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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1996
or
[ ] 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 0-18121
MAF BANCORP, INC.
(Exact name of registrant as specified in its charter)
----------------------------
DELAWARE 36-3664868
(State of Incorporation) (I.R.S. Employer
Identification No.)
55TH STREET & HOLMES AVENUE 60514
CLARENDON HILLS, ILLINOIS (Zip Code)
(Address of Principal executive Offices)
Registrant's telephone number: (708) 325-7300
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 issuer's common stock, par value $.01
per share, was 5,244,463 at May 9, 1996.
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MAF BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
Index
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PART I. FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 1996 (unaudited) and June 30, 1995.................3
Consolidated Statements of Income for the Three and Nine
Months Ended March 31, 1996 and 1995 (unaudited)...................4
Consolidated Statements of Changes in Stockholders'
Equity for the Nine Months Ended March 31, 1996
and 1995 (unaudited)...............................................5
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1996 and 1995 (unaudited)..............6
Notes to Unaudited Consolidated Financial Statements...............8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................11
PART II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders...............33
Item 5 Other Information.................................................33
Item 6 Exhibits and Reports on Form 8-K..................................33
Signature Page....................................................34
2
3
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
MARCH 31, JUNE 30,
1996 1995
----------- -----------
(Unaudited)
ASSETS
- - ------
Cash and due from banks $ 44,097 39,982
Interest-bearing deposits 27,099 10,465
Federal funds sold 6,270 9,360
Investment securities, at amortized cost (fair value of $32,900
at March 31, 1996 and $53,172 at June 30, 1995) 32,592 53,206
Investment securities available for sale, at fair value 39,225 24,088
Stock in Federal Home Loan Bank of Chicago, at cost 19,775 13,025
Mortgage-backed securities, at amortized cost (fair value of $116,868
at March 31, 1996 and $237,697 at June 30, 1995) 119,414 243,952
Mortgage-backed securities available for sale, at fair value 143,817 63,438
Loans receivable, net of allowance for losses of $9,498
at March 31, 1996 and $9,197 at June 30, 1995 1,472,505 1,242,469
Loans receivable held for sale, at fair value 14,817 24,984
Accrued interest receivable 11,749 10,246
Foreclosed real estate 109 336
Real estate held for development or sale 8,589 11,454
Premises and equipment, net 22,519 21,135
Other assets 17,607 14,936
--------- ---------
$ 1,980,184 1,783,076
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
Liabilities:
Deposits 1,372,783 1,313,306
Borrowed Funds 426,343 307,024
Subordinated capital notes, net 26,660 20,100
Advances by borrowers for taxes and insurance 18,054 15,219
Accrued expenses and other liabilities 26,690 22,008
--------- ---------
Total liabilities 1,870,530 1,677,657
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000
shares; none outstanding - -
Common stock, $.01 par value; authorized 20,000,000 shares;
5,244,463 shares outstanding at March 31, 1996 and
5,492,743 shares outstanding at June 30, 1995 59 59
Additional paid-in capital 39,762 39,740
Retained earnings, substantially restricted 84,158 73,447
Unrealized loss on marketable securities, net of tax (248) (48)
Treasury stock, at cost; 616,825 shares at March 31, 1996
and 366,825 shares at June 30, 1995 (14,077) (7,779)
--------- ---------
Total stockholders' equity 109,654 105,419
--------- ---------
Commitments and contingencies
$ 1,980,184 1,783,076
========= =========
See accompanying notes to unaudited consolidated financial statements.
3
4
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
1996 1995 1996 1995
------- ------- ------- -------
(Unaudited) (Unaudited)
Interest income:
Loans receivable $ 27,978 22,219 81,295 62,456
Mortgage-backed securities 4,177 4,874 13,303 14,828
Investment securities 1,367 1,245 4,277 3,767
Interest-bearing deposits 442 632 1,357 1,598
Federal funds sold 235 471 856 1,034
------ ------ ------- ------
Total interest income 34,199 29,441 101,088 83,683
------ ------ ------- ------
Interest expense:
Deposits 15,037 14,062 45,488 41,061
Borrowed funds 7,415 4,583 21,592 12,031
------ ------ ------- ------
Total interest expense 22,452 18,645 67,080 53,092
------ ------ ------- ------
Net interest income 11,747 10,796 34,008 30,591
Provision for loan losses 200 - 450 325
------ ------ ------- ------
Net interest income after provision for loan losses 11,547 10,796 33,558 30,266
------ ------ ------- ------
Non-interest income:
Gain (loss) on sale of:
Loans receivable 11 (94) 189 60
Mortgage-backed securities 38 - 95 -
Investment securities - 72 45 (5)
Foreclosed real estate 27 27 48 100
Income from real estate operations 1,550 664 4,370 5,002
Deposit account service charges 1,205 790 3,575 2,343
Loan servicing fee income 597 579 1,761 1,794
Brokerage commissions 476 357 1,226 998
Other 570 526 1,919 1,510
------ ------ ------- ------
Total non-interest income 4,474 2,921 13,228 11,802
------ ------ ------- ------
Non-interest expense:
Compensation and benefits 5,213 4,710 14,910 13,448
Office occupancy and equipment 948 907 2,703 2,688
Federal deposit insurance premiums 770 748 2,293 2,255
Advertising and promotion 374 410 1,290 1,321
Data processing 431 413 1,191 1,077
Other 1,429 1,267 4,051 3,912
------ ------ ------- ------
Total non-interest expense 9,165 8,455 26,438 24,701
------ ------ ------- ------
Income before income taxes and extraordinary item 6,856 5,262 20,348 17,367
Income taxes 2,655 1,954 7,858 6,628
------ ------ ------- ------
Income before extraordinary item 4,201 3,308 12,490 10,739
Extraordinary item - loss on early extinguishment of
debt, net of applicable income taxes of $300 - - (474) -
------ ------ ------- ------
Net income $ 4,201 3,308 12,016 10,739
====== ====== ======= ======
Primary earnings per share:
Income before extraordinary item $ .74 .56 2.15 1.81
Extraordinary item - - (.08) -
------ ------ ------- ------
Net income $ .74 .56 2.07 1.81
====== ====== ======= ======
Fully-diluted earnings per share:
Income before extraordinary item $ .74 .56 2.15 1.81
Extraordinary item - - (.08) -
------ ------ ------- ------
Net income $ .74 .56 2.07 1.81
====== ====== ======= ======
See accompanying notes to unaudited consolidated financial statements.
4
5
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
UNREALIZED
GAIN (LOSS)
ADDITIONAL ON MARKETABLE COMMON STOCK COMMON STOCK
COMMON PAID-IN RETAINED SECURITIES, TREASURY ACQUIRED BY ACQUIRED BY
STOCK CAPITAL EARNINGS NET OF TAX STOCK ESOP MRP'S TOTAL
------ ---------- -------- ------------- -------- ------------ ------------ -----
NINE MONTHS ENDED MARCH 31, 1996
- - --------------------------------
Balance at June 30, 1995 $ 59 39,740 73,447 (48) (7,779) - - 105,419
Net income - - 12,016 - - - - 12,016
Issuance of 1,720 shares of common stock - 9 - - - - - 9
Tax benefits from stock-related compensation - 13 - - - - - 13
Market value adjustment on available
for sale securities - - - (200) - - - (200)
Purchase of treasury stock - - - - (6,298) - - (6,298)
Cash dividends declared ($.24 per share) - - (1,294) - - - - (1,294)
Impact of special 10% stock dividend - - (11) - - - - (11)
---- ------ ------ ---- ------- ----- ----- -------
Balance at March 31, 1996 $ 59 39,762 84,158 (248) (14,077) - - 109,654
==== ====== ====== ==== ======= ===== ===== =======
NINE MONTHS ENDED MARCH 31, 1995
- - --------------------------------
Balance at June 30, 1994 $ 54 27,347 72,117 - (4,038) (146) (184) 95,150
Net income - - 10,739 - - - - 10,739
Issuance of 12,375 shares of common stock - 64 - - - - - 64
Tax benefits from stock-related compensation - 219 - - - - - 219
Market value adjustment on available
for sale securities (709) - - (709)
Purchase of treasury stock - - - - (3,129) - - (3,129)
Principal payment on ESOP loan - - - - - 146 - 146
Distribution of MRP stock awards - - - - - - 184 184
Cash dividends declared ($.218 per share) - - (1,212) - - - - (1,212)
---- ------ ------ ---- ------- ----- ----- -------
Balance at March 31, 1995 $ 54 27,630 81,644 (709) (7,167) - - 101,452
==== ====== ====== ==== ======= ===== ===== =======
See accompanying notes to unaudited consolidated financial statements.
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MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
NINE MONTHS ENDED
MARCH 31,
-----------------
1996 1995
------- -------
(Unaudited)
Operating activities:
Net income $ 12,016 10,739
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,404 1,371
Provision for loan losses 450 325
Distribution of MRP stock awards - 184
Deferred income tax expense 1,386 1,049
Extraordinary item, net of tax 474 -
Interest credited to deposits 41,328 37,349
Amortization of premiums, discounts and deferred loan expenses (5) 437
Net gain on sale of loans, mortgage-backed securities,
and real estate held for development or sale (4,654) (5,062)
(Gain) loss on sale of investment securities (45) 5
Increase in accrued interest receivable (1,503) (630)
Net decrease in other assets and liabilities 2,004 973
Loans originated for sale (151,257) (39,621)
Loans purchased for sale (65,384) (14,436)
Sale of loans originated and purchased for sale 203,785 56,173
Sale of mortgage-backed securities available for sale 23,800 -
-------- ---------
Net cash provided by operating activities 63,799 48,856
-------- ---------
Investing activities:
Loans originated for investment (330,657) (256,925)
Principal repayments on loans receivable 281,598 158,227
Principal repayments on mortgage-backed securities 43,457 39,449
Proceeds from maturities of investment securities available for sale 27,789 -
Proceeds from maturities of investment securities held to maturity 23,830 20,734
Proceeds from sale of:
Investment securities available for sale 711 4,085
Real estate held for development or sale 12,080 12,852
Premises and equipment - 55
Purchases of:
Loans receivable held for investment (181,902) (74,583)
Investment securities available for sale (25,367) (960)
Investment securities held to maturity (20,646) (11,133)
Stock in Federal Home Loan Bank of Chicago (7,050) -
Mortgage-backed securities - (10,003)
Real estate held for development or sale (4,160) (10,021)
Premises and equipment (2,788) (1,858)
-------- ---------
Net cash used in investing activities (183,105) (130,081)
-------- ---------
(continued)
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7
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
NINE MONTHS ENDED
MARCH 31,
-----------------
1996 1995
------- -------
(Unaudited)
Financing activities:
Proceeds from insurance of commmon stock $ 9 64
Dividends paid (1,274) (811)
Purchase of treasury stock (6,298) (3,129)
Net decrease in ESOP - 146
Net increase (decrease) in deposits (exclusive of interest credited) 18,149 (16,352)
Proceeds from borrowings 186,797 115,027
Repayment of borrowings (63,253) (8,797)
Increase in advances by borrowers for taxes and insurance 2,835 5,213
-------- --------
Net cash provided by financing activities 136,965 91,361
-------- --------
Increase in cash and cash equivalents 17,659 10,136
-------- --------
Cash and cash equivalents at beginning of period 59,807 76,060
-------- --------
Cash and cash equivalents at end of period $ 77,466 86,196
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds $ 66,571 52,734
Income taxes 6,950 4,450
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate 302 483
Transfer of investment securities to available for sale 17,999 16,000
Transfer of mortgage-backed securities to available for sale 108,742 77,831
Loans receivable swapped into mortgage-backed securities 23,684 -
======== ========
See accompanying notes to unaudited consolidated financial statements.
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8
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended March 31, 1996 and 1995
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) necessary for a fair presentation have been
included.
The results of operations for the three and nine months ended March 31, 1996 are
not necessarily indicative of results that may be expected for the entire fiscal
year ended June 30, 1996.
The consolidated financial statements include the accounts of MAF Bancorp, Inc.
("Company"), and its wholly-owned subsidiaries, Mid America Federal Savings Bank
and subsidiaries ("Bank") and MAF Developments, Inc., as of and for the three
and nine month periods ended March 31, 1996 and 1995 and as of June 30, 1995.
All material intercompany balances and transactions have been eliminated in
consolidation.
(2) ACCOUNTING CHANGES
On July 1, 1995, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan", and SFAS No.
118, "Accounting by Creditors for Impairment of Loan-Income Recognition and
Disclosures". SFAS No. 114 addresses the accounting by creditors for impairment
of certain loans. The Company had previously measured such loans in accordance
with the methods prescribed by SFAS No. 114. Impaired loans within the scope of
SFAS No. 114 should be measured based on the present value of future cash flows
discounted at the loan's effective interest rate or, alternatively, at the
loan's observable market price or fair value of the supporting collateral. SFAS
No. 118 permits the Company's existing interest income recognition policy to
continue. The adoption of these standards had no material impact on the
Company's results of operations or financial position.
(3) EARNINGS PER SHARE
For purposes of computed earnings per share, the number of shares outstanding
for the periods indicated is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ ----------------------
1996 1995 1996 1995
--------- ---------- ---------- ----------
Primary earnings per share 5,675,086 5,865,550 5,800,017 5,928,883
Fully-diluted earnings per share 5,675,086 5,875,854 5,803,213 5,937,924
========= ========= ========= =========
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(4) INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Company accounts for investment and mortgage-backed securities under SFAS
No. 115. At March 31, 1996, the Company has no securities classified as trading.
The Company determines the classification of new purchases of marketable
securities at the time of purchase.
As allowed under an implementation guide to SFAS No. 115, the Company
reclassified an additional $126.7 million of investment and mortgage-backed
securities, with a market value of $126.5 million, into its available for sale
category as of December 31, 1995. The transfer was done to provide additional
flexibility for the Company in managing its investment and liquidity positions.
(5) LOANS RECEIVABLE
Most conforming fixed-rate loans and some adjustable-rate loans originated by
the Bank are identified as being held for sale and are carried at the lower of
cost or market. At March 31, 1996, $14.8 million of loans are held for sale, and
are reflected at the lower of cost or market.
(6) STOCKHOLDERS' EQUITY
During the nine months ended March 31, 1996, 1,720 previously authorized but
unissued shares were issued for gross proceeds of $9,000, relating to exercising
of stock options by an executive officer of the Company.
On June 28, 1995, the Company announced its intent to repurchase up to 100,000
shares of its common stock. On November 30, 1995, the Company announced an
expansion to this program to allow for the repurchase of up to 250,000 shares
through June 30, 1996. During the current nine month period, all 250,000 shares
were repurchased, at an average cost of $25.20. To date, the Company has
repurchased 616,825 shares at an average cost of $22.82 per share.
(7) COMMITMENTS AND CONTINGENCIES
At March 31, 1996, the Bank had outstanding commitments to originate and
purchase loans of $168.9 million, of which $106.8 million were fixed-rate loans,
with rates ranging from 6.25% to 9.375%, and $62.1 million were adjustable-rate
loans. At March 31, 1996, commitments to sell loans were $50.7 million.
At March 31, 1996, the Bank had outstanding nine standby letters of credit
totaling $15.2 million, two of which totaled $13.3 million to enhance a
developer's industrial revenue bond financings of commercial real estate in the
Bank's market. These letters of credit are collateralized by mortgage-backed
securities and U.S. Government and agency securities owned by the Bank.
Additionally, the Company had eight outstanding standby letters of credit
totaling $3.9 million related to real estate development improvements.
(8) INCOME TAXES
The Company accounts for income taxes under SFAS No. 109. The reasons for the
differences between the effective income tax rate attributable to income from
continuing operations and the corporate federal income tax rate are summarized
in the table below.
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------- ---------------------------
1996 1995 1996 1995
-------- -------- -------- -------
Federal income tax rate 35.0% 35.0 35.0% 35.0
Items affecting effective income tax rate:
State income taxes, net of federal benefit 4.2 5.2 4.0 4.5
Reversal of deferred tax valuation reserve - (2.9) - (0.9)
Other items, net (0.5) (0.2) (0.4) (0.4)
----- ----- ----- -----
38.7% 37.1 38.6% 38.2
===== ===== ===== =====
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The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at March 31, 1996 are
presented below (in thousands):
AT MARCH 31, 1996
Deferred tax assets:
Loan origination fees $ 401
Deferred compensation 2,040
Book general loan loss reserves 4,006
Book v. tax basis in joint venture investments 25
Book v. tax state income tax expense 761
Book v. tax basis in securities 163
Net operating loss carryforwards 27
Other 158
------
Subtotal 7,581
Less: Valuation allowance (27)
------
Total deferred tax assets $ 7,554
------
Deferred tax liabilities:
Loan origination fees $ (964)
CMO REMIC - treatment of bond discount
amortization (100)
Excess of tax bad debt reserve over base year amount (1,611)
Book v. tax basis in FHLB stock (596)
Book v. tax state income tax expense (45)
Book v. tax basis in joint venture investments (435)
Book v. tax basis in real estate held for sale (83)
Book v. tax basis fixed assets (249)
Book v. tax basis in capitalized servicing (394)
Other (16)
-----
Total deferred tax liabilities $(4,493)
------
Net deferred tax asset $ 3,061
======
The Company believes that it is more likely than not that the net deferred tax
asset will be realized, based on historical taxable income levels and
anticipated future earnings and taxable income levels. The Company has reported
federal taxable income and pre-tax book income amounts totaling approximately
$62 million and $66 million, over the past three fiscal years, respectively.
The valuation allowance for deferred tax assets as of June 30, 1995 was $27,000
and such allowance did not change during the nine months ended March 31, 1996.
(9) RECLASSIFICATIONS
Certain reclassifications of prior quarter amounts have been made to conform
with current quarter presentation.
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11
MAF BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
MAF Bancorp, Inc. ("Company"), is a registered savings and loan holding company
incorporated under the laws of the state of Delaware and is primarily engaged in
the consumer banking business through its wholly owned subsidiary, Mid America
Federal Savings Bank ("Bank") and secondarily, in the residential real estate
development business through MAF Developments, Inc. ("MAF Developments").
Deposits of the Bank are insured up to the applicable limits of the Savings
Association Insurance Fund ("SAIF"), currently administered by the Federal
Deposit Insurance Corporation ("FDIC"). The Bank is subject to regulation by the
Office of Thrift Supervision ("OTS") and the FDIC. The Bank files periodic
reports with the OTS regarding its activities and financial condition, and is
subject to periodic examination by both the OTS and the FDIC.
The Bank is a consumer-oriented financial institution offering various financial
services to its customers through 14 retail banking offices. The Bank's market
area is generally defined as the western suburbs of Chicago, including DuPage
County, which has the second highest per capita income in Illinois. It is
principally engaged in the business of attracting deposits from the general
public and using such deposits, along with other borrowings, to make loans
secured by real estate, primarily one-to four-family residential mortgage loans.
To a lesser extent, the Bank also makes multi-family mortgage, residential
construction, land acquisition and development and a variety of consumer loans.
The Bank also has a small portfolio of commercial real estate loans, although in
recent years it has made new commercial real estate loans only on a limited
basis. Through two wholly owned subsidiaries, MAF Developments, Inc. ("MAF
Developments") and Mid America Development Services, Inc. ("Mid America
Developments"), the Company and the Bank, respectively, are also engaged in real
estate development activities. Additionally, the Bank operates an insurance
agency, Mid America Insurance Agency, Inc., which provides general insurance
services, and a brokerage operation through its affiliation with INVEST, a
registered broker-dealer.
As a federally chartered savings bank, the Bank's deposits are insured up to the
applicable limits by the Federal Deposit Insurance Corporation ("FDIC"). The
Bank is a member of the Federal Home Loan Bank ("FHLB") of Chicago, which is one
of the twelve regional banks for federally insured savings institutions
comprising the FHLB system. The Bank is regulated by the Office of Thrift
Supervision ("OTS") and the FDIC. The Bank is further regulated by the Board of
Governors of the Federal Reserve System as to reserves required to be maintained
against deposits and certain other matters.
REGULATION AND SUPERVISION
The Bank is subject to extensive regulation by the OTS, as its chartering
authority and primary federal regulator, and by the FDIC, which insures its
deposits up to applicable limits. Such regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities. Any change in
such regulation, whether by the OTS, the FDIC or Congress could have a material
impact on the Bank and its operations.
11
12
CAPITAL STANDARDS. Savings associations must meet three capital requirements;
core and tangible capital to total assets ratios as well as a regulatory capital
to total risk-weighted assets ratio.
Core Capital Requirement
The core capital requirement, or the required "leverage limit" currently
requires a savings institution to maintain core capital of not less than 3% of
adjusted total assets. Core capital generally includes common stockholders'
equity (including retained earnings), certain noncumulative perpetual preferred
stock and related surplus and minority interests in the equity accounts of fully
consolidated subsidiaries, less intangibles other than certain purchased
mortgage servicing rights. Investments in and loans to subsidiaries engaged in
activities not permissible for national banks, such as Mid America Developments,
are required to be deducted from total capital over a five-year phase-in period.
See "Deductions from Regulatory Capital on Non-Permissible Activities".
Tangible Capital Requirement
Under OTS regulations, savings institutions are required to meet a tangible
capital requirement of 1.5% of adjusted total assets. Tangible capital is
defined as core capital less any intangible assets, plus purchased mortgage
servicing rights in an amount includable in core capital.
Risk-Based Capital Requirement
The risk-based capital requirement provides that savings institutions maintain
total capital equal to not less than 8% of total risk-weighted assets. For
purposes of the risk-based capital computation, total capital is defined as core
capital, as defined above, plus supplementary capital. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan loss and lease loss
reserves (limited to a maximum of 1.25% of total risk weighted assets.)
Supplementary capital included in total capital cannot exceed 100% of core
capital.
Interest Rate Risk Component of Regulatory Capital
The OTS regulatory capital requirements also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings institution's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has delayed
implementation of the interest rate risk component. If the Bank had been subject
to an interest rate risk capital component as of March 31, 1996, the Bank's
total risk-weighted capital would not have been subject to a deduction based on
interest rate risk. At March 31, 1996, the Bank met each of its capital
requirements, in each case on a fully phased-in basis.
12
13
Deductions from Regulatory Capital on Non-Permissible Activities
Under the OTS capital regulation, deductions from tangible and core capital, for
the purpose of computing regulatory capital requirements, are required for
investments in and loans to subsidiaries engaged in non-permissible activities
for a national bank. Included in these non-permissible activities is the
development of real estate through the Bank's wholly-owned subsidiary, Mid
America Developments. The regulation includes a transitional rule for the
deduction from tangible capital over a five year period for investments in and
loans to Mid America Developments as of April 12, 1989. As of July 1, 1995, 60%
of such investment in and advances to Mid America Developments was required to
be deducted from capital. The scheduled deduction from tangible capital
increases to 100% as of July 1, 1996.
Included in the calculation of the Bank's deduction from tangible and core
capital due to investments in and advances to Mid America Developments is the
Bank's total equity investment in Mid America Developments as well as unsecured
loans made to Mid America Developments. Decreasing the investment in and
advances to Mid America Developments requires the generation of cash at Mid
America Developments to repay its loans to the Bank or to declare dividends to
pass undistributed profits up to the Bank. Currently, the generation of cash at
Mid America Developments is accomplished by continued lot sales from improved
land developments.
The following is a summary of the Bank's investment in and advances to Mid
America Developments at the dates indicated:
3/31/96 12/31/95 9/30/95 6/30/95 3/31/95
------- -------- ------- ------- -------
(in thousands)
Common Stock $ 1,397 1,397 1,397 1,397 1,397
Retained earnings 2,982 2,656 3,372 2,977 6,816
Intercompany advances 227 29 479 265 412
------ ------ ------ ------ ------
$ 4,606 4,082 5,248 4,639 8,625
====== ====== ====== ====== ======
As a result of the Bank's $4.6 million investment in and advances to Mid America
Developments at March 31, 1996, the Bank is currently required to reduce capital
for purposes of computing regulatory capital by 60% of such amount, or $2.8
million. Should the Bank's investment in and advances to Mid America
Developments as of March 31, 1996, remain outstanding through the current fiscal
year, the Bank would deduct from capital, for the purpose of computing
regulatory capital requirements, $2.8 million through June 30, 1996, and $4.6
million thereafter.
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14
At March 31, 1996, the Bank was in compliance with all of its capital
requirements as follows:
AT MARCH 31, 1996 AT JUNE 30, 1995
--------------------------- --------------------------
PERCENT OF PERCENT OF
AMOUNT ASSETS AMOUNT ASSETS
---------- ------------ ---------- -----------
(Dollars in thousands)
Stockholder's equity of the Bank $ 108,911 5.53% $ 101,539 5.73%
========= ==== ======== ====
Tangible capital (1) $ 106,521 5.42% $ 99,723 5.64%
Tangible capital requirement (1) 29,453 1.50 26,517 1.50
--------- ---- -------- ----
Excess $ 77,068 3.92% $ 73,206 4.14%
========= ==== ======== ====
Core capital (1) $ 106,521 5.42% $ 99,723 5.64%
Core capital requirement (1) 58,907 3.00 53,033 3.00
--------- ---- -------- ----
Excess $ 47,614 2.42% $ 46,690 2.64%
========= ==== ======== ====
Core and supplementary capital (2) $ 115,807 11.39% $ 108,706 12.07%
Risk-based capital requirement (2) 81,334 8.00 72,068 8.00
--------- ----- -------- -----
Excess $ 34,473 3.39% $ 36,638 4.07%
========= ==== ======== ====
Total Bank assets $1,968,117 $1,770,946
Adjusted total Bank assets 1,963,566 1,767,781
Total risk-weighted assets 1,021,227 904,018
Adjusted total risk-weighted assets 1,016,677 900,853
Investment in real estate subsidiary 4,607 4,639
- - ----------------------------
(1) Percentages represent percent of adjusted total Bank assets.
(2) Percentages represent percent of adjusted total risk-weighted assets.
A reconciliation of consolidated stockholder's equity of the Bank for financial
reporting purposes to regulatory capital available to the Bank to meet
regulatory capital requirements is as follows:
MARCH 31, 1996 JUNE 30, 1995
-------------- -------------
(in thousands)
Stockholder's equity of the Bank $108,911 101,539
Non-permissible subsidiary deduction (2,764) (1,856)
Non-includable purchased mortgage servicing rights (162) (75)
SFAS No. 115 capital adjustment 536 115
--------- --------
Tangible and core capital 106,521 99,723
General loan loss reserves 9,498 9,197
Land loans greater than 80% loan-to-value (212) (214)
--------- --------
Core and supplementary capital $115,807 108,706
========= ========
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15
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution is
considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier 1 (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier 1 (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has a
ratio of total capital to weighted assets of less of than 8%, a ratio of Tier 1
(core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
risk-based capital ratio of less than 3% or a leverage ratio that is less than
3% is considered to be "significantly undercapitalized," and a savings
institution that has a tangible capital to assets ratio equal to or less than 2%
is deemed to be "critically undercapitalized." Subject to a narrow exception,
the banking regulator is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. The FDIC has adopted a risk-based deposit
insurance system that assesses deposit insurance premiums according to the level
of risk involved in an institution's activities. An institution's risk category
is based upon whether the institution is classified as "well capitalized,"
"adequately capitalized" or "undercapitalized" and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation and information
which the FDIC determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance fund. Based on its capital
and supervisory subgroups, each Bank Insurance Fund ("BIF") and SAIF member
institution is assigned an annual FDIC assessment rate between 23 basis points
for an institution in the highest category (i.e., well-capitalized and healthy)
and 31 basis points for an institution in the lowest category (i.e.,
undercapitalized and posing substantial supervisory concern). The FDIC has
authority to further raise premiums if deemed necessary. If such action is
taken, it could have an adverse effect on the earnings of the Bank.
In 1995, the FDIC adopted a new assessment rate schedule of 0 to 27 basis points
for BIF members beginning in the fourth quarter of 1995. Under that schedule,
approximately 92% of BIF members would pay only $2,000 per year, the legal
minimum, in insurance assessments. The FDIC retained the existing assessment
rate schedule of 23 to 31 basis points applicable to SAIF member institutions.
Consequently, there is a significant differential in the insurance premiums paid
by BIF and SAIF members. As long as the premium differential continues, it may
place SAIF members, such as the Bank, at a substantial disadvantage to BIF
members with respect to pricing of loans and deposits and the ability to achieve
lower operating costs.
Several bills have been introduced in Congress to mitigate the effect of the
BIF/SAIF premium disparity. Among other things, these bills impose a special one
time assessment on SAIF members in an amount left to the discretion of the FDIC
but expected to be between 79-85 basis points to recapitalize the SAIF fund.
This would allow adoption of an ongoing assessment schedule similar to that
applicable to BIF
15
16
members. The pending legislation would also require the merger of the BIF and
SAIF into one fund by January 1, 1998 provided that subsequent legislation is
enacted to eliminate the federal thrift charter. In addition, certain provisions
of another pending bill would eliminate the bad debt reserve deduction for
financial institutions and would require savings associations to recapture any
post 1987 additions to an institution's bad debt reserves. It cannot be
predicted whether this legislation will be enacted or whether any other
legislation regarding the disparity will be enacted or, if legislation is
enacted, the amount of any special assessment. Any such legislation may have an
adverse effect on the operating expenses and results of operations of the Bank.
Legislative proposals are also under consideration that would eliminate the
federal thrift charter and abolish the OTS and require federal savings
associations to become either national or state chartered banks. If such
legislation is adopted, it could require divestiture of activities, adverse tax
consequences or otherwise disrupt operations. No prediction can be made as to
any such legislation.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At March 31, 1996,
the Bank's limit on loans to one borrower was $16.0 million. At March 31, 1996,
the Bank's largest aggregate outstanding balance of loans to one borrower
consisted of $16.2 million. Although this balance exceeds the Bank's current
loan to one borrower limitation, this borrower's balance was grandfathered under
OTS regulations to be subject to the Bank's loan to one borrower limit as of
August 9, 1989, or $59.5 million.
Standards for Safety and Soundness. The federal banking agencies have adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
The agencies are expected to adopt a proposed rule that proposes asset quality
and earnings standards which, if adopted in final, would be added to the
Guidelines. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final rule
establishes deadlines for the submission and review of such safety and soundness
compliance plans when such plans are required.
Limitation on Capital Distributions. OTS regulations impose limitations upon all
capital distributions by savings institutions, such as cash dividends, payments
to repurchase or otherwise acquire its shares, payments to shareholders of
another institution in a cash-out merger and other distributions charged against
capital. The rule establishes three tiers of institutions, which are based
primarily on an institution's capital level. An institution that exceeds all
fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the
16
17
OTS, make capital distributions during a calendar year equal to the greater of
(i) 100% of its net earnings to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year or (ii) 75% of its net income for the previous four quarters. Any
additional capital distributions would require prior regulatory approval. In the
event the Bank's capital fell below its regulatory requirements or the OTS
notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. In December 1994,
the OTS proposed amendments to its capital distribution regulation that would
generally authorize the payment of capital distributions without OTS approval
provided the payment does not make the institution undercapitalized within the
meaning of the prompt corrective action regulation. However, institutions in a
holding company structure would still have a prior notice requirement. At March
31, 1996, the Bank was a Tier 1 Bank. During the nine months ended March 31,
1996, the Bank declared and paid dividends to the Company totaling $4.0 million.
The Internal Revenue Code may also limit dividend payments by the Bank. To the
extent that (i) the balance in the Bank's reserve for losses on qualifying real
property loans exceeds the amount that would have been allowed under an
experience method (the "excess bad debt reserve") and (ii) the Bank makes
"nondividend distributions" to stockholders that are considered to result in
distributions from the excess bad debt reserve or the supplemental reserve for
losses on loans ("Excess Distributions"), an amount based on the amount
distributed will be included in the Bank's taxable income. Nondividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid out of
the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Bank's bad debt reserve.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB System, which
consists of 12 regional FHLBs. The FHLBs provide a central credit facility
primarily for member institutions. The Bank, as a member of the FHLB of Chicago,
is required to acquire and hold shares of capital stock in that FHLB in an
amount at least equal to 1% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 1/20 of its advances (borrowings) from the FHLB of Chicago, whichever
is greater. The Bank is in compliance with this requirement. FHLB advances must
be secured by specified types of collateral and may be obtained only for the
purpose of providing funds for residential housing finance. At March 31, 1996,
FHLB of Chicago advances totaled $395.5 million.
The FHLBs are required to provide funds on certain obligations on bonds issued
to fund the resolution of insolvent thrifts and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also result in the FHLBs
imposing a higher rate of interest on advances to their members, which could
reduce the net interest income of member savings associations, such as the Bank.
Further, there can be no assurance that the impact of FDICIA and FIRREA on the
FHLBs will not also cause a decrease in the value of the FHLB of Chicago stock
held by the Bank.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board regulations require savings
institutions to maintain non-interest earning reserves against their transaction
accounts (primarily NOW and regular checking accounts). The Federal Reserve
Board regulations generally require that reserves be maintained against
aggregate transaction accounts as follows: for accounts aggregating $52.0
million or less (subject to adjustment by the Federal
17
18
Reserve Board) the reserve requirement is 3%; and for accounts greater than
$52.0 million, the reserve requirement is $1.56 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that portion
of total transaction accounts in excess of $52.0 million. The first $4.3 million
of otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
CHANGES IN FINANCIAL CONDITION
As of March 31, 1996, total assets of the Company were $1.98 billion, an
increase of $197.1 million, or 11.0% compared to $1.78 billion at June 30, 1995.
The increase is primarily due to increased deposits and borrowings, which were
used to finance mortgage originations held for investment.
Cash and short-term investments totaled a combined $77.5 million at March 31,
1996, an increase of $17.7 million, or 29.5% from the $59.8 million reported at
June 30, 1995.
Investment securities classified as held to maturity decreased $20.6 million to
$32.6 million at March 31, 1996 compared to $53.2 million at June 30, 1995. The
decrease is due to purchases of $20.6 million of investments offset by
maturities of $23.5 million, as well as the transfer of $18.0 million (fair
value of $17.9 million) of investments into the available for sale portfolio on
December 31, 1995, as allowed under an implementation guide related to SFAS No.
115.
Investment securities available for sale increased to $39.2 million, at market
at March 31, 1996, from $24.1 million at June 30, 1995. The primary reason for
the increase was due to the Bank transferring $17.9 million from its investments
held to maturity portfolio (at fair value) into available for sale to provide
greater liquidity for funding loan volume. Additionally, during the nine months
ending March 31, 1996, the Company purchased $25.4 million investments available
for sale, which were offset by $27.8 million of maturities. At March 31, 1996,
unrealized gains were $489,000.
Mortgage-backed securities classified as held to maturity decreased $124.5
million to $119.4 million at March 31, 1996. On December 31, 1995, the Bank
transferred $108.7 million (fair value of $108.5 million) of mortgage-backed
securities and collateralized mortgage obligations ("CMOs") into its available
for sale portfolio as allowed under an implementation guide to SFAS No. 115.
Mortgage-backed securities available for sale increased to $143.8 million, at
market as of March 31, 1996. The increase is due to the transfer of $108.5
million of mortgage-backed securities and CMO's on December 31, 1995 (at fair
value), offset by prepayments and amortization of $27.8 million. At March 31,
1996, unrealized losses were $900,000.
The Bank has $222.7 million of CMO securities included in mortgage-backed
securities available for sale and held to maturity at March 31, 1996, the
majority of which are collateralized by FNMA, FHLMC and GNMA mortgage-backed
securities, and to a lesser extent by whole loans.
Loans receivable, including loans held for sale, increased $219.9 million to
$1.49 billion at March 31, 1996, from $1.27 billion at June 30, 1995. The
increase is primarily a function of loan originations and purchases of $727.6
million, offset by sales of $226.6 million and amortization and prepayments of
$281.6 million. The growth in loans receivable is due to continued originations
of adjustable-rate loans, which the Bank has traditionally held in its portfolio
to help control interest-rate risk.
The allowance for loan losses increased to $9.5 million at March 31, 1996,
compared to $9.2 million at June 30, 1995, due to a $450,000 in provision for
loan losses during the nine months ended March 31, 1996, offset by $149,000 of
net charge-offs. At March 31, 1996, the ratio of the allowance for loan losses
to non-performing loans was 105.3%, compared to 128.2% at June 30, 1995.
18
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Real estate held for development or sale decreased $2.9 million to $8.6 million
at March 31, 1996. A summary of real estate held for development or sale is as
follows:
MARCH 31, JUNE 30,
1996 1995
----------- ----------
(in thousands)
Mid America Developments
Ashbury $ 1,373 2,042
Woods of Rivermist 767 861
----- ------
2,140 2,903
MAF Developments
The Plantation 4,724 2,536
Creekside of Remington 1,707 1,734
Clow Creek Farm 18 3,924
Other - 357
----- ------
6,449 8,551
----- ------
$ 8,589 11,454
===== ======
The decrease in Ashbury is due to 33 sales during the current nine month period,
offset by development costs in the final phases of the project. At March 31,
1996, 30 lots were pending sale in Ashbury, leaving 2 lots unsold in this 1,115
lot subdivision. The Woods of Rivermist has 10 lots remaining, with 5 lots under
contract at March 31, 1996. Development is substantially complete in the
project. No sales have been recorded in fiscal 1996.
The Plantation subdivision is in the planning phase and is expected to commence
development in the fourth quarter of fiscal 1996. The increase of $2.2 million
is due to land acquisition and other planning costs. The decrease in Clow Creek
Farm is due to development costs of $1.0 million, offset by 137 lot sales. At
March 31, 1996, 42 lots remain, with 16 lots pending sale. The slight decrease
in the Creekside of Remington development is due to $625,000 of development
costs offset by 27 lot sales. At March 31, 1996, 137 lots remain, with no lots
under contract. The Company wrote off its $424,000 investment related to options
it had acquired on two parcels of land aggregating 280 acres in Plainfield,
Illinois. The options were not exercised following a thorough financial and
market assessment of the proposed project.
Deposits increased 4.5%, or $59.5 million, to $1.37 billion at March 31, 1996.
After consideration of interest credited to accounts of $41.3 million for the
nine months ended March 31, 1996, actual cash inflows were $18.2 million, and
are primarily attributable to an increase in certificates of deposit.
Borrowed funds, which consist primarily of FHLB of Chicago advances, increased
$119.3 million to $426.3 million at March 31, 1996. The primary reason for the
increase is due to the Bank increasing its FHLB of Chicago advances by $160.0
million since June 30, 1995. These advances were primarily adjustable rate and
used to fund the increased adjustable-rate loan volume generated during the
current nine month period. Offsetting this increase was the repayment of a $12.7
million reverse repurchase agreement with an original term of 2 years, as well
as a $4.5 million decrease in the Bank's CMO bonds payable issued by its
special-purpose finance subsidiary.
Subordinated capital notes, net increased $6.6 million to $26.7 million at March
31, 1996. The increase is due to the refinancing of $20.9 million of 10%
subordinated capital notes in November 1995 with $27.6 million of 10-year
subordinated notes, with a coupon rate of 8.32%, and an effective cost of 8.85%
after consideration of $1.0 million of issuance costs.
19
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ASSET QUALITY
NON-PERFORMING LOANS. When a borrower fails to make a required payment by the
end of the month in which the payment is due, the Bank generally institutes
collection procedures. The Bank will send a late notice, and in most cases,
delinquencies are cured promptly; however, if a loan has been delinquent for
more than 60 days, the Bank contacts the borrower in order to determine the
reason for the delinquency and to effect a cure, and, where appropriate, reviews
the condition of the property and the financial circumstances of the borrower.
Based upon the results of any such investigation, the Bank may: (1) accept a
repayment program for the arrearage from the borrower; (2) seek evidence, in the
form of a listing contract, of efforts by the borrower to sell the property if
the borrower has stated that he is attempting to sell; (3) request a deed in
lieu of foreclosure; or (4) initiate foreclosure proceedings. When a loan
payment is delinquent for three or more monthly installments, the Bank will
initiate foreclosure proceedings.
On July 1, 1995, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures," which impose certain requirements on the identification and
measurement of impaired loans. A loan is considered impaired when, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan. For
loans which are not individually significant (i.e. loans under $500,000), and
represent a homogeneous population, the Bank evaluates impairment collectively
based on management reports on the level and extent of delinquencies, as well as
historical loss experience for these types of loans. The Bank uses this criteria
on one-to four-family residential loans, consumer loans, multi-family
residential loans, and land loans. Impairment for loans considered individually
significant and commercial real estate loans are measured based on the fair
value of the collateral securing the loan. At March 31, 1996, the Company has no
loans which are considered impaired under the criteria of SFAS No. 114.
Charge-offs of principal occur when a loss has deemed to have occurred as a
result of the book value exceeding the fair value or net realizable value.
The Company's policy for recognition of interest income on impaired loans is
unchanged as a result of the adoption of SFAS No. 114 and 118. A loan (whether
considered impaired or not) is classified as non-accrual when collectibility is
in doubt, and is normally analyzed upon the borrower becoming 90 days past due
on contractual principal or interest payments. When a loan is placed on
non-accrual status, or in the process of foreclosure, previously accrued but
unpaid interest is reserved in full. Income is subsequently recorded to the
extent cash payments are received, or at a time when the loan is brought current
in accordance with its original terms.
At March 31, 1996, restructured loans which meet the definition of troubled debt
restructurings under SFAS No. 15 "Accounting by Debtors and Creditors for
Troubled Debt Restructurings," were $4.3 million, consisting of two loans, at an
average interest rate of 6.90%, compared to $4.4 million, consisting of two
loans at an average rate of 6.41% at June 30, 1995. At March 31, 1996, one of
the loans was 30 days delinquent.
For the quarter ended March 31, 1996, interest income that would have been
recorded on non-accrual loans (had they been performing according to their
original terms) amounted to $40,000, compared to $41,000 for the three months
ended March 31, 1995.
Non-performing loans increased $1.8 million to $9.0 million at March 31, 1996
from $7.2 million at June 30, 1995. The increase was primarily in the
one-to-four family portfolio. As of March 31, 1996, the Bank's ratio of
non-performing loans to total loans was .60%, compared to .57% at June 30, 1995
and .69% at March 31, 1995.
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LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of
the Bank's loan portfolio in dollar amounts at the dates indicated:
YEAR ENDED JUNE 30, QUARTER ENDED
------------------------- -------------------------------------------------------------------------
1995 1994 1993 3/96 12/95 9/95 6/95 3/95 12/94 9/94
---- ---- ---- ---- ----- ---- ---- ---- ----- ----
(In thousands)
REAL ESTATE LOANS:
One-to four-family:
Held for investment $1,032,233 835,369 735,526 1,227,470 1,156,852 1,107,821 1,032,233 973,232 933,304 882,756
Held for sale 24,984 8,739 68,165 14,817 24,327 25,625 24,984 8,352 2,800 7,785
Multi-family 67,248 49,864 46,043 81,919 80,817 71,046 67,248 63,713 60,538 55,521
Commercial 47,273 52,090 56,687 45,087 45,115 46,026 47,273 49,406 49,708 50,597
Construction 19,984 13,860 12,460 17,860 16,403 18,035 19,984 17,370 16,613 15,394
Land 19,281 15,453 17,873 26,149 22,608 22,128 19,281 19,649 21,105 21,015
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total real estate
loans 1,211,003 975,375 936,754 1,413,302 1,346,122 1,290,681 1,211,003 1,131,722 1,084,068 1,033,068
OTHER LOANS:
Consumer loans:
Equity lines of
credit 66,637 46,451 41,164 75,902 74,380 71,064 66,637 61,401 57,110 48,512
Home equity loans 4,335 1,112 2,040 8,877 7,537 5,608 4,335 2,617 1,134 1,001
Other 2,725 2,471 2,483 3,946 3,494 3,232 2,725 4,049 4,051 3,983
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total consumer
loans 73,697 50,034 45,687 88,725 85,411 79,904 73,697 68,067 62,295 53,496
Commercial business
lines 1,560 2,341 1,241 2,220 2,234 2,100 1,560 1,195 1,268 2,269
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total other loans 75,257 52,375 46,928 90,945 87,645 82,004 75,257 69,262 63,563 55,765
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total loans
receivable 1,286,260 1,027,750 983,682 1,504,247 1,433,767 1,372,685 1,286,260 1,200,984 1,147,631 1,088,833
Less:
Loans in process 8,728 5,161 7,592 8,843 7,893 8,135 8,728 8,338 8,534 12,153
Unearned discounts,
premiums and
deferred loan fees
(expenses), net 882 2,818 4,417 (1,416) (914) (78) 882 1,630 2,171 2,588
Allowance for loan
losses 9,197 8,779 7,993 9,498 9,288 9,209 9,197 9,125 9,080 8,927
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total loans
receivable, net 1,267,453 1,010,992 963,680 1,487,322 1,417,500 1,355,419 1,267,453 1,181,891 1,127,846 1,065,165
Loans receivable held
for sale (24,984) (8,739) (68,165) (14,817) (24,327) (25,625) (24,984) (8,532) (2,800) (7,785)
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Loans receivable,
net $1,242,469 1,002,253 895,515 1,472,505 1,393,173 1,329,794 1,242,469 1,173,359 1,125,046 1,057,380
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
21
22
NON-PERFORMING ASSETS. The following table sets forth information regarding
non-accrual loans, loans which are 91 days or more delinquent but on which the
Bank is accruing interest, foreclosed real estate and non-accrual investment
securities of the Bank.
YEAR ENDED JUNE 30, QUARTER ENDED
----------------------- ----------------------------------------------------
1995 1994 1993 3/96 12/95 9/95 6/95 3/95 12/94 9/94
---- ---- ---- ---- ----- ---- ---- ---- ----- ----
(In thousands)
Non-performing loans:
One-to four-family and multi-family loans:
Non-accrual loans $ 1,972 2,933 3,796 $2,801 1,925 1,579 1,972 3,137 2,272 2,414
Accruing loans 91 days or more days overdue 555 482 702 1,235 1,440 119 555 321 159 778
------- ------ ------ ------ ------ ----- ----- ----- ----- ------
Total 2,527 3,415 4,498 4,036 3,365 1,698 2,527 3,458 2,431 3,192
------- ------ ------ ------ ------ ----- ----- ----- ----- ------
Commercial real estate, construction and land loans:
Non-accrual loans - 312 - 439 211 - - 181 430 430
Accruing loans 91 or more days overdue 100 118 659 - 233 211 100 - - 212
Restructured or renegotiated loans 4,379 4,464 6,933 4,321 4,344 4,363 4,379 4,392 4,413 4,435
------- ------ ------ ------ ------ ----- ----- ----- ----- ------
Total 4,479 4,894 7,592 4,760 4,788 4,574 4,479 4,573 4,843 5,077
------- ------ ------ ------ ------ ----- ----- ----- ----- ------
Other loans:
Non-accrual loans 168 163 419 223 163 164 168 132 89 139
Accruing loans 91 or more days overdue - 24 15 - 15 - - - - 22
------- ------ ------ ------ ------ ----- ----- ----- ----- ------
Total 168 187 434 223 178 164 168 132 89 161
------- ------ ------ ------ ------ ----- ----- ----- ----- ------
Total non-performing loans:
Non-accrual loans 2,140 3,408 4,215 3,463 2,299 1,743 2,140 3,450 2,791 2,983
Accruing loans 91 days or more overdue 655 624 1,376 1,235 1,688 330 655 321 159 1,012
Restructured or renegotiated loans 4,379 4,464 6,933 4,321 4,344 4,363 4,379 4,392 4,413 4,435
------- ------ ------ ------ ------ ----- ----- ----- ----- ------
Total $ 7,174 8,496 12,524 $9,019 8,331 6,436 7,174 8,163 7,363 8,430
======= ====== ====== ====== ====== ===== ===== ===== ===== ======
Non-accrual loans to total loans .17% .33 .46 .23% .16 .13 .17 .29 .24 .28
Accruing loans 91 days or more overdue to total loans .05 .06 .15 .08 .12 .02 .05 .03 .01 .09
Restructured or renegotiated loans to total loans .35 .44 .76 .29 .31 .32 .35 .37 .39 .41
------- ------ ------ ------ ------ ----- ----- ----- ----- ------
Non-performing loans to total loans .57% .83 1.37 .60% .59 .47 .57 .69 .64 .78
======= ====== ====== ====== ====== ===== ===== ===== ===== ======
Foreclosed real estate (net of related reserves):
One-to four-family $ 311 1,379 386 $ 109 249 126 311 139 465 819
Commercial, construction and land 25 2,090 6,544 - - - 25 119 538 812
------- ------ ------ ------ ------ ----- ----- ----- ----- ------
Total $ 336 3,469 6,930 $ 109 249 126 336 258 1,003 1,631
======= ====== ====== ====== ====== ===== ===== ===== ===== ======
Non-performing loans and foreclosed real estate
to total loans and foreclosed real estate .60% 1.17 2.11 .61% .61 .49 .60 .71 .73 .93
======= ====== ====== ====== ====== ===== ===== ===== ===== ======
Total non-performing assets $ 7,510 11,965 19,454 $9,128 $8,580 6,562 7,510 8,421 8,366 10,061
======= ====== ====== ====== ====== ===== ===== ===== ===== ======
Total non-performing assets to total assets .42% .75 1.26 .46 .45 .35 .42 .49 .50 .63
======= ====== ====== ====== ====== ===== ===== ===== ===== ======
22
23
DELINQUENT LOANS. Delinquencies in the Bank's portfolio at the dates indicated
were as follows:
61-90 DAYS 91 DAYS OR MORE
--------------------------- ----------------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE OF PERCENT NUMBER BALANCE OF PERCENT
OF DELINQUENT OF OF DELINQUENT OF
LOANS LOANS TOTAL LOANS LOANS TOTAL
------ ---------- ------- ------ ---------- -------
(Dollars in thousands)
March 31, 1996 26 $2,718 .18% 35 $4,203 .28%
== ====== === == ====== ===
December 31, 1995 17 $1,998 .14% 31 $3,818 .27%
== ====== === == ====== ===
September 30, 1995 20 $1,847 .14% 21 $2,017 .15%
== ====== === == ====== ===
June 30, 1995 10 $1,077 .09% 30 $2,564 .20%
== ====== === == ====== ===
March 31, 1995 9 $ 867 .07% 35 $3,376 .28%
== ====== === == ====== ===
CLASSIFICATION OF ASSETS. In connection with the filing of its periodic reports
with the OTS, the Bank regularly reviews its portfolio to determine whether any
assets require classification in accordance with OTS regulation. At March 31,
1996 and June 30, 1995, the Bank had no loans classified as doubtful or loss. At
March 31, 1996 and June 30, 1995, all non-performing assets are classified as
substandard. The table below summarizes assets classified as substandard at the
dates indicated:
MARCH 31, 1996 JUNE 30, 1995
-------------- -------------
(in thousands)
Loans receivable:
One-to-four family and multi-family $4,036 2,527
Commercial, construction and land 4,760 4,479
Equity lines of credit 223 163
Consumer-secured - 5
------ -----
Total loans receivable 9,019 7,174
Foreclosed real estate 109 336
------ -----
$9,128 7,510
====== =====
23
24
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash dividends paid by the Bank and
MAF Developments, and liquidity generated by the issuance of common stock,
preferred stock, or borrowings. The Company's principal uses of funds are
interest payments on its subordinated capital notes, cash dividends to
shareholders, loans to and investments in MAF Developments, as well as
investment purchases with excess cash flow. The Company also maintains a $15.0
million unsecured revolving line of credit from a commercial bank, of which no
balances have been drawn. For the nine month period ended March 31, 1996, the
Company received $4.0 million in dividends from the Bank and declared cash
dividends on common stock of $.24 per share, or $1.3 million.
In November 1995, the Company raised $27.6 million in 10-year subordinated notes
with a coupon rate of 8.32%, and an effective cost of 8.85% after consideration
of issuance expenses. Proceeds were used to retire the Company's 10%
subordinated capital notes at par, with the remainder of proceeds available for
general corporate purposes. The early repayment resulted in an extraordinary
charge of $.08 per share due to the write-off of the remaining unamortized
issuance expenses.
On November 29, 1995, the Company agreed to acquire N.S. Bancorp, Inc. for a
combination of stock and cash valued at $277.2 million at that date, based on
the Company's stock price at that date. N.S. Bancorp is the parent holding
company of Northwestern Savings Bank, which operates six branches in Chicago and
two nearby suburbs. As of March 31, 1996, N.S. Bancorp had $1.15 billion in
assets, $880.4 million in deposits, and $235.2 million in equity. The
transaction is subject to regulatory and shareholder approvals and is expected
to close prior to June 30, 1996.
In connection with the merger, the Company has obtained a financing commitment
from a commercial bank to provide up to $45.0 million in an unsecured term loan
facility to be funded on or after the closing of the merger but no later than
August 31, 1996. The Company has the option of selecting either a fixed or
floating interest rate or a combination thereof. The financing commitment
provides for increasing annual principal payments beginning in December 1997
with the final maturity of December 31, 2003.
The Bank's principal sources of funds are deposits, advances from the FHLB of
Chicago, principal repayments on loans and mortgage-backed securities, proceeds
from the sale of loans and funds provided by operations. While scheduled loan
and mortgage-backed securities amortization and maturing interest-bearing
deposits are a relatively predictable source of funds, deposit flows and loan
and mortgage-backed securities prepayments are greatly influenced by economic
conditions, the general level of interest rates and competition. The Bank
utilizes particular sources of funds based on comparative costs and
availability. The Bank generally manages the pricing of its deposits to maintain
a steady deposit balance, but has from time to time decided not to pay rates on
deposits as high as its competition, and when necessary, to supplement deposits
with longer term and/or less expensive alternative sources of funds, such as
advances from the FHLB of Chicago. During the current nine month period the Bank
obtained $160.0 million of primarily adjustable rate FHLB of Chicago advances to
fund mortgage loan originations held for investment.
The Bank is required by regulation to maintain specific minimum levels of liquid
investments. Regulations currently in effect require the Bank to maintain liquid
assets at least equal to 5.0% of the sum of its average daily balance of net
withdrawable accounts and borrowed funds due in one year or less. This
regulatory requirement may be changed from time to time to reflect current
economic conditions. During the quarter ended March 31, 1996, the Bank's average
liquidity ratio was 6.23%. At March 31, 1996, total liquidity was $103.1
million, or 7.03%, which was $29.8 million in excess of the 5.0% regulatory
requirement.
24
25
During the three months ended March 31, 1996, the Bank originated and purchased
loans totaling $240.2 million compared with $110.7 million during the same
period a year ago. The increase in loan volume is attributable to growth in
wholesale loan purchases. Loan sales for the three months ended March 31, 1996,
were $71.3 million, compared to $12.2 million for the prior year period. The
Bank has outstanding commitments to originate and purchase loans of $168.9
million and commitments to sell loans of $50.7 million at March 31, 1996.
ASSET/LIABILITY MANAGEMENT
The Bank's overall asset/liability management strategy is directed toward
reducing the Bank's exposure to interest rate risk over time in changing
interest rate environments. Asset/liability management is a daily function of
the Bank's management due to continual fluctuations in interest rates and
financial markets.
As part of its asset/liability strategy, the Bank has implemented a policy to
maintain its cumulative one-year interest sensitivity gap ratio within a range
of (15)% to 15% of total assets, which helps the Bank to maintain a more stable
net interest rate spread in various interest rate environments. The gap ratio
fluctuates as a result of market conditions and management's expectation of
future interest rate trends. Under OTS Thrift Bulletin 13, the Bank is required
to measure its interest rate risk assuming various increases and decreases in
general interest rates, and the effect on net interest income and market value
of portfolio equity. An interest rate risk policy has been approved by the Board
of Directors setting the limits to changes in net interest income and market
value of portfolio equity at the various rate scenarios required. In addition,
the OTS has added an interest rate risk component to its regulatory capital
requirements which could require an additional amount of capital based on the
level of adverse change in a savings institution's market value of portfolio
equity, resulting from changes in interest rates. Management continually reviews
its interest rate risk policies in light of potential higher capital
requirements that may result from the final adoption of an interest rate risk
component to the OTS capital requirements.
The Bank's asset/liability management strategy emphasizes the origination of
one- to four-family adjustable-rate loans and other loans which have shorter
terms to maturity or reprice more frequently than fixed-rate mortgage loans,
yet, provide a positive margin over the Bank's cost of funds. In response to
customer demand, the Bank originates fixed-rate mortgage loans, but sells the
majority of these loans in the secondary market in order to maintain its
interest rate sensitivity levels.
In conjunction with the strategy discussed above, management has also hedged the
Bank's exposure to interest rate risk primarily by committing to sell fixed-rate
mortgage loans for future delivery. Under these commitments, the Bank agrees to
sell fixed-rate loans at a specified price and at a specified future date. The
sale of fixed-rate mortgage loans for future delivery has enabled the Bank to
continue to originate new mortgage loans, and to generate gains on sale of these
loans as well as loan servicing fee income, while maintaining its gap ratio
within the parameters discussed above. Most of these forward sale commitments
are conducted with the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC") with respect to loans that
conform to the requirements of these government agencies. The forward commitment
of mortgage loans presents a risk to the Bank if the Bank is not able to deliver
the mortgage loans by the commitment expiration date. If this should occur, the
Bank would be required to pay a fee to the buyer. The Bank attempts to mitigate
this risk by charging potential retail borrowers a 1% fee to fix the interest
rate, or by requiring the interest rate to float at market rates until shortly
before closing. In its wholesale lending operation, there is more risk due to
the competitive inability to charge a rate lock fee to the mortgage brokers,
which the Bank tries to offset by using higher assumed fallout rates. In
addition, the Bank has started using U.S. Treasury bond futures contracts to
hedge some of the mortgage pipeline exposure. These futures contracts are used
to hedge mortgage loan production in those circumstances where loans are not
sold forward as described above.
25
26
The table below sets forth the scheduled repricing or maturity of the Bank's
assets and liabilities at March 31, 1996, based on the assumptions used by the
Federal Home Loan Bank ("FHLB") of Chicago with respect to passbook account
withdrawals, loan and mortgage-backed security prepayment percentages. In a
departure from the FHLB of Chicago assumptions, which assume a 0% prepayment for
other borrowings, the Bank assumes that the collateralized mortgage obligations
included in other borrowings prepay at the same rate used for the
mortgage-backed securities collateralizing these obligations. The effect of
these assumptions is to quantify the estimated dollar amount of items that are
interest-sensitive and may be repriced within each of the periods specified
Certain shortcomings are inherent in the method of analysis presented in the
table below as it does not necessarily indicate the impact of general interest
rate movements on the Bank's net interest yield because the repricing of certain
categories of assets and liabilities is subject to competitive and other
pressures beyond the Bank's control. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. As a result, certain assets and
liabilities indicated as maturing or otherwise repricing within a stated period
may, in fact, mature or reprice at different times and at different volumes.
AT MARCH 31, 1996
------------------------------------------------------------------------------------
MORE THAN MORE THAN MORE THAN
6 MONTHS 6 MONTHS 1 YEAR 3 YEARS MORE THAN
OR LESS TO 1 YEAR TO 3 YEARS TO 5 YEARS 5 YEARS TOTAL
---------- ------------ ------------ ------------- ----------- ----------
(In thousands)
Interest-earning assets:
Loan receivable $ 369,876 214,920 486,834 196,455 227,319 1,495,404
Mortgage-backed securities 106,816 14,664 47,557 27,598 66,450 263,085
Interest-bearing deposits 27,099 - - - - 27,099
Federal funds sold 6,270 - - - - 6,270
Investment securities(1) 68,600 - 7,876 - 15,116 91,592
-------- -------- ------- ------- ------- ---------
Total interest-earning assets 578,661 229,584 542,267 224,053 308,885 1,883,450
Yield adjustments, net (69) 217 433 234 747 1,562
-------- -------- ------- ------- ------- ---------
Total net interest-earning assets 578,592 229,801 542,700 224,287 309,632 1,885,012
Impact of hedging activity(2) 11,616 - - - (11,616) -
-------- -------- ------- ------- ------- ---------
Total net interest-earning assets adjusted
for impact of hedging activities 590,208 229,801 542,700 224,287 298,016 1,885,012
-------- -------- ------- ------- ------- ---------
Interest-bearing liabilities:
NOW and checking accounts 131,875 - - - - 131,875
Money market accounts 143,850 - - - - 143,850
Passbook accounts 21,976 20,108 73,597 45,716 97,148 258,545
Certificate accounts 350,071 138,899 215,419 58,263 10,935 773,587
FHLB advances 150,000 30,000 35,000 145,000 35,500 395,500
Other borrowings 3,233 2,681 24,929 - 26,660 57,503
-------- -------- ------- ------- ------- ---------
Total interest-bearing liabilities 801,005 191,688 348,945 248,979 170,243 1,760,860
-------- -------- ------- ------- ------- ---------
Interest sensitivity gap $(210,797) 38,113 193,755 (24,692) 127,773 124,152
======== ======== ======= ======= ======= =========
Cumulative gap $(210,797) (172,684) 21,071 (3,621) 124,152
======== ======== ======= ======= =======
Cumulative gap assets as a percentage
of total assets (10.65)% (8.72) 1.06 (0.18) 6.27
Cumulative net interest-earning assets as a
percentage of interest-bearing liabilities 73.68% 82.60 101.57 99.77 107.05
- - ----------------------------------------
(1) Includes $19.8 million of stock in FHLB of Chicago in 6 months or less.
(2) Represents forward commitments to sell long-term fixed-rate mortgage loans.
26
27
AVERAGE BALANCE SHEETS
The following table sets forth certain information relating to the Bank's
consolidated statements of financial condition and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Such yields
and costs are derived by dividing income or expense by the average balance of
assets or liabilities, respectively, for the periods shown. Average balances are
derived from average daily balances. The yield/cost at March 31, 1996 includes
fees which are considered adjustments to yield.
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31, AT MARCH 31,
------------------------------------------------ -----------------------------------------------
1996 1995 1996 1995 1996
----------------------- ----------------------- ------------------------ --------------------- -------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST BALANCE COST
------- -------- ------ ------- -------- ------ ------- -------- ------ -------- -------- ---- ------- -----
(dollars in thousands)
ASSETS:
Interest-earning
assets:
Loans
receivable $1,451,667 27,978 7.71% $1,157,904 22,219 7.68% $1,387,931 81,295 7.81% $1,100,938 62,456 7.56% $1,496,820 7.71%
Mortgage-backed
securities 269,581 4,177 6.20 313,149 4,874 6.23 283,883 13,303 6.25 324,561 14,828 6.09 263,231 6.27
Interest-bearing
deposits (1) 20,107 442 8.70 37,901 632 6.76 20,326 1,357 8.74 34,576 1,598 6.16 27,099 5.25
Federal funds
sold (1) 11,045 235 8.42 31,862 471 6.00 13,432 856 8.34 22,133 1,034 6.22 6,270 5.15
Investment
securities (2) 91,329 1,420 6.15 83,391 1,298 6.31 94,269 4,436 6.16 86,789 3,926 6.03 91,592 6.21
--------- ------ -------- ------ -------- ------ --------- ------ --------
Total interest-
earning assets 1,843,729 34,252 7.43 1,624,207 29,494 7.28 1,799,841 101,247 7.49 1,568,997 83,842 7.12 1,885,012 7.39
Non-interest
earning assets 83,404 76,496 81,856 76,198 95,172
--------- --------- --------- --------- ---------
Total assets $1,927,133 $1,700,703 $1,881,697 $1,645,195 $1,980,184
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing
liabilities:
Deposits 1,285,027 15,037 4.69 1,256,569 14,062 4.54 1,270,146 45,488 4.75 1,251,498 41,061 4.37 1,307,857 4.63
Borrowed funds 428,652 7,415 6.85 265,426 4,583 6.98 402,720 21,592 7.04 224,463 12,031 7.14 453,003 6.71
--------- ------ --------- ------ ---------- ------ --------- ------ ---------
Total interest-
bearing
liabilities 1,713,679 22,452 5.23 1,521,995 18,645 4.97 1,672,866 67,080 5.30 1,475,961 53,092 4.79 1,760,860 5.17
------ ---- ------ ---- ------ ---- ------ ---- ----
Non-interest
bearing deposits 59,434 44,297 56,287 39,984 64,926
Other liabilities 44,609 34,804 43,253 31,985 44,744
--------- --------- --------- --------- ---------
Total other
liabilities 104,043 79,101 99,540 71,969 109,670
--------- --------- --------- --------- ---------
Total
liabilities 1,817,722 1,601,096 1,772,406 1,547,930 1,870,530
Stockholders'
equity 109,411 99,607 109,291 97,265 109,654
--------- --------- --------- --------- ---------
Liabilities and
stockholders'
equity $1,927,133 $1,700,703 $1,881,697 $1,645,195 $1,980,184
========== ========== ========= ========= =========
Net interest
income/interest
rate spread $11,800 2.20% $10,849 2.31% $34,167 2.19% $30,750 2.33% 2.22%
====== ==== ====== ==== ====== ==== ====== ==== ====
Net earning
assets/net
yield on average
interest-earning
assets $ 130,050 2.56% $ 102,212 2.67% $ 126,975 2.53% $ 93,036 2.61% $ 124,152 N/A
Ratio of ======== ==== ======== ==== ========= ==== ========= ==== ========= ===
interest-earning
assets to
interest-bearing
liabilities 107.59% 106.72% 107.59% 106.30% 107.05%
======== ======== ========= ========= =========
- - ------------------------------------
(1) Includes pro-rata share of interest income received on outstanding drafts payable.
(2) Income and yields are stated on a taxable equivalent basis.
27
28
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The following table describes the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated. Information is provided in each category with respect to
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate), (ii) changes attributable to changes in rates (changes in rates
multiplied by prior volume, and (iii) the net change. Changes attributable to
the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1996
COMPARED TO COMPARED TO
MARCH 31, 1995 MARCH 31, 1995
INCREASE (DECREASE) INCREASE(DECREASE)
------------------------- ------------------------
VOLUME RATE NET VOLUME RATE NET
------ ---- ----- ------ ---- -----
(In thousands)
INTEREST-EARNING ASSETS:
Loans receivable $5,754 5 5,759 16,761 2,078 18,839
Mortgage-backed securities (706) 9 (697) (1,905) 380 (1,525)
Interest-bearing deposits (344) 154 (190) (784) 543 (241)
Federal funds sold (325) 89 (236) (472) 294 (178)
Investment securities 184 (62) 122 408 102 510
----- --- ----- ------- ----- ------
Total $4,563 195 4,758 14,008 3,397 17,405
----- --- ----- ------- ----- ------
INTEREST-BEARING LIABILITIES:
Deposits $ 343 632 975 647 3,780 4,427
Borrowed funds 3,039 (207) 2,832 9,726 (165) 9,561
----- --- ----- ------- ----- ------
Total 3,382 425 3,807 10,373 3,615 13,988
----- --- ----- ------- ----- ------
Net change in net interest income $1,181 (230) 951 3,635 (218) 3,417
===== === ===== ======= ===== ======
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
GENERAL - Net income for the three months ended March 31, 1996 was $4.2 million,
compared to $3.3 million for the three months ended March 31, 1995, an increase
of $893,000, or 27.0%. Earnings per share was $.74 per share for the three
months ended March 31, 1996 compared to $.56 per share for the three months
ended March 31, 1995, an increase of 32.1% reflecting the positive impact of the
Company's stock repurchase programs.
NET INTEREST INCOME - Net interest income for the three months ended March 31,
1996 was $11.7 million, an increase of $951,000, or 8.8% from the $10.8 million
recorded for the three months ended March 31, 1995. The Bank's net interest
margin declined to 2.56% for the three months ended March 31, 1996 compared to
2.67% for the three months ended March 31, 1995. This margin decrease was more
than offset by an increase in average interest-earning assets to $1.84 billion
for the current three month period, compared to $1.62 billion for the three
months ended March 31, 1995.
Interest income on loans receivable increased $5.8 million during the current
three month period, as a result of a $293.8 million increase in average
balances. The increase in average balance is due to a change in the mix of loan
originations favoring adjustable-rate loans, which the Bank generally holds in
portfolio. Due to available liquidity being invested in loan originations, the
Bank has had limited activity in purchasing
28
29
mortgage-backed securities, which together with amortization and repayments
accounts for the decrease in income from mortgage-backed securities.
Interest expense on interest-bearing liabilities increased by $3.8 million, due
to a $1.0 million increase in interest expense on deposits, and an increase in
interest expense on borrowed funds of $2.8 million. The increase in deposit
interest expense is due to an increase in the average rate on deposits of 15
basis points and a $28.5 million increase in average balances. The increase in
interest expense on borrowed funds is primarily due to the increase in average
balances outstanding of $172.2 million to $428.7 million compared to $256.4
million for the three months ended March 31, 1995, without a material increase
in average cost.
PROVISION FOR LOAN LOSSES - The Bank provided $200,000 for possible loan losses
during the quarter ended March 31, 1996, compared to $0 for the quarter ended
March 31, 1995. The current period provision was recorded due to growth in the
Bank's loan portfolio, higher level of charge-offs and the increase in
non-performing assets. The Bank's ratio of the allowance for loan losses to
non-performing loans was 105.3% at March 31, 1996, compared to 111.8% at March
31, 1995, and 128.2% at June 30, 1995.
NON-INTEREST INCOME - Non-interest income increased $1.6 million during the
quarter ended March 31, 1996, to $4.5 million, primarily due to increases in
income from real estate operations, and deposit account service changes.
Gain on sale of loans and mortgage-backed securities increased a combined
$143,000 to $49,000 for the three months ended March 31, 1996, compared to the
three months ended March 31, 1995. The increase is due to an increase in loans
sold to $71.3 million for the three months ended March 31, 1996 compared to
$12.2 million for the three months ended March 31, 1995. Included in the current
period gains is $38,000 from the sale of mortgage-backed securities, which
represent loans originated by the Bank and swapped prior to sale. During the
current quarter, the Bank swapped and sold $9.4 million of current loan
originations.
During the current quarter, the Company recorded $0 in gains on the sale of
investment securities compared to gains of $72,000 in the prior year period. The
prior year gains were generated from the sale of marketable equity securities,
which were classified as available for sale.
The Bank recorded income from real estate operations of $1.6 million for the
three months ended March 31, 1996, compared to $664,000 for the three months
ended March 31, 1995.
THREE MONTHS ENDED MARCH 31,
---------------------------------------
1996 1995
---------------- -----------------
# OF PRE-TAX # OF PRE-TAX
LOTS INCOME LOTS INCOME
---- ------ ---- -------
(dollars in thousands)
Clow Creek Farm 62 $1,665 11 $ 245
Ashbury 9 309 9 360
Woods of Rivermist - - 1 50
Creekside of Remington - - 6 9
Other - (424) - -
-- ----- -- -----
71 $1,550 27 $ 664
== ===== == =====
The Clow Creek Farm sales reflect the strong demand for Unit 2 lots. At March
31, 1996, 16 lots in Clow Creek Farm are under contract. Ashbury sales were
consistent with the prior year period. At March 31, 1996, 30 of the 32 remaining
lots are under contract. The loss of $424,000 reflects the write-off of
capitalized costs for a project which the Company decided not to exercise its
options to purchase two parcels of land.
29
30
Loan servicing fee income increased slightly to $597,000 for the three months
ended March 31, 1996. Although average loans serviced for others increased 11.4%
to $981.8 for the current three month period, compared to $881.6 million for the
prior three month period, loan servicing fee income increased only 3.1% due to
the amortization of purchased loan servicing rights, which totaled $70,000 for
the current three month period, compared to $26,000 for the prior three month
period.
Deposit account service charges increased $415,000, or 52.5% to $1.2 million for
the three months ended March 31, 1996. The increase is due to the addition of
approximately 16,600 checking accounts since March 31, 1995, in response to the
Bank's successful direct mail checking account program.
NON-INTEREST EXPENSE - Total non-interest expense increased $710,000, or 8.4% to
$9.2 million for the three months ended March 31, 1996, primarily due to
increases in compensation and benefits.
Compensation and benefits increased $503,000 or 10.7% during the current
quarter, to $5.2 million. In addition to normal salary increases, this category
increased due to higher loan volume, and its impact on loan department related
compensation, including higher loan officer commissions, overtime and incentive
compensation.
INCOME TAXES - The Company recorded a provision for income taxes of $2.7 million
for the quarter ended March 31, 1996, or an effective income tax rate of 38.7%,
compared to $2.0 million, or an effective income tax rate of 37.1% in the prior
year period.
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 1996 AND 1995
GENERAL - Net income for the nine months ended March 31, 1996 was $12.0 million,
or $2.07 per share, compared to $10.7 million, or $1.81 per share, an increase
of $1.3 million, or 11.9%. On an operating basis, before consideration of the
$.08 per share charge due to early extinguishment of debt, earnings per share
increased 18.8% to $2.15 per share for the current nine months, compared to
$1.81 per share for the prior nine month period.
NET INTEREST INCOME - Net interest income for the nine months ended March 31,
1996 was $34.0 million compared to $30.6 million for the nine months ended March
31, 1995, an increase of $3.4 million, or 11.2%. The increase is a function of
the growth in average interest-earning assets of $230.8 million, offset by a
decrease in the net interest margin to 2.53% for the nine months ended March 31,
1996, compared to 2.61% for the prior year's nine month period.
Interest income on interest-earning assets increased $17.4 million during the
nine months ended March 31, 1996. Of this increase, $18.8 million is
attributable to loans receivable. Due to the substantial increase in the
origination of adjustable-rate loans, the Bank's average balance of loans
receivable increased $287.0 million during the current period, while the average
yield on loans receivable increased 25 basis points. The $1.5 million decrease
in interest income on mortgage-backed securities is due to a $40.7 million
decrease in average balance due to lower purchase activity in light of higher
loan originations for investment purposes.
Interest expense on interest-bearing liabilities increased $14.0 million during
the nine months ended March 31, 1996. Interest expense on savings deposits
increased $4.4 million, primarily due to an increase in the average cost of
savings of 38 basis points. Average deposit balances between the nine month
periods remained relatively constant. Interest expense on borrowed funds
increased $9.6 million, due primarily to a $178.3 million increase in the
average balance of borrowed funds, due to the growth in loans held for
investment, with little change in the average cost of borrowed funds.
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31
PROVISION FOR LOAN LOSSES - The Bank provided $450,000 for possible loan losses
for the nine months ended March 31, 1996 compared to $325,000 for the nine
months ended March 31, 1995. Net charge-offs were $149,000 for the current nine
month period compared to net recoveries of $21,000 for the prior nine month
period. The higher provision was due to the growth in the Bank's loan portfolio,
higher level of charge-offs and increase in non-performing assets.
NON-INTEREST INCOME - Non-interest income increased $1.4 million to $13.2
million for the nine months ended March 31, 1996.
Gain on sale of loans receivable and mortgage-backed securities were a combined
$284,000 for the nine months ended March 31, 1996, compared to $60,000 for the
nine months ended March 31, 1995, an increase of $224,000. Loan sales were
$226.6 million during the current period compared to $56.4 million in the prior
nine month period, which is the primary reason for the increase. Included in
gains during the current nine month period is $95,000 in gains from the sale of
mortgage-backed securities, which represent loans originated by the Bank and
swapped prior to sale. During the current nine month period, the Bank swapped
and sold $23.7 million of current loan originations.
During the current nine months, the Company recognized gains on the sale of
investment securities of $45,000, compared to net losses of $5,000 for the
previous nine month period. The current year gains are primarily from the sale
of marketable equity securities, while the prior year losses include a $181,000
loss on the sale of $2.5 million of U.S. Agency securities from the available
for sale portfolio, offset by gains on marketable equity securities.
Income from real estate operations was $4.4 million for the nine months ended
March 31, 1996, compared to income of $5.0 million for the nine months ended
March 31, 1995.
NINE MONTHS ENDED MARCH 31,
---------------------------------------
1996 1995
---------------- -----------------
# OF PRE-TAX # OF PRE-TAX
LOTS INCOME LOTS INCOME
---- ------ ---- -------
(dollars in thousands)
Clow Creek Farm 137 $3,340 11 $ 245
Ashbury 33 1,373 120 4,698
Woods of Rivermist - - 1 50
Creekside of Remington 27 81 6 9
Other - (424) - -
--- ----- --- -----
197 $4,370 138 $5,002
=== ===== === =====
At March 31, 1996, 32 lots remain, of which 30 are under contract. Clow Creek
Farm sales increased substantially due to the availability of lots during the
nine month period. At March 31, 1996, 42 lots remain, with 16 under contract.
The reduction in Ashbury sales is due to the near sell-out of the project. Woods
of Rivermist has 10 lots remaining, with 5 under contract at March 31, 1996.
Creekside of Remington has 137 lots remaining with no lots under contract, as
sales have been slow since the first quarter of 1996. The $424,000 loss
represents the write-off of capitalized costs related to a real estate project
which the Company decided not to exercise its options to purchase two parcels of
land.
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32
Loan service fee income decreased 1.8% to $1.8 million for the nine months ended
March 31, 1996. Although the average balance of loans serviced for others has
increased 7.5% to $946.1 million for the current nine month period, compared to
$880.3 million in the prior nine month period, loan servicing fees decreased
primarily due to amortization of purchased loan servicing rights, which totaled
$256,000 for the current nine month period, compared to $55,000 for the prior
nine month period.
Deposit account service charges increased $1.2 million, or 52.6% to $3.6 million
for the nine months ended March 31, 1996, due to a dramatic increase in the
number of checking accounts generated by the Bank's direct mail checking account
program.
NON-INTEREST EXPENSE - Non-interest expense for the nine months ended March 31,
1996 increased $1.7 million, or 7.0% to $26.4 million compared to $24.7 million
for the nine months ended March 31, 1995, primarily due to an increase in
compensation and benefits.
Compensation and benefits increased $1.5 million for the nine months ended March
31, 1996, to $14.9 million. The increase is a function of the 86.6% increase in
loan volume during the current nine month period which has increased loan
officer commissions and other loan department related compensation.
Additionally, benefits expense has increased $352,000 due to higher FICA taxes,
employee benefit plan and training expenses.
EXTRAORDINARY ITEM - The Company reported an extraordinary loss of $474,000 for
the nine months ended March 31, 1996. This item relates to the prepayment of
$20.9 million of 10% subordinated capital notes originally due in 2002, in
November 1995.
INCOME TAXES - The Company recorded a provision for income taxes of $7.9 million
attributable to income from continuing operations for the nine months ended
March 31, 1996, or an effective income tax rate of 38.6%. Income tax expense for
the nine months ended March 31, 1995, was $6.6 million, or an effective income
tax rate of 38.2%.
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PART II - OTHER INFORMATION
- - -----------------------------
Item 1. Legal Proceedings. The Company is not presently engaged in any legal
proceedings of a material nature.
Item 2. Changes in Securities. Not Applicable.
Item 3. Defaults Upon Senior Securities. Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No. 11. Statement re: Computation of Per Share Earnings
NINE
QUARTER ENDED MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1996
-------------- --------------
Net income $4,201,000 $12,016,000
========= ==========
Weighted average shares outstanding 5,295,161 5,421,921
Common stock equivalents due to dilutive
effect of stock options 379,925 378,096
--------- ----------
Total weighted average common shares and
equivalents outstanding for primary computation 5,675,086 5,800,017
========= ==========
Primary earnings per share $ .74 $ 2.07
========= ==========
Total weighted average common shares and
equivalents outstanding for primary computation 5,675,086 5,800,017
Additional dilutive shares using the end of period
market value versus the average market value
when applying the treasury stock method - 3,196
--------- ----------
Total weighted average common shares and
equivalents outstanding for fully-diluted computation 5,675,086 5,803,213
========= ==========
Fully-diluted earnings per share $ .74 2.07
========= ==========
(b) Reports on Form 8-K. None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAF Bancorp. Inc.
-----------------
(Registrant)
Date: May 9, 1996 /s/ Allen H. Koranda
----------- -----------------------------------------
Allen H. Koranda
Chairman of the Board and Chief Executive
Officer
(Duly Authorized Officer)
Date: May 9, 1996 /s/ Jerry Weberling
----------- -----------------------------------------
Jerry Weberling
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
34