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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 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 24,056,005 at November 12, 1999.
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MAF BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
Index
-----
Part I. Financial Information Page
- ------- --------------------- ----
Item 1 Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 1999 and December 31, 1998 (unaudited).. 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1999 and 1998 (unaudited)........ 4
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 1999 (unaudited).... 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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........................................... 33
Item 2 Changes in Securities....................................... 33
Item 3 Defaults Upon Senior Securities............................. 33
Item 4 Submission of Matters to a Vote of Security Holders......... 33
Item 5 Other Information........................................... 33
Item 6 Exhibits and Reports on Form 8-K............................ 33
Signature Page.............................................. 34
2
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands)
(unaudited)
September 30, December 31,
1999 1998
------------- ------------
Assets
- ------
Cash and due from banks $ 43,473 53,995
Interest-bearing deposits 17,253 24,564
Federal funds sold 77,004 79,140
Investment securities, at cost (fair value of $12,226 and $12,360) 11,658 11,107
Investment securities available for sale, at fair value 182,141 198,960
Stock in Federal Home Loan Bank of Chicago, at cost 62,275 50,878
Mortgage-backed securities, at amortized cost (fair value of $97,467 and $127,570) 99,381 128,538
Mortgage-backed securities available for sale, at fair value 41,479 55,065
Loans receivable held for sale 13,787 89,406
Loans receivable, net of allowance for losses of $17,012 and $16,770 3,671,171 3,229,670
Accrued interest receivable 23,255 21,545
Foreclosed real estate 7,803 8,357
Real estate held for development or sale 21,956 25,134
Premises and equipment, net 42,031 40,724
Other assets 49,562 41,785
Intangible assets, net of accumulated amortization of $9,576 and $6,671 62,435 62,219
---------- ---------
$4,426,664 4,121,087
========== =========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits $2,693,588 2,656,872
Borrowed funds 1,294,200 1,034,500
Advances by borrowers for taxes and insurance 31,283 30,576
Accrued expenses and other liabilities 57,063 54,143
---------- ---------
Total liabilities 4,076,134 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; 24,266,205 and 24,984,398 shares outstanding 254 254
Additional paid-in capital 194,188 191,473
Retained earnings, substantially restricted 187,403 159,935
Stock in gain deferral plan; 223,453 shares 511 -
Accumulated other comprehensive income (loss) (2,300) 425
Treasury stock, at cost; 1,377,898 and 436,252 shares (29,526) (7,091)
---------- ---------
Total stockholders' equity 350,530 344,996
Commitments and contingencies
---------- ---------
$4,426,664 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 Nine Months Ended
September 30, September 30,
------------------ --------------------
1999 1998 1999 1998
------- ------- -------- --------
Interest income:
Loans receivable $64,505 $53,570 $185,550 $157,938
Mortgage-backed securities 1,557 2,333 5,114 8,042
Mortgage-backed securities available for sale 665 936 2,147 2,992
Investment securities 1,197 872 3,283 2,696
Investment securities available for sale 2,864 2,692 8,529 7,412
Interest-bearing deposits and federal funds sold 1,455 1,711 3,829 6,135
------- ------- -------- --------
Total interest income 72,243 62,114 208,452 185,215
------- ------- -------- --------
Interest expense:
Deposits 24,907 24,150 74,073 72,545
Borrowed funds 17,891 13,818 47,612 40,323
------- ------- -------- --------
Total interest expense 42,798 37,968 121,685 112,868
------- ------- -------- --------
Net interest income 29,445 24,146 86,767 72,347
Provision for loan losses 300 200 800 600
------- ------- -------- --------
Net interest income after provision for loan losses 29,145 23,946 85,967 71,747
------- ------- -------- --------
Non-interest income:
Gain (loss) on sale and writedown of:
Loans receivable 387 862 2,225 2,071
Mortgage-backed securities 77 11 113 179
Investment securities 494 208 1,032 606
Foreclosed real estate (241) 86 (121) 152
Deposit account service charges 2,679 2,337 7,425 6,169
Income from real estate operations 2,478 1,755 7,016 3,854
Brokerage commissions 719 644 1,938 2,153
Loan servicing fee income (loss) 751 (383) 1,781 373
Other 1,275 1,475 4,287 3,741
------- ------- -------- --------
Total non-interest income 8,619 6,995 25,696 19,298
------- ------- -------- --------
Non-interest expense:
Compensation and benefits 9,554 8,764 28,289 26,016
Office occupancy and equipment 1,799 1,679 5,424 5,025
Advertising and promotion 1,049 565 2,404 1,802
Data processing 665 593 1,856 1,689
Federal deposit insurance premiums 390 363 1,187 1,091
Amortization of intangible assets 951 578 2,905 1,833
Other 2,809 2,410 7,856 6,799
------- ------- -------- --------
Total non-interest expense 17,217 14,952 49,921 44,255
------- ------- -------- --------
Income before income taxes 20,547 15,989 61,742 46,790
Income tax expense 7,671 6,128 23,948 17,982
------- ------- -------- --------
Net income $12,876 $ 9,861 $ 37,794 $ 28,808
======= ======= ======== ========
Basic earnings per share $ .53 $ .44 $ 1.55 $ 1.28
======= ======= ======== ========
Diluted earnings per share $ .52 $ .42 $ 1.51 $ 1.23
======= ======= ======== ========
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 Gain
Nine Months Ended Common paid-in Retained comprehensive Deferral Treasury
September 30, 1999 stock capital earnings income(loss) Plan stock Total
- --------------------- ----- ---------- -------- ------------- -------- -------- -------
Balance at December 31, 1998 $254 191,473 159,935 425 - (7,091) 344,996
Comprehensive income: ---- ------- ------- ------- ------ ------- -------
Net income - - 37,794 - - - 37,794
Other comprehensive income (loss), net of tax:
Unrealized holding loss during the period - - - (2,089) - - (2,089)
Less: reclassification adjustment of gains
included in net income - - - (636) - - (636)
---- ------- ------- ------- ------ ------- -------
Total comprehensive income - - 37,794 (2,725) - - 35,069
---- ------- ------- ------- ------ ------- -------
Exercise of 473,745 stock options and
reissuance of treasury stock - - (4,277) - - 5,125 848
Impact of exercise of acquisition
carry-over stock options - 1,703 - - - - 1,703
Purchase of treasury stock - - - - - (26,988) (26,988)
Tax benefits from stock-related compensation - 1,012 - - - - 1,012
Stock issued to gain deferral plan - - 20 - 511 (572) (41)
Cash dividends ($.25 per share) - - (6,069) - - - (6,069)
---- ------- ------- ------- ------ ------- -------
Balance at September 30, 1999 $254 194,188 187,403 (2,300) 511 (29,526) 350,530
==== ======= ======= ======= ====== ======= =======
See accompanying notes to unaudited consolidated financial statements.
5
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Nine Months Ended
September 30,
------------------------
1999 1998
--------- ---------
Operating activities:
Net income $ 37,794 $ 28,808
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,866 2,624
Provision for loan losses 800 600
Deferred income tax (benefit) expense 1,577 (894)
Amortization of goodwill and core deposit intangibles 2,905 1,833
Amortization of premiums, discounts, loan fees and servicing rights 898 1,897
Net gain on sale of loans, mortgage-backed securities,
and real estate held for development or sale (9,354) (6,104)
Gain on sale of investment securities (1,032) (606)
Increase in accrued interest receivable (1,710) (253)
Net increase in other assets and liabilities (6,571) (2,219)
Loans originated for sale (180,456) (240,101)
Loans purchased for sale (21,797) (79,063)
Sale of loans originated and purchased for sale 352,459 302,541
Sale of mortgage-backed securities available for sale 60,943 17,430
--------- ---------
Net cash provided by operating activities 239,322 26,493
--------- ---------
Investing activities:
Loans originated for investment (855,463) (743,930)
Principal repayments on loans receivable 525,799 695,623
Principal repayments on mortgage-backed securities 42,329 64,720
Proceeds from maturities of investment securities available for sale 43,284 102,953
Proceeds from maturities of investment securities held to maturity 10,001 15,000
Proceeds from sale of:
Investment securities available for sale 30,335 12,938
Investments held to maturity -- 912
Real estate held for development or sale 31,652 25,279
Stock in FHLB of Chicago -- 500
Purchases of:
Loans receivable held for investment (251,520) (165,856)
Investment securities available for sale (60,176) (164,631)
Investment securities held to maturity (10,479) (590)
Mortgage-backed securities available for sale -- (9,552)
Stock in FHLB of Chicago (11,397) (9,250)
Bank owned life insurance -- (20,000)
Real estate held for development or sale (13,002) (10,105)
Premises and equipment (4,070) (5,360)
Cash received from assumption of deposits, net 18,734 --
-------- --------
Net cash used in investing activities (503,973) (211,349)
-------- --------
(continued)
6
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Nine Months Ended
September 30,
--------------------------
1999 1998
--------- --------
(Unaudited)
Financing activities:
Proceeds from FHLB of Chicago advances 475,000 210,000
Proceeds from unsecured line of credit 21,000 -
Repayment of FHLB of Chicago advances (205,000) (40,000)
Repayment of unsecured line of credit (21,000) -
Net decrease in other borrowings (10,300) (24,804)
Proceeds from exercise of stock options 786 325
Purchase of treasury stock (26,988) (5,456)
Cash dividends (5,415) (3,701)
Net increase in deposits 15,892 6,773
Decrease in advances by borrowers for taxes and insurance 707 99
-------- -------
Net cash provided by financing activities 244,682 143,236
-------- -------
Decrease in cash and cash equivalents (19,969) (41,620)
-------- -------
Cash and cash equivalents at beginning of period 157,699 146,918
-------- -------
Cash and cash equivalents at end of period 137,730 105,298
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds 120,121 112,478
Income taxes 14,532 16,601
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate 5,045 2,106
Loans receivable swapped into mortgage-backed securities 61,066 17,371
Loans receivable transferred to held for sale 74,379 -
Treasury stock received for option exercises - 79
======== =======
See accompanying notes to unaudited consolidated financial statements.
7
MAF BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Three and Nine Months Ended September 30, 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 nine months ended
September 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
nine month periods ended September 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 September 30, 1999 Three Months Ended September 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 $12,876 24,196,070 $ .53 $9,861 22,577,730 $ .44
======= ====== ====== ======
Effect of dilutive securities:
Stock options 617,358 709,055
---------- ----------
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversions $12,876 24,813,428 $ .52 $9,861 23,286,785 $ .42
======= ========== ====== ====== ========== ======
8
(2) Earnings Per Share (continued)
Nine Months Ended September 30, 1999 Nine Months Ended September 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 $37,794 24,324,046 $1.55 $28,808 22,554,637 $1.28
======= ===== ======= =====
Effect of dilutive securities:
Stock options 719,093 779,772
----------- ----------
Diluted earnings per share -
Income available to common
shareholders plus assumed
conversions $37,794 25,043,139 $1.51 $18,947 23,334,409 $1.23
======= ========== ===== ======= ========== =====
(3) Commitments and Contingencies
At September 30, 1999, the Bank had outstanding commitments to originate
and purchase loans of $405.8 million, of which $181.1 million were fixed-rate
loans, with rates ranging from 6.00% to 8.625%, and $224.7 million were
adjustable-rate loans. At September 30, 1999, commitments to sell loans were
$32.5 million.
At September 30, 1999, the Bank had outstanding standby letters of credit
totaling $16.0 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
$12.4 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 September 30, 1999
--------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 72,458 - (215) 72,243
Interest expense 42,798 215 (215) 42,798
---------- ------ ---- ------------
Net interest income 29,660 (215) - 29,445
Provision for loan losses 300 - - 300
---------- ------ ---- ------------
Net interest income after provision 29,360 (215) - 29,145
Non-interest income 6,141 2,478 - 8,619
Non-interest expense 17,072 145 - 17,217
---------- ------ ---- ------------
Income before income taxes 18,429 2,118 - 20,547
Income tax expense 6,872 799 - 7,671
---------- ------ ---- ------------
Net income $ 11,557 1,319 - 12,876
========== ====== ==== ============
Average assets $ 4,311,181 21,929 - 4,333,110
========== ====== ==== ============
At or For the Three Months Ended September 30, 1998
--------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 62,549 - (435) 62,114
Interest expense 37,968 435 (435) 37,968
---------- ------ ---- ------------
Net interest income 24,581 (435) - 24,146
Provision for loan losses 200 - - 200
---------- ------ ---- ------------
Net interest income after provision 24,381 (435) - 23,946
Non-interest income 5,240 1,755 - 6,995
Non-interest expense 14,829 123 - 14,952
---------- ------ ---- ------------
Income before income taxes 14,792 1,197 - 15,989
Income tax expense 5,668 460 - 6,128
---------- ------ ---- ------------
Net income $ 9,124 737 - 9,861
========== ====== ==== ============
Average assets $3,561,347 26,174 - 3,587,521
========== ====== ==== ============
10
(6) Segment Information (continued)
At or For the Nine Months Ended September 30, 1999
-------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 209,607 -- (1,155) 208,452
Interest expense 121,685 1,155 (1,155) 121,685
---------- ------ ------ ---------
Net interest income 87,922 (1,155) -- 86,767
Provision for loan losses 800 -- -- 800
---------- ------ ------ ---------
Net interest income after provision 87,122 (1,155) -- 85,967
Non-interest income 18,680 7,016 -- 25,696
Non-interest expense 49,331 590 -- 49,921
---------- ------ ------ ---------
Income before income taxes 56,471 5,271 -- 61,742
Income tax expense 21,904 2,044 -- 23,948
---------- ------ ------ ---------
Net income $ 34,567 3,227 -- 37,794
========== ====== ====== =========
Average assets $4,166,294 25,466 -- 4,191,760
========== ====== ====== =========
At or For the Nine Months Ended September 30, 1998
-------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 186,820 -- (1,605) 185,215
Interest expense 112,868 1,605 (1,605) 112,868
---------- ------ ------ ---------
Net interest income 73,952 (1,605) -- 72,347
Provision for loan losses 600 -- -- 600
---------- ------ ------ ---------
Net interest income after provision 73,352 (1,605) -- 71,747
Non-interest income 15,444 3,854 -- 19,298
Non-interest expense 43,725 530 -- 44,255
---------- ------ ------ ---------
Income before income taxes 45,071 1,719 -- 46,790
Income tax expense 17,321 661 -- 17,982
---------- ------ ------ ---------
Net income $ 27,750 1,058 -- 28,808
========== ====== ====== =========
Average assets $3,512,789 28,738 -- 3,541,527
========== ====== ====== =========
(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 25 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"), NW Financial, Inc., and ("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, an investment brokerage operation through its
affiliation with INVEST, a registered broker-dealer and MAF Realty Co., LLC III,
which owns MAF Realty, LLC IV, a real estate investment trust.
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 tax and financial 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.
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 and tested all of these items, and determined that they are Year
2000 compliant.
13
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. 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
September 30, 1999, the Company estimates the incremental cost expended for Year
2000 compliance has amounted to approximately $400,000, 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 has finalized a 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.
The contingency plan includes 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 also has a liquidity and branch cash contingency plan to
address expected potential higher cash withdrawals by customers in light of the
Year 2000 Issue. The plan was 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. To date, the Bank has not experienced a level
of cash withdrawals by customers inconsistent with its normal operations in the
past.
14
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 with respect 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.
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. For the Bank, core capital generally includes common
stockholders' equity (including retained earnings), 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 also required to be deducted in computing core 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 September 30, 1999, the Bank was in compliance with all of its capital
requirements as follows:
September 30, 1999 December 31, 1998
----------------------- -----------------------
Percent of Percent of
Amount Assets Amount Assets
---------- ----------- ---------- -----------
(Dollars in thousands)
Stockholder's equity of the Bank $ 342,874 7.80% $ 341,568 8.36%
========== ===== ========== =====
Tangible capital $ 273,814 6.35% $ 266,793 6.67%
Tangible capital requirement 64,730 1.50 60,009 1.50
---------- ----- ---------- -----
Excess $ 209,084 4.85% $ 206,784 5.17%
========== ===== ========== =====
Core capital $ 273,814 6.35% $ 266,793 6.67%
Core capital requirement 129,460 3.00 120,018 3.00
---------- ----- ---------- -----
Excess $ 144,354 3.35% $ 146,775 3.67%
========== ===== ========== =====
Core and supplementary capital $ 290,826 12.37% $ 283,563 13.42%
Risk-based capital requirement 188,014 8.00 169,051 8.00
---------- ----- ---------- -----
Excess $ 102,812 4.37% $ 114,512 5.42%
========== ===== ========== =====
Total Bank assets $4,393,944 $4,084,110
Adjusted total Bank assets 4,315,332 4,000,600
Total risk-weighted assets 2,428,783 2,196,644
Adjusted total risk-weighted assets 2,350,171 2,113,134
Investment in Bank's real estate subsidiaries 8,853 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:
September 30, December 31,
1999 1998
----------------- --------------
(In thousands)
Stockholder's equity of the Bank $342,874 341,568
Goodwill (55,880) (54,868)
Core deposit intangibles (6,555) (7,351)
Non-permissible subsidiary deduction (8,853) (12,518)
Non-includable purchased mortgage servicing rights (678) (421)
Regulatory capital adjustment for available for sale securities 2,906 383
-------- -------
Tangible and core capital 273,814 266,793
General loan loss reserves 17,012 16,770
-------- -------
Core and supplementary capital $290,826 283,563
======== =======
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 regulatory capital.
16
Changes in Financial Condition
Total assets of the Company were $4.43 billion at September 30, 1999, an
increase of $305.6 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, as well as a decline in mortgage loan
prepayments due to rising interest rates.
Cash and short-term investments totaled a combined $137.7 million at September
30, 1999, a decrease of $20.0 million from the combined balance of $157.7
million at December 31, 1998. The Company used $26.5 million to purchase
1,143,562 shares of common stock into treasury during the current nine month
period.
Investment securities available for sale decreased $16.8 million to $182.1
million at September 30, 1999. The decrease is due to sales of $30.3 million and
maturities of $43.3 million of primarily U.S. Government and agency securities,
offset by purchases of $60.2 million in primarily asset-backed and U.S.
Government and agency securities. The Company recognized a gain of $1.0 million
on the sale of investment securities during the nine months ended September 30,
1999. At September 30, 1999, gross unrealized losses in the available for sale
portfolio were $3.3 million compared to gross unrealized gains of $913,000 at
December 31, 1998.
Mortgage-backed securities classified as held to maturity decreased $29.1
million to $99.4 million at September 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 $13.6 million to $41.5
million at September 30, 1999, primarily due to amortization and prepayments.
Gross unrealized losses in the available for sale portfolio were $470,000 at
September 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 $78.9 million of CMO securities at September 30, 1999,
the majority of which are collateralized by FNMA, FHLMC and GNMA mortgage-backed
securities, and to a lesser extent by whole loans.
Loans receivable, including loans held for sale, increased $365.9 million, or
11.0%, to $3.68 billion at September 30, 1999. The Bank originated $1.31
billion during the nine month period ended September 30, 1999. Offsetting this
increase were amortization and prepayments totaling $525.8 million, as well as
loan sales of $352.3 million. Loans receivable held for sale decreased to $13.8
million as of September 30, 1999, compared to $89.4 million at December 31,
1998.
The allowance for loan losses totaled $17.0 million at September 30, 1999, an
increase of $242,000 from the balance at December 31, 1998, due to a $800,000
provision for loan losses, offset by net charge-offs of $558,000. Charge-offs
for the nine months were primarily on six one- to four-family residences and one
commercial property. The Bank's allowance for loan losses to total loans
outstanding was .46% at September 30, 1999, compared to .52% at December 31,
1998. Non-performing loans decreased $389,000 to $13.7 million at September
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 .37% at September
30, 1999, compared to .43% at December 31, 1998.
17
Foreclosed real estate decreased $554,000 to $7.8 million at September 30,
1999, primarily due to sales of $5.2 million, offset by new single family
foreclosures of $5.0 million and a writedown of a commercial parcel by $350,000.
Real estate held for development or sale decreased $3.2 million to $22.0
million at September 30, 1999. A summary of the carrying value of real estate
held for development or sale is as follows:
September 30, December 31,
1999 1998
------------- ------------
(in thousands)
MAF Developments, Inc.
Tallgrass of Naperville $16,974 17,817
Creekside of Remington 1,544 1,456
Harmony Grove - 6
------- ------
18,518 19,279
------- ------
NW Financial, Inc.
Reigate Woods 3,038 3,419
Woodbridge 400 2,436
------- ------
3,438 5,855
------- ------
$21,956 25,134
======= ======
The decrease in the Tallgrass of Naperville project is primarily due to
continued 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 September 30, 1999, 327 lots are under contract, due to a successful
presale to builders in August 1999. The closings should 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 lots in Harmony Grove during the current nine month period.
The Company sold eight homesites in its Reigate Woods subdivision during the
first nine months of 1999. At September 30, 1999 there are 13 remaining
homesites, with two 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 and two parcels totaling 15 acres were sold during August 1999 at a pre-
tax profit of $2.3 million. The remaining four individual parcels are under
contract with closings expected over the next six months at estimated pre-tax
profits of approximately $1.0 million.
Deposits increased $36.7 million, to $2.69 billion at September 30, 1999,
primarily due to the assumption of $22.2 million in deposits as part of the
purchase of a branch from the Northern Trust Company in September 1999. After
consideration of interest credited to accounts of $72.0 million during the nine
months ended September 30, 1999, actual cash outflows were $56.2 million during
the period.
Borrowed funds, which consist primarily of FHLB of Chicago advances, increased
$259.7 million to $1.29 billion at September 30, 1999. The increase is primarily
attributable to a net $270.0 million increase in FHLB of Chicago borrowings,
offset by a net decrease in reverse repurchase agreements of $10.3 million as of
September 30, 1999.
18
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 September 30, 1999, interest income that would have been
recorded on non-accrual loans (had they been performing according to their
original terms) amounted to $248,000, compared to $214,000 for the three months
ended September 30, 1998.
Delinquent Loans. Delinquencies in the Bank's portfolio at the dates indicated
were as follows:
61-90 Days 91 Days or More
----------------------------------- ---------------------------------------
Principal Principal
Number Balance of Percent Number Balance of Percent
Of Delinquent of Of Delinquent of
Loans Loans Total Loans Loans Total
--------- ------------ ---------- ----------- ------------- -----------
(Dollars in thousands)
September 30, 1999 62 $4,828 .13% 123 $12,321 .33%
== ====== === === ======= ===
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%
== ====== === === ======= ===
19
Loan Portfolio Composition. The following table sets forth the composition of
the Bank's loan portfolio in dollar amounts at the dates indicated:
At
---------------------------------------------------------------------------------
9/30/99 6/30/99 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98
--------- --------- --------- --------- --------- --------- ---------
(In thousands)
Real estate loans:
One- to four-family:
Held for investment $3,292,649 3,085,456 2,998,662 2,877,482 2,597,715 2,490,361 2,459,572
Held for sale 13,787 100,016 21,387 89,406 23,777 42,993 14,008
Multi-family 164,687 153,150 141,018 137,254 118,493 112,158 108,618
Commercial 39,670 38,050 41,581 43,069 32,772 34,456 34,738
Construction 29,651 29,558 39,090 28,429 20,861 20,986 17,367
Land 20,148 24,655 23,674 24,765 20,282 20,766 22,253
---------- --------- --------- --------- --------- --------- ---------
Total real estate loans 3,560,592 3,430,885 3,265,412 3,200,405 2,813,900 2,721,720 2,656,556
Other loans:
Consumer loans:
Equity lines of credit 95,749 93,502 90,053 91,915 85,101 83,822 85,690
Home equity loans 45,717 44,987 40,434 42,398 38,695 36,940 34,711
Other 6,008 6,252 6,294 6,015 5,105 6,056 6,157
---------- --------- --------- --------- --------- --------- ---------
Total consumer loans 147,474 144,741 136,781 140,328 128,901 126,818 126,558
Commercial business lines 1,740 1,743 1,780 2,356 2,025 2,059 2,628
---------- --------- --------- --------- --------- --------- ---------
Total other loans 149,214 146,484 138,561 142,684 130,926 128,877 129,186
---------- --------- --------- --------- --------- --------- ---------
Total loans receivable 3,709,806 3,577,369 3,403,973 3,343,089 2,944,826 2,850,597 2,785,742
Less:
Loans in process 13,240 16,828 17,904 10,698 11,222 10,939 7,778
Unearned discounts, premiums
and deferred loan expenses, net (5,404) (4,603) (3,743) (3,455) (1,224) (817) (402)
Allowance for loan losses 17,012 16,978 16,794 16,770 15,808 15,689 15,625
---------- --------- --------- --------- --------- --------- ---------
Total loans receivable, net 3,684,958 3,548,166 3,373,018 3,319,076 2,919,020 2,824,786 2,762,741
Loans receivable held for sale (13,787) (100,016) (21,387) (89,406) (23,777) (42,993) (14,008)
---------- --------- --------- --------- --------- --------- ---------
Loans receivable, net $3,671,171 3,448,150 3,351,631 3,229,670 2,895,243 2,781,793 2,748,733
========== ========= ========= ========= ========= ========= =========
20
Non-performing assets. The following table sets forth information regarding non-
accrual loans, loans which are 91 days or more delinquent but on which the Bank
is accruing interest, foreclosed real estate and non-accrual investment
securities of the Bank.
At
-------------------------------------------------------------------
9/30/99 6/30/99 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98
------- ------- ------- -------- ------- ------- -------
(In thousands)
Non-performing loans:
One- to four-family and multi-family loans:
Non-accrual loans $10,453 9,472 9,897 10,641 9,430 9,673 8,900
Accruing loans 91 days or more overdue 1,312 1,377 1,743 1,381 624 1,296 2,508
------- ------ ------ ------ ------ ------ ------
Total 11,765 10,849 11,640 12,022 10,054 10,969 11,408
------- ------ ------ ------ ------ ------ ------
Commercial real estate, construction and land loans:
Non-accrual loans 608 926 1,744 1,284 1,126 1,259 736
Accruing loans 91 days or more overdue - - - - - - 33
------- ------ ------ ------ ------ ------ ------
Total 608 926 1,744 1,284 1,126 1,259 769
------- ------ ------ ------ ------ ------ ------
Other loans:
Non-accrual loans 1,258 1,239 1,166 721 178 286 210
Accruing loans 91 days or more overdue 29 42 16 22 1 11 96
------- ------ ------ ------ ------ ------ ------
Total 1,287 1,281 1,182 743 179 297 306
------- ------ ------ ------ ------ ------ ------
Total non-performing loans:
Non-accrual loans 12,319 11,637 12,807 12,646 10,734 11,218 9,846
Accruing loans 91 days or more overdue 1,341 1,419 1,759 1,403 625 1,307 2,637
------- ------ ------ ------ ------ ------ ------
Total $13,660 13,056 14,566 14,049 11,359 12,525 12,483
======= ====== ====== ====== ====== ====== ======
Non-accrual loans to total loans .33% .34 .38 .39 .37 .40 .36
Accruing loans 91 days or more overdue to total loans .04 .04 .05 .04 .02 .05 .09
------- ------ ------ ------ ------ ------ ------
Non-performing loans to total loans .37% .38 .43 .43 .39 .45 .45
======= ====== ====== ====== ====== ====== ======
Foreclosed real estate (net of related reserves):
One- to four-family $ 1,558 2,404 2,307 1,736 1,030 266 361
Commercial, construction and land 6,245 6,624 6,621 6,621 6,500 6,500 6,500
------- ------ ------ ------ ------ ------ ------
Total $ 7,803 9,028 8,928 8,357 7,530 6,766 6,861
======= ====== ====== ====== ====== ====== ======
Non-performing loans and foreclosed real estate
to total loans and foreclosed real estate .58% .63 .69 .73 .64 .69 .70
======= ====== ====== ====== ====== ====== ======
Total non-performing assets $21,463 22,084 23,494 22,406 18,889 19,291 19,344
======= ====== ====== ====== ====== ====== ======
Total non-performing assets to total assets .48% .52 .57 .54 .52 .54 .55
======= ====== ====== ====== ====== ====== ======
21
Liquidity and Capital Resources
The Company's principal sources of funds are cash dividends paid by the Bank
and MAF Developments, and liquidity generated by the issuance of common stock 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. For the nine month
period ended September 30, 1999, the Company received $35.0 million in dividends
from the Bank and declared common stock dividends of $.25 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 to pay rates on deposits as high as its competition, and when necessary,
to supplement deposits with longer term and/or less expensive alternative
sources of funds. During the current nine month period the Bank borrowed $475.0
million of primarily fixed-rate FHLB of Chicago advances and repaid $205.0
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 September 30, 1999, the Bank's
average liquidity ratio was 6.71%. At September 30, 1999, total liquidity was
$190.0 million, or 7.19%, which was $84.2 million in excess of the 4.0%
regulatory requirement.
During the nine months ended September 30, 1999, the Bank originated and
purchased loans totaling $1.31 billion compared with $1.23 billion during the
same period a year ago. Loan sales and swaps for the nine months ended September
30, 1999, were $352.3 million, compared to $319.3 million for the prior year
period. The Bank has outstanding commitments to originate and purchase loans of
$405.8 million and commitments to sell or swap loans of $32.5 million at
September 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 eighteen to twenty-four month
period ended June 30, 1999, the Bank had 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 were funded with intermediate to longer-term fixed rate FHLB
advances, some of which contained call options at the discretion of the FHLB of
Chicago. 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 discontinued the origination of prepayment protected fixed-rate
mortgage loans for its portfolio in June 1999. See "Item 3. Quantitative and
Qualitative Disclosures about Market Risk" in the Form 10-Q as of and for the
period ended June 30, 1999.
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 September 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 the period of time until their respective final maturities.
The effect of these assumptions is to quantify the dollar amount of items
that are interest-sensitive and may be repriced within each of the periods
specified. The table does not necessarily indicate the impact of general
interest rate movements on the Bank's net interest yield because the repricing
of certain categories of assets and liabilities is subject to competitive and
other pressures beyond the Bank's control. As a result, certain assets and
liabilities indicated as maturing or otherwise repricing within a stated period
may, in fact, mature or reprice at different times and at different volumes.
At September 30, 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 $ 572,234 382,311 1,322,792 309,600 1,115,033 3,701,970
Mortgage-backed securities 86,203 7,089 17,589 13,339 16,640 140,860
Interest-bearing deposits 17,253 - - - - 17,253
Federal funds sold 77,004 - - - - 77,004
Investment securities (1) 164,248 6,412 25,012 16,793 43,609 256,074
---------- -------- --------- ------- --------- ---------
Total interest-earning assets 916,942 395,812 1,365,393 339,732 1,175,282 4,193,161
Impact of hedging activity (2) 13,787 - - - (13,787) -
---------- -------- --------- ------- --------- ---------
Total net interest-earning assets adjusted
for impact of hedging activities 930,729 395,812 1,365,393 339,732 1,161,495 4,193,161
---------- -------- --------- ------- --------- ---------
Interest-bearing liabilities:
NOW and checking accounts 17,351 15,876 58,107 36,095 75,903 203,332
Money market accounts 169,503 - - - - 169,503
Passbook accounts 63,259 57,882 211,848 131,595 279,642 744,226
Certificate accounts 758,103 407,887 241,326 47,447 10,742 1,465,505
FHLB advances 195,000 30,000 420,000 140,500 460,000 1,245,500
Other borrowings 48,700 - - - - 48,700
---------- -------- --------- ------- --------- ---------
Total interest-bearing liabilities 1,251,916 511,645 931,281 355,637 826,287 3,876,766
---------- -------- --------- ------- --------- ---------
Interest sensitivity gap $ (321,187) (115,833) 434,112 (15,905) 335,208 316,395
========== ======== ========= ======= ========= =========
Cumulative gap $ (321,187) (437,020) (2,908) (18,813) 316,395
========== ======== ========= ======= =========
Cumulative gap as a percentage
of total assets (7.26)% (9.87) (.07) (.42) 7.15
Cumulative net interest-earning assets as
a percentage of interest-bearing 74.34% 75.22 99.89 99.38 108.16
liabilities
- ------------------------------------------------
(1) Includes $62.3 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 September 30, 1999
includes fees which are considered adjustments to yield.
Three Months Ended September 30,
-----------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $3,630,144 64,505 7.11% $2,884,710 53,570 7.43%
Mortgage-backed securities 143,916 2,222 6.18 202,294 3,269 6.46
Interest-bearing deposits (1) 26,512 470 6.94 24,050 448 7.29
Federal funds sold (1) 53,956 985 7.14 68,089 1,263 7.26
Investment securities (2) 263,795 4,098 6.08 233,945 3,603 6.03
---------- -------- ---------- --------
Total interest-earning assets 4,118,323 72,280 7.01 3,413,088 62,153 7.27
Non-interest earning assets 214,787 174,433
---------- ----------
Total assets $4,333,110 $3,587,521
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,559,086 24,907 3.86 2,253,467 24,150 4.25
Borrowed funds 1,227,864 17,891 5.70 883,694 13,818 6.12
---------- -------- ---------- --------
Total interest-bearing liabilities 3,786,950 42,798 4.46 3,137,161 37,968 4.78
-------- ------ -------- ------
Non-interest bearing deposits 112,813 93,654
Other liabilities 84,744 73,993
---------- ----------
Total liabilities 3,984,507 3,304,808
Stockholders' equity 348,603 282,713
---------- ----------
Liabilities and stockholders' equity $4,333,110 $3,587,521
========== ==========
Net interest income/interest rate spread $ 29,482 2.55% $ 24,185 2.49%
======== ====== ======== ======
Net earning assets/net yield on average
interest-earning assets $ 331,373 2.86% $ 275,927 2.83%
========== ====== ========== ======
Ratio of interest-earning assets to
interest-bearing liabilities 108.75% 108.80%
====== ======
Nine Months Ended September 30,
-----------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $3,484,200 185,550 7.10% $2,814,398 157,938 7.48%
Mortgage-backed securities 156,209 7,261 6.20 225,145 11,034 6.53
Interest-bearing deposits (1) 27,369 1,478 7.12 35,911 1,883 6.91
Federal funds sold (1) 41,423 2,351 7.48 80,421 4,252 6.97
Investment securities (2) 263,123 11,923 5.98 217,737 10,227 6.19
---------- -------- ---------- --------
Total interest-earning assets 3,972,324 208,563 7.00 3,373,612 185,334 7.32
Non-interest earning assets 219,436 167,915
---------- ----------
Total assets $4,191,760 $3,541,527
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,549,147 74,073 3.89 2,247,706 72,545 4.32
Borrowed funds 1,106,824 47,612 5.67 854,733 40,323 6.22
---------- -------- ---------- --------
Total interest-bearing liabilities 3,655,971 121,685 4.43 3,102,439 112,868 4.84
-------- ------ -------- ------
Non-interest bearing deposits 108,674 91,057
Other liabilities 85,063 72,553
---------- ----------
Total liabilities 3,849,708 3,266,049
Stockholders' equity 342,052 275,478
---------- ----------
Liabilities and stockholders' equity $4,191,760 $3,541,527
========== ==========
Net interest income/interest rate spread $ 86,878 2.57% $ 72,466 2.48%
======== ====== ======== ======
Net earning assets/net yield on average
interest-earning assets $ 316,353 2.92% $ 271,173 2.86%
========== ====== ========== ======
Ratio of interest-earning assets to
interest-bearing liabilities 108.65% 108.74%
====== ======
At September 30, 1999
---------------------
Yield/
Balance Cost
---------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $3,701,970 7.13%
Mortgage-backed securities 140,860 6.33
Interest-bearing deposits (1) 17,253 5.24
Federal funds sold (1) 77,004 5.18
Investment securities (2) 256,074 6.20
----------
Total interest-earning assets 4,193,161 7.01
Non-interest earning assets 233,483
----------
Total assets $4,426,644
==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,582,566 3.99%
Borrowed funds 1,294,200 5.80
----------
Total interest-bearing liabilities 3,876,766 4.60
------
Non-interest bearing deposits 111,022
Other liabilities 88,326
----------
Total liabilities 4,076,114
Stockholders' equity 350,530
----------
Liabilities and stockholders' equity $4,426,644
==========
Net interest income/interest rate spread 2.41%
======
Net earning assets/net yield on average
interest-earning assets $ 316,395 N/A
========== ======
Ratio of interest-earning assets to
interest-bearing liabilities 108.16%
======
- --------------------
(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 Nine Months Ended
September 30, 1999 September 30, 1999
Compared to Compared to
September 30, 1998 September 30, 1998
Increase(Decrease) Increase(Decrease)
-------------------------------------- ---------------------------------------
Volume Rate Net Volume Rate Net
-------- ------------ ------- ------- ------------ -------
(In thousands)
Interest-earning assets:
Loans receivable $13,328 (2,393) 10,935 36,012 (8,400) 27,612
Mortgage-backed securities (907) (140) (1,047) (3,229) (544) (3,773)
Interest-bearing deposits 44 (22) 22 (459) 54 (405)
Federal funds sold (258) (20) (278) (2,187) 286 (1,901)
Investment securities 463 32 495 2,061 (365) 1,696
------- ------ ------ ------ ------- ------
Total 12,670 (2,543) 10,127 32,198 (8,969) 23,229
------- ------ ------ ------ ------- ------
Interest-bearing liabilities:
Deposits 3,075 (2,318) 757 9,196 (7,668) 1,528
Borrowed funds 5,047 (974) 4,073 11,045 (3,756) 7,289
------- ------ ------ ------ ------- ------
Total 8,122 (3,292) 4,830 20,241 (11,424) 8,817
------- ------ ------ ------ ------- ------
Change in net interest income $ 4,548 749 5,297 11,957 2,455 14,412
======= ====== ====== ====== ====== ======
Comparison of the Results of Operations for the Three Months Ended September 30,
1999 and 1998
General - Net income for the three months ended September 30, 1999 was
$12.9 million, or $.52 per diluted share, compared to net income of $9.9
million, or $.42 per diluted share for the three months ended September 30,
1998, an increase of $3.0 million or 22.5% on an EPS basis. The increase in
earnings was primarily due to an increase in income from real estate operations,
higher deposit account service charges, and the impact of the repurchase of
shares under the Company's stock repurchase plans.
Net interest income - Net interest income was $29.4 million for the current
quarter, compared to $24.1 million for the quarter ended September 30, 1998, an
increase of $5.3 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. Average net interest-earning assets increased to
$331.4 million for the three months ended September 30, 1999, compared to $275.9
million for the three months ended September 30, 1998, while the Company's net
interest margin increased to 2.86% for the current three month period, compared
to 2.83% for the prior year period.
26
Interest income on loans receivable increased $10.9 million as a result of
a $745.4 million increase in average loans receivable, while the average yield
on loans receivable decreased 32 basis points. Loans receivable increased $245.2
million due to the acquisition of Westco, in addition to loans originated for
investment purposes. The decrease in the average yield on loans receivable is
attributable to the heavy loan origination, refinance and modification volume in
a period of generally lower interest rates, particularly in the fourth quarter
of 1998 and first quarter of 1999. The change in the mix of originations in the
last six months toward adjustable rate loans for portfolio at lower rates, and
the slowdown in prepayments has stabilized the loan portfolio yield. Interest
income on mortgage-backed securities decreased $1.0 million to $2.2 million for
the current quarter, due to a $58.4 million decrease in average balances. This
decline in average balance is a result of higher prepayments. Interest income on
investment securities increased $497,000 to $4.1 million, primarily due to the
increase in average balance of $29.9 million.
Interest expense on deposit accounts increased $757,000 to $24.9 million,
due to a $305.6 million increase in average deposits during the current three
month period, offset by a 39 basis point decrease in the average cost of
deposits. The decline in the cost of deposits is attributable to lower U. S.
Treasury in the latter half of 1998 and early 1999 rates and their favorable
impact on maturing certificate of deposits as well as lower cost core deposits
comprising a larger percentage of the deposit base. The Bank acquired $259.5
million from the acquisition of Westco in December 1998 and $22.2 million from
the purchase of a branch office.
Interest expense on borrowed funds increased $4.1 million to $17.9 million,
as a result of a $344.2 million increase in the average balance of borrowed
funds, offset by a 42 basis point decrease in the average cost of borrowed
funds. The increase in the average balance is primarily due to an increase in
FHLB of Chicago advances of $365.4 million, offset by the payoff of the
Company's 8.32% subordinated capital notes since September 30, 1998. The
reduction in average cost is due to maturing FHLB advances being refinanced into
primarily fixed-rate advances at lower 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, as retail
deposits have become a cheaper funding source than wholesale borrowings. The
Bank discontinued the origination of prepayment protected fixed-rate mortgage
loans for portfolio in June 1999 and is currently emphasizing the origination of
adjustable-rate loans which reduce interest rate risk exposure but carry lower
interest rates. 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 $300,000 in provision for
loan losses during the current three month period, compared to $200,000 for the
prior year three month period. Net charge-offs during the current quarter were
$267,000, compared to net charges-offs of $81,000 for the three months ended
September 30, 1998. At September 30, 1999, the Bank's allowance for loan losses
was $17.0 million, which equaled .46% of total loans receivable, compared to
.52% at December 31, 1998. The ratio of the allowance for loan losses to non-
performing loans was 124.5% at September 30, 1999 compared to 119.4% at December
31, 1998 and 139.2% at September 30, 1998.
27
Non-interest income - Non-interest income increased 23.2% to $8.6 million
for the three months ended September 30, 1999, compared to $7.0 million for the
three months ended September 30, 1998, primarily due to increased deposit
account service charges and greater loan servicing fee income.
Gain on sale of loans and mortgage-backed securities decreased to a
combined $464,000 for the three months ended September 30, 1999, compared to a
combined $873,000 for the three months ended September 30, 1998. Loan sale
volume was $80.1 million during the current quarter, compared to $118.5 million
for the three months ended September 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
September 30, 1999, $60.3 million in loans were swapped and sold, compared to
$2.2 million during the three months ended September 30, 1998.
Income from real estate operations increased $723,000 to $2.5 million for
the three months ended September 30, 1999. A summary of income from real estate
operations is as follows:
Three Months Ended September 30,
--------------------------------------------------
1999 1998
----------------------- -------------------------
Pre-tax Pre-tax
# of Income # of Income
Lots (Loss) Lots (Loss)
---------- ----------- ---------- -------------
(dollars in thousands)
Woodbridge - $2,290 3 $ 38
Tallgrass of Naperville 19 180 - -
Harmony Grove - - 42 1,014
Reigate Woods 3 158 6 305
Creekside of Remington - - 2 13
Fields of Ambria - - 3 (14)
Clow Creek Farm - - 2 100
Ashbury - (150) - 297
Woods of Rivermist - - 1 2
-- ------- -- ------
22 $2,478 59 $1,755
== ====== == ======
The Woodbridge project consists of a 48-acre commercial parcel. Two parcels
were sold during August 1999 at a pre-tax profit of $2.3 million. The remaining
four parcels in the project are under contract and are expected to close within
the next six months at estimated pre-tax profits of approximately $1.0 million.
The Company sold 19 lots in Tallgrass of Naperville, during the three months
ended September 30, 1999. There are 327 lots under contract in this 926-lot
subdivision at September 30, 1999. The Company held a pre-sale of 314 lots of
Unit 2 of Tallgrass to builders in August 1999, with closings expected to
commence late in the fourth quarter. The 85-lot Reigate Woods subdivision had
three sales during the current quarter, with 13 homesites remaining. Two
homesites are under contract as of September 30, 1999. The current quarter
includes a $150,000 charge for the Company's share of unexpected higher costs
related to the City of Naperville's completion of a roadway adjacent to the
Ashbury subdivision.
Deposit account service charges increased $342,000, or 14.6% to $2.7
million for the three months ended September 30, 1999, primarily due to
continued growth in the number of checking accounts and related fees, including
debit card fees. At September 30, 1999, the Bank had approximately 100,900
checking accounts, compared to 89,100 at September 30, 1998.
28
Loan servicing fee income (loss) increased to $751,000, for the three
months ended September 30, 1999 compared to $(383,000) for the three months
ended September 30, 1998. The increase was primarily due to a $290,000 recovery
of a previously recorded mortgage servicing impairment writedown and the impact
in the prior year quarter of a $740,000 impairment valuation writedown. The
recovery was recognized due to lower actual prepayments over the past nine
months, and expected slower prepayments in the future due to recent increases in
long-term interest rates. The average balance of loans serviced for others
increased 10.9% to $1.16 billion for the current three-month period, compared to
$1.00 billion for the prior year period. Amortization of mortgage servicing
rights equaled $314,000 for the three months ended September 30, 1999, compared
to $327,000 for the prior three-month period.
Other non-interest income decreased $200,000, or 13.6% to $1.3 million for
the three months ended September 30, 1999, primarily due to decreased fee income
related to loan modifications, in light of slower refinance activity.
Non-interest expense - Non-interest expense increased $2.3 million or 15.2%
to $17.2 million for the three months ended September 30, 1999. The ratio of
non-interest expense to average assets improved to 1.59% for the current quarter
compared to 1.67% for the prior year period, reflecting increased operating
efficiencies.
Compensation and benefits increased 9.0% or $790,000 to $9.6 million for
the three months ended September 30, 1999, compared to the three months ended
September 30, 1998. The increase is primarily due to increased compensation and
benefit costs as a result of an increase in staff from the Westco acquisition.
Occupancy expense increased $120,000, or 7.2% to $1.8 million for the three
months ended September 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 $484,000, or 85.7% for the
three months ended September 30, 1999 compared to the prior year. The increase
is primarily due to a radio-based marketing campaign designed to enhance the
Company's brand awareness initiated earlier in the year. The Company intends to
continue 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 $373,000 from the prior year period
to $951,000 for the three months ended September 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 September 30, 1999, income tax
expense totaled $7.7 million, or an effective income tax rate of 37.3%, compared
to $6.1 million, or an effective income tax rate of 38.3%, for the three months
ended September 30, 1998.
The lower effective income tax rate in the current period was primarily the
result of proactive tax planning initiated during the quarter, involving the
transfer of Bank portfolio assets to a newly-formed operating subsidiary. This
structure is expected to generate net tax savings of approximately $900,000-
$1,100,000 for calendar 1999. These savings will be offset in 1999 by
approximately $350,000 in after-tax professional fees and other costs incurred.
While the effective income tax rate may vary from quarter to quarter, the
Company currently expects the new structure to result in a lowering of its
effective income tax rate to approximately 37.3%-37.8% for the year ending
December 31, 2000, depending on the balances of the assets contributed to the
subsidiary, the amount and composition of financial statement and taxable
earnings of calendar 2000 and various other factors.
29
Comparison of the Nine Months Ended September 30, 1999 and 1998
General - Net income for the nine months ended September 30, 1999 was $37.8
million, or $1.51 per diluted share, compared to $28.8 million, or $1.23 per
diluted share, an increase of $9.0 million, or 22.2% on a per share basis.
Net interest income - Net interest income for the nine months ended
September 30, 1999 was $86.8 million compared to $72.3 million for the nine
months ended September 30, 1998, an increase of $14.4 million. The increase is a
function of the growth in average interest-earning assets of $598.7 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 2.92% for the nine months
ended September 30, 1999, compared to 2.86% for the prior year's nine month
period.
Interest income on interest-earning assets increased $23.2 million, or
12.6% for the nine months ended September 30, 1999 compared to the prior nine
month period primarily due to the increased volume of loans receivable. The
Bank's average balance of loans receivable increased $669.8 million during the
current period, while the average yield on loans receivable decreased 38 basis
points, resulting in a $27.6 million increase in interest income attributable to
loans receivable. The decrease in average yield is primarily due to lower
interest rates through most of 1998 and into calendar 1999, heavy prepayments of
higher rate fixed-rate and ARM loans during the same period and a change in the
mix of loan originations over the last six months to lower yielding adjustable
rate loans. The $3.8 million decrease in interest income on mortgage-backed
securities is due to a $68.9 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 $1.7 million to $11.8 million for the nine
months ended September 30, 1999, due to the increase of $45.4 million in the
average balance, offset by a decrease in the average yield of 21 basis points.
Interest expense on interest-bearing liabilities increased $8.8 million, or
7.8% for the nine months ended September 30, 1999 compared to the prior year
period. Interest expense on savings deposits increased $1.5 million, primarily
due to an increase in the average deposits of $301.4 million offset by a 43
basis point decrease in average cost. Interest expense on borrowed funds
increased $7.3 million, due primarily to a $252.1 million increase in the
average balance of borrowed funds offset by a 55 basis point decrease in average
cost. The Bank has primarily been utilizing 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 and the
early redemption of the Company's 8.32% subordinated capital notes in November
1998.
30
Provision for loan losses - The Bank provided $800,000 for possible loan
losses for the nine months ended September 30, 1999 compared to $600,000 for the
nine months ended September 30, 1998. Net charge-offs were $558,000 for the
current nine month period compared to $267,000 for the prior nine month period.
At September 30, 1999, the Bank's allowance for loan losses was $17.0 million,
which was .46% of total loans receivable, compared to .52% at December 31, 1998.
The ratio of allowance for loan losses to non-performing loans was 124.54% at
September 30, 1999 compared to 119.37% at December 31, 1998, and 139.17% at
September 30, 1998.
Non-interest income - Non-interest income increased $6.4 million to $25.7
million for the nine months ended September 30, 1999, compared to $19.3 million
for the nine months ended September 30, 1998.
Gain on sale of loans receivable and mortgage-backed securities were a
combined $2.3 million for the nine months ended September 30, 1999, essentially
unchanged from the amount recorded in the prior year period. Loan sales were
$291.2 million during the current period compared to $301.9 million in the prior
nine-month period. During the current nine-month period, the Bank swapped and
sold $61.1 million of loan originations compared to $17.4 million in the prior
nine-month period.
During the current nine months, the Company recognized gains on the sale of
investment securities of $1.0 million, compared to $606,000 for the previous
nine-month period. The gains are primarily from the sale of U.S. Agency
securities and to a lesser extent, marketable equity securities.
Income from real estate operations was $7.0 million for the nine months
ended September 30, 1999, compared to income of $3.9 million for the nine months
ended September 30, 1998, an increase of $3.2 million, or 82.0%.
Nine Months Ended September 30,
--------------------------------
1999 1998
-------------- --------------
# of Income # of Income
Lots (Loss) Lots (Loss)
---- ------ ---- ------
(dollars in thousands)
Woodbridge - $5,163 14 $ 138
Tallgrass of Naperville 151 1,075 - -
Harmony Grove 7 381 170 2,576
Reigate Woods 8 375 13 666
Creekside of Remington 42 172 11 23
Fields of Ambria - - 6 (111)
Clow Creek Farm - - 6 260
Ashbury - (150) - 297
Woods of Rivermist - - 2 5
--- ------ --- ------
208 $7,016 222 $3,854
=== ====== === ======
The Company sold 151 lot sales in Tallgrass of Naperville during the nine
months ended September 30, 1999. In addition, the Company held a pre-sale for
314 lots in Unit 2 of the project in August 1999. All lots offered were sold,
with closings expected to commence in the fourth quarter. The large decrease in
Harmony Grove lot sales is due to the completion of the project during the
current nine-month period. The 85-lot Reigate Woods subdivision had eight sales
during the current nine months. A total of 13 homesites remain unsold, with two
homesites under contract at September 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.
31
The Woodbridge project consists of a 48-acre commercial parcel. During the
nine months ended September 30, 1999, the Company sold parcels at a pre-tax
profit of $5.2 million and the remaining four parcels are under contract with
closings expected over the next six months.
Loan servicing fee income increased $1.4 million to $1.8 million for the
nine months ended September 30, 1999. Loan servicing fee income includes
$540,000 in recoveries of mortgage servicing impairment writedowns. The prior
nine month period includes $740,000 of impairment writedowns. The average
balance of loans serviced for others increased 11.6% to $1.13 billion for the
current nine-month period, compared to $1.01 billion in the prior nine-month
period. Amortization of purchased loan servicing rights totaled $981,000 for the
current nine-month period, compared to $872,000 for the prior nine-month period.
Deposit account service charges increased $1.3 million or 20.4% to $7.4
million for the nine months ended September 30, 1999, due to an increase in the
number of checking accounts and related fees. Brokerage commissions decreased
$215,000 or 10.0% for the nine months ended September 30, 1999 compared to the
prior year period due to attrition of personnel and movement of personnel
between offices earlier in the year which hampered sales efforts.
Other non-interest income increased $546,000 or 14.6% to $4.3 million for
the nine months ended September 30, 1999 primarily due to the recording of
higher income from a bank-owned life insurance investment made in July 1998,
reflecting the increased cash surrender value of the underlying policies.
Non-interest expense - Non-interest expense for the nine months ended
September 30, 1999 increased $5.7 million or 12.8% to $49.9 million compared to
$44.3 million for the nine months ended September 30, 1998.
Compensation and benefits increased $2.3 million, or 8.7% for the nine
months ended September 30, 1999, to $28.3 million, primarily due to normal
salary increases and increased staffing resulting from the acquisition of
Westco.
Occupancy expense increased $399,000, or 7.9% to $5.4 million for the nine
months ended September 30, 1999, primarily due to the acquisition of Westco and
opening of a new branch and drive-up facility.
Advertising and promotion expense increased $602,000 for the nine months
ended September 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 $1.1 million to $2.9 million for the
nine months ended September 30, 1999 due to the purchase of Westco.
Income taxes - For the nine months ended September 30, 1999, income tax
expense totaled $23.9 million, or an effective income tax rate of 38.8%,
compared to $18.0 million, or an effective income tax rate of 38.4%, for the
nine months ended September 30, 1998. Despite the increase in the effective tax
rate compared to the prior year, the implementation of the structure discussed
above resulted in tax savings for the current nine-month period as the effective
income tax rate reported for the six months ended June 30, 1999 was 39.5%.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A comprehensive qualitative and quantatative analysis regarding market risk
is disclosed in the Company's June 30, 1999 Form 10-Q. There has been no
material changes in the assumptions used or results obtained regarding market
risk since June 30, 1999.
32
Part II - Other Information
- -----------------------------
Item 1. Legal Proceedings. Not applicable.
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) Exhibits.
Exhibit No.:
10. MAF Bancorp, Inc. Stock Option Gain Deferral Plan Trust
Agreement
11. Statement re: Computation of per share earnings
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
--------------------- --------------------
Net income $12,876,000 $37,794,000
=========== ===========
Weighted average common shares outstanding 24,196,070 24,324,046
=========== ===========
Basic earnings per share $ .53 $ 1.55
=========== ===========
Weighted average common shares outstanding 24,196,070 24,324,046
Common stock equivalents due to dilutive
effect of stock options 617,358 719,093
----------- -----------
Total weighted average common shares and
equivalents outstanding for diluted computation 24,813,428 25,043,139
=========== ===========
Diluted earnings per share $ .52 $ 1.51
=========== ===========
27. Financial Data Schedule.
(b) Reports on Form 8-K.
On July 27, 1999, MAF Bancorp, Inc. filed the announcement of its
1999 second quarter earnings results.
33
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: November 12, 1999 By: /s/ Allen H. Koranda
------------------ ---------------------
Allen H. Koranda
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
Date: November 12, 1999 By: /s/ Jerry A. Weberling
----------------- -----------------------
Jerry A. Weberling
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer)
34