported in the statement of condition for cash and short-
term instruments approximate those assets' fair values.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Fair values for investment and mortgage-backed securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
value is based on quoted market prices of comparable instruments.
LOANS RECEIVABLE
For mortgage and consumer loans, fair value is based on quoted market prices
where available and, where not available, on quoted prices of other mortgage
debt with similar characteristics (with appropriate adjustment if necessary).
FEDERAL HOME LOAN BANK STOCK
The fair value of FHLB stock equals its carrying amount because the shares can
be resold to the FHLB or other member banks at their carrying amount of $100 per
share par value.
MORTGAGE SERVICING RIGHTS
The fair value of mortgage servicing rights is estimated using discounted cash
flows based on a current market interest rate.
OFF-BALANCE-SHEET INSTRUMENTS
Fair values for off-balance-sheet instruments (lending commitments) are based on
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing.
DEPOSIT LIABILITIES
The fair value disclosed for non-maturing deposits (e.g., passbook, NOW, and
money market deposit accounts) is, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair values for
fixed-rate certificates of deposit are estimated using a current market rate
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected maturities on time deposits.
ADVANCES FROM FEDERAL HOME LOAN BANK
The fair value of advances from the FHLB is estimated based on current rates
offered by the FHLB.
OTHER ASSETS AND LIABILITIES
Carrying amounts of miscellaneous receivables and liabilities approximate their
fair value.
39
<PAGE>
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total interest income $37,388 $38,553 $40,238 $41,317
Total interest expense 21,393 22,885 24,161 25,496
- -------------------------------------------------------------------------------------------------------------
Net interest income 15,995 15,668 16,077 15,821
Provision for loan losses 800 800 450 450
Non-interest income 3,000 1,442 2,126 2,312
Non-interest expense 10,415 10,247 20,195 11,108
- -------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 7,780 6,063 (2,442) 6,575
Income taxes (benefit) 2,859 2,245 (1,436) 2,396
- -------------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,921 $ 3,818 $ (1,006) $ 4,179
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Earnings (loss) per share $ 0.31 $ 0.25 $ (0.07) $ 0.27
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31, 1995 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total interest income $30,373 $32,746 $33,752 $35,102
Total interest expense 15,503 17,266 18,883 20,015
- -------------------------------------------------------------------------------------------------------------
Net interest income 14,870 15,480 14,869 15,087
Provision for loan losses 165 605 525 400
Non-interest income 1,053 1,600 1,179 1,474
Non-interest expense 9,009 9,435 9,678 9,570
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 6,749 7,040 5,845 6,591
Income taxes 2,458 2,537 2,099 2,414
- -------------------------------------------------------------------------------------------------------------
Net income $ 4,291 $ 4,503 $ 3,746 $ 4,177
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Earnings (loss) per share $ 0.25 $ 0.26 $ 0.22 $ 0.25
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
18. CONDENSED FINANCIAL INFORMATION
The condensed statements of condition of Standard Financial, Inc. (Parent
Company only) as of December 31, 1996 and 1995, and the related condensed
statements of income and cash flows for each of the three periods in the period
ended December 31, 1996, are summarized as follows:
CONDENSED STATEMENTS OF CONDITION
December 31, 1996 1995
- --------------------------------------------------------------------------------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents $ 51 $ 29
Investment securities available-for-sale 45,243 56,086
Mortgage-backed securities available-for-sale 10,206 10,289
Investment in subsidiaries 202,180 203,318
Other 10,748 12,353
- --------------------------------------------------------------------------------
Total assets $268,428 $282,075
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Miscellaneous liabilities $ 350 $ 1,189
- --------------------------------------------------------------------------------
Total liabilities 350 1,189
Total stockholders' equity 268,078 280,886
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $268,428 $282,075
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
Period From
July 28, 1994
To
December 31,
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
(IN THOUSANDS)
Interest income $ 3,717 $ 4,609 $1,968
NON-INTEREST INCOME
Equity in net earnings of subsidiaries 9,658 13,810 5,806
Gain (loss) on sales of investment
securities available-for-sale 1,563 1,009 (669)
- --------------------------------------------------------------------------------
Total income 14,938 19,428 7,105
General and administrative expenses (1,878) (1,146) (239)
- --------------------------------------------------------------------------------
Income before income taxes 13,060 18,282 6,866
Federal and state income tax (1,148) (1,565) (371)
- --------------------------------------------------------------------------------
Net income $11,912 $16,717 $6,495
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
40
<PAGE>
18. CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
July 28, 1994
To
December 31,
Year ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 11,912 $ 16,717 $ 6,495
Adjustment to reconcile net income to net cash provided by operating activities:
Amortization of premiums and discounts (1,463) (472) (371)
ESOP and MRP expense 3,150 2,503 546
(Gain) loss on sale of investment securities available-for-sale (1,563) (1,009) 669
Undistributed earnings of subsidiaries (9,658) (13,810) (5,806)
Other 12,803 453 (1,015)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 15,181 4,382 518
INVESTING ACTIVITIES
Proceeds from sales of investment securities 105,682 116,906 39,248
Purchases of investment securities (364,389) (163,006) (173,121)
Proceeds from maturity and repayment of investment securities 270,184 71,826 55,613
Acquisition of the stock of the Bank - - (91,261)
Purchase of mortgage-backed securities - (9,943) -
Proceeds from maturity and repayment of mortgage-backed securities 84 8 -
Capitalization of subsidiaries - (1,556) -
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 11,561 14,235 (169,521)
FINANCING ACTIVITIES
Net proceeds from stock offering - - 182,522
Common stock acquired by ESOP - - (12,696)
Dividends paid (5,316) - -
Purchase of treasury stock (21,674) (19,411) -
Stock options exercised 270 - -
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (26,720) (19,411) 169,826
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 22 (794) 823
Cash and cash equivalents at beginning of period 29 823 -
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 51 $ 29 $ 823
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
STANDARD FINANCIAL, INC. CORPORATE INFORMATION
STOCK PRICE INFORMATION
Standard Financial, Inc.'s common stock is traded on the Nasdaq Stock Market
under the symbol "STND". Newspaper stock tables list the company as "STD
FINCL". The Company declared its first cash dividend of $.08 per share during
the first quarter of 1996 and paid $.08 per share during each subsequent quarter
of 1996. As of December 31, 1996, the Company had 19,092,585 shares of common
stock issued and 16,173,235 shares of common stock outstanding. The table below
shows the reported high and low sale prices of the common stock for 1995 and
1996.
DIVIDENDS
1996 PAID HIGH LOW
- -----------------------------------------------------------------------
First Quarter $0.08 15 1/8 14 1/8
Second Quarter 0.08 16 1/2 14 1/2
Third Quarter 0.08 16 1/2 15 1/2
Fourth Quarter 0.08 21 1/4 16 1/4
1995
- -----------------------------------------------------------------------
First Quarter $0.00 11 1/4 9 1/2
Second Quarter 0.00 13 1/4 11
Third Quarter 0.00 14 3/4 13
Fourth Quarter 0.00 14 7/8 13 3/8
ANNUAL MEETING OF STOCKHOLDERS
The annual meeting of stockholders of Standard Financial, Inc. will be held at
10:00 a.m. on April 24, 1997, at Marie's Ashton Place, 342 West 75th Street,
Willowbrook, Illinois 60515. All stockholders are cordially invited.
ANNUAL REPORT ON FORM 10K
Copies of Standard Financial, Inc.'s Annual Report on Form 10K for the year
ended December 31, 1996, as filed with the Securities and Exchange Commission
are available without charge to stockholders upon written request to:
Thomas M. Ryan
Executive Vice President
Investor Relations
Standard Financial, Inc.
800 Burr Ridge Parkway
Burr Ridge, Illinois 60521
INVESTOR INFORMATION
Stockholders, investors and analysts interested in additional information may
contact:
Thomas M. Ryan
Executive Vice President, COO and CFO
or
Randall R. Schwartz
Vice President and General Counsel
STOCK TRANSFER AGENT AND REGISTRAR
Standard Financial, Inc.'s transfer agent, Harris Trust and Savings Bank,
maintains all stockholder records and can assist with stock transfer and
registration, address change, and changes or corrections in social security or
tax identification numbers. If you have any questions, please contact the stock
transfer agent at the address below:
Harris Trust and Savings Bank
Attention: Stockholder Services
P.O. Box 755
Chicago, Illinois 60690
(312) 461-5754
CORPORATE COUNSEL - CHICAGO, ILLINOIS
Barack, Ferrazzano, Kirschbaum & Perlman
333 West Wacker Drive
Suite 2700
Chicago, Illinois 60606
INDEPENDENT AUDITORS
Ernst & Young LLP
233 South Wacker Drive
Chicago, Illinois 60606
CORPORATE OFFICE
Standard Financial, Inc.
800 Burr Ridge Parkway
Burr Ridge, Illinois 60521
(630) 986-4900
42
<PAGE>
STANDARD FINANCIAL, INC. AND STANDARD FEDERAL BANK FOR SAVINGS OFFICERS AND
DIRECTORS
EXECUTIVE OFFICERS
DAVID MACKIEWICH
President, Chief Executive Officer
and Chairman of the Board
THOMAS M. RYAN
Executive Vice President, Chief Operating Officer
and Chief Financial Officer
KURTIS D. MACKIEWICH
Senior Vice President
RUTA M. STANIULIS
Senior Vice President
LEONARD A. METHENY, SR.
Vice President and Corporate Secretary
RANDALL R. SCHWARTZ
Vice President and General Counsel
ROBERT R. HARRING, III
President, Standard Financial Mortgage Corporation
Vice President, Standard Federal Bank for savings
BOARD OF DIRECTORS
DAVID MACKIEWICH
President, Chief Executive Officer
and Chairman of the Board
STASYS J. BARAS
Senior Vice President, Retired
Standard Federal Bank for savings
FRED V. GWYER, M.D.
Physician, Retired
TOMAS KISIELIUS, M.D.
Physician
GEORGE LANE
President
Creative Business Forms and Supplies, Inc.
JACK LEVY
President
Jack Levy Associates
ALBERT M. PETKUS
Executive Vice President
Universal Financial Products Corp.
SHARON REESE DALENBERG
President
The Astor Group
President
Continental Courier Ltd.
President
Errand Boy, Inc.
THOMAS M. RYAN
Executive Vice President, Chief Operating Officer
and Chief Financial Officer
<PAGE>
[LOGO]
800 Burr Ridge Parkway
Burr Ridge, IL 60521
(630) 986-4900
<PAGE>
[LOGO]
March 21, 1997
Dear Stockholder:
Enclosed is Standard Financial's 1996 Annual Report to Stockholders. Also
enclosed is a press release, dated March 17, 1997, announcing the agreement
to merge Standard Financial with TCF Financial Corporation. As described in
the release, Standard Financial stockholders may elect to receive, subject to
overall limitations on the percentages of cash and stock available to
stockholders, cash, TCF common stock or some combination thereof. The exact
exchange ratio of TCF shares for Standard Financial shares will depend upon
the average trading price of TCF stock during the 30 trading days preceding
the merger. For example, if the average trading price of TCF stock during
that period is between $43.75 and $47.75, each Standard Financial share will
be converted into the right to receive consideration having an aggregate
value between $24.69 and $25.81. The receipt of TCF shares will be tax free
to Standard Financial stockholders.
The proposed merger with TCF is subject to the approval of the Standard
Financial stockholders and certain regulatory filings and approvals. Standard
Financial will call a special meeting of the stockholders in the next few
months to vote on the merger. Because of this special meeting of the
stockholders, the 1997 Annual Meeting has been postponed. Proxy materials for
the special meeting detailing the background and specific terms of the
proposed merger will be sent at a later date.
We will keep you posted on developments.
David Mackiewich
President, Chief Executive Officer
and Chairman of the Board
<PAGE>
[LOGO]
CONTACT:
STANDARD FINANCIAL TCF
Thomas Ryan, Exec. VP, CFO Cynthia Lee (Investors)
(630) 986-7833 (612) 661-8859
Randall Schwartz, VP, Gen. Counsel Ann Storberg (Investors)
(630) 986-7836 (612) 661-8883
Bill Murphy, Financial Relations Bd. Elizabeth Anders (Media)
(312) 640-6764 (612) 661-8853
TCF and Standard Financial Agree to Merge
Creating $10 Billion Company
MINNEAPOLIS, March 17, 1997 - TCF Financial Corporation (TCF) (NYSE:TCB)
and Standard Financial, Inc. (Standard) (Nasdaq - NNM:STND) today announced a
definitive agreement to merge, creating a company with a combined $10
billion in assets and providing access to 276 financial services offices and
more than 900 ATMs in five midwestern states.
The transaction is structured as a cash election merger, providing for an
exchange of TCF common stock and cash for Standard shares. TCF will be the
surviving corporation in the merger. The transaction is expected to have an
aggregate value, based on the closing price of TCF common stock on March 14,
of approximately $424 million, or approximately $25 per Standard common
share. The transaction value is approximately 160 percent of Standard's book
value. TCF expects the merger to be accretive to both reported and cash
earnings in 1998.
TCF Chairman and Chief Executive Officer William A. Cooper said that
Standard's retail branch network complements TCF's 35 Illinois bank branches,
26 of which are in the Chicago
-more-
<PAGE>
area. "This union significantly expands our profitable and growing Illinois
franchise," said Cooper. "Chicago has long been an attractive market for TCF -
a large, urban-based population receptive to banking convenience - and
Standard has an exemplary tradition of meeting community banking needs."
Cooper added that no bank branches will be closed in connection with the
merger.
"Joining TCF will accelerate our transformation to a leading consumer
bank for the benefit of our shareholders, customers, and the communities we
serve," said Standard Chairman and President David Mackiewich. "We will have
access to a broader range of products and services, convenient banking
locations - including seven-day banking at supermarkets and 248 Cash Station
ATMs - and the financial resources of a dynamic regional bank."
"We believe this merger will produce long-term revenue enhancements and
meaningful cost savings," said Cooper. He noted that the strategic plan for
improving the Chicago franchise follows TCF's community banking philosophy:
increasing lower interest-cost checking, savings, and money market deposit
accounts; increasing higher-yielding consumer and commercial loans;
introducing complementary products and services such as annuities, mutual
funds, debit cards; and consolidating back-office operations.
For Standard's stockholders, the transaction will be structured as a cash
election merger in which holders of Standard's stock will have the right to
choose either cash or TCF common stock, or a combination of the two. Between
40 percent and 60 percent of the purchase price will be paid in shares of TCF
common stock, and the remainder will be paid in cash. The transaction will be
a tax-free exchange for Standard's stockholders to the extent they receive
shares of TCF common stock.
-more-
<PAGE>
The exchange ratio for shares of Standard stock will depend on the
average trading price of TCF stock during the 30 trading days preceding the
merger. If the average trading price of TCF stock during that period is
between $43.75 and $47.75, each Standard share will be converted into the
right to receive consideration having an aggregate value between $24.69 and
$25.81. If the average trading price of TCF stock is below $43.75 but greater
than or equal to $37.50, each Standard share will converted into the right to
receive consideration having an aggregate value of $24.69. If the average
trading price of TCF stock is above $47.75 but less than or equal to $54.00,
each Standard share will be converted into the right to receive consideration
having an aggregate value of $25.81.
The definitive agreement was signed after completion of due diligence and
approval of both companies' boards of directors. It is subject to approval by
Standard's stockholders, and required regulatory filings and approvals. The
merger is expected to close in the third quarter of 1997 and be accounted for
as a purchase transaction. Standard has agreed to pay a $15 million
termination fee if the merger agreement is terminated under certain
circumstances.
In connection with the transaction, TCF will record intangibles of
approximately $200 million.
After the merger, Standard's bank branches will be combined with TCF Bank
Illinois. The directors of Standard will join TCF Bank Illinois' board of
directors. Mackiewich will become executive chairman of TCF Bank Illinois and
a director of TCF Financial Corporation. Michael B. Johnstone, president and
chief executive officer of TCF Bank Illinois, will continue in that capacity.
-more-
<PAGE>
TCF will contribute $1 million over five years to Illinois community
organizations, consistent with TCF's philanthropic giving program which is
focused on housing and economic development in low-income communities, and
K-12 education reform.
In connection with the merger, Standard has announced that it has
postponed its annual meeting and plans to call a special meeting at which it
will seek stockholder approval of the merger.
Standard is a community-oriented thrift institution with $2.4 billion in
assets and 14 full-service offices on the southwest side of Chicago and in
the nearby southwestern and western suburbs. Excluding a regulatory special
assessment, Standard reported record 1996 earnings of $17.7 million, or $1.13
per share, a return on average assets of 0.78 percent and a return on average
equity of 6.60 percent.
TCF is a Minneapolis-based stock savings bank holding company with $7.1
billion in assets and more than 260 financial services offices. Its bank
subsidiaries operate in Minnesota, Illinois, and Wisconsin as TCF Bank, and
in Michigan and Ohio as Great Lakes Bankcorp. Affiliates include consumer
finance, mortgage banking, title insurance, annuity and mutual fund sales
companies. Excluding a regulatory special assessment, TCF reported record
1996 earnings of $107.4 million, or $3.04 per share, a return on average
assets of 1.56 percent, and a return on average common equity of 20.22 percent.
TCF intends to convert its federal savings bank subsidiaries into national
banks in the 1997 second quarter, pending all required regulatory approvals.
