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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-18121
MAF BANCORP, INC.
(Exact name of registrant as specified in its charter)
----------------
Delaware 36-3664868
(State of Incorporation) (I.R.S. Employer
Identification No.)
55th Street & Holmes Avenue
Clarendon Hills, Illinois 60514
(Address of Principal executive Offices) (Zip Code)
Registrant's telephone number: (630) 325-7300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
The number of shares outstanding of the issuer's common stock, par value $.01
per share, was 22,568,945 at May 12, 1998.
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MAF BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
Index
-----
Part I. Financial Information Page
- ------- --------------------- ----
Item 1 Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 1998 (unaudited) and December 31, 1997....... 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1998 and 1997 (unaudited)............. 4
Consolidated Statement of Changes in Stockholders' Equity
for the Three Months Ended March 31, 1998 (unaudited)........ 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 (unaudited)....... 6
Notes to Unaudited Consolidated Financial Statements......... 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk... 27
Part II. Other Information
- -------- -----------------
Item 4 Submission of Matters to a Vote of Security Holders.......... 28
Item 5 Other Information............................................ 29
Item 6 Exhibits and Reports on Form 8-K............................. 29
Signature Page............................................... 30
2
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands)
March 31, December 31,
1998 1997
---------- ------------
(Unaudited)
Assets
- ------
Cash and due from banks $ 41,003 39,721
Interest-bearing deposits 19,649 57,197
Federal funds sold 88,343 50,000
Investment securities, at amortized cost (fair value of $10,802 at
March 31, 1998 and $26,222 at December 31, 1997) 9,978 25,268
Investment securities available for sale, at fair value 168,467 119,510
Stock in Federal Home Loan Bank of Chicago, at cost 36,025 33,025
Mortgage-backed securities, at amortized cost (fair value of $169,767
at March 31, 1998 and $216,867 at December 31, 1997) 170,208 215,449
Mortgage-backed securities available for sale, at fair value 67,624 67,559
Loans receivable held for sale 14,008 6,537
Loans receivable, net of allowance for loan losses of $15,625
at March 31, 1998 and $15,475 at December 31, 1997 2,748,733 2,700,590
Accrued interest receivable 21,097 20,970
Foreclosed real estate 6,861 489
Real estate held for development or sale 29,793 31,197
Premises and equipment, net 36,693 35,820
Excess of cost over fair value of net assets acquired 24,272 24,606
Other assets 28,431 29,726
---------- ---------
$3,511,185 3,457,664
========== =========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits 2,348,974 2,337,013
Borrowed funds 795,804 770,013
Subordinated capital notes, net 26,798 26,779
Advances by borrowers for taxes and insurance 26,953 22,679
Accrued expenses and other liabilities 40,886 37,769
---------- ---------
Total liabilities 3,239,415 3,194,253
---------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000
shares; none outstanding
Common stock, $.01 par value; authorized 40,000,000 shares;
25,421,304 shares issued; 22,544,976 outstanding at
March 31, 1998, 25,421,304 shares issued;
22,519,285 outstanding at December 31, 1997 169 169
Additional paid-in capital 172,210 172,201
Retained earnings, substantially restricted 136,794 129,002
Accumulated other comprehensive income, net of tax 1,805 1,552
Treasury stock, at cost; 2,876,328 shares at March 31, 1998
and 2,902,019 shares at December 31, 1997 (39,208) (39,513)
---------- ---------
Total stockholders' equity 271,770 263,411
Commitments and contingencies
---------- ---------
$3,511,185 3,457,664
========== =========
See accompanying notes to unaudited consolidated financial statements.
3
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
Three Months Ended
March 31,
--------------------
1998 1997
------- ------
(Unaudited)
Interest income:
Loans receivable $51,817 47,524
Mortgage-backed securities 3,126 4,586
Mortgage-backed securities available for sale 1,050 1,432
Investment securities 1,013 1,727
Investment securities available for sale 2,053 1,065
Interest-bearing deposits and federal funds sold 2,229 1,633
------- ------
Total interest income 61,288 57,967
------- ------
Interest expense:
Deposits 24,251 23,789
Borrowed funds 13,044 10,626
------- ------
Total interest expense 37,295 34,415
------- ------
Net interest income 23,993 23,552
Provision for loan losses 200 300
------- ------
Net interest income after provision for loan losses 23,793 23,252
------- ------
Non-interest income:
Gain on sale of:
Loans receivable 405 18
Mortgage-backed securities 42 6
Investment securities 328 78
Foreclosed real estate 64 68
Deposit account service charges 1,753 1,562
Income from real estate operations 801 1,416
Brokerage commissions 670 476
Loan servicing fee income 363 606
Other 1,020 802
------- ------
Total non-interest income 5,446 5,032
------- ------
Non-interest expense:
Compensation and benefits 8,497 7,350
Office occupancy and equipment 1,652 1,530
Advertising and promotion 653 497
Data processing 532 459
Federal deposit insurance premiums 362 366
Amortization of goodwill 334 339
Other 2,387 2,505
------- ------
Total non-interest expense 14,417 13,046
------- ------
Income before income taxes 14,822 15,238
Income tax expense 5,655 5,952
------- ------
Net income $ 9,167 9,286
======= ======
Basic earnings per share $ .41 .39
======= ======
Diluted earnings per share $ .39 .38
======= ======
See accompanying notes to unaudited consolidated financial statements.
4
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
(Dollars in thousands)
(Unaudited)
Accumulated
Additional other
Common paid-in Retained comprehensive Treasury
Three Months Ended March 31, 1998 stock capital earnings income stock Total
- --------------------------------- ------ ---------- -------- ------------- -------- -------
Balance at December 31, 1997 $169 172,201 129,002 1,552 (39,513) 263,411
---- ------- -------- ------- ------- -------
Comprehensive income:
Net income - - 9,167 - - 9,167
Other comprehensive income, net of tax:
Unrealized holding gain during the period - - - 381 - 381
Less: reclassification adjustment of gains
included in net income - - - (128) - (128)
---- ------- -------- ------- ------- -------
Total comprehensive income - - 9,167 253 - 9,420
---- ------- -------- ----- ------- -------
Exercise of 30,116 options and reissuance of treasury stock - - (322) - 393 71
Purchase of treasury stock - - - - (88) (88)
Tax benefits from stock-related compensation - 9 - - - 9
Cash dividends ($.047 per share) - - (1,053) - - (1,053)
---- ------- -------- ----- ------- -------
Balance at March 31, 1998 $169 172,210 136,794 1,805 (39,208) 271,770
==== ======= ======== ===== ======= =======
See accompanying notes to unaudited consolidated financial statements.
5
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended
March 31,
--------------------------
1998 1997
--------- --------
(Unaudited)
Operating activities:
Net income $ 9,167 9,286
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 842 729
Provision for loan losses 200 300
Deferred income tax (benefit) expense (414) 419
Amortization of goodwill and core deposit intangible 628 693
Amortization of premiums, discounts, loan fees and intangible assets 608 (10)
Net gain on sale of loans, mortgage-backed securities,
and real estate held for development or sale (1,248) (1,439)
Gain on sale of investment securities (328) (78)
Increase in accrued interest receivable (526) (262)
Net decrease in other assets and liabilities 3,509 4,209
Loans originated for sale (45,706) (2,550)
Loans purchased for sale (21,323) (15,784)
Sale of loans originated and purchased for sale 59,542 18,366
Sale of mortgage-backed securities available for sale 4,507 1,540
--------- --------
Net cash provided by operating activities 9,458 15,419
--------- --------
Investing activities:
Loans originated for investment (274,148) (132,912)
Principal repayments on loans receivable 245,690 126,640
Principal repayments on mortgage-backed securities 21,742 22,372
Proceeds from maturities of investment securities available for sale 46,652 42,109
Proceeds from maturities of investment securities held to maturity 15,000 39,266
Proceeds from sale of:
Loans receivable 200 78
Investment securities available for sale 1,211 391
Investments held to maturity 912
Real estate held for development or sale 6,481 9,174
Premises and equipment - 4
Purchases of:
Loans receivable held for investment (52,330) (43,226)
Investment securities available for sale (96,210) (50,989)
Investment securities held to maturity (590) (1,969)
Mortgage-backed securities available for sale (6,508)
Stock in Federal Home Loan Bank of Chicago (3,000)
Real estate held for development or sale (2,935) (12,188)
Premises and equipment (1,715) (2,135)
--------- --------
Net cash used in investing activities (72,548) (3,385)
--------- --------
(continued)
6
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended
March 31,
-------------------------
1998 1997
-------- -------
(Unaudited)
Financing activities:
Proceeds from FHLB of Chicago advances $ 60,000 25,000
Repayment of FHLB of Chicago advances (10,000) (55,000)
Repayment of collateralized mortgage obligations - (2,131)
Proceeds from exercise of stock options 71 43
Purchase of treasury stock (88) (3,399)
Cash dividends (1,051) (944)
Net increase in deposits 11,961 28,967
Decrease in advances by borrowers for taxes and insurance 4,274 3,319
-------- -------
Net cash provided (used in) financing activities 65,167 (4,145)
-------- -------
Increase in cash and cash equivalents 2,077 7,889
-------- -------
Cash and cash equivalents at beginning of period 146,918 125,717
-------- -------
Cash and cash equivalents at end of period $148,995 133,606
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds $ 36,825 35,457
Income taxes 1 -
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate 706 331
Loans receivable swapped into mortgage-backed securities 4,493 1,535
Treasury stock received for option exercises 18 236
======== =======
See accompanying notes to unaudited consolidated financial statements.
7
MAF BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 1998 and 1997
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) necessary for a fair presentation have been
included. The results of operations for the three months ended March 31, 1998
are not necessarily indicative of results that may be expected for the entire
fiscal year ended December 31, 1998.
The consolidated financial statements include the accounts of MAF Bancorp,
Inc. ("Company"), and its wholly-owned subsidiaries, Mid America Bank, fsb and
subsidiaries ("Bank") and MAF Developments, Inc., as of and for the three month
period ended March 31, 1998 and 1997 and as of December 31, 1997. All material
intercompany balances and transactions have been eliminated in consolidation.
(2) Earnings Per Share
In accordance with SFAS No. 128, earnings per share is determined by dividing
net income for the period by the weighted average number of shares outstanding.
Stock options are regarded as common stock equivalents and are considered in the
earnings per share calculations, and are the only adjustment made to average
shares outstanding in computing diluted earnings per share. Common stock
equivalents are computed using the treasury stock method. Weighted average
shares used in calculating earnings per share are summarized below for the
periods indicated:
Three months Ended March 31, 1998 Three Months Ended March 31, 1997
--------------------------------------- --------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------------ ----------- -------------- ------
(Dollars in thousands)
Basic earnings per share:
Income available to
common shareholders $9,167 22,523,922 $ .41 $9,286 23,552,097 $ .39
======= ======
Effect of dilutive securities:
Options 815,358 713,402
---------- ----------
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversions $9,167 23,339,280 $ .39 $9,286 24,265,499 $ .38
====== ========== ======= ====== ========== ======
All share and per share amounts have been adjusted for the 3-for-2 stock split
announced by the Company on April 29, 1998, which is payable on July 10, 1998 to
shareholders of record on June 18, 1998.
8
(3) Commitments and Contingencies
At March 31, 1998, the Bank had outstanding commitments to originate and
purchase loans of $294.0 million, of which $212.0 million were fixed-rate loans,
with rates ranging from 6.00% to 9.50%, and $82.0 million were adjustable-rate
loans. At March 31, 1998, commitments to sell loans were $77.0 million.
At March 31, 1998, the Bank had outstanding 18 standby letters of credit
totaling $15.9 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 11 outstanding standby letters of credit totaling
$5.3 million related to real estate development improvements.
(4) Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, interest-bearing deposits and federal funds sold. Generally,
federal funds are sold for one-day periods and interest-bearing deposits mature
within one day to three months.
During the current period, the Bank sold its 100% beneficial interest in its
two special-purpose finance subsidiaries, Mid America Finance Corporation
("MAFC") and Northwestern Acceptance Corporation ("NWAC"), for net proceeds of
$912,000. Due to the sale, the Bank no longer consolidates these subsidiaries,
which reduced mortgage-backed securities and borrowed funds by approximately
$30.2 million. In addition, other borrowings were increased by a $6.0 million
industrial revenue bond which secures a commercial office building the Company
took title to in January 1998 and is included in real estate owned.
(5) Reclassifications
Certain reclassifications of prior quarter amounts have been made to conform
with current quarter presentation.
(6) New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires
disclosure for each segment that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. It requires limited segment data on a
quarterly basis. It also requires geographic data by country, as opposed to
broader geographic regions as permitted under current standards. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted. Management of the Company does not expect that the
adoption of SFAS No. 131 will have a material effect on the consolidated
financial statements of the Company.
The FASB has issued SFAS No. 132, "Employers' Disclosures about Pensions and
Other Post-Retirement Benefits, "which is effective for fiscal years beginning
after December 15, 1997. This statement revises employers' disclosures about
pensions and other post-retirement benefit plans. It does not change the
measurement of recognition of those plans. It standardizes the disclosure
requirements for pensions and other post-retirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful. The
Company adopted SFAS No. 132 on January 1, 1998. The adoption did not have an
effect on the consolidated financial statements of the Company.
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 Bank, fsb ("Bank") and secondarily, in the residential
real estate development business through MAF Developments, Inc. ("MAF
Developments").
The Bank is a consumer-oriented financial institution offering various
financial services to its customers through 22 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"), the Company and
the Bank are also engaged in primarily residential real estate development
activities. Additionally, the Bank operates an insurance agency, Mid America
Insurance Agency, Inc., which provides general insurance services, and an
investment brokerage operation through its affiliation with INVEST, a registered
broker-dealer.
As a federally chartered savings bank, the Bank's deposits are insured up to
the applicable limits by the Federal Deposit Insurance Corporation ("FDIC"). The
Bank is a member of the Federal Home Loan Bank ("FHLB") of Chicago, which is one
of the twelve regional banks for federally insured savings institutions
comprising the FHLB system. The Bank is regulated by the Office of Thrift
Supervision ("OTS") and the FDIC. The Bank is further regulated by the Board of
Governors of the Federal Reserve System as to reserves required to be maintained
against deposits and certain other matters.
Regulation and Supervision
The Bank is subject to extensive regulation, by the OTS, as its chartering
authority and primary federal regulator, and by the FDIC, which insures its
deposits up to applicable limits. Such regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities. Any change in
such regulation, whether by the OTS, the FDIC or Congress could have a material
impact on the Company and their operations.
10
Capital Standards. Savings associations must meet three capital requirements;
core and tangible capital to total assets ratios as well as a regulatory capital
to total risk-weighted assets ratio.
Core Capital Requirement
The core capital requirement, or the required "leverage limit" currently
requires a savings institution to maintain core capital of not less than 3% of
adjusted total assets. Core capital generally includes common stockholders'
equity (including retained earnings), certain noncumulative perpetual preferred
stock and related surplus and minority interests in the equity accounts of fully
consolidated subsidiaries, less intangibles other than certain servicing rights.
Investments in and advances to subsidiaries engaged in activities not
permissible for national banks, such as Mid America Developments, are required
to be deducted from total capital. See "Deductions from Regulatory Capital on
Non-Permissible Activities".
Tangible Capital Requirement
Under OTS regulation, savings institutions are required to meet a tangible
capital requirement of 1.5% of adjusted total assets. Tangible capital is
defined as core capital less any intangible assets, plus purchased mortgage
servicing rights in an amount includable in core capital.
Risk-Based Capital Requirement
The risk-based capital requirement provides that savings institutions maintain
total capital equal to not less than 8% of total risk-weighted assets. For
purposes of the risk-based capital computation, total capital is defined as core
capital, as defined above, plus supplementary capital, primarily general loan
loss reserves (limited to a maximum of 1.25% of total risk-weighted assets.)
Supplementary capital included in total capital cannot exceed 100% of core
capital.
At March 31, 1998, the Bank was in compliance with all of its capital
requirements as follows:
March 31, 1998 December 31, 1997
----------------------- -----------------------
Percent of Percent of
Amount Assets Amount Assets
---------- ----------- ---------- -----------
(Dollars in thousands)
Stockholder's equity of the Bank $ 280,912 8.08% $ 279,165 8.15%
========== ===== ========== =====
Tangible capital $ 234,460 6.86% $ 232,109 6.88%
Tangible capital requirement 51,301 1.50 50,605 1.50
---------- ----- ---------- -----
Excess $ 183,159 5.36% $ 181,504 5.38%
========== ===== ========== =====
Core capital $ 234,460 6.86% $ 232,109 6.88%
Core capital requirement 102,602 3.00 101,210 3.00
---------- ----- ---------- -----
Excess $ 131,858 3.86% $ 130,899 3.88%
========== ===== ========== =====
Core and supplementary capital $ 249,730 14.01% $ 247,280 14.34%
Risk-based capital requirement 142,557 8.00 137,906 8.00
---------- ----- ---------- -----
Excess $ 107,173 6.01% $ 109,374 6.34%
========== ===== ========== =====
Total Bank assets $3,475,558 $3,424,182
Adjusted total Bank assets 3,420,053 3,373,667
Total risk-weighted assets 1,837,823 1,774,644
Adjusted total risk-weighted assets 1,781,963 1,723,824
Investment in Bank's real estate subsidiaries 15,757 15,351
========== ==========
11
A reconciliation of consolidated stockholder's equity of the Bank for
financial reporting purposes to regulatory capital available to the Bank to meet
regulatory capital requirements is as follows:
March 31, December 31,
1998 1997
------------------ ----------------
(In thousands)
Stockholder's equity of the Bank $280,912 279,165
Goodwill and other non-allowable intangible assets (30,702) (31,330)
Non-permissible subsidiary deduction (15,747) (15,351)
Non-includable purchased mortgage servicing rights -- (249)
SFAS No. 115 capital adjustment (3) (126)
-------- -------
Tangible and core capital 234,460 232,109
General loan loss reserves 15,625 15,475
Land loans greater than 80% loan-to-value (355) (304)
-------- -------
Core and supplementary capital $249,730 247,280
======== =======
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. As of July 1, 1996, 100% of such
investment in and advances to Mid America Developments and NW Financial was
required to be deducted from capital.
Included in the calculation of the Bank's deduction from tangible and core
capital due to investments in and advances to Mid America Developments and NW
Financial is the Bank's total equity investment as well as unsecured loans made
to these real estate subsidiaries. Decreasing the investment in and advances to
the real estate subsidiaries requires the generation of cash to repay its loans
to the Bank or to declare dividends to pass undistributed profits up to the
Bank. Currently, the generation of cash at Mid America Developments is
accomplished by continued lot sales from improved land developments, and home
sales in projects owned by NW Financial.
The following is a summary of the Bank's investment in and advances to Mid
America Developments and NW Financial at the dates indicated:
3/31/98 12/31/97 9/30/97 6/30/97 3/31/97
-------- -------- ------- ------- -------
(In thousands)
Common stock $ 2,157 1,657 1,657 1,657 1,657
Retained earnings 12,390 12,285 11,419 11,402 10,955
Intercompany advances 1,200 1,409 4,857 7,097 8,263
-------- -------- ------- ------- -------
$ 15,747 15,351 17,933 20,156 20,875
======== ======== ======= ======= =======
12
Interest Rate Risk Component of Regulatory Capital
The OTS regulatory capital requirements also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings institution's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. For the
present time, the OTS has deferred implementation of the interest rate risk
component. If the Bank had been subject to an interest rate risk capital
component as of March 31, 1998, the Bank's total risk-weighted capital would not
have been subject to a deduction based on interest rate risk. At March 31,
1998, the Bank met each of its capital requirements.
Insurance of Deposit Accounts. The FDIC has adopted a risk-based deposit
insurance system that assesses deposit insurance premiums according to the level
of risk involved in an institution's activities. An institution's risk category
is based upon whether the institution is classified as "well capitalized,"
"adequately capitalized" or "undercapitalized" and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation and information
which the FDIC determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance fund. Based on its
capital and supervisory subgroups, each Bank Insurance Fund ("BIF") and SAIF
member institution is assigned an annual FDIC assessment rate, with an
institution in the highest category (i.e., well-capitalized and healthy)
receiving the lowest rates and an institution in the lowest category (i.e.,
undercapitalized and posing substantial supervisory concern) receiving the
highest rates. The FDIC has authority to further raise premiums if deemed
necessary. If such action is taken, it could have an adverse effect on the
earnings of the Bank.
On September 30, 1996, the President signed the Deposit Insurance Funds Act of
1996 (the "Funds Act"), which, among other things, imposed a special one-time
assessment on SAIF members, including the Bank, to recapitalize the SAIF. The
Funds Act also spreads the obligations for payment of the Financing Corporation
("FICO") bonds across all SAIF and BIF members. Beginning on January 1, 1997,
BIF deposits were assessed for a FICO payment of 1.3 basis points, while SAIF
deposits paid 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 has 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 continued to make the FICO payments
described above. Management cannot predict the level of FDIC insurance
assessments on an on-going basis, whether the savings association charter will
be eliminated or whether the BIF and SAIF will eventually be merged.
The Bank's assessment rate is currently the lowest available to well-
capitalized financial institutions. 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. Some bills would require federal savings institutions to convert
to a national bank or some type of state charter by a specified date, or they
would automatically become national banks. Under some proposals, concerted
federal thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. A more recent bill passed by the House
Banking Committee would allow federal savings institutions to continue to
exercise activities being conducted when they convert to a bank regardless of
whether a national bank could engage on the activity. Holding companies for
savings institutions would become subject to the same regulation as holding
companies that control commercial banks, with a limited grandfathering,
including for savings and loan holding company activities. The grandfathering
would be lost under certain circumstances such as a change in control of the
Company. The Bank is unable to predict whether such legislation would be
enacted, the extent to which the legislation would restrict or disrupt its
operations or whether the BIF and SAIF funds will eventually merge.
Changes in Financial Condition
Total assets of the Company were $3.51 billion at March 31, 1998, an increase
of $53.5 million from $3.46 billion at December 31, 1997. The increase is
primarily due to an increase in savings deposits and FHLB of Chicago advances to
fund one- to four-family loan originations.
Cash and short-term investments totaled a combined $149.0 million at March 31,
1998, an increase of $2.1 million from the combined balance of $146.9 million at
December 31, 1997.
Investment securities classified as held to maturity decreased $15.3 million
to $10.0 million at March 31, 1998. The decrease is primarily due to maturities
of U.S. Government agency obligations totaling $10.0 million, and the call,
prior to maturity, of $5.0 million of FHLB callable notes.
Investment securities available for sale increased $49.0 million to $168.5
million at March 31, 1998. The increase is due to purchases of $96.2 million of
primarily U.S. Government and agency securities, offset by maturities of $26.7
million, the call, prior to maturity of $20.0 million of FHLB callable notes,
and sales of marketable equity securities with a book value of $1.2 million.
The Company recognized a gain on the sale of investment securities of $328,000
during the three months ended March 31, 1998. At March 31, 1998, gross
unrealized gains in the available for sale portfolio were $2.8 million compared
to $2.5 million at December 31, 1997.
Mortgage-backed securities classified as held to maturity decreased $45.2
million to $170.2 million at March 31, 1998, compared to $215.4 million at
December 31, 1997. During the quarter, the Bank sold its 100% beneficial
interest in both of its duration-matched special-purpose subsidiaries, MAFC, and
NWAC. The Bank no longer consolidates these entities as a result of the sales,
which led to a net reduction in mortgage-backed securities of approximately
$30.2 million.
14
Mortgage-backed securities available for sale increased $65,000 to $67.6
million at March 31, 1998. Amortization and prepayments of $6.7 million were
offset by $6.5 million of purchases as well as an increase in unrealized gains
in the portfolio. Gross unrealized gains in the available for sale portfolio
were $240,000 at March 31, 1998, compared to $19,000 at December 31, 1997. The
Bank has $129.5 million of CMO securities at March 31, 1998, the majority of
which are collateralized by FNMA, FHLMC and GNMA mortgage-backed securities, and
to a lesser extent by whole loans.
Loans receivable, including loans held for sale, increased $55.6 million, or
2.1%, to $2.76 billion at March 31, 1998. The Bank originated and purchased
(through wholesale originations) $367.7 million during the three month period
ended March 31, 1998. Offsetting this increase was amortization and prepayments
totaling $245.7 million, as well as sales of $63.9 million. Loans receivable
held for sale increased to $14.0 million as of March 31, 1998, compared to $6.5
million at December 31, 1997. The Company has increased its sales activity as a
result of the significant increase in fixed-rate mortgage loan originations
during the quarter.
The allowance for loan losses totaled $15.6 million at March 31, 1998, an
increase of $150,000 from the balance at December 31, 1997, due to a $200,000
provision for loan losses, offset by net charge-offs of $50,000. The Bank's
allowance for loan losses to total loans outstanding was .56% at March 31, 1998,
compared to .57% at December 31, 1997. Non-performing loans increased $1.8
million to $12.5 million at March 31, 1998, or .45% of total loans receivable,
compared to $10.7 million, or .39% at December 31, 1997.
Real estate held for development or sale decreased $1.4 million to $29.8
million at March 31, 1998. A summary of real estate held for development or sale
is as follows:
March 31, December 31,
1998 1997
--------- ------------
(in thousands)
MAF Developments, Inc.
Tallgrass of Naperville $15,152 14,292
Harmony Grove 2,681 4,856
Creekside of Remington 1,624 1,662
Clow Creek Farm 72 128
------- -------
19,529 20,938
------- -------
Mid America Developments, Inc.
Woods of Rivermist 159 154
Ashbury 50 50
------- -------
209 204
------- -------
NW Financial, Inc.
Reigate Woods 6,260 5,314
Woodbridge 2,962 3,498
Fields of Ambria 833 1,243
------- -------
10,055 10,055
------- -------
$29,793 31,197
======= =======
The Company had 64 lot sales in Harmony Grove for the quarter ended March 31,
1998, which were offset, in part, by continued development costs of the final
phase of the project. As of March 31, 1998, there are 16 lots under contract in
Harmony Grove. A pre-sale to builders of 99 of the remaining 111 lots was held
in April 1998, where 97 lots were sold, with expected closings in the third and
fourth quarter of 1998. Clow Creek Farm is substantially complete, with only 4
lots remaining, of which two are under contract as of March 31, 1998. The
Creekside of Remington subdivision, with 170 total lots, and 128 lots remaining,
had one sale during the current three month period. Nine lots are under
contract as of March
15
31, 1998. Tallgrass of Naperville is currently planned as a 565-lot joint
venture in Naperville, Illinois with the purchase of land for an additional 533
lots currently in negotiations. The increase in balance is due to improvement
costs in the first phase of the development. The Company expects the first lots
to be sold in the fourth quarter of 1998.
The $536,000 decrease in the Woodbridge subdivision is primarily due to the
sale of six homesites since December 31, 1997. Of the remaining nine homesites,
five are under contract as of March 31, 1998. The balance of Reigate Woods
increased due to an increased number of sales under contract. At March 31, 1998
there are 41 remaining homesites, with 12 homesites under contract. There were
two home sales in Fields of Ambria during the three months ended March 31, 1998.
At March 31, 1998 there were four homesites remaining, with one under contract.
Deposits increased $12.0 million, to $2.35 billion at March 31, 1998. After
consideration of interest credited to accounts of $22.7 million for the three
months ended March 31, 1998, actual cash outflows were $10.7 million.
Borrowed funds, which consist primarily of FHLB of Chicago advances,
increased $25.8 million to $795.8 million at March 31, 1998. The primary
reason for the increase is due to the Bank increasing its FHLB of Chicago
advances by a net $50.0 million since December 31, 1997 and the assumption of a
$6.0 million industrial revenue bond which secures a commercial office building
the Company took title to in January 1998, offsetting this increase was a $30.2
million reduction in CMO borrowings associated with the sale of the Bank's 100%
beneficial interest in its two duration-matched special-purpose finance
subsidiaries.
Asset Quality
Non-Performing Assets. When a borrower fails to make a required payment by
the end of the month in which the payment is due, the Bank generally institutes
collection procedures. The Bank will send a late notice, and in most cases,
delinquencies are cured promptly; however, if a loan has been delinquent for
more than 60 days, the Bank contacts the borrower in order to determine the
reason for the delinquency and to effect a cure, and, where appropriate, reviews
the condition of the property and the financial circumstances of the borrower.
Based upon the results of any such investigation, the Bank may: (1) accept a
repayment program for the arrearage from the borrower; (2) seek evidence, in the
form of a listing contract, of efforts by the borrower to sell the property if
the borrower has stated that he is attempting to sell; (3) request a deed in
lieu of foreclosure; or (4) initiate foreclosure proceedings. When a loan
payment is delinquent for three or more monthly installments, the Bank will
initiate foreclosure proceedings. Interest income on loans is reduced by the
full amount of accrued and uncollected interest on loans which are in
foreclosure or otherwise determined to be uncollectible.
The Bank considers a loan impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan. For loans which are not
individually significant (i.e. loans under $750,000), and represent a
homogeneous population, the Bank evaluates impairment collectively based on
management reports on the level and extent of delinquencies, as well as
historical loss experience for these types of loans. The Bank uses this
criteria on one-to four-family residential loans, consumer loans, multi-family
residential loans, and land loans. Impairment for loans considered individually
significant and commercial real estate loans are measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate, or the fair value of the collateral if the loan is collateral dependent.
Charge-offs of principal occur when a loss has deemed to have occurred as a
result of the book value exceeding the fair value.
16
A loan (whether considered impaired or not) is classified as non-accrual when
collectibility is in doubt, and is normally analyzed upon the borrower becoming
90 days past due on contractual principal or interest payments. When a loan is
placed on non-accrual status, or in the process of foreclosure, previously
accrued but unpaid interest is reserved in full. Income is subsequently
recorded to the extent cash payments are received, or at a time when the loan is
brought current in accordance with its original terms.
For the quarter ended March 31, 1998, interest income that would have been
recorded on non-accrual loans (had they been performing according to their
original terms) amounted to $186,000, compared to $267,000 for the three months
ended March 31, 1997.
As of March 31, 1998, the Bank's ratio of non-performing loans to total loans
was .45%, compared to .39% at December 31, 1997 and .61% at March 31, 1997.
Foreclosed real estate increased $6.4 million to $6.9 million at March 31,
1998, primarily due to the Company taking title to a commercial office building
with a fair value of $6.5 million.
Delinquent Loans. Delinquencies in the Bank's portfolio at the dates
indicated were as follows:
61-90 Days 91 Days or More
----------------------------------- --------------------------------
Principal Principal
Number Balance of Percent Number Balance of Percent
Of Delinquent of of Delinquent of
Loans Loans Total Loans Loans Total
------- ---------- ------- ------- ---------- -------
(Dollars in thousands)
March 31, 1998 63 $7,193 .26% 104 $11,260 .41%
== ====== === === ======= ===
December 31, 1997 32 $2,697 .10% 86 $10,134 .37%
== ====== === === ======= ===
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%
== ====== === === ======= ===
Management does not believe that increases in 61-90 day delinquencies
during the current quarter represent a material change in the credit quality of
the Bank's loan portfolio.
17
Loan Portfolio Composition. The following table sets forth the composition of
the Bank's loan portfolio in dollar amounts at the dates indicated:
At
----------------------------------------------------------------------
3/31/98 12/31/97 9/30/97 6/30/97 3/31/97 12/31/96
--------- --------- --------- --------- --------- ---------
(In thousands)
Real estate loans:
One-to four-family:
Held for investment $2,459,572 2,408,393 2,341,861 2,258,938 2,198,886 2,160,525
Held for sale 14,008 6,537 6,620 4,697 6,284 6,495
Multi-family 108,618 105,051 99,949 97,515 97,483 92,968
Commercial 34,738 35,839 44,164 44,881 45,459 46,313
Construction 17,367 17,263 16,615 17,105 17,277 17,263
Land 22,253 24,425 26,345 26,854 26,561 25,685
---------- --------- --------- --------- --------- ---------
Total real estate loans 2,656,556 2,597,508 2,535,554 2,449,990 2,391,950 2,349,249
Other loans:
Consumer loans:
Equity lines of credit 85,690 88,106 89,155 88,868 88,595 86,614
Home equity loans 34,711 34,447 31,629 22,866 13,634 14,251
Other 6,157 5,793 5,610 4,797 5,838 5,009
---------- --------- --------- --------- --------- ---------
Total consumer loans 126,558 128,346 126,394 116,531 108,067 105,874
Commercial business lines 2,628 2,659 2,360 2,312 2,333 1,871
---------- --------- --------- --------- --------- ---------
Total other loans 129,186 131,005 128,754 118,843 110,400 107,745
---------- --------- --------- --------- --------- ---------
Total loans receivable 2,785,742 2,728,513 2,664,308 2,568,833 2,502,350 2,456,994
Less:
Loans in process 7,778 6,683 7,005 6,990 6,700 7,620
Unearned discounts, premiums
and deferred loan fees, net (402) (772) (268) 645 696 1,347
Allowance for loan losses 15,625 15,475 18,337 18,182 18,010 17,914
---------- --------- --------- --------- --------- ---------
Total loans receivable, net 2,762,741 2,707,127 2,639,234 2,543,016 2,476,944 2,430,113
Loans receivable held for sale (14,008) (6,537) (6,620) (4,697) (6,284) (6,495)
---------- --------- --------- --------- --------- ---------
Loans receivable, net $2,748,733 2,700,590 2,632,614 2,538,319 2,470,660 2,423,618
========== ========= ========= ========= ========= =========
18
Non-performing assets. The following table sets forth information regarding non-
accrual loans, loans which are 91 days or more delinquent but on which the Bank
is accruing interest, foreclosed real estate and non-accrual investment
securities of the Bank.
At
-------------------------------------------------------
3/31/98 12/31/97 9/30/97 6/30/97 3/31/97 12/31/96
-------- -------- ------- ------- ------- --------
(In thousands)
Non-performing loans:
One-to four-family and multi-family loans:
Non-accrual loans $ 8,900 7,039 6,260 8,965 8,757 7,680
Accruing loans 91 days or more overdue 2,508 2,071 1,547 845 1,008 896
------- ------ ------ ------ ------ ------
Total 11,408 9,110 7,807 9,810 9,765 8,576
------- ------ ------ ------ ------ ------
Commercial real estate, construction and land loans:
Non-accrual loans 736 1,240 4,376 4,067 4,254 3,762
Accruing loans 91 days or more overdue 33 -- -- -- 599 699
------- ------ ------ ------ ------ ------
Total 769 1,240 4,376 4,067 4,853 4,461
------- ------ ------ ------ ------ ------
Other loans:
Non-accrual loans 210 181 225 461 366 353
Accruing loans 91 days or more overdue 96 124 24 25 79 74
------- ------ ------ ------ ------ ------
Total 306 305 249 486 445 427
------- ------ ------ ------ ------ ------
Total non-performing loans:
Non-accrual loans 9,846 8,460 10,861 13,493 13,377 11,795
Accruing loans 91 days or more overdue 2,637 2,195 1,571 870 1,686 1,669
------- ------ ------ ------ ------ ------
Total $12,483 10,655 12,432 14,363 15,063 13,464
======= ====== ====== ====== ====== ======
Non-accrual loans to total loans .36% .31 .41 .53 .54 .48
Accruing loans 91 days or more overdue to total loans .09 .08 .06 .03 .07 .07
------- ------ ------ ------ ------ ------
Non-performing loans to total loans .45% .39 .47 .56 .61 .55
======= ====== ====== ====== ====== ======
Foreclosed real estate (net of related reserves):
One- to four-family $ 6,861 489 1,810 724 773 1,257
Commercial, construction and land -- -- -- -- -- --
------- ------ ------ ------ ------ ------
Total $ 6,861 489 1,810 724 773 1,257
======= ====== ====== ====== ====== ======
Non-performing loans and foreclosed real estate
to total loans and foreclosed real estate .70% .41 .54 .59 .63 .60
======= ====== ====== ====== ====== ======
Total non-performing assets $19,344 11,144 14,242 15,087 15,836 14,721
======= ====== ====== ====== ====== ======
Total non-performing assets to total assets .55% .32 .42 .45 .49 .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
$34.5 million unsecured term bank loan, cash dividends to shareholders, loans to
and investments in MAF Developments, as well as investment purchases with excess
cash flow. The Company also maintains a one year, $15.0 million unsecured
revolving line of credit from a commercial bank, which was renewed and extended
until April 30, 1999. For the three month period ended March 31, 1998, the
Company received $7.5 million in dividends from the Bank and declared a common
stock dividend of $.047 per share, which was paid on April 3, 1998.
The Bank's principal sources of funds are deposits, advances from the FHLB of
Chicago, reverse repurchase agreements, principal repayments on loans and
mortgage-backed securities, proceeds from the sale of loans and funds provided
by operations. While scheduled loan and mortgage-backed securities amortization
and maturing interest-bearing deposits are a relatively predictable source of
funds, deposit flows and loan and mortgage-backed securities prepayments are
greatly influenced by economic conditions, the general level of interest rates
and competition. The Bank utilizes particular sources of funds based on
comparative costs and availability. The Bank generally manages the pricing of
its deposits to maintain a steady deposit balance, but has from time to time
decided not to pay rates on deposits as high as its competition, and when
necessary, to supplement deposits with longer term and/or less expensive
alternative sources of funds. During the current three month period the Bank
borrowed $60.0 million of primarily fixed-rate FHLB of Chicago advances and
repaid $10.0 million of maturing advances to fund the net increase in mortgage
loan originations held for investment for the current quarter.
The Bank is required by regulation to maintain specific minimum levels of
liquid investments. Regulations currently in effect require the Bank to maintain
liquid assets at least equal to 4.0% of the sum of its average daily balance of
net withdrawable accounts and borrowed funds due in one year or less. This
regulatory requirement may be changed from time to time to reflect current
economic conditions. During the quarter ended March 31, 1998, the Bank's
average liquidity ratio was 11.64%. At March 31, 1998, total liquidity was
$271.7 million, or 11.1%, which was $173.9 million in excess of the 4.0%
regulatory requirement.
During the three months ended March 31, 1998, the Bank originated and
purchased loans totaling $367.7 million compared with $195.8 million during
the same period a year ago. Loan sales and swaps for the three months ended
March 31, 1998, were $63.9 million, compared to $19.8 million for the prior
year period. The Bank has outstanding commitments to originate and purchase
loans of $294.0 million and commitments to sell or swap loans of $77.0 million
at March 31, 1998.
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 current three
month period, the Bank began to sell more of its fixed-rate originations than it
had over the previous twelve months to manage its interest rate risk.
In conjunction with the strategy discussed above, management has also hedged
the Bank's exposure to interest rate risk primarily by committing to sell fixed-
rate mortgage loans for future delivery. Under these commitments, the Bank
agrees to sell fixed-rate loans at a specified price and at a specified future
date. The sale of fixed-rate mortgage loans for future delivery has enabled the
Bank to continue to originate new mortgage loans, and to generate gains on sale
of these loans as well as loan servicing fee income, while maintaining its gap
ratio within the parameters discussed above. Most of these forward sale
commitments are conducted with FNMA and FHLMC with respect to loans that conform
to the requirements of these government agencies. The forward commitment of
mortgage loans presents a risk to the Bank if the Bank is not able to deliver
the mortgage loans by the commitment expiration date. If this should occur, the
Bank would be required to pay a fee to the buyer. The Bank attempts to mitigate
this risk by charging potential retail borrowers a 1% fee to fix the interest
rate, or by requiring the interest rate to float at market rates until shortly
before closing. In its wholesale lending operation, there is more risk due to
the competitive inability to charge a rate lock fee to the mortgage brokers,
which the Bank tries to offset by using higher assumed fallout rates. In
addition, the Bank uses U.S. Treasury bond futures contracts to hedge some of
the mortgage pipeline exposure. These futures contracts are used to hedge
mortgage loan production in those circumstances where loans are not sold forward
as described above.
21
The table below sets forth the scheduled repricing or maturity of the Bank's
assets and liabilities at March 31, 1998, based on the assumptions used by the
FHLB of Chicago with respect to NOW, checking and passbook account withdrawals.
The effect of these assumptions is to quantify the dollar amount of items that
are interest-sensitive and may be repriced within each of the periods specified.
The table does not necessarily indicate the impact of general interest rate
movements on the Bank's net interest yield because the repricing of certain
categories of assets and liabilities is subject to competitive and other
pressures beyond the Bank's control. As a result, certain assets and
liabilities indicated as maturing or otherwise repricing within a stated period
may, in fact, mature or reprice at different times and at different volumes.
At March 31, 1998
----------------------------------------------------------------------
More Than More Than More Than
6 Months 6 Months 1 Year 3 Years to More Than
or Less to 1 Year to 3 Years 5 Years 5 Years Total
-------- --------- ----------- ----------- ---------- ---------
(In thousands)
Interest-earning assets:
Loans receivable $649,252 435,442 767,212 168,947 757,111 2,777,964
Mortgage-backed securities 95,084 50,449 40,024 25,673 25,927 237,157
Interest-bearing deposits 19,649 -- -- -- -- 19,649
Federal funds sold 88,343 -- -- -- -- 88,343
Investment securities (1) 116,977 20,884 12,054 7,963 56,592 214,470
-------- ------- ------- -------- ------- ---------
Total interest-earning assets 969,305 506,775 819,290 202,583 839,630 3,337,583
Less yield adjustments, net 264 322 264 (177) 404 1,077
-------- ------- ------- -------- ------- ---------
Total net interest-earning assets 969,569 507,097 819,554 202,406 840,034 3,338,660
Impact of hedging activity (2) 14,008 -- -- -- (14,008) --
-------- ------- ------- -------- ------- ---------
Total net interest-earning assets
adjusted for impact of hedging activities 983,577 507,097 819,554 202,406 826,026 3,338,660
-------- ------- ------- -------- ------- ---------
Interest-bearing liabilities:
NOW and checking accounts 14,477 13,247 48,483 30,116 63,998 170,321
Money market accounts 142,879 -- -- -- -- 142,879
Passbook accounts 54,925 50,256 183,937 114,258 242,797 646,173
Certificate accounts 611,949 336,161 299,520 35,492 13,151 1,296,273
FHLB advances 80,000 105,000 270,000 195,000 60,500 710,500
Other borrowings 65,304 -- 20,000 -- 26,798 112,102
-------- ------- ------- -------- ------- ---------
Total interest-bearing liabilities 969,534 504,664 821,940 374,866 407,244 3,078,248
-------- ------- ------- -------- ------- ---------
Interest sensitivity gap $ 14,043 2,433 (2,386) (172,460) 418,782 260,412
======== ======= ======= ======== ======= =========
Cumulative gap $ 14,043 16,476 14,090 (158,370) 260,412
======== ======= ======= ======== =======
Cumulative gap assets as a percentage
of total assets .42% .49 .42 (4.74) 7.80
Cumulative net interest-earning assets as
a percentage of interest-bearing
liabilities 101.45% 101.12 100.61 94.07 108.46
- ------------------------------
(1) Includes $36.0 million of stock in FHLB of Chicago in 6 months or less.
(2) Represents forward commitments to sell long-term fixed-rate mortgage loans.
22
Average Balance Sheets
The following table sets forth certain information relating to the Bank's
consolidated statements of financial condition and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Such yields
and costs are derived by dividing income or expense by the average balance of
assets or liabilities, respectively, for the periods shown. Average balances
are derived from average daily balances. The yield/cost at March 31, 1998
includes fees which are considered adjustments to yield.
Three Months Ended March 31,
----------------------------------------------------------------- At March 31,
1998 1997 1998
------------------------------- -------------------------------- ---------------------
Average Average
Average Yield/ Average Yield/ Yield/
Balance Interest Cost Balance Interest Cost Balance Cost
---------- -------- -------- ---------- -------- -------- ---------- -------
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans receivable $2,754,100 51,817 7.53% $2,462,723 47,524 7.72% $2,778,366 7.63%
Mortgage-backed securities 252,302 4,176 6.62 345,882 6,018 6.96 237,832 6.70
Interest-bearing deposits (1) 49,300 833 6.76 67,929 1,044 6.15 214,470 6.28
Federal funds sold (1) 82,074 1,396 6.80 38,052 589 6.19 19,649 5.50
Investment securities (2) 189,108 3,106 6.57 151,534 2,881 7.60 88,343 5.46
---------- ------- ---------- ------- ----------
Total interest-earning assets 3,326,884 61,328 7.37 3,066,120 58,056 7.57 3,338,660 7.41
Non-interest earning assets 165,841 161,524 172,525
---------- ---------- ----------
Total assets $3,492,725 $3,227,644 $3,511,185
========== ========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits $2,242,762 24,251 4.39 $2,197,211 23,789 4.39 $2,255,646 4.41
Borrowed funds 825,894 13,044 6.32 643,278 10,626 6.61 822,602 6.35
---------- ------- ---------- ------- ----------
Total interest-bearing liabilities 3,068,656 37,295 4.91 2,840,489 34,415 4.89 3,078,248 4.93
------- ---- ------- ---- ----
Non-interest bearing deposits 86,749 67,820 93,328
Other liabilities 69,553 65,745 67,839
---------- ---------- ----------
Total liabilities 3,224,958 2,974,054 3,239,415
Stockholders' equity 267,767 253,590 271,770
---------- ---------- ----------
Liabilities and stockholders' equity $3,492,725 $3,227,644 $3,511,185
========== ========== ==========
Net interest income/interest rate $24,033 2.46% $23,641 2.68% 2.48%
spread ======= ==== ======= ==== ====
Net earning assets/net yield on
average interest-earning assets $ 258,228 2.89% $ 225,631 3.08% $ 260,412 N/A
========== ==== ========== ==== ========== ====
Ratio of interest-earning assets to
interest-bearing liabilities 108.42% 107.94% 108.46%
========== ========== ==========
- -------------------------------
(1) Includes pro-rata share of interest income received on outstanding drafts
payable.
(2) Income and yields are stated on a taxable equivalent basis.
23
Rate/Volume Analysis of Net Interest Income
The following table describes the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated, on a taxable equivalent basis. Information is provided
in each category with respect to (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate), (ii) changes attributable to
changes in rates (changes in rates multiplied by prior volume), and (iii) the
net change. Changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
Three Months Ended March 31, 1998
Compared to March 31, 1997
Increase (Decrease)
----------------------------------------
Volume Rate Net
------------ ------------ ------------
(In thousands)
Interest-earning assets:
Loans receivable $ 5,507 (1,214) 4,293
Mortgage-backed securities (1,561) (281) (1,842)
Interest bearing deposits (307) 96 (211)
Federal funds sold 743 64 807
Investment securities 651 (426) 225
------- ------ ------
Total 5,033 (1,761) 3,272
------- ------ ------
Interest-bearing liabilities:
Deposits 493 (31) 462
Borrowed funds 2,902 (484) 2,418
------- ------ ------
Total 3,395 (515) 2,880
------- ------ ------
Net change in net interest income $ 1,638 (1,246) 392
======= ====== ======
Comparison of the Three Months Ended March 31, 1998 and 1997
General - Net income for the three months ended March 31, 1998 was $9.2
million, or $.39 per diluted share, compared to net income of $9.3 million, or
$.38 per diluted share for the three months ended March 31, 1997. The higher
earnings per share on slightly lower income is the result of the Company's stock
repurchase program during 1997.
Net interest income - Net interest income was $24.0 million for the current
quarter, compared to $23.6 million for the quarter ended March 31, 1997, an
increase of $441,000. The Company's average net interest-earning assets
increased to $258.2 million for the three months ended March 31, 1998, compared
to $225.6 million for the three months ended March 31, 1997, offset by a decline
in the Company's net interest margin to 2.89% for the current three month
period, from 3.08% for the prior year period. The primary reason for the
decline in the net interest margin is the reduction in the average yield on
mortgage loans, which decreased 19 basis points during the current three month
period, due to reduced portfolio interest rates from refinance activity as well
as accelerated amortization of deferred loan expenses.
24
Interest income on loans receivable increased $4.3 million as a result of a
$291.4 million increase in average loans receivable, while the average yield of
loans receivable decreased 19 basis points. Interest income on mortgage-backed
securities decreased $1.8 million to $4.2 million for the current quarter, due
to a $93.6 million decrease in average balances. This decline in average balance
is a result of higher prepayments, and the impact of the sale of the Bank's 100%
beneficial interests in its two special-purpose finance subsidiaries. Interest
income on investment securities increased $274,000 to $3.1 million, due to the
increase in average balance.
Interest expense on deposit accounts increased $462,000 to $24.3 million, due
to an increase in average deposits of $45.6 million during the current three
month period, while the average cost of savings remained steady at 4.39%.
Interest expense on borrowed funds increased $2.4 million to $13.0 million, as
a result of a $182.6 million increase in the average balance of borrowed funds,
offset by a 29 basis point decrease in the average cost of borrowed funds. The
increase in the average balance is due to an increase in FHLB of Chicago
advances of $238.8 million, offset by a decrease in average reverse repurchase
agreements and CMO bonds payable of $59.1 million since March 31, 1997. The
reduction in average cost is due to maturing FHLB advances being redrawn at
lower interest rates, as well as the reduction in CMO bonds payable due to the
sale of the Bank's residual interests which carried a weighted average cost of
9.46%.
Provision for loan losses - The Bank provided $200,000 in provision for loan
losses during the current three month period, compared to $300,000 for the prior
three month period. Net charge-offs during the current quarter were $50,000,
compared to net charges-offs of $204,000 for the three months ended March 31,
1997. At March 31, 1998, the Bank's allowance for loan losses was $15.6 million,
which equaled .56% of total loans receivable, compared to .57% at December 31,
1997. The ratio of the allowance for loan losses to non-performing loans was
125.2% at March 31, 1998 compared to 145.2% at December 31, 1997, and 119.6% at
March 31, 1997.
Non-interest income - Non-interest income increased 8.2% to $5.4 million for
the three months ended March 31, 1998, compared to $5.0 million for the three
months ended March 31, 1997.
Gain on sale of loans and mortgage-backed securities increased to a combined
$447,000 for the three months ended March 31, 1998, compared to a combined
$24,000 for the three months ended March 31, 1997. Current quarter loan volume
consisted of primarily long-term fixed rate loans, which the Bank actively sold
during the current period. Loan sale volume was $59.4 million, compared to $18.3
million for the three months ended March 31, 1997. The gain on sale of mortgage-
backed securities represents loans originated by the Bank and swapped into
mortgage-backed securities prior to sale. During the three months ended March
31, 1998, $4.5 million of loans were swapped and sold, compared to $1.5 million
during the three months ended March 31, 1997.
The Company recognized $328,000 in gains on investment securities for the
three months ended March 31, 1998, compared to $78,000 for the prior year
period, primarily due to sales of marketable equity securities, and $75,000 from
the sale of beneficial interests in MAFC and NWAC.
25
Income from real estate operations decreased $615,000 to $801,000 for the
three months ended March 31, 1998. A summary of income from real estate
operations is as follows:
Three Months Ended March 31,
-------------------------------------------------
1998 1997
----------------------- ------------------------
Pre-tax
# of Income # of Pre-tax
Lots Loss Lots Income
---------- ---------- ---------- ------------
(dollars in thousands)
Harmony Grove 64 $694 37 $ 685
Clow Creek Farm 2 85 5 194
Woodbridge 6 2 8 15
Reigate Woods - 30 2 132
Fields of Ambria 2 (11) 5 41
Ashbury - - 4 203
Creekside of Remington 1 1 - -
Woods of Rivermist - - 3 146
-- ---- -- ------
75 $801 64 $1,416
== ==== == ======
Harmony Grove, with a total of 386 lots, commenced sales in 1996. To date, the
project has sold 259 lots, 64 in the current quarter. Of the remaining 127 lots,
16 lots are under contract as of March 31, 1998. The Woodbridge subdivision
consists of 531 residential lots. At March 31, 1998, 9 lots remained with 5
under contract. The decrease in sales is due to the subdivision being
substantially sold out. The Company expects to close the current pending sales
during the next quarter. The 85-lot Reigate Woods subdivision had no sales
during the current quarter, with 41 homesites remaining. Twelve homesites are
under contract as of March 31, 1998. Lot sale profits per lot in Clow Creek Farm
improved due to higher prices in the 260-lot subdivision, as it nears
completion. At March 31, 1998, two of the remaining four lots are under
contract. The Company had one sale in the Creekside of Remington subdivision,
which is a 170-lot development. Project to date sales have been slower than in
other projects. At March 31, 1998, nine lots are under contract. The Fields of
Ambria subdivision is nearly complete, with two sales during the current
quarter. Only four of the 240 total homesites in this project remain unsold at
March 31, 1998. The Woods of Rivermist development has two lots remaining to be
sold at March 31, 1998. Prior year Ashbury profits represent the sale of the
last residential lots.
The Company also entered into a contract during the quarter for the sale of
approximately 26.5 acres of a 48-acre commercial real estate parcel located in
Elgin, Illinois. The sale is expected to close in the fourth quarter of 1998 at
a pre-tax gain of $3.4 million.
Deposit account service charges increased $191,000, or 12.2% to $1.8 million
for the three months ended March 31, 1998, primarily due to continued growth in
the number of checking accounts and related fees. Brokerage commissions
increased $194,000 or 40.8% for the three months ended March 31, 1998 compared
to the prior year quarter due to strong financial markets.
Loan servicing fee income decreased $243,000 to $363,000, for the three months
ended March 31, 1998. The average balance of loans serviced for others decreased
5.9% to $980.8 million for the current three month period, compared to $1.04
billion for the prior year period. Amortization of servicing rights equaled
$278,000 for the three months ended March 31, 1998, compared to $81,000 for the
prior three month period.
Other non-interest income increased $218,000, or 27.2% to $1.0 million for the
three months ended March 31, 1998, due to increased fee income from loan
modifications and prepayment penalties.
26
Non-interest expense - Non-interest expense increased $1.4 million to $14.4
million for the three months ended March 31, 1998.
Compensation and benefits increased $1.1 million to $8.5 million for the three
months ended March 31, 1998, compared to the three months ended March 31, 1997.
The increase is primarily due to increased compensation and benefit costs at two
new branches, increased medical expenses and higher loan compensation as a
result of the record loan volume during the quarter.
Occupancy expense increased 8.0% to $1.7 million for the three months ended
March 31, 1998 compared to the prior year period, primarily due to the opening
of two new branches during 1997.
Advertising and promotion expense increased $156,000 for the three months
ended March 31, 1998 compared to the prior year due to expenditures related to
the new branch openings and special deposit and equity loan promotions.
Income taxes - For the three months ended March 31, 1998, income tax expense
totaled $5.7 million, or an effective income tax rate of 38.2%, compared to $6.0
million, or an effective income tax rate of 39.1%, for the three months ended
March 31, 1997.
Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in market risk since December 31, 1997, as
reported in the Company's Form 10-K.
27
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings
The Company is not presently engaged in any legal proceedings of a
material nature.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Shareholders on April 29,
1998.
(b) The names of each director elected at the Annual Meeting are as
follows:
Terry A. Ekl
Kenneth Koranda
Lois B. Vasto
Jerry A. Weberling
The names of each of the directors whose term of office continued
after the Annual Meeting are as follows:
Robert Bowles, M.D. Henry Smogolski
Joe F. Hanauer F. William Trescott
Allen H. Koranda Andrew J. Zych
(c) The following matters were voted upon at the Annual Meeting and the
number of affirmative votes and negative votes cast with respect to
the matter follows.
(i) Approval of amendments to the MAF Bancorp, Inc. 1990 Incentive
Stock Option Plan:
For Against Abstain
---------- --------- -------
11,707,591 1,731,674 74,292
(ii) Ratification of the appointment of KPMG Peat Marwick LLP as the
Company's independent auditors for the year ending December 31,
1998:
For Against Abstain
---------- ------- -------
13,452,531 29,177 31,849
(d) None.
28
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No. 11. Statement re: Computation of per share earnings
Quarter Ended
March 31, 1998
--------------
Net income $ 9,167,000
===========
Weighted average common shares outstanding 22,523,922
===========
Basic earnings per share $ .41
===========
Weighted average common shares outstanding 22,523,922
Common stock equivalents due to dilutive
effect on stock options 815,358
-----------
Total weighted average common shares and equivalents
outstanding for diluted computation 23,339,280
===========
Diluted earnings per share $ .39
===========
(b) Reports on Form 8-K.
None.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAF Bancorp. Inc.
------------------------------------
(Registrant)
Date: May 12, 1998 By: /s/ Allen H. Koranda
-------------------- ------------------------------------
Allen H. Koranda
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
Date: May 12, 1998 By: /s/ Jerry A. Weberling
-------------------- ------------------------------------
Jerry A. Weberling
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer)
30