<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO ________________
Commission File Number: 1-13734
STANDARD FEDERAL BANCORPORATION, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2899274
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2600 West Big Beaver Road, Troy, Michigan 48084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 810-643-9600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
The number of shares outstanding of the registrant's no par value common
stock as of November 4, 1996, was 31,206,798.
<PAGE> 2
STANDARD FEDERAL BANCORPORATION, INC.
INDEX
PAGE
- - --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<S> <C>
Consolidated Statements of Financial Condition -
September 30, 1996, December 31, 1995, and September 30, 1995 1
Consolidated Statements of Income - Three and Nine Months
Ended September 30, 1996 and 1995 2
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1996 and 1995 3-5
Notes to Consolidated Financial Statements 6-12
Independent Accountants' Report 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Three and Nine Months
Ended September 30, 1996 and 1995 14-30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 5. Other Information - Dividend Declaration and Payment
on Common Stock 31
Item 6. Exhibits and Reports on Form 8-K 31-32
Signatures 33
Exhibit Index 34
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANDARD FEDERAL BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
------------ ----------- ------------
<S> <C> <C> <C>
ASSETS
Cash $ 115,506 $ 90,789 $ 74,613
----------- ----------- ------------
Cash equivalents 48,411 16,029 40,640
Term federal funds sold and securities
purchased under resale agreements 1,200 -- 15,400
Investment securities held to maturity (fair
values of $481,451, $210,935 and $209,978,
respectively) 484,659 211,745 211,801
Mortgage-backed securities held for trading
at fair value -- 224,843 69,088
Mortgage-backed securities available for sale
at fair value 622,004 689,432 --
Mortgage-backed securities held to maturity
(fair values of $2,359,316, $2,329,546 and
$2,542,726, respectively) 2,379,633 2,275,158 2,522,662
Loans receivable available for sale 843,866 902,816 667,238
Loans receivable 10,185,529 8,294,909 9,109,708
----------- ----------- ------------
Total earning assets 14,565,302 12,614,932 12,636,537
Accrued interest receivable 84,704 69,147 71,328
Real estate and other repossessed assets 12,675 5,764 4,739
Premises and equipment 212,972 191,988 189,255
Cost in excess of fair value of net assets
acquired 166,739 135,874 139,827
Other assets 195,784 167,114 155,695
----------- ----------- ------------
Total assets $15,353,682 $13,275,608 $ 13,271,994
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $10,786,092 $ 9,151,929 $9,137,305
FHLB advances and other long-term borrowings 1,771,611 1,973,797 1,862,096
Federal funds purchased and reverse repurchase
agreements 1,245,797 844,420 978,388
Medium-term subordinated notes 98,621 -- --
----------- ----------- ------------
Total interest-bearing liabilities 13,902,121 11,970,146 11,977,789
Accrued interest payable 37,916 58,430 59,338
Undisbursed payments on participations sold 60,751 98,798 67,521
Advance payments by borrowers for taxes and
insurance 154,894 75,767 137,827
Federal income taxes payable 27,969 66,245 45,993
Liability for checks and money orders issued 146,913 50,785 65,188
Other liabilities 127,415 39,174 39,870
------------ ----------- ------------
Total liabilities 14,457,979 12,359,345 12,393,526
------------ ----------- ------------
</TABLE>
<PAGE> 4
STANDARD FEDERAL BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
STOCKHOLDERS' EQUITY:
<TABLE>
<S> <C> <C> <C>
Serial preferred stock, no par value per share;
50,000,000 shares authorized; none issued -- -- --
Common stock, no par value per share: 150,000,000
shares authorized; shares issued and outstanding
at:
September 30, 1996 - 31,192,373
December 31, 1995 - 31,185,175
September 30, 1995 - 31,403,025 223,356 231,884 240,395
Restricted stock grant, net (99) -- --
Retained earnings, partially restricted 662,354 663,655 638,073
Unrealized gain on mortgage-backed securities
available for sale 10,092 20,724 --
----------- ----------- -----------
Total stockholders' equity 895,703 916,263 878,468
----------- ----------- -----------
Total liabilities and stockholders' equity $15,353,682 $13,275,608 $13,271,994
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 5
STANDARD FEDERAL BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 208,603 $ 182,266 $ 572,799 $ 519,986
Mortgage-backed securities 55,834 51,756 171,371 142,925
Investment securities 9,291 5,317 21,314 19,547
--------- --------- --------- ---------
Total 273,728 239,339 765,484 682,458
--------- --------- --------- ---------
INTEREST EXPENSE:
Deposits 125,384 110,827 350,077 305,693
FHLB advances and other long-term
borrowings 27,392 31,109 84,836 93,520
Federal funds purchased and reverse
repurchase agreements 17,390 16,674 44,129 44,347
Medium-term subordinated notes 1,634 -- 1,634 --
--------- --------- --------- ---------
Total 171,800 158,610 480,676 443,560
--------- --------- --------- ---------
Net interest income 101,928 80,729 284,808 238,898
Provision for losses 1,042 909 2,184 564
--------- --------- --------- ---------
Net interest income after provision
for losses 100,886 79,820 282,624 238,334
--------- --------- --------- ---------
NON-INTEREST INCOME:
Loan fees and charges 2,468 1,708 6,825 5,025
Deposit-related fees and charges 7,715 6,521 21,628 19,291
Loan servicing fee income, net 4,359 2,876 10,712 10,555
Gain on the sale of earning
assets 2,762 7,611 14,296 7,902
Loss on the sale of real estate owned (453) (967) (625) (1,053)
Other 3,776 776 5,735 5,058
--------- --------- --------- ---------
Total 20,627 18,525 58,571 46,778
--------- --------- --------- ---------
OTHER EXPENSES:
Compensation and benefits 28,023 18,667 74,055 58,171
Occupancy and equipment 14,020 11,894 40,406 35,044
Federal insurance premium 6,690 4,928 17,920 14,333
General and administrative 6,707 3,774 16,100 10,736
Amortization of cost in excess of
fair value of net assets acquired 4,681 3,954 11,267 11,827
Advertising 3,784 2,753 9,172 7,667
Other taxes 2,294 1,636 6,904 4,147
Other 439 2,177 3,901 4,531
--------- --------- --------- ---------
Other expenses before FDIC special
assessment 66,638 49,783 179,725 146,456
FDIC special assessment 67,311 -- 67,311 --
--------- --------- --------- ---------
Total 133,949 49,783 247,036 146,456
--------- --------- --------- ---------
</TABLE>
<PAGE> 6
STANDARD FEDERAL BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(In thousands, except share data)
<TABLE>
<S> <C> <C> <C> <C>
Income (Loss) before provision for
federal income taxes and the
cumulative effect of a change in
accounting for goodwill (12,436) 48,562 94,159 138,656
Provision (Benefit) for federal income
taxes (4,100) 17,950 34,300 50,350
---------- ---------- ---------- ----------
Income (Loss) before the cumulative
effect of a change in accounting for
goodwill (8,336) 30,612 59,859 88,306
Cumulative effect of a change in
accounting for goodwill -- -- (43,032) --
---------- ---------- ---------- ----------
NET INCOME (LOSS) ($8,336) $30,612 $59,859 $88,306
========== ========== ========== ==========
EARNINGS PER SHARE:
Income (Loss) before the cumulative
effect of a change in accounting
for goodwill ($0.26) $0.94 $1.86 $2.73
Cumulative effect of a change in
accounting for goodwill -- -- (1.34) --
---------- ---------- ---------- ----------
NET INCOME (LOSS) ($0.26) $0.94 $0.52 $2.73
========== ========== ========== ==========
DIVIDENDS PER COMMON SHARE $0.20 $0.18 $0.58 $0.52
========== ========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 7
STANDARD FEDERAL BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Interest received on earning assets $ 759,934 $ 668,753
Loan and other fees received 81,145 56,403
Proceeds from the sale of mortgage-backed securities
held for trading 635,048 --
Cash disbursed for real estate loans available for sale (5,544,101) (2,951,988)
Proceeds from the sale of real estate loans available
for sale 4,902,538 2,426,939
Other operating income, net 5,089 2,570
Interest paid on interest-bearing liabilities (512,879) (427,195)
Operating and administrative expenses (220,318) (195,154)
Federal income taxes paid (50,500) (32,100)
------------ -----------
Net cash provided by (used in) operating activities 55,956 (451,772)
------------ -----------
INVESTING ACTIVITIES:
Net increase in term federal funds sold and securities
purchased under resale agreements (1,200) (15,400)
Proceeds from the sale of investment and mortgage-backed
securities available for sale 148,782 --
Maturities of interest-earning deposits 831 --
Purchases of investment securities held to maturity (6,641) (166,737)
Maturities and partial repayments of investment securities
held to maturity 49,363 227,318
Purchases of FHLB stock (7,909) --
Disbursements of real estate loans (2,002,041) (2,074,875)
Principal repayments of real estate loans, net 1,442,491 1,065,613
Principal repayments of mortgage-backed securities held to
maturity 579,067 235,110
Net increase in consumer and commercial loans (96,506) (39,005)
Proceeds from the disposition of real estate and other
repossessed assets 10,285 13,372
Capital expenditures, net (22,354) (8,153)
Net cash used to acquire Bell Bancorp, Inc. (341,794) --
Net cash used to acquire FSB Financial Corporation (23,423) --
------------ -----------
Net cash used in investing activities (271,049) (762,757)
------------ -----------
</TABLE>
<PAGE> 8
STANDARD FEDERAL BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
------------ ------------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts, excluding
sale of deposits (86,638) 1,018,526
Cash transferred to the acquiror of deposit liabilities -- (30,235)
Net increase in federal funds purchased and reverse
repurchase agreements 401,377 226,925
Proceeds from FHLB advances 725,000 140,000
Repayments of FHLB advances (956,010) (300,163)
Proceeds from other borrowings 100,000 --
Repayments of other borrowings (1,379) --
Net proceeds from the exercise of common stock options 6,634 3,661
Dividends paid to stockholders (18,129) (16,386)
Net change in retail transactions in process 83,712 (57,754)
Cash repurchase of stock (15,279) (9,937)
Restricted stock grants 17 --
Net receipts of advance payments by borrowers for taxes
and insurance 72,401 59,742
Net receipts (disbursements) of payments due on
participations sold (39,514) 27,064
------------ ------------
Net cash provided by financing activities 272,192 1,061,443
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 57,099 (153,086)
BEGINNING CASH AND CASH EQUIVALENTS 106,818 268,339
------------ ------------
ENDING CASH AND CASH EQUIVALENTS $163,917 $115,253
============ ============
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Net income $16,827 $88,306
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 11,329 10,370
Amortization of cost in excess of fair value of net
assets acquired 11,267 11,827
Cumulative effect of a change in accounting for goodwill 43,032 --
Provision for losses 2,184 564
Gain on the sale of branches -- (1,444)
Provision for deferred federal income taxes 6,113 3,282
Increase (Decrease) in federal income taxes payable, net (44,388) 14,309
Increase in investment and mortgage-backed securities
available for sale (94,682) --
(Increase) Decrease in loans receivable available for sale 58,950 (532,953)
Increase in accrued interest receivable (3,267) (10,805)
Increase (Decrease) in accrued interest payable (11,156) 16,539
Accretion of loan fees and other discounts and premiums,
net (5,267) (1,234)
Deferral of loan origination fees (costs), net 3,915 (12,138)
Net change in accrued and prepaid expenses 61,099 (38,395)
------------ ------------
Net cash provided by (used in) operating activities $55,956 ($451,772)
============ ============
</TABLE>
<PAGE> 9
STANDARD FEDERAL BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
------------ ------------
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Loans receivable transferred to real estate and other
repossessed assets $17,196 $7,051
Loans receivable exchanged for mortgage-backed securities $5,819,895 $2,749,642
</TABLE>
SUPPLEMENTAL SCHEDULE OF ACQUISITIONS:
The Company acquired Bell Bancorp, Inc., of Chicago, Illinois, on June 7, 1996
and FSB Financial Corporation of Kalamazoo, Michigan, on January 12, 1996.
<TABLE>
<CAPTION>
June 7, 1996
----------------------------
<S> <C> <C>
BELL BANCORP, INC., ACQUISITION:
Cash paid for common stock and stock options $355,006
Fair value of assets acquired $1,923,610
Fair value of liabilities assumed (1,644,204)
----------
Fair value of net assets acquired 279,406
--------
Core deposit premium and cost in excess of fair value of
net assets acquired $75,600
========
</TABLE>
<TABLE>
<CAPTION>
January 12, 1996
----------------------------
<S> <C> <C>
FSB FINANCIAL CORPORATION ACQUISITION:
Cash paid for common stock and stock options $24,726
Fair value of assets acquired $165,778
Fair value of liabilities assumed (147,073)
--------
Fair value of net assets acquired 18,705
------
Core deposit premium and cost in excess of fair value of
net assets acquired $6,021
======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 10
STANDARD FEDERAL BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE (1) - PRINCIPLES OF CONSOLIDATION
Standard Federal Bancorporation, Inc. (the "Company"), is the holding company
for Standard Federal Bank (the "Bank"). The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary, the Bank.
Significant intercompany balances and transactions have been eliminated.
NOTE (2) - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation. The results of operations for the three and
nine months ended September 30, 1996, are not necessarily indicative of the
results that may be expected for the entire year. The interim financial
information should be read in conjunction with the consolidated financial
statements and notes included in Appendix A of the 1995 Notice of Annual
Meeting and Proxy Statement of the Company. Certain reclassifications have
been made in the 1995 Consolidated Financial Statements and accompanying Notes
thereto, in order to conform with the 1996 presentation.
NOTE (3) - EARNINGS PER SHARE
Refer to Exhibit 11, on page 34, for the computations of primary and fully
diluted earnings per share.
NOTE (4) - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments and mortgage-backed securities ("MBS") are recorded at cost on
trade date. Discounts and premiums are amortized using the effective interest
method over the estimated lives of the assets. Investments and MBS determined
to be trading securities are reported at fair value with unrealized gains and
losses included in earnings. Investments and MBS which the Company has the
positive intent and ability to hold to maturity are reported at amortized cost.
All other investments and MBS are classified as available for sale, and are
reported at fair value with unrealized gains and losses reported in
stockholders' equity. Gain or loss on the sales of investments and MBS are
based on the specific identification method.
<PAGE> 11
STANDARD FEDERAL BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE (4) - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (CONTINUED)
Investment securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
-------------------- --------------------
Carrying Market Carrying Market
Value Value Value Value
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Investment securities held to maturity:
Collateralized mortgage obligations $296,940 $295,630 $ 25,642 $ 25,837
Investment-grade corporate debt securities 95 95 125 125
FHLB stock - at cost 112,058 112,058 102,427 102,427
Certificates of deposit -- -- 831 831
U.S. government and agency obligations 74,179 72,510 81,082 80,346
Other 1,387 1,158 1,638 1,369
-------- -------- -------- --------
Total $484,659 $481,451 $211,745 $210,935
======== ======== ======== ========
</TABLE>
The investment securities held to maturity portfolio reflects gross unrealized
gains of $1.3 million and gross unrealized losses of $4.5 million at September
30, 1996. The MBS held to maturity portfolio reflects gross unrealized gains
of $15.1 million and unrealized losses of $35.4 million at September 30, 1996.
NOTE (5) - LOANS RECEIVABLE
Loans receivable available for sale are carried at the lower of cost or market
determined on an aggregate basis. All loans held in portfolio are carried at
amortized cost. The Company has both the intent and the ability to hold all
loans in portfolio, for investment purposes, for the foreseeable future.
Discounts and premiums are amortized using the effective interest method over
the estimated lives of the assets.
As part of its management of assets and liabilities, the Company has sold
retail single-family loans, primarily all of which had been classified as
available for sale. In addition, through its wholesale mortgage banking
division, the Company routinely sells loans primarily to the secondary market
agencies. The Company has identified a population of loans as being available
for sale at September 30, 1996. The Company intends to sell all of this
portfolio, primarily during the fourth quarter of 1996. Gains or losses
resulting from the sale of loans are based on the specific identification
method and recorded on a settlement date basis, and reflect the extent that the
sales proceeds exceed the Company's investment in the loans.
Loans receivable available for sale are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
---------------------- ----------------------
Carrying Market Carrying Market
Value Value Value Value
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Loans receivable available for sale $843,866 $845,457 $902,816 $909,533
======== ======== ======== ========
</TABLE>
<PAGE> 12
STANDARD FEDERAL BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE (6) - LOAN ORIGINATION FEES
All loan origination fees and certain loan origination costs are deferred and
amortized as an adjustment of yield over the life of the loan using the
effective interest method. This method of amortization is based upon
contractual payment terms adjusted for actual prepayments. Unamortized net
deferred fees (costs) are taken into income, as a gain or a loss on the sale,
at the time of the loan sale in proportion to the percentage of the loan sold
or into interest income upon prepayment by the borrower.
NOTE (7) - ALLOWANCE FOR LOSSES
A provision for possible losses is charged to operations based on management's
evaluation of the potential losses in its various loan and investment
portfolios. The major factors considered in evaluating potential losses and
the adequacy of total allowances are historical charge-off experience,
delinquency, general economic conditions and the fair value of any related
collateral.
NOTE (8) - INTEREST RATE EXCHANGE AGREEMENTS
The Company utilizes interest rate exchange agreements ("swaps") to hedge
interest rate risk. Under the contractual terms of the swap outstanding at
September 30, 1996, the Company agreed to pay interest at a fixed rate of
12.81% on notional principal totaling $10.0 million, and to receive interest at
a variable rate of 5.66% determined by independent indices at September 30,
1996. This swap matures during November 1997. The Company is exposed to
credit loss in the unanticipated event of nonperformance by the counterparties
to the swap, primarily if the Company is in a net accrued interest receivable
position at the time of default by the counterparties. However, at September
30, 1996, the Company was in a net accrued interest payable position. Notional
principal amounts often are used to express the volume of these transactions,
but the amounts potentially subject to credit risk are much smaller.
NOTE (9) - PLEDGED ASSETS
At September 30, 1996, real estate loans totaling $2.8 billion, certain MBS
totaling $1.5 billion, investment securities totaling $4.3 million and the
Company's FHLB stock totaling $112.1 million were pledged to secure FHLB
advances, securities sold under agreements to repurchase, other long-term
borrowings and interest rate exchange agreements.
NOTE (10) - COMMITMENTS
At September 30, 1996, the Company had commitments to fund approximately $1.2
billion of mortgage loans and $15.6 million of consumer loans. The vast
majority of these commitments are expected to settle during the next four
months. Additionally, at September 30, 1996, the Company had firm forward
commitments to sell $1.0 billion of recently closed or committed single-family
loans. These sales, which will primarily occur during the fourth quarter of
1996, are not expected to produce any material gain or loss to the Company.
The Company's exposure to credit loss in the event of nonperformance by the
counterparty to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Company uses the same credit policies in making these commitments as those
involved in extending loans to customers.
<PAGE> 13
STANDARD FEDERAL BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE (10) - COMMITMENTS (CONTINUED)
At September 30, 1996, in addition to the firm forward commitments discussed in
the preceding paragraph, the Bank also had options to sell $300.0 million of
securitized, single-family loans. The cost of these options, which expire in
the fourth quarter of 1996, was $401,000 and will become an adjustment to the
basis of the loans sold if the options are exercised or will be expensed if
unexercised.
Total commercial and other standby letters of credit amounting to $13.3 million
were issued and outstanding at September 30, 1996. Unused lines of credit
provided to consumers (generally, open-ended lines of credit which are funded
on demand) totaled $870.0 million at September 30, 1996. Unused lines of
credit provided to commercial customers (generally, open-ended lines of credit
which are funded on demand) totaled $101.3 million at September 30, 1996.
NOTE (11) - MORTGAGE SERVICING RIGHTS
Mortgage servicing rights ("MSR") represent the cost of acquiring the right to
service mortgage loans. These costs are initially capitalized and subsequently
amortized in proportion to, and over the period of, estimated net loan
servicing income. The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights ("SFAS 122")" during May 1995. SFAS 122 requires that a
mortgage banking enterprise recognize as separate assets rights to service
mortgage loans for others that have been acquired through either the purchase
or origination of a loan. A mortgage banking enterprise that sells or
securitizes those loans with servicing rights retained must allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans based
on their relative fair values. Additionally, SFAS 122 requires that MSR be
reported at the lower of cost or fair value. The carrying value of MSR is
included in the caption entitled "Other Assets" in the Consolidated Statement
of Financial Condition. The Company adopted SFAS 122 during May 1995,
effective as of January 1, 1995. The on-going impact of SFAS 122 is dependent
upon, among other things, the volume of loan originations, the general levels
of market interest rates and the rate of estimated loan prepayments.
The activity of capitalized MSR is summarized below:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Beginning balance $97,555 $59,134
Additions through wholesale mortgage banking operations 72,121 41,593
Additions through retail lending operations 13,818 4,003
Value of MSR acquired through mergers 432 --
Valuation allowance adjustment due to change in fair
value of MSRs 795 --
Sales of MSR (1) (48,776) (6,754)
Amortization (14,392) (5,462)
-------- -------
Ending balance $121,553 $92,514
======== =======
</TABLE>
(1) The Company sold servicing rights relating to $3.6 billion and $467.4
million of loans serviced for the benefit of others during the first nine
months of 1996 and 1995, respectively.
<PAGE> 14
STANDARD FEDERAL BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE (11) - MORTGAGE SERVICING RIGHTS (CONTINUED)
The fair value of capitalized MSR is calculated, on a disaggregated basis, by
discounting estimated expected future cash flows using a discount rate
commensurate with the risk involved. The aggregate fair value of the Company's
MSR that is subject to the provisions of SFAS 122 totaled approximately $140.5
million at September 30, 1996. In applying this valuation method, the Company
used assumptions that market participants would use in estimating future net
servicing income which included estimates of the cost of servicing per loan,
the discount rate, float value, inflation rate, ancillary income per loan,
prepayment speeds and default rates. The Company conducts its periodic
impairment analyses using a disaggregated method, based on the underlying
loans' interest rates and loan types.
The activity in the impairment-based valuation allowance for capitalized MSR is
summarized below:
<TABLE>
<CAPTION>
Nine Months Ended
Description September 30, 1996
-------------------------------------------------- ------------------
<S> <C>
Beginning balance $6,600
Decrease related to the sales of MSR (2,805)
Decrease related to a change in fair value of MSR (795)
------
Ending balance $3,000
======
</TABLE>
The Company did not have an impairment-based valuation allowance during the
nine months ended September 30, 1995.
NOTE (12) - COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED
Since 1980, the Company has expanded its branch network geographically by
merging with 19 savings institutions and purchasing three branches from other
savings institutions. All but one of these acquisitions were accounted for
using the purchase method of accounting. Under the purchase method of
accounting, the Company's Consolidated Statements of Income reflect the income
of the acquired institutions only since the respective dates of acquisition.
In addition, all assets acquired and liabilities assumed are adjusted to fair
value as of the dates of acquisition. Goodwill and other intangible assets are
reviewed for possible impairment when events or changed circumstances may
affect the underlying basis of the assets.
During the third quarter of 1996, the Company adopted the FASB's Statement of
Financial Accounting Standards No. 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions" ("SFAS 72"), retroactive to January 1, 1996,
for three regulatory-assisted acquisitions completed by the Bank during the
period 1980-1982, prior to the FASB's issuance of SFAS 72. In conjunction with
this SFAS 72 adoption, the provisions of which prescribe an accelerated
amortization method over shorter-time periods, the Company reduced the carrying
value of its cost in excess of fair value of net assets acquired ("goodwill")
by $43.0 million. The Consolidated Financial Statements presented in this Form
10-Q reflect the effects of the goodwill write-off and adjusted goodwill
amortization, on its previously reported results of operations and financial
condition for the first and second quarters of 1996.
<PAGE> 15
STANDARD FEDERAL BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE (13) - COMPLETED ACQUISITIONS
On June 7, 1996, the Company completed its acquisition of Bell Bancorp, Inc.
("Bell"). The purchase price, including payments made with respect to
outstanding stock options, amounted to $355.0 million. Bell, through its
principal operating subsidiary, Bell Federal Savings and Loan Association,
operated 14 full-service branch offices in the greater Chicago, Illinois,
market. Bell had total assets of $1.9 billion and deposits of $1.6 billion at
the date of acquisition.
On January 12, 1996, the Company completed its acquisition of FSB Financial
Corporation ("FSB"). The purchase price, including payments made with respect
to outstanding stock options, amounted to $24.7 million. FSB, through its
principal operating subsidiary, Fidelity Savings Bank, operated four
full-service branch offices within the Company's operating area in Kalamazoo,
Michigan. FSB had total assets of $163.3 million and deposits of $122.8
million at the date of acquisition.
NOTE (14) - ACCOUNTING AND REPORTING DEVELOPMENTS
During March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"). This Statement requires that
long-lived assets, goodwill related to those assets to be held and used by an
entity and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The Company adopted SFAS 121 effective January
1, 1996. Adoption of this Statement has not had, nor is expected to have, a
material impact on the financial condition or results of operations of the
Company.
During June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"). This Statement, among other
things, applies a "financial-components approach" that focuses on control,
whereby an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes assets when control has been
surrendered, and derecognizes liabilities when extinguished. This Statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. The Company plans
to adopt SFAS 125 on January 1, 1997. Adoption of this Statement is not
expected to have a material impact on the financial condition or results of
operations of the Company.
<PAGE> 16
STANDARD FEDERAL BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE (15) - HOLDING COMPANY ONLY STATEMENT OF FINANCIAL CONDITION
The following is an unconsolidated Statement of Financial Condition for
Standard Federal Bancorporation, Inc. as of September 30, 1996.
STATEMENT OF FINANCIAL CONDITION
(In thousands)
<TABLE>
<CAPTION>
September 30, 1996
------------------
<S> <C>
ASSETS:
Cash $ 79
Investment securities 1,200
Loan receivable-subsidiary 60,000
Accrued interest receivable 275
Accounts receivable - subsidiary 661
Investment in subsidiary 934,626
Federal income tax benefit 921
----------
Total assets $997,762
==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Medium-term subordinated notes $ 98,621
Accrued interest payable 1,615
Accounts payable - subsidiary 340
Other liabilities 1,483
----------
Total liabilities $102,059
==========
STOCKHOLDERS' EQUITY:
Serial preferred stock, no par value per share, 50,000,000 shares
authorized, none issued $ --
Common stock, no par value per share; 150,000,000 shares
authorized, 31,192,373 shares issued and outstanding at
September 30, 1996 223,356
Restricted stock grant, net (99)
Retained earnings, partially restricted 662,354
Unrealized net income from subsidiary 10,092
----------
Total stockholders' equity 895,703
----------
Total liabilities and stockholders' equity $997,762
==========
</TABLE>
<PAGE> 17
Deloitte & Touche LLP Letterhead
INDEPENDENT ACCOUNTANTS' REPORT
Standard Federal Bancorporation, Inc.:
We have reviewed the accompanying consolidated statements of financial
condition of Standard Federal Bancorporation, Inc. (the "Company") as of
September 30, 1996 and 1995, the related consolidated statements of income for
the three and nine months ended September 30, 1996 and 1995, and the
consolidated statements of cash flows for the nine months ended September 30,
1996 and 1995. These consolidated financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the consolidated financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial condition of Standard
Federal Bancorporation, Inc. as of December 31, 1995, and the related
consolidated statements of income, cash flows and stockholders' equity for the
year then ended (not presented herein); and in our report dated January 18,
1996 we expressed an unqualified opinion on those consolidated financial
statements.
/s/Deloitte & Touche LLP
October 17, 1996
Detroit, Michigan
<PAGE> 18
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL CONDITION
The primary operating objective of Standard Federal Bancorporation, Inc. (the
"Company"), and its wholly owned subsidiary Standard Federal Bank (the "Bank")
is to maximize net interest income over the long term, while taking into
consideration both credit risk and interest rate risk. In pursuit of this
objective, the Company follows the strategy of acquiring assets for investment
purposes and retaining portions of its loan production. The Company attempts
to achieve reasonable spreads through matching such assets with deposits and a
number of other funding sources. The Company has never made any foreign loans,
nor does it participate as an investor in high-yield financing, highly
leveraged transactions or non-investment grade securities.
As part of its strategy for the management of assets and liabilities, the
Company has, from time to time, sold retail single-family loans, primarily all
of which had been classified as available for sale. In addition, the Company's
wholesale mortgage-banking division routinely sells wholesale loans primarily
to the secondary market agencies. At September 30, 1996, the Company had
identified $843.9 million of single-family loans as available for sale. These
loans, the vast majority of which were acquired by the Company's wholesale
mortgage-banking division, are recorded at the lower of cost or market. While
the Company intends to sell all of this portfolio, the level of gains or
losses, if any, to be recognized in subsequent periods is anticipated to be
insignificant.
The Company's total mortgage-backed securities ("MBS") portfolio, including MBS
held for trading and available for sale, decreased by $187.8 million during the
first nine months of 1996, (net of $91.0 million of MBS the Company acquired
from the Bell Bancorp, Inc. ("Bell") acquisition) due to principal repayments
and sales of certain MBS which had been classified as either held for trading
or available for sale as of December 31, 1995.
During the first nine months of 1996, loans receivable (including loans
available for sale), net of sales and repayments, increased $1.8 billion, or
20%, due primarily to the $1.3 billion of loans added from the Bell
acquisition. During the first nine months of 1996, the Company originated $7.9
billion of single-family home mortgage loans, compared to $5.1 billion during
the same period last year. The Bank sold/securitized $6.1 billion of mortgage
loans and received $1.5 billion in net mortgage loan repayments during the
nine-month period ended September 30, 1996.
The Company's total investment securities portfolio increased by $306.5
million, net of repayments, during the first nine months of 1996. This
increase due primarily to the Bell acquisition.
The Company's cost in excess of fair value of net assets acquired ("goodwill")
decreased by $30.9 million for the nine months ended September 30, 1996. The
Company implemented a change in accounting principles relating to goodwill
arising from its regulatory-assisted acquisitions of three financial
institutions in the early 1980s. Generally accepted accounting principles
allow the Company to adopt Statement of Financial Accounting Standards No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions" ("SFAS
No. 72") as of January 1, 1996. Accordingly, the remaining goodwill associated
with these acquisitions, which aggregated to $43.0 million as of January 1,
1996, was written- off as a non-cash charge to earnings. The Company also
recorded $75.6 million of goodwill relating to its acquisition of Bell on June
7, 1996, and $6.0 million of goodwill relating to its acquisition of FSB
Financial Corporation ("FSB") on January 12, 1996.
<PAGE> 19
FINANCIAL CONDITION (CONTINUED)
The Company's capitalized mortgage servicing rights ("MSR") increased by $24.0
million during the first nine months of 1996. This increase is primarily
attributable to the recognition of MSR from the Company's on-going mortgage
banking activities. As presented in Footnote (11) of the Notes to Consolidated
Financial Statements, the Company capitalized $85.9 million of MSR during the
nine months ended September 30, 1996, amortized $14.4 million of MSR and sold
$3.6 billion of loans serviced for the benefit of others with $48.8 million of
associated MSR.
During the first nine months of 1996, deposits increased $1.6 billion, or 18%.
This increase in deposits is attributable to the $1.6 billion of deposits
acquired in the merger with Bell Bancorp, Inc. on June 7, 1996.
From time to time, the Bank uses Federal Home Loan Bank ("FHLB") advances as a
source of longer-term, fixed-rate funds for purposes of investing in loans and
mortgage-backed securities. During the first nine months of 1996, the Bank
decreased its level of FHLB advances by $202.2 million, net.
During the first nine months of 1996, securities sold under agreements to
repurchase increased by $401.4 million. The Company uses either this funding
source or FHLB advances depending on its overall asset/liability position and
related interest rate risk management objectives. Recent borrowings under
reverse repurchase agreements have included longer-term borrowings with
maturities of up to three years.
The Company completed a $100.0 million medium-term, fixed-rate, subordinated
note offering during July 1996. The Company used $30.0 million of these funds
to repay a short-term demand note which was outstanding during June 1996. The
Company also loaned $60.0 million of these funds to the Bank during July 1996.
The remainder of the proceeds from the debt offering will be used for general
corporate purposes, which may include continuation of the Company's previously
announced share repurchase program. During 1995, the Company's Board of
Directors approved the repurchase of up to 5% of the Company's outstanding
common stock. Approximately 3% of the Company's common stock has been
repurchased to date.
Advance payments by borrowers for taxes and insurance ("escrow") increased
$79.1 million during the first nine months of 1996 due to the continued growth
in the Company's loan portfolio. Additionally, escrow balances accumulate
throughout each calendar year but decrease significantly, primarily in August
and December, due to semiannual property tax payments.
The Company's other liabilities increased $88.2 million in the nine months
ended September 30, 1996. This increase is primarily attributable to the
accrual of the Company's portion of the industry-wide FDIC special assessment
of $67.3 million, which will be remitted to the FDIC during the fourth quarter
of 1996. Refer to the "Other Expenses" section of this Form 10-Q on page 28
for further discussion of this one-time assessment.
<PAGE> 20
FINANCIAL CONDITION (CONTINUED)
Table 1 below presents the Bank's position relative to the three current
regulatory capital requirements. The Bank meets all of the capital
requirements mandated by the Office of Thrift Supervision (the "OTS") at
September 30, 1996.
TABLE 1
SUMMARY OF CAPITAL REQUIREMENTS - STANDARD FEDERAL BANK
SEPTEMBER 30, 1996
(In thousands)
<TABLE>
<CAPTION>
Stated Required
Capital Capital Excess
Stated As a % of Required As a % of Excess Capital
Capital Assets(1) Capital Assets(1) Capital Percentage
------- --------- ------- --------- ------- ----------
<S> <C> <C> <C> <C> <C>
Total stockholders' equity $934,626 6.09%
Adjustments for tangible, core
and total capital:
Goodwill, net of deferred tax
liability on core deposit
premium (140,901)
Core deposit premium (16,377)
Valuation adjustment for
mortgage servicing rights (11,816)
Unrealized net gain on mortgage-
backed securities available for
sale (10,092)
Investments in non-includable
subsidiaries (4,922)
--------
Total tangible capital 750,518 4.95% $227,492 1.50% $523,026 3.45%
Qualifying core deposit premium 16,377
--------
Total core capital 766,895 5.05% $455,475 3.00% $311,420 2.05%
(Tier 1 capital)
General allowance for loan
losses 45,416
--------
Total capital (risk based) $812,311 10.67% $608,823 8.00% $203,488 2.67%
========
</TABLE>
1) The regulatory capital requirements are calculated as a percentage of
adjusted assets, as defined by OTS regulation.
<PAGE> 21
FINANCIAL CONDITION (CONTINUED)
Pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of
1989, the OTS has prescribed three separate minimum capital-to-assets
requirements which must be met by the Bank: (1) a risk-based capital
requirement that "total capital" be at least equal to 8% of "risk-weighted
assets"; (2) a tangible capital requirement that "tangible capital" be at least
equal to 1.5% of "adjusted total assets"; and (3) a leverage ratio requirement
that "core capital" be at least equal to 3.0% of "adjusted total assets."
Capital standards for thrift institutions must be "no less stringent" than
those applicable to national banks. The capital standards applicable to
national banks require a leverage ratio equal to 4% of adjusted assets in order
for an entity to be categorized as at least being adequately capitalized. As
such, the OTS' general minimum requirement of core capital at least equal to 3%
of adjusted total assets, as presented in Table 1 herein, may be applicable
only to those institutions that received a composite rating of one, which is
the highest rating under the "CAMEL" rating system for financial institutions,
and those which are, in general, considered strong organizations having
well-diversified risks, including no undue interest rate risk exposure,
excellent control systems, good earnings, high asset quality and liquidity and
well managed on- and off-balance sheet assets. All other thrift institutions
must maintain core capital of 3% plus an additional 1% to 2%, as established by
the OTS on a case-by-case basis. Therefore, Standard Federal Bank believes
that it may be required to maintain core capital of at least 4% of adjusted
total assets.
The various federal banking agencies have formally implemented the Prompt
Corrective Action ("PCA") provisions contained in the Federal Deposit Insurance
Corporation Improvement Act of 1991. The specified capital categories and
management's calculations of the Bank's ratios at September 30, 1996, are
summarized as follows:
<TABLE>
<CAPTION>
Tangible Total Tier 1 Tier 1
Capital Risk-based Risk-based Leverage
Capital Category Ratio Ratio Ratio (1) Ratio
- - ---------------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Well-capitalized N/A >10% >6% >5%
- - -
Adequately capitalized N/A >8% >4% >4%
- - -
Undercapitalized N/A <8% <4% <4%
Significantly undercapitalized N/A <6% <3% <3%
Critically undercapitalized <2% N/A N/A N/A
-
Standard Federal Bank at
- - ------------------------
September 30, 1996:
-------------------
Stated capital (in thousands) $750,518 $812,311 $766,895 $766,895
======== ======== ======== ========
As a percentage of adjusted assets 4.95% 10.67% 10.14% 5.05%
======== ======== ======== ========
</TABLE>
(1) The Tier 1 Risk-based ratio is defined as total core capital (Tier 1
capital) divided by risk-adjusted assets minus general allowances
for losses.
N/A - Not Applicable
Notwithstanding the above ratios, the OTS may deem a financial institution to
be classified one category lower than the above guidelines would otherwise
indicate. The Bank was categorized for purposes of PCA as a well-capitalized
institution by the OTS as of their completion of the Bank's 1995 Safety and
Soundness Examination and the Company's management believes the Bank remains so
categorized at September 30, 1996.
<PAGE> 22
FINANCIAL CONDITION (CONTINUED)
As a function of its regulatory oversight efforts, the OTS has also defined an
interest rate risk ("IRR") component. Initially proposed as an additional
component of risk-based capital requirements, it is now likely that the IRR
component will be used by the OTS only as a supervisory tool. The results
derived from the OTS' IRR model indicate that the Bank was exposed to IRR at a
level higher than the regulatory benchmark. The Bank's September 30, 1996 IRR
component was $73.6 million; such amount equaling the Bank's IRR component as
of June 30, 1996, the most recent date for which data is available. Because
the Bank had $203.5 million of excess risk-based capital as of September 30,
1996, this IRR component will neither affect the Bank's continued compliance
with applicable regulatory capital requirements, nor will it likely result in
any increased regulatory oversight.
RESULTS OF OPERATIONS
A one-time, industry wide assessment, mandated by federal law, the Bank's
portion of which totaled $43.8 million after taxes, for the recapitalization of
the Savings Association Insurance Fund (the "SAIF") of the Federal Deposit
Insurance Corporation ("FDIC") directly contributed to the Company's third
quarter 1996 reported loss of $8.3 million, or $0.26 per share. Excluding the
one-time charge, the Company's net earnings would have totaled $35.4 million,
or $1.11 per share, during the three months ended September 30, 1996,
representing an adjusted annualized ROA of 0.92% and an adjusted annualized ROE
of 14.61%. This adjusted earnings performance represents an increase of 16%
when compared to the $30.6 million, or $0.94 per share, recorded during the
same period in 1995 (ROA of 0.93% and ROE of 14.10%). The third quarter
results brought earnings for the nine months ended September 30, 1996, to $16.8
million, or $0.52 per share. The nine-month net earnings for 1996 also reflect
the effects of a change in accounting for goodwill previously discussed in this
Form 10-Q, which resulted in a reduction of $43.0 million in unamortized
goodwill, which was made retroactive to January 1, 1996. For the nine-month
period, net operating earnings excluding the SAIF assessment and the goodwill
write-off were $103.6 million, or $3.23 per share, a 17% increase over net
income of $88.3 million, or $2.73 per share, reported for the first nine months
of 1995.
NET INTEREST INCOME
Net interest income increased 26% and 19% during the third quarter and first
nine months of 1996, totaling $101.9 million and $284.8 million, compared to
$80.7 million and $238.9 million recorded in the same periods last year. The
Company's net interest margin was 2.82% and 2.81% of average earning assets
during the third quarter and first nine months of 1996, respectively, compared
to 2.60% and 2.66% during the same periods in 1995.
The Company's gradually improving net interest margin and a 13% increase in
total average earning assets ($13.5 billion during the nine months ended
September 1996, versus $12.0 billion during the nine months ended September of
1995) produced the increased level of net interest income noted above.
<PAGE> 23
NET INTEREST INCOME (CONTINUED)
Like most thrift institutions, the Company has generally recorded higher levels
of net interest income during relatively low and falling interest rate
environments and has generally experienced a declining net interest margin
during periods of relatively high and/or rising interest rate environments. In
order to moderate the impact of a rising interest rate environment on the
Company's operations, the Company's earning assets and interest-bearing
liabilities have been configured such that, at various time horizons,
differences between the amounts of assets and liabilities that either reprice
or mature are minimized to the extent possible. Any difference between the
amount of assets and liabilities repricing within one year is referred to as
the "one-year-repricing gap." At September 30, 1996, the Company had $76.5
million more in liabilities expected to mature or reprice within one year than
assets. This $76.5 million "negative" repricing gap represented -0.50% of
total assets at September 30, 1996, compared to a "positive" one-year repricing
gap of $22.7 million, representing +0.17% of total assets at December 31, 1995.
While gap analysis is the most commonly used indicator of interest rate risk in
the thrift industry, there is no single interest rate risk measurement system
that takes into consideration all of the factors which influence the net
interest margin. Other significant factors which impact reported net margins
include changes in the shape of the U.S. Treasury yield curve, the volume and
composition of loan originations and repayment rates on fixed-rate loans.
The table on the following page presents interest income from average earning
assets, expressed in dollars and yields, and interest expense on average
interest-bearing liabilities, expressed in dollars and rates. Interest income
from earning assets includes the accretion/amortization of unearned
discounts/premiums and the accretion of net deferred loan origination fees.
The yields earned on mortgage-backed and investment securities available for
sale are based on historical, amortized cost balances. Interest expense on
interest-bearing liabilities includes the impact of interest rate exchange
agreements (see Note 8 of Notes to Consolidated Financial Statements), and the
accretion/amortization of unearned purchase accounting discounts/premiums.
<PAGE> 24
NET INTEREST INCOME (CONTINUED)
TABLE 2
AVERAGE YIELDS EARNED AND RATES PAID
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------------------
1996 1995
-------------------------- ----------------------------
Average Yield/ Average Yield/
(In millions) Balance Interest Rate Balance Interest Rate
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Real estate loans $10,029.1 $188.6 7.52% $8,748.2 $164.5 7.52%
Consumer loans 629.6 16.3 10.29 539.0 14.8 10.93
Commercial loans 173.8 3.7 8.60 121.3 2.9 9.46
--------- ------ ----- --------- ------ -----
Total loans 10,832.5 208.6 7.70 9,408.5 182.2 7.74
Mortgage-backed securities
available for sale 651.0 13.7 8.61 18.8 0.4 7.63
Mortgage-backed securities 2,400.7 42.1 7.01 2,841.4 51.4 7.24
Investment securities
available for sale 3.7 0.1 6.75 -- -- --
Investment securities 558.2 9.2 6.59 328.5 5.3 6.43
--------- ------ ----- --------- ------ -----
Total earning assets $14,446.1 $273.7 7.57% $12,597.2 $239.3 7.60%
========= ====== ===== ========= ====== =====
Other assets 857.4 614.7
--------- ---------
Total assets $15,303.5 $13,211.9
========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Deposits $10,784.0 $125.4 4.63% $8,902.2 $110.8 4.94%
FHLB advances and other
long-term borrowings 1,914.5 29.0 6.03 1,944.0 31.1 6.26
Federal funds purchased and
reverse repurchase
agreements 1,110.9 17.4 6.23 997.7 16.7 6.69
--------- ------ ----- --------- ------ -----
Total interest-bearing
liabilities $13,809.4 $171.8 4.94% $11,843.9 $158.6 5.30%
========= ====== ===== ========= ====== =====
Other liabilities 578.1 499.8
Stockholders' equity 916.0 868.2
--------- ---------
Total liabilities and
stockholders' equity $15,303.5 $13,211.9
========= =========
EXCESS OF AVERAGE EARNING ASSETS
OVER AVERAGE INTEREST-BEARING
LIABILITIES $636.7 $753.3
========= =========
INTEREST RATE SPREAD 2.63% 2.30%
===== =====
INTEREST INCOME/EARNING ASSETS $273.7 7.76% $239.3 7.60%
INTEREST EXPENSE/EARNING ASSETS 171.8 4.94 158.6 5.00
------ ----- ------ -----
NET INTEREST MARGIN $101.9 2.82% $80.7 2.60%
====== ===== ====== =====
</TABLE>
<PAGE> 25
NET INTEREST INCOME (CONTINUED)
TABLE 2 (CONTINUED)
AVERAGE YIELDS EARNED AND RATES PAID
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1996
------------------------------------------------------------
1996 1995
-------------------------- ----------------------------
Average Yield/ Average Yield/
(In millions) Balance Interest Rate Balance Interest Rate
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Real estate loans $9,220.1 $516.4 7.47% $8,352.0 $469.1 7.49%
Consumer loans 590.0 46.3 10.49 516.6 42.2 10.93
Commercial loans 154.4 10.1 8.73 121.7 8.7 9.55
--------- ------ ----- --------- ------ -----
Total loans 9,964.5 572.8 7.67 8,990.3 520.0 7.71
Mortgage-backed securities
available for sale 655.3 42.4 8.63 7.5 0.4 7.63
Mortgage-backed securities 2,448.6 129.0 7.02 2,633.3 142.5 7.22
Investment securities
available for sale 4.0 0.2 6.75 -- -- --
Investment securities 462.5 21.1 6.08% 394.6 19.6 6.58
--------- ------ ----- --------- ------ -----
Total earning assets $13,534.9 $765.5 7.54% $12,025.7 $682.5 7.57%
========= ====== ===== ========= ====== =====
Other assets 682.0 655.1
--------- ---------
Total assets $14,216.9 $12,680.8
========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Deposits $9,995.1 $350.1 4.68% $8,525.0 $305.7 4.79%
FHLB advances and other
long-term borrowings 1,917.4 86.5 6.02 1,981.1 93.5 6.23
Federal funds purchased and
reverse repurchase
agreements 915.3 44.1 6.44 882.0 44.4 6.70
--------- ------ ----- --------- ------ -----
Total interest-bearing
liabilities $12,827.8 $480.7 5.00% $11,388.1 $443.6 5.19%
========= ====== ===== ========= ====== =====
Other liabilities 488.3 446.5
Stockholders' equity 900.8 846.2
--------- ---------
Total liabilities and
stockholders' equity $14,216.9 $12,680.8
========= =========
EXCESS OF AVERAGE EARNING ASSETS
OVER AVERAGE INTEREST-BEARING
LIABILITIES $707.1 $637.6
========= =========
INTEREST RATE SPREAD 2.54% 2.38%
===== =====
INTEREST INCOME/EARNING ASSETS $765.5 7.81% $682.5 7.57%
INTEREST EXPENSE/EARNING ASSETS 480.7 5.00 443.6 4.91
------ ----- ------ -----
NET INTEREST MARGIN $284.8 2.81% $238.9 2.66%
====== ===== ====== =====
</TABLE>
<PAGE> 26
NET INTEREST INCOME (CONTINUED)
The following table presents the dollar amount of changes in interest income
and interest expense for major components of earning assets and
interest-bearing liabilities which are presented in Table 2 herein. The table
distinguishes between the changes related to average outstanding balances
(changes in volume while holding the initial rate constant) and the changes
related to average interest rates (changes in average rates while holding the
initial balance constant). Changes attributable to both volume and rates have
been allocated proportionately.
<TABLE>
<CAPTION>
TABLE 3
RATE/VOLUME ANALYSIS Three Months Ended Nine Months Ended
September 30, September 30,
1996 Versus 1995 1996 Versus 1995
--------------------------- ---------------------------
Increase (Decrease) Due To: Increase (Decrease) Due To:
Volume Rate Total Volume Rate Total
--------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
(In millions)
EARNING ASSETS:
Real estate loans $24.1 -- $24.1 $48.6 ($1.3) $47.3
Consumer loans 2.4 (0.9) 1.5 5.8 (1.7) 4.1
Commercial loans 1.1 (0.3) 0.8 2.1 (0.7) 1.4
----- ----- ----- ----- ----- -----
Total loans 27.6 (1.2) 26.4 56.5 (3.7) 52.8
Mortgage-backed securities 3.4 0.6 4.0 25.6 2.9 28.5
Investment securities 3.9 0.1 4.0 3.3 (1.6) 1.7
----- ----- ----- ----- ----- -----
Total $34.9 ($0.5) $34.4 $85.4 ($2.4) $83.0
===== ===== ===== ===== ===== =====
INTEREST-BEARING LIABILITIES:
Deposits $21.9 ($7.3) $14.6 $51.6 (7.2) $44.4
FHLB advances and other
long-term borrowings (0.7) (1.4) (2.1) (3.4) (3.6) (7.0)
Federal funds purchased and
reverse repurchase
agreements 1.8 (1.1) 0.7 1.5 (1.8) (0.3)
----- ----- ----- ----- ------ -----
Total $23.0 ($9.8) $13.2 $49.7 ($12.6) $37.1
===== ===== ===== ===== ====== =====
NET INTEREST INCOME $11.9 $9.3 $21.2 $35.7 $10.2 $45.9
===== ===== ===== ===== ====== =====
</TABLE>
<PAGE> 27
NET INTEREST INCOME (CONTINUED)
The following tables sets forth the one-year and total repricing of the
Company's earning assets and interest-bearing liabilities at September 30,
1996, based upon a flat interest rate scenario. The principal amounts of each
asset and liability are shown in the period in which they are anticipated to
mature or reprice. The rates indicated represent the effective yield or cost,
on a bond equivalent basis, on the principal balances. Passbook savings,
transaction accounts and money market deposit accounts have been included in
the various date categories based on the Company's actual current withdrawal
experience. The decay rates used were 14% for passbook accounts, 17% for
transaction accounts and 31% for money market deposit accounts.
TABLE 4
ASSET/LIABILITY REPRICING SCHEDULE
<TABLE>
<CAPTION>
MATURING/REPRICING IN:
September 30, 1996 1-3 3-6 6-12 TOTAL
(IN MILLIONS) 1 MONTH MONTHS MONTHS MONTHS 1 YEAR
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
EARNING ASSETS:
Investment securities $200 $76 $20 $29 $325
Mortgage-backed securities 283 118 174 340 915
Loans Receivable
Real Estate:
Adjustable-rate 342 685 1,027 2,056 4,110
Fixed-rate 504 368 183 347 1,402
Commercial and Consumer 57 501 54 34 646
------ ------ ------ ------ ------
Total $1,386 $1,748 $1,458 $2,806 $7,398
====== ====== ====== ====== ======
INTEREST-BEARING LIABILITIES:
Deposits:
NOW, checking, money market
checking, and passbook
savings $25 $49 $74 $148 $296
Money market deposits 52 104 156 312 624
Certificates:
Under $100,000 398 541 1,197 1,867 4,003
Over $100,000 645 510 148 248 1,551
------ ------ ------ ------ ------
Subtotal 1,120 1,204 1,575 2,575 $6,474
------ ------ ------ ------ ------
BORROWINGS:
FHLB advances and other
long-term borrowings -- 17 201 12 230
Federal funds purchased and
reverse repurchase
agreements 606 -- 175 -- 781
------ ------ ------ ------ ------
Subtotal 606 17 376 12 1,011
------ ------ ------ ------ ------
Impact of interest rate swaps -- (10) -- -- (10)
------ ------ ------ ------ ------
Total $1,726 $1,211 $1,951 $2,587 $7,475
====== ====== ====== ====== ======
Excess (Deficiency) of
earning assets over (to)
interest-bearing liabilities ($340) $537 ($493) $219 ($77)
====== ====== ====== ====== ======
</TABLE>
<PAGE> 28
NET INTEREST INCOME (CONTINUED)
TABLE 4 (CONTINUED)
ASSET/LIABILITY REPRICING SCHEDULE
<TABLE>
<CAPTION>
MATURING/REPRICING IN:
September 30, 1996 1-3 3-5 5-10
(In millions) 1 YEAR YEARS YEARS YEARS THEREAFTER TOTAL RATE
------ ----- ----- ----- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Investment securities $325 $166 $39 $4 $-- $534 6.98%
Mortgage-backed securities 915 525 667 489 406 3,002 7.27
Loans Receivable
Real Estate:
Adjustable-rate 4,110 -- -- -- -- 4,110 7.56
Fixed-rate 1,402 1,161 1,448 1,155 920 6,086 7.61
Commercial and Consumer 646 69 62 48 8 833 9.97
------ ------ ------ ------ ------ ------- -----
Total $7,398 $1,921 $2,216 $1,696 $1,334 $14,565 7.64
====== ====== ====== ====== ====== ======= =====
INTEREST-BEARING LIABILITIES:
Deposits:
NOW, checking, money market
checking, and passbook
savings $296 $465 $332 $472 $372 $1,937 1.78%
Money market deposits 624 725 345 264 49 2,007 4.14
Certificates:
Under $100,000 4,003 808 184 239 -- 5,234 5.65
Over $100,000 1,551 43 4 10 -- 1,608 5.46
------ ------ ------ ------ ------ ------- -----
Subtotal 6,474 2,041 865 985 421 10,786 4.65
------ ------ ------ ------ ------ ------- -----
BORROWINGS:
FHLB advances and other
long-term borrowings 230 1,514 15 111 -- 1,870 6.04
Federal funds purchased and
reverse repurchase
agreements 781 465 -- -- -- 1,246 6.08
------ ------ ------ ------ ------ ------- -----
Subtotal 1,011 1,979 15 111 -- 3,116 6.06
------ ------ ------ ------ ------ ------- -----
Impact of interest rate swaps (10) 10 -- -- -- -- 7.15
------ ------ ------ ------ ------ ------- -----
Total $7,475 $4,030 $880 $1,096 $421 $13,902 4.97%
====== ====== ====== ====== ====== ======= =====
Interest rate spread 2.67%
=====
Excess (Deficiency) of
earning assets over (to)
interest-bearing liabilities ($77) ($2,109) $1,336 $600 $913 $663 (1)
====== ======= ====== ====== ====== =======
</TABLE>
(1) The excess of $663 million noted above has the effect of increasing
the indicated spread by 0.20%.
<PAGE> 29
NONPERFORMING ASSETS - PROVISION FOR LOSSES
A very high percentage of the Company's assets are secured by first mortgages
on single-family homes which have historically resulted in low exposure to loss
for the Company. An important measure of asset quality in the financial
services industry is the ratio of nonperforming assets to total assets. At
both September 30, 1996, and December 31, 1995, the Company's nonperforming
asset ratios were significantly below the industry average. The Company's
management believes that the allowance for losses is adequate to cover
currently estimated losses in the various portfolios.
The Company's nonperforming assets are summarized in Table 5 below:
TABLE 5
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
(In thousands)
<S> <C> <C>
Nonaccrual loans $31,886 $13,643
Past due loans 39,202 24,242
Renegotiated loans 8,965 9,236
------- -------
Total nonperforming loans 80,053 47,121
Real estate and other repossessed assets ("REO") 10,489 5,006
------- -------
Total nonperforming assets 90,542 52,127
Less allowance for losses (48,000) (35,400)
------- -------
Total nonperforming assets (net of allowances) $42,542 $16,727
======= =======
Ratio of nonperforming assets to total assets 0.59% 0.39%
======= =======
Ratio of nonperforming assets to total loans and REO 0.82% 0.56%
======= =======
Allowance coverage of nonperforming loans 59.96% 75.13%
======= =======
Ratio of allowances to total loans 0.43% 0.38%
======= =======
Ratio of allowances to total loans and REO 0.44% 0.39%
======= =======
</TABLE>
The activity in the allowance for losses on the Company's loan portfolios is
summarized in Table 6 below:
TABLE 6
ALLOWANCE FOR LOSSES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Beginning balance $48,600 $34,650 $35,400 $35,000
Provision for losses 1,042 909 2,184 564
Allowances of acquired institutions -- -- 12,764 --
Recoveries 1,165 653 2,051 2,949
Realized losses (2,807) (1,222) (4,399) (3,523)
------- ------- ------- -------
Ending balance $48,000 $34,990 $48,000 $34,990
======= ======= ======= =======
Ratio of net charge-offs to average
loans 0.01% 0.02% 0.03% 0.01%
======= ======= ======= =======
</TABLE>
During the first nine months of 1996, the Company's provision for losses
totalled $2.2 million. During this same time period, the Company's population
of nonperforming assets increased by $38.4 million, or 74%, while its
allowances for loan losses increased by 36%. This increase in both
nonperforming assets and allowance for losses is primarily attributable to the
Company's recent acquisition of Bell. The Company's nonperforming assets
remain well below industry averages.
<PAGE> 30
NON-INTEREST INCOME
During the three and nine months ended September 30, 1996, the Company earned
$2.5 million and $6.8 million in loan fees and charges, respectively, compared
to the $1.7 million and $5.0 million earned during the comparable periods in
1995. The increases of 44% and 36% resulted from the Company's expanding loan
portfolio during 1996.
During the three and nine months ended September 30, 1996, the Company earned
$7.7 million and $21.6 million in deposit-related fees and charges,
respectively, compared to the $6.5 million and $19.3 million earned during the
comparable periods in 1995. The increases of 18% and 12% resulted from the
Company's expanding retail customer deposit base and certain fee increases
implemented in early 1996.
Approximately $6.1 billion of the Company's recently acquired, single-family
loans were sold during the first nine months of 1996. Such sales occurred in
the normal course of business, and resulted in gains totaling approximately
$14.3 million, compared to $7.9 million in gains recorded on sales of $2.8
billion of single-family loans and certain mortgage loan servicing rights
during the same period in the prior year. The amount and timing of such gains
are subject to fluctuations based upon loan volume, the general levels of
interest rates and other factors.
The Company recorded net loan servicing fee income of $4.4 million and $10.7
million for the three and nine months ended September 30, 1996, respectively,
compared to income of $2.9 million and $10.6 million recorded during the
comparable periods in 1995. At September 30, 1996, loans serviced for the
benefit of others totaled $9.9 billion, compared to $8.5 billion at December
31, 1995, and $7.4 billion at September 30, 1995. The comparatively higher
levels of loan servicing income recorded during the three and nine months ended
September 30, 1996, was due to the higher amounts of loans serviced for others
during the current year, offset by slightly higher rate of MSR amortization in
the current year's comparatively lower interest rate environment, which has
produced higher levels of loan prepayments. While the Company normally records
higher levels of net interest income and stronger net interest margins during
relatively low and falling interest rate environments, a rapidly declining
interest rate environment may result in further acceleration in the rate of MSR
amortization with a corresponding negative effect on the Company's reported
earnings.
<PAGE> 31
OTHER EXPENSES
Table 7 below presents information concerning the Company's operating and
administrative expenses.
TABLE 7
OPERATING AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Change from Change from
Three Months Ended Prior Year: Nine Months Ended Prior Year:
September 30, Increase September 30, Increase
1996 1995 (Decrease) 1996 1995 (Decrease)
-------- -------- ------------ -------- -------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Compensation and benefits $36,459 $28,881 $7,578 $104,795 $82,006 $22,789
Occupancy and equipment 14,020 11,894 2,126 40,406 35,044 5,362
Federal insurance premium 6,690 4,928 1,762 17,920 14,333 3,587
General and administrative 8,815 6,328 2,487 23,784 16,696 7,088
Amortization of cost in
excess of fair value of
net assets acquired 4,681 3,954 727 11,267 11,827 (560)
Advertising 3,784 2,753 1,031 9,172 7,667 1,505
Other taxes 2,294 1,636 658 6,904 4,147 2,757
Other 439 2,177 (1,738) 3,901 4,531 (630)
-------- ------- ------- -------- -------- --------
Gross operating and
administrative expense
before the FDIC special
assessment 77,182 62,551 14,631 218,149 176,251 41,898
FDIC special assessment 67,311 -- 67,311 67,311 -- 67,311
-------- ------- ------- -------- -------- --------
Gross operating and
administrative expenses 144,493 62,551 81,942 285,460 176,251 109,209
Less: Capitalized direct
costs of loan originations (10,544) (12,768) 2,224 (38,424) (29,795) (8,629)
-------- ------- ------- -------- -------- --------
Total, net $133,949 $49,783 $84,166 $247,036 $146,456 $100,580
======== ======= ======= ======== ======== ========
Gross operating expense
ratio 60.29% 67.54% 62.75% 63.21%
======== ======= ======== ========
Net operating expense
ratio (1) 51.53% 49.49% 51.09% 48.28%
======== ======= ======== ========
</TABLE>
(1) Total net operating and administrative expenses (excluding amortization of
cost in excess of fair value of net assets acquired and the FDIC special
assessment) divided by the sum of net interest income and other recurring
income (primarily fees and charges). This ratio is often referred to as an
efficiency ratio.
The operating and administrative expenses of the Company totaled $133.9 million
and $247.0 million for the three and nine months ended September 30, 1996,
respectively. Included in the operating and administrative expenses for the
three and nine months ended September 30, 1996 is the payment of the $67.3
million FDIC special assessment. Net operating and administrative expenses
excluding this nonrecurring charge totaled $66.6 million and $179.7 million for
the three and nine months ended September 30, 1996, respectively, increases of
34% and 23% over the $49.8 million and $146.5 incurred during the same periods
in 1995. The sources of these increases are discussed in the following
paragraphs.
<PAGE> 32
OTHER EXPENSES (CONTINUED)
The Company's gross compensation and benefits expense, before the
capitalization of direct costs of loan originations, during the three and nine
months ended September 30, 1996, totaled $36.5 million and $104.8 million,
respectively, representing increases of 26% and 28% over the $28.9 million and
$82.0 recorded during the same periods in 1995. These increases are
attributable to greater staffing levels in the Company's wholesale lending
division, its new mutual fund and annuities sales program and its commercial
business lending function, as well as normal salary increases for the Bank's
workforce, greater use of temporary employment services and increased overtime
and commission expenses related to the record loan production during these
periods. The acquisition of Bell on June 7, 1996, and its retained workforce
also increased the Company's compensation expense during the third quarter of
1996.
The Company's occupancy and equipment expenses during the three and nine months
ended September 30, 1996, totaled $14.0 million and $40.4 million, representing
increases of 18% and 15% over the $11.9 million and $35.0 million recorded
during the same periods in 1995. These increases are due partially to the
comparatively higher lending and loan sale volumes during the third quarter and
first nine months of 1996, which increased the Company's microfilming and
imaging costs compared to prior periods. The recent acquisition of Bell, and
its fourteen branch offices also increased occupancy and equipment expenses in
the third quarter of 1996.
The Company paid FDIC premiums totaling $6.7 million and $17.9 million for the
three and nine months ended September 30, 1996, compared to $4.9 million and
$14.3 million during the same periods in 1995. The higher levels of expense
recorded during 1996 are primarily attributable to a $1.9 billion, or 21%
increase, and a $1.7 billion, or 17% increase, in the average balance of
deposits outstanding during the three-month and nine-month periods ended
September 30, 1996, respectively, compared to the respective year-earlier
periods. As previously discussed, the Bank was required by federal law to
recognize, during the third quarter of 1996, a one-time, industry-wide
assessment, the Bank's portion of which totaled $67.3 million. This assessment
will be used to recapitalize the SAIF. Payment of this special assessment will
reduce the Bank's annual FDIC insurance premium rate by approximately 72%,
prospectively.
The Company's general and administrative expenses, before the capitalization of
direct costs of loan originations, during the three and nine months ended
September 30, 1996, totaled $8.8 million and $23.8 million, representing
increases of 39% and 42% over the $6.3 million and $16.7 million recorded
during the same periods in 1995. These increases are due to the comparatively
higher lending volumes during the first nine months of 1996. Certain
volume-related costs such as contract underwriting, fee appraisals and credit
reports are recorded in this expense category.
Advertising expense, which totaled $3.8 million and $9.2 million during the
three and nine months ended September 30, 1996, increased $1.0 million and $1.5
million over the amounts of advertising expenses incurred during the respective
periods in 1995. Advertising expenditures can fluctuate periodically because
they are dependent upon desired levels of product promotions. The Company is
currently conducting various retail product promotions in Michigan and
Illinois, in both print and broadcast media.
<PAGE> 33
OTHER EXPENSES (CONTINUED)
During the third quarter and first nine months of 1996, the Company's other tax
expense totaled $2.3 million and $6.9 million, respectively, increases of 40%
and 66% when compared to the other tax expense incurred in the year-earlier
periods. These increases are primarily attributable to the Company's
recognition of a one-time benefit during the first nine months of 1995, which
was the result of favorable Michigan state tax legislation that had been
enacted. The Michigan single business tax is a tax which, due to its nature,
is not considered an income tax for financial reporting purposes. Accordingly,
the expense has been reflected in the Company's operating and administrative
expenses under the caption, "Other Taxes" in the Consolidated Statements of
Income.
Certain direct costs of originating loans are capitalized and amortized over
the lives of the related loans. Various expense categories are reduced as
these costs are capitalized. Consequently, the level of loan originations
during a period impacts the nominal amount of expenses reported in the
Company's Consolidated Statements of Income. Expenses totaling $10.5 million
and $38.4 million were capitalized during the three and nine months ended
September 30, 1996, compared to $12.8 million and $29.8 million recorded during
the comparable periods in 1995. The 29% increase noted for the nine-month
period in 1996 is due to the dramatically higher lending volumes compared to
the same year-ago period.
FEDERAL INCOME TAXES
The Company's statutory tax rate was 35% for both periods presented. The
Company's effective tax rate for each of the periods presented differs from
each period's statutory rate due primarily to the nondeductibility of goodwill
amortization.
The Company and its consolidated subsidiaries are currently undergoing IRS
examinations of the consolidated federal income tax returns for the years ended
December 31, 1990 through 1992. The final determination of tax liability for
these taxable years has not been completed. In the opinion of the Company's
management, any such final determination or examination of still open returns,
including returns of subsidiaries and predecessors of or entities merged into
the Company, would not result in a deficiency which would have a material
adverse effect on the financial condition or results of operations of the
Company and its consolidated subsidiaries.
Recently enacted federal legislation has amended the sections of the Internal
Revenue Code relating to deductions for bad debts by thrift institutions. This
legislation generally requires thrifts to recapture into income over a six-year
period only the portion of their bad debt reserves that exceed its reserves
existing before 1988. If the Company meets a "residential loan requirement" for
a tax year beginning in 1996 or 1997, the recapture of the reserves will be
suspended for such tax year. Thus, recapture can potentially be deferred for
up to two years.
In accordance with this legislation, the Company's pre-1988 reserves are
frozen, not forgiven. Certain events will still trigger a recapture of these
reserves. For example, while the pre-1988 reserves will not be recaptured if
the Company converts to a bank charter or is merged into a bank, it will be
recaptured if the Company ceases to qualify as a bank for federal income tax
purposes (e.g., the Company converts to a credit union). The pre-1988 reserves
also remain subject to income tax penalty provisions which, in general, require
recapture upon certain stock redemptions of, and excess distributions to,
shareholders.
<PAGE> 34
FEDERAL INCOME TAXES (CONTINUED)
The Company's pre-1988 bad debt reserves total approximately $50.0 million,
while its post-1988 bad debt reserves total approximately $30.0 million. Under
existing generally accepted accounting principles (i.e., SFAS No. 109,
"Accounting for Income Taxes"), the Company has consistently accrued a
liability for the post-1987 reserves. Thus, recapture of the post-1987 bad
debt reserves will not materially impact the Company's financial condition or
its results of operations during the six-year period.
CHANGE IN ACCOUNTING PRINCIPLES
The Company implemented a change in accounting principles relating to the
Company's adoption of the Financial Accounting Standards Board's SFAS No. 72
(Accounting for Certain Acquisitions of Banking or Thrift Institutions) for the
three acquisitions completed by Standard Federal during the period 1980 to
1982. Generally accepted accounting principles allow the Company to adopt SFAS
No. 72 for the three acquisitions as of January 1, 1996. Accordingly, the
Company wrote-off the remaining goodwill associated with these acquisitions as
of the beginning of fiscal 1996. As of January 1, 1996, the aggregate
unamortized goodwill balance associated with these acquisitions was $43.0
million.
The goodwill write-off is a one-time, non-cash charge to earnings that has no
effect on the Company's tangible book value and results in comparatively lower
goodwill amortization prospectively. Beginning in 1996, the reduced amounts of
amortization will increase the Company's reported earnings by $0.12 per share
on an annual basis.
LIQUIDITY AND CAPITAL RESOURCES
Federal regulations currently require that savings institutions maintain an
average daily balance, for each calendar month, of cash, cash equivalents and
certain marketable securities which are not committed as collateral under
secured borrowing arrangements equal to 5.0% of net withdrawable accounts and
borrowings payable in one year or less ("liquidity ratio"). At September 30,
1996, the Bank's liquidity ratio was 7.09%. Liquidity levels will vary
depending upon savings flows, future loan fundings and sales and operating
needs. The Bank does not foresee any difficulty in meeting its liquidity
requirements.
The Company's primary sources of funds are customer deposits, loan principal
repayments, sales of loans, repayments of mortgage-backed and investment
securities, advances from the Federal Home Loan Bank of Indianapolis ("FHLB"),
securities sold under agreements to repurchase with primary dealers and cash
generated from operations.
Under Federal Reserve Board regulations, the Bank is required to maintain
specified levels of reserve balances with the Federal Reserve Bank. Such
balances are based upon the composition of the Bank's deposit base and other
specified liabilities. At September 30, 1996, the Bank was required to
maintain net reserve balances of $20.7 million. The Bank is in compliance with
such regulations.
<PAGE> 35
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 25, 1995, the Company filed a claim in the United States Court of
Claims to recover damages as a result of the enactment of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). Under
FIRREA, the Company was forced to accelerate the rate of exclusion from
qualifying regulatory capital of approximately $120.5 million of supervisory
goodwill arising out of the acquisition of seven troubled savings and loan
associations from 1980 through 1983. During July 1996, the Supreme Court of
the United States ruled in favor of a California thrift in its claim to recover
funds lost as a result of FIRREA. The Supreme Court held that FIRREA nullified
contracts with the thrift by changing accounting rules and that this
legislation, therefore, violated the U.S. Constitution. At this time the
Company is unable to predict the likelihood of ultimate success in its claim,
nor can it estimate the range of potential recovery.
ITEM 5. OTHER INFORMATION - DIVIDEND DECLARATION AND PAYMENT ON COMMON STOCK
On August 31, 1996, the Company paid a cash dividend of $0.20 per share to
stockholders of record on August 16, 1996. The declaration of the dividend
reduced retained earnings/stockholders' equity by approximately $6.2 million
during July 1996.
On October 17, 1996, the Company's Board of Directors declared a regular
quarterly dividend of $0.20 per share, payable on November 29, 1996, to
stockholders of record on November 15, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT 11. EARNINGS PER SHARE
Earnings per share computations are based on the weighted average number of
common shares outstanding during each period, including common stock
equivalents. Earnings per share were not materially diluted by outstanding
stock options during any of the periods. Exhibit 11., attached, presents
information necessary for the computation of earnings per share, on both
primary and fully diluted bases, for the three and nine months ended September
30, 1996 and 1995.
EXHIBIT 15. INDEPENDENT ACCOUNTANTS' REPORT
Such report is incorporated herein by reference to Part I, page 12 of this Form
10-Q.
<PAGE> 36
EXHIBIT 27. FINANICAL DATA SCHEDULE (EDGAR FILING ONLY)
(B) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed during the three months ended September
30, 1996.
<PAGE> 37
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Standard Federal Bancorporation, Inc.
-------------------------------------
(Registrant)
Date November 4, 1996 /s/ Thomas R. Ricketts
---------------------------- -----------------------------------
Thomas R. Ricketts
Chairman of the Board and President
(Principal Executive Officer)
Date November 4, 1996 /s/ Joseph Krul
---------------------------- -----------------------------------
Joseph Krul
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE> 38
EXHIBIT INDEX
EXHIBIT NO. PAGE
- - -------------------------------------------------------- ----
Exhibit 11. Earnings Per Share E-1
Exhibit 27. Financial Data Schedule (Edgar filing only) E-2
<PAGE> 1
EXHIBIT 11. EARNINGS PER SHARE
The following table presents information necessary for the computation of
earnings per share, on both primary and fully diluted bases, for the three and
nine months ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Primary and fully diluted
earnings per share:
Net income (loss) applicable
to common stock and common
stock equivalents ($8,336) $30,612 $16,827 $88,306
========== ========== ========== ==========
Average number of common
shares outstanding 31,265 31,519 31,262 31,533
Common stock equivalents on
stock options 748 885 838 802
---------- ---------- ---------- ----------
Total 32,013 32,404 32,100 32,335
========== ========== ========== ==========
Primary earnings (loss) per share ($0.26) $0.94 $0.52 $2.73
========== ========== ========== ==========
Fully diluted earnings (loss) per
share ($0.26) $0.94 $0.52 $2.73
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 115,506 115,506
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 622,004 622,004
<INVESTMENTS-CARRYING> 2,913,903 2,913,903
<INVESTMENTS-MARKET> 2,890,378 2,890,378
<LOANS> 11,029,395 11,029,395
<ALLOWANCE> 48,000 48,000
<TOTAL-ASSETS> 15,353,682 15,353,682
<DEPOSITS> 10,786,092 10,786,092
<SHORT-TERM> 1,245,797 1,245,797
<LIABILITIES-OTHER> 555,858 555,858
<LONG-TERM> 1,870,232 1,870,232
0 0
0 0
<COMMON> 223,257 223,257
<OTHER-SE> 672,446 672,446
<TOTAL-LIABILITIES-AND-EQUITY> 15,353,682 15,353,682
<INTEREST-LOAN> 208,603 572,799
<INTEREST-INVEST> 65,125 192,685
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 273,728 765,484
<INTEREST-DEPOSIT> 125,384 350,077
<INTEREST-EXPENSE> 171,800 480,676
<INTEREST-INCOME-NET> 101,928 284,808
<LOAN-LOSSES> 1,042 2,184
<SECURITIES-GAINS> 2,762 14,296
<EXPENSE-OTHER> 133,949 247,036
<INCOME-PRETAX> (12,436) 94,159
<INCOME-PRE-EXTRAORDINARY> (8,336) 59,859
<EXTRAORDINARY> 0 0
<CHANGES> 0 (43,032)
<NET-INCOME> (8,336) 16,827
<EPS-PRIMARY> (0.26) 0.52
<EPS-DILUTED> (0.26) 0.52
<YIELD-ACTUAL> 7.57 7.54
<LOANS-NON> 31,886 31,886
<LOANS-PAST> 39,202 39,202
<LOANS-TROUBLED> 8,965 8,965
<LOANS-PROBLEM> 9,432 9,432
<ALLOWANCE-OPEN> 48,600 35,400
<CHARGE-OFFS> 2,806 4,398
<RECOVERIES> 1,165 2,051
<ALLOWANCE-CLOSE> 48,000 48,000
<ALLOWANCE-DOMESTIC> 48,000 48,000
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 44,407 44,407
</TABLE>
