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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-18121
MAF BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3664868
(State of Incorporation) (I.R.S. Employer
Identification No.)
55th Street & Holmes Avenue
Clarendon Hills, Illinois 60514
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number: (630) 325-7300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
The number of shares outstanding of the issuer's common stock, par value $.01
per share, was 22,513,839 at August 10, 2001.
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MAF BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
Index
- -----
Part I. Financial Information Page
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of June 30, 2001 and December 31, 2000 (unaudited)...... 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2001 and 2000 (unaudited)............ 4
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 2001 (unaudited)......... 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000 (unaudited)........ 6
Notes to Unaudited Consolidated Financial Statements....... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 32
Part II. Other Information
- -------- -----------------
Item 1. Legal Proceedings.......................................... 33
Item 2. Changes in Securities...................................... 33
Item 3. Defaults Upon Senior Securities............................ 33
Item 4. Submission of Matters to a Vote of Security Holders........ 33
Item 5. Other Information.......................................... 33
Item 6. Exhibits and Reports on Form 8-K........................... 34
Signature Page............................................. 35
2
Part I. Financial Information
Item 1. Financial Statements
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands)
(Unaudited)
June 30, December 31,
2001 2000
---------- -----------
Assets
- ------
Cash and due from banks $ 94,491 77,860
Interest-bearing deposits 52,128 53,392
Federal funds sold 144,367 139,268
Investment securities, at cost (fair value of $0 and $13,290) - 12,633
Investment securities available for sale, at fair value 283,764 174,494
Stock in Federal Home Loan Bank of Chicago, at cost 117,968 84,775
Mortgage-backed securities, at amortized cost (fair value of $0 and $79,137) - 80,301
Mortgage-backed securities available for sale, at fair value 103,254 24,084
Loans receivable held for sale 87,036 41,074
Loans receivable, net of allowance for losses of $18,221 and $18,258 4,126,468 4,287,040
Accrued interest receivable 27,859 27,888
Foreclosed real estate 1,260 1,808
Real estate held for development or sale 7,126 12,718
Premises and equipment, net 50,144 48,904
Other assets 66,482 60,485
Intangible assets, net of accumulated amortization of $17,311 and $15,030 66,583 68,864
---------- ---------
$5,228,930 5,195,588
========== =========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits $3,125,251 2,974,213
Borrowed funds 1,600,900 1,728,900
Advances by borrowers for taxes and insurance 38,992 38,354
Accrued expenses and other liabilities 68,928 66,392
---------- ---------
Total liabilities 4,834,071 4,807,859
---------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000
shares; none outstanding - -
Common stock, $.01 par value;
authorized 80,000,000 shares; 25,420,650 shares issued;
22,504,396 and 23,110,022 shares outstanding 254 254
Additional paid-in capital 198,144 198,068
Retained earnings, substantially restricted 260,712 237,867
Stock in gain deferral plan; 223,453 shares 511 511
Accumulated other comprehensive income, net of tax 1,993 1,435
Treasury stock, at cost; 3,139,707 and 2,534,081 shares (66,755) (50,406)
---------- ---------
Total stockholders' equity 394,859 387,729
---------- ---------
$5,228,930 5,195,588
========== =========
See accompanying notes to unaudited consolidated financial statements.
3
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
Interest income:
Loans receivable $78,187 74,856 158,270 145,561
Mortgage-backed securities - 1,496 - 3,021
Mortgage-backed securities available for sale 1,650 635 3,310 1,284
Investment securities 1,559 1,687 3,052 3,284
Investment securities available for sale 4,074 3,264 7,511 6,478
Interest-bearing deposits and federal funds sold 2,437 2,693 4,911 5,094
------- ------ ------- -------
Total interest income 87,907 84,631 177,054 164,722
------- ------ ------- -------
Interest expense:
Deposits 31,637 27,902 63,147 53,691
Borrowed funds 24,419 24,668 49,558 48,427
------- ------ ------- -------
Total interest expense 56,056 52,570 112,705 102,118
------- ------ ------- -------
Net interest income 31,851 32,061 64,349 62,604
Provision for loan losses - 300 - 600
------- ------ ------- -------
Net interest income after provision for loan losses 31,851 31,761 64,349 62,004
------- ------ ------- -------
Non-interest income:
Gain (loss) on sale of:
Loans receivable 1,906 147 2,597 204
Mortgage-backed securities - (700) - (700)
Investment securities 390 - 560 133
Foreclosed real estate 147 132 322 204
Deposit account service charges 4,107 3,100 7,533 5,670
Income from real estate operations 1,321 2,701 4,670 5,176
Brokerage commissions 637 476 1,182 1,154
Loan servicing fee income (expense) (63) 473 (326) 1,029
Other 2,056 1,489 3,822 2,707
------- ------ ------- -------
Total non-interest income 10,501 7,818 20,360 15,577
------- ------ ------- -------
Non-interest expense:
Compensation and benefits 11,704 10,112 23,045 20,257
Office occupancy and equipment 2,210 1,990 4,434 3,905
Advertising and promotion 1,099 888 2,347 1,890
Data processing 746 736 1,510 1,452
Federal deposit insurance premiums 147 149 302 296
Amortization of intangible assets 1,130 1,184 2,281 2,144
Other 3,211 2,938 6,276 5,739
------- ------ ------- -------
Total non-interest expense 20,247 17,997 40,195 35,683
------- ------ ------- -------
Income before income taxes 22,105 21,582 44,514 41,898
Income tax expense 8,225 7,911 16,556 15,118
------- ------ ------- -------
Net income $13,880 13,671 27,958 26,780
======= ====== ======= =======
Basic earnings per share $ .61 .59 1.23 1.14
======= ====== ======= =======
Diluted earnings per share $ .60 .58 1.20 1.13
======= ====== ======= =======
See accompanying notes to unaudited consolidated financial statements.
4
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30, 2001
----------------------------------------------------------------------------
Accumulated Stock in
Additional other gain
Common paid-in Retained comprehensive deferral Treasury
stock capital earnings income plan stock Total
------ ---------- --------- ------------- -------- -------- -------
Balance at December 31, 2000 $254 198,068 237,867 1,435 511 (50,406) 387,729
---- ------- ------- ----- --- ------- -------
Comprehensive income:
Net income - - 27,958 - - - 27,958
Other comprehensive income, net of tax:
Unrealized holding gain during the period - - - 910 - - 910
Less: reclassification adjustment of gains
included in net income - - - (352) - - (352)
---- ------- ------- ----- --- ------- -------
Total comprehensive income - - 27,958 558 - - 28,516
---- ------- ------- ----- --- ------- -------
Exercise of 30,401 stock options and
reissuance of treasury stock - - (174) - - 578 404
Purchase of treasury stock - - - - - (16,927) (16,927)
Tax benefits from stock-related compensation - 76 - - - - 76
Cash dividends ($.22 per share) - - (4,989) - - - (4,989)
Dividends paid to gain deferral plan - - 50 - - - 50
---- ------- ------- ----- --- ------- -------
Balance at June 30, 2001 $254 198,144 260,712 1,933 511 (66,755) 394,859
==== ======= ======= ===== === ======= =======
See accompanying notes to unaudited consolidated financial statements.
5
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
--------------------
2001 2000
--------- --------
Operating activities:
Net income $ 27,958 26,780
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 2,432 2,140
Provision for loan losses - 600
FHLB of Chicago stock dividend (3,193) (1,347)
Deferred income tax expense 677 526
Amortization of intangible assets 2,281 2,144
Amortization of premiums, discounts, loan fees and servicing rights 3,113 335
Net gain on sale of loans receivable and real estate held for
development or sale (7,267) (4,680)
Gain on sale of investment securities (560) (133)
Decrease (increase) in accrued interest receivable 29 (2,508)
Net increase in other assets and liabilities (8,484) (25,811)
Loans originated for sale (545,874) (132,856)
Sale of loans originated and purchased for sale 499,196 109,162
--------- --------
Net cash used in operating activities (29,692) (25,648)
Investing activities:
Loans receivable originated for investment (657,990) (548,258)
Principal repayments on loans receivable 818,432 317,126
Principal repayments on mortgage-backed securities 12,659 12,308
Proceeds from maturities of investment securities available for sale 17,165 36,565
Proceeds from sale of:
Investment securities available for sale 3,009 717
Real estate held for development or sale 17,291 25,109
Mortgage-backed securities available for sale - 9,300
Purchases of:
Loans receivable held for investment - (54,019)
Investment securities available for sale (115,584) (15,968)
Investment securities held to maturity - (59)
Mortgage-backed securities available for sale (11,278) (4,085)
Stock in FHLB of Chicago (30,000) (4,403)
Real estate held for development or sale (2,633) (10,887)
Premises and equipment (3,672) (2,674)
Cash received from acquisition of deposits, net - 80,903
--------- --------
Net cash provided by (used in) investing activities $ 47,399 (158,325)
--------- --------
(continued)
6
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------
2001 2000
--------- --------
Financing activities:
Proceeds from FHLB of Chicago advances $ 80,000 $225,000
Proceeds from unsecured line of credit 6,000 15,000
Repayment of FHLB of Chicago advances (210,000) (90,000)
Repayment of unsecured line of credit (4,000) (5,000)
Net decrease in other borrowings - (288)
Proceeds from exercise of stock options 403 70
Purchase of treasury stock (16,924) (17,338)
Cash dividends (4,546) (4,238)
Net increase in deposits 151,188 87,894
Increase in advances by borrowers for taxes and insurance 638 3,018
--------- --------
Net cash provided by financing activities 2,759 214,118
--------- --------
Increase in cash and cash equivalents 20,466 30,145
Cash and cash equivalents at beginning of period 270,520 158,040
--------- --------
Cash and cash equivalents at end of period $ 290,986 $188,185
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds $ 113,535 $100,731
Income taxes 15,200 12,011
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate 1,569 1,221
Loans receivable swapped into mortgage-backed securities 55,928 2,998
Investments securities held-to-maturity transferred to available-for-sale 12,633 -
Mortgage-backed securities held-to-maturity transferred to
available-for-sale 80,301 -
Treasury stock received for option exercises (1,339 and 39,691 shares) 36 790
========= ========
See accompanying notes to unaudited consolidated financial statements.
7
MAF BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Three and Six Months Ended June 30, 2001 and 2000
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) necessary for a fair presentation have been
included. The results of operations for the three and six months ended June 30,
2001 are not necessarily indicative of results that may be expected for the year
ending December 31, 2001.
The consolidated financial statements include the accounts of MAF Bancorp,
Inc. ("Company"), and its wholly-owned subsidiaries, Mid America Bank, fsb and
subsidiaries ("Bank") and MAF Developments, Inc., as of and for the three and
six month periods ended June 30, 2001 and 2000 and as of December 31, 2000. All
material intercompany balances and transactions have been eliminated in
consolidation.
(2) Earnings Per Share
Earnings per share is determined by dividing net income for the period by the
weighted average number of shares outstanding. Stock options are regarded as
potential common stock and are considered in the diluted earnings per share
calculations to the extent that they have a dilutive effect. Stock options are
the only adjustment made to average shares outstanding in computing diluted
earnings per share. Weighted average shares used in calculating earnings per
share are summarized below for the periods indicated:
Three Months Ended June 30,
-------------------------------------------------------------------------------
2001 2000
------------------------------------- -------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
(Dollars in thousands, except per share data)
Basic earnings per share:
Income available to common shareholders $ 13,880 22,585,594 $ .61 $ 13,671 23,245,139 $ .59
=========== ========= =========== =========
Effect of dilutive securities:
Stock options 501,414 273,354
------------- -------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 13,880 23,087,008 $ .60 $ 13,671 23,518,493 $ .58
=========== ============= ========= =========== ============= =========
8
(2) Earning Per Share (continued)
Six Months Ended June 30,
-------------------------------------------------------------------------------
2001 2000
------------------------------------- -------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
(Dollars in thousands, except per share data)
Basic earnings per share:
Income available to common shareholders $ 27,958 22,802,133 $ 1.23 $ 26,780 23,512,690 $ 1.14
=========== ========= =========== =========
Effect of dilutive securities:
Stock options 487,904 223,554
------------- -------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 27,958 23,290,037 $ 1.20 $ 26,780 23,736,244 $ 1.13
=========== ============= ========= =========== ============= =========
(3) Commitments and Contingencies
At June 30, 2001, the Bank had outstanding commitments to originate and
purchase loans of $527.5 million, of which $368.6 million were fixed-rate loans,
with rates ranging from 5.875% to 8.50%, and $158.9 million were adjustable-rate
loans. At June 30, 2001, commitments to sell loans were $119.6 million.
At June 30, 2001, the Bank had outstanding standby letters of credit totaling
$14.7 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
$4.3 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 2000 amounts have been made to conform with
current period presentations.
9
(6) Segment Information
The Company utilizes the "management approach" for segment reporting. This
approach is based on the way that the chief decision maker for the Company
organizes segments for making operating decisions and assessing performance.
The Company operates two separate lines of business. The Bank operates
primarily as a retail bank, participating in residential mortgage portfolio
lending, deposit gathering and offering other financial services mainly to
individuals. Land development consists primarily of developing raw land for
residential use and sale to builders. Selected segment information is included
in the tables below:
At or For the Three Months Ended June 30, 2001
-------------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 87,914 - (7) 87,907
Interest expense 56,010 53 (7) 56,056
---------- ----- ------------ ---------
Net interest income 31,904 (53) - 31,851
Non-interest income 9,180 1,321 - 10,501
Non-interest expense 20,008 239 - 20,247
---------- ----- ------------ ---------
Income before income taxes 21,076 1,029 - 22,105
Income tax expense 7,817 408 - 8,225
---------- ----- ------------ ---------
Net income $ 13,259 621 - 13,880
========== ===== ============ =========
Average assets $5,206,128 7,972 - 5,214,100
========== ===== ============ =========
At or For the Three Months Ended June 30, 2000
-------------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 84,691 - (60) 84,631
Interest expense 52,570 60 (60) 52,570
---------- ------ ------------ ---------
Net interest income 32,121 (60) - 32,061
Provision for loan losses 300 - - 300
---------- ------ ------------ ---------
Net interest income after provision 31,821 (60) - 31,761
Non-interest income 5,117 2,701 - 7,818
Non-interest expense 17,836 161 - 17,997
---------- ------ ------------ ---------
Income before income taxes 19,102 2,480 - 21,582
Income tax expense 6,927 984 - 7,911
---------- ------ ------------ ---------
Net income $ 12,175 1,496 - 13,671
========== ====== ============ =========
Average assets $4,889,249 13,760 - 4,903,009
========== ====== ============ =========
10
(6) Segment Information (continued)
At or For the Six Months Ended June 30, 2001
-------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 177,073 - (19) 177,054
Interest expense 112,614 110 (19) 112,705
---------- ----------- ------------ ------------
Net interest income 64,459 (110) - 64,349
Non-interest income 15,690 4,670 - 20,360
Non-interest expense 39,610 585 - 40,195
---------- ----------- ------------ ------------
Income before income taxes 40,539 3,975 - 44,514
Income tax expense 14,979 1,577 - 16,556
---------- ----------- ------------ ------------
Net income $ 25,560 2,398 - 27,958
========== =========== ============ ============
Average assets $5,161,726 9,888 - 5,171,614
========== =========== ============ ============
At or For the Six Months Ended June 30, 2000
-------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 164,876 - (154) 164,722
Interest expense 102,118 154 (154) 102,118
---------- ------------- ------------ ------------
Net interest income 62,758 (154) - 62,604
Provision for loan losses 600 - - 600
---------- ------------- ------------ ------------
Net interest income after provision 62,158 (154) - 62,004
Non-interest income 10,401 5,176 - 15,577
Non-interest expense 35,231 452 - 35,683
---------- ------------- ------------ ------------
Income before income taxes 37,328 4,570 - 41,898
Income tax expense 13,305 1,813 - 15,118
---------- ------------- ------------ ------------
Net income $ 24,023 2,757 - 26,780
========== ============= ============ ============
Average assets $4,801,078 15,966 - 4,817,044
========== ============= ============ ============
(7) New Accounting Pronouncements
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
140 supercedes and replaces FASB SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Accordingly,
SFAS No. 140 is now the authoritative accounting literature for transfers and
servicing of financial assets and extinguishments of liabilities. SFAS No. 140
also includes several additional disclosure requirements in the area of
securitized financial assets and collateral arrangements. The provisions of SFAS
No. 140 related to transfers of financial assets are to be applied to all
transfers of financial assets occurring after March 31, 2001. The collateral
recognition and disclosure provisions in SFAS No. 140 are effective for fiscal
years ending after December 15, 2000. The adoption of SFAS No. 140 did not have
a material impact on the Company's results of operation.
11
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" (SFAS No.
141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142).
SFAS No. 141 requires that all business combinations initiated after June 30,
2001 be accounted for under the purchase method and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. SFAS No. 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 provides that intangible assets with finite useful
lives be amortized and that goodwill and intangible assets with indefinite lives
will not be amortized, but will rather be tested at least annually for
impairment. SFAS No. 142 is effective January 1, 2002 for calendar year
companies, however, any acquired goodwill or intangible assets recorded in
transactions closed subsequent to June 30, 2001 will be subject immediately to
the nonamortization and amortization provisions of SFAS No. 142. As required
under SFAS No. 142, the Company will discontinue the amortization of goodwill
related to purchase acquisitions consummated prior to June 30, 2001 effective
January 1, 2002. Management expects the benefit related to the elimination of
$3.2 million of current annual goodwill amortization to be approximately $.14
per diluted share. The Company will also complete an initial goodwill
impairment assessment to determine if a transition impairment charge will be
recognized under SFAS No. 142.
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. The Company undertakes no obligation to update
these forward-looking statements in the future. Factors which could have a
material adverse effect on the operations and could affect the outlook or future
prospects of the Company and its subsidiaries include, but are not limited to
unanticipated changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the Company's or Mid Town Bancorp's loan or
investment portfolios, demand for loan products, secondary mortgage market
conditions, deposit flows, competition, demand for financial services and
residential real estate in the Company's market area, unanticipated slowdowns in
real estate lot sales or problems in closing pending real estate contracts,
delays in real estate development projects, higher than anticipated costs or
lower than anticipated revenues associated with the Mid Town Bancorp acquisition
or the possible short-term dilutive effect of other potential acquisitions, if
any, and changes in accounting principles, policies and guidelines. These risks
and uncertainties should be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements.
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
12
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
loans. 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 Co., LLC IV, a real estate investment trust.
On July 5, 2001, the Company agreed to acquire privately-held Mid Town
Bancorp, Inc., ("Mid Town") based in Chicago, in a 80% cash, 20% stock
transaction valued at $69 million. Mid Town is the parent holding company for
Mid Town Bank & Trust Company of Chicago, which operates four branches in
Chicago, Illinois. As of March 31, 2001, Mid Town had $322 million in assets,
$283 million in deposits and $31.5 million in stockholders' equity. The
transaction will be accounted for as a purchase under the new business
combinations standards discussed in Note 7, "New Accounting Pronouncements," is
subject to regulatory approval and the approval of Mid Town's shareholders, and
is expected to close prior to the end of 2001.
The banking industry has and continues to experience consolidation both
nationally and in the local Chicago area. As it has in recent years, the Company
expects to continue to search for and evaluate potential acquisition
opportunities that will enhance franchise value and may periodically be
presented with opportunities to acquire other institutions, branches or deposits
in the markets it serves, or which allow the Company to expand outside its
current primary market areas of DuPage County and the City of Chicago.
Management intends to review acquisition opportunities across a variety of
parameters, including the potential impact on its financial condition as well as
its financial performance in the future. It is anticipated that future
acquisitions, if any, will likely be valued at a premium to book value, and
generally at a premium to current market value. As such, management anticipates
that future acquisitions made by the Company could involve some short-term book
value per share dilution and earnings per share dilution depending on the
Company's success in integrating the operations of businesses acquired and the
level of cost savings and revenue enhancements that may be achieved.
Regulation and Supervision
As a federally chartered savings bank, the Bank's deposits are insured up to
the applicable limits by the Federal Deposit Insurance Corporation ("FDIC"). The
Bank is a member of the Federal Home Loan Bank ("FHLB") of Chicago, which is one
of the twelve regional banks for federally insured savings institutions
comprising the FHLB system. The Bank is regulated by the Office of Thrift
Supervision ("OTS") and the FDIC. The Bank is further regulated by the Board of
Governors of the Federal Reserve System as to reserves required to be maintained
against deposits and certain other matters. Such regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities. Any change in such regulation, whether by the OTS, the FDIC or
Congress could have a material impact on the Company and its operations.
13
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.
14
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 June 30, 2001, the Bank was in compliance with all of its capital
requirements as follows:
June 30, 2001 December 31, 2000
----------------------- -----------------------
Percent of Percent of
Amount Assets Amount Assets
---------- ----------- ---------- -----------
(Dollars in thousands)
Stockholder's equity of the Bank $ 403,410 7.74% $ 394,474 7.63%
========== =========== ========== ===========
Tangible capital $ 332,142 6.47% $ 321,931 6.32%
Tangible capital requirement 77,057 1.50 76,408 1.50
---------- ----------- ---------- -----------
Excess $ 255,085 4.97% $ 245,523 4.82%
========== =========== ========== ===========
Core capital $ 332,142 6.47% $ 321,931 6.32%
Core capital requirement 154,114 3.00 152,816 3.00
---------- ----------- ---------- -----------
Excess $ 178,028 3.47% $ 169,115 3.32%
========== =========== ========== ===========
Core and supplementary capital $ 344,070 11.95% $ 336,801 11.98%
Risk-based capital requirement 230,307 8.00 224,878 8.00
---------- ----------- ---------- -----------
Excess $ 113,763 3.95% $ 111,923 3.98%
========== =========== ========== ===========
Total Bank assets $5,209,542 $5,168,163
Adjusted total Bank assets 5,137,147 5,093,883
Total risk-weighted assets 2,951,235 2,885,260
Adjusted total risk-weighted assets 2,878,840 2,810,981
Investment in Bank's real estate subsidiaries 2,476 2,445
========== ==========
A reconciliation of consolidated stockholder's equity of the Bank for
financial reporting purposes to capital available to the Bank to meet regulatory
capital requirements is as follows:
June 30, December 31,
2001 2000
---------- ------------
(In thousands)
Stockholder's equity of the Bank $403,410 394,474
Goodwill (60,340) (61,962)
Core deposit intangibles (6,243) (6,902)
Non-permissible subsidiary deduction (2,476) (2,445)
Non-includable purchased mortgage servicing rights (835) (511)
Regulatory capital adjustment for available for sale securities (1,374) (723)
-------- -------
Tangible and core capital 332,142 321,931
Recourse on loan sales (6,292) (3,388)
General loan loss reserves 18,220 18,258
-------- -------
Core and supplementary capital $344,070 336,801
======== =======
15
Changes in Financial Condition
Total assets of the Company were $5.23 billion at June 30, 2001, an increase
of $33.3 million, or .6% from $5.20 billion at December 31, 2000. The increase
is primarily due to an increase in investment securities funded by an increase
in deposits offset by a decrease in loans receivable. Heavy mortgage loan
refinance activity and borrowers preferring long term fixed-rate mortgage loans,
which the Bank generally sells into the secondary market resulted in the
decrease in loans receivable. Currently, management expects fixed-rate loan
origination activity to be strong for the remainder of 2001 resulting in little
additional balance sheet growth from June 30, 2001.
Cash and short-term investments totaled a combined $291.0 million at June 30,
2001, an increase of $20.5 million from the combined balance of $270.5 million
at December 31, 2000.
Investment securities available for sale increased $109.3 million to $283.8
million at June 30, 2001. The Company transferred $12.6 million of investment
securities with a market value of $13.3 million from the held-to-maturity
category to the available for sale category on January 1, 2001 as allowed upon
adoption of SFAS No. 133. The remaining increase is due to $115.6 million in
purchases of primarily agency debt securities, corporate bonds and preferred
stock offset by maturities of $17.2 million of primarily asset-backed and U.S.
Agency securities, and sales of $3.0 million of equity securities. The increased
investment securities purchase activity in 2001 is due to the additional
liquidity available from higher levels of loan prepayments. The Company
recognized a gain of $560,000 on the sale of investment securities available for
sale during the six months ended June 30, 2001.
Mortgage-backed securities available for sale increased $79.2 million to
$103.3 million at June 30, 2001, primarily due to the transfer of $80.3 million
of mortgage-backed securities with a market value of $79.1 million from the
held-to-maturity category to the available for sale category on January 1, 2001
as allowed upon adoption of SFAS No. 133. Purchases of GNMA mortgage-backed
securities and Collaterized Mortgage Obligations ("CMO") totaling $11.3 million,
were offset by normal amortization and prepayments.
Included in mortgage-backed securities classified as available for sale are
$54.2 million of CMO securities at June 30, 2001, the majority of which are
collateralized by FNMA, FHLMC and GNMA mortgage-backed securities, and to a
lesser extent by whole loans.
Loans receivable, including loans held for sale, decreased $114.6 million, or
2.7%, to $4.21 billion at June 30, 2001. The Bank originated $1.2 billion of
loans during the six-month period ended June 30, 2001, compared to $736.2
million during the prior year period. The higher loan origination volume was
primarily due to an increase in mortgage refinance activity due to the decline
in interest rates during 2001. Offsetting originations were amortization and
prepayments totaling $818.4 million, as well as loan sales of $499.8 million.
Loans receivable held for sale increased to $87.0 million as of June 30, 2001,
compared to $41.1 million at December 31, 2000. The large increase in loans held
for sale, as well as loan sale activity during the current six month period, is
due to an increase in long-term fixed-rate loan originations, that the Bank
typically sells into the secondary market.
The allowance for loan losses totaled $18.2 million at June 30, 2001, a
decrease of $37,000 from the balance at December 31, 2000, due to net charge-
offs for the period. The Bank's allowance for loan losses to total loans
outstanding was .44% at June 30, 2001, compared to .42% at December 31, 2000.
Non-performing loans decreased $129,000 to $16.6 million at June 30, 2001,
compared to $16.7 million at December 31, 2000. As a percentage of total loans
receivable, the level of non-performing loans was .40% at June 30, 2001,
compared to .39% at December 31, 2000. The ratio of the allowance for loan
losses to non-performing loans was 109.9% at June 30, 2001 compared to 109.3% at
December 31, 2000, and 117.1% at June 30, 2000.
16
In evaluating the adequacy of the allowance for loan losses and determining,
if any, the related provision for loan losses, management considers: (1)
subjective factors, including local and general economic business factors and
trends, portfolio concentrations and changes in the size and/or general terms of
the loan portfolio, (2) historical loss experience which has ranged from 1 to 14
basis points as a percentage of outstanding loans over the last five years, and
(3) specific allocations based upon probable losses identified during the review
of the portfolio.
Foreclosed real estate decreased $548,000 to $1.3 million at June 30, 2001
primarily due to the sales of single family homes. The balance of foreclosed
real estate is made up of eight single family homes all in the Bank's market
area.
Real estate held for development or sale decreased $5.6 million to $7.1
million at June 30, 2001 primarily due to lot sales in its Tallgrass
subdivision. A summary of the carrying value of real estate held for development
or sale follows:
June 30, December 31,
2001 2000
-------- ------------
(in thousands)
Tallgrass of Naperville $ 2,359 8,041
Shenandoah 4,461 4,387
Woodbridge 306 290
-------- ------------
$ 7,126 12,718
======== ============
The Company had 118 lot sales in Tallgrass of Naperville during the six months
ended June 30, 2001. At June 30, 2001, 255 lots remain in Tallgrass, with none
under contract. The lack of pending sales at June 20, 2001 is due to the current
depletion of inventory, which is expected to increase as the development of the
latest phase of the project reaches completion in the third quarter of 2001. The
balance of the Shenandoah project reflects the Company's purchase, in the second
quarter of 2000, of 182 acres of land in Plainfield, Illinois. The project is
currently expected to yield 365 lots, with development expected to commence in
late 2001. The remaining balance of the Woodbridge project consists of two
parcels of commercial property totaling 3.5 acres. At June 30, 2001, one of the
two remaining parcels is under contract with the Bank, and expected to be used
for future branch expansion, while the other is under contract and expected to
be sold in the fourth quarter of 2001 at a pre-tax profit of approximately
$550,000.
Deposits increased $151.0 million, to $3.13 billion at June 30, 2001. After
consideration of interest of $59.6 million credited to accounts during the six
months ended June 30, 2001, actual cash inflows were $91.6 million. The increase
is primarily due to increases in money market and certificate of deposit
balances.
Borrowed funds, which consist primarily of FHLB of Chicago advances, decreased
$128.0 million to $1.6 billion at June 30, 2001. The decrease is primarily
attributable to repayments of FHLB of Chicago borrowings utilizing net deposit
inflows, as well as excess liquidity from higher levels of loan prepayments and
loan sales during the first six months of 2001. Borrowings at June 30, 2001 also
include $6.0 million drawn on the Company's revolving line of credit compared to
$4.0 million at December 31, 2000. These funds have been used primarily to fund
a portion of the repurchases under the Company's stock buyback program.
Stockholders' equity increased $7.1 million, or 1.84% at June 30, 2001,
primarily due to net income of $28.0 million, offset by stock repurchases of
$16.9 million and cash dividends declared of $5.0 million.
17
Asset Quality
Non-Performing Assets. A loan (whether considered impaired or not) is
classified as non-accrual when collectibility is in doubt. Under the Bank's
current policies, when a loan is 90 days or more past due, in the process of
foreclosure, or in bankruptcy, the full amount of previously accrued but unpaid
interest is deducted from interest income. Income is subsequently recorded to
the extent cash payments are received, or at the time when the loan is brought
current in accordance with its original terms. This policy is applied
consistently for all types of loans in the loan portfolio.
For the quarter ended June 30, 2001, interest on non-accrual loans that would
have been recorded as income, had they been performing according to their
original terms, amounted to $306,000, compared to $294,000 for the three months
ended June 30, 2000. For the six months ended June 30, 2001, interest on non-
accrual loans that would have been recorded as income, had they been performing
according to their original terms, amounted to $572,000 compared to $589,000 for
the six months ended June 30, 2000.
Delinquent Loans. Delinquencies in the Bank's portfolio at the dates indicated
were as follows:
61-90 Days 91 Days or More
---------------------------- ----------------------------
Principal Principal
Number Balance of Percent Number Balance of Percent
Of Delinquent Of Of Delinquent Of
Loans Loans Total Loans Loans Total
------ ---------- -------- ------ ---------- --------
(Dollars in thousands)
June 30, 2001 37 $ 3,465 .08% 125 $16,397 .37%
== ======== === === ======= ===
March 31, 2001 37 $ 4,745 .10% 123 $15,749 .35%
== ======== === === ======= ===
December 31, 2000 50 $ 4,084 .10% 115 $14,764 .34%
== ======== === === ======= ===
September 30, 2000 36 $ 4,004 .09% 119 $14,693 .35%
== ======== === === ======= ===
June 30, 2000 42 $ 3,665 .09% 111 $14,047 .34%
== ======== === === ======= ===
18
Loan Portfolio Composition. The following table sets forth the composition of the Bank's loan portfolio in dollar amounts at the
dates indicated:
At
----------------------------------------------------------------------------------
6/30/01 3/31/01 12/31/00 9/30/00 6/30/00 3/31/00 12/31/99
---------- --------- --------- --------- --------- --------- ---------
(In thousands)
Real estate loans:
One- to four-family:
Held for investment $3,635,457 3,714,537 3,807,980 3,783,956 3,723,765 3,581,604 3,479,425
Held for sale 87,036 162,355 41,074 52,156 35,973 37,899 12,601
Multi-family 166,777 171,883 173,072 168,128 165,309 162,666 164,878
Commercial 49,137 46,483 41,223 40,730 41,919 40,142 38,817
Construction 28,443 31,985 29,566 26,866 30,621 27,529 27,707
Land 37,962 40,752 40,497 35,114 34,272 29,143 28,602
---------- --------- --------- --------- --------- --------- ---------
Total real estate loans 4,004,812 4,167,995 4,133,412 4,106,950 4,031,859 3,878,983 3,752,030
Other loans:
Consumer loans:
Equity lines of credit 168,875 154,009 146,020 132,894 120,835 106,503 99,099
Home equity loans 57,977 60,551 64,465 63,307 59,736 51,746 48,397
Other 4,712 4,735 4,783 4,720 4,746 4,751 4,757
---------- --------- --------- --------- --------- --------- ---------
Total consumer loans 231,564 219,295 215,268 200,921 185,317 163,000 152,253
Commercial business loans 4,362 3,162 3,528 3,485 3,387 3,399 3,132
---------- --------- --------- --------- --------- --------- ---------
Total other loans 235,926 222,457 218,796 204,406 188,704 166,399 155,385
---------- --------- --------- --------- --------- --------- ---------
Total loans receivable 4,240,738 4,390,452 4,352,208 4,311,356 4,220,563 4,045,382 3,907,415
Less:
Loans in process 14,430 12,949 12,912 11,297 12,837 11,467 11,893
Unearned discounts, premiums
and deferred loan expenses, net (5,417) (6,416) (7,076) (6,960) (6,641) (6,408) (6,323)
Allowance for loan losses 18,221 18,279 18,258 18,167 17,870 17,567 17,276
---------- --------- --------- --------- --------- --------- ---------
Total loans receivable, net 4,213,504 4,365,640 4,328,114 4,288,852 4,196,497 4,022,756 3,884,569
Loans receivable held for sale (87,036) (162,355) (41,074) (52,156) (35,973) (37,899) (12,601)
---------- --------- --------- --------- --------- --------- ---------
Loans receivable, net $4,126,468 4,203,285 4,287,040 4,236,696 4,160,524 3,984,857 3,871,968
========== ========= ========= ========= ========= ========= =========
19
Non-performing assets. The following table sets forth information regarding non-accrual loans, loans which are 91 days or more
delinquent but on which the Bank is accruing interest, foreclosed real estate and non-accrual investment securities of the Bank.
At
-----------------------------------------------------------------
6/30/01 3/31/01 12/31/00 9/30/00 6/30/00 3/31/00 12/31/99
-------- -------- -------- ------- ------- ------- --------
(In thousands)
Non-performing loans:
One- to four-family and multi-family loans:
Non-accrual loans $ 15,431 16,627 14,023 13,398 13,211 13,624 12,548
Accruing loans 91 days or more overdue - - 1,732 1,557 608 529 771
-------- -------- -------- ------- ------- ------- --------
Total 15,431 16,627 15,755 14,955 13,819 14,153 13,319
-------- -------- -------- ------- ------- ------- --------
Commercial real estate, construction and land loans:
Non-accrual loans 343 321 269 405 451 632 607
Accruing loans 91 days or more overdue - - - - - - -
-------- -------- -------- ------- ------- ------- --------
Total 343 321 269 405 451 632 607
-------- -------- -------- ------- ------- ------- --------
Other loans:
Non-accrual loans 806 921 683 608 988 1,445 1,683
Accruing loans 91 days or more overdue - - 2 6 4 24 41
-------- -------- -------- ------- ------- ------- --------
Total 806 921 685 614 992 1,469 1,724
-------- -------- -------- ------- ------- ------- --------
Total non-performing loans:
Non-accrual loans 16,580 17,869 14,975 14,411 14,650 15,701 14,838
Accruing loans 91 days or more overdue - - 1,734 1,563 612 553 812
-------- -------- -------- ------- ------- ------- --------
Total $ 16,580 17,869 16,709 15,974 15,262 16,254 15,650
======== ======== ======== ======= ======= ======= ========
Non-accrual loans to total loans .40 .42 .35 .34 .35 .40 .38
Accruing loans 91 days or more overdue to total loans - - .04 .04 .01 .01 .02
-------- -------- -------- ------- ------- ------- --------
Non-performing loans to total loans .40 .42 .39 .38 .36 .41 .40
======== ======== ======== ======= ======= ======= ========
Foreclosed real estate (net of related reserves):
One- to four-family $ 1,260 1,345 1,762 1,221 410 1,454 1,220
Commercial, construction and land - - 46 100 571 6,767 6,195
-------- -------- -------- ------- ------- ------- --------
Total $ 1,260 1,345 1,808 1,321 981 8,221 7,415
-------- -------- -------- ------- ------- ------- --------
Non-performing loans and foreclosed real estate
to total loans and foreclosed real estate .43 .45 .43 .41 .39 .61 .59
======== ======== ======== ======= ======= ======= ========
Total non-performing assets $ 17,840 19,214 18,517 17,295 16,243 24,475 23,065
======== ======== ======== ======= ======= ======= ========
Total non-performing assets to total assets .34 .37 .36 .34 .33 .51 .50
======== ======== ======== ======= ======= ======= ========
20
Liquidity and Capital Resources
The Company's principal sources of funds are cash dividends paid by the Bank
and MAF Developments, and liquidity generated by borrowings or the issuance of
common stock. The Company's principal uses of funds are interest payments on
the Company's term loan and revolving line of credit, cash dividends to
shareholders, loans to and investments in MAF Developments, as well as
investment purchases, stock repurchases and debt repayment. The Company also
maintains a one-year, $35.0 million unsecured revolving line of credit from a
commercial bank, due and renewable annually on May 31. At June 30, 2001, the
Company had $6.0 million outstanding under this line of credit. For the six-
month period ended June 30, 2001, the Company received $17.5 million in
dividends from the Bank and declared common stock dividends of $.22 per share,
or $5.0 million. During this same period, the Company repurchased 607,100
shares of its common stock at an average price of $26.86 per share, for a total
of $16.3 million.
The Bank's principal sources of funds are deposits, advances from the FHLB of
Chicago, reverse repurchase agreements, principal repayments on loans and
mortgage-backed securities, proceeds from the sale of loans and funds provided
by operations. While scheduled payments on loan and mortgage-backed securities
and maturing investment securities are relatively predictable sources of funds,
deposit flows and loan and mortgage-backed securities prepayments are greatly
influenced by economic conditions, the general level of interest rates and
competition. The Bank utilizes particular sources of funds based on comparative
costs and availability. The Bank generally manages the pricing of its deposits
to maintain a steady deposit balance, but has from time to time decided not to
pay rates on deposits as high as its competition, and when necessary, to
supplement deposits with longer term and/or less expensive alternative sources
of funds. During the current six-month period the Bank borrowed $25.0 million
of fixed and $55.0 million of variable rate FHLB of Chicago advances and repaid
$210.0 million.
During the six months ended June 30, 2001, the Bank originated and purchased
loans totaling $1.2 billion compared with $736.2 million during the same period
a year ago. Loan sales and swaps for the six months ended June 30, 2001, were
$499.8 million, compared to $109.5 million for the prior year period. The Bank
has outstanding commitments to originate and purchase loans of $527.5 million
and commitments to sell or swap loans of $119.6 million at June 30, 2001. At
June 30, 2001, the Company believes that it has sufficient cash to fund its
outstanding commitments or will be able to obtain the necessary funds from
outside sources to meet its cash requirements.
Asset/Liability Management
As part of its normal operations, the Bank is subject to interest-rate risk on
the interest-sensitive assets it invests in and the interest-sensitive
liabilities it borrows. The Bank's exposure to interest rate risk is reviewed at
least quarterly by the Bank's asset/liability management committee ("ALCO") and
the Board of Directors of the Company. The ALCO, which includes members of
senior management, monitors the rate and sensitivity repricing characteristics
of the individual asset and liability portfolios the Bank maintains and
determines risk management strategies.
The Bank utilizes an interest rate sensitivity gap analysis to monitor the
relationship of maturing or repricing interest-earning assets and interest-
bearing liabilities, while maintaining an acceptable interest rate spread.
Interest rate sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific period of time
and the amount of interest-bearing liabilities maturing or repricing within that
same period of time, and is usually analyzed at a period of one year.
Generally, a negative gap, where more interest-bearing liabilities are repricing
or maturing than interest-earning assets, 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
21
four-family adjustable-rate loans and other loans which have shorter terms to
maturity or reprice more frequently than fixed-rate mortgage loans, yet provide
a positive margin over the Bank's cost of funds.
The Bank, except as noted below, has not used derivative financial instruments
such as interest rate swaps, caps, floors, options or similar financial
instruments to manage its interest rate risk. However, in conjunction with its
origination and sale strategy, management does hedge the Bank's exposure to
interest rate risk primarily by committing to sell fixed-rate mortgage loans for
future delivery. Under these commitments, the Bank agrees to sell fixed-rate
loans at a specified price and at a specified future date. The sale of fixed-
rate mortgage loans for future delivery has enabled the Bank to continue to
originate new mortgage loans, and to generate gains on sale of these loans as
well as loan servicing fee income, while maintaining its gap ratio within the
parameters discussed above. Most of these forward sale commitments are
conducted with FNMA and FHLMC with respect to loans that conform to the
requirements of these government agencies. The forward commitment of mortgage
loans presents a risk to the Bank if the Bank is not able to deliver the
mortgage loans by the commitment expiration date. If this should occur, the Bank
would be required to pay a fee to the buyer. The Bank attempts to mitigate this
risk by charging potential retail borrowers a 1% fee to fix the interest rate,
or by requiring the interest rate to float at market rates until shortly before
closing. In addition, the Bank uses U.S. Treasury bond futures contracts to
hedge some of the mortgage pipeline exposure. These futures contracts are used
to hedge mortgage loan production in those circumstances where loans are not
sold forward as described above.
The table on the next page sets forth the scheduled repricing or maturity of
the Bank's assets and liabilities at June 30, 2001. The table uses management's
assumptions regarding prepayment percentages on loans and mortgage-backed
securities, based on its recent experience in these portfolios. The Bank uses
the withdrawal assumptions used by the FHLB of Chicago with respect to NOW,
checking and passbook accounts, which are 17.0%, 17.0%, 17.0%, 16.0%, and 33.0%,
respectively. Investment securities and FHLB advances that contain call
provisions at the option of the issuer or lender are generally shown in the
category relating to their respective final maturities. However, due to changes
in market interest rates, $39.7 million of investment securities with final
maturities ranging from 80 to 98 months, but callable in 6 months or less are
categorized in the 6 months or less category, in anticipation of their calls.
Additionally, $160.0 million of FHLB advances with final remaining maturities
ranging from 53 to 88 months, but callable between 6 months and 1 year are
categorized in the more than 6 months to 1 year category, in anticipation of
their calls by the lender.
The effect of these assumptions is to quantify the dollar amount of items that
are interest-sensitive and may be repriced within each of the periods specified.
Certain shortcomings are inherent in using gap analysis to quantify exposure to
interest rate risk. For example, although certain assets and liabilities may
have similar maturities or repricings in the table, they may react differently
to actual changes in market interest rates. The interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. This is especially true in circumstances where management has a certain
amount of control over interest rates, such as the pricing of deposits.
Additionally, certain assets such as hybrid adjustable-rate mortgage loans have
features that restrict changes in interest rates on a short-term basis and over
the life of the asset. Finally, as interest rates change, loan prepayment rates
may materially differ from those rates assumed by management for presentation
purposes in the table.
22
Although management believes that its asset/liability management strategies
mitigate the potential effects of changes in interest rates on the Bank's
operations, material and prolonged increases in interest rates may adversely
affect the Bank's operations because the Bank's interest-bearing liabilities
which mature or reprice within one year are currently greater than the Bank's
interest-earning assets which mature or reprice within the same period.
At June 30, 2001
------------------------------------------------------------------------------
More Than More Than More Than
6 Months 6 Months 1 Year 3 Years to More Than
or Less to 1 Year to 3 Years 5 Years 5 Years Total
----------- --------- ---------- ---------- --------- ---------
(In thousands)
Interest-earning assets:
Loans receivable $ 867,340 567,241 1,058,188 783,479 955,477 4,231,725
Mortgage-backed securities 68,281 7,643 8,457 5,795 13,078 103,254
Interest-bearing deposits 52,128 - - - - 52,128
Federal funds sold 144,367 - - - - 144,367
Investment securities (1) 262,381 9,431 68,191 3,267 58,462 401,732
---------- -------- --------- ------- --------- ---------
Total interest-earning assets 1,394,497 584,315 1,134,836 792,541 1,027,017 4,933,206
Impact of hedging activity (2) 87,036 - - - (87,036) -
---------- -------- --------- ------- --------- ---------
Total net interest-earning
assets adjusted for impact
of hedging activities 1,481,533 584,315 1,134,836 792,541 939,981 4,933,206
---------- -------- --------- ------- --------- ---------
Interest-bearing liabilities:
NOW and checking accounts 21,063 19,273 70,538 43,817 93,110 247,801
Money market accounts 283,097 - - - - 283,097
Passbook accounts 65,335 59,781 218,799 135,913 288,815 768,643
Certificate accounts 855,819 376,740 391,019 34,218 6,225 1,664,021
FHLB advances 330,000 305,000 390,500 285,000 255,000 1,565,500
Other borrowings 35,400 - - - - 35,400
---------- -------- --------- ------- --------- ---------
Total interest-bearing liabilities 1,590,714 760,794 1,070,856 498,948 643,150 4,564,462
Interest sensitivity gap $ (109,181) (176,479) 63,980 293,593 296,831 368,744
========== ======== ========= ======= ========= =========
Cumulative gap $ (109,181) (285,660) (221,680) 71,913 368,744
========== ======== ========= ======= =========
Cumulative gap assets as a
percentage of total assets (2.09)% (5.46) (4.24) 1.38 7.05
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 93.14% 87.85 93.52 101.83 108.08
(1) Includes $118.0 million of stock in FHLB of Chicago in 6 months or less.
(2) Represents forward commitments to sell long-term fixed-rate mortgage loans.
23
Average Balances/Rates
The following table sets forth certain information relating to the Bank's
consolidated statements of financial condition and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Average
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods shown. Average
balances are derived from average daily balances. The yield/cost at June 30,
2001 includes fees which are considered adjustments to yield.
Three Months Ended June 30,
-----------------------------------------------------------------
2001 2000
------------------------------- --------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------ ------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $4,344,926 78,187 7.20% $4,118,049 74,856 7.27%
Mortgage-backed securities 109,028 1,650 6.05 125,216 2,131 6.81
Interest-bearing deposits/(1)/ 38,678 561 5.82 29,184 504 6.93
Federal funds sold/(1)/ 134,965 1,876 5.58 118,404 2,189 7.42
Investment securities/(2)/ 362,907 5,717 6.32 277,784 4,988 7.20
---------- ------- ---------- -------
Total interest-earning assets 4,990,504 87,991 7.06 4,668,637 84,668 7.26
Non-interest earning assets 223,596 234,372
---------- ----------
Total assets $5,214,100 $4,903,009
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,913,615 31,637 4.36 2,700,355 27,902 4.14
Borrowed funds 1,639,164 24,419 5.98 1,625,305 24,668 6.09
---------- ------- ---------- -------
Total interest-bearing liabilities 4,552,779 56,056 4.94 4,325,660 52,570 4.87
------- ------ ------- ------
Non-interest bearing deposits 154,417 131,187
Other liabilities 115,074 91,668
---------- ----------
Total liabilities 4,822,270 4,548,515
Stockholders' equity 391,830 354,494
---------- ----------
Liabilities and stockholders' equity $5,214,100 $4,903,009
========== ==========
Net interest income/interest rate spread $31,935 2.12% $32,098 2.39%
======= ====== ======= ======
Net earning assets/net yield on average
interest-earning assets $ 437,725 2.56% $ 342,977 2.75%
========== ====== ========== ======
Ratio of interest-earning assets to
interest-bearing liabilities 109.61% 107.93%
====== ======
Six Months Ended June 30,
-----------------------------------------------------------------
2001 2000
------------------------------- --------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- -------- ------ ---------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $4,356,519 158,270 7.27% $4,034,245 145,561 7.22%
Mortgage-backed securities 104,963 3,310 6.31 128,345 4,305 6.71
Interest-bearing deposits/(1)/ 34,824 1,071 6.20 31,659 1,078 6.83
Federal funds sold/(1)/ 122,206 3,840 6.34 113,031 4,016 7.13
Investment securities/(2)/ 326,317 10,684 6.60 280,889 9,836 7.02
---------- -------- ---------- --------
Total interest-earning assets 4,944,829 177,175 7.17 4,588,169 164,796 7.19
Non-interest earning assets 226,785 228,875
---------- ----------
Total assets $5,171,614 $4,817,044
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,876,704 63,147 4.44 2,641,760 53,691 4.08
Borrowed funds 1,649,315 49,558 6.06 1,608,019 48,427 6.04
---------- -------- ---------- --------
Total interest-bearing liabilities 4,526,019 112,705 5.03 4,249,779 102,118 4.82
-------- ---- -------- ------
Non-interest bearing deposits 144,337 125,350
Other liabilities 110,254 88,509
--------- ----------
Total liabilities 4,780,610 4,463,638
Stockholders' equity 391,004 353,406
---------- ----------
Liabilities and stockholders' equity $5,171,614 $4,817,044
========== ==========
Net interest income/interest rate spread $ 64,470 2.14% $ 62,678 2.37%
======== ====== ======== ======
Net earning assets/net yield on average
interest-earning assets $ 418,810 2.61% $ 338,390 2.73%
========== ====== ========== ======
Ratio of interest-earning assets to
interest-bearing liabilities 109.25% 107.96%
====== ======
At June 30, 2001
-------------------
Yield/
Balance Cost
------- ------
Assets:
Interest-earning assets:
Loans receivable $4,231,725 7.26%
Mortgage-backed securities 103,254 6.34
Interest-bearing deposits/(1)/ 52,128 3.92
Federal funds sold/(1)/ 144,367 3.93
Investment securities/(2)/ 401,732 5.96
----------
Total interest-earning assets 4,933,206 7.00
Non-interest earning assets 295,724
----------
Total assets $5,228,930
==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,963,562 4.22%
Borrowed funds 1,600,900 5.97
----------
Total interest-bearing liabilities 4,564,462 4.83
------
Non-interest bearing deposits 161,689
Other liabilities 107,920
----------
Total liabilities 4,834,071
Stockholders' equity 394,859
----------
Liabilities and stockholders' equity $5,228,930
==========
Net interest income/interest rate spread 2.17%
======
Net earning assets/net yield on average
interest-earning assets $ 368,744 N/A
========== ======
Ratio of interest-earning assets to
interest-bearing liabilities 108.08%
======
- --------------
/(1)/ Includes pro-rata share of interest income received on outstanding drafts
payable.
/(2)/ Income and yields are stated on a taxable equivalent basis.
24
Rate/Volume Analysis of Net Interest Income
The following table describes the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated, on a taxable equivalent basis. Information is provided
in each category with respect to (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate), (ii) changes attributable to
changes in rates (changes in rates multiplied by prior volume), and (iii) the
net change. Changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
Compared to Compared to
June 30, 2000 June 30, 2000
Increase (Decrease) Increase (Decrease)
------------------------ -----------------------
Volume Rate Net Volume Rate Net
------ ------ ----- ------ ------ ------
(In thousands)
Interest-earning assets:
Loans receivable $4,089 (758) 3,331 11,666 1,043 12,709
Mortgage-backed securities (259) (222) (481) (749) (246) (995)
Interest-bearing deposits 147 (90) 57 100 (107) (7)
Federal funds sold 280 (593) (313) 303 (479) (176)
Investment securities 1,397 (668) 729 1,481 (633) 848
------ ------ ----- ------ ------ ------
Total $5,654 (2,331) 3,323 12,801 (422) 12,379
------ ------ ----- ------ ------ ------
Interest-bearing liabilities:
Deposits 2,272 1,463 3,735 4,726 4,730 9,456
Borrowed funds 210 (459) (249) 1,004 127 1,131
------ ------ ----- ------ ------ ------
Total 2,482 1,004 3,486 5,730 4,857 10,587
------ ------ ----- ------ ------ ------
Net change in net interest income $3,172 (3,335) (163) 7,071 (5,279) 1,792
====== ====== ===== ====== ====== ======
Comparison of the Results of Operations for the Three Months Ended June 30, 2001
and 2000
General - Net income for the three months ended June 30, 2001 was $13.9
million, or $.60 per diluted share, compared to net income of $13.7 million, or
$.58 per diluted share for the three months ended June 30, 2000. Although
average interest-earning assets grew $321.9 million, a 19 basis point decrease
in the net interest margin, primarily due to the yield in the Company's loan
portfolio dropping faster than its funding costs, pressured earnings growth.
Net interest income - Net interest income was $31.9 million for the current
quarter, compared to $32.1 million for the quarter ended June 30, 2000, a
decrease of $210,000 or .7%. The Company's average interest-earning assets
increased to $4.99 billion for the three months ended June 30, 2001, compared to
$4.67 billion for the three months ended June 30, 2000, while the Company's net
interest margin decreased to 2.56% for the current three-month period, compared
to 2.75% in the prior year period. The decrease in the net interest margin is a
function of decreased average asset yields, and slightly higher average funding
costs. Heavy refinance activity in the Bank's loan portfolio, as well as the
impact of falling interest rates on adjustable-rate investment securities,
overnight deposits and other short-term loan products, such as home equity
loans, led to the 20 basis point decline in the yield on average interest-
earning assets. Conversely, the average cost of funds increased seven basis
points, as the decline in wholesale borrowing costs from the FHLB of Chicago
were offset by a 22 basis point increase in the cost of deposits. Due to an
expected decrease in the Bank's cost of funds,
25
management currently expects its net interest margin to moderate in the third
quarter and trend upward near the end of 2001 and into 2002.
Interest income on loans receivable increased $3.3 million as a result of a
$226.9 million increase in average loans receivable, offset by a seven basis
point decrease in the average yield on loans receivable. The decrease in yield
is primarily due to heavy prepayments of high interest rate loans and a high
volume of refinancing on floating rate loans. Interest income on mortgage-
backed securities decreased $481,000 to $1.7 million for the current quarter,
due primarily to a $16.2 million decrease in average balances and a 76 basis
point decrease in yield. Average balances declined due to normal amortization
and prepayments. Interest income on investment securities increased $682,000 to
$5.6 million, due to a $85.1 million increase in the average balance of this
portfolio, offset by a 88 basis point decrease in yield. The increase in
investment balance is primarily due to reinvestment of cash flows from loan
prepayments and loan sales during the quarter.
Interest expense on deposit accounts increased $3.7 million to $31.6 million
for the second quarter of 2001, due to a $213.3 million increase in average
deposits compared to the prior year quarter, and a 22 basis point increase in
the average cost of deposits compared to the prior year's three-month period.
The growth in average deposits is attributable to the acquisition of two branch
offices in April 2000, with the remainder of the increase primarily due to an
increase in money market accounts and certificates of deposit balances. The
increase in average cost of deposits is primarily due to the upward repricing of
maturing certificates of deposit during 2000. With the recent reduction in U.S.
Treasury rates, the Bank expects the average cost of deposits to begin
declining.
Interest expense on borrowed funds decreased $249,000 to $24.4 million, as a
result of an 11 basis point decrease in average cost offset by a $13.9 million
increase in the average balance. The decrease in the average rates has been due
to maturing higher rate FHLB of Chicago advances that have been refinanced with
lower coupons or paid off, as well as decreases in the cost of variable rate
borrowings. The increase in the average balance of borrowed funds has been
primarily for funding loan originations during 2000, as actual borrowings have
decreased by $128.0 million during the six months ended June 30, 2001.
Provision for loan losses - The Bank provided no provision for loan losses
during the second quarter of 2001, compared to a $300,000 provision for the 2000
second quarter. Net charge-offs during the current quarter were $58,000
compared to net recoveries of $3,000 for the three months ended June 30, 2000.
The lack of a provision this quarter is due to an assessment of a number of
factors, including the stable composition of the loan portfolio, good historical
loss experience as evidenced by net recoveries for the quarter, and the low
level of non-performing assets which is expected to continue. There were no
changes in estimation method or assumptions that impacted the provision for loan
loss during the quarter. At June 30, 2001 and December 31, 2000, the Bank's
allowance for loan losses was $18.2 million and 18.3 million, respectively which
equaled .44% of total loans receivable at June 30, 2001, compared to .42% at
December 31, 2000. The ratio of the allowance for loan losses to non-performing
loans was 109.9% at June 30, 2001 compared to 109.3% at December 31, 2000 and
117.1% at June 30, 2000.
Non-interest income - Non-interest income increased $2.7 million, or 34.3%,
to $10.5 million for the three months ended June 30, 2001, compared to $7.8
million for the three months ended June 30, 2000. The increase is primarily due
to higher gains on the sale of loans receivable and higher fee income from
deposit account products offset by lower income from real estate operations.
26
Lower interest rates, and a higher level of fixed-rate loan originations, led
to significantly increased profits from loan sales. Gain on sale of loans
increased to $1.9 million for the three months ended June 30, 2001, compared to
$147,000 for the three months ended June 30, 2000. A $(121,000) mark-to-market
adjustment is netted in the gain on sale of loans as a result of the valuation
of loan commitments and forward loan sales as derivative instruments under SFAS
No. 133. Loan sale volume was $373.5 million, including $36.3 million of
current quarter originations that were swapped into mortgage-backed securities
and sold during the three months ended June 30, 2001. For the three months
ended June 30, 2000, loan sale volume was $73.8 million. The increase in loan
sales is due to a higher level of fixed-rate loan originations by the Bank due
to falling interest rates. Because the Company generally sells long term fixed
rate mortgage originations, this change in the loan origination mix results in
higher mortgage banking profits, and will contribute to more moderate balance
sheet growth in 2001.
Income from real estate operations decreased $1.4 million to $1.3 million for
the three months ended June 30, 2001 compared to the prior year quarter. A
summary of income from real estate operations follows:
Three Months Ended June 30,
-------------------------------------
2001 2000
---------------- ----------------
# of Pre-tax # of Pre-tax
Lots Income Lots Income
---- ------- ---- -------
(Dollars in thousands)
Tallgrass of Naperville 33 $1,321 92 $2,305
Reigate Woods -- -- 2 58
Creekside of Remington -- -- 75 105
Woodbridge -- -- -- 233
-- ------ --- ------
33 $1,321 169 $2,701
== ====== === ======
The Company sold 33 lots in Tallgrass of Naperville project during the three
months ended June 30, 2001. The significant increase in profit per lot is
primarily due to higher lot prices on current year sales compared to the prior
year. There are no lots under contract in this 951-lot subdivision at June 30,
2001, with 255 remaining to be sold. The lack of pending sales at June 30, 2001
is due to the current depletion of inventory, which is expected to increase as
the development of the latest phase of the project reaches completion in the
third quarter of 2001, resulting in expected real estate income for the third
quarter to be less than $400,000. Based on the expectation that demand for lots
in Tallgrass remains strong, management currently expects that pre-tax income
from real estate development in 2001 should be in the range of $8.5-$9.5
million. The remaining two parcels in the Woodbridge project is commercially
zoned and are expected to be sold prior to the end of 2001. The 85 lot Reigate
Woods subdivision was sold out in the prior year and the final 75 lots in the
Creekside of Remington subdivision were sold in bulk to a local developer in
June 2000 at a nominal profit.
Deposit account service charges increased $1.0 million, or 32.5%, to $4.1
million for the three months ended June 30, 2001, primarily due to fee
increases, debit card interchange income and continued growth in the number of
checking accounts serviced by the Bank. At June 30, 2001, the Bank had
approximately 122,700 checking accounts, compared to 110,600 at June 30, 2000 an
increase of 10.9%.
Brokerage commissions increased $161,000, or 33.8%, to $637,000 for the three
months ended June 30, 2001 compared to the prior year quarter. The increase in
commission income reflects higher sales volumes and the benefit gained from a
renegotiated contract with the Bank's registered broker-dealer.
27
Loan servicing fee income decreased $536,000 to a net expense of $(63,000) for
the three months ended June 30, 2001, compared to $473,000 for the prior year
quarter. The average balance of loans serviced for others decreased 24.0% to
$938.0 million for the current three-month period, compared to $1.23 billion in
the prior three-month period. The decrease is primarily due to increased
amortization of servicing rights due to heavy prepayments in the loans serviced
for others portfolio, and the sale of $600 million of servicing rights
(approximately half of the Bank's portfolio of loans serviced for others at that
time) in the third quarter of 2000. Amortization of servicing rights was
$770,000 for the three months ended June 30, 2001, compared to $323,000 for the
prior year three-month period.
Other non-interest income increased $567,000, or 38.1% to $2.1 million for the
three months ended June 30, 2001, compared to $1.5 million for the prior year
quarter. The increase is due primarily to increased income from loan
modifications and title agency fees from the heavy refinance activity.
Non-interest expense - Non-interest expense increased $2.3 million or 12.5%
compared to prior year period, to $20.2 million for the three months ended June
30, 2001.
Compensation and benefits increased 15.7% or $1.6 million to $11.7 million for
the three months ended June 30, 2001, compared to the three months ended June
30, 2000. The increase is primarily due to normal salary increases, higher
benefit costs, increased staffing costs due to increased loan volume as well as
the Bank's new business banking division, as well as from two branch
acquisitions in April 2000.
Occupancy expense increased $220,000, or 11.1% to $2.2 million for the three
months ended June 30, 2001 compared to the prior year period, primarily due to
higher utility and maintenance costs, as well as general occupancy costs from
two branches acquired in April 2000.
Advertising and promotion expense increased $211,000, or 23.8% to $1.1 million
for the three months ended June 30, 2001 compared to the prior year, primarily
due to increased advertising activity related to the Company's branding
campaign.
Amortization of intangibles decreased $54,000 to $1.1 million for the three
months ended June 30, 2001. The amortization relates to goodwill and core
deposit intangibles from transactions accounted for under the purchase method of
accounting. The decrease in expense over the prior period is attributable to
the accelerated method of amortization utilized by the Bank on its core deposit
premiums.
Other non-interest expense increased $273,000 to $3.2 million for the three
months ended June 30, 2001 compared to the prior year period. Costs increased
primarily due to courier and postage expense and well as a higher experience of
check losses due to the increased checking account base.
Income taxes - For the three months ended June 30, 2001, income tax expense
totaled $8.2 million, or an effective income tax rate of 37.2%, compared to $7.9
million, or an effective income tax rate of 36.7%, for the three months ended
June 30, 2000.
Comparison of the Six Months Ended June 30, 2001 and 2000
General - Net income for the six months ended June 30, 2001 was $28.0 million,
or $1.20 per diluted share, compared to $26.8 million, or $1.13 per diluted
share, an increase of $1.2 million, or 6.4% on a per diluted share basis. The
increase is primarily due to higher non-interest income and 1.9% less average
outstanding shares due to the Company's share repurchase program. Average
shares outstanding at June 30, 2001 were 23.3 million compared to 23.7 million
at June 30, 2000.
28
Net interest income - Net interest income for the six months ended June 30,
2001 was $64.3 million compared to $62.6 million for the six months ended June
30, 2000, an increase of $1.7 million. The increase is principally due to the
growth in the Company's average interest-earning assets of $356.7 million to
$4.94 billion, offset by a 12 basis point decline in the Company's net interest
margin.
Interest income on interest-earning assets increased $12.3 million for the six
months ended June 30, 2001, compared to the six months ended June 30, 2000. Of
this increase, $12.7 million is attributable to interest earned on loans
receivable. The Bank's average balance of loans receivable increased $322.3
million to $4.36 billion for the first six months of 2001, in addition to the
average yield on loans receivable increasing five basis points over the prior
year period. The increases in average balance and rate are due to the impact of
rising rates in the first half of 2000 resulting in originations heavily
weighted towards ARM loans, which the Bank generally holds in portfolio. With
little difference between ARM origination rates and long-term mortgage rates,
ARM loans originated and held in portfolio during the first nine months of 2000
were generally at rates in excess of the weighted average yield on the loan
portfolio. The $995,000 decrease in interest income on mortgage-backed
securities is due to a $23.4 million decrease in the average balance primarily
due to normal prepayments and a 40 basis point decrease in yield. Interest
income on investment securities increased $801,000 to $10.6 million for the six
months ended June 30, 2001, due to a $45.4 million increase in the average
balance for the period, offset by a 42 basis point decrease in the average yield
on this portfolio.
Interest expense on interest-bearing liabilities increased $10.6 million to
$112.7 million for the six months ended June 30, 2001. Interest expense on
deposits increased $9.5 million, due to a $234.9 million increase in balance of
average deposits and a 36 basis point increase in average cost of deposits.
Higher interest rates negatively impacted the cost of maturing certificates of
deposit in the latter half of 2000 and early 2001. Interest expense on borrowed
funds increased $1.1 million, reflecting a $41.3 million increase in the average
balance of borrowed funds, primarily advances from the FHLB of Chicago, and a
two basis point increase in average cost. These borrowings were used to fund
the growth in loans receivable. The Bank has primarily borrowed fixed-rate
advances with 2 to 5 year maturities, some of which have call options at the
discretion of the lender, to fund its loan originations during the past twelve
months.
Provision for loan losses - The Bank provided no provision for loan losses for
the six months ended June 30, 2001 compared to $600,000 for the six months ended
June 30, 2000. Net charge-offs were $37,000 for the current year six-month
period compared to $6,000 for the prior six-month period. The lack of a
provision during the six months ended June 30, 2001 is due to an assessment of a
number of factors, including the stable composition of the loan portfolio, good
historical loss experience, and the low level of non-performing assets which is
expected to continue. There were no changes in estimation method or assumptions
that impacted the provision for loan loss during the six-month period.
Non-interest income - Non-interest income increased $4.8 million to $20.4
million for the six months ended June 30, 2001, compared to $15.6 million for
the six months ended June 30, 2000 primarily due to increased loan sale gains
and deposit fee income offset by decreased loan servicing fees.
Gain on sale of loans receivable was $2.6 million for the six months ended
June 30, 2001, compared to $204,000 for the six months ended June 30, 2000, an
increase of $2.4 million. The increase was due to both higher sales volume and
improved profit margins. Loan sales were $499.8 million during the current six
month period compared to $109.5 million in the prior six-month period. The
increase in loan sale activity is primarily due to a greater amount of fixed-
rate originations in the current six-month period due to falling interest rates,
and the dramatic shift in consumer preference for long-term fixed rate loan
products. The $700,000 loss on sale of mortgage-backed securities in the prior
year six-month period was due to the sale of a $9.3 million floating rate CMO
security.
29
During the current six months, the Company recognized $560,000 of gains on the
sale of investment securities, primarily marketable equity securities, compared
to gains of $133,000 for the previous six-month period from the sale of U.S.
agency securities and, to a lesser extent, marketable equity securities.
Income from real estate operations was $4.7 million for the six months ended
June 30, 2001, compared to income of $5.2 million for the six months ended
June 30, 2000, a decrease of $506,000.
Six Months Ended June 30,
---------------------------------------
2001 2000
-------------- -------------
# of Pre-tax # of Pre-tax
Lots Income Lots Income
---- ------- ---- -------
(Dollars in thousands)
Tallgrass of Naperville 118 $4,670 182 $4,592
Reigate Woods - - 5 142
Harmony Grove - - - 104
Woodbridge - - - 233
Creekside of Remington - - 75 105
---- ------ ---- ------
118 $4,670 262 $5,176
==== ====== ==== ======
During the current-six month period, the Company sold 118 lot sales in its
951-lot Tallgrass of Naperville project at average prices that were higher than
comparative sales in the prior period, due to continued strong demand from local
builders. Additionally, actual costs for the residential lots have been lower
than previously estimated costs, and have added to the profit margin, as the
Company prospectively recognizes these changes in accounting estimates. There
are no lots under contract in this 951-lot subdivision at June 30, 2001. The
Company expects to hold a pre-sale of approximately 120 lots in the next phase
during September 2001, which will likely increase pending sales during the third
quarter with closings expected to commence late in the fourth quarter of 2001.
The remaining land in the Woodbridge project is commercially zoned. During the
first half of 2000, one commercial parcel was sold and the remaining two parcels
are expected to be sold prior to the end of 2001. The 85 lot Reigate Woods
subdivision was sold out in the prior year and the final 75 lots in the
Creekside of Remington subdivision were sold in bulk to a local developer in
June 2000 at a nominal profit. The Harmony Grove project was also completed
during the first quarter of 2000. The income recorded in 2000 related to Harmony
Grove represents rebated costs previously charged against the cost of lots sold.
Loan servicing fee income was a net expense of $(326,000) for the six months
ended June 30, 2001 compared to $1.0 million for the six months ended June 30,
2000. The average balance of loans serviced for others decreased 29.5% to $868.4
million for the current six-month period, compared to $1.23 billion in the prior
six-month period. The decrease is primarily due to the sale of $600 million of
servicing rights (approximately half of the Bank's portfolio of loans serviced
for others) in the third quarter of 2000. Current year servicing fee income also
includes a $215,000 impairment writedown taken on mortgage servicing rights due
to the impact of higher expected prepayment speeds on the net present value of
expected cash flows from these servicing rights. Amortization of purchased loan
servicing rights totaled $1.4 million for the 2001 six-month period, compared to
$546,000 for the prior six-month period due to the higher level of prepayments.
30
Deposit account service charges increased $1.9 million or 32.9% to $7.5
million for the six months ended June 30, 2001, due to an increase in the number
of checking accounts, debit cards and related fees.
Other non-interest income increased $1.1 million or 41.2% to $3.8 million for
the six months ended June 30, 2001 primarily due to an increase in loan related
and title agency fee income compared to the prior year due to an increase in
loan refinance and modification activity.
Non-interest expense - Non-interest expense for the six months ended June 30,
2001 increased $4.5 million or 12.6% to $40.2 million compared to $35.7 million
for the six months ended June 30, 2000.
Compensation and benefits increased $2.8 million, or 13.8%, to $23.0 million,
for the six months ended June 30, 2001, primarily due to normal salary
increases, higher benefit costs and increased staffing costs related to higher
loan volume and the two branches the Bank acquired in April 2000.
Occupancy expense increased $529,000, or 13.6% to $4.4 million for the six
months ended June 30, 2001. The increase in expense is due to higher utility and
maintenance expense as well as costs incurred from two branches the Bank
acquired in April 2000.
Advertising and promotion expense increased $457,000 or 24.2% compared to the
prior year, to $2.3 million for the six months ended June 30, 2001. The
increase in cost is primarily related to an expansion of the Company's branding
campaign.
Data processing expense increased $58,000 or 4.0% for the six months ended
June 30, 2001 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 $137,000 to $2.3 million for the six
months ended June 30, 2001 due to an increase in goodwill and core deposit
intangible as a result of the purchase of two new branches in April 2000.
Other non-interest expense increased $537,000 to $6.3 million for the six
months ended June 30, 2001 compared to the prior year period. The increase is
primarily due to operations at two new branches, costs for stationery,
telephone, courier and higher check losses due to an increased checking account
base.
Income taxes - The Company recorded a provision for income taxes of $16.6
million for the six months ended June 30, 2001, or an effective income tax rate
of 37.2%, compared to $15.1 million for the six months ended June 30, 2000, or
an effective income tax rate of 36.1%. The increase in the effective income tax
rate was primarily the result of increased state income taxes and the
recognition in the prior period of income tax benefits relating to the
resolution of certain prior years' income tax issues.
31
Outlook for 2002
In providing its first outlook for next year, management currently expects
earnings per share for 2002 to be in the range of $2.85-$2.95 per diluted share.
The projected earnings per share results for 2002 assume the completion of the
Mid Town acquisition in the fourth quarter of 2001. The earnings per share
estimate is also based on the provisions of SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and other Intangible Assets", which
were issued in July 2001. "See Note 7. New Accounting Pronouncements."
The Company's 2002 projections assume a favorable interest rate environment in
2002, which is expected to result in an increase in the interest rate spread and
a corresponding improvement in both the net interest margin and overall net
interest income next year. The Company indicated that it was looking for its
real estate development operation to contribute $9.0-$11.0 million in pre-tax
earnings next year and also to report continued strong growth in fee income. The
projections also assume housing and mortgage activity in the Bank's markets
remain strong.
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, 2000 Form 10-K. There have been no
material changes in the assumptions used or results obtained regarding market
risk since December 31, 2000.
32
Part II - Other Information
- -----------------------------
Item 1. Legal Proceedings. Not applicable.
Item 2. Changes in Securities. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The information required by this item with respect to the Company's
Annual Meeting of Shareholders held on April 25, 2001, was included in
Part II, Item 4 of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. 3. Certificate of Incorporation and By-laws.
(i) Restated Certificate of Incorporation. (Incorporated
herein by reference to Exhibit 3.1 to Registrant's
Form 8-K dated December 19, 2000).
(ii) Amended and Restated By-laws of Registrant. (Incorporated
herein by reference to Exhibit No. 3 to Registrant's
March 31, 2001 Form 10-Q).
Exhibit No. 10. Material Contracts
(i) Amendment dated May 16, 2001 to the MAF Bancorp, Inc.
Stock Option Gain Deferral Plan Trust Agreement. *
(ii) Amendment dated May 16, 2001 to the Mid America Bank, fsb
Deferred Compensation Trust Agreement. *
(iii) Amendment dated May 23, 2001 of the Credit Agreement
dated as of May 22, 1996, as amended, between MAF
Bancorp, Inc. and Harris Trust and Savings Bank.
- --------------
* Indicates management contracts or compensatory plans or arrangements
required to be filed as an exhibit.
33
Exhibit No. 11. Statement re: Computation of per share earnings.
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
------------- -------------
Net income $13,880,000 $27,958,000
=========== ===========
Weighted average common shares 22,585,594 22,802,133
outstanding =========== ===========
Basic earnings per share $ .61 $ 1.23
=========== ===========
Weighted average common shares 22,585,594 22,802,133
outstanding
Common stock equivalents due to dilutive
Effect of stock options 501,414 487,904
Total weighted average common shares
and equivalents outstanding for diluted
computation 23,087,008 23,290,037
=========== ===========
Diluted earnings per share $ .60 $ 1.20
=========== ===========
(b) Reports on Form 8-K.
A Form 8-K was filed to report that on April 18, 2001, MAF Bancorp,
Inc. announced its 2001 first quarter earnings results, and a copy of
the press release was included as an exhibit.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAF Bancorp. Inc.
----------------------------
(Registrant)
Date: August 13, 2001 By: /s/ Allen H. Koranda
-------------------- ----------------------------
Allen H. Koranda
Chairman of the Board and
Chief Executive Officer
Date: August 13, 2001 By: /s/ Jerry A. Weberling
------------------- ----------------------------
Jerry A. Weberling
Executive Vice President and
Chief Financial Officer
35