<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 June 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 August 13, 1996, was 31,248,268.
<PAGE> 2
STANDARD FEDERAL BANCORPORATION, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
June 30, 1996, December 31, 1995, and June 30, 1995 1
Consolidated Statements of Income - Three and Six Months
Ended June 30, 1996 and 1995 2
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1996 and 1995 3-5
Notes to Consolidated Financial Statements 6-11
Independent Accountants' Report 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Three
and Six Months Ended June 30, 1996 and 1995 13-29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information - Dividend Declaration and Payment
on Common Stock 31
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
Exhibit Index 33
</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>
June 30, December 31, June 30,
1996 1995 1995
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Cash $97,237 $90,789 $123,036
----------- ----------- -----------
Cash equivalents 52,935 16,029 82,349
Term federal funds sold and securities
purchased under resale agreements 3,000 -- --
Investment securities available for sale,
at fair value 14,920 -- --
Investment securities held to maturity (fair
values of $501,672, $210,935 and $219,548,
respectively) 503,597 211,745 221,288
Mortgage-backed securities held for trading
at fair value 3,554 224,843 --
Mortgage-backed securities available for sale
at fair value 653,342 689,432 75,344
Mortgage-backed securities held to maturity
(fair values of $2,469,450, $2,329,546 and
$2,422,966, respectively) 2,489,842 2,275,158 2,380,666
Loans receivable available for sale 901,316 902,816 474,204
Loans receivable 9,823,206 8,294,909 9,090,484
----------- ----------- -----------
Total earning assets 14,445,712 12,614,932 12,324,335
Accrued interest receivable 83,851 69,147 66,792
Real estate and other repossessed assets 10,889 5,764 8,560
Premises and equipment 206,231 191,988 187,289
Cost in excess of fair value of net assets
acquired 208,930 135,874 143,781
Other assets 187,133 167,114 117,725
----------- ----------- -----------
Total assets $15,239,983 $13,275,608 $12,971,518
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $10,932,352 $9,151,929 $8,630,500
FHLB advances and other long-term borrowings 1,860,496 1,973,797 1,923,668
Federal funds purchased and reverse repurchase
agreements 944,175 844,420 1,096,888
Other short-term borowing 30,000 -- --
----------- ----------- -----------
Total interest-bearing liabilities 13,767,023 11,970,146 11,651,056
Accrued interest payable 44,500 58,430 63,197
Undisbursed payments on participations sold 73,566 98,798 60,050
Advance payments by borrowers for taxes and
insurance 207,018 75,767 167,528
Federal income taxes payable 43,915 66,245 42,181
Liability for checks and money orders issued 76,380 50,785 83,359
Other liabilities 64,646 39,174 41,913
----------- ----------- -----------
Total liabilities 14,277,048 12,359,345 12,109,284
----------- ----------- -----------
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
STANDARD FEDERAL BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONTINUED)
(In thousands, except share data)
<S> <C> <C> <C>
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; shares issued and outstanding
at:
June 30, 1996 - 31,324,268
December 31, 1995 - 31,185,175
June 30, 1995 - 31,636,925 234,783 231,884 249,117
Restricted stock grant, net (114) -- --
Retained earnings, partially restricted 717,988 663,655 613,117
Unrealized gain on mortgage-backed securities
available for sale 10,278 20,724 --
----------- ----------- -----------
Total stockholders' equity 962,935 916,263 862,234
----------- ----------- -----------
Total liabilities and stockholders' equity $15,239,983 $13,275,608 $12,971,518
=========== =========== ===========
</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 Six Months Ended
June 30, June 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $189,014 $174,962 $364,196 $337,720
Mortgage-backed securities 54,154 46,116 115,537 91,169
Investment securities 6,101 6,680 12,023 14,230
---------- ---------- ---------- ----------
Total 249,269 227,758 491,756 443,119
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits 112,598 102,518 224,693 194,866
FHLB advances and other long-term
borrowings 28,231 31,193 57,444 62,411
Federal funds purchased and reverse
repurchase agreements 13,686 14,624 26,739 27,673
---------- ---------- ---------- ----------
Total 154,515 148,335 308,876 284,950
---------- ---------- ---------- ----------
Net interest income 94,754 79,423 182,880 158,169
Provision for (Recovery of) losses 537 680 1,142 (345)
---------- ---------- ---------- ----------
Net interest income after provision
for (recovery of) losses 94,217 78,743 181,738 158,514
---------- ---------- ---------- ----------
NON-INTEREST INCOME:
Loan fees and charges 2,290 1,686 4,357 3,317
Deposit-related fees and charges 7,511 6,986 13,913 12,770
Loan servicing fee income, net 3,362 3,894 6,353 7,679
Gain (Loss) on the sale of earning
assets 5,853 (1,279) 11,534 291
Loss on the sale of real estate owned (59) (615) (172) (86)
Other 752 1,673 1,959 4,282
---------- ---------- ---------- ----------
Total 19,709 12,345 37,944 28,253
---------- ---------- ---------- ----------
OTHER EXPENSES:
Compensation and benefits 24,687 18,160 46,032 39,504
Occupancy and equipment 14,196 11,473 26,386 23,150
Federal insurance premium 5,623 4,700 11,230 9,405
General and administrative 5,011 3,094 9,393 6,962
Amortization of cost in excess of
fair value of net assets acquired 4,482 3,915 8,564 7,873
Advertising 2,914 2,429 5,388 4,914
Other taxes 2,339 1,269 4,610 2,511
Other 1,648 1,308 3,462 2,354
---------- ---------- ---------- ----------
Total 60,900 46,348 115,065 96,673
---------- ---------- ---------- ----------
Income before provision for federal
income taxes 53,026 44,740 104,617 90,094
Provision for federal income taxes 19,000 16,100 38,400 32,400
---------- ---------- ---------- ----------
NET INCOME $34,026 $28,640 $66,217 $57,694
========== ========== ========== ==========
EARNINGS PER SHARE $1.06 $0.89 $2.06 $1.79
========== ========== ========== ==========
DIVIDENDS PER COMMON SHARE $0.19 $0.17 $0.38 $0.34
========== ========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 6
STANDARD FEDERAL BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Interest received on earning assets $488,536 $434,002
Loan and other fees received 52,953 36,543
Proceeds from the sale of mortgage-backed securities
held for trading 498,336 --
Proceeds from the sale of mortgage-backed securities
available for sale 76,555 --
Cash disbursed for real estate loans available for sale (4,003,050) (1,413,787)
Proceeds from the sale of real estate loans available
for sale 3,441,194 1,074,160
Other operating income, net 1,774 2,769
Interest paid on interest-bearing liabilities (334,495) (264,657)
Operating and administrative expenses (138,831) (118,927)
Federal income taxes paid (39,190) (17,904)
------------ ------------
Net cash provided by (used in) operating activities 43,782 (267,801)
------------ ------------
INVESTING ACTIVITIES:
Net increase in term federal funds sold and securities
purchased under resale agreements (3,000) --
Proceeds from the sale of investment securities available
for sale 38,776 --
Maturities of interest-earning deposits 831 --
Purchases of investment securities held to maturity 10,863 (166,737)
Maturities and partial repayments of investment securities
held to maturity 27,602 217,746
Purchases of FHLB stock (7,909) --
Disbursements of real estate loans (1,262,590) (1,364,787)
Principal repayments of real estate loans, net 1,164,664 616,434
Principal repayments of mortgage-backed securities held to
maturity 285,005 123,666
Net increase in consumer and commercial loans (38,615) (33,372)
Proceeds from the disposition of real estate and other
repossessed assets 7,057 5,548
Capital expenditures, net (11,622) (2,557)
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 (154,155) (604,059)
------------ ------------
</TABLE>
<PAGE> 7
STANDARD FEDERAL BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
------------ ------------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase in deposit accounts, excluding sale of
deposits 59,622 511,722
Cash transferred to the acquiror of deposit liabilities -- (30,235)
Net increase in federal funds purchased and reverse
repurchase agreements 99,755 345,425
Proceeds from FHLB advances 500,000 --
Repayments of FHLB advances (642,010) (98,093)
Proceeds from other borrowings 30,000 --
Net proceeds from the exercise of common stock options 2,879 2,445
Dividends paid to stockholders (11,883) (10,729)
Net change in retail transactions in process 17,631 (20,665)
Cash repurchase of stock (97) --
Restricted stock grants 3 --
Net receipts of advance payments by borrowers for taxes
and insurance 124,526 89,443
Net receipts (disbursements) of payments due on
participations sold (26,699) 19,593
------------ ------------
Net cash provided by financing activities 153,727 808,906
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 43,354 (62,954)
BEGINNING CASH AND CASH EQUIVALENTS 106,818 268,339
------------ ------------
ENDING CASH AND CASH EQUIVALENTS $150,172 $205,385
============ ============
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Net income $66,217 $57,694
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,421 6,943
Amortization of cost in excess of fair value of net
assets acquired 8,564 7,873
Provision for (Recovery of) losses 1,142 (345)
Gain on the sale of branches -- (1,444)
Provision for deferred federal income taxes 564 2,188
Increase (Decrease) in federal income taxes payable, net (22,893) 11,591
(Increase) Decrease in loans receivable available for sale 1,500 (339,919)
Increase in accrued interest receivable (2,414) (6,269)
Increase (Decrease) in accrued interest payable (4,571) 20,398
Accretion of loan fees and other discounts and premiums,
net (3,457) (1,209)
Deferral of loan origination fees (costs), net 1,113 (7,003)
Net change in accrued and prepaid expenses (9,404) (18,299)
------------ ------------
Net cash provided by (used in) operating activities $43,782 ($267,801)
============ ============
</TABLE>
<PAGE> 8
STANDARD FEDERAL BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
------------ ------------
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Loans receivable transferred to real estate and other
repossessed assets $6,829 $3,047
Loans receivable exchanged for mortgage-backed securities $4,236,235 $1,078,465
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.
June 7, 1996
----------------------------
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
=======
January 12, 1996
----------------------------
FSB FINANCIAL CORPORATION ACQUISITION:
Cash paid for common stock and stock options $24,726
Fair value of assets acquired $165,778
Fair value of liabilities assumed (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> 9
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 six months ended June 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. The
investment securities available for sale at June 30, 1996, consist solely of
certain assets which had been recently obtained in the Company's acquisition
of Bell Bancorp, Inc. Such assets were sold, without recognition of gain or
loss, of during July 1996. The MBS held for trading at June 30, 1996,
consist of certain of the Company's recent loan originations that were
securitized during the month of June 1996 as a part of the Company's on-
going mortgage banking activities, but which were not sold until the month
of July 1996.
<PAGE> 10
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>
June 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 $308,928 $309,021 $25,642 $25,837
Investment-grade corporate debt securities 125 125 125 125
FHLB stock - at cost 112,058 112,058 102,427 102,427
Certificates of deposit -- -- 831 831
U.S. government and agency obligations 81,003 79,228 81,082 80,346
Other 1,483 1,240 1,638 1,369
-------- -------- -------- --------
Total $503,597 $501,672 $211,745 $210,935
======== ======== ======== ========
</TABLE>
The investment securities held to maturity portfolio reflects gross
unrealized gains of $0.4 million and gross unrealized losses of $2.3 million
at June 30, 1996. The MBS held to maturity portfolio reflects gross
unrealized gains of $16.4 million and unrealized losses of $36.8 million at
June 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 June 30, 1996. The Company intends to sell all of
this portfolio, primarily during the third 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.
<PAGE> 11
Loans receivable available for sale are summarized as follows:
<TABLE>
<CAPTION>
June 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 $901,316 $901,316 $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 swaps outstanding at
June 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 June 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 swaps, primarily if the Company is in a net accrued interest receivable
position at the time of default by the counterparties. However, at June 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 June 30, 1996, real estate loans totaling $3.0 billion, certain MBS
totaling $1.2 million, investment securities totaling $9.1 million and the
Company's FHLB stock totaling $126.6 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 June 30, 1996, the Company had commitments to fund approximately $1.0
billion of mortgage loans and $15.0 million of consumer loans. The vast
majority of these commitments are expected to settle during the next four
months. Additionally, at June 30, 1996, the Company had firm forward
commitments to sell $1.0 billion of recently closed or committed single-
family loans, including the $3.6 million of MBS held for trading identified
in the Consolidated Statement of Financial Condition. These sales, which
will primarily occur during the third 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 June 30, 1996, in addition to the firm forward commitments discussed in
the preceding paragraph, the Bank also had options to sell $250.0 million of
securitized, single-family loans. The cost of these options, which expire
in the third quarter of 1996, was $171,000 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 $9.2
million were issued and outstanding at June 30, 1996. Unused lines of
credit provided to consumers (generally, open-ended lines of credit which
are funded on demand) totaled $876.7 million at June 30, 1996. Unused lines
of credit provided to commercial customers (generally, open-ended lines of
credit which are funded on demand) totaled $102.5 million at June 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. Accordingly, the Company's
management is unable to predict with any reasonable certainty what effect
SFAS 122 will have on its future results of operations or its financial
condition.
The activity of capitalized MSR is summarized below:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Beginning balance $97,555 $59,134
Additions through wholesale mortgage banking operations 50,140 20,777
Additions through retail lending operations 12,066 968
Value of MSR acquired through mergers 432 --
Valuation allowance adjustment due to change in fair
value of MSRs 200 --
Sales of MSR (1) (35,170) (3,208)
Amortization (9,728) (3,585)
-------- -------
Ending balance $115,495 $74,086
</TABLE>
(1) The Company sold servicing rights relating to $2.6 billion and $222.8
million of loans serviced for the benefit of others during the first half 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 $133.5 million at June 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>
Six Months Ended
Description June 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 (200)
------
Ending balance $3,595
======
</TABLE>
The Company did not have an impairment-based valuation allowance during the
six months ended June 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.
<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. In accordance with the provisions of this
Statement, the Company will 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
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 June 30, 1996.
STATEMENT OF FINANCIAL CONDITION
(In thousands)
<TABLE>
<CAPTION>
June 30, 1996
-------------
<S> <C>
ASSETS:
Cash $2,332
Investment securities 3,020
Accrued interest receivable 67
Accounts receivable - subsidiary 12,315
Investment in subsidiary 989,246
Federal income tax benefit 1,926
----------
Total assets $1,008,906
==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Short-term borrowing $30,000
Accrued interest payable 17
Accounts payable - subsidiary 15,954
----------
Total liabilities $45,971
==========
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, 31,324,268 shares issued and outstanding at June 30, 1996 234,783
Restricted stock grant, net (114)
Retained earnings, partially restricted 717,988
Unrealized net income from subsidiary 10,278
----------
STANDARD FEDERAL BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE (15) - HOLDING COMPANY ONLY FINANCIAL STATEMENT (CONTINUED)
STATEMENT OF FINANCIAL CONDITION (CONTINUED)
(In thousands)
Total stockholders' equity 962,935
----------
Total liabilities and stockholders' equity $1,008,906
==========
</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
June 30, 1996 and 1995, the related consolidated statements of income for
the three and six months ended June 30, 1996 and 1995, and the consolidated
statements of cash flows for the six months ended June 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
July 18, 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 June 30, 1996, the
Company had identified $901.3 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.
On June 7, 1996, the Company completed its acquisition of Bell Bancorp, Inc.
("Bell"). The Condensed Combining Statement of Financial Condition that
follows summarizes the initial effects of the acquisition. This information
is consistent with that presented in the Company's Report of Form 8-K, filed
with the Securities and Exchange Commission on June 14, 1996.
<PAGE> 19
FINANCIAL CONDITION (CONTINUED)
Condensed Combining Statement of Financial Condition - June 7, 1996
(In thousands)
<TABLE>
<CAPTION>
Related Purchase
Accounting Entries
Company Bell Debit Credit Combined
----------- ---------- --------------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash $116,596 $12,706 $129,302
----------- ---------- --------- --------- ------------
Investments 213,450 483,383 $10,764 686,069
Mortgage-backed
securities 3,165,144 90,959 3,256,103
Loans receivable 9,402,468 1,307,298 $1,430 10,711,196
----------- ---------- --------- --------- ------------
Total earning assets 12,781,062 1,881,640 1,430 10,764 14,653,368
Real estate and other
repossessed assets 6,580 3,351 9,931
Premises and equipment 198,368 5,004 3,000 206,372
Cost in excess of fair
value of net assets
acquired and core
deposit intangibles 134,750 -- 75,600 210,350
Other assets 242,061 27,243 269,304
----------- ---------- --------- --------- ------------
Total assets $13,479,417 $1,929,944 $80,030 $10,764 $15,478,627
=========== ========== ========= ========= ============
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Liabilities:
Deposits $9,409,012 $1,598,038 $11,007,050
FHLB advances and other
borrowings 2,597,319 10,000 2,607,319
----------- ---------- --------- --------- ------------
Total interest-
bearing liabilities 12,006,331 1,608,038 13,614,369
Other liabilities 521,777 26,292 $364,880(1) 912,949
----------- ---------- --------- --------- ------------
Total liabilities 12,528,108 1,634,330 364,880 14,527,318
----------- ---------- --------- --------- ------------
STOCKHOLDERS' EQUITY:
Common stock and
additional paid-in
capital 234,322 80,216 $80,216 234,322
Retained earnings 708,371 215,398 215,398 708,371
Net unrealized gain on
securities available
for sale 8,616 -- 8,616
----------- ---------- --------- --------- ------------
Total stockholders'
equity 951,309 295,614 295,614 951,309
----------- ---------- --------- --------- ------------
Total liabilities
and stockholders'
equity $13,479,417 $1,929,944 $295,614 $364,880 $15,478,627
=========== ========== ========= ========= ============
</TABLE>
(1) Represents primarily the cost of the acquisition, payable in cash to
Bell's stockholders.
<PAGE> 20
FINANCIAL CONDITION (CONTINUED)
The Company's total mortgage-backed securities ("MBS") portfolio, including
MBS held for trading and available for sale, decreased by $42.7 million
during the first six months of 1996, (net of $91.0 million of MBS the
Company acquired from the 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 six months of 1996, loans receivable (including loans
available for sale), net of sales and repayments, increased $1.5 billion, or
17%, due primarily to the $1.3 billion of loans added from the Bell
acquisition. During the first half of 1996, the Company originated $5.6
billion of single-family home mortgage loans, compared to $2.7 billion
during the same period last year. The Bank sold/securitized $4.4 billion of
mortgage loans and received $1.1 billion in net mortgage loan repayments
during the six month period ending June 30, 1996.
The Company's capitalized mortgage servicing rights ("MSR") increased by
$17.9 million during the first half 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 Notes to Consolidated
Financial Statements, the Company capitalized $62.2 million of MSR during
the six months ended June 30, 1996, amortized $9.7 million of MSR and sold
$2.6 billion of loans serviced for the benefit of others with $35.2 million
of associated MSR.
During the first six months of 1996, deposits increased $1.8 billion, or
19%. 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, and
to various deposit account promotions and competitive interest rates offered
by the Company for certain retail certificate of deposit and public unit
accounts.
From time to time, the Bank uses Federal Home Loan Bank ("FHLB") advances as
a source of longer-term, fixed-rate funds for purposes of investing in loans
and mortgage-backed securities. During the first half of 1996, the Bank
decreased its level of FHLB advances by $113.3 million, net.
During the first six months of 1996, securities sold under agreements to
repurchase increased by $99.8 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 also borrowed $30.0 million in the form of a short-term demand
note, the funds from which were contributed to the Bank as additional
capital. This loan was repaid during July 1996 upon completion of the
Company's $100.0 million subordinated debt offering, which is discussed in
this section.
Advance payments by borrowers for taxes and insurance ("escrow") increased
$131.3 million during the first half 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.
<PAGE> 21
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
June 30, 1996.
<TABLE>
<CAPTION>
TABLE 1
SUMMARY OF CAPITAL REQUIREMENTS - STANDARD FEDERAL BANK
June 30, 1996
(In thousands)
Stated Required
Capital Capital Excess
Stated As a % of Required As a % of Excess Capital
Capital Assets(1) Capital Assets(1) Capital Percentage
------- --------- ------- --------- ------- ----------
<S> <S> <C> <C> <C> <C> <C>
Total stockholders' equity $989,246 6.49%
Adjustments for tangible, core
and total capital:
Goodwill, net of deferred tax
liability on core deposit
premium (181,477)
Core deposit premium (17,546)
Valuation adjustment for
mortgage servicing rights (11,193)
Unrealized net gain on mortgage-
backed securities available for
sale (10,278)
Investments in non-includable
subsidiaries (3,049)
--------
Total tangible capital 765,703 5.10% $225,069 1.50% $540,634 3.60%
Qualifying core deposit premium 17,546
--------
Total core capital 783,249 5.21% $450,665 3.00% $332,584 2.21%
(Tier 1 capital)
General allowance for loan
losses 44,851
--------
Total capital (risk based) $828,100 11.23% $589,726 8.00% $238,374 3.23%
========
</TABLE>
1) The regulatory capital requirements are calculated as a percentage of
adjusted assets, as defined by OTS regulation.
<PAGE> 22
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 general minimum requirement of core
capital at least equal to 3% of adjusted total assets, which has been de
facto superseded, was applicable only to those institutions that received a
composite rating of one, which is the highest rating under the "CAMEL"
rating system for financial institutions, and those which were, in general,
considered strong organizations having well-diversified risks, including no
undue interest rate risk exposure, excellent control systems, good earnings,
high asset quality and liquidity and well managed on- and off-balance sheet
assets. All other thrift institutions must maintain core capital of 3% plus
an additional 1% to 2%, as established by the OTS on a case-by-case basis.
Therefore, Standard Federal Bank believes that it is required to maintain
core capital of at least 4% of adjusted total assets.
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 June 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
- ------------------------
June 30, 1996:
--------------
Stated capital (in thousands) $765,703 $828,100 $783,249 $783,249
======== ======== ======== ========
As a percentage of adjusted assets 5.10% 11.23% 10.69% 5.21%
======== ======== ======== ========
</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
<PAGE> 23
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 June 30, 1996.
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
June 30, 1996 IRR component was $59.8 million; such amount equaling the
Bank's IRR component as of March 31, 1996, the most recent date for which
data is available. Because the Bank had $238.4 million of excess risk-based
capital as of June 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.
Various Committees of Congress and various federal regulatory banking
agencies, including the Federal Deposit Insurance Corporation ("FDIC"), are
currently discussing changes to the federal deposit insurance system to
narrow or eliminate the difference in financial characteristics between the
Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund
("SAIF"). One of the proposals being discussed would, among other things,
assess thrifts, such as the Bank, a one-time fee to bring the SAIF fund into
parity with the BIF fund. In the event that such proposal was to become
law, the Bank would be required to record a one-time charge to earnings of
approximately $65.9 million, or $2.05 per share, after-tax, based on March
31, 1995 balances and a fee of 85 basis points. Thereafter, the Bank's
annual deposit insurance expense would be reduced for the foreseeable future
by approximately 80% to 100% of current premiums. A premium reduction of
this magnitude would represent annual after-tax cost savings to the Bank of
approximately $11.9 million to $14.9 million, or $0.37 per share to $0.46
per share, based upon the actual 1995 deposit insurance premiums incurred by
the Bank and Bell Federal. During July 1996, the Company completed a
medium-term subordinated debt offering of $100.0 million. A portion of the
proceeds were used to repay the $30.0 million short-term borrowing
previously discussed. The remainder will be used for general corporate
purposes, which may include continuation of the Company's previously
announced share repurchase program and/or funding of the SAIF/BIF assessment
discussed above. During 1995, the Company's Board of Directors approved the
repurchase of up to 5% of the Company's outstanding common stock.
Approximately 2% of the Company's common stock has been repurchased to date.
Available capital may be used to continue this share repurchase program in
the future.
RESULTS OF OPERATIONS
The Company's net income totaled $34.0 million, or $1.06 per share, during
the three months ended June 30, 1996. This represents an annualized return
on average assets ("ROA") of 0.97% and an annualized return on average
stockholders' equity ("ROE") of 14.36%. This earnings performance
represents an increase of 19% when compared to the $28.6 million, or $0.89
per share, recorded during the same period in 1995 (ROA of 0.91% and ROE of
13.51%). The second quarter results brought earnings for the six months
ended June 30, 1996, to $66.2 million, or $2.06 per share (ROA of 0.96% and
ROE of 14.13%), compared to $57.7 million, or $1.79 per share (ROA of 0.93%
and ROE of 13.80%).
<PAGE> 24
NET INTEREST INCOME
Net interest income increased 19% and 16% during the second quarter and
first half of 1996, totaling $94.8 million and $182.9 million, compared to
$79.4 million and $158.2 million recorded in the same periods last year.
The Company's net interest margin was 2.85% and 2.80% of average earning
assets during the second quarter and first half of 1996, respectively,
compared to 2.67% and 2.72% during the same periods in 1995.
The Company's gradually improving net interest margin and a 11% increase in
total average earning assets ($13.3 billion during the current quarter
versus $12.0 billion during the second quarter of 1995) produced the
increased level of net interest income noted above.
Like most thrift institutions, the Company has generally recorded higher
levels of net interest income during relatively low and falling interest
rate environments and has generally experienced a declining net interest
margin during periods of relatively high and/or rising interest rate
environments. In order to moderate the impact of a rising interest rate
environment on the Company's operations, the Company's earning assets and
interest-bearing liabilities have been configured such that, at various time
horizons, differences between the amounts of assets and liabilities that
either reprice or mature are minimized to the extent possible. Any
difference between the amount of assets and liabilities repricing within one
year is referred to as the "one-year-repricing gap." At June 30, 1996, the
Company had $203.8 million more in liabilities expected to mature or reprice
within one year than assets. This $203.8 million "negative" repricing gap
represented -1.34% of total assets at June 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>
<CAPTION>
TABLE 2
AVERAGE YIELDS EARNED AND RATES PAID
Three Months Ended June 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 $9,200.8 $170.6 7.42% $8,403.2 $157.8 7.51%
Consumer loans 573.0 15.0 10.53 515.0 14.2 11.05
Commercial loans 157.7 3.4 8.77 121.9 2.9 9.62
--------- ------ ----- --------- ------ -----
Total loans 9,931.5 189.0 7.62 9,040.1 174.9 7.74
Mortgage-backed securities
available for sale 662.9 14.3 8.64 -- -- --
Mortgage-backed securities 2,277.5 39.9 7.01 2,522.0 46.1 7.31
Investment securities
available for sale 3.7 0.1 6.75 -- -- --
Investment securities 410.2 6.0 5.85 398.6 6.7 6.68
--------- ------ ----- --------- ------ -----
Total earning assets $13,285.8 $249.3 7.51% $11,960.7 $227.7 7.62%
========= ====== ===== ========= ====== =====
Other assets 679.3 677.1
--------- ---------
Total assets $13,965.1 $12,637.8
========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Deposits $9,780.7 $112.6 4.63% $8,476.6 $102.5 4.85%
FHLB advances and other
long-term borrowings 1,872.2 28.2 6.07 1,986.0 31.2 6.21
Federal funds purchased and
reverse repurchase
agreements 850.2 13.7 6.47 848.7 14.6 6.89
--------- ------ ----- --------- ------ -----
Total interest-bearing
liabilities $12,503.1 $154.5 4.97% $11,311.3 $148.3 5.24%
========= ====== ===== ========= ====== =====
Other liabilities 514.2 478.8
Stockholders' equity 947.8 847.7
--------- ---------
Total liabilities and
stockholders' equity $13,965.1 $12,637.8
========= =========
EXCESS OF AVERAGE EARNING ASSETS
OVER AVERAGE INTEREST-BEARING
LIABILITIES $782.7 $649.4
========= =========
INTEREST RATE SPREAD 2.54% 2.38%
===== =====
INTEREST INCOME/EARNING ASSETS $249.3 7.51% $227.7 7.62%
INTEREST EXPENSE/EARNING ASSETS 154.5 4.66 148.3 4.95
------ ----- ------ -----
NET INTEREST MARGIN $94.8 2.85% $79.4 2.67%
====== ===== ====== =====
</TABLE>
<PAGE> 25
NET INTEREST INCOME (CONTINUED)
<TABLE>
<CAPTION>
TABLE 2 (CONTINUED)
AVERAGE YIELDS EARNED AND RATES PAID
Six Months Ended June 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 $8,815.7 $327.8 7.44% $8,153.9 $304.5 7.47%
Consumer loans 570.1 30.1 10.61 505.4 27.4 10.93
Commercial loans 144.7 6.3 8.81 122.0 5.8 9.60
--------- ------ ----- --------- ------ -----
Total loans 9,530.5 364.2 7.65 8,781.3 337.7 7.70
Mortgage-backed securities
available for sale 657.4 28.4 8.64 -- -- --
Mortgage-backed securities 2,472.7 87.1 7.04 2,531.1 91.2 7.20
Investment securities
available for sale 4.1 0.1 6.75 -- -- --
Investment securities 414.7 12.0 5.79 427.6 14.2 6.64
--------- ------ ----- --------- ------ -----
Total earning assets $13,079.4 $491.8 7.52% $11,740.0 $443.1 7.55%
========= ====== ===== ========= ====== =====
Other assets 699.0 678.8
--------- ---------
Total assets $13,778.4 $12,418.8
========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Deposits $9,600.7 $224.7 4.71% $8,336.5 $194.9 4.71%
FHLB advances and other
long-term borrowings 1,918.8 57.5 6.02 1,999.6 62.4 6.21
Federal funds purchased and
reverse repurchase
agreements 817.5 26.7 6.58 824.1 27.6 6.72
--------- ------ ----- --------- ------ -----
Total interest-bearing
liabilities $12,337.0 $308.9 5.03% $11,160.2 $284.9 5.12%
========= ====== ===== ========= ====== =====
Other liabilities 504.2 422.7
Stockholders' equity 937.2 835.9
--------- ---------
Total liabilities and
stockholders' equity $13,778.4 $12,418.8
========= =========
EXCESS OF AVERAGE EARNING ASSETS
OVER AVERAGE INTEREST-BEARING
LIABILITIES $742.4 $579.8
========= =========
INTEREST RATE SPREAD 2.49% 2.43%
===== =====
INTEREST INCOME/EARNING ASSETS $491.8 7.52% $443.1 7.55%
INTEREST EXPENSE/EARNING ASSETS 308.9 4.72 284.9 4.83
------ ----- ------ -----
NET INTEREST MARGIN $182.9 2.80% $158.2 2.72%
====== ===== ====== =====
</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 Six Months Ended
June 30, June 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 $14.7 ($1.9) $12.8 $24.5 ($1.2) $23.3
Consumer loans 1.5 (0.7) 0.8 3.5 (0.8) 2.7
Commercial loans 0.8 (0.3) 0.5 1.0 (0.5) 0.5
----- ----- ----- ----- ----- -----
Total loans 17.0 (2.9) 14.1 29.0 (2.5) 26.5
Mortgage-backed securities 7.7 0.4 8.1 22.0 2.3 24.3
Investment securities 0.3 (0.9) (0.6) (0.3) (1.8) (2.1)
----- ----- ----- ----- ----- -----
Total $25.0 ($3.4) $21.6 $50.7 ($2.0) $48.7
===== ===== ===== ===== ===== =====
INTEREST-BEARING LIABILITIES:
Deposits $15.0 ($4.9) $10.1 $29.8 -- $29.8
FHLB advances and other
long-term borrowings (2.2) (0.8) (3.0) (2.8) (2.1) (4.9)
Federal funds purchased and
reverse repurchase
agreements -- (0.9) (0.9) (0.2) (0.7) (0.9)
----- ----- ----- ----- ----- -----
Total $12.8 ($6.6) $6.2 $26.8 ($2.8) $24.0
===== ===== ===== ===== ===== =====
NET INTEREST INCOME $12.2 $3.2 $15.4 $23.9 $0.8 $24.7
===== ===== ===== ===== ===== =====
</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 June 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>
<CAPTION>
TABLE 4
ASSET/LIABILITY REPRICING SCHEDULE Maturing/Repricing In:
June 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 $219 $77 $4 $13 $313
Mortgage-backed securities 297 122 180 352 951
Loans Receivable
Real Estate:
Adjustable-rate 342 685 1,027 2,055 4,109
Fixed-rate 533 291 176 335 1,335
Commercial and Consumer 50 478 48 20 596
------ ------ ------ ------ ------
Total $1,441 $1,653 $1,435 $2,775 $7,304
====== ====== ====== ====== ======
INTEREST-BEARING LIABILITIES:
Deposits:
NOW, checking, money market
checking, and passbook
savings $26 $51 $77 $154 $308
Money market deposits 52 105 157 315 629
Certificates:
Under $100,000 516 841 934 1,524 3,815
Over $100,000 804 541 167 192 1,704
------ ------ ------ ------ ------
Subtotal 1,398 1,538 1,335 2,185 $6,456
------ ------ ------ ------ ------
BORROWINGS:
FHLB advances and other
long-term borrowings 147 197 17 201 562
Federal funds purchased and
reverse repurchase
agreements 305 -- -- 175 480
------ ------ ------ ------ ------
Subtotal 452 197 17 376 1,042
------ ------ ------ ------ ------
Impact of interest rate swaps -- -- 10 -- 10
------ ------ ------ ------ ------
Total $1,850 $1,735 $1,362 $2,561 $7,508
====== ====== ====== ====== ======
Excess (Deficiency) of
earning assets over (to)
interest-bearing liabilities ($409) ($82) $73 $214 ($204)
====== ====== ====== ====== ======
</TABLE>
<PAGE> 28
NET INTEREST INCOME (CONTINUED)
<TABLE>
<CAPTION>
TABLE 4 (CONTINUED)
ASSET/LIABILITY REPRICING SCHEDULE Maturing/Repricing In:
June 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 $313 $84 $41 $85 $51 $574 6.84%
Mortgage-backed securities 951 533 697 514 452 3,147 7.44
Loans Receivable
Real Estate:
Adjustable-rate 4,109 -- -- -- -- 4,109 7.35
Fixed-rate 1,335 1,120 1,366 1,135 884 5,840 7.59
Commercial and Consumer 596 76 56 40 8 776 10.15
------ ------ ------ ------ ------ ------- -----
Total $7,304 $1,813 $2,160 $1,774 $1,395 $14,446 7.58
====== ====== ====== ====== ====== ======= =====
INTEREST-BEARING LIABILITIES:
Deposits:
NOW, checking, money market
checking, and passbook
savings $308 $481 $343 $488 $387 $2,007 1.79%
Money market deposits 629 735 350 269 50 2,033 4.14
Certificates:
Under $100,000 3,815 886 188 244 -- 5,133 5.65
Over $100,000 1,704 40 4 11 -- 1,759 5.48
------ ------ ------ ------ ------ ------- -----
Subtotal 6,456 2,142 885 1,012 437 10,932 4.46
------ ------ ------ ------ ------ ------- -----
BORROWINGS:
FHLB advances and other
long-term borrowings 562 1,288 28 13 -- 1,891 5.93
Federal funds purchased and
reverse repurchase
agreements 480 464 -- -- -- 944 6.31
------ ------ ------ ------ ------ ------- -----
Subtotal 1,042 1,752 28 13 -- 2,835 6.00
------ ------ ------ ------ ------ ------- -----
Impact of interest rate swaps 10 (10) -- -- -- -- 4.19
------ ------ ------ ------ ------ ------- -----
Total $7,508 $3,884 $913 $1,025 $437 $13,767 4.93%
====== ====== ====== ====== ====== ======= =====
Interest rate spread 2.65%
=====
Excess (Deficiency) of
earning assets over (to)
interest-bearing liabilities ($204) ($2,071) $1,247 $749 $958 $679 (1)
====== ======= ====== ====== ====== =======
</TABLE>
(1) The excess of $679 million noted above has the effect of increasing the
indicated spread by 0.21%.
<PAGE>
<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 June 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>
<CAPTION>
TABLE 5
NONPERFORMING ASSETS
June 30, 1996 December 31, 1995
----------------- -----------------
(In thousands)
<S> <C> <C>
Nonaccrual loans $32,327 $13,643
Past due loans 33,280 24,242
Renegotiated loans 8,989 9,236
------- -------
Total nonperforming loans 74,596 47,121
Real estate and other repossessed assets ("REO") 8,045 5,006
------- -------
Total nonperforming assets 82,641 52,127
Less allowance for losses (48,600) (35,400)
------- -------
Total nonperforming assets (net of allowances) $34,041 $16,727
======= =======
Ratio of nonperforming assets to total assets 0.54% 0.39%
======= =======
Ratio of nonperforming assets to total loans and REO 0.77% 0.56%
======= =======
Allowance coverage of nonperforming loans 65.15% 75.13%
======= =======
Ratio of allowances to total loans 0.45% 0.38%
======= =======
Ratio of allowances to total loans and REO 0.45% 0.39%
======= =======
</TABLE>
<PAGE> 30
The activity in the allowance for losses on the Company's loan portfolios is
summarized in Table 6 below:
<TABLE>
<CAPTION>
TABLE 6
ALLOWANCE FOR LOSSES
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Beginning balance $36,400 $34,450 $35,400 $35,000
Provision for (Recovery of) losses 537 680 1,142 (345)
Allowances of acquired institutions 12,000 -- 12,764 --
Recoveries 520 279 886 2,296
Realized losses (857) (759) (1,592) (2,301)
------- ------- ------- -------
Ending balance $48,600 $34,650 $48,600 $34,650
======= ======= ======= =======
Ratio of net charge-offs to average
loans 0.01% 0.02% 0.01% --%
======= ======= ======= =======
</TABLE>
<PAGE> 31
NONPERFORMING ASSETS - PROVISION FOR LOSSES (CONTINUED)
During the first six months of 1996, the Company's provision for losses
totalled $1.1 million. During this same time period, the Company's
population of nonperforming assets increased by $30.5 million, or 59%, while
its allowances for loan losses increased by 37%. This increase in both
nonperforming assets and allowance for losses is primarily attributable to
the Company's recent acquisition of Bell Bancorp, Inc. The Company's
nonperforming assets remain well below industry averages.
NON-INTEREST INCOME
During the three and six months ended June 30, 1996, the Company earned $7.5
million and $13.9 million in deposit-related fees and charges, respectively,
compared to the $7.0 million and $12.8 million earned during the comparable
periods in 1995. The increases of 8% and 9% resulted from the Company's
expanding retail customer deposit base and certain fee increases implemented
in early 1996.
Approximately $4.4 billion of the Company's recently acquired, single-family
loans were sold during the first six months of 1996. Such sales occurred in
the normal course of business, and resulted in gains totaling approximately
$11.5 million, compared to $0.3 million in gains recorded on sales of $1.1
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 $3.4 million and $6.4
million for the three and six months ended June 30, 1996, respectively,
compared to income of $3.9 million and $7.7 million recorded during the
comparable periods in 1995. At June 30, 1996, loans serviced for the
benefit of others totaled $9.6 billion, compared to $8.5 billion at December
31, 1995, and $6.3 billion at June 30, 1995. The comparatively lower level
of loan servicing income recorded during the three and six months ended June
30, 1996, was due to the higher amounts of MSR amortization in the current
year's comparatively lower interest rate environment, which has produced
higher levels of loan prepayments. Recent increases in the general levels
of market interest rates have caused loan prepayment rates to decrease,
which may lessen the rate of MSR amortization in the near-term.
<PAGE> 32
OTHER EXPENSES
Table 7 below presents information concerning the Company's operating and
administrative expenses.
<TABLE>
<CAPTION>
TABLE 7
OPERATING AND ADMINISTRATIVE EXPENSES
Change from Change from
Three Months Ended Prior Year: Six Months Ended Prior Year:
June 30, Increase June 30, Increase
1996 1995 (Decrease) 1996 1995 (Decrease)
-------- -------- ------------ -------- -------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Compensation and benefits $35,126 $26,970 $8,156 $68,336 $53,125 $15,211
Occupancy and equipment 14,196 11,473 2,723 26,386 23,150 3,236
Federal insurance premium 5,623 4,700 923 11,230 9,405 1,825
General and administrative 7,621 5,297 2,324 14,969 10,368 4,601
Amortization of cost in
excess of fair value of
net assets acquired 4,482 3,915 567 8,564 7,873 691
Advertising 2,914 2,429 485 5,388 4,914 474
Other taxes 2,339 1,269 1,070 4,610 2,511 2,099
Other 1,648 1,308 340 3,462 2,354 1,108
------- ------- ------- -------- -------- -------
Gross operating and
administrative expenses 73,949 57,361 16,588 142,945 113,700 29,245
Less: Capitalized direct
costs of loan originations (13,049) (11,013) (2,036) (27,880) (17,027) (10,853)
------- ------- ------- -------- ------- -------
Total, net $60,900 $46,348 $14,552 $115,065 $96,673 $18,392
======= ======= ======= ======== ======= =======
Gross operating expense ratio 63.93% 57.06% 64.16% 56.83%
======= ======= ======== =======
Net operating expense ratio (1) 51.92% 45.03% 50.84% 47.69%
======= ======= ======== =======
</TABLE>
(1) Total net operating and administrative expenses (excluding
amortization of cost in excess of fair value of net assets acquired)
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 $60.9
million and $115.1 million for the three and six months ended June 30, 1996,
respectively, increases of 31% and 19% over the $46.3 million and $96.7
incurred during the same periods in 1995. The sources of these increases
are discussed in the following paragraphs.
The Company's gross compensation and benefits expense, before the
capitalization of direct costs of loan originations, during the three and
six months ended June 30, 1996, totaled $35.1 million and $68.3 million,
respectively, representing increases of 30% and 29% over the $27.0 million
and $53.1 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 Bancorp, Inc. on June 7,
1996, and its retained workforce also increased the Company's compensation
expense during the month ended June 30, 1996.
<PAGE> 33
OTHER EXPENSES (CONTINUED)
The Company's occupancy and equipment expenses during the three and six
months ended June 30, 1996, totaled $14.2 million and $26.4 million,
representing increases of 24% and 14% over the $11.5 million and $23.2
million recorded during the same periods in 1995. These increases are due
partially to the comparatively higher lending and loan sale volumes during
the second quarter and first half of 1996, which increased the Company's
microfilming and imaging costs compared to prior periods. The recent
acquisition of Bell Bancorp, Inc., and its fourteen branch offices also
increased occupancy and equipment expenses in the month of June 1996.
The Company paid Federal Deposit Insurance Corporation ("FDIC") premiums
totaling $5.6 million and $11.2 million for the three and six months ended
June 30, 1996, compared to $4.7 million and $9.4 million during the same
periods in 1995. The higher levels of expense recorded during 1996 are
primarily attributable to a $1.3 billion, or 15% increase in the average
balance of deposits outstanding during both the three- and six-month periods
ended June 30, 1996, compared to the respective year-earlier periods.
The Company's general and administrative expenses, before the capitalization
of direct costs of loan originations, during the three and six months ended
June 30, 1996, totaled $7.6 million and $15.0 million, representing
increases of 44% over both the $5.3 million and $10.4 million recorded
during the same periods in 1995. These increases are due to the
comparatively higher lending volumes during the first half of 1996. Certain
volume-related costs such as contract underwriting, fee appraisals and
credit reports are recorded in this expense category.
During the second quarter and first half of 1996, the Company's other tax
expense totaled $2.3 million and $4.6 million, respectively, increases of
84% 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 half of 1995, which was
the result of favorable Michigan state tax legislation that had been
enacted.
Certain direct costs of originating loans are capitalized and amortized over
the lives of the related loans. Various expense categories are reduced as
these costs are capitalized. Consequently, the level of loan originations
during a period impacts the nominal amount of expenses reported in the
Company's Consolidated Statements of Income. Expenses totaling $13.0
million and $27.9 million were capitalized during the three and six months
ended June 30, 1996, compared to $11.0 million and $17.0 million recorded
during the comparable periods in 1995. These increases of 18% and 64% are
due to the dramatically higher lending volumes during both the second
quarter and first half of 1996.
FEDERAL INCOME TAXES
The Company's statutory tax rate was 35% for both periods presented. The
Company's effective tax rate for each of the periods presented differs from
each period's statutory rate due primarily to the nondeductibility of
goodwill amortization.
The Company and its consolidated subsidiaries are currently undergoing IRS
examinations of the consolidated federal income tax returns for the years
ended December 31, 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.
<PAGE> 34
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
June 30, 1996, the Bank's liquidity ratio was 7.12%. 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 June 30, 1996, the Bank was required to maintain
net reserve balances of $25.2 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on April 23, 1996.
The stockholders were asked to elect three directors to hold office for a
term of three years and until their successors are elected and qualified,
and to ratify the appointment of Deloitte & Touche LLP to audit the books
and accounts of the Company for the fiscal year ending December 31, 1996.
Proxies for the Company's Annual Meeting were solicited by the Board of
Directors of the Company. There was no solicitation in opposition to
management's nominees listed in the proxy statement.
The following directors were elected by the Company's stockholders:
Name of Director Votes For Votes Withheld
- -------------------- ----------- --------------
Beverly Beltaire 27,322,455 104,784
Garry G. Carley 27,314,540 112,699
David P. Williams 27,326,951 100,288
The following directors' current terms of office continue:
Name of Director
- ------------------------------------------
Ernest L. Grove, Jr. Jack Otto
Norman P. Hahn Thomas R. Ricketts
William E. Hoglund E.G. Wilkinson
John M. O'Hara
The stockholders ratified the appointment of Deloitte & Touche LLP to audit
the books and accounts of the Company for the fiscal year ending December
31, 1996 with 27,338,585 votes for, 49,453 votes against and 39,201
abstentions.
<PAGE> 36
ITEM 5. OTHER INFORMATION - DIVIDEND DECLARATION AND PAYMENT ON COMMON
STOCK
On May 31, 1996, the Company paid a cash dividend of $0.19 per share to
stockholders of record on May 17, 1996. The declaration of the dividend
reduced retained earnings/stockholders' equity by approximately $5.9 million
during April 1996.
On July 18, 1996, the Company's Board of Directors declared a regular
quarterly dividend of $0.20 per share, payable on August 30, 1996, to
stockholders of record on August 16, 1996. This cash dividend, which is the
tenth consecutive semi-annual increased dividend, represents an increase of
5% compared to the Company's $0.19 per share divided paid during each of the
previous two quarters.
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 six months ended June 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.
EXHIBIT 27. FINANCIAL DATA SCHEDULE (EDGAR FILING ONLY)
(b) Reports on Form 8-K.
There were two reports on Form 8-K filed during the three months ended June
30, 1996. The first report, filed with the Securities and Exchange
Commission ("SEC") on May 15, 1996, discussed the receipt of the Office of
Thrift Supervision's ("OTS") approval to complete the Company's pending
acquisition of Bell Bancorp, Inc. ("Bell"). The second report, filed with
the SEC on June 14, 1996, announced the Company's completion of the
acquisition of Bell.
<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 August 14, 1996 /s/ Thomas R. Ricketts
---------------------------- --------------------------------
Thomas R. Ricketts
Chairman of the Board and
President
(Principal Executive Officer)
Date August 14, 1996 /s/ Joseph Krul
---------------------------- --------------------------------
Joseph Krul
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE> 38
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Page
- ------------------------------------------------------ ----
<S> <C>
Exhibit 11. Earnings Per Share E-1
Exhibit 27. Financial Data Schedule (Edgar filing only) E-2
</TABLE>
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 six months ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 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 applicable to
common stock and common
stock equivalents $34,026 $28,640 $66,217 $57,694
========== ========== ========== ==========
Average number of common
shares outstanding 31,304 31,582 31,269 31,554
Common stock equivalents on
stock options 869 800 888 762
---------- ---------- ---------- ----------
Total 32,173 32,382 32,157 32,316
========== ========== ========== ==========
Primary earnings per share $1.06 $0.89 $2.06 $1.79
========== ========== ========== ==========
Fully diluted earnings per share $1.06 $0.89 $2.06 $1.79
========== ========== ========== ==========
</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.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 97,237 97,237
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 3,554 3,554
<INVESTMENTS-HELD-FOR-SALE> 668,262 668,262
<INVESTMENTS-CARRYING> 3,049,374 3,049,374
<INVESTMENTS-MARKET> 3,027,057 3,027,057
<LOANS> 10,724,522 10,724,522
<ALLOWANCE> 48,600 48,600
<TOTAL-ASSETS> 15,239,983 15,239,983
<DEPOSITS> 10,932,352 10,932,352
<SHORT-TERM> 944,175 944,175
<LIABILITIES-OTHER> 510,025 510,025
<LONG-TERM> 1,890,496 1,890,496
0 0
0 0
<COMMON> 234,669 234,669
<OTHER-SE> 728,266 728,266
<TOTAL-LIABILITIES-AND-EQUITY> 15,239,983 15,239,983
<INTEREST-LOAN> 189,014 364,196
<INTEREST-INVEST> 60,255 127,560
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 249,269 491,756
<INTEREST-DEPOSIT> 112,598 224,693
<INTEREST-EXPENSE> 154,515 308,876
<INTEREST-INCOME-NET> 94,754 182,880
<LOAN-LOSSES> 537 1,142
<SECURITIES-GAINS> 5,853 11,534
<EXPENSE-OTHER> 60,900 115,065
<INCOME-PRETAX> 53,026 104,617
<INCOME-PRE-EXTRAORDINARY> 34,026 66,217
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 34,026 66,217
<EPS-PRIMARY> 1.06 2.06
<EPS-DILUTED> 1.06 2.06
<YIELD-ACTUAL> 7.51 7.52
<LOANS-NON> 32,327 32,327
<LOANS-PAST> 33,280 33,280
<LOANS-TROUBLED> 8,989 8,989
<LOANS-PROBLEM> 8,772 8,772
<ALLOWANCE-OPEN> 36,400 35,400
<CHARGE-OFFS> 858 1,592
<RECOVERIES> 520 886
<ALLOWANCE-CLOSE> 48,600 48,600
<ALLOWANCE-DOMESTIC> 48,600 48,600
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 43,943 43,943
</TABLE>
