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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended June 30, 1996 Commission file number 0-18121
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MAF Bancorp, Inc.
Delaware 36-3664868
(State of incorporation) (IRS Employer identification No.)
55th Street & Holmes Avenue, Clarendon Hills, Illinois 60514
Telephone Number (630) 325-7300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share NASDAQ
(Title of Class) (Name of each exchange on which registered)
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
---------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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Based upon the closing price of the registrant's common stock as of September 4,
1996, the aggregate market value of the voting stock held by non-affiliates of
the registrant was $210,172,307.*
The number of shares of Common Stock outstanding as of September 4, 1996:
10,476,450
- --------------------------------------------------------------------------------
Documents Incorporated by Reference
PART III - Portions of the Proxy Statement for the 1996 Annual Meeting of
Shareholders to be held on October 23, 1996 are incorporated by reference into
Part III hereof.
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* Solely for purposes of this calculation, all executive officers and directors
of the registrant are considered to be affiliates. Also included are shares held
by various employee benefit plans where trustees are (i) directors or executive
officers of the registrant or (ii) required to vote a portion of unallocated
shares at the direction of employees.
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PART I
Item 1. Business
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 subsidiaries,
Mid America Federal Savings Bank ("Bank") and secondarily, in the residential
real estate development business through MAF Developments, Inc. ("MAF
Developments").
On May 30, 1996, the Company successfully completed its acquisition of N.S.
Bancorp, Inc. ("NSBI"), which was the sole shareholder of Northwestern Savings
Bank ("Northwestern"). At acquisition date, Northwestern had $749.7 million in
loans receivable, which are primarily one-to four- family residential mortgage
loans, and $872.0 million in deposits, which were serviced from six branch
locations. All but one of the branches are in markets which the Bank did not
service in the past. See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations for a more detailed review of the
acquisition.
The Bank is a consumer-oriented financial institution offering various
financial services to its customers through 20 retail banking offices. The
Bank's market area is generally defined as the western suburbs of Chicago,
including DuPage County, which has the second highest per capita income in
Illinois, as well as the northwest side of Chicago, due to the acquisition of
NSBI. 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, Inc. ("MAF
Developments"), and Mid America Development Services, Inc. ("Mid America
Developments"), and NW Financial, Inc. ("NW Financial"), which the Company
acquired with NSBI, the Company and the Bank are also engaged in real estate
development activities. Additionally, the Bank operates an insurance agency,
Mid America Insurance Agency, Inc., which provides general insurance services,
and a brokerage operation through its affiliation with INVEST, a registered
broker-dealer.
As a federally chartered savings bank, the Bank's deposits are insured up to
the applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Chicago, which is
one of the twelve regional banks for federally insured savings institutions
comprising the FHLB system. The Bank is regulated by the Office of Thrift
Supervision ("OTS") and the FDIC. The Bank is further regulated by the Board of
Governors of the Federal Reserve System as to reserves required to be maintained
against deposits and certain other matters.
The Company's executive offices are located at 55th Street and Holmes Avenue,
Clarendon Hills, Illinois 60514. The telephone number is (630) 325-7300.
Market Data
Based on total assets at June 30, 1996, the Bank is the one of the largest
financial institutions headquartered in the Chicago metropolitan area, with its
home office located in Clarendon Hills, Illinois in the southeastern portion of
DuPage County. Through its network of 20 retail banking offices, the Bank
serves the residential, commercial and high technology sector west of Chicago,
including western Cook County, northern Will County, eastern Kane County and
DuPage County, as well as the northwest side of the City of Chicago.
2
Competition
The Bank is faced with increasing competition in attracting retail customer
business, including deposit accounts and loan originations. Competition for
deposit accounts comes primarily from other savings institutions, commercial
banks, money market funds, and insurance companies (primarily in the form of
annuity products). Factors affecting the attraction of customers include
interest rates offered, convenience of branch locations, ease of business
transactions, and office hours. Competition for loan products come primarily
from other mortgage brokers, savings institutions, commercial banks and mortgage
banking companies. Factors affecting business include interest rates, terms,
fees, customer service, and more recently, over-capacity in the loan origination
market.
Regulatory Environment
The Bank is subject to extensive regulation, supervision and examination by
the OTS, as its chartering authority and primary federal regulator, and by the
FDIC, which insures its deposits up to applicable limits. Such regulation and
supervision establish a comprehensive framework of activities in which the Bank
can engage and is designed 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 Bank and its operations.
Legislation is pending in Congress to mitigate the effect of the Bank
Insurance Fund ("BIF") Savings Association Insurance Fund ("SAIF") premium
disparity. Under the legislation a special assessment would be imposed on the
amount of deposits held by SAIF-member institutions, including the Bank, as of a
specified date, currently March 31, 1995, to recapitalize the SAIF. The amount
of the special assessment would be left to the discretion of the FDIC but is
generally estimated at between 79 to 85 basis points of insured deposits. The
legislation would also require that the BIF and SAIF be merged, provided that
subsequent legislation is enacted requiring federal savings associations to
become national banks or state chartered banks or thrifts, and that the
Financing Insurance Company ("FICO") payments be spread across all BIF and SAIF
members. The payment of the special assessment would have the effect of
immediately reducing the capital of SAIF-member institutions, net of any tax
effect; however, it would not affect the Bank's compliance with its regulatory
capital requirements. Management cannot predict whether legislation imposing
such an assessment will be enacted, or, if enacted the specific terms of such
legislation including the amount of any special assessment and when and whether
ongoing SAIF insurance premiums will be reduced to a level equal to that of BIF
premiums. Management can also not predict whether or when the BIF and SAIF will
merge. A significant increase in SAIF insurance premiums or a significant
special assessment to recapitalize the SAIF would likely have an adverse effect
on the operating expenses of the Company. The assessment of a 79 to 85 basis
point fee to recapitalize the SAIF would result in a $10.4 million to $11.1
million payment on an after tax basis, based on deposits as of March 31, 1995.
3
Executive Officers of the Registrant
The following executive officers were employed by the Company and the Bank as
of July 1, 1996.
Name Age Position(s) Held
---- --- ----------------
Allen H. Koranda 50 Chairman of the Board and Chief Executive
Officer of the Company and the Bank
Kenneth Koranda 46 President and Director of the Company and the
Bank
Jerry A. Weberling 45 Executive Vice President and Chief Financial
Officer of the Company and the Bank
Gerard J. Buccino 35 Senior Vice President and Controller of the
Company and the Bank
William Haider 45 Senior Vice President of the Company and the
Bank; President of Mid America Developments
and MAF Developments
Michael J. Janssen 37 Senior Vice President of the Company and the
Bank
David W. Kohlsaat 42 Senior Vice President of the Company and the
Bank
Thomas Miers 44 Senior Vice President of the Company and the
Bank
Kenneth Rusdal 54 Senior Vice President of the Company and the
Bank
Lois B. Vasto 62 Senior Vice President and Director of the
Company and the Bank
Sharon Wheeler 43 Senior Vice President of the Company and the
Bank
Alan W. Schatz 38 First Vice President of the Bank
Carolyn Pihera 53 Vice President and Corporate Secretary of the
Company and the Bank
Hugo Koranda 81 Chairman Emeritus of the Bank
4
Biographical Information
Set forth below is certain information with respect to executive officers of
the Company and the Bank. Unless otherwise indicated, the principal occupation
listed for each person below has been his principal occupation for the past five
years.
Allen H. Koranda has been Chairman of the Board and Chief Executive Officer of
the Company since August, 1989, and of the Bank since May, 1984. He joined the
Bank in 1972. He is also Senior Vice President and a director of Mid America
Developments, a wholly owned subsidiary of the Bank. Mr. Koranda holds Bachelor
of Arts and Juris Doctor degrees from Northwestern University. Mr. Koranda is
the brother of Kenneth Koranda.
Kenneth Koranda has been President of the Company since August, 1989, and of
the Bank since July 1984. He joined the Bank in 1972. He is also Chairman of
Mid America Developments. Mr. Koranda holds a Bachelor of Arts degree from
Stanford University and a Juris Doctor degree from Northwestern University. Mr.
Koranda is the brother of Allen Koranda.
Jerry A. Weberling has been Executive Vice President and Chief Financial
Officer of the Company and the Bank since July 1993. Prior to that, he was
Senior Vice President of the Company since August, 1989, and Senior Vice
President and Chief Financial Officer of the Bank from March 1990 to July 1993.
He was Senior Vice President and Controller from 1986 to March 1990. He joined
the Bank in 1984. He is a certified public accountant. Mr. Weberling holds a
Bachelor of Science degree from Northern Illinois University.
Gerard J. Buccino was named Senior Vice President and Controller of the
Company and the Bank in July 1996. Prior to that he was First Vice President
and Controller of the Company and the Bank from July 1993 to July 1996 and Vice
President and Controller of the Company and the Bank from March 1990 to July
1993. He is a certified public accountant. Mr. Buccino holds a Bachelor of
Science degree from Marquette University and a Master of Business Administration
degree from the University of Chicago Graduate School of Business.
William Haider was named Senior Vice President of the Company and the Bank in
July 1996. Prior to that he was Vice President of the Company since April 1993
and of the Bank since 1987. He is President of Mid America Developments and MAF
Developments, managing the real estate development activities of the Company.
Mr. Haider holds a Bachelor of Science degree from Southern Illinois University.
He joined the Bank in 1984.
Michael J. Janssen was named Senior Vice President - Investor Relations and
Taxation of the Company and the Bank in July 1996. Prior to that he was First
Vice President - Investor Relations and Taxation of the Company and the Bank
from July 1993 to July 1996, and Vice President of the Company from March 1990
to July 1993. He is a certified public accountant. Mr. Janssen holds a
Bachelor of Business Administration degree from the University of Notre Dame,
and a Master of Science of Taxation degree from DePaul University.
David W. Kohlsaat was named Senior Vice President - Administration in July
1996. Prior to that he was First Vice President - Administration of the Company
from July 1993 to July 1996, and is responsible for retail deposit
administration and Human Resources. He has been Vice President of the Company
since April 1993 and of the Bank since 1980. Mr. Kohlsaat holds a Bachelor of
Science degree from Southern Methodist University. He joined the Bank in 1976.
5
Thomas Miers has been Senior Vice President of the Company since April 1993
and Senior Vice President-Retail Banking of the Bank since January 1992. Prior
to that he was Senior Vice President - Marketing. Mr. Miers holds a Bachelor of
Science degree from George Williams College. He joined the Bank in 1979.
Kenneth Rusdal has been Senior Vice President of the Company since April 1993
and Senior Vice President-Operations and Information System since January 1992.
Prior to that he was Senior Vice President-Information Systems from 1987 through
1991. He also served as Vice President of Software Development for FISERV,
Inc., where he was employed from 1983 to 1987.
Lois B. Vasto has been Senior Vice President of the Company since August,
1989, and Senior Vice President - Loan Operations of the Bank since May 1984.
She joined the Bank in 1953. She is also Senior Vice President of Mid America
Developments and Secretary of Mid America Insurance, wholly-owned subsidiaries
of the Bank.
Sharon Wheeler has been Senior Vice President of the Company since April 1993
and has been Senior Vice President - Residential Lending of the Bank since July
1986. She joined the Bank in 1971.
Alan W. Schatz was named First Vice President - Secondary Marketing of the
Bank in July 1996. Prior to that he was Vice President - Secondary Marketing of
the Bank from September 1992 to July 1996. Prior to that he served as the
Director of Trading and Risk Management at First Illinois Mortgage Corporation
where he was employed from 1987 until 1992. Mr. Schatz holds a Bachelor of
Science degree from the University of Illinois at Chicago and a Master of
Business Administration degree from Rosary College.
Carolyn Pihera has been Vice President since 1979 and Corporate Secretary to
the Board of Directors of the Company since August 1989, and of the Bank since
1980. She joined the Bank in 1959 and currently is also Office Manager of the
Clarendon Hills office.
Hugo Koranda is an executive officer and Chairman Emeritus of the Bank. He
served as Chairman of the Board of the Bank until 1984. He served as a
consultant to the Bank from July 1989 until April 1991. Mr. Koranda is the
father of Allen and Kenneth Koranda.
Employees
The Bank employs a total of 849 full time equivalent employees as of June 30,
1996. Management considers its relationship with its employees to be excellent.
Item 2. Properties
The Company neither owns nor leases any real property. For the time being, it
utilizes the property and equipment of the Bank without payment to the Bank.
The Bank conducts its business through 20 retail banking offices, including
its executive location in Clarendon Hills, Illinois. The Bank has its own data
processing facilities. The data processing equipment primarily consists of
mainframe hardware, personal computers and ATMs. At June 30, 1996, the data
processing equipment owned has a net book value of $2.7 million.
6
The following table sets forth information regarding the Bank's executive
office and its 20 branches. At June 30, 1996, the total net book value of the
Bank's premises and related equipment was $31.2 million.
Date Leased Date Lease % of Total Net Book Value
Location or Acquired Expires Deposits June 30,1996
-------- ------------ ---------- ----------- ------------
(dollars in thousands)
Executive and Home Office
55th Street and Holmes Avenue
Clarendon Hills, Illinois 60514 1975/1986 owned 11.05% $ 4,879
Branches
Chicago, Illinois
2300 North Western Avenue 1996 owned 5.81 2,433
3844 West Belmont Avenue 1996 owned 11.59 1,836
6333 North Milwaukee Avenue 1996 2001 4.80 73
5075 South Archer Avenue 1996 owned 7.35 1,017
Norridge, Illinois
4100 North Harlem Avenue 1996 1999 5.42 --
Cicero, Illinois
5900/5847 West Cermak Road 1939/1978 owned 14.41 1,221
4830 West Cermak Road 1970 owned 1.78 458
Berwyn, Illinois
6620 West Ogden Avenue 1996 owned 0.25 1,248
6650 West Cermak Avenue 1996 owned 3.94 1,526
Riverside, Illinois
40 East Burlington 1977 owned 4.44 967
LaGrange Park, Illinois
1921 East 31st Street 1981 owned 4.44 881
Western Springs, Illinois
40 West 47th Street 1978 owned 3.55 782
Naperville, Illinois
1001 South Washington 1974 owned 7.79 1,874
9 East Ogden Avenue 1982 owned 1.81 962
1308 S. Naperville Blvd. 1987 owned 2.65 1,493
3040 Book Road 1993 1997 .66
Wheaton, Illinois
250 East Roosevelt Road 1977 owned 3.77 970
161 Danada Square East 1988 2009 1.53 334
St. Charles, Illinois
2600 East Main Street 1979 owned 2.96 2,161
Other fixed assets -- 6,130
--------- -------
Total 100.00% $ 31,245
========= =======
7
Item 3. Legal Proceedings
There are no outstanding legal proceedings against the Company. There are
various actions pending against the Bank but, in the opinion of management, the
probable liability resulting from these suits is unlikely, individually or in
the aggregate, to have a material effect on the Bank's or the Company's
financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held a special meeting of Stockholders on May 29, 1996.
(b) Not applicable.
(c) The following matters were voted upon at the special meeting, and the
number of affirmative votes and negative votes cast with respect to the
matters follows.
(i) Approval and adoption of the Amended and Restated Agreement and Plan
of Reorganization, dated November 29, 1996, by and between MAF
Bancorp and N.S. Bancorp, Inc. pursuant to which N.S. Bancorp, Inc.
will be merged into MAF Bancorp:
For Against Abstain
--- ------- -------
4,118,600 25,257 156,227
(ii) Amendment to the Certificate of Incorporation of MAF Bancorp to
increase the number of authorized shares of its Common Stock from 20
million shares to 40 million shares:
For Against Abstain
--- ------- -------
4,169,899 90,645 39,540
(d) None.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholders
Matters
The Company's common stock is traded over-the-counter and quoted on the
NASDAQ/National Market System under the symbol "MAFB". As of September 4, 1996,
the Company had 1,798 stockholders of record. The table below shows the
reported high and low sales prices of the common stock during the periods
indicated in fiscal 1996 and 1995.
1996 1995
----------- ------------
High Low High Low
----- ----- ----- -----
First Quarter 25.50 20.68 20.91 19.32
Second Quarter 26.25 24.00 20.91 16.36
Third Quarter 25.50 24.50 21.70 17.05
Fourth Quarter 27.00 24.00 21.59 20.45
Such over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
The Company declared $0.32 per share in dividends during fiscal 1996, and
$0.291 per share in dividends during fiscal 1995. The Company's ability to pay
cash dividends primarily depends on cash dividends received from the Bank.
Dividend payments from the Bank are subject to various restrictions. See Item 7.
"Management's Discussion and Analysis-Regulation and Supervision - Federal
Savings Institution Regulation - Limitation on Capital Distributions."
8
Item 6. Selected Financial Data
The following table sets forth certain summary consolidated financial data at or
for the periods indicated. This information should be read in conjunction with
the Consolidated Financial Statements and notes thereto included herein. See
Item 8. "Financial Statements and Supplementary Data."
At June 30,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- --------- --------- ---------
(Dollars in thousands, except per share data)
Selected Financial Data:
Total assets $ 3,117,149 1,783,076 1,586,334 1,544,439 1,513,331
Loans receivable, net 2,293,399 1,267,453 1,010,992 963,680 946,038
Mortgage-backed securities 418,102 307,390 347,902 362,172 321,356
Interest-bearing deposits 37,496 10,465 29,922 43,312 71,242
Federal funds sold 5,700 9,360 17,450 12,625 11,800
Investment securities 171,251 90,319 97,260 69,606 74,784
Real estate held for development or sale 26,620 11,454 6,404 14,174 13,956
Deposits 2,254,100 1,313,306 1,292,531 1,290,072 1,268,557
Borrowed funds 537,696 307,024 149,856 117,581 130,905
Subordinated capital notes, net 26,676 20,100 20,027 19,962 19,915
Stockholders' equity 242,226 105,419 95,150 85,002 70,202
Book value per share 23.42 19.19 16.77 14.49 12.03
Tangible book value per share 19.98 19.19 16.77 14.49 12.03
For the Year Ended June 30,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
Selected Operating Data:
Interest income $ 143,095 114,963 103,778 112,854 122,602
Interest expense 93,221 73,367 69,694 74,311 87,300
---------- --------- --------- --------- ---------
Net interest income 49,874 41,596 34,084 38,543 35,302
Provision for loan losses 700 475 1,200 2,700 4,100
---------- --------- --------- --------- ---------
Net interest income after provision
for loan losses 49,174 41,121 32,884 35,843 31,202
Non-interest income:
Gain (loss) on sale of:
Loans receivable and
mortgage-backed securities 198 (56) 3,135 5,364 4,177
Loan servicing rights - - - - 1,296
Income from real estate operations 4,786 7,497 7,719 3,427 2,749
Gain (loss) on sale and writedown of:
Investment securities 188 (231) 200 (717) 68
Foreclosed real estate 50 181 145 (1,624) (880)
Loan servicing fee income 2,394 2,373 2,456 2,566 2,735
Other 9,484 6,886 5,993 5,297 5,644
---------- --------- --------- --------- ---------
Total non-interest income 17,100 16,650 19,648 14,313 15,789
Non-interest expense:
Compensation and benefits 21,209 18,257 16,954 15,138 15,815
Office occupancy and equipment 3,774 3,522 3,569 3,539 3,753
Federal deposit insurance premiums 3,255 3,003 2,996 2,430 2,699
Other 9,548 8,630 7,797 7,136 7,440
---------- --------- --------- --------- ---------
Total non-interest expense 37,786 33,412 31,316 28,243 29,707
---------- --------- --------- --------- ---------
Income before income taxes
and other items 28,488 24,359 21,216 21,913 17,284
Income taxes 10,805 9,316 7,766 8,402 8,401
---------- --------- --------- --------- ---------
Income before other items 17,683 15,043 13,450 13,511 8,883
Other items (1) (474) - - 435 913
---------- --------- --------- --------- ---------
Net income $ 17,209 15,043 13,450 13,946 9,796
========== ========= ========= ========= =========
Primary earnings per share $ 2.76 2.54 2.22 2.27 1.66
========== ========= ========= ========= =========
Fully-diluted earnings per share $ 2.76 2.54 2.22 2.26 1.63
========== ========= ========= ========= =========
9
For the Year Ended June 30,
-------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands, except per share data)
Selected Financial Ratios and
Other Data:
Return on average assets .85% .90% .85% .91% .67%
Return on average equity 14.21 15.22 14.80 17.80 15.03
Average stockholders' equity
to average assets 6.00 5.91 5.75 5.09 4.43
Stockholders' equity to total assets 7.77 5.91 6.00 5.50 4.64
Tangible and core capital to
total assets (Bank only) 7.02 5.64 5.90 5.71 5.28
Risk-based capital ratio (Bank only) 15.36 12.07 13.24 12.77 11.06
Interest rate spread during period 2.24 2.29 1.99 2.38 2.31
Net yield on average interest-earning assets 2.62 2.62 2.29 2.66 2.55
Average interest-earning assets to average
interest-bearing liabilities 107.83 107.22 106.48 105.55 103.75
Non-interest expense to average assets 1.87 2.00 1.98 1.83 2.02
Non-interest expense to average assets and
average loans serviced for others 1.27 1.31 1.31 1.18 1.23
Ratio of earnings to fixed charges:
Including interest on deposits 1.30x 1.32x 1.30x 1.29x 1.19x
Excluding interest on deposits 1.94x 2.34x 2.24x 2.43x 2.15x
Non-performing loans to total loans .56 .57 .83 1.37 1.58
Non-performing assets to total assets .44 .42 .75 1.26 1.60
Cumulative one-year gap 5.22 4.89 1.84 4.06 (1.83)
Number of deposit accounts 255,960 164,592 148,519 149,218 152,702
Mortgage loans serviced for others $1,040,260 887,887 823,924 828,776 877,649
Loan originations 989,753 585,882 813,689 809,486 650,883
Full-service customer service facilities 20 13 13 12 12
Stock Price and Dividend Information
High $ 27.00 21.70 22.27 17.42 8.94
Low 20.68 16.36 16.07 8.37 4.24
Close 24.50 21.36 20.91 16.36 8.64
Cash dividends per share .32 .291 - - -
Dividend payout ratio 11.59% 11.46% - - -
- ----------------------
(1) Other items in 1996 represents a $474,000 extraordinary charge for the early
extinguishment of debt. Other items in 1993 represents a $1.25 million
credit for the cumulative effect of a change in accounting for income taxes,
offset by an $815,000 extraordinary charge incurred on the prepayment of
debt. The other item in 1992 represents an extraordinary credit primarily
from the utilization of net operating loss carryforwards.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Net income for the Company was $17.2 million, or $2.76 per full-diluted share
for the year ended June 30, 1996, compared to $15.0 million, or $2.54 per fully-
diluted share for the year ended June 30, 1995 and $13.5 million, or $2.22 per
fully-diluted share for the year ended June 30, 1994. On an operating basis,
the Company earned $2.84 per fully-diluted share in 1996 before consideration of
a $474,000 or $0.08 per share extraordinary loss on the early repayment of
subordinated capital notes. Earnings improvements are largely a result of
improved net interest margins, and increased fee income, coupled with controlled
operating expenses. Per share income has also been improved as a result of
share repurchase programs over the past two years.
Highlights of results for the Company's performance in fiscal 1996 are as
follows:
. The Company completed the acquisition of N.S. Bancorp, opening the
Company to new, stable deposit markets characterized by loyal low cost
deposit base.
. Assets grew by $1.3 billion, due to the acquisition of NSBI, as well
as due to strong loan portfolio growth originated by the Bank.
. Loan originations increased 69% to $989.8 million in 1996, from $585.9
million in 1995, including a 131% increase in wholesale loan
originations to $360.9 million in 1996.
. Net interest income improved to $49.2 million in 1996 compared to
$41.1 million in 1995, while maintaining an average net interest
margin of 2.62% for both years.
. Deposit account service charges increased 46.2% in 1996, following a
38.6% increase in 1995, due to continued growth in the Bank's checking
account base.
. Non-interest expenses declined as a percentage of average assets
between 1996 and 1995.
Acquisition
On May 30, 1996, the Company completed its acquisition of NSBI, and its
wholly-owned subsidiary, Northwestern, for cash and stock totaling $269.7
million. The Company paid $41.18 per share of NSBI in the form of $20.1799 cash
and .8549 shares of the Company's common stock. The Company issued 5.2 million
shares in the acquisition, nearly doubling the number shares outstanding as a
result of the transaction. The cash portion of the purchase was made from
existing cash, as well as funds from Northwestern in the form of a dividend due
to their excess capital position as of the acquisition date. Additionally, the
Company obtained a $35.0 million unsecured term bank loan with a local
commercial bank. The loan has a final maturity of seven years, and amortizes on
an increasing basis beginning in 1998.
As a result of the merger, the Bank becomes the second largest independent
savings institution and the ninth largest financial institution overall in the
Chicago metropolitan area. Northwestern had $872.0 million of deposits at the
merger date, serviced from six locations in Cook County, Illinois, giving the
Bank access to markets in which it did not operate previously.
The transaction was accounted for under the purchase method. As such, on May
30, 1996, the Company valued the assets and liabilities of NSBI at fair value,
and created goodwill and other intangible assets of $35.9 million as a result of
the transaction. Amortization of these intangibles was immaterial in 1996, and
is expected to be approximately $2.8 million for fiscal 1997.
11
Net Interest Income
Net interest income is the principal source of earnings for the Company, and
consists of interest on loans, mortgage-backed and investments securities,
offset by interest expense on deposits and borrowed funds. Net interest income
fluctuates due to a variety of reasons, most notably due to the size of the
balance sheet, changes in interest rates, and to a lesser extent asset quality.
The Company seeks to increase net interest income without materially mismatching
maturities of the interest-earning assets it invests in compared to the
interest-bearing liabilities which fund such investments.
Net interest income before the provision for loan losses increased $8.3
million, or 19.9% to $49.9 million for the year ended June 30, 1996, compared to
$41.6 million for the year ended June 30, 1995. This improvement follows a $7.5
million, or 22.0% increase for the year ended June 30, 1995 compared to the year
ended June 30, 1994. The net interest margin (net interest income divided by
average interest-earning assets) remained constant at 2.62% for the years ended
June 30, 1996 and 1995, and increased from 2.29% for the year ended June 30,
1994. The stability in the net interest margin in 1996 was primarily due to a
28 basis point increase in the yield on average interest earning assets, offset
by an increase in the average cost of funds of 33 basis points. Although the
net interest spread declined by 5 basis points, this was offset by growth in the
balance of interest-earning assets over interest-bearing liabilities, due to the
increased capital level of the Bank. The major reason for the increase in the
net interest margin between 1995 and 1994 was due to the Bank's collateralized
mortgage obligation ("CMO") bonds payable. Due to accelerated prepayments of
the mortgage-backed securities which underlie the CMO bonds, the Bank needed to
accelerate amortization of the related CMO bond discount in 1994, which
significantly reduced net interest income. The net negative impact to net
interest income from the CMO bonds was $4.0 million in 1994, while only $467,000
in 1995, and $409,000 in 1996.
Rate/Volume Analysis
The table below 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 on a
fully taxable equivalent basis during the periods indicated.
1996 vs 1995 1995 vs 1994
------------------------ ----------------------------
Interest Total Due to Total Due to
---------------------------- -------------- -----------------
1996 1995 1994 Change Volume Rate Change Volume Rate
------ ------ ------ ------ ------ ---- ------ ------ ----
(In thousands)
Interest-earning assets:
Loans receivable $ 115,466 86,511 75,781 28,955 27,454 1,501 10,730 9,824 906
Mortgage-backed securities 18,291 19,747 20,304 (1,456) (1,961) 505 (557) (1,095) 538
Investment securities 6,382 5,253 4,958 1,129 859 270 295 (87) 382
Interest-bearing deposits 2,064 2,068 2,390 (4) (593) 589 (322) (1,155) 833
Federal funds sold 1,121 1,596 562 (475) (771) 296 1,034 646 388
------- ------- ------- ------ ------ ----- ------ ------ ------
Total interest income 143,324 115,175 103,995 28,149 24,988 3,161 11,180 8,133 3,047
------- ------- ------- ------ ------ ----- ------ ------ ------
Interest-bearing liabilities:
Deposits 63,325 55,794 53,004 7,531 4,699 2,832 2,790 276 2,514
Borrowed funds 29,896 17,573 16,690 12,323 12,871 (548) 883 6,380 (5,497)
------- ------- ------- ------ ------ ----- ------ ------ ------
Total interest expense 93,221 73,367 69,694 19,854 17,570 2,284 3,673 6,656 (2,983)
------- ------- ------- ------ ------ ----- ------ ------ ------
Net interest income $ 50,103 41,808 34,301 8,295 7,418 877 7,507 1,477 6,030
======= ======= ======= ====== ====== ===== ====== ====== ======
12
The average yield on interest-earning assets improved during 1996 to 7.49%
compared to 7.21% in 1995 and to 6.94% in 1994 due to increases in interest
rates, driven primarily by a 13 basis point increase in the yield on loans
receivable, and mostly stable average yields on other interest-earning assets,
due to the relative stability of short-term interest rates during 1996. The
increase in the average yield on interest-earning assets in 1995 was due to
increasing short-term interest rates, which had a more dramatic impact on the
yield on liquid investments, as well as increasing Treasury and Cost of Funds
Index ("COFI") indices leading to improved yields on adjustable-rate loans and
mortgage-backed securities.
The Company's average balance of investment securities, interest-bearing
deposits and federal funds sold has been relatively consistent over the past
three fiscal years, due to the addition of loans receivable over this time
period. The average balance of these assets was $138.9 million in 1996, a level
at which the Bank maintains sufficient liquidity for operating and regulatory
purposes, as well as investment securities for collateral purposes. Average
loans receivable increased by $352.6 million, or 31.1% in 1996, following a
$128.3, or 12.8% increase in 1995. The increase in 1996 was augmented by the
addition of $749.7 million of loans receivable from the NSBI merger. Increases
in loans receivable have been funded primarily with additional borrowings, due
to the lack of available liquidity and the relatively small growth in savings
deposits. As a result of increased loan origination activity, the Bank has
relied less on the purchase of mortgage-backed securities for investment
purposes. The average balance of mortgage-backed securities has declined for
the last two years, decreasing by $31.3 million in 1996, and by $18.1 million in
1995, due to normal amortization and prepayments.
The average cost of savings deposits increased 22 basis points in 1996,
primarily due to increased rates on certificates of deposits. The 20 basis
point increase in the cost of savings deposits in 1995 was due to the ability of
management to lag increases in short-term interest rates when pricing deposit
products while still remaining competitive. Average deposits remained
relatively constant between 1995 and 1994, and increased $102.0 million in 1996,
due to lower savings outflows, higher interest credited to accounts, as well as
the addition of $872.0 million in deposits from the acquisition of NSBI.
Because of the inability to increase savings deposits, the increase in
interest-earning assets in 1996 and 1995 was funded with borrowed funds,
primarily FHLB of Chicago advances, and a limited amount of reverse repurchase
agreements. Average borrowings increased $183.3 million in 1996, after
increasing $75.8 million in 1995. Additional borrowings in 1996 did lead to a
decrease in the average cost of borrowings by 22 basis points, although this is
somewhat attributable to the shorter duration of adjustable-rate advances from
the FHLB of Chicago, and short-term reverse repurchase agreements. Included in
the increase in borrowed funds in 1996 is a $35.0 million unsecured term bank
loan which was obtained for the acquisition of NSBI. The loan carries an
interest rate of the one-month London interbank offering rate ("LIBOR") plus 1%,
or 6.47% at June 30, 1996. The loan is convertible all or in part, with certain
limitations at the end of any repricing period into a fixed rate loan at the
discretion of management at 1.25% over the U.S. Treasury rate corresponding to
the term to the final maturity of the loan, which is December 31, 2003.
Offsetting the increase in borrowed funds was the continued reduction in the
Bank's CMO bonds payable issued by Mid America Finance Corporation ("MAFC"). In
1996 and 1995, the rate of prepayment on the underlying mortgage-backed
securities slowed compared to 1994, leading to a decrease in the CMO bonds
payable of $4.5 million in 1996, compared to $4.7 million in 1995 and $38.9
million in 1994. At June 30, 1996, the outstanding balance of the Bank's CMO
bonds payable issued by MAFC was $14.7 million net of unamortized discounts of
$1.2 million.
13
Average Balance Sheets
The following table sets forth certain information relating to the Company's
consolidated statements of financial condition and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Such yields
and costs are derived by dividing income or expense, on a tax equivalent basis,
by the average balance of assets or liabilities. Average balances are derived
from average daily balances, and include non-performing loans. The yield/cost at
June 30, 1996 includes fees which are considered adjustments to yield.
Year Ended June 30,
-------------------------------------------------------------------------------------
1996 1995
------------------------------------- -------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $1,485,309 115,466 7.77% $1,132,669 $ 86,511 7.64%
Mortgage-backed securities 289,759 18,291 6.31 321,074 19,747 6.15
Investment securities (1) 100,671 6,382 6.34 86,932 5,253 6.04
Interest-bearing deposits 24,128 2,064 8.55 32,205 2,068 6.42
Federal funds sold 14,088 1,121 7.96 24,389 1,596 6.54
---------- ---------- ---------- ----------
Total interest-earning assets 1,913,955 143,324 7.49 1,597,269 115,175 7.21
Non-interest earning assets 104,543 75,098
---------- ----------
Total assets $2,018,498 $1,672,367
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits 1,350,501 63,325 4.69 $1,248,513 55,794 4.47
Borrowed funds 424,461 29,896 7.04 241,141 17,573 7.26
---------- ---------- ---------- ----------
Total interest-bearing liabilities 1,774,962 93,221 5.25 1,489,654 73,367 4.92
Non-interest bearing deposits 57,665 ---------- ------ 47,576 ---------- ------
Other liabilities 64,729 36,320
---------- ----------
Total liabilities 1,897,356 1,573,550
Stockholders' equity 121,142 98,817
---------- ----------
Liabilities and stockholders' equity $2,018,498 $1,672,367
========== ==========
Net interest income/interest rate spread $ 50,103 2.24% $ 41,808 2.29%
========== ====== ========== ======
Net earning assets/net yield on average
interest-earning assets $ 138,993 2.62% $ 107,615 2.62%
========== ====== ========== ======
Ratio of interest-earning assets
to interest-bearing liabilities 107.83% 107.22%
========== ======
--------------------------------- At June 30,
1994 1996
--------------------------------- ----------------------
Average
Average Yield/ Yield/
Balance Interest Cost Balance Cost
------- -------- ---- ------- ----
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $1,004,342 $ 75,781 7.55% $2,310,653 7.64%
Mortgage-backed securities 339,182 20,304 5.99 418,102 6.91
Investment securities (1) 88,462 4,958 5.60 171,251 6.86
Interest-bearing deposits 53,638 2,390 4.46 37,496 5.89
Federal funds sold 13,065 562 4.30 5,700 5.25
---------- -------- ----------
Total interest-earning assets 1,498,689 103,995 6.94 2,943,202 7.46
Non-interest earning assets 81,251 173,947
---------- ----------
Total assets $1,579,940 $3,117,149
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits $1,242,130 53,004 4.27 $2,189,247 4.41
Borrowed funds 165,345 16,690 10.09 564,372 6.36
---------- -------- ----------
Total interest-bearing liabilities 1,407,475 69,694 4.95 2,753,619 4.81
---------- -------- ----- ----
Non-interest bearing deposits 47,517 64,853
Other liabilities 34,094 56,451
---------- ----------
Total liabilities 1,489,086 2,874,923
Stockholders' equity 90,854 242,226
---------- ----------
Liabilities and stockholders' equity $1,579,940 $3,117,149
========== ==========
Net interest income/interest rate spread $ 34,301 1.99% 2.65%
======== ===== ====
Net earning assets/net yield on average
interest-earning assets $ 91,214 2.29% $ 189,583 n/a
========== ===== ==========
Ratio of interest-earning assets
to interest-bearing liabilities 106.48% 106.88%
========== ==========
- --------------------------
(1) Includes $18.7 million, $10.4 million, and $10.7 million and $30.7
million of Stock in Federal Home Loan Bank of Chicago for the years ended June
30, 1996, 1995, and 1994 and at June 30, 1996, respectively.
14
Non-interest income
Non-interest income is another significant source of revenue for the Company.
It consists of fees earned on products and services, gains and losses from loan
sale activity and income from real estate operations. Although changes in
interest rates can have an impact on earnings from these sources, the impact is
generally not nearly as dramatic as the impact on net interest income. Non-
interest income was $17.1 million, $16.7 million and $19.6 million for the years
ended June 30, 1996, 1995 and 1994, respectively. The table below shows the
composition of non-interest income for the periods indicated.
For the Year Ended June 30,
------------------------------
1996 1995 1994
--------- --------- --------
(In thousands)
Gain (loss) on sale of loans and
mortgage-backed securities $ 198 (56) 3,135
Gain (loss) on sale and writedown of
investment securities 188 (231) 200
Gain on sale of foreclosed real estate 50 181 145
Income from real estate operations 4,786 7,497 7,719
Deposit account service charges 4,894 3,347 2,414
Loan servicing fee income 2,394 2,373 2,456
Brokerage commissions 1,711 1,383 1,682
Mortgage loan late charges and other loan fees 948 759 665
Insurance commissions 412 432 448
Safety deposit box fees 273 271 262
Loss on real estate owned operations, net (17) (5) (300)
Other 1,263 699 822
------- ------ ------
$ 17,100 16,650 19,648
======= ====== ======
The Bank recorded a net gain on the sale of loans receivable and mortgage-
backed securities in 1996 of $198,000, compared to a loss of $56,000 in 1995 and
to a gain of $3.1 million in 1994. In 1996, loan sale volume increased
dramatically, due to a 68.9% increase in loan origination volume from 1995. In
1996, the Bank sold $269.2 million of loans, compared to $95.2 million in 1995
and $343.7 million in 1994. Although loan sale volume increased, margins on
loan sales remained thin due to competitive pricing in the origination market,
which often led to the Bank originating loans at near break even.
The gains and losses on mortgage-backed securities included in the above
figures represents the sale of loans originated by the Bank and swapped into
mortgage-backed securities prior to sale. In 1996, the Bank swapped and sold
$41.2 million of loans into mortgage-backed securities. In 1995, the Bank had
no swap activity. During 1994, the Bank swapped and sold $4.8 million of loans
into mortgage-backed securities.
The Company had net gains on the sale of investment securities during the
current year of $188,000, primarily due to the sale of marketable equity
securities, compared to net losses on the sale and writedown of investment
securities during 1995 of $231,000, and net gains in 1994 of $200,000. The
losses in 1995 are primarily from the write-off of a $159,000 equity investment
in a local community housing organization and from the sale of investment
securities available for sale whose values deteriorated in the wake of rising
interest rates. These losses were offset by gains on the sale of marketable
equity securities. In 1994, the gains are primarily from the sale of marketable
equity securities.
15
Income from real estate operations decreased $2.7 million to $4.8 million in
1996, compared to $7.5 million in 1995 and $7.7 million in 1994. A summary of
income from real estate operations is as follows:
Year Ended June 30,
-------------------------------------------------------
1996 1995 1994
------------- -------------- ---------------
Lots Income Lots Lots
Sold (Loss) Sold Income Sold Income
---- ------ ---- ------ ---- ------
(Dollars in thousands)
Clow Creek Farm 145 $ 3,537 81 $ 1,711 - -
Ashbury 34 1,392 134 5,364 306 $ 6,975
Woods of Rivermist - - 6 374 15 593
Scott's Crossing - - 1 39 3 151
Creekside of Remington 27 81 6 9 - -
Woodbridge 10 85 - - - -
Reigate Woods 2 98 - - - -
Fields of Ambria 2 17 - - - -
Other - (424) - - - -
--- ----- --- ------ --- -----
220 $ 4,786 228 $ 7,497 324 $ 7,719
=== ===== === ===== === =====
The Company had strong sales in the 260-lot Clow Creek Farm subdivision during
1996, due to the near sellout of the successful 1,115-lot Ashbury subdivision
adjacent to Clow Creek Farm. As of June 30, 1996, all of the remaining 31 lots
in Ashbury are under contract, and 13 of the remaining 34 lots are under
contract in Clow Creek Farm. The Company expects both of these projects will be
closed-out during fiscal 1997. To replace these projects, the Company plans to
commence development in the 386-lot Harmony Grove subdivision in early fiscal
1997, with closings expected to begin in the first and second quarters of 1997.
A builder pre-sale in this subdivision was very successful, with 126 of the 128
lots offered to builders in the first phase under contract as of June 30, 1996.
The Creekside of Remington project, located in Bolingbrook, Illinois, just east
of Naperville, had strong sales early in 1996, but has since slowed. At June
30, 1996, there are no lots under contract. Margins on these lots are much lower
than previous projects, due to these being smaller, lower priced lots as well as
due to the sharing the development costs and profits, with a joint venture
partner. Woods of Rivermist is the Company's most upscale subdivision,
consisting of 31 lots. None of the remaining 10 lots were sold during 1996,
although 5 are under contract as of June 30, 1996. The Scott's Crossing project
was sold out in 1995.
The sales in Woodbridge, Reigate Woods, and Fields of Ambria are results from
NW Financial, the land development subsidiary of Northwestern acquired in the
acquisition of NSBI. These sales represent home sales, as NW Financial's land
development activity consists of land improvement and homesite construction.
Sales represent one month of activity. The other loss of $424,000 represents
the write-off of the Company's investment related to an option it had acquired
on two parcels of land. The Company chose not to exercise its option to
purchase the parcels following a thorough financial and market assessment of the
project.
Deposit account service charges increased 46.2% in 1996, to $4.9 million,
following a similar increase in 1995. The results are a function of an increase
in the number of checking accounts due to continued success in the Bank's direct
mail checking campaign which is designed to attract new checking accounts for
potential fee revenue. The 1996 improved results are primarily due to an
increase in NSF charges, as the Bank did not increase per item fees on most of
its transactions during 1996. In 1995, the increase in deposit account service
charges was due to an increased volume of NSF transactions, as well as an
increase in service fees per item.
16
Loan servicing fee income is generated from loans which the Bank has
originated and sold, or from purchased servicing. Loan servicing fee income
totaled $2.4 million, $2.4 million and $2.5 million for 1996, 1995 and 1994,
respectively, on average loans serviced for others of $963.8 million, $881.0
million, and $813.1 million, respectively. The increase in average loans
serviced in 1996 is due to increased sales activity in the wake of higher loan
originations. In 1995, the increase was primarily due to the bulk purchase of
$66.8 million of loan servicing rights. The consistency in income from loan
servicing over the past three years despite an increase in the average balance
of loans serviced for others is due to the continued reduction in the average
loan servicing fee, due to new sales containing only .25% in service fees, as
well as the reduction in income from the amortization of purchased servicing
premiums, and capitalized servicing premiums from wholesale loan originations.
Amortization totaled $253,000 in 1996, $109,000 in 1995, and was diminimus in
1994.
Through the Bank's affiliation with INVEST, the Bank offers non-traditional
investment products to its customers such as mutual funds, annuities and other
brokerage services. Revenues rebounded from the prior year decline to $1.7
million in 1996, compared to $1.4 million in 1995 and $1.7 million in 1994. The
improvement in 1996 over 1995 is due to increased sales of mutual funds and
other non-traditional products, as well as sharing in a greater percentage of
commissions and trailer fee income with INVEST. The decline in 1995 was
attributable to an increase in interest rates which moved certain customers into
certificate of deposit investments, as well as the uncertainty of investing in
the stock market at the record high levels reached during the last half of 1995.
Non-interest expense
Non-interest expense increased $4.4 million, or 13.1% to $37.8 million in 1996
compared to 1995. Non-interest expense in 1995 was $2.1 million, or 6.7% greater
than non-interest expense in 1994. Adding to the large increase in 1996 is one
month of operations of Northwestern. The table below shows the composition of
non-interest expense for the periods indicated.
For the Year Ended June 30,
---------------------------
1996 1995 1994
--------- ------- -------
(In thousands)
Compensation $16,790 14,474 12,975
Employee benefits 4,419 3,783 3,979
------- ------ ------
Total compensation and benefits 21,209 18,257 16,954
Occupancy expense 2,469 2,274 2,297
Furniture, fixture and equipment expense 1,305 1,248 1,272
Federal deposit insurance premiums 3,255 3,003 2,996
Advertising and promotion 1,746 1,760 1,408
Data processing 1,683 1,473 1,282
Professional fees 904 751 954
Postage 872 659 656
Stationery, brochures and supplies 857 618 599
ATM network fees 527 523 421
Telephone 413 349 329
Insurance costs 260 298 370
Other 2,051 2,199 1,778
Amortization of goodwill and core deposit
intangible 235 - -
------- ------ ------
$ 37,786 33,412 31,316
======= ====== ======
17
Compensation and benefits increased $3.0 million, or 16.2% in 1996. The
primary reason for the increase is due to an increase in loan related
compensation, most notably a $1.0 million increase in loan officer commissions,
as well as the addition of employees, primarily to staff a new branch and to
handle increased loan volume. In addition, the acquisition of NSBI increased
compensation and benefits for one month in 1996, or approximately $600,000.
Benefit costs increased $636,000 in 1996 due to additional FICA tax expense, as
well as profit sharing and SERP benefit expenses. The $1.3 million, or 7.7%
increase in 1995 was primarily due to regular annual raises for employees, as
well as a reduction in the deferral of loan origination direct costs. The number
of loans subject to deferral declined by 42.0% in 1995 from 1994 amounts.
FDIC insurance premiums increased slightly in 1996, compared to 1995 and 1994.
Insurance premium expense is strictly a function of average savings deposits
outstanding, as the Bank's insurance premium rate has remained constant for the
last three years.
Advertising expense was consistent in 1996 compared to 1995, while it
increased 25.0% in 1995 when the Bank commenced its new checking account
strategy. The Bank continued its expansive retail marketing strategy during
1996, which resulted in similar expense to 1995. The primary focus of the
marketing strategy is the use of direct mail to attract checking accounts as
well as home equity lines of credit. These increases are a response to
increased competitive pressures in the markets served by the Bank.
Data processing expenses rose $210,000, or 14.3% in 1996, after rising
$191,000 or 14.9% in 1995 due to the upgrading of data processing systems over
the past few years. The Bank has installed PC technology into many of its
operations as a means of controlling general operating expenses as well as
providing the means to improve the speed of processing transactions.
Other operating expenses increased a total of $722,000 in 1996, after a small
increase in 1995, due to the growth in the Bank's loan portfolio, as well as
checking account base, which has led to increased costs for postage, and
stationary and supplies expense. The increase in professional expense in 1996
is due to $92,000 for flood insurance certifications obtained on the Bank's loan
portfolio in response to new FNMA guidelines. Additionally, the Bank recognized
amortization of goodwill and core deposit intangible expense of $235,000 in 1996
due to the acquisition of NSBI.
Provision for loan losses
The provision for loan losses is recorded to provide coverage for losses on
loans unknown to the Bank at the current time. Over the past three years, the
Bank has maintained consistent and historically low levels of non-performing
loan balances, as well as high coverage percentages of the allowance for loan
losses to non-performing loans. The 1996 provision was $700,000, which was
slightly larger than the 1995 provision of $475,000 primarily due to the growth
of the Bank's loan portfolio during the current year. The 1995 provision for
loan losses was $475,000, compared to $1.2 million in 1994 due to a decrease in
the ratio of non-accrual loans to total loans during 1995. Asset quality in the
loan portfolio has remained excellent over the past three years. The ratio of
the allowance for loan losses to total loans receivable increased slightly to
.75% at June 30, 1996, from .73% at June 30, 1995 and .86% at June 30, 1994.
The ratio of the allowance for loan losses to non-performing loans improved to
134.5% at June 30, 1996, compared to 128.2% at June 30, 1995 and 103.3% at June
30, 1994.
18
Income taxes
For the year ended June 30, 1996, income tax expense attributable to income
from continuing operations totaled $10.8 million, equal to an effective income
tax rate of 37.9%, compared to $9.3 million, or an effective income tax rate of
38.2% for the year ended June 30, 1995, and $7.8 million, or an effective income
tax rate of 36.6% for the year ended June 30, 1994. The lower effective tax
rate in 1994 was attributable to the reversal of certain state income tax
valuation allowances.
Review of Financial Condition
Total assets increased $1.3 billion, or 74.8% to $3.1 billion at June 30,
1996, compared to $1.78 billion at June 30, 1995. The increase was due to the
acquisition of NSBI, as well as growth in loans receivable, which were funded
primarily with borrowed funds. At acquisition date, NSBI had assets
approximately $1.2 billion, and stockholders' equity of $231.6 million.
Cash, interest-bearing deposits and federal funds sold increased a total of
$35.1 million to $94.9 million at June 30, 1996. The higher cash balance is
primarily due to the acquisition, which required the maintenance of more
liquidity due to deposit growth. For most of the year, the Bank used most of
its available cash, in addition to outside borrowings to fund increased loan
volume held for investment purposes.
Investment securities classified as held to maturity increased $49.0 million,
to $102.2 million as of June 30, 1996. The increase is due to the addition of
$146.8 million of investment securities as a result of the acquisition, and
purchases of $21.7 million. Offsetting these increases were maturities of
$101.2 million, which were primarily used to fund the cash portion of the
acquisition, as well as the transferring of $18.0 million of investment
securities into the available for sale category as allowed by an implementation
guide to SFAS No. 115.
Investment securities available for sale increased $14.2 million to $38.3
million at June 30, 1996. Increases due to the transfer of $18.0 million from
investments held to maturity and purchases of $31.1 million were offset by sales
of $34.0 million, as well as the transfer of $2.5 million of the Company's stock
previously owned by NSBI into treasury stock upon acquisition. Net unrealized
gains in the available for sale portfolio were $329,000 at June 30, 1996.
Stock in the FHLB of Chicago increased $17.7 million due to the purchase of
$8.3 million of stock due to the growth in borrowings from the FHLB of Chicago,
as well as $9.7 million of stock acquired from NSBI.
Mortgage-backed securities classified as held to maturity increased $49.4
million to $293.4 million as of June 30, 1996. The increase is primarily due to
$182.1 million acquired from NSBI, offset by amortization and prepayments
totaling $23.7 million and the transfer of $108.7 million of CMOs into its
available for sale portfolio.
Mortgage-backed securities classified as available for sale increased $61.3
million to $124.7 million at June 30, 1996, from $63.4 at June 30, 1995. The
increase is primarily due the transfer of $108.7 million of CMOs into the
available for sale category, offset by amortization and prepayments of $46.1
million. At June 30, 1996, net unrealized losses in the available for sale
portfolio were $1.7 million.
19
Included in total mortgage-backed securities at June 30, 1996 are $328.1
million of CMO's which have 3-5 year weighted average lives, and are primarily
collateralized by the Federal National Mortgage Association ("FNMA"), the
Federal Home Loan Mortgage Corporation ("FHLMC") and the Government National
Mortgage Association ("GNMA") mortgage-backed securities, and to a lesser extent
by whole loans. Also included in mortgage-backed securities as of June 30, 1996
and 1995 are $44.3 million, and $20.3 million, respectively, of FHLMC securities
with an average yield of 8.54% and 8.52%, respectively, which collateralize a
similar amount of CMO bonds issued by the Bank's special purpose finance
subsidiaries, Mid America Finance Corporation ("MAFC") and Northwestern
Acceptance Corporation ("NWAC"). Principal repayments and prepayments on these
securities are available exclusively for the repayment of the CMO bonds which
they collateralize.
Investment securities and mortgage-backed securities acquired and classified
as available-for-sale represent a secondary source of liquidity to the Bank and
the Company. The market value of these securities fluctuates with interest rate
movements. Net interest income in future periods may be adversely impacted to
the extent interest rates increase and these securities are not sold with the
proceeds reinvested at the higher market rates. The decision whether to sell
the available for sale securities or not, is based on a number of factors,
including but not limited to projected funding needs, reinvestment alternatives
and the relative cost of alternative liquidity sources. Investments and
mortgage-backed securities classified as held to maturity cannot be sold except
under extraordinary and very restrictive circumstances. Generally, these
investments are acquired for investment after taking into account the Bank's
cash flow needs, the investment's projected cash flows, the Bank's overall
interest rate and maturity structure of the liability base used to fund these
investment's and the net interest spread obtained. To the extent the Bank has
been able to maintain funding costs below a market rate of interest, the
potential negative impact from rising interest rates on investments and
mortgage-backed securities held to maturity on net interest income in future
periods has been substantially mitigated.
Loans receivable increased 81.0%, or $1.0 billion to $2.3 billion at June 30,
1996. The increase was primarily due to the acquisition of NSBI, which added
$749.7 million to loans receivable as of the acquisition date. In addition,
loan origination and purchase volume (through the Bank's wholesale loan
origination division) was $989.8 million, offset by amortization and prepayments
of $394.3 million, as well as sales of $269.2 million. The loans sold represent
long-term fixed-rate mortgages, and are sold as an integral part of the Bank's
mortgage banking strategy. During the current year, the Bank originated a
larger percentage of shorter-term adjustable-rate loans, which it holds in its
portfolio than it did fixed-rate loans, which helped fuel the increase in the
outstanding balance of loans receivable held for investment purposes.
The allowance for loan losses increased to $17.3 million as of June 30, 1996,
due to the acquisition of NSBI, which had $7.7 million in its allowance for loan
losses as of the acquisition date, and a current year provision for loan losses
of $700,000. Net charge-offs in 1996 were $365,000. As of June 30, 1996, the
Bank's ratio of the allowance for loan losses to total non-performing loans was
134.5%, compared to 128.2% as of June 30, 1995. In addition, the ratio of the
allowance for loan losses to total loans was relatively consistent at .75% at
June 30, 1996, compared to .73% at June 30, 1995.
20
Real estate held for development or sale increased $15.2 million to $26.6
million at June 30, 1996. A summary of real estate held for development or sale
is as follows:
June 30,
---------------
1996 1995
------- ------
(in thousands)
MAF Developments, Inc.
Harmony Grove $ 5,104 2,536
Clow Creek Farm 1,168 3,924
Creekside of Remington 1,807 1,734
Other - 357
------- ------
8,079 8,551
------- ------
Mid America Developments, Inc.
Ashbury 1,196 2,042
Woods of Rivermist 755 861
------- ------
1,951 2,903
------- ------
NW Financial, Inc.
Reigate Woods 7,734 -
Woodbridge 6,475 -
Fields of Ambria 2,381 -
------- ------
16,590 -
------- ------
$ 26,620 11,454
======= ======
The primary reason for the increase in real estate held for development or
sale is due to the acquisition of NSBI, and its real estate subsidiary, NW
Financial. NW Financial's projects differ from those of the Bank and Company,
as they not only develop lots for single-family development, but also
participate in home construction on these developed lots as well. Currently,
management of the Bank intends to operate NW Financial's projects through their
completion. However, management does not currently plan to seek additional
projects which include home construction.
Activity at MAF Developments, owned by the Company, included the additional
purchase of land for Harmony Grove, which is currently being developed. The
Company held a builder pre-sale in June, 1996 where 128 lots in the first phase
of the project were offered. Of these lots, 126 were sold, and are scheduled to
close in the first and second quarters of 1997. The decline in Clow Creek Farm
is due to the successful sale of a majority of this project. At June 30, 1996,
there are 34 lots remaining, of which 13 are under contract. Creekside of
Remington's investment remained constant due to 27 lot sales being offset by
development costs. No sales are pending in Creekside at June 30, 1996. The
other category represented preliminary costs associated with two parcels of land
which the Company had an option to purchase. During 1996, the Company wrote-off
this investment after deciding not to exercise its right to purchase these
parcels. The write-off totaled $424,000.
Mid America Developments is nearing the completion of its operations with the
continued sales in Ashbury and Woods of Rivermist. At June 30, 1996, all of the
remaining 31 lots of Ashbury are under contract, with sales expected to close by
the end of the second quarter of 1997. The Woods of Rivermist development is
completely developed, with 5 of the 10 remaining lots under contract at June 30,
1996.
Premises and equipment increased $10.1 million to $31.2 million at June 30,
1996. The increase was primarily due to $7.9 million acquired from NSBI (at
fair value), as well as purchases of premises and equipment of $4.3 million.
The primary expenditures related to the construction of a new branch site, as
well as costs in conjunction with the Bank's upgrading of data processing
equipment and remodeling of some of the Bank's branch offices.
21
Cost in excess of fair value of net assets acquired (goodwill) increased to
$26.9 million as a result of the acquisition of NSBI in May 1996. Total
goodwill created in the acquisition amounted to $27.0 million, and is being
amortized over 20 years on a straight line basis. Amortization expense in 1996
was $113,000.
Other assets increased $19.0 million to $33.9 million at June 30, 1996, due to
$7.6 million from the acquisition of NSBI, as well as the establishment of a
core deposit premium related to the acquisition of $8.9 million, which the Bank
expects to amortize over a 10 year period on an accelerated basis.
Deposits increased $940.8 million to $2.25 billion as of June 30, 1996,
primarily due to $872.0 million of deposits acquired from NSBI. The remainder
of the increase is due to interest credited on deposits of $62.0 million, as
well as net inflows of $6.3 million during the current year.
Borrowed funds, which consist primarily of FHLB of Chicago advances, as well
as CMO bonds payable, and other short-term borrowings, increased $230.7 million,
to $537.7 million at June 30, 1996. During the current year, the Bank borrowed
an additional $160.0 million (net) of FHLB of Chicago advances, primarily to
fund loan volume held for investment purposes. As of June 30, 1996, the Bank
has $420.5 million of FHLB of Chicago advances at a weighted average rate and
term of 6.40%, and 2.2 years, respectively, compared to $260.5 million at a
weighted average rate and term of 7.06%, and 3.3 years, respectively, as of June
30, 1995. The decrease in rate and average term is due to $125.0 million of
advances being adjustable rate, which are tied to short-term interest rate
indices such as LIBOR and the prime rate. CMO bonds payable increased at net
$23.5 million, primarily due to $27.7 million from the acquisition of NSBI,
offset by $6.0 million in repayments on CMO bonds. The Bank also increased its
balance of reverse repurchase agreements by $12.1 million to $39.8 million at
June 30, 1996. These borrowings have an average life of 19 months at June 30,
1996, with an average cost of 6.74%. In addition, as part of the funding for
the acquisition of NSBI, the Company obtained a $35.0 million unsecured term
bank loan. The loan has a final maturity of December 31, 2003, and currently
has a floating interest rate at one-month LIBOR plus 1%, or 6.47% at June 30,
1996.
Subordinated capital notes increased $6.6 million to $26.7 million at June 30,
1996. During 1996, the Bank refinanced $20.9 million of its 10% subordinated
capital notes originally issued in 1993, with $27.6 million of 8.32%
subordinated notes due September 30, 2006. The early repayment of the $20.9
million of subordinated capital notes resulted in an extraordinary after-tax
loss of $474,000 due to the write-off of deferred issuance costs in the second
quarter in 1996. The 8.32% subordinated notes are callable anytime after
September 30, 1998, at par plus accrued interest. The Company received $26.6
million after consideration of $1.0 million of expenses, which were deferred and
are being amortized over the life of the notes.
Other liabilities increased $13.3 million to $32.7 million at June 30, 1996.
The primary reason for the increase is due to $7.9 million from the acquisition
of NSBI.
Stockholders' equity increased $136.8 million to $242.2 million at June 30,
1996. The increase was due to the acquisition of NSBI, which resulted in the
issuance of 5.2 million shares of common stock valued at $131.2 million,
including $3.3 million related to the carryover of stock options, as well as
earnings of $17.2 million, offset by dividends paid to shareholders and the
purchase of treasury shares through the Company's stock buyback programs.
During 1996, the Company repurchased 250,000 shares for $6.2 million. In
addition, 100,000 shares of the Company stock owned by NSBI was transferred to
treasury shares upon the acquisition of NSBI, who had held stock in the Company
at the time of acquisition.
22
Lending Activities
General. The Bank's lending activities reflect its focus as a consumer
banking institution serving its local market area by concentrating on
residential mortgage lending. Reflective of this focus, the Bank has been one
of the largest originators of residential mortgages in its market area for
years. In the past three years, the Bank started a wholesale lending operation
that purchases loans from brokers and correspondents. In connection with these
activities, the Bank emphasizes the origination of adjustable-rate or shorter-
term loans for its portfolio and sells the majority of its long-term fixed-rate
loans directly into the secondary market. It is the Bank's general policy that
approximately 60-70% of its loan portfolio have adjustable rates or terms to
repricing or maturity of seven years or less. The Bank originates and purchases
long-term fixed-rate mortgage loans in response to customer demand; however,
most conforming long-term fixed-rate mortgage loans and a limited amount of ARM
loans are sold in the secondary market, primarily to the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC").
In 1996, the Bank originated and purchased $441.9 million in fixed-rate one-
to four-family residential mortgage loans, of which $319.3 million, or 72.3%,
conformed to the requirements for sale to FNMA and FHLMC and $122.6 million, or
27.7%, did not conform to the requirements of these agencies. During the year
ended June 30, 1996, the Bank sold $267.4 million of these loans in the
secondary market. The Bank's "nonconforming" loans are generally designated as
such because the principal loan balance exceeds $207,000, which is the current
FHLMC and FNMA purchase limit, and not because the loans present increased risk
of default to the Bank. Generally, nonconforming loans are held in the Bank's
loan portfolio. Loans with such excess balances carry interest rates from one-
eighth to three-eighths of one percent higher than similar, conforming fixed-
rate loans.
As a result of its acquisition of NSBI, the Bank acquired a $749.7 million
loan portfolio. Included in the portfolio as of the acquisition date was a
$670.5 million nationwide portfolio of single-family residential mortgage loans
which had been purchased through brokers as part of NSBI's loan strategy.
Collateral for this portfolio is spread throughout 46 states and the District of
Columbia. Currently, it is not management's intent to continue the purchase
strategy utilized successfully by NSBI, rather management intends to manage this
purchased loan portfolio through its maturity.
While the Bank has primarily focused its lending activities on the origination
of loans secured by first mortgages on owner-occupied one- to four-family
residences, the Bank, to a lesser extent, also originates multi-family mortgage
loans, residential construction loans, land acquisition and development loans,
commercial real estate loans and a variety of consumer loans. At June 30, 1996,
the Bank's net loans receivable amounted to $2.3 billion, excluding $418.1
million in mortgage-backed securities.
23
Loan Portfolio Composition. The following table sets forth the composition of
the Bank's loan and mortgage-backed securities portfolio in dollar amounts and
in percentages at the dates indicated:
At June 30,
-----------------------------------------------------------------------
1996 1995 1994
----------------------- -------------------- -----------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
---------- ----------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Real estate loans:
One- to four-family:
Held for investment $2,032,102 87.57% $1,032,233 80.25% $ 835,369 81.28%
Held for sale 9,314 0.40 24,984 1.94 8,739 0.85
Multi-family 94,713 4.08 67,248 5.23 49,864 4.85
Commercial 46,101 1.99 47,273 3.68 52,090 5.07
Construction 16,090 0.69 19,984 1.55 13,860 1.35
Land 26,644 1.15 19,281 1.50 15,453 1.50
---------- ---------- ---------- --------- ---------- ---------
Total real estate
loans 2,224,964 95.88 1,211,003 94.15 975,375 94.90
---------- ---------- ---------- --------- ---------- ---------
Other loans:
Consumer loans:
Equity lines of
credit 79,193 3.41 66,710 5.19 46,451 4.52
Home equity loans 10,525 0.45 4,335 0.34 1,112 0.11
Other 4,110 0.18 2,652 0.20 2,471 0.24
---------- ---------- ---------- --------- ---------- ---------
Total consumer loans 93,828 4.04 73,697 5.73 50,034 4.87
Commercial business
loans 1,821 0.08 1,560 0.12 2,341 0.23
---------- ---------- ---------- --------- ---------- ---------
Total other loans 95,649 4.12 75,257 5.85 52,375 5.10
---------- ---------- ---------- --------- ---------- ---------
Total loans
receivable 2,320,613 100.00% 1,286,260 100.00% 1,027,750 100.00%
====== ====== ======
Less:
Loans in process 6,715 8,728 5,161
Unearned discounts,
premiums
and deferred loan
fees, net 3,245 882 2,818
Allowance for loan
losses 17,254 9,197 8,779
----------- ---------- ----------
Loans receivable, net $ 2,293,399 $ 1,267,453 $ 1,010,992
=========== ========== ==========
Mortgage-backed
securities:
GNMA held to maturity $ 3,637 - -
FHLMC held to maturity 157,468 31,560 38,789
FHLMC available for
sale 8,052 - -
FNMA held to maturity 32,044 16,296 19,283
FNMA available for
sale 13,565 - -
CMOs held to maturity 100,232 196,096 289,830
CMOs available for
sale 103,104 63,438 -
----------- ---------- ----------
Total mortgage-backed $ 418,102 307,390 347,902
=========== ========== ==========
At June 30,
---------------------------------------------
1993 1992
------------------- -------------------
Percent Percent
of of
Amount Total Amount Total
-------- -------- -------- --------
Real estate loans:
One- to four-family:
Held for investment $735,526 74.77% $704,270 73.10%
Held for sale 68,165 6.93 51,233 5.32
Multi-family 46,043 4.68 47,871 4.96
Commercial 56,687 5.76 69,985 7.26
Construction 12,460 1.27 17,171 1.78
Land 17,873 1.82 17,976 1.88
-------- ------- -------- -------
Total real estate
loans 936,754 95.23 908,506 94.30
-------- ------- -------- -------
Other loans:
Consumer loans:
Equity lines of
credit 41,164 4.18 46,299 4.80
Home equity loans 2,040 0.21 4,266 0.44
Other 2,483 0.25 3,339 0.35
-------- ------- -------- -------
Total consumer loans 45,687 4.64 53,904 5.59
Commercial business
loans 1,241 0.13 1,046 0.11
-------- ------- -------- -------
Total other loans 46,928 4.77 54,950 5.70
-------- ------- -------- -------
Total loans
receivable 983,682 100.00% 963,456 100.00%
======= =======
Less:
Loans in process 7,592 5,480
Unearned discounts,
premiums
and deferred loan
fees, net 4,417 6,202
Allowance for loan
losses 7,993 5,736
-------- --------
Loans receivable, net $ 963,680 $ 946,038
======== ========
Mortgage-backed
securities:
GNMA held to maturity - -
FHLMC held to maturity 90,444 125,450
FHLMC available for
sale - -
FNMA held to maturity 40,445 74,627
FNMA available for
sale 4,108 9,326
CMOs held to maturity 227,175 111,953
CMOs available for
sale - -
-------- --------
Total mortgage-backed 362,172 321,356
securities ======== ========
24
The following table shows the composition of the Bank's fixed- and adjustable-
rate loan portfolio as well as the Bank's mortgage-backed securities portfolio
as of the dates indicated.
At June 30,
------------------------------------------------------------------
1996 1995 1994
-------------------- ------------------- --------------------
Amount Percent Amount Percent Amount Percent
------- --------- -------- ------- -------- ---------
(Dollars in thousands)
Adjustable-rate loans:
Real estate:
One-to four-family held for investment $1,513,732 65.23% $ 728,383 56.63% $ 526,312 51.21%
Multi-family 68,058 2.93 63,030 4.90 46,927 4.57
Commercial 20,178 .87 25,245 1.96 29,391 2.86
Construction 11,812 .51 5,837 .45 5,978 .58
Land 14,872 .64 6,782 .53 4,214 .41
---------- ------ -------- ------ ---------- ------
Total adjustable-rate real estate loans 1,628,652 70.18 829,277 64.47 612,822 59.63
Consumer 79,883 3.44 66,775 5.19 46,518 4.53
Commercial business 911 .04 829 .07 2,219 .21
---------- ------ -------- ------ ---------- ------
Total adjustable-rate loans receivable 1,709,446 73.66 896,881 69.73 661,559 64.37
---------- ------ -------- ------ ---------- ------
Fixed-rate loans:
Real estate:
One-to four-family held for investment 518,370 22.34 303,850 23.62 309,057 30.07
One-to four-family held for sale 9,314 .40 24,984 1.94 8,739 .85
Multi-family 26,655 1.15 4,218 .33 2,937 .29
Commercial 25,923 1.12 22,028 1.71 22,699 2.21
Construction 4,278 .18 14,147 1.10 7,882 .77
Land 11,772 .51 12,499 .97 11,239 1.09
---------- ------ -------- ------ ---------- ------
Total fixed-rate real estate loans 596,312 25.70 381,726 29.67 362,553 35.28
Consumer 13,945 .60 6,922 .54 3,516 .34
Commercial business 910 .04 731 .06 122 .01
---------- ------ -------- ------ ---------- ------
Total fixed-rate loans receivable 611,167 26.34 389,379 30.27 366,191 35.63
---------- ------ -------- ------ ---------- ------
Total loans receivable 2,320,613 100.00% 1,286,260 100.00% 1,027,750 100.00%
====== ====== ======
Less:
Loans in process 6,715 8,728 5,161
Unearned discounts, premiums and
deferred loan fees, net 3,245 882 2,818
Allowance for loan losses 17,254 9,197 8,779
---------- -------- ---------- -
Loans receivable, net $2,293,399 $1,267,453 $ 1,010,992
=========== =========== ===========
Mortgage-backed securities:
Adjustable-rate $ 165,905 39.77% $ 102,614 33.42% $ 107,206 30.89%
Fixed-rate held by the Bank 207,032 49.63 183,924 59.91 214,687 61.87
Fixed-rate held by finance subsidiaries (1) 44,202 10.60 20,470 6.67 25,133 7.24
---------- ------ -------- ------ ---------- ------
Total mortgage-backed securities 417,139 100.00% 307,008 100.00% 347,026 100.00%
====== ====== ======
Plus unamortized premiums 963 382 876
---------- -------- ----------
Mortgage-backed securities, net $ 418,102 $ 307,390 $ 347,902
========== ========= =========
Summary:
Adjustable rate loans:
Loans receivable $ 1,709,446 63.46% $ 896,881 57.03% $ 661,559 49.02%
Mortgage-backed securities 165,905 6.16 102,614 6.52 107,206 7.94
---------- ------ -------- ------ ---------- ------
Total adjustable-rate loans 1,875,351 69.62 999,495 63.55 768,765 56.96
Fixed-rate loans:
Loans receivable 611,167 22.69 389,379 24.76 366,191 27.13
Mortgage-backed securities (2) 207,032 7.69 183,924 11.69 214,687 15.91
---------- ------ -------- ------ ---------- ------
Total fixed-rate loans 818,199 30.38 573,303 36.45 580,878 43.04
---------- ------ -------- ------ ---------- ------
Total loan portfolio (2) $ 2,693,550 100.00% $ 1,572,798 100.00% $ 1,349,643 100.00%
========== ====== ========= ====== ========= ======
- ---------------------------
(1) See "Subsidiary activities - Mid America Finance Corporation and
Northwestern Acceptance Corporation."
(2) Excludes the fixed-rate mortgage-backed securities held by MAFC and NWAC,
which are duration matched.
25
Loan Maturity
The following table shows the contractual maturity of the Bank's loan
portfolio at June 30, 1996. The table does not include principal repayments.
Principal repayments and prepayments on mortgage loans totaled $394.3 million,
$231.2 million, and $419.1 million, for the years ended June 30, 1996, 1995, and
1994, respectively.
At June 30, 1996
--------------------------------------------------------------------------------
Real Estate Mortgage Loans Other loans
----------------------------------------------- ------------------
One-to Comm-
Four- Multi- Comm- Con- ercial
Family Family ercial struction Land Consumer Business Total
---------- ------- ------ --------- ------ -------- -------- ----------
(In thousands)
Amount due:
One year or less $ 1,459 299 746 13,119 503 2,383 517 19,026
---------- ------ ------ ------ ------ ------ -------- ----------
After one year:
1 year to 2 years 363 227 9 1,450 2,774 653 39 5,515
2 years to 3 years 691 2,297 8,058 1,521 18,669 1,384 198 32,818
3 years to 5 years 26,760 7,029 3,202 - 45 3,909 503 41,448
5 years to 10 years 152,406 13,457 10,229 - 1,231 51,300 564 229,187
10 years to 20 years 184,678 27,035 19,610 - 3,211 34,199 - 268,733
Over 20 years 1,665,745 44,369 4,247 - 211 - - 1,714,572
---------- ------ ------ ------ ------ ------ -------- ----------
Total after 1 year 2,030,643 94,414 45,355 2,971 26,141 91,445 1,304 2,292,273
---------- ------ ------ ------ ------ ------ -------- ----------
Total amount due $ 2,032,102 94,713 46,101 16,090 26,644 93,828 1,821 2,311,299
========== ====== ====== ====== ====== ====== ======== ==========
Less:
Loans in process 6,715
Deferred yield adjustments 3,245
Allowance for loan losses 17,254
----------
Total loans held for investment 2,284,085
Mortgage loans held for sale 9,314
----------
Total loans, net $2,293,399
==========
The following table sets forth at June 30, 1996 the dollar amount of gross
loans receivable held for investment due after June 30, 1997, and whether such
loans have fixed interest rates or adjustable interest rates.
Due After June 30, 1997
---------------------------------
Fixed Adjustable Total
---------- ---------- ---------
(In thousands)
Real estate loans:
One-to four-family $ 498,213 1,532,430 2,030,643
Multi-family 26,623 67,791 94,414
Commercial 24,840 20,515 45,355
Construction 2,077 894 2,971
Land 6,535 19,606 26,141
Consumer 12,526 78,919 91,445
Commercial business 216 1,088 1,304
------- --------- ---------
Total loans receivable $ 571,030 1,721,243 2,292,273
======= ========= =========
26
Retail Residential Mortgage Lending. The Bank focuses its lending efforts
primarily on the retail origination of loans secured by first mortgages on
owner-occupied, one-to four-family residences. Residential loan originations are
generated by the Bank's marketing efforts, its present customers, walk-in
customers and referrals from real estate brokers and builders. The Bank's loan
officers are compensated primarily through commissions, based on the level of
loans originated in accordance with the Bank's lending standards. At June 30,
1996, the Bank's one-to four- family residential mortgage loans totaled $2.0
billion, or 88.0% of the Bank's total loans receivable. The Bank emphasizes the
origination of conventional ARM loans and short-term to maturity or repricing
and jumbo fixed-rate loans for retention in its portfolio and fixed-rate
conforming loans for sale in the secondary market. The Bank's retail
residential mortgage originations are predominantly in the Bank's market area.
During the year ended June 30, 1996, the Bank originated $120.7 million of
residential ARM loans, representing 21.9% of the total loans originated by the
Bank during that period. During the same period, the Bank originated $348.6
million of fixed-rate residential mortgage loans, representing 63.2% of the
total mortgage loans originated by the Bank during that period.
The Bank currently makes adjustable-rate one- to four-family residential
mortgage loans. The Bank also offers FHA and VA guaranteed loans, although at
June 30, 1996, such loans represented less than 1.5% of the Bank's total loans
receivable. The Bank currently offers a number of ARM loan programs under which
the interest rate may be fixed for the initial one-, three-, five- or seven-year
period. Most of the Bank's residential ARM loans adjust on an annual basis
following the initial one-, three- or five-year fixed-rate period. The Bank
also offers ARM loans that are fixed for an initial five- or seven-year period
that reprice once at the end of the initial period for the remaining 25 or 23
year term based on a spread above the weekly average of U.S. Treasury securities
adjusted to a constant maturity of ten years (the "ten year Treasury constant
maturity index"). The Bank's ARM loans generally carry an initial interest rate
which is less than the fully indexed rate for the loan. The initial discount
rate is determined by the Bank in accordance with market and competitive
factors. After the initial fixed-rate period, the interest rates on the ARM
loans that adjust annually reprice based on a spread above the published weekly
average yield on United States Treasury securities, adjusted to a constant
maturity of one year (the "one-year Treasury constant maturity index").
Interest rates and origination fees on ARM loans are priced to be competitive in
the local market. These loans are subject to limitations on annual interest
rate adjustments of 2%, as well as a lifetime interest rate cap adjustment of
either 6% or 7%, and are originated for terms of up to 30 years. At June 30,
1996, the weighted average term to repricing of the Bank's ARM loan portfolio
was 1.72 years.
The Bank also offers fixed-rate mortgage loans with terms to maturity of 10,
15, 20 and 30 years and fixed-rate balloon loans that mature after seven years.
The Bank's fixed-rate loan products offer a monthly or bi-weekly repayment
option. Interest rates charged on fixed-rate loans are competitively priced on
a daily basis based on secondary market prices and market conditions. The Bank
generally originates its fixed-rate mortgage loans in a form consistent with
secondary market standards.
The Bank's residential mortgage loans customarily include due-on-sale clauses
giving the Bank the right to declare the loan immediately due and payable in the
event, among other things, the borrower sells or otherwise disposes of the
property subject to the mortgage and the loan is not repaid. The Bank has
enforced due-on-sale clauses in its mortgage contracts for the purpose of
increasing its loan portfolio yield, often through the authorization of
assumptions of existing loans at higher rates of interest and the imposition of
assumption fees. ARM loans may be assumed provided home buyers meet the Bank's
underwriting standards and the applicable fees are paid.
Loan applications are reviewed in accordance with the underwriting standards
approved by the Bank's Board of Directors and which generally conform to FNMA
standards. Loans in excess of $500,000 must be approved by a senior officer and
loans in excess of $1.0 million must be approved by the Loan Committee of the
Board of Directors. In underwriting residential real estate loans, the Bank
evaluates both the borrower's ability to make monthly payments and the value of
the property securing the loan. Potential
27
borrowers are qualified for ARM loans and fixed-rate loans based on the initial
or stated rate of the loan, except for one-year ARM loans with a loan-to-value
ratio in excess of 70% and a term greater than 15 years, in which case the
borrower is qualified at 2% above the initial note rate.
Upon receipt of a completed loan application from a prospective borrower,
credit reports are ordered and income, employment and financial information is
verified in accordance with FNMA standards. An appraisal of the real estate
intended to secure the proposed loan is undertaken by a Bank appraiser or an
independent appraiser previously approved by the Bank. It is the Bank's policy
to obtain title insurance on all mortgage loans. Borrowers also must obtain
hazard (including fire) insurance prior to closing. The Bank also requires
flood insurance on a property located in special flood hazard areas. Borrowers
are required to advance funds on a monthly basis together with each payment of
principal and interest through a mortgage escrow account from which the Bank
makes disbursements for items such as real estate taxes and hazard insurance
premiums as they become due. The Bank has adopted a policy of limiting the
loan-to-value ratio on originated loans and refinanced loans to 95% and
requiring that loans exceeding 80% of the appraised value of the property or its
purchase price, whichever is less, be insured by a mortgage insurance company
approved by the FNMA in an amount sufficient to reduce the Bank's exposure to no
greater than the 75% level. Despite the benefits of ARM loans to the Bank's
asset/liability management program, they do pose potential additional risks,
primarily because as interest rates rise, the underlying payment requirements of
the borrower rise, thereby increasing the potential of default.
Wholesale Residential Lending. In 1994, the Bank commenced a wholesale loan
origination division which purchases loans from brokers and correspondents for a
broker fee ranging from 1.25% to 1.50%. Generally, the Bank offers the same type
of loan products, both fixed-rate and adjustable-rate loans, at interest rates
similar to those it offers on retail originations. The purchase of these loans
does not necessitate the Bank to incur the processing costs associated with its
retail originations. The Bank acts as the supplier of funds for the mortgage
broker who is responsible for the processing and closing of the loan. The Bank
performs its normal underwriting procedures on wholesale originated loans
similar to retail loans, and can refuse to purchase any loan which does not meet
its underwriting criteria. Wholesale originations were $360.9 million in 1996,
compared to $156.3 million in 1995.
Purchased Loans. At June 30, 1996, the Bank had $664.5 million of purchased
residential mortgage loans, nearly all of which were acquired as part of the
acquisition of NSBI. The Bank does not intend to continue Northwestern's
strategy of purchasing out-of-state loans. The vast majority of purchased
loans are secured by properties which serve as the primary residence of the
borrower, and which are located primarily in metropolitan areas located in 46
states and the District of Columbia. At June 30, 1996, purchased loans were
being serviced by approximately 135 companies, the largest of which serviced
$129.3 million, or 19.4% of total purchased loans at that date. The loans in
this portfolio had to meet Northwestern's underwriting standards, which were
similar to the Bank's in that underwriting needed to follow FNMA and FHLMC
guidelines. One variation from these guidelines is that loans exceeding FNMA
and FHLMC limits could be purchased up to $400,000 with a loan-to-value-ratio of
80% or less, and up to $300,000 with a loan-to-value ratio of 90% or less with
private mortgage insurance. At June 30, 1996, $415.5 million, or 62.5% of the
loans in the purchased loan portfolio are in excess of the current FNMA limit of
$207,000. In addition to these underwriting guidelines, original executed
promissory notes with proper endorsements are in the possession of the Bank.
Construction and Land Lending. The Bank originates loans to finance the
construction of one-to four-family residences, primarily in its market area. At
June 30, 1996, the Bank had $16.4 million of loans to finance the construction
of one- to four-family residences. The Bank also originates loans for the
acquisition and development of unimproved property to be used primarily for
residential purposes in cases where the Bank is to provide the construction
funds to improve the properties. At June 30, 1996, the Bank's construction and
land loans totaled $42.7 million, or 1.8%, of total loans receivable.
28
The Bank finances the construction of primarily individual, owner-occupied
houses where qualified contractors are involved and on the basis of underwriting
and construction loan guidelines. Construction loans are structured either to
be converted to permanent loans at the end of the construction phase or to be
paid off upon receiving financing from another financial institution.
Construction loans are based on the appraised value of the property, as
determined by an independent appraiser, and an analysis of the potential
marketability and profitability of the project. Construction loans generally
have terms of up to 12 months, with extensions as needed. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
Land loans include loans to developers for the development of residential
subdivisions and loans on improved lots to builders and individuals. At June
30, 1996, the Bank had land loans to developers totaling $14.1 million. At June
30, 1996, the largest aggregate amount of land acquisition and development loans
to a single developer amounted to $11.8 million. Loans to developers are short-
term loans with terms of three to five years. The loan-to-value ratio may not
exceed 80% and generally is less than 75%. The majority of such loans are at
fixed interest rates, although the Bank offers an ARM loan product with interest
rates which adjust based on a stated percentage over the prime rate. Loans
generally are made to customers of the Bank and developers with whom the Bank
has had long-standing relationships. The Bank requires an independent appraisal
of the property and feasibility studies may be required to determine the profit
potential of the development project. All of the Bank's land loans to
developers have been made in the Chicago metropolitan area.
Land loans are also made to local builders for the purchase of improved lots.
At June 30, 1996, the Bank had land loans outstanding to local builders totaling
$8.2 million. Such loans are generally for terms of up to three years and are
made at the prevailing fixed interest rates quoted for 30-year fixed-rate
residential mortgage loans. The loan-to-value ratio on such loans is limited to
80%. Land loans for the purchase of fully improved lots are also made to
individuals. At June 30, 1996, the Bank had land loans to individuals totaling
$4.3 million. Such loans are made for up to 15-year terms with adjustable
interest rates which are generally higher than those granted for one- to four-
family residential ARM loans. The loans adjust in accordance with the one-year
Treasury constant maturity index and are underwritten in accordance with the
same standards used for residential ARM loans.
Construction and land loans afford the Bank the opportunity to increase the
interest rate sensitivity of its loan portfolio and to receive yields higher
than those obtainable on ARM loans secured by existing residential properties.
These higher yields correspond to the higher risks associated with construction
lending. Construction loans involve additional risks attributable to the fact
that loan funds are advanced upon the security of the project under
construction, which is of uncertain value prior to its completion. Because of
the uncertainties inherent in estimating construction costs as well as the
market value of the completed project and the effects of governmental regulation
of real property, it is relatively difficult to evaluate accurately the total
funds required to complete a project and the related loan-to-value ratio. As a
result of the foregoing, construction lending often involves the disbursement of
substantial funds with repayment dependent, in part, on the success of the
ultimate project rather than the ability of the borrower or guarantor to repay
principal and interest. If the Bank is forced to foreclose on a project prior
to or at completion due to a default, there can be no assurance that the Bank
will be able to recover all of the unpaid balance of, and accrued interest on,
the loan as well as related foreclosure and holding costs. In addition, the
Bank may be required to fund additional amounts to complete the project and may
have to hold the property for an unspecified period of time. The Bank has
attempted to address these risks through its underwriting procedures and its
limited amount of construction lending on multi-family and commercial real
estate properties.
29
Multi-family Lending. The Bank originates multi-family residential mortgage
loans in its market area. At June 30, 1996, the Bank multi-family loans of $94.7
million, including a portfolio of purchased participating interests of $2.2
million related to low-income housing. Multi-family loans represent 4.1% of
total loans receivable at June 30, 1996. ARM loans represented 71.9% of the
multi-family residential loan portfolio at June 30, 1996. Such loans are
offered with initial fixed-rate periods of one, three, five, seven and ten
years. Multi-family residential mortgage loans are made for terms to maturity
of up to 30 years and carry a loan-to-value ratio not greater than 80%. The
Bank requires a positive net operating income to debt service ratio for loans
secured by multi-family residential property. Loans secured by non-owner
occupied properties of more than six units are qualified on the basis of rental
income generated by the property. On loans secured by owner-occupied properties
of six units or less, the Bank will qualify the borrower on the basis of the
borrower's personal income and rental income generated by the property.
Commercial Real Estate Lending. In connection with the Bank's policy of
maintaining an interest-rate sensitive loan portfolio, the Bank has originated
loans secured by commercial real estate, which generally carry a higher yield
and are made for a shorter term than fixed-rate one- to four-family residential
loans. At June 30, 1996, the Bank had $46.1 million of commercial real estate
loans. The Bank's policy has been to curtail the origination of additional
commercial real estate loans. Commercial real estate loans are generally
granted in amounts up to 80% of the appraised value of the property, as
determined by an independent appraiser previously approved by the Bank. The
Bank's commercial real estate loans are secured by improved properties located
in the Chicago metropolitan area. The Bank often requires borrowers to provide
their personal guarantees on loans made for commercial real estate.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than residential mortgage loans. Because
payments on loans secured by commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. The Bank seeks to minimize these risks by lending primarily on
existing income-producing properties and generally restricting such loans to
properties in the Chicago area. The Bank analyzes the financial condition of
the borrower and the reliability and predictability of the net income generated
by the security property in determining whether to extend credit. In addition,
the Bank generally requires a net operating income to debt service ratio of at
least 1.15 times.
A loan with an outstanding balance of $6.0 million at June 30, 1996 represents
the Bank's largest single commercial real estate loan to one borrower. The loan
is on a shopping center located in Carol Stream, Illinois and is current as to
the payment of principal and interest at June 30, 1996. At June 30, 1996, the
Bank's ten largest commercial real estate loans totaled $29.3 million, all but
one of which are current and performing in accordance with their original or
restructured terms. See "Asset Quality and Allowance for Loan Losses".
Other Lending. The Bank's other lending activities consist of consumer
lending, primarily home equity lines of credit, and to a lesser extent,
commercial business lending. On June 30, 1996, outstanding balances on home
equity lines represented $79.2 million or 3.4% of the Bank's total loan
portfolio. Home equity lines of credit are extended up to 80% of the appraised
value of the property, less existing liens, at an interest rate of a designated
prime rate plus 1.5%, some of which are subject to floors. To a lesser extent,
the Bank offers home equity lines of credit at greater than 80% of the appraised
value of the property up to 100% of the appraised value. Interest rates on
greater than 80% loan-to-value lines of credit range from prime plus 2.0% to
prime plus 3.5%. The Bank uses the same underwriting standards for home equity
lines of credit as it uses for residential mortgage loans. Other home equity
lending consists of $10.5 million of fixed-rate, second mortgage loans with
original maturities of fifteen years or less.
At June 30, 1996, the Bank's loan portfolio included other loans amounting to
$5.9 million, which consisted of $1.2 million of automobile loans, $1.3 million
of savings account loans, and $3.4 million of
30
commercial business loans, student loans and other loans. In addition, at June
30, 1996, the Bank had $18.4 million in standby letters of credit, one of which
totals $6.5 million to enhance a developer's industrial revenue bond financing
of commercial real estate located in the Bank's market area. The Bank's second
mortgage on this commercial real estate parcel has been restructured. See "Asset
Quality and Allowance for Loan Losses"
Environmental Issues. The Bank encounters certain environmental risks in its
lending activities. Under federal and state environmental laws, lenders may
become liable for the costs of cleaning up hazardous materials found on security
property. Although environmental risks are usually associated with industrial
and commercial loans, risks may be substantial for residential lenders like the
Bank if environmental contamination makes security property unsuitable for use.
This could also have effect on nearby property values. In accordance with FNMA
and FHLMC guidelines, appraisals for single-family residences on which the Bank
lends include comment on environmental influences. The Bank attempts to control
its risk by training its appraisers and underwriters to be cognizant of signs
indicative of environmental hazards. No assurance can be given, however, that
the values of properties securing loans in the Bank's portfolio will not be
adversely affected by unforeseen environmental risks, although the Bank is
unaware of any environmental issues which would subject it to liability at this
time.
Originations, Purchases, Sales, Swaps of Mortgage Loans and Mortgage-Backed
Securities. The Bank originates and purchases both ARM and fixed-rate loans.
Its ability to originate loans is dependent upon the relative customer demand
for fixed-rate or ARM loans in the origination and purchase market, which is
affected by the term structure (short-term compared to long-term) of interest
rates as well as the current and expected future level of interest rates. The
Bank sells loans in the secondary mortgage market, primarily conforming fixed-
rate mortgages, to reduce its interest rate risk exposure. Substantially all of
these loans are sold without recourse. These loan sales also allow the Bank to
continue to make loans when deposit flows decline or funds are not otherwise
available for lending. Generally, the loans are sold for cash or securitized
and sold in the secondary mortgage market to investors such as FNMA and FHLMC,
as well as investment banks and life insurance companies.
The Bank has also exchanged or swapped loans out of its portfolio for
mortgage-backed securities primarily with FNMA and FHLMC. Generally, the
mortgage-backed securities are used to collateralize borrowings and deposits or
are sold in the secondary market to raise additional funds. Swap activity by
the Bank is governed by pricing levels in the secondary mortgage market for
whole mortgage loans versus securitized mortgage loans, as well as the level of
rates for collateralized borrowings. During the current year, the Bank swapped
and sold $41.2 million of loans originated, while in 1995, it had no swap
activity.
The Bank has purchased mortgage-backed securities and collateralized mortgage
obligations from time to time that coincide with its ongoing asset/liability
management objectives. Purchases were minimal in 1996 and 1995 due to the high
level of originations of adjustable-rate loans which more than utilized the
Bank's available funds. In 1994, the Bank relied more on purchases of
mortgage-backed securities due to the fixed-rate nature of the Bank's
origination activity. The purchases were generally comprised of short-term
fixed-rate CMOs with estimated weighted average lives in the two to five year
range, and adjustable-rate CMOs.
All of the mortgage-backed securities and CMOs in the Bank's portfolio are
issued by or have collateral backed by FNMA, FHLMC or GNMA, or are backed with
whole loan collateral and have an investment grade rating. Coupon rates at June
30, 1996, ranged from 4.83% to 16.25%. At June 30, 1996, mortgage-backed
securities, net, totaled $418.1 million, or 13.4% of total assets, including
$44.3 million which collateralized CMOs issued by the Bank's special purpose
finance subsidiaries. At June 30, 1996, the Bank's mortgage-backed securities
portfolio had a market value of $415.0 million, including $43.8 million related
to the CMO's issued by the Bank's special-purpose finance subsidiaries.
31
The following table sets forth the Bank's originations, purchases, sales,
swaps and principal repayments of loans receivable and mortgage-backed
securities for the periods indicated.
For the Year Ended June 30,
-----------------------------------
1996 1995 1994
-------------- -------- ---------
(In thousands)
Loans receivable:
Loans originated:
Adjustable-rate:
Real estate:
One-to four-family $ 120,747 184,874 201,464
Multi-family 16,061 20,425 9,593
Commercial 340 190 679
Construction 20,642 9,142 16,200
Land 19,134 12,528 3,018
Other loans:
Commercial business 811 450 167
Consumer 63,795 57,803 47,461
---------- ------- --------
Total adjustable-rate 241,530 285,412 278,582
Fixed-rate:
Real estate:
One-to four-family 348,629 101,100 466,136
Multi-family 10,847 1,989 832
Commercial 1,052 571 2,894
Construction 6,890 25,171 15,506
Land 7,439 8,433 14,484
Other loans - consumer 10,301 5,861 1,812
---------- ------- --------
Total fixed-rate 385,158 143,125 501,664
---------- ------- --------
Total loans originated 626,688 428,537 780,246
Loans purchased:
Fixed-rate one-to four-family real estate 93,270 31,221 12,071
Adjustable-rate one-to four-family real
estate 267,645 125,054 20,730
Other 2,151 1,070 642
---------- ------- --------
Total loans purchased 363,066 157,345 33,443
---------- ------- --------
Total loans originated and purchased 989,754 585,882 813,689
---------- ------- --------
Loans acquired through merger 749,740 - -
Loans sold:
One-to four-family (fixed rate) 267,352 92,725 341,614
Consumer loans 1,805 2,466 2,069
---------- ------- --------
Total loans sold 269,157 95,191 343,683
FHLMC and FNMA mortgage loan swaps 41,195 - 4,835
Transfer to foreclosed real estate 515 1,016 2,041
Amortization and prepayments 394,274 231,165 419,062
---------- ------- --------
Total loans sold, loan swaps,
amortization and prepayments 705,141 327,372 769,621
---------- ------- --------
Net increase during period $ 1,034,353 258,510 44,068
========== ======= ========
Mortgage-backed securities:
Mortgage-backed securities purchased $ - 10,000 170,623
Mortgage-backed securities acquired
through merger 181,144 - -
Mortgage-backed securities swaps 41,195 - 4,835
Mortgage-backed securities sold (41,195) - (8,170)
Amortization and prepayments (69,790) (49,583) (182,930)
---------- ------- --------
Net increase (decrease) during period $ 111,354 (39,583) (15,642)
========== ======= ========
32
Servicing of Mortgage Loans. Upon sale, the Bank normally retains the
responsibility for collecting and remitting loan payments, inspecting properties
securing the loans, assuring that real estate tax payments are made on behalf of
borrowers, and otherwise servicing the loans. Typically, the Bank receives a
servicing fee for performing the aforementioned services equal to at least 1/4
of 1% for fixed-rate mortgages and at least 3/8 of 1% for ARM loans on the
outstanding principal balance of the sold loan being serviced.
The following table sets forth information as to the Bank's loan servicing
portfolio, excluding loans owned by the Bank which are serviced by others. The
increase in loans serviced for others in 1996 was due to the increase in loan
sale volume, while in 1995 the increase was primarily due to bulk purchase of
servicing rights on $66.8 million of loans.
At June 30,
-----------------------------------------------------------------
1996 1995 1994
------------------- ------------------- ------------------
Amount Percent Amount Percent Amount Percent
-------- ------- ------ ------- ------ --------
(Dollars in thousands)
Loans owned by the Bank $ 1,646,710 61.28 $ 1,277,532 59.00% $ 1,022,589 55.38%
Loans serviced for others 1,040,260 38.72 887,887 41.00 823,924 44.62
---------- ------ ---------- ------ ---------- ------
Total loans serviced $ 2,686,970 100.00% $ 2,165,419 100.00% $ 1,846,513 100.00%
========== ====== ========== ====== ========= ======
Information regarding the Bank's servicing fee income from loans serviced for
others is summarized in the following table for the periods indicated:
For the Year Ended June 30,
-------------------------------
1996 1995 1994
--------- --------- ---------
(Dollars in thousands)
Average balance of loans serviced for others $963,757 $881,050 $813,111
Loan servicing income 2,394 2,373 2,456
Net servicing spread during the period (1) .25% .27% .30%
- -------------------------------------------------------------------------------
(1) Loan servicing income divided by the average daily balance of loans
serviced for others.
Asset Quality and Allowance for Loan Losses
When a borrower fails to make a required payment by the end of the month in
which the payment is due, the Bank generally institutes collection procedures.
The Bank will send a late notice, and in most cases, delinquencies are cured
promptly; however, if a loan has been delinquent for more than 60 days, the Bank
contacts the borrower in order to determine the reason for the delinquency and
to effect a cure, and, where appropriate, reviews the condition of the property
and the financial circumstances of the borrower. Based upon the results of any
such investigation, the Bank may: (1) accept a repayment program for the
arrearage from the borrower; (2) seek evidence, in the form of a listing
contract, of efforts by the borrower to sell the property if the borrower has
stated that he is attempting to sell; (3) request a deed in lieu of foreclosure;
or (4) initiate foreclosure proceedings. When a loan payment is delinquent for
three or more monthly installments, the Bank will initiate foreclosure
proceedings. Interest income on loans is reduced by the full amount of accrued
and uncollected interest on loans which are in process of foreclosure or
otherwise determined to be uncollectible.
33
On July 1, 1995, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan,"
and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures," which impose certain requirements on the
identification and measurement of impaired loans. A loan is considered impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
the loan. For loans which are not individually significant (i.e. loans under
$500,000), and represent a homogeneous population, the Bank evaluates impairment
collectively based on management reports on the level and extent of
delinquencies, as well as historical loss experience for these types of loans.
The Bank uses this criteria on one-to four-family residential loans, consumer
loans, multi-family residential loans, and land loans. Impairment for loans
considered individually significant and commercial real estate loans are
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate, or the fair value of the collateral if the
loan is collateral dependent. At June 30, 1996, and throughout the year, the
Company had no loans which are considered impaired under the criteria of SFAS
No. 114. Charge-offs of principal occur when a loss has deemed to have occurred
as a result of the book value exceeding the fair value or net realizable value.
The Company's policy for recognition of interest income on impaired loans is
unchanged as a result of the adoption of SFAS No. 114 and 118. A loan (whether
considered impaired or not) is classified as non-accrual when collectibility is
in doubt, and is normally analyzed upon the borrower becoming 90 days past due
on contractual principal or interest payments. When a loan is placed on non-
accrual status, or in the process of foreclosure, previously accrued but unpaid
interest is reversed against 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.
Delinquent Loans. At June 30, 1996, 1995 and 1994, delinquencies in the
Bank's portfolio were as follows:
61-90 Days 91 or More Days
------------------------------ -------------------------------
Principal Principal
Number Balance of Percent Number Balance of Percent
of Delinquent of of Delinquent of
Loans Loans Total(1) Loans Loans Total(1)
------ ---------- ---------- ------ ----------- ----------
(Dollars in thousands)
June 30, 1996 24 $3,107 .14% 38 $5,504 .24%
== ====== === == ====== ===
June 30, 1995 10 $1,077 .09% 30 $2,564 .20%
== ====== === == ====== ===
June 30, 1994 21 $1,534 .15% 41 $3,837 .38%
== ====== === == ====== ===
- --------------------
(1) Percentage represents principal balance of delinquent loans to total loans
outstanding.
34
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,
non-accrual investment securities, and foreclosed real estate held by the Bank
at the dates indicated.
At or For the Year Ended June 30,
------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------- ------- -------
(Dollars in thousands)
One-to four-family and multi-family loans:
Non-accrual loans (1) $ 5,415 1,972 2,933 3,796 3,622
Accruing loans 91 or more days overdue 1,940 555 482 702 2,086
------- ----- ------ ------ ------
Total 7,355 2,527 3,415 4,498 5,708
------- ----- ------ ------ ------
Commercial real estate, construction and land loans:
Non-accrual loans (1) 433 - 312 - 1,269
Accruing loans 91 or more days overdue 459 100 118 659 104
Restructured or renegotiated 4,299 4,379 4,464 6,933 6,953
------- ----- ------ ------ ------
Total 5,191 4,479 4,894 7,592 8,326
------- ----- ------ ------ ------
Other loans:
Non-accrual loans (1) 287 168 163 419 256
Accruing loans 91 or more days overdue - - 24 15 54
------- ----- ------ ------ ------
Total 287 168 187 434 310
------- ----- ------ ------ ------
Total non-performing loans:
Non-accrual loans (1) 6,135 2,140 3,408 4,215 5,147
Accruing loans 91 or more days overdue 2,399 655 624 1,376 2,244
Restructured or renegotiated 4,299 4,379 4,464 6,933 6,953
------- ----- ------ ------ ------
Total $ 12,833 7,174 8,496 12,524 14,344
======= ===== ====== ====== ======
Non-accrual loans to total loans .27% .17% .33% .46% .57%
Accruing loans 91 or more days overdue to total loans .10 .05 .06 .15 .25
Restructured or renegotiated to total loans .19 .35 .44 .76 .76
----- --- ---- ---- ----
Non-performing loans to total loans .56% .57% .83% 1.37% 1.58%
===== === ==== ==== ====
Foreclosed real estate:
One-to four-family $ 888 311 1,379 386 333
Commercial real estate - 25 2,090 6,544 8,973
------- ----- ------ ------ ------
Total foreclosed real estate, net of related reserves $ 888 336 3,469 6,930 9,306
======= ===== ====== ====== ======
Non-accrual mortgage-derivative securities - - - - 526
======= ===== ====== ====== ======
Total non-performing assets $ 13,721 7,510 11,965 19,454 24,176
======= ===== ====== ====== ======
Total non-performing assets to total assets .44% .42% .75% 1.26% 1.60%
====== ==== ===== ===== =====
- ---------------------
(1) Consists of loans in the process of foreclosure or for which interest is
otherwise deemed uncollectible.
For the year ended June 30, 1996, 1995, 1994, 1993 and 1992, the amount of
interest income that would have been recorded on non-accrual loans amounted to
$132,000, $98,000, $168,000, $472,000, and $947,000, respectively, if the loans
had been current. For the year ended June 30, 1996, interest income on non-
accrual loans and troubled debt restructurings that was included in net income
amounted to $297,000.
Included in the $5.2 million of non-performing commercial real estate,
construction and land loans at June 30, 1996 are two loans totaling $4.3 million
representing restructured or renegotiated loans which meet the definition of
troubled debt restructurings under SFAS No. 15 "Accounting by Debtors and
Creditors for Troubled Debt Restructurings." These restructured or renegotiated
loans were earning an average rate of 6.48% at June 30, 1996, compared to 6.41%
at June 30, 1995.
35
Classified Assets. The federal regulators have adopted a classification
system for problem assets of insured institutions which covers all problem
assets. Under this classification system, problem assets of insured
institutions are classified as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified, "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
Assets classified as substandard at June 30, 1996 and 1995, are summarized as
follows:
June 30, 1996 June 30, 1995
------------------------ ------------------------
Number of Number of
Loans Amount Loans Amount
--------- ------ --------- ------
(Dollars in thousands)
Loans receivable:
One-to four-family and multi-family 55 $ 7,355 26 $ 2,527
Commercial, construction and land 5 5,191 4 4,479
Equity line of credit 12 287 7 163
Consumer-secured - - 1 5
--- ------- --- ------
72 12,833 38 7,174
=== ===
Foreclosed real estate 888 336
------- ------
$ 13,721 $ 7,510
======= ======
When an insured institution classifies problem assets as either substandard or
doubtful, it is required to establish general allowances for loan losses in an
amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such an amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the institution's Principal Supervisory Agent of the OTS,
who can order the establishment of additional general or specific loss
allowances.
In connection with the filing of its periodic reports with the OTS, the Bank
regularly reviews the problem loans in its portfolio to determine whether any
loans require classification in accordance with applicable regulations. At June
30, 1996 and 1995, the Bank had no loans classified as doubtful or loss. At
June 30, 1996, all non-performing loans are classified as substandard. The Bank
also considers the classification of investment securities, should such
securities show signs of deteriorating quality.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of all loans of which full
collectibility may not be reasonably assured, considers among other matters, the
estimated net realizable value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
recognition in providing for an adequate loan loss allowance.
36
The following table sets forth the Bank's allowance for loan losses at the
dates indicated. The balances below represent general loan loss reserves and
are not allocable to any one type of loan in the Bank's loan portfolio.
At June 30,
----------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------------ ------ ------
(Dollars in thousands)
Balance at beginning of period $ 9,197 8,779 7,993 5,736 1,888
Charge-offs:
One-to four-family (376) (72) (223) (221) (125)
Commercial - (7) - (196) (125)
Construction - - (112) - -
Land - - - - -
Consumer - (31) (82) (30) (31)
------- ------- ------ ----- -----
(376) (110) (417) (447) (281)
------- ------ ------ ----- -----
Recoveries:
One-to four-family - - - - 19
Commercial 10 - - - -
Construction - 49 - - -
Consumer 1 4 3 4 10
------- ------ ------ ----- -----
11 53 3 4 29
------- ------ ------ ----- -----
Net charge-offs (365) (57) (414) (443) (252)
Provision for loan losses 700 475 1,200 2,700 4,100
Balance related to acquisition 7,722 - - - -
------- ------ ------ ----- -----
Balance at end of period $17,254 9,197 8,779 7,993 5,736
======= ====== ====== ===== =====
Ratio of net charge-offs to
average loans outstanding .03% .01 .04 .05 .03
Ratio of allowance for loan losses to total
loans receivable .75 .73 .86 .87 .63
Ratio of allowance for loan losses to total
non-performing loans 134.45 128.20 103.33 63.82 39.99
Ratio of allowance for loan losses to total
non-performing assets 125.75 122.46 73.37 41.09 23.73
At June 30, 1996, the Bank maintained no specific reserves on its loan
portfolio. As such, the $17.3 million allowance for loan losses, based on
currently available information, is a general reserve. As of June 30, 1996,
management is unaware of any specifically identifiable charge-offs in its loan
portfolio. Assuming no significant adverse changes in existing market
conditions, management anticipates charge-offs in fiscal 1996 to increase
moderately over historical amounts as a result of the acquisition of NSBI.
However, no assurances can be made that charge-offs will not be less than or
exceed this estimate if facts or circumstances change in the future.
37
At June 30, 1996, the Bank's loan portfolio consists of 88.0% of one-to four-
family real estate loans, with an additional 3.9% being equity lines of credit
or home equity loans on one-to four-family real estate. Based on the Bank's
historical high asset quality, low charge-off experience and concentration on
one-to four-family lending in its market area, management considers the risk of
loss due to these loans as minimal. The remaining 8.1% of the Bank's portfolio,
or $189.5 million, consists of multi-family mortgage, commercial real estate,
construction, land, and other loans. These loans generally tend to exhibit
greater risk of loss than do one-to four-family loans, primarily because such
loans typically carry higher loan balances and repayment is dependent, in large
part, on sufficient income to cover operating expenses. In addition, economic
events and government regulations, which are outside the control of the Bank and
the borrower, could impact the security of the loan or the future cash flow of
affected properties. Management has addressed these risks through its
underwriting standards.
With respect to multi-family loans, the Bank has traditionally limited its
lending to small apartment buildings, which management believes lower risk than
larger properties. At June 30, 1996, in the Bank's $94.7 million multi-family
portfolio, only 7 loans are on properties greater than 36 units and the average
multi-family loan size is $246,000. In addition, almost all of the Bank's
construction and land loans are on residential property. All of the Bank's
multi-family, construction and land loans are secured by properties located in
the Chicago metropolitan area.
Investment Activities
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Bank is to invest funds among various
categories of investments and maturities based upon the Bank's asset/liability
management policies, investment quality and marketability, liquidity needs and
performance objectives.
The Bank is required to maintain liquid assets at minimum levels. See
"Regulation and Supervision - Federal Savings Institution Regulation -
Liquidity." The Bank's liquid investments include interest-bearing deposits,
primarily at the Federal Home Loan Bank of Chicago, federal funds sold and U.S.
Government and federal agency obligations. The Bank invests overnight federal
funds with two large commercial banks in Chicago, based upon periodic review of
these institutions' financial condition. The Bank generally limits overnight
federal funds to amounts ranging up to $25.0 million at each institution.
38
The table below sets forth information regarding the carrying value, weighted
average yields and maturities of the Company's investment securities.
At June 30, 1996
----------------------------------------------------------------------------------
One Year 1 to 5 to More than
or Less 5 Years 10 Years 10 Years
------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
U.S. Government and agency
securities:
Held for investment $47,301 7.31% $10,000 4.25% $19,646 7.17% $24,321 7.69 %
Available for sale 10,982 5.24 12,839 5.38 - - - -
Marketable equity securities (1):
Common stock - - - - - - 1,704 2.47
Preferred stock - - - - - - 10,868 9.26
Other investment securities:
Held for investment 957 5.35 - - - - 1 5.00
Available for sale - - - - 1,903 7.79 - -
------- ------- ------- -------
Total $ 59,240 6.89% $ 22,839 4.88% $ 21,549 7.22% $ 36,894 7.91%
======= ===== ======= ==== ======= ==== ======= =======
Total Investment Securities
---------------------------------------
Average Weighted
Life Carrying Market Average
in Years Value Value Yield
-------- -------- -------- --------
U.S. Government and agency
securities:
Held for investment 5.39 $101,268 $101,143 7.08%
Available for sale 1.40 23,821 23,821 5.31
Marketable equity securities (1):
Common stock - 1,704 1,704 2.47
Preferred stock - 10,868 10,868 9.26
Other investment securities:
Held for investment .06 958 958 5.35
Available for sale 6.90 1,903 1,903 7.79
-------- --------
Total 4.66 $140,522 $140,397 6.89%
====== ======== ======== =======
- ------------------------------
(1) Marketable equity securities with no stated maturity are included in the
"More than 10 Years" category.
39
The following table sets forth certain information regarding the book value of
the Company's and the Bank's liquidity and investment securities portfolio at
the dates indicated. At June 30, 1996 and 1995, the fair value of the
investment securities portfolio was $140.4 million and $77.3 million,
respectively.
At June 30,
----------------------------
1996 1995 1994
------- ----------- ------
(In thousands)
Interest-bearing deposits $ 37,496 10,465 29,922
======= ======= =======
Federal funds sold $ 5,700 9,360 17,450
======= ======= =======
Investment securities:
Available for sale:
U.S. Government and agency securities $ 23,821 9,993 -
Marketable equity securities 12,572 8,232 7,502
Other investment securities 1,903 5,863 -
------- ------- -------
Total investments available for sale 38,296 24,088 7,502
------- ------- -------
Held to maturity:
U.S. Government and agency securities 101,268 53,085 78,309
Other investment securities 958 121 1,702
------- ------- -------
Total investments held to maturity 102,226 53,206 80,011
------- ------- -------
Total investment securities $ 140,522 77,294 87,513
======= ======= =======
The classification of investments as available for investment, available for
sale, or for trading purposes is made at the time of purchase based upon
management's intent at that time. At June 30, 1996, $38.3 million of investment
securities were classified as available for sale and appropriately recorded at
fair value (cost basis of $38.0 million). At June 30, 1995, $24.1 million of
investments were categorized as available for sale, with a cost basis of $23.7
million.
Sources of Funds
The Bank's primary sources of funds are deposits, amortization and prepayment
of loan principal (including mortgage-backed securities), borrowings, sales of
mortgage loans, sales or maturities of investment securities, mortgage-backed
securities and short-term investments, and funds provided from operations.
Deposits. The Bank offers a variety of deposit accounts having a wide range
of interest rates and terms. The Bank's deposits consist of passbook accounts,
NOW and checking accounts, money market and certificate accounts. The Bank only
solicits deposits from its market area and does not use brokers to obtain
deposits. The Bank relies primarily on competitive pricing policies,
advertising, and customer service to attract and retain these deposits. The
flow of deposits is influenced significantly by general economic conditions,
changes in money market and prevailing interest rates and competition.
In fiscal 1996, 1995 and 1994, the net increase in deposits resulted primarily
from interest credited on deposits. The Bank had a small net deposit inflows
(exclusive of the acquisition of NSBI) in 1996, while having withdrawals which
exceeded deposits in 1995 and 1994, primarily due to the inability to attract
additional savings dollars at a reasonable cost due to competition from other
financial institutions, as well as from money market funds, bond funds and other
alternative investments.
40
Deposit Portfolio. The following tables sets forth the distribution and the
weighted average nominal interest rates of the Bank's average deposit accounts
at the dates indicated.
At June 30,
------------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------------- -------------------------------- ------------------------------
Percent Weighted Percent Weighted Percent Weighted
of Average of Average of Average
Average Total Nominal Average Total Nominal Average Total Nominal
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
---------- -------- -------- --------- -------- ------ --------- -------- --------
(Dollars in thousands)
Passbook accounts $ 288,389 20.48% 3.10% $ 262,691 20.26% 3.13% $ 267,389 20.75% 2.86%
Interest bearing NOW
accounts 121,187 8.61 1.69 110,222 8.50 1.77 101,595 7.88 1.81
Non-interest bearing
checking 27,508 1.95 - 21,914 1.69 - 19,116 1.48 -
Commercial checking
accounts 30,157 2.14 - 25,662 1.98 - 28,400 2.20 -
---------- ------- --------- ------- ---------- ----
Total passbook, NOW
and checking accounts 467,241 33.18 2.35 420,489 32.43 2.42 416,500 32.31 2.28
---------- ------- --------- ------- ---------- ------
Money market accounts 138,837 9.86 3.09 148,291 11.44 2.95 160,861 12.47 2.44
Jumbo deposits 29,993 2.13 5.55 21,220 1.64 5.01 18,291 1.42 4.51
Certificate accounts
with original
maturities of:
7 days to 31 days 343 .02 4.77 359 .03 4.38 287 .02 2.99
32 to 90 days 521 .04 5.29 491 .04 4.03 531 .04 3.00
91 days 9,240 .65 4.75 8,681 .67 4.01 7,700 .60 2.97
6 months 137,525 9.77 5.45 114,833 8.86 4.57 108,753 8.43 3.14
8 months 13,890 .99 5.58 - - -
9 months 8,020 .57 5.25 - - -
10 months 6 - 3.13 4,751 .37 3.78 8,274 .64 3.57
---------- ------- --------- ------- ---------- ------
Total jumbo
certificates of
deposits and 7-day
to 10 month
certificate accounts 199,538 14.17 5.43 150,335 11.61 4.58 143,836 11.15 3.33
---------- ------- --------- ------- ---------- ------
Certificate accounts
with original
maturities of:
12 months 119,531 8.49 5.65 96,162 7.42 4.36 101,126 7.84 3.44
18 months 92,600 6.58 5.86 61,064 4.71 4.91 34,986 2.71 3.78
19 months 4,313 .31 5.89 - - - - - -
24 months 48,596 3.45 5.96 23,128 1.78 4.66 29,751 2.31 4.33
30 months 118,505 8.41 5.89 163,641 12.63 5.37 152,608 11.83 5.31
36 months 2,065 .15 5.12 - - - - - -
42 months 30,713 2.18 5.90 27,763 2.14 5.84 25,266 1.96 6.18
48 months - - - 1,629 .13 7.97 3,712 .29 8.10
60 months 101,004 7.17 6.11 90,310 6.97 6.20 85,803 6.65 7.22
61 months to 120
months 84,438 6.00 8.04 112,652 8.69 8.81 134,659 10.44 9.46
Other 785 .05 5.62 625 .05 5.21 539 .04 4.53
---------- ------- --------- ------- ---------- ------
Total 12-month to
120-month certificate
accounts and other
certificate accounts 602,550 42.79 6.18 576,974 44.52 5.95 568,450 44.07 6.16
---------- ------- --------- ------- ---------- ------
Total deposits $1,408,166 100.00% 4.50% $1,296,089 100.00% 4.30% $1,289,647 100.00% 4.13%
========= ======= ======== ========= ======= ===== ========= ====== =====
41
The following table presents the deposit activity of the Bank for the
periods indicated:
At June 30,
-----------------------------------------------
1996 1995 1994
---------- ---------- ----------
(In thousands)
Deposits $ 4,458,404 3,547,326 3,564,535
Withdrawals (4,452,055) (3,577,181) (3,611,113)
---------- ---------- -----------
Deposits greater (less) than withdrawals 6,349 (29,885) (46,578)
Deposits acquired, including acquisition premium, net 872,419 - -
Interest credited on deposits 62,026 50,630 49,037
---------- ---------- -----------
Net increase in deposits $ 940,794 20,775 2,459
========== ========== ===========
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at June 30, 1996, 1995 and 1994, and the
periods to maturity of the certificate accounts outstanding at June 30, 1996.
Period to Maturity June 30, 1996
-------------------------------------
At June 30, Within 1 to 3 Over
--------------------------------
1996 1995 1994 One Year Years 3 Years Total
---------- ----------- ------- -------- ------- ------- ---------
(In thousands)
Certificate accounts:
3.99% or less $ 1,080 12,814 260,014 1,072 3 5 1,080
4.00% to 4.99% 192,338 103,927 106,670 186,439 5,883 16 192,338
5.00% to 5.99% 746,819 287,222 108,973 528,943 197,729 20,147 746,819
6.00% to 6.99% 217,707 236,593 77,862 82,392 84,773 50,542 217,707
7.00% to 7.99% 30,581 33,077 33,399 10,440 13,181 6,960 30,581
8.00% to 8.99% 41,779 50,186 56,865 5,265 35,641 873 41,779
9.00% to 9.99% 1,191 18,636 18,635 57 1,134 - 1,191
10.00% to 10.99% - 4,163 9,535 - - - -
11.00% to 11.99% - - 16,495 - - - -
12.00% or greater - - 21,721 - - - -
---------- ------- ------- ------- ------- ------ ---------
Total $1,231,495 746,618 710,169 814,608 338,344 78,543 1,231,495
========== ======= ======= ======= ======= ====== =========
At June 30, 1996, the Bank had outstanding $136.2 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
Period to Maturity Amount
------------------ --------
(In thousands)
Three months or less $ 34,767
Over three through six months 27,180
Over six through 12 months 26,459
Over 12 months 47,799
--------
Total $ 136,205
========
Borrowings. Although deposits are the Bank's primary source of funds, the
Bank's policy has been to utilize borrowings, such as advances from FHLB of
Chicago, and reverse repurchase agreements, when they are a less costly source
of funds or can be invested at a positive rate of return.
The Bank obtains advances from the FHLB of Chicago upon the security of its
capital stock in the FHLB of Chicago and a blanket pledge of certain of its
mortgage loans. See "Regulation and Supervision - Federal Home Loan Bank
System." Such advances are made pursuant to several different credit programs,
each of which has its own interest rate and range of maturities. The maximum
amount that the FHLB of Chicago will advance to member institutions, including
the Bank, for purposes other than meeting
42
withdrawals, fluctuates from time to time in accordance with the policies of the
OTS and the FHLB of Chicago. The maximum amount of FHLB of Chicago advances to a
member institution generally is reduced by borrowings from any other source. At
June 30, 1996, the Bank's FHLB of Chicago advances totaled $420.5 million,
representing 13.5% of total assets.
A summary of the Company's borrowed funds at June 30, 1996, 1995 and 1994 is
as follows:
Weighted Average
Interest Rate Amount
--------------------- -----------------------------
1996 1995 1994 1996 1995 1994
------ ------ ----- --------- -------- --------
(Dollars in thousands)
Fixed rate advances from FHLB of Chicago due:
1996% - % 9.73 9.73 $ - 25,000 25,000
1997 7.15 7.15 - 50,000 50,000 -
1998 6.38 6.41 5.33 50,000 25,000 10,000
1999 8.27 8.27 8.27 15,000 15,000 15,000
2000 6.64 6.64 5.87 80,000 80,000 35,000
2001 6.45 6.39 5.77 65,000 40,000 15,000
2002 6.13 5.62 5.62 30,000 5,000 5,000
2003 6.13 6.13 6.13 5,500 5,500 5,500
-------- ------- -------
Total fixed rate advances 6.66 7.06 7.01 295,500 245,500 110,500
Adjustable rate advances from FHLB of Chicago due:
1997 5.79 7.09 - 125,000 15,000 -
-------- ------- -------
Total advances from FHLB of Chicago 6.40 7.06 7.01 420,500 260,500 110,500
-------- ------- -------
Collateralized mortgage obligations:
Issued by MAFC due 2018 (1) 15,928 20,470 25,133
Unamortized discount (1,202) (1,621) (2,116)
-------- ------- -------
11.42 11.19 16.00 14,726 18,849 23,017
Issued by NWAC due 2018 (2) 27,419 - -
Unamortized premium 247 - -
-------- ------- ------
8.05 - - 27,666 - -
-------- ------- -------
Total collateralized mortgage obligations, net 42,392 18,849 23,017
-------- ------- -------
Unsecured term bank loan payable, due 2004 6.47 - - 35,000 - -
Reverse repurchase agreements 6.74 5.96 4.00 39,804 27,675 12,675
Other collateralized borrowings - - 2.00 - - 3,518
Debt of Employee Stock Ownership Plan - - 7.25 - - 146
-------- ------- -------
6.23% 7.22 8.02 $ 537,696 307,024 149,856
===== ===== ===== ======== ======= =======
- ---------------
(1) See "Subsidiary Activities - Mid America Finance Corporation."
(2) See "Subsidiary Activities - Northwestern Acceptance Corporation."
Subordinated Capital Notes. During the second quarter of fiscal 1996, the
Company refinanced its $20.9 million of 10% Subordinated Capital Notes due June
30, 2002 with $27.6 million of 8.32% Subordinated Notes due September 30, 2005.
The payment of principal and interest on the current notes is subordinated at
all times to any indebtedness or liability of the Company outstanding or
incurred after the date of issuance. Costs incurred in the refinance transaction
amounted to $1.0 million and are being accreted over the life of the notes
yielding an effective interest rate of 8.85%. The capital notes are callable at
the discretion of the Company at any time after September 30, 1998, at par plus
any accrued interest. The indenture provides for restrictions on the amounts of
additional indebtedness the Company may incur as well as the amount of dividends
and other distributions it may pay with respect to its equity securities,
depending on the Company's capital ratio. The refinance transaction resulted in
a $474,000, or $0.08 per share extraordinary charge to earnings due to the early
extinguishment of debt as a result of writing-off the remaining unamortized
transaction costs of $774,000, net of income taxes of $300,000.
43
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 interest sensitivity gap ratio within a range
of (15)% to 15% of total assets, which helps the Bank to maintain a more stable
net interest rate spread in various interest rate environments. The gap ratio
fluctuates as a result of market conditions and management's expectation of
future interest rate trends. Under OTS Thrift Bulletin 13, the Bank is required
to measure its interest rate risk assuming various increases and decreases in
general interest rates, and the effect on net interest income and market value
of portfolio equity. An interest rate risk policy has been approved by the
Board of Directors setting the limits to changes in net interest income and
market value of portfolio equity at the various rate scenarios required. In
addition, the OTS has added an interest rate risk component to its regulatory
capital requirements which could require an additional amount of capital based
on the level of adverse change in a savings institution's market value of
portfolio equity, resulting from changes in interest rates. Management
continually reviews its interest rate risk policies in light of potential higher
capital requirements that could result from the adoption of an interest rate
risk component to the OTS capital requirements.
The Bank's asset/liability management strategy emphasizes the origination of
one- to four-family adjustable-rate loans and other loans which have shorter
terms to maturity or reprice more frequently than fixed-rate mortgage loans,
yet, provide a positive margin over the Bank's cost of funds. In response to
customer demand, the Bank originates fixed-rate mortgage loans, but sells the
majority of these loans in the secondary market in order to maintain its
interest rate sensitivity levels.
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.
44
The table below sets forth the scheduled repricing or maturity of the
Bank's assets and liabilities at June 30, 1996, based on the assumptions used by
the FHLB of Chicago with respect to NOW, checking and passbook account
withdrawals and loan prepayment percentages. In a departure from the FHLB of
Chicago assumptions, which assume a 0% prepayment for other borrowings, the Bank
assumes that the collateralized mortgage obligations included in other
borrowings prepay at the same rate used for the mortgage-backed securities
collateralizing these obligations, while the NWAC collateralized mortgage
obligations are adjustable-rate and included in the 6 months or less category.
The effect of these assumptions is to quantify the dollar amount of items
that are interest-sensitive and may be repriced within each of the periods
specified. The table does not necessarily indicate the impact of general
interest rate movements on the Bank's net interest yield because the repricing
of certain categories of assets and liabilities is subject to competitive and
other pressures beyond the Bank's control. As a result, certain assets and
liabilities indicated as maturing or otherwise repricing within a stated period
may, in fact, mature or reprice at different times and at different volumes.
At June 30, 1996
---------------------------------------------------------------------------
Less Than
1/2 Yr. 1/2 - 1 Yr. 1 - 3 Yrs. 3 - 5 Yrs. 5+ Yrs. Total
-------------- ----------- ----------- ---------- --------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable $ 851,538 293,341 637,830 254,173 277,014 2,313,896
Mortgage-backed securities 182,335 29,361 58,772 43,862 102,808 417,138
Investment securities (1) 91,357 17,693 12,932 - 50,074 172,056
Interest-bearing deposits 37,496 - - - - 37,496
Federal funds sold 5,700 - - - - 5,700
----------- ------- ------- ------- ------- ---------
Total interest-earning assets 1,168,426 340,395 709,534 298,035 429,896 2,946,286
Less yield adjustments, net (185) 80 (225) (468) (2,286) (3,084)
Impact of hedging activities (2) 7,447 - - - (7,447) -
----------- ------- ------- ------- ------- ---------
Total net interest-earning assets,
adjusted for impact of hedging activities 1,175,688 340,475 709,309 297,567 420,163 2,943,202
Interest-bearing liabilities:
NOW and checking accounts 13,188 11,351 40,762 25,807 54,839 145,947
Money market accounts 139,684 - - - - 139,684
Passbook accounts 57,096 52,245 191,214 118,777 252,404 671,736
Certificate accounts 613,163 225,182 315,049 67,509 10,977 1,231,880
FHLB advances 160,000 15,000 65,000 145,000 35,500 420,500
Other borrowings 64,666 1,800 45,804 4,000 27,602 143,872
----------- ------- ------- ------- ------- ---------
Total interest-bearing liabilities 1,047,797 305,578 657,829 361,093 381,322 2,753,619
----------- ------- ------- ------- ------- ---------
Interest sensitivity gap $ 127,891 34,897 51,480 (63,526) 38,841 189,583
=========== ======= ======= ======= ======= =========
Cumulative gap $ 127,891 162,788 214,268 150,742 189,583
=========== ======= ======= ======= =======
Cumulative gap as a percentage
of total assets 4.10% 5.22 6.87 4.84 6.08
Cumulative net interest-earning assets as
a percentage of interest-bearing liabilities 112.21% 112.03 110.65 106.35 106.88
- -------------------------
(1) Includes $30.7 million of stock in FHLB of Chicago in 6 months or less.
(2) Represents forward commitments to sell long-term fixed-rate mortgage loans.
45
Liquidity and Capital Resources
The Company's principal sources of funds are cash dividends paid by the Bank
and MAF Developments, and liquidity generated by the issuance of common stock,
preferred stock, or borrowings. The Company's principal uses of funds are
interest payments on the Company's borrowed funds, cash dividends to
shareholders, loans to and investments in MAF Developments, stock repurchases,
as well as investment purchases with excess cash flow. In addition, cash has
been used to fund stock buyback programs as a means of reducing the number of
shares outstanding. During the last two years, the Company has repurchased
527,675 shares of its common stock for a total of $12.5 million, including
100,000 shares for $2.5 million which were owned by NSBI prior to the
acquisition.
The Company obtained a $35.0 million unsecured term bank loan in conjunction
with its acquisition of NSBI. The loan provides for an interest rate of the
prime rate or 1% over one, two or three-month LIBOR at management's discretion
adjustable and payable at the end of the repricing period. The loan currently
carries an interest rate of 1% over one-month LIBOR. The loan is convertible
all or in part, with certain limitations at the end of any repricing period, at
management's election to a fixed rate at 1.25% over the U.S. Treasury rate with
a maturity corresponding to the remaining term of the loan. The loan requires
increasing annual principal payments starting in December 1997 with $9.2 million
due at the final maturity of the loan on December 31, 2003. Prepayments of
principal are allowed, but fixed-rate portions are subject to penalty. In
conjunction with the term bank loan, the Company also maintains a $15.0 million
one year unsecured revolving line of credit which matures January 26, 1997, but
is renewable. The interest rate on the line of credit is the prime rate or 1%
over one, two, or three-month LIBOR, at management's discretion with interest
payable at the end of the repricing period. No amounts have been drawn on the
line of credit. The financing agreements contain covenants that, among other
things, requires the Company to maintain a minimum stockholders' equity balance
and to obtain certain minimum operating results, as well as requiring the Bank
to maintain "well capitalized" regulatory capital levels and certain non-
performing asset ratios. In addition, the Company has agreed not to pledge any
stock of the Bank or MAF Developments for any purpose. At June 30, 1996, the
Company was in compliance with these covenants.
During the years ended June 30, 1996 and 1995, the Company received cash
dividends from the Bank totaling $69.0 million and $10.0 million, respectively.
The large increase in 1996 was due to the acquisition of NSBI. After the
acquisition was complete, the Company received $65.0 million from the Bank due
to its overcapitalization for regulatory purposes from the merger with
Northwestern. The Company paid $.32 per share in cash dividends to common
shareholders in 1996, compared to $.291 per share in 1995.
The Bank's principal sources of funds are deposits, advances from the FHLB of
Chicago, principal repayments on loans and mortgage-backed securities, proceeds
from the sale of loans and funds provided by operations. While scheduled loan
and mortgage-backed securities amortization and maturing interest-bearing
deposits are a relatively predictable source of funds, deposit flows and loan
and mortgage-backed securities prepayments are greatly influenced by economic
conditions, the general level of interest rates and competition. The Bank
utilizes particular sources of funds based on comparative costs and
availability. The Bank generally manages the pricing of its deposits to maintain
a steady deposit balance, but has from time to time decided not to pay rates on
deposits as high as its competition, and when necessary, to supplement deposits
with longer term and/or less expensive alternative sources of funds, such as
advances from the FHLB of Chicago. During the current year the Bank borrowed
$160.0 million (net) in FHLB of Chicago advances and an additional $12.1 million
(net), under reverse repurchase agreements to fund adjustable-rate loan volume
which has been held in portfolio by the Bank.
46
The Bank is required by regulation to maintain specific minimum levels of
liquid investments. Regulations currently require the Bank to maintain liquid
assets at least equal to 5.0% 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 year ended June 30, 1996, the Bank's average
liquidity ratio was 6.86%. At June 30, 1996, total liquidity was $167.1 million,
or 6.81%, which was $44.4 million in excess of the 5.0% regulatory requirement.
This excess liquidity has provided the Bank with the flexibility needed to
maintain its short-term gap ratios within strategic limits, as well as most
recently, to fund the increased loan volume.
During the year ended June 30, 1996, the Bank originated and purchased loans
totaling $989.8 million compared with $585.9 million during the year ended June
30, 1995. The Bank has outstanding commitments to originate loans of $100.9
million and to purchase loans of $65.1 million and commitments to sell loans of
$39.4 million at June 30, 1996. The Company expects to fund current and future
loan commitments using principal repayments on loans and mortgage-backed
securities, as well as outside funding sources.
Subsidiary Activities
Mid America Developments, NW Financial and MAF Developments. The Bank engages
in the business of purchasing unimproved land for development into residential
subdivisions of single family lots through its wholly-owned subsidiary, Mid
America Developments. The Bank has been engaged in this activity since 1974,
and since that time has developed and sold over 4,000 lots in 19 different
subdivisions in the western suburbs of Chicago. Mid America Developments acts
as sole principal or as a joint venture partner in its developments. For those
joint ventures it is engaged in, Mid America Developments has historically
provided essentially all of the capital for a joint venture and receives in
exchange an ownership interest in the joint venture which entitles it to a
percentage of the profit or loss generated by the project. Mid America
Developments only invests in real estate development projects which it believes
it can monitor effectively. To date, such projects have all been located in its
market area. Mid America Developments has a percentage interest in the net
profit of each joint venture, generally 50%, with the exact percentage based
upon a number of factors, including characteristics of the venture, the
perceived risks involved, and the time to completion. The net profits are
generally defined in the joint venture agreement as the gross profits of the
joint venture from sales, less all expenses, loan repayments and capital
contributions.
In the acquisition of NSBI, the Bank acquired NW Financial, which is active in
the development of unimproved land for development into residential
subdivisions, as well as the construction of single-family homesites on the
improved lots. NW Financial currently has three projects whereby it and a
venture partner share in the profits of the projects on a 50/50 basis. NW
Financial also provides the funds, via loans, to the projects. NW Financial was
a borrower from Northwestern, or since acquisition, from the Bank. The projects
are located in the north and northwest suburbs of Chicago.
OTS regulations imposed restrictions on the Bank's participation in real
estate development activities through Mid America Developments. See "Regulation
and Supervision - Federal Savings Institution Regulation - Capital
Requirements." In response to the restrictions imposed by the OTS, Mid America
Developments' activities, since 1989, have been limited to the completion of
then-existing projects. Mid America Developments has not initiated any new
projects since 1989. In 1993, the Company formed a wholly-owned subsidiary, MAF
Developments, to continue its land development activities. As a subsidiary of
the Company, the activities of MAF Developments are not restricted by OTS
regulations as they are for the Bank. The Bank also plans to limit the activity
of NW Financial to the completion of the three existing projects in process as
of the acquisition.
47
The following is a summary as of June 30, 1996, of the residential real estate
projects Mid America Developments, NW Financial and MAF Developments currently
has an interest in:
Lots
Date Number of Number Available For
Land Lots Sold but Development Total Investment
Description of Project Acquired Sold Not Closed or Sale Lots Balance
- ------------------------- -------- --------- ---------- ------------- ----- ----------
(Dollars in thousands)
Mid America Developments:
Ashbury 1/87-6/87 1,084 31 - 1,115 $ 1,196
1,115 residential lots
13-acre commercial parcel
Woods of Rivermist 6/86 21 5 5 31 755
31 residential lots
NW Financial:
Woodbridge 2/90 357 14 160 531 6,475
531 single-family homes
48-acre commercial parcel
Reigate Woods 10/93 18 14 53 85 7,734
85 single-family homes
Fields of Ambria 9/89-5/91 212 11 17 240 2,381
240 single-family homes
MAF Developments, Inc.:
Clow Creek Farm 6/93 226 13 21 260 1,168
260 residential lots
Creekside of Remington N/A 33 - 137 170 1,807
170 residential lots
Harmony Grove 11/94 126 260 386 5,104
------
386 residential lots
5-acre commercial parcel $ 26,620
======
The following table is a summary of the Bank's investment in and advances to
Mid America Developments and NW Financial at June 30:
1996 1995 1994
------- ----- ------
(In thousands)
Common stock $ 1,657 1,397 1,397
Retained earnings 12,308 2,977 8,570
Intercompany advances 7,729 265 2,813
------- ----- ------
$21,694 4,639 12,780
======= ===== ======
During the years ended June 30, 1996 and 1995, Mid America Developments paid
dividends of $2.0 million and $9.2 million, respectively to the Bank. The
remaining investment is subject to a capital deduction for the Bank in computing
its regulatory capital requirements, equal to 60% or $13.0 million as of June
30, 1996. This deduction increased to 100% as of July 1, 1996. The large
addition in the total balance in 1996 is solely due to the acquisition of NW
Financial.
48
The following is a description of the current projects involving Mid
America Developments:
Ashbury
The Ashbury subdivision is located in Naperville, Illinois, and consists of
1,115 lots. A venture partner participates in 50% of the profits on 482 of the
total lots under a joint venture agreement. A summary of lots as of June 30,
1996 is as follows:
Non-
Venture Venture Total
------- ------- -----
Total lots 482 633 1,115
=== === =====
Total sold 466 618 1,084
Pending sales 16 15 31
Remaining - -
--- --- -----
482 633 1,115
=== === =====
Development of Ashbury was substantially completed during 1995. At June 30,
1996, all of the remaining lots are under contract and are expected to be closed
by the end of the second quarter of 1997.
Mid America Developments also owns a 13-acre commercial site in the Ashbury
development. The Bank opened a temporary branch location on this property in
July 1994 under a land lease with Mid America Developments. The site was sold
in July 1996, at a pre-tax profit of $730,000, with an agreement that the Bank's
temporary branch can remain on the property for a period of two years.
Woods of Rivermist
Mid America Developments is a participant in a joint venture in a 31-lot
development in Naperville, Illinois. Mid America Developments receives 50% of
the profits from the development. At June 30, 1996, Mid America Development's
investment in the Woods of Rivermist joint venture was $755,000. At June 30,
1996, 21 of the 31 lots of this development were sold with 5 lots under contract
as of June 30, 1996.
The following is a summary of projects at MAF Developments, Inc.
Clow Creek Farm
MAF Developments, Inc. purchased a 103 acre parcel of land in 1993 for the
development of 260 lots in Naperville, Illinois, adjacent to the Ashbury
subdivision. As of June 30, 1996, the Company's investment was $1.2 million.
The development is substantially complete, and 226 sales have been closed, with
145 lot sales in 1996. At June 30, 1996, there are 13 lots under contract. The
Company expects to be substantially sold out of Clow Creek Farm by the end of
1997.
Creekside of Remington
MAF Developments, Inc. entered into a joint venture agreement to develop 170
lots in Bolingbrook, Illinois. The joint venture partner contributed the land
while MAF Developments contributes development costs. Development commenced in
late fiscal 1994 in the first unit which consists of 91 lots. Sales during 1996
totaled 27 lots, with no lots under contract as of June 30, 1996. Due to slower
absorption in this development, the Company has not begun development of the
next phase of the project.
49
Harmony Grove
MAF Developments, Inc. entered into a joint venture to develop 386 lots in
Naperville, Illinois by purchasing 160 acres of land, which includes a 5-acre
commercial parcel, from its venture partner. The Company's investment at June
30, 1996 was $5.1 million. To date, no lots have been sold as development
commenced late in fiscal 1996. As of June 30, 1996, there are 126 lots under
contract in the first phase of the project, which consists of 128 lots. Lot
closings are expected to begin in the first and second quarters of 1997. The
commercial parcel is under contract to be sold, with a closing expected in the
latter half of fiscal 1997.
The following is a summary of projects at NW Financial.
Fields of Ambria
Fields of Ambria consists of approximately 80 acres of land in Mundelein,
Illinois. The subdivision was developed into 240 lots for single-family home
construction by a joint venture partner, who shares in the profits of the
project. The project was funded solely by funds from NW Financial, which have
all been repaid. At June 30, 1996, the Company's investment was $2.4 million,
representing 28 unsold homesites. At June 30, 1996, 11 homesites are pending
sale.
Reigate Woods
Reigate Woods consist of approximately 106 acres of land in Green Oaks,
Illinois. The subdivision was developed into 85 lots for single-family home
construction by a joint venture partner, who shares in the profits of the
project. The project is funded solely by funds from NW Financial. At June 30,
1996, the Company has an investment of $7.7 million, representing 67 unsold
homesites. At June 30, 1996, 14 homesites are pending sale.
Woodbridge
Woodbridge consists of 341 acres of land in Elgin, Illinois. The project is
being developed with a joint venture partner who shares in the projects profits,
if any. The land includes 232 acres for the construction of 531 single-family
homes. At June 30, 1996, 14 of the remaining 174 homesites are under contract.
The project also includes 55 acres of property zoned for multi-family use, which
has been sold, as well as 48 acres of commercially-zoned property. At June 30,
1996, the combined investment in the residential and commercial property is $6.5
million.
Mid America Finance Corporation. In 1988, the Bank issued collateralized
mortgage obligations CMOs through MAFC, a wholly owned special purpose finance
subsidiary. The Bank contributed $149.8 million of mortgage-backed securities
to MAFC which, in turn, pledged the securities to an independent trustee as
collateral for the CMOs. The issuance of the CMOs resulted in net proceeds to
the Bank of $130.9 million which were ultimately used to fund loan originations.
Substantially all of the payments of principal and interest on the underlying
collateral are paid through to the holders of the CMOs.
The CMOs were issued in four maturity classes. The actual maturity of each
class of CMO will vary according to the timing of the cash receipts from the
underlying collateral. The CMOs are accounted for as a financing transaction
and are reflected as borrowed funds in the consolidated financial statements of
the Company. At June 30, 1996, the CMOs had an outstanding balance of $15.9
million. The mortgage-backed securities securing the CMOs had a carrying value
and market value of $15.8 million and $16.2 million, respectively, at June 30,
1996.
50
The CMO bonds and the mortgage-backed securities which collateralize them both
carry fixed interest rates, adjusted for amortization of discounts based upon
prepayment assumptions. The mortgage-backed securities yield averaged 8.60% for
the year ended June 30, 1996. In contrast, the effective cost of the CMO bonds,
including amortization of bond discount averaged 11.24% during 1995. This
negative spread led to a $409,000 reduction to net interest income for 1996.
Northwestern Acceptance Corporation. In 1986, Northwestern issued $300
million of CMOs through NWAC, a special purpose finance subsidiary. The CMOs
were issued in two classes. Class A-1 CMOs, with an original face of $200
million, have an interest rate that is indexed to LIBOR for three-month
eurodollar deposits, with a maximum rate of 13.5% per year. The Class A-2 CMOs,
originally issued for $100 million, have an interest rate that adjusts in
inverse proportion to the LIBOR rate, but in no event may be less than 0% per
year or greater than 23.89% per year. The CMOs have a stated maturity of
February 20, 2018, although actual maturity of each class of CMO will vary due
to prepayments in the underlying mortgage collateral. The CMOs are also subject
to mandatory and optional redemption provisions, depending on the repayment of
the underlying collateral and the amount of CMOs outstanding.
At June 30, 1996, the CMOs had an outstanding balance of $27.4 million. The
CMOs are collateralized by 9.0% FHLMC mortgage-backed securities which had a
carrying value and market value of $28.5 million and $29.2 million, respectively
at June 30, 1996. In addition to the mortgage-backed securities, cash and
investment securities totaling $1.0 million were held by the trustee to pay
principal and interest on the CMOs. The mortgage-backed securities pledged, as
well as the cash and investment securities held by the trustee are solely for
the repayment of the CMOs.
Mid America Insurance Agency. Mid America Insurance Agency, Inc. ("Mid
America Insurance") is a wholly owned subsidiary of the Bank which provides
insurance brokerage services, including personal and commercial insurance
products, to the Bank's customers. For 1996, 1995 and 1994, Mid America
Insurance generated pre-tax income of $97,000, $102,000, and $116,000,
respectively.
INVEST. On June 23, 1983, the Bank, through Mid America Developments, entered
into an agreement with ISFA Corporation ("ISFA") to become a subscriber to its
INVEST program. ISFA is a registered broker-dealer and provides certain
securities brokerage and investment advisory services under its INVEST service
mark to the general public. Through this program and licensed dual employees,
these services are offered to customers of the Bank. Presently nine brokers are
employed and operate from eight Bank locations. Revenues are generate d from
the sales of securities products in the form of commissions which are
apportioned between ISFA and the Bank. For 1996, 1995 and 1994, pre-tax income
from INVEST operations was $711,000, $460,000 and $769,000, respectively.
51
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS under the Home Owners' Loan Act of 1933, as amended (the "HOLA"). In
addition, the activities of savings institutions, such as the Bank, are governed
by the HOLA and the Federal Deposit Insurance Act ("FDI Act").
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer.
The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its
deposit accounts are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") managed by the FDIC. The Bank must file reports with
the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and/or the FDIC conduct periodic examinations to test the
Bank's compliance with various regulatory requirements. This 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 and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulatory
requirements and policies, whether by the OTS, the FDIC or the Congress could
have a material adverse impact on the Company, the Bank and their operations.
Certain of the regulatory requirements applicable to the Bank and to the Company
are referred to below or elsewhere herein. The description of statutory
provisions and regulations applicable to savings institutions and their holding
companies set forth in this Form 10-K does not purport to be a complete
description of such statutes and regulations and their effects on the Bank and
the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally will not be restricted under existing laws as to the types
of business activities in which it may engage, provided that the Bank continues
to be a qualified thrift lender ("QTL"). See "Federal Savings Institution
Regulation - QTL Test." Upon any non-supervisory acquisition by the Company of
another savings institution or savings bank that meets the QTL test and is
deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act of 1956, as
amended ("BHC Act"), subject to the prior approval of the OTS, and activities
authorized by OTS regulation. Recently proposed legislation could restrict the
activities of unitary savings and loan holding companies to those permissible
for multiple savings and loan holding companies.
The HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another savings institution or holding company thereof, without prior
written approval of the OTS; acquiring or retaining, with certain exceptions,
more than 5% of a nonsubsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of a depository
institution that is not insured by the
52
FDIC. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources and
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions, as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Federal Savings Institution Regulation
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core capital) ratio and an 8% risk-based capital ratio.
In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
(core) capital ratio (3% for institutions receiving the highest rating on the
CAMEL financial institution rating system), and, together with the risk-based
capital standard itself, a 4% Tier I risk-based capital standard. Core capital
is defined as common stockholder's equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus, and minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain purchased mortgage servicing rights and credit card relationships.
The OTS regulations also require that, in meeting the leverage ratio, tangible
and risk-based capital standards, institutions must generally deduct investments
in and loans to subsidiaries engaged in activities not permissible for a
national bank. For the Bank, this includes its $21.7 million investment in Mid
America Developments at June 30, 1996, which the Bank must deduct 60%, or $13.0
million from regulatory capital for purposes of calculating its capital
requirements.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
53
The OTS regulatory capital requirements also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings institution's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. If the Bank had been
subject to an interest rate risk capital component as of June 30, 1996, the
Bank's total risk-weighted capital would not have been subject to a deduction
based on interest rate risk. At June 30, 1996, the Bank met each of its capital
requirements, in each case on a fully phased-in basis.
At June 30, 1996 and 1995, the Bank was in compliance with the current capital
requirements as follows:
At June 30, 1996 At June 30, 1995
----------------------- -----------------------
Percent of Percent of
Amount Assets Amount Assets
---------- ----------- ---------- -----------
(Dollars in thousands)
Stockholder's equity of
the Bank $ 263,346 8.43% $ 101,539 5.73%
======= ===== ======== ======
Tangible capital $ 215,582 7.02% $ 99,723 5.64%
Tangible capital
requirement 46,095 1.50 26,517 1.50
------- ----- -------- ------
Excess $ 169,487 5.52% 73,206 4.14%
======= ===== ======== ======
Core capital $ 215,582 7.02% $ 99,723 5.64%
Core capital requirement 92,189 3.00 53,033 3.00
------- ----- -------- ------
Excess $ 123,393 4.02% $ 46,690 2.64%
======= ===== ======== ======
Core and supplementary
capital $ 232,625 15.36% $ 108,706 12.07%
Risk-based capital
requirement 121,167 8.00 72,068 8.00
------- ----- -------- ------
Excess $ 111,458 7.36% $ 36,638 4.07%
======= ===== ======== ======
Total Bank assets $ 3,122,790 $ 1,770,946
Adjusted total Bank assets 3,072,970 1,767,781
Total risk-weighted assets 1,564,618 904,018
Adjusted total
risk-weighted assets 1,514,587 900,853
Investment in Bank's real
estate subsidiary 21,694 4,639
The table above assumes a 60% deduction from capital for the Banks' investment
in and advances to Mid America Developments and NW Financial at June 30,1996.
As of July 1, 1996, this deduction increased to 100%. If the 100% deduction had
been applied to the Bank's balance sheet as of June 30, 1996, its tangible and
core capital ratio would have been 6.76% and its risk-based capital ratio would
have been 14.88%.
54
The following table reflects the Bank's regulatory capital as of June 30, 1996
as it relates to these three capital requirements:
Risk-
Tangible Core Based
-------- -------- --------
(Dollars in thousands)
Stockholder's equity of the Bank $ 263,346 263,346 263,346
Goodwill and other non-allowable intangible
assets (35,630) (35,630) (35,630)
Non-permissible subsidiary deduction (13,016) (13,016) (13,016)
Non-includible purchased mortgage servicing
rights (184) (184) (184)
Regulatory capital adjustment for available
for sale securities 1,066 1,066 1,066
Land loans greater than 80% loan-to-value - - (211)
General loan loss reserves - - 17,254
------- ------- -------
Regulatory capital $ 215,582 215,582 232,625
======= ======= =======
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution
is considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has
a ratio of total capital to weighted assets of less of than 8%, a ratio of Tier
I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
risk-based capital ratio of less than 3% or a leverage ratio that is less than
3% is considered to be "significantly undercapitalized," and a savings
institution that has a tangible capital to assets ratio equal to or less than 2%
is deemed to be "critically undercapitalized." Subject to a narrow exception,
the banking regulator is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. The FDIC has adopted a risk-based deposit
insurance system that assesses deposit insurance premiums according to the level
of risk involved in an institution's activities. An institution's risk category
is based upon whether the institution is classified as "well capitalized,"
"adequately capitalized" or "undercapitalized" and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation and information
which the FDIC determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance fund. Based on its
capital and supervisory subgroups, each Bank Insurance Fund ("BIF") and SAIF
member institution is assigned an annual FDIC assessment rate between 23 basis
points for an institution in the highest category (i.e., well-capitalized and
healthy) and 31 basis points for an institution in the lowest category (i.e.,
undercapitalized and
55
posing substantial supervisory concern). The FDIC has authority to further raise
premiums if deemed necessary. If such action is taken, it could have an adverse
effect on the earnings of the Bank.
The FDIC recently adopted a new assessment rate schedule of 0 to 27 basis
points for BIF members. Under that schedule, most BIF pay $2,000 per year, the
legal minimum in insurance premiums. With respect to SAIF member institutions,
the existing assessment schedule of 23 to 31 basis points was retained. As long
as the premium disparity remains, it may place SAIF members, such as the Bank,
at a substantial disadvantage to BIF members with respect to pricing of loans
and deposits and the ability to achieve lower operating costs.
Several bills have been introduced in Congress to mitigate the effect of the
BIF/SAIF premium disparity. Among other things, these bills would impose a
special assessment on SAIF members to recapitalize the SAIF fund and would
spread the FICO payments across all BIF and SAIF members. It is presently
estimated that the amount of the one-time fee would range from 79 to 85 basis
points on the amount of deposits held by SAIF-member institutions as of March
31, 1995. An assessment of a 79 to 85 basis point fee to recapitalize the SAIF
would result in a $10.4 million to $11.1 million payment on an after tax basis
for the Bank, based on deposits as of March 31, 1995.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At June 30, 1996,
the Bank's limit on loans to one borrower was $32.3 million. At June 30, 1996,
the Bank's largest aggregate outstanding balance of loans to one borrower
consisted of a $16.2 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings and loan association is required to maintain at least
65% of its "portfolio assets" (total assets less (i) specified liquid assets up
to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the
value of property used to conduct business) in certain "qualified thrift
investments" (primarily residential mortgages and related investments, including
certain mortgage-backed securities) in at least 9 months out of each 12 month
period. A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
June 30, 1996, the Bank maintained 93.5% of its portfolio assets in qualified
thrift investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations upon
all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or
56
(ii) 75% of its net income for the previous four quarters. Any additional
capital distributions would require prior regulatory approval. In the event the
Bank's capital fell below its regulatory requirements or the OTS notified it
that it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. In December 1994, the OTS proposed
amendments to its capital distribution regulation that would generally authorize
the payment of capital distributions without OTS approval provided the payment
does not make the institution undercapitalized within the meaning of the prompt
corrective action regulation. However, institutions in a holding company
structure would still have a prior notice requirement. At June 30, 1996, the
Bank was a Tier 1 Bank.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 5% but may be changed from time to time
by the OTS to any amount within the range of 4% to 10% depending upon economic
conditions and the savings flows of member institutions. OTS regulations also
require each member savings institution to maintain an average daily balance of
short-term liquid assets at a specified percentage (currently 1%) of the total
of its net withdrawable deposit accounts and borrowings payable in one year or
less. Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's liquidity and short-term liquidity ratios for June 30,
1996 were 6.81% and 5.72% respectively, which exceeded the then applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the OTS
to fund the agency's operations. The general assessment, paid on a semi-annual
basis, is computed upon the savings institution's total assets, including
consolidated subsidiaries, as reported in the Bank's latest quarterly thrift
financial report. The assessments paid by the Bank for the fiscal year ended
June 30, 1996 totaled $305,000.
Branching. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A, and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and 10%
shareholders, as well as entities such persons control, is governed by Sections
22(g) and 22(h) of the FRA and Regulation O
57
thereunder. Among other things, such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and to not
involve more than the normal risk of repayment. Regulation O also places
individual and aggregate limits on the amount of loans the Bank may make to such
persons based, in part, on the Bank's capital position and requires certain
board approval procedures to be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of proceedings for receivership, conservatorship or
termination of deposit insurance. Civil penalties cover a wide range of
violations and may amount to $25,000 per day, or even $1 million per day in
especially egregious cases. Under the FDI Act, the FDIC has the authority to
recommend to the Director of the OTS enforcement action to be taken with respect
to a particular savings institution. If action is not taken by the Director,
the FDIC has authority to take such action under certain circumstances. Federal
law also establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
The agencies are expected to adopt a proposed rule that proposes asset quality
and earnings standards which, if adopted in final, would be added to the
Guidelines. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
rule establishes deadlines for the submission and review of such safety and
soundness compliance plans when such plans are required.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional FHLBs.
The FHLB provides a central credit facility primarily for member institutions.
The Bank, as a member of the FHLB of Chicago, is required to acquire and hold
shares of capital stock in that FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB-Chicago, whichever is greater. At June 30, 1996, the Bank was in
compliance with this requirement, with an investment in FHLB of Chicago stock of
$30.7 million. FHLB of Chicago advances must be secured by specified types of
collateral and may be obtained primarily for the purpose of providing funds for
residential housing finance.
The FHLBs are required to provide funds to cover certain obligations on bonds
issued to fund the resolution of insolvent thrifts and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also result in the FHLBs
imposing a higher rate of interest on advances to their members. For the fiscal
years ended June 30, 1996, 1995, and 1994, dividends from the FHLB of Chicago to
the Bank amounted to $1.3 million, $656,000, and $637,000, respectively. If
FHLB dividends were reduced, or interest on future FHLB advances increased, the
Bank's net interest income might also be reduced.
58
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to maintain
non-interest earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The Federal Reserve Board regulations generally
require that reserves be maintained against aggregate transaction accounts as
follows: for accounts aggregating $54.0 million or less (subject to adjustment
by the Federal Reserve Board) the reserve requirement is 3%; and for accounts
greater than $54.0 million, the reserve requirement is $1.6 million plus 10%
(subject to adjustment by the Federal Reserve Board between 8% and 14%) against
that portion of total transaction accounts in excess of $54.0 million. The
first $4.2 million of otherwise reservable balances (subject to adjustments by
the Federal Reserve Board) are exempted from the reserve requirements. The Bank
is in compliance with the foregoing requirements. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy liquidity requirements imposed by the OTS.
Impact of New Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 121 is effective for fiscal years beginning
after December 15, 1995. SFAS No. 121 provides guidance for the recognition and
measurement of impairment of long-lived assets, certain identifiable
intangibles, and goodwill related both to assets to be held and used and assets
to be disposed of. SFAS No. 121 requires entities to perform separate
calculations for assets to be held and used to determine whether recognition of
an impairment loss is required and, if so, to measure the impairment. SFAS No.
121 requires long-lived assets and certain identifiable intangibles to be
disposed of to be reported at the lower of carrying amount or fair value less
costs to sell. The Company does not expect the adoption of SFAS No. 121 to have
a material impact on its consolidated financial condition or results of
operations.
In May 1995, the FASB issued SFAS No. 122, "Accounting in Mortgage Banking
Activities." SFAS No. 122 is effective for fiscal years beginning after
December 31, 1995, with earlier application encouraged. SFAS No. 122 requires
the recognition of a separate asset related to rights to service loans for
others, however those servicing rights are acquired. SFAS No. 122 also requires
an assessment of the capitalized mortgage rights for impairment based on the
fair value of those rights. The Bank implemented the provisions of SFAS No. 122
on July 1, 1996. It is anticipated that the implementation will have a positive
impact on earnings, due to the active retail loan origination strategy of the
Bank, although the amount is subject to a variety of factors, including the
general level of interest rates, the mix of loan originations at the time of
implementation, and the estimated value management determines its servicing
rights to have.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 is effective for the Company in fiscal 1997. SFAS
No. 123 allows for alternative accounting treatment for stock-based compensation
which the Company currently reports under Accounting Principles Board ("APB")
No. 25, "Accounting for Stock Issued to Employees." The Company does not intend
to elect the fair value based method of expense recognition for stock-based
compensation as contemplated by SFAS No. 123, but rather will adopt the pro
forma disclosure alternative provided in SFAS No. 123, and continue to account
for stock-based compensation under APB No. 25.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extingushments of Liabilities." This
Statement, among other things, applies a "financial-components approach" that
focuses on control, whereby an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes assets when
control has been surrendered, and derecognizes liabilities when extinguished.
SFAS No. 125 provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. The Company
does not expect this pronouncement to have a significant impact on its
consolidated financial condition or results of operations.
59
Item 8. Financial Statements and Supplementary Data
MAF Bancorp, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
June 30,
-----------------------
1996 1995
----------- ----------
(In thousands)
Assets
Cash and due from banks $ 51,665 39,982
Interest-bearing deposits 37,496 10,465
Federal funds sold 5,700 9,360
Investment securities, at amortized cost (fair value
of $102,098 at June 30, 1996 and $53,172 at
June 30, 1995) 102,226 53,206
Investment securities available for sale, at fair value 38,296 24,088
Stock in Federal Home Loan Bank of Chicago, at cost 30,729 13,025
Mortgage-backed securities, at amortized cost (fair
value of $290,249 at June 30, 1996 and $237,697
at June 30, 1995) 293,381 243,952
Mortgage-backed securities available for sale, at fair
value 124,721 63,438
Loans receivable held for sale 9,314 24,984
Loans receivable, net of allowance for loan losses of
$17,254 at June 30, 1996, and $9,197 at June 30, 1995 2,284,085 1,242,469
Accrued interest receivable 19,974 10,246
Foreclosed real estate 888 336
Real estate held for development or sale 26,620 11,454
Premises and equipment, net 31,245 21,135
Excess of cost over fair value of net assets acquired 26,901 -
Other assets 33,908 14,936
--------- ---------
$3,117,149 1,783,076
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits 2,254,100 1,313,306
Borrowed funds 537,696 307,024
Subordinated capital notes, net 26,676 20,100
Advances by borrowers for taxes and insurance 17,056 15,219
Accrued expenses and other liabilities 39,395 22,008
--------- ---------
Total liabilities 2,874,923 1,677,657
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued or outstanding - -
Common stock, $.01 par value; authorized 40,000,000
shares; 11,057,498 shares issued and 10,340,673
outstanding at June 30, 1996; 5,859,568 shares
issued and 5,492,743 outstanding at June 30, 1995 111 59
Additional paid-in capital 170,956 39,740
Retained earnings, substantially restricted 88,524 73,447
Unrealized loss on securities available for sale, net
of tax (825) (48)
Treasury stock, at cost; 716,825 shares at June 30,
1996 and 366,825 shares at June 30, 1995 (16,540) (7,779)
--------- ---------
Total stockholders' equity 242,226 105,419
Commitments and contingencies --------- ---------
$3,117,149 1,783,076
========= =========
See Accompanying Notes to Consolidated Financial Statements.
60
MAF Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended June 30,
---------------------------------------------
1996 1995 1994
--------- ------------ -----------
(dollars in thousands, except per share data)
---------------------------------------------
Interest income:
Loans receivable $ 115,466 86,511 75,781
Mortgage-backed securities 18,291 19,747 20,304
Investment securities 6,153 5,041 4,741
Interest-bearing deposits 2,064 2,068 2,390
Federal funds sold 1,121 1,596 562
-------- ------- -------
Total interest income 143,095 114,963 103,778
Interest expense:
Deposits 63,325 55,794 53,004
Borrowed funds and
subordinated capital notes 29,896 17,573 16,690
-------- ------- -------
Total interest expense 93,221 73,367 69,694
-------- ------- -------
Net interest income 49,874 41,596 34,084
Provision for loan losses 700 475 1,200
-------- ------- -------
Net interest income after
provision for loan losses 49,174 41,121 32,884
Non-interest income:
Gain (loss) on sale of:
Loans receivable 203 (56) 2,631
Mortgage-backed securities (5) - 504
Income from real estate operations 4,786 7,497 7,719
Gain (loss) on sale and
writedown of investment securities 188 (231) 200
Gain on sale of foreclosed
real estate 50 181 145
Deposit account service charges 4,894 3,347 2,414
Loan servicing fee income 2,394 2,373 2,456
Brokerage commissions 1,711 1,383 1,682
Other 2,879 2,156 1,897
-------- ------- -------
Total non-interest income 17,100 16,650 19,648
Non-interest expense:
Compensation and benefits 21,209 18,257 16,954
Office occupancy and equipment 3,774 3,522 3,569
Federal deposit insurance premiums 3,255 3,003 2,996
Advertising and promotion 1,746 1,760 1,408
Data processing 1,683 1,473 1,282
Other 6,119 5,397 5,107
-------- ------- -------
Total non-interest expense 37,786 33,412 31,316
-------- ------- -------
Income before income taxes and
extraordinary item 28,488 24,359 21,216
Income taxes 10,805 9,316 7,766
-------- ------- -------
Income before extraordinary item 17,683 15,043 13,450
Extraordinary item-loss on early
extinguishment of debt, net of tax
benefit of $300 (474) - -
-------- ------- -------
Net income $ 17,209 15,043 13,450
======== ======= =======
Primary earnings per share:
Income before extraordinary item $ 2.84 2.54 2.22
Extraordinary item, net of tax (.08) - -
-------- ------- -------
Net income $ 2.76 2.54 2.22
======== ======= =======
Fully diluted earnings per share:
Income before extraordinary item $ 2.84 2.54 2.22
Extraordinary item, net of tax (.08) - -
-------- ------- -------
Net income $ 2.76 2.54 2.22
======== ======= =======
See Accompanying Notes to Consolidated Financial Statements.
61
MAF Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Unrealized loss
Additional on securities
Common paid-in Retained available for sale,
stock capital earnings net of tax
----- ------- -------- ----------
(Dollars in thousands)
Balance at June 30, 1993 54 27,006 58,674 -
Net income - - 13,450 -
Proceeds from exercise of 17,643 stock options - 90 - -
Purchase of treasury shares - - - -
Tax benefits from stock-related compensation - 251 - -
Principal payment on ESOP loan - - - -
Distribution of MRP stock awards - - - -
50% stock dividend related to fractional shares - - (7) -
----- ------- ------- --------
Balance at June 30, 1994 54 27,347 72,117 -
Net income - - 15,043 -
Proceeds from exercise of 14,025 stock options - 78 - -
Purchase of treasury shares - - - -
Tax benefits from stock-related compensation - 219 - -
Principal payment on ESOP loan - - - -
Distribution of MRP stock awards - - - -
Cumulative effect of change in accounting for
securities available for sale, net of tax - - - (739)
Change in unrealized loss on securities
available for sale, net of tax - - - 691
Cash dividends declared, $0.291 per share - - (1,612) -
Special 10% stock dividend 5 12,096 (12,101) -
----- ------- ------- --------
Balance at June 30, 1995 59 39,740 73,447 (48)
Net income - - 17,209 -
Issuance of 5,194,710 shares, including value of
option carryovers, for acquisition of N.S. Bancorp 52 131,186 - -
Proceeds from exercise of 3,150 stock options - 17 - -
Purchase of treasury shares - - - -
Tax benefits from stock-related compensation - 13 - -
Change in unrealized loss on securities
available for sale, net of tax - - - (777)
Cash dividends declared, $0.32 per share - - (2,121) -
10% stock dividend related to fractional shares - - (11) -
----- ------- ------- --------
Balance at June 30, 1996 $ 111 170,956 88,524 (825)
===== ======= ======= ========
Common stock Common stock
Treasury acquired by acquired by
Stock ESOP MRPs Total
----- ---- ---- ---------
(Dollars in thousands)
Balance at June 30, 1993 - (383) (349) 85,002
Net income - - - 13,450
Proceeds from exercise of 17,643 stock options - - - 90
Purchase of treasury shares (4,038) - - (4,038)
Tax benefits from stock-related compensation - - - 251
Principal payment on ESOP loan - 237 - 237
Distribution of MRP stock awards - - 165 165
50% stock dividend related to fractional shares - - - (7)
------- ------- ------- --------
Balance at June 30, 1994 (4,038) (146) (184) 95,150
Net income - - - 15,043
Proceeds from exercise of 14,025 stock options - - - 78
Purchase of treasury shares (3,741) - - (3,741)
Tax benefits from stock-related compensation - - - 219
Principal payment on ESOP loan - 146 - 146
Distribution of MRP stock awards - - 184 184
Cumulative effect of change in accounting for
securities available for sale, net of tax - - - (739)
Change in unrealized loss on securities
available for sale, net of tax - - - 691
Cash dividends declared, $0.291 per share - - - (1,612)
Special 10% stock dividend - - - -
------- ------- ------- --------
Balance at June 30, 1995 (7,779) - - 105,419
Net income - - - 17,209
Issuance of 5,194,710 shares, including value of
option carryovers, for acquisition of N.S. Bancorp - - - 131,238
Proceeds from exercise of 3,150 stock options - - - 17
Purchase of treasury shares (8,761) - - (8,761)
Tax benefits from stock-related compensation - - - 13
Change in unrealized loss on securities
available for sale, net of tax - - - (777)
Cash dividends declared, $0.32 per share - - - (2,121)
10% stock dividend related to fractional shares - - - (11)
------- ------- ------- --------
Balance at June 30, 1996 $(16,540) - - 242,226
======= ======= ======= ========
See Accompanying Notes to Consolidated Financial Statements.
62
MAF Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended June 30,
--------------------------------
1996 1995 1994
---------- --------- ---------
(In thousands)
Operating activities:
Net income $ 17,209 15,043 13,450
Adjustments to reconcile net income to net
cash
provided by operating activities:
Depreciation and amortization 1,996 1,825 1,817
Amortization of premiums, discounts and
deferred loan fees 175 632 2,926
Distribution of MRP awards - 184 165
Provision for loan losses 700 475 1,200
FHLB of Chicago stock dividends - (156) -
Deferred income tax expense (benefit) 1,452 1,423 (2,035)
Extraordinary item, net of tax 474 - -
Net gain on sale of loans, mortgage-backed
securities, and real estate held for
development or sale (4,984) (7,441) (10,854)
(Gain) loss on sale of and writedown of
investment securities, net (188) 231 (200)
(Increase) decrease in accrued interest
receivable (1,849) (777) (97)
Net (increase) decrease in other assets
and liabilities, net of effects from
purchase of NSBI 5,477 4,898 (2,473)
--------- -------- --------
Net adjustments 3,253 1,294 (9,551)
Loans originated for sale (157,961) (74,841) (273,982)
Loans purchased for sale (93,271) (31,221) (12,071)
Sale of mortgage-backed securities available
for sale 41,188 - 8,630
Sale of loans originated and purchased for
sale 267,394 92,246 342,977
--------- -------- --------
Net cash provided by operating
activities 77,812 2,521 69,453
--------- -------- --------
Investing activities:
Loans originated for investment (473,622) (348,610) (528,951)
Principal repayments on loans receivable 394,274 231,165 419,062
Principal repayments on mortgage-backed
securities 69,790 49,583 181,616
Proceeds from maturities of investment
securities available for sale 34,002 137 -
Proceeds from maturities of investment
securities held to maturity 101,194 27,507 712
Proceeds from sale of:
Loans receivable 1,805 - 2,069
Investment securities available for sale 1,155 6,516 4,416
Stock in Federal Home Loan Bank of Chicago 300 - 1,356
Real estate held for development or sale 16,184 19,455 28,905
Premises and equipment 1 55 1
Purchases of:
Loans receivable held for investment (269,796) (126,124) (282)
Investment securities available for sale (31,111) (6,960) (2,466)
Investment securities held to maturity (21,715) (16,938) (31,917)
Mortgage-backed securities available for
sale - (10,003) (31,304)
Mortgage-backed securities held to maturity - - (139,319)
Stock in Federal Home Loan Bank of Chicago (8,300) (3,122) -
Real estate held for development or sale (7,297) (12,588) (6,159)
Premises and equipment (4,282) (2,599) (1,255)
Payment for purchase of N.S. Bancorp, net of
cash acquired (174,730) - -
--------- -------- --------
Net cash used in investing activities (372,148) (192,526) (103,516)
--------- -------- --------
(Continued)
63
MAF Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(continued)
Year Ended June 30,
-----------------------------
1996 1995 1994
--------- -------- --------
(In thousands)
Financing activities:
Proceeds from:
FHLB of Chicago advances 205,000 150,000 55,000
Unsecured term bank loan 35,000 - -
Issuance of subordinated notes, net 26,629 - -
Repayments of:
FHLB of Chicago advances (45,000) - -
Subordinated capital notes (20,900) - -
Collateralized mortgage obligations (6,038) (6,477) (40,676)
Net increase (decrease) in reverse repurchase
agreements (56,910) 15,000 12,675
Net decrease in other borrowings - (3,518) (278)
Net additions to deposits 68,375 20,775 2,459
Increase (decrease) in advances by borrowers
for taxes and insurance 809 2,901 (2,236)
Issuance of common stock in conjunction with
acquisition 131,238 - -
Proceeds from exercise of stock options 17 78 90
Purchase of treasury stock (6,299) (3,741) (4,038)
Cash dividends paid (2,531) (1,213) -
------- ------- -------
Net cash provided by financing activities 329,390 173,805 22,996
------- ------- -------
Increase (decrease) in cash and cash
equivalents 35,054 (16,200) (11,067)
Cash and cash equivalents at beginning of year 59,807 76,007 87,074
------- ------- -------
Cash and cash equivalents at end of year $ 94,861 59,807 76,007
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowed funds $ 96,294 72,426 69,793
Income taxes 9,150 6,450 10,715
Summary of non-cash transactions:
Transfer of loans receivable to
foreclosed real estate 515 1,016 2,041
Loans receivable swapped into mortgage-backed
securities 41,195 - 4,835
Investment securities transferred to
available for sale category 17,999 16,004 -
Mortgage-backed securities transferred
to available for sale category 108,743 77,827 -
Investment securities of N.S. Bancorp
transferred to treasury stock 2,462 - -
======= ======= =======
See Accompanying Notes to Consolidated Financial Statements
64
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
1. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include
the accounts of MAF Bancorp, Inc. ("Company") and its two wholly-owned
subsidiaries, Mid America Federal Savings Bank ("Bank") and MAF Developments,
Inc., as well as the Bank's wholly-owned subsidiaries, Mid America Development
Services, Inc. ("Mid America Developments"), Mid America Finance Corporation
("MAFC"), Mid America Insurance Agency, Inc., Mid America Mortgage Securities,
Inc., NW Financial, Inc ("NW Financial"), and Northwestern Acceptance
Corporation ("NWAC"). All significant intercompany balances and transactions
have been eliminated in consolidation.
Use of Estimates. The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
Investment and Mortgage-Backed Securities. All investment securities and
mortgage-backed securities are classified in one of three categories: trading,
held to maturity, or available for sale. Trading securities include investment
and mortgage-backed securities which the Company has purchased and holds for the
purpose of selling in the future. These investments are carried at fair value,
with unrealized gains and losses reflected in income in the current period. Held
to maturity securities include investment and mortgage-backed securities which
the Company has the positive intent and ability to hold to maturity. These
investments are carried at amortized cost, with no recognition of unrealized
gains or losses in the financial statements. All other investment and mortgage-
backed securities are classified as available for sale. These investments are
carried at fair value, with unrealized gains and losses reflected as an
adjustment to stockholders' equity, net of tax.
Amortization of premiums, accretion of discounts, and the amortization of
purchase accounting adjustments for investment and mortgage-backed securities
acquired are recognized in interest income over the period to maturity for
investment securities, or the estimated life of mortgage-backed securities using
the level-yield method. Gains and losses on sales of investment securities,
mortgage-backed securities, and equity securities are determined using the
specific identification method.
The Bank arranges for "swap" transactions with the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC")
which involve the exchange of whole mortgage loans originated by the Bank for
mortgage-backed securities. These securities are generally categorized as
available for sale as they are usually sold in conjunction with the Bank's
mortgage banking strategy.
Upon adoption of Statement of Financial Accounting Standards No. 115 in
1995, the Company transferred $16.0 million of investment securities and $77.8
million of mortgage-backed securities into the available for sale category. The
unrealized loss at the date of transfer was $1.2 million. In accordance with an
implementation guide to SFAS No. 115 issued in November 1995, the Company
transferred $18.0 million of investment securities and $108.7 million of
mortgage-backed securities on December 31, 1995, from held to maturity to
available for sale. The unrealized loss was $267,000 at the date of transfer.
The transfers in both years were made to provide additional flexibility for the
Company in managing its investment and liquidity positions.
65
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Loans receivable held for sale. The Bank sells, generally without recourse,
whole loans and participation interests in mortgage loans which it originates.
Loans originated are identified as either held for investment or sale upon
origination. Loans which the Bank intends to sell before maturity are classified
as held for sale, and are carried at the lower of cost, adjusted for applicable
deferred loan fees or expenses, or estimated market value in the aggregate.
The Bank enters into forward commitments to sell mortgage loans primarily
with FNMA to deliver mortgage loans originated by the Bank at a specific time
and specific price in the future. Loans subject to forward sales are classified
as held for sale. Unrealized losses, if any, on forward commitments are included
in gain (loss) on sale of mortgage loans in the period the loans are committed.
Loans Receivable. Loans receivable are stated at unpaid principal balances
less unearned discounts, deferred loan origination fees, loans in process and
allowance for loan losses.
Discounts on loans receivable are amortized to interest income using the
level-yield method over the remaining period to contractual maturity, adjusted
for anticipated prepayments. Amortization of purchase accounting discounts are
being amortized over the contractual term of loans receivable acquired, adjusted
for anticipated prepayments, using the level-yield method.
Loan fees and certain direct loan origination costs are deferred, and the
net deferred fee or cost is recognized as an adjustment to yield using the
level-yield method over the contractual life of the loans.
On July 1, 1995, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan,"
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures," which impose certain requirements on the
identification and measurement of impaired loans. A loan is considered impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
the loan. For loans which are not individually significant (i.e. loans under
$500,000), and represent a homogeneous population, the Bank evaluates impairment
collectively based on management reports on the level and extent of
delinquencies, as well as historical loss experience for these types of loans.
The Bank uses this criteria on one-to four-family residential loans, consumer
loans, multi-family residential loans, and land loans. Impairment for loans
considered individually significant and commercial real estate loans are
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate, or the fair value of the collateral if the
loan is collateral dependent. At June 30, 1996, and throughout the year, the
Company had no loans which are considered impaired under the criteria of SFAS
No. 114. Charge-offs of principal occur when a loss has deemed to have occurred
as a result of the book value exceeding the fair value or net realizable value.
The Company's policy for recognition of interest income on impaired loans is
unchanged as a result of the adoption of SFAS No. 114 and 118. A loan (whether
considered impaired or not) is classified as non-accrual when collectibility is
in doubt, and is normally analyzed upon the borrower becoming 90 days past due
on contractual principal or interest payments. When a loan is placed on non-
accrual status, or in the process of foreclosure, previously accrued but unpaid
interest is reversed against 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.
66
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Allowance for Loan Losses. The allowance for loan losses is increased by
charges to operations and decreased by charge-offs, net of recoveries. The
allowance for loan losses reflects management's estimate of the reserves needed
to cover the risks inherent in the Bank's loan portfolio. In determining a
proper level of loss reserves, management periodically evaluates the adequacy of
the allowance based on the Bank's past loan loss experience, known and inherent
risks in the loan portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral, and current and
prospective economic conditions.
Foreclosed Real Estate. Real estate properties acquired through, or in lieu
of, loan foreclosure to be sold and are initially recorded at fair value at the
date of foreclosure establishing a new cost basis. Valuations are periodically
performed by management and an allowance for loss is established by a charge to
operations if the carrying value of a property exceeds its estimated fair value
less cost to dispose.
Real Estate Held for Development or Sale. Real estate properties held for
development or sale, are carried at the lower of cost, including capitalized
holding costs or net realizable value. Gains and losses on individual lot sales
in a particular development are based on cash received less the estimated cost
of sales per lot. Cost of sales is calculated as the current investment in the
particular development plus anticipated costs to complete the development, which
includes interest capitalized, divided by the remaining number of lots to be
sold. Periodic estimates are made as to a development's cost to complete. Per
unit cost of sales estimates are adjusted on a prospective basis when, and if,
estimated costs to complete change.
Premises and Equipment. Land is carried at cost. Buildings, leasehold
improvements, furniture, fixtures, and equipment are carried at cost, less
accumulated depreciation and amortization, Buildings, furniture, fixtures, and
equipment are depreciated using the straight-line method over the estimated
useful lives of the assets. Useful lives are 20 to 50 years for office
buildings, 10 to 15 years for parking lot improvements, and 3 to 10 years for
furniture, fixtures, and equipment. The cost of leasehold improvements is being
amortized using the straight-line method over the lesser of the life of the
leasehold improvement or the term of the related lease.
Intangibles. Included in other assets is an identifiable core deposit
intangible established in the acquisition of N.S. Bancorp, which was established
due to the application of the purchase method of accounting and is being
amortized over a 10 year period on an accelerated method of amortization.
The excess of cost over fair value of net assets and identified intangible
assets acquired (goodwill) due to the application of the purchase method of
accounting is being amortized over 20 years using the straight-line method.
Mortgage Servicing Rights. Included in other assets are purchased mortgage
servicing rights which represent the cost of acquiring the right to service
mortgage loans. These costs are initially capitalized and are subsequently
amortized over the estimated life of the loan servicing income stream using the
level-yield method. The Bank conducts periodic impairment analysis by
evaluating the present value of the future economic benefit to be derived from
the servicing rights using current information regarding interest rates,
prepayment assumptions, and the cost to service such loans.
67
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Borrowed Funds. Discounts and premiums on collateralized mortgage
obligations are amortized using the level-yield method over the remaining
contractual maturities of the underlying mortgage-backed security collateral,
adjusted for estimated prepayments. The discount on subordinated capital notes
is amortized using the level-yield method over the life of the notes.
Income Taxes. The Company and its subsidiaries file a consolidated federal
income tax return. Deferred income taxes are provided for all significant items
of income and expense that are recognized in different periods for financial
reporting purposes and income tax reporting purposes. The asset and liability
approach is used for the financial accounting and reporting of income taxes.
This approach requires companies to take into account changes in the tax rates
when valuing the deferred income tax accounts recorded on the balance sheet. In
addition, it provides that a deferred tax liability or asset shall be recognized
for the estimated future tax effects attributable to "temporary differences" and
loss and tax credit carryforwards. Temporary differences include differences
between financial statement income and tax return income which are expected to
reverse in future periods as well as differences between tax bases of assets and
liabilities and their amounts for financial reporting purposes which are also
expected to be settled in future periods. To the extent a deferred tax asset is
established which more likely than not is not expected to be realized, a
valuation allowance shall be established against such asset.
Derivative Financial Instruments. The Company utilizes for purposes other
than trading the use of forward commitments to sell mortgage loans and interest
rate futures contracts, primarily U.S. Treasury bond futures, as part of its
mortgage loan origination hedging strategy. Gains and losses on open and closed
futures positions are deferred and recognized as an adjustment to gain (loss) on
the sale of loans receivable when the underlying loan being hedged is sold into
the secondary market.
Restrictions on Cash. Based on the types and amounts of deposits received,
the Bank must maintain non-interest bearing cash balances in accordance with
Federal Reserve Bank reserve requirements. The Bank's reserve requirement was
$9.7 million and $9.0 million at June 30, 1996, and 1995, respectively.
Earnings Per Share. Earnings per share is determined by dividing net income
for the year by the weighted average number of shares outstanding. Stock
options are regarded as common stock equivalents and are considered in the
earnings per share calculations. Common stock equivalents are computed using
the treasury stock method. Weighted average shares used in calculating earnings
per share are summarized below for the years ended June 30:
1996 1995 1994
--------- --------- ---------
Primary earnings per share 6,238,444 5,912,787 6,054,836
Fully-diluted earnings per share 6,240,842 5,918,892 6,060,981
========= ========= =========
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.
Reclassifications. Certain reclassifications of prior year amounts have been
made to conform with current year presentation.
68
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
2. Acquisition
On May 30, 1996, the Company acquired N.S. Bancorp, Inc. ("NSBI"), and its
wholly-owned subsidiary Northwestern Savings Bank ("Northwestern") through the
issuance of .8529 shares of MAF Bancorp common stock plus $20.1799 of cash for
each share of NSBI stock as follows (dollars in thousands):
Cash paid (including acquisition expenses of $7.6 million) $ 130,545
Common stock issued, including $3.3 million value of
option carryovers 131,238
-------
Total consideration 261,783
Less: cash acquired from NSBI 87,053
-------
Purchase of NSBI, net of cash acquired $ 174,730
=======
The Company issued 5.2 million shares of its common stock in the
acquisition. The funds used for the purchase were obtained from available cash
and cash equivalents, cash acquired, and short-term borrowings, which were
subsequently repaid with NSBI's maturing investment securities. Additionally,
the Company obtained an unsecured long-term bank borrowing for $35.0 million
(See note 10).
The transaction was accounted for as a purchase. Acquisition expenses
incurred in the transaction include professional fees as well as $4.2 million of
severance costs, net of applicable tax benefits. All assets, liabilities and
identified intangible assets of NSBI, and its wholly-owned subsidiaries, were
adjusted to fair value as of the effective date of the merger creating goodwill
in the amount of $27.0 million, which was pushed-down to the Bank, and is being
amortized on the straight line basis over 20 years. Premiums and discounts on
the fair value adjustments amounted to $4.1 million and $8.5 million,
respectively.
The following table summarizes the unaudited proforma financial results for
1996 and 1995 as if NSBI had been acquired on July 1, 1995.
1996 1995
------- ------
(In thousands)
Net interest income after provision for loan losses $ 78,722 66,053
Total non-interest income 24,344 25,799
Total non-interest expense 56,376 53,670
Income taxes 17,945 14,757
Extraordinary item, net of tax (474) -
------- ------
Net income $ 28,271 23,425
======= ======
Earnings per share:
Income before extraordinary item $ 2.62 2.08
Extraordinary item, net of tax (.08) -
------- ------
Net income $ 2.54 2.08
======= ======
The proforma information is not necessarily indicative of the actual results
of operations which would have occurred had the acquisition of NSBI been
consummated on July 1, 1995, nor is it necessarily indicative of future
operating results.
69
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
3. Investment Securities
Investment securities available for sale and held to maturity are summarized
below at June 30:
1996 1995
------------------------------------------ -------------------------------------------
Gross Gross Gross Gross
Book Unrealized Unrealized Fair Book Unrealized Unrealized Fair
Value Gains Losses Value Value Gains Losses Value
------- ----- ------ ------ ----- ----- ------ ------
(Dollars in thousands)
Available for sale:
United States government
and agency obligations due:
Within one year $ 10,997 8 (23) 10,982 5,000 - (9) 4,991
After one year to five years 12,998 - (159) 12,839 5,000 2 - 5,002
Marketable equity securities 12,050 526 (4) 12,572 7,871 404 (43) 8,232
Other investment securities 1,922 - (19) 1,903 5,863 - - 5,863
-------- --- ---- ------- ------ --- ---- ------
$ 37,967 534 (205) 38,296 23,734 406 (52) 24,088
======== === ==== ======= ====== === ==== ======
Held to maturity:
United States government
and agency obligations due:
Within one year $ 47,301 4 (29) 47,276 10,084 - (81) 10,003
After one year to five years 10,000 - (323) 9,677 33,030 53 (712) 32,371
After five years to ten years 19,646 374 (60) 19,960 9,971 706 - 10,677
Ten or more years 24,321 - (94) 24,227 - - - -
Other investment securities 958 - - 958 121 - - 121
-------- --- ---- ------- ------ --- ---- ------
$ 102,226 378 (506) 102,098 53,206 759 (793) 53,172
======== === ==== ======= ====== === ==== ======
Weighted average yield at June 30 6.89% 5.68%
======== ======
During 1996 and 1995, proceeds on the sale of investment securities
available for sale were $1.2 million and $6.5 million, respectively. In 1996,
gross realized gains were $188,000. In 1995, gross realized gains were $199,000,
and gross realized losses were $430,000. During 1994, proceeds on the sale of
investment securities were $5.8 million. Gross realized gains were $200,000.
4. Mortgage-Backed Securities
Mortgage-backed securities available for sale and held to maturity are
summarized below at June 30:
1996 1995
------------------------------------------- ------------------------------------------
Gross Gross Gross Gross
Book Unrealized Unrealized Fair Book Unrealized Unrealized Fair
Value Gains Losses Value Value Gains Losses Value
--------- ---------- ----------- ------- -------- ---------- ----------- -------
(Dollars in thousands)
Available for sale:
FHLMC pass-through certificates $ 8,000 71 (19) 8,052 - - - -
FNMA pass-through certificates 13,232 343 (10) 13,565 - - - -
Collateralized mortgage obligations 105,146 56 (2,098) 103,104 63,872 17 (451) 63,438
-------- ----- ------ ------- ------- ----- ------ -------
$ 126,378 470 (2,127) 124,721 63,872 17 (451) 63,438
======== ===== ====== ======= ======= ===== ====== =======
Held to maturity:
GNMA pass-through certificates $ 3,637 168 (9) 3,796 - - - -
FHLMC pass-through certificates 157,468 2,441 (1,579) 158,330 31,560 778 - 32,338
FNMA pass-through certificates 32,044 223 (109) 32,158 16,296 529 - 16,825
Collateralized mortgage obligations 100,232 30 (4,297) 95,965 196,096 - (7,562) 188,534
-------- ----- ------ ------- ------- ----- ------ -------
$ 293,381 2,862 (5,994) 290,249 243,952 1,307 (7,562) 237,697
======== ===== ====== ======= ======= ===== ====== =======
Weighted average yield at June 30 6.91% 6.39%
======== =======
70
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The Bank swaps certain loans it originates into mortgage-backed securities.
Included in mortgage-backed securities at June 30, 1996, and 1995, are $22.6
million and $28.7 million, respectively, of loans originated by the Bank. During
the years ended June 30, 1996, 1995 and 1994, the Bank swapped $41.2 million, $-
0-, and $4.8 million, respectively, all of which were sold in the same year
swapped.
5. Loans Receivable
Loans receivable are summarized as follows at June 30:
1996 1995
---------- ----------
(In thousands)
Real estate loans:
One-to-four family residential $ 2,032,102 1,032,233
Multi-family 94,713 67,248
Commercial 46,101 47,273
Construction 16,090 19,984
Land 26,644 19,281
----------- ---------
Total real estate loans 2,215,650 1,186,019
Unearned discounts, premiums, and deferred loan
fees, net (3,245) (882)
Loans in process (6,602) (8,459)
----------- ---------
2,205,803 1,176,678
Other loans:
Consumer loans:
Equity lines of credit 79,193 66,710
Home equity loans 10,525 4,335
Other 4,110 2,652
----------- ---------
Total consumer loans 93,828 73,697
Commercial business loans 1,821 1,560
----------- ---------
Total other loans 95,649 75,257
Loans in process (113) (269)
----------- ---------
95,536 74,988
----------- ---------
2,301,339 1,251,666
Allowance for loan losses (17,254) (9,197)
----------- ---------
$ 2,284,085 1,242,469
=========== =========
Weighted average yield at June 30 7.64% 7.88%
==== ====
Adjustable-rate loans totaled $1.7 billion at June 30, 1996, and $896.9
million at June 30, 1995.
Activity in the allowance for loan losses is summarized as follows for the
years ended June 30:
1996 1995 1994
------- -------- --------
(In thousands)
Balance at beginning of year $ 9,197 8,779 7,993
Provision for loan losses 700 475 1,200
Balance acquired in merger 7,722 - -
Charge-offs (376) (110) (417)
Recoveries 11 53 3
------- ------- -------
Balance at end of year $17,254 9,197 8,779
======= ======= =======
71
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
At June 30, 1996, 1995 and 1994, the Bank had $6.1 million, $2.1 million and
$3.4 million, respectively, of loans which were on non-accrual status. Interest
income that would have been recorded on non-accrual loans amounted to $132,000,
$98,000 and $168,000 for the years ended June 30, 1996, 1995 and 1994,
respectively had these loans being accruing under their contractual terms.
Loans receivable accounted for as troubled debt restructuring are summarized
as follows:
1996 1995 1994
------ ------ ------
(In thousands)
Aggregate principal balance $ 4,299 4,379 4,464
===== ===== =====
Interest income which would have been recorded 297 283 305
Interest income recognized 297 283 342
----- ----- -----
Interest income foregone (recaptured) $ - - (37)
===== ===== =====
The Bank has no commitments to lend additional funds to borrowers whose
loans are included above as of June 30, 1996.
The Bank services loans for its own account and for the benefit of others
pursuant to loan servicing agreements. Pursuant to these agreements, the Bank
typically collects from the borrower monthly payments of principal and interest,
as well as funds for the payment of real estate taxes and insurance. The Bank
retains its loan servicing fee from these payments and remits the balance of the
principal and interest payments to the various investors. Mortgage loans
serviced for others are not included in the accompanying consolidated statements
of financial condition. The unpaid principal balances of these loans were $1.04
billion, $887.9 million, and $823.9 million at June 30, 1996, 1995 and 1994,
respectively. Non-interest bearing custodial balances maintained in connection
with mortgage loans serviced for others and included in deposits were $16.6
million and $16.9 million at June 30, 1996 and 1995, respectively.
Activity in purchased mortgage servicing rights is as follows for the years
ended June 30:
1996 1995 1994
------ -------- -------
(In thousands)
Balance at beginning of year $ 1,160 119 -
Additions 933 1,150 121
Amortization (253) (109) (2)
----- ------- ------
Balance at end of year $ 1,840 1,160 119
===== ======= ======
6. Accrued Interest Receivable
Accrued interest receivable is summarized as follows at June 30:
1996 1995
------- ------
(In thousands)
Investment securities $ 2,185 838
Mortgage-backed securities 3,020 1,592
Loans receivable 15,558 8,487
Reserve for uncollected interest (789) (671)
------- ------
$19,974 10,246
======= ======
72
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
7. Real Estate Held for Development or Sale
Real estate held for development or sale is summarized as follows at
June 30:
1996 1995
------ ------
Project (In thousands)
Reigate Woods $ 7,734 -
Woodbridge 6,475 -
Harmony Grove 5,104 2,536
Fields of Ambria 2,381 -
Creekside of Remington 1,807 1,734
Ashbury 1,196 2,042
Clow Creek Farm 1,168 3,924
Woods of Rivermist 755 861
Other - 357
------- ------
$26,620 11,454
======= ======
Income from real estate operations is summarized by project as follows:
1996 1995 1994
------ ------ ------
(In thousands)
Clow Creek Farm $3,536 1,711 -
Ashbury 1,392 5,364 6,975
Woods of Rivermist - 374 593
Scott's Crossing - 39 151
Creekside of Remington 81 9 -
Woodbridge 86 - -
Reigate Woods 98 - -
Fields of Ambria 17 - -
Other (424) - -
------ ------ ------
$4,786 7,497 7,719
====== ====== ======
The loss of $424,000 in 1996 above represents the write-off of capitalized
costs on a parcel of land which the Company decided not to exercise its option
to purchase.
Information regarding revenues, expenses, and minority interest in earnings
is as follows:
1996 1995 1994
-------- ------- -------
(In thousands)
Gross lot sale revenues $15,688 15,584 23,788
Costs of sales 10,220 7,584 13,641
------- ------ ------
Gross margin from lot sales 5,468 8,000 10,147
Other (424) - -
Minority interest in gross margin (258) (503) (2,428)
------- ------ ------
$ 4,786 7,497 7,719
======= ====== ======
73
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Non-interest expense related to real estate operations was $446,000,
$325,000, and $322,000, for the years ended June 30, 1996, 1995 and 1994,
respectively. Interest capitalized to the cost of real estate held for
development or sale amounted to $115,000, $489,000 and $375,000 for the years
ended June 30, 1996, 1995 and 1994, respectively.
8. Premises and Equipment
Premises and equipment are summarized as follows at June 30:
1996 1995
------- -------
(In thousands)
Land $ 5,697 4,057
Office buildings 23,780 17,670
Furniture, fixtures and equipment 15,956 11,912
Parking lot improvements 558 507
Leasehold improvements 817 733
------- -------
Total office properties and equipment, at cost 46,808 34,879
Less: accumulated depreciation and amortization (15,563) (13,744)
------- -------
$ 31,245 21,135
======= =======
Depreciation and amortization of premises and equipment, included in data
processing expense and office occupancy and equipment expense was $2.0 million,
$1.8 million, and $1.8 million for the years ended June 30, 1996, 1995 and 1994,
respectively.
9. Deposits
Deposit account balances by interest rate are summarized as follows at June
30:
1996 1995
----------------------------------- ------------------------------
Weighted Weighted
% of Average % of Average
Amount Total Rate Amount Total Rate
----------- ----- ---- -------- ----- ----
(Dollars in thousands)
Commercial checking accounts $ 31,687 1.4% - % $ 30,184 2.3% - %
Non-interest bearing checking 33,166 1.5 - 24,834 1.9 -
Interest bearing NOW accounts 145,947 6.5 1.69 114,408 8.7 1.86
Money market accounts 139,684 6.2 3.36 141,166 10.8 3.48
Passbook accounts 671,736 29.8 2.86 256,096 19.5 3.07
---------- -------- ---------- -------
1,022,220 45.4 566,688 43.2
---------- -------- ---------- -------
Certificate accounts:
3.00% to 3.99% 1,080 0.1 3.01 12,814 1.0 3.66
4.00% to 4.99% 192,338 8.5 4.84 103,927 7.9 4.60
5.00% to 5.99% 746,819 33.1 5.41 287,222 21.9 5.49
6.00% to 6.99% 217,707 9.6 6.44 236,593 18.0 6.39
7.00% to 7.99% 30,581 1.4 7.21 33,077 2.5 7.26
8.00% to 8.99% 41,779 1.8 8.52 50,186 3.8 8.48
9.00% to 10.99% 1,191 0.1 9.03 22,799 1.7 9.65
---------- -------- ---------- -------
1,231,495 54.6 746,618 56.8
---------- -------- ---------- -------
Unamortized premium 385 - - -
---------- -------- ---------- -------
Total deposits $2,254,100 100.0% $1,313,306 100.0%
========== ======== ========== =======
Weighted average
interest rate at June 30 4.28% 4.56%
==== ====
74
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Scheduled maturities of certificate accounts at June 30, 1996 are as follows
(in thousands):
Less than 12 months $ 814,607
12 to 24 months 247,800
25 to 36 months 90,545
Over 36 months 78,543
---------
$1,231,495
=========
Interest expense on deposit accounts is summarized as follows for the years
ended June 30:
1996 1995 1994
------ ------ ------
(In thousands)
NOW and money market accounts $ 6,376 6,393 5,833
Passbook accounts 8,967 8,289 7,691
Certificate accounts 47,982 41,112 39,480
------ ------ ------
$ 63,325 55,794 53,004
====== ====== ======
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was $136.2 million, $90.8 million and $87.0 million at June 30,
1996, 1995 and 1994, respectively.
At June 30, 1996, U.S. Treasury Notes, FHLMC and FNMA mortgage-backed
securities, as well as mortgage loans with an aggregate carrying value and
market value of $18.2 million, were pledged as collateral for certain jumbo
certificates aggregating $14.4 million.
75
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
10. BORROWED FUNDS
Borrowed funds are summarized as follows at June 30:
Weighted Average
Interest Rate Amount
---------------- ------------------
1996 1995 1996 1995
-------- ------ -------- --------
(In thousands)
Fixed rate advances from FHLB of
Chicago due:
1996 - 9.73% $ - 25,000
1997 7.15 7.15 50,000 50,000
1998 6.38 6.41 50,000 25,000
1999 8.27 8.27 15,000 15,000
2000 6.64 6.64 80,000 80,000
2001 6.45 6.39 65,000 40,000
2002 6.13 5.62 30,000 5,000
2003 6.13 6.13 5,500 5,500
------- -------
Total fixed rate advances 6.66 7.06 295,500 245,500
Adjustable rate advances from FHLB of
Chicago due:
1997 5.79 7.09 125,000 15,000
------- -------
Total advances from FHLB of Chicago 6.40 7.06 420,500 260,500
------- -------
Collateralized mortgage obligations:
Issued by MAFC due 2018 15,928 20,470
Unamortized discount (1,202) (1,621)
------- -------
11.42 11.19 14,726 18,849
------- -------
Issued by NWAC due 2018 27,419 -
Unamortized premium 247 -
------- -------
8.05 - 27,666 -
------- -------
Total collateralized mortgage
obligations, net 42,392 18,849
------- -------
Reverse repurchase agreements 6.74 5.96 39,804 27,675
Unsecured term bank loan, due 2003 6.47 - 35,000 -
------- -------
Total borrowed funds 6.23% 7.22 $ 537,696 307,024
===== ===== ======= =======
The Bank has adopted a collateral pledge agreement whereby the Bank has
agreed to at all times keep on hand, free of all other pledges, liens, and
encumbrances, first mortgages with unpaid principal balances aggregating no less
than 167% of the outstanding secured advances from the Federal Home Loan Bank
("FHLB") of Chicago. All stock in the FHLB of Chicago is pledged as additional
collateral for these advances. At June 30, 1996, adjustable rate advances have
interest rates which adjust as follows: $85.0 million at the 7th District FHLB
daily investment deposit rate plus .45%; $25.0 million at the London interbank
offering rate ("LIBOR") for three months less .05%; and $15.0 million at the
prime rate less 2.01%.
The Bank issued collateralized mortgage obligations ("CMOs") in 1988 through
MAFC. The CMOs are collateralized by mortgage-backed securities of the Bank.
Substantially all of the collections of principal and interest from the
underlying collateral are paid through to the holders of the CMOs. The CMOs
were issued in four traunches. The actual maturity of each traunche of the CMO
varies depending upon the timing of cash receipts from the underlying
collateral. At June 30, 1996 and 1995, the CMOs
76
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
are secured by mortgage-backed securities of the Bank with a carrying value of
$15.8 million and $20.3 million and a fair value of $16.2 million and $20.9
million, respectively. For the years ended June 30, 1996, 1995, and 1994, the
effective annual cost of the CMOs was approximately 11.24%, 11.13% and 19.31%,
respectively.
Through acquisition, the Bank has CMOs which were issued by NWAC in 1988.
The CMOs were issued in two classes, which have floating interest rates tied to
LIBOR. The CMOs are collateralized by mortgage-backed securities of the Bank.
Substantially all of the collections of principal and interest from the
underlying collateral are paid through to the holders of the CMOs. At June 30,
1996, the CMOs are secured by mortgage-backed securities of the Bank with a
carrying value and fair value of $32.1 million and $30.6 million, respectively.
For the year ended June 30, 1996, the effective annual cost of the CMOs was
approximately 8.05%.
The Bank enters into sales of securities under agreements to repurchase the
identical securities ("reverse repurchase agreements") with nationally
recognized primary securities dealers and are treated as financings. The
securities underlying the agreements are delivered to the dealers who arrange
the transaction and are reflected as assets. The following table presents
certain information regarding reverse repurchase agreements as of June 30 and
the years then ended:
1996 1995 1994
------ ------- -------
(in thousands)
Balance at end of year $ 39,804 27,675 12,675
Maximum month-end balance 78,826 27,675 12,675
Average balance 18,619 16,626 9,515
Weighted average rate at end of year 6.74% 5.96% 4.00%
Weighted average rate on average balance 7.25 5.79 4.00
At June 30, 1996 and 1995, the reverse repurchase agreements were
collateralized by CMOs with a carrying value of $42.1 million and $29.9 million
and a market value of $42.4 million and $29.5 million, respectively. At June
30, 1996, the reverse repurchase agreements have maturities of more than one
year.
The Company obtained a $35.0 million unsecured term bank loan in conjunction
with its acquisition of NSBI. The loan provides for an interest rate of the
prime rate or 1% over one, two or three-month LIBOR at management's discretion
adjustable and payable at the end of the repricing period. The loan currently
carries an interest rate of 1% over one-month LIBOR. The loan is convertible
all or in part, with certain limitations at the end of any repricing period, at
management's election to a fixed rate at 1.25% over the U.S. Treasury rate with
a maturity corresponding to the remaining term of the loan. The loan requires
increasing annual principal payments starting in December 1997 with $9.2 million
due at the final maturity of the loan on December 31, 2003. Prepayments of
principal are allowed, but fixed-rate portions are subject to penalty. In
conjunction with the term bank loan, the Company also maintains a $15.0 million
one year unsecured revolving line of credit which matures January 26, 1997, but
is renewable. The interest rate on the line of credit is the prime rate or 1%
over one, two, or three-month LIBOR, at management's discretion with interest
payable at the end of the repricing period. No amounts have been drawn on the
line of credit. The financing agreements contain covenants that, among other
77
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
things, requires the Company to maintain a minimum stockholders' equity balance
and to obtain certain minimum operating results, as well as requiring the Bank
to maintain "well capitalized" regulatory capital levels and certain non-
performing asset ratios. In addition, the Company has agreed not to pledge any
stock of the Bank or MAF Developments for any purpose. At June 30, 1996, the
Company was in compliance with these covenants.
Maturities of the unsecured term bank loan are as follows as of June 30,
1996 (in thousands):
December 31, 1997 $ 500
December 31, 1998 1,500
December 31, 1999 3,100
December 31, 2000 4,500
December 31, 2001 7,000
Thereafter 18,400
-------
$35,000
=======
11. Subordinated Capital Notes
During the second quarter of fiscal 1996, the Company refinanced its $20.9
million of 10% Subordinated Capital Notes due June 30, 2002 with $27.6 million
of 8.32% Subordinated Notes due September 30, 2005. The payment of principal
and interest on the current notes is subordinated at all times to any
indebtedness or liability of the Company outstanding or incurred after the date
of issuance. Costs incurred in the refinance transaction amounted to $1.0
million which were deferred and are being accreted over the life of the notes to
yield an effective interest rate of 8.85%. The capital notes are callable at the
discretion of the Company at any time after September 30, 1998, at par plus any
accrued interest. The indenture provides for restrictions on the amounts of
additional indebtedness the Company may incur as well as the amount of dividends
and other distributions it may pay with respect to its equity securities,
depending on the Company's capital ratio. The refinance transaction resulted in
a $474,000, or $0.08 per share extraordinary charge to earnings due to the early
extinguishment of debt as a result of writing-off the remaining unamortized
transaction costs of $774,000, net of income taxes of $300,000.
12. Income Taxes
Total income tax expense for the years ended June 30, 1996, 1995 and 1994
was allocated as follows:
1996 1995 1994
------ ------ ------
(In thousands)
Income from continuing
operations $10,805 9,316 7,766
Extraordinary item, for debt
extinguishment (300) - -
Stockholders' equity, for
compensation expense for tax purposes
in excess of amounts recognized
for financial reporting purposes (13) (219) (251)
Stockholders' equity, for change in
unrealized loss on marketable securities (471) (32) -
------- ----- -----
$10,021 9,065 7,515
======= ===== =====
Retained earnings at June 30, 1996, include $53.9 million of "base-year" tax
bad debt reserves for which no provision for federal income taxes has been made
(including reserves of Northwestern). If in the future this amount, or a
portion thereof, is used for certain purposes other than to absorb losses on bad
debts, a federal income tax liability will be imposed on the amount so used at
the then current corporate income tax rate.
78
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Income tax expense (benefit) attributable to income from continuing
operations for the years ended June 30, 1996, 1995 and 1994 is summarized as
follows:
1996 1995 1994
------- ------ ------
(In thousands)
Current:
Federal $ 8,218 6,613 8,348
State 1,135 1,280 1,453
------- ----- ------
9,353 7,893 9,801
Deferred:
Federal 1,189 1,285 (1,447)
State 263 138 (588)
------- ----- ------
1,452 1,423 (2,035)
------- ----- ------
Total income tax expense attributed to
income from continuing operations $10,805 9,316 7,766
======= ===== ======
The significant components of income tax expense attributable to income
from continuing operations for the years ended June 30, 1996, 1995 and 1994 are
as follows :
1996 1995 1994
----------------- ------------------ -------------------
Current Deferred Current Deferred Current Deferred
------- -------- ------- --------- -------- ---------
(In thousands)
Income tax expense (exclusive of the effects
of other components listed below) $9,340 1,452 7,674 1,575 9,637 (1,631)
Adjustments to tax assets and liabilities for enacted
changes in tax laws and rates, including impact of
retroactive effective dates - - - - 100 (94)
Tax expense resulting from allocating tax benefits
from stock-related compensation directly to
stockholders' equity 13 - 219 - 251 -
Decrease in beginning of year balance of valuation
allowance for deferred tax assets - - - (152) (187) (310)
------ -------- ------- -------- ----- ------
$9,353 1,452 7,893 1,423 9,801 (2,035)
====== ======== ======= ======== ===== ======
The reasons for the differences between the effective income tax rate
attributable to income from continuing operations and the corporate federal
income tax rate are summarized in the following table:
Percentage of Income
Before Income Taxes
-----------------------
1996 1995 1994
------ ------ ------
Federal income tax rate 35.0% 35.0 35.0
Items affecting effective income tax rate:
State income taxes, net of federal benefit 3.2 4.4 5.0
Reversal of deferred tax valuation allowance - (0.6) (2.3)
Other items, net (0.3) (0.6) (1.1)
---- ---- ----
Effective income tax rate 37.9% 38.2 36.6
==== ==== ====
79
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1996 and 1995, are presented below:
1996 1995
-------- --------
(In thousands)
Deferred tax assets:
Loan origination fees $ 637 550
Deferred compensation 2,406 1,574
Book general loan loss reserves 6,931 3,879
Book versus tax basis of real estate
held for sale 1,410 108
Book versus tax state income tax
expense 810 712
Book versus tax basis of loans
receivable 2,173 -
Book versus tax basis of securities 847 32
Other 554 295
-------- ------
Subtotal 15,768 7,150
Less: Valuation allowance (27) (27)
-------- ------
Total deferred tax assets 15,741 7,123
Deferred tax liabilities:
Loan origination fees (1,398) (106)
CMO REMIC - treatment of bond discount
amortization (83) (208)
Excess of tax bad debt reserve over
base year amount (2,010) (1,166)
Book versus tax basis of FHLB stock (1,020) (596)
Book versus tax state income tax
expense (55) (37)
Book versus tax basis of real estate
held for sale (517) (507)
Book versus tax basis of land and
fixed assets (1,704) (249)
Book versus tax basis of capitalized
servicing (473) (172)
Book versus tax basis of intangible
assets (3,500) -
Other (310) (67)
-------- ------
Total deferred tax liabilities (11,070) (3,108)
-------- ------
Net deferred tax asset $ 4,671 4,015
======== ======
The Company believes that it is more likely than not that the net deferred
tax asset will be realized, based on historical taxable income levels and
anticipated future earnings and taxable income levels. The Company has reported
federal taxable income and pre-tax book income amounts totaling approximately
$58 million and $73 million over the past three fiscal years, respectively.
13. COMMITMENTS AND CONTINGENCIES
The Bank is obligated under non-cancelable leases primarily on four of its
branch offices. Rent expense under these leases for the years ended June 30,
1996, 1995, and 1994 approximated $260,000, $226,000 and $173,000, respectively.
The projected minimum rentals under existing leases (excluding lease
escalations) as of June 30, 1996, are as follows (in thousands):
1997 $ 469,000
1998 427,000
1999 228,000
2000 168,000
2001 155,000
Thereafter 1,054,000
----------
Total $2,501,000
==========
80
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires the disclosure of estimated fair values of all asset, liability and
off-balance sheet financial instruments. The estimated fair value amounts under
SFAS No.107 have been determined as of a specific point in time utilizing
various available market information, assumptions and appropriate valuation
methodologies. Accordingly, the estimated fair values presented herein are not
necessarily representative of the underlying value of the Company. Rather the
disclosures are limited to reasonable estimates of the fair value of only the
Company's financial instruments. The use of assumptions and various valuation
techniques, as well as the absence of secondary markets for certain financial
instruments, will likely reduce the comparability of fair value disclosures
between financial institutions. The Company does not plan to sell most of its
assets or settle most of its liabilities at these fair values.
The estimated fair values of the Company's financial instruments as of June
30, 1996 and 1995 are set forth in the following table below.
1996 1995
--------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- --------- --------- ---------
(In thousands)
Financial assets:
Cash and cash equivalents $ 94,861 94,861 59,807 59,807
Investment securities 171,251 171,123 90,319 90,285
Mortgage-backed securities 418,102 414,970 307,390 301,135
Loans receivable, net 2,293,399 2,279,272 1,267,453 1,262,805
Interest receivable 19,974 19,974 10,246 10,246
---------- --------- --------- ---------
Total financial assets $2,997,587 2,980,200 1,735,215 1,724,278
========== ========= ========= =========
Financial liabilities:
Non-maturity deposits $1,022,220 1,022,220 566,688 566,688
Deposits with stated maturities 1,231,495 1,237,102 746,618 750,671
Borrowed funds 564,372 561,330 327,124 329,067
Interest payable 5,293 5,293 2,102 2,102
---------- --------- --------- ---------
Total financial liabilities $2,823,380 2,825,945 1,642,532 1,648,528
========== ========= ========= =========
The following methods and assumptions are used by the Company in estimating
the fair value amounts for its financial instruments.
Cash and cash equivalents. The carrying value of cash and cash equivalents
approximates fair value due to the relatively short period of time between the
origination of the instruments and their expected realization.
Investment securities and mortgage-backed securities. The fair value of
these financial instruments were estimated using quoted market prices, when
available. If quoted market prices were not available, fair value was estimated
using quoted market prices for similar assets. The fair value of FHLB of Chicago
stock is based on its redemption value.
81
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Loans receivable. The fair value of loans receivable held for investment is
estimated based on contractual cash flows adjusted for prepayment assumptions,
discounted using the current rate at which similar loans would be made to
borrowers with similar credit ratings and remaining terms to maturity. The fair
value of mortgage loans held for sale are based on estimated values that could
be obtained in the secondary market.
Interest receivable and payable. The carrying value of interest receivable,
net of the reserve for uncollected interest, and interest payable approximates
fair value due to the relatively short period of time between accrual and
expected realization.
Deposits. The fair value of deposits with no stated maturity, such as demand
deposit, passbook savings, NOW and money market accounts, are disclosed as the
amount payable on demand. The fair value of fixed-maturity deposits is the
present value of the contractual cash flows discounted using interest rates
currently being offered for deposits with similar remaining terms to maturity.
Borrowed funds. The fair value of FHLB of Chicago advances and reverse
repurchase agreements is the present value of the contractual cash flows,
discounted by the current rate offered for similar remaining maturities. The
carrying value of the unsecured term bank loan approximates fair value due to
the short term to repricing and adjustable rate nature of the loan.
The fair values of the subordinated capital notes and CMO bonds payable were
estimated using quoted market prices.
Commitments to extend credit and standby letters of credit. The fair value
of commitments to extend credit is estimated based on current levels of interest
rates versus the committed rates. As of June 30, 1996 and 1995, the fair value
of the Bank's mortgage loan commitments of $166.0 million and $130.2 million,
respectively, was $(1.4) million and $700,000, respectively, which represents
the differential between the committed value and value at current rates. The
fair value of the standby letters of credit approximate the recorded amounts of
related fees and are not material at June 30, 1996 and 1995.
82
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
15. Regulatory Capital
The Bank is subject to regulatory capital requirements under the OTS.
Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary actions by regulators which could have a
material impact on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines as calculated under regulatory accounting
practices.
OTS regulations require all savings institutions to meet three capital
requirements: a tangible capital to adjusted total assets ratio of 1.5%, a core
capital to adjusted total assets ratio of 3.0%, and a risk-based capital to
total risk-weighted assets ratio of 8.0%. Management believes, as of June 30,
1996, that the Bank meets all capital adequacy requirements to which it is
subject. The following table reflects the Bank's regulatory capital as of June
30, 1996 as it relates to its three capital adequacy requirements.
Risk-
Tangible Core Based
--------- -------- --------
(Dollars in thousands)
Stockholder's equity of the Bank $ 263,346 263,346 263,346
Goodwill and other non-allowable intangible
assets (35,630) (35,630) (35,630)
Non-permissible subsidiary deduction (13,016) (13,016) (13,016)
Non-includible purchased mortgage servicing
rights (184) (184) (184)
Regulatory capital adjustment for available
for sale securities 1,066 1,066 1,066
Land loans greater than 80% loan-to-value - - (211)
General loan loss reserves - - 17,254
-------- ------- -------
Regulatory capital 215,582 215,582 232,625
Minimum requirement 46,095 92,189 121,167
-------- ------- -------
Excess over minimum requirement $ 169,487 123,393 111,458
======== ======= =======
Capital ratios of the Bank 7.02% 7.02 15.36
======== ======= =======
Core capital is defined as common stockholder's equity plus non-cumulative
perpetual preferred stock and related surplus and minority interest in equity
accounts of consolidated subsidiaries, plus 90% of the fair market value of
readily marketable purchased mortgage servicing rights, less non-qualifying
intangible assets, such as goodwill and core deposit intangibles. Tangible
capital is defined as core capital less all intangible assets other than a
limited amount of readily marketable purchased mortgage servicing rights. The
risk-based capital requirement requires the Bank to maintain risk-based capital
of 8% of total risk-weighted assets. Assets of the Bank, including certain off-
balance sheet items, are adjusted to reflect degrees of credit risk to compute
total risk-weighted assets. Capital for this computation includes core capital
plus supplementary capital, which includes general loan loss reserves.
OTS regulations require that in meeting the tangible, core and risk-based
capital standards, institutions must generally deduct investments in and loans
to subsidiaries engaged in activities not permissible for a national bank. For
the Bank, this includes its $21.7 million investment in Mid America Developments
and NW Financial at June 30, 1996, which the Bank must deduct 60%, or $13.0
million from regulatory capital for purposes of calculating its capital
requirements. As of July 1, 1996, the Bank is required to deduct 100% of this
investment for capital purposes.
83
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
As of June 30, 1996, the most recent notification from the OTS categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes have changed the Bank's category. To be categorized as
well capitalized the Bank must maintain a minimum core capital ratio of 5%, a
minimum risk-based capital ratio of 10%, as well as a ratio of core capital to
adjusted risk-weighted assets of 6%. At June 30, 1996, the Bank's ratios were
7.02%, 15.36% and 14.23%, respectively.
16. Officer, Director and Employee Plans
Mid America Federal Employee Stock Ownership Plan (ESOP)/Profit Sharing
Plan/401(k) Plan. The Mid America Federal ESOP covers substantially all
employees with more than one year of employment who have attained the age of 21.
The ESOP borrowed $1.7 million from an unaffiliated third party bank and
purchased 321,750 common shares of the Company in the initial public offering.
The ESOP loan was paid off in 1995. Contributions to the ESOP by the Bank are
made to fund the principal and interest payments on any debt of the ESOP or to
purchase additional common shares of the Company's stock. For the years ended
June 30, 1996, 1995 and 1994, total contributions to the ESOP were $360,000,
$146,000 and $246,000, respectively.
The Company maintains a Profit Sharing/401(k) Plan to which it made
discretionary contributions of $360,000, $450,000 and $200,000 for the years
ended June 30, 1996, 1995 and 1994, respectively. Employees are allowed to make
pre-tax contributions of up to 15% of their compensation and after-tax
contributions of up to 10% of compensation, subject to certain limitations.
Northwestern ESOP/401(k) Plan. The Northwestern ESOP was terminated on the
effective date of the merger. The Northwestern 401(k) Plan will be merged with
the Mid America Federal Profit Sharing/401(k) Plan. There is no financial
statement impact for the years ended June 30, 1996, 1995 and 1994 for either of
these plans.
Stock Option Plans. The Company and its shareholders have adopted an
incentive stock option plan ("Incentive Plan") and a premium price stock option
plan ("Premium Plan") for the benefit of employees of the Bank. In connection
with acquisition of NSBI, certain options previously granted to employees of
Northwestern have been converted into options to purchase the Company's common
stock.
The number of shares of common stock authorized under the Incentive Plan is
523,463. The option exercise price must be at least 100% of the fair market
value of the common stock on the date of grant, and the option term cannot
exceed 10 years.
Under the Incentive Plan, there were 497,830 outstanding option grants at
June 30, 1996 all of which were exercisable. During the last three fiscal years,
no options were granted under the Incentive Plan. At June 30, 1996, options for
81 shares were available for grant under the Incentive Plan. Options for 3,220,
3,850, and 1,650 shares were exercised in 1996, 1995 and 1994, respectively,
under the plan, at prices ranging from $5.15 to $8.48 per share.
The number of shares of common stock authorized under the Premium Plan is
247,500. The option exercise price equals 133% of the fair market value of the
common stock on the date of grant with respect to executive officers, 110% with
respect to directors and 100% with respect to non-executive officers. The
option term cannot exceed 10 years.
84
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Under the Premium Plan, there were 96,081 outstanding option grants at June
30, 1996, of which 26,567 were exercisable. During 1996, 1995 and 1994, there
were options of 43,357, 25,748 and 26,976 granted under the Premium Plan,
respectively, at exercise prices ranging from $26.15 to $33.58 per share. At
June 30, 1996, options for 151,419 shares were available for grant under the
Premium Plan. To date, there have been no options exercised under the Premium
Plan.
Pursuant to the terms of the acquisition of NSBI, a total of 100,000 options
previously granted to employees of Northwestern have been converted into options
to purchase 167,233 shares of the Company's common stock at an exercise price of
$4.78 per share. The value of these options was included in the purchase price
and added to additional paid-in capital in the consolidated statement of
financial condition. No such options were exercised in 1996.
The table below presents a summary of the aggregate options outstanding
under the Incentive Plan and Premium Plan. Information shown for the year ended
June 30, 1994 includes 10,175 fully exercisable options under the Directors'
Option Plan which terminated during fiscal 1995.
Number of Shares Price of Shares Under Option
--------------------- ----------------------------
Under Eligible for Weighted
Option Exercise Per share Average
------- ------------ ---------------- ----------
June 30, 1996 761,144 691,630 $ 4.78 - 33.58 $ 8.36
June 30, 1995 553,774 510,042 5.15 - 26.30 7.88
June 30, 1994 542,051 513,425 5.15 - 26.30 6.95
Management Recognition / Retention Plans. In conjunction with the Bank's
conversion, the Company formed two Management Recognition and Retention Plans
and Trusts ("MRPs"), each of which purchased 80,438 common shares of the
Company. The funds used to acquire the MRPs' shares were contributed by the
Bank. These shares are available for issuance to employees in key management
positions with the Bank. At June 30, 1996, there were no plan share awards
outstanding. An additional 147 shares owned by the MRPs have not yet been
awarded. For the years ended June 30, 1996, 1995 and 1994, -0-, 35,517 and
31,996 shares, respectively, were vested and distributed to employees. For the
years ended June 30, 1996, 1995 and 1994, $-0-, $59,000 and $165,000,
respectively, was reflected as an expense.
Supplemental Executive Retirement Plan. During fiscal 1995, the Bank adopted
a supplemental executive retirement plan ("SERP") for the purpose of providing
certain retirement benefits to executive officers and other corporate officers
approved by the Board of Directors. The annual retirement plan benefit under the
SERP is calculated equal to 2% of final average salary times the years of
service after 1994. Ten additional years of service are credited to participants
in the event of a change in control transaction although in no event may total
years of service exceed 20 years. The maximum annual retirement is equal to 40%
of final average salary. Benefits are payable in various forms in the event of
retirement, death, disability and separation from service, subject to certain
conditions defined in the plan. The SERP also provides for certain death
benefits to the extent such amounts exceed a participant's accrued benefit at
the time of death. The Company has life insurance policies which are intended to
be used to satisfy obligations of the SERP. For the years ended June 30, 1996
and 1995, $258,000 and $120,000 was reflected as an expense for the SERP. The
vested liability under the SERP was approximately $56,000 and $18,000 as of June
30, 1996 and 1995, respectively.
85
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
17. Financial Instruments with Off-Balance Sheet Risk and Concentrations of
Credit Risk
The Bank is a party to various financial instruments with off-balance sheet
risk in the normal course of its business. These instruments include commitments
to extend credit, standby letters of credit, and forward commitments to sell
loans. These financial instruments carry varying degrees of credit and interest-
rate risk in excess of amounts recorded in the financial statements.
Commitments to purchase and originate loans of $166.0 million at June 30,
1996, represent amounts which the Bank plans to fund within the normal
commitment period of 60 to 90 days of which $96.0 million were fixed-rate, with
rates ranging from 6.25% to 9.25%, and $70.0 million were adjustable-rate loans.
Because the credit worthiness of each customer is reviewed prior to extension of
the commitment, the Bank adequately controls their credit risk on these
commitments, as it does for loans recorded on the balance sheet. As part of its
effort to control interest-rate risk on these commitments, the Bank sells fixed-
rate mortgage loan commitments, for future delivery, at a specified price and at
a specified future date. Such commitments for future delivery present a risk to
the Bank, in the event it cannot deliver the loans during the delivery period.
This could lead to the Bank being charged a fee for non-performance, or being
forced to reprice the mortgage loans at a lower rate, causing a loss to the
Bank. The Bank seeks to mitigate this potential loss by charging potential
borrowers, at the time of application, a fee to fix the interest rate, or by
requiring the interest rate to float at market rates until closing. At June 30,
1996, forward commitments to sell mortgage loans for future delivery were $39.4
million, of which $7.8 million are related to loans held for sale, and $31.6
million are unfunded as of June 30, 1996.
Additionally, the Bank has approved, but unused, home equity lines of credit
of $77.2 million at June 30, 1996. Approval of equity lines is based on
underwriting standards that generally do not allow total borrowings, including
the equity line of credit to exceed 80% of the current appraised value of the
customer's home, which is similar to guidelines used when the Bank originates
first mortgage loans, and are a means of controlling its credit risk on the
loan. However, the Bank offers home equity lines of credit up to 100% of the
homes current appraised value, less existing liens, at a commensurably higher
interest rate.
The Bank had 22 standby letters of credit totaling $18.4 million, two of
which total $13.3 million, which enhance a developer's industrial revenue bond
financings of commercial real estate in the Bank's market. At June 30, 1996, the
Bank had pledged mortgage-backed securities and investment securities with an
aggregate carrying value and market value of $25.8 million and $25.9 million
respectively, as collateral for these two standby letters of credit. Standby
letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. The credit risk involved in
these transactions is essentially the same as that involved in extending a loan
to a customer, as performance under the letters of credits creates a first
position lien in favor of the Bank. Additionally, at June 30, 1996, the Company
had 8 standby letters of credit totaling $6.3 million, which insure the
completion of land development improvements on behalf of MAF Developments, Inc.
86
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
In addition to financial instruments with off-balance sheet risk, the Bank
is exposed to varying risks with concentrations of credit. Concentrations of
credit include significant lending activities in specific geographical areas and
large extensions of credit to individual borrowers. At June 30, 1995, the Bank's
loan portfolio included over 95% of loans that the Bank has originated within
its primary lending area of western Cook, DuPage, northern Will and eastern Kane
counties of Illinois. During 1996, with the acquisition of N.S. Bancorp, the
Bank obtained a purchased loan portfolio, consisting of primarily single-family,
owner-occupied residential loans located in 46 states and the District of
Columbia. The following table identifies the geographic distribution of the
Bank's collateral on real estate loans at June 30, 1996.
Purchased Bank originated Total
Real estate loans Real estate loans Real estate loans
--------------------- -------------------- -------------------
Amount Percent Amount Percent Amount Percent
-------- -------- ---------- -------- --------- --------
(Dollars in thousands)
Alabama $ 42,198 6.6% $ - -% $ 42,198 1.9%
California 142,164 21.4 488 0.1 142,652 6.4
Colorado 31,099 4.7 1,456 0.1 32,555 1.5
Georgia 68,983 10.4 1,070 0.1 70,053 3.2
Illinois 100,494 15.1 1,525,155 98.3 1,625,649 73.4
Minnesota 21,244 3.2 872 0.1 22,116 1.0
New Jersey 35,397 5.3 1,579 0.1 36,976 1.7
New York 22,671 3.4 1,446 0.1 24,117 1.1
Texas 27,723 4.2 1,427 0.1 29,150 1.3
Utah 27,816 4.2 - - 27,816 1.2
All other 144,661 21.5 17,707 1.0 162,368 7.3
-------- ------- ---------- ----- --------- -------
Total $ 664,450 100.0% $ 1,551,200 100.0% $ 2,215,650 100.0%
======== ======= ========== ===== ========== =======
18. Derivative Financial Instruments
The Bank enters into forward commitments to sell mortgage loans for future
delivery as a means of limiting exposure to changing interest rates between the
date a loan customer commits to a given rate, or closes the loan, whichever is
sooner, and the sale date, which is generally 10 to 60 days after the closing
date. These commitments to sell require the Bank to deliver mortgage loans at
stated coupon rates within the specified forward sale period, and subject the
Bank to risk to the extent the loans do not close. The Bank attempts to
mitigate this risk by collecting a non-refundable commitment fee, where
possible, and by estimating a percentage of fallout when determining the amount
of forward commitments to sell.
The following is a summary of the Bank's forward sales commitment activity
for the years ended June 30, 1996 and 1995:
1996 1995
--------- --------
(In thousands)
Balance at beginning of year $ 42,100 10,595
New forward commitments to deliver loans 305,488 123,638
Loans delivered to satisfy forward commitments (308,157) (92,133)
-------- -------
Balance at end of year $ 39,431 42,100
======== =======
87
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The Bank also enters into interest rate futures contracts to hedge its
exposure to price fluctuations on firm commitments to originate loans intended
for sale, that have not been covered by forward commitments to sell loans for
future delivery. Included in gain (loss) on sale of mortgage loans in 1996 and
1995 are $75,000 of net futures gains and $437,000 of net futures losses,
respectively, from hedging activities. At June 30, 1996, $4,000 of losses were
explicitly deferred and will be recognized in operations when the loans are
sold, comprised of deferred gains of $59,000 on closed positions and $63,000 of
deferred losses on open positions. At June 30, 1995, the Bank had $109,000 in
deferred losses, of which $98,000 were deferred losses on closed positions, and
$11,000 were deferred losses on open positions.
The following is a summary of the notional amount of interest rate futures
contract activity for the years ended June 30, 1996 and 1995:
1996 1995
-------- --------
(In thousands)
Balance at beginning of year $ 2,700 5,000
Interest rate futures contracts sold 116,800 57,500
Interest rate futures contracts closed (113,000) (59,800)
-------- -------
Balance at end of year $ 6,500 2,700
======== =======
19. Parent Company Only Financial Information
The information as of June 30, 1996 and 1995, and for the three years ended
June 30, 1996 presented below should be read in conjunction with the other Notes
to Consolidated Financial Statements.
Statements of Financial Condition 1996 1995
-------- --------
(In thousands)
Assets:
Cash and cash equivalents $ 25,495 8,371
Investment securities 4,761 2,982
Loans receivable 514 -
Equity in net assets of subsidiaries 268,070 104,648
Other assets 10,346 10,121
------- -------
$309,186 126,122
======= =======
Liabilities and Stockholders' Equity:
Unsecured term bank loan $ 35,000 -
Subordinated capital notes, net 26,676 20,100
Accrued expenses 5,284 603
------- -------
Total liabilities 66,960 20,703
------- -------
Stockholders' equity:
Common stock 111 59
Additional paid-in capital 170,956 39,740
Retained earnings 88,524 73,447
Treasury stock (16,540) (7,779)
Unrealized loss on marketable securities, net of tax (825) (48)
------- -------
Total stockholders' equity 242,226 105,419
------- -------
$309,186 126,122
======= =======
88
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Statements of Operations 1996 1995 1994
-------- -------- --------
(In thousands)
Interest income $ 1,231 1,056 517
Interest expense 2,641 2,163 2,157
-------- ------- -------
Net interest expense (1,410) (1,107) (1,640)
Gain (loss) on sale of investment
securities, net 188 (72) 208
Non-interest expense 1,446 1,256 909
Extraordinary loss, net of tax (474) - -
-------- ------- -------
Net loss before income taxes and
equity
in earnings of subsidiaries (3,142) (2,435) (2,341)
Income tax benefit (1,107) (999) (1,093)
-------- ------- -------
Net loss before equity in earnings of
subsidiaries (2,035) (1,436) (1,248)
Equity in earnings of subsidiaries 19,244 16,479 14,698
-------- ------- -------
Net income $ 17,209 15,043 13,450
======== ======= =======
Statements of Cash Flows 1996 1995 1994
--------- ------- -------
(In thousands)
Operating activities:
Net income $ 17,209 15,043 13,450
Equity in earnings of subsidiaries (19,244) (16,479) (14,698)
Dividends received from the Bank 69,000 10,000 12,500
Extraordinary loss, net of tax 474 - -
(Gain) loss on sale of investment
securities (188) 72 (208)
Amortization of premiums and discounts (28) 80 71
Net decrease (increase) in other
assets and liabilities,
net of effects from purchase of NSBI 7,284 (9,156) (772)
Decrease in ESOP loan - 146 237
-------- ------- -------
Net cash provided by (used in)
operating activities 74,507 (294) 10,580
Investing activities:
Proceeds from sale of investment
securities 1,155 6,516 1,503
Proceeds from maturity of investment
securities 44,000 53 -
Repayment of loans receivable 18,432
Purchases of investment securities (26,367) (960) (8,029)
Investment in and loans to subsidiary (320) 1,275 (700)
Payment for purchase of NSBI, net of
cash acquired (257,437) - -
-------- ------- -------
Net cash provided by (used in)
investing activities (220,537) 6,884 (7,226)
Financing activities:
Proceeds from issuance of common stock 131,255 78 90
Proceeds from borrowings 61,629 - -
Repayment of borrowings (20,900) (146) (237)
Cash dividends paid (2,531) (1,213) -
Purchases of treasury stock (6,299) (3,741) (4,038)
-------- ------- -------
Net cash provided by (used in)
financing activities 163,154 (5,022) (4,185)
-------- ------- -------
Increase (decrease) in cash and cash
equivalents 17,124 1,568 (831)
Cash and cash equivalents at beginning
of year 8,371 6,803 7,634
-------- ------- -------
Cash and cash equivalents at end of $ 25,495 8,371 6,803
year ======== ======= =======
89
MAF Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following are the consolidated results of operations on a quarterly
basis:
YEAR ENDED JUNE 30, 1996
-------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
Interest income $32,920 33,969 34,199 42,007
------ ------ ------ ------
Interest expense 21,751 22,877 22,452 26,141
------ ------ ------ ------
Net interest income 11,169 11,092 11,747 15,866
Provision for loan losses 100 150 200 250
------ ------ ------ ------
Net interest income
after provision for
loan losses 11,069 10,942 11,547 15,616
Net gain on sale of assets 143 158 76 59
Income from real estate
operations 1,513 1,307 1,550 416
Other income 2,784 2,849 2,848 3,397
Non-interest expense 8,638 8,635 9,165 11,348
------ ------ ------ ------
Income before income
taxes and extraordinary
item 6,871 6,621 6,856 8,140
Income taxes 2,651 2,552 2,655 2,947
------ ------ ------ ------
Income before
extraordinary item 4,220 4,069 4,201 5,193
Extraordinary item - (474) - -
------ ------ ------ ------
Net income $ 4,220 3,595 4,201 5,193
====== ====== ====== ======
Earnings per share before
extraordinary item $ .72 .69 .74 .69
Extraordinary item - (.08) - -
------ ------ ------ ------
Earnings per share $ .72 .61 .74 .69
====== ====== ====== ======
Cash dividends declared
per share $ .08 .08 .08 .08
====== ====== ====== ======
Stock price range:
High $ 25.50 26.25 25.50 27.00
Low 20.68 24.00 24.50 24.00
Close 25.13 25.00 24.88 24.50
YEAR ENDED JUNE 30, 1995
-------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
Interest income $26,473 27,769 29,441 31,280
Interest expense 16,844 17,603 18,645 20,275
------ ------ ------ ------
Net interest income 9,629 10,166 10,796 11,005
Provision for loan losses 150 175 - 150
------ ------ ------ ------
Net interest income
after provision for
loan losses 9,479 9,991 10,796 10,855
Net gain (loss) on sale
and writedown of assets 351 (201) 5 (261)
Income from real estate
operations 932 3,406 664 2,495
Other income 2,160 2,233 2,252 2,614
Non-interest expense 8,194 8,052 8,455 8,711
------ ------ ------ ------
Income before income
taxes 4,728 7,377 5,262 6,992
Income taxes 1,816 2,858 1,954 2,688
------ ------ ------ ------
Net income $ 2,912 4,519 3,308 4,304
====== ====== ====== ======
Earnings per share $ .48 .77 .56 .73
====== ====== ====== ======
Cash dividends declared
per share $ .0727 .0727 .0727 .0727
====== ====== ====== ======
Stock price range:
High $ 20.91 20.91 21.70 21.59
Low 19.32 16.36 17.05 20.45
Close 20.68 17.05 21.36 21.36
90
Independent Auditors' Report
The Board of Directors
MAF Bancorp, Inc.
We have audited the accompanying consolidated statements of financial
condition of MAF Bancorp, Inc. and subsidiaries as of June 30, 1996 and 1995,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended June
30, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MAF Bancorp,
Inc. and subsidiaries as of June 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
August 19, 1996
91
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors of the registrant is included in the
Registrant's proxy statement under the heading "Election of Directors" and the
information included therein is incorporated herein by reference. Information
regarding the executive officers of the registrant and the Bank is included in
Part I. Business.
Item 11. Executive Compensation
Information regarding compensation of executive officers and directors is
included in the registrant's proxy statement under the headings "Directors
Compensation," "Executive Compensation - Summary Compensation Table,"
"Employment and Special Termination Agreements," "Supplemental Executive
Retirement Plan," "Option Plans," and "Long Term Incentive Plan," and the
information included therein is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management is included in the registrant's proxy statement under the headings
"Voting Securities" and "Security Ownership of Certain Beneficial Owners," and
"Information With Respect to Nominees, Continuing Directors and Others," and the
information included therein is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is
included in the registrant's proxy statement under the heading "Transactions
with Certain Related Persons," and the information included therein is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a)(1) Financial Statements
The following consolidated financial statements of the registrant and
its subsidiaries are filed as a part of this document under Item 8.
Financial Statements and Supplementary Data
Consolidated Statements of Financial Condition at June 30, 1996 and
1995.
Consolidated Statements of Operations for each of the years in the
three-year period ended June 30, 1996.
Consolidated Statements of Changes in Stockholders' Equity for each of
the years in the three-year period ended June 30, 1996.
92
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended June 30, 1996.
Notes to Consolidated Financial Statements.
Independent Auditors' Report
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not required or are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
(a)(3) Exhibits
The following exhibits are either filed as part of this report or are
incorporated herein by reference:
Exhibit No. 2. Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession.
Amended and Restated Agreement and Plan of Reorganization among
MAF Bancorp, Inc. and N.S. Bancorp, Inc. dated November 29, 1995
(Incorporated by reference to Exhibit No. 2 to Registrant's Form
S-4 Registration Statement No. 333-2330).
Exhibit No. 3. Certificate of Incorporation and By-laws.
(i) Certificate of Incorporation, as amended.
(ii) Bylaws of Registrant, as amended. (Incorporated herein by
reference to exhibit No. 3 to Registrant's 1990 Form 10-K ).
Exhibit No. 4. Instruments Defining the Rights of Security Holders.
Indenture between MAF Bancorp, Inc. and Harris Trust and Savings
Bank (Trustee) dated as of September 27, 1995, for the 8.32%
Subordinated Notes due September 30, 2005. (Incorporated by
reference to Exhibit No. 4 to Registrant's Form S-3 Registration
Statement No. 33-96754).
Exhibit No. 10. Material Contracts
(i) Mid America Federal Savings Bank Employee Stock Ownership Plan;
as amended.
(ii) Mid America Federal Savings Bank Employee Stock Ownership Trust
Loan and Security Agreement. (Incorporated herein by reference
to Exhibit No. 10 to Registrant's 1990 Form 10-K).
(iii) Trust Agreement between Mid America Federal Savings Bank and NBD
Bank, N.A., Trustee (as successor to INB National Bank and
Chesterton State Bank) for the Mid America Federal Savings Bank
Employee Stock Ownership Trust. (Incorporated herein by
reference to Exhibit No. 10 to Registrant's 1990 Form 10-K).
(iv) Mid America Federal Savings Bank Management Recognition and
Retention Plan and Trust Agreement. (Incorporated herein by
reference to Exhibit No. 10 to Registrant's 1992 Form 10-K).
93
(v) MAF Bancorp, Inc. 1990 Incentive Stock Option Plan, as amended
(Incorporated herein by reference to Exhibit 4.3 to
Registrant's Registration Statement on Form S-8 (33-45794) as
filed with the SEC on February 14, 1992).
(vi) MAF Bancorp, Inc. 1993 Amended and Restated Premium Price
Stock Option Plan
(vii) Credit Agreement dated as of May 22, 1996, as amended, between
MAF Bancorp, Inc. and Harris Trust and Savings Bank.
(viii) Mid America Federal Savings Bank Employees' Profit Sharing
Plan, as amended.
(ix) Mid America Federal Savings and Loan Association Deferred
Compensation Trust Agreement. (Incorporated herein by
reference to Exhibit No. 10 to Registrant's 1990 Form 10-K).
(x) Mid America Federal Savings Bank Directors' Deferred
Compensation Plan. (Incorporated herein by reference to
Exhibit No. 10 to Registrant's 1993 Form 10-K).
(xi) Mid America Federal Savings Bank Executive Deferred
Compensation Plan. (Incorporated herein by reference to
Exhibit No. 10 to Registrant's 1993 Form 10-K).
(xii) MAF Bancorp, Inc. Executive Annual Incentive Plan.
(Incorporated herein by reference to Exhibit No. 10 to
Registrant's 1994 Form 10-K).
(xiii) MAF Bancorp, Inc. Shareholder Value Long-Term Incentive Plan.
(Incorporated herein by reference to Exhibit No. 10 to
Registrant's 1995 Form 10-K).
(xiv) Mid America Federal Savings Bank Supplemental Executive
Retirement Plan. (Incorporated herein by reference to Exhibit
No. 10 to Registrant's 1995 Form 10-K).
(xv) Form of Employment Agreement, as amended, between MAF Bancorp,
Inc. and various officers.
(xvi) Form of Employment Agreement, as amended, between Mid America
Federal Savings Bank and various officers.
(xvii) Form of Special Termination Agreement, as amended, between MAF
Bancorp, Inc. and various officers.
(xviii) Form of Special Termination Agreement, as amended, between Mid
America Federal Savings Bank and various officers.
(xix) Consultant Agreement dated August 27, 1996 between Mid America
Federal Savings Bank and Nicholas J. DiLorenzo, Sr.
(xx) N.S. Bancorp, Inc. 1990 Incentive Stock Option Plan, as
amended (Incorporated by reference to Registrant's Form S-8
Registration Statement No. 333-06593).
(xxi) Northwestern Savings and Loan Association Employee Stock
Ownership Plan, as amended.
(xxii) MAF Severance Benefits Program for Northwestern Employees.
94
Exhibit No. 11. Statement re: Computation of Per Share Earnings for the
years ended June 30:
1996 1995 1994
----------- ---------- ----------
Net income
$ 17,209,000 15,043,000 13,450,000
=========== ========== ==========
Weighted average shares outstanding
Common stock equivalents due to dilutive 5,825,501 5,557,334 5,788,107
effect on stock options
412,943 355,453 266,729
----------- ---------- ----------
Total weighted average common shares
and equivalents outstanding
6,238,444 5,912,787 6,054,836
=========== ========== ==========
Primary earnings per share
$ 2.76 2.54 2.22
==== ==== ====
Total weighted average common shares
and equivalents outstanding
6,238,444 5,912,787 6,054,836
Additional dilutive shares using the end of
period market value versus the average market
value when applying the treasury stock method
2,398 6,105 6,145
----------- ---------- ----------
Total weighted average common shares and
equivalents outstanding for fully diluted
computation
6,240,842 5,918,892 6,060,981
=========== ========== ==========
Fully diluted earnings per share
$ 2.76 2.54 2.22
==== ==== ====
Exhibit No. 12. Statements re: computation of ratio of earnings to fixed
charges.
Exhibit No. 21. Subsidiaries of the Registrant
A list of the Company's and Mid America Federal Savings Bank's
subsidiaries is included as an exhibit to this report.
Exhibit No. 23. Consent of KPMG Peat Marwick LLP
Exhibit No. 99 Additional Exhibits
(i) Stock Option Agreement dated as of November 29, 1995 between MAF
Bancorp, Inc. and N.S. Bancorp, Inc. (Incorporated by reference to
Exhibit No. 99.3 to Registrant's Form S-4 Registration Statement No.
333-2330).
(ii) Form of Stockholder Voting Agreements dated November 29, 1995, between
MAF Bancorp, Inc. and the directors and executive officers of N.S.
Bancorp, Inc.
(b) Reports on Form 8-K
On April 16, 1996, the Company announced that earnings for the three
months ended March 31, 1996 totaled $4.2 million, or $.74 per share.
On June 11, 1996, the Company filed an announcement that it had competed
its merger with N.S. Bancorp, Inc. on May 30,1996 pursuant to a
definitive merger agreement dated as of November 29, 1995.
95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/ Allen H. Koranda
------------------------------
Allen H. Koranda
Chairman of the Board and
Chief Executive Officer
September 4, 1996
------------------------------
(Date)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Allen H. Koranda or Kenneth Koranda or either of them,
his true and lawful attorney-in-fact and agents, with full power of substitution
and re-substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto, and all other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming said attorneys-in-fact and agents or their substitutes or substitute
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Allen H. Koranda September 4, 1996
----------------------------------- --------------------------------
Allen H. Koranda (Date)
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Jerry A. Weberling September 4, 1996
----------------------------------- --------------------------------
Jerry A. Weberling (Date)
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Gerard J. Buccino September 4, 1996
----------------------------------- --------------------------------
Gerard J. Buccino (Date)
Senior Vice President
and Controller
(Principal Accounting Officer)
96
By: /s/ Robert Bowles, M.D. September 4, 1996
--------------------------------- ---------------------------------
Robert Bowles, M.D. (Date)
Director
By: /s/ Nicholas J. DiLorenzo, Sr. September 4, 1996
--------------------------------- ---------------------------------
Nicholas J. DiLorenzo, Sr. (Date)
Director
By: /s/ Terry Ekl September 4, 1996
--------------------------------- ---------------------------------
Terry Ekl (Date)
Director
By: /s/ Joe. F. Hanauer September 4, 1996
--------------------------------- ---------------------------------
Joe F. Hanauer (Date)
Director
By: /s/ Richard Kallal September 4, 1996
--------------------------------- ---------------------------------
Richard Kallal (Date)
Director
By: /s/ Kenneth Koranda September 4, 1996
--------------------------------- ---------------------------------
Kenneth Koranda (Date)
Director
By: /s/ Henry Smogolski September 4, 1996
--------------------------------- ---------------------------------
Henry Smogolski (Date)
Director
By: /s/ F. William Trescott September 4, 1996
--------------------------------- ---------------------------------
F. William Trescott (Date)
Director
By: /s/ Lois B. Vasto September 4, 1996
--------------------------------- ---------------------------------
Lois B. Vasto (Date)
Director
By: /s/ Andrew J. Zych September 4, 1996
--------------------------------- ---------------------------------
Andrew J. Zych (Date)
Director
97