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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 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 22,041,509 at October 30, 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 September 30, 1998 (unaudited) and December 31, 1997... 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1998 and 1997 (unaudited)......... 4
Consolidated Statements of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 1998 (unaudited)..... 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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.......................... 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk... 32
Part II. Other Information
- -------- -----------------
Item 1 Legal Proceedings............................................ 33
Item 2 Changes in Securities........................................ 33
Item 3 Defaults Upon Senior Securities.............................. 33
Item 4 Submission of Matters to a Vote of Security Holders.......... 33
Item 5 Other Information............................................ 33
Item 6 Exhibits and Reports on Form 8-K............................. 34
Signature Page............................................... 35
2
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
September 30, December 31,
1998 1997
----------------- ----------------
(Unaudited)
Assets
- ------
Cash and due from banks $ 33,283 39,721
Interest-bearing deposits 18,989 57,197
Federal funds sold 53,026 50,000
Investment securities, at amortized cost (fair value of $11,424 at
September 30, 1998 and $26,222 at December 31, 1997) 9,980 25,268
Investment securities available for sale, at fair value 166,296 119,510
Stock in Federal Home Loan Bank of Chicago, at cost 41,775 33,025
Mortgage-backed securities, at amortized cost (fair value of $139,648
at September 30, 1998 and $216,867 at December 31, 1997) 139,941 215,449
Mortgage-backed securities available for sale, at fair value 57,391 67,559
Loans receivable held for sale 23,777 6,537
Loans receivable, net of allowance for loan losses of $15,808
at September 30, 1998 and $15,475 at December 31, 1997 2,895,243 2,700,590
Accrued interest receivable 20,825 20,970
Foreclosed real estate 7,530 489
Real estate held for development or sale 25,574 31,197
Premises and equipment, net 38,557 35,820
Excess of cost over fair value of net assets acquired 23,604 24,606
Other assets 50,113 29,726
---------- ---------
$3,605,904 3,457,664
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits 2,343,786 2,337,013
Borrowed funds 891,000 770,013
Subordinated capital notes, net 26,837 26,779
Advances by borrowers for taxes and insurance 22,778 22,679
Accrued expenses and other liabilities 40,347 37,769
---------- ---------
Total liabilities 3,324,748 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;
25,420,648 shares issued; 22,392,947 outstanding at
September 30, 1998, 25,420,651 shares issued;
22,518,632 outstanding at December 31, 1997 254 254
Additional paid-in capital 172,210 172,201
Retained earnings, substantially restricted 152,247 128,917
Accumulated other comprehensive income (loss), net of tax (164) 1,552
Treasury stock, at cost; 3,027,701 shares at September 30, 1998
and 2,902,019 shares at December 31, 1997 (43,391) (39,513)
---------- ---------
Total stockholders' equity 281,156 263,411
Commitments and contingencies
---------- ---------
$3,605,904 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ---------------------------
1998 1997 1998 1997
-------------- -------------- -------------- -----------
(Unaudited) (Unaudited)
Interest income:
Loans receivable $53,570 50,632 157,938 147,027
Mortgage-backed securities 2,333 4,120 8,042 13,069
Mortgage-backed securities available for sale 936 1,253 2,992 4,031
Investment securities 872 1,070 2,696 3,825
Investment securities available for sale 2,692 1,294 7,412 3,615
Interest-bearing deposits and federal funds sold 1,711 2,104 6,135 5,714
------- ------ ------- -------
Total interest income 62,114 60,473 185,215 177,281
------- ------ ------- -------
Interest expense:
Deposits 24,150 25,200 72,545 73,511
Borrowed funds 13,818 12,041 40,323 33,712
------- ------ ------- -------
Total interest expense 37,968 37,241 112,868 107,223
------- ------ ------- -------
Net interest income 24,146 23,232 72,347 70,058
Provision for loan losses 200 250 600 850
------- ------ ------- -------
Net interest income after provision for loan losses 23,946 22,982 71,747 69,208
------- ------ ------- -------
Non-interest income:
Gain (loss) on sale of:
Loans receivable 862 80 2,071 179
Mortgage-backed securities 11 - 179 7
Investment securities 208 137 606 225
Foreclosed real estate 86 (15) 152 10
Income from real estate operations 1,755 2,114 3,854 5,088
Deposit account service charges 2,337 1,899 6,169 5,224
Loan servicing fee income 357 552 1,113 1,752
Impairment of mortgage servicing rights (740) - (740) -
Brokerage commissions 644 482 2,153 1,461
Other 1,475 875 3,741 2,659
------- ------ ------- -------
Total non-interest income 6,995 6,124 19,298 16,605
------- ------ ------- -------
Non-interest expense:
Compensation and benefits 8,764 7,844 26,016 22,548
Office occupancy and equipment 1,679 1,581 5,025 4,639
Advertising and promotion 565 776 1,802 1,939
Data processing 593 542 1,689 1,515
Federal deposit insurance premiums 363 365 1,091 1,102
Amortization of goodwill 334 334 1,002 1,007
Other 2,654 2,574 7,630 7,671
------- ------ ------- -------
Total non-interest expense 14,952 14,016 44,255 40,421
------- ------ ------- -------
Income before income taxes 15,989 15,090 46,790 45,392
Income tax expense 6,128 5,894 17,982 16,700
------- ------ ------- -------
Net income $ 9,861 9,196 28,808 28,692
======= ====== ======= =======
Basic earnings per share $ .44 .40 1.28 1.23
======= ====== ======= =======
Diluted earnings per share $ .42 .39 1.23 1.19
======= ====== ======= =======
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
NINE MONTHS ENDED SEPTEMBER 30, 1998 STOCK CAPITAL EARNINGS INCOME (LOSS) STOCK TOTAL
- ------------------------------------ ----- ------- -------- ------------- ----- -----
Balance at December 31, 1997 $ 254 172,201 128,917 1,552 (39,513) 263,411
------ ------- ------- ------ -------- -------
Comprehensive income:
Net income - - 28,808 - - 28,808
Other comprehensive income, net of tax:
Unrealized holding loss during the period - - - (1,389) - (1,389)
Less: reclassification adjustment of gains
included in net income - - - (327) - (327)
------ ------- ------- ------ -------- -------
Total comprehensive income - - 28,808 (1,716) - 27,092
------ ------- ------- ------ -------- -------
Exercise of 124,368 options and reissuance of treasury stock - - (1,253) - 1,578 325
Purchase of treasury stock - - - - (5,456) (5,456)
Impact of 50% stock dividend related to fractional shares - - (16) - - (16)
Tax benefits from stock-related compensation - 9 - - - 9
Cash dividends ($.187 per share) - - (4,209) - - (4,209)
------ ------- ------- ------ -------- -------
Balance at September 30, 1998 $ 254 172,210 152,247 (164) (43,391) 281,156
====== ======= ======= ====== ======== =======
See accompanying notes to unaudited consolidated financial statements.
5
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1998 1997
----------------- ----------------
(Unaudited)
Operating activities:
Net income $ 28,808 $ 28,692
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 2,624 2,260
Provision for loan losses 600 850
Deferred income tax benefit (894) (366)
Amortization of premiums, discounts, loan fees and servicing rights 1,897 (44)
Amortization of goodwill and core deposit premium 1,833 2,010
Net gain on sale of loans, mortgage-backed securities,
and real estate held for development or sale (6,104) (5,274)
Gain on sale of investment securities (606) (225)
Increase in accrued interest receivable (253) (869)
Net (increase) decrease in other assets and liabilities (2,219) 3,294
Loans originated for sale (241,203) (10,726)
Loans purchased for sale (79,063) (53,976)
Sale of loans originated and purchased for sale 302,541 64,708
Sale of mortgage-backed securities available for sale 17,430 2,209
--------- ---------
Net cash provided by operating activities 25,391 32,543
--------- ---------
Investing activities:
Loans originated for investment (743,930) (559,223)
Principal repayments on loans receivable 695,623 483,890
Principal repayments on mortgage-backed securities 64,720 57,523
Proceeds from maturities of investment securities available for sale 102,953 57,545
Proceeds from maturities of investment securities held to maturity 15,000 42,350
Proceeds from sale of:
Loans receivable 1,102 -
Investment securities available for sale 12,938 6,660
Investments held to maturity 912 -
Real estate held for development or sale 25,279 33,987
Premises and equipment 1 172
Stock in FHLB of Chicago 500 6,299
Purchases of:
Loans receivable held for investment (165,856) (138,911)
Investment securities available for sale (164,631) (82,072)
Investment securities held to maturity (590) (5,133)
Mortgage-backed securities available for sale (9,552) -
Stock in FHLB of Chicago (9,250) (5,345)
Bank owned life insurance (20,000) -
Real estate held for development or sale (10,105) (27,738)
Premises and equipment (5,361) (5,424)
--------- ---------
Net cash used in investing activities (210,247) (135,420)
--------- ---------
(continued)
6
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1998 1997
----------------- ---------------
(Unaudited)
Financing activities:
Proceeds from FHLB of Chicago advances $210,000 200,000
Proceeds from unsecured line of credit - 3,000
Repayment of FHLB of Chicago advances (40,000) (85,000)
Repayment of unsecured line of credit - (3,000)
Net decrease in reverse repurchase agreements - (15,000)
Net decrease in other borrowings (24,804) (5,465)
Proceeds from exercise of stock options 325 174
Purchase of treasury stock (5,456) (14,908)
Cash dividends (3,701) (2,967)
Net increase in deposits 6,773 34,041
Increase (decrease) in advances by borrowers for taxes and insurance 99 (7,367)
-------- -------
Net cash provided by financing activities 143,236 103,508
-------- -------
Increase (decrease) in cash and cash equivalents (41,620) 631
-------- -------
Cash and cash equivalents at beginning of period 146,918 125,717
-------- -------
Cash and cash equivalents at end of period $105,298 126,348
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds $112,478 108,028
Income taxes 16,601 16,800
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate 2,106 2,361
Loans receivable swapped into mortgage-backed securities 17,371 2,202
Treasury stock received for option exercises 79 236
======== =======
See accompanying notes to unaudited consolidated financial statements.
7
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 nine months ended
September 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
nine month periods ended September 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 Statement of Financial Accounting Standards ("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 SEPTEMBER 30, 1998 THREE MONTHS ENDED SEPTEMBER 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 $ 9,861 22,577,730 $ .44 $ 9,196 23,006,521 $ .40
========= ========
Effect of dilutive securities:
Options 709,055 802,330
------------ ------------
Diluted earnings per share -
Income available to common
shareholders plus assumed
conversions $ 9,861 23,286,785 $ .42 $ 9,196 23,808,851 $ .39
=========== ============ ========= ============= ============ ========
8
(2) EARNINGS PER SHARE (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 NINE MONTHS ENDED SEPTEMBER 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 $ 28,808 22,554,637 $ 1.28 $ 28,692 23,282,852 $ 1.23
========= ========
Effect of dilutive securities:
Options 779,772 753,263
------------ ------------
Diluted earnings per share -
Income available to common
shareholders plus assumed
conversions $ 28,808 23,334,409 $ 1.23 $ 28,692 24,036,115 $ 1.19
============ ============= ========= ============== ============ ========
All prior period 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 September 30, 1998, the Bank had outstanding commitments to originate
and purchase loans of $330.0 million, of which $261.7 million were fixed-rate
loans, and $68.3 million were adjustable-rate loans. Prospective borrowers had
locked the interest rate on $118.0 million of these loan commitments, of which
$98.8 million were fixed rate loans, with rates ranging from 6.125% to 7.875%
and $19.2 million were adjustable rate loans with rates ranging from 5.75% to
8.5%. At September 30, 1998, commitments to sell conforming fixed rate loans
were $57.4 million.
At September 30, 1998, the Bank had outstanding 14 standby letters of
credit totaling $15.4 million, two of which totaled $13.3 million to enhance a
developer's industrial revenue bond financings of commercial real estate in the
Bank's market. These letters of credit are collateralized by mortgage-backed
securities and U.S. Government and agency securities owned by the Bank.
Additionally, the Company had 14 outstanding standby letters of credit totaling
$7.9 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 nine-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
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 nine months ended September 30,
1998 and 1997 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1998 1997 1998 1997
---------- -------- --------- --------
(In thousands)
Net income $ 9,861 9,196 28,808 28,692
Other comprehensive income, net of tax
Net unrealized holding gain (loss) during the period (1,735) 812 (1,389) 1,218
Less: reclassification adjustment of gains included
in net income (128) (83) (327) (137)
--------- ----- ------ -------
Total comprehensive income $ 7,998 9,925 27,092 29,773
========= ===== ====== =======
(6) NEW ACCOUNTING PRONOUNCEMENTS
In September 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.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" which is effective the first
fiscal quarter after December 15, 1998. This statement amends SFAS No. 65
"Accounting for Certain Mortgage Banking Activities". This statement revises the
accounting for retained securities and beneficial interests along with the
classification of the retained securities and beneficial interests. Management
of the Company does not expect that the adoption of SFAS No. 134 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 loans. 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 contain 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. Based on testing and review to date, 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 all apply to Bank customer transactions and support its
ability to generate new business with its customers. The contingency plan
includes the ability to safely operate the Bank's 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.
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:
SEPTEMBER 30, 1998 DECEMBER 31, 1997
----------------------- -----------------------
PERCENT OF PERCENT OF
AMOUNT ASSETS AMOUNT ASSETS
---------- ----------- ---------- -----------
(Dollars in thousands)
Stockholder's equity of the Bank $ 277,982 7.79% $ 279,165 8.15%
========== ===== ========== =====
Tangible capital $ 233,532 6.64% $ 232,109 6.88%
Tangible capital requirement 52,748 1.50 50,605 1.50
---------- ----- ---------- -----
Excess $ 180,784 5.14% $ 181,504 5.38%
========== ===== ========== =====
Core capital $ 233,532 6.64% $ 232,109 6.88%
Core capital requirement 105,497 3.00 101,210 3.00
---------- ----- ---------- -----
Excess $ 128,035 3.64% $ 130,899 3.88%
========== ===== ========== =====
Core and supplementary capital $ 249,340 13.22% $ 247,280 14.34%
Risk-based capital requirement 150,915 8.00 137,906 8.00
---------- ----- ---------- -----
Excess $ 98,425 5.22% $ 109,374 6.34%
========== ===== ========== =====
Total Bank assets $3,570,616 $3,424,182
Adjusted total Bank assets 3,516,552 3,373,667
Total risk-weighted assets 1,940,502 1,774,644
Adjusted total risk-weighted assets 1,886,439 1,723,824
Investment in Bank's real estate subsidiary 14,682 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:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------- -------------------
(In thousands)
Stockholder's equity of the Bank $277,982 279,165
Goodwill and other non-allowable intangible assets (29,496) (31,330)
Non-permissible subsidiary deduction (14,682) (15,351)
Non-includable purchased mortgage servicing rights (371) (249)
SFAS No. 115 capital adjustment 99 (126)
-------- -------
Tangible and core capital 233,532 232,109
General loan loss reserves 15,808 15,475
Land loans greater than 80% loan-to-value - (304)
-------- -------
Core and supplementary capital $249,340 247,280
======== =======
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 is
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:
9/30/98 6/30/98 3/31/98 12/31/97 9/30/97
-------- ------- ------- -------- -------
(In thousands)
Common stock $ 2,157 2,157 2,157 1,657 1,657
Retained earnings 10,852 10,309 12,390 12,285 11,419
Intercompany advances 1,673 1,353 1,200 1,409 4,857
-------- ------- ------- -------- -------
$ 14,682 13,819 15,747 15,351 17,933
======== ======= ======= ======== =======
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 September 30, 1998, the Bank's total risk-weighted capital would
not have been subject to a deduction based on interest rate risk. At September
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.
Recent 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 September 30, 1998, total assets of the Company were $3.61 billion,
an increase of $148.2 million or 4.3% 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 $105.3 million at
September 30, 1998, a decrease of $41.6 million from the combined balance of
$146.9 million at December 31, 1997.
Investment securities classified as held to maturity decreased $15.3
million to $10.0 million at September 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 $46.8 million to $166.3
million at September 30, 1998. The increase is due to purchases of $164.6
million of primarily U.S. Government and agency securities, offset by maturities
of $56.3 million, the call, prior to maturity, of $46.7 million of FHLB and
agency callable notes, and sales of marketable equity securities with a book
value of $12.9 million. The Company recognized gains of $530,000 on the sale of
marketable equity securities during the nine months ended September 30, 1998.
At September 30, 1998, unrealized losses in the available for sale portfolio
were $155,000, compared to unrealized gains of $2.5 million at December 31,
1997.
Mortgage-backed securities classified as held to maturity decreased $75.5
million to $139.9 million at September 30, 1998, compared to $215.4 million at
December 31, 1997, primarily due to normal amortization and prepayments of the
underlying loans of $44.3 million. In addition, during the first quarter, the
Bank sold its 100% beneficial interest in both of its duration-matched special-
purpose subsidiaries, MAFC, and NWAC. The Bank no longer consolidates these
entities as a result of the sales which led to a net reduction in mortgage-
backed securities of approximately $30.2 million.
16
Mortgage-backed securities available for sale decreased $10.2 million to
$57.4 million at September 30, 1998, compared to $67.6 million at December 31,
1997. Amortization and prepayments of $19.5 million were offset by $9.6 million
of purchases. Unrealized losses in the available for sale portfolio were
$116,000 at September 30, 1998, compared to $19,000 at December 31, 1997. The
Bank has $107.6 million of CMO securities at September 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 $211.9 million,
or 7.8%, to $2.92 billion at September 30, 1998. The Bank originated and
purchased (through wholesale originations) $1.23 billion during the nine months
ended September 30, 1998, due in part to heavy refinance activity in the Bank's
loan portfolio. Offsetting this increase was amortization and prepayments
totaling $695.6 million, as well as sales of $319.3 million. Loans receivable
held for sale increased $17.2 million to $23.8 million as of September 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 current nine month period.
The allowance for loan losses totaled $15.8 million at September 30, 1998,
an increase of $333,000 from the balance at December 31, 1997. The Bank's
allowance for loan losses to total loans outstanding was .54% at September 30,
1998, compared to .57% at December 31, 1997. Non-performing loans increased
$704,000 to $11.4 million at September 30, 1998, or .39% of total loans
receivable, compared to $10.7 million, or .39% at December 31, 1997.
Foreclosed real estate increased to $7.5 million at September 30, 1998,
primarily 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, 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. Subsequently, 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 $5.6 million to $25.6
million at September 30, 1998. A summary of real estate held for development or
sale is as follows:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(in thousands)
MAF Developments, Inc.
Tallgrass of Naperville $16,795 14,292
Harmony Grove 385 4,856
Creekside of Remington 1,455 1,662
Clow Creek Farm - 128
------- ------
18,635 20,938
------- ------
Mid America Developments, Inc.
Woods of Rivermist - 154
Ashbury - 50
------- ------
- 204
------- ------
NW Financial, Inc.
Reigate Woods 4,622 5,314
Woodbridge 2,317 3,498
Fields of Ambria - 1,243
------- ------
6,939 10,055
------- ------
$25,574 31,197
======= ======
17
Tallgrass of Naperville, a planned 924-lot subdivision commenced
development in the current nine month period. The increase in the investment
includes a small additional land acquisition, and improvement costs. Profits
from the project will be split 60/40 with the joint venture partner. A presale
to builders for 181 lots in the first unit was held in September 1998. Contracts
were received for all lots offered. The Company expects first closings of these
contracts late in the fourth quarter of 1998 and into the first half of 1999.
The large decrease in the balance of Harmony Grove is due to the sale of 170
lots during the current nine month period. The development is substantially
complete as to development costs. As of September 30, 1998, there are 21 lots
remaining, with 14 lots under contract. The decrease in the 170-lot Creekside of
Remington subdivision is primarily due to 13 lot sales during the current nine
month period. One lot is under contract as of September 30, 1998. The Company is
contemplating development of the last unit of this subdivision subject to market
conditions.
The $1.2 million decrease in the Woodbridge subdivision is primarily due to
the sale of 14 homesites since December 31, 1997. The remaining $2.3 million
investment in Woodbridge relates to a 48-acre commercial parcel, of which a 26-
acre parcel is under contract and expected to close in early 1999. The balance
of Reigate Woods decreased due to the sale of 13 homesites during the current
nine month period. September 30, 1998 there are 28 remaining homesites, with
eight homesites under contract.
The current nine month period marked the sell-out of four subdivisions:
Ashbury, Clow Creek Farm, Woods of Rivermist and Fields of Ambria. These
projects are complete as to costs incurred and property sold.
Other assets increased $20.4 million from December 31, 1997 primarily due
to a $20.0 million investment in a new bank-owned life insurance program.
Deposits increased $6.8 million, to $2.34 billion at September 30, 1998.
After consideration of interest credited to accounts of $68.5 million for the
nine months ended September 30, 1998, actual cash outflows were $61.7 million.
Borrowed funds, which consist primarily of FHLB of Chicago advances,
increased $121.0 million to $891.0 million at September 30, 1998. The Bank has
increased its FHLB of Chicago advances by a net $170.0 million since December
31, 1997 to fund loans held for investment, and assumed a $6.0 million
industrial revenue bond which secures a commercial office building the Company
owns as foreclosed real estate. Offsetting these increases was a $30.2 million
reduction in CMO borrowings associated with the sale of the Bank's 100%
beneficial interest in its two duration-matched special-purpose finance
subsidiaries 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 September 30, 1998, interest income that would have
been recorded on non-accrual loans (had they been performing according to their
original terms) amounted to $214,000, compared to $202,000 for the three months
ended September 30, 1997.
As of September 30, 1998, the Bank's ratio of non-performing loans to total
loans was .39%, compared to .39% at December 31, 1997 and .47% at September 30,
1997.
As discussed above, foreclosed real estate increased $7.0 million to $7.5
million at September 30, 1998, primarily due to the foreclosure of a commercial
office building with a fair value of $6.5 million. The Company is currently
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)
September 30, 1998 60 $6,365 .22% 87 $10,201 .35%
== ====== === === ======= ===
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%
== ====== === === ======= ===
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
---------------------------------------------------------------------------------
9/30/98 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97
--------- --------- --------- --------- --------- --------- ----------
(In thousands)
Real estate loans:
One-to four-family:
Held for investment $ 2,597,715 2,490,361 2,459,572 2,408,393 2,341,861 2,258,938 2,198,886
Held for sale 23,777 42,993 14,008 6,537 6,620 4,697 6,284
Multi-family 118,493 112,158 108,618 105,051 99,949 97,515 97,483
Commercial 32,772 34,456 34,738 35,839 44,164 44,881 45,459
Construction 20,861 20,986 17,367 17,263 16,615 17,105 17,277
Land 20,282 20,766 22,253 24,425 26,345 26,854 26,561
--------- --------- --------- --------- --------- --------- ----------
Total real estate loans 2,813,900 2,721,720 2,656,556 2,597,508 2,535,554 2,449,990 2,391,950
OTHER LOANS:
Consumer loans:
Equity lines of credit 85,101 83,822 85,690 88,106 89,155 88,868 88,595
Home equity loans 38,695 36,940 34,711 34,447 31,629 22,866 13,634
Other 5,105 6,056 6,157 5,793 5,610 4,797 5,838
--------- --------- --------- --------- --------- --------- ----------
Total consumer loans 128,901 126,818 126,558 128,346 126,394 116,531 108,067
Commercial business lines 2,025 2,059 2,628 2,659 2,360 2,312 2,333
--------- --------- --------- --------- --------- --------- ----------
Total other loans 130,926 128,877 129,186 131,005 128,754 118,843 110,400
--------- --------- --------- --------- --------- --------- ----------
Total loans receivable 2,944,826 2,850,597 2,785,742 2,728,513 2,664,308 2,568,833 2,502,350
Less:
Loans in process 11,222 10,939 7,778 6,683 7,005 6,990 6,700
Unearned discounts,premiums
and deferred loan fees, net (1,224) (817) (402) (772) (268) 645 696
Allowance for loan losses 15,808 15,689 15,625 15,475 18,337 18,182 18,010
--------- --------- --------- --------- --------- --------- ----------
Total loans receivable, net 2,919,020 2,824,786 2,762,741 2,707,127 2,639,234 2,543,016 2,476,944
Loans receivable held for sale (23,777) (42,993) (14,008) (6,537) (6,620) (4,697) (6,284)
--------- --------- --------- --------- --------- --------- ---------
Loans receivable, net $ 2,895,243 2,781,793 2,748,733 2,700,590 2,632,614 2,538,319 2,470,660
========= ========= ========= ========= ========= ========= ==========
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
----------------------------------------------------------------
9/30/98 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97
-------- ------- ------- -------- ------- ------- --------
(In thousands)
Non-performing loans:
One-to four-family and multi-family loans:
Non-accrual loans $ 9,430 9,673 8,900 7,039 6,260 8,965 8,757
Accruing loans 91 days or more overdue 624 1,296 2,508 2,071 1,547 845 1,008
-------- ------- ------- ------- ------- ------- ------
Total 10,054 10,969 11,408 9,110 7,807 9,810 9,765
-------- ------- ------- ------- ------- ------- ------
Commercial real estate, construction and land loans:
Non-accrual loans 1,126 1,259 736 1,240 4,376 4,067 4,254
Accruing loans 91 days or more overdue - - 33 - - - 599
-------- ------- ------- ------- ------- ------- ------
Total 1,126 1,259 769 1,240 4,376 4,067 4,853
-------- ------- ------- ------- ------- ------- ------
Other loans:
Non-accrual loans 178 286 210 181 225 461 366
Accruing loans 91 days or more overdue 1 11 96 124 24 25 79
-------- ------- ------- ------- ------- ------- ------
Total 179 297 306 305 249 486 445
-------- ------- ------- ------- ------- ------- ------
Total non-performing loans:
Non-accrual loans 10,734 11,218 9,846 8,460 10,861 13,493 13,377
Accruing loans 91 days or more overdue 625 1,307 2,637 2,195 1,571 870 1,686
-------- ------- ------- ------- ------- ------- ------
Total $ 11,359 12,525 12,483 10,655 12,432 14,363 15,063
======== ======= ======= ======= ======= ======= ======
Non-accrual loans to total loans .37% .40 .36 .31 .41 .53 .54
Accruing loans 91 days or more overdue to total loans .02 .05 .09 .08 .06 .03 .07
-------- -------- ------- ------- ------- ------- ------
Non-performing loans to total loans .39% .45 .45 .39 .47 .56 .61
======== ======= ======= ======= ======= ======= ======
Foreclosed real estate (net of related reserves):
One- to four-family $ 1,030 266 361 489 1,810 724 773
Commercial, construction and land 6,500 6,500 6,500 -- -- -- --
-------- ------- ------- ------- ------- ------- ------
Total $ 7,530 6,766 6,861 489 1,810 724 773
======== ======= ======= ======= ======= ======= ======
Non-performing loans and foreclosed real estate
to total loans and foreclosed real estate .64% .69 .70 .41 .54 .59 .63
======== ====== ======= ======= ======= ======= ======
Total non-performing assets $ 18,889 19,291 19,344 11,144 14,242 15,087 15,836
======== ====== ======= ======= ======= ======= ======
Total non-performing assets to total assets .52% .54 .55 .32 .42 .45 .49
======== ====== ======= ======= ======= ======= ======
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 nine
months ended September 30, 1998, the Company received $30.0 million in dividends
from the Bank and declared common stock dividends of $.187 per share.
On September 1, 1998, the Company announced a stock repurchase plan under
which the Company is authorized to repurchase up to 1,250,000, or approximately
5.5% of its outstanding common stock. As of September 30, 1998, the Company has
repurchased 239,500 shares at an average cost of $22.07 per share.
On October 27, 1998, the Company announced its intention to call its $26.7
million 8.32% subordinated notes in accordance with the indenture effective
November 30, 1998. The notes are callable at par plus any accrued interest since
the last interest payment date. The Company will use available cash and a $20.0
million dividend expected to be Received from the Bank to call the notes. The
early redemption will result in an extraordinary charge to earnings of
approximately $460,000, or $.02 per diluted share, related to unamortized
issuance costs.
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 nine month period the Bank
borrowed $210.0 million of primarily fixed-rate FHLB of Chicago advances and
repaid $40.0 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 September 30, 1998, the Bank's
average liquidity ratio was 9.80%. At September 30, 1998, total liquidity was
$195.4 million, or 8.85%, which was $107.1 million in excess of the 4.0%
regulatory requirement.
During the nine months ended September 30, 1998, the Bank originated and
purchased loans totaling $1.23 billion compared with $760.4 million during the
same period a year ago. Loan sales and swaps for the nine months ended September
30, 1998, were $319.3 million, compared to $66.8 million for the prior year
period, reflecting the increase in fixed-rate loan originations during the
current nine month period. At September 30, 1998, the Bank has outstanding
commitments to originate and purchase mortgage loans of $330.0 million.
Prospective borrowers had locked the interest rate on $118.0 million of these
loan commmitments. Commitments to sell or swap fixed-rate loans of $57.4 million
at September 30, 1998.
22
ACQUISITION AND EXPANSION ACTIVITY
On August 17, 1998, the Company agreed to acquire Westco Bancorp,
("Westco") in an all-stock transaction valued at $84.3 million based on the
Company's stock price on that date. The merger agreement provides for a fixed
exchange ratio pursuant to which each share of Westco common stock will be
exchanged for 1.395 shares of MAF Bancorp common stock. Westco is the parent
holding company for First Federal Savings and Loan Association of Westchester,
which operates one branch and one drive-up facility in Westchester, Illinois. As
of September 30, 1998, Westco had $318.5 million in assets, $261.0 million in
deposits and $48.0 million in stockholders' equity. The transaction will be
accounted for as a purchase, is subject to regulatory and Westco shareholders
approval and is expected to close prior to the end of January 1999.
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.
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 nine 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
23
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
September 30, 1998, loans with aggregate balances of approximately $470 million,
or 16.7% 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 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.
24
The table below sets forth the scheduled repricing or maturity of the
Bank's assets and liabilities at September 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 SEPTEMBER 30, 1998
-----------------------------------------------------------------------
MORE THAN MORE THAN MORE THAN
6 MONTHS 6 MONTHS 1 YEAR 3 YEARS MORE THAN
OR LESS TO 1 YEAR TO 3 YEARS TO 5 YEARS 5 YEARS TOTAL
----------- ---------- ---------- ----------- ---------- ---------
(In thousands)
Interest-earning assets:
Loans receivable $ 794,194 409,504 834,574 258,222 637,108 2,933,602
Mortgage-backed securities 112,982 13,452 32,014 20,777 17,598 196,823
Interest-bearing deposits 18,989 - - - - 18,989
Federal funds sold 53,026 - - - - 53,026
Investment securities (1) 122,103 11,834 33,011 8,718 42,385 218,051
---------- ------- ------- ------- ------- ---------
Total interest-earning assets 1,101,294 434,790 899,599 287,717 697,091 3,420,491
Less yield adjustments, net 327 222 272 (83) 997 1,735
---------- ------- ------- ------- ------- ---------
Total net interest-earning assets 1,101,621 435,012 899,871 287,634 698,088 3,422,226
Impact of hedging activity (2) 23,777 - - - (23,777) -
---------- ------- ------- ------- ------- ---------
Total net interest-earning assets adjusted
for impact of hedging activities 1,125,398 435,012 899,871 287,634 674,311 3,422,226
---------- ------- ------- ------- ------- ---------
Interest-bearing liabilities:
NOW and checking accounts 14,333 13,115 48,000 29,816 63,360 168,624
Money market accounts 132,293 - - - - 132,293
Passbook accounts 54,748 50,094 183,346 113,891 242,016 644,095
Certificate accounts 658,200 346,181 250,579 36,407 12,395 1,303,762
FHLB advances 180,000 85,000 280,000 100,500 185,000 830,500
Other borrowings 67,337 20,000 - - - 87,337
---------- ------- ------- ------- ------- ---------
Total interest-bearing liabilities 1,106,911 514,390 761,925 280,614 502,771 3,166,611
---------- ------- ------- ------- ------- ---------
Interest sensitivity gap $ 18,487 (79,378) 137,946 7,020 171,540 255,615
========== ======= ======= ======= ======= =========
Cumulative gap $ 18,487 (60,891) 77,055 84,075 255,615
========== ======= ======= ======= =======
Cumulative gap as a percentage
of total assets .54% (1.78) 2.25 2.46 7.47
Cumulative net interest-earning assets as
a percentage of interest-bearing liabilities 101.67 96.24 103.23 103.16 108.07
________________________
(1) Includes $41.8 million of stock in FHLB of Chicago in 6 months or less.
(2) Represents forward commitments to sell long-term fixed-rate mortgage loans.
25
AVERAGE BALANCE SHEETS
The following table sets forth certain information relating to the Bank's
consolidated statements of financial condition and reflects the average yield
on assets and average cost of liabilities for the periods indicated. Such
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods shown.
Average balances are derived from average daily balances. The yield/cost at
September 30, 1998 includes fees which are considered adjustments to yield.
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
1998 1997
------------------------------ -------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- -------- ----------- -------- --------
ASSETS:
Interest-earning assets:
Loans receivable $2,884,710 53,570 7.43% $2,601,481 50,632 7.78%
Mortgage-backed
securities 202,294 3,269 6.46 307,987 5,373 6.98
Interest-bearing
deposits (1) 24,050 448 7.29 79,312 1,296 6.39
Federal funds sold (1) 68,089 1,263 7.26 49,230 808 6.42
Investment securities (2) 233,945 3,603 6.03 150,506 2,411 6.27
---------- ------- ---------- -------
Total interest-earning
assets 3,413,088 62,153 7.27 3,188,516 60,520 7.58
Non-interest earning
assets 174,433 164,950
---------- ----------
Total assets $3,587,521 $3,353,466
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing
liabilities:
Deposits 2,253,467 24,150 4.25 2,230,287 25,200 4.48
Borrowed funds 883,694 13,818 6.21 721,249 12,041 6.63
---------- ------- ---------- -------
Total interest-bearing
liabilities 3,137,161 37,968 4.80 2,951,536 37,241 5.01
------- ---- ------- ----
Non-interest bearing
deposits 93,654 73,949
Other liabilities 73,993 67,298
---------- ----------
Total other liabilities 167,647 141,247
---------- ----------
Total liabilities 3,304,808 3,092,783
Stockholders' equity 282,713 260,683
---------- ----------
Liabilities and
stockholders' equity $3,587,521 $3,353,466
========== ==========
Net interest
income/interest rate
spread $ 24,185 2.47% $23,279 2.57%
======= ==== ======= ====
Net earning assets/net
yield on average
Interest-earning assets $ 275,927 2.83% $ 236,980 2.92%
========== ==== ========== ====
Ratio of interest-earning
assets to
Interest-bearing
liabilities 108.80% 108.03%
====== ======
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------
1998 1997 AT SEPTEMBER 30, 1998
------------------------------- ------------------------------- ----------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE COST
----------- -------- -------- ----------- -------- -------- ----------- ---------
(Dollars in thousands)
ASSETS:
Interest-earning assets:
Loans receivable $2,814,398 157,938 7.48% $2,528,339 147,027 7.75% $2,934,828 7.44%
Mortgage-backed
securities 225,145 11,034 6.53 326,119 17,100 6.99 197,332 6.50
Interest-bearing
deposits (1) 35,911 1,883 6.91 74,479 3,542 6.27 18,989 5.08
Federal funds sold (1) 80,421 4,252 6.97 45,375 2,173 6.32 53,026 5.47
Investment securities (2) 217,737 10,227 6.19 148,494 7,665 6.81 218,051 6.08
---------- -------- ---------- -------- ----------
Total interest-earning
assets 3,373,612 185,334 7.32 3,122,806 177,507 7.57 3,422,226 7.25
Non-interest earning
assets 167,915 162,876 183,678
---------- ---------- ----------
Total assets $3,541,527 $3,285,682 $3,605,904
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing
liabilities:
Deposits 2,247,706 72,545 4.32 2,214,013 73,511 4.44 2,248,774 4.22
Borrowed funds 854,733 40,323 6.31 676,094 33,712 6.66 917,837 6.16
---------- -------- ---------- -------- ----------
Total interest-bearing
liabilities 3,102,439 112,868 4.86 2,890,107 107,223 4.96 3,166,611 4.78
-------- ---- -------- ---- ----
Non-interest bearing
deposits 91,057 72,041 95,012
Other liabilities 72,553 66,378 63,125
---------- ---------- ----------
Total other liabilities 163,610 138,419 158,137
---------- ---------- ----------
Total liabilities 3,266,049 3,028,526 3,324,748
Stockholders' equity 275,478 257,156 281,156
---------- ---------- ----------
Liabilities and
stockholders' equity $3,541,527 $3,285,682 $3,605,904
========== ========== ==========
Net interest
income/interest rate
spread $ 72,466 2.46% $ 70,284 2.61% 2.47%
======== ==== ======== ==== ====
Net earning assets/net
yield on average
Interest-earning assets $ 271,173 2.86% $ 232,699 3.00% $ 255,615 N/A
========== ==== ========== ==== ========== ====
Ratio of interest-earning
assets to
Interest-bearing
liabilities 108.74% 108.05% 108.07%
====== ====== ======
____________________________
(1) Includes pro-rata share of interest income received on outstanding drafts
payable.
(2) Income and yields are stated on a taxable equivalent basis.
26
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The following table describes the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated, on a taxable equivalent basis. Information is provided
in each category with respect to (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate), (ii) changes attributable to
changes in rates (changes in rates multiplied by prior volume), and (iii) the
net change. Changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
COMPARED TO COMPARED TO
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------------------------- -------------------------------------
VOLUME RATE NET VOLUME RATE NET
------------ ----------- ----------- ----------- ----------- -----------
(In thousands)
INTEREST-EARNING ASSETS:
Loans receivable $ 5,328 (2,390) 2,938 16,181 (5,270) 10,911
Mortgage-backed securities (1,732) (372) (2,104) (5,009) (1,057) (6,066)
Interest-bearing deposits (1,002) 154 (848) (1,985) 326 (1,659)
Federal funds sold 340 115 455 1,832 247 2,079
Investment securities 1,285 (93) 1,192 3,292 (730) 2,562
------- ------ ------ ------ ------ ------
Total $ 4,219 (2,586) 1,633 14,311 (6,484) 7,827
------- ------ ------ ------ ------ ------
INTEREST-BEARING LIABILITIES:
Deposits 256 (1,306) (1,050) 1,112 (2,078) (966)
Borrowed funds 2,569 (792) 1,777 8,501 (1,890) 6,611
------- ------ ------ ------ ------ ------
Total 2,825 (2,098) 727 9,613 (3,968) 5,645
------- ------ ------ ------ ------ ------
Net change in net interest income $ 1,394 (488) 906 4,698 (2,516) 2,182
======= ====== ====== ====== ====== ======
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
GENERAL - Net income for the three months ended September 30, 1998 was $9.9
million, or $.42 per diluted share, an increase of 7.2% over income of $9.2
million, or $.39 per diluted share for the prior year quarter. 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 by the Company on
July 10, 1998.
NET INTEREST INCOME - Net interest income was $24.1 million for the current
quarter, compared to $23.2 million for the quarter ended September 30, 1997, an
increase of $914,000. The Company's average net interest-earning assets
increased to $275.9 million for the three months ended September 30, 1998,
compared to $237.0 million for the three months ended September 30, 1997. The
Company's net interest margin declined to 2.83% for the current three-month
period, compared to 2.92% for the prior year period. The net interest margin
decline is primarily due to increased refinance activity on loans and mortgage-
backed securities due to a dramatic decline in interest rates. The average yield
on interest-earning assets decreased 25 basis points during the current three
month period, to 7.31%, while the average cost of interest-bearing liabilities
decreased only 10 basis points.
27
Interest income on loans receivable increased $2.9 million as a result of a
$283.2 million increase in average loans receivable, offset by a 35 basis point
decrease in the average yield of the loan portfolio. The Bank has increased its
loan portfolio with mainly longer-term fixed rate loans with prepayment
penalties, as higher yielding loans have prepaid during the current period of
falling interest rates. Interest income on mortgage-backed securities decreased
$2.1 million, to $3.3 million for the current quarter, due to a $105.7 million
decrease in average balances, and a 52 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-
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
$3.6 million. The increase is primarily due to an increase in the average
balance of investment securities of $83.4 million, offset in part by a decrease
in average yield of 24 basis points. The Bank has utilized investment
securities to a greater extent during the current period of high loan
prepayments to the extent it cannot originate the level of loans it desires to
maintain in its held for investment portfolio.
Interest expense on deposit accounts decreased $1.1 million to $24.2
million, due to an increase in average deposits of $23.2 million during the
current three month period, offset by a 23 basis point decrease in the average
cost of savings.
Interest expense on borrowed funds increased $1.8 million to $13.8 million,
as a result of a $162.4 million increase in the average balance of borrowed
funds, offset by a 42 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 $239.0 million, offset by a decrease in average reverse
repurchase agreements and CMO bonds payable of $45.9 million since September 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 $250,000 for the
prior year's period. Net charge-offs during the current quarter were $81,000,
compared to $95,000 for the three months ended September 30, 1997. At September
30, 1998, the Bank's allowance for loan losses was $15.8 million, which was .54%
of total loans receivable, compared to .57% at December 31, 1997. The ratio of
the allowance for loan losses to non-performing loans was 139.2% at September
30, 1998 compared to 145.2% at December 31, 1997.
NON-INTEREST INCOME - Non-interest income increased 14.2% to $7.0 million
for the three months ended September 30, 1998, compared to $6.1 million for the
three months ended September 30, 1997.
Gain on sale of loans and mortgage-backed securities increased to a
combined $873,000 for the three months ended September 30, 1998, compared to a
combined gain of $80,000 for the three months ended September 30, 1997. The Bank
sold $118.5 million in mortgage loans during the quarter ended September 30,
1998 compared to $21.4 million during the quarter ended September 30, 1997. The
increase in sales is due to a higher level of fixed-rate loan originations by
the Bank due to falling interest rates. The Bank generally sells its non-
prepayment penalty long-term fixed-rate loans to manage interest-rate risk. 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 September 30, 1998, $2.2 million of loans were swapped and sold.
There was no swap activity during the three months ended September 30, 1997.
The Company recognized $208,000 in net gains on sale of investment
securities available for sale for the three months ended September 30, 1998,
compared to $137,000 for the prior year period, due to sales of marketable
equity securities and an FHLB floating rate note from its available for sale
portfolio.
28
Income from real estate operations decreased $359,000 to $1.8 million for
the three months ended September 30, 1998. A summary of income from real estate
operations is as follows:
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
1998 1997
---------------------- ----------------------
# OF INCOME # OF INCOME
LOTS (LOSS) LOTS (LOSS)
--------- ----------- --------- -----------
(Dollars in thousands)
Harmony Grove 42 $1,014 34 $ 370
Reigate Woods 6 305 2 132
Clow Creek Farm 2 100 3 111
Woodbridge 3 38 49 1,497
Fields of Ambria 3 (14) 3 (5)
Ashbury -- 297 -- --
Creekside of Remington 2 13 4 9
Woods of Rivermist 1 2 -- --
--------- ----------- --------- -----------
59 $1,755 95 $2,114
========= =========== ========= ===========
Harmony Grove, with a total of 386 lots, commenced sales in 1996. To date,
the project has sold 365 lots, 42 in the current quarter, due to continued sales
in the last unit of the project. Of the remaining 21 lots, 14 lots are under
contract as of September 30, 1998. The 85-lot Reigate Woods subdivision had six
sales during the current quarter, with 28 homesites remaining, and eight
homesites are under contract as of September 30, 1998. The Woodbridge
subdivision consists of 531 residential lots. At September 30, 1998, one lot
remains. The decrease in sales is due to the subdivision being substantially
sold out. The Company had two 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
September 30, 1998, one lot is under contract. The Fields of Ambria subdivision
is complete, with the final sales during the current quarter. The losses on
these remaining lots were primarily due to discounts on sales prices of the
remaining homesites. The Woods of Rivermist development is also complete as of
September 30, 1998. The Company sold the remaining commercial parcel in the
Ashbury development during the current quarter.
During the current quarter, one of the two previously disclosed pending
sales in the 48-acre commercial property of the Woodbridge project was
terminated. The other, covering approximately 26 acres, is expected to close in
the first half of 1999, and is expected to result in a pre-tax gain of
approximately $3.0 million, or $.08 per diluted share.
Deposit account service charges increased $438,000, or 23.1% to $2.3
million for the three months ended September 30, 1998 primarily due to continued
growth in the number of checking accounts, fee increases and new fees
implemented in the middle of the current quarter. Brokerage commissions
increased $162,000 or 33.6% for the three months ended September 30, 1998
compared to the prior year due to improved sales efforts in the Bank's INVEST
operations.
Loan servicing fee income decreased $195,000 to $357,000, for the three
months ended September 30, 1998, despite an increase in the average balance of
loans serviced for others to $1.04 billion for the current three month period,
compared to $1.02 billion for the prior year period. Income was offset by an
increase in the amortization of loan servicing rights to $327,000 for the three
months ended September 30, 1998, compared to $111,000 for the prior three month
period. In addition, the Bank also recorded a $740,000 impairment allowance on
its mortgage servicing rights reflecting a decrease in expected future cash
flows from the mortgage servicing portfolio as a result of higher prepayments
than originally estimated.
29
Other non-interest income increased $600,000 or 68.6% to $1.5 million for
the three months ended September 30, 1998. The increase is primarily due to a
cash surrender value increase of $244,000, related to a new bank-owned life
insurance program, as well as increases in residential loan modification fee
income, and foreclosed real estate operating income from the $6.5 million
foreclosed commercial office building.
NON-INTEREST EXPENSE - Non-interest expense increased $936,000 to $15.0
million for the three months ended September 30, 1998.
Compensation and benefits increased $920,000 to $8.8 million for the three
months ended September 30, 1998, compared to the three months ended September
30, 1997. This increase was due to normal salary increases, additional staffing
at new branches, higher loan department compensation expenses resulting from the
record loan volume and higher brokerage commission expense. Increased medical,
retirement plan and payroll tax expenses also contributed to the increase in
compensation and benefit costs.
Occupancy expense increased 6.2% to $1.7 million for the three months ended
September 30, 1998 compared to the prior year period, primarily due to the
opening of new branches, and capital improvement projects at various locations.
Advertising and promotion decreased $211,000, or 27.2% to $565,000
primarily due to efficiencies in the Bank's direct mail campaigns related to
checking accounts, which has reduced postage and other related costs for this
marketing program.
INCOME TAXES - For the three months ended September 30, 1998, income tax
expense totaled $6.1 million, or an effective income tax rate of 38.3%, compared
to $5.9 million, or an effective income tax rate of 39.1%, for the three months
ended September 30, 1997.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
General - Net income for the nine months ended September 30, 1998 was $28.8
million, or $1.23 per diluted share, compared to $28.7 million, or $1.19 per
diluted share. 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 nine months ended
September 30, 1998 was $72.3 million compared to $70.1 million for the nine
months ended September 30, 1997, an increase of $2.3 million. The increase is a
function of the growth in average interest-earning assets to $3.37 billion for
the current nine month period, compared to $3.12 billion for the prior nine
month period, offset by a decrease in the net interest margin to 2.86% for the
nine months ended September 30, 1998, compared to 3.00% for the prior year's
nine month period.
Interest income on interest-earning assets increased $7.9 million during
the nine months ended September 30, 1998. Of this increase, $10.9 million is
attributable to loans receivable. The Bank's average balance of loans receivable
increased $286.1 million during the current period, while the average yield on
loans receivable decreased 27 basis points. The decrease in average yield is
primarily due to heavy refinance activity in the Bank's loan portfolio. The $6.1
million decrease in interest income on mortgage-backed securities is due to a
$101.0 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. The Bank has used proceeds from mortgage-
backed securities to fund new loan originations. Interest income on investment
securities increased $2.6 million to $10.1 million for the nine months ended
September 30, 1998, due to the increase of $69.2 million in the average balance,
offset by a decrease in the average yield of 62 basis points.
Interest expense on interest-bearing liabilities increased $5.6 million
during the nine months ended September 30, 1998. Interest expense on savings
deposits decreased $966,000, primarily due to a 12 basis point decrease in
30
average cost offset by an increase in average deposits of $33.7 million.
Interest expense on borrowed funds increased $6.6 million, due primarily to a
$178.6 million increase in the average balance of borrowed funds offset by a 35
basis point decrease in average cost. The Bank has been funding the prepayment
protected fixed-rate mortgage loans with longer term fixed rate FHLB of Chicago
advances callable at the option of the lender at various terms from three to
seven years. 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 $600,000 for possible loan
losses for the nine months ended September 30, 1998 compared to $850,000 for the
nine months ended September 30, 1997. Net charge-offs were $267,000 for the
current nine month period compared to $427,000 for the prior nine month period.
At September 30, 1998, the Bank's allowance for loan losses was $15.8 million
which was .54% of total loans receivable, compared to .57% at December 31, 1997.
The ratio of allowance for loan losses to non-performing loans was 139.2% at
September 30, 1998 compared to 145.2% at December 31, 1997.
Non-interest income - Non-interest income increased $2.7 million to $19.3
million for the nine months ended September 30, 1998, compared to $16.6 million
for the nine months ended September 30, 1997.
Gain on sale of loans receivable and mortgage-backed securities were a
combined $2.3 million for the nine months ended September 30, 1998, compared to
a gain of $186,000 for the nine months ended September 30, 1997, an increase of
$2.1 million. Loan sales were $301.9 million during the current period compared
to $64.6 million in the prior nine 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
nine month period, the Bank swapped and sold $17.4 million of current loan
originations compared to $2.2 million in the prior nine month period.
During the current nine months, the Company recognized gains on the sale of
investment securities of $606,000, compared to $225,000 for the previous nine
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 $3.9 million for the nine months
ended September 30, 1998, compared to income of $5.1 million for the nine months
ended September 30, 1997, a decrease of $1.2 million or 24.3%.
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------
1998 1997
----------------------------- ---------------------------
# OF INCOME # OF
LOTS (LOSS) LOTS INCOME
------------ --------------- ----------- --------------
(Dollars in thousands)
Harmony Grove 170 $2,576 89 $1,221
Reigate Woods 13 666 8 447
Clow Creek Farm 6 260 15 576
Woodbridge 14 138 91 2,286
Fields of Ambria 6 (111) 9 33
Ashbury -- 297 8 290
Creekside of Remington 11 23 6 15
Woods of Rivermist 2 5 5 220
--- ------ --- ------
222 $3,854 231 $5,088
=== ====== === ======
The 170 lot sales in Harmony Grove represent sales from the last units of
the project, and increased from the prior nine month period due to more lots
being available for sale. A majority of the remaining 21 lots should be sold by
the end of 1998. Clow Creek Farm sales represent the final lots in this
development. The decrease in
31
number of homes sold in the Woodbridge subdivision is due to the subdivision
being nearly sold out. The final lots in the Fields of Ambria subdivision were
sold in the nine months ended September 30, 1998. The net loss on these
remaining lots were primarily due to discounts offered to buyers on the
remaining homesites. The Company sold the remaining commercial parcel in the
Ashbury development during the current period. The Woods of Rivermist activity
during the current nine month period represent the sales of the last lots
remaining in the 31-lot development.
Loan servicing fee income decreased 36.5%, or $639,000 to $1.1 million for
the nine months ended September 30, 1998. The average balance of loans serviced
for others decreased 2.3% to $1.01 billion for the current nine month period,
compared to $1.03 billion in the prior nine month period. Loan servicing fees
also decreased due to higher amortization of purchased loan servicing rights,
which totaled $872,000 for the current nine month period, compared to $280,000
for the prior nine month period. In addition, the Bank recorded a $740,000
impairment allowance related to its mortgage servicing rights reflecting a
decrease in expected future cash flows from the mortgage servicing portfolio as
a result of expected higher prepayments than originally estimated.
Deposit account service charges increased $945,000 or 18.1% to $5.2 million
for the nine months ended September 30, 1998, due to an increase in the number
of checking accounts and fee increases and implementation of new fees.
Brokerage commissions increased $692,000 or 47.4% for the nine months ended
September 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.
Other non-interest income increased $1.1 million or 40.7% to $3.7 million
for the nine months ended September 30, 1998, due to a cash surrender value
increase of $244,000, related to a new bank-owned life insurance program, an
increase in residential loan modification related fee income, as well as
foreclosed real estate operating income from the Bank's $6.5 million foreclosed
commercial office building.
NON-INTEREST EXPENSE - Non-interest expense for the nine months ended
September 30, 1998 increased $3.8 million, or 9.5% to $44.3 million compared to
$40.4 million for the nine months ended September 30, 1997.
Compensation and benefits increased $3.5 million for the nine months ended
September 30, 1998, to $26.0 million, primarily due to normal salary increases,
new branch facilities personnel, increased loan compensation resulting from
record loan volume during the nine month period as well as increased medical
costs, retirement plan and payroll tax expenses, and higher compensation costs
due to increased brokerage commission activity.
Occupancy expense increased $386,000, or 8.3% to $5.0 million for the nine
months ended September 30, 1998. The current nine month increase is due to the
opening of new branches and capital improvement projects.
Income taxes - The Company recorded a provision for income taxes of $18.0
million for the nine months ended September 30, 1998, or an effective income tax
rate of 38.4%, compared to $16.7 million for the nine months ended September 30,
1997, or an effective income tax rate of 36.8%. The increase in the effective
income tax rate is primarily due to the prior period recognition of income tax
benefits, relating to the resolution of certain prior years' income tax issues,
in excess of the amounts of such benefits recognized in the current year.
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.
32
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 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.
33
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No. 11. Statement re: Computation of per share earnings
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
Net income $ 9,861,000 28,808,000
=========== ==================
Weighted average common shares outstanding 22,577,730 22,554,637
=========== ==================
Basic earnings per share $ .44 1.28
=========== ==================
Weighted common shares outstanding 22,577,730 22,554,637
Common stock equivalents due to dilutive
effect on stock options 709,055 779,772
----------- ------------------
Total weighted average common shares and equivalents
Outstanding for diluted computation 23,286,785 23,334,409
=========== ==================
Diluted earnings per share $ .42 1.23
=========== ==================
(b) Reports on Form 8-K.
On August 17, 1998, the Company announced that it has agreed to
acquire Westco Bancorp, Inc. in an all-stock transaction and that the
respective boards of directors of the two companies unanimously
approved a definitive agreement to merge the two corporations, with
the Company to be the surviving corporation. The transaction is
subject to regulatory approvals and approval by the stockholders of
Westco.
On September 1, 1998, the Company announced that it has agreed with
Westco Bancorp, Inc. to amend the previously announced merger
agreement reflecting a change in accounting treatment for the merger
which will be accounted for as a purchase rather than a pooling of
interests. The Company also announced a stock repurchase plan under
which the Company is authorized to repurchase up to 1,250,000 shares,
or approximately 5.5% of its common stock.
34
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: October 30, 1998 By: /s/ Allen H. Koranda
---------------- ---------------------------------
Allen H. Koranda
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
Date: October 30, 1998 By: /s/ Jerry A. Weberling
---------------- ---------------------------------
Jerry A. Weberling
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer)
35