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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999
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)
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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 24,142,650 at May 12, 1999.
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MAF BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
Index
-----
Part I. Financial Information Page
- ------- --------------------- ----
Item 1 Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 1999 (unaudited) and December 31, 1998.... 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 and 1998 (unaudited).......... 4
Consolidated Statement of Changes in Stockholders' Equity
for the Three Months Ended March 31, 1999 (unaudited)..... 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 (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 28
Part II. Other Information
- -------- -----------------
Item 1 Legal Proceedings......................................... 29
Item 2 Changes in Securities..................................... 29
Item 3 Defaults Upon Senior Securities........................... 29
Item 4 Submission of Matters to a Vote of Security Holders....... 29
Item 5 Other Information......................................... 29
Item 6 Exhibits and Reports on Form 8-K.......................... 30
Signature Page............................................ 31
2
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands)
March 31, December 31,
1999 1998
---------- ------------
(Unaudited)
Assets
- ------
Cash and due from banks $ 38,438 53,995
Interest-bearing deposits 34,313 24,564
Federal funds sold 42,834 79,140
Investment securities, at cost (fair value of $12,214 and $12,360) 11,303 11,107
Investment securities available for sale, at fair value 193,206 198,960
Stock in Federal Home Loan Bank of Chicago, at cost 50,878 50,878
Mortgage-backed securities, at amortized cost
(fair value of $114,039 and $127,570) 114,855 128,538
Mortgage-backed securities available for sale, at fair value 49,522 55,065
Loans receivable held for sale 21,387 89,406
Loans receivable, net of allowance for losses of $16,794 and $16,770 3,351,631 3,229,670
Accrued interest receivable 21,779 21,545
Foreclosed real estate 8,928 8,357
Real estate held for development or sale 27,762 25,134
Premises and equipment, net 40,681 40,724
Other assets 42,507 41,785
Intangible assets, net of accumulated amortization of $7,648 and 61,242 62,219
$6,671 ---------- ---------
$4,111,266 4,121,087
========== =========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits 2,669,943 2,656,872
Borrowed funds 1,028,500 1,034,500
Advances by borrowers for taxes and insurance 35,427 30,576
Accrued expenses and other liabilities 45,455 54,143
---------- ---------
Total liabilities 3,779,325 3,776,091
---------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000
shares; none outstanding - -
Common stock, $.01 par value;
authorized 80,000,000 shares; 25,420,650 shares issued;
24,129,988 and 24,984,398 shares outstanding 254 254
Additional paid-in capital 192,820 191,473
Retained earnings, substantially restricted 166,907 159,935
Accumulated other comprehensive income (loss) (151) 425
Treasury stock, at cost; 1,290,662 and 436,252 shares (27,889) (7,091)
---------- ---------
Total stockholders' equity 331,941 344,996
Commitments and contingencies
---------- ---------
$4,111,266 4,121,087
========== =========
See accompanying notes to unaudited consolidated financial statements.
3
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
Three Months Ended
March 31,
--------------------
1999 1998
------- ------
(Unaudited)
Interest income:
Loans receivable $59,693 51,817
Mortgage-backed securities 1,860 3,126
Mortgage-backed securities available for sale 780 1,050
Investment securities 920 1,013
Investment securities available for sale 2,932 2,053
Interest-bearing deposits and federal funds sold 1,213 2,229
------- ------
Total interest income 67,398 61,288
------- ------
Interest expense:
Deposits 24,581 24,251
Borrowed funds 14,454 13,044
------- ------
Total interest expense 39,035 37,295
------- ------
Net interest income 28,363 23,993
Provision for loan losses 250 200
------- ------
Net interest income after provision for loan losses 28,113 23,793
------- ------
Non-interest income:
Gain on sale of:
Loans receivable 1,456 405
Mortgage-backed securities 4 42
Investment securities 538 328
Foreclosed real estate 12 64
Deposit account service charges 2,205 1,753
Income from real estate operations 621 801
Brokerage commissions 592 670
Loan servicing fee income 376 363
Other 1,552 1,020
------- ------
Total non-interest income 7,356 5,446
------- ------
Non-interest expense:
Compensation and benefits 9,466 8,497
Office occupancy and equipment 1,807 1,652
Advertising and promotion 532 653
Data processing 591 532
Federal deposit insurance premiums 404 362
Amortization of intangible assets 977 628
Other 2,403 2,093
------- ------
Total non-interest expense 16,180 14,417
------- ------
Income before income taxes 19,289 14,822
Income tax expense 7,610 5,655
------- ------
Net income $11,679 9,167
======= ======
Basic earnings per share $ .47 .41
======= ======
Diluted earnings per share $ .46 .39
======= ======
See accompanying notes to unaudited consolidated financial statements.
4
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
(Dollars in thousands)
(Unaudited)
Accumulated
Additional other
Common paid-in Retained comprehensive Treasury
Three Months Ended March 31,1999 stock capital earnings income(loss) stock Total
- --------------------------------- ----- ---------- -------- ------------- -------- --------
Balance at December 31,
1998 $ 254 191,473 159,935 425 (7,091) 344,996
----- -------- -------- ------ -------- --------
Comprehensive income:
Net income -- -- 11,679 -- -- 11,679
Other comprehensive
income, net of tax:
Unrealized holding
loss during the period -- -- -- (250) -- (250)
Less: reclassification
adjustment of gains
included in net income -- -- -- (326) -- (326)
----- -------- -------- ------ -------- --------
Total comprehensive
income -- -- 11,679 (576) -- 11,103
----- -------- -------- ------ -------- --------
Exercise of 180,981 options
and reissuance of treasury stock -- 335 (3,007) -- 3,626 954
Purchase of treasury stock -- -- -- -- (24,424) (24,424)
Tax benefits from stock-related
compensation -- 1,012 -- -- -- 1,012
Cash dividends ($.07 per share) -- -- (1,700) -- -- (1,700)
----- -------- -------- ------ -------- --------
Balance at March 31, 1999 $ 254 192,820 166,907 (151) (27,889) 331,941
===== ======== ======== ====== ======== ========
See accompanying notes to unaudited consolidated financial statements.
5
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended
March 31,
----------------------------------
1999 1998
------------ ------------
(Unaudited)
Operating activities:
Net income 11,679 9,167
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 965 842
Provision for loan losses 250 200
Deferred income tax (benefit) expense 562 (414)
Amortization of goodwill and core deposit intangibles 977 628
Amortization of premiums, discounts, loan fees and servicing rights 296 608
Net gain on sale of loans, mortgage-backed securities,
and real estate held for development or sale (2,081) (1,248)
Gain on sale of investment securities (538) (328)
Increase in accrued interest receivable (234) (526)
Net (increase) decrease in other assets and liabilities (9,707) 3,509
Loans originated for sale (56,877) (45,506)
Loans purchased for sale (13,548) (21,323)
Sale of loans originated and purchased for sale 138,892 59,542
Sale of mortgage-backed securities available for sale 752 4,507
------------ ------------
Net cash provided by operating activities 71,388 9,658
------------ ------------
Investing activities:
Loans originated for investment (250,270) (247,148)
Principal repayments on loans receivable 188,557 245,690
Principal repayments on mortgage-backed securities 19,384 21,742
Proceeds from maturities of investment securities available for sale 28,035 46,652
Proceeds from maturities of investment securities held to maturity -- 15,000
Proceeds from sale of:
Investment securities available for sale 8,859 1,211
Investments held to maturity -- 912
Real estate held for development or sale 5,852 6,481
Premises and equipment 2 --
Purchases of:
Loans receivable held for investment (62,225) (52,330)
Investment securities available for sale (31,835) (96,210)
Investment securities held to maturity (196) (590)
Mortgage-backed securities available for sale -- (6,508)
Stock in Federal Home Loan Bank of Chicago -- (3,000)
Real estate held for development or sale (5,846) (2,935)
Premises and equipment (922) (1,715)
------------ ------------
Net cash used in investing activities (100,605) (72,748)
------------ ------------
(continued)
6
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended
March 31,
------------------------
1999 1998
------- -------
(Unaudited)
Financing activities:
Proceeds from FHLB of Chicago advances 70,000 60,000
Proceeds from unsecured line of credit 8,000 --
Repayment of FHLB of Chicago advances (80,000) (10,000)
Repayment of unsecured line of credit (4,000) --
Proceeds from exercise of stock options 619 71
Purchase of treasury stock (24,424) (88)
Cash dividends (1,541) (1,051)
Net increase in deposits 13,598 11,961
Decrease in advances by borrowers for taxes and insurance 4,851 4,274
------- -------
Net cash provided (used in) financing activities (12,897) 65,167
------- -------
Increase (decrease) in cash and cash equivalents (42,114) 2,077
------- -------
Cash and cash equivalents at beginning of period 157,699 146,918
------- -------
Cash and cash equivalents at end of period 115,585 148,995
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds 38,822 36,825
Income taxes 800 1
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate 1,607 706
Loans receivable swapped into mortgage-backed securities 753 4,493
Treasury stock received for option exercises -- 18
======= =======
See accompanying notes to unaudited consolidated financial statements.
7
MAF BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 1999 and 1998
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) necessary for a fair presentation have been
included. The results of operations for the three months ended March 31, 1999
are not necessarily indicative of results that may be expected for the entire
fiscal year ending December 31, 1999.
The consolidated financial statements include the accounts of MAF Bancorp,
Inc. ("Company"), and its wholly-owned subsidiaries, Mid America Bank, fsb and
subsidiaries ("Bank") and MAF Developments, Inc., as of and for the three month
periods ended March 31, 1999 and 1998 and as of December 31, 1998. All material
intercompany balances and transactions have been eliminated in consolidation.
(2) Earnings Per Share
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
future common stock and are considered in the diluted earnings per share
calculations. Stock options are the only adjustment made to average shares
outstanding in computing diluted earnings per share. Future common stock is
computed using the treasury stock method. Weighted average shares used in
calculating earnings per share are summarized below for the periods indicated:
Three months Ended March 31, 1999 Three Months Ended March 31, 1998
---------------------------------------------- -------------------------------------
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 $11,679 24,636,116 $.47 9,167 22,523,268 $.41
==== ====
Effect of dilutive securities:
Stock options 785,744 815,338
------------ ------------
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversions $11,679 25,421,860 $.46 9,167 23,338,606 $.39
========== ============ ===== ======= ============ ====
8
(3) Commitments and Contingencies
At March 31, 1999, the Bank had outstanding commitments to originate and
purchase loans of $380.0 million, of which $275.3 million were fixed-rate loans,
with rates ranging from 5.63% to 8.25%, and $104.7 million were adjustable-rate
loans. At March 31, 1999, commitments to sell loans were $45.6 million.
At March 31, 1999, the Bank had outstanding standby letters of credit
totaling $15.7 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 two letters of credit are collateralized by mortgage-backed
securities and U.S. Government and agency securities owned by the Bank.
Additionally, the Company had outstanding standby letters of credit totaling
$8.1 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.
(5) Reclassifications
Certain reclassifications of prior quarter amounts have been made to
conform with current quarter presentation.
(6) Segment Information
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" (SFAS No. 131) was issued in June 1997, and utilizes the
"management approach" for segment reporting. This approach is based on the way
that a chief decision maker for the Company organizes segments for making
operating decisions and assessing performance.
The Company operates two separate lines of business. The Bank operates
primarily as a retail consumer bank, participating in residential mortgage
portfolio lending, deposit gathering and offering other financial services
mainly to individuals. Land development consists primarily of developing raw
land for residential use and sale to builders. Selected segment information is
included in the table below:
At or For the Three Months Ended March 31, 1999
------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 67,885 - (487) 67,398
Interest expense 39,035 487 (487) 39,035
---------- ----------- ------------ ------------
Net interest income 28,850 (487) - 28,363
Provision for loan losses 250 - - 250
---------- ----------- ------------ ------------
Net interest income after provision 28,600 (487) - 28,113
Non-interest income 6,735 621 - 7,356
Non-interest expense 15,877 303 - 16,180
---------- ----------- ------------ ------------
Income before income taxes 19,458 (169) - 19,289
Income tax expense 7,677 (67) - 7,610
---------- ----------- ------------ ------------
Net income (loss) $ 11,781 (102) - 11,679
---------- ----------- ------------ ------------
Average assets $4,054,130 28,156 - 4,082,286
========== =========== ============ ============
9
At or For the Three Months Ended March 31, 1998
------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 61,922 - (634) 61,288
Interest expense 37,295 634 (634) 37,295
---------- ----------- ------------ ------------
Net interest income 24,627 (634) - 23,993
Provision for loan losses 200 - - 200
---------- ----------- ------------ ------------
Net interest income after provision 24,427 (634) - 23,793
Non-interest income 4,645 801 - 5,446
Non-interest expense 14,173 244 - 14,417
---------- ----------- ------------ ------------
Income before income taxes 14,899 (77) - 14,822
Income tax expense 5,684 (29) - 5,655
---------- ----------- ------------ ------------
Net income (loss) $ 9,215 (48) - 9,167
========== =========== ============ ============
Average assets $3,461,551 31,174 - 3,492,725
========== =========== ============ ============
(7) New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires all derivatives to be recognized as either assets or liabilities in the
statement of financial condition and to be measured at fair value. The Statement
will be effective for the Company in the quarter beginning January 1, 2000. The
Company intends to adopt this statement in the third quarter of 1999. The
Company does not believe this statement will have a material impact on its
financial position or results of operations.
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 24 retail banking offices. The
Bank's market area is generally defined as the western suburbs of Chicago,
including DuPage County, western Cook county, northern Will county, eastern Kane
County, as well as the northwest side of Chicago. It is principally engaged in
the business of attracting deposits from the general public and using such
deposits, along with other borrowings, to make loans secured by real estate,
primarily one-to four-family residential mortgage loans. To a lesser extent, the
Bank also makes multi-family mortgage, residential construction, land
acquisition and development and a variety of consumer loans. The Bank also has a
small portfolio of commercial real estate. Through three wholly-owned
subsidiaries, MAF Developments, Mid America Development Services, Inc. ("Mid
America Developments"), and NW Financial, Inc. ("NW Financial"), the Company and
the Bank are also engaged in real estate development activities, primarily
residential. Additionally, the Bank operates an insurance agency, Mid America
Insurance Agency, Inc., which provides general insurance services, a title
agency, Centre Point Title Services, Inc., which provides general title services
for the Bank's loan customers, and an investment brokerage operation through its
affiliation with INVEST, a registered broker-dealer.
Forward Looking Information
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere, contains, and other periodic reports and press
releases of the Company may contain, certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The Company
intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and is including this statement for purposes of
invoking these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Company, are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project," "plan," or
similar expressions. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on the operations and future prospects of
the Company and the subsidiaries include, but are not limited to, changes in
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
Company's loan or investment portfolios, demand for loan products, deposit
flows, competition, demand for financial services in the Company's market area,
the possible short-term dilutive effect of potential acquisitions, the
effectiveness of the Company's compliance review and implementation plan to
identify and resolve Year 2000 issues, and accounting principles, policies and
guidelines. These risks and uncertainties may cause actual future results to
differ from those predicted and should be considered in evaluating forward-
looking statements, an undue reliance should not be placed on such statements.
11
The banking industry has and continues to experience consolidation both
nationally and in the local Chicago area. As it has in recent years, the Company
expects to continue to search for and evaluate potential acquisition
opportunities that will enhance franchise value and may periodically be
presented with opportunities to acquire other institutions, branches or deposits
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 intends to review acquisition opportunities across a variety of
parameters, including the potential impact on its financial condition as well as
its financial performance in the future. It is anticipated that future
acquisitions, if any, will likely be valued at a premium to book value, and many
times at a premium to current market value. As such, management anticipates that
acquisitions made by the Company may include some book value per share dilution
and earnings per share dilution depending on the Company's success in
integrating the operations of businesses acquired and the level of cost savings
and revenue enhancements that may be achieved.
Year 2000 Compliance
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define an applicable year in a record of
data. Computer programs or hardware that have date-sensitive software or
embedded microprocessor chips may recognize a date using "00" as 1900 rather
than 2000. The result of such problem could result in system failure,
miscalculations, and disruption of the Company's operations as is pertains to
transacting customer business.
The Company has assessed the scope of its Year 2000 Issue as it relates to
its mainframe, its companywide PC based network, as well as any other
operational issues that may be hindered by system failures due to the Year 2000
bug. The Company believes that with modifications and/or replacements of
existing software and certain hardware, its Year 2000 Issue can be mitigated.
However, if such modifications and replacements are not made, or are not
completed on a timely basis, the Year 2000 Issue could have an adverse impact on
the operations of the Company, and such impact could be material.
The Company has designed a plan to resolve its Year 2000 Issue that
includes phases for assessment, testing and implementation. The plan's
implementation status is reviewed quarterly with senior management and the Board
of Directors. To date, the Company has fully completed its assessment of systems
that could be significantly affected by the Year 2000. This assessment indicated
that many of the software applications could have been affected by the Year
2000. Additionally, the assessment phase identified the potential for embedded
chips in certain systems (such as vault security, elevators, etc.) that may also
be at risk. The assessment plan also identified the potential impact of Year
2000 compliance as it relates to its significant suppliers and vendors, and as
part of the implementation phase, the Company is obtaining information regarding
their status of Year 2000 compliance.
The Company has completed its testing and implementation of software that
upgrades its mainframe computer system to achieve Year 2000 readiness. Software
was provided to the Company by its third party vendor under a maintenance
contract that the Company maintains in the normal course of business. In October
1998, the Company received and tested this vendor's major software upgrade for
the Year 2000 Issue. The Company believes that this upgrade has fully addressed
potential Year 2000 problems relating to its main system. In addition, the
Company has written proprietary programs for internal management reporting or
for the support of other operations of the Bank. Many of these programs contain
code that is date dependent, and have been reviewed and tested as part of the
Year 2000 plan. The Company believes that the testing and reprogramming of
critical proprietary programs has been successfully completed.
12
In addition to software and mainframe computer hardware Year 2000 issues,
there are other important mechanical devices that the Company relies upon in the
normal course of business, including alarm systems, vault security systems, and
other functioning equipment which protect the assets of the Company. The Company
has assessed all of these items, and is 90% complete with the testing of these
functions. Testing and upgrades to these systems is expected to be complete by
July 1999.
The Company relies on computer links with third party vendors in its normal
course of business, including obtaining credit reports, title policies, and
preparing closing statements with title companies. The Company is currently in
the process of working with these "EDI" links to ensure that the Company's
systems that interface with these third parties are Year 2000 compliant by
December 31, 1999. Testing of these such links is substantially complete, with
any remaining testing expected to be completed by July 1999. The Company has
queried and received indications from its major vendors in this area that they
will be Year 2000 compliant.
The Company has also evaluated the potential Year 2000 impact of
significant suppliers that do not share information systems with the Company
(external agents). For the Company, these would include certain government
agencies and utility providers. The Company has identified and contacted certain
vendors that would create the most material impact on the Company's operations,
and has been advised that they will be Year 2000 ready. However, the Company has
no means of ensuring that these external agents will be Year 2000 compliant by
the end of 1999. The effect of non-compliance by critical external agents has
been addressed in the contingency plans being developed currently by the
Company.
The Company has relied primarily on its own Information Technology ("IT")
department to reprogram, replace, test and implement the software and operating
equipment for Year 2000 modifications. Although this has diverted a material
amount of the Company's IT resources during this process, the Company does not
believe this diversion has had or will have a material impact on the results of
operations. The Year 2000 plan has included the upgrading of mainframe software,
which was accomplished pursuant to existing software maintenance agreements at
no incremental cost to the Company. With respect to various PC software
applications, necessary upgrades in some cases required a total replacement. At
March 31, 1999, the Company estimates the incremental cost expended for Year
2000 compliance has amounted to approximately $250,000, not including the
salaries and benefit costs of internal personnel. In total, the Company believes
its total cost of achieving Year 2000 compliance will not exceed $500,000.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 Issue in a timely manner. Management also believes that
its testing and implementation to date, as well as the continued implementation
of its Year 2000 plan will ready the Company for Year 2000. However, to the
extent that the Company's preparation and testing does not prove to be adequate,
leading to the unforeseen failure of its mainframe computer system, or if
significant external agents prove to fail in their Year 2000 compliance efforts,
the Company's ability to conduct its business may be materially adversely
affected as it relates to processing customer transactions related to its core
banking operation. Management is in the process of developing contingency plans
to address potential risks in the event of Year 2000 failure, including non-
compliance by third parties. The contingency plan will attempt to address
failure of mission critical systems, including the telecommunications network,
to allow the Company to continue operating on a reduced, semi-manual basis for a
limited period of time. Non-compliance caused by third parties (including
utilities) and Year 2000 disruptions to the national or local economy in general
could also have a material adverse impact on the Company.
13
Regulation and Supervision
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. 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.
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.
14
At March 31, 1999, the Bank was in compliance with all of its capital
requirements as follows:
March 31, 1999 December 31, 1998
------------------------- -------------------------
Percent of Percent of
Amount Assets Amount Assets
----------- ---------- ----------- ----------
(Dollars in thousands)
Stockholder's equity of the Bank $ 339,083 8.32% $ 341,568 8.36%
=========== ===== =========== =====
Tangible capital $ 265,118 6.64% $ 266,793 6.67%
Tangible capital requirement 59,927 1.50 60,009 1.50
----------- ----- ----------- -----
Excess $ 205,191 5.14% $ 206,784 5.17%
=========== ===== =========== =====
Core capital $ 265,118 6.64% $ 266,793 6.67%
Core capital requirement 119,855 3.00 120,018 3.00
----------- ----- ----------- -----
Excess $ 145,263 3.64% $ 146,775 3.67%
=========== ===== =========== =====
Core and supplementary capital $ 281,912 12.96% $ 283,563 13.42%
Risk-based capital requirement 173,967 8.00 169,051 8.00
----------- ----- ----------- -----
Excess $ 107,945 4.96% $ 114,512 5.42%
=========== ===== =========== =====
Total Bank assets $ 4,077,505 $ 4,084,110
Adjusted total Bank assets 3,995,153 4,000,600
Total risk-weighted assets 2,256,934 2,196,644
Adjusted total risk-weighted assets 2,174,582 2,113,134
Investment in Bank's real estate subsidiaries 12,802 12,518
=========== ===========
A reconciliation of consolidated stockholder's equity of the Bank for
financial reporting purposes to capital available to the Bank to meet regulatory
capital requirements is as follows:
March 31, December 31,
1999 1998
--------- ------------
(In thousands)
Stockholder's equity of the Bank $ 339,083 341,568
Goodwill (54,218) (54,868)
Core deposit intangibles (7,024) (7,351)
Non-permissible subsidiary deduction (12,802) (12,518)
Non-includable purchased mortgage servicing rights (509) (421)
Regulatory capital adjustment for available for sale securities 588 383
--------- -------
Tangible and core capital 265,118 266,793
General loan loss reserves 16,794 16,770
--------- -------
Core and supplementary capital $ 281,912 283,563
========= =======
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. Since July 1, 1996, 100% of such
investment in and advances to Mid America Developments and NW Financial has been
required to be deducted from capital.
15
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 is accomplished by continued home sales
and improved commercial parcels.
Interest Rate Risk Component of Regulatory Capital
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. For the
present time, the OTS has deferred implementation of the interest rate risk
component. If the Bank had been subject to an interest rate risk capital
component as of March 31, 1999, the Bank's total risk-weighted capital would not
have been subject to a deduction based on interest rate risk. At March 31, 1999,
the Bank met each of its capital requirements.
Changes in Financial Condition
Total assets of the Company were $4.11 billion at March 31, 1999, a
decrease of $9.8 million from $4.12 billion at December 31, 1998. The decrease
is primarily due to a decrease in cash and short term investments primarily for
the repurchase of the Company's common stock.
Cash and short-term investments totaled a combined $115.6 million at March
31, 1999, a decrease of $42.1 million from the combined balance of $157.7
million at December 31, 1998. The Company used $23.9 million to purchase
1,013,562 shares of common stock into treasury during the current quarter.
Investment securities available for sale decreased $5.7 million to $193.2
million at March 31, 1999. The decrease is due to sales of $8.9 million and
maturities of $28.0 million of primarily U.S. Government and agency securities,
offset by purchases of $31.8 million in primarily asset-backed and U.S. Agency
securities. The Company recognized a gain of $538,000 on the sale of investment
securities during the three months ended March 31, 1999. At March 31, 1999,
gross unrealized losses in the available for sale portfolio were $327,000
compared to gross unrealized gains of $913,000 at December 31, 1998.
Mortgage-backed securities classified as held to maturity decreased $13.7
million to $114.9 million at March 31, 1999, compared to $128.5 million at
December 31, 1998, primarily due to normal amortization and prepayments.
Mortgage-backed securities available for sale decreased $5.5 million to
$49.5 million at March 31, 1999 primarily due to amortization and prepayments.
Gross unrealized losses in the available for sale portfolio were $10,000 at
March 31, 1999, compared to $204,000 at December 31, 1998.
Included in mortgage-backed securities classified as held to maturity and
available for sale are $90.6 million of CMO securities at March 31, 1999, the
majority of which are collateralized by FNMA, FHLMC and GNMA mortgage-backed
securities, and to a lesser extent by whole loans.
16
Loans receivable, including loans held for sale, increased $53.9 million,
or 1.6%, to $3.37 billion at March 31, 1999. The Bank originated $391.1 million
during the three month period ended March 31, 1999. Offsetting this increase
were amortization and prepayments totaling $188.6 million, as well as loan sales
of $139.2 million. Loans receivable held for sale decreased to $21.4 million as
of March 31, 1999, compared to $89.4 million at December 31, 1998, reflecting
the funding of loan sales pending at December 31, 1998 and a decrease in loan
volume compared to the fourth quarter of 1998.
The allowance for loan losses totaled $16.8 million at March 31, 1999, an
increase of $24,000 from the balance at December 31, 1998, due to a $250,000
provision for loan losses, offset by net charge-offs of $226,000. Charge-offs
for the quarter were primarily on three one-to-four family residences. The
Bank's allowance for loan losses to total loans outstanding was .50% at March
31, 1999, compared to .52% at December 31, 1998. Non-performing loans increased
$517,000 to $14.6 million at March 31, 1999, compared to $14.0 million December
31, 1998. As a percentage of total loans receivable, the level of non-performing
loans remained steady at .43%.
Real estate held for development or sale increased $2.6 million to $27.8
million at March 31, 1999. A summary of the carrying value of real estate held
for development or sale is as follows:
March 31, December 31,
1999 1998
--------- ------------
(in thousands)
MAF Developments, Inc.
Tallgrass of Naperville $ 20,619 17,817
Harmony Grove 47 6
Creekside of Remington 1,460 1,456
-------- ------
22,126 19,279
-------- ------
NW Financial, Inc.
Reigate Woods 3,196 3,419
Woodbridge 2,440 2,436
-------- ------
5,636 5,855
-------- ------
$ 27,762 25,134
======== ======
The increase in the Tallgrass of Naperville project is primarily due to a
$3.3 million installment payment on the final acreage of the project, offset by
38 lot sales. As of March 31, 1999, 124 lots are under contract. A second unit
of 369 lots is expected to be developed in 1999 to meet the higher builder
demand in this project. The Company had five lot sales in the Harmony Grove
subdivision for the quarter ended March 31, 1999, which were offset, in part, by
continued development costs of the final phase of the project. As of March 31,
1999, the final two lots are under contract in Harmony Grove. There were no
sales during the first quarter in the 170-lot Creekside of Remington
subdivision. However, during the quarter, the Company contracted with a local
developer for the purchase of the remaining 117 lots in two installments. The
first closing, consisting of 42 lots occurred on April 30, 1999. The remaining
75 lots are scheduled to close on April 30, 2000.
The balance of Reigate Woods decreased due to three homesite sales. At
March 31, 1999 there are 18 remaining homesites, with four homesites under
contract. The Woodbridge project currently contains approximately 48 acres of
commercially zoned land of which sites for a total of 46 acres are under
contract. The closings on the sale of these commercial sites over the next
twelve to fifteen months is expected to generate pre-tax profits on sale of
approximately $6.0 million.
17
Deposits increased $13.1 million, to $2.67 billion at March 31, 1999. After
consideration of interest of $22.5 million credited to accounts during the three
months ended March 31, 1999, actual cash outflows were $8.9 million.
Borrowed funds, which consist primarily of FHLB of Chicago advances,
decreased $6.0 million to $1.03 billion at March 31, 1999. The decrease is
attributable to a reduction in FHLB borrowings by a net $10.0 million since
December 31, 1998. This reduction was offset in part by $4.0 million outstanding
under the Company's revolving line of credit at March 31, 1999. These funds were
used to finance stock repurchases during the current quarter.
Asset Quality
Non-Performing Assets. 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, the full amount of previously accrued but unpaid
interest is deducted from interest income. Income is subsequently recorded to
the extent cash payments are received, or at a time when the loan is brought
current in accordance with its original terms.
For the quarter ended March 31, 1999, interest income that would have been
recorded on non-accrual loans (had they been performing according to their
original terms) amounted to $255,000, compared to $186,000 for the three months
ended March 31, 1998.
The Bank's ratio of non-performing loans to total loans as of March 31,
1999, remained flat at .43%, compared to December 31, 1998, and down slightly
from .45% at March 31, 1998.
Foreclosed real estate increased $571,000 to $8.9 million at March 31,
1999, primarily due to $1.6 million in new single family foreclosures offset by
sales of $773,000.
Delinquent Loans. Delinquencies in the Bank's portfolio at the dates
indicated were as follows:
61-90 Days 91 Days or More
----------------------------------- ---------------------------------------
Principal Principal
Number Balance of Percent Number Balance of Percent
Of Delinquent of of Delinquent of
Loans Loans Total Loans Loans Total
--------- ------------ ---------- ----------- ------------- -----------
(Dollars in thousands)
March 31, 1999 33 $3,125 .09% 123 $13,677 .40%
== ====== === === ======= ===
December 31, 1998 41 $4,259 .13% 109 $13,163 .41%
== ====== === === ======= ===
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%
== ====== === === ======= ===
18
Loan Portfolio Composition. The following table sets forth the composition of
the Bank's loan portfolio in dollar amounts at the dates indicated:
At
---------------------------------------------------------------------
3/31/99 12/31/98 9/30/98 6/30/98 3/31/98 12/31/97
--------- --------- --------- --------- --------- ---------
(In thousands)
Real estate loans:
One-to four-family:
Held for investment $2,998,662 2,877,482 2,597,715 2,490,361 2,459,572 2,408,393
Held for sale 21,387 89,406 23,777 42,993 14,008 6,537
Multi-family 141,018 137,254 118,493 112,158 108,618 105,051
Commercial 41,581 43,069 32,772 34,456 34,738 35,839
Construction 39,090 28,429 20,861 20,986 17,367 17,263
Land 23,674 24,765 20,282 20,766 22,253 24,425
--------- --------- --------- --------- --------- ---------
Total real estate loans 3,265,412 3,200,405 2,813,900 2,721,720 2,656,556 2,597,508
Other loans:
Consumer loans:
Equity lines of credit 90,053 91,915 85,101 83,822 85,690 88,106
Home equity loans 40,434 42,398 38,695 36,940 34,711 34,447
Other 6,294 6,015 5,105 6,056 6,157 5,793
--------- --------- --------- --------- --------- ---------
Total consumer loans 136,781 140,328 128,901 126,818 126,558 128,346
Commercial business lines 1,780 2,356 2,025 2,059 2,628 2,659
--------- --------- --------- --------- --------- ---------
Total other loans 138,561 142,684 130,926 128,877 129,186 131,005
--------- --------- --------- --------- --------- ---------
Total loans receivable 3,403,973 3,343,089 2,944,826 2,850,597 2,785,742 2,728,513
Less:
Loans in process 17,904 10,698 11,222 10,939 7,778 6,683
Unearned discounts, premiums
and deferred loan fees, net (3,743) (3,455) (1,224) (817) (402) (772)
Allowance for loan losses 16,794 16,770 15,808 15,689 15,625 15,475
--------- --------- --------- --------- --------- ---------
Total loans receivable, net 3,373,018 3,319,076 2,919,020 2,824,786 2,762,741 2,707,127
Loans receivable held for sale (21,387) (89,406) (23,777) (42,993) (14,008) (6,537)
--------- --------- --------- --------- --------- ---------
Loans receivable, held for sale
Loans receivables, net $3,351,631 3,229,670 2,895,243 2,781,793 2,748,733 2,700,590
========= ========= ========= ========= ========= =========
19
Non-performing assets. The following table sets forth information regarding
non-accrual loans, loans which are 91 days or more delinquent but on which
the Bank is accruing interest, foreclosed real estate and non-accrual
investment securities of the Bank.
At
-------------------------------------------------------
3/31/99 12/31/98 9/30/98 6/30/98 3/31/98 12/31/97
-------- -------- ------- ------- ------- --------
(In thousands)
Non-performing loans:
One-to four-family and multi-family loans:
Non-accrual loans $ 9,897 10,641 9,430 9,673 8,900 7,039
Accruing loans 91 days or more overdue 1,743 1,381 624 1,296 2,508 2,071
------- -------- ------- ------- ------- --------
Total 11,640 12,022 10,054 10,969 11,408 9,110
------- -------- ------- ------- ------- --------
Commercial real estate, construction and land loans:
Non-accrual loans 1,744 1,284 1,126 1,259 736 1,240
Accruing loans 91 days or more overdue -- -- -- -- 33 --
------- -------- ------- ------- ------- --------
Total 1,744 1,284 1,126 1,259 769 1,240
------- -------- ------- ------- ------- --------
Other loans:
Non-accrual loans 1,166 721 178 286 210 181
Accruing loans 91 days or more overdue 16 22 1 11 96 124
------- -------- ------- ------- ------- --------
Total 1,182 743 179 297 306 305
------- -------- ------- ------- ------- --------
Total non-performing loans:
Non-accrual loans 12,807 12,646 10,734 11,218 9,846 8,460
Accruing loans 91 days or more overdue 1,759 1,403 625 1,307 2,637 2,195
------- -------- ------- ------- ------- --------
Total $ 14,566 14,049 11,359 12,525 12,483 10,655
======= ======== ======= ======= ======= ========
Non-accrual loans to total loans .38% .39 .37 .40 .36 .31
Accruing loans 91 days or more overdue to total loans .05 .04 .02 .05 .09 .08
-------- -------- ------- ------- ------- --------
Non-performing loans to total loans .43% .43 .39 .45 .45 .39
======== ======== ======= ======= ======= ========
Foreclosed real estate (net of related reserves):
One- to four-family $ 2,307 1,736 1,030 266 361 489
Commercial, construction and land 6,621 6,621 6,500 6,500 6,500
------- -------- ------- ------- -------
Total $ 8,928 8,357 7,530 6,766 6,861 489
======= ======== ======= ======= ======= ========
Non-performing loans and foreclosed real estate
to total loans and foreclosed real estate .69% .73 .64 .69 .70 .41
======= ======== ======= ======= ======= ========
Total non-performing assets $ 23,494 22,406 18,889 19,291 19,344 11,144
======= ======== ======= ======= ======= ========
Total non-performing assets to total assets .57% .54 .52 .54 .55 .32
======= ======== ======= ======= ======= ========
20
Liquidity and Capital Resources
At the present company level, 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 $33.0 million
unsecured term bank loan, cash dividends to shareholders, loans to and
investments in MAF Developments, as well as investment purchases and stock
repurchases with excess cash flow. The Company also maintains a one-year, $20.0
million unsecured revolving line of credit from a commercial bank, which was
increased from $15.0 million to $20.0 million, renewed and extended until April
30, 2000. At March 31, 1999, the Company had $4.0 million outstanding under this
line of credit at a rate 5.97%. For the three month period ended March 31, 1999,
the Company received $15.0 million in dividends from the Bank and declared a
common stock dividend of $.07 per share, which was paid on April 2, 1999. The
Company announced an increase in the quarterly cash dividend to $.09 effective
with the dividend to be paid on July 2, 1999.
The Bank's principal sources of funds are deposits, advances from the FHLB
of Chicago, reverse repurchase agreements, principal repayments on loans and
mortgage-backed securities, proceeds from the sale of loans and funds provided
by operations. While scheduled loan and mortgage-backed securities amortization
and maturing interest-bearing deposits are a relatively predictable source of
funds, deposit flows and loan and mortgage-backed securities prepayments are
greatly influenced by economic conditions, the general level of interest rates
and competition. The Bank utilizes particular sources of funds based on
comparative costs and availability. The Bank generally manages the pricing of
its deposits to maintain a steady deposit balance, but has from time to time
decided not to pay rates on deposits as high as its competition, and when
necessary, to supplement deposits with longer term and/or less expensive
alternative sources of funds. During the current three month period the Bank
borrowed $70.0 million of primarily fixed-rate and variable rate FHLB of Chicago
advances and repaid $80.0 million of maturing advances.
The Bank is required by regulation to maintain specific minimum levels of
liquid investments. Regulations currently in effect require the Bank to maintain
liquid assets at least equal to 4.0% of the sum of its average daily balance of
net withdrawable accounts and borrowed funds due in one year or less. This
regulatory requirement may be changed from time to time to reflect current
economic conditions. During the quarter ended March 31, 1999, the Bank's average
liquidity ratio was 8.42%. At March 31, 1999, total liquidity was $184.4
million, or 7.12%, which was $80.8 million in excess of the 4.0% regulatory
requirement.
During the three months ended March 31, 1999, the Bank originated and
purchased loans totaling $391.1 million compared with $367.8 million during the
same period a year ago. Loan sales and swaps for the three months ended March
31, 1999, were $139.2 million, compared to $63.9 million for the prior year
period. The Bank has outstanding commitments to originate and purchase loans of
$380.0 million and commitments to sell or swap loans of $45.6 million at March
31, 1999.
21
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
Bank's asset/liability management strategy emphasizes the origination of one- to
four-family adjustable-rate loans and other loans which have shorter terms to
maturity or reprice more frequently than fixed-rate mortgage loans, yet, provide
a positive margin over the Bank's cost of funds. In response to customer demand,
the Bank originates fixed-rate mortgage loans, but has historically generally
sold the conforming loans in the secondary market in order to maintain its
interest rate sensitivity levels. During the last eighteen to twenty-four
months, the Bank has been retaining the majority of the non-conforming, fixed-
rate originations and all of the prepayment protected fixed-rate loan
originations in portfolio for investment purposes to help utilize the Bank's
higher capital base resulting from the merger with Northwestern. These fixed
rate loans have been funded with intermediate to longer-term fixed rate FHLB
advances.
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.
22
The table below sets forth the scheduled repricing or maturity of the
Bank's assets and liabilities at March 31, 1999, based on the assumptions used
by the FHLB of Chicago with respect to NOW, checking and passbook account
withdrawals as well as loan and mortgage-backed securities prepayment
percentages. Investment securities and FHLB advances that contain call
provisions at the option of the issuer or lender are shown in the category
relating to their respective final maturities at March 31, 1999.
The effect of these assumptions is to quantify the dollar amount of items
that are interest-sensitive and may be repriced within each of the periods
specified. The table does not necessarily indicate the impact of general
interest rate movements on the Bank's net interest yield because the repricing
of certain categories of assets and liabilities is subject to competitive and
other pressures beyond the Bank's control. As a result, certain assets and
liabilities indicated as maturing or otherwise repricing within a stated period
may, in fact, mature or reprice at different times and at different volumes.
At March 31, 1999
------------------------------------------------------------------------
More More More
Than Than Than
6 Months 6 Months 1 Year 3 Years to More Than
or Less to 1 Year to 3 Years 5 Years 5 Years Total
---------- --------- ---------- ---------- --------- ---------
(In thousands)
Interest-earning assets:
Loans receivable $ 629,580 400,828 1,088,652 320,399 950,353 3,389,812
Mortgage-backed securities 76,710 29,189 23,165 16,677 18,636 164,377
Interest-bearing deposits 34,313 - - - - 34,313
Federal funds sold 42,834 - - - - 42,834
Investment securities (1) 134,762 38,917 19,917 5,768 56,023 255,387
---------- --------- ---------- ---------- --------- ---------
Total interest-earning assets 918,199 468,934 1,131,734 342,844 1,025,012 3,886,723
Impact of hedging activity (2) 21,387 - - - (21,387) -
---------- --------- ---------- ---------- --------- ---------
Total net interest-earning assets adjusted
for impact of hedging activities 939,586 468,934 1,131,734 342,844 1,003,625 3,886,723
---------- --------- ---------- ---------- --------- ---------
Interest-bearing liabilities:
NOW and checking accounts 17,440 15,958 58,407 36,281 77,097 205,183
Money market accounts 164,754 - - - - 164,754
Passbook accounts 62,197 56,911 208,293 129,387 274,947 731,735
Certificate accounts 844,804 343,612 215,714 43,108 11,891 1,459,129
FHLB advances 225,000 95,000 230,000 55,500 360,000 965,500
Other borrowings 63,000 - - - - 63,000
---------- --------- ---------- ---------- --------- ---------
Total interest-bearing liabilities 1,377,195 511,481 712,414 264,276 723,935 3,589,301
---------- --------- ---------- ---------- --------- ---------
Interest sensitivity gap $ (437,609) (42,547) 419,320 78,568 279,690 297,422
========== ========= ========== ========== ========= =========
Cumulative gap $ (437,609) (480,156) (60,836) 17,732 297,422
========== ========= ========== ========== =========
Cumulative gap assets as a percentage
of total assets (10.64)% (11.68) (1.48) .43 7.23
Cumulative net interest-earning assets as
a percentage of interest-bearing liabilities 68.22% 74.58 97.66 100.62 108.29
- --------------------
(1) Includes $50.9 million of stock in FHLB of Chicago in 6 months or less.
(2) Represents forward commitments to sell long-term fixed-rate mortgage loans.
23
Average Balances/Rates
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. Average yields
and costs are derived by dividing income or expense by the average balance of
assets or liabilities, respectively, for the periods shown. Average balances are
derived from average daily balances. The yield/cost at March 31, 1999 includes
fees which are considered adjustments to yield.
Three Months Ended March 31,
----------------------------------------------------------------- At March 31,
1999 1998 1999
------------------------------- ------------------------------- -------------------
Average Average
Average Yield/ Average Yield/ Yield/
Balance Interest Cost Balance Interest Cost Balance Cost
---------- -------- ------- ---------- -------- ------- ---------- ------
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans receivable $3,362,180 59,693 7.11% $2,754,100 51,817 7.53% $3,389,812 7.18%
Mortgage-backed securities 169,675 2,640 6.22 252,302 4,176 6.62 164,377 6.27
Interest-bearing deposits (1) 30,206 543 7.19 49,300 833 6.76 34,313 4.78
Federal funds sold (1) 33,880 670 7.91 82,074 1,396 6.80 42,834 4.77
Investment securities (2) 265,339 3,889 5.86 189,108 3,106 6.57 255,387 6.02
---------- -------- ---------- -------- ----------
Total interest-earning assets 3,861,280 67,435 6.99 3,326,884 61,328 7.37 3,886,723 7.02
========
Non-interest earning assets 221,006 165,841 224,543
Total assets $4,082,286 $3,492,725 $4,111,266
========== ========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits $2,533,651 24,581 3.93 $2,242,762 24,251 4.39 $2,560,801 4.01
Borrowed funds 1,018,389 14,454 5.68 825,894 13,044 6.32 1,028,500 5.74
---------- -------- ---------- -------- ----------
Total interest-bearing liabilities 3,552,040 39,035 4.43 3,068,656 37,295 4.91 3,589,301 4.51
-------- ------- -------- ------- ------
Non-interest bearing deposits 103,747 86,749 109,142
Other liabilities 86,891 69,553 80,882
---------- ---------- ----------
Total liabilities 3,742,678 3,224,958 3,779,325
Stockholders' equity 339,608 267,767 331,941
---------- ---------- ----------
Liabilities and stockholders' equity $4,082,286 $3,492,725 $4,111,266
========== ========== ==========
Net interest income/interest rate spread $ 28,400 2.56% $ 24,033 2.46% 2.51%
-------- ------- -------- ------- ------
Net earning assets/net yield on average
interest-earning assets $ 309,240 2.94% $ 258,228 2.89% $ 297,422 N/A
========== ======= ========== ======= ========== ======
Ratio of interest-earning assets to
interest-bearing liabilities 108.71% 108.42% 108.29%
========== ========== ==========
- --------------------
(1) Includes pro-rata share of interest income received on outstanding drafts
payable.
(2) Income and yields are stated on a taxable equivalent basis.
24
Rate/Volume Analysis of Net Interest Income
The following table describes the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated, on a taxable equivalent basis. Information is provided
in each category with respect to (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate), (ii) changes attributable to
changes in rates (changes in rates multiplied by prior volume), and (iii) the
net change. Changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
Three Months Ended March 31, 1999
Compared to March 31, 1998
Increase (Decrease)
----------------------------------------
Volume Rate Net
------------ ------------ ------------
(In thousands)
Interest-earning assets:
Loans receivable $10,933 (3,057) 7,876
Mortgage-backed securities (1,298) (238) (1,536)
Interest bearing deposits (340) 50 (290)
Federal funds sold (924) 198 (726)
Investment securities 1,146 (363) 783
------- ------ ------
Total 9,517 (3,410) 6,107
------- ------ ------
Interest-bearing liabilities:
Deposits 3,004 (2,674) 330
Borrowed funds 2,824 (1,414) 1,410
------- ------ ------
Total 5,828 (4,088) 1,740
------- ------ ------
Net change in net interest income $ 3,689 678 4,367
======= ====== ======
Comparison of the Results of Operations for the Three Months Ended March 31,
1999 and 1998
General - Net income for the three months ended March 31, 1999 was $11.7
million, or $.46 per diluted share, compared to net income of $9.2 million, or
$.39 per diluted share for the three months ended March 31, 1998.
Net interest income - Net interest income was $28.4 million for the current
quarter, compared to $24.0 million for the quarter ended March 31, 1998, an
increase of $4.4 million. The increase is primarily due to the Company's
acquisition of WCBI on December 31, 1998, which increased the Company's balance
of net interest-earning assets. Average net interest-earning assets increased
to $309.2 million for the three months ended March 31, 1999, compared to $258.2
million for the three months ended March 31, 1998, while the Company's net
interest margin increased to 2.94% for the current three month period, compared
to 2.89% for the prior year period.
25
Interest income on loans receivable increased $7.9 million as a result of a
$608.1 million increase in average loans receivable, while the average yield on
loans receivable decreased 42 basis points. Loans receivable increased $245.2
million due to the acquisition of WCBI which was accounted for under the
purchase method of accounting. The decrease in the average yield on loans
receivable is attributable to the high level of refinance and modification
activity experienced by the Bank over the past 12 months due to declining long-
term interest rates. Interest income on mortgage-backed securities decreased
$1.5 million to $2.6 million for the current quarter, due to a $82.6 million
decrease in average balances. This decline in average balance is a result of
higher prepayments. Interest income on investment securities increased $786,000
to $3.9 million, due to the increase in average balance of $76.2 million.
Interest expense on deposit accounts increased $330,000 to $24.6 million,
due to an increase in average deposits of $290.9 million during the current
three month period, offset by a 46 basis point decrease in the average cost of
savings. The decline in the cost of savings is attributable to lower U. S.
Treasury rates and the impact on maturing certificate of deposits as well as
decreases in rates offered on core deposits including passbook accounts. The
Bank acquired $259.5 million from the acquisition of WCBI, with the remainder of
the increase primarily due to an increase in money market and passbook balances.
Interest expense on borrowed funds increased $1.4 million to $14.5 million,
as a result of a $192.5 million increase in the average balance of borrowed
funds, offset by a 64 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 $254.7 million, offset by a decrease in average reverse
repurchase agreements $24.8 million since March 31, 1998. The reduction in
average cost is due to maturing FHLB advances being refinanced at lower interest
rates.
Provision for loan losses - The Bank provided $250,000 in provision for
loan losses during the current three month period, compared to $200,000 for the
prior three month period. Net charge-offs during the current quarter were
$226,000, compared to net charges-offs of $50,000 for the three months ended
March 31, 1998. The increased charge-off activity was primarily from three
single family mortgage loans. At March 31, 1999, the Bank's allowance for loan
losses was $16.8 million, which equaled .50% of total loans receivable, compared
to .52% at December 31, 1998. The ratio of the allowance for loan losses to non-
performing loans was 115.3% at March 31, 1999 compared to 119.4% at December 31,
1998, and 125.2% at March 31, 1998.
Non-interest income - Non-interest income increased 35.1% to $7.4 million
for the three months ended March 31, 1999, compared to $5.4 million for the
three months ended March 31, 1998.
Gain on sale of loans and mortgage-backed securities increased to a
combined $1.5 million for the three months ended March 31, 1999, compared to a
combined $447,000 for the three months ended March 31, 1998. Current quarter
loan volume consisted of primarily long-term fixed rate loans, which the Bank
actively sold during the current period. Loan sale volume was $138.4 million,
compared to $59.4 million for the three months ended March 31, 1998. The gain on
sale of mortgage-backed securities results from loans originated by the Bank
being swapped into mortgage-backed securities prior to sale. During the three
months ended March 31, 1999, $753,000 of loans were swapped and sold, compared
to $4.5 million during the three months ended March 31, 1998.
The Company recognized $538,000 in gains on investment securities for the
three months ended March 31, 1999, compared to $328,000 for the prior year
period, primarily due to the sale of asset-backed and marketable equity
securities.
26
Income from real estate operations decreased $180,000 to $621,000 for the
three months ended March 31, 1999. A summary of income from real estate
operations is as follows:
Three Months Ended March 31,
--------------------------------------------------
1999 1998
----------------------- -------------------------
Pre-tax Pre-tax
# of Income # of Income
Lots (Loss) Lots (Loss)
---------- ----------- ---------- -------------
(dollars in thousands)
Tallgrass of Naperville 38 $202 -- $ --
Harmony Grove 5 323 64 694
Reigate Woods 3 135 -- 30
Woodbridge -- (39) 6 2
Fields of Ambria -- -- 2 (11)
Clow Creek Farm -- -- 2 85
Creekside of Remington -- -- 1 1
-- ---- -- ----
46 $621 75 $801
== ==== == ====
The Company sold 38 lots in its newest subdivision, Tallgrass of
Naperville, during the three months ended March 31, 1999. There were 124 lots
under contract in this 926 lot subdivision at March 31, 1999. The 85-lot Reigate
Woods subdivision had three sales during the current quarter, with 18 homesites
remaining. Four homesites are under contract as of March 31, 1999. The loss
incurred in the Woodbridge subdivision was due to continued costs related to the
residential lots sold out in 1998. The Company entered into a sale agreement
with a third party for the remaining 117 lots of the Creekside subdivision. The
sale will occur in two stages, beginning in April 1999.
Deposit account service charges increased $452,000, or 25.8% to $2.2
million for the three months ended March 31, 1999, primarily due to continued
growth in the number of checking accounts and related fees.
Brokerage commissions decreased $78,000 the three months ended March 31,
1999 compared to the prior year quarter, due to a decrease in the sales force
from attrition. The Company expects these positions to be rehired during the
second quarter.
Loan servicing fee income increased $13,000 to $376,000, for the three
months ended March 31, 1999. The average balance of loans serviced for others
increased 11.62% to $1.09 billion for the current three month period, compared
to $980.8 million for the prior year period. Amortization of servicing rights
equaled $343,000 for the three months ended March 31, 1999, compared to $278,000
for the prior three month period.
Other non-interest income increased $532,000, or 52.2% to $1.6 million for
the three months ended March 31, 1999, due to increased income from bank-owned
life insurance and fee income from loan modifications and prepayment penalties.
27
Non-interest expense - Non-interest expense increased $1.8 million to $16.2
million for the three months ended March 31, 1999.
Compensation and benefits increased $969,000 to $9.5 million for the three
months ended March 31, 1999, compared to the three months ended March 31, 1998.
The increase is primarily due to increased compensation and benefit costs due to
the increased staff resulting from the WCBI acquisition and normal salary
increases effective January 1, 1999.
Occupancy expense increased 9.4% to $1.8 million for the three months ended
March 31, 1999 compared to the prior year period, primarily due the addition of
WCBI.
Advertising and promotion expense decreased $121,000 for the three months
ended March 31, 1999 compared to the prior year due to a decrease in direct mail
and television costs while preparing to initiate a new advertising campaign in
the second quarter.
Amortization of intangibles increased $349,000 to $977,000 for the three
months ended March 31, 1999 due to the purchase of WCBI.
Income taxes - For the three months ended March 31, 1999, income tax
expense totaled $7.6 million, or an effective income tax rate of 39.5%, compared
to $5.7 million, or an effective income tax rate of 38.2%, for the three months
ended March 31, 1998.
Quantitative and Qualitative Disclosures About Market Risk- A comprehensive
qualitative and quantatative analysis regarding market risk was disclosed in the
Company's December 31, 1998 Form 10-K. There has been no material changes in the
assumptions used regarding market risk. At March 31, 1999, the Company's
cumulative one-year interest sensitivity gap increased to (11.68)% from (4.23)%
at December 31, 1998. The increase in the negative gap, while within the Company
policy, makes the Company more susceptible to a decrease in net interest income
in a period of rising rates. The cumulative gap at three years moved from 2.98%
at December 31, 1998, to (1.48)% at March 31, 1999. The change in the one year
gap is due to a number of factors, including the prepayments in the Bank's
purchased adjustable-rate mortgage portfolio and continued reinvestment in
prepayment protected fixed-rate mortgage loans, the Company's stock repurchase
program as well as an increase in short term borrowings at the end of the
quarter. The Company is currently taking steps to replace the short term
borrowings with longer term fixed rate advances from the Federal Home Loan Bank
of Chicago, as well as attempting to extend maturities on certificate of deposit
accounts, both of which will reduce the negative cumulative one-year sensitivity
gap.
28
Part II - Other Information
- -----------------------------
Item 1. Legal Proceedings
The Company is not presently involved in any legal proceedings of a
material nature.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Shareholders on April 28,
1999.
(b) The names of each director elected at the Annual Meeting for three-
year terms are as follows:
Robert Bowles, MD
David C. Burba
Allen H. Koranda
Henry Smogolski
The names of the other directors, whose terms of office continued after
the Annual Meeting, are as follows:
Terry A. Ekl Lois B. Vasto
Joe F. Hanauer Jerry A. Weberling
Kenneth Koranda Andrew J. Zych
F. William Trescott
(c) In addition to the election of directors, the following matters
were voted upon at the Annual Meeting. The number of affirmative
votes and negative votes cast with respect to each matter is shown
below.
(i) Approval of an amendment to the MAF Bancorp, Inc. Certificate of
Incorporation increasing the number of authorized shares of common
stock from 40,000,000 shares to 80,000,000 shares:
For Against Abstain
-------------- -------------- --------------
20,028,095 999,504 242,024
(ii) Ratification of the appointment of KPMG LLP as the Company's
independent auditors for the year ending December 31, 1999:
For Against Abstain
-------------- -------------- --------------
21,014,359 224,310 30,954
(d) None.
29
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No. 3. Certificate of Amendment of MAF Bancorp's amended
Certificate of Incorporation.
(b) Exhibit No. 11. Statement re: Computation of per share earnings
Quarter Ended
March 31, 1999
--------------
Net income $11,679,000
===========
Weighted average common shares outstanding 24,636,116
-----------
Basic earnings per share $ .47
-----------
Weighted average common shares outstanding 24,636,116
Common stock equivalents due to dilutive
effect of stock options 785,744
-----------
Total weighted average common shares and equivalents
outstanding for diluted computation 25,421,860
===========
Diluted earnings per share $ .46
===========
(c) Exhibit No. 27. Financial Data Schedule.
(d) Reports on Form 8-K.
On January 27, 1999, MAF Bancorp, Inc. announced its 1998 fourth
quarter and year-end earnings results.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAF Bancorp. Inc.
-----------------
(Registrant)
Date: May 12, 1999 By: /s/ Allen H. Koranda
------------- --------------------------
Allen H. Koranda
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
Date: May 12, 1999 By: /s/ Jerry A. Weberling
------------ ----------------------------
Jerry A. Weberling
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer)
31