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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1997
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 (CHECK) No
-------- -----
The number of shares outstanding of the issuer's common stock, par value $.01
per share, was 15,530,145 at May 9, 1997.
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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 March 31, 1997 (unaudited) and December 31, 1996........ 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1997 and 1996 (unaudited).............. 4
Consolidated Statements of Changes in Stockholders' Equity
for the Three Months Ended March 31, 1997 and 1996 (unaudited) 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996 (unaudited)........ 6
Notes to Unaudited Consolidated Financial Statements.......... 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
Part II. Other Information
- -------- -----------------
Item 4 Submission of Matters to a Vote of Security Holders........... 28
Item 5 Other Information............................................. 29
Item 6 Exhibits and Reports on Form 8-K.............................. 29
Signature Page................................................ 30
2
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands)
March 31, December 31,
1997 1996
------------- -------------
(Unaudited)
Assets
- ------
Cash and due from banks $ 28,704 45,732
Interest-bearing deposits 55,277 55,285
Federal funds sold 49,625 24,700
Investment securities, at amortized
cost (fair value of $35,327 at
March 31, 1997 and $72,855 at December
31, 1996) 35,201 72,040
Investment securities available for
sale, at fair value 77,226 69,049
Stock in Federal Home Loan Bank of
Chicago, at cost 30,729 30,729
Mortgage-backed securities, at
amortized cost (fair value of $248,867
at March 31, 1997 and $266,340 at
December 31, 1996) 250,504 266,658
Mortgage-backed securities available
for sale, at fair value 86,281 92,929
Loans receivable held for sale 6,284 6,495
Loans receivable, net of allowance for
losses of $18,010 at March 31, 1997 and
$17,914 at December 31, 1996 2,470,660 2,423,618
Accrued interest receivable 20,719 20,457
Foreclosed real estate 773 1,257
Real estate held for development or sale 34,586 28,112
Premises and equipment, net 33,686 32,302
Excess of cost over fair value of net
assets acquired 25,608 26,347
Other assets 30,586 34,631
---------- ---------
$3,236,449 3,230,341
========== =========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits 2,291,065 2,262,226
Borrowed funds 601,114 632,897
Subordinated capital notes, net 26,726 26,709
Advances by borrowers for taxes and
insurance 21,761 18,442
Accrued expenses and other liabilities 40,673 39,442
---------- ---------
Total liabilities 2,981,339 2,979,716
---------- ---------
Stockholders' equity:
Preferred stock, $.01 par value;
authorized 5,000,000
shares; none outstanding - -
Common stock, $.01 par value;
authorized 60,000,000 shares;
16,936,673 shares issued; 15,643,695
outstanding at March 31, 1997,
16,878,768 shares issued; 15,735,199
outstanding at December 31, 1996 169 168
Additional paid-in capital 172,010 171,732
Retained earnings, substantially
restricted 103,700 95,356
Unrealized loss on marketable
securities, net of tax (365) 138
Treasury stock, at cost; 1,292,978
shares at March 31, 1997 and
1,143,569 shares at December 31, 1996 (20,404) (16,769)
---------- ---------
Total stockholders' equity 255,110 250,625
Commitments and contingencies
---------- ---------
$3,236,449 3,230,341
========== =========
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)
Three Months Ended
March 31,
------------------
1997 1996
-------- --------
(Unaudited)
Interest income:
Loans receivable $47,524 27,978
Mortgage-backed securities 4,586 1,843
Mortgage-backed securities available for sale 1,432 2,334
Investment securities 1,819 793
Investment securities available for sale 973 574
Interest-bearing deposits and federal funds sold 1,633 677
------- ------
Total interest income 57,967 34,199
------- ------
Interest expense:
Deposits 23,789 15,037
Borrowed funds 10,626 7,415
------- ------
Total interest expense 34,415 22,452
------- ------
Net interest income 23,552 11,747
Provision for loan losses 300 200
------- ------
Net interest income after provision for loan losses 23,252 11,547
------- ------
Non-interest income:
Gain on sale of:
Loans receivable 18 11
Mortgage-backed securities 6 38
Investment securities 78 --
Foreclosed real estate 68 27
Income from real estate operations 1,416 1,550
Deposit account service charges 1,562 1,205
Loan servicing fee income 606 597
Brokerage commissions 476 476
Other 779 570
------- ------
Total non-interest income 5,009 4,474
------- ------
Non-interest expense:
Compensation and benefits 7,350 5,213
Office occupancy and equipment 1,530 948
Federal deposit insurance premiums 366 770
Advertising and promotion 497 374
Data processing 459 431
Amortization of goodwill 339 --
Other 2,482 1,429
------- ------
Total non-interest expense 13,023 9,165
------- ------
Income before income taxes 15,238 6,856
Income tax expense 5,952 2,655
------- ------
Net income $ 9,286 4,201
======= ======
Primary and fully-diluted earnings per share $ .57 .49
======= ======
See accompanying notes to unaudited consolidated financial statements.
4
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands)
(Unaudited)
Unrealized gain (loss)
Additional on marketable
Common paid-in Retained securities, Treasury
Three Months Ended March 31, 1997 stock capital earnings net of tax stock Total
- --------------------------------- ------ ---------- --------- ---------------------- -------- -------
Balance at December 31, 1996 $ 168 171,732 95,356 138 (16,769) 250,625
Net income -- -- 9,286 -- -- 9,286
Proceeds from exercise of
57,905 stock options 1 278 -- -- (236) 43
Market value adjustment
on available for sale
securities -- -- -- (503) -- (503)
Purchase of treasury stock -- -- -- -- (3,399) (3,399)
Cash dividends ($.06 per share) -- -- (942) -- -- (942)
----- ------- ------- ---- ------- -------
Balance at March 31, 1997 $ 169 172,010 103,700 (365) (20,404) 255,110
===== ======= ======= ==== ======= =======
Three Months Ended March 31, 1996
- ---------------------------------
Balance at December 31, 1995 $ 59 39,750 80,377 125 (10,005) 110,306
Net income -- -- 4,201 -- -- 4,201
Proceeds from exercise of 1,425
stock options -- 5 -- -- -- 5
Tax benefits from stock-related
compensation -- 7 -- -- -- 7
Market value adjustment on
available for sale securities -- -- -- (373) -- (373)
Purchase of treasury stock -- -- -- -- (4,072) (4,072)
Cash dividends ($.053 per share) -- -- (420) -- -- (420)
----- ------- ------- ---- ------- -------
Balance at March 31, 1996 $ 59 39,762 84,158 (248) (14,077) 109,654
===== ======= ======= ==== ======= =======
See accompanying notes to unaudited consolidated financial statements.
5
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended
March 31,
---------------------
1997 1996
---------- ---------
(Unaudited)
Operating activities:
Net income $ 9,286 4,201
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 729 470
Provision for loan losses 300 200
Deferred income tax expense 419 (896)
Amortization of premiums, discounts, loan fees
and intangible assets 683 118
Net gain on sale of loans, mortgage-backed
securities, and real estate held for
development or sale (1,439) (1,599)
Gain on sale of investment securities (78) --
Increase in accrued interest receivable (262) (509)
Net decrease in other assets and liabilities 4,209 1,591
Loans originated for sale (2,550) (43,055)
Loans purchased for sale (15,784) (18,811)
Sale of loans originated and purchased for sale 18,366 62,303
Sale of mortgage-backed securities available for sale 1,540 9,413
--------- --------
Net cash provided by operating activities 15,419 13,426
--------- --------
Investing activities:
Loans originated for investment (132,912) (110,452)
Principal repayments on loans receivable 126,718 98,076
Principal repayments on mortgage-backed securities 22,372 14,048
Proceeds from maturities of investment securities
available for sale 42,109 1,892
Proceeds from maturities of investment securities
held to maturity 39,266 415
Proceeds from sale of:
Investment securities available for sale 391 --
Real estate held for development or sale 9,174 4,678
Premises and equipment 4 --
Purchases of:
Loans receivable held for investment (43,226) (67,485)
Investment securities available for sale (50,989) (80)
Investment securities held to maturity (1,969) (113)
Stock in Federal Home Loan Bank of Chicago -- (2,050)
Real estate held for development or sale (12,188) (591)
Premises and equipment (2,135) (907)
--------- --------
Net cash used in investing activities (3,385) (62,569)
--------- --------
(continued)
6
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended
March 31,
---------------------
1997 1996
---------- ---------
(Unaudited)
Financing activities:
Proceeds from FHLB of Chicago advances $ 25,000 60,000
Repayment of FHLB of Chicago advances (55,000) (25,000)
Repayment of collateralized mortgage obligations (2,131) (1,130)
Proceeds from exercise of stock options 43 5
Purchase of treasury stock (3,399) (4,072)
Cash dividends (944) (435)
Net increase in deposits 28,967 16,058
Decrease in advances by borrowers for taxes and insurance 3,319 3,386
-------- -------
Net cash provided (used in) financing activities (4,145) 48,812
-------- -------
Increase (decrease) in cash and cash equivalents 7,889 (331)
-------- -------
Cash and cash equivalents at beginning of period 125,717 77,797
-------- -------
Cash and cash equivalents at end of period $133,606 77,466
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds $ 35,457 22,315
Income taxes -- 2,400
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate 331 89
Loans receivable swapped into mortgage-backed securities 1,535 9,362
Treasury stock received for option exercises 236 --
======== =======
See accompanying notes to unaudited consolidated financial statements.
7
MAF BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 1997 and 1996
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) necessary for a fair presentation have been
included.
The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of results that may be expected for the entire fiscal
year ended December 31, 1997.
The consolidated financial statements include the accounts of MAF Bancorp,
Inc. ("Company"), and its wholly-owned subsidiaries, Mid America Federal Savings
Bank and subsidiaries ("Bank") and MAF Developments, Inc., as of and for the
three month period ended March 31, 1997 and 1996 and as of December 31, 1996.
All material intercompany balances and transactions have been eliminated in
consolidation.
(2) Earnings Per Share
For purposes of computed earnings per share, the number of average shares
outstanding for the periods indicated is as follows:
Three Months Ended March 31,
----------------------------
1997 1996
-------------- ------------
Primary earnings per share 16,177,465 8,512,629
Fully-diluted earnings per share 16,193,878 8,512,929
========== =========
All share amounts have been adjusted for the 3-for-2 stock split announced
by the Company on April 30, 1997, which is payable on July 9, 1997 to
shareholders of record on June 17, 1997.
The large increase in average shares outstanding is due to the acquisition
of N.S. Bancorp, Inc. ("NSBI" or "Northwestern") on May 30, 1996, whereby the
Company issued 7,792,065 of its common shares as part of the merger
consideration.
8
(3) Commitments and Contingencies
At March 31, 1997, the Bank had outstanding commitments to originate and
purchase loans of $160.0 million, of which $90.6 million were fixed-rate loans,
with rates ranging from 6.630% to 9.250%, and $69.4 million were adjustable-rate
loans. At March 31, 1997, commitments to sell loans were $18.1 million.
At March 31, 1997, the Bank had outstanding 22 standby letters of credit
totaling $18.1 million, two of which totaled $13.3 million to enhance a
developer's industrial revenue bond financings of commercial real estate in the
Bank's market. These letters of credit are collateralized by mortgage-backed
securities and U.S. Government and agency securities owned by the Bank.
Additionally, the Company had 12 outstanding standby letters of credit totaling
$4.5 million related to real estate development improvements.
(4) Reclassifications
Certain reclassifications of prior quarter amounts have been made to
conform with current quarter presentation.
(5) New Accounting Pronouncement
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 supersedes APB Opinion No. 15, "Earnings Per Share," and
specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS") for entities with publicly held common stock or
potential common stock. SFAS No. 128 was issued to simplify the computations of
EPS and to make the U.S. standard more compatible with the EPS standards of
other countries and that of the International Accounting Standards Committee. It
replaces the presentation of primary EPS with a presentation of basic EPS and
fully-diluted EPS with diluted EPS. It also requires dual presentation of basic
EPS and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.
Basic EPS, unlike primary EPS, excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Diluted EPS is
computed similarly to fully-diluted EPS under APB 15.
SFAS No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. However, pro forma EPS
disclosures for periods prior to adoption is allowed. Had the provisions of SFAS
No. 128 been adopted for the three months ended March 31, 1997 and 1996,
earnings per share would have been as follows:
Three Months Ended
March 31,
------------------
1997 1996
------ ------
As reported:
Primary and fully-diluted earnings per share $0.57 0.49
===== ====
Pro forma:
Basic earnings per share 0.59 0.53
Diluted earnings per share 0.57 0.49
===== ====
9
MAF BANCORP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
MAF Bancorp, Inc. ("Company"), is a registered savings and loan holding
company incorporated under the laws of the state of Delaware and is primarily
engaged in the consumer banking business through its wholly-owned subsidiary,
Mid America Federal Savings Bank ("Bank") and secondarily, in the residential
real estate development business through MAF Developments, Inc. ("MAF
Developments").
On May 30, 1996, the Company completed its acquisition of N.S. Bancorp,
Inc. ("NSBI"), which was the sole shareholder of Northwestern Savings Bank
("Northwestern"). At acquisition date, Northwestern had $749.7 million in loans
receivable, which were primarily one-to four-family residential mortgage loans,
and $872.0 million in deposits, which were serviced from six branch locations.
All but one of the branches are in markets which the Bank did not service in the
past.
The Bank is a consumer-oriented financial institution offering various
financial services to its customers through 20 retail banking offices. The
Bank's market area is generally defined as the western suburbs of Chicago,
including DuPage County, which has the second highest per capita income in
Illinois, as well as the northwest side of Chicago, due to the acquisition of
NSBI. It is principally engaged in the business of attracting deposits from the
general public and using such deposits, along with other borrowings, to make
loans secured by real estate, primarily one-to four-family residential mortgage
loans. To a lesser extent, the Bank also makes multi-family mortgage,
residential construction, land acquisition and development and a variety of
consumer loans. The Bank also has a small portfolio of commercial real estate.
Through three wholly-owned subsidiaries, MAF Developments, Mid America
Development Services, Inc. ("Mid America Developments"), and NW Financial, Inc.
("NW Financial") (which the Company acquired with NSBI), 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, and an
investment brokerage operation through its affiliation with INVEST, a registered
broker-dealer.
As a federally chartered savings bank, the Bank's deposits are insured up
to the applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Chicago, which is
one of the twelve regional banks for federally insured savings institutions
comprising the FHLB system. The Bank is regulated by the Office of Thrift
Supervision ("OTS") and the FDIC. The Bank is further regulated by the Board of
Governors of the Federal Reserve System as to reserves required to be maintained
against deposits and certain other matters.
Regulation and Supervision
The Bank is subject to extensive regulation, by the OTS, as its chartering
authority and primary federal regulator, and by the FDIC, which insures its
deposits up to applicable limits. Such regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities. Any change in
such regulation, whether by the OTS, the FDIC or Congress could have a material
impact on the Company and their operations.
10
Capital Standards. Savings associations must meet three capital requirements;
core and tangible capital to total assets ratios as well as a regulatory capital
to total risk-weighted assets ratio.
Core Capital Requirement
The core capital requirement, or the required "leverage limit" currently
requires a savings institution to maintain core capital of not less than 3% of
adjusted total assets. Core capital generally includes common stockholders'
equity (including retained earnings), certain noncumulative perpetual preferred
stock and related surplus and minority interests in the equity accounts of fully
consolidated subsidiaries, less intangibles other than certain servicing rights.
Investments in and advances to subsidiaries engaged in activities not
permissible for national banks, such as Mid America Developments, are required
to be deducted from total capital. See "Deductions from Regulatory Capital on
Non-Permissible Activities".
Tangible Capital Requirement
Under OTS regulation, savings institutions are required to meet a tangible
capital requirement of 1.5% of adjusted total assets. Tangible capital is
defined as core capital less any intangible assets, plus purchased mortgage
servicing rights in an amount includable in core capital.
Risk-Based Capital Requirement
The risk-based capital requirement provides that savings institutions
maintain total capital equal to not less than 8% of total risk-weighted assets.
For purposes of the risk-based capital computation, total capital is defined as
core capital, as defined above, plus supplementary capital, primarily general
loan loss reserves (limited to a maximum of 1.25% of total risk-weighted
assets.) Supplementary capital included in total capital cannot exceed 100% of
core capital.
At March 31, 1997, the Bank was in compliance with all of its capital
requirements as follows:
March 31, 1997 December 31, 1996
------------------------ ------------------------
Percent of Percent of
Amount Assets Amount Assets
---------- ---------- ---------- -----------
(Dollars in thousands)
Stockholder's equity of the Bank $ 274,487 8.55% $ 273,545 8.52%
========== ===== ========== =====
Tangible capital $ 220,980 7.01% $ 219,080 6.96%
Tangible capital requirement 47,258 1.50 47,202 1.50
---------- ----- ---------- -----
Excess $ 173,722 5.51% $ 171,878 5.46%
========== ===== ========== =====
Core capital $ 220,980 7.01% $ 219,080 6.96%
Core capital requirement 94,515 3.00 94,404 3.00
---------- ----- ---------- -----
Excess $ 126,465 4.01% $ 124,676 3.96%
========== ===== ========== =====
Core and supplementary capital $ 237,092 14.96% $ 235,057 15.05%
Risk-based capital requirement 126,806 8.00 124,943 8.00
---------- ----- ---------- -----
Excess $ 110,286 6.96% $ 110,114 7.05%
========== ===== ========== =====
Total Bank assets $3,209,243 $3,209,058
Adjusted total Bank assets 3,150,504 3,146,788
Total risk-weighted assets 1,644,215 1,624,489
Adjusted total risk-weighted assets 1,585,078 1,561,782
Investment in Bank's real estate subsidiary 20,875 20,184
========== ==========
11
A reconciliation of consolidated stockholder's equity of the Bank for
financial reporting purposes to regulatory capital available to the Bank to meet
regulatory capital requirements is as follows:
March 31, December 31,
1997 1996
--------- ------------
(in thousands)
Stockholder's equity of the Bank $274,487 273,545
Goodwill and other non-allowable
intangible assets (33,274) (34,368)
Non-permissible subsidiary deduction (20,875) (20,184)
Non-includable purchased mortgage
servicing rights (212) (203)
SFAS No. 115 capital adjustment 854 290
-------- -------
Tangible and core capital 220,980 219,080
General loan loss reserves 16,510 16,414
Land loans greater than 80% (398) (437)
loan-to-value -------- -------
Core and supplementary capital $237,092 235,057
======== =======
Deductions from Regulatory Capital on Non-Permissible Activities
Under the OTS capital regulation, deductions from tangible and core
capital, for the purpose of computing regulatory capital requirements, are
required for investments in and loans to subsidiaries engaged in non-permissible
activities for a national bank. Included in these non-permissible activities is
the development of real estate through the Bank's wholly-owned subsidiaries, Mid
America Developments, and NW Financial, which was acquired on May 30, 1996 as
part of the acquisition of NSBI. As of July 1, 1996, 100% of such investment in
and advances to Mid America Developments and NW Financial was required to be
deducted from capital.
Included in the calculation of the Bank's deduction from tangible and core
capital due to investments in and advances to Mid America Developments and NW
Financial is the Bank's total equity investment as well as unsecured loans made
to these real estate subsidiaries. Decreasing the investment in and advances to
the real estate subsidiaries requires the generation of cash to repay its loans
to the Bank or to declare dividends to pass undistributed profits up to the
Bank. Currently, the generation of cash at Mid America Developments is
accomplished by continued lot sales from improved land developments, and home
sales in projects owned by NW Financial.
The following is a summary of the Bank's investment in and advances to Mid
America Developments and NW Financial at the dates indicated:
3/31/97 12/31/96 9/30/96 6/30/96 3/31/96
-------- -------- ------- ------- -------
(in thousands)
Common stock $ 1,657 1,657 1,657 1,657 1,397
Retained earnings 10,955 10,642 10,767 12,308 2,982
Intercompany advances 8,263 7,885 7,637 7,729 227
-------- ------ ------ ------ -----
$ 20,875 20,184 20,061 21,694 4,606
======== ====== ====== ====== =====
The increase in the Bank's investment balance at June 30, 1996 is due to
the acquisition of Northwestern. As a result of the Bank's $20.9 million
investment in and advances to Mid America Developments and NW Financial at March
31, 1997, the Bank is currently required to reduce capital for purposes of
computing regulatory capital by $20.9 million.
12
Interest Rate Risk Component of Regulatory Capital
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. For the
present time, the OTS has deferred implementation of the interest rate risk
component. If the Bank had been subject to an interest rate risk capital
component as of March 31, 1997, the Bank's total risk-weighted capital would not
have been subject to a deduction based on interest rate risk. At March 31, 1997,
the Bank met each of its capital requirements.
Insurance of Deposit Accounts. The FDIC has adopted a risk-based deposit
insurance system that assesses deposit insurance premiums according to the level
of risk involved in an institution's activities. An institution's risk category
is based upon whether the institution is classified as "well capitalized,"
"adequately capitalized" or "undercapitalized" and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation and information
which the FDIC determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance fund. Based on its
capital and supervisory subgroups, each Bank Insurance Fund ("BIF") and SAIF
member institution is assigned an annual FDIC assessment rate, with an
institution in the highest category (i.e., well-capitalized and healthy)
receiving the lowest rates and an institution in the lowest category (i.e.,
undercapitalized and posing substantial supervisory concern) receiving the
highest rates. The FDIC has authority to further raise premiums if deemed
necessary. If such action is taken, it could have an adverse effect on the
earnings of the Bank.
On September 30, 1996, the President signed the Deposit Insurance Funds Act
of 1996 (the "Funds Act"), which, among other things, imposed a special one-time
assessment on SAIF members, including the Bank, to recapitalize the SAIF. The
Funds Act also spreads the obligations for payment of the Financing Corporation
("FICO") bonds across all SAIF and BIF members. Beginning on January 1, 1997,
BIF deposits will be assessed for a FICO payment of 1.3 basis points, while SAIF
deposits will pay 6.48 basis points. Full pro rata sharing of the FICO payments
between BIF and SAIF members will occur on the earlier of January 1, 2000 or the
date the BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF
will be merged on January 1, 1999, provided no savings associations remain as of
that time.
As a result of the Funds Act, the FDIC recently voted to effectively lower
SAIF assessments to 0 to 27 basis points as of January 1, 1997, a range
comparable to that of BIF members. Also, SAIF members will continue to make the
FICO payments described above. The FDIC also lowered the SAIF assessment
schedule for the fourth quarter of 1996 to 18 to 27 basis points. Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated or whether the BIF
and SAIF will eventually be merged.
The Bank's assessment rate is currently 6.48 basis points. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank.
13
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date. Various proposals to eliminate the federal thrift charter, create
a uniform financial institutions charter and abolish the OTS have been
introduced in Congress. The bills would require federal savings institutions to
convert to a national bank or some type of state charter by a specified date
(January 1, 1998 in one bill, June 30, 1998 in the other) or they would
automatically become national banks. Converted federal thrifts would generally
be required to conform their activities to those permitted for the charter
selected and divestiture of nonconfoming assets would be required over a two
year period, subject to two possible one year extensions. State chartered
thrifts would become subject to the same federal regulation as applies to state
commercial banks. Holding companies for savings institutions would become
subject to the same regulation as holding companies that control commercial
banks, with a limited grandfather provision for unitary savings and loan holding
company activities. The Bank is unable to predict whether such legislation would
be enacted, the extent to which the legislation would restrict or disrupt its
operations or whether the BIF and SAIF funds will eventually merge.
Changes in Financial Condition
Total assets of the Company were $3.24 billion at March 31, 1997,
relatively unchanged from $3.23 billion at December 31, 1996.
Cash and short-term investments totaled a combined $133.6 million at March
31, 1997, an increase of $7.9 million from the combined balance of $125.7
million at December 31, 1996.
Investment securities classified as held to maturity decreased $36.8
million to $35.2 million at March 31, 1997. The decrease is due to maturities of
U.S. Government agency obligations totaling $17.4 million, and the call, prior
to maturity, of $20.0 million of FHLB callable notes, offset by purchases of
$1.9 million.
Investment securities available for sale increased $8.2 million to $77.2
million at March 31, 1997. The increase is due to purchases of $51.0 million of
primarily U.S. Government and agency securities, offset by maturities of $42.1
million, and sales of marketable equity securities with a book value of
$313,000. The Company recognized a gain on the sale of investment securities of
$78,000 during the three months ended March 31, 1997. At March 31, 1997, gross
unrealized gains in the available for sale portfolio were $143,000, compared to
$592,000 at December 31, 1996.
Mortgage-backed securities classified as held to maturity decreased $16.2
million to $250.5 million at March 31, 1997, compared to $266.7 million at
December 31, 1996. The decrease is primarily due to amortization and
prepayments in the portfolio. The Bank did not actively purchase any mortgage-
backed securities during the current period due to the ability to generate loans
receivable for its own portfolio through its retail and wholesale originations.
14
Mortgage-backed securities available for sale decreased $6.6 million to
$86.3 million at March 31, 1997, compared to $92.9 million at December 31, 1996.
The decrease is due to amortization and prepayment activity in the portfolio.
There was no purchase or sale activity during the three month period ended March
31, 1997. Gross unrealized losses in the available for sale portfolio were
$722,000 at March 31, 1997, compared to $352,000 at December 31, 1996.
The Bank has $161.4 million of CMO securities at March 31, 1997, the
majority of which are collateralized by FNMA, FHLMC and GNMA mortgage-backed
securities, and to a lesser extent by whole loans. Additionally, included in
mortgage-backed securities held to maturity as of March 31, 1997, and December
31, 1996 are $36.2 million, and $38.1 million, respectively of FHLMC securities
with an average yield of 8.80% and 8.73%, respectively, which collateralize a
similar amount of CMO bonds issued by the Bank's special purpose finance
subsidiaries. Principal repayments and prepayments on these securities are
available exclusively for the repayment of the CMO bonds which they
collateralize.
Loans receivable, including loans held for sale, increased $46.8 million,
or 1.9%, to $2.48 billion at March 31, 1997. The Bank originated and purchased
(through wholesale originations) $195.9 million during the three month period
ended March 31, 1997. Offsetting this increase was amortization and prepayments
totaling $126.7 million, as well as sales of $19.8 million. Loans receivable
held for sale was relatively unchanged at $6.3 million as of March 31, 1997,
compared to $6.5 million at December 31, 1996. The Company has reduced its sales
activity of longer term, fixed-rate originations in an effort to better utilize
the Bank's capital base. The relatively small balance in loans held for sale as
of March 31, 1997 is a result of the Company reducing its sales activity.
The allowance for loan losses totaled $18.0 million at March 31, 1997, an
increase of $96,000 from the balance at December 31, 1996, due to a $300,000
provision for loan losses, offset by net charge-offs of $204,000. The Bank's
allowance for loan losses to total loans outstanding was .72% at March 31, 1997,
compared to .73% at December 31, 1996. Non-performing loans increased $1.6
million to $15.1 million at March 31, 1997, or .61% of total loans receivable,
compared to $13.5 million, or .55% at December 31, 1996.
Real estate held for development or sale increased $6.5 million to $34.6
million at March 31, 1997. A summary of real estate held for development or sale
is as follows:
March 31, December 31,
1997 1996
--------- ------------
(in thousands)
MAF Developments, Inc.
Harmony Grove $ 4,103 4,164
Clow Creek Farm 388 717
Creekside of Remington 1,792 1,760
Other 11,380 4,392
------- ------
17,663 11,033
------- ------
Mid America Developments, Inc.
Ashbury 65 122
Woods of Rivermist 263 546
------- ------
328 668
------- ------
NW Financial, Inc.
Reigate Woods 6,108 6,263
Woodbridge 9,262 8,348
Fields of Ambria 1,225 1,800
------- ------
16,595 16,411
------- ------
$34,586 28,112
======= ======
15
The Company had 37 lot sales in Harmony Grove for the quarter ended March
31, 1997, which were offset by continued development costs. In addition, the
development's commercial site was sold in February 1997 for a pre-tax profit of
$228,000. As of March 31, 1997 there are 15 lots under contract in Harmony
Grove. The next phase of the subdivision will be available for sale to builders
in the second quarter. Closings are anticipated to occur in the third and fourth
quarters of 1997. Clow Creek Farm is substantially complete, with only 19 lots
remaining, of which seven are under contract as of March 31, 1997. The Creekside
of Remington subdivision, with 170 total lots, and 137 lots remaining, had no
sales or development activity during the current three month period. Seven lots
are under contract as of March 31, 1997. The $7.0 million increase in the other
category represents an additional land parcel purchased for future development.
Ashbury had four lot sales, with the remaining four lots of this 1,115-lot
subdivision under contract at March 31, 1997. The balance in the Woods of
Rivermist subdivision decreased due to three lot sales during the current
quarter. At March 31, 1997, the development is substantially complete, with one
of the remaining four lots under contract.
The balance of Reigate Woods decreased due to continued sales of homesites.
At March 31, 1997, there are 50 remaining homesites, with five homesites under
contract. The $914,000 increase in Woodbridge is primarily due to additional
costs on homes under construction. At March 31, 1997, there are 140 homesites
remaining, with 79 under contract. There were 5 home sales in Fields of Ambria
during the three months ended March 31, 1997. At March 31, 1997, there are 10
homesites remaining, none of which were under contract.
Deposits increased $28.8 million, to $2.29 billion at March 31, 1997. After
consideration of interest credited to accounts of $23.8 million for the three
months ended March 31, 1997, actual cash inflows were $5.1 million.
Borrowed funds, which consist primarily of FHLB of Chicago advances and CMO
bonds payable, decreased $31.8 million to $601.1 million at March 31, 1997. The
primary reason for the decrease is due to the Bank decreasing its FHLB of
Chicago advances by a net $30.0 million since December 31, 1996. The Bank was
able to repay maturing FHLB of Chicago advances, as cash received from
amortization and prepayments of its loan and mortgage-backed securities
portfolios provided adequate liquidity for mortgage loan originations during the
current quarter. The remaining decrease in borrowed funds is due to normal
amortization of the CMO bonds payable.
Asset Quality
Non-Performing Assets. When a borrower fails to make a required payment by
the end of the month in which the payment is due, the Bank generally institutes
collection procedures. The Bank will send a late notice, and in most cases,
delinquencies are cured promptly; however, if a loan has been delinquent for
more than 60 days, the Bank contacts the borrower in order to determine the
reason for the delinquency and to effect a cure, and, where appropriate, reviews
the condition of the property and the financial circumstances of the borrower.
Based upon the results of any such investigation, the Bank may: (1) accept a
repayment program for the arrearage from the borrower; (2) seek evidence, in the
form of a listing contract, of efforts by the borrower to sell the property if
the borrower has stated that he is attempting to sell; (3) request a deed in
lieu of foreclosure; or (4) initiate foreclosure proceedings. When a loan
payment is delinquent for three or more monthly installments, the Bank will
initiate foreclosure proceedings. Interest income on loans is reduced by the
full amount of accrued and uncollected interest on loans which are in
foreclosure or otherwise determined to be uncollectible.
The Bank considers a loan impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan. For loans which are not
individually significant (i.e. loans under $750,000), and represent a
homogeneous population,
16
the Bank evaluates impairment collectively based on management reports on the
level and extent of delinquencies, as well as historical loss experience for
these types of loans. The Bank uses this criteria on one-to four-family
residential loans, consumer loans, multi-family residential loans, and land
loans. Impairment for loans considered individually significant and commercial
real estate loans are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or the fair value
of the collateral if the loan is collateral dependent. Charge-offs of principal
occur when a loss has deemed to have occurred as a result of the book value
exceeding the fair value.
A loan (whether considered impaired or not) is classified as non-accrual
when collectibility is in doubt, and is normally analyzed upon the borrower
becoming 90 days past due on contractual principal or interest payments. When a
loan is placed on non-accrual status, or in the process of foreclosure,
previously accrued but unpaid interest is reserved in full. Income is
subsequently recorded to the extent cash payments are received, or at a time
when the loan is brought current in accordance with its original terms.
At March 31, 1997, the Bank has one loan which is considered impaired based
on the criteria above. The average balance of this impaired loan was $2.9
million during the current quarter. A specific reserve of $1.5 million is
recorded against this impaired loan, and the net recorded balance of this loan
is $1.4 million. No interest income was recorded on this loan during the three
months ended March 31, 1997.
For the quarter ended March 31, 1997, interest income that would have been
recorded on non-accrual loans (had they been performing according to their
original terms) amounted to $267,000, compared to $134,000 for the three months
ended March 31, 1996.
As of March 31, 1997, the Bank's ratio of non-performing loans to total
loans was .61%, compared to .55% at December 31, 1996 and .60% at March 31,
1996.
Foreclosed real estate decreased $484,000 to $773,000 at March 31, 1997,
due to the sale of three single family residential properties. At March 31,
1997, foreclosed real estate consists primarily of five single-family
residences.
Delinquent Loans. Delinquencies in the Bank's portfolio at the dates
indicated were as follows:
61-90 Days 91 Days or More
---------------------------- ----------------------------
Principal Principal
Number Balance of Percent Number Balance of Percent
of Delinquent of of Delinquent of
Loans Loans Total Loans Loans Total
------ ---------- -------- ------ ---------- --------
(Dollars in thousands)
March 31, 1997 54 $7,582 .30% 81 $14,102 .57%
== ====== === == ======= ===
December 31, 1996 48 $6,834 .28% 76 $ 9,780 .40%
== ====== === == ======= ===
September 30, 1996 48 $6,050 .25% 63 $ 8,688 .36%
== ====== === == ======= ===
June 30, 1996 24 $3,107 .14% 38 $ 5,504 .24%
== ====== === == ======= ===
March 31, 1996 9 $ 867 .07% 35 $ 3,376 .28%
== ====== === == ======= ===
17
Loan Portfolio Composition. The following table sets forth the composition of
the Bank's loan portfolio in dollar amounts at the dates indicated:
At
----------------------------------------------------------------------
3/31/97 12/31/96 9/30/96 6/30/96 3/31/96 12/31/95
--------- --------- --------- --------- --------- ---------
(In thousands)
Real estate loans:
One-to four-family:
Held for investment $2,198,886 2,160,525 2,114,595 2,032,102 1,227,470 1,156,852
Held for sale 6,284 6,495 1,250 9,314 14,817 24,327
Multi-family 97,483 92,968 93,246 94,713 81,919 80,817
Commercial 45,459 46,313 45,875 46,101 45,087 45,115
Construction 17,277 17,263 15,854 16,090 17,860 16,403
Land 26,561 25,685 22,932 26,644 26,149 22,608
---------- --------- --------- --------- --------- ---------
Total real estate loans 2,391,950 2,349,249 2,293,752 2,224,964 1,413,302 1,346,122
Other loans:
Consumer loans:
Equity lines of credit 88,595 86,614 83,786 79,193 75,902 74,380
Home equity loans 13,634 14,251 13,126 10,525 8,877 7,537
Other 5,838 5,009 4,797 4,110 3,946 3,494
---------- --------- --------- --------- --------- ---------
Total consumer loans 108,067 105,874 101,709 93,828 88,725 85,411
Commercial business lines 2,333 1,871 2,098 1,821 2,220 2,234
---------- --------- --------- --------- --------- ---------
Total other loans 110,400 107,745 103,807 95,649 90,945 87,645
---------- --------- --------- --------- --------- ---------
Total loans receivable 2,502,350 2,456,994 2,397,559 2,320,613 1,504,247 1,433,767
Less:
Loans in process 6,700 7,620 6,406 6,715 8,843 7,893
Unearned discounts, premiums
and deferred loan fees, net 696 1,347 2,572 3,245 (1,416) (914)
Allowance for loan losses 18,010 17,914 17,589 17,254 9,498 9,288
---------- --------- --------- --------- --------- ---------
Total loans receivable, net 2,476,944 2,430,113 2,370,992 2,293,399 1,487,322 1,417,500
Loans receivable held for sale (6,284) (6,495) (1,250) (9,314) (14,817) (24,327)
---------- --------- --------- --------- --------- ---------
Loans receivable, net $2,470,660 2,423,618 2,369,742 2,284,085 1,472,505 1,393,173
========== ========= ========= ========= ========= =========
18
Non-performing assets. The following table sets forth information regarding
non-accrual loans, loans which are 91 days or more delinquent but on which
the Bank is accruing interest, foreclosed real estate and non-accrual
investment securities of the Bank.
At
------------------------------------------------------
3/31/97 12/31/96 9/30/96 6/30/96 3/31/96 12/31/95
------- -------- ------- ------- ------- --------
(In thousands)
Non-performing loans:
One- to four-family and multi-family loans:
Non-accrual loans $ 8,757 7,680 5,929 5,415 2,801 1,925
Accruing loans 91 days or more overdue 1,008 896 1,589 1,940 1,235 1,440
------- -------- ------- ------- ------- --------
Total 9,765 8,576 7,518 7,355 4,036 3,365
------- -------- ------- ------- ------- --------
Commercial real estate, construction and land loans:
Non-accrual loans 4,254 3,762 889 433 439 211
Accruing loans 91 days or more overdue 599 699 599 459 233
Restructured or renegotiated loans -- -- 4,271 4,299 4,321 4,344
------- -------- ------- ------- ------- --------
Total 4,853 4,461 5,759 5,191 4,760 4,788
------- -------- ------- ------- ------- --------
Other loans:
Non-accrual loans 366 353 385 287 223 163
Accruing loans 91 days or more overdue 79 74 23 -- -- 15
------- -------- ------- ------- ------- --------
Total 445 427 408 287 223 178
------- -------- ------- ------- ------- --------
Total non-performing loans:
Non-accrual loans 13,377 11,795 7,203 6,135 3,463 2,299
Accruing loans 91 days or more overdue 1,686 1,669 2,211 2,399 1,235 1,688
Restructured or renegotiated loans -- -- 4,271 4,299 4,321 4,344
------- -------- ------- ------- ------- --------
Total $15,063 13,464 13,685 12,833 9,019 8,331
======= ======== ======== ======= ======= ========
Non-accrual loans to total loans .54% .48 .30 .27 .23 .16
Accruing loans 91 days or more overdue to total loans .07 .07 .09 .10 .08 .12
Restructured or renegotiated loans to total loans .00 .00 .18 .19 .29 .31
------- -------- ------- ------- ------- --------
Non-performing loans to total loans .61% .55 .57 .56 .60 .59
======= ======== ======== ======= ======= ========
Foreclosed real estate (net of related reserves):
One- to four-family $ 773 1,257 1,068 888 109 249
Commercial, construction and land -- -- -- -- -- --
------- -------- ------- ------- ------- --------
Total $ 773 1,257 1,068 888 109 249
======= ======== ======== ======= ======= ========
Non-performing loans and foreclosed real estate
to total loans and foreclosed real estate .63% .60 .62 .60 .61 .61
======= ======== ======== ======= ======= ========
Total non-performing assets $15,836 14,721 14,753 13,721 9,128 8,580
======= ======== ======== ======= ======= ========
Total non-performing assets to total assets .49% .46 .47 .44 .46 .45
======== ======== ======== ======= ======= ========
19
Liquidity and Capital Resources
The Company's principal sources of funds are cash dividends paid by the
Bank and MAF Developments, and liquidity generated by the issuance of common
stock, preferred stock, or borrowings. The Company's principal uses of funds are
interest payments on the Company's $26.7 million of 8.32% subordinated notes and
$35.0 million unsecured term bank loan, cash dividends to shareholders, loans to
and investments in MAF Developments, as well as investment purchases with excess
cash flow. The Company also maintains a one year, $15.0 million unsecured
revolving line of credit from a commercial bank, of which no balances have been
drawn. The line of credit maturity date was recently renewed and extended to
April 30, 1998. For the three month period ended March 31, 1997, the Company
received $8.0 million in dividends from the Bank and declared a common stock
dividend of $.06 per share, which was paid on April 4, 1997.
The Bank's principal sources of funds are deposits, advances from the FHLB
of Chicago, reverse repurchase agreements, principal repayments on loans and
mortgage-backed securities, proceeds from the sale of loans and funds provided
by operations. While scheduled loan and mortgage-backed securities amortization
and maturing interest-bearing deposits are a relatively predictable source of
funds, deposit flows and loan and mortgage-backed securities prepayments are
greatly influenced by economic conditions, the general level of interest rates
and competition. The Bank utilizes particular sources of funds based on
comparative costs and availability. The Bank generally manages the pricing of
its deposits to maintain a steady deposit balance, but has from time to time
decided not to pay rates on deposits as high as its competition, and when
necessary, to supplement deposits with longer term and/or less expensive
alternative sources of funds. During the current three month period the Bank
borrowed $25.0 million of primarily fixed-rate FHLB of Chicago advances and
repaid $55.0 million of maturing advances. The Bank was able to fund mortgage
loan originations held for investment for the current quarter with liquidity
from prepayments and amortization from its mortgage loan and mortgage-backed
securities portfolios.
The Bank is required by regulation to maintain specific minimum levels of
liquid investments. Regulations currently in effect require the Bank to maintain
liquid assets at least equal to 5.0% of the sum of its average daily balance of
net withdrawable accounts and borrowed funds due in one year or less. This
regulatory requirement may be changed from time to time to reflect current
economic conditions. During the quarter ended March 31, 1997, the Bank's average
liquidity ratio was 6.42%. At March 31, 1997, total liquidity was $143.3
million, or 6.04%, which was $24.6 million in excess of the 5.0% regulatory
requirement.
During the three months ended March 31, 1997, the Bank originated and
purchased loans totaling $195.9 million compared with $240.2 million during the
same period a year ago. Loan sales and swaps for the three months ended March
31, 1997, were $19.8 million, compared to $71.3 million for the prior year
period, reflecting the Bank's current strategy of holding more loan originations
for investment purposes during the current three month period. The Bank has
outstanding commitments to originate and purchase loans of $160.0 million and
commitments to sell or swap loans of $18.1 million at March 31, 1997.
20
Asset/Liability Management
The Bank's overall asset/liability management strategy is directed toward
reducing the Bank's exposure to interest rate risk over time in changing
interest rate environments. Asset/liability management is a daily function of
the Bank's management due to continual fluctuations in interest rates and
financial markets.
As part of its asset/liability strategy, the Bank has implemented a policy
to maintain its cumulative one-year hedged interest sensitivity gap ratio within
a range of (15)% to 15% of total assets, which helps the Bank to maintain a more
stable net interest rate spread in various interest rate environments. The gap
ratio fluctuates as a result of market conditions and management's expectation
of future interest rate trends. Under OTS Thrift Bulletin 13, the Bank is
required to measure its interest rate risk assuming various increases and
decreases in general interest rates, and the effect on net interest income and
market value of portfolio equity. An interest rate risk policy has been approved
by the Board of Directors setting the limits to changes in net interest income
and market value of portfolio equity at the various rate scenarios required. In
addition, the OTS has added an interest rate risk component to its regulatory
capital requirements which could require an additional amount of capital based
on the level of adverse change in a savings institution's market value of
portfolio equity, resulting from changes in interest rates. Management
continually reviews its interest rate risk policies in light of potential higher
capital requirements that may result from the final adoption of an interest rate
risk component to the OTS capital requirements.
The Bank's asset/liability management strategy emphasizes the origination
of one- to four-family adjustable-rate loans and other loans which have shorter
terms to maturity or reprice more frequently than fixed-rate mortgage loans,
yet, provide a positive margin over the Bank's cost of funds. In response to
customer demand, the Bank originates fixed-rate mortgage loans, but has
historically generally sold the conforming loans in the secondary market in
order to maintain its interest rate sensitivity levels. During the last nine
months, the Bank has been retaining the majority of the retail fixed-rate
originations in portfolio for investment purposes to help utilize the Bank's
higher capital base resulting from the merger with NSBI.
In conjunction with the strategy discussed above, management has also
hedged the Bank's exposure to interest rate risk primarily by committing to sell
fixed-rate mortgage loans for future delivery. Under these commitments, the Bank
agrees to sell fixed-rate loans at a specified price and at a specified future
date. The sale of fixed-rate mortgage loans for future delivery has enabled the
Bank to continue to originate new mortgage loans, and to generate gains on sale
of these loans as well as loan servicing fee income, while maintaining its gap
ratio within the parameters discussed above. Most of these forward sale
commitments are conducted with FNMA and FHLMC with respect to loans that conform
to the requirements of these government agencies. The forward commitment of
mortgage loans presents a risk to the Bank if the Bank is not able to deliver
the mortgage loans by the commitment expiration date. If this should occur, the
Bank would be required to pay a fee to the buyer. The Bank attempts to mitigate
this risk by charging potential retail borrowers a 1% fee to fix the interest
rate, or by requiring the interest rate to float at market rates until shortly
before closing. In its wholesale lending operation, there is more risk due to
the competitive inability to charge a rate lock fee to the mortgage brokers,
which the Bank tries to offset by using higher assumed fallout rates. In
addition, the Bank uses U.S. Treasury bond futures contracts to hedge some of
the mortgage pipeline exposure. These futures contracts are used to hedge
mortgage loan production in those circumstances where loans are not sold forward
as described above.
21
The table below sets forth the scheduled repricing or maturity of the
Bank's assets and liabilities at March 31, 1997, based on the assumptions used
by the FHLB of Chicago with respect to NOW, checking and passbook account
withdrawals and loan prepayment percentages. In a departure from the FHLB of
Chicago assumptions, which assume a 0% prepayment for other borrowings, the Bank
assumes that the collateralized mortgage obligations of Mid America Finance
Corporation included in other borrowings prepay at the same rate used for the
mortgage-backed securities collateralizing these obligations, while the
Northwestern Acceptance Corporation collateralized mortgage obligations are
adjustable-rate and included in the 6 months or less category.
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. The table does not necessarily indicate the impact of general
interest rate movements on the Bank's net interest yield because the repricing
of certain categories of assets and liabilities is subject to competitive and
other pressures beyond the Bank's control. As a result, certain assets and
liabilities indicated as maturing or otherwise repricing within a stated period
may, in fact, mature or reprice at different times and at different volumes.
At March 31, 1997
------------------------------------------------------------------------
More Than More Than More Than
6 Months 6 Months 1 Year 3 Years More Than
or Less to 1 Year to 3 Years to 5 Years 5 Years Total
----------- ---------- ----------- ----------- ---------- ----------
(In thousands)
Interest-earning assets:
Loans receivable $658,590 484,098 716,238 241,996 394,728 2,495,650
Mortgage-backed securities 139,436 32,014 46,198 32,054 86,234 335,936
Interest-bearing deposits 55,277 -- -- -- -- 55,277
Federal funds sold 49,625 -- -- -- -- 49,625
Investment securities (1) 80,369 2,946 14,938 -- 45,453 143,706
-------- ------- ------- ------- ------- ---------
Total interest-earning assets 983,297 519,058 777,374 274,050 526,415 3,080,194
Less yield adjustments, net 367 356 (31) (422) (667) (397)
-------- ------- ------- ------- ------- ---------
Total net interest-earning assets 983,664 519,414 777,343 273,628 525,748 3,079,797
Impact of hedging activity (2) 6,284 -- -- -- (6,284) --
-------- ------- ------- ------- ------- ---------
Total net interest-earning assets
adjusted for impact of hedging activities 989,948 519,414 777,343 273,628 519,464 3,079,797
-------- ------- ------- ------- ------- ---------
Interest-bearing liabilities:
NOW and checking accounts 13,026 11,918 43,621 27,096 57,579 153,240
Money market accounts 133,703 -- -- -- -- 133,703
Passbook accounts 56,407 51,612 188,900 117,340 249,347 663,606
Certificate accounts 573,446 340,008 299,911 42,919 12,645 1,268,929
FHLB advances 30,000 20,000 240,000 155,000 5,500 450,500
Other borrowings 76,830 22,548 51,236 -- 26,726 177,340
-------- ------- ------- ------- ------- ---------
Total interest-bearing liabilities 883,412 446,086 823,668 342,355 351,797 2,847,318
-------- ------- ------- ------- ------- ---------
Interest sensitivity gap $106,536 73,328 (46,325) (68,727) 167,667 232,479
======== ======= ======= ======= ======= =========
Cumulative gap $106,536 179,864 133,539 64,812 232,479
======== ======= ======= ======= =======
Cumulative gap assets as a percentage
of total assets 3.29% 5.56 4.13 2.00 7.18
Cumulative net interest-earning assets
as a percentage of interest-bearing
liabilities 112.06 113.53 106.20 102.60 108.16
- -----------------------------
(1) Includes $30.7 million of stock in FHLB of Chicago in 6 months or less.
(2) Represents forward commitments to sell long-term fixed-rate mortgage loans.
22
Average Balance Sheets
The following table sets forth certain information relating to the Bank's
consolidated statements of financial condition and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Such yields
and costs are derived by dividing income or expense by the average balance of
assets or liabilities, respectively, for the periods shown. Average balances are
derived from average daily balances. The yield/cost at March 31, 1997 includes
fees which are considered adjustments to yield.
Three Months Ended March 31, At March 31,
------------------------------------------------------------------ ---------------------
1997 1996 1997
-------------------------------- -------------------------------- ---------------------
Average Average
Average Yield/ Average Yield/ Yield/
Balance Interest Cost Balance Interest Cost Balance Cost
------------ -------- -------- ------------ -------- -------- ------------ -------
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans receivable $2,462,723 47,524 7.72% $1,451,667 27,978 7.71% $2,494,954 7.82%
Mortgage-backed securities 345,882 6,018 6.96 269,581 4,177 6.20 336,785 7.00
Interest-bearing deposits (1) 67,929 1,044 6.15 20,107 442 8.70 55,277 5.21
Federal funds sold (1) 38,052 589 6.19 11,045 235 8.42 49,625 5.26
Investment securities (2) 151,534 2,881 7.60 91,329 1,420 6.15 143,156 6.67
---------- ------- ---------- ------- ----------
Total interest-earning assets 3,066,120 58,056 7.57 1,843,729 34,252 7.43 3,079,797 7.59
Non-interest earning assets 161,524 83,404 156,652
---------- ---------- ----------
Total assets $3,227,644 $1,927,133 $3,236,449
========== ========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits $2,197,211 23,789 4.39 $1,285,027 15,037 4.69 $2,219,478 4.45
Borrowed funds 643,278 10,626 6.61 428,652 7,415 6.85 627,840 6.71
---------- ------- ---------- ------- ----------
Total interest-bearing liabilities 2,840,489 34,415 4.89 1,713,679 22,452 5.23 2,847,318 4.95
------- ---- ------- ---- ----
Non-interest bearing deposits 67,820 59,434 71,587
Other liabilities 65,745 44,609 62,434
---------- ---------- ----------
Total liabilities 2,974,054 1,817,722 2,981,339
Stockholders' equity 253,590 109,411 255,110
---------- ---------- ----------
Liabilities and stockholders' equity $3,227,644 $1,927,133 $3,236,449
========== ========== ==========
Net interest income/interest
rate spread $23,641 2.68% $11,800 2.20% 2.64%
======= ==== ======= ==== ====
Net earning assets/net yield on
average interest-earning assets $ 225,631 3.08% $ 130,050 2.56% $ 232,479 N/A
========== ==== ========== ==== ==========
Ratio of interest-earning assets to
interest-bearing liabilities 107.94% 107.59% 108.16%
========== ========== ==========
- ----------------
(1) Includes pro-rata share of interest income received on outstanding drafts
payable.
(2) Income and yields are stated on a taxable equivalent basis.
23
Rate/Volume Analysis of 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 March 31, 1997
Compared to March 31, 1996
Increase (Decrease)
----------------------------------
Volume Rate Net
----------- ---------- ---------
(In thousands)
Interest-earning assets:
Loans receivable $19,514 32 19,546
Mortgage-backed securities 1,285 556 1,841
Interest bearing deposits 764 (162) 602
Federal funds sold 430 (76) 354
Investment securities 1,075 386 1,461
------- ------ ------
Total 23,068 736 23,804
------- ------ ------
Interest-bearing liabilities:
Deposits 9,794 (1,042) 8,752
Borrowed funds 3,489 (278) 3,211
------- ------ ------
Total 13,283 (1,320) 11,963
------- ------ ------
Net change in net interest income $ 9,785 2,056 11,841
======= ====== ======
Comparison of the Three Months Ended March 31, 1997 and 1996
General - Net income for the three months ended March 31, 1997 was $9.3
million, or $.57 per fully-diluted share, compared to net income of $4.2
million, or $.49 per fully-diluted share for the three months ended March 31,
1996.
Net interest income - Net interest income was $23.6 million for the current
quarter, compared to $11.7 million for the quarter ended March 31, 1996, an
increase of $11.8 million. The increase is due to the Company's acquisition of
NSBI on May 30, 1996. The Company's average net interest-earning assets have
increased to $225.6 million for the three months ended March 31, 1997, compared
to $130.1 million for the three months ended March 31, 1996. The Company's net
interest margin improved to 3.08% for the current three month period, compared
to 2.56% for the prior year period, primarily due to the acquisition of NSBI,
which added a substantial amount of low-cost deposits to the Company's funding
base. Included in net interest income for the current quarter is approximately
$510,000 of accelerated purchase accounting discount amortization, primarily due
to the recognition of $425,000 of remaining discount on an investment security
which was called prior to maturity, as well as from higher than anticipated
prepayments on mortgage loans. This higher discount amortization added 6 basis
points to the Company's net interest margin for the three months ended March 31,
1997.
24
Interest income on loans increased $19.5 million as a result of a $1.0
billion increase in average loans receivable while the average yield of the loan
portfolio remained flat. Loans receivable increased $749.7 million due to the
acquisition of NSBI, with the remainder of the increase in the average balance
due to the Bank's originations of one-to-four family adjustable rate mortgage
loans for portfolio purposes. Interest income on mortgage-backed securities
increased $1.8 million, to $6.0 million for the current quarter, due to a $76.3
million increase in average balances, which is primarily a result of the
acquisition of NSBI, and a 76 basis point increase in average yield, again due
to the acquisition of NSBI, whose mortgage-backed securities were primarily
longer-term, fixed-rate securities carrying higher coupon interest rates.
Interest income on investment securities increased $1.4 million to $2.8 million,
primarily due to the acquisition of NSBI. The average balances of federal funds
sold and interest-bearing deposits combined increased, although only nominally
when compared to the increase in the total interest-earning assets of the Bank,
due to the continued maintenance of lower levels of liquidity.
Interest expense on deposit accounts increased $8.8 million to $23.8
million, due to an increase in average deposits of $912.2 million during the
current three month period, offset by a 30 basis point decrease in the average
cost of savings. The Bank acquired $872.0 million in deposits from the NSBI
acquisition, with the remainder of the increase due to increases in checking
balances, and the opening of a new branch. The decrease in the average cost of
savings is primarily due to the acquisition of NSBI, whose deposit base had a
heavier concentration of low-cost passbook accounts than that of the Bank's
prior to the acquisition.
Interest expense on borrowed funds increased $3.2 million to $10.6 million,
as a result of a $214.6 million increase in the average balance of borrowed
funds, offset by a 24 basis point decrease in the average cost of borrowed
funds. The increase in the average balance is due to an increase in FHLB of
Chicago advances of $92.4 million, and an increase in average reverse repurchase
agreements of $64.8 million since March 31, 1996, which have been used to fund
loan originations which have been held in portfolio. Additionally, the Company
borrowed $35.0 million as part of funding the purchase of NSBI.
Provision for loan losses - The Bank provided $300,000 in provision for
loan losses during the current three month period, compared to $200,000 for the
prior three month period. Net charge-offs during the current quarter were
$204,000, compared to net recoveries of $10,000 for the three months ended March
31, 1996. At March 31, 1997, the Bank's allowance for loan losses was $18.0
million, which was .72% of total loans receivable, compared to .73% at December
31, 1996. The ratio of the allowance for loan losses to non-performing loans was
119.6% at March 31, 1997 compared to 133.1% at December 31, 1996.
Non-interest income - Non-interest income increased 12.0% to $5.0 million
for the three months ended March 31, 1997, compared to $4.5 million for the
three months ended March 31, 1996.
Gain on sale of loans and mortgage-backed securities decreased to a
combined $24,000 for the three months ended March 31, 1997, compared to a
combined $49,000 for the three months ended March 31, 1996. Continued
competitive pricing in the retail and wholesale origination markets have made
the generation of gains on the sale of loans difficult. The gain on sale of
mortgage-backed securities represents loans originated by the Bank and swapped
into mortgage-backed securities prior to sale. During the three months ended
March 31, 1997, $1.5 million of loans were swapped and sold, while during the
three months ended March 31, 1996, $9.4 million of loans were swapped and sold.
The Bank sold $18.3 million in mortgage loans during the quarter ended March 31,
1997 compared to $62.0 million during the quarter ended March 31, 1996.
The Company recognized $78,000 in gains on investment securities for the
three months ended March 31, 1997, compared to $-0- for the prior year period,
primarily due to sales of marketable equity securities.
25
Income from real estate operations decreased $134,000 to $1.4 million for
the three months ended March 31, 1997. A summary of income from real estate
operations is as follows:
Three Months Ended March 31,
-------------------------------
1997 1996
-------------- ---------------
# of Pre-tax # of Pre-tax
Lots Income Lots Income
---- -------- ---- ---------
(dollars in thousands)
Ashbury 4 $ 203 9 $ 309
Woods of Rivermist 3 146 - -
Clow Creek Farm 5 194 62 1,665
Harmony Grove 37 685 - -
Fields of Ambria 5 41 - -
Reigate Woods 2 132 - -
Woodbridge 8 15 - -
Other - - - (424)
---- ------ ---- ------
64 $1,416 71 $1,550
==== ====== ==== ======
The four lot sales in Ashbury leaves only four lots unsold in this 1,115-
lot subdivision. All of the remaining lots are under contract. The three sales
in the 31-lot Woods of Rivermist development leave four lots remaining, of which
one is under contract at March 31, 1997. Lot sales in Clow Creek Farm declined
from activity a year ago due to the 260-lot subdivision being nearly sold out.
At March 31, 1997, seven of the remaining 19 lots are under contract. The Fields
of Ambria subdivision is nearly complete, with 5 sales during the current
quarter. Only 10 of the 240 total homesites in this project remain unsold at
March 31, 1997. The 85-lot Reigate Woods subdivision had two sales during the
current quarter, with 50 homesites remaining. Five homesites are under contract
as of March 31, 1997. The Woodbridge subdivision consists of 531 lots. At March
31, 1997, 140 lots were remaining with 79 under contract. The substantial
increase in pending sales is due to implementing a new marketing program of
smaller homes. The Company expects to close the current pending sales during the
second and third quarters of 1997. The $424,000 loss for the three months ended
March 31, 1996 is due to the write-off of capitalized costs for a project which
the Company decided not to exercise its options to purchase two parcels of land.
Deposit account service charges increased $357,000, or 29.6% to $1.6
million for the three months ended March 31, 1997. The increase is due to
improved fee income from checking accounts due to a large increase in the number
of checking accounts opened in response to the Bank's direct mail program. The
number of checking accounts at the Bank exceeded 73,000 at March 31, 1997,
compared to 57,000 at March 31, 1996.
Loan servicing fee income remained relatively flat at $606,000, for the
three months ended March 31, 1997. The average balance of loans serviced for
others increased 6.2% to $1.0 billion for the current three month period,
compared to $981.8 million for the prior year period. Amortization of servicing
rights equaled $81,000 for the three months ended March 31, 1997, compared to
$70,000 for the prior three month period.
Brokerage commissions were $476,000 for both the three months ended March
31, 1997 and the three months ended March 31, 1996. Other non-interest income
increased $209,000, or 36.7% to $779,000 for the three months ended March 31,
1997, due to increased fee income from the addition of six branch locations
acquired from NSBI, compared to the prior year period.
26
Non-interest expense - Non-interest expense increased $3.9 million to $13.0
million for the three months ended March 31, 1997 primarily due to increased
compensation and benefit costs related to the increased staff with the
acquisition of NSBI.
Compensation and benefits increased $2.1 million to $7.4 million for the
three months ended March 31, 1997, compared to the three months ended March 31,
1996. The increase is primarily due to the additional headcount of the Company
due to the merger with NSBI, as well as increased medical benefit costs.
Occupancy expense increased 61.4% to $1.5 million for the three months
ended March 31, 1997 compared to the prior year period, primarily due to the
addition of six branches from the NSBI acquisition, one new branch in Berwyn,
Illinois, in May 1996, as well the opening of a new centralized loan processing
facility in Naperville, Illinois.
Data processing expense increased $28,000 to $459,000 for the three months
ended March 31, 1997 due primarily to greater depreciation expense from
enhancements in the company's PC-based local and wide area network system, as
well as the costs associated with the addition of NSBI.
FDIC insurance premiums decreased significantly due to legislation passed
to recapitalize the SAIF, which insures deposits of savings institutions. The
decrease in the Bank's insurance rate on deposits to 6.48 basis points for the
three months ended March 31, 1997, compared to 23 basis points for the three
months ended March 31, 1996 led to the decrease in FDIC insurance costs.
Offsetting the rate decrease was a $912.2 million increase in average deposits
between the three month periods, primarily a result of the merger with NSBI.
Other non-operating expense increased $1.1 million to $2.5 million for the
three months ended March 31, 1997. The increase is due to the current three
month period including $354,000 in amortization of the core deposit intangible
created in the acquisition of NSBI. Additionally, increased operating costs as a
result of the merger with NSBI accounts for the remainder of the increase in
this category. The Company also incurred $339,000 in amortization expense of
goodwill during the current three month period, which was established in the
acquisition of NSBI. The Company is amortizing goodwill over 20 years on a
straight line basis.
Income taxes - For the three months ended March 31, 1997, income tax
expense totaled $6.0 million, or an effective income tax rate of 39.1%,
compared to $2.7 million, or an effective income tax rate of 38.7%, for the
three months ended March 31, 1996.
27
Part II - Other Information
- -----------------------------
Item 1. Legal Proceedings
The Company is not presently engaged in any legal proceedings of a
material nature.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Shareholders on April 30,
1997.
(b) The names of each director elected at the Annual Meeting are as
follows:
Nicholas J. DiLorenzo, Sr.
Joe F. Hanauer
F. William Trescott
Andrew J. Zych
The names of each of the directors whose term of office continued
after the Annual Meeting are as follows:
Robert Bowles, M.D. Kenneth Koranda
Terry Ekl Henry Smogolski
Allen H. Koranda Lois B. Vasto
(c) The following matter was voted upon at the Annual Meeting and the
number of affirmative votes and negative votes cast with respect
to the matter follows.
(i) Ratification of the appointment of KPMG Peat Marwick LLP as
the Company's independent auditors for the year ending December
31, 1997:
For Against Abstain
--------- ------- -------
9,398,814 17,052 17,155
(d) None.
28
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No. 11. Statement re: Computation of per share earnings
Quarter Ended
March 31, 1997
--------------
Net income $ 9,286,000
===========
Weighted average shares outstanding 15,701,865
Common stock equivalents due to dilutive effect of
of stock options 475,600
-----------
Total weighted average common shares and equivalents
outstanding for primary computation 16,177,465
===========
Primary earnings per share $ .57
===========
Total weighted average common shares and equivalents
outstanding for primary computation 16,177,465
Additional dilutive shares using the end of period
market value versus the average market value when
applying the treasury stock method 16,413
-----------
Total weighted average common shares and equivalents
outstanding for fully diluted computation 16,193,878
===========
Fully-diluted earnings per share $ .57
===========
(b) Reports on Form 8-K.
None.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAF Bancorp. Inc.
--------------------------
(Registrant)
Date: May 9, 1997 By: /s/ Allen H. Koranda
------------ --------------------------
Allen H. Koranda
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
Date: May 9, 1997 By: /s/ Jerry A. Weberling
----------- --------------------------
Jerry A. Weberling
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer)
30