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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 June 30, 2000
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 23,093,836 at August 10, 2000.
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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 June 30, 2000 and December 31, 1999 (unaudited)................... 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2000 and 1999 (unaudited)......................... 4
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 2000 (unaudited)...................... 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 (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.............. 31
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........................................ 32
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)
June 30, December 31,
2000 1999
----------- ------------
Assets
- ------
Cash and due from banks $ 56,534 71,721
Interest-bearing deposits 22,682 51,306
Federal funds sold 108,969 35,013
Investment securities, at cost (fair value of $12,388 and $12,321) 12,060 11,999
Investment securities available for sale, at fair value 173,466 194,105
Stock in Federal Home Loan Bank of Chicago, at cost 80,775 75,025
Mortgage-backed securities, at amortized cost
(fair value of $85,576 and $92,095) 88,965 94,251
Mortgage-backed securities available for sale, at fair value 27,337 39,703
Loans receivable held for sale 35,973 12,601
Loans receivable, net of allowance for losses of $17,870 and $17,276 4,160,524 3,871,968
Accrued interest receivable 26,248 23,740
Foreclosed real estate 981 7,415
Real estate held for development or sale 10,839 15,889
Premises and equipment, net 45,523 42,489
Other assets 71,191 49,640
Intangible assets, net of accumulated amortization of $12,699 and $10,555 71,179 61,200
----------- -----------
$ 4,993,246 4,658,065
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits $ 2,876,553 2,699,242
Borrowed funds 1,665,075 1,526,363
Advances by borrowers for taxes and insurance 37,785 34,767
Accrued expenses and other liabilities 54,668 44,772
----------- -----------
Total liabilities 4,634,081 4,305,144
----------- -----------
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;
23,161,974 and 24,984,398 shares outstanding 254 254
Additional paid-in capital 197,343 194,874
Retained earnings, substantially restricted 213,506 198,156
Stock in gain deferral plan; 226,640 and 223,453 shares 595 511
Accumulated other comprehensive loss (3,035) (3,675)
Treasury stock, at cost; 2,485,316 and 1,732,595 shares (49,498) (37,199)
----------- -----------
Total stockholders' equity 359,165 352,921
Commitments and contingencies
$ 4,993,246 4,658,065
=========== ===========
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 Six Months Ended
June 30, June 30,
-------------------- -------------------
2000 1999 2000 1999
-------- ------- -------- -------
Interest income:
Loans receivable $ 74,856 61,436 145,561 121,169
Mortgage-backed securities 1,496 1,697 3,021 3,557
Mortgage-backed securities available for sale 635 702 1,284 1,482
Investment securities 1,687 1,166 3,284 2,086
Investment securities available for sale 3,264 2,733 6,478 5,665
Interest-bearing deposits and federal funds sold 2,693 1,161 5,094 2,374
-------- -------- -------- --------
Total interest income 84,631 68,895 164,722 136,333
-------- -------- -------- --------
Interest expense:
Deposits 27,902 24,585 53,691 49,166
Borrowed funds 24,668 15,267 48,427 29,721
-------- -------- -------- --------
Total interest expense 52,570 39,852 102,118 78,887
-------- -------- -------- --------
Net interest income 32,061 29,043 62,604 57,446
Provision for loan losses 300 250 600 500
-------- -------- -------- --------
Net interest income after provision for loan losses 31,761 28,793 62,004 56,946
-------- -------- -------- --------
Non-interest income:
Gain (loss) on sale of:
Loans receivable 147 414 204 1,874
Mortgage-backed securities (700) -- (700) --
Investment securities -- -- 133 538
Foreclosed real estate 132 108 204 120
Deposit account service charges 3,100 2,541 5,670 4,746
Income from real estate operations 2,701 3,917 5,176 4,538
Brokerage commissions 476 627 1,154 1,219
Loan servicing fee income 473 654 1,029 1,030
Other 1,489 1,376 2,707 2,888
-------- -------- -------- --------
Total non-interest income 7,818 9,637 15,577 16,953
-------- -------- -------- --------
Non-interest expense:
Compensation and benefits 10,112 9,269 20,257 18,735
Office occupancy and equipment 1,990 1,818 3,905 3,625
Advertising and promotion 888 823 1,890 1,355
Data processing 736 600 1,452 1,191
Federal deposit insurance premiums 149 393 296 797
Amortization of intangible assets 1,184 977 2,144 1,954
Other 2,938 2,644 5,739 5,047
-------- -------- -------- --------
Total non-interest expense 17,997 16,524 35,683 32,704
-------- -------- -------- --------
Income before income taxes 21,582 21,906 41,898 41,195
Income tax expense 7,911 8,667 15,118 16,277
-------- -------- -------- --------
Net income $ 13,671 13,239 26,780 24,918
======== ======== ======== ========
Basic earnings per share $ .59 .55 1.14 1.02
======== ======== ======== ========
Diluted earnings per share .58 .53 1.13 .99
======== ======== ======== ========
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)
Six Months Ended June 30, 2000
-----------------------------------------------------------------------------
Accumulated Stock in
Additional other gain
Common paid-in Retained comprehensive deferral Treasury
stock capital earnings income (loss) plan stock Total
-------- ---------- -------- ------------- -------- -------- --------
Balance at December 31, 1999 $ 254 194,874 198,156 (3,675) 511 (37,199) 352,921
-------- -------- -------- -------- -------- -------- --------
Comprehensive income:
Net income -- -- 26,780 -- -- -- 26,780
Other comprehensive income, net of tax:
Unrealized holding income during the period -- -- -- 278 -- -- 278
Less: reclassification adjustment of losses
included in net income -- -- -- 362 -- -- 362
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income -- -- 26,780 640 -- -- 27,420
-------- -------- -------- -------- -------- -------- --------
Exercise of 367,745 stock options and
reissuance of treasury stock -- -- (7,023) -- -- 7,093 70
Impact of exercise of acquisition
carry-over stock options -- 52 -- -- -- -- 52
Purchase of treasury stock -- -- -- -- -- (19,308) (19,308)
Tax benefits from stock-related compensation -- 2,417 -- -- -- -- 2,417
Cash dividends ($.19 per share) -- -- (4,451) -- -- -- (4,451)
Dividends paid to gain deferral plan -- -- 44 -- 84 (84) 44
-------- -------- -------- -------- -------- -------- --------
Balance at June 30, 2000 $ 254 197,343 213,506 (3,035) 595 (49,498) 359,165
======== ======== ======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
5
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------
2000 1999
--------- ---------
Operating activities:
Net income $ 26,780 24,918
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 2,140 1,960
Provision for loan losses 600 500
FHLB of Chicago stock dividend (1,347) --
Deferred income tax expense 526 1,063
Amortization of intangible assets 2,144 1,954
Amortization of premiums, discounts, loan fees and servicing rights 335 617
Net gain on sale of loans, mortgage-backed securities,
and real estate held for development or sale (4,680) (6,412)
Gain on sale of investment securities (133) (538)
Increase in accrued interest receivable (2,508) (746)
Net increase in other assets and liabilities (25,811) (12,303)
Loans originated for sale (122,956) (125,821)
Loans purchased for sale (9,900) (15,901)
Sale of loans receivable originated, swapped, and purchased for sale 109,162 212,306
--------- ---------
Net cash provided by (used in) operating activities (25,648) 81,597
--------- ---------
Investing activities:
Loans receivable originated for investment (548,258) (569,002)
Principal repayments on loans receivable 317,126 404,382
Principal repayments on mortgage-backed securities 12,308 31,834
Proceeds from maturities of investment securities available for sale 36,565 41,490
Proceeds from sale of:
Investment securities available for sale 717 8,859
Real estate held for development or sale 25,109 22,531
Mortgage-backed securities available for sale 9,300 --
Purchases of:
Loans receivable held for investment (54,019) (137,800)
Investment securities available for sale (15,968) (45,176)
Investment securities (59) (10,266)
Mortgage-backed securities (4,085) --
Stock in FHLB of Chicago (4,403) (4,647)
Real estate held for development or sale (10,887) (10,265)
Premises and equipment (2,674) (2,784)
Cash received from acquisition of deposits, net 80,903 --
--------- ---------
Net cash used in investing activities $(158,325) (270,844)
--------- ---------
(continued)
6
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------
2000 1999
--------- --------
Financing activities:
Proceeds from FHLB of Chicago advances $ 225,000 280,000
Proceeds from unsecured line of credit 15,000 21,000
Repayment of FHLB of Chicago advances (90,000) (145,000)
Repayment of unsecured line of credit (5,000) (11,000)
Net decrease in other borrowings (288) --
Proceeds from exercise of stock options 70 727
Purchase of treasury stock (17,338) (24,537)
Cash dividends (4,238) (3,241)
Net increase in deposits 87,894 14,013
Decrease in advances by borrowers for taxes and insurance 3,018 2,686
--------- ---------
Net cash provided by financing activities 214,118 134,648
--------- ---------
Increase (decrease) in cash and cash equivalents 30,145 (54,599)
--------- ---------
Cash and cash equivalents at beginning of period 158,040 157,699
--------- ---------
Cash and cash equivalents at end of period $ 188,185 103,100
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds 100,731 78,066
Income taxes 12,011 12,942
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate 1,221 3,381
Loans receivable swapped into mortgage-backed securities 2,998 753
Common stock received for option exercises 790 --
========= =========
See accompanying notes to unaudited consolidated financial statements.
7
MAF BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Three and Six Months Ended June 30, 2000 and 1999
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) necessary for a fair presentation have been
included. The results of operations for the three and six months ended June 30,
2000 are not necessarily indicative of results that may be expected for the year
ending December 31, 2000.
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
six month periods ended June 30, 2000 and 1999 and as of December 31, 1999. 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. 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 June 30,
-----------------------------------------------------------------------------
2000 1999
--------------------------------------- -------------------------------------
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 $ 13,671 23,245,139 $ .59 $ 13,239 24,139,952 $ .55
========== ======= ========== =======
Effect of dilutive securities:
Stock options 273,354 754,176
---------- ----------
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversions $ 13,671 23,518,493 $ .58 $ 13,239 24,894,128 $ .53
========== ========== ======= ========== ========== =======
8
(2) Earnings Per Share (continued)
Six Months Ended June 30,
-----------------------------------------------------------------------------
2000 1999
--------------------------------------- -------------------------------------
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 $ 26,780 23,512,690 $ 1.14 $ 24,918 24,388,034 $ 1.02
========== ======== ========== =======
Effect of dilutive securities:
Stock options 223,554 769,960
---------- ----------
Diluted earnings per share -
Income available to common
shareholders plus assumed
conversions $ 26,780 23,736,244 $ 1.13 $ 24,918 25,157,994 $ .99
========== ========== ======== ========== ========== =======
(3) Commitments and Contingencies
At June 30, 2000, the Bank had outstanding commitments to originate and
purchase loans of $436.6 million, of which $134.0 million were fixed-rate loans,
with rates ranging from 5.00% to 9.38%, and $302.6 million were adjustable-rate
loans. At June 30, 2000, commitments to sell loans were $74.9 million.
At June 30, 2000, 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
$8.2 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 1999 amounts have been made to conform with
current year presentations.
9
(6) Segment Information
The Company utilizes the "management approach" for segment reporting. This
approach is based on the way that a 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 consumer 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 tables below:
At or For the Three Months Ended June 30, 2000
------------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
--------- ----------- ------------ ------------
(In thousands)
Interest income $ 84,691 -- (60) 84,631
Interest expense 52,570 60 (60) 52,570
---------- ---------- ---------- ----------
Net interest income 32,121 (60) -- 32,061
Provision for loan losses 300 -- -- 300
---------- ---------- ---------- ----------
Net interest income after provision 31,821 (60) -- 31,761
Non-interest income 5,117 2,701 -- 7,818
Non-interest expense 17,836 161 -- 17,997
---------- ---------- ----------
Income before income taxes 19,102 2,480 -- 21,582
Income tax expense 6,927 984 -- 7,911
---------- ---------- ---------- ----------
Net income $ 12,175 1,496 -- 13,671
========== ========== ========== ==========
Average assets $4,889,249 13,760 -- 4,903,009
========== ========== ========== ==========
At or For the Three Months Ended June 30, 1999
------------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
--------- ----------- ------------ ------------
(In thousands)
Interest income $ 69,348 -- (453) 68,895
Interest expense 39,852 453 (453) 39,852
---------- ---------- ---------- ----------
Net interest income 29,496 (453) -- 29,043
Provision for loan losses 250 -- -- 250
---------- ---------- ---------- ----------
Net interest income after provision 29,246 (453) -- 28,793
Non-interest income 5,720 3,917 -- 9,637
Non-interest expense 16,382 142 -- 16,524
---------- ---------- ---------- ----------
Income before income taxes 18,584 3,322 -- 21,906
Income tax expense 7,355 1,312 -- 8,667
---------- ---------- ---------- ----------
Net income $ 11,229 2,010 -- 13,239
========== ========== ========== ==========
Average assets $4,131,275 25,851 -- 4,157,126
========== ========== ========== ==========
10
(6) Segment Information (continued)
At or For the Six Months Ended June 30, 2000
------------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
--------- ----------- ------------ ------------
(In thousands)
Interest income $ 164,876 -- (154) 164,722
Interest expense 102,118 154 (154) 102,118
---------- ---------- ---------- ----------
Net interest income 62,758 (154) -- 62,604
Provision for loan losses 600 -- -- 600
---------- ---------- ---------- ----------
Net interest income after provision 62,158 (154) -- 62,004
Non-interest income 10,401 5,176 -- 15,577
Non-interest expense 35,231 452 -- 35,683
---------- ---------- ---------- ----------
Income before income taxes 37,328 4,570 -- 41,898
Income tax expense 13,305 1,813 -- 15,118
---------- ---------- ---------- ----------
Net income $ 24,023 2,757 -- 26,780
========== ========== ========== ==========
Average assets $4,801,078 15,966 -- 4,817,044
========== ========== ========== ==========
At or For the Six Months Ended June 30, 1999
------------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
--------- ----------- ------------ ------------
(In thousands)
Interest income $ 137,273 -- (940) 136,333
Interest expense 78,887 940 (940) 78,887
---------- ---------- ---------- ----------
Net interest income 58,386 (940) -- 57,446
Provision for loan losses 500 -- -- 500
---------- ---------- ---------- ----------
Net interest income after provision 57,886 (940) -- 56,946
Non-interest income 12,415 4,538 -- 16,953
Non-interest expense 32,259 445 -- 32,704
---------- ---------- ---------- ----------
Income before income taxes 38,042 3,153 -- 41,195
Income tax expense 15,031 1,246 -- 16,277
---------- ---------- ---------- ----------
Net income $ 23,011 1,907 -- 24,918
========== ========== ========== ==========
Average assets $4,092,914 26,998 -- 4,119,912
========== ========== ========== ==========
(7) New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires all derivatives to be recognized as either assets or liabilities in the
statement of financial condition and to be measured at fair value. As issued,
the Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of SFAS No. 133." The Statement is effective upon issuance and it amends SFAS
No. 133 to be effective for all fiscal quarters of fiscal years beginning after
June 30, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an Amendment of
FASB Statement No. 133." The Statement is effective at the later of the first
fiscal quarter beginning after June 15, 2000 or upon adoption of SFAS No. 133,
and should be adopted concurrently with SFAS No. 133. The Company does not
believe these statements will have a material impact on its financial position
or results of operations.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 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. Factors which could have a material adverse
effect on the operations and future prospects of the Company and the
subsidiaries include, but are not limited to changes in interest rates, general
economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality or composition of the Company's loan or
investment portfolios, demand for loan products, deposit flows, cost and
availability of wholesale borrowings, competition, demand for financial services
and real estate lots and parcels in the Company's market area, the possible
short-term dilutive effect of potential acquisitions, and tax and financial
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.
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 through 27 retail banking offices. 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. To a lesser extent, the Bank also makes multi-family mortgage,
residential construction, land acquisition and development and a variety of
consumer loans. The Bank also has a small portfolio of commercial real estate.
Through two wholly-owned subsidiaries, MAF Developments, and NW Financial, Inc.,
the Company and the Bank are also engaged in primarily residential real estate
development activities. Additionally, the Bank operates an insurance agency, Mid
America Insurance Agency, Inc., which provides general insurance services, a
title agency, Centre Point Title Services, Inc., which provides general title
services for the Bank's loan customers, Mid America Investment Services, Inc.,
which offers investment services and securities brokerage primarily to Bank
customers through its affiliation with INVEST, a registered broker-dealer, and
MAF Realty Co., LLC III, the holding company of MAF Realty, LLC IV, a real
estate investment trust.
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
12
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 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.
On April 17, 2000, the Company completed its purchase of two savings bank
branches from the Marshall & Ilsley ("M&I") banking organization, Milwaukee,
Wisconsin. The branch acquisitions expand the Company's banking franchise into
the southwest suburbs of Chicago with locations in Burbank and Tinley Park,
Illinois. The transaction involved the acquisition of approximately $90.0
million of deposits and the related branch sites. The Company paid 12.9%, or
$11.6 million premium on deposits.
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.
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.
13
At June 30, 2000, the Bank was in compliance with all of its capital
requirements as follows:
June 30, 2000 December 31, 1999
------------------------ ----------------------
Percent of Percent of
Amount Assets Amount Assets
----------- ---------- ----------- ----------
(Dollars in thousands)
Stockholder's equity of the Bank $ 369,576 7.44% $ 354,297 7.64%
=========== ====== =========== ======
Tangible capital $ 294,919 6.03% $ 288,177 6.32%
Tangible capital requirement 73,415 1.50 68,391 1.50
----------- ------ ----------- ------
Excess $ 221,504 4.53% $ 219,786 4.82%
=========== ====== =========== ======
Core capital $ 294,919 6.03% $ 288,177 6.32%
Core capital requirement 146,830 3.00 136,782 3.00
----------- ------ ----------- ------
Excess $ 148,089 3.03% $ 151,395 3.32%
=========== ====== =========== ======
Core and supplementary capital $ 312,789 11.59% $ 305,453 12.32%
Risk-based capital requirement 215,884 8.00 198,423 8.00
----------- ------ ----------- ------
Excess $ 96,905 3.59% $ 107,030 4.32%
=========== ====== =========== ======
Total Bank assets $ 4,974,612 $ 4,634,591
Adjusted total Bank assets 4,894,344 4,559,397
Total risk-weighted assets 2,774,824 2,555,481
Adjusted total risk-weighted assets 2,698,555 2,480,286
Investment in Bank's real estate subsidiaries 5,929 7,930
=========== ===========
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:
June 30, December 31,
2000 1999
--------- ------------
(In thousands)
Stockholder's equity of the Bank $ 369,576 354,297
Goodwill (63,570) (54,939)
Core deposit intangibles (7,609) (6,261)
Non-permissible subsidiary deduction (5,929) (7,930)
Non-includable purchased mortgage servicing rights (771) (733)
Regulatory capital adjustment for available for sale securities 3,222 3,743
--------- ---------
Tangible and core capital 294,919 288,177
General loan loss reserves 17,870 17,276
--------- ---------
Core and supplementary capital $ 312,789 305,453
========= =========
14
Changes in Financial Condition
Total assets of the Company were $4.99 billion at June 30, 2000, an
increase of $335.2 million, or 7.2% from $4.66 billion at December 31, 1999. The
increase is primarily due to an increase in deposits and FHLB of Chicago
advances used to fund mortgage loans held for investment and sale.
Cash and short-term investments totaled a combined $188.2 million at June
30, 2000, an increase of $30.1 million from the combined balance of $158.0
million at December 31, 1999. Cash and due from banks decreased $15.2 million
due to the reinvestment of vault cash accumulated as of December 31, 1999 for
potential Year 2000 customer concerns.
Investment securities available for sale decreased $20.6 million to $173.5
million at June 30, 2000. The decrease is due to maturities of $36.6 million of
primarily asset-backed and U.S. Agency securities, sales of $717,000, offset by
purchases of $16.0 million in primarily asset-backed, U.S. Agency and equity
securities. The Company recognized a gain of $133,000 on the sale of investment
securities available for sale during the six months ended June 30, 2000.
Mortgage-backed securities classified as held to maturity decreased $5.3
million to $89.0 million at June 30, 2000, compared to $94.3 million at December
31, 1999, due to purchases of $4.1 million offset by normal amortization and
prepayments.
Mortgage-backed securities available for sale decreased $12.4 million to
$27.3 million at June 30, 2000, primarily due to a sale of a $9.3 million CMO
security and normal amortization and prepayments. The Company recognized a
$700,000 loss on this sale.
Included in mortgage-backed securities classified as held to maturity and
available for sale are $59.1 million of CMO securities at June 30, 2000, the
majority of which are collateralized by FNMA, FHLMC and GNMA mortgage-backed
securities, and to a lesser extent by whole loans.
Loans receivable, including loans held for sale, increased $311.9 million,
or 8.0%, to $4.20 billion at June 30, 2000. The Bank originated $736.2 million
during the six-month period ended June 30, 2000. Offsetting this increase were
amortization and prepayments totaling $317.1 million, as well as loan sales of
$109.5 million. Loans receivable held for sale increased to $36.0 million as of
June 30, 2000, compared to $12.6 million at December 31, 1999. Included in loan
sale volume for the current six-month period is $16.9 million of hybrid ARM
loans. Traditionally, the Bank has generally held ARM originations in its
portfolio. However, due to current consumer preference for ARM loans, as well as
less than favorable spreads to funding costs for current ARM originations, the
Bank began selling some of its hybrid ARM loan originations on a servicing
released basis in the second quarter of 2000. It is expected that the Bank will
continue to sell certain ARM originations on a servicing released basis in the
foreseeable future to manage its balance sheet growth.
The allowance for loan losses totaled $17.9 million at June 30, 2000, an
increase of $594,000 from the balance at December 31, 1999, due to a $600,000
provision for loan losses, offset by net charge-offs of $6,000. The Bank's
allowance for loan losses to total loans outstanding was .43% at June 30, 2000,
compared to .44% at December 31, 1999. Non-performing loans decreased $387,000
to $15.3 million at June 30, 2000, compared to $15.6 million at December 31,
1999. As a percentage of total loans receivable, the level of non-performing
loans was .36% at June 30, 2000, compared to .40% at December 31, 1999. The
ratio of the allowance for loan losses to non-performing loans was 117.1% at
June 30, 2000 compared to 110.4% at December 31, 1999, and 130.0% at June 30,
1999.
Foreclosed real estate decreased $6.4 million to $981,000 at June 30, 2000
primarily due to the sale of a $6.1 million commercial office complex in June
2000. As part of the sale, the buyer assumed a $6.0 million industrial revenue
bond previously assumed by the Bank as part of other borrowings. The Bank
continues to maintain a $6.5 million standby letter of credit against this
borrowing.
15
Real estate held for development or sale decreased $5.1 million to $10.8
million at June 30, 2000. A summary of the carrying value of real estate held
for development or sale is as follows:
June 30, December 31,
2000 1999
-------- ------------
(In thousands)
MAF Developments, Inc.
Tallgrass of Naperville $ 5,463 11,720
Land for future development 4,321 --
Creekside of Remington -- 1,657
------- -------
9,784 13,377
------- -------
NW Financial, Inc.
Reigate Woods 734 2,112
Woodbridge 321 400
------- -------
1,055 2,512
------- -------
$10,839 15,889
======= =======
During the six months ended June 30, 2000, the Company had 182 lot sales in
Tallgrass of Naperville, a 926-lot single-family project, bringing the total
number of sales in the project to 454 lots. The Company plans to hold a presale
of the next phase of the project, approximately 127 lots, in September 2000.
Closings are expected to commence late in the fourth quarter of 2000. The land
for future development category reflects the Company's purchase, in June 2000,
of 182 acres of land in Plainfield, Illinois. The project is currently expected
to yield 365 lots, with development expected to commence in late 2001. The final
75 lots of the Creekside of Remington project were sold to a local developer in
June 2000.
The Company sold five homesites in its Reigate Woods subdivision during the
first six months of 2000. The final five lots in the project are under contract
and are scheduled to close throughout the remainder of 2000. The remaining
balance of the Woodbridge project consists of two parcels of commercial property
totaling 4.3 acres. During the current quarter, one parcel was sold. At June 30,
2000, one of the two remaining parcels is under contract with the Bank, and
expected to be used for future branch expansion, while the other remains for
sale. The Company expects the two parcels will be sold in 2000 at a pre-tax
profit of approximately $800,000.
Deposits increased $177.3 million, to $2.88 billion at June 30, 2000. The
increase is primarily due to the addition of $89.9 million in deposits from the
M&I branch acquisitions. After consideration of interest of $54.8 million
credited to accounts during the six months ended June 30, 2000, actual cash
inflows were $33.1 million, exclusive of the acquired deposits.
Borrowed funds, which consist primarily of FHLB of Chicago advances,
increased $138.7 million to $1.67 billion at June 30, 2000. The increase is
primarily attributable to a net $135.0 million increase in FHLB of Chicago
borrowings used to fund loan originations. Borrowings at June 30, 2000 also
include $10.0 million drawn on the Company's revolving line of credit during
2000, compared to $0 at December 31, 1999. Funds have been used primarily to
fund the Company's stock buyback program. These increases were offset by a
buyer's assumption of the Bank's $6.0 million industrial revenue bond, upon the
sale of the foreclosed real estate property secured by the bond.
16
Asset Quality
Non-Performing Assets. A loan (whether considered impaired or not) is
classified as non-accrual when collectibility is in doubt, and is normally
analyzed upon the borrower becoming 90 days past due on contractual principal or
interest payments. When a loan is placed on non-accrual status, or in the
process of foreclosure, 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 a time when the loan is brought
current in accordance with its original terms.
For the quarter ended June 30, 2000, interest on non-accrual loans that
would have been recorded as income, had they been performing according to their
original terms, amounted to $294,000, compared to $232,000 for the three months
ended June 30, 1999. For the six months ended June 30, 2000, interest on
non-accrual loans that would have been recorded as income, had they been
performing according to their original terms, amounted to $589,000, compared to
$464,000 for the six months ended June 30, 1999.
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)
June 30, 2000 42 $ 3,665 .09% 111 $14,047 .34%
======= ======= === ======= ======= ===
March 31, 2000 40 $ 4,370 .11% 122 $14,254 .36%
======= ======= === ======= ======= ===
December 31, 1999 63 $ 6,280 .16% 130 $13,224 .34%
======= ======= === ======= ======= ===
September 30, 1999 62 $ 4,828 .13% 123 $12,321 .33%
======= ======= === ======= ======= ===
June 30, 1999 49 $ 3,655 .11% 112 $12,299 .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
-----------------------------------------------------------------------------------------
6/30/00 3/31/00 12/31/99 9/30/99 6/30/99 3/31/99 12/31/98
----------- ----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
Real estate loans:
One- to four-family:
Held for investment $ 3,723,765 3,581,604 3,479,425 3,292,649 3,085,456 2,998,662 2,877,482
Held for sale 35,973 37,899 12,601 13,787 100,016 21,387 89,406
Multi-family 165,309 162,666 164,878 164,687 153,150 141,018 137,254
Commercial 41,919 40,142 38,817 39,670 38,050 41,581 43,069
Construction 30,621 27,529 27,707 29,651 29,558 39,090 28,429
Land 34,272 29,143 28,602 20,148 24,655 23,674 24,765
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total real estate loans 4,031,859 3,878,983 3,752,030 3,560,592 3,430,885 3,265,412 3,200,405
Other loans:
Consumer loans:
Equity lines of credit 120,835 106,503 99,099 95,749 93,502 90,053 91,915
Home equity loans 59,736 51,746 48,397 45,717 44,987 40,434 42,398
Other 4,746 4,751 4,757 6,008 6,252 6,294 6,015
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total consumer loans 185,317 163,000 152,253 147,474 144,741 136,781 140,328
Commercial business lines 3,387 3,399 3,132 1,740 1,743 1,780 2,356
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total other loans 188,704 166,399 155,385 149,214 146,484 138,561 142,684
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total loans receivable 4,220,563 4,045,382 3,907,415 3,709,806 3,577,369 3,403,973 3,343,089
Less:
Loans in process 12,837 11,467 11,893 13,240 16,828 17,904 10,698
Unearned discounts, premiums
and deferred loan expenses, net (6,641) (6,408) (6,323) (5,404) (4,603) (3,743) (3,455)
Allowance for loan losses 17,870 17,567 17,276 17,012 16,978 16,794 16,770
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total loans receivable, net 4,196,497 4,022,756 3,884,569 3,684,958 3,548,166 3,373,018 3,319,076
Loans receivable held for sale (35,973) (37,899) (12,601) (13,787) (100,016) (21,387) (89,406)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loans receivable, net $ 4,160,524 3,984,857 3,871,968 3,671,171 3,448,150 3,351,631 3,229,670
=========== =========== =========== =========== =========== =========== ===========
18
Non-performing assets. The following table sets forth information regarding
non-accrual loans, loans which are 91 days or more delinquent but on which the
Bank is accruing interest, foreclosed real estate and non-accrual investment
securities of the Bank.
At
----------------------------------------------------------------------------
6/30/00 3/31/00 12/31/99 9/30/99 6/30/99 3/31/99 12/31/98
-------- ------- -------- ------- ------- ------- --------
(In thousands)
Non-performing loans:
One- to four-family and multi-family loans:
Non-accrual loans $13,211 13,624 12,548 10,453 9,472 9,897 10,641
Accruing loans 91 days or more overdue 608 529 771 1,312 1,377 1,743 1,381
------- ------- ------- ------- ------- ------- -------
Total 13,819 14,153 13,319 11,765 10,849 11,640 12,022
------- ------- ------- ------- ------- ------- -------
Commercial real estate, construction and land loans:
Non-accrual loans 451 632 607 608 926 1,744 1,284
Accruing loans 91 days or more overdue -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total 451 632 607 608 926 1,744 1,284
------- ------- ------- ------- ------- ------- -------
Other loans:
Non-accrual loans 988 1,445 1,683 1,258 1,239 1,166 721
Accruing loans 91 days or more overdue 4 24 41 29 42 16 22
------- ------- ------- ------- ------- ------- -------
Total 992 1,469 1,724 1,287 1,281 1,182 743
------- ------- ------- ------- ------- ------- -------
Total non-performing loans:
Non-accrual loans 14,650 15,701 14,838 12,319 11,637 12,807 12,646
Accruing loans 91 days or more overdue 612 553 812 1,341 1,419 1,759 1,403
------- ------- ------- ------- ------- ------- -------
Total $15,262 16,254 15,650 13,660 13,056 14,566 14,049
======= ======= ======= ======= ======= ======= =======
Non-accrual loans to total loans .35% .40 .38 .33 .34 .38 .39
Accruing loans 91 days or more overdue to total loans .01 .01 .02 .04 .04 .05 .04
------- ------- ------- ------- ------- ------- -------
Non-performing loans to total loans .36% .41 .40 .37 .38 .43 .43
======= ======= ======= ======= ======= ======= =======
Foreclosed real estate (net of related reserves):
One- to four-family $ 410 1,454 1,220 1,558 2,404 2,307 1,736
Commercial, construction and land 571 6,767 6,195 6,245 6,624 6,621 6,621
------- ------- ------- ------- ------- ------- -------
Total $ 981 8,221 7,415 7,803 9,028 8,928 8,357
======= ======= ======= ======= ======= ======= =======
Non-performing loans and foreclosed real estate
to total loans and foreclosed real estate .39% .61 .59 .58 .63 .69 .73
======= ======= ======= ======= ======= ======= =======
Total non-performing assets $16,243 24,475 23,065 21,463 22,084 23,494 22,406
======= ======= ======= ======= ======= ======= =======
Total non-performing assets to total assets .33% .51 .50 .48 .52 .57 .54
======= ======= ======= ======= ======= ======= =======
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 $29.9 million unsecured term bank loan, cash dividends to
shareholders, loans to and investments in MAF Developments, as well as
investment purchases and stock repurchases with excess cash flow. The Company
also maintains a one-year, $20.0 million unsecured revolving line of credit from
a commercial bank, due and renewable annually on April 30. At June 30, 2000, the
Company had $10.0 million outstanding under this line of credit. For the
six-month period ended June 30, 2000, the Company received $12.5 million in
dividends from the Bank and declared common stock dividends of $.19 per share,
or $4.5 million. During the six-months ended June 30, 2000 the Company
repurchased 981,800 shares of its common stock at an average price of $17.66 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 loan and mortgage-backed securities amortization
and maturing investment securities are a relatively predictable source of funds,
deposit flows and loan and mortgage-backed securities prepayments are greatly
influenced by economic conditions, the general level of interest rates and
competition. The Bank utilizes particular sources of funds based on comparative
costs and availability. The Bank generally manages the pricing of its deposits
to maintain a steady deposit balance, but has from time to time decided not to
pay rates on deposits as high as its competition, and when necessary, to
supplement deposits with longer term and/or less expensive alternative sources
of funds. During the current six-month period the Bank borrowed $225.0 million
of primarily fixed-rate and variable rate FHLB of Chicago advances and repaid
$90.0 million.
The Bank is required by regulation to maintain specific minimum levels of
liquid investments. Regulations currently in effect require the Bank to maintain
liquid assets at least equal to 4.0% of the sum of its average daily balance of
net withdrawable accounts and borrowed funds due in one year or less. This
regulatory requirement may be changed from time to time to reflect current
economic conditions. During the quarter ended June 30, 2000, the Bank's average
liquidity ratio was 9.93%. At June 30, 2000, total liquidity was $254.7 million,
or 9.72%, which was $149.9 million in excess of the 4.0% regulatory minimum.
During the six months ended June 30, 2000, the Bank originated and
purchased loans totaling $736.2 million compared with $855.1 million during the
same period a year ago. Loan sales and swaps for the six months ended June 30,
2000, were $109.5 million, compared to $211.9 million for the prior year period.
The Bank has outstanding commitments to originate and purchase loans of $436.6
million and commitments to sell or swap loans of $74.9 million at June 30, 2000.
At June 30, 2000, 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.
20
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, 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. Historically, the Bank has generally sold
its conforming fixed-rate loan originations in the secondary market in order to
maintain its interest rate sensitivity levels. During the eighteen to
twenty-four month period ended June 30, 1999, the Bank had been retaining the
majority of the non-conforming, fixed-rate originations and all of the
prepayment protected fixed-rate loan originations in portfolio for investment
purposes to help utilize the Bank's higher capital base resulting from the
Company's merger with Northwestern. These fixed rate loans were funded with
intermediate to longer-term fixed rate FHLB advances, some of which contain call
options exercisable at the discretion of the FHLB of Chicago.
The Bank, except as noted below, has not used derivative financial
instruments such as swaps, caps, floors, options or similar financial
instruments to manage its interest rate risk. However, in conjunction with its
origination and sale strategy discussed above, 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 its wholesale lending operation, there is more risk due to the
competitive inability to charge a rate lock fee to the mortgage brokers, which
the Bank tries to offset by using higher assumed fallout rates. In addition, the
Bank 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.
Although the Bank's overall strategy for asset/liability management remains
consistent, due to the increased consumer demand for ARM loans, the relatively
flat U.S. Treasury yield curve, and reduced regulatory capital levels, the Bank
decided to begin selling a portion of its hybrid ARM originations on a servicing
released basis during 2000. It is currently expected that the Bank will continue
to sell some of its hybrid ARM production for the foreseeable future.
21
The table on the next page sets forth the scheduled repricing or maturity
of the Bank's assets and liabilities at June 30, 2000. The table uses
management's assumptions regarding prepayment percentages on loans and
mortgage-backed securities, based on its current 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 in the past have
been shown in the category relating to the period of time until their respective
final maturities. However, due to recent increases in market interest rates,
$165.0 million of FHLB advances with final remaining maturities ranging from 30
to 109 months, but callable in one year or less are categorized as $80.0 million
due in 6 months or less, and $85.0 million due between 6 months and 1 year in
anticipation of the issuer exercising its option to call the borrowings.
The effect of these assumptions is to quantify the dollar amount of items
that are interest-sensitive and may by 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 will differ from those rates assumed by management
for presentation purposes in the table.
22
Although management believes that its asset/liability management strategies
mitigate the potential effects of changes in interest rates on the Bank's
operations, material and prolonged increases in interest rates may adversely
affect the Bank's operations because the Bank's interest-bearing liabilities
which mature or reprice within one year are currently greater than the Bank's
interest-earning assets which mature or reprice within the same period.
At June 30, 2000
--------------------------------------------------------------------------------
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 $ 585,421 422,862 1,148,674 734,532 1,322,878 4,214,367
Mortgage-backed securities 65,277 10,140 13,093 10,606 17,186 116,302
Interest-bearing deposits 22,682 -- -- -- -- 22,682
Federal funds sold 108,969 -- -- -- -- 108,969
Investment securities (1) 141,282 890 3,395 36,388 84,346 266,301
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets 923,631 433,892 1,165,162 781,526 1,424,410 4,728,621
Impact of hedging activity (2) 35,972 -- -- -- (35,972) --
----------- ----------- ----------- ----------- ----------- -----------
Total net interest-earning assets adjusted
for impact of hedging activities 959,603 433,892 1,165,162 781,526 1,388,438 4,728,621
----------- ----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities:
NOW and checking accounts 19,290 17,649 64,597 40,126 85,268 226,930
Money market accounts 196,270 -- -- -- -- 196,270
Passbook accounts 63,947 58,511 214,152 133,026 282,681 752,317
Certificate accounts 738,345 290,918 482,934 44,248 8,781 1,565,226
FHLB advances 270,000 250,000 640,500 150,000 305,000 1,615,500
Other borrowings 49,575 -- -- -- -- 49,575
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 1,337,427 617,078 1,402,183 367,400 681,730 4,405,818
----------- ----------- ----------- ----------- ----------- -----------
Interest sensitivity gap $ (377,824) (183,186) (237,021) 414,126 706,708 322,803
=========== =========== =========== =========== =========== ===========
Cumulative gap $ (377,824) (561,010) (798,031) (383,905) 322,803
=========== =========== =========== =========== ===========
Cumulative gap assets as a percentage
of total assets (7.57)% (11.24) (15.98) (7.69) 6.46
Cumulative net interest-earning assets as
a percentage of interest-bearing liabilities 71.75% 71.30 76.23 86.69 107.33
(1) Includes $80.8 million of stock in FHLB of Chicago in 6 months or less.
(2) Represents forward commitments to sell long-term fixed-rate mortgage loans.
23
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 June 30, 2000 includes
fees which are considered adjustments to yield.
Three Months Ended June 30,
--------------------------------------------------------------------
2000 1999
--------------------------------- --------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- -------- ------ ---------- -------- ------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $4,118,049 74,856 7.27% $3,457,332 61,436 7.11%
Mortgage-backed securities 125,216 2,131 6.81 155,320 2,399 6.18
Interest-bearing deposits (1) 29,184 504 6.93 25,429 465 7.33
Federal funds sold (1) 118,404 2,189 7.42 36,212 696 7.71
Investment securities (2) 277,784 4,988 7.20 260,251 3,936 6.07
---------- ------- ---------- -------
Total interest-earning assets 4,668,637 84,668 7.26 3,934,544 68,932 7.01
Non-interest earning assets 234,372 222,582
---------- ----------
Total assets $4,903,009 $4,157,126
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,700,355 27,902 4.14 2,554,424 24,585 3.86
Borrowed funds 1,625,305 24,668 6.09 1,071,918 15,267 5.71
---------- ------- ---------- -------
Total interest-bearing liabilities 4,325,660 52,570 4.87 3,626,342 39,852 4.41
------- ------ ------- ------
Non-interest bearing deposits 131,187 109,358
Other liabilities 91,668 83,580
---------- ----------
Total liabilities 4,548,515 3,819,280
Stockholders' equity 354,494 337,846
---------- ----------
Liabilities and stockholders'
equity $4,903,009 $4,157,126
========== ==========
Net interest income/interest rate
spread $32,098 2.39% $29,080 2.60%
======= ====== ======= ======
Net earning assets/net yield on
average interest-earning assets $ 342,977 2.75% $ 308,202 2.96%
========== ====== ========== ======
Ratio of interest-earning assets
to interest-bearing liabilities 107.93% 108.50%
====== ======
[WIDE TABLE CONTINUED]
Six Months Ended June 30,
--------------------------------------------------------------------
2000 1999 At June 30, 2000
--------------------------------- -------------------------------- -------------------
Average Average
Average Yield/ Average Yield/ Yield/
Balance Interest Cost Balance Interest Cost Balance Cost
---------- -------- ------ ---------- -------- ------ ---------- ------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $4,034,245 145,561 7.22% $3,410,019 121,169 7.11% $4,214,367 7.37%
Mortgage-backed securities 128,345 4,305 6.71 162,458 5,039 6.20 116,302 6.79
Interest-bearing deposits (1) 31,659 1,078 6.83 27,804 1,008 7.31 22,682 6.37
Federal funds sold (1) 113,031 4,016 7.13 35,052 1,366 7.86 108,969 6.50
Investment securities (2) 280,889 9,836 7.02 262,781 7,825 6.00 266,301 6.95
---------- -------- ---------- -------- ----------
Total interest-earning assets 4,588,169 164,796 7.19 3,898,114 136,407 7.00 4,728,621 7.30
Non-interest earning assets 228,875 221,798 264,625
---------- ---------- ----------
Total assets $4,817,044 $4,119,912 $4,993,246
========== ========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,641,760 53,691 4.08 2,544,095 49,166 3.90 2,740,743 4.32%
Borrowed funds 1,608,019 48,427 6.04 1,045,301 29,721 5.73 1,665,075 6.17
---------- -------- ---------- -------- ----------
Total interest-bearing liabilities 4,249,779 102,118 4.82 3,589,396 78,887 4.43 4,405,818 5.02
-------- ------ -------- ------ ------
Non-interest bearing deposits 125,350 106,568 135,810
Other liabilities 88,509 85,226 92,453
---------- ---------- ----------
Total liabilities 4,463,638 3,781,190 4,634,081
Stockholders' equity 353,406 338,722 359,165
---------- ---------- ----------
Liabilities and stockholders'
equity $4,817,044 $4,119,912 $4,993,246
========== ========== ==========
Net interest income/interest rate
spread $ 62,678 2.37% $ 57,520 2.57% 2.28%
======== ====== ======== ====== ======
Net earning assets/net yield on
average interest-earning assets $ 338,390 2.73% $ 308,718 2.95% $ 322,803 N/A
========== ====== ========== ====== ========== ======
Ratio of interest-earning assets
to interest-bearing liabilities 107.96% 108.60% 107.33%
====== ====== ======
- --------------------
(1) Includes pro-rata share of interest income received on outstanding drafts
payable.
(2) Income and yields are stated on a taxable equivalent basis.
24
Rate/Volume Analysis of Net Interest Income
The following table describes the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated, 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 Six Months Ended
June 30, 2000 June 30, 2000
Compared to Compared to
June 30, 1999 June 30, 1999
Increase (Decrease) Increase (Decrease)
-------------------------------- --------------------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
(In thousands)
Interest-earning assets:
Loans receivable $ 11,981 1,439 13,420 22,518 1,874 24,392
Mortgage-backed securities (496) 228 (268) (1,120) 386 (734)
Interest-bearing deposits 66 (27) 39 138 (68) 70
Federal funds sold 1,521 (28) 1,493 2,790 (140) 2,650
Investment securities 278 774 1,052 581 1,430 2,011
-------- -------- -------- -------- -------- --------
Total $ 13,350 2,386 15,736 24,907 3,482 28,389
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits 1,449 1,868 3,317 2,061 2,464 4,525
Borrowed funds 8,341 1,060 9,401 17,020 1,686 18,706
-------- -------- -------- -------- -------- --------
Total 9,790 2,928 12,718 19,081 4,150 23,231
-------- -------- -------- -------- -------- --------
Net change in net interest income $ 3,560 (542) 3,018 5,826 (668) 5,158
======== ======== ======== ======== ======== ========
Comparison of the Results of Operations for the Three Months Ended June 30, 2000
and 1999
General - Net income for the three months ended June 30, 2000 was $13.7
million, or $.58 per diluted share, compared to net income of $13.2 million, or
$.53 per diluted share for the three months ended June 30, 1999, a 9.3% increase
on a per share basis. The increase in earnings was primarily due to higher net
interest income, increased deposit account service charges as well as the impact
of the repurchase of shares under the Company's stock repurchase programs,
offset by lower income from real estate development operations due to
nonrecurring sales of commercial parcels in 1999, a loss on the sale of a
mortgage-backed security, and higher non-interest expense in 2000 related to
growth in operations.
Net interest income - Net interest income was $32.1 million for the current
quarter, compared to $29.0 million for the quarter ended June 30, 1999, an
increase of $3.0 million or 10.4%. The Company's average net interest-earning
assets increased to $343.0 million for the three months ended June 30, 2000,
compared to $308.2 million for the three months ended June 30, 1999, while the
Company's net interest margin decreased to 2.75% for the current three month
period, compared to 2.96% in the prior year period. The decline in net interest
margin is primarily due to the impact of rising U. S. Treasury rates on the
Bank's funding base, causing increases in interest costs on maturing
certificates of deposit and new FHLB advances, at a faster pace than the
increase in yield on interest earning assets due to longer average maturities on
the asset side of the balance sheet.
25
Interest income on loans receivable increased $13.4 million as a result of
a $660.7 million increase in average loans receivable, along with a 16 basis
point increase in the average yield on loans receivable. The increase due to
rate as compared to volume, period over period, has been much slower since loan
originations have trended towards lower initial-yielding ARM loans over the past
twelve months. Interest income on mortgage-backed securities decreased $268,000
to $2.1 million for the current quarter, due to a $30.1 million decrease in
average balances offset by a 63 basis point increase in yield. Interest income
on investment securities increased $1.1 million to $5.0 million, due to a
increase in the average balance of this portfolio and a 113 basis point increase
in yield.
Interest expense on deposit accounts increased $3.3 million to $27.9
million for the second quarter of 2000, due to a $145.9 million increase in
average deposits compared to the prior year quarter, and a 28 basis point
increase in the average cost of savings compared to the prior three-month
period. Approximately $112.0 million of the growth in deposits is attributable
to the acquisition of three branch offices since June 30, 1999, with the
remainder of the increase primarily due to an increase in money market and
passbook balances. The increase in average cost of deposits is primarily due to
upward repricing of maturing certificates of deposit.
Interest expense on borrowed funds increased $9.4 million to $24.7 million,
as a result of a $553.4 million increase in the average balance of borrowed
funds, and a 38 basis point increase in the average cost of borrowed funds. The
increase in the average balance is primarily due to a $565.7 million increase in
average FHLB of Chicago advances, used to fund loan originations, offset by a
decrease in other borrowings of $4.6 million, and a decrease in average reverse
repurchase agreements of $7.7 million.
Increases in short term U.S. Treasury rates, increased competition for
deposits requiring the Bank to pay higher deposit rates to attract and retain
deposit funding, recent declines in mortgage interest rates and seasonal
outflows of payments for mortgage customer real estate tax payments will have a
negative impact on the Bank's net interest margin. Management expects that
upward repricing of maturing certificates of deposit and borrowings will
increase the Bank's funding costs faster than asset yields increase resulting in
significant pressure on the Bank's net interest margin over the next few
quarters.
The Federal Reserve Bank's 175 basis point increase in the federal funds
rate target over the last twelve months, the recent flattening and inversion of
the Treasury yield curve, along with borrower preferences starting to move back
toward fixed-rate mortgage loans, will limit the Company's ability to offset the
expected margin compression through balance sheet growth. If the current
interest rate environment continues, the Company may offset some of the margin
pressure with higher gains on loan sales and/or additional stock buybacks.
Provision for loan losses - The Bank provided $300,000 in provision for
loan losses during the second quarter of 2000, compared to $250,000 for the 1999
three-month period. Net recoveries during the 2000 quarter were $3,000, compared
to net charge-offs of $66,000 for the three months ended June 30, 1999. At June
30, 2000, the Bank's allowance for loan losses was $17.9 million, which equaled
.43% of total loans receivable, compared to .44% at December 31, 1999. The ratio
of the allowance for loan losses to non-performing loans was 117.1% at June 30,
2000 compared to 110.4% at December 31, 1999 and 130.0% at June 30, 1999.
Non-interest income - Non-interest income decreased $1.8 million, or 18.9%,
to $7.8 million for the three months ended June 30, 2000, compared to $9.6
million for the three months ended June 30, 1999. The decrease was primarily due
to a $1.2 million decrease in income from real estate, and a loss of $700,000 on
the sale of a CMO security, offset by increased fee income.
Gain on sale of loans decreased to $147,000 for the three months ended June
30, 2000, compared to $414,000 for the three months ended June 30, 1999. Loan
sale volume was $73.8 million, of which $3.0 million was swapped into
mortgage-backed securities, prior to sale. For the three months ended June 30,
1999, loan sale volume was $72.7 million with no swap activity.
26
The loss on sale of mortgage-backed securities in the current period
reflects the sale of a $9.3 million floating rate CMO, classified as available
for sale, at a loss of approximately $700,000. This security was more
appropriate for a steeper, positively sloped yield curve environment, so the
security was sold to redeploy the proceeds into higher yielding assets.
Income from real estate operations decreased $1.2 million compared to the
prior year quarter to $2.7 million for the three months ended June 30, 2000. The
decrease is primarily attributable to the recognition of gains on the sale of
two larger commercial parcels during the 1999 period. A summary of income from
real estate operations is as follows:
Three Months Ended June 30,
---------------------------------
2000 1999
--------------- ---------------
# of Pre-tax # of Pre-tax
Lots Income Lots Income
------ ------ ------ ------
(Dollars in thousands)
Tallgrass of Naperville 92 $2,305 94 $ 694
Woodbridge -- 233 -- 2,912
Creekside of Remington 75 105 42 172
Reigate Woods 2 58 2 82
Harmony Grove -- -- 2 57
------ ------ ------ ------
169 $2,701 140 $3,917
====== ====== ====== ======
The Company sold 92 lots in its six-unit Tallgrass of Naperville project
during the three months ended June 30, 2000. The significant increase in profit
per lot is primarily due to increased lot prices of current year sales compared
to the prior year, without any appreciable increase in development costs. There
are 46 lots under contract in this 926-lot subdivision at June 30, 2000. The
Company expects to hold a pre-sale of 127 lots in the next unit of Tallgrass to
builders in September 2000, which will likely increase pending sales during the
third quarter. Closings are expected to commence late in the fourth quarter of
2000. As demand continues to be strong for the lots in this project, the Company
currently expects profit margins to remain at current levels for the foreseeable
future. During the second quarter of 2000, one smaller parcel of the Woodbridge
commercial site was sold, with the remaining two parcels expected to be sold in
the fourth quarter of 2000 at a pre-tax profit of approximately $800,000. The
final 75 lots in the Creekside of Remington project were sold in bulk to a local
developer in June 2000. The Company had two sales in Reigate Woods during the
current three months. The lower profit margins, as compared to the previous
year's sales, is reflective of discounted pricing on homes as the project nears
completion. The remaining five lots in Reigate are under contract and expected
to close prior to the end of 2000.
Deposit account service charges increased $559,000, or 22.0%, to $3.1
million for the three months ended June 30, 2000, primarily due to continued
growth in the number of checking accounts serviced by the Bank. At June 30,
2000, the Bank had approximately 110,600 checking accounts, compared to 97,800
at June 30, 1999. The Bank instituted fee increases for services provided on its
checking accounts during 2000, and has also had continued growth from
interchange fees earned on its debit cards.
Brokerage commissions decreased $151,000, or 24.1%, for the three months
ended June 30, 2000 compared to the prior year quarter. The decline in
commission income is primarily due to slower sales during the current quarter
due to market volatility.
Loan servicing fee income decreased $181,000 to $473,000 for the three
months ended June 30, 2000, compared to the same quarter in 1999. The decrease
was primarily due to recognition in the prior year quarter of a $250,000
recovery of mortgage servicing impairment writedowns. Excluding the recovery,
loan servicing fee income in 2000 increased by $69,000 or 17.1%. The average
balance of loans serviced for others increased 9.7% to $1.23 billion for the
second quarter of 2000, compared to $1.12 billion for the prior year period.
Amortization of servicing rights equaled $316,000 for the three months ended
June 30, 2000, compared to $324,000 for the prior three-month period.
Non-interest expense - Non-interest expense increased $1.5 million or 8.9%
compared to prior year period, to $18.0 million for the three months ended June
30, 2000. However, the ratio of non-interest expense to average assets decreased
twelve basis points to 1.47% for the current year period from 1.59% for the
prior year period.
27
Compensation and benefits increased 9.1% or $843,000 to $10.1 million for
the three months ended June 30, 2000, compared to the three months ended June
30, 1999. The increase is primarily due to increased compensation and benefit
costs due to increased staff resulting from three branch acquisitions since June
of 1999 as well as normal year-end salary increases for existing staff.
Occupancy expense increased $172,000, or 9.5% to $2.0 million for the three
months ended June 30, 2000 compared to the prior year period, primarily due to
increased real estate tax, office building and maintenance costs related to
three new branches.
Advertising and promotion expense increased $65,000 for the three months
ended June 30, 2000 compared to the prior year, primarily due to costs related
to a new billboard advertising campaign. The Bank has continued to use resources
to promote its brand campaign begun in May 1999 through radio and newspaper
advertising.
Data processing expense increased $136,000 or 22.7% to $736,000 for the
three months ended June 30, 2000 compared to the prior year period. The increase
is primarily due to increased depreciation expense for computer equipment due to
upgrading equipment and continued expansion of its retail network.
Federal deposit insurance premium expense decreased $244,000 or 62.1%
compared to the prior year to $149,000 for the three months ended June 30, 2000,
due to a scheduled decrease in insurance rates that went into effect January 1,
2000.
Amortization of intangibles increased $207,000 to $1.2 million for the
three months ended June 30, 2000. The amortization relates to goodwill and core
deposit intangibles from transactions accounted for under the purchase method of
accounting. The increase in expense during the current period was attributable
to three branch acquisitions during the last twelve months, each accounted for
as a purchase.
Other non-interest expense increased $294,000 to $2.9 million for the three
months ended June 30, 2000 compared to the prior year period. Costs increased
due to operations at three new branches, as well as outside professional
expenses related to internet based lending.
Income taxes - For the three months ended June 30, 2000, income tax expense
totaled $7.9 million, or an effective income tax rate of 36.7%, compared to $8.7
million, or an effective income tax rate of 39.6%, for the three months ended
June 30, 1999. The lower effective income tax rate in the current period was
primarily the result of proactive tax planning initiated in mid 1999, involving
the transfer of Bank portfolio assets to an operating subsidiary.
Comparison of the Six Months Ended June 30, 2000 and 1999
General - Net income for the six months ended June 30, 2000 was $26.8
million, or $1.13 per diluted share, compared to $24.9 million, or $.99 per
diluted share, an increase of $1.9 million, or 13.9% on a per diluted share
basis. Average outstanding shares were 23.5 million for the current six-month
period, 3.6% lower than the previous six-month period, as a result of the
Company's share repurchase programs.
28
Net interest income - Net interest income for the six months ended June 30,
2000 was $62.6 million compared to $57.4 million for the six months ended June
30, 1999, an increase of $5.2 million. The increase is principally due to the
growth in the Company's average net interest-earning assets of $29.7 million to
$338.4 million, offset by a 22 basis point decline in the Company's net interest
margin.
Interest income on interest-earning assets increased $28.4 million for the
six months ended June 30, 2000, compared to the first half of 1999. Of this
increase, $24.4 million is attributable to interest earned on loans receivable.
The Bank's average balance of loans receivable increased $624.2 million to $4.03
billion, for the first six months of 2000, in addition to the average yield on
loans receivable increasing 11 basis points over the prior year period due to
upward repricing on adjustable rate investments held by the Bank. Average rates
on current mortgage originations are in excess of the Bank's overall loan
portfolio rate, which has led to an 11 basis point increase in yield on loans
receivable. The $734,000 decrease in interest income on mortgage-backed
securities is due to a $34.1 million decrease in the average balance primarily
due to a $9.3 million sale and normal prepayments. Interest income on investment
securities increased $2.0 million to $9.8 million for the six months ended June
30, 2000, due to an $18.1 million increase in the average balance for the
period, and a 102 basis point increase in the average yield on this portfolio.
Interest expense on interest-bearing liabilities increased $23.2 million to
$102.1 million for the six months ended June 30, 2000. Interest expense on
deposits increased $4.5 million, due to a $97.7 million increase in the average
deposits and an 18 basis point increase in average cost. Higher interest rates
have negatively impacted the cost of maturing certificates of deposit. Interest
expense on borrowed funds increased $18.7 million, reflecting a $562.7 million
increase in the average balance of borrowed funds, primarily advances from the
FHLB of Chicago, and a 31 basis point increase in average cost. These borrowings
have been used to fund the growth in loans receivable. The Bank has primarily
borrowed fixed-rate advances with 2 to 5 year maturities, some of which have
call options at the discretion of the lender, to fund its loan originations
during the past twelve months.
Provision for loan losses - The Bank provided $600,000 for possible loan
losses for the six months ended June 30, 2000 compared to $500,000 for the six
months ended June 30, 1999. Net charge-offs were $6,000 for the current year
six-month period compared to $291,000 for the prior six-month period.
Non-interest income - Non-interest income decreased $1.4 million to $15.6
million for the six months ended June 30, 2000, compared to $17.0 million for
the six months ended June 30, 1999, primarily reflecting decreased loan sale
activity.
Gain on sale of loans receivable was $204,000 for the six months ended June
30, 2000, compared to $1.9 million for the six months ended June 30, 1999, a
decrease of $1.7 million. Loan sales were $109.5 million during the current
period compared to $211.9 million in the prior six-month period. The decrease in
long sale activity is primarily due to a lesser amount of fixed-rate
originations in the current six-month period due to rising interest rates. The
$700,000 loss on sale of mortgage-backed securities in the current year
six-month period was due to the sale of a $9.3 million floating rate CMO
security.
During the current six months, the Company recognized $133,000 of gains on
the sale of investment securities, primarily marketable equity securities,
compared to gains of $538,000 for the previous six-month period from the sale of
U.S. agency securities and, to a lesser extent, marketable equity securities.
29
Income from real estate operations was $5.2 million for the six months
ended June 30, 2000, compared to income of $4.5 million for the six months ended
June 30, 1999, an increase of $638,000.
Six Months Ended June 30,
---------------------------------
2000 1999
--------------- ---------------
# of Pre-tax # of Pre-tax
Lots Income Lots Income
------ ------ ------ ------
(Dollars in thousands)
Tallgrass of Naperville 182 $4,592 132 $ 896
Woodbridge -- 233 -- 2,873
Reigate Woods 5 142 5 217
Creekside of Remington 75 105 42 172
Harmony Grove -- 104 7 380
------ ------ ------ ------
262 $5,176 186 $4,538
====== ====== ====== ======
During the current-six month period, the Company sold 182 lot sales in its
926-lot Tallgrass of Naperville project at average prices that were
approximately 35% higher than comparative sales in the prior period, due to
continued strong demand from local builders. There are 46 lots under contract in
this 926-lot subdivision at June 30, 2000. The Company expects to hold a
pre-sale of the 127 lots in the next phase during September 2000, which will
likely increase pending sales during the third quarter with closings expected to
commence late in the fourth quarter. The remaining land in the Woodbridge
project is commercially zoned. During the first half of 2000, one parcel was
sold and the remaining two parcels are expected to be sold prior to the end of
2000. The prior year included the sale of two of the largest parcels. The 85-lot
Reigate Woods subdivision had five sales during the current six months, with
five lots remaining in the project, all pending sale. The lower profit per lot
margin compared to 1999 is due to discounts related to the final lots. The final
75 lots in the Creekside of Remington subdivision were sold in bulk to a local
developer in June 2000 at a nominal profit. The Harmony Grove project was
complete in the first quarter of 2000. The income recorded in 2000 related to
Harmony Grove represents rebated costs previously charged against the cost of
lots sold.
Loan servicing fee income was $1.0 million for the six months ended June
30, 2000 and 1999. The average balance of loans serviced for others increased
10.9% to $1.23 billion for the current six-month period, compared to $1.11
billion in the prior six-month period. Prior year loan servicing fee income
included a $250,000 recovery of mortgage servicing impairment writedowns.
Excluding the recovery, loan servicing fee income for the first half of 2000,
increased $249,000 or 31.9% over prior year period, due to the increase in loans
serviced for others and less amortization of loan servicing rights due to slower
prepayments. Amortization of purchased loan servicing rights totaled $539,000
for the 2000 six-month period, compared to $667,000 for the prior six-month
period.
Deposit account service charges increased $924,000 or 19.5% to $5.7 million
for the six months ended June 30, 2000, due to an increase in the number of
checking accounts and related fees. Brokerage commissions decreased $65,000 or
5.3% for the six months ended June 30, 2000 compared to the prior year period.
Other non-interest income decreased $181,000 or 6.3% to $2.7 million for
the six months ended June 30, 2000 primarily due to a decrease in loan related
fee income compared to the prior year due to a large reduction of refinance and
modification activity.
30
Non-interest expense - Non-interest expense for the six months ended June
30, 2000 increased $3.0 million or 9.1% to $35.7 million compared to $32.7
million for the six months ended June 30, 1999.
Compensation and benefits increased $1.5 million, or 8.1%, to $20.3
million, for the six months ended June 30, 2000, primarily due to normal salary
increases and increased staffing resulting from three acquired branches.
Occupancy expense increased $280,000, or 7.7% to $3.9 million for the six
months ended June 30, 2000. The increase in expense is due to costs incurred
from three branches the Bank has acquired since the prior period.
Advertising and promotion expense increased $535,000 or 39.5% compared to
the prior year, to $1.9 million for the six months ended June 30, 2000. The
primary reason for the increase is due to a radio based brand campaign that
began in May 1999.
Data processing expense increased $261,000 or 21.9% for the six months
ended June 30, 2000 compared to the prior year, primarily due to increased
depreciation expense for computer equipment and costs associated with upgrading
equipment and the expansion of the Bank's branch network.
Amortization of intangibles increased $190,000 to $2.1 million for the six
months ended June 30, 2000 due to an increase in goodwill and core deposit
intangible as a result of the purchase of three new branches, that were
accounted for under the purchase method of accounting.
Other non-interest expense increased $692,000 to $5.7 million for the six
months ended June 30, 2000 compared to the prior year period. Costs increased
due to operations at three new branches, as well as outside professional
expenses related to internet based lending.
Income taxes - The Company recorded a provision for income taxes of $15.1
million for the six months ended June 30, 2000, or an effective income tax rate
of 36.1%, compared to $16.3 million for the six months ended June 30, 1999, or
an effective income tax rate of 39.5%. The lower effective income tax rate in
the current period was primarily the result of proactive tax planning initiated
in mid 1999, involving the transfer of Bank portfolio assets to an operating
subsidiary.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A comprehensive qualitative and quantitative analysis regarding market risk
is disclosed in the Company's December 31, 1999 Form 10-K. There have been no
material changes in the assumptions used or results obtained regarding market
risk since December 31, 1999.
31
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.
The information required by this Item with respect to the Company's
Annual Meeting of Shareholders held on April 26, 2000, was included in
Part II, Item 4 of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000.
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) Certificate of Incorporation, as amended. (Incorporated by
reference to Exhibit 3(i) to Registrant's December 31, 1999
10-K).
(ii) By-laws of Registrant, as amended. (Incorporated by
reference to Exhibit No. 2 to Registrant's June 30, 1990
Form 10-K).
Exhibit No. 10. Material Contracts.
(i) Amendment dated May 5, 2000, of the Credit Agreement dated
as of May 22, 1996, as amended, between MAF Bancorp, Inc.
and Harris Trust and Savings Bank.
(ii) MAF Bancorp, Inc. 2000 Stock Option Plan (Incorporated by
reference to Exhibit A filed as part of Registrant's Proxy
Statement, dated March 22, 2000, relating to the 2000 Annual
Meeting of Shareholders, File No. 0-18121).
32
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: August 10, 2000 By: /s/ Allen H. Koranda
----------------------------- --------------------------
Allen H. Koranda
Chairman of the Board and
Chief Executive Officer
Date: August 10, 2000 By: /s/ Jerry A. Weberling
----------------------------- ---------------------------
Jerry A. Weberling
Executive Vice President and
Chief Financial Officer
34