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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 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)
--------------
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 24,156,627 at August 13, 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 June 30, 1999 and December 31, 1998 (unaudited)...... 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1999 and 1998 (unaudited)............ 4
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 1999 (unaudited)......... 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 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........................ 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk. 32
Part II. Other Information
- -------- -----------------
Item 1 Legal Proceedings.......................................... 34
Item 2 Changes in Securities...................................... 34
Item 3 Defaults Upon Senior Securities............................ 34
Item 4 Submission of Matters to a Vote of Security Holders........ 34
Item 5 Other Information.......................................... 34
Item 6 Exhibits and Reports on Form 8-K........................... 35
Signature Page............................................. 36
2
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands)
(unaudited)
June 30, December 31,
1999 1998
---------- ------------
Assets
- ------
Cash and due from banks $ 42,966 53,995
Interest-bearing deposits 20,824 24,564
Federal funds sold 39,310 79,140
Investment securities, at cost (fair value of $22,085 and $12,360) 21,426 11,107
Investment securities available for sale, at fair value 192,840 198,960
Stock in Federal Home Loan Bank of Chicago, at cost 55,525 50,878
Mortgage-backed securities, at amortized cost
(fair value of $105,556 and $127,570) 106,905 128,538
Mortgage-backed securities available for sale, at fair value 44,723 55,065
Loans receivable held for sale 100,016 89,406
Loans receivable, net of allowance for losses of $16,978 and $16,770 3,448,150 3,229,670
Accrued interest receivable 22,291 21,545
Foreclosed real estate 9,028 8,357
Real estate held for development or sale 22,775 25,134
Premises and equipment, net 41,472 40,724
Other assets 48,143 41,785
Intangible assets, net of accumulated amortization of $8,625 and $6,671 60,270 62,219
---------- ---------
$4,276,664 4,121,087
========== =========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits $2,669,886 2,656,872
Borrowed funds 1,179,500 1,034,500
Advances by borrowers for taxes and insurance 33,262 30,576
Accrued expenses and other liabilities 50,069 54,143
---------- ---------
Total liabilities 3,932,717 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;
24,156,627 and 24,984,398 shares outstanding 254 254
Additional paid-in capital 194,016 191,473
Retained earnings, substantially restricted 177,396 159,935
Accumulated other comprehensive income (loss) (401) 425
Treasury stock, at cost; 1,264,023 and 436,252 shares (27,318) (7,091)
---------- ---------
Total stockholders' equity 343,947 344,996
Commitments and contingencies
---------- ---------
$4,276,664 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)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -----------------------------
1999 1998 1999 1998
---------------- ------------- ------------- --------------
Interest income:
Loans receivable $61,352 $52,551 $121,045 $104,368
Mortgage-backed securities 1,697 2,583 3,557 5,709
Mortgage-backed securities available for sale 702 1,006 1,482 2,056
Investment securities 1,166 811 2,086 1,824
Investment securities available for sale 2,733 2,667 5,665 4,720
Interest-bearing deposits and federal funds sold 1,161 2,195 2,374 4,424
------- ------- -------- --------
Total interest income 68,811 61,813 136,209 123,101
------- ------- -------- --------
Interest expense:
Deposits 24,585 24,144 49,166 48,395
Borrowed funds 15,267 13,461 29,721 26,505
------- ------- -------- --------
Total interest expense 39,852 37,605 78,887 74,900
------- ------- -------- --------
Net interest income 28,959 24,208 57,322 48,201
Provision for loan losses 250 200 500 400
------- ------- -------- --------
Net interest income after provision for
loan losses 28,709 24,008 56,822 47,801
------- ------- -------- --------
Non-interest income:
Gain on sale of:
Loans receivable 382 804 1,838 1,209
Mortgage-backed securities 32 126 36 168
Investment securities - 70 538 398
Foreclosed real estate 108 21 120 66
Deposit account service charges 2,541 2,079 4,746 3,832
Income from real estate operations 3,917 1,298 4,538 2,099
Brokerage commissions 627 839 1,219 1,509
Loan servicing fee income 654 393 1,030 756
Other 1,460 1,227 3,012 2,266
------- ------- -------- --------
Total non-interest income 9,721 6,857 17,077 12,303
------- ------- -------- --------
Non-interest expense:
Compensation and benefits 9,269 8,755 18,735 17,252
Office occupancy and equipment 1,818 1,694 3,625 3,346
Advertising and promotion 823 584 1,355 1,237
Data processing 600 564 1,191 1,096
Federal deposit insurance premiums 393 366 797 728
Amortization of intangible assets 977 627 1,954 1,255
Other 2,644 2,296 5,047 4,389
------- ------- -------- --------
Total non-interest expense 16,524 14,886 32,704 29,303
------- ------- -------- --------
Income before income taxes 21,906 15,979 41,195 30,801
Income tax expense 8,667 6,199 16,277 11,854
------- ------- -------- --------
Net income $13,239 $ 9,780 $ 24,918 $ 18,947
======= ======= ======== ========
Basic earnings per share $ .55 $ .43 $ 1.02 $ .84
======= ======= ======== ========
Diluted earnings per share $ .53 $ .42 $ .99 $ .81
======= ======= ======== ========
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
Six Months Ended June 30, 1999 stock capital earnings income (loss) stock Total
- ------------------------------ ----- ------- -------- ------------ ----- -----
Balance at December 31, 1998 $254 191,473 159,935 425 (7,091) 344,996
---- ------- ------- ---- ------- -------
Comprehensive income:
Net income -- -- 24,918 -- -- 24,918
Other comprehensive income (loss), net of tax:
Unrealized holding loss during the period -- -- -- (500) -- (500)
Less: reclassification adjustment of gains
included in net income -- -- -- (326) -- (326)
---- ---- ------ ---- ------- -------
Total comprehensive income -- -- 24,918 (826) -- 24,092
---- ---- ------ ---- ------- -------
Exercise of 212,620 stock options and
reissuance of treasury stock -- -- (3,583) -- 4,310 727
Impact of exercise of acquisition carry-over stock options -- 1,531 -- -- -- 1,531
Purchase of treasury stock -- -- -- -- (24,537) (24,537)
Tax benefits from stock-related compensation -- 1,012 -- -- -- 1,012
Cash dividends ($.16 per share) -- -- (3,874) -- -- (3,874)
---- ------- ------- ---- ------- -------
Balance at June 30, 1999 $254 194,016 177,396 (401) (27,318) 343,947
==== ======= ======= ==== ======= =======
See accompanying notes to unaudited consolidated financial statements.
5
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six Months Ended
June 30,
------------------------------------
1999 1998
----------------- -----------------
Operating activities:
Net income $ 24,918 $ 18,947
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,960 1,722
Provision for loan losses 500 400
Deferred income tax (benefit) expense 1,063 (366)
Amortization of goodwill and core deposit intangibles 1,954 1,142
Amortization of premiums, discounts, loan fees and servicing rights 617 1,255
Net gain on sale of loans, mortgage-backed securities,
and real estate held for development or sale (6,412) (3,476)
Gain on sale of investment securities (538) (398)
Increase in accrued interest receivable (746) (508)
Net increase in other assets and liabilities (12,303) (2,958)
Loans originated for sale (125,821) (166,004)
Loans purchased for sale (15,901) (54,767)
Sale of loans originated and purchased for sale 211,522 183,796
Sale of mortgage-backed securities available for sale 784 15,207
--------- ---------
Net cash provided by (used in) operating activities 81,597 (6,008)
--------- ---------
Investing activities:
Loans originated for investment (569,002) (467,367)
Principal repayments on loans receivable 404,382 484,318
Principal repayments on mortgage-backed securities 31,834 45,961
Proceeds from maturities of investment securities available for sale 41,490 71,964
Proceeds from maturities of investment securities held to maturity -- 15,000
Proceeds from sale of:
Investment securities available for sale 8,859 1,522
Investments held to maturity -- 912
Real estate held for development or sale 22,531 16,359
Premises and equipment -- 1
Stock in FHLB of Chicago -- 500
Purchases of:
Loans receivable held for investment (137,800) (114,374)
Investment securities available for sale (45,176) (137,403)
Investment securities held to maturity (10,266) (590)
Mortgage-backed securities available for sale -- (9,552)
Stock in FHLB of Chicago (4,647) (8,000)
Real estate held for development or sale (10,265) (6,635)
Premises and equipment (2,784) (3,604)
--------- ---------
Net cash used in investing activities (270,844) (110,988)
--------- ---------
(continued)
6
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended
June 30,
----------------------------------
1999 1998
----------------- ---------------
(Unaudited)
Financing activities:
Proceeds from FHLB of Chicago advances $ 280,000 $160,000
Proceeds from unsecured line of credit 21,000 --
Repayment of FHLB of Chicago advances (145,000) (35,000)
Repayment of unsecured line of credit (11,000) --
Net decrease in other borrowings -- (24,804)
Proceeds from exercise of stock options 727 150
Purchase of treasury stock (24,537) (137)
Cash dividends (3,241) (2,104)
Net increase in deposits 14,013 16,486
Decrease in advances by borrowers for taxes and insurance 2,686 1,692
--------- --------
Net cash provided by financing activities 134,648 116,283
--------- --------
Decrease in cash and cash equivalents (54,599) (713)
--------- --------
Cash and cash equivalents at beginning of period 157,699 146,918
--------- --------
Cash and cash equivalents at end of period 103,100 146,205
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds 78,066 74,681
Income taxes 12,942 10,401
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate 3,381 849
Loans receivable swapped into mortgage-backed securities 753 15,144
Loans receivable transferred to held for sale 80,004 --
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 and Six Months Ended June 30, 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 and six months ended June 30,
1999 are not necessarily indicative of results that may be expected for the 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 and
six month periods ended June 30, 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
potential 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. Weighted average shares
used in calculating earnings per share are summarized below for the periods
indicated:
Three Months Ended June 30, 1999 Three Months Ended June 30, 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 $13,239 24,139,952 $.55 $9,780 22,562,943 $.43
======= ==== ====== ====
Effect of dilutive securities:
Stock options 754,176 814,923
---------- ----------
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversions $13,239 24,894,128 $.53 $9,780 23,377,866 $.42
======= ========== ==== ====== ========== ====
8
(2) Earnings Per Share (continued)
Six Months Ended June 30, 1999 Six Months Ended June 30, 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 $24,918 24,388,034 $1.02 $18,947 22,543,121 $ .84
====== ==== ====== =======
Effect of dilutive securities:
Stock options 769,960 815,130
---------- ----------
Diluted earnings per share -
Income available to common
shareholders plus assumed
conversions $24,918 25,157,994 $.99 $18,947 23,358,251 $ .81
====== ========== === ====== ========== =======
(3) Commitments and Contingencies
At June 30, 1999, the Bank had outstanding commitments to originate and
purchase loans of $398.6 million, of which $254.1 million were fixed-rate loans,
with rates ranging from 5.50% to 8.75%, and $144.5 million were adjustable-rate
loans. At June 30, 1999, commitments to sell loans were $105.7 million.
At June 30, 1999, the Bank had outstanding standby letters of credit
totaling $16.2 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
$15.4 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 1998 amounts have been made to conform with
current year presentations.
9
(6) Segment Information
The Company 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 June 30, 1999
------------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
------- ----------- ------------ ------------
(In thousands)
Interest income $ 69,264 -- (453) 68,811
Interest expense 39,852 453 (453) 39,852
---------- ------- ------ ---------
Net interest income 29,412 (453) -- 28,959
Provision for loan losses 250 -- -- 250
---------- ------- ------ ---------
Net interest income after provision 29,162 (453) -- 28,709
Non-interest income 5,804 3,917 -- 9,721
Non-interest expense 16,382 142 -- 16,524
---------- ------- ------ ---------
Income before income taxes 18,584 3,322 -- 21,906
Income tax expense 7,355 1,312 -- 8,667
---------- ------- ------ ---------
Net income $ 11,229 2,010 -- 13,239
========== ======= ====== =========
Average assets $4,131,275 25,851 -- 4,157,126
========== ======= ====== =========
At or For the Three Months Ended June 30, 1999
------------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
------- ----------- ------------ ------------
(In thousands)
Interest income $ 62,349 -- (536) 61,813
Interest expense 37,605 536 (536) 37,605
---------- ------- ------ ---------
Net interest income 24,744 (536) -- 24,208
Provision for loan losses 200 -- -- 200
---------- ------- ------ ---------
Net interest income after provision 24,544 (536) -- 24,008
Non-interest income 5,559 1,298 -- 6,857
Non-interest expense 14,723 163 -- 14,886
---------- ------- ------ ---------
Income before income taxes 15,380 599 -- 15,979
Income tax expense 5,969 230 -- 6,199
---------- ------- ------ ---------
Net income $ 9,411 369 -- 9,780
========== ======= ====== =========
Average assets $3,514,350 28,943 -- 3,543,293
========== ======= ====== =========
10
(6) Segment Information (continued)
At or For the Six Months Ended June 30, 1999
---------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 137,149 - (940) 136,209
Interest expense 78,887 940 (940) 78,887
---------- ------ ------ ---------
Net interest income 58,262 (940) - 57,322
Provision for loan losses 500 - - 500
---------- ------ ------ ---------
Net interest income after provision 57,762 (940) - 56,822
Non-interest income 12,539 4,538 - 17,077
Non-interest expense 32,259 445 - 32,704
---------- ------ ------ ---------
Income before income taxes 38,042 3,153 - 41,195
Income tax expense 15,031 1,246 - 16,277
---------- ------ ------ ---------
Net income $ 23,011 1,907 - 24,918
========== ====== ====== =========
Average assets $4,092,914 26,998 - 4,119,912
========== ====== ====== =========
At or For the Six Months Ended June 30, 1998
---------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 124,271 - (1,170) 123,101
Interest expense 74,900 1,170 (1,170) 74,900
---------- ------ ------ ---------
Net interest income 49,371 (1,170) - 48,201
Provision for loan losses 400 - - 400
---------- ------ ------ ---------
Net interest income after provision 48,971 (1,170) - 47,801
Non-interest income 10,204 2,099 - 12,303
Non-interest expense 28,896 407 - 29,303
---------- ------ ------ ---------
Income before income taxes 30,279 522 - 30,801
Income tax expense 11,653 201 - 11,854
---------- ------ ------ ---------
Net income $ 18,626 321 - 18,947
========== ====== ====== =========
Average assets $3,488,095 30,053 - 3,518,148
========== ====== ====== =========
(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. As issued,
the Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities Deferral of the Effective Date of
FASB No. 133." The Statement is effective upon issuance and it amends SFAS No.
133 to be effective for all fiscal quarters of fiscal years beginning after June
30, 2000. The Company does not believe this statement will have a material
impact on its financial position or results of operations.
11
Item 2. 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.
12
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 markets 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 could 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 it pertains to
transacting customer business.
The Company has designed a plan to resolve its Year 2000 Issue that
includes phases for assessment, testing and implementation. 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. The Company has sought and
obtained information regarding Year 2000 compliance from substantially all of
its key suppliers and vendors. Substantially all of these vendors report that
they are expending efforts to become Year 2000 compliant and plan to be Year
2000 compliant in advance of December 31, 1999.
13
The plan's implementation status is reviewed quarterly with senior
management and the Board of Directors. In addition, during 1998 and 1999, the
Bank's Year 2000 compliance plan and related activities have been periodically
reviewed by the Office of Thrift Supervision, the Bank's primary regulator. 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 and
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.
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 95% complete with the testing of these
functions. Testing and upgrades to these systems is expected to be complete by
September 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 links is substantially complete, with any
remaining testing expected to be completed by September 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 consequences of non-compliance by critical external agents
are addressed in the contingency plans developed 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
June 30, 1999, the Company estimates the incremental cost expended for Year 2000
compliance has amounted to approximately $350,000, not including the salaries
and benefit costs of internal personnel. The Company believes its total cost of
achieving Year 2000 compliance will not exceed $500,000 (excluding salary and
benefit costs).
Management is in the process of finalizing the development of its
contingency plan in the event of Year 2000 failure of mission critical systems,
including the telecommunications and electricity network. In the normal course
of business, the Company maintains a disaster recovery plan that includes
procedures for a mainframe failure. This offsite backup system consists of the
same mainframe computer that the Company currently uses, and is certified to be
Year 2000 compliant by the third party vendor. The Company has contracted for
backup generator power at its branch location that houses its mainframe computer
system and data processing operations. Telecommunication failure is addressed
with backup procedures for capturing local branch customer transactions on
transferable media that can be transported to the mainframe location for
periodic uploading. To the extent that either its mainframe computer or certain
utilities prove to be inoperative, the plan outlines procedures to allow a
limited amount of customer transactions to be processed at a limited number of
locations within the Bank's branch network.
It is expected that the contingency plan will include policies and
procedures to permit the Company to operate on a reduced, semi-manual basis for
a limited period of time. To aid in the additional effort a semi-manual system
would require, the Company has put a moratorium on most employee vacations for
the period December 15, 1999 to January 15, 2000. The Company expects to have a
finalized contingency plan in place by September 1999.
The Company has also developed an overall liquidity and branch cash
contingency plan to address expected potential higher cash withdrawals by
customers in light of the Year 2000 Issue. The plan will be implemented in
October 1999. The Company estimates that the costs of implementing the liquidity
and branch cash contingency plan, planned fourth quarter printing and mailing of
Year 2000 customer communications and extra customer account statements will
cost the Company approximately $300,000 to $400,000. These costs are in addition
to the costs noted above related to Year 2000 compliance.
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 the Year 2000. However, to the
extent that the Company's preparation and testing does not prove to be adequate,
and its contingency plans prove to be ineffective, the Company's ability to
conduct its business may be adversely affected as it relates to processing
customer transactions related to its core banking operation. 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.
14
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 its 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.
15
At June 30, 1999, the Bank was in compliance with all of its capital
requirements as follows:
June 30, 1999 December 31, 1998
---------------------- ----------------------
Percent of Percent of
Amount Assets Amount Assets
---------- ---------- ---------- ----------
(Dollars in thousands)
Stockholder's equity of the Bank $ 341,090 8.06% $ 341,568 8.36%
========== ===== ========== =====
Tangible capital $ 271,249 6.53% $ 266,793 6.67%
Tangible capital requirement 62,323 1.50 60,009 1.50
---------- ----- ---------- -----
Excess $ 208,926 5.03% $ 206,784 5.17%
========== ===== ========== =====
Core capital $ 271,249 6.53% $ 266,793 6.67%
Core capital requirement 124,647 3.00 120,018 3.00
---------- ----- ---------- -----
Excess $ 146,602 3.53% $ 146,775 3.67%
========== ===== ========== =====
Core and supplementary capital $ 288,227 12.66% $ 283,563 13.42%
Risk-based capital requirement 182,179 8.00 169,051 8.00
---------- ----- ---------- -----
Excess $ 106,048 4.66% $ 114,512 5.42%
========== ===== ========== =====
Total Bank assets $4,233,962 $4,084,110
Adjusted total Bank assets 4,154,884 4,000,600
Total risk-weighted assets 2,356,318 2,196,644
Adjusted total risk-weighted assets 2,277,240 2,113,134
Investment in Bank's real estate subsidiaries 10,706 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:
June 30, December 31,
1999 1998
-------- ------------
(In thousands)
Stockholder's equity of the Bank $341,090 341,568
Goodwill (53,573) (54,868)
Core deposit intangibles (6,697) (7,351)
Non-permissible subsidiary deduction (10,706) (12,518)
Non-includable purchased mortgage servicing rights (570) (421)
Regulatory capital adjustment for available for sale securities 1,705 383
-------- -------
Tangible and core capital 271,249 266,793
General loan loss reserves 16,978 16,770
-------- -------
Core and supplementary capital $288,227 283,563
======== =======
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
deducted from capital.
16
Changes in Financial Condition
Total assets of the Company were $4.28 billion at June 30, 1999, an
increase of $155.6 million from $4.12 billion at December 31, 1998. The increase
is primarily due to an increase in borrowings used to fund mortgage loans held
for investment and sale.
Cash and short-term investments totaled a combined $103.1 million at June
30, 1999, a decrease of $54.6 million from the combined balance of $157.7
million at December 31, 1998. The Company used $24.1 million to purchase
1,018,562 shares of common stock into treasury during the current six month
period.
Investment securities available for sale decreased $6.1 million to $192.8
million at June 30, 1999. The decrease is due to sales of $8.9 million and
maturities of $41.5 million of primarily U.S. Government and agency securities,
offset by purchases of $45.2 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 six months ended June 30, 1999. At June 30, 1999, gross
unrealized losses in the available for sale portfolio were $400,000 compared to
gross unrealized gains of $913,000 at December 31, 1998.
Mortgage-backed securities classified as held to maturity decreased $21.6
million to $106.9 million at June 30, 1999, compared to $128.5 million at
December 31, 1998, primarily due to normal amortization and prepayments.
Mortgage-backed securities available for sale decreased $10.3 million to
$44.7 million at June 30, 1999, primarily due to amortization and prepayments.
Gross unrealized losses in the available for sale portfolio were $255,000 at
June 30, 1999, compared to $204,000 at December 31, 1998.
Included in mortgage-backed securities classified as held to maturity and
available for sale are $84.1 million of CMO securities at June 30, 1999, the
majority of which are collateralized by FNMA, FHLMC and GNMA mortgage-backed
securities, and to a lesser extent by whole loans.
17
Loans receivable, including loans held for sale, increased $229.1 million,
or 6.9%, to $3.55 billion at June 30, 1999. The Bank originated $855.1 million
during the six month period ended June 30, 1999. Offsetting this increase were
amortization and prepayments totaling $404.4 million, as well as loan sales of
$211.9 million. Loans receivable held for sale increased to $100.0 million as of
June 30, 1999, compared to $89.4 million at December 31, 1998. During the
current quarter the Bank transferred $80.0 million of fixed-rate loans
receivable to loans held for sale with a lower of cost or market adjustment of
$66,000. The transfer was made for interest-rate risk and liquidity management
purposes.
The allowance for loan losses totaled $17.0 million at June 30, 1999, an
increase of $208,000 from the balance at December 31, 1998, due to a $500,000
provision for loan losses, offset by net charge-offs of $292,000. Charge-offs
for the six months were primarily on four one-to-four family residences. The
Bank's allowance for loan losses to total loans outstanding was .49% at June 30,
1999, compared to .52% at December 31, 1998. Non-performing loans decreased
$993,000 to $13.1 million at June 30, 1999, compared to $14.0 million at
December 31, 1998. As a percentage of total loans receivable, the level of non-
performing loans was .38% at June 30, 1999, compared to .43% at December 31,
1998.
Real estate held for development or sale decreased $2.4 million to $22.8
million at June 30, 1999. A summary of the carrying value of real estate held
for development or sale is as follows:
June 30, December 31,
1999 1998
-------- ------------
(in thousands)
MAF Developments, Inc.
Tallgrass of Naperville $16,292 17,817
Harmony Grove -- 6
Creekside of Remington 1,544 1,456
------- ------
17,836 19,279
------- ------
NW Financial, Inc.
Reigate Woods 3,480 3,419
Woodbridge 1,459 2,436
------- ------
4,939 5,855
------- ------
$22,775 25,134
======= ======
The decrease in the Tallgrass of Naperville project is primarily due to
strong lot sales in Unit 1 of the project, offset in part by development costs
incurred in Unit 2, currently scheduled to include 346 lots. As of June 30,
1999, 30 lots are under contract. The Company plans to hold a presale of Unit 2
lots in August 1999, with closings expected to commence late in the fourth
quarter. In March 1999, the Company contracted with a local developer for the
purchase of the remaining 117 lots in the Creekside of Remington subdivision.
The first closing, consisting of 42 lots, occurred on April 30, 1999. The sale
of the remaining 75 lots are scheduled to close on April 30, 2000, at a nominal
profit to the Company. In addition, the Company sold the final two lots in
Harmony Grove.
The Company sold five homesites in its Reigate Woods subdivision during the
first six months of 1999. The small increase in the Company's investment is due
to project costs related to homesites currently under contract. At June 30, 1999
there are 16 remaining homesites, with five homesites under contract. As of
December 31, 1998, the Woodbridge project consisted of a 48-acre parcel of
commercial real estate. A 26-acre commercial parcel was sold during June 1999 at
a pre-tax profit of $2.9 million. The remaining 22-acres of land, which consist
of six individual parcels, are under contract with closings expected over the
next twelve months at estimated pre-tax profits of approximately $3.3 million.
18
Deposits increased $13.0 million, to $2.67 billion at June 30, 1999. After
consideration of interest of $48.2 million credited to accounts during the six
months ended June 30, 1999, actual cash outflows were $34.2 million.
Borrowed funds, which consist primarily of FHLB of Chicago advances,
increased $145.0 million to $1.18 billion at June 30, 1999. The increase is
primarily attributable to a net $135.0 million increase in FHLB of Chicago
borrowings as well as the use of $10.0 million under the Company's revolving
line of credit as of June 30, 1999.
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 June 30, 1999, interest income that would have been
recorded on non-accrual loans (had they been performing according to their
original terms) amounted to $232,000, compared to $227,000 for the three months
ended June 30, 1998.
Foreclosed real estate increased $671,000 to $9.0 million at June 30, 1999,
primarily due to $3.4 million in new single family foreclosures offset by sales
of $2.4 million.
Delinquent Loans. Delinquencies in the Bank's portfolio at the dates
indicated were as follows:
61-90 Days 91 Days or More
----------------------------------- ---------------------------------------
Principal Principal
Number Balance of Percent Number Balance of Percent
of Delinquent of of Delinquent of
Loans Loans Total Loans Loans Total
--------- ------------ ---------- ----------- ------------- -----------
(Dollars in thousands)
June 30, 1999 49 $3,655 .11% 112 $12,299 .35%
== ====== === === ======= ===
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%
== ====== === === ======= ===
19
Loan Portfolio Composition. The following table sets forth the
composition of the Bank's loan portfolio in dollar amounts at the dates
indicated:
At
----------------------------------------------------------------------------------
6/30/99 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 $3,085,456 2,998,662 2,877,482 2,597,715 2,490,361 2,459,572 2,408,393
Held for sale 100,016 21,387 89,406 23,777 42,993 14,008 6,537
Multi-family 153,150 141,018 137,254 118,493 112,158 108,618 105,051
Commercial 38,050 41,581 43,069 32,772 34,456 34,738 35,839
Construction 29,558 39,090 28,429 20,861 20,986 17,367 17,263
Land 24,655 23,674 24,765 20,282 20,766 22,253 24,425
---------- --------- --------- --------- --------- --------- ---------
Total real estate loans 3,430,885 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 93,502 90,053 91,915 85,101 83,822 85,690 88,106
Home equity loans 44,987 40,434 42,398 38,695 36,940 34,711 34,447
Other 6,252 6,294 6,015 5,105 6,056 6,157 5,793
---------- --------- --------- --------- --------- --------- ---------
Total consumer loans 144,741 136,781 140,328 128,901 126,818 126,558 128,346
Commercial business lines 1,743 1,780 2,356 2,025 2,059 2,628 2,659
---------- --------- --------- --------- --------- --------- ---------
Total other loans 146,484 138,561 142,684 130,926 128,877 129,186 131,005
---------- --------- --------- --------- --------- --------- ---------
Total loans receivable 3,577,369 3,403,973 3,343,089 2,944,826 2,850,597 2,785,742 2,728,513
Less:
Loans in process 16,828 17,904 10,698 11,222 10,939 7,778 6,683
Unearned discounts, premiums
and deferred loan fees, net (4,603) (3,743) (3,455) (1,224) (817) (402) (772)
Allowance for loan losses 16,978 16,794 16,770 15,808 15,689 15,625 15,475
---------- --------- --------- --------- --------- --------- ---------
Total loans receivable, net 3,548,166 3,373,018 3,319,076 2,919,020 2,824,786 2,762,741 2,707,127
Loans receivable held for sale (100,016) (21,387) (89,406) (23,777) (42,993) (14,008) (6,537)
---------- --------- --------- --------- --------- --------- ---------
Loans receivable, net $3,448,150 3,351,631 3,229,670 2,895,243 2,781,793 2,748,733 2,700,590
========== ========= ========= ========= ========= ========= =========
20
Non-performing assets. The following table sets forth information regarding non-
accrual loans, loans which are 91 days or more delinquent but on which the Bank
is accruing interest, foreclosed real estate and non-accrual investment
securities of the Bank.
At
----------------------------------------------------------------
6/30/99 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 $ 9,472 9,897 10,641 9,430 9,673 8,900 7,039
Accruing loans 91 days or more overdue 1,377 1,743 1,381 624 1,296 2,508 2,071
------- ------ ------ ------ ------ ------ -------
Total 10,849 11,640 12,022 10,054 10,969 11,408 9,110
------- ------ ------ ------ ------ ------ -------
Commercial real estate, construction and land loans:
Non-accrual loans 926 1,744 1,284 1,126 1,259 736 1,240
Accruing loans 91 days or more overdue - - - - - 33 -
------- ------ ------ ------ ------ ------ -------
Total 926 1,744 1,284 1,126 1,259 769 1,240
------- ------ ------ ------ ------ ------ -------
Other loans:
Non-accrual loans 1,239 1,166 721 178 286 210 181
Accruing loans 91 days or more overdue 42 16 22 1 11 96 124
------- ------ ------ ------ ------ ------ -------
Total 1,281 1,182 743 179 297 306 305
------- ------ ------ ------ ------ ------ -------
Total non-performing loans:
Non-accrual loans 11,637 12,807 12,646 10,734 11,218 9,846 8,460
Accruing loans 91 days or more overdue 1,419 1,759 1,403 625 1,307 2,637 2,195
------- ------ ------ ------ ------ ------ -------
Total $13,056 14,566 14,049 11,359 12,525 12,483 10,655
======= ====== ====== ====== ====== ====== ======
Non-accrual loans to total loans .34% .38 .39 .37 .40 .36 .31
Accruing loans 91 days or more overdue to total loans .04 .05 .04 .02 .05 .09 .08
------- ------ ------ ------ ------ ------ -------
Non-performing loans to total loans .38% .43 .43 .39 .45 .45 .39
======= ====== ====== ====== ====== ====== ======
Foreclosed real estate (net of related reserves):
One- to four-family $ 2,404 2,307 1,736 1,030 266 361 489
Commercial, construction and land 6,624 6,621 6,621 6,500 6,500 6,500 -
------- ------ ------ ------ ------ ------ -------
Total $ 9,028 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 .63% .69 .73 .64 .69 .70 .41
======= ====== ====== ====== ====== ====== ======
Total non-performing assets $22,084 23,494 22,406 18,889 19,291 19,344 11,144
======= ====== ====== ====== ====== ====== ======
Total non-performing assets to total assets .52% .57 .54 .52 .54 .55 .32
======= ====== ====== ====== ====== ====== ======
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 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, due and renewable on April 30, 2000. At June 30, 1999, the
Company had $10.0 million outstanding under this line of credit. For the six
month period ended June 30, 1999, the Company received $25.0 million in
dividends from the Bank and declared common stock dividends of $.16 per share.
The Bank's principal sources of funds are deposits, advances from the FHLB
of Chicago, reverse repurchase agreements, principal repayments on loans and
mortgage-backed securities, proceeds from the sale of loans and funds provided
by operations. While scheduled loan and mortgage-backed securities amortization
and maturing interest-bearing deposits are a relatively predictable source of
funds, deposit flows and loan and mortgage-backed securities prepayments are
greatly influenced by economic conditions, the general level of interest rates
and competition. The Bank utilizes particular sources of funds based on
comparative costs and availability. The Bank generally manages the pricing of
its deposits to maintain a steady deposit balance, but has from time to time
decided not to pay rates on deposits as high as its competition, and when
necessary, to supplement deposits with longer term and/or less expensive
alternative sources of funds. During the current six month period the Bank
borrowed $280.0 million of primarily fixed-rate and variable rate FHLB of
Chicago advances and repaid $145.0 million.
The Bank is required by regulation to maintain specific minimum levels of
liquid investments. Regulations currently in effect require the Bank to maintain
liquid assets at least equal to 4.0% of the sum of its average daily balance of
net withdrawable accounts and borrowed funds due in one year or less. This
regulatory requirement may be changed from time to time to reflect current
economic conditions. During the quarter ended June 30, 1999, the Bank's average
liquidity ratio was 6.01%. At June 30, 1999, total liquidity was $152.0 million,
or 5.83%, which was $47.6 million in excess of the 4.0% regulatory requirement.
During the six months ended June 30, 1999, the Bank originated and
purchased loans totaling $855.1 million compared with $806.9 million during the
same period a year ago. Loan sales and swaps for the six months ended June 30,
1999, were $211.9 million, compared to $198.6 million for the prior year period.
The Bank has outstanding commitments to originate and purchase loans of $398.6
million and commitments to sell or swap loans of $105.7 million at June 30,
1999.
22
Asset/Liability Management
The Bank's overall asset/liability management strategy is directed toward
reducing the Bank's exposure to interest rate risk over time in changing
interest rate environments. Asset/liability management is a daily function of
the Bank's management due to continual fluctuations in interest rates and
financial markets.
As part of its asset/liability strategy, the Bank has implemented a policy
to maintain its cumulative one-year hedged interest sensitivity gap ratio within
a range of (15)% to 15% of total assets, which helps the Bank to maintain a more
stable net interest rate spread in various interest rate environments. The
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. As a result of the recent rise in interest rates and the Bank's higher
level of interest rate and market risk exposure to further increases in interest
rates, the Bank has discontinued the origination of prepayment protected fixed-
rate mortgage loans for its portfolio. See "Item 3. Quantitative and Qualitative
Disclosures about Market Risk."
In conjunction with the strategy discussed above, management has also
hedged the Bank's exposure to interest rate risk primarily by committing to sell
fixed-rate mortgage loans for future delivery. Under these commitments, the Bank
agrees to sell fixed-rate loans at a specified price and at a specified future
date. The sale of fixed-rate mortgage loans for future delivery has enabled the
Bank to continue to originate new mortgage loans, and to generate gains on sale
of these loans as well as loan servicing fee income, while maintaining its gap
ratio within the parameters discussed above. Most of these forward sale
commitments are conducted with FNMA and FHLMC with respect to loans that conform
to the requirements of these government agencies. The forward commitment of
mortgage loans presents a risk to the Bank if the Bank is not able to deliver
the mortgage loans by the commitment expiration date. If this should occur, the
Bank would be required to pay a fee to the buyer. The Bank attempts to mitigate
this risk by charging potential retail borrowers a 1% fee to fix the interest
rate, or by requiring the interest rate to float at market rates until shortly
before closing. In its wholesale lending operation, there is more risk due to
the competitive inability to charge a rate lock fee to the mortgage brokers,
which the Bank tries to offset by using higher assumed fallout rates. In
addition, the Bank uses U.S. Treasury bond futures contracts to hedge some of
the mortgage pipeline exposure. These futures contracts are used to hedge
mortgage loan production in those circumstances where loans are not sold forward
as described above.
23
The table below sets forth the scheduled repricing or maturity of the
Bank's assets and liabilities at June 30, 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 June 30, 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 June 30, 1999
-------------------------------------------------------------------------
More Than More Than More Than
6 Months 6 Months 1 Year 3 Years to More Than
or Less to 1 Year to 3 Years 5 Years 5 Years Total
------------ ---------- ---------- ------------ ---------- ---------
(In thousands)
Interest-earning assets:
Loans receivable $ 607,753 392,248 1,228,274 345,568 991,301 3,565,144
Mortgage-backed securities 85,082 13,826 19,273 14,594 18,853 151,628
Interest-bearing deposits 20,824 - - - - 20,824
Federal funds sold 39,310 - - - - 39,310
Investment securities (1) 168,613 20,351 19,140 15,311 46,376 269,791
---------- -------- --------- ------- --------- ---------
Total interest-earning assets 921,582 426,425 1,266,687 375,473 1,056,530 4,046,697
Impact of hedging activity (2) 100,016 - - - (100,016) -
---------- -------- --------- ------- --------- ---------
Total net interest-earning assets adjusted
for impact of hedging activities 1,021,598 426,425 1,266,687 375,473 956,514 4,046,697
---------- -------- --------- ------- --------- ---------
Interest-bearing liabilities:
NOW and checking accounts 17,388 15,924 58,282 36,203 76,932 204,729
Money market accounts 162,028 - - - - 162,028
Passbook accounts 63,225 57,853 211,738 131,526 279,494 743,836
Certificate accounts 838,812 355,311 192,647 48,634 11,210 1,446,614
FHLB advances 215,000 40,000 365,000 80,500 410,000 1,110,500
Other borrowings 69,000 - - - - 69,000
---------- -------- --------- ------- --------- ---------
Total interest-bearing liabilities 1,365,453 469,088 827,667 296,863 777,636 3,736,707
---------- -------- --------- ------- --------- ---------
Interest sensitivity gap $ (343,855) (42,663) 439,020 78,610 178,878 309,990
========== ======== ========= ======= ========= =========
Cumulative gap $ (343,855) (386,518) 52,502 131,112 309,990
========== ======== ========= ======= =========
Cumulative gap assets as a percentage
of total assets (8.04)% (9.04) 1.23 3.07 7.25
Cumulative net interest-earning assets as
a percentage of interest-bearing liabilities 74.82% 78.93 101.97 104.43 108.30
- ------------------------------------------------
(1) Includes $55.5 million of stock in FHLB of Chicago in 6 months or less.
(2) Represents forward commitments to sell long-term fixed-rate mortgage loans.
24
Average 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 June 30, 1999 includes
fees which are considered adjustments to yield.
Three Months Ended June 30,
-------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $3,457,332 61,352 7.10% $2,802,948 52,551 7.50%
Mortgage-backed securities 155,320 2,399 6.18 221,388 3,589 6.48
Interest-bearing deposits (1) 25,429 465 7.23 34,661 602 6.87
Federal funds sold (1) 36,212 696 7.60 91,255 1,593 6.91
Investment securities (2) 260,251 3,936 5.98 229,664 3,518 6.06
---------- ------- ---------- -------
Total interest-earning assets 3,934,544 68,848 6.99 3,379,916 61,853 7.31
Non-interest earning assets 222,582 163,377
---------- ----------
Total assets $4,157,126 $3,543,293
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,554,424 24,585 3.86 2,246,770 24,144 4.31
Borrowed funds 1,071,918 15,267 5.63 853,977 13,461 6.24
---------- ------- ---------- -------
Total interest-bearing liabilities 3,626,342 39,852 4.38 3,100,747 37,605 4.84
------- ------ ------- ------
Non-interest bearing deposits 109,358 92,692
Other liabilities 83,580 74,063
---------- ----------
Total liabilities 3,819,280 3,267,502
Stockholders' equity 337,846 275,791
---------- ----------
Liabilities and stockholders' equity $4,157,126 $3,543,293
========== ==========
Net interest income/interest rate spread $28,996 2.61% $24,248 2.47%
======= ====== ======= ======
Net earning assets/net yield on average
interest-earning assets $ 308,202 2.95% $ 279,169 2.87%
========== ====== ========== ======
Ratio of interest-earning assets to
interest-bearing liabilities 108.50% 109.00%
====== ======
Six Months Ended June 30,
-------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $3,410,019 121,045 7.10% $2,778,660 104,368 7.51%
Mortgage-backed securities 162,458 5,039 6.20 236,760 7,765 6.56
Interest-bearing deposits (1) 27,804 1,008 7.21 41,940 1,435 6.81
Federal funds sold (1) 35,052 1,366 7.75 86,690 2,989 6.86
Investment securities (2) 262,781 7,825 5.92 209,498 6,624 6.29
---------- ------- ---------- -------
Total interest-earning assets 3,898,114 136,283 6.99 3,353,548 123,181 7.34
Non-interest earning assets 221,798 164,600
---------- ----------
Total assets $4,119,912 $3,518,148
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,544,095 49,166 3.90 2,244,777 48,395 4.35
Borrowed funds 1,045,301 29,721 5.65 840,013 26,505 6.28
---------- ------- ---------- -------
Total interest-bearing liabilities 3,589,396 78,887 4.41 3,084,790 74,900 4.87
------- ------ ------- ------
Non-interest bearing deposits 106,568 89,737
Other liabilities 85,226 71,820
---------- ----------
Total liabilities 3,781,190 3,246,347
Stockholders' equity 338,722 271,801
---------- ----------
Liabilities and stockholders' equity $4,119,912 $3,518,148
========== ==========
Net interest income/interest rate spread $ 57,396 2.58% $ 48,281 2.47%
======== ====== ======== ======
Net earning assets/net yield on average
interest-earning assets $ 308,718 2.94% $ 268,758 2.88%
========== ====== ========== ======
Ratio of interest-earning assets to
interest-bearing liabilities 108.60% 108.71%
====== ======
At June 30, 1999
----------------------
Yield/
Balance Cost
---------- ------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $3,565,144 7.12%
Mortgage-backed securities 151,628 6.39
Interest-bearing deposits (1) 20,824 4.96
Federal funds sold (1) 39,310 4.76
Investment securities (2) 269,791 6.02
----------
Total interest-earning assets 4,046,697 6.98
Non-interest earning assets 229,967
----------
Total assets $4,276,664
==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,557,207 3.95%
Borrowed funds 1,179,500 5.78
----------
Total interest-bearing liabilities 3,736,707 4.52
------
Non-interest bearing deposits 112,679
Other liabilities 83,331
----------
Total liabilities 3,932,717
Stockholders' equity 343,947
----------
Liabilities and stockholders' equity $4,276,664
==========
Net interest income/interest rate spread 2.46%
======
Net earning assets/net yield on average
interest-earning assets $ 309,990 N/A
========== ======
Ratio of interest-earning assets to
interest-bearing liabilities 108.30%
======
- ------------
(1) Includes pro-rata share of interest income received on outstanding drafts
payable.
(2) Income and yields are stated on a taxable equivalent basis.
25
Rate/Volume Analysis of Net Interest Income
The following table describes the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated, on a taxable equivalent basis. Information is provided in
each category with respect to (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate), (ii) changes attributable to
changes in rates (changes in rates multiplied by prior volume), and (iii) the
net change. Changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
Compared to Compared to
June 30, 1998 June 30, 1998
Increase (Decrease) Increase (Decrease)
-------------------------------------- -------------------------------------
Volume Rate Net Volume Rate Net
------------ ----------- ----------- ----------- ----------- -----------
(In thousands)
Interest-earning assets:
Loans receivable $11,736 (2,935) 8,801 22,672 (5,995) 16,677
Mortgage-backed securities (1,027) (163) (1,190) (2,324) (402) (2,726)
Interest-bearing deposits (167) 30 (137) (507) 80 (427)
Federal funds sold (1,041) 144 (897) (1,967) 344 (1,623)
Investment securities 462 (44) 418 1,601 (400) 1,201
------- ------ ------ ------ ------ ------
Total $ 9,963 (2,968) 6,995 19,475 (6,373) 13,102
------- ------ ------ ------ ------ ------
Interest-bearing liabilities:
Deposits 3,118 (2,677) 441 6,123 (5,352) 771
Borrowed funds 3,181 (1,375) 1,806 6,006 (2,790) 3,216
------- ------ ------ ------ ------ ------
Total 6,299 (4,052) 2,247 12,129 (8,142) 3,987
------- ------ ------ ------ ------ ------
Net change in net interest income $ 3,664 1,084 4,748 7,346 1,769 9,115
======= ====== ====== ====== ====== ======
Comparison of the Results of Operations for the Three Months Ended June 30, 1999
and 1998
General - Net income for the three months ended June 30, 1999 was $13.2
million, or $.53 per diluted share, compared to net income of $9.8 million, or
$.42 per diluted share for the three months ended June 30, 1998, an increase of
$3.5 million or 35.4%. The increase in earnings was primarily due to a $2.6
million increase in income from real estate operations, the impact of the Westco
acquisition which closed on December 31, 1998 and is being accounted for under
the purchase method of accounting and higher deposit account service charges.
Net interest income - Net interest income was $29.0 million for the current
quarter, compared to $24.2 million for the quarter ended June 30, 1998, an
increase of $4.8 million. The increase is primarily due to the Company's
acquisition of Westco on December 31, 1998, which increased the Company's
interest-earning asset base. In addition, average net interest-earning assets
increased to $308.2 million for the three months ended June 30, 1999, compared
to $279.2 million for the three months ended June 30, 1998, while the Company's
net interest margin increased to 2.95% for the current three month period,
compared to 2.87% for the prior year period.
26
Interest income on loans receivable increased $8.8 million as a result of a
$654.4 million increase in average loans receivable, while the average yield on
loans receivable decreased 40 basis points. Loans receivable increased $245.2
million due to the acquisition of Westco 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
$1.2 million to $2.4 million for the current quarter, due to a $66.1 million
decrease in average balances. This decline in average balance is a result of
higher prepayments. Interest income on investment securities increased $421,000
to $3.9 million, due to the increase in average balance of $30.6 million.
Interest expense on deposit accounts increased $441,000 to $24.6 million,
due to an increase in average deposits of $307.7 million during the current
three month period, offset by a 45 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 Westco, with the remainder
of the increase primarily due to an increase in money market and passbook
balances.
Interest expense on borrowed funds increased $1.8 million to $15.3 million,
as a result of a $217.9 million increase in the average balance of borrowed
funds, offset by a 61 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 $255.3 million, an increase in other borrowings of $1.2
million, offset by a decrease in average reverse repurchase agreements of $18.5
million and the payoff of the Company's 8.32% subordinated capital note since
June 30, 1998. The reduction in average cost is due to maturing FHLB advances
being refinanced at lower interest rates.
Recent increases in U. S. Treasury rates and widening of credit spreads, as
well as uncertainty regarding potential additional Federal Reserve Board
interest rate increases, is expected to have a negative impact on the Bank's net
interest margin. In addition, competition for deposits has increased in the last
few months, as retail deposits have become a cheaper funding source than
wholesale borrowings. The Bank has recently discontinued the origination of
prepayment protected fixed-rate mortgage loans for portfolio and is currently
emphasizing the origination of adjustable-rate loans which carry lower interest
rates. See "Item 3. Quantitative and Qualitative Disclosures about Market Risk."
The net interest margin will also be pressured by the expected repricing of
maturing certificates of deposits and FHLB advances at higher 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
$66,000, compared to net charges-offs of $136,000 for the three months ended
June 30, 1998. At June 30, 1999, the Bank's allowance for loan losses was $17.0
million, which equaled .49% of total loans receivable, compared to .52% at
December 31, 1998. The ratio of the allowance for loan losses to non-performing
loans was 130.0% at June 30, 1999 compared to 119.4% at December 31, 1998 and
125.3% at June 30, 1998.
Non-interest income - Non-interest income increased 41.8% to $9.7 million
for the three months ended June 30, 1999, compared to $6.9 million for the three
months ended June 30, 1998.
Gain on sale of loans and mortgage-backed securities decreased to a
combined $414,000 for the three months ended June 30, 1999, compared to a
combined $930,000 for the three months ended June 30, 1998. Loan sale volume was
$72.7 million, compared to $124.0 million for the three months ended June 30,
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 June 30, 1999, no loans were swapped and
sold, compared to $10.7 million during the three months ended June 30, 1998.
27
Income from real estate operations increased $2.6 million to $3.9 million
for the three months ended June 30, 1999. A summary of income from real estate
operations is as follows:
Three Months Ended June 30,
-------------------------------
1999 1998
------------- -------------
Pre-tax
# of Pre-tax # of Income
Lots Income Lots (Loss)
---- ------- ---- -------
(dollars in thousands)
Tallgrass of Naperville 94 $ 694 - $ -
Creekside of Remington 42 172 7 9
Reigate Woods 2 82 7 332
Harmony Grove 2 57 64 867
Woodbridge - 2,912 5 98
Fields of Ambria - - 1 (86)
Clow Creek Farm - - 2 75
Woods of Rivermist - - 1 3
--- ------ -- ------
140 $3,917 87 $1,298
=== ====== == ======
The Company sold 94 lots in its newest subdivision, Tallgrass of Naperville,
during the three months ended June 30, 1999. There are 30 lots under contract in
this 926-lot subdivision at June 30, 1999. The Company expects to hold a pre-
sale of the 346 lots of Unit 2 of Tallgrass to builders in August 1999, which
will likely increase pending sales during the third quarter with closings
expected to commence late in the fourth quarter. The Company entered into a sale
agreement with a third party for the remaining 117 lots of the Creekside
subdivision. In April 1999, 42 lots were sold. A second sale to this third party
for the remaining 75 lots is scheduled to close April 2000 at a nominal profit
to the Company. The 85-lot Reigate Woods subdivision had two sales during the
current quarter, with 16 homesites remaining. Five homesites are under contract
as of June 30, 1999. The Woodbridge project currently consists of a 48-acre
commercial parcel. During the current quarter, the Company sold a 26-acre parcel
at a pre-tax profit of $2.9 million and the remaining 22 acres are under
contract with closings expected over the next twelve months at estimated pre-tax
profits of $3.3 million.
Deposit account service charges increased $462,000, or 22.2% to $2.5
million for the three months ended June 30, 1999, primarily due to continued
growth in the number of checking accounts and related fees. At June 30, 1999,
the Bank had approximately 97,800 checking accounts, compared to 86,700 at June
30, 1998.
Brokerage commissions decreased $212,000, or 25.3% for the three months
ended June 30, 1999 compared to the record prior year quarter, due to attrition
in its sales force. Although the Bank has rehired these positions, it is
expected that revenue from brokerage operations will remain softer than prior
years' results until the new brokers are fully integrated into the Bank's
brokerage operation.
Loan servicing fee income increased $261,000 to $654,000, for the three
months ended June 30, 1999. The increase was primarily due to a $250,000
recovery of the $1.3 million of mortgage servicing impairment writedowns
recognized by the Bank in the third and fourth quarter of 1998. The recovery was
recognized due to lower actual prepayments over the past six months, and
expected slower prepayments in the future due to higher long-term interest
rates. The average balance of loans serviced for others increased 12.4% to $1.12
billion for the current three-month period, compared to $1.00 billion for the
prior year period. Amortization of servicing rights equaled $324,000 for the
three months ended June 30, 1999, compared to $267,000 for the prior three-month
period.
28
Other non-interest income increased $233,000, or 19.0% to $1.5 million for
the three months ended June 30, 1999, due to increased income from bank-owned
life insurance and fee income related to loan operations.
Non-interest expense - Non-interest expense increased $1.6 million or 11.0%
to $16.5 million for the three months ended June 30, 1999.
Compensation and benefits increased 5.9% or $514,000 to $9.3 million for
the three months ended June 30, 1999, compared to the three months ended June
30, 1998. The increase is primarily due to increased compensation and benefit
costs due to increased staff resulting from the Westco acquisition, and normal
year-end salary increases for existing staff.
Occupancy expense increased $124,000, or 7.3% to $1.8 million for the three
months ended June 30, 1999 compared to the prior year period, primarily due to
the addition of Westco and the openings of a new branch and drive-up facility.
Advertising and promotion expense increased $239,000 for the three months
ended June 30, 1999 compared to the prior year. During the current quarter, the
Company initiated a radio-based marketing campaign designed to enhance the
Company's brand awareness. The Company intends to market its brand for the
foreseeable future, and will likely incur increased advertising and promotion
expenses for the remainder of 1999 when compared to similar expenditures for
1998.
Amortization of intangibles increased $350,000 to $977,000 for the three
months ended June 30, 1999 due to the acquisition of Westco which is being
accounted for using the purchase method of accounting.
Income taxes - For the three months ended June 30, 1999, income tax expense
totaled $8.7 million, or an effective income tax rate of 39.6%, compared to $6.2
million, or an effective income tax rate of 38.8%, for the three months ended
June 30, 1998.
Comparison of the Six Months Ended June 30, 1999 and 1998
General - Net income for the six months ended June 30, 1999 was $24.9
million, or $.99 per diluted share, compared to $18.9 million, or $.81 per
diluted share, an increase of $6.0 million, or 22.1% on a per share basis.
Net interest income - Net interest income for the six months ended June 30,
1999 was $78.9 million compared to $74.9 million for the six months ended June
30, 1998, an increase of $4.0 million. The increase is a function of the growth
in average interest-earning assets of $544.6 million, of which approximately
$307.7 million is attributable to the purchase of Westco, as well as an increase
in the net interest margin to 2.94% for the six months ended June 30, 1999,
compared to 2.88% for the prior year's six month period.
Interest income on interest-earning assets increased $13.1 million during
the six months ended June 30, 1999. Of this increase, $16.7 million is
attributable to loans receivable. The Bank's average balance of loans receivable
increased $631.4 million during the current period, while the average yield on
loans receivable decreased 41 basis points. The decrease in average yield is
primarily due to heavy refinance activity in the Bank's loan portfolio. The $2.7
million decrease in interest income on mortgage-backed securities is due to a
$74.3 million decrease in average balance primarily due to higher prepayments,
and the impact of the sale of the Bank's 100% beneficial interest in its two
special-purpose finance subsidiaries. Interest income on investment securities
increased $1.2 million to $7.8 million for the six months ended June 30, 1999,
due to the increase of $53.3 million in the average balance, offset by a
decrease in the average yield of 37 basis points.
29
Interest expense on interest-bearing liabilities increased $4.0 million
during the six months ended June 30, 1999. Interest expense on savings deposits
increased $771,000, primarily due to an increase in the average deposits of
$299.3 million offset by a 45 basis point decrease in average cost. Interest
expense on borrowed funds increased $3.2 million, due primarily to a $205.3
million increase in the average balance of borrowed funds offset by a 63 basis
point decrease in average cost. The Bank has been utilizing three to five year
fixed-rate FHLB of Chicago advances to fund its increase in loans receivable.
The decrease in the average cost is primarily due to the maturities of higher-
cost advances and the reduction in CMO bonds payable with an average cost of
9.46% due to the sale of the Bank's 100% beneficial interest in its two special-
purpose finance subsidiaries.
Provision for loan losses - The Bank provided $500,000 for possible loan
losses for the six months ended June 30, 1999 compared to $400,000 for the six
months ended June 30, 1998. Net charge-offs were $292,000 for the current six
month period compared to $186,000 for the prior six month period. At June 30,
1999, the Bank's allowance for loan losses was $17.0 million, which was .49% of
total loans receivable, compared to .52% at December 31, 1998. The ratio of
allowance for loan losses to non-performing loans was 130.04% at June 30, 1999
compared to 119.37% at December 31, 1998, and 125.26% at June 30, 1998.
Non-interest income - Non-interest income increased $4.8 million to $17.1
million for the six months ended June 30, 1999, compared to $12.3 million for
the six months ended June 30, 1998.
Gain on sale of loans receivable and mortgage-backed securities were a
combined $1.9 million for the six months ended June 30, 1999, compared to a gain
of $1.4 million for the six months ended June 30, 1998, an increase of $497,000.
Loan sales were $211.1 million during the current period compared to $183.4
million in the prior six month period, due to increased loan volume, and a
greater percentage of loan originations being long-term fixed-rate, which the
Bank usually prefers to sell to minimize interest-rate risk. During the current
six month period, the Bank swapped and sold $753,000 of current loan
originations compared to $15.1 million in the prior six month period.
During the current six months, the Company recognized gains on the sale of
investment securities of $538,000, compared to $398,000 for the previous six-
month period. The gains are primarily from the sale of asset-backed securities
and to a lesser extent, marketable equity securities.
Income from real estate operations was $4.5 million for the six months
ended June 30, 1999, compared to income of $2.1 million for the six months ended
June 30, 1998, an increase of $2.4 million.
Six Months Ended June 30,
--------------------------------------------------
1999 1998
------------------- --------------------
# of # of Income
Lots Income Lots (loss)
---- ------ ---- ------
(dollars in thousands)
Tallgrass of Naperville 132 $ 896 -- $ --
Harmony Grove 7 380 128 1,561
Reigate Woods 5 217 7 362
Creekside of Remington 42 172 9 10
Woodbridge -- 2,873 11 100
Fields of Ambria -- -- 3 (97)
Clow Creek Farm -- -- 4 160
Woods of Rivermist -- -- 1 3
--- ------ --- ------
186 $4,538 163 $2,099
=== ====== === ======
The Company sold 132 lot sales in its newest subdivision, Tallgrass of
Naperville during the six months ended June 30, 1999. There are 30 lots under
contract in this 926-lot subdivision at June 30, 1999. The
30
Company expects to hold a pre-sale for the 346 lots of Unit 2 of Tallgrass to
builders in late August 1999, which will likely increase pending sales during
the third quarter with closings expected to commence late in the fourth quarter.
The large decrease in Harmony Grove lot sales is due to the completion of the
project during the current six-month period. The 85-lot Reigate Woods
subdivision had five sales during the current six months. A total of 16
homesites remain unsold, with five homesites under contract at June 30, 1999.
The Company entered into a sale agreement with a third party for the remaining
117 lots of the Creekside subdivision. In April, 1999, 42 lots were sold. A
second sale to this third party for the remaining 75 lots is scheduled to close
in April 2000 at a nominal profit to the Company.
The Woodbridge project currently consists of a 48-acre commercial parcel.
During the current quarter, the Company sold a 26-acre parcel at a pre-tax
profit of $2.9 million and the remaining 22 acres, which consist of six
individual parcels, are under contract with closings expected over the next
twelve months.
Loan servicing fee income increased 36.2%, or $274,000 to $1.0 million for
the six months ended June 30, 1999. The average balance of loans serviced for
others increased 12.0% to $1.11 billion for the current six-month period,
compared to $991.0 million in the prior six-month period. Loan servicing fee
income includes a $250,000 recovery of the $1.3 million of mortgage servicing
impairment writedowns recognized in the third and fourth quarter of 1998.
Amortization of purchased loan servicing rights totaled $667,000 for the current
six-month period, compared to $545,000 for the prior six-month period.
Deposit account service charges increased $914,000 or 23.9% to $4.7 million
for the six months ended June 30, 1999, due to an increase in the number of
checking accounts and related fees. Brokerage commissions decreased $290,000 or
19.2% for the six months ended June 30, 1999 compared to the prior year period.
Other non-interest income increased $746,000 or 32.9% to $3.0 million for
the six months ended June 30, 1999 primarily due to income from bank-owned life
insurance, as well as fee income from loan operations.
Non-interest expense - Non-interest expense for the six months ended June
30, 1999 increased $3.4 million or 11.6% to $32.7 million compared to $29.3
million for the six months ended June 30, 1998.
Compensation and benefits increased $1.5 million, or 8.6% for the six
months ended June 30, 1999, to $18.7 million, primarily due to normal salary
increases and increased staffing resulting from the acquisition of Westco.
Occupancy expense increased $279,000, or 8.3% to $3.6 million for the six
months ended June 30, 1999, primarily due to the acquisition of Westco and
opening of a new branch and drive-up facility.
Advertising and promotion expense increased $118,000 for the six months
ended June 30, 1999 compared to the prior year. During the current period, the
Company initiated a radio-based marketing campaign designed to enhance the
Company's brand awareness.
Amortization of intangibles increased $699,000 to $2.0 million for the six
months ended June 30, 1999 due to the purchase of Westco.
Income taxes - The Company recorded a provision for income taxes of $16.3
million for the six months ended June 30, 1999, or an effective income tax rate
of 39.5%, compared to $11.9 million for the six months ended June 30, 1998, or
an effective income tax rate of 38.5%.
31
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A comprehensive qualitative and quantatative analysis regarding market risk
is disclosed in the Company's December 31, 1998 Form 10-K. Interest-rate risk is
the most significant market risk affecting the Company and the Bank, and
normally rises in periods of material fluctuations in U.S. Treasury rates. Since
December 31, 1998, the six-month Treasury bill has increased 50 bps to 5.03%,
while the ten-year Treasury bond has increased 114 bps to 5.79% as of June 30,
1999. This movement in interest rates, coupled with the Bank's recent strategy
of investing in long-term prepayment protected fixed-rate mortgage loans funded
with longer-term fixed-rate FHLB of Chicago advances has altered the Bank's one-
year gap ratio, as well as its NPV ratio since December 31, 1998. See "Item 2.
Asset/Liability Management."
At June 30, 1999, the Company's cumulative one-year interest sensitivity
gap moved to (9.04)% from (4.23)% at December 31, 1998. The increase in the
negative gap, makes the Company increasingly susceptible to declines in net
interest income during a period of rising interest rates. The change in the one
year gap is due to a number of factors, including prepayments in the Bank's
purchased adjustable-rate mortgage portfolio being reinvested into prepayment
protected fixed-rate mortgage loans and the Company's stock repurchase program,
which was funded during the current six-month period primarily with short-term
liquidity. At June 30, 1999, the Bank has $760.9 million of prepayment protected
fixed-rate mortgage loans in its portfolio, or 21.3% of total loans at an
average interest rate of 6.79%. During a period of rising interest rates, long-
term fixed-rate loans (with or without prepayment penalty clauses) tend to
prepay at a slower pace than during stable or falling interest rates, which does
not allow the Bank to reinvest into higher yielding assets. At June 30, 1999,
the Bank had $1.0 billion of fixed-rate FHLB of Chicago advances at an average
cost of 5.87%, of which $435.0 million with a weighted-average rate of 5.20%
contain call provisions at the discretion of the issuer. The portfolio of fixed-
rate FHLB of Chicago advances has a weighted-average term to maturity of 55
months compared to a weighted-average term to call of 32 months. At June 30,
1999, the Bank has $50.0 million of fixed-rate FHLB advances at a weighted
average rate of 5.38% callable by the issuer in calendar 2000, and $60.0 million
of fixed-rate FHLB advances at a weighted average rate of 5.25% callable by the
issuer in calendar 2001. Call provisions are more likely to be exercised at the
discretion of the issuer during periods of increasing interest rates, which
could require the Bank to refinance these borrowings at higher interest rates
sooner than their respective maturity dates. The Bank pays a lower interest rate
on such borrowings in exchange for the call provisions.
As a result of the change in market risk during the second quarter, the
Bank discontinued its origination of long-term prepayment protected fixed-rate
mortgage loans for portfolio purposes. The Bank is emphasizing the origination
of adjustable-rate mortgage loans for portfolio, which generally earn a lower
interest rate than long-term fixed-rate mortgage loans and is attempting to
extend maturities on certificate of deposit accounts, both of which would have
the impact of reducing the Company's negative cumulative one-year sensitivity
gap.
32
Interest rate sensitivity analysis is used to measure the Bank's interest
rate risk by calculating the estimated change in the NPV of its cash flows from
interest sensitive assets and liabilities, as well as certain off-balance sheet
items, in the event of a series of sudden and sustained changes in interest
rates ranging from 100 to 300 basis points. Management assumes that a 200 basis
point movement up or down is considered reasonable and plausible for purposes of
managing its interest-rate risk on a day-to-day basis. NPV is the market value
of portfolio equity and is computed as the difference between the market value
of assets and the market value of liabilities, adjusted for the value of off-
balance sheet items. The table below shows the change in NPV for the various
rate shocks as of June 30, 1999 and December 31, 1998.
Estimated Increase Percentage Increase
Estimated NPV (Decrease) in NPV (Decrease) in NPV
Change in ------------------ -------------------- ---------------------
Interest rate 6/30/99 12/31/98 6/30/99 12/31/98 6/30/99 12/31/98
- -------------------------- -------- -------- -------- -------- ------- --------
(Dollars in thousands)
200 basis point rise $226,801 272,711 (118,464) (88,007) (34)% (24)
100 basis point rise 293,342 323,955 (51,923) (36,763) (15) (10)
Base scenario 345,265 360,718 - - - -
100 basis point decline 374,239 378,655 28,974 17,936 8 5
200 basis point decline 386,002 382,975 40,737 22,257 12 6
Primarily as a result of increased long-term interest rates, the Bank's net
portfolio value ("NPV") at June 30, 1999 decreased $15.4 million to $345.3
million from $360.7 million at December 31, 1998. Due to a greater percentage of
the Bank's mortgage loan portfolio being long-term and fixed-rate in nature,
during a period of rising interest rates the Bank's interest-earning assets
would decline in value at a faster pace than fixed-rate interest-bearing
liabilities increase in value.
33
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
Not Applicable
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No. 10. Material Contracts.
(i) MAF Bancorp, Inc. Stock Option Gain Deferral Plan;
(ii) Amendment to MAF Bancorp, Inc. 1990 Incentive Stock Option Plan,
as amended;
(iii) Amendment to MAF Bancorp, Inc. 1993 Amended and Restated
Premium Price Stock Option Plan.
34
(c) Exhibit No. 11. Statement re: Computation of per share earnings
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------- -------------
Net income $13,239,000 $24,918,000
=========== ===========
Weighted average common shares outstanding 24,139,952 24,388,034
=========== ===========
Basic earnings per share $ .55 $ 1.02
=== ====
Weighted average common shares outstanding 24,139,952 24,388,034
Common stock equivalents due to dilutive
effect of stock options 754,176 769,960
----------- -----------
Total weighted average common shares and equivalents
outstanding for diluted computation 24,894,128 25,157,994
=========== ===========
Diluted earnings per share $ .53 $ .99
=== ===
(c) Exhibit No. 27. Financial Data Schedule.
(d) Reports on Form 8-K.
On April 20, 1999, MAF Bancorp, Inc. announced its 1999 first quarter
earnings results.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAF Bancorp. Inc.
-----------------
(Registrant)
Date: August 13, 1999 By: /s/ Allen H. Koranda
--------------- ---------------------
Allen H. Koranda
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
Date: August 13, 1999 By: /s/ Jerry A. Weberling
--------------- -----------------------
Jerry A. Weberling
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer)
36