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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 September 30, 2001
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
Clarendon Hills, Illinois 60514
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number: (630) 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 22,482,963 at November 7, 2001.
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MAF BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
Index
- -----
Part I. Financial Information Page
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 2001 and December 31, 2000 (unaudited) 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2001 and 2000 (unaudited) 4
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2001 (unaudited) 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2001 and 2000 (unaudited) 6
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Part II. Other Information
- ------- -----------------
Item 1. Legal Proceedings 32
Item 2. Changes in Securities 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 33
Signature Page 34
2
Part I. Financial Information
Item 1. Financial Statements
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands)
(Unaudited)
September 30, December 31,
2001 2000
----------- -----------
Assets
- ------
Cash and due from banks $ 93,699 77,860
Interest-bearing deposits 22,542 53,392
Federal funds sold 53,152 139,268
Investment securities, at cost (fair value of $13,290 at December 31, 2000) -- 12,633
Investment securities available for sale, at fair value 357,285 174,494
Stock in Federal Home Loan Bank of Chicago, at cost 119,527 84,775
Mortgage-backed securities, at amortized cost
(fair value of $79,137 at December 31, 2000) -- 80,301
Mortgage-backed securities available for sale, at fair value 147,209 24,084
Loans receivable held for sale 108,931 41,074
Loans receivable, net of allowance for losses of $18,210 and $18,258 4,101,878 4,287,040
Accrued interest receivable 28,659 27,888
Foreclosed real estate 1,365 1,808
Real estate held for development or sale 12,795 12,718
Premises and equipment, net 52,271 48,904
Other assets 68,814 60,485
Intangible assets, net of accumulated amortization of $18,441 and $15,030 65,453 68,864
----------- -----------
$ 5,233,580 5,195,588
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits $ 3,205,150 2,974,213
Borrowed funds 1,510,900 1,728,900
Advances by borrowers for taxes and insurance 35,450 38,354
Accrued expenses and other liabilities 73,905 66,392
----------- -----------
Total liabilities 4,825,405 4,807,859
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000
shares; none outstanding -- --
Common stock, $.01 par value;
authorized 80,000,000 shares; 25,420,650 shares issued;
22,481,363 and 23,110,022 shares outstanding 254 254
Additional paid-in capital 198,201 198,068
Retained earnings, substantially restricted 271,589 237,867
Stock in gain deferral plan; 223,453 shares 511 511
Accumulated other comprehensive income, net of tax 5,064 1,435
Treasury stock, at cost; 3,162,740 and 2,534,081 shares (67,444) (50,406)
----------- -----------
Total stockholders' equity 408,175 387,729
----------- -----------
$ 5,233,580 5,195,588
=========== ===========
See accompanying notes to unaudited consolidated financial statements
3
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Interest income:
Loans receivable $ 74,989 78,570 233,259 224,131
Mortgage-backed securities -- 1,393 -- 4,414
Mortgage-backed securities available for sale 1,962 483 5,272 1,767
Investment securities -- 1,919 -- 5,203
Investment securities available for sale 6,354 2,988 16,917 9,466
Interest-bearing deposits and federal funds sold 1,996 2,957 6,907 8,051
-------- -------- -------- --------
Total interest income 85,301 88,310 262,355 253,032
-------- -------- -------- --------
Interest expense:
Deposits 30,166 30,359 93,313 84,050
Borrowed funds 22,844 26,116 72,402 74,543
-------- -------- -------- --------
Total interest expense 53,010 56,475 165,715 158,593
-------- -------- -------- --------
Net interest income 32,291 31,835 96,640 94,439
Provision for loan losses -- 500 -- 1,100
-------- -------- -------- --------
Net interest income after provision for loan losses 32,291 31,335 96,640 93,339
-------- -------- -------- --------
Non-interest income:
Gain (loss) on sale of:
Loans receivable 2,678 272 5,275 476
Mortgage-backed securities (2) -- (2) (700)
Investment securities 264 4 824 137
Foreclosed real estate 30 (27) 352 177
Mortgage loan servicing rights -- 4,337 -- 4,337
Deposit account service charges 4,230 3,439 11,763 9,109
Income from real estate operations 799 2,625 5,469 7,801
Brokerage commissions 512 586 1,694 1,740
Loan servicing fee income 118 365 7 1,394
Impairment of mortgage servicing rights (539) -- (754) --
Other 2,002 1,585 5,824 4,292
-------- -------- -------- --------
Total non-interest income 10,092 13,186 30,452 28,763
-------- -------- -------- --------
Non-interest expense:
Compensation and benefits 12,173 10,408 35,218 30,665
Office occupancy and equipment 2,169 2,071 6,603 5,976
Advertising and promotion 1,051 830 3,398 2,720
Data processing 788 784 2,298 2,236
Federal deposit insurance premiums 155 153 457 449
Amortization of intangible assets 1,130 1,167 3,411 3,311
Other 3,268 3,025 9,544 8,764
-------- -------- -------- --------
Total non-interest expense 20,734 18,438 60,929 54,121
-------- -------- -------- --------
Income before income taxes 21,649 26,083 66,163 67,981
Income tax expense 8,002 9,570 24,558 24,688
-------- -------- -------- --------
Net income $ 13,647 16,513 41,605 43,293
======== ======== ======== ========
Basic earnings per share $ .61 .71 1.83 1.85
======== ======== ======== ========
Diluted earnings per share $ .59 .71 1.79 1.83
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
4
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
(Dollars in thousands)
(Unaudited)
Nine Months Ended September 30, 2001
-----------------------------------------------------------------------------
Accumulated Stock in
Additional other gain
Common paid-in Retained comprehensive deferral Treasury
stock capital earnings income plan stock Total
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2000 $ 254 198,068 237,867 1,435 511 (50,406) 387,729
-------- -------- -------- -------- -------- -------- --------
Comprehensive income:
Net income -- -- 41,605 -- -- -- 41,605
Other comprehensive income, net of tax:
Unrealized holding gain during the period -- -- -- 4,146 -- -- 4,146
Less: reclassification adjustment of gains
included in net income -- -- -- (517) -- -- (517)
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income -- -- 41,605 3,629 -- -- 45,234
-------- -------- -------- -------- -------- -------- --------
Exercise of 46,544 stock options and
reissuance of treasury stock -- -- (266) -- -- 919 653
Purchase of treasury stock -- -- -- -- -- (17,957) (17,957)
Tax benefits from stock-related compensation -- 133 -- -- -- -- 133
Cash dividends ($.34 per share) -- -- (7,695) -- -- -- (7,695)
Dividends paid to gain deferral plan -- -- 78 -- -- -- 78
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 2001 $ 254 198,201 271,589 5,064 511 (67,444) 408,175
======== ======== ======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
5
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------------
2001 2000
----------- -----------
Operating activities:
Net income $ 41,605 43,293
Adjustments to reconcile net income to net cash
Used in operating activities:
Depreciation and amortization 3,681 3,289
Impairment of mortgage servicing rights 754 --
Provision for loan losses -- 1,100
FHLB of Chicago stock dividend (4,752) (2,782)
Deferred income tax (benefit) expense 928 (365)
Amortization of intangible assets 3,411 3,311
Amortization of premiums, discounts, loan fees and servicing rights 4,753 817
Net gain on sale of loans receivable and real estate held for
development or sale (10,742) (7,577)
Gain on sale of investment securities (824) (137)
Gain on sale of mortgage servicing rights -- (4,337)
Increase in accrued interest receivable (771) (3,973)
Net increase in other assets and liabilities (9,693) (6,290)
Loans originated for sale (803,832) (237,196)
Loans purchased for sale (376) (10,407)
Sale of loans originated and purchased for sale 736,696 207,315
----------- -----------
Net cash used in operating activities (39,162) (13,939)
Investing activities:
Loans receivable originated for investment (1,007,108) (811,000)
Principal repayments on loans receivable 1,192,271 510,543
Principal repayments on mortgage-backed securities 20,859 19,977
Proceeds from maturities of investment securities available for sale 50,830 45,420
Proceeds from sale of:
Investment securities available for sale 4,273 1,721
Real estate held for development or sale 22,215 35,924
Mortgage-backed securities available for sale -- 9,300
Purchases of:
Loans receivable held for investment -- (62,012)
Investment securities available for sale (219,981) (22,000)
Investment securities held to maturity -- (359)
Mortgage-backed securities available for sale (62,127) (4,808)
Stock in FHLB of Chicago (30,000) (4,468)
Real estate held for development or sale (11,866) (12,530)
Premises and equipment (7,048) (5,246)
Cash received from acquisition of deposits, net -- 80,903
----------- -----------
Net cash used in investing activities $ (47,682) (218,635)
----------- -----------
(continued)
6
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------
2001 2000
--------- ---------
Financing activities:
Proceeds from FHLB of Chicago advances $ 110,000 $ 335,000
Proceeds from unsecured line of credit 6,000 15,000
Repayment of FHLB of Chicago advances (330,000) (175,000)
Repayment of unsecured line of credit (4,000) (8,000)
Net decrease in other borrowings -- (288)
Net increase in deposits 231,107 117,778
Increase (decrease) in advances by borrowers for taxes and insurance (2,904) 6,826
Proceeds from exercise of stock options 653 145
Purchase of treasury stock (17,917) (19,070)
Cash dividends (7,222) (6,536)
--------- ---------
Net cash provided by (used in) financing activities (14,283) 265,855
--------- ---------
Increase (decrease) in cash and cash equivalents (101,127) 33,281
Cash and cash equivalents at beginning of period 270,520 158,040
--------- ---------
Cash and cash equivalents at end of period $ 169,393 $ 191,321
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds $ 166,565 $ 157,284
Income taxes 21,605 19,477
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate 2,097 2,172
Loans receivable swapped into mortgage-backed securities 72,104 7,032
Investments securities held-to-maturity transferred to available-for-sale 12,633 --
Mortgage-backed securities held-to-maturity transferred to
available-for-sale 80,301 --
Treasury stock received for option exercises (1,339 and 39,691 shares) 36 989
========= =========
See accompanying notes to unaudited consolidated financial statements.
7
MAF BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Three and Nine Months Ended September 30, 2001 and 2000
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America 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 accounting
principles generally accepted in the United States of America 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
September 30, 2001 are not necessarily indicative of results that may be
expected for the year ending December 31, 2001.
The consolidated financial statements include the accounts of MAF Bancorp,
Inc. ("Company"), and its wholly-owned subsidiaries, Mid America Bank, fsb and
subsidiaries ("Bank") and MAF Developments, Inc., as of and for the three and
nine month periods ended September 30, 2001 and 2000 and as of December 31,
2000. All material intercompany balances and transactions have been eliminated
in consolidation.
(2) Earnings Per Share
Earnings per share is determined by dividing net income for the period by
the weighted average number of shares outstanding. Stock options are regarded as
potential common stock and are considered in the diluted earnings per share
calculations to the extent that they have a dilutive effect. Stock options are
the only adjustment made to average shares outstanding in computing diluted
earnings per share. Weighted average shares used in calculating earnings per
share are summarized below for the periods indicated:
Three Months Ended September 30,
-------------------------------------------------------------------------
2001 2000
------------------------------------ ------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
(Dollars in thousands, except per share data)
Basic earnings per share:
Income available to
common shareholders $ 13,647 22,510,714 $ .61 $ 16,513 23,121,187 $ .71
======== ====== ======== ======
Effect of dilutive securities:
Stock options 546,677 297,372
---------- ----------
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversions $ 13,647 23,057,391 $ .59 $ 16,513 23,418,559 $ .71
======== ========== ====== ======== ========== ======
8
(2) Earning Per Share (continued)
Nine Months Ended September 30,
-------------------------------------------------------------------------
2001 2000
------------------------------------ ------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
(Dollars in thousands, except per share data)
Basic earnings per share:
Income available to
common shareholders $ 41,605 22,704,994 $ 1.83 $ 43,293 23,382,189 $ 1.85
======== ====== ======== ======
Effect of dilutive securities:
Stock options 507,495 248,160
---------- ----------
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversions $ 41,605 23,212,489 $ 1.79 $ 43,293 23,630,349 $ 1.83
======== ========== ====== ======== ========== ======
(3) Commitments and Contingencies
At September 30, 2001, the Bank had outstanding commitments to originate
and purchase loans of $540.7 million, of which $369.6 million were fixed-rate
loans, with rates ranging from 6.0% to 8.375%, and $171.1 million were
adjustable-rate loans. At September 30, 2001, commitments to sell loans were
$125.3 million. Additionally, the Bank has approved, but unused, equity lines of
credit of $198.5 million at September 30, 2001.
At September 30, 2001, the Bank had outstanding standby letters of credit
totaling $15.0 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 two letters of credit are collateralized by mortgage-backed
securities and U.S. Government and agency securities owned by the Bank.
Additionally, the Company had outstanding standby letters of credit totaling
$9.2 million related to real estate development improvements.
(4) Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, interest-bearing deposits and federal funds sold.
Generally, federal funds are sold for one-day periods and interest-bearing
deposits mature within one day to three months.
(5) Reclassifications
Certain reclassifications of 2000 amounts have been made to conform with
current period presentations.
9
(6) Segment Information
The Company utilizes the "management approach" for segment reporting.
This approach is based on the way that the chief decision maker for the Company
organizes segments for making operating decisions and assessing performance.
The Company operates two separate lines of business. The Bank operates
primarily as a retail bank, participating in residential mortgage portfolio
lending, deposit gathering and offering other financial services mainly to
individuals. Land development consists primarily of developing raw land for
residential use and sale to builders. Selected segment information is included
in the table below and the table on the following page:
At or For the Three Months Ended September 30, 2001
---------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ----------
(In thousands)
Interest income $ 85,306 -- (5) 85,301
Interest expense 52,973 42 (5) 53,010
---------- ---------- ---------- ----------
Net interest income 32,333 (42) -- 32,291
Non-interest income 9,293 799 -- 10,092
Non-interest expense 20,631 103 -- 20,734
---------- ---------- ---------- ----------
Income before income taxes 20,995 654 -- 21,649
Income tax expense 7,743 259 -- 8,002
---------- ---------- ---------- ----------
Net income $ 13,252 395 -- 13,647
========== ========== ========== ==========
Average assets $5,185,289 9,873 -- 5,195,162
========== ========== ========== ==========
At or For the Three Months Ended September 30, 2000
---------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ----------
(In thousands)
Interest income $ 88,349 -- (39) 88,310
Interest expense 56,475 39 (39) 56,475
---------- ---------- ---------- ----------
Net interest income 31,374 (39) -- 31,835
Provision for loan losses 500 -- -- 500
---------- ---------- ---------- ----------
Net interest income after provision 31,874 (39) -- 31,335
Non-interest income 10,561 2,625 -- 13,186
Non-interest expense 18,249 189 -- 18,438
---------- ---------- ---------- ----------
Income before income taxes 23,686 2,397 -- 26,083
Income tax expense 8,619 951 -- 9,570
---------- ---------- ---------- ----------
Net income $ 15,067 1,446 -- 16,513
========== ========== ========== ==========
Average assets $5,005,289 8,030 -- 5,013,319
========== ========== ========== ==========
10
(6) Segment Information (continued)
At or For the Nine Months Ended September 30, 2001
---------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 262,379 -- (24) 262,355
Interest expense 165,587 152 (24) 165,715
---------- ---------- ---------- ----------
Net interest income 96,792 (152) -- 96,640
Non-interest income 24,983 5,469 -- 30,452
Non-interest expense 60,241 688 -- 60,929
---------- ---------- ---------- ----------
Income before income taxes 61,534 4,629 -- 66,163
Income tax expense 22,722 1,836 -- 24,558
---------- ---------- ---------- ----------
Net income $ 38,812 2,793 -- 41,605
========== ========== ========== ==========
Average assets $5,170,441 9,109 -- 5,179,550
========== ========== ========== ==========
At or For the Nine Months Ended September 30, 2000
---------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 253,225 -- (193) 253,032
Interest expense 158,593 193 (193) 158,593
---------- ---------- ---------- ----------
Net interest income 94,632 (193) -- 94,439
Provision for loan losses 1,100 -- -- 1,100
---------- ---------- ---------- ----------
Net interest income after provision 93,532 (193) -- 93,339
Non-interest income 20,962 7,801 -- 28,763
Non-interest expense 53,480 641 -- 54,121
---------- ---------- ---------- ----------
Income before income taxes 61,014 6,967 -- 67,981
Income tax expense 21,924 2,764 -- 24,688
---------- ---------- ---------- ----------
Net income $ 39,090 4,203 -- 43,293
========== ========== ========== ==========
Average assets $4,869,683 13,262 -- 4,882,945
========== ========== ========== ==========
(7) New Accounting Pronouncements
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
140 supercedes and replaces FASB SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Accordingly,
SFAS No. 140 is now the authoritative accounting literature for transfers and
servicing of financial assets and extinguishments of liabilities. SFAS No. 140
also includes several additional disclosure requirements in the area of
securitized financial assets and collateral arrangements. The provisions of SFAS
No. 140 related to transfers of financial assets are to be applied to all
transfers of financial assets occurring after March 31, 2001. The collateral
recognition and disclosure provisions in SFAS No. 140 are effective for fiscal
years ending after December 15, 2000. The adoption of SFAS No. 140 did not have
a material impact on the Company's results of operation.
11
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" (SFAS
No. 141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No.
142). SFAS No. 141 requires that all business combinations initiated after June
30, 2001 be accounted for under the purchase method and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. SFAS No. 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 provides that intangible assets with finite useful
lives be amortized and that goodwill and intangible assets with indefinite lives
will not be amortized, but will rather be tested at least annually for
impairment. SFAS No. 142 is effective January 1, 2002 for calendar year
companies, however, any acquired goodwill or intangible assets recorded in
transactions closed subsequent to June 30, 2001 will be subject immediately to
the nonamortization and amortization provisions of SFAS No. 142. As required
under SFAS No. 142, the Company will discontinue the amortization of goodwill
related to purchase acquisitions consummated prior to June 30, 2001 effective
January 1, 2002. Management expects the benefit related to the elimination of
$3.2 million of current annual goodwill amortization to be approximately $.13
per diluted share. The Company will also complete an initial goodwill impairment
assessment to determine if a transition impairment charge will be recognized
under SFAS No. 142. Due to the extensive nature and effort in adopting SFAS No.
141 and 142, it is not practicable to reasonably estimate the impact of adopting
these statements on the Company's financial statements at the date of this
reporting including whether any transitional impairment losses will be required
to be reported as a cumulative effect of a change in accounting principle.
Item 2. 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 retail banking business through its wholly-owned subsidiary, Mid
America Bank, fsb ("Bank"), and secondarily, in the land development business
primarily through MAF Developments, Inc.
The Bank is a consumer-oriented financial institution offering various
financial services to its customers. Currently, the Bank has 27 retail banking
offices and two new offices under construction. The Bank's market area is
generally defined as the western suburbs of Chicago, including DuPage County,
western Cook County, northern Will County, eastern Kane County, as well as the
northwest and southwest sides of Chicago. 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. The Company also participates in
the following businesses through the designated subsidiaries:
Subsidiary Activity
---------- --------
MAF Developments; NW Financial, Inc. Residential land development
Mid America Insurance Agency, Inc. General insurance services
Centre Pointe Title Services, Inc. General title services for Bank loan customers
Mid America Investments Services, Inc. INVEST affiliate investment service/brokerage
MAF Realty Co., LLC III;
MAF Realty Co., LLC IV Real estate investment trust
Mid America Re, Inc. Captive reinsurance
On July 5, 2001, the Company agreed to acquire privately-held Mid Town
Bancorp, Inc., ("Mid Town") based in Chicago, in a 80% cash, 20% stock
transaction valued at $69 million. Mid Town is the parent holding company for
Mid Town Bank & Trust Company of Chicago, which operates four branches in
Chicago, Illinois. As of September 30, 2001, Mid Town had $315 million in
assets, $275 million in deposits and $33 million in stockholders' equity. The
transaction will be accounted for as
12
a purchase under the new business combinations standards discussed in Note 7,
"New Accounting Pronouncements." The transaction has been approved by Mid Town's
shareholders, and the Company currently expects to obtain the requisite
regulatory approvals, and expects the transaction to close prior to the end of
2001.
The banking industry has and continues to experience consolidation both
nationally and in the local Chicago area. As it has in recent years, the Company
expects to continue to search for and evaluate potential acquisition
opportunities that will enhance franchise value and may periodically be
presented with opportunities to acquire other institutions, branches or deposits
in the markets it serves, or which allow the Company to expand outside its
current primary market areas of DuPage County and the City of Chicago.
Management intends to review acquisition opportunities across a variety of
parameters, including the potential impact on its financial condition as well as
its financial performance in the future. It is anticipated that future
acquisitions, if any, will likely be valued at a premium to book value, and
generally at a premium to current market value. As such, management anticipates
that future acquisitions made by the Company could involve some short-term book
value per share dilution and earnings per share dilution depending on the
Company's success in integrating the operations of businesses acquired and the
level of cost savings and revenue enhancements that may be achieved.
Regulation and Supervision
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. 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 Company and its operations.
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. The minimum level required for each of
these capital standards is established by regulation. The Company has managed
its balance sheet so as to reasonably exceed these minimums.
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. For the Bank, core capital generally includes common
stockholders' equity (including retained earnings), and minority interests in
the equity accounts of fully consolidated subsidiaries, less intangibles other
than certain servicing rights. Investments in and advances to subsidiaries
engaged in activities not permissible for national banks are also required to be
deducted in computing core capital.
Tangible Capital Requirement
Under OTS regulation, savings institutions are required to meet a minimum
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.
13
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, primarily general
loan loss reserves (limited to a maximum of 1.25% of total risk-weighted
assets.) In computing total capital, the supplementary capital included cannot
exceed 100% of core capital.
At September 30, 2001, the Bank was in compliance with all of its capital
requirements as follows:
September 30, 2001 December 31, 2000
------------------------ -------------------------
Percent of Percent of
Amount Assets Amount Assets
---------------------------------------------------------
(Dollars in thousands)
Stockholder's equity of the Bank $ 410,411 7.88% $ 394,474 7.63%
=========== ====== =========== ======
Tangible capital $ 336,968 6.56% $ 321,931 6.32%
Tangible capital requirement 77,008 1.50 76,408 1.50
----------- ------ ----------- ------
Excess $ 259,960 5.06% $ 245,523 4.82%
=========== ====== =========== ======
Core capital $ 336,968 6.56% $ 321,931 6.32%
Core capital requirement 154,016 3.00 152,816 3.00
----------- ------ ----------- ------
Excess $ 182,952 3.56% $ 169,115 3.32%
=========== ====== =========== ======
Core and supplementary capital $ 348,903 11.65% $ 336,801 11.98%
Risk-based capital requirement 239,688 8.00 224,878 8.00
----------- ------ ----------- ------
Excess $ 109,215 3.65% $ 111,923 3.98%
=========== ====== =========== ======
Total Bank assets $ 5,208,395 $ 5,168,163
Adjusted total Bank assets 5,133,865 5,093,883
Total risk-weighted assets 3,070,632 2,885,260
Adjusted total risk-weighted assets 2,996,095 2,810,981
Investment in Bank's real estate subsidiaries 2,514 2,445
=========== ===========
A reconciliation of consolidated stockholder's equity of the Bank for
financial reporting purposes to capital available to the Bank to meet regulatory
capital requirements is as follows:
September 30, December 31,
2001 2000
------------ ------------
(In thousands)
Stockholder's equity of the Bank $ 410,411 394,474
Goodwill (59,529) (61,962)
Core deposit intangibles (5,924) (6,902)
Non-permissible subsidiary deduction (2,514) (2,445)
Non-includable purchased mortgage servicing rights (932) (511)
Regulatory capital adjustment for available for sale securities (4,544) (723)
------------ ------------
Tangible and core capital 336,968 321,931
Recourse on loan sales (6,269) (3,388)
Land loans greater than 80% loan-to-value (6) -
General loan loss reserves 18,210 18,258
------------ ------------
Core and supplementary capital $ 348,903 336,801
============ ============
14
Changes in Financial Condition
Total assets of the Company were $5.23 billion at September 30, 2001, an
increase of $38.0 million, or 0.7% from $5.20 billion at December 31, 2000. The
increase is primarily due to an increase in investment securities and
mortgage-backed securities offset by a decrease in loans receivable, funded
primarily by an increase in deposits.
Cash and short-term investments totaled a combined $169.4 million at
September 30, 2001, a decrease of $101.1 million from the combined balance of
$270.5 million at December 31, 2000. The decrease is primarily due to a
redeployment of low yielding overnight funds into short-term investment
securities during mid-September as world events impacted short-term overnight
rates.
Investment securities available for sale increased $182.8 million to $357.3
million at September 30, 2001. The Company transferred $12.6 million of
investment securities with a market value of $13.3 million from the
held-to-maturity category to the available for sale category on January 1, 2001
as allowed upon adoption of SFAS No. 133. The remaining increase is due to
$220.0 million in purchases of primarily agency debt securities, higher-grade
commercial paper, corporate bonds and preferred stock offset by maturities of
$50.8 million of primarily asset-backed and U.S. Agency securities, and sales of
$4.3 million of equity securities. The increased investment securities purchase
activity in 2001 is due to the additional liquidity available from higher levels
of loan prepayments. The Company recognized a gain of $824,000 on the sale of
investment securities available for sale during the nine months ended
September 30, 2001.
Mortgage-backed securities available for sale increased $123.1 million to
$147.2 million at September 30, 2001, primarily due to the transfer of $80.3
million of mortgage-backed securities with a market value of $79.1 million from
the held-to-maturity category to the available for sale category on January 1,
2001 as allowed upon adoption of SFAS No. 133. Purchases of GNMA mortgage-backed
securities and Collaterized Mortgage Obligations ("CMO") totaling $62.1 million,
were offset by normal amortization and prepayments.
Included in mortgage-backed securities classified as available for sale are
$87.6 million of CMO securities at September 30, 2001, 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, decreased $117.3 million
or 2.71%, to $4.21 billion at September 30, 2001. The Bank originated $1.8
billion of loans during the nine-month period ended September 30, 2001, compared
to $1.1 billion during the prior year period. The higher loan origination volume
was primarily due to an increase in mortgage refinance activity stemming from
the dramatic decline in interest rates during 2001. Offsetting originations were
amortization and prepayments totaling $1.19 billion, as well as loan sales of
$736.4 million. Loans receivable held for sale increased to $108.9 million as of
September 30, 2001, compared to $41.1 million at December 31, 2000. The large
increase in loans held for sale, as well as loan sale activity during the
current-nine month period, is due to an increase in long-term fixed-rate loan
originations. The Bank typically sells fixed-rate long-term loans into the
secondary market as a means of meeting current customer demand for fixed-rate
loans while managing interest rate risk.
The allowance for loan losses totaled $18.2 million at September 30, 2001,
a decrease of $48,000 from the balance at December 31, 2000, due to net
charge-offs for the period. The Bank's allowance for loan losses to total loans
outstanding was .44% at September 30, 2001, compared to .42% at December 31,
2000. Non-performing loans increased $593,000 to $19.1 million at September 30,
2001, compared to $18.5 million at December 31, 2000. As a percentage of total
loans receivable, the level of non-performing loans was .43% at September 30,
2001, compared to .39% at December 31, 2000. The ratio of the allowance for loan
losses to non-performing loans was 102.6% at September 30, 2001 compared to
109.3% at December 31, 2000, and 113.7% at September 30, 2000.
15
In evaluating the adequacy of the allowance for loan losses and
determining, if any, the related provision for loan losses, management
considers: (1) subjective factors, including local and general economic business
factors and trends, portfolio concentrations and changes in the size and/or
general terms of the loan portfolio, (2) historical loss experience which has
ranged from 1 to 14 basis points as a percentage of outstanding loans over the
last five years, and (3) specific allocations based upon probable losses
identified during the review of the portfolio.
Foreclosed real estate decreased $443,000 to $1.4 million at September 30,
2001 primarily due to the sales of single-family homes. The balance of
foreclosed real estate is made up of eight single-family homes.
Real estate held for development or sale increased $77,000 to $12.8 million
at September 30, 2001. A summary of the carrying value of real estate held for
development or sale follows:
September 30, December 31,
2001 2000
-------- ---------
(In thousands)
Tallgrass of Naperville $ 8,022 8,041
Shenandoah 4,466 4,387
Woodbridge 307 290
-------- ---------
$ 12,795 12,718
======== =========
The balance of the Tallgrass of Naperville project reflects the sale of 127
lot sales during the nine months ended September 30, 2001, offset by continued
development of the remaining phases of the project. At September 30, 2001, 246
lots remain in Tallgrass, with 151 under contract approximately half of which
are expected to close in the fourth quarter of 2001. The balance of the
Shenandoah project reflects the Company's purchase, in the second quarter of
2000, of 182 acres of land in Plainfield, Illinois. The project is currently
planned to yield 365 lots, with development expected to commence in late 2001,
and initial sales anticipated in the fourth quarter of 2002. At September 30,
2001, the remaining balance of the Woodbridge project consists of two parcels of
commercial property totaling 3.5 acres. One of the parcels was sold in October
2001 to the Bank, which expects to use the parcel for a future branch site. The
other parcel is under contract with an unrelated third party, and is expected to
close in the fourth quarter of 2001 at a pre-tax profit of approximately
$550,000.
Deposits increased $230.9 million, to $3.2 billion at September 30, 2001.
After consideration of interest of $87.9 million credited to accounts during the
nine months ended September 30, 2001, actual cash inflows were $143.2 million.
The increase was primarily in money market and certificate of deposit balances.
Borrowed funds, which consist primarily of FHLB of Chicago advances,
decreased $218.0 million to $1.51 billion at September 30, 2001. The decrease is
primarily attributable to repayments of FHLB of Chicago borrowings utilizing net
deposit inflows, as well as excess liquidity from higher levels of loan
prepayments and loan sales during the first nine months of 2001. Borrowings at
September 30, 2001 also include $6.0 million drawn on the Company's revolving
line of credit compared to $4.0 million at December 31, 2000. These funds have
been used primarily to fund a portion of the repurchases under the Company's
stock buyback program.
Stockholders' equity increased $20.4 million, or 5.3% at September 30,
2001, primarily due to net income of $41.6 million, offset by stock repurchases
of $17.3 million and cash dividends declared of $7.7 million.
16
Asset Quality
Non-Performing Assets. A loan (whether considered impaired or not) is
classified as non-accrual when collectibility is in doubt. Under the Bank's
current policies, when a loan is 90 days or more past due, in the process of
foreclosure, or in bankruptcy, the full amount of previously accrued but unpaid
interest is deducted from interest income. Income is subsequently recorded to
the extent cash payments are received, or at the time when the loan is brought
current in accordance with its original terms. This policy is applied
consistently for all types of loans in the loan portfolio.
For the quarter ended September 30, 2001, interest on non-accrual loans
that would have been recorded as income, had they been performing according to
their original terms, amounted to $337,000, compared to $292,000 for the three
months ended September 30, 2000. For the nine months ended September 30, 2001,
interest on non-accrual loans that would have been recorded as income, had they
been performing according to their original terms, amounted to $812,000 compared
to $876,000 for the nine months ended September 30, 2000.
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)
September 30, 2001 49 $ 6,002 .14% 155 $17,682 .41%
== ===== === === ====== ===
June 30, 2001 37 $ 3,465 .08% 125 $16,397 .37%
== ===== === === ====== ===
March 31, 2001 37 $ 4,745 .10% 123 $15,749 .35%
== ===== === === ====== ===
December 31, 2000 50 $ 4,084 .10% 115 $14,764 .34%
== ===== === === ====== ===
September 30, 2000 36 $ 4,004 .09% 119 $14,693 .35%
== ===== === === ====== ===
17
Loan Portfolio Composition. The following table sets forth the
composition of the Bank's loan portfolio in dollar amounts at the dates
indicated:
At
-----------------------------------------------------------------------------------------------
9/30/01 6/30/01 3/31/01 12/31/00 9/30/00 6/30/00 3/31/00
----------- ----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
Real estate loans:
One- to four-family:
Held for investment $ 3,579,027 3,635,457 3,714,537 3,807,980 3,783,956 3,723,765 3,581,604
Held for sale 108,931 87,036 162,355 41,074 52,156 35,973 37,899
Multi-family 171,516 166,777 171,883 173,072 168,128 165,309 162,666
Commercial 51,060 49,137 46,483 41,223 40,730 41,919 40,142
Construction 31,969 28,443 31,985 29,566 26,866 30,621 27,529
Land 31,968 37,962 40,752 40,497 35,114 34,272 29,143
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total real estate loans 3,974,471 4,004,812 4,167,995 4,133,412 4,106,950 4,031,859 3,878,983
Other loans:
Consumer loans:
Equity lines of credit 193,780 168,875 154,009 146,020 132,894 120,835 106,503
Home equity loans 56,778 57,977 60,551 64,465 63,307 59,736 51,746
Other 4,827 4,712 4,735 4,783 4,720 4,746 4,751
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total consumer loans 255,385 231,564 219,295 215,268 200,921 185,317 163,000
Commercial business loans 10,958 4,362 3,162 3,528 3,485 3,387 3,399
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total other loans 266,343 235,926 222,457 218,796 204,406 188,704 166,399
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total loans receivable 4,240,814 4,240,738 4,390,452 4,352,208 4,311,356 4,220,563 4,045,382
Less:
Loans in process 16,582 14,430 12,949 12,912 11,297 12,837 11,467
Unearned discounts, premiums
and deferred loan expenses, net (4,787) (5,417) (6,416) (7,076) (6,960) (6,641) (6,408)
Allowance for loan losses 18,210 18,221 18,279 18,258 18,167 17,870 17,567
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total loans receivable, net 4,210,809 4,213,504 4,365,640 4,328,114 4,288,852 4,196,497 4,022,756
Loans receivable held for sale (108,931) (87,036) (162,355) (41,074) (52,156) (35,973) (37,899)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loans receivable, net $ 4,101,878 4,126,468 4,203,285 4,287,040 4,236,696 4,160,524 3,984,857
=========== =========== =========== =========== =========== =========== ===========
18
Non-performing assets. The following table sets forth information
regarding non-accrual loans, foreclosed real estate and non-accrual
investment securities of the Bank, and for periods in 2000, loans which
were 91 days or more delinquent but on which the Bank continues to accrue
interest.
At
------------------------------------------------------------------------
9/30/01 6/30/01 3/31/00 12/31/00 9/30/00 6/30/00 3/31/00
-------- -------- -------- -------- -------- ------- -------
(In thousands)
Non-performing loans:
One- to four-family and multi-family loans:
Non-accrual loans $ 16,442 15,431 16,627 14,023 13,398 13,211 13,624
Accruing loans 91 days or more overdue (1) - - - 1,732 1,557 608 529
-------- -------- -------- -------- -------- ------- -------
Total 16,442 15,431 16,627 15,755 14,955 13,819 14,153
-------- -------- -------- -------- -------- ------- -------
Commercial real estate, construction and land loans:
Non-accrual loans 342 343 321 269 405 451 632
Accruing loans 91 days or more overdue - - - - - - -
-------- -------- -------- -------- -------- ------- -------
Total 342 343 321 269 405 451 632
-------- -------- -------- -------- -------- ------- -------
Other loans:
Non-accrual loans 961 806 921 683 608 988 1,445
Accruing loans 91 days or more overdue - - - 2 6 4 24
-------- -------- -------- -------- -------- ------- -------
Total 961 806 921 685 614 992 1,469
-------- -------- -------- -------- -------- ------- -------
Total non-performing loans:
Non-accrual loans 17,745 16,580 17,869 14,975 14,411 14,650 15,701
Accruing loans 91 days or more overdue (1) - - - 1,734 1,563 612 553
-------- -------- -------- -------- -------- ------- -------
Total $ 17,745 16,580 17,869 16,709 15,974 15,262 16,254
======== ======== ======== ======== ======== ======= =======
Non-accrual loans to total loans .43 .40 .42 .35 .34 .35 .40
Accruing loans 91 days or more overdue to total loans - - - .04 .04 .01 .01
-------- -------- -------- -------- -------- ------- -------
Non-performing loans to total loans .43 .40 .42 .39 .38 .36 .41
======== ======== ======== ======== ======== ======= =======
Foreclosed real estate (net of related reserves):
One- to four-family $ 1,365 1,260 1,345 1,762 1,221 410 1,454
Commercial, construction and land - - - 46 100 571 6,767
-------- -------- -------- -------- -------- ------- -----
Total $ 1,365 1,260 1,345 1,808 1,321 981 8,221
======== ======== ======== ======== ======== ======= =====
Non-performing loans and foreclosed real estate
to total loans and foreclosed real estate .46 .43 .45 .43 .41 .39 .61
======== ======== ======== ======== ======== ======= =======
Total non-performing assets $ 19,110 17,840 19,214 18,517 17,295 16,243 24,475
======== ======== ======== ======== ======== ======= =======
Total non-performing assets to total assets .37 .34 .37 .36 .34 .33 .51
======== ======== ======== ======== ======== ======= =======
(1) As of January 1, 2001, the Bank no longer accrues interest on loans 91 or
more days delinquent.
19
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 borrowings or the issuance
of common stock. The Company's principal uses of funds are interest payments on
the Company's term loan and revolving line of credit, cash dividends to
shareholders, loans to and investments in MAF Developments, as well as
investment purchases, stock repurchases and debt repayment. The Company also
maintains a one-year, $35.0 million unsecured revolving line of credit from a
commercial bank, due and renewable annually on May 31. At September 30, 2001,
the Company had $6.0 million outstanding under this line of credit. In
connection with its Midtown acquisition funding needs, the Company is in the
process of securing an increase in its term loan from $29.4 million to $55.0
million and its unsecured revolving line of credit from $35.0 million to $40.0
million.
For the nine-month period ended September 30, 2001, the Company received
$27.5 million in dividends from the Bank and declared common stock dividends of
$.34 per share, or $7.7 million. During the nine-months ended September 30,
2001, the Company completed a previously announced stock buyback program and
initiated a new 500,000 share buyback program on September 17, 2001. During this
same period, the Company repurchased 645,100 shares of its common stock at an
average price of $26.82 per share, for a total of $17.3 million.
The Bank's principal sources of funds are deposits, advances from the FHLB
of Chicago, reverse repurchase agreements, principal repayments on loans and
mortgage-backed securities, proceeds from the sale of loans and funds provided
by operations. While scheduled payments on loan and mortgage-backed securities
and maturing investment securities are relatively predictable sources 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. During the current nine-month period the Bank borrowed $25.0 million
of fixed and $85.0 million of variable rate FHLB of Chicago advances and repaid
$330.0 million, as deposits increased $230.9 million.
During the nine months ended September 30, 2001, the Bank originated and
purchased loans totaling $1.8 billion compared with $1.1 billion during the same
period a year ago. Loan sales and swaps for the nine months ended September 30,
2001, were $736.4 million, compared to $208.0 million for the prior year period.
The Bank has outstanding commitments to originate and purchase loans of $540.7
million and commitments to sell or swap loans of $125.3 million at September 30,
2001. At September 30, 2001, the Company believes that it has sufficient cash to
fund its outstanding commitments or will be able to obtain the necessary funds
from outside sources to meet its cash requirements.
Asset/Liability Management
As part of its normal operations, the Bank is subject to interest-rate risk
on the interest-sensitive assets it invests in and the interest-sensitive
liabilities it borrows. The Bank's exposure to interest rate risk is reviewed at
least quarterly by the Bank's asset/liability management committee ("ALCO") and
the Board of Directors of the Company. The ALCO, which includes members of
senior management, monitors the rate and sensitivity repricing characteristics
of the individual asset and liability portfolios the Bank maintains and
determines risk management strategies.
The Bank utilizes an interest rate sensitivity gap analysis to monitor the
relationship of maturing or repricing interest-earning assets and
interest-bearing liabilities, while maintaining an acceptable interest rate
spread. Interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing within a specific period
of time and the amount of interest-bearing liabilities maturing or repricing
within that same period of time, and is usually analyzed at a period of one
year. Generally, a negative gap, where more interest-bearing liabilities are
repricing or maturing than interest-earning assets,
20
would tend to result in a reduction in net interest income in a period of rising
interest rates. Conversely, during a period of falling interest rates, a
negative gap would likely result in an improvement in net interest income.
Management's goal is to maintain its cumulative one-year gap within the range of
(15)% to 15%. The gap ratio fluctuates as a result of market conditions and
management's expectation of future interest rate trends. The Bank's
asset/liability management strategy emphasizes, for its own portfolio, 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.
The Bank, except as noted below, has not used derivative financial
instruments such as interest rate swaps, caps, floors, options or similar
financial instruments to manage its interest rate risk. However, in conjunction
with its origination and sale strategy, management does hedge 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 FNMA and 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 addition, the Bank uses 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.
The table on the next page sets forth the scheduled repricing or maturity
of the Bank's assets and liabilities at September 30, 2001. The table uses
management's assumptions regarding prepayment percentages on loans and
mortgage-backed securities, based on its recent experience in these portfolios.
The Bank uses the withdrawal assumptions used by the FHLB of Chicago with
respect to NOW, checking and passbook accounts, which are 17.0%, 17.0%, 17.0%,
16.0%, and 33.0%, respectively. Investment securities and FHLB advances that
contain call provisions at the option of the issuer or lender are generally
shown in the category relating to their respective final maturities. However,
due to changes in market interest rates, $20.0 million of investment securities
with final maturities ranging from 7 to 30 years, but callable in 6 months or
less are categorized in the 6 months or less category, and $15.2 million of
investment securities with 3 year final maturities are categorized in the more
than 6 months to one year category, in anticipation of their calls.
Additionally, a $25.0 million FHLB advance with a final remaining maturity of 85
months, but callable between 6 months and 1 year is categorized in the more than
6 months to 1 year category, in anticipation of its call by the lender.
The effect of these assumptions is to quantify the dollar amount of items
that are interest-sensitive and may be repriced within each of the periods
specified. Certain shortcomings are inherent in using gap analysis to quantify
exposure to interest rate risk. For example, although certain assets and
liabilities may have similar maturities or repricings in the table, they may
react differently to actual changes in market interest rates. The interest rates
on certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind
changes in market rates. This is especially true in circumstances where
management has a certain amount of control over interest rates, such as the
pricing of deposits. Additionally, certain assets such as hybrid adjustable-rate
mortgage loans have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. Finally, as interest rates
change, loan prepayment rates may materially differ from those rates assumed by
management for presentation purposes in the table.
21
Management believes that its asset/liability management strategies mitigate
the potential effects of changes in interest rates on the Bank's operations. At
September 30, 2001, the Bank's cumulative one-year gap as a percentage of total
assets was (4.15)%. This slightly negative gap position positions the Bank to
benefit from the decreases in interest rates experienced subsequent to September
30, 2001 as it relates to its net interest spread and margin, as funding costs
on interest-bearing liabilities have decreased slightly faster than yields on
interest-earning assets.
At September 30, 2001
-------------------------------------------------------------------------
More Than More Than More Than
6 Months 6 Months 1 Year 3 Years to More Than
or Less to 1 Year to 3 Years 5 Years 5 Years Total
----------- ------------- ----------- --------------------- --------
(In thousands)
Interest-earning assets:
Loans receivable $ 934,546 588,707 1,001,256 707,810 996,700 4,229,019
Mortgage-backed securities 73,889 9,285 20,171 13,642 30,222 147,209
Interest-bearing deposits 22,542 - - - - 22,542
Federal funds sold 53,152 - - - - 53,152
Investment securities (1) 321,229 15,906 69,539 23,984 46,154 476,812
---------- -------- ---------- ----------- ---------- ----------
Total interest-earning assets 1,405,358 613,898 1,090,966 745,436 1,073,076 4,928,734
Impact of hedging activity (2) 108,931 - - - (108,931) -
---------- -------- ---------- ----------- ---------- ----------
Total net interest-earning assets adjusted
for impact of hedging activities 1,514,289 613,898 1,090,966 745,436 964,145 4,928,734
---------- -------- ---------- ----------- ---------- ----------
Interest-bearing liabilities:
NOW and checking accounts 21,608 19,772 72,366 44,952 95,523 254,221
Money market accounts 318,282 - - - - 318,282
Passbook accounts 66,850 61,167 223,872 139,064 295,512 786,465
Certificate accounts 911,993 415,431 312,794 34,566 5,870 1,680,654
FHLB advances 300,000 195,000 365,500 250,000 365,000 1,475,500
Other borrowings 35,400 - - - - 35,400
---------- -------- ---------- ----------- ---------- ----------
Total interest-bearing liabilities 1,654,133 691,370 974,532 468,582 761,905 4,550,522
Interest sensitivity gap $ (139,844) (77,472) 116,434 276,854 202,240 378,212
=========== ======== ========== =========== ========== ==========
Cumulative gap $ (139,844) (217,316) (100,882) 175,972 378,212
=========== ======== ========== =========== ==========
Cumulative gap assets as a percentage
of total assets (2.67)% (4.15) (1.93) 3.36 7.23
Cumulative net interest-earning assets as
a percentage of interest-bearing liabilities 91.55% 90.73 96.96 104.64 108.31
(1) Includes $119.5 million of stock in FHLB of Chicago in 6 months or less.
(2) Represents forward commitments to sell long-term fixed-rate mortgage loans.
22
Average Balances/Rates
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. Average 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 September 30, 2001
includes fees which are considered adjustments to yield.
Three Months Ended September 30,
--------------------------------------------------------
2001 2000
---------------------------- --------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $4,235,471 74,989 7.08% $4,256,770 78,570 7.38%
Mortgage-backed securities 136,287 1,962 5.76 111,293 1,876 6.74
Interest-bearing deposits (1) 52,072 493 3.76 34,615 731 8.38
Federal funds sold (1) 128,741 1,503 4.63 114,038 2,226 7.74
Investment securities (2) 409,391 6,443 6.24 265,507 4,944 7.39
--------- ------ -------- -------
Total interest-earning assets 4,961,962 85,390 6.88 4,782,223 88,347 7.38
Non-interest earning assets 233,200 231,096
--------- ---------
Total assets $5,195,162 $5,013,319
========= =========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,984,951 30,166 4.01 2,748,745 30,359 4.38
Borrowed funds 1,544,215 22,844 5.87 1,668,401 26,116 6.21
--------- ------ --------- -------
Total interest-bearing liabilities 4,529,166 53,010 4.64 4,417,146 56,475 5.07
------ ---- ------- ----
Non-interest bearing deposits 156,611 132,595
Other liabilities 108,003 98,210
--------- --------
Total liabilities 4,793,780 4,647,951
Stockholders' equity 401,382 365,368
--------- ---------
Liabilities and stockholders' equity $5,195,162 $5,013,319
=========== =========
Net interest income/interest rate spread $32,380 2.24% $31,872 2.31%
======= ==== ======= ====
Net earning assets/net yield on average
interest-earning assets $ 432,796 2.61% $ 365,077 2.67%
========= ==== ======== ====
Ratio of interest-earning assets to
interest-bearing liabilities 109.56% 108.26%
====== ======
Nine Months Ended September 30,
---------------------------------------------------- At
2001 2000 September 30, 2001
------------------------- ------------------------- ------------------
Average Average
Average Yield/ Average Yield/ Yield/
Balance Interest Cost Balance Interest Cost Balance Cost
--------- -------- ----- ------- -------- ------- ------- --------
Assets:
Interest-earning assets:
Loans receivable $4,315,726 233,259 7.21% $4,108,961 224,131 7.27% $4,229,019 7.12%
Mortgage-backed securities 115,519 5,272 6.08 122,619 6,181 6.72 147,209 5.80
Interest-bearing deposits (1) 40,636 1,564 5.15 32,651 1,809 7.38 22,542 3.25
Federal funds sold (1) 124,409 5,343 5.74 113,369 6,242 7.33 53,152 3.07
Investment securities (2) 354,313 17,127 6.46 275,724 14,780 7.14 476,812 5.24
---------- ------- ------- ------- ---------
Total interest-earning assets 4,950,603 262,565 7.07 4,653,324 253,143 7.25 4,928,734 6.84
Non-interest earning assets 228,947 229,621 304,846
---------- --------- ---------
Total assets $5,179,550 $4,882,945 $5,233,580
========== ========= =========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,913,183 93,313 4.29 2,677,682 84,050 4.18 3,039,622 3.75
Borrowed funds 1,613,896 72,402 6.00 1,628,293 74,543 6.10 1,510,900 5.80
---------- ------- --------- ------- ---------
Total interest-bearing liabilities 4,527,079 165,715 4.90 4,305,975 158,593 4.91 4,550,522 4.43
------- ---- ------- ---- ----
Non-interest bearing deposits 148,474 127,782 165,528
Other liabilities 109,496 91,766 109,355
----------- -------- ---------
Total liabilities 4,785,049 4,525,523 4,825,405
Stockholders' equity 394,501 357,422 408,175
---------- --------- ----------
Liabilities and stockholders' equity $5,179,550 $4,882,945 $5,233,580
========== ========= ==========
Net interest income/interest rate spread $96,850 2.17% $94,550 2.34% 2.41%
======= ===== ====== ==== ====
Net earning assets/net yield on average
interest-earning assets $ 423,524 2.61% $ 347,349 2.71% $ 378,212 N/A
========== ==== ========== ==== ========= ===
Ratio of interest-earning assets to
interest-bearing liabilities 109.36% 108.07% 108.31%
====== ====== ======
- ------------------------------------------
(1) Includes pro-rata share of interest income received on outstanding drafts
payable.
(2) Income and yields are stated on a taxable equivalent basis.
23
Rate/Volume Analysis of Changes in 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, on a taxable equivalent basis. 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
September 30, 2001 September 30, 2001
Compared to Compared to
September 30, 2000 September 30, 2000
Increase (Decrease) Increase (Decrease)
------------------------------- ------------------------------
Changes in Net Interest Changes in Net Interest
Income Due to Income Due to
Volume Rate Net Volume Rate Net
-------- ------- -------- -------- ------- -------
(In thousands)
Interest-earning assets:
Loans receivable $ (391) (3,190) (3,581) 11,161 (2,033) 9,128
Mortgage-backed securities 384 (298) 86 (345) (564) (909)
Interest-bearing deposits 269 (507) (238) 380 (625) (245)
Federal funds sold 256 (979) (723) 560 (1,459) (899)
Investment securities 2,347 (848) 1,499 3,864 (1,517) 2,347
--------- -------- -------- --------- ------- --------
Total $ 2,865 (5,822) (2,957) 15,620 (6,198) 9,422
--------- -------- -------- --------- ------- --------
Interest-bearing liabilities:
Deposits 2,476 (2,669) (193) 7,087 2,176 9,263
Borrowed funds (1,882) (1,390) (3,272) (748) (1,393) (2,141)
--------- -------- -------- --------- ------- --------
Total 594 (4,059) (3,465) 6,339 783 7,122
--------- -------- -------- --------- ------- --------
Net change in net interest income $ 2,271 (1,763) 508 9,281 (6,981) 2,300
========= ======== ======== ========= ======= ========
Comparison of the Results of Operations for the Three Months Ended September 30,
2001 and 2000
General - Net income for the three months ended September 30, 2001 was
$13.6 million, or $.59 per diluted share, compared to net income of $16.5
million, or $.71 per diluted share for the three months ended September 30,
2000. The prior year quarter included a $2.6 million or an $.11 per diluted
share after tax gain on the sale of mortgage servicing rights.
Net interest income - Net interest income was $32.3 million for the current
quarter, compared to $31.8 million for the quarter ended September 30, 2000, an
increase of $456,000 or 1.43%. The Company's average interest-earning assets
increased to $4.96 billion for the three months ended September 30, 2001,
compared to $4.78 billion for the three months ended September 30, 2000, while
the Company's net interest margin decreased to 2.61% for the current three-month
period, compared to 2.67% in the prior year period. The decrease in the net
interest margin is a function of faster declines in earning asset yields than
funding costs. Heavy refinance activity in the Bank's loan portfolio during the
current quarter, as well as the impact of falling interest rates on
adjustable-rate investment securities, overnight deposits and other short-term
loan products, including home equity loans, led to the 50 basis point decline in
the yield on average interest-earning assets. Over the same time horizon, the
average cost of funds decreased 43 basis points,
24
including a 37 basis point decrease in the cost of deposits and a 34 basis point
decline in borrowing costs. Based on current scheduled maturities of deposits
and fixed-rate borrowings, and the current low interest rate environment,
management currently expects the Bank's cost of funds to continue decreasing at
a rate that will expand its net interest margin modestly in the fourth quarter
of 2001 and into 2002.
Interest income on loans receivable decreased $3.6 million as a result of a
$21.3 million decrease in average loans receivable, as well as a 30 basis point
decrease in the average yield on loans receivable. The decrease in yield is
primarily due to heavy prepayments of higher-yielding mortgage loans and the
downward repricing of floating rate loans tied to U.S. Treasury rates and the
prime rate. The decrease in the average balance of loans receivable is primarily
due to a large percentage of loan refinancings being long-term fixed-rate in
nature, which the Bank generally sells to help manage its interest rate risk.
Interest income on mortgage-backed securities increased $86,000 to $2.0 million
for the current quarter, due primarily to a $25.0 million increase in average
balances, offset by a 98 basis point decrease in yield. Interest income on
investment securities increased $1.4 million to $6.4 million, due to a $143.9
million increase in the average balance of this portfolio, offset by a 115 basis
point decrease in yield. The increase in the average balance of investment
securities is primarily due to the investment of cash flows from loan
prepayments and loan sales during the quarter.
Interest expense on deposit accounts decreased $193,000 to $30.2 million
for the third quarter of 2001, due to a 37 basis point decrease in the average
cost of deposits compared to the prior year quarter, offset by a $236.2 million
increase in average deposits. The growth in average deposits is attributable to
an increase in money market accounts and certificates of deposit balances. The
decrease in the average cost of deposits is primarily due to the downward
repricing of maturing certificates of deposit during 2001, as well as reductions
to interest rates paid on the Bank's core deposit products. With the recent
reduction in U.S. Treasury rates, the Bank currently anticipates a continued
decline in its average cost of deposits into 2002.
Interest expense on borrowed funds decreased $3.3 million to $22.8 million,
as a result of a 34 basis point decrease in average cost and a $124.2 million
decrease in the average balance. The decrease in the average rates has been due
to maturing higher rate FHLB of Chicago advances that have been refinanced with
lower coupons or paid off, as well as decreases in the cost of variable rate
borrowings. At September 30, 2001, the Bank has $520.0 million of FHLB of
Chicago advances scheduled to mature through 2002 at an average cost of 5.69%.
With the recent reduction of U.S. Treasury rates, the Bank currently anticipates
a decline in its average cost of borrowings for the remainder of 2001, and into
2002.
Provision for loan losses - The Bank made no provision for loan losses
during the third quarter of 2001, compared to a $500,000 provision for the 2000
third quarter. Net charge-offs during the current quarter were $11,000 compared
to net charge-offs of $203,000 for the three months ended September 30, 2000.
The lack of a provision this quarter is due to an assessment of a number of
factors, including the stable composition of the loan portfolio, good historical
loss experience as evidenced by minimal charge-offs for the quarter, and the low
level of non-performing assets, which is expected to continue. There were no
changes in estimation methods or assumptions that impacted the provision for
loan loss during the quarter. At September 30, 2001 and December 31, 2000, the
Bank's allowance for loan losses was $18.2 million and $18.3 million,
respectively, which equaled .44% of total loans receivable at September 30,
2001, compared to .42% at December 31, 2000. The ratio of the allowance for loan
losses to non-performing loans was 102.6% at September 30, 2001 compared to
109.3% at December 31, 2000 and 113.7% at September 30, 2000.
Non-interest income - Non-interest income decreased $3.1 million, or 23.5%,
to $10.1 million for the three months ended September 30, 2001, compared to
$13.2 million for the three months ended September 30, 2000. The decrease is
primarily due to $4.3 million in income recognized in the prior year period from
a
25
sale of mortgage servicing rights, as well as lower income from real estate
operations in 2001, offset by higher gains on the sale of loans receivable and
an increase in deposit account service charges.
Lower interest rates, better profit margins, and a higher level of
fixed-rate loan originations, led to significantly higher loan sale volume and
increased profits from loan sales during the three-month period ended September
30, 2001 compared to the prior year period. Gain on sale of loans increased to
$2.7 million for the three months ended September 30, 2001, compared to $272,000
for the three months ended September 30, 2000. During the current quarter, loan
sale volume was $236.6 million, including $16.2 million of originations that
were swapped into mortgage-backed securities and sold concurrently, compared to
$98.6 million of loan sale volume, including $4.0 million of originations that
were swapped into mortgage-backed securities and sold concurrently, in the prior
year period. Management currently expects fixed-rate loan activity to continue
to be strong into 2002, resulting in continued loan sale volume, and modest
balance sheet growth.
Income from real estate operations decreased $1.8 million to $799,000 for
the three months ended September 30, 2001 compared to the prior year quarter. A
summary of income from real estate operations follows:
Three Months Ended September 30,
------------------------------------------
2001 2000
------------------- -------------------
# of Pre-tax # of Pre-tax
Lots Income Lots Income
----- ------- ------- -------
(Dollars in thousands)
Tallgrass of Naperville 9 $ 528 76 $ 2,374
Reigate Woods - - 2 67
Woodbridge - - - 184
Other - 271 - -
----- ------- ------- -------
9 $ 799 78 $ 2,625
===== ======= ======= =======
The Company sold nine lots in Tallgrass of Naperville project during the
three months ended September 30, 2001. The significant increase in profit per
lot is primarily due to higher lot prices on current year sales compared to the
prior year. There were 151 lots under contract in this 951-lot subdivision at
September 30, 2001, with 95 remaining to be sold. Assuming no delays in
anticipated closings, management expects approximately half of these lots to
close in the fourth quarter of 2001. The third quarter 2001 results also reflect
a gain of $271,000 on a bulk sale of the Sugar Grove land that the Company
decided not to develop. The 85-lot Reigate Woods subdivision was sold out in the
prior year.
Deposit account service charges increased $791,000, or 23.0%, to $4.2
million for the three months ended September 30, 2001, primarily due to fee
increases, higher debit card interchange income from an increased number of
transactions, as well as the continued growth in the number of checking accounts
serviced by the Bank. At September 30, 2001, the Bank had approximately 126,500
checking accounts, compared to 113,300 at September 30, 2000, an increase of
11.7%.
Brokerage commissions decreased $74,000, or 12.6%, to $512,000 for the
three months ended September 30, 2001 compared to the prior year quarter. The
decrease in commission income reflects lower sales volume due to the weakening
economy and the impact of U.S. equity markets.
26
Loan servicing fee income decreased $247,000 to $118,000 for the three
months ended September 30, 2001, compared to $365,000 for the prior year
quarter. The decrease is primarily due to increased amortization of servicing
rights due to heavy prepayments in the loans serviced for others portfolio.
Amortization of servicing rights was $724,000 for the three months ended
September 30, 2001, compared to $292,000 for the prior year three-month period.
The average balance of loans serviced for others increased 10.0% to $1.18
billion for the third quarter 2001, compared to $1.07 billion in the prior
three-month period. The expected higher prepayment rate led to a $539,000
impairment writedown of the Company's mortgage loan servicing portfolio during
the three months ended September 30, 2001.
Other non-interest income increased $417,000, or 26.3% to $2.0 million for
the three months ended September 30, 2001, compared to $1.6 million for the
prior year quarter. The increase is due primarily to increased income from loan
modifications and title agency fees from increased refinance activity.
Non-interest expense - Non-interest expense increased $2.3 million or 12.5%
compared to prior year period, to $20.7 million for the three months ended
September 30, 2001.
Compensation and benefits increased 17.0% or $1.8 million to $12.2 million
for the three months ended September 30, 2001, compared to the three months
ended September 30, 2000. The increase is primarily due to normal salary
increases, increased staffing costs due to increased loan volume as well as
compensation related to the Bank's new business banking division. Additionally,
employee benefit costs, primarily medical insurance costs and FICA taxes,
increased $406,000 during the current three-month period compared to the prior
year period.
Occupancy expense increased $98,000, or 4.7% to $2.2 million for the three
months ended September 30, 2001 compared to the prior year period, primarily due
to higher depreciation expense and equipment costs.
Advertising and promotion expense increased $221,000, or 26.6% to $1.1
million for the three months ended September 30, 2001 compared to the prior
year, primarily due to increased spending related to the Company's branding
campaign.
Amortization of intangibles decreased $37,000 to $1.1 million for the three
months ended September 30, 2001. The amortization relates to goodwill and core
deposit intangibles from transactions accounted for under the purchase method of
accounting. The decrease in expense over the prior period is attributable to the
accelerated method of amortization utilized by the Bank on its core deposit
premiums.
Other non-interest expense increased $243,000 to $3.3 million for the three
months ended September 30, 2001 compared to the prior year period. Costs
increased primarily due to higher postage and correspondent bank charges, and
higher experience of fraudulent check losses, due to the increased checking
account base.
Income taxes - For the three months ended September 30, 2001, income tax
expense totaled $8.0 million, or an effective income tax rate of 37.0%, compared
to $9.6 million, or an effective income tax rate of 36.7%, for the three months
ended September 30, 2000.
27
Comparison of the Nine Months Ended September 30, 2001 and 2000
General - Net income for the nine months ended September 30, 2001 was $41.6
million, or $1.79 per diluted share, compared to $43.3 million, or $1.83 per
diluted share, a decrease of $1.7 million, or 3.9% on a per diluted share basis.
The prior year period includes an $.11 gain on the sale of mortgage servicing
rights. Without this gain, earnings increased 2.4%, primarily due to increases
in net interest income and gains on the sale of loans receivable.
Net interest income - Net interest income for the nine months ended
September 30, 2001 was $96.6 million compared to $94.4 million for the nine
months ended September 30, 2000, an increase of $2.2 million.
Interest income on interest-earning assets increased $9.3 million for the
nine months ended September 30, 2001, compared to the nine months ended
September 30, 2000. Of this increase, $9.1 million is attributable to interest
earned on loans receivable. The Bank's average balance of loans receivable
increased $206.8 million to $4.32 billion for the first nine months of 2001,
offset by a six basis point reduction in the average yield on loans receivable
compared to the prior year period. The $909,000 decrease in interest income on
mortgage-backed securities is due to a $7.1 million decrease in the average
balance primarily due to normal prepayments and a 64 basis point decrease in
yield. Interest income on investment securities increased $2.3 million to $16.9
million for the nine months ended September 30, 2001, due to a $78.6 million
increase in the average balance for the period, offset by a 68 basis point
decrease in the average yield on this portfolio.
Interest expense on interest-bearing liabilities increased $7.1 million to
$165.7 million for the nine months ended September 30, 2001 from the prior year
period. Interest expense on deposits increased $9.3 million, due to a $235.5
million increase in balance of average deposits and an 11 basis point increase
in average cost of deposits. The increase in average cost is attributable to
maturing certificates of deposits repricing at higher rates of interest in the
latter half of 2000 and early 2001. Interest expense on borrowed funds decreased
$2.1 million, reflecting a $14.4 million decrease in the average balance of
borrowed funds, primarily advances from the FHLB of Chicago, and a 10 basis
point decrease in average cost. Slower growth in loans receivable balances due
to higher prepayments and increased loan sale activity, as well as increased
deposit balances has enabled the Bank to repay maturing FHLB advances as they
matured in 2001.
Provision for loan losses - The Bank provided no provision for loan losses
for the nine months ended September 30, 2001 compared to $1.1 million for the
nine months ended September 30, 2000. Net charge-offs were $48,000 for the
current year nine-month period compared to $209,000 for the prior nine-month
period. The lack of a provision during the nine months ended September 30, 2001
is due to an assessment of a number of factors, including the stable composition
of the loan portfolio, good historical loss experience as evidenced by minimal
charge-offs for the current nine months, and the low level of non-performing
assets which is expected to continue. There were no changes in estimation method
or assumptions that impacted the provision for loan loss during the nine-month
period.
Non-interest income - Non-interest income increased $1.7 million to $30.5
million for the nine months ended September 30, 2001, compared to $28.8 million
for the nine months ended September 30, 2000 primarily due to increased loan
sale gains and deposit account service charges, offset by less income from real
estate development operations and decreased loan servicing fee income.
Gain on sale of loans receivable was $5.3 million for the nine months ended
September 30, 2001, compared to $476,000 for the nine months ended September 30,
2000, an increase of $4.8 million. The increase was due to both higher sales
volume and improved profit margins. Loan sales were $736.4 million
28
during the current nine-month period compared to $208.0 million in the prior
nine-month period. The increase in loan sale activity is primarily due to a
greater amount of fixed-rate originations in the current nine-month period due
to falling interest rates, and the shift in consumer preference for long-term
fixed rate loan products. The $700,000 loss on sale of mortgage-backed
securities in the prior year nine-month period was due to the sale of a $9.3
million floating rate CMO security.
During the current nine months, the Company recognized $824,000 of gains on
the sale of investment securities, primarily marketable equity securities,
compared to gains of $137,000 for the previous nine-month period from the sale
of U.S. agency securities and, to a lesser extent, marketable equity securities.
Income from real estate operations was $5.5 million for the nine months
ended September 30, 2001, compared to income of $7.8 million for the nine months
ended September 30, 2000, a decrease of $2.3 million.
Nine Months Ended September 30,
----------------------------------------
2001 2000
------------------- -------------------
# of Pre-tax # of Pre-tax
Lots Income Lots Income
------- -------- ------ ---------
(Dollars in thousands)
Tallgrass of Naperville 127 $ 5,198 258 $ 6,964
Woodbridge - - - 418
Reigate Woods - - 7 210
Harmony Grove - - - 104
Creekside of Remington - - 75 105
Other - 271 - -
------- ------- ------ -------
127 $ 5,469 340 $ 7,801
======= ======= ====== =======
During the current-nine month period, the Company sold 127 lot sales in its
951-lot Tallgrass of Naperville project at average prices that were higher than
comparative sales in the prior period, due to continued strong demand from local
builders. The Company held a pre-sale of 151 lots in the next phase of Tallgrass
during September 2001, and all lots offered are under contract at September 30,
2001. Assuming no delays in anticipated closings, management expects
approximately half of these lots to close in the fourth quarter of 2001. The
remaining land in the Woodbridge project is commercially zoned. During the nine
months ended September 30, 2000, one commercial parcel was sold. At September
30, 2001, the remaining balance of the Woodbridge project consists of two
parcels totaling 3.5 acres. One of the parcels was purchased by the Bank,
which expects to use the parcel for a future branch site. The other parcel
is under contract with an unrelated third party, and is scheduled to close in
the fourth quarter of 2001 at a pre-tax profit of approximately $550,000.
Additionally, in 2001, the Company recognized a $271,000 gain on the bulk sale
of a parcel of land in Sugar Grove it decided not to develop. The Reigate Woods
and Harmony Grove subdivisions were each sold out in the prior year, while the
final 75 lots in the Creekside of Remington subdivision were sold in bulk
to a local developer in June.
Loan servicing fee income decreased $1.4 million for the nine months ended
September 30, 2001 compared to the nine months ended September 30, 2000. The
average balance of loans serviced for others decreased 17.4% to $972.9 million
for the current nine-month period, compared to $1.18 billion in the prior
nine-month period. The decrease is primarily due to the sale of $600 million of
servicing rights in the third quarter of 2000, offset in part by additions to
the portfolio from current period sales. Current year servicing fee income also
includes a $754,000 impairment writedown taken on mortgage servicing rights due
to the
29
impact of higher expected prepayment speeds on the net present value of expected
cash flows from these servicing rights. Amortization of purchased loan servicing
rights totaled $2.1 million for the 2001 nine-month period, compared to $826,000
for the prior nine-month period due to the higher level of prepayments.
Deposit account service charges increased $2.7 million or 29.1% to $11.8
million for the nine months ended September 30, 2001, due to an increase in the
number of checking accounts serviced by the Bank and higher fees for certain
services, as well as higher debit card interchange income from an increase in
transactions.
Other non-interest income increased $1.5 million or 35.7% to $5.8 million
for the nine months ended September 30, 2001 primarily due to an increase in
loan related and title agency fee income compared to the prior year due to an
increase in loan refinance and modification activity.
Non-interest expense - Non-interest expense for the nine months ended
September 30, 2001 increased $6.8 million or 12.6% to $60.9 million compared to
$54.1 million for the nine months ended September 30, 2000.
Compensation and benefits increased $4.6 million, or 14.9%, to $35.2
million, for the nine months ended September 30, 2001. The increase is primarily
due to normal salary increases, increased staffing costs due to increased loan
volume, two new branch locations acquired in April 2000, as well as compensation
related to the Bank's new business banking division. Additionally, employee
benefit costs, primarily medical insurance costs and FICA taxes, increased $1.3
million during the current nine-month period compared to the prior year period.
Occupancy expense increased $627,000, or 10.5% to $6.6 million for the nine
months ended September 30, 2001 compared to the nine months ended September 30,
2000. The increase in expense is primarily due to higher maintenance costs
incurred at existing branches, as well as additional costs incurred from two
branches the Bank acquired in April 2000.
Advertising and promotion expense increased $678,000 or 24.9% compared to
the prior year, to $3.4 million for the nine months ended September 30, 2001.
The increase in cost is primarily related to increased spending relating to the
Company's branding campaign.
Amortization of intangibles increased $100,000 to $3.4 million for the nine
months ended September 30, 2001 due to an increase in goodwill and core deposit
intangible as a result of the purchase of two new branches in April 2000.
Other non-interest expense increased $780,000 to $9.5 million for the nine
months ended September 30, 2001 compared to the prior year period. The increase
is primarily due to general operating costs at two new branches, as well as
increased expenses incurred for postage, correspondent banking fees, as well as
higher fraudulent check losses incurred in conjunction with the Bank's increased
checking base.
Income taxes - The Company recorded a provision for income taxes of $24.6
million for the nine months ended September 30, 2001, or an effective income tax
rate of 37.1%, compared to $24.7 million for the nine months ended September 30,
2000, or an effective income tax rate of 36.3%. The increase in the effective
income tax rate was primarily the result of increased state income taxes and the
recognition in the prior year period of income tax benefits relating to the
resolution of certain prior years' income tax issues.
30
Outlook for 2002
In providing its outlook for next year, management currently expects
earnings per share for 2002 to be in the range of $2.85-$2.95 per diluted share.
The projected earnings per share results for 2002 assume the completion of the
Mid Town acquisition in the fourth quarter of 2001. The earnings per share
estimate is also based on the provisions of SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and other Intangible Assets," which
were issued in July 2001. See "Note 7. New Accounting Pronouncements."
The Company's 2002 projections assume a favorable steep yield curve
environment in 2002, which is expected to result in an increase in the interest
rate spread and a corresponding improvement in both the net interest margin and
overall net interest income next year. The Company also expects its real estate
development operations to contribute $10.0-$12.0 million in pre-tax earnings
next year and also to report continued strong growth in fee income. The
projections also assume that housing and mortgage activity in the Bank's
markets, as well as credit quality, remains strong.
Cautionary Statement Regarding Forward-Looking Information
This report, in Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere, contains, and or other
periodic reports and press releases of the Company may contain, certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company intends such forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, and is including this
statement for purposes of invoking these safe harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe future plans,
strategies and expectations of the Company, are generally identifiable by use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project,"
"plan," or similar expressions. The Company's ability to predict results or the
actual effect of future plans or strategies is inherently uncertain and actual
results may differ from those predicted. The Company undertakes no obligation to
update these forward-looking statements in the future. Factors which could have
a material adverse effect on the operations and could affect the outlook or
future prospects of the Company and its subsidiaries include, but are not
limited to, unanticipated changes in interest rates, general economic
conditions, legislative/regulatory changes, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the Company's or Mid Town Bancorp's loan or
investment portfolios, demand for loan products, secondary mortgage market
conditions, deposit flows, competition, demand for financial services and
residential real estate in the Company's market area, unanticipated slowdowns in
real estate lot sales or problems in closing pending real estate contracts,
delays in real estate development projects, higher than anticipated costs or
lower than anticipated revenues associated with the Mid Town Bancorp acquisition
or the possible short-term dilutive effect of other potential acquisitions, if
any, and changes in accounting principles, policies and guidelines. These risks
and uncertainties should be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements.
31
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since December 31, 2000, the Bank has operated in an interest rate
environment that has seen short-term U.S. Treasury rates decrease over 350 basis
points. During that same time, long-term U.S. Treasury rates have decreased
approximately 50 basis points. The impact of the changes in U.S. Treasury rates
has had a significant impact on the interest-earning asset and interest-bearing
liabilities portfolios of the Bank, including the shortening of certificates of
deposit maturities, as customers have sought shorter-term deposits in light of
lower rates, and the prepayments of mortgage loans, which has shortened the
average life of interest-earning assets. As dramatic as the change in interest
rates has been since December 31, 2000, the Bank's exposure to interest-rate
risk, as measured by its interest-sensitivity gap, as well as its NPV
sensitivity measure, has remained relatively consistent, in part due to the
shortening of liability maturities being offset by increased prepayments on
loans, as well as management maintaining its policy of selling longer-term fixed
rate loan originations to manage its interest rate risk. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Asset/Liability Management."
Part II - Other Information
- -----------------------------
Item 1. Legal Proceedings. Not applicable.
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) Exhibits.
Exhibit No.3. Certificate of Incorporation and By-laws.
(i) Restated Certificate of Incorporation. (Incorporated herein
by reference to Exhibit 3.1 to Registrant's Form 8-K dated
December 19, 2000).
(ii) Amended and Restated By-laws of Registrant. (Incorporated
herein by reference to Exhibit No. 3 to Registrant's
March 31, 2001 Form 10-Q).
32
Exhibit No.11. Statement re: Computation of per share earnings.
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Net income $ 13,647,000 $ 41,605,000
========== ==========
Weighted average common shares outstanding 22,510,714 22,704,994
========== ==========
Basic earnings per share $ .61 $ 1.83
==== ====
Weighted average common shares outstanding 22,510,714 22,704,994
Common stock equivalents due to dilutive
effect of stock options 546,677 507,495
---------- -----------
Total weighted average common shares and equivalents
outstanding for diluted computation 23,057,391 23,212,489
========== ===========
Diluted earnings per share $ .59 $ 1.79
=== ====
(b) Reports on Form 8-K.
A Form 8-K was filed to report that on July 5, 2001, MAF Bancorp,
Inc.announced that it has agreed to acquire Mid Town Bancorp, Inc.
("Midtown") in a stock and cash transaction valued at $69 million.
A copy of the joint press release relating to the merger and an
Agreement and Plan of Merger by and among MAF Bancorp, Inc.,
Lincoln Acquisition Corp. and Mid Town Bancorp, Inc. were included
as exhibits.
A Form 8-K was filed to report that on July 19, 2001, MAF Bancorp,
Inc. announced its 2001 second quarter earnings results, and a
copy of the press release was included as an exhibit.
A Form 8-K was filed to report that on July 23, 2001 MAF Bancorp,
Inc. issued a press release announcing its participation in the
Keefe, Bruyette & Woods, Inc. Community Bank Investor Conference
on July 25-26, 2001. A copy of the press release and the materials
used by MAF for the presentation were included as exhibits.
A Form 8-K was filed to report that on September 17, 2001 MAF
Bancorp, Inc. issued a press release announcing the corporation's
new stock repurchase program. A copy of the press release was
included as an exhibit.
33
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: November 13, 2001 By: /s/ Allen H. Koranda
----------------------------- -----------------------------------
Allen H. Koranda
Chairman of the Board and
Chief Executive Officer
Date: November 13, 2001 By: /s/ Jerry A. Weberling
----------------------------- -----------------------------------
Jerry A. Weberling
Executive Vice President and
Chief Financial Officer
34