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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 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 23,094,170 at November 9, 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 September 30, 2000 and December 31, 1999 (unaudited)...... 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2000 and 1999 (unaudited)............ 4
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2000 (unaudited)........ 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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)
September 30, December 31,
2000 1999
---------- ---------
Assets
- ------
Cash and due from banks $ 82,836 71,721
Interest-bearing deposits 18,713 51,306
Federal funds sold 89,772 35,013
Investment securities, at cost (fair value of $12,802 and $12,321) 12,361 11,999
Investment securities available for sale, at fair value 173,129 194,105
Stock in Federal Home Loan Bank of Chicago, at cost 82,275 75,025
Mortgage-backed securities, at amortized cost
(fair value of $81,576 and $92,095) 83,939 94,251
Mortgage-backed securities available for sale, at fair value 24,746 39,703
Loans receivable held for sale 52,156 12,601
Loans receivable, net of allowance for losses of $18,167 and $17,276 4,236,696 3,871,968
Accrued interest receivable 27,713 23,740
Foreclosed real estate 1,321 7,415
Real estate held for development or sale 6,262 15,889
Premises and equipment, net 46,946 42,489
Other assets 64,875 49,640
Intangible assets, net of accumulated amortization of $13,866 and 70,028 61,200
$10,555 ---------- ---------
$ 5,073,768 4,658,065
========== =========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits $ 2,906,240 2,699,242
Borrowed funds 1,687,075 1,526,363
Advances by borrowers for taxes and insurance 41,593 34,767
Accrued expenses and other liabilities 64,957 44,772
---------- ---------
Total liabilities 4,699,865 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;
23,094,170 and 23,911,508 shares outstanding 254 254
Additional paid-in capital 198,060 194,874
Retained earnings, substantially restricted 227,126 198,156
Stock in gain deferral plan; 223,453 shares 511 511
Accumulated other comprehensive loss (1,329) (3,675)
Treasury stock, at cost; 2,549,933 and 1,732,595 shares (50,719) (37,199)
---------- ---------
Total stockholders' equity 373,903 352,921
Commitments and contingencies
---------- ---------
$ 5,073,768 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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------- ------ ------- -------
Interest income:
Loans receivable $78,570 64,381 224,131 185,550
Mortgage-backed securities 1,393 1,557 4,414 5,114
Mortgage-backed securities available for sale 483 665 1,767 2,147
Investment securities 1,919 1,197 5,203 3,283
Investment securities available for sale 2,988 2,864 9,466 8,529
Interest-bearing deposits and federal funds sold 2,957 1,455 8,051 3,829
------- ------ ------- -------
Total interest income 88,310 72,119 253,032 208,452
------- ------ ------- -------
Interest expense:
Deposits 30,359 24,907 84,050 74,073
Borrowed funds 26,116 17,891 74,543 47,612
------- ------ ------- -------
Total interest expense 56,475 42,798 158,593 121,685
------- ------ ------- -------
Net interest income 31,835 29,321 94,439 86,767
Provision for loan losses 500 300 1,100 800
------- ------ ------- -------
Net interest income after provision for loan 31,335 29,021 93,339 85,967
losses ------- ------ ------- -------
Non-interest income:
Gain (loss) on sale of:
Loans receivable 272 464 476 2,338
Mortgage-backed securities - - (700) -
Investment securities 4 494 137 1,032
Foreclosed real estate (27) (241) 177 (121)
Mortgage loan servicing rights 4,337 - 4,337 -
Deposit account service charges 3,439 2,679 9,109 7,425
Income from real estate operations 2,625 2,478 7,801 7,016
Brokerage commissions 586 719 1,740 1,938
Loan servicing fee income 365 751 1,394 1,781
Other 1,585 1,399 4,292 4,287
------- ------ ------- -------
Total non-interest income 13,186 8,743 28,763 25,696
------- ------ ------- -------
Non-interest expense:
Compensation and benefits 10,408 9,554 30,665 28,289
Office occupancy and equipment 2,071 1,799 5,976 5,424
Advertising and promotion 830 1,049 2,720 2,404
Data processing 784 665 2,236 1,856
Federal deposit insurance premiums 153 390 449 1,187
Amortization of intangible assets 1,167 951 3,311 2,905
Other 3,025 2,809 8,764 7,856
------- ------ ------- -------
Total non-interest expense 18,438 17,217 54,121 49,921
------- ------ ------- -------
Income before income taxes 26,083 20,547 67,981 61,742
Income tax expense 9,570 7,671 24,688 23,948
------- ------ ------- -------
Net income $16,513 12,876 43,293 37,794
------- ------ ------- -------
Basic earnings per share $ .71 .53 1.85 1.55
======= ====== ======= =======
Diluted earnings per share $ .71 .52 1.83 1.51
======= ====== ======= =======
See accompanying notes to unaudited consolidated financial statements.
4
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
(Dollars in thousands)
(Unaudited)
Nine Months Ended September 30, 2000
------------------------------------------------------------------------------------
Accumulated Stock in
Additional other gain
Common paid-in Retained comprehensive deferral Treasury
stock capital earnings 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 - - 43,293 - - - 43,293
Other comprehensive income, net of tax:
Unrealized holding gain during the
period - - - 1,987 - - 1,987
Less: reclassification adjustment of losses
included in net income - - - 359 - - 359
-------- ------- ---------- ------------- --------- --------- --------
Total comprehensive income - - 43,293 2,346 - - 45,639
-------- ------- ---------- ------------- --------- --------- --------
Exercise of 409,427 stock options and
reissuance of treasury stock - - (7,628) - - 7,773 145
Impact of exercise of acquisition
carry-over stock options - 769 - - - - 769
Purchase of treasury stock - - - - - (21,293) (21,293)
Tax benefits from stock-related
compensation - 2,417 - - - - 2,417
Cash dividends ($.29 per share) - - (6,761) - - - (6,761)
Dividends paid to gain deferral plan - - 66 - - - 66
-------- ------- ---------- ------------- --------- ------- --------
Balance at September 30, 2000 $ 254 198,060 227,126 (1,329) 511 (50,719) 373,903
======== ======= ========== ============= ========= ======= ========
See accompanying notes to unaudited consolidated financial statements.
5
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------------
2000 1999
--------- --------
Operating activities:
Net income $ 43,293 37,794
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 3,289 2,866
Provision for loan losses 1,100 800
FHLB of Chicago stock dividend (2,782) -
Deferred income tax (benefit) expense (365) 1,577
Amortization of intangible assets 3,311 2,905
Amortization of premiums, discounts, loan fees and servicing 817 898
rights
Net gain on sale of loans, mortgage-backed securities,
and real estate held for development or sale (7,577) (9,354)
Gain on sale of investment securities (137) (1,032)
Gain on sale of mortgage servicing rights (4,337) -
Increase in accrued interest receivable (3,973) (1,710)
Net increase in other assets and liabilities (6,290) (6,571)
Loans originated for sale (237,196) (180,456)
Loans purchased for sale (10,407) (21,797)
Sale of loans receivable 207,315 413,402
--------- --------
Net cash provided by (used in) operating activities (13,939) 239,322
--------- --------
Investing activities:
Loans originated for investment (811,000) (855,463)
Principal repayments on loans receivable 510,543 525,799
Principal repayments on mortgage-backed securities 19,977 42,329
Proceeds from maturities of investment securities available for sale 45,420 43,284
Proceeds from maturities of investment securities held to maturity - 10,001
Proceeds from sale of :
Investment securities available for sale 1,721 30,335
Real estate held for development or sale 35,924 31,652
Mortgage-backed securities available for sale 9,300 -
Purchases of:
Loans receivable held for investment (62,012) (251,520)
Investment securities available for sale (22,000) (60,176)
Investment securities (359) (10,479)
Mortgage-backed securities (4,808) -
Stock in FHLB of Chicago (4,468) (11,397)
Real estate held for development or sale (12,530) (13,002)
Premises and equipment (5,246) (4,070)
Cash received from acquisition of deposits, net 80,903 18,734
--------- --------
Net cash used in investing activities (218,635) (503,973)
--------- --------
(continued)
6
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------------
2000 1999
--------- --------
Financing activities:
Proceeds from FHLB of Chicago advances 335,000 475,000
Proceeds from unsecured line of credit 15,000 21,000
Repayment of FHLB of Chicago advances (175,000) (205,000)
Repayment of unsecured line of credit (8,000) (21,000)
Net decrease in other borrowings (288) (10,300)
Proceeds from exercise of stock options 145 786
Purchase of treasury stock (19,070) (26,988)
Cash dividends (6,536) (5,415)
Net increase in deposits 117,778 15,892
Increase in advances by borrowers for taxes and insurance 6,826 707
--------- --------
Net cash provided by financing activities 265,855 244,682
--------- --------
Increase (decrease) in cash and cash equivalents 33,281 (19,969)
--------- --------
Cash and cash equivalents at beginning of period 158,040 157,699
--------- --------
Cash and cash equivalents at end of period $ 191,321 137,730
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds $ 157,284 120,121
Income taxes 19,477 14,532
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate 2,172 5,045
Loans receivable swapped into mortgage-backed securities 7,032 61,066
Loan receivable transferred to held for sale - 74,379
Common stock received for option exercises 989 572
========= ========
See accompanying notes to unaudited consolidated financial statements.
7
MAF BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Three and Nine Months Ended September 30, 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 nine months ended
September 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
nine month periods ended September 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 to the extent that they have a dilutive effect. Stock options are
the only adjustment made to average shares outstanding in computing diluted
earnings per share. Weighted average shares used in calculating earnings per
share are summarized below for the periods indicated:
Three Months Ended September 30,
-------------------------------------------------------------------------------------------
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 $ 16,513 23,121,187 $ .71 $ 12,876 24,196,070 $ .53
============ ========= =========== =========
Effect of dilutive securities:
Stock options 297,372 617,358
------------- -------------
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversions $ 16,513 23,418,559 $ .71 $ 12,876 24,813,428 $ .52
============ ============= ========= =========== ============= =========
8
(2) Earnings Per Share (continued)
Nine Months Ended September 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 $43,293 23,382,189 $ 1.85 $37,794 24,324,046 $ 1.55
======= ====== ======= ======
Effect of dilutive securities:
Stock options 248,160 719,093
---------- ----------
Diluted earnings per share -
Income available to common
shareholders plus assumed
conversions $43,293 23,630,349 $ 1.83 $37,794 25,043,139 $ 1.51
======= ========== ====== ======= ========== ======
(3) Commitments and Contingencies
At September 30, 2000, the Bank had outstanding commitments to originate
and purchase loans of $393.4 million, of which $164.4 million were fixed-rate
loans, with rates ranging from 6.00% to 9.38%, and $229.0 million were
adjustable-rate loans. At September 30, 2000, commitments to sell loans were
$72.6 million.
At September 30, 2000, the Bank had outstanding standby letters of credit
totaling $14.4 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
$3.3 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 period 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 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 September 30, 2000
---------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
--------- ------------- ------------ ------------
(In thousands)
Interest income $ 88,349 - (39) 88,310
Interest expense 56,475 39 (39) 56,475
---------- --------- --------- ---------
Net interest income 31,874 (39) - 31,835
Provision for loan losses 500 - - 500
---------- --------- --------- ---------
Net interest income after provision 31,374 (39) - 31,335
Non-interest income 10,561 2,625 - 13,186
Non-interest expense 18,249 189 - 18,438
---------- --------- --------- ---------
Income before income taxes 23,686 2,397 - 26,083
Income tax expense 8,619 951 - 9,570
---------- --------- --------- ---------
Net income $ 15,067 1,446 - 16,513
========== ========= ========= =========
Average assets $5,005,289 8,030 - 5,013,319
========== ========= ========= =========
At or For the Three Months Ended September 30, 1999
----------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
--------- ------------- ------------ ------------
(In thousands)
Interest income $ 72,334 - (215) 72,119
Interest expense 42,798 215 (215) 42,798
---------- --------- --------- ---------
Net interest income 29,536 (215) - 29,321
Provision for loan losses 300 - - 300
---------- --------- --------- ---------
Net interest income after provision 29,236 (215) - 29,021
Non-interest income 6,265 2,478 - 8,743
Non-interest expense 17,072 145 - 17,217
---------- --------- --------- ---------
Income before income taxes 18,429 2,118 - 20,547
Income tax expense 6,872 799 - 7,671
---------- --------- --------- ---------
Net income $ 11,557 1,319 - 12,876
========== ========= ========= =========
Average assets $4,311,181 21,929 - 4,333,110
========= ========= ========= =========
10
(6) Segment Information (continued)
At or For the Nine Months Ended September 30, 2000
----------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- -------------- ------------- ------------
(In thousands)
Interest income $ 253,225 - (193) 253,032
Interest expense 158,593 193 (193) 158,593
---------- ------ ------ ---------
Net interest income 94,632 (193) - 94,439
Provision for loan losses 1,100 - - 1,100
---------- ------ ------ ---------
Net interest income after provision 93,532 (193) - 93,339
Non-interest income 20,962 7,801 - 28,763
Non-interest expense 53,480 641 - 54,121
---------- ------ ------ ---------
Income before income taxes 61,014 6,967 - 67,981
Income tax expense 21,924 2,764 - 24,688
---------- ------ ------ ---------
Net income $ 39,090 4,203 - 43,293
========== ====== ====== =========
Average assets $4,869,683 13,262 - 4,882,945
========== ====== ====== =========
At or For the Nine Months Ended September 30, 1999
-------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- ------------- ------------ ------------
(In thousands)
Interest income $ 209,607 - (1,155) 208,452
Interest expense 121,685 1,155 (1,155) 121,685
---------- ------ ------ ---------
Net interest income 87,922 (1,155) - 86,767
Provision for loan losses 800 - - 800
---------- ------ ------ ---------
Net interest income after provision 87,122 (1,155) - 85,967
Non-interest income 18,680 7,016 - 25,696
Non-interest expense 49,331 590 - 49,921
---------- ------ ------ ---------
Income before income taxes 56,471 5,271 - 61,742
Income tax expense 21,904 2,044 - 23,948
---------- ------ ------ ---------
Net income $ 34,567 3,227 - 37,794
========== ====== ====== =========
Average assets $4,166,294 25,466 - 4,191,760
========== ====== ====== =========
(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 unanticipated changes in interest
rates, general economic conditions, legislative/regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Federal Reserve Board, the quality or composition of the Company's loan
or investment portfolios, demand for loan products and secondary mortgage market
conditions, deposit flows, competition, demand for financial services and
residential real estate in the Company's market area, the possible short-term
dilutive effect of potential acquisitions, and changes in accounting principles,
policies and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements.
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.
Regulation and Supervision
As a federally chartered savings bank, the Bank's deposits are insured up to
the applicable limits by the Federal Deposit Insurance Corporation ("FDIC"). The
Bank is a member of the Federal Home Loan Bank ("FHLB") of Chicago, which is one
of the twelve regional banks for federally insured savings institutions
comprising the FHLB system. The Bank is regulated by the Office of Thrift
Supervision ("OTS") and the FDIC. The Bank is further regulated by the Board of
Governors of the Federal Reserve System as to reserves required to be maintained
against deposits and certain other matters. Such regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities. Any change in such regulation, whether by the OTS, the FDIC or
Congress could have a material impact on the Company and its operations.
Capital Standards. Savings associations must meet three capital requirements:
core and tangible capital to total assets ratios as well as a regulatory capital
to total risk-weighted assets ratio. The minimum level required for each of
these capital standards is established by regulation. The Company has managed
its balance sheet so as to reasonably exceed these minimums.
Core Capital Requirement
The core capital requirement, or the required "leverage limit," currently
requires a savings institution to maintain core capital of not less than 3% of
adjusted total assets. For the Bank, core capital generally includes common
stockholders' equity (including retained earnings), and minority interests in
the equity accounts of fully consolidated subsidiaries, less intangibles other
than certain servicing rights. Investments in and advances to subsidiaries
engaged in activities not permissible for national banks are also required to be
deducted in computing core capital.
Tangible Capital Requirement
Under OTS regulation, savings institutions are required to meet a minimum
tangible capital requirement of 1.5% of adjusted total assets. Tangible capital
is defined as core capital less any intangible assets, plus purchased mortgage
servicing rights in an amount includable in core capital.
13
Risk-Based Capital Requirement
The risk-based capital requirement provides that savings institutions maintain
total capital equal to not less than 8% of total risk-weighted assets. For
purposes of the risk-based capital computation, total capital is defined as core
capital, as defined above, plus supplementary capital, primarily general loan
loss reserves (limited to a maximum of 1.25% of total risk-weighted assets.) In
computing total capital, the supplementary capital included cannot exceed 100%
of core capital.
At September 30, 2000, the Bank was in compliance with all of its capital
requirements as follows:
September 30, 2000 December 31, 1999
----------------------- ------------------------
Percent of Percent of
Amount Assets Amount Assets
---------- ----------- ---------- -----------
(Dollars in thousands)
Stockholder's equity of the Bank $ 379,240 7.50% $ 354,297 7.64%
========== ===== ========== =====
Tangible capital $ 308,200 6.19% $ 288,177 6.32%
Tangible capital requirement 74,734 1.50 68,391 1.50
---------- ----- ---------- -----
Excess $ 233,466 4.69% $ 219,786 4.82%
========== ===== ========== =====
Core capital $ 308,200 6.19% $ 288,177 6.32%
Core capital requirement 149,467 3.00 136,782 3.00
---------- ----- ---------- -----
Excess $ 158,733 3.19% $ 151,395 3.32%
========== ===== ========== =====
Core and supplementary capital $ 326,367 11.83% $ 305,453 12.32%
Risk-based capital requirement 220,632 8.00 198,423 8.00
---------- ----- ---------- -----
Excess $ 105,735 3.83% $ 107,030 4.32%
========== ===== ========== =====
Total Bank assets $ 5,055,002 $ 4,634,591
Adjusted total Bank assets 4,982,249 4,559,397
Total risk-weighted assets 2,830,693 2,555,481
Adjusted total risk-weighted assets 2,757,939 2,480,286
Investment in Bank's real estate subsidiaries 2,428 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:
September 30, December 31,
2000 1999
----------- ----------
(In thousands)
Stockholder's equity of the Bank $ 379,240 354,297
Goodwill (62,774) (54,939)
Core deposit intangibles (7,254) (6,261)
Non-permissible subsidiary deduction (2,428) (7,930)
Non-includable purchased mortgage servicing rights (414) (733)
Regulatory capital adjustment for available for sale securities 1,830 3,743
----------- ----------
Tangible and core capital 308,200 288,177
General loan loss reserves 18,167 17,276
----------- ----------
Core and supplementary capital $ 326,367 305,453
=========== ==========
14
Changes in Financial Condition
Total assets of the Company were $5.07 billion at September 30, 2000, an
increase of $415.7 million, or 8.9% from $4.66 billion at December 31, 1999. The
increase is primarily due to an increase in adjustable-rate single family
mortgage originations that management has elected to retain in portfolio,
increasing outstanding loans receivable.
Cash and short-term investments totaled a combined $191.3 million at September
30, 2000, an increase of $33.3 million from the combined balance of $158.0
million at December 31, 1999.
Investment securities available for sale decreased $21.0 million to $173.1
million at September 30, 2000. The decrease is due to maturities of $45.4
million of primarily asset-backed and U.S. Agency securities, sales of $1.7
million, offset by purchases of $22.0 million in primarily asset-backed, U.S.
Agency and equity securities. The Company recognized a gain of $137,000 on the
sale of investment securities available for sale during the nine months ended
September 30, 2000.
Mortgage-backed securities classified as held to maturity decreased $10.3
million to $83.9 million at September 30, 2000, compared to $94.3 million at
December 31, 1999, due to purchases of $4.8 million offset by normal
amortization and prepayments.
Mortgage-backed securities available for sale decreased $15.0 million to $24.7
million at September 30, 2000, primarily due to the 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 $54.0 million of CMO securities at September 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 $404.3 million, or
10.4%, to $4.29 billion at September 30, 2000. The Bank originated $1.12 billion
during the nine-month period ended September 30, 2000, compared to $1.31 billion
during the prior year period. The lower loan origination volume was primarily
due to a decline in mortgage refinance activity compared to the prior year.
Offsetting this increase in loan balances were amortization and prepayments
totaling $510.5 million, as well as loan sales of $208.0 million. Loans
receivable held for sale increased to $52.2 million as of September 30, 2000,
compared to $12.6 million at December 31, 1999. Included in loan sale volume for
the current nine-month period is $20.9 million of hybrid ARM loans.
Traditionally, the Bank has generally held ARM originations in its portfolio.
However, due to consumer preference for ARM loans in the last twelve months, as
well as narrower spreads over 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 a portion of its ARM originations on a servicing released basis
in the foreseeable future to manage its balance sheet growth.
The allowance for loan losses totaled $18.2 million at September 30, 2000, an
increase of $891,000 from the balance at December 31, 1999, due to a $1.1
million provision for loan losses, offset by net charge-offs of $209,000. The
Bank's allowance for loan losses to total loans outstanding was .43% at
September 30, 2000, compared to .44% at December 31, 1999. Non-performing loans
increased $324,000 to $16.0 million at September 30, 2000, compared to $15.7
million at December 31, 1999. As a percentage of total loans receivable, the
level of non-performing loans was .38% at September 30, 2000, compared to .40%
at December 31, 1999. The ratio of the allowance for loan losses to non-
performing loans was 113.7% at September 30, 2000 compared to 110.4% at December
31, 1999, and 124.5% at September 30, 1999.
15
Foreclosed real estate decreased $6.1 million to $1.3 million at September 30,
2000 primarily due to the sale of a $6.1 million commercial office complex in
June 2000.
Real estate held for development or sale decreased $9.6 million to $6.3
million at September 30, 2000. A summary of the carrying value of real estate
held for development or sale follows:
September 30, December 31,
2000 1999
------ ------
(In thousands)
MAF Developments, Inc.
Tallgrass of Naperville $1,091 11,720
Land for future development 4,370 -
Creekside of Remington - 1,657
------ ------
5,461 13,377
------ ------
NW Financial, Inc.
Reigate Woods 539 2,112
Woodbridge 262 400
------ ------
801 2,512
------ ------
$6,262 15,889
====== ======
The Company had 258 lot sales in Tallgrass of Naperville during the nine
months ended September 30, 2000. At September 30, 2000, 421 lots remain in
Tallgrass, with nine under contract. A presale of the next phase of the project,
held in October 2000, resulted in an additional 141 contracts on lots, with
closings expected to begin late in the fourth quarter. The land for future
development category reflects the Company's purchase, in the second quarter of
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.
Another new project consisting of 126 lots, in Sugar Grove, Illinois, is
currently under contract with lot sales expected in 2001. The final 75 lots of
the Creekside of Remington project were sold to a local developer in the second
quarter of 2000. Based on the strong demand in Tallgrass and the new project in
Sugar Grove, management currently expects that pre-tax income from real estate
development in 2001 should be in the range of $7.0-$9.0 million.
The Company sold seven homesites in its Reigate Woods subdivision during the
nine months ended September 30, 2000. The final three lots in the project are
under contract and are scheduled to close in the fourth quarter of 2000. The
remaining balance of the Woodbridge project consists of two parcels of
commercial property totaling 3.5 acres. During the current quarter, one parcel
was sold. At September 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 early 2001 at a pre-tax profit of approximately $600,000.
Deposits increased $207.0 million, to $2.91 billion at September 30, 2000. The
increase is primarily due to the addition of $90.0 million in deposits from the
M&I branch acquisitions. After consideration of interest of $80.1 million
credited to accounts during the nine months ended September 30, 2000, actual
cash inflows were $37.7 million, exclusive of the acquired deposits.
Borrowed funds, which consist primarily of FHLB of Chicago advances, increased
$160.7 million to $1.69 billion at September 30, 2000. The increase is primarily
attributable to a net $160.0 million increase in FHLB of Chicago borrowings used
to fund loan originations. Borrowings at September 30, 2000 also include $7.0
million drawn on the Company's revolving line of credit during 2000, compared to
$-0- at December 31, 1999. These funds have been used primarily to fund the
Company's stock buyback program. These increases were offset by a buyer's
assumption of a $6.0 million industrial revenue bond, previously included in
other borrowings upon the Bank's sale in June 2000 of the foreclosed real estate
property secured by the bond.
16
Stockholders' equity increased $21.0 million, or 6.0% at September 30, 2000,
primarily due to net income of $43.3 million and a decrease in accumulated other
comprehensive loss of $2.3 million, offset by stock repurchases of $19.1 million
and dividends paid of $6.8 million.
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 September 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 $292,000, compared to $248,000 for the three months
ended September 30, 1999. For the nine months ended September 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 $876,000,
compared to $744,000 for the nine months ended September 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)
September 30, 2000 36 $4,004 .09% 119 $14,693 .35%
== ====== === === ======= ===
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%
== ====== === === ======= ===
17
Loan Portfolio Composition. The following table sets forth the composition
of the Bank's loan portfolio in dollar amounts at the dates indicated:
At
--------------------------------------------------------------------------------
9/30/00 6/30/00 3/31/00 12/31/99 9/30/99 6/30/99 3/31/99
--------- ---------- --------- --------- --------- --------- ---------
(In thousands)
Real estate loans:
One- to four-family:
Held for investment $3,783,956 3,723,765 3,581,604 3,479,425 3,292,649 3,085,456 2,998,662
Held for sale 52,156 35,973 37,899 12,601 13,787 100,016 21,387
Multi-family 168,128 165,309 162,666 164,878 164,687 153,150 141,018
Commercial 40,730 41,919 40,142 38,817 39,670 38,050 41,581
Construction 26,866 30,621 27,529 27,707 29,651 29,558 39,090
Land 35,114 34,272 29,143 28,602 20,148 24,655 23,674
---------- --------- --------- --------- --------- --------- ---------
Total real estate loans 4,106,950 4,031,859 3,878,983 3,752,030 3,560,592 3,430,885 3,265,412
Other loans:
Consumer loans:
Equity lines of credit 132,894 120,835 106,503 99,099 95,749 93,502 90,053
Home equity loans 63,307 59,736 51,746 48,397 45,717 44,987 40,434
Other 4,720 4,746 4,751 4,757 6,008 6,252 6,294
---------- --------- --------- --------- --------- --------- ---------
Total consumer loans 200,921 185,317 163,000 152,253 147,474 144,741 136,781
Commercial business lines 3,485 3,387 3,399 3,132 1,740 1,743 1,780
---------- --------- --------- --------- --------- --------- ---------
Total other loans 204,406 188,704 166,399 155,385 149,214 146,484 138,561
---------- --------- --------- --------- --------- --------- ---------
Total loans receivable 4,311,356 4,220,563 4,045,382 3,907,415 3,709,806 3,577,369 3,403,973
Less:
Loans in process 11,297 12,837 11,467 11,893 13,240 16,828 17,904
Unearned discounts, premiums
and deferred loan expenses, net (6,960) (6,641) (6,408) (6,323) (5,404) (4,603) (3,743)
Allowance for loan losses 18,167 17,870 17,567 17,276 17,012 16,978 16,794
---------- --------- --------- --------- --------- --------- ---------
Total loans receivable, net 4,288,852 4,196,497 4,022,756 3,884,569 3,684,958 3,548,166 3,373,018
Loans receivable held for sale (52,156) (35,973) (37,899) (12,601) (13,787) (100,016) (21,387)
---------- ---------- --------- --------- --------- --------- ---------
Loans receivable, net $4,236,696 4,160,524 3,984,857 3,871,968 3,671,171 3,448,150 3,351,631
========== ========== ========= ========= ========= ========= =========
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
---------------------------------------------------------------------------------
9/30/00 6/30/00 3/31/00 12/31/99 9/30/99 6/30/99 3/31/99
--------- --------- --------- ---------- --------- --------- ---------
(In thousands)
Non-performing loans:
One- to four-family and
multi-family loans:
Non-accrual loans $13,398 13,211 13,624 12,548 10,453 9,472 9,897
Accruing loans 91 days
or more overdue 1,557 608 529 771 1,312 1,377 1,743
--------- --------- --------- ---------- --------- --------- ---------
Total 14,955 13,819 14,153 13,319 11,765 10,849 11,640
--------- --------- --------- ---------- --------- --------- ---------
Commercial real estate,
construction and land
loans:
Non-accrual loans 405 451 632 607 608 926 1,744
Accruing loans 91 days or
more overdue - - - - - - -
--------- --------- --------- ---------- --------- --------- ---------
Total 405 451 632 607 608 926 1,744
--------- --------- --------- ---------- --------- --------- ---------
Other loans:
Non-accrual loans 608 988 1,445 1,683 1,258 1,239 1,166
Accruing loans 91 days
or more overdue 6 4 24 41 29 42 16
--------- --------- --------- ---------- --------- --------- ---------
Total 614 992 1,469 1,724 1,287 1,281 1,182
--------- --------- --------- ---------- --------- --------- ---------
Total non-performing
loans:
Non-accrual loans 14,411 14,650 15,701 14,838 12,319 11,637 12,807
Accruing loans 91 days
or more overdue 1,563 612 553 812 1,341 1,419 1,759
--------- --------- --------- ---------- --------- --------- ---------
Total $15,974 15,262 16,254 15,650 13,660 13,056 14,566
========= ========= ========= ========== ========= ========= =========
Non-accrual loans to
total loans .34% .35 .40 .38 .33 .34 .38
Accruing loans 91 days
or more overdue to
total loans .04 .01 .01 .02 .04 .04 .05
--------- --------- --------- ---------- --------- --------- ---------
Non-performing loans to
total loans .38% .36 .41 .40 .37 .38 .43
========= ========= ========= ========== ========= ========= =========
Foreclosed real estate
(net of related reserves):
One-to-four-family $ 1,221 1,454 1,220 1,558 2,404 2,307
Commercial, construction
and land 100 571 6,767 6,195 6,245 6,624 6,621
--------- --------- --------- ---------- --------- --------- ---------
Total $ 1,321 981 8,221 7,415 7,803 9,028 8,928
========= ========= ========= ========== ========= ========= =========
Non-performing loans and
foreclosed real estate
to total loans and
foreclosed real estate .41% .39 .61 .59 .58 .63 .69
--------- --------- --------- ---------- --------- --------- ---------
Total non-performing
assets $17,295 16,243 24,475 23,065 21,463 22,084 23,494
========= ========= ========= ========== ========= ========= =========
Total non-performing
assets to total assets .34% .33 .51 .50 .48 .52 .57
========= ========= ========= ========== ========= ========= =========
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, $25.0 million unsecured revolving line of credit from
a commercial bank, due and renewable annually on April 30. At September 30,
2000, the Company had $7.0 million outstanding under this line of credit. For
the nine-month period ended September 30, 2000, the Company received $20.0
million in dividends from the Bank and declared common stock dividends of $.29
per share, or $6.8 million. During the nine-months ended September 30, 2000,
the Company repurchased 1.1 million shares of its common stock at an average
price of $17.82 per share, for a total of $19.1 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 nine-month period the Bank borrowed $335.0 million
of primarily fixed and variable rate FHLB of Chicago advances and repaid $175.0
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 September 30, 2000, the Bank's
average liquidity ratio was 8.74%. At September 30, 2000, total liquidity was
$212.3 million, or 7.81%, which was $103.5 million in excess of the 4.0%
regulatory minimum.
During the nine months ended September 30, 2000, the Bank originated and
purchased loans totaling $1.12 billion compared with $1.31 billion during the
same period a year ago. Loan sales and swaps for the nine months ended
September 30, 2000, were $208.0 million, compared to $352.3 million for the
prior year period. The Bank has outstanding commitments to originate and
purchase loans of $393.4 million and commitments to sell or swap loans of $72.6
million at September 30, 2000. At September 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 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.
21
Although the Bank's overall strategy for asset/liability management remains
consistent, due to the increased consumer demand for ARM loans in the first half
of the year, the relatively flat to inverted 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.
The table on the next page sets forth the scheduled repricing or maturity
of the Bank's assets and liabilities at September 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 volatility in market interest rates, $85.0
million of FHLB advances with final remaining maturities ranging from 27 to 92
months, but callable in one year or less, are categorized as $60.0 million due
in 6 months or less, and $25.0 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 September 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 $ 723,222 487,359 1,356,722 797,193 942,523 4,307,019
Mortgage-backed securities 65,215 4,001 10,037 9,075 20,357 108,685
Interest-bearing deposits 18,713 - - - - 18,713
Federal funds sold 89,772 - - - - 89,772
Investment securities (1) 140,359 767 18,136 25,463 83,040 267,765
---------- -------- --------- ------- --------- ---------
Total interest-earning assets 1,037,281 492,127 1,384,895 831,731 1,045,920 4,791,954
Impact of hedging activity (2) 52,156 - - - (52,156) -
---------- -------- --------- ------- --------- ---------
Total net interest-earning assets adjusted
for impact of hedging activities 1,089,437 492,127 1,384,895 831,731 993,764 4,791,954
---------- -------- --------- ------- --------- ---------
Interest-bearing liabilities:
NOW and checking accounts 19,757 18,077 66,163 41,099 87,334 232,430
Money market accounts 207,807 - - - - 207,807
Passbook accounts 62,803 57,464 210,320 130,646 277,622 738,855
Certificate accounts 714,222 267,301 562,875 41,167 8,486 1,594,051
FHLB advances 355,000 200,000 545,500 235,000 305,000 1,640,500
Other borrowings 46,575 - - - - 46,575
---------- -------- --------- ------- --------- ---------
Total interest-bearing liabilities 1,406,164 542,842 1,384,858 447,912 678,442 4,460,218
---------- -------- --------- ------- --------- ---------
Interest sensitivity gap $ (316,727) (50,715) 37 383,819 315,322 331,736
========== ======== ========= ======= ========= =========
Cumulative gap $ (316,727) (367,442) (367,405) 16,414 331,736
========== ======== ========= ======= =========
Cumulative gap assets as a percentage
of total assets (6.24)% (7.24) (7.24) .32 6.54
Cumulative net interest-earning assets as
a percentage of interest-bearing liabilities 77.48% 81.15 88.98 100.43 107.44
(1) Includes $82.3 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 September
30, 2000 includes fees which are considered adjustments to yield.
Three Months Ended September 30,
--------------------------------------------------------------
2000 1999
------------------------------ ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $4,256,770 78,570 7.38% $3,630,144 64,381 7.09%
Mortgage-backed securities 111,293 1,876 6.74 143,916 2,222 6.18
Interest-bearing deposits/(1)/ 34,615 731 8.38 26,512 470 7.03
Federal funds sold /(1)/ 114,038 2,226 7.74 53,956 985 7.24
Investment securities /(2)/ 265,507 4,944 7.39 263,795 4,098 6.16
---------- ------- ---------- -------
Total interest-earning assets 4,782,223 88,347 7.38 4,118,323 72,156 7.00
Non-interest earning assets 231,096 214,787
---------- ----------
Total assets $5,013,319 $4,333,110
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,748,745 30,359 4.38 2,559,086 24,907 3.86
Borrowed funds 1,668,401 26,116 6.21 1,227,864 17,891 5.78
---------- ------- ---------- -------
Total interest-bearing
liabilities 4,417,146 56,475 5.07 3,786,950 42,798 4.48
------- ---- ------- ----
Non-interest bearing
deposits 132,595 112,813
Other liabilities 98,210 84,744
---------- ----------
Total liabilities 4,647,951 3,984,507
Stockholders' equity 365,368 348,603
---------- ----------
Liabilities and
stockholders' equity $5,013,319 $4,333,110
========== ==========
Net interest income/interest rate
spread $31,872 2.31% $ 29,358 2.52%
======= ==== ======== ====
Net earning assets/net yield on
average interest-earning assets $ 365,077 2.67% $ 331,373 2.85%
========== ==== ========== ====
Ratio of interest-earning assets
to interest-bearing liabilities 108.26% 108.75%
======= =======
Nine Months Ended September 30,
---------------------------------------------------------------
2000 1999 At September 30, 2000
------------------------------- ------------------------------- ----------------------
Average Average
Average Yield/ Average Yield/ Yield/
Balance Interest Cost Balance Interest Cost Balance Cost
---------- -------- ------- ---------- -------- ------- ---------- -----------
Assets:
Interest-earning assets:
Loans receivable $4,108,961 224,131 7.27% $3,484,200 185,550 7.10% $4,307,019 7.44%
Mortgage-backed securities 122,619 6,181 6.72 156,209 7,261 6.20 108,685 6.74
Interest-bearing deposits/(1)/ 32,651 1,809 7.38 27,369 1,478 7.22 18,713 6.49
Federal funds sold /(1)/ 113,369 6,242 7.33 41,423 2,351 7.59 89,772 6.50
Investment securities /(2)/ 275,724 14,780 7.14 263,123 11,923 6.06 267,765 6.97
---------- -------- ---------- -------- ----------
Total interest-earning assets 4,653,324 253,143 7.25 3,972,324 208,563 7.00 4,791,954 7.38
Non-interest earning assets 229,621 219,436 281,814
---------- ---------- ----------
Total assets $4,882,945 $4,191,760 $5,073,768
========== ========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,677,682 84,050 4.18 2,549,147 74,073 3.89 2,773,143 4.49
Borrowed funds 1,628,293 74,543 6.10 1,106,824 47,612 5.75 1,687,075 6.24
---------- -------- ---------- -------- ----------
Total interest-bearing liabilities 4,305,975 158,593 4.91 3,655,971 121,685 4.45 4,460,218 5.15
-------- ---- -------- ---- ------
Non-interest bearing deposits 127,782 108,673 133,097
Other liabilities 91,766 85,064 106,550
---------- ---------- ----------
Total liabilities 4,525,523 3,849,708 4,699,865
Stockholders' equity 357,422 342,052 373,903
---------- ---------- ----------
Liabilities and
stockholders' equity $4,882,945 $4,191,760 $5,073,768
========== ========== ==========
Net interest income/interest rate
spread $ 94,550 2.34% $ 86,878 2.55% 2.23%
======== ==== ======== ==== ======
Net earning assets/net yield on
average interest-earning assets $ 347,349 2.71% $ 316,353 2.92% $ 331,736 N/A
========== ==== ========== ===== ========== ======
Ratio of interest-earning assets
to interest-bearing liabilities 108.07% 108.65% 107.44%
===== ====== ======
________________________________
/(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 Nine Months Ended
September 30, 2000 September 30, 2000
Compared to Compared to
September 30, 1999 September 30, 1999
Increase (Decrease) Increase (Decrease)
-------------------------------------- -------------------------------------
Volume Rate Net Volume Rate Net
------------ ----------- ----------- ----------- ----------- -----------
(In thousands)
Interest-earning assets:
Loans receivable $11,483 2,706 14,189 34,005 4,576 38,581
Mortgage-backed securities (537) 191 (346) (1,656) 576 (1,080)
Interest-bearing deposits 160 101 261 297 34 331
Federal funds sold 1,168 73 1,241 3,972 (81) 3,891
Investment securities 26 820 846 604 2,253 2,857
------- ------ ------ ------ ------ ------
Total 12,300 3,891 16,191 37,222 7,358 44,580
------- ------ ------ ------ ------ ------
Interest-bearing liabilities:
Deposits 1,934 3,518 5,452 3,970 6,007 9,977
Borrowed funds 6,814 1,411 8,225 23,874 3,057 26,931
------- ------ ------ ------ ------ ------
Total 8,748 4,929 13,677 27,844 9,064 36,908
------- ------ ------ ------ ------ ------
Net change in net interest income $ 3,552 (1,038) 2,514 9,378 (1,706) 7,672
======= ====== ====== ====== ====== ======
Comparison of the Results of Operations for the Three Months Ended September 30,
2000 and 1999
General - Net income for the three months ended September 30, 2000 was $16.5
million, or $.71 per diluted share, compared to net income of $12.9 million, or
$.52 per diluted share for the three months ended September 30, 1999. The
increase in earnings is primarily due to a pre-tax gain of $4.3 million on the
sale of mortgage servicing rights, equal to $.11 per diluted share on an after-
tax basis. Without this gain, earnings increased 15% from the prior year
quarter, primarily due to higher net interest income, partially offset by
increased non-interest expense and income tax expense.
Net interest income - Net interest income was $31.8 million for the current
quarter, compared to $29.3 million for the quarter ended September 30, 1999, an
increase of $2.5 million or 8.6%. The Company's average net interest-earning
assets increased to $365.1 million for the three months ended September 30,
2000, compared to $331.4 million for the three months ended September 30, 1999,
while the Company's net interest margin decreased to 2.67% for the current three
month period, compared to 2.85% in the prior year period. The decrease in the
net interest margin is primarily due to the impact of the current inverted yield
curve, increased competition for savings deposits, and wider than normal
borrowing spreads. For the current quarter, the impact of these forces led to a
59 basis point increase in the cost of average interest-bearing liabilities
coupled with only a 38 basis point increase in the yield on average interest-
earning assets.
25
Interest income on loans receivable increased $14.2 million as a result of a
$626.6 million increase in average loans receivable, along with a 29 basis point
increase in the average yield on loans receivable. The increase due to rate has
been affected by the trend in loan originations away from fixed-rate mortgages
towards lower initial-yielding ARM loans in the rising interest rate environment
over the past twelve months. Interest income on mortgage-backed securities
decreased $346,000 to $1.9 million for the current quarter, due to a $32.6
million decrease in average balances offset by a 56 basis point increase in
yield. Interest income on investment securities increased $846,000 to $4.9
million, due to a $896.6 million increase in the average balance of this
portfolio, as well as a 123 basis point increase in yield.
Interest expense on deposit accounts increased $5.5 million to $30.4 million
for the third quarter of 2000, due to a $189.7 million increase in average
deposits compared to the prior year quarter, and a 52 basis point increase in
the average cost of deposits compared to the prior year's three-month
period. Approximately $112.0 million of the growth in average deposits is
attributable to the acquisition of three branch offices since September 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 the upward repricing of maturing certificates of deposit.
Interest expense on borrowed funds increased $8.2 million to $26.1 million, as
a result of a $440.5 million increase in the average balance of borrowed funds,
primarily advances from the FHLB of Chicago, and a 43 basis point increase in
the average cost of borrowed funds. The increase in the average balance has
been primarily for funding loan originations, while the increase in the average
rates has been due to the replacement of maturing and called advances at higher
interest rates.
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
continue to create pressure on the Bank's net interest margin over the next few
quarters.
The Federal Reserve Bank's 125 basis point increase in the federal funds rate
target over the last fifteen 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 seek to offset some of the
margin pressure with increased sales of current loan originations in an effort
to generate additional gains on loan sales and/or additional stock buybacks.
Provision for loan losses - The Bank provided $500,000 in provision for loan
losses during the third quarter of 2000, compared to $300,000 for the 1999
three-month period. Net charge-offs during the 2000 quarter were $203,000,
compared $267,000 for the three months ended September 30, 1999. At September
30, 2000, the Bank's allowance for loan losses was $18.2 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 113.7% at
September 30, 2000 compared to 110.4% at December 31, 1999 and 124.5% at
September 30, 1999.
Non-interest income - Non-interest income increased $4.4 million, or 50.8%,
to $13.2 million for the three months ended September 30, 2000, compared to $8.7
million for the three months ended September 30, 1999. The increase was
primarily due to a $4.3 million gain on the sale of mortgage servicing rights.
Exclusive of the gain on servicing rights, total non-interest income for the
third quarter was $8.8 million, relatively unchanged from the prior year
quarter. Positive results in real estate development income and higher fee
income from deposit account products were offset by reduced gains on sales of
loans and investment securities, and lower loan servicing income.
26
Higher interest rates, competitive pricing pressures, and a higher level of
adjustable rate loan originations led to continued low mortgage banking profits
resulting from loan sales. Gain on sale of loans decreased to $272,000 for the
three months ended September 30, 2000, compared to $464,000 for the three months
ended September 30, 1999. Loan sale volume was $98.6 million, including $4.0
million, which was swapped into mortgage-backed securities. For the three
months ended September 30, 1999, loan sale volume was $140.4 million of which
$60.3 million was swapped into mortgage-backed securities. Recently, the Bank
has begun to experience a shift in consumers' preferences to fixed-rate mortgage
loans, due in part to a decline in long-term rates. Because the Company
generally sells fixed rate mortgage originations, this change may result in
higher mortgage banking profits, as well as contribute to more moderate balance
sheet growth in 2001.
Income from real estate operations increased $147,000 compared to the prior
year quarter to $2.6 million for the three months ended September 30, 2000. The
increase is primarily due a $184,000 gain on the sale of a commercial parcel. A
summary of income from real estate operations follows:
Three Months Ended September 30,
---------------------------------------------
2000 1999
----------------- ----------------------
# of Pre-tax # of Pre-tax
Lots Income Lots Income(loss)
---- ------ ---- ------------
(Dollars in thousands)
Tallgrass of Naperville 76 $2,374 19 $ 180
Woodbridge - 184 - 2,290
Reigate Woods 2 67 3 158
Ashbury - - - (150)
-- ------ -- ------
78 $2,625 22 $2,478
== ====== == ======
The Company sold 76 lots in Tallgrass of Naperville project during the three
months ended September 30, 2000. The significant increase in profit per lot is
primarily due to significantly higher lot prices on current year sales compared
to the prior year, without any appreciable increase in development costs.
There are nine lots under contract in this 951-lot subdivision at September 30,
2000, with 412 remaining to be sold. The Company held a pre-sale of 141 lots in
the next unit of Tallgrass to builders in October 2000, resulting in contracts
on all lots offered. Closings are expected to commence late in the fourth
quarter of 2000, and the Company currently expects profit margins comparable to
third quarter levels for these sales. Due to the reduced inventory pending
completion of fourth quarter improvements in the next phase of the project, real
estate income in the fourth quarter of 2000 is expected to be significantly
lower than in the third quarter. The Company had two sales in Reigate Woods
during the third quarter of 2000. The lower profit margins, as compared to
1999, is reflective of discounted pricing on homes as the project nears
completion. The remaining three lots in Reigate are under contract and expected
to close prior to the end of 2000.
Woodbridge sales during the three months ended September 30, 2000 and 1999
were from commercial sites remaining after a sell-out in 1998 of all residential
lots in the project. During the current quarter of 2000, one smaller parcel of
the Woodbridge commercial site was sold, with the remaining two parcels expected
to be sold in the first quarter of 2001 at a pre-tax profit of approximately
$600,000. During the three months ended September 30, 1999, two parcels were
sold at a pre-tax profit of $2.3 million.
Deposit account service charges increased $760,000, or 28.4%, to $3.4 million
for the three months ended September 30, 2000, primarily due to continued growth
in the number of checking accounts serviced by the Bank. At September 30, 2000,
the Bank had approximately 113,300 checking accounts, compared to 100,900 at
September 30, 1999, an annualized increase of 14%. The Bank instituted fee
increases for services provided on its checking accounts during 2000, and has
also had growth in interchange fees earned on its debit cards.
27
Brokerage commissions decreased $133,000, or 18.5%, for the three months ended
September 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 $386,000 to $365,000 for the three months
ended September 30, 2000, compared to the same quarter in 1999. The decrease
was primarily due to the sale of servicing rights on approximately $600.0
million of mortgage loans during the three months ended September 30, 2000.
Management expects loan servicing income to decrease by approximately $700,000-
$900,000 in 2001 as a result of this sale. Historically, the Bank has not been
a seller of servicing rights. The bulk sale completed in the current quarter
took advantage of aggressive pricing for loan servicing rights currently in the
marketplace. The Bank expects to continue to service most of the loans it
originates for sale into the secondary market. Amortization of servicing rights
was $292,000 for the three months ended September 30, 2000, compared to $314,000
for the prior year three-month period.
Non-interest expense - Non-interest expense increased $1.2 million or 7.1%
compared to prior year period, to $18.4 million for the three months ended
September 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.
Compensation and benefits increased 8.9% or $854,000 to $10.4 million for the
three months ended September 30, 2000, compared to the three months ended
September 30, 1999. The increase is primarily due to increased staff resulting
from three branch acquisitions as well as normal year-end salary increases for
existing staff.
Occupancy expense increased $272,000, or 15.1% to $2.1 million for the three
months ended September 30, 2000 compared to the prior year period, primarily due
to increased operating expenses at three new branch sites acquired since
September 1999.
Advertising and promotion expense decreased $219,000 for the three months
ended September 30, 2000 compared to the prior year, primarily due to higher
costs in the prior year period for radio advertising. 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 $119,000 or 17.9% to $784,000 for the three
months ended September 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 $237,000 or 60.8% compared
to the prior year to $153,000 for the three months ended September 30, 2000, due
to a scheduled decrease in insurance rates that went into effect January 1,
2000.
Amortization of intangibles increased $216,000 to $1.2 million for the three
months ended September 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 purchase transactions.
Other non-interest expense increased $216,000 to $3.0 million for the three
months ended September 30, 2000 compared to the prior year period. Costs
increased due to general operating expenses at three new branches, as well as
expenses related to the Bank's internet-based lending activities.
28
Income taxes - For the three months ended September 30, 2000, income tax
expense totaled $9.6 million, or an effective income tax rate of 36.7%, compared
to $7.7 million, or an effective income tax rate of 37.3%, for the three months
ended September 30, 1999.
Comparison of the Nine Months Ended September 30, 2000 and 1999
General - Net income for the nine months ended September 30, 2000 was $43.3
million, or $1.83 per diluted share, compared to $37.8 million, or $1.51 per
diluted share, an increase of $3.6 million, or 35.9% on a per diluted share
basis. The period over period increase was 14%, or $.21 per diluted share,
exclusive of a $4.3 million pre-tax gain on the sale of mortgage servicing
rights in 2000.
Net interest income - Net interest income for the nine months ended September
30, 2000 was $94.4 million compared to $86.8 million for the nine months ended
September 30, 1999, an increase of $7.7 million, or 8.8%. The increase is
principally due to the growth in the Company's average net interest-earning
assets of $31.0 million to $347.3 million, offset by a 21 basis point decline in
the Company's net interest margin.
Interest income on interest-earning assets increased $44.6 million for the
nine months ended September 30, 2000, compared to the prior year period. Of
this increase, $38.6 million is attributable to interest earned on loans
receivable. The Bank's average balance of loans receivable increased $624.8
million to $4.11 billion, for the nine months ended September 30, 2000, in
addition to the average yield on loans receivable increasing 17 basis points
over the prior year period due to higher loan origination rates, as well as
upward repricing on adjustable rate investments held by the Bank. The $1.1
million decrease in interest income on mortgage-backed securities is due to a
$33.6 million decrease in the average balance primarily due to a $9.3 million
sale and normal prepayments. Interest income on investment securities increased
$2.9 million to $14.7 million for the nine months ended September 30, 2000, due
to an $12.6 million increase in the average balance for the period, and a 108
basis point increase in the average yield on this portfolio.
Interest expense on interest-bearing liabilities increased $36.9 million to
$158.6 million for the nine months ended September 30, 2000. Interest expense
on deposits increased $10.0 million, due to a $128.5 million increase in the
average deposits and a 29 basis point increase in average cost. Higher interest
rates have negatively impacted the cost of maturing certificates of deposit
during the current nine-month period. Interest expense on borrowed funds
increased $26.9 million, reflecting a $521.5 million increase in the average
balance of borrowed funds, primarily advances from the FHLB of Chicago, and a 35
basis point increase in average cost. These borrowings have been primarily used
to fund the growth in loans receivable.
Provision for loan losses - The Bank provided $1.1 million for possible loan
losses for the nine months ended September 30, 2000 compared to $800,000 for the
nine months ended September 30, 1999. Net charge-offs were $209,000 for the
current year nine-month period compared to $558,000 for the prior nine-month
period.
Non-interest income - Non-interest income increased $3.1 million to $28.8
million for the nine months ended September 30, 2000, compared to $25.7 million
for the nine months ended September 30, 1999, primarily due to a $4.3 million
gain on the sale of mortgage servicing rights, higher deposit account service
charges and income from real estate development, offset by lower mortgage
banking revenue and investment securities gains.
Gain on sale of loans receivable was $476,000 for the nine months ended
September 30, 2000, compared to $2.3 million for the nine months ended September
30, 1999, a decrease of $1.9 million. Loan sales were $208.0 million during the
current period compared to $352.3 million in the prior nine-month period. The
decrease in loan sale activity is primarily due to a lesser amount of fixed-rate
originations and a decline in refinancing activity in the current nine-month
period due to rising interest rates.
29
During the nine months ended September 30, 2000, the Company recognized
$137,000 of gains on the sale of investment securities, primarily marketable
equity securities, compared to gains of $1.0 million for the prior year from the
sale of U.S. agency securities and, to a lesser extent, marketable equity
securities.
Income from real estate operations was $7.8 million for the nine months ended
September 30, 2000, compared to income of $7.0 million for the nine months ended
September 30, 1999, an increase of $785,000.
Nine Months Ended September 30,
---------------------------------------------------
2000 1999
--------------------- -----------------------
# of Pre-tax # of Pre-tax
Lots Income Lots Income(loss)
---- ------ ---- ------------
(Dollars in thousands)
Tallgrass of Naperville 258 $6,966 151 $1,075
Woodbridge - 418 - 5,163
Reigate Woods 7 210 8 375
Creekside of Remington 75 105 42 172
Harmony Grove - 104 7 381
Ashbury - - - (150)
--- ------ --- ------
340 $7,803 208 $7,016
=== ====== === ======
During the nine months ended September 30, 2000, the Company sold 258 lots in
its 951-lot Tallgrass of Naperville project at higher average selling prices
than comparative sales in the prior period, due to continued strong demand from
local builders. There were nine lots under contract at September 30, 2000. The
Company held a pre-sale of 141 lots in the next phase during October 2000,
resulting in contracts on all lots offered, with closings expected to commence
late in the fourth quarter. The 85-lot Reigate Woods subdivision had seven sales
during the first nine months of 2000, with three 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 the second
quarter of 2000 at a nominal profit. The Harmony Grove project was completed 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.
The remaining land in the Woodbridge project is commercially zoned. During
the nine months ended September 30, 2000, two parcels were sold and the
remaining two parcels are expected to be sold early in 2001. The prior year
included the sale of two of the largest parcels.
Loan servicing fee income was $1.4 million for the nine months ended September
30, 2000 compared to $1.8 million for the nine months ended September 30, 1999.
The average balance of loans serviced for others increased 4.7% to $1.17 billion
for the current nine-month period, compared to $1.13 billion in the prior nine-
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 nine months ended September 30, 2000, decreased
$137,000 or 9.8% over prior year period, due to the sale of servicing rights on
approximately $600.0 million of loans as of September 30, 2000. Management
expects loan servicing income to decrease by approximately $700,000-$900,000 in
2001 as a result of this sale. Loan servicing fee income is decreased by
amortization of purchased loan servicing rights which totaled $826,000 for the
2000 nine-month period, compared to $981,000 for the prior nine-month period.
Deposit account service charges increased $1.7 million or 22.7% to $9.1
million for the nine months ended September 30, 2000, due to an increase in the
number of checking accounts and related fees. Brokerage commissions decreased
$198,000 or 10.2% for the nine months ended September 30, 2000 compared to the
prior year period.
30
Non-interest expense - Non-interest expense for the nine months ended
September 30, 2000 increased $4.2 million or 8.4% to $54.1 million compared to
$49.9 million for the nine months ended September 30, 1999.
Compensation and benefits increased $2.4 million, or 8.4%, to $30.7 million,
for the nine months ended September 30, 2000, primarily due to normal salary
increases and increased staffing resulting from three acquired branches.
Occupancy expense increased $552,000, or 10.2% to $6.0 million for the nine
months ended September 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 $316,000 or 13.1% compared to the
prior year, to $2.7 million for the nine months ended September 30, 2000. The
increase is due to a radio based brand campaign that began in May 1999 and
heavier print advertising costs for deposit products and equity lines of credit.
Data processing expense increased $380,000 or 20.5% for the nine months ended
September 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 $406,000 to $3.3 million for the nine
months ended September 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 $908,000 to $8.8 million for the nine
months ended September 30, 2000 compared to the prior year period. Costs
increased due to operations at three new branches, as well as expenses related
to internet based lending activities.
Income taxes - The Company recorded a provision for income taxes of $24.7
million for the nine months ended September 30, 2000, or an effective income tax
rate of 36.3%, compared to $23.9 million for the nine months ended September 30,
1999, or an effective income tax rate of 38.8%. 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.
Not applicable.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. 3. Certificate of Incorporation and By-laws.
(i) 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).
32
Exhibit No. 11. Statement re: Computation of per share earnings.
Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
------------------ ------------------
Net income $16,513,000 $43,293,000
=========== ===========
Weighted average common shares outstanding 23,121,187 23,382,189
=========== ===========
Basic earnings per share $ .71 $ 1.85
=========== ===========
Weighted average common shares outstanding 23,121,187 23,382,189
Common stock equivalents due to dilutive
Effect of stock options 297,372 248,160
----------- -----------
Total weighted average common shares and equivalents
outstanding for diluted computation 23,418,559 23,630,349
=========== ===========
Diluted earnings per share $ .71 $ 1.83
=========== ===========
Exhibit No. 27. Financial Data Schedule.
(b) Reports on Form 8-K.
A Form 8-K was filed to report that on July 20, 2000, MAF Bancorp, Inc.
announced its 2000 second quarter earnings results, and a copy of the press
release was included as an exhibit.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAF Bancorp. Inc.
---------------------------------
(Registrant)
Date: November 13, 2000 By: /s/ Allen H. Koranda
------------------ ---------------------------------
Allen H. Koranda
Chairman of the Board and
Chief Executive Officer
Date: November 13, 2000 By: /s/ Jerry A. Weberling
----------------- ---------------------------------
Jerry A. Weberling
Executive Vice President and
Chief Financial Officer
34