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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 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 15,101,735 at November 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 September 30, 1997 (unaudited) and December 31, 1996....... 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1997 and 1996 (unaudited)............. 4
Consolidated Statements of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 1997 and 1996 (unaudited) 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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)
September 30, December 31,
1997 1996
----------------- ----------------
(Unaudited)
Assets
- ------
Cash and due from banks $ 38,319 45,732
Interest-bearing deposits 38,179 55,285
Federal funds sold 49,850 24,700
Investment securities, at amortized cost (fair value of $36,431 at
September 30, 1997 and $72,855 at December 31, 1996) 35,304 72,040
Investment securities available for sale, at fair value 88,646 69,049
Stock in Federal Home Loan Bank of Chicago, at cost 29,775 30,729
Mortgage-backed securities, at amortized cost (fair value of $229,352
at September 30, 1997 and $266,340 at December 31, 1996) 228,141 266,658
Mortgage-backed securities available for sale, at fair value 74,080 92,929
Loans receivable held for sale 6,620 6,495
Loans receivable, net of allowance for losses of $18,337
at September 30, 1997 and $17,914 at December 31, 1996 2,632,614 2,423,618
Accrued interest receivable 21,326 20,457
Foreclosed real estate 1,810 1,257
Real estate held for development or sale 33,609 28,112
Premises and equipment, net 35,276 32,302
Excess of cost over fair value of net assets acquired 24,940 26,347
Other assets 32,098 34,631
---------- ---------
$3,370,587 3,230,341
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits 2,296,139 2,262,226
Borrowed funds 727,663 632,897
Subordinated capital notes, net 26,761 26,709
Advances by borrowers for taxes and insurance 11,075 18,442
Accrued expenses and other liabilities 46,333 39,442
---------- ---------
Total liabilities 3,107,971 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; 15,249,102 outstanding at
September 30, 1997, 16,878,302 shares issued;
15,734,733 outstanding at December 31, 1996 169 168
Additional paid-in capital 172,198 171,732
Retained earnings, substantially restricted 120,943 95,356
Unrealized gain on marketable securities, net of tax 1,219 138
Treasury stock, at cost; 1,698,434 shares at September 30, 1997
and 1,143,569 shares at December 31, 1996 (31,913) (16,769)
---------- ---------
Total stockholders' equity 262,616 250,625
Commitments and contingencies
---------- ---------
$3,370,587 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 Nine Months Ended
September 30, September 30,
------------------------------ --------------------------
1997 1996 1997 1996
-------------- -------------- ----------- -------------
(Unaudited) (Unaudited)
Interest income:
Loans receivable $50,632 45,043 147,027 107,192
Mortgage-backed securities 4,120 5,033 13,069 9,790
Mortgage-backed securities available for sale 1,253 1,912 4,031 6,320
Investment securities 1,171 1,976 4,115 4,092
Investment securities available for sale 1,193 634 3,325 1,761
Interest-bearing deposits and federal funds sold 2,104 994 5,714 2,643
------- ------ ------- -------
Total interest income 60,473 55,592 177,281 131,798
------- ------ ------- -------
Interest expense:
Deposits 25,200 23,915 73,511 56,789
Borrowed funds 12,041 9,588 33,712 25,307
------- ------ ------- -------
Total interest expense 37,241 33,503 107,223 82,096
------- ------ ------- -------
Net interest income 23,232 22,089 70,058 49,702
Provision for loan losses 250 350 850 800
------- ------ ------- -------
Net interest income after provision for loan losses 22,982 21,739 69,208 48,902
------- ------ ------- -------
Non-interest income:
Gain (loss) on sale of:
Loans receivable 80 155 179 180
Mortgage-backed securities - (4) 7 (66)
Investment securities 137 100 225 243
Foreclosed real estate (15) 64 10 93
Income from real estate operations 2,114 1,663 5,088 3,629
Deposit account service charges 1,899 1,518 5,224 4,042
Loan servicing fee income 552 624 1,752 1,854
Brokerage commissions 482 426 1,461 1,387
Other 836 995 2,558 2,525
------- ------ ------- -------
Total non-interest income 6,085 5,541 16,504 13,887
------- ------ ------- -------
Non-interest expense:
Compensation and benefits 7,844 7,425 22,548 18,937
Office occupancy and equipment 1,581 1,307 4,639 3,326
Advertising and promotion 776 458 1,939 1,288
Data processing 542 566 1,515 1,489
Federal deposit insurance premiums 365 1,312 1,102 3,044
Special SAIF assessment - 14,216 - 14,216
Amortization of goodwill 334 338 1,007 451
Other 2,535 2,193 7,570 5,577
------- ------ ------- -------
Total non-interest expense 13,977 27,815 40,320 48,328
------- ------ ------- -------
Income before income taxes 15,090 (535) 45,392 14,461
Income taxes 5,894 (197) 16,700 5,405
------- ------ ------- -------
Net income $ 9,196 (338) 28,692 9,056
======= ====== ======= =======
Primary and fully diluted earnings per share: $.58 (.02) 1.79 .75
======= ====== ======= =======
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
Nine Months Ended September 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 - - 28,692 - - 28,692
Proceeds from exercise of 69,234 stock options 1 409 - - (236) 174
Tax benefits from stock-related compensation - 57 - - - 57
Market value adjustment on available
for sale securities - - - 1,081 - 1,081
Purchase of treasury stock - - - - (14,908) (14,908)
Impact of 50% stock dividend
related to fractional shares - - (13) - - (13)
Cash dividends ($.20 per share) - - (3,092) - - (3,092)
---- ------- -------- ----- ------- -------
Balance at September 30, 1997 $ 169 172,198 120,943 1,219 (31,913) 262,616
==== ======= ======== ======== ======== =======
Nine Months Ended September 30, 1996
- ------------------------------------
Balance at December 31, 1995 $ 59 39,750 80,377 125 (10,005) 110,306
Net income - - 9,056 - - 9,056
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 233,991 stock options 1 752 - - - 753
Tax benefits from stock-related compensation - 20 - - - 20
Market value adjustment on available
for sale securities - - - (581) - (581)
Purchase of treasury stock - - - - (6,759) (6,759)
Cash dividends ($.18 per share) - - (2,190) - - (2,190)
---- ------- -------- ------ -------
Balance at September 30, 1996 $ 112 171,708 87,243 (456) (16,764) 241,843
==== ======= ======== ======== ======== =======
See accompanying notes to unaudited consolidated financial statements.
5
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
NINE MONTHS ENDED
September 30,
-----------------------------------
1997 1996
------------------ ---------------
(Unaudited)
Operating activities:
Net income $ 28,692 9,056
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,260 1,751
Provision for loan losses 850 800
Deferred income tax (benefit) expense (366) 589
Amortization of premiums, discounts, loan fees and servicing rights (44) (388)
Amortization of goodwill and core deposit premium 2,010 927
Net gain on sale of loans, mortgage-backed securities,
and real estate held for development or sale (5,274) (3,743)
Gain on sale of investment securities (225) (243)
Increase in accrued interest receivable (869) (1,644)
Net decrease in other assets and liabilities 3,294 14,813
Loans originated for sale (10,726) (75,429)
Loans purchased for sale (53,976) (56,105)
Sale of loans originated and purchased for sale 64,708 169,155
Sale of mortgage-backed securities available for sale 2,209 34,118
--------- --------
Net cash provided by operating activities 32,543 93,657
--------- --------
Investing activities:
Loans originated for investment (559,223) (371,808)
Principal repayments on loans receivable 483,890 338,380
Principal repayments on mortgage-backed securities 57,523 62,042
Proceeds from maturities of investment securities available for sale 57,545 9,487
Proceeds from maturities of investment securities held to maturity 42,350 100,850
Proceeds from sale of:
Investment securities available for sale 6,660 824
Real estate held for development or sale 33,987 17,643
Premises and equipment 172 1
Stock in FHLB of Chicago 6,299 300
Purchases of:
Loans receivable held for investment (138,911) (256,689)
Investment securities available for sale (82,072) (18,244)
Investment securities held to maturity (5,133) (1,970)
Stock in FHLB of Chicago (5,345) (3,300)
Real estate held for development or sale (27,738) (12,228)
Premises and equipment (5,424) (3,472)
Payment for purchase of N.S. Bancorp, net of cash acquired -- (174,730)
--------- --------
Net cash used in investing activities (135,420) (312,914)
--------- --------
(continued)
6
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
NINE MONTHS ENDED
September 30,
----------------------------------
1997 1996
----------------- ---------------
(Unaudited)
Financing activities:
Proceeds from FHLB of Chicago advances $200,000 275,000
Proceeds from unsecured line of credit 3,000 --
Proceeds from unsecured term loan -- 35,000
Repayment of FHLB of Chicago advances (85,000) (200,000)
Repayment of unsecured line of credit (3,000) --
Net decrease in reverse repurchase agreements (15,000) (4,235)
Net decrease in other borrowings (5,465) (5,964)
Issuance of common stock in conjunction with acquisition -- 131,238
Proceeds from exercise of stock options 174 757
Purchase of treasury stock (14,908) (4,297)
Cash dividends (2,967) (1,692)
Net increase in deposits 34,041 10,673
Decrease in advances by borrowers for taxes and insurance (7,367) (7,073)
-------- --------
Net cash provided by financing activities 103,508 229,407
-------- --------
Increase in cash and cash equivalents 631 10,150
-------- --------
Cash and cash equivalents at beginning of period 125,717 77,797
-------- --------
Cash and cash equivalents at end of period $126,348 87,947
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds $108,028 78,787
Income taxes 16,800 4,600
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate 2,361 1,038
Loans receivable swapped into mortgage-backed securities 2,202 34,194
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 Nine Months Ended September 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 nine months ended September 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 nine month periods ended September 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 Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Primary earnings per share 15,873,735 16,183,979 16,024,764 12,008,879
Fully-diluted earnings per share 15,885,717 16,190,881 16,037,929 12,011,179
========== ========== ========== ==========
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 nine months ended September 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 September 30, 1997, the Bank had outstanding commitments to originate
and purchase loans of $190.4 million, of which $106.3 million were fixed-rate
loans, with rates ranging from 6.50% to 9.50%, and $84.1 million were adjustable
- - rate loans. At September 30, 1997, commitments to sell loans were $15.4
million.
At September 30, 1997, the Bank had outstanding 21 standby letters of
credit totaling $16.4 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 12 outstanding standby letters of credit totaling
$6.3 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 nine months ended September 30, 1997 and 1996,
earnings per share would have been as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
---- ----
As reported:
Primary and fully-diluted earnings per share $1.79 0.75
===== ====
Pro forma:
Basic earnings per share $1.85 0.80
Diluted earnings per share 1.79 0.75
===== ====
(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:
September 30, 1997 DECEMBER 31, 1996
----------------------- -----------------------
Percent of Percent of
Amount Assets Amount Assets
---------- ----------- ---------- -----------
(Dollars in thousands)
Stockholder's equity of the Bank $ 281,327 8.43% $ 273,545 8.52%
========== ===== ========== =====
Tangible capital $ 231,229 7.04% $ 219,080 6.96%
Tangible capital requirement 49,233 1.50 47,202 1.50
---------- ----- ---------- -----
Excess $ 181,996 5.54% $ 171,878 5.46%
========== ===== ========== =====
Core capital $ 231,229 7.04% $ 219,080 6.96%
Core capital requirement 98,467 3.00 94,404 3.00
---------- ----- ---------- -----
Excess $ 132,762 4.04% $ 124,676 3.96%
========== ===== ========== =====
Core and supplementary capital $ 247,761 14.81% $ 235,057 15.05%
Risk-based capital requirement 133,802 8.00 124,943 8.00
---------- ----- ---------- -----
Excess $ 113,959 6.81% $ 110,114 7.05%
========== ===== ========== =====
Total Bank assets $ 3,336,978 $ 3,209,058
Adjusted total Bank assets 3,282,231 3,146,788
Total risk-weighted assets 1,727,573 1,624,489
Adjusted total risk-weighted assets 1,672,520 1,561,782
Investment in Bank's real estate subsidiary 17,933 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:
SEPTEMBER 30, December 31,
1997 1996
------------------- ----------------
(in thousands)
Stockholder's equity of the Bank $281,327 273,545
Goodwill and other non-allowable intangible assets (31,957) (34,368)
Non-permissible subsidiary deduction (17,933) (20,184)
Non-includable purchased mortgage servicing rights (233) (203)
SFAS No. 115 capital adjustment 25 290
-------- -------
Tangible and core capital 231,229 219,080
General loan loss reserves 16,837 16,414
Land loans greater than 80% loan-to-value (305) (437)
-------- -------
Core and supplementary capital $247,761 235,057
======== =======
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 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, with
respect to NW Financial, from home sales in projects owned by such subsidiary.
The following is a summary of the Bank's investment in and advances to Mid
America Developments and NW Financial at the dates indicated:
9/30/97 6/30/97 3/31/97 12/31/96 9/30/96
------- ------- ------- -------- -------
(in thousands)
Common stock $ 1,657 1,657 1,657 1,657 1,657
Retained earnings 11,419 11,402 10,955 10,642 10,767
Intercompany advances 4,857 7,097 8,263 7,885 7,637
-------- ------- ------- -------- -------
$ 17,933 20,156 20,875 20,184 20,061
======== ======= ======= ======== =======
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 September 30, 1997, the Bank's total risk-weighted capital would
not have been subject to a deduction based on interest rate risk. At September
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 federal 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 September 30, 1997, total assets of the Company were $3.37 billion, an
increase of $140.2 million or 4.3% 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 $126.3 million at September
30, 1997, an increase of $631,000 from the combined balance of $125.7 million at
December 31, 1996.
Investment securities classified as held to maturity decreased $36.7 million
to $35.3 million at September 30, 1997. The decrease is primarily 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 $5.1 million.
Investment securities available for sale increased $19.6 million to $88.6
million at September 30, 1997. The increase is due to purchases of $82.1 million
of which $64.9 million was in U.S. Government and agency securities, $11.2
million in floating rate asset-backed certificates, and $5.9 million in equity
securities, offset by maturities of $53.0 million, and sales of marketable
equity securities with a book value of $1.4 million. The Company recognized a
gain on the sale of investment securities of $225,000 during the nine months
ended September 30, 1997. At September 30, 1997, gross unrealized gains in the
available for sale portfolio were $2.1 million, compared to $592,000 at December
31, 1996.
Mortgage-backed securities classified as held to maturity decreased $38.5
million to $228.1 million at September 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 $18.8 million to $74.1
million at September 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 nine month period
14
ended September 30, 1997. Gross unrealized losses in the available for sale
portfolio were $39,000 at September 30, 1997, compared to $352,000 at December
31, 1996.
The Bank has $145.1 million of CMO securities at September 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 September 30, 1997, and
December 31, 1996 are $32.4 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 $209.1 million, or
8.6%, to $2.64 billion at September 30, 1997. The Bank originated $760.4
million during the nine months period ended September 30, 1997. Offsetting this
increase was amortization and prepayments totaling $483.9 million, as well as
sales of $66.8 million. Loans receivable held for sale increased $125,000 to
$6.6 million as of September 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 September 30, 1997 is a
result of this strategy.
The allowance for loan losses totaled $18.3 million at September 30, 1997,
including a $1.5 million specific allowance for loss against a commercial real
estate loan. The increase of $423,000 from the balance at December 31, 1996, is
due to a $850,000 provision for loan losses, offset by net charge-offs of
$427,000. The Bank's allowance for loan losses to total loans outstanding was
.69% at September 30, 1997, compared to .73% at December 31, 1996. Non-
performing loans decreased $1.0 million to $12.4 million at September 30, 1997,
or .47% of total loans receivable, compared to $13.5 million, or .55% at
December 31, 1996.
Real estate held for development or sale increased $5.5 million to $33.6
million at September 30, 1997. A summary of real estate held for development or
sale is as follows:
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(in thousands)
MAF Developments, Inc.
Harmony Grove $ 4,429 4,164
Creekside of Remington 1,709 1,760
Clow Creek Farm 168 717
Other 13,901 4,392
------- ------
20,207 11,033
------- ------
Mid America Developments, Inc.
Ashbury 50 122
Woods of Rivermist 109 546
------- ------
159 668
------- ------
NW Financial, Inc.
Woodbridge 6,634 8,348
Reigate Woods 5,393 6,263
Fields of Ambria 1,216 1,800
------- ------
13,243 16,411
------- ------
$ 33,609 28,112
======= ======
The Company had 89 lot sales in Harmony Grove for the nine months ended
September 30, 1997, which were offset by continued development costs. In
addition, the development's commercial site was
15
sold in February 1997 at a pre-tax profit of $228,000. As of September 30, 1997
there are 67 lots under contract in Harmony Grove. Clow Creek Farm is
substantially complete, with only 9 lots remaining, of which one is under
contract as of September 30, 1997. The Creekside of Remington subdivision, with
170 total lots, and 131 lots remaining, had six sales during the current nine
month period. Eight lots are under contract as of September 30, 1997. The $9.5
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. Preliminary work has begun on the project.
Ashbury has been fully sold out, with the sale of the remaining eight lots of
this 1,115-lot subdivision during the current nine 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 nine month period. At September 30, 1997, the development is
substantially complete, with two lots remaining.
The $1.7 million decrease in the Woodbridge subdivision is primarily due to
the sale of 91 homesites since December 31, 1996. Of the remaining 57 homesites,
45 are under contract as of September 30, 1997. The balance of Reigate Woods
decreased due to continued sales of homesites. At September 30, 1997, there are
44 remaining homesites, with five homesites under contract. There were nine home
sales in Fields of Ambria during the nine months ended September 30, 1997. At
September 30, 1997, there are six homesites remaining, none of which were under
contract.
Deposits increased $33.9 million, to $2.30 billion at September 30, 1997.
After consideration of interest credited to accounts of $69.8 million for the
nine months ended September 30, 1997, actual cash outflows were $35.8 million.
Borrowed funds, which consist primarily of FHLB of Chicago advances and CMO
bonds payable, increased $94.8 million to $727.7 million at September 30, 1997.
The primary reason for the increase is due to the Bank increasing its FHLB of
Chicago advances by a net $115.0 million since December 31, 1996. The increases
were primarily to fund loan volume held for investment. Offsetting this
increase was a $5.7 million decrease in the Bank's CMO bonds payable issued by
its special-purpose finance subsidiaries, as well as the repayment of a maturing
reverse repurchase agreement of $15.0 million.
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
16
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 September 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 September 30, 1997. Management anticipates the completion of
foreclosure proceedings in the first quarter of 1998.
For the quarter ended September 30, 1997, interest income that would have been
recorded on non-accrual loans (had they been performing according to their
original terms) amounted to $202,000, compared to $213,000 for the three months
ended September 30, 1996.
As of September 30, 1997, the Bank's ratio of non-performing loans to total
loans was .47%, compared to .55% at December 31, 1996 and .57% at September 30,
1996.
Foreclosed real estate increased $553,000 to $1.8 million at September 30,
1997, due to the addition of fifteen single family residential properties offset
by the sale of nine properties. At September 30, 1997, foreclosed real estate
consists primarily of ten 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)
September 30, 1997 39 $3,847 .14% 67 $11,822 .44%
== ====== === == ======= ===
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%
== ====== === == ======= ===
17
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of
the Bank's loan portfolio in dollar amounts at the dates indicated:
AT
---------------------------------------------------------------------------------------
9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96
----------- ----------- ----------- ----------- ----------- ----------- -----------
(In thousands )
REAL ESTATE LOANS:
One-to four-family:
Held for investment $ 2,341,861 2,258,938 2,198,886 2,160,525 2,114,595 2,032,102 1,227,470
Held for sale 6,620 4,697 6,284 6,495 1,250 9,314 14,817
Multi-family 99,949 97,515 97,483 92,968 93,246 94,713 81,919
Commercial 44,164 44,881 45,459 46,313 45,875 46,101 45,087
Construction 16,615 17,105 17,277 17,263 15,854 16,090 17,860
Land 26,345 26,854 26,561 25,685 22,932 26,644 26,149
--------- --------- --------- --------- --------- --------- ---------
Total real estate loans 2,535,554 2,449,990 2,391,950 2,349,249 2,293,752 2,224,964 1,413,302
OTHER LOANS:
Consumer loans:
Equity lines of credit 89,155 88,868 88,595 86,614 83,786 79,193 75,902
Home equity loans 31,629 22,866 13,634 14,251 13,126 10,525 8,877
Other 5,610 4,797 5,838 5,009 4,797 4,110 3,946
--------- --------- --------- --------- --------- --------- ---------
Total consumer loans 126,394 116,531 108,067 105,874 101,709 93,828 88,725
Commercial business lines 2,360 2,312 2,333 1,871 2,098 1,821 2,220
--------- --------- --------- --------- --------- --------- ---------
Total other loans 128,754 118,843 110,400 107,745 103,807 95,649 90,945
--------- --------- --------- --------- --------- --------- ---------
Total loans receivable 2,664,308 2,568,833 2,502,350 2,456,994 2,397,559 2,320,613 1,504,247
Less:
Loans in process 7,005 6,990 6,700 7,620 6,406 6,715 8,843
Unearned discounts, premiums
and deferred loan fees, net (268) 645 696 1,347 2,572 3,245 (1,416)
Allowance for loan losses 18,337 18,182 18,010 17,914 17,589 17,254 9,498
--------- --------- --------- --------- --------- --------- ---------
Total loans receivable, net 2,639,234 2,543,016 2,476,944 2,430,113 2,370,992 2,293,399 1,487,322
Loans receivable held for sale (6,620) (4,697) (6,284) (6,495) (1,250) (9,314) (14,817)
--------- --------- --------- --------- --------- --------- ----------
Loans receivable, net $ 2,632,614 2,538,319 2,470,660 2,423,618 2,369,742 2,284,085 1,472,505
========= ========= ========= ========= ========= ========= ==========
18
NON-PERFORMING ASSETS. The following table sets forth information regarding non-
accrual loans, loans which are 91 days or more delinquent but on which the Bank
is accruing interest, foreclosed real estate and non-accrual investment
securities of the Bank.
AT
---------------------------------------------------------------------
9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96
-------- -------- --------- ---------- --------- -------- ---------
(In thousands)
Non-performing loans:
One-to four-family and multi-family loans:
Non-accrual loans 6,260 8,965 8,757 7,680 5,929 5,415 2,801
Accruing loans 91 days or more overdue 1,547 845 1,008 896 1,589 1,940 1,235
-------- -------- ------- ------- ------- ------ ------
Total $ 7,807 9,810 9,765 8,576 7,518 7,355 4,036
-------- -------- -------- ------- ------- ------- ------
Commercial real estate, construction and land loans:
Non-accrual loans 4,376 4,067 4,254 3,762 889 433 439
Accruing loans 91 days or more overdue -- -- 599 699 599 459 --
Restructured or renegotiated loans -- -- -- -- 4,271 4,299 4,321
-------- -------- ------- ------- ------- ------ ------
Total 4,376 4,067 4,853 4,461 5,759 5,191 4,760
-------- -------- -------- ------- ------- ------- ------
Other loans:
Non-accrual loans 225 461 366 353 385 287 223
Accruing loans 91 days or more overdue 24 25 79 74 23 -- --
-------- -------- ------- ------- ------- ------ ------
Total 249 486 445 427 408 287 223
-------- -------- ------- ------- ------- ------ ------
Total non-performing loans
Non-accrual loans 10,861 13,493 13,377 11,795 7,203 6,135 3,463
Accruing loans 91 days or more overdue 1,571 870 1,686 1,669 2,211 2,399 1,235
Restructured or renegotiated loans -- -- -- -- 4,271 4,299 4,321
-------- -------- ------- ------- ------- ------ ------
Total $ 12,432 14,363 15,063 13,464 13,685 12,833 9,019
======== ======== ======= ======= ======= ====== ======
Non-accrual loans to total loans .41% .53 .54 .48 .30 .27 .23
Accruing loans 91 days or more overdue to total loans .06 .03 .07 .07 .09 .10 .08
Restructured or renegotiated loans to total loans -- -- -- -- .18 .19 .29
-------- -------- ------- ------- ------- ------ ------
Non-performing loans to total loans .47% .56 .61 .55 .57 .56 .60
======== ======== ======= ======= ======= ====== ======
Foreclosed real estate (net of related reserves):
One- to four-family $ 1,810 724 773 1,257 1,068 888 109
Commercial, construction and land -- -- -- -- -- -- --
-------- -------- ------- ------- ------- ------ ------
Total $ 1,810 724 773 1,257 1,068 888 109
======== ======== ======= ======= ======= ====== ======
Non-performing loans and foreclosed real estate
to total loans and foreclosed real estate .54% .59 .63 .60 .62 .60 .61
======== ======== ======= ======= ======= ====== ======
Total non-performing assets $ 14,242 15,087 15,836 14,721 14,753 13,721 9,128
======== ======== ======= ======= ======= ====== ======
Total non-performing assets to total assets .42% .45 .49 .46 .47 .44 .46
======== ======== ======= ======= ======= ====== ======
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. The line of credit is generally renewed annually, and matures on April 30,
1998. It is available for general corporate purposes. For the nine month period
ended September 30, 1997, the Company received $22.5 million in dividends from
the Bank and declared common stock dividends of $.20 per share. In addition, the
Company repurchased 543,001 shares of its common stock since December 31, 1996
at a cost of $14.8 million, or an average of $27.31 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 nine month period the Bank
borrowed $200.0 million of fixed-rate FHLB of Chicago advances and repaid $85.0
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 September 30, 1997, the Bank's
average liquidity ratio was 6.81%. At September 30, 1997, total liquidity was
$128.0 million, or 5.26%, which was $6.3 million in excess of the 5.0%
regulatory requirement.
During the nine months ended September 30, 1997, the Bank originated and
purchased loans totaling $760.4 million compared with $756.3 million during the
same period a year ago. Loan sales and swaps for the nine months ended September
30, 1997, were $66.8 million, compared to $201.7 million for the prior year
period, reflecting the Bank's current strategy of holding more fixed-rate
mortgage loan originations for investment purposes during the current nine month
period. The Bank has outstanding commitments to originate and purchase mortgage
loans of $190.4 million and commitments to sell or swap loans of $15.4 million
at September 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 September 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 September 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 $672,243 428,312 798,209 270,943 487,596 2,657,303
Mortgage-backed securities 141,824 14,020 40,727 27,512 77,386 301,469
Interest-bearing deposits 38,179 -- -- -- -- 38,179
Federal funds sold 49,850 -- -- -- -- 49,850
Investment securities (1) 85,802 4,977 7,999 10,020 45,458 154,256
-------- ------- ------- ------- ------- ---------
Total interest-earning assets 987,898 447,309 846,935 308,475 610,440 3,201,057
Less yield adjustments, net 69 328 246 (243) 89 489
-------- ------- ------- ------- ------- ---------
Total net interest-earning assets 987,967 447,637 847,181 308,232 610,529 3,201,546
Impact of hedging activity (2) 6,620 -- -- -- (6,620) --
-------- ------- ------- ------- ------- ---------
Total net interest-earning assets
adjusted for impact of hedging
activities 994,587 447,637 847,181 308,232 603,909 3,201,546
-------- ------- ------- ------- ------- ---------
Interest-bearing liabilities:
NOW and checking accounts 12,780 11,692 42,796 26,584 56,491 150,343
Money market accounts 128,132 128,132
Passbook accounts 55,075 50,393 184,439 114,569 243,460 647,936
Certificate accounts 670,690 271,932 309,143 35,380 13,548 1,300,693
FHLB advances 45,000 30,000 315,000 200,000 5,500 595,500
Other borrowings 79,606 27,353 25,204 -- 26,761 158,924
-------- ------- ------- ------- ------- ---------
Total interest-bearing liabilities 991,283 391,370 876,582 376,533 345,760 2,981,528
-------- ------- ------- ------- ------- ---------
Interest sensitivity gap $ 3,304 56,267 (29,401) (68,301) 258,149 220,018
======== ======= ======= ======= ======= =========
Cumulative gap $ 3,304 59,571 30,170 (38,131) 220,018
======== ======= ======= ======= =======
Cumulative gap as a percentage
of total assets 0.10% 1.77 0.90 (1.13) 6.53
Cumulative net interest-earning assets as
a percentage of interest-bearing
liabilities 100.33 104.31 101.34 98.55 107.38
_____________________
(1) Includes $29.8 million of stock in FHLB of Chicago in 6 months or less.
(2) Represents forward commitments to sell long-term fixed-rate mortgage loans.
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
September 30, 1997 includes fees which are considered adjustments to yield.
Three Months Ended September 30,
----------------------------------------------------------------
1997 1996
------------------------------ -------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- -------- -------- ----------- -------- --------
(dollars in thousands)
ASSETS:
Interest-earning assets:
Loans receivable $2,601,481 50,632 7.78% $2,326,633 45,043 7.74%
Mortgage-backed
securities 307,987 5,373 6.98 405,381 6,945 6.85
Interest-bearing
deposits (1) 79,312 1,296 6.39 41,787 713 6.68
Federal funds sold (1) 49,230 808 6.42 16,686 281 6.59
Investment securities
(2) 150,506 2,411 6.27 161,908 2,699 6.52
---------- ------- ---------- -------
Total interest-earning
assets 3,188,516 60,520 7.57 2,952,395 55,681 7.53
Noninterest earning
assets 167,009 165,125
---------- ----------
Total assets $3,355,525 $3,117,520
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interestbearing liabilities:
Deposits 2,230,287 25,200 4.48 2,162,688 23,915 4.39
Borrowed funds 721,249 12,041 6.55 558,878 9,588 6.74
---------- ------- ---------- -------
Total interest-bearing
liabilities 2,951,536 37,241 4.99 2,721,566 33,503 4.87
------- ---- ------- ----
Noninterest bearing
deposits 73,949 78,039
Other liabilities 67,298 71,215
---------- ----------
Total other liabilities 141,247 149,254
---------- ----------
Total liabilities 3,092,783 2,870,820
Stockholders' equity 262,742 246,700
---------- ----------
Liabilities and
stockholders' equity $3,355,525 $3,117,520
========== ==========
Net interest
income/interest rate
spread $23,279 2.58% $22,178 2.66%
======= ==== ======= ====
Net earning assets/net
yield on average
interestearning assets $ 236,980 2.92% $ 230,829 3.00%
========== ==== ========== ====
Ratio of interestearning
assets to interestbearing
liabilities 108.03% 108.48%
========== ==========
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
1997 1996 AT SEPTEMBER 30,
-------- -------- 1997
------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Cost
----------- -------- -------- ----------- -------- -------- ----------- -----
ASSETS:
Interest-earning assets:
Loans receivable $2,528,339 147,027 7.75% $1,860,702 107,202 7.68% $2,657,571 7.82%
Mortgage-backed
securities 326,119 17,100 6.99 329,393 16,110 6.52 302,221 7.02
Interest-bearing
deposits (1) 74,479 3,541 6.27 32,656 1,861 7.49 38,179 5.41
Federal funds sold (1) 45,375 2,173 6.32 14,646 781 7.01 49,850 5.46
Investment securities (2)
148,494 7,665 6.81 124,948 6,065 6.38 153,725 6.19
---------- ------- ---------- ------- ----------
Total interest-earning
assets 3,122,806 177,506 7.57 2,362,345 132,019 7.44 3,201,546 7.60
Noninterest earning
assets 163,883 128,468 169,041
---------- ---------- ----------
Total assets $3,286,689 $2,490,813 $3,370,587
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interestbearing
liabilities:
Deposits 2,214,013 73,511 4.44 1,687,740 56,789 4.48 2,227,104 4.53
Borrowed funds 676,094 33,712 6.58 494,684 25,307 6.74 754,424 6.60
---------- ------- ---------- ------- ----------
Total interest-bearing
liabilities 2,890,107 107,223 4.94 2,182,424 82,096 4.99 2,981,528 5.05
---------- ------- ---- ------- ---- ----
Noninterest bearing
deposits 72,041 66,717 69,035
Other liabilities 66,378 69,833 57,408
--------- ---------- ----------
Total other liabilities 138,419 136,550 126,443
--------- ---------- ----------
Total liabilities 3,028,526 2,318,974 3,107,971
Stockholders' equity 258,163 171,839 262,616
---------- ---------- ----------
Liabilities and
stockholders' equity $3,286,689 $2,490,813 $3,370,587
========== ========== ==========
Net interest
income/interest rate
spread $70,283 2.63% $49,923 2.45% 2.55%
======= ==== ======= ==== ====
Net earning assets/net
yield on average
interestearning assets $ 232,699 3.00% $ 179,921 2.82% $ 220,018 N/A
========== ==== ========== ==== ========== ====
Ratio of
interestearning assets
to
interestbearing
liabilities 108.05% 108.24% 107.38%
========== ========== ==========
(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 NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
COMPARED TO COMPARED TO
SEPTEMBER 30, 1996 September 30, 1996
Increase (Decrease) Increase (Decrease)
-------------------------------------- ------------------------------------
Volume Rate NET Volume Rate Net
------------ ----------- ----------- ----------- ----------- ----------
(In thousands)
INTEREST-EARNING ASSETS:
Loans receivable $ 5,348 241 5,589 38,784 1,041 39,825
Mortgage-backed securities (1,697) 125 (1,572) (161) 1,151 990
Interest-bearing deposits 613 (30) 583 2,020 (340) 1,680
Federal funds sold 534 (7) 527 1,475 (83) 1,392
Investment securities (185) (103) (288) 1,179 421 1,600
------- ---- ------ ------ ------ ------
Total $ 4,613 226 4,839 43,297 2,190 45,487
------- ---- ------ ------ ------ ------
INTEREST-BEARING LIABILITIES:
Deposits 757 528 1,285 17,281 (559) 16,722
Borrowed funds 2,717 (264) 2,453 8,982 (577) 8,405
------- ---- ------ ------ ------ ------
Total 3,474 264 3,738 26,263 (1,136) 25,127
------- ---- ------ ------ ------ ------
Net change in net interest income $ 1,139 (38) 1,101 17,034 3,326 20,360
======= ==== ====== ====== ====== ======
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
GENERAL - Net income for the three months ended September 30, 1997 was $9.2
million, or $.58 per fully-diluted share, compared to a net loss of $338,000, or
($.02) per fully-diluted share for the three months ended September 30, 1996.
The prior year quarter included a one-time charge of $8.7 million or $.54, net
of applicable income taxes, reflecting the cost of the SAIF recapitalization.
NET INTEREST INCOME - Net interest income was $23.2 million for the current
quarter, compared to $22.1 million for the quarter ended September 30, 1996, an
increase of $1.1 million. Although the Company's average net interest-earning
assets increased to $237.0 million for the three months ended September 30,
1997, compared to $230.8 million for the three months ended September 30, 1996,
the Company's net interest margin declined to 2.92% for the current three month
period, compared to 3.00% for the prior year period. The decrease is primarily
due to a combination of a flattening Treasury yield curve, and the reliance on
higher cost FHLB of Chicago advances to fund new loan volume. While the average
yield on interest-earning assets rose four basis points to 7.57%, the average
cost of interest-bearing liabilities rose 12 basis points to 4.99%.
24
Interest income on loans increased $5.6 million as a result of a $247.8
million increase in average loans receivable as well as a 4 basis point increase
in the average yield of the loan portfolio. Interest income on mortgage-backed
securities decreased $1.6 million to $5.4 million for the current quarter, due
to a $97.4 million decrease in average balances due to regular amortization and
prepayments, offset by a 13 basis point increase in average yield, primarily due
to slight upward repricing of certain adjustable rate mortgage-backed securities
and CMO's. Interest income on investment securities decreased $246,000 to $2.4
million. The combined average balances of federal funds sold and interest-
bearing deposits increased $70.1 million, due to higher prepayments in loans
receivable.
Interest expense on deposit accounts increased $1.3 million to $25.2 million,
due to an increase in average deposits of $67.6 million during the current three
month period, as well as a 9 basis point increase in the average cost of
savings. The increase in the average cost of deposits is primarily due to an
increase in average certificate of deposit balances, which carry higher interest
rates than the Bank's core deposit accounts.
Interest expense on borrowed funds increased $2.5 million to $12.0 million, as
a result of a $162.4 million increase in the average balance of borrowed funds,
offset by a 19 basis point decrease in the average cost of borrowed funds. The
increase in the average balance is primarily due to an increase in FHLB of
Chicago advances of $167.3 million. The decrease in the average cost is a
result of falling medium term interest rates, as well as the repayment of $85.0
million of FHLB of Chicago advances with higher rates.
PROVISION FOR LOAN LOSSES - The Bank provided $250,000 in provision for loan
losses during the current three month period, compared to $350,000 for the prior
three month period. Net charge-offs during the current quarter were $95,000,
compared to $15,000 for the three months ended September 30, 1996. At September
30, 1997, the Bank's allowance for loan losses was $18.3 million, which was .69%
of total loans receivable, compared to .73% at December 31, 1996. The ratio of
the allowance for loan losses to non-performing loans was 147.5% at September
30, 1997 compared to 133.1% at December 31, 1996.
NON-INTEREST INCOME - Non-interest income increased 9.8% to $6.1 million for
the three months ended September 30, 1997, compared to $5.5 million for the
three months ended September 30, 1996.
Gain on sale of loans and mortgage-backed securities decreased to a combined
$80,000 for the three months ended September 30, 1997, compared to a combined
gain of $151,000 for the three months ended September 30, 1996. The Bank sold
$21.4 million in mortgage loans during the quarter ended September 30, 1997
compared to $48.7 million during the quarter ended September 30, 1996.
The Company recognized $137,000 in gains on investment securities for the
three months ended September 30, 1997, compared to $100,000 for the prior year
period, primarily due to sales of marketable equity securities. Unrealized gains
in the Company's marketable equity portfolio totaled $2.1 million at September
30, 1997.
25
Income from real estate operations increased $451,000 to $2.1 million for the
three months ended September 30, 1997. A summary of income from real estate
operations is as follows:
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
1997 1996
---------------------- ---------------------
PRE-TAX
# OF INCOME # OF PRE-TAX
LOTS (LOSS) LOTS INCOME
---- ------- ---- -------
(dollars in thousands)
Woodbridge 49 $1,497 10 $ 115
Harmony Grove 34 370 - -
Reigate Woods 2 132 5 245
Clow Creek Farm 3 111 6 142
Creekside of Remington 4 9 - -
Fields of Ambria 3 (5) 5 39
Woods of Rivermist - - 2 112
Ashbury - - 7 1,010
---- ------- ---- -------
95 $2,114 35 $1,663
==== ======= ==== =======
The Woodbridge subdivision consists of 531 residential lots. At September 30,
1997, 57 lots were remaining with 45 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 next two quarters.
Harmony Grove, with a total of 386 lots, commenced sales one year ago. To date,
the project has sold 164 lots, 34 in the current quarter. Of the remaining 222
lots, 67 lots are under contract as of September 30, 1997. The 85-lot Reigate
Woods subdivision had two sales during the current quarter, with 44 homesites
remaining. Five homesites are under contract as of September 30, 1997. Lot sale
profits per lot in Clow Creek Farm improved due to higher prices in the 260-lot
subdivision, as it nears completion. At September 30, 1997, one of the
remaining nine lots are under contract. The Company had 4 sales in the
Creekside of Remington subdivision, which is a 170-lot development. Project to
date sales have been slower than in other projects. At September 30, 1997,
eight lots are under contract. The Fields of Ambria subdivision is nearly
complete, with three sales during the current quarter. Only six of the 240
total homesites in this project remain unsold at September 30, 1997. The Woods
of Rivermist development has two lots remaining to be sold at September 30,
1997. Prior year Ashbury profits represent lot sale profits, as well as the
sale of a 13 acre commercial parcel at a $728,000 profit.
Deposit account service charges increased $381,000, or 25.1% to $1.9 million
for the three months ended September 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 80,000 at September 30, 1997,
compared to 69,000 at September 30, 1996.
Loan servicing fee income decreased $72,000 or 11.5% to $552,000, for the
three months ended September 30, 1997. The average balance of loans serviced
for others decreased 3.3% to $1.02 billion for the current three month period,
compared to $1.05 billion for the prior year period, and the average servicing
fee decreased to 26 basis points in 1997 compared to 27 basis in 1996.
Amortization of servicing rights equaled $111,000 for the three months ended
September 30, 1997, compared to $76,000 for the prior three month period, as a
result of increased prepayments in the loan serviced for others portfolio.
NON-INTEREST EXPENSE - Non-interest expense decreased $13.8 million to $14.0
million for the three months ended September 30, 1997 primarily due to a one-
time charge of $14.2 million for the recapitalization of the SAIF in the prior
year period. Without regard to the one-time charge, non-interest expense
increased $378,000.
Compensation and benefits increased $419,000 to $7.8 million for the three
months ended September 30, 1997, compared to the three months ended September
30, 1996. The increase is primarily due to higher medical costs and
26
retirement plan expenses, as well as higher loan officer commissions due to an
increase in loan originations during the current quarter as compared to the
prior year quarter.
Occupancy expense increased $274,000, or 21.0%, to $1.6 million for the three
months ended September 30, 1997. The increase is a result of increased
occupancy costs related to the Bank's new loan operations center, Downers Grove
branch, and land lease for the new Harlem Irving branch.
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 September 30, 1997, compared to 23 basis points for the three
months ended September 30, 1996 led to the decrease in FDIC insurance costs.
Marketing expense increased $318,000, or 69.4% to $776,000 for the three
months ended September 30, 1997 due to costs associated with the opening of the
Bank's newest branch, as well as costs for marketing new deposit products, and
direct mail expenses related to home equity loans. In addition, the prior year
quarter did not include marketing expense for our Northwestern branches since
our products had not yet been introduced in those areas.
Other non-interest expense increased $342,000 to $2.5 million for the three
months ended September 30, 1997. The increase is primarily due to higher title,
credit report and appraisal fees due to higher loan volume in the quarter and a
higher experience of check losses due to the increased checking account base.
INCOME TAXES - For the three months ended September 30, 1997, income tax
expense totaled $5.9 million, or an effective income tax rate of 39.1%, compared
to an income tax benefit of $197,000, or an effective income tax benefit rate of
36.8%, for the three months ended September 30, 1996.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
GENERAL - Net income for the nine months ended September 30, 1997 was $28.7
million, or $1.79 per share, compared to $9.1 million, or $.75 per share, an
increase of $19.6 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 nine months ended September
30, 1997 was $70.1 million compared to $49.7 million for the nine months ended
September 30, 1996, an increase of $20.4 million, or 41.0%. The increase is a
function of the growth in average interest-earning assets of $760.5 million due
primarily to the acquisition of NSBI, as well as an increase in the net interest
margin to 3.00% for the nine months ended September 30, 1997, compared to 2.82%
for the prior year's six month period.
Interest income on interest-earning assets increased $45.5 million during the
nine months ended September 30, 1997. Of this increase, $39.8 million is
attributable to loans receivable. The Bank's average balance of loans receivable
increased $667.6 million during the current period, primarily due to the
acquisition of NSBI, while the average yield on loans receivable increased 7
basis points. The $990,000 increase in interest income on mortgage-backed
securities is due to a 47 basis point increase in average yield offset by a
decrease in average balance of $3.2 million. Interest income on investment
securities increased $1.6 million to $7.4 million for the nine months ended
September 30, 1997, due to the increase in the average balance of $23.5 million,
and an increase in the average yield of 43 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 $25.1 million
during the nine months ended September 30, 1997. Interest expense on savings
deposits increased $16.7 million, primarily due to an increase in the average
deposits of $526.3 million primarily from the NSBI acquisition. Interest
expense on borrowed funds increased $8.4 million, due primarily to a $181.4
million increase in the average balance of borrowed funds offset by a 16 basis
point decrease in average cost.
27
PROVISION FOR LOAN LOSSES - The Bank provided $850,000 for possible loan
losses for the nine months ended September 30, 1997 compared to $800,000 for the
nine months ended September 30, 1996. Net charge-offs were $427,000 for the
current nine month period compared to $246,000 for the prior nine month period.
At September 30, 1997, the Bank's allowance for loan losses was $18.3 million
which was .69% of total loans receivable, compared to .73% at December 31, 1996.
The ratio of allowance for loan losses to non-performing loans was 147.5% at
September 30, 1997 compared to 133.1% at December 31, 1996.
NON-INTEREST INCOME - Non-interest income increased $2.6 million to $16.5
million for the nine months ended September 30, 1997.
Gain on sale of loans receivable and mortgage-backed securities were a
combined $186,000 for the nine months ended September 30, 1997, compared to
$114,000 for the nine months ended September 30, 1996, an increase of $72,000.
Loan sales were $64.6 million during the current period compared to $167.5
million in the prior nine month period. During the current nine month period,
the Bank swapped and sold $2.2 million of current loan originations compared to
$34.2 million in the prior nine 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 nine months, the Company recognized gains on the sale of
investment securities of $225,000, compared to $243,000 for the previous nine
month period. The gains are primarily from the sale of marketable equity
securities.
Income from real estate operations was $5.1 million for the nine months ended
September 30, 1997, compared to income of $3.6 million for the nine months ended
September 30, 1996.
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------
1997 1996
---------------------------- ----------------------------
# OF # OF INCOME
LOTS INCOME LOTS (LOSS)
------------ -------------- ----------- ---------------
(dollars in thousands)
Ashbury 8 $ 290 17 $1,338
Woods of Rivermist 5 220 2 112
Clow Creek Farm 15 576 76 2,004
Harmony Grove 89 1,221 - -
Fields of Ambria 9 33 7 56
Creekside of Remington 6 15 - -
Reigate Woods 8 447 7 343
Woodbridge 91 2,286 20 200
Other - - - (424)
--- ------ --- ------
231 $5,088 129 $3,629
=== ====== === ======
The eight lot sales in Ashbury represent the final sales of this 1,115-lot
subdivision. Included in the pre-tax income from Ashbury in 1996 is a $728,000
profit from the sale of a 13-acre commercial parcel. The Woods of Rivermist
activity during the current nine month period leaves only two lots remaining in
the 31-lot development. Clow Creek Farm sales decreased due to the near
completion of this project as of September 30, 1997. At September 30, 1997, 9
lots remain, with one under contract. Harmony Grove is the Company's newest
subdivision. The 89 lot sales represent a majority of the remaining Unit 1 and
Unit 3 lots. The Company expects sales to continue to close in the 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 four months of activity. The $424,000 loss in the prior nine
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 5.5%, or $102,000 to $1.8 million for the
nine months ended September 30, 1997. Although the average balance of loans
serviced for others has increased 1.5% to $1.03 billion for the current nine
month period, compared to $1.02 billion in the prior nine month period, loan
servicing fees decreased primarily due to amortization of purchased loan
servicing rights, which totaled $280,000 for the current nine month period,
compared to $206,000 for the prior nine month period.
Deposit account service charges increased $1.2 million or 29.2% to $5.2
million for the nine months ended September 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 nine months ended
September 30, 1997 decreased $8.0 million, or 16.6% to $40.3 million compared to
$48.3 million for the nine months ended September 30, 1996 primarily due to a
one-time charge of $14.2 million for the recapitalization of the SAIF in the
prior year period. Exclusive of the SAIF assessment, non-interest expenses
increased $6.2 million. The general reason for this increase in non-interest
expense for the current nine month period is due to the prior nine month period
including the impact of the Company's acquisition of NSBI for only four months,
compared to nine months for the current period.
Compensation and benefits increased $3.6 million for the nine months ended
September 30, 1997, to $22.5 million. The increase is primarily due to the
increase in staff with the acquisition of NSBI and normal salary increases.
Occupancy expense increased $1.3 million, or 39.5% to $4.6 million for the
nine months ended September 30, 1997 due to the acquisition of NSBI, which added
six locations to the branch network. In addition, the current nine 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 $1.9 million to $1.1 million due to
legislation passed to recapitalize the SAIF, which insures deposits of savings
institutions. The result was a decrease in the Bank's insurance rate on
deposits to 6.48 basis points for the nine months ended September 30, 1997,
compared to 23 basis points for the nine months ended September 30, 1996.
Advertising and promotion costs increased $651,000 to $1.9 million for the
nine months ended September 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 $2.0 million to $7.6 million for the nine
months ended September 30, 1997. The increase is due to the current nine month
period including $1.0 million in amortization of the core deposit intangible
created in the acquisition of NSBI, compared to $476,000 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 $1.0 million in amortization expense of goodwill during the
current nine month period, compared to $451,000 in the prior year period.
INCOME TAXES - The Company recorded a provision for income taxes of $16.7
million for the nine months ended September 30, 1997, or an effective income tax
rate of 36.8%, compared to $5.4 million for the nine months ended September 30,
1996, or an effective income tax rate of 37.4%. The decrease in the effective
income tax rate is primarily due to the 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.
Item 5. Other Information
None.
30
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No. 11. Statement re: Computation of per share earnings
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
--------------------- ------------------------
Net income $ 9,196,000 28,692,000
=========== ==========
Weighted average shares outstanding 15,338,117 15,522,337
Common stock equivalents due to dilutive
effect of stock options 535,618 502,427
----------- ----------
Total weighted average common shares
and equivalents outstanding for primary
computation 15,873,735 16,024,764
=========== ==========
Primary earnings per share $ .58 1.79
=========== ==========
Total weighted average common shares
and equivalents outstanding for primary
computation 15,873,735 16,024,764
Additional dilutive shares using the end of
period market value versus the average
market value when applying the
treasury stock method 11,982 13,165
----------- ----------
Total weighted average common shares and
equivalents outstanding for fully diluted
computation 15,885,717 16,037,929
=========== ==========
Fully diluted earnings per share $ .58 1.79
=========== ==========
(b) Reports on Form 8-K.
None.
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: November 12, 1997 By: /s/ Allen H. Koranda
---------------------- -------------------------
Allen H. Koranda
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
Date: November 12, 1997 By: /s/ Jerry A. Weberling
--------------------- ---------------------------
Jerry A. Weberling
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer)
32