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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, 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 X No
----- -----
The number of shares outstanding of the issuer's common stock, par value $.01
per share, was 15,399,648 at August 12, 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 June 30, 1997 (unaudited) and December 31, 1996........ 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1997 and 1996 (unaudited).............. 4
Consolidated Statements of Changes in Stockholders' Equity
for the Six Months Ended June 30, 1997 and 1996 (unaudited).. 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 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.......... 30
Item 5 Other Information............................................ 30
Item 6 Exhibits and Reports on Form 8-K............................. 31
Signature Page............................................... 32
2
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands)
June 30, December 31,
1997 1996
---------- --------------
(Unaudited)
Assets
- ------
Cash and due from banks $ 37,143 45,732
Interest-bearing deposits 78,065 55,285
Federal funds sold 49,775 24,700
Investment securities, at amortized cost (fair value of $36,001 at
June 30, 1997 and $72,855 at December 31, 1996) 35,262 72,040
Investment securities available for sale, at fair value 82,482 69,049
Stock in Federal Home Loan Bank of Chicago, at cost 26,275 30,729
Mortgage-backed securities, at amortized cost (fair value of $241,209
at June 30, 1997 and $266,340 at December 31, 1996) 240,774 266,658
Mortgage-backed securities available for sale, at fair value 80,391 92,929
Loans receivable held for sale 4,697 6,495
Loans receivable, net of allowance for losses of $18,182
at June 30, 1997 and $17,914 at December 31, 1996 2,538,319 2,423,618
Accrued interest receivable 20,871 20,457
Foreclosed real estate 724 1,257
Real estate held for development or sale 35,264 28,112
Premises and equipment, net 33,977 32,302
Excess of cost over fair value of net assets acquired 25,274 26,347
Other assets 32,171 34,631
---------- ---------
$3,321,464 3,230,341
========== =========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits 2,301,664 2,262,226
Borrowed funds 674,604 632,897
Subordinated capital notes, net 26,743 26,709
Advances by borrowers for taxes and insurance 20,420 18,442
Accrued expenses and other liabilities 39,649 39,442
---------- ---------
Total liabilities 3,063,080 2,979,716
---------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000
shares; none outstanding -- --
Common stock, $.01 par value; authorized 40,000,000 shares;
16,940,405 shares issued; 15,392,517 outstanding at
June 30, 1997, 16,878,302 shares issued;
15,734,733 outstanding at December 31, 1996 169 168
Additional paid-in capital 172,050 171,732
Retained earnings, substantially restricted 112,828 95,356
Unrealized gain on marketable securities, net of tax 490 138
Treasury stock, at cost; 1,547,888 shares at June 30, 1997
and 1,143,569 shares at December 31, 1996 (27,153) (16,769)
---------- ---------
Total stockholders' equity 258,384 250,625
Commitments and contingencies
---------- ---------
$3,321,464 3,230,341
========== =========
See accompanying notes to unaudited consolidated financial statements.
3
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- --------------------
1997 1996 1997 1996
------- ------ ------ ------
(Unaudited) (Unaudited)
Interest income:
Loans receivable $48,871 34,171 96,395 62,149
Mortgage-backed securities 4,363 2,914 8,949 4,757
Mortgage-backed securities available for sale 1,346 2,074 2,778 4,408
Investment securities 1,125 1,324 2,944 2,116
Investment securities available for sale 1,159 552 2,132 1,127
Interest-bearing deposits and federal funds sold 1,977 972 3,610 1,649
------- ------ ------- ------
Total interest income 58,841 42,007 116,808 76,206
------- ------ ------- ------
Interest expense:
Deposits 24,522 17,837 48,311 32,874
Borrowed funds 11,045 8,304 21,671 15,719
------- ------ ------- ------
Total interest expense 35,567 26,141 69,982 48,593
------- ------ ------- ------
Net interest income 23,274 15,866 46,826 27,613
Provision for loan losses 300 250 600 450
------- ------ ------- ------
Net interest income after provision for loan losses 22,974 15,616 46,226 27,163
------- ------ ------- ------
Non-interest income:
Gain (loss) on sale of:
Loans receivable 81 14 99 25
Mortgage-backed securities 1 (100) 7 (62)
Investment securities 10 143 88 143
Foreclosed real estate (43) 2 25 29
Income from real estate operations 1,558 416 2,974 1,966
Deposit account service charges 1,763 1,319 3,325 2,524
Loan servicing fee income 594 633 1,200 1,230
Brokerage commissions 503 485 979 961
Other 943 960 1,722 1,530
------- ------ ------- ------
Total non-interest income 5,410 3,872 10,419 8,346
------- ------ ------- ------
Non-interest expense:
Compensation and benefits 7,354 6,299 14,704 11,512
Office occupancy and equipment 1,528 1,071 3,058 2,019
Advertising and promotion 666 456 1,163 830
Data processing 514 492 973 923
Federal deposit insurance premiums 371 962 737 1,732
Amortization of goodwill 334 113 673 113
Other 2,553 1,955 5,035 3,384
------- ------ ------- ------
Total non-interest expense 13,320 11,348 26,343 20,513
------- ------ ------- ------
Income before income taxes 15,064 8,140 30,302 14,966
Income taxes 4,854 2,947 10,806 5,602
------- ------ ------- ------
Net income $10,210 5,193 19,496 9,394
======= ====== ======= ======
Primary and fully diluted earnings per share: $ .64 .46 1.21 .95
======= ====== ======= ======
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
Six Months Ended June 30, 1997 stock capital earnings net of tax stock Total
- ------------------------------ ----- ---------- -------- ---------- --------- -------
Balance at December 31, 1996 $168 171,732 95,356 138 (16,769) 250,625
Net income - - 19,496 - - 19,496
Proceeds from exercise of 62,103 stock options 1 305 - - (236) 70
Tax benefits from stock-related compensation - 13 - - - 13
Market value adjustment on available
for sale securities - - - 352 - 352
Purchase of treasury stock - - - - (10,148) (10,148)
Cash dividends ($.13 per share) - - (2,024) - - (2,024)
---- ------- ------- ---- ------- -------
Balance at June 30, 1997 $169 172,050 112,828 490 (27,153) 258,384
==== ======= ======= ==== ======= =======
Six Months Ended June 30, 1996
- ------------------------------
Balance at December 31, 1995 $ 59 39,750 80,377 125 (10,005) 110,306
Net income - - 9,394 - - 9,394
Issuance of 7,791,850 shares, including value of
option carryovers, for acquisition of N.S. Bancorp 52 131,186 - - - 131,238
Proceeds from exercise of 3,675 stock options - 13 - - - 13
Tax benefits from stock-related compensation - 7 - - - 7
Market value adjustment on available
for sale securities - - - (950) - (950)
Purchase of treasury stock - - - - (6,535) (6,535)
Cash dividends ($.12 per share) - - (1,247) - - (1,247)
---- ------- ------- ---- ======= =======
Balance at June 30, 1996 $111 170,956 88,524 (825) (16,540) 242,226
==== ======= ======= ==== ======= =======
See accompanying notes to unaudited consolidated financial statements.
5
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended
June 30,
-----------------------
1997 1996
--------- ---------
(Unaudited)
Operating activities:
Net income $ 19,496 $ 9,394
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,488 1,062
Provision for loan losses 600 450
Deferred income tax (benefit) expense (683) 556
Amortization of premiums, discounts, loan fees and servicing rights 1,382 63
Amortization of goodwill and core deposit premium 720 235
Net gain on sale of loans, mortgage-backed securities,
and real estate held for development or sale (3,080) (1,929)
Gain on sale of investment securities (88) (143)
Increase in accrued interest receivable (414) (855)
Net decrease in other assets and liabilities 780 3,678
Loans originated for sale (3,884) (51,564)
Loans purchased for sale (38,731) (46,698)
Sale of loans originated and purchased for sale 44,479 127,717
Sale of mortgage-backed securities available for sale 2,210 26,801
--------- --------
Net cash provided by operating activities 24,275 68,767
--------- --------
Investing activities:
Loans originated for investment (319,638) (251,612)
Principal repayments on loans receivable 280,321 210,752
Principal repayments on mortgage-backed securities 38,367 40,381
Proceeds from maturities of investment securities available for sale 50,936 8,105
Proceeds from maturities of investment securities held to maturity 40,492 77,779
Proceeds from sale of:
Investment securities available for sale 501 444
Real estate held for development or sale 20,231 8,782
Premises and equipment 172 1
Stock in FHLB of Chicago 6,299 300
Purchases of:
Loans receivable held for investment (80,028) (155,379)
Investment securities available for sale (64,229) (5,824)
Investment securities held to maturity (3,244) (1,182)
Stock in FHLB of Chicago (1,845) (3,300)
Real estate held for development or sale (20,598) (3,728)
Premises and equipment (3,353) (2,401)
Payment for purchase of N.S. Bancorp, net of cash acquired -- (174,730)
--------- --------
Net cash used in investing activities (55,616) (251,612)
--------- --------
(continued)
6
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended
June 30,
----------------------------------
1997 1996
----------------- ---------------
(Unaudited)
Financing activities:
Proceeds from FHLB of Chicago advances $100,000 105,000
Proceeds from unsecured term loan -- 35,000
Repayment of FHLB of Chicago advances (55,000) (45,000)
Net decrease in reverse repurchase agreements -- (44,235)
Net decrease in other borrowings (3,974) (2,662)
Issuance of common stock in conjunction with acquisition -- 131,238
Proceeds from exercise of stock options 70 17
Purchase of treasury stock (10,148) (4,073)
Cash dividends (1,885) (1,692)
Net increase in deposits 39,566 24,956
Decrease in advances by borrowers for taxes and insurance 1,978 1,360
-------- -------
Net cash provided by financing activities 70,607 199,909
-------- -------
Increase in cash and cash equivalents 39,266 17,064
-------- -------
Cash and cash equivalents at beginning of period 125,717 77,797
-------- -------
Cash and cash equivalents at end of period $164,983 94,861
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds $ 70,723 52,038
Income taxes 10,600 4,600
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate 972 302
Loans receivable swapped into mortgage-backed securities 2,202 26,873
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 and Six Months Ended June 30, 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 and six months ended June 30, 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 and six month periods ended June 30, 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 Six Months Ended
June 30, June 30,
------------------------- ---------------------------
1997 1996 1997 1996
---------- ---------- ---------- ---------
Primary earnings per share 16,023,558 11,330,278 16,100,279 9,921,336
Fully-diluted earnings per share 16,034,658 11,330,278 16,114,035 9,921,336
========== ========== ========== =========
All share amounts have been adjusted for the 3-for-2 stock split which was paid
in the form of a 50% stock dividend, on July 9, 1997 to shareholders of record
on June 17, 1997. The large increase in average shares outstanding for the three
and six months ended June 30, 1997, is due to the acquisition of N.S. Bancorp,
Inc. ("NSBI" or "Northwestern") on May 30, 1996, whereby the Company issued
7,791,850 of its common shares as part of the merger consideration.
8
(3) Commitments and Contingencies
At June 30, 1997, the Bank had outstanding commitments to originate and
purchase loans of $186.6 million, of which $93.5 million were fixed-rate loans,
with rates ranging from 6.63% to 9.50%, and $93.1 million were adjustable-rate
loans. At June 30, 1997, commitments to sell loans were $6.4 million.
At June 30, 1997, the Bank had outstanding 22 standby letters of credit
totaling $17.4 million, two of which totaled $13.3 million to enhance a
developer's industrial revenue bond financings of commercial real estate in the
Bank's market. These letters of credit are collateralized by mortgage-backed
securities and U.S. Government and agency securities owned by the Bank.
Additionally, the Company had 15 outstanding standby letters of credit totaling
$6.8 million related to real estate development improvements.
(4) 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 six months ended June 30, 1997 and 1996, earnings
per share would have been as follows:
Six Months Ended
June 30,
----------------
1997 1996
-------- ------
As reported:
Primary and fully-diluted earnings per share $1.21 0.95
===== ====
Pro forma:
Basic earnings per share $1.25 1.02
Diluted earnings per share 1.21 0.95
===== ====
(5) Reclassifications
Certain reclassifications of prior quarter amounts have been made to
conform with current quarter presentation.
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 serve in the
past.
The Bank is a consumer-oriented financial institution offering various
financial services to its customers through 21 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. 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.
The Bank was in compliance with all of its capital requirements as of the
dates indicated below:
June 30, 1997 December 31, 1996
----------------------- ----------------------
Percent of Percent of
Amount Assets Amount Assets
---------- ----------- ---------- ----------
(Dollars in thousands)
Stockholder's equity of the Bank $ 278,863 8.47% $ 273,545 8.52%
========= ===== ========== =====
Tangible capital $ 226,156 7.00% $ 219,080 6.96%
Tangible capital requirement 48,482 1.50 47,202 1.50
--------- ----- --------- -----
Excess $ 177,674 5.50% $ 171,878 5.46%
========= ===== ========= =====
Core capital $ 226,156 7.00% $ 219,080 6.96%
Core capital requirement 96,964 3.00 94,404 3.00
---------- ----- ---------- -----
Excess $ 129,192 4.00% $ 124,676 3.96%
========= ===== ========= =====
Core and supplementary capital $ 242,489 14.84% $ 235,057 15.05%
Risk-based capital requirement 130,749 8.00 124,943 8.00
--------- ----- ---------- -----
Excess $ 111,740 6.84% $ 110,114 7.05%
========= ===== ========= =====
Total Bank assets $3,291,214 $3,209,058
Adjusted total Bank assets 3,232,143 3,146,788
Total risk-weighted assets 1,693,778 1,624,489
Adjusted total risk-weighted assets 1,634,358 1,561,782
Investment in Bank's real estate subsidiary 20,156 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:
June 30, December 31,
1997 1996
--------- ------------
(in thousands)
Stockholder's equity of the Bank $278,863 273,545
Goodwill and other non-allowable intangible assets (32,585) (34,368)
Non-permissible subsidiary deduction (20,156) (20,184)
Non-includable purchased mortgage servicing rights (228) (203)
SFAS No. 115 capital adjustment 262 290
-------- -------
Tangible and core capital 226,156 219,080
General loan loss reserves 16,682 16,414
Land loans greater than 80% loan-to-value (349) (437)
-------- -------
Core and supplementary capital $242,489 235,057
======== =======
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. Current OTS regulations require 100% of such
investment in and advances to Mid America Developments and NW Financial was
required to be deducted from capital for purposes of computing regulatory
capital requirements.
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:
6/30/97 3/31/97 12/31/96 9/30/96 6/30/96
-------- ------- -------- ------- -------
(in thousands)
Common stock $ 1,657 1,657 1,657 1,657 1,657
Retained earnings 11,402 10,955 10,642 10,767 12,308
Intercompany advances 7,097 8,263 7,885 7,637 7,729
-------- ------- -------- ------- -------
$ 20,156 20,875 20,184 20,061 21,694
======== ======= ======== ======= =======
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 June 30, 1997, the Bank's total risk-weighted capital would not
have been subject to a deduction based on interest rate risk. At June 30, 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. As of January 1, 1997, BIF
deposits are being assessed for a FICO payment of 1.3 basis points, while SAIF
deposits are being assessed 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. 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 House Banking Committee reported a bill in July 1997
that would require federal savings institutions to convert to a national or
state bank charter within two years of enactment. The bill would allow banks
resulting from the conversion of a savings association to continue to engage in
activities (and hold assets) in which it was lawfully engaged on the day before
enactment. 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 OTS would be merged with the
Office of the Comptroller of the Currency, the agency that regulates national
banks. 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
As of June 30, 1997, total assets of the Company were $3.32 billion, an
increase of $91.1 million or 2.8% from the $3.23 billion at December 31, 1996.
The increase is primarily due to an increase in deposits and borrowings which
were used to fund mortgage loans held for investment.
Cash and short-term investments totaled a combined $165.0 million at June
30, 1997, an increase of $39.3 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 June 30, 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
$3.2 million.
Investment securities available for sale increased $13.4 million to $82.5
million at June 30, 1997. The increase is due to purchases of $64.2 million of
primarily U.S. Government and agency securities, offset by maturities of $48.0
million, and sales of marketable equity securities with a book value of
$413,000. The Company recognized a gain on the sale of investment securities of
$88,000 during the six months ended June 30, 1997. At June 30, 1997, gross
unrealized gains in the available for sale portfolio were $1.1 million, compared
to $592,000 at December 31, 1996.
Mortgage-backed securities classified as held to maturity decreased $25.9
million to $240.8 million at June 30, 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.
Mortgage-backed securities available for sale decreased $12.5 million to
$80.4 million at June 30, 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 six month period ended June
30, 1997. Gross unrealized losses in the available for sale portfolio were
$287,000 at June 30, 1997, compared to $352,000 at December 31, 1996.
14
The Bank has $154.4 million of CMO securities at June 30, 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 June 30, 1997, and December
31, 1996 are $34.5 million, and $38.1 million, respectively of FHLMC securities
with an average yield of 8.70% 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 $112.9 million,
or 4.6%, to $2.54 billion at June 30, 1997. The Bank originated and purchased
(through wholesale originations) $440.4 million during the six months period
ended June 30, 1997. Offsetting this increase was amortization and prepayments
totaling $280.3 million, as well as sales of $45.4 million. Loans receivable
held for sale decreased $1.8 million to $4.7 million as of June 30, 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 June 30, 1997 is a result of this strategy.
The allowance for loan losses totaled $18.2 million at June 30, 1997, an
increase of $268,000 from the balance at December 31, 1996, due to a $600,000
provision for loan losses, offset by net charge-offs of $332,000. The Bank's
allowance for loan losses to total loans outstanding was .71% at June 30, 1997,
compared to .73% at December 31, 1996. Non-performing loans increased $899,000
to $14.4 million at June 30, 1997, or .56% of total loans receivable, compared
to $13.5 million, or .55% at December 31, 1996.
Real estate held for development or sale increased $7.2 million to $35.3
million at June 30, 1997. A summary of real estate held for development or sale
is as follows:
June 30, December 31,
1997 1996
-------- ------------
(in thousands)
MAF Developments, Inc.
Harmony Grove $ 3,944 4,164
Creekside of Remington 1,799 1,760
Clow Creek Farm 234 717
Other 12,928 4,392
------- ------
18,905 11,033
------- ------
Mid America Developments, Inc.
Ashbury 50 122
Woods of Rivermist 60 546
------- ------
110 668
------- ------
NW Financial, Inc.
Woodbridge 9,215 8,348
Reigate Woods 5,442 6,263
Fields of Ambria 1,592 1,800
------- ------
16,249 16,411
------- ------
$35,264 28,112
======= ======
The Company had 55 lot sales in Harmony Grove for the six months ended June
30, 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 June 30, 1997 there are 94 lots under contract in Harmony Grove.
Clow Creek Farm is substantially complete, with only 12 lots remaining, of which
three are under contract as of June 30, 1997. The Creekside of Remington
subdivision, with 170 total lots, and 135 lots remaining, had two sales during
the current six month period. Eleven lots are under contract as of
15
June 30, 1997. The $8.5 million increase in the other category represents an
additional land parcel purchased for future development. The other category
represents 241 acres of land in Naperville that are expected to be developed
into approximately 550 residential lots.
Ashbury has been fully sold out, with the sale of the remaining eight lots
of this 1,115-lot subdivision during the current six month period. The balance
represents a small commercial parcel currently being offered for sale. The
balance in the Woods of Rivermist subdivision decreased due to five lot sales
during the current six month period. At June 30, 1997, the development is
substantially complete, with two lots remaining.
The balance of Reigate Woods decreased due to continued sales of homesites.
At June 30, 1997, there are 46 remaining homesites, with two homesites under
contract. The $867,000 increase in Woodbridge is primarily due to additional
costs on homes under construction. At June 30, 1997, there are 106 homesites
remaining, with 81 under contract. There were six home sales in Fields of
Ambria during the six months ended June 30, 1997. At June 30, 1997, there are
nine homesites remaining, none of which were under contract.
Deposits increased $39.4 million, to $2.30 billion at June 30, 1997. After
consideration of interest credited to accounts of $47.2 million for the six
months ended June 30, 1997, actual cash outflows were $7.8 million.
Borrowed funds, which consist primarily of FHLB of Chicago advances and CMO
bonds payable, increased $41.7 million to $674.6 million at June 30, 1997. The
primary reason for the increase is due to the Bank increasing its FHLB of
Chicago advances by a net $45.0 million since December 31, 1996. The increases
were primarily to fund loan volume held for investment. Offsetting this
increase was a $3.4 million decrease in the Bank's CMO bonds payable issued by
its special-purpose finance subsidiaries.
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, 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.
16
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 June 30, 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 June 30, 1997.
For the quarter ended June 30, 1997, interest income that would have been
recorded on non-accrual loans (had they been performing according to their
original terms) amounted to $248,000, compared to $136,000 for the three months
ended June 30, 1996.
As of June 30, 1997, the Bank's ratio of non-performing loans to total
loans was .56%, compared to .55% at December 31, 1996 and .56% at June 30, 1996.
Foreclosed real estate decreased $533,000 to $724,000 at June 30, 1997, due
to the sale of five single family residential properties. At June 30, 1997,
foreclosed real estate consists primarily of four 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)
June 30, 1997 30 $3,946 .15% 73 $13,378 .52%
== ====== === == ======= ===
March 31, 1997 46 $4,913 .20% 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%
== ====== === == ======= ===
17
Loan Portfolio Composition. The following table sets forth the
composition of the Bank's loan portfolio in dollar amounts at the dates
indicated:
At
------------------------------------------------------------------------------
6/30/97 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 $2,258,938 2,198,886 2,160,525 2,114,595 2,032,102 1,227,470 1,156,852
Held for sale 4,697 6,284 6,495 1,250 9,314 14,817 24,327
Multi-family 97,515 97,483 92,968 93,246 94,713 81,919 80,817
Commercial 44,881 45,459 46,313 45,875 46,101 45,087 45,115
Construction 17,105 17,277 17,263 15,854 16,090 17,860 16,403
Land 26,854 26,561 25,685 22,932 26,644 26,149 22,608
--------- --------- --------- --------- --------- --------- ---------
Total real estate loans 2,449,990 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 88,868 88,595 86,614 83,786 79,193 75,902 74,380
Home equity loans 22,866 13,634 14,251 13,126 10,525 8,877 7,537
Other 4,797 5,838 5,009 4,797 4,110 3,946 3,494
--------- --------- --------- --------- --------- --------- ---------
Total consumer loans 116,531 108,067 105,874 101,709 93,828 88,725 85,411
Commercial business lines 2,312 2,333 1,871 2,098 1,821 2,220 2,234
--------- --------- --------- --------- --------- --------- ---------
Total other loans 118,843 110,400 107,745 103,807 95,649 90,945 87,645
--------- --------- --------- --------- --------- --------- ---------
Total loans receivable 2,568,833 2,502,350 2,456,994 2,397,559 2,320,613 1,504,247 1,433,767
Less:
Loans in process 6,990 6,700 7,620 6,406 6,715 8,843 7,893
Unearned discounts, premiums
and deferred loan fees, net 645 696 1,347 2,572 3,245 (1,416) (914)
Allowance for loan losses 18,182 18,010 17,914 17,589 17,254 9,498 9,288
--------- --------- --------- --------- --------- --------- ---------
Total loans receivable, net 2,543,016 2,476,944 2,430,113 2,370,992 2,293,399 1,487,322 1,417,500
Loans receivable held for sale (4,697) (6,284) (6,495) (1,250) (9,314) (14,817) (24,327)
--------- --------- --------- --------- --------- --------- ---------
Loans receivable, net $2,538,319 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
----------------------------------------------------------------
6/30/97 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 $ 8,965 8,757 7,680 5,929 5,415 2,801 1,925
Accruing loans 91 days or more overdue 845 1,008 896 1,589 1,940 1,235 1,440
------- ------ ------ ------ ------ ------ ------
Total 9,810 9,765 8,576 7,518 7,355 4,036 3,365
------- ------ ------ ------ ------ ------ ------
Commercial real estate, construction and land loans:
Non-accrual loans 4,067 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 4,067 4,853 4,461 5,759 5,191 4,760 4,788
------- ------ ------ ------ ------ ------ ------
Other loans:
Non-accrual loans 461 366 353 385 287 223 163
Accruing loans 91 days or more overdue 25 79 74 23 -- -- 15
------- ------ ------ ------ ------ ------ ------
Total 486 445 427 408 287 223 178
------- ------ ------ ------ ------ ------ ------
Total non-performing loans:
Non-accrual loans 13,493 13,377 11,795 7,203 6,135 3,463 2,299
Accruing loans 91 days or more overdue 870 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 $14,363 15,063 13,464 13,685 12,833 9,019 8,331
======= ====== ====== ====== ====== ====== ======
Non-accrual loans to total loans .53% .54 .48 .30 .27 .23 .16
Accruing loans 91 days or more overdue to total
loans .03 .07 .07 .09 .10 .08 .12
Restructured or renegotiated loans to total loans .00 .00 .00 .18 .19 .29 .31
------- ------ ------ ------ ------ ------ ------
Non-performing loans to total loans .56% .61 .55 .57 .56 .60 .59
======= ====== ====== ====== ====== ====== ======
Foreclosed real estate (net of related reserves):
One- to four-family $ 724 773 1,257 1,068 888 109 249
Commercial, construction and land -- -- -- -- -- -- --
------- ------ ------ ------ ------ ------ ------
Total $ 724 773 1,257 1,068 888 109 249
======= ====== ====== ====== ====== ====== ======
Non-performing loans and foreclosed real estate
to total loans and foreclosed real estate .59% .63 .60 .62 .60 .61 .61
======= ====== ====== ====== ====== ====== ======
Total non-performing assets $15,087 15,836 14,721 14,753 13,721 9,128 8,580
======= ====== ====== ====== ====== ====== ======
Total non-performing assets to total assets .45% .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, loans to and investments in MAF
Developments, cash dividends to shareholders and repurchases of the Company's
common stock under its stock repurchase programs. 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 is generally
renewed annually, and matures on April 30, 1998. For the six month period ended
June 30, 1997, the Company received $15.0 million in dividends from the Bank and
declared common stock dividends of $.13 per share. In addition, the Company has
repurchased 393,001 shares of its common stock since December 31, 1996 at an
average price of $25.67 per share.
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 six month period the Bank
borrowed $100.0 million of fixed-rate FHLB of Chicago advances and repaid $55.0
million of maturing advances. The Bank was able to fund the remainder of its
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 June 30, 1997, the Bank's average
liquidity ratio was 7.28%. At June 30, 1997, total liquidity was $166.5 million,
or 6.95%, which was $46.7 million in excess of the 5.0% regulatory requirement.
During the six months ended June 30, 1997, the Bank originated and
purchased loans totaling $440.4 million compared with $502.4 million during the
same period a year ago. Loan sales and swaps for the six months ended June 30,
1997, were $45.4 million, compared to $152.9 million for the prior year period,
reflecting the Bank's current strategy of holding more mortgage loan
originations for investment purposes during the current six month period. The
Bank has outstanding commitments to originate and purchase mortgage loans of
$186.6 million and commitments to sell or swap loans of $6.4 million at June 30,
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 six
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 June 30, 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 June 30, 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 $ 643,884 482,280 756,496 247,788 431,394 2,561,842
Mortgage-backed securities 145,161 19,166 43,731 30,425 81,892 320,375
Interest-bearing deposits 78,065 -- -- -- -- 78,065
Federal funds sold 49,775 -- -- -- -- 49,775
Investment securities (1) 81,217 14,969 2,974 -- 45,399 144,559
---------- ------- ------- ------- ------- ---------
Total interest-earning assets 998,102 516,415 803,201 278,213 558,685 3,154,616
Less yield adjustments, net 302 317 (18) (418) (577) (394)
---------- ------- ------- ------- ------- ---------
Total net interest-earning assets 998,404 516,732 803,183 277,795 558,108 3,154,222
Impact of hedging activity (2) 4,696 -- -- -- (4,696) --
---------- ------- ------- ------- ------- ---------
Total net interest-earning assets
adjusted for impact of hedging
activities 1,003,100 516,732 803,183 277,795 553,412 3,154,222
---------- ------- ------- ------- ------- ---------
Interest-bearing liabilities:
NOW and checking accounts 12,822 11,732 42,940 26,673 56,613 150,780
Money market accounts 132,129 -- -- -- -- 132,129
Passbook accounts 56,558 51,750 189,406 117,655 250,016 665,385
Certificate accounts 587,411 328,218 309,568 38,763 13,167 1,277,127
FHLB advances 40,000 35,000 265,000 180,000 5,500 525,500
Other borrowings 95,769 27,352 25,983 -- 26,743 175,847
---------- ------- ------- ------- ------- ---------
Total interest-bearing liabilities 924,689 454,052 832,897 363,091 352,039 2,926,768
---------- ------- ------- ------- ------- ---------
Interest sensitivity gap $ 78,411 62,680 (29,714) (85,296) 201,373 227,454
========== ======= ======= ======= ======= =========
Cumulative gap $ 78,411 141,091 111,377 26,081 227,454
========== ======= ======= ======= =======
Cumulative gap as a percentage
of total assets 2.36% 4.25 3.35 .79 6.85
Cumulative net interest-earning assets as
a percentage of interest-bearing
liabilities 108.48 110.23 105.04 101.01 107.77
- -----------------------
(1) Includes $26.3 million of stock in FHLB of Chicago in 6 months or less.
(2) Represents forward commitments to sell long-term fixed-rate mortgage loans.
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
June 30, 1997 includes fees which are considered adjustments to yield.
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------------------------ ---------------------------------
1997 1996 1997
---------------------------- ---------------------------- ---------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------ -------- -------- ------- -------- -------- -------
(dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $2,519,289 48,871 7.76% $1,778,237 34,181 7.68% $2,491,162 96,395 7.74%
Mortgage-backed
securities 325,201 5,709 7.02 308,763 4,988 6.46 335,484 11,727 6.99
Interest-bearing
deposits /(1)/ 76,070 1,201 6.25 35,615 706 7.84 72,022 2,245 6.20
Federal funds sold /(1)/ 48,720 776 6.30 16,024 265 6.54 43,416 1,365 6.25
Investment securities /(2)/ 143,454 2,373 6.54 119,827 1,946 6.42 147,472 5,254 7.09
---------- ------- ---------- ------- ---------- --------
Total interest-earning
assets 3,112,734 58,930 7.56 2,258,466 42,086 7.44 3,089,556 116,986 7.57
Non-interest earning
assets 162,759 135,058 162,145
---------- ---------- ----------
Total assets $3,275,493 2,393,524 $3,251,701
========== ========== ==========
Liabilities and
stockholders' equity:
Interest-bearing
liabilities:
Deposits 2,214,177 24,522 4.44 1,591,738 17,837 4.49 2,205,741 48,311 4.42
Borrowed funds 662,899 11,045 6.60 490,380 8,304 6.71 653,143 21,671 6.60
---------- ------- ---------- ------ ---------- --------
Total interest-bearing
liabilities 2,877,076 35,567 4.94 2,082,118 26,141 5.02 2,858,884 69,982 4.92
------- ---- ------ ---- ---------- -------- ----
Non-interest bearing
deposits 74,287 61,819 71,071
Other liabilities 66,075 92,891 65,911
---------- ---------- ----------
Total other liabilities 140,362 154,710 136,982
---------- ---------- ----------
Total liabilities 3,017,438 2,236,828 2,995,866
Stockholders' equity 258,055 156,696 255,835
---------- ---------- ----------
Liabilities and
stockholders' equity $3,275,493 $2,393,524 $3,251,701
========== ========== ==========
Net interest
income/interest rate
spread $23,363 2.62% $15,945 2.42% $ 47,004 2.65%
======= ==== ====== ==== ======== ====
Net earning assets/net
yield on average
interest-earning assets $ 235,658 3.00% $ 176,348 2.82% $ 230,672 3.04%
========== ==== ========== ==== ========== ====
Ratio of
interest-earning assets
to interest-bearing liabilities
108.19% 108.47% 108.07%
========== ========== ==========
1996 At June 30,1997
----------------------------- ---------------
Average
Average Yield/
Balance Interest Cost Balance Cost
------- -------- ------- ------- ----
Assets:
Interest-earning assets:
Loans receivable $1,623,875 62,159 7.65% $2,561,198 7.87%
Mortgage-backed
securities 290,770 9,165 6.30 321,165 7.04
Interest-bearing
deposits/(1)/ 28,015 1,148 8.11 78,065 5.39
Federal funds sold/(1)/ 13,609 500 7.27 49,775 5.46
Investment securities/(2)/ 106,161 3,366 6.27 144,019 6.29
---------- -------- ----------
Total interest-earning
assets 2,062,430 76,338 7.39 3,154,222 7.61
Non-interest earning
assets 109,834 167,242
---------- ----------
Total assets $2,172,264 $3,321,464
========== ==========
Liabilities and
stockholders' equity:
Interest-bearing
liabilities:
Deposits 1,446,329 32,874 4.56 2,225,421 4.49
Borrowed funds 462,055 15,719 6.74 701,347 6.70
---------- -------- ----------
Total interest-bearing-
liabilities 1,908,384 48,593 5.09 2,926,768 5.02
-------- ---- ----
Non-interest bearing
deposits 60,961 76,243
Other liabilities 69,130 60,069
---------- ----------
Total other liabilities 130,091 136,312
---------- ----------
Total liabilities 2,038,475 3,063,080
Stockholders' equity 133,789 258,384
---------- ----------
Liabilities and
stockholders' equity $2,172,264 $3,321,464
========== ==========
Net interest
income/interest rate
spread $27,745 2.30% 2.59%
======= ==== ====
Net earning assets/net
yield on average
interest-earning assets $ 154,046 2.69% $ 227,454 N/A
========== ==== ========= ===
Ratio of
interest-earning assets
to interest-bearing
liabilities 108.07% 107.77%
========== ==========
- -------------------------
(1) Includes prorata 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 Six Months Ended
June 30, 1997 June 30, 1997
Compared to Compared to
June 30, 1996 June 30, 1996
Increase (Decrease) Increase (Decrease)
------------------------------------ -----------------------------------
Volume Rate Net Volume Rate Net
----------- ---------- ---------- ---------- ----------- ----------
(In thousands)
Interest-earning assets:
Loans receivable $14,369 321 14,690 33,526 710 34,236
Mortgage-backed securities 275 446 721 1,499 1,063 2,562
Interest-bearing deposits 661 (166) 495 1,419 (322) 1,097
Federal funds sold 521 (10) 511 943 (78) 865
Investment securities 390 37 427 1,415 473 1,888
------- ---- ------ ------ ------ ------
Total $16,216 628 16,844 38,802 1,846 40,648
------- ---- ------ ------ ------ ------
Interest-bearing liabilities:
Deposits 6,897 (212) 6,685 16,508 (1,071) 15,437
Borrowed funds 2,877 (136) 2,741 6,275 (323) 5,952
------- ---- ------ ------ ------ ------
Total 9,774 (348) 9,426 22,783 (1,394) 21,389
------- ---- ------ ------ ------ ------
Net change in net interest income $ 6,442 976 7,418 16,019 3,240 19,259
======= ==== ====== ====== ====== ======
Comparison of the Three Months Ended June 30, 1997 and 1996
General - Net income for the three months ended June 30, 1997 was $10.2
million, or $.64 per fully-diluted share, compared to net income of $5.2
million, or $.46 per fully-diluted share for the three months ended June 30,
1996. Results between the two periods are generally not comparable due to the
Company's acquisition of NSBI on May 30, 1996.
Net interest income - Net interest income was $23.3 million for the current
quarter, compared to $15.9 million for the quarter ended June 30, 1996, an
increase of $7.4 million. The increase is due primarily to the Company's
acquisition of NSBI on May 30, 1996. The Company's average net interest-earning
assets increased to $235.7 million for the three months ended June 30, 1997,
compared to $176.3 million for the three months ended June 30, 1996. The
Company's net interest margin improved to 3.00% for the current three month
period, compared to 2.82% 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.
Interest income on loans increased $14.7 million as a result of a $741.1
million increase in average loans receivable as well as a 8 basis point increase
in the average yield of the loan portfolio. The increase is primarily due to the
acquisition of NSBI. Interest income on mortgage-backed securities increased
$721,000, to $5.7 million for the current quarter, due to a $16.4 million
increase in average balances, which is primarily a result of the acquisition
24
of NSBI, and a 56 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 $408,000 to $2.3 million, primarily
due to the acquisition of NSBI. The average balances of federal funds sold and
interest-bearing deposits combined increased $73.2 million, due to higher
prepayments in loans receivable.
Interest expense on deposit accounts increased $6.7 million to $24.5 million,
due to an increase in average deposits of $622.4 million during the current
three month period, offset by a 5 basis point decrease in the average cost of
savings. The increase is primarily due to the acquisition of NSBI, with the
remainder of the increase due to increases in checking balances. 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 $2.7 million to $11.0 million, as
a result of a $172.5 million increase in the average balance of borrowed funds,
offset by a 11 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 $75.7 million, and an increase in average reverse repurchase
agreements of $58.3 million, 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 $250,000 for the prior
three month period. Net charge-offs during the current quarter were $128,000,
compared to $216,000 for the three months ended June 30, 1996. At June 30,
1997, the Bank's allowance for loan losses was $18.2 million, which was .71% of
total loans receivable, compared to .73% at December 31, 1996. The ratio of the
allowance for loan losses to non-performing loans was 126.6% at June 30, 1997
compared to 133.1% at December 31, 1996.
Non-interest income - Non-interest income increased 39.7% to $5.4 million for
the three months ended June 30, 1997, compared to $3.9 million for the three
months ended June 30, 1996.
Gain on sale of loans and mortgage-backed securities increased to a combined
$82,000 for the three months ended June 30, 1997, compared to a combined loss of
$86,000 for the three months ended June 30, 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 June 30, 1997,
$667,000 of loans were swapped and sold, while during the three months ended
June 30, 1996, $17.5 million of loans were swapped and sold. The Bank sold
$24.9 million in mortgage loans during the quarter ended June 30, 1997 compared
to $64.1 million during the quarter ended June 30, 1996.
The Company recognized $10,000 in gains on investment securities for the three
months ended June 30, 1997, compared to $143,000 for the prior year period,
primarily due to sales of marketable equity securities.
25
Income from real estate operations increased $1.1 million to $1.6 million for
the three months ended June 30, 1997. A summary of income from real estate
operations is as follows:
Three Months Ended June 30,
---------------------------------------------
1997 1996
---------------------- ---------------------
# of Pre-tax # of Pre-tax
Lots Income Lots Income
--------- ----------- --------- ----------
(dollars in thousands)
Ashbury 4 $ 87 3 $ 19
Woods of Rivermist 2 74 - -
Clow Creek Farm 7 271 8 196
Harmony Grove 18 166 - -
Creekside of Remington 2 6 - -
Fields of Ambria 1 (3) 3 17
Reigate Woods 4 183 1 98
Woodbridge 34 774 6 86
-- ------ -- ----
72 $1,558 21 $416
== ====== == ====
The four lot sales in Ashbury are the final lots in this 1,115-lot
subdivision. The two sales in the 31-lot Woods of Rivermist development leave
two lots remaining to be sold at June 30, 1997. Lot sale profits in Clow Creek
Farm improved due to higher prices in the 260-lot subdivision, as it nears
completion. At June 30, 1997, three of the remaining 12 lots are under contract.
Harmony Grove sales commenced three quarters ago, with current quarter activity
representing the remaining Unit 1 lots. The Company held a pre-sale for the
remaining 238 lots in June 1997, and sold 92 lots which are expected to begin
closing in the third quarter of 1997. At June 30, 1997, 94 lots in Harmony Grove
are under contract. The Fields of Ambria subdivision is nearly complete, with
one sale during the current quarter. Only nine of the 240 total homesites in
this project remain unsold at June 30, 1997. The 85-lot Reigate Woods
subdivision had four sales during the current quarter, with 46 homesites
remaining. Two homesites are under contract as of June 30, 1997. The Woodbridge
subdivision consists of 531 lots. At June 30, 1997, 106 lots were remaining with
81 under contract. The increase in sales is due to an improvement in
identification of the subdivision's target market. The Company expects to close
the current pending sales during the third and fourth quarters of 1997.
Deposit account service charges increased $444,000, or 33.7% to $1.8 million
for the three months ended June 30, 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 77,000 at June 30, 1997, compared to
74,000 at June 30, 1996.
Loan servicing fee income decreased $39,000 or 6.16% to $594,000, for the
three months ended June 30, 1997. The average balance of loans serviced for
others increased 1.8% to $1.04 billion for the current three month period,
compared to $1.02 billion for the prior year period. Amortization of servicing
rights equaled $87,000 for the three months ended June 30, 1997, compared to
$60,000 for the prior three month period.
Non-interest expense - Non-interest expense increased $2.0 million to $13.3
million for the three months ended June 30, 1997 primarily due to increased
compensation, occupancy and other expenses related to the acquisition of NSBI
offset by a reduction in FDIC insurance premiums due to the SAIF
recapitalization in September 1996.
Compensation and benefits increased $1.1 million to $7.4 million for the three
months ended June 30, 1997, compared to the three months ended June 30, 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.
26
Occupancy expense increased 42.7% to $1.5 million for the three months ended
June 30, 1997 compared to the prior year period, primarily due to the addition
of six branches from the NSBI acquisition, new branches in Berwyn and Downers
Grove, Illinois, as well the opening of a new centralized loan processing
facility in Naperville, Illinois.
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 June 30, 1997, compared to 23 basis points for the three
months ended June 30, 1996 led to the decrease in FDIC insurance costs.
Offsetting the rate decrease was a $622.4 million increase in average deposits
between the three month periods, primarily a result of the merger with NSBI.
Other non-interest expense increased $598,000 to $2.6 million for the three
months ended June 30, 1997. The increase is due to the current three month
period including $355,000 in amortization of the core deposit intangible created
in the acquisition of NSBI, compared to $122,000 in the prior year quarter.
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 $334,000 in amortization of goodwill expense during the current three
month period, compared to $113,000 during the prior three month period, which
was established in the acquisition of NSBI. The Company is amortizing goodwill
over 20 years on the straight line basis.
Income taxes - For the three months ended June 30, 1997, income tax expense
totaled $4.9 million, or an effective income tax rate of 32.2%, compared to $2.9
million, or an effective income tax rate of 36.2%, for the three months ended
June 30, 1996. The decrease in the effective tax rate during the current quarter
is primarily due to the current period recognition of $1.0 million in income tax
benefits, equal to $.06 per share, relating to the resolution of certain prior
years' income tax issues.
Comparison of the Six Months Ended June 30, 1997 and 1996
General - Net income for the six months ended June 30, 1997 was $19.5 million,
or $1.21 per share, compared to $9.4 million, or $.95 per share, an increase of
$10.1 million. Results between the two periods are generally not comparable due
to the Company's acquisition of NSBI on May 30, 1996.
Net interest income - Net interest income for the six months ended June 30,
1997 was $46.8 million compared to $27.6 million for the six months ended June
30, 1996, an increase of $19.2 million, or 69.6%. The increase is a function of
the growth in average interest-earning assets of $1.0 billion, due primarily to
the acquisition of NSBI, as well as an increase in the net interest margin to
3.04% for the six months ended June 30, 1997, compared to 2.69% for the prior
year's six month period.
Interest income on interest-earning assets increased $40.6 million during the
six months ended June 30, 1997. Of this increase, $34.2 million is attributable
to loans receivable. The Bank's average balance of loans receivable increased
$867.3 million during the current period, primarily due to the acquisition of
NSBI, while the average yield on loans receivable increased 9 basis points. The
$2.6 million increase in interest income on mortgage-backed securities is due to
a $44.7 million increase in average balance, primarily due to the acquisition of
NSBI. Interest income on investment securities increased $1.8 million to $5.1
million for the six months ended June 30, 1997, due to the increase in the
average balance of $41.3 million, and an increase in the average yield of 82
basis points. Both increases are generally due to the acquisition of NSBI, whose
investment portfolio carried a longer duration than that of the Bank's.
Interest expense on interest-bearing liabilities increased $21.4 million
during the six months ended June 30, 1997. Interest expense on savings deposits
increased $15.4 million, primarily due to an increase in the average deposits of
$759.4 million primarily from the NSBI acquisition. Interest expense on borrowed
funds increased $6.0 million, due primarily to a $191.1 million increase in the
average balance of borrowed funds offset by a 14 basis point decrease in average
cost.
27
Provision for loan losses - The Bank provided $600,000 for possible loan
losses for the six months ended June 30, 1997 compared to $450,000 for the six
months ended June 30, 1996. Net charge-offs were $332,000 for the current six
month period compared to $206,000 for the prior six month period. At June 30,
1997, the Bank's allowance for loan losses was $18.2 million which was .71% of
total loans receivable, compared to .73% at December 31, 1996. The ratio of
allowance for loan losses to non-performing loans was 126.6% at June 30, 1997
compared to 133.1% at December 31, 1996.
Non-interest income - Non-interest income increased $2.1 million to $10.4
million for the six months ended June 30, 1997.
Gain on sale of loans receivable and mortgage-backed securities were a
combined $106,000 for the six months ended June 30, 1997, compared to a loss of
$37,000 for the six months ended June 30, 1996, an increase of $143,000. Loan
sales were $25.6 million during the current period compared to $81.6 million in
the prior six month period. During the current six month period, the Bank
swapped and sold $2.2 million of current loan originations compared to $26.9
million in the prior six month period. Loan sale activity is down due to the
Bank's strategy of keeping more fixed-rate mortgage loans in portfolio to better
utilize its capital base.
During the current six months, the Company recognized gains on the sale of
investment securities of $88,000, compared to $143,000 for the previous six
month period. The gains are primarily from the sale of marketable equity
securities.
Income from real estate operations was $3.0 million for the six months
ended June 30, 1997, compared to income of $2.0 million for the six months ended
June 30, 1996.
Six Months Ended June 30,
----------------------------------------------------------
1997 1996
---------------------------- ----------------------------
# of # of Income
Lots Income Lots (Loss)
------------ -------------- ----------- ---------------
(dollars in thousands)
Ashbury 8 $ 290 12 $ 328
Woods of Rivermist 5 220 - -
Clow Creek Farm 12 465 70 1,861
Harmony Grove 55 851 - -
Fields of Ambria 6 38 3 17
Creekside of Remington 2 6 - -
Reigate Woods 6 315 1 98
Woodbridge 42 789 6 86
Other - - - (424)
--- ------ -- ------
136 $2,974 92 $1,966
=== ====== == ======
The eight lot sales in Ashbury represent the final sales of this 1,115-lot
subdivision. The Woods of Rivermist activity during the current six month
period leaves only two lots remaining in the 21-lot development. Clow Creek
Farm sales decreased due to the near completion of this project as of June 30,
1997. At June 30, 1997, 12 lots remain, with three under contract. Harmony
Grove is the Company's newest subdivision. The 55 lot sales represent a
majority of the remaining Unit 1 lots. The Company expects sales to close in
the third and fourth quarter of 1997 in the next unit of this project. Activity
in Fields of Ambria, Reigate Woods and Woodbridge is due to the acquisition of
NSBI. Prior period amounts represent one month of activity. The $424,000 loss
in the prior six month period represents the write-off of capitalized costs
related to a real estate project which the Company decided not to exercise its
options to purchase two parcels of land.
28
Loan servicing fee income decreased 2.4%, or $30,000 to $1.2 million for
the six months ended June 30, 1997. Although the average balance of loans
serviced for others has increased 3.9% to $1.04 billion for the current six
month period, compared to $999.5 million in the prior six month period, loan
servicing fees decreased primarily due to amortization of purchased loan
servicing rights, which totaled $169,000 for the current six month period,
compared to $130,000 for the prior six month period.
Deposit account service charges increased $801,000 or 31.7% to $3.3 million
for the six months ended June 30, 1997, due to an increase in the number of
checking accounts generated by the Bank's direct mail checking account program.
Non-interest expense - Non-interest expense for the six months ended June
30, 1997 increased $5.8 million, or 28.4% to $26.3 million compared to $20.5
million for the six months ended June 30, 1996. The general reason for the
increase in non-interest expense for the current six month period is due to the
prior six month period including the impact of the Company's acquisition of NSBI
for only one month, compared to six months for the current period.
Compensation and benefits increased $3.2 million for the six months ended
June 30, 1997, to $14.7 million. The increase is primarily due to the increase
in staff with the acquisition of NSBI and normal salary increases.
Occupancy expense increased $1.0 million, or 51.5% to $3.1 million for the
six months ended June 30, 1997 due to the acquisition of NSBI, which added six
locations to the branch network. In addition, the current six month increase is
due to a branch opening by the Bank, and the addition of a centralized loan
processing center for the Bank's loan origination and processing departments.
FDIC insurance premiums declined $1.0 million to $737,000 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 six months ended June 30, 1997, compared to 23 basis points
for the six months ended June 30, 1996 led to the decrease in FDIC insurance
costs.
Advertising and promotion costs increased $333,000 to $1.2 million for the
six months ended June 30, 1997 due primarily to additional costs incurred with a
new branch and the expansion of the direct mail program for checking accounts to
the six new locations acquired.
Other non-interest expense increased $1.7 million to $5.6 million for the
six months ended June 30, 1997. The increase is due to the current six month
period including $709,000 in amortization of the core deposit intangible created
in the acquisition of NSBI, compared to $122,000 in the prior year period.
Additionally, increased operating costs as a result of the merger with NSBI
account for the remainder of the increase in this category. The Company also
incurred $673,000 in amortization expense of goodwill during the current six
month period, which was established in the acquisition of NSBI.
Income taxes - The Company recorded a provision for income taxes of $10.8
million for the six months ended June 30, 1997, or an effective income tax rate
of 35.7%, compared to $5.6 million for the six months ended June 30, 1996, or an
effective income tax rate of 37.4%. The decrease in the effective income tax
rate is primarily due to the current period recognition of $1.0 million in
income tax benefits, equal to $.06 per share, relating to the resolution of
certain prior years' state income tax issues.
29
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
Not Applicable.
30
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 Six Months Ended
June 30, 1997 June 30, 1997
------------- -------------
Net income $10,210,000 19,496,000
=========== ==========
Weighted average shares outstanding 15,527,495 15,614,447
Common stock equivalents due to dilutive
effect of stock options 496,063 485,832
----------- ----------
Total weighted average common shares
and equivalents outstanding for primary
computation 16,023,558 16,100,279
=========== ==========
Primary earnings per share $ .64 1.21
=========== ==========
Total weighted average common shares
and equivalents outstanding for primary
computation 16,023,558 16,100,279
Additional dilutive shares using the end of
period market value versus the average
market value when applying the
treasury stock method 11,100 13,756
----------- ----------
Total weighted average common shares and
equivalents outstanding for fully diluted
computation 16,034,658 16,114,035
=========== ==========
Fully diluted earnings per share $ .64 1.21
=========== ==========
(b) Reports on Form 8-K.
On April 29, 1997, the company declared a 3-for-2 stock split on
its common stock with the payment date of July 9, 1997.
Additionally, the Company announced that it will increase its
quarterly cash dividend on a pre-split basis to 10.5 cents per
share from 9 cents per share.
31
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 12, 1997 By: /s/ Allen H. Koranda
---------------- ------------------------
Allen H. Koranda
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
Date: August 12, 1997 By: /s/ Jerry A. Weberling
--------------- --------------------------
Jerry A. Weberling
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer)
32