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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 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 22,608,471 at August 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 June 30, 1998 (unaudited) and December 31, 1997......................... 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1998 and 1997 (unaudited)............................... 4
Consolidated Statements of Changes in Stockholders' Equity
for the Six Months Ended June 30, 1998 (unaudited)............................ 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 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.................... 31
Part II. Other Information
- -------- -----------------
Item 1 Legal Proceedings............................................................. 32
Item 2 Changes in Securities......................................................... 32
Item 3 Defaults Upon Senior Securities............................................... 32
Item 4 Submission of Matters to a Vote of Security Holders........................... 32
Item 5 Other Information............................................................. 32
Item 6 Exhibits and Reports on Form 8-K.............................................. 32
Signature Page................................................................ 33
2
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands)
June 30, December 31,
1998 1997
----------- -------
(Unaudited)
Assets
- ------
Cash and due from banks $ 39,344 39,721
Interest-bearing deposits 29,557 57,197
Federal funds sold 77,304 50,000
Investment securities, at amortized cost (fair value of $10,852 at
June 30, 1998 and $26,222 at December 31, 1997) 9,980 25,268
Investment securities available for sale, at fair value 184,036 119,510
Stock in Federal Home Loan Bank of Chicago, at cost 40,525 33,025
Mortgage-backed securities, at amortized cost (fair value of $152,864
at June 30, 1998 and $216,867 at December 31, 1997) 153,345 215,449
Mortgage-backed securities available for sale, at fair value 63,097 67,559
Loans receivable held for sale 42,993 6,537
Loans receivable, net of allowance for loan losses of $15,689
at June 30, 1998 and $15,475 at December 31, 1997 2,781,793 2,700,590
Accrued interest receivable 21,080 20,970
Foreclosed real estate 6,766 489
Real estate held for development or sale 26,287 31,197
Premises and equipment, net 37,702 35,820
Excess of cost over fair value of net assets acquired 23,938 24,606
Other assets 31,909 29,726
---------- ----------
$ 3,569,656 3,457,664
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits 2,353,499 2,337,013
Borrowed funds 846,000 770,013
Subordinated capital notes, net 26,817 26,779
Advances by borrowers for taxes and insurance 24,371 22,679
Accrued expenses and other liabilities 39,076 37,769
---------- ----------
Total liabilities 3,289,763 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;
25,420,678 shares issued; 22,576,705 outstanding at June 30, 1998,
25,420,681 shares issued; 22,518,662 outstanding at December 31, 1997 254 254
Additional paid-in capital 172,210 172,201
Retained earnings, substantially restricted 144,561 128,917
Accumulated other comprehensive income, net of tax 1,699 1,552
Treasury stock, at cost; 2,843,973 shares at June 30, 1998
and 2,902,019 shares at December 31, 1997 (38,831) (39,513)
---------- ----------
Total stockholders' equity 279,893 263,411
---------- ----------
Commitments and contingencies
$ 3,569,656 3,457,664
========== ==========
See accompanying notes to unaudited consolidated financial statements.
3
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited)
Interest income:
Loans receivable $ 52,551 48,871 $ 104,368 96,395
Mortgage-backed securities 2,583 4,363 5,709 8,949
Mortgage-backed securities available for sale 1,006 1,346 2,056 2,778
Investment securities 811 1,028 1,824 2,755
Investment securities available for sale 2,667 1,256 4,720 2,321
Interest-bearing deposits and federal funds sold 2,195 1,977 4,424 3,610
------ ------- ------- -------
Total interest income 61,813 58,841 123,101 116,808
------ ------- ------- -------
Interest expense:
Deposits 24,144 24,522 48,395 48,311
Borrowed funds 13,461 11,045 26,505 21,671
------ ------- ------- -------
Total interest expense 37,605 35,567 74,900 69,982
------ ------- ------ -------
Net interest income 24,208 23,274 48,201 46,826
Provision for loan losses 200 300 400 600
------ ------- ------- -------
Net interest income after provision for loan losses 24,008 22,974 47,801 46,226
------ ------- ------- -------
Non-interest income:
Gain (loss) on sale of:
Loans receivable 804 81 1,209 99
Mortgage-backed securities 126 1 168 7
Investment securities 70 10 398 88
Foreclosed real estate 21 (43) 66 25
Income from real estate operations 1,298 1,558 2,099 2,974
Deposit account service charges 2,079 1,763 3,832 3,325
Loan servicing fee income 393 594 756 1,200
Brokerage commissions 839 503 1,509 979
Other 1,227 982 2,266 1,784
------ ------- ------- -------
Total non-interest income 6,857 5,449 12,303 10,481
------ ------- ------- -------
Non-interest expense:
Compensation and benefits 8,755 7,354 17,252 14,704
Office occupancy and equipment 1,694 1,528 3,346 3,058
Advertising and promotion 584 666 1,237 1,163
Data processing 564 514 1,096 973
Federal deposit insurance premiums 366 371 728 737
Amortization of goodwill 334 334 668 673
Other 2,589 2,592 4,976 5,097
------ ------- ------- -------
Total non-interest expense 14,886 13,359 29,303 26,405
------ ------- ------- -------
Income before income taxes 15,979 15,064 30,801 30,302
Income tax expense 6,199 4,854 11,854 10,806
------ ------- ------- -------
Net income $ 9,780 10,210 18,947 19,496
====== ======= ======= =======
Basic earnings per share $ .43 .44 .84 .83
====== ======= ======= =======
Diluted earnings per share $ .42 .42 .81 .81
====== ======= ======= =======
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)
Accumulated
Additional other
Common paid-in Retained comprehensive Treasury
Six Months Ended June 30, 1998 stock capital earnings income stock Total
------------------------------ ----- ------- -------- ------ ----- -----
Balance at December 31, 1997 $ 254 172,201 128,917 1,552 (39,513) 263,411
-------- -------- -------- -------- -------- --------
Comprehensive income:
Net income -- -- 18,947 -- -- 18,947
Other comprehensive income, net of tax:
Unrealized holding gain during the period -- -- -- 287 -- 287
Less: reclassification adjustment of gains
included in net income -- -- -- (140) -- (140)
-------- -------- -------- -------- -------- --------
Total comprehensive income -- -- 18,947 147 -- 19,094
-------- -------- -------- -------- -------- --------
Exercise of 64,316 options and reissuance
of treasury stock -- -- (669) -- 819 150
Purchase of treasury stock -- -- -- -- (137) (137)
Tax benefits from stock-related compensation -- 9 -- -- -- 9
Cash dividends ($.117 per share) -- -- (2,634) -- -- (2,634)
-------- -------- -------- -------- -------- --------
Balance at June 30, 1998 $ 254 172,210 144,561 1,699 (38,831) 279,893
======== ======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
5
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
June 30,
--------------------------
1998 1997
---------- ---------
(Unaudited)
Operating activities:
Net income $ 18,947 19,496
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 1,722 1,488
Provision for loan losses 400 600
Deferred income tax benefit (366) (683)
Amortization of premiums, discounts, loan fees and servicing rights 1,142 720
Amortization of goodwill and core deposit premium 1,255 1,382
Net gain on sale of loans, mortgage-backed securities,
and real estate held for development or sale (3,476) (3,080)
Gain on sale of investment securities (398) (88)
Increase in accrued interest receivable (508) (414)
Net (increase) decrease in other assets and liabilities (3,846) 780
Loans originated for sale (166,004) (5,137)
Loans purchased for sale (54,767) (38,731)
Sale of loans originated and purchased for sale 183,796 44,479
Sale of mortgage-backed securities available for sale 15,207 2,210
---------- ---------
Net cash provided by (used in) operating activities (6,896) 23,022
---------- ---------
Investing activities:
Loans originated for investment (467,367) (319,638)
Principal repayments on loans receivable 484,318 280,321
Principal repayments on mortgage-backed securities 45,961 38,367
Proceeds from maturities of investment securities available for sale 71,964 50,936
Proceeds from maturities of investment securities held to maturity 15,000 40,492
Proceeds from sale of:
Loans receivable 888 1,253
Investment securities available for sale 1,522 501
Investments held to maturity 912 -
Real estate held for development or sale 16,359 20,231
Premises and equipment 1 172
Stock in FHLB of Chicago 500 6,299
Purchases of:
Loans receivable held for investment (114,374) (80,028)
Investment securities available for sale (137,403) (64,229)
Investment securities held to maturity (590) (3,244)
Mortgage-backed securities available for sale (9,552) -
Stock in FHLB of Chicago (8,000) (1,845)
Real estate held for development or sale (6,635) (20,598)
Premises and equipment (3,604) (3,353)
---------- ---------
Net cash used in investing activities (110,100) (54,363)
---------- ---------
(continued)
6
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
June 30,
----------------------------
1998 1997
---------- ----------
(Unaudited)
Financing activities:
Proceeds from FHLB of Chicago advances $160,000 100,000
Repayment of FHLB of Chicago advances (35,000) (55,000)
Repayment of collateralized mortgage obligation - (3,974)
Net decrease in other borrowings (24,804) -
Proceeds from exercise of stock options 150 70
Purchase of treasury stock (137) (10,148)
Cash dividends (2,104) (1,885)
Net increase in deposits 16,486 39,566
Decrease in advances by borrowers for taxes and insurance 1,692 1,978
---------- ----------
Net cash provided by financing activities 116,283 70,607
---------- ----------
Increase (decrease) in cash and cash equivalents (713) 39,266
---------- ----------
Cash and cash equivalents at beginning of period 146,918 125,717
---------- ----------
Cash and cash equivalents at end of period $146,205 164,983
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds $ 74,681 70,723
Income taxes 10,401 10,600
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate 849 972
Loans receivable swapped into mortgage-backed securities 15,144 2,202
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 and Six Months Ended June 30, 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 and six months ended June 30,
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 and
six month periods ended June 30, 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 June 30, 1998 Three Months Ended June 30, 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 $ 9,780 22,562,943 $ .43 $ 10,210 23,290,619 $ .44
====== =====
Effect of dilutive securities:
Options 814,923 744,077
---------- ----------
Diluted earnings per share -
Income available to common
shareholders plus assumed
conversions $ 9,780 23,377,866 $ .42 $ 10,210 24,034,696 $ .42
======== ========== ===== ======= ========== =====
8
(2) Earnings Per Share (continued)
Three months Ended June 30, 1998 Three Months Ended June 30, 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 $ 18,947 22,543,121 $ .84 $ 19,496 23,421,047 $ .83
===== =====
Effect of dilutive securities:
Options 815,130 728,731
---------- ----------
Diluted earnings per share -
Income available to common
shareholders plus assumed
conversions $ 18,947 23,358,251 $ .81 $ 19,496 24,149,778 $ .81
======== ========== ===== ======= ========== =====
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 was paid on July 10,
1998 to shareholders of record on June 18, 1998.
(3) Commitments and Contingencies
At June 30, 1998, the Bank had outstanding commitments to originate and
purchase loans of $327.3 million, of which $244.0 million were fixed-rate loans,
with rates ranging from 5.875% to 9.5%, and $83.3 million were adjustable-rate
loans. At June 30, 1998, commitments to sell loans were $47.8 million.
At June 30, 1998, the Bank had outstanding 16 standby letters of credit
totaling $15.6 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 16 outstanding standby letters of credit totaling
$3.6 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 six-month 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 increased $6.0
million, due to the assumption of an industrial revenue bond that secures a
commercial office building the Company owns in foreclosed real estate.
9
(5) Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," was adopted by the Company as of January 1, 1998. This
statement requires reporting of changes in stockholders' equity that do not
result directly from transactions from nonowner sources. Comprehensive income
for the three and six months ended June 30, 1998 and 1997 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
Net income $9,780 10,210 18,947 19,496
Other comprehensive income, net of tax
Net unrealized holding gain (loss) during the period (97) 855 284 373
Less: reclassification adjustment of gains included
in net income (9) - (137) (21)
------ ------ ------ ------
Total comprehensive income $9,674 11,065 19,094 19,848
====== ====== ====== ======
(6) New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement requires disclosure for each
segment that is 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. 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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. The statement requires all derivatives to be
recorded on the balance sheet at fair value. It also establishes "special
accounting" for hedges of changes in the fair value of assets, liabilities, or
firm commitments (fair value hedges), hedges of the variable cash flows of
forecasted transactions (cash flow hedges), and hedges of foreign currency
exposures of net investments in foreign operations. To the extent the hedge is
considered highly effective, both the change in the fair value of the derivative
and the change in the fair value of the hedged item are recognized (offset) in
earnings in the same period. Changes in fair value of derivatives that do not
meet the criteria of one of these three hedge categories are included in income.
Management of the Company does not expect that the adoption of SFAS No. 133 will
have a material effect on the consolidated financial statements of the Company.
(7) Reclassifications
Certain reclassifications of prior quarter amounts have been made to conform
with current quarter presentation.
10
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 23 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.
Year 2000 Compliance
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed without considering the impact of the
upcoming change in the century. If not corrected, many computer applications
and systems could fail or create erroneous results by or at the year 2000. The
Bank's daily operations rely heavily on software applications that could be
affected by year 2000 issues.
The Bank has prepared a comprehensive "Year 2000" plan, which has identified
both internal and external computer systems and software, as well as non-
computer related hardware and systems that contains embedded technology, that
have the potential to create an operational problem at the turn of the century.
The plan's implementation status is reviewed monthly with senior management and
the Board of Directors. The Bank's year 2000 plan calls for testing and
certifying all mainframe software applications and internal network
communications in October 1998 and the Bank expects to have fully implemented
its year 2000 plan by March 31, 1999, although there can be no assurances as to
the timely completion of any necessary corrective actions to systems and
software.
11
The Bank owns all of its computer hardware, including its mainframe computer
that processes customer transactions. However, it relies on outside vendors who
write and support the software applications that run on its mainframe and PCs.
The Bank also has many proprietary programs written internally for management
reporting or for the support of other operations at the Bank. The Bank has
identified and prioritized the review and testing of its outside vendor
software, including its mainframe software, as well as its internal programs
which are at risk of a year 2000 problem.
Linked directly to the Bank's mainframe operations is the communication of its
branch network to the mainframe, as well as communication across its PC network.
The Bank has identified its year 2000 issues with its provider of
telecommunications equipment and service (a major telecommunications company),
and is in the process of certifying its system for year 2000 compliance as it
relates to the Bank's operations.
Additionally, many of the Bank's security systems, such as vaults, alarms, and
other functional equipment have been identified as potential sources of year
2000 problems and are in the process of being tested, with the help of the
manufacturers, to confirm year 2000 preparedness.
Included in the Bank's year 2000 plan is a contingency plan for the failure of
its mission critical systems, including its mainframe software, its
telecommunications network, and its security systems. Failures in these systems
would be the most critical problems the Bank would face as a result of year
2000. These systems apply to all of the Bank's customer transactions, and its
ability to generate new business with its customers. The contingency plan
includes the ability to safely operate its branch network, and to execute
customer transactions in the event of a telecommunications failure, or a problem
with the Bank's mainframe software system. These plans are subject to the
testing and review procedures in conjunction with its year 2000 plan.
The Bank has relied primarily on its own data processing department to
facilitate its year 2000 plan. As part of its year 2000 plan, the Bank has
upgraded certain PC-based software packages, and hardware where necessary. To
date, the costs related to these items have been immaterial to the Bank's
operation. In addition, upgrades for year 2000 compliance to the Bank's
mainframe software, and telecommunications systems are covered by the respective
vendors under annual maintenance programs maintained by the Bank. The Company
expects the final cost of its year 2000 compliance plan to be less than
$500,000, and not material to its operations or financial condition.
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.
12
Capital Standards. Savings associations must meet three capital requirements;
core and tangible capital to total assets ratios as well as a regulatory capital
to total risk-weighted assets ratio.
Core Capital Requirement
The core capital requirement, or the required "leverage limit" currently
requires a savings institution to maintain core capital of not less than 3% of
adjusted total assets. Core capital generally includes common stockholders'
equity (including retained earnings), certain noncumulative perpetual preferred
stock and related surplus and minority interests in the equity accounts of fully
consolidated subsidiaries, less intangibles other than certain servicing rights.
Investments in and advances to subsidiaries engaged in activities not
permissible for national banks, such as Mid America Developments, are required
to be deducted from total capital. See "Deductions from Regulatory Capital on
Non-Permissible Activities".
Tangible Capital Requirement
Under OTS regulation, savings institutions are required to meet a tangible
capital requirement of 1.5% of adjusted total assets. Tangible capital is
defined as core capital less any intangible assets, plus purchased mortgage
servicing rights in an amount includable in core capital.
Risk-Based Capital Requirement
The risk-based capital requirement provides that savings institutions maintain
total capital equal to not less than 8% of total risk-weighted assets. For
purposes of the risk-based capital computation, total capital is defined as core
capital, as defined above, plus supplementary capital, primarily general loan
loss reserves (limited to a maximum of 1.25% of total risk-weighted assets.)
Supplementary capital included in total capital cannot exceed 100% of core
capital.
The Bank was in compliance with all of its capital requirements as of the
dates indicated below:
June 30, 1998 December 31, 1997
---------------------- ----------------------
Percent of Percent of
Amount Assets Amount Assets
---------- ---------- ---------- ----------
(Dollars in thousands)
Stockholder's equity of
the Bank $ 283,400 8.02% $ 279,165 8.15%
========== ===== ========== =====
Tangible capital $ 239,457 6.88% $ 232,109 6.88%
Tangible capital
requirement 52,202 1.50 50,605 1.50
---------- ----- ---------- -----
Excess $ 187,255 5.38% $ 181,504 5.38%
========== ===== ========== =====
Core capital $ 239,457 6.88% $ 232,109 6.88%
Core capital requirement 104,403 3.00 101,210 3.00
---------- ----- ---------- -----
Excess $ 135,054 3.88% $ 130,899 3.88%
========== ===== ========== =====
Core and supplementary
capital $ 255,146 13.95% $ 247,280 14.34%
Risk-based capital
requirement 146,279 8.00 137,906 8.00
---------- ----- ---------- -----
Excess $ 108,867 5.95% $ 109,374 6.34%
========== ===== ========== =====
Total Bank assets $ 3,533,780 $ 3,424,182
Adjusted total Bank assets 3,480,115 3,373,667
Total risk-weighted assets 1,882,148 1,774,644
Adjusted total
risk-weighted assets 1,828,483 1,723,824
Investment in Bank's real
estate subsidiary 13,819 15,351
========== ==========
13
A reconciliation of consolidated stockholder's equity of the Bank for
financial reporting purposes to regulatory capital available to the Bank to meet
regulatory capital requirements is as follows:
June 30, December 31,
1998 1997
------------ ------------
(In thousands)
Stockholder's equity of the Bank $283,400 279,165
Goodwill and other non-allowable intangible assets (30,074) (31,330)
Non-permissible subsidiary deduction (13,819) (15,351)
Non-includable purchased mortgage servicing rights - (249)
SFAS No. 115 capital adjustment (50) (126)
-------- -------
Tangible and core capital 239,457 232,109
General loan loss reserves 15,689 15,475
Land loans greater than 80% loan-to-value - (304)
-------- -------
Core and supplementary capital $255,146 247,280
======== =======
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:
6/30/98 3/31/98 12/31/97 9/30/97 6/30/97
-------- ------- -------- ------- -------
(In thousands)
Common stock $ 2,157 2,157 1,657 1,657 1,657
Retained earnings 10,309 12,390 12,285 11,419 11,402
Intercompany advances 1,353 1,200 1,409 4,857 7,097
-------- ------- -------- ------- -------
$ 13,819 15,747 15,351 17,933 20,156
======== ======= ======== ======= =======
14
Interest Rate Risk Component of Regulatory Capital
The OTS regulatory capital requirements also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings institution's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. For the
present time, the OTS has deferred implementation of the interest rate risk
component. If the Bank had been subject to an interest rate risk capital
component as of June 30, 1998, the Bank's total risk-weighted capital would not
have been subject to a deduction based on interest rate risk. At June 30, 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. The FDIC readopted this scale for the second half of 1998.
Also, SAIF members will continue to make the FICO payments described above.
Management cannot predict the level of FDIC insurance assessments on an on-going
basis, whether the savings association charter will be eliminated or whether the
BIF and SAIF will eventually be merged.
The Bank's assessment rate is currently 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.
15
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, converted
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 charted thrifts would become subject to the same federal regulation as
applies to state commercial banks. A more recent bill passed by the House of
Representatives would not abolish the federal charter but would make unitary
savings and loan holding companies subject to the same activities restrictions
as holding companies controlling commercial banks. However, existing unitary
holding companies, such as the Company, would be grandfathered. The Company is
unable to predict whether such legislation will be enacted, the extent to which
it may restrict or disrupt its operations or whether the BIF and SAIF funds will
merge.
Changes in Financial Condition
As of June 30, 1998, total assets of the Company were $3.57 billion, an
increase of $112.0 million or 3.2% from the $3.46 billion at December 31, 1997.
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 $146.2 million at June 30,
1998, a decrease of $713,000 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 June 30, 1998. The decrease is 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 $64.5 million to $184.0
million at June 30, 1998. The increase is due to purchases of $137.4 million of
primarily U.S. Government and agency securities, offset by maturities of $33.5
million, the call, prior to maturity, of $38.4 million of FHLB and agency
callable notes, and sales of marketable equity securities with a book value of
$1.5 million. The Company recognized gains on the sale of investment securities
of $321,000 during the six months ended June 30, 1998. At June 30, 1998, gross
unrealized gains in the available for sale portfolio were $2.7 million, compared
to $2.5 million at December 31, 1997.
Mortgage-backed securities classified as held to maturity decreased $62.1
million to $153.3 million at June 30, 1998, compared to $215.4 million at
December 31, 1997. During the six months ended June 30, 1998, 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.
16
Mortgage-backed securities available for sale decreased $4.5 million to $63.1
million at June 30, 1998, compared to $67.6 million at December 31, 1997.
Amortization and prepayments of $14.1 million were offset by $9.6 million of
purchases. Gross unrealized losses in the available for sale portfolio were
$146,000 at June 30, 1998, compared to $19,000 at December 31, 1997. The Bank
has $118.9 million of CMO securities at June 30, 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 $117.7 million, or
4.4%, to $2.82 billion at June 30, 1998. The Bank originated and purchased
(through wholesale originations) $806.9 million during the six months period
ended June 30, 1998, due in part to heavy refinance activity in the Bank's loan
portfolio. Offsetting this increase was amortization and prepayments totaling
$484.5 million, as well as sales of $198.6 million. Loans receivable held for
sale increased $36.5 million to $43.0 million as of June 30, 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 six months.
The allowance for loan losses totaled $15.7 million at June 30, 1998, an
increase of $214,000 from the balance at December 31, 1997. The Bank's
allowance for loan losses to total loans outstanding was .56% at June 30, 1998,
compared to .57% at December 31, 1997. Non-performing loans increased $1.9
million to $12.5 million at June 30, 1998, or .45% of total loans receivable,
compared to $10.7 million, or .39% at December 31, 1997.
Foreclosed real estate increased to $6.8 million, as a result of the
foreclosure of a $6.5 million commercial office building in January 1998. In
conjunction with the foreclosure, the Bank assumed a $6.0 million industrial
revenue bond which is secured by the property. As previously announced in the
Company's July 21, 1998 press release of second quarter earnings, the Bank
entered into a contract to sell the building (which included the assumption of
the industrial revenue bond obligation), which it expected to close in August
1998, at a slight profit. Subsequently, on August 6, 1998, in accordance with
the terms of the sales agreement, the buyer elected to terminate the contract.
The Company plans to continue marketing the building for sale.
Real estate held for development or sale decreased $4.9 million to $26.3
million at June 30, 1998. A summary of real estate held for development or sale
is as follows:
June 30, December 31,
1998 1997
-------- --------
(in thousands)
MAF Developments, Inc.
Tallgrass of Naperville $ 15,707 14,292
Harmony Grove 125 4,856
Creekside of Remington 1,483 1,662
Clow Creek Farm 22 128
------ ------
17,337 20,938
------ ------
Mid America Developments, Inc.
Woods of Rivermist 94 154
Ashbury 52 50
------ ------
146 204
------ ------
NW Financial, Inc.
Reigate Woods 5,525 5,314
Woodbridge 2,645 3,498
Fields of Ambria 634 1,243
------ ------
8,804 10,055
------ ------
$ 26,287 31,197
====== ======
17
The Company had 128 lot sales in Harmony Grove for the six months ended June
30, 1998. As of June 30, 1998, there are 53 lots under contract. 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. The
170-lot Creekside of Remington subdivision, had nine sales during the current
six month period. Three lots are under contract as of June 30, 1998. Clow
Creek Farm is substantially complete, with only two lots remaining, of which one
is under contract as of June 30, 1998. During the second quarter, the Company
finalized an agreement to purchase land for the Tallgrass of Naperville project
from its joint venture partner and replatted the project to yield a total of 924
lots. Located in Naperville, Illinois, the Company is currently developing 205
lots and expects first closings late in the fourth quarter of 1998 and into the
first quarter of 1999. Profits will be split 60/40 with the joint venture
partner.
The $853,000 decrease in the Woodbridge subdivision is primarily due to the
sale of eleven homesites since December 31, 1997. The remaining four homesites
are under contract as of June 30, 1998. The balance of Reigate Woods increased
due to development and construction costs related to an increase in homes under
contract. At June 30, 1998 there are 34 remaining homesites, with nine
homesites under contract. There were three home sales in Fields of Ambria
during the six months ended June 30, 1998. At June 30, 1998 there were three
homesites remaining with two under contract.
Deposits increased $16.5 million, to $2.35 billion at June 30, 1998. After
consideration of interest credited to accounts of $45.6 million for the six
months ended June 30, 1998, actual cash outflows were $29.1 million.
Borrowed funds, which consist primarily of FHLB of Chicago advances, increased
$76.0 million to $846.0 million at June 30, 1998. The primary reason for the
increase is due to the Bank increasing its FHLB of Chicago advances by a net
$125.0 million since December 31, 1997, and the assumption of a $6.0 million
industrial revenue bond which secures a commercial office building the Company
owns as foreclosed real estate. Offsetting this increase was $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 and the maturity of a $24.8 million reverse repurchase agreement.
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.
18
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.
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 June 30, 1998, interest income that would have been
recorded on non-accrual loans (had they been performing according to their
original terms) amounted to $227,000, compared to $248,000 for the three months
ended June 30, 1997.
As of June 30, 1998, the Bank's ratio of non-performing loans to total loans
was .45%, compared to .39% at December 31, 1997 and .56% at June 30, 1997.
As discussed above, foreclosed real estate increased $6.3 million to $6.8
million at June 30, 1998, primarily due to the foreclosure of a commercial
office building with a fair value of $6.5 million with respect to which the
Company is seeking a buyer.
Delinquent Loans. Delinquencies in the Bank's portfolio at the dates
indicated were as follows:
61-90 Days 91 Days or More
--------------------------------- --------------------------------
Principal Principal
Number Balance of Percent Number Balance of Percent
of Delinquent of of Delinquent of
Loans Loans Total Loans Loans Total
------ ---------- -------- ------ ---------- --------
(Dollars in thousands)
June 30, 1998 46 $5,589 .20% 105 $10,752 .38%
== ====== === === ======= ===
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%
== ====== === === ======= ===
19
Loan Portfolio Composition. The following table sets forth the composition of
the Bank's loan portfolio in dollar amounts at the dates indicated:
At
---------------------------------------------------------------------------------
6/30/98 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 $ 2,490,361 2,459,572 2,408,393 2,341,861 2,258,938 2,198,886 2,160,525
Held for Sale 42,993 14,008 6,537 6,620 4,697 6,284 6,495
Multi-family 112,158 108,618 105,051 99,949 97,515 97,483 92,968
Commercial 34,456 34,738 35,839 44,164 44,881 45,459 46,313
Construction 20,986 17,367 17,263 16,615 17,105 17,277 17,263
Land 20,766 22,253 24,425 26,345 26,854 26,561 25,685
--------- --------- --------- --------- --------- --------- ----------
Total real estate loans 2,721,720 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 83,822 85,690 88,106 89,155 88,868 88,595 86,614
Home equity loans 36,940 34,711 34,447 31,629 22,866 13,634 14,251
Other 6,056 6,157 5,793 5,610 4,797 5,838 5,009
--------- --------- --------- --------- --------- --------- ----------
Total consumer loans 126,818 126,558 128,346 126,394 116,531 108,067 105,874
Commercial business lines 2,059 2,628 2,659 2,360 2,312 2,333 1,871
--------- --------- --------- --------- --------- --------- ----------
Total other loans 128,877 129,186 131,005 128,754 118,843 110,400 107,745
--------- --------- --------- --------- --------- --------- ----------
Total loans receivable 2,850,597 2,785,742 2,728,513 2,664,308 2,568,833 2,502,350 2,456,994
Less:
Loans in process 10,939 7,778 6,683 7,005 6,990 6,700 7,620
Unearned discounts, premiums
and deferred loan fees, net (817) (402) (772) (268) 645 696 1,347
Allowance for loan losses 15,689 15,625 15,475 18,337 18,182 18,010 17,914
--------- --------- --------- --------- --------- --------- ----------
Total loans receivable, net 2,824,786 2,762,741 2,707,127 2,639,234 2,543,016 2,476,944 2,430,113
Loans receivable held
for sale (42,993) (14,008) (6,537) (6,620) (4,697) (6,284) (6,495)
--------- --------- --------- --------- --------- --------- ----------
Loans receivable, net $ 2,781,793 2,748,733 2,700,590 2,632,614 2,538,319 2,470,660 2,423,618
========= ========= ========= ========= ========= ========= ==========
20
Non-performing assets. The following table sets forth information regarding non-
accrual loans, loans which are 91 days or more delinquent but on which the Bank
is accruing interest, foreclosed real estate and non-accrual investment
securities of the Bank.
At
-------
6/30/98 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 $ 9,673 8,900 7,039 6,260 8,965 8,757 7,680
Accruing loans 91 days or more overdue 1,296 2,508 2,071 1,547 845 1,008 896
-------- ------- -------- ------- ------- ------- --------
Total 10,969 11,408 9,110 7,807 9,810 9,765 8,576
-------- ------- -------- ------- ------- ------- --------
Commercial real estate, construction and land loans:
Non-accrual loans 1,259 736 1,240 4,376 4,067 4,254 3,762
Accruing loans 91 days or more overdue - 33 - - - 599 699
-------- ------- -------- ------- ------- ------- --------
Total 1,259 769 1,240 4,376 4,067 4,853 4,461
-------- ------- -------- ------- ------- ------- --------
Other loans:
Non-accrual loans 286 210 181 225 461 366 353
Accruing loans 91 days or more overdue 11 96 124 24 25 79 74
-------- ------- -------- ------- ------- ------- --------
Total 297 306 305 249 486 445 427
-------- ------- -------- ------- ------- ------- --------
Total non-performing loans:
Non-accrual loans 11,218 9,846 8,460 10,861 13,493 13,377 11,795
Accruing loans 91 days or more overdue 1,307 2,637 2,195 1,571 870 1,686 1,669
-------- ------- -------- ------- ------- ------- --------
Total $ 12,525 12,483 10,655 12,432 14,363 15,063 13,464
======== ======= ======== ======= ======= ======= ========
Non-accrual loans to total loans .40% .36 .31 .41 .53 .54 .48
Accruing loans 91 days or more overdue to total
loans .05 .09 .08 .06 .03 .07 .07
-------- ------- -------- ------- ------- ------- --------
Non-performing loans to total loans .45% .45 .39 .47 .56 .61 .55
======== ======= ======== ======= ======= ======= ========
Foreclosed real estate (net of related reserves):
One- to four-family $ 266 361 489 1,810 724 773 1,257
Commercial, construction and land 6,500 6,500 - - - - -
-------- ------- -------- ------- ------- ------- --------
Total $ 6,766 6,861 489 1,810 724 773 1,257
======== ======= ======== ======= ======= ======= ========
Non-performing loans and foreclosed real estate
to total loans and foreclosed real estate .69% .70 .41 .54 .59 .63 .60
======== ======= ======== ======= ======= ======= ========
Total non-performing assets $ 19,291 19,344 11,144 14,242 15,087 15,836 14,721
======== ======= ======== ======= ======= ======= ========
Total non-performing assets to total assets .54% .55 .32 .42 .45 .49 .46
======== ======= ======== ======= ======= ======= ========
21
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 expires April 30, 1999,
but is generally renewable for an additional one-year period. For the six months
ended June 30, 1998, the Company received $15.0 million in dividends from the
Bank and declared common stock dividends of $.117 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, and proceeds from the sale of loans and funds
provided by operations. While scheduled loan and mortgage-backed securities
amortization and maturing interest-bearing deposits are a relatively predictable
source of funds, deposit flows and loan and mortgage-backed securities
prepayments are greatly influenced by economic conditions, the general level of
interest rates and competition. The Bank utilizes particular sources of funds
based on comparative costs and availability. The Bank generally manages the
pricing of its deposits to maintain a steady deposit balance, but has from time
to time decided not to pay rates on deposits as high as its competition, and
when necessary, to supplement deposits with longer term and/or less expensive
alternative sources of funds. During the current six month period the Bank
borrowed $160.0 million of primarily fixed-rate FHLB of Chicago advances and
repaid $35.0 million of maturing advances. The Bank was able to fund the
remainder of its mortgage loan originations 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 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 June 30, 1998, the Bank's average
liquidity ratio was 12.34%. At June 30, 1998, total liquidity was $256.7
million, or 11.90%, which was $170.4 million in excess of the 4.0% regulatory
requirement.
During the six months ended June 30, 1998, the Bank originated and purchased
loans totaling $806.9 million compared with $440.4 million during the same
period a year ago. Loan sales and swaps for the six months ended June 30, 1998,
were $198.6 million, compared to $45.4 million for the prior year period,
reflecting the increase in fixed-rate loan originations during the current six
month period. The Bank has outstanding commitments to originate and purchase
mortgage loans of $327.3 million, and commitments to sell or swap fixed-rate
loans of $47.8 million at June 30, 1998.
Future Acquisition and Expansion Activity
The banking industry is currently experiencing a period of rapid consolidation
both nationally and in the local Chicago area. The Company seeks to enhance
franchise value through acquisitions and may periodically be presented with
opportunities to acquire other institutions in the market it serves, or which
allow the Company to expand outside its current primary market areas of DuPage
County and the City of Chicago. Management reviews acquisition candidates across
a variety of parameters, including the potential impact on its financial
condition as well as its financial performance in the future. Acquisitions
typically are valued at a premium to book value, and many times at a premium to
current market value. As such, acquisitions made by the Company may include some
book value dilution and earnings per share dilution.
22
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. As a result of the
flatter yield curve environment, consumer demand has been heavily weighted in
favor of long term fixed-rate mortgage loans. In response to customer demand,
the Bank originates fixed-rate mortgage loans, but has historically generally
sold the majority of such loans that are conforming loans in the secondary
market in order to maintain its interest rate sensitivity levels. During the
current six months, the Bank began to sell a higher percentage of its non-
prepayment protected fixed-rate originations than it had over the previous
twelve months to manage its interest rate risk. The Bank started offering loan
products with prepayment penalties in an effort to supplement loan portfolio
growth and mitigate interest rate and prepayment risks in a declining rate
environment. The borrower receives a lower interest rate in return for accepting
prepayment penalties based on the original loan balance. The penalty is 2% for
the initial three years on ARM loans that are fixed for the initial three-year
period. The penalty for 10, 15, 20 and 30 year fixed rate loans, seven year
balloon loans and ARM loans that are fixed for the initial five-year period is
3% for the first three years, 2% in year four and 1% in year five. At June 30,
1998, loans with aggregate balances of approximately $317 million, or 11.6% of
the Bank's mortgage loan portfolio contained prepayment penalties.
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
23
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.
The table below sets forth the scheduled repricing or maturity of the Bank's
assets and liabilities at June 30, 1998, based on the assumptions used by the
OTS 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 June 30, 1998
------------------------------------------------------------------------
More Than More Than More Than More Than
6 Months 6 Months 1 Year 3 Years
or Less to 1 Year to 3 Years to 5 Years 5 Years Total
----------- ---------- ----------- ----------- ---------- ---------
(In thousands)
Interest-earning assets:
Loans receivable $ 641,657 396,455 825,022 184,007 792,543 2,839,684
Mortgage-backed securities 107,520 22,717 31,710 23,146 30,752 215,845
Interest-bearing deposits 29,557 - - - - 29,557
Federal funds sold 77,304 - - - - 77,304
Investment securities (1) 146,741 2,385 15,408 11,777 58,230 234,421
---------- ------- ------- -------- ------- ---------
Total interest-earning assets 1,002,779 421,557 872,140 218,930 881,525 3,396,931
Less yield adjustments, net 270 293 224 (106) 707 1,388
---------- ------- ------- -------- ------- ---------
Total net interest-earning assets 1,003,049 421,850 872,364 218,824 882,232 3,398,319
Impact of hedging activity (2) 42,993 - - - (42,993) -
---------- ------- ------- -------- ------- ---------
Total net interest-earning assets adjusted
for impact of hedging activities 1,046,042 421,850 872,364 218,824 839,239 3,398,319
---------- ------- ------- -------- ------- ---------
Interest-bearing liabilities:
NOW and checking accounts 14,594 13,353 48,873 30,359 64,512 171,691
Money market accounts 137,892 - - - - 137,892
Passbook accounts 54,948 50,277 184,016 114,306 242,901 646,448
Certificate accounts 661,365 301,264 288,035 37,139 12,371 1,300,174
FHLB advances 135,000 75,000 270,000 170,500 135,000 785,500
Other borrowings 67,317 - 20,000 - - 87,317
---------- ------- ------- -------- ------- ---------
Total interest-bearing liabilities 1,071,116 439,894 810,924 352,304 454,784 3,129,022
---------- ------- ------- -------- ------- ---------
Interest sensitivity gap $ (68,337) (18,337) 61,216 (133,374) 426,741 267,909
========== ======= ======= ======== ======= =========
Cumulative gap $ (68,337) (86,674) (25,458) (158,832) 267,909
========== ======= ======= ======== =======
Cumulative gap as a percentage
of total assets -2.01% -2.55 -.75 -4.67 7.88
Cumulative net interest-earning assets as
a percentage of interest-bearing 97.66 97.15 100.79 95.69 108.61
liabilities
- ------------------------------------------------
(1) Includes $40.5 million of stock in FHLB of Chicago in 6 months or less.
(2) Represents forward commitments to sell long-term fixed-rate mortgage loans.
24
Average Balance Sheets
The following table sets forth certain information relating to the Bank's
consolidated statements of financial condition and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Such yields
and costs are derived by dividing income or expense by the average balance of
assets or liabilities, respectively, for the periods shown. Average balances are
derived from average daily balances. The yield/cost at June 30, 1998 includes
fees which are considered adjustments to yield.
Three Months Ended June 30,
-----------------------------------------------------------
1998 1997
----------------------------- ---------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- ---------- ------ -------- ---------- ------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $ 2,802,948 52,551 7.50% $ 2,519,289 48,871 7.76%
Mortgage-backed securities 221,388 3,589 6.48 324,904 5,709 7.03
Interest-bearing deposits (1) 34,661 602 6.87 76,070 1,201 6.25
Federal funds sold (1) 91,255 1,593 6.91 48,720 776 6.30
Investment securities (2) 229,664 3,518 6.06 143,454 2,373 6.54
---------- ------- ---------- ------
Total interest-earning assets 3,379,916 61,853 7.31 3,112,437 58,930 7.56
Non-interest earning assets 163,377 162,117
---------- ----------
Total assets $ 3,543,293 $ 3,274,554
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,246,770 24,144 4.31 2,214,177 24,522 4.44
Borrowed funds 853,977 13,461 6.24 662,899 11,045 6.60
---------- ------ ---------- ------
Total interest-bearing liabilities 3,100,747 37,605 4.84 2,877,076 35,567 4.94
------ ------ ---------- ------ ------
Non-interest bearing deposits 92,692 74,287
Other liabilities 74,063 66,075
---------- ----------
Total other liabilities 166,755 140,362
---------- ----------
Total liabilities 3,267,502 3,017,438
Stockholders' equity 275,791 257,116
---------- ----------
Liabilities and stockholders' equity $ 3,543,293 $ 3,274,554
========== ==========
Net interest income/interest rate spread $24,248 2.47% $23,363 2.62%
====== ====== ====== ======
Net earning assets/net yield on average
Interest-earning assets $ 279,169 2.87% $ 235,361 3.00%
========== ====== ========== ======
Ratio of interest-earning assets to
Interest-bearing liabilities 109.00% 108.18%
====== ======
Six Months Ended June 30,
---------------------------------------------------------------
1998 1997 At June 30, 1998
------------------------------ ------------------------------ --------------------
Average Average
Average Yield/ Average Yield/ Yield/
Balance Interest Cost Balance Interest Cost Balance Cost
--------- --------- ---- --------- ---------- ------ --------- ------
Assets:
Interest-earning assets:
Loans receivable $ 2,778,660 104,368 7.51% $ 2,491,162 96,395 7.74% $ 2,840,475 7.54%
Mortgage-backed securities 236,760 7,765 6.56 335,335 11,727 6.99 216,442 6.42
Interest-bearing deposits (1) 41,940 1,435 6.81 72,022 2,246 6.20 29,557 5.47
Federal funds sold (1) 86,690 2,989 6.86 43,415 1,365 6.25 77,304 5.44
Investment securities (2) 209,498 6,624 6.29 147,472 5,254 7.09 234,541 6.13
---------- ------- ---------- ------- ----------
Total interest-earning assets 3,353,548 123,181 7.34 3,089,406 116,987 7.57 3,398,319 7.31
Non-interest earning assets 164,600 161,822 171,337
---------- ---------- ----------
Total assets $ 3,518,148 $ 3,251,228 $ 3,569,656
========== ========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,244,777 48,395 4.35 2,205,741 48,311 4.42 2,256,205 4.33
Borrowed funds 840,013 26,505 6.28 653,143 21,671 6.60 872,817 6.26
---------- ------- ---------- ------- ----------
Total interest-bearing liabilities 3,084,790 74,900 4.87 2,858,884 69,982 4.92 3,129,022 4.87
------- ------ ------- ------ ------
Non-interest bearing deposits 89,737 71,071 97,294
Other liabilities 71,820 65,911 63,447
---------- ---------- ----------
Total other liabilities 161,557 136,982 160,741
---------- ---------- ----------
Total liabilities 3,246,347 2,995,866 3,289,763
Stockholders' equity 271,801 255,362 279,893
---------- ---------- ----------
Liabilities and stockholders' equity $ 3,518,148 $ 3,251,228 $ 3,569,656
========== ========== ==========
Net interest income/interest rate spread $48,281 2.47% $ 47,005 2.65% 2.44%
====== ====== ======= ====== ======
Net earning assets/net yield on average
Interest-earning assets $ 268,758 2.88% $ 230,522 3.04% $ 269,297 N/A
========= ====== ========= ====== ========= ===
Ratio of interest-earning assets to
Interest-bearing liabilities 108.71% 108.06% 108.61%
====== ====== ======
- --------------------------------
(1) Includes pro-rata share of interest income received on outstanding drafts
payable.
(2) Income and yields are stated on a taxable equivalent basis.
25
Rate/Volume Analysis of Net Interest Income
The following table describes the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated, on a taxable equivalent basis. Information is provided
in each category with respect to (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate), (ii) changes attributable to
changes in rates (changes in rates multiplied by prior volume), and (iii) the
net change. Changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
Compared to Compared to
June 30, 1997 June 30, 1997
Increase (Decrease) Increase (Decrease)
----------------------------- ----------------------------
Volume Rate Net Volume Rate Net
--------- ------ ------- -------- ------ -------
(In thousands)
Interest-earning assets:
Loans receivable $ 5,357 (1,677) 3,680 10,862 (2,889) 7,973
Mortgage-backed securities (1,706) (414) (2,120) (3,270) (692) (3,962)
Interest-bearing deposits (707) 108 (599) (1,011) 200 (811)
Federal funds sold 736 81 817 1,480 144 1,624
Investment securities 1,329 (184) 1,145 2,009 (639) 1,370
------- ------ ------ ------ ------ ------
Total $ 5,009 (2,086) 2,923 10,070 (3,876) 6,194
------- ------ ------ ------ ------ ------
Interest-bearing liabilities:
Deposits 359 (737) (378) 855 (771) 84
Borrowed funds 3,037 (621) 2,416 5,939 (1,105) 4,834
------- ------ ------ ------ ------ ------
Total 3,396 (1,358) 2,038 6,794 (1,876) 4,918
------- ------ ------ ------ ------ ------
Net change in net interest income $ 1,613 (728) 885 3,276 (2,000) 1,276
======= ====== ====== ====== ====== ======
Comparison of the Three Months Ended June 30, 1998 and 1997
General - Net income for the three months ended June 30, 1998 was $9.8
million, or $.42 per diluted share, an increase of 10.5% over operating income
of $9.2 million, or $.38 per diluted share. The prior year results include $1.0
million, or $.04 per share, relating to the resolution of prior years' tax
issues, resulting in net income of $10.2 million or $.42 per diluted share for
the three months ended June 30, 1997. All per share amounts have been adjusted
to conform to SFAS No. 128, "Earnings per Share," and have been restated to
reflect the 3-for-2 stock split paid on July 10, 1998.
Net interest income - Net interest income was $24.2 million for the current
quarter, compared to $23.3 million for the quarter ended June 30, 1997, an
increase of $934,000. The Company's average net interest-earning assets
increased to $279.2 million for the three months ended June 30, 1998, compared
to $235.4 million for the three months ended June 30, 1997. The Company's net
interest margin declined to 2.87% for the current three month period, compared
to 3.00% for the prior year period. This net interest margin decline is
primarily due to a 26 basis point decrease in the average yield on mortgage
loans, due to heavy refinance activity as well as the negative impact of
accelerated amortization of deferred loan expenses.
Interest income on loans receivable increased $3.7 million as a result of a
$283.7 million increase in average loans receivable, offset by a 26 basis point
decrease in the average yield of the loan portfolio. Interest income on
mortgage-backed securities decreased $2.1 million, to $3.6 million for the
current quarter, due to a $103.5 million decrease in average balances, and a 55
basis point decrease in average yield. This decline in average balances is a
result of higher prepayments, and the impact of the sale of the Bank's 100%
beneficial interests in its special-
26
purpose finance subsidiaries, as well as the lack of purchase activity due to
the Bank's ability and strategy to originate loans for its own investment
portfolio. Interest income on investment securities increased $1.2 million to
$3.5 million. The increase is primarily due to an increase in the average
balance of investment securities as a result of the high prepayments experienced
in the Bank's loan portfolio. The Bank has been unable to originate a sufficient
amount of adjustable-rate loans for its portfolio, as the refinance activity
generates a higher percentage of fixed-rate loans, which the Bank sells to
manage interest rate risk, and invests the proceeds in shorter maturity
investment securities.
Interest expense on deposit accounts decreased $378,000 to $24.1 million, due
to an increase in average deposits of $32.6 million during the current three
month period, offset by a 13 basis point decrease in the average cost of
savings.
Interest expense on borrowed funds increased $2.4 million to $13.5 million, as
a result of a $191.1 million increase in the average balance of borrowed funds,
offset by a 36 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 $263.6 million, offset by a decrease in average reverse repurchase
agreements and CMO bonds payable of $72.7 million since June 30, 1997. The
reduction in average cost is due to maturing FHLB advances being refinanced 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 $136,000,
compared to $128,000 for the three months ended June 30, 1997. At June 30,
1998, the Bank's allowance for loan losses was $15.7 million, which was .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 125.3% at June 30, 1998
compared to 145.2% at December 31, 1997.
Non-interest income - Non-interest income increased 25.8% to $6.9 million for
the three months ended June 30, 1998, compared to $5.4 million for the three
months ended June 30, 1997.
Gain on sale of loans and mortgage-backed securities increased to a combined
$930,000 for the three months ended June 30, 1998, compared to a combined gain
of $82,000 for the three months ended June 30, 1997 due to the increase in
fixed-rate originations from the heavy refinance activity currently being
experienced by the Bank. The gain on sale of mortgage-backed securities
represents loans originated by the Bank and swapped into mortgage-backed
securities prior to sale. During the three months ended June 30, 1998, $10.7
million of loans were swapped and sold, while during the three months ended June
30, 1997, $667,000 of loans were swapped and sold. The Bank sold $124.0 million
in mortgage loans during the quarter ended June 30, 1998 compared to $24.9
million during the quarter ended June 30, 1997.
The Company recognized $70,000 in gains on investment securities for the three
months ended June 30, 1998, compared to $10,000 for the prior year period,
primarily due to sales of marketable equity securities.
27
Income from real estate operations decreased $260,000 to $1.3 million for the
three months ended June 30, 1998. A summary of income from real estate
operations is as follows:
Three Months Ended June 30,
--------------------------------
1998 1997
--------------- ---------------
# of Pre-tax # of Pre-tax
Lots Income Lots Income
---- --------- ---- ---------
(dollars in thousands)
Harmony Grove 64 $ 867 18 $ 166
Reigate Woods 7 332 4 183
Clow Creek Farm 2 75 7 271
Woodbridge 5 98 34 774
Fields of Ambria 1 (86) 1 (3)
Ashbury -- -- 4 87
Creekside of Remington 7 9 2 6
Woods of Rivermist 1 3 2 74
-- ------ -- ------
87 $ 1,298 72 $ 1,558
==== ====== === ======
Harmony Grove, with a total of 386 lots, commenced sales in 1996. To date,
the project has sold 323 lots, 64 in the current quarter, due to the beginning
of sales being closed in the last unit of the project. Of the remaining 63
lots, 53 lots are under contract as of June 30, 1998. The 85-lot Reigate Woods
subdivision had seven sales during the current quarter, with 34 homesites
remaining, and nine homesites are under contract as of June 30, 1998. The
Woodbridge subdivision consists of 531 residential lots. At June 30, 1998, four
lots remained, all 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 Company had seven sales in
the Creekside of Remington subdivision, which is a 170-lot development. Project
to date sales have been slower than in other projects, and the Company is
considering alternative strategies for the completion of this project, including
the potential for a bulk sale. At June 30, 1998, three lots are under
contract. The Fields of Ambria subdivision is nearly complete, with one sale
during the current quarter, and two of the three remaining homesites under
contract. The Woods of Rivermist development has one lot remaining to be sold at
June 30, 1998. Prior year Ashbury profits represent the sale of the last
residential lots.
The Company also has two parcels of approximately 37 acres of commercial land
under contract and, subject to satisfaction of customary closing conditions,
expect them to close in late 1998 or early 1999. If consummated, the sales of
the commercial property are currently expected to result in pre-tax gains of
approximately $4.5 million.
Deposit account service charges increased $316,000, or 17.9% to $2.1 million
for the three months ended June 30, 1998 primarily due to continued growth in
the number of checking accounts and fee increases implemented in the middle of
the current quarter. Brokerage commissions increased $336,000 or 66.8% for the
three months ended June 30, 1998 compared to the prior year due to strong
financial markets, and a growth in the number of brokers employed by the Bank.
Loan servicing fee income decreased $201,000 or 33.8% to $393,000, for the
three months ended June 30, 1998, while the average balance of loans serviced
for others decreased 3.2% to $1.00 billion for the current three month period,
compared to $1.04 billion for the prior year period, income was offset by an
increase in the amortization of loan servicing rights to $267,000 for the three
months ended June 30, 1998, compared to $87,000 for the prior three month period
due to higher than estimated prepayments.
Other non-interest income increased $245,000 or 24.9% to $1.2 million for the
three months ended June 30, 1998, due to an increase in residential loan
modification fee income, and prepayment penalty income, as well as foreclosed
real estate operating income from the $6.5 million foreclosed commercial office
building.
28
Non-interest expense - Non-interest expense increased $1.5 million to $14.9
million for the three months ended June 30, 1998.
Compensation and benefits increased $1.4 million to $8.8 million for the three
months ended June 30, 1998, compared to the three months ended June 30, 1997.
The increase is primarily due to increased loan compensation resulting from
record loan volume during the quarter and higher staffing costs related to new
branch operations.
Occupancy expense increased 10.9% to $1.7 million for the three months ended
June 30, 1998 compared to the prior year period, primarily due to the opening of
new branches during the last 14 months.
Income taxes - For the three months ended June 30, 1998, income tax expense
totaled $6.2 million, or an effective income tax rate of 38.8%, compared to $4.9
million, or an effective income tax rate of 32.2%, for the three months ended
June 30, 1997. The increase in the effective tax rate during the current
quarter is primarily due to the prior period recognition of $1.0 million in
income tax benefits, equal to $.04 per diluted share, relating to the resolution
of certain prior years' income tax issues.
Comparison of the Six Months Ended June 30, 1998 and 1997
General - Net income for the six months ended June 30, 1998 was $18.9 million,
or $.81 per diluted share, compared to $19.5 million, or $.81 per diluted share,
a decrease of $549,000. All per share amounts have been adjusted to conform to
SFAS No. 128, "Earnings per Share," and have been restated to reflect the
3-for-2 stock split paid on July 10, 1998.
Net interest income - Net interest income for the six months ended June 30,
1998 was $48.2 million compared to $46.8 million for the six months ended June
30, 1997, an increase of $1.4 million. The increase is a function of the growth
in average interest-earning assets of $264.1 million, offset by a decrease in
the net interest margin to 2.88% for the six months ended June 30, 1998,
compared to 3.04% for the prior year's six month period.
Interest income on interest-earning assets increased $6.3 million during the
six months ended June 30, 1998. Of this increase, $8.0 million is attributable
to loans receivable. The Bank's average balance of loans receivable increased
$287.5 million during the current period, while the average yield on loans
receivable decreased 23 basis points. The decrease in average yield is primarily
due to heavy refinance activity in the Bank's loan portfolio. The $4.0 million
decrease in interest income on mortgage-backed securities is due to a $98.6
million decrease in average balance primarily due to higher prepayments, and the
impact of the sale of the Bank's 100% beneficial interest in its two special-
purpose finance subsidiaries. Interest income on investment securities
increased $1.5 million to $6.6 million for the six months ended June 30, 1998,
due to the increase of $62.0 million in the average balance, offset by a
decrease in the average yield of 80 basis points.
Interest expense on interest-bearing liabilities increased $4.9 million during
the six months ended June 30, 1998. Interest expense on savings deposits
increased $84,000, primarily due to an increase in the average deposits of $39.0
million offset by a seven basis point decrease in average cost. Interest
expense on borrowed funds increased $4.8 million, due primarily to a $186.9
million increase in the average balance of borrowed funds offset by a 32 basis
point decrease in average cost. The Bank currently relies primarily on three
to five year fixed rate FHLB of Chicago advances to fund its increase in loans
receivable. The decrease in the average cost is primarily due to the maturities
of higher-cost advances and the reduction in CMO bonds payable with an average
cost of 9.46% due to the sale of the Bank's 100% beneficial interest in its two
special-purpose finance subsidiaries.
Provision for loan losses - The Bank provided $400,000 for possible loan
losses for the six months ended June 30, 1998 compared to $600,000 for the six
months ended June 30, 1997. Net charge-offs were $186,000 for the current six
month period compared to $332,000 for the prior six month period. At June 30,
1998, the Bank's allowance for loan losses was $15.7 million which was .56% of
total loans receivable, compared to .57% at December 31, 1997. The ratio of
allowance for loan losses to non-performing loans was 125.3% at June 30, 1998
compared to 145.2% at December 31, 1997.
29
Non-interest income - Non-interest income increased $1.8 million to $12.3
million for the six months ended June 30, 1998, compared to $10.5 million for
the six months ended June 30, 1997.
Gain on sale of loans receivable and mortgage-backed securities were a
combined $1.4 million for the six months ended June 30, 1998, compared to a gain
of $106,000 for the six months ended June 30, 1997, an increase of $1.3 million.
Loan sales were $183.4 million during the current period compared to $43.2
million in the prior six month period, due to increased loan volume, and a
greater percentage of loan originations being long-term fixed-rate, which the
Bank generally sells to minimize interest-rate risk. During the current six
month period, the Bank swapped and sold $15.1 million of current loan
originations compared to $2.2 million in the prior six month period.
During the current six months, the Company recognized gains on the sale of
investment securities of $398,000, compared to $88,000 for the previous six
month period. The gains are primarily from the sale of marketable equity
securities, and $75,000 from the sale of beneficial interests in MAFC and NWAC.
Income from real estate operations was $2.1 million for the six months ended
June 30, 1998, compared to income of $3.0 million for the six months ended June
30, 1997, a decrease of $875,000 or 29.4%.
Six Months Ended June 30,
--------------------------------
1998 1997
--------------- ---------------
# of # of Income
Lots Income Lots (Loss)
---- --------- ---- ---------
(dollars in thousands)
Harmony Grove 128 $1,561 55 $ 851
Reigate Woods 7 362 6 315
Clow Creek Farm 4 160 12 465
Woodbridge 11 100 42 789
Fields of Ambria 3 (97) 6 38
Ashbury -- -- 8 290
Creekside of Remington 9 10 2 6
Woods of Rivermist 1 3 5 220
--- ------ --- ------
163 $2,099 136 $2,974
=== ====== === ======
The 128 lot sales in Harmony Grove represent sales from the last units of the
project, and increased from the prior six month period due to more lots being
available for sale in the current six month period. A majority of the remaining
63 lots should be sold by the end of 1998. Clow Creek Farm sales decreased due
to the near completion of this project as of June 30, 1998. The decrease in
number of homes sold in the Woodbridge subdivision is due to the subdivision
being nearly sold out. Three lots remain in the 240-lot Fields of Ambria
subdivision with two homesites under contract at June 30, 1998. The eight lot
sales in 1997 in Ashbury represent the final sales of this 1,115-lot
subdivision. The Woods of Rivermist activity during the current six month
period leaves only one lot remaining in the 31-lot development.
Loan servicing fee income decreased 37.0%, or $444,000 to $756,000 for the six
months ended June 30, 1998. The average balance of loans serviced for others
decreased 4.6% to $991.1 million for the current six month period, compared to
$1.04 billion in the prior six month period. Loan servicing fees also decreased
due to higher amortization of purchased loan servicing rights, which totaled
$544,000 for the current six month period, compared to $169,000 for the prior
six month period.
Deposit account service charges increased $507,000 or 15.3% to $3.8 million
for the six months ended June 30, 1998, due to an increase in the number of
checking accounts and related fees. Brokerage commissions increased $530,000 or
54.1% for the six months ended June 30, 1998 compared to the prior year period
due to a growth in the number of brokers employed by the Bank and strong
financial markets.
30
Other non-interest income increased $482,000 or 27.0% to $2.3 million for the
six months ended June 30, 1998, due to an increase in residential loan
modification related fee income, prepayment penalty income, as well as
foreclosed real estate operating income from the $6.5 million foreclosed
commercial office building.
Non-interest expense - Non-interest expense for the six months ended June 30,
1998 increased $2.9 million, or 11.0% to $29.3 million compared to $26.4 million
for the six months ended June 30, 1997.
Compensation and benefits increased $2.5 million for the six months ended June
30, 1998, to $17.3 million, primarily due to increased loan compensation
resulting from record loan volume during the six month period as well as
increased medical costs and higher compensation costs at new branches.
Occupancy expense increased $288,000, or 9.4% to $3.3 million for the six
months ended June 30, 1998. In addition, the current six month increase is due
to the opening of new branches.
Income taxes - The Company recorded a provision for income taxes of $11.9
million for the six months ended June 30, 1998, or an effective income tax rate
of 38.5%, compared to $10.8 million for the six months ended June 30, 1997, or
an effective income tax rate of 35.7%. The increase in the effective income tax
rate is primarily due to the prior period recognition of $1.0 million in income
tax benefits, relating to the resolution of certain prior years' income tax
issues.
Quantitative and Qualitative Disclosures About Market Risk- A comprehensive
qualitative and quantitative analysis regarding market risk was disclosed in the
Company's December 31, 1997 Form 10-K. There has been no material changes in
the assumptions used or results obtained regarding market risk.
31
Part II - Other Information
- -----------------------------
Item 1. Legal Proceedings
The Bank is the named defendant in an action filed on June 29, 1998, in
the Circuit Court of Lake County, Illinois, in which the plaintiffs are seeking
certification of a plaintiff class. The plaintiffs claim certain alleged
violations under the Real Estate Settlement Practices Act in connection with a
residential mortgage loan made to the plaintiffs and certain disclosure
violations under Illinois state consumer protection law. The Bank removed the
suit to Federal District Court of the Northern District of Illinois on July 22,
1998. While this action is still in the very early stages of litigation, the
Company does not anticipate that the suit will be certified as a class action
and does not believe that the ultimate outcome of the matter will have a
material adverse effect on the Company.
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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No. 11. Statement re: Computation of per share earnings
Quarter Ended Six Months Ended
June 30, 1998 June 30, 1998
------------- ----------------
Net income $ 9,780,000 18,947,000
=========== ==========
Weighted average common shares outstanding 22,562,943 22,543,121
=========== ==========
Basic earnings per share $ .43 .84
=========== ==========
Weighted common shares outstanding 22,562,943 22,543,121
Common stock equivalents due to dilutive
Effect on stock options 814,923 815,130
----------- ----------
Total weighted average common shares and equivalents
Outstanding for diluted computation 23,377,866 23,358,251
=========== ==========
Diluted earnings per share $ .42 .81
=========== ==========
(b) Reports on Form 8-K.
The Company filed a Form 8-K on April 28, 1998 to report that the
Company declared a 3-for-2 stock split on its common stock with the
payment date of July 10, 1998. Additionally, the Company announced
that it will increase its quarterly cash dividend on a pre-split basis
to 10.5 cents per share from 7 cents per share.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAF Bancorp. Inc.
------------------------------
(Registrant)
Date: August 12, 1998 By: /s/ Allen H. Koranda
--------------------- ------------------------------
Allen H. Koranda
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
Date: August 12, 1998 By: /s/ Jerry A. Weberling
--------------------- ------------------------------
Jerry A. Weberling
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer)
33