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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-18121
MAF BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3664868
(State of Incorporation) (I.R.S. Employer
Identification No.)
55th Street & Holmes Avenue
Clarendon Hills, Illinois 60514
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number: (630) 325-7300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
The number of shares outstanding of the issuer's common stock, par value $.01
per share, was 23,229,141 at August 12, 2002.
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MAF BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
Index
- -----
Part I. Financial Information Page
- ------- --------------------- -----
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of June 30, 2002 and December 31, 2001 (unaudited) .................... 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2002 and 2001 (unaudited) .......................... 4
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 2002 (unaudited) ....................... 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001 (unaudited) ...................... 6
Notes to Unaudited Consolidated Financial Statements (unaudited) ......... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............... 34
Part II. Other Information
- -------- -----------------
Item 1. Legal Proceedings ........................................................ 34
Item 2. Changes in Securities .................................................... 34
Item 3. Defaults Upon Senior Securities .......................................... 34
Item 4. Submission of Matters to a Vote of Security Holders ...................... 35
Item 5. Other Information ........................................................ 35
Item 6. Exhibits and Reports on Form 8-K ......................................... 35
Signature Page ........................................................... 37
2
Part I. Financial Information
Item 1. Financial Statements
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands)
(Unaudited)
June 30, December 31,
2002 2001
----------- ------------
Assets
- ------
Cash and due from banks $ 129,354 82,540
Interest-bearing deposits 105,206 29,367
Federal funds sold 93,353 112,765
---------- ---------
Total cash and cash equivalents 327,913 224,672
---------- ---------
Investment securities available for sale, at fair value 378,035 355,461
Stock in Federal Home Loan Bank of Chicago, at cost 165,646 132,081
Mortgage-backed securities available for sale, at fair value 244,903 142,158
Loans receivable held for sale 52,809 161,105
Loans receivable, net of allowance for losses of $19,375 and $19,607 4,317,781 4,286,470
Accrued interest receivable 28,436 28,761
Foreclosed real estate 809 1,405
Real estate held for development or sale 13,112 12,993
Premises and equipment, net 68,082 63,815
Other assets 73,080 80,448
Goodwill, net of accumulated amortization of $12,806 and $12,480 94,587 96,851
Core deposit intangibles, net of accumulated amortization of $7,961 and $7,128 7,986 8,819
---------- ---------
$5,773,179 5,595,039
========== =========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits $3,709,442 3,557,997
Borrowed funds 1,470,500 1,470,500
Advances by borrowers for taxes and insurance 37,722 38,484
Accrued expenses and other liabilities 88,095 92,185
---------- ---------
Total liabilities 5,305,759 5,159,166
---------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000
shares; none outstanding - -
Common stock, $.01 par value;
authorized 80,000,000 shares; 25,420,650 shares issued;
23,223,726 and 22,982,634 shares outstanding 254 254
Additional paid-in capital 204,624 201,468
Retained earnings, substantially restricted 309,021 286,742
Stock in gain deferral plan; 223,453 shares 511 511
Accumulated other comprehensive income 5,509 3,672
Treasury stock, at cost; 2,420,377 and 2,661,469 shares (52,499) (56,774)
---------- ---------
Total stockholders' equity 467,420 435,873
---------- ---------
$5,773,179 5,595,039
========== =========
See accompanying notes to unaudited consolidated financial statements.
3
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2002 2001 2002 2001
-------- -------- --------- ---------
Interest income:
Loans receivable $ 71,563 78,187 143,568 158,270
Mortgage-backed securities available for sale 2,908 1,650 5,280 3,310
Investment securities available for sale 6,122 5,633 11,938 10,563
Interest-bearing deposits and federal funds sold 1,289 2,437 2,652 4,911
-------- -------- --------- ---------
Total interest income 81,882 87,907 163,438 177,054
-------- -------- --------- ---------
Interest expense:
Deposits 24,218 31,637 49,764 63,147
Borrowed funds 19,527 24,419 39,573 49,558
-------- -------- --------- ---------
Total interest expense 43,745 56,056 89,337 112,705
-------- -------- --------- ---------
Net interest income 38,137 31,851 74,101 64,349
Provision for loan losses - - - -
-------- -------- --------- ---------
Net interest income after provision for loan losses 38,137 31,851 74,101 64,349
Non-interest income:
Gain on sale of:
Loans receivable held for sale 2,662 1,906 5,002 2,597
Mortgage-backed securities 39 - 39 -
Investment securities 517 390 982 560
Foreclosed real estate 124 147 151 322
Income from real estate operations 160 1,321 3,057 4,670
Deposit account service charges 5,527 4,107 10,351 7,533
Loan servicing fee income (expense) 137 (63) 97 (111)
Impairment of mortgage servicing rights (490) - (490) (215)
Brokerage commissions 642 637 1,245 1,182
Other 2,276 2,056 4,834 3,822
-------- -------- --------- ---------
Total non-interest income 11,594 10,501 25,268 20,360
-------- -------- --------- ---------
Non-interest expense:
Compensation and benefits 14,719 11,704 28,945 23,045
Office occupancy and equipment 2,801 2,210 5,668 4,434
Advertising and promotion 1,362 1,099 2,549 2,347
Data processing 847 746 1,846 1,510
Federal deposit insurance premiums 173 147 347 302
Other 3,975 3,211 7,679 6,276
Amortization of goodwill 163 811 326 1,622
Amortization of core deposit intangibles 409 319 833 659
-------- -------- --------- ---------
Total non-interest expense 24,449 20,247 48,193 40,195
-------- -------- --------- ---------
Income before income taxes 25,282 22,105 51,176 44,514
Income tax expense 8,995 8,225 18,346 16,556
-------- -------- --------- ---------
Net income $ 16,287 13,880 32,830 27,958
======== ======== ========= =========
Basic earnings per share $ .70 .61 1.42 1.23
======== ======== ========= =========
Diluted earnings per share $ .68 .60 1.38 1.20
======== ======== ========= =========
See accompanying notes to unaudited consolidated financial statements.
4
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30, 2002
------------------------------------------------------------------------------
Accumulated Stock in
Additional other gain
Common paid-in Retained comprehensive deferral Treasury
stock capital earnings income plan stock Total
----- --------- -------- ------------- -------- -------- -------
Balance at December 31, 2001 $ 254 201,468 286,742 3,672 511 (56,774) 435,873
----- ------- ------- ----- ---- ------- -------
Comprehensive income:
Net income - - 32,830 - - - 32,830
Other comprehensive income, net of tax:
Unrealized holding gain during the period - - - 2,492 - - 2,492
Less: reclassification adjustment of gains
included in net income - - - (655) - - (655)
----- ------- ------- ----- ---- ------- -------
Total comprehensive income - - 32,830 1,837 - - 34,667
----- ------- ------- ----- ---- ------- -------
Exercise of 292,212 stock options and
reissuance of treasury stock - - (3,665) - - 4,371 706
Impact of exercise of acquisition carry-over options - 1,413 - - - - 1,413
Tax benefits from stock-related compensation - 1,743 - - - - 1,743
Purchase of treasury stock - - - - - (96) (96)
Cash dividends declared, ($.30 per share) - - (6,956) - - - (6,956)
Dividends paid to gain deferral plan - - 70 - - - 70
----- ------- ------- ----- ---- ------- -------
Balance at June 30, 2002 $ 254 204,624 309,021 5,509 511 (52,499) 467,420
===== ======= ======= ===== ==== ======= =======
See accompanying notes to unaudited consolidated financial statements.
5
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
---------------------------
2002 2001
---------- ----------
Operating activities:
Net income $ 32,830 27,958
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,124 2,432
FHLB of Chicago stock dividend (3,565) (3,193)
Deferred income tax expense 185 677
Amortization of goodwill and core deposit intangibles 1,159 2,281
Amortization of premiums, discounts, and deferred loan fees 4,120 3,113
Net gain on sale of loans receivable held for sale (5,002) (2,597)
Net gain on sale of investment securities and mortgage-backed securities (1,021) (560)
Net gain on real estate held for development or sale (3,057) (4,670)
Decrease in accrued interest receivable 325 29
Net (increase) decrease in other assets and liabilities 430 (8,484)
Loans originated for sale (467,923) (545,874)
Sale of loans originated for sale 576,941 499,196
---------- ----------
Net cash provided by (used in) operating activities 138,546 (29,692)
---------- ----------
Investing activities:
Loans receivable originated for investment (933,987) (657,990)
Principal repayments on loans receivable 903,629 818,432
Principal repayments on mortgage-backed securities 23,561 12,659
Proceeds from maturities of investment securities available for sale 63,767 17,165
Proceeds from sale of:
Investment securities available for sale 8,773 3,009
Mortgage-backed securities available for sale 14,823 -
Real estate held for development or sale 10,517 17,291
Purchases of:
Investment securities available for sale (97,023) (115,584)
Mortgage-backed securities available for sale (135,803) (11,278)
Stock in FHLB of Chicago (30,000) (30,000)
Real estate held for development or sale (3,493) (2,633)
Premises and equipment (6,620) (3,672)
---------- ----------
Net cash provided by (used in) investing activities $ (181,856) 47,399
---------- ----------
(continued)
6
MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
-----------------------------
2002 2001
---------- ----------
Financing activities:
Proceeds from FHLB of Chicago advances $ 150,000 80,000
Proceeds from unsecured line of credit - 6,000
Repayment of FHLB of Chicago advances (140,000) (210,000)
Repayment of unsecured line of credit (10,000) (4,000)
Proceeds from exercise of stock options 1,881 403
Purchase of treasury stock (96) (16,924)
Cash dividends (6,159) (4,546)
Net increase in deposits 151,687 151,188
Increase (decrease) in advances by borrowers for taxes and insurance (762) 638
--------- -------
Net cash provided by financing activities 146,551 2,759
--------- -------
Increase in cash and cash equivalents 103,241 20,466
Cash and cash equivalents at beginning of period 224,672 270,520
--------- -------
Cash and cash equivalents at end of period $ 327,913 290,986
========= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds $ 89,738 113,535
Income taxes 18,157 15,200
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate 1,724 1,569
Loans receivable swapped into mortgage-backed securities 13,624 55,928
Investments securities held-to-maturity transferred to available-for-sale - 12,633
Mortgage-backed securities held-to-maturity transferred to
available-for-sale $ - 80,301
========= =======
See accompanying notes to unaudited consolidated financial statements.
7
MAF BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Three and Six Months Ended June 30, 2002 and 2001
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) necessary for a fair presentation have been
included. The results of operations for the three and six months ended June 30,
2002 are not necessarily indicative of results that may be expected for the year
ending December 31, 2002.
The consolidated financial statements include the accounts of MAF Bancorp,
Inc. ("Company"), and its wholly-owned subsidiaries, Mid America Bank, fsb and
subsidiaries ("Bank") and MAF Developments, Inc. ("MAFD"), as of and for the
three and six month periods ended June 30, 2002 and 2001 and as of December 31,
2001. All material intercompany balances and transactions have been eliminated
in consolidation.
(2) Earnings Per Share
Earnings per share is determined by dividing net income for the period by
the weighted average number of shares outstanding. Stock options are regarded as
potential common stock and are considered in the diluted earnings per share
calculations to the extent that they have a dilutive effect. Stock options are
the only adjustment made to average shares outstanding in computing diluted
earnings per share. Weighted average shares used in calculating earnings per
share are summarized below for the periods indicated:
Three Months Ended June 30,
------------------------------------------------------------------------------
2002 2001
-------------------------------------- ---------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ------------ ------------- ---------
(Dollars in thousands, except per share data)
Basic earnings per share:
Income available to
common shareholders $16,287 23,154,581 $.70 $13,880 22,585,594 $.61
======= ==== ======= ====
Effect of dilutive securities:
Stock options 691,551 501,414
---------- ----------
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversions $16,287 23,846,132 $.68 $13,880 23,087,008 $.60
======= ========== ==== ======= ========== ====
8
Six Months Ended June 30,
------------------------------------------------------------------------------
2002 2001
-------------------------------------- --------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
(Dollars in thousands, except per share data)
Basic earnings per share:
Income available to
common shareholders $32,830 23,084,701 $1.42 $27,958 22,802,133 $1.23
======= ===== ======= =====
Effect of dilutive securities:
Stock options 626,375 487,904
---------- ----------
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversions $32,830 23,711,076 $1.38 $ 7,958 23,290,037 $1.20
======= ========== ===== ======= ========== =====
(3) Commitments and Contingencies
At June 30, 2002, the Bank had outstanding commitments to originate and
purchase loans of $620.2 million, of which $319.9 million were fixed-rate loans
and $300.3 million were adjustable-rate loans. Prospective borrowers had locked
the interest rate on $198.7 million of these commitments, of which $97.3 million
were fixed rate loans, with rates ranging from 5.0% to 8.25%, and $101.3 million
were adjustable rate loans with rates ranging from 4.63% to 7.75%. At June 30,
2002, commitments to sell loans were $103.0 million.
At June 30, 2002, the Bank had outstanding standby letters of credit
totaling $14.3 million, two of which totaled $13.3 million to enhance a
developer's industrial revenue bond financings of commercial real estate in the
Bank's market. These two letters of credit are collateralized by mortgage-backed
securities and U.S. Government and agency securities owned by the Bank.
Additionally, the Company had outstanding standby letters of credit totaling
$8.8 million related to real estate development improvements.
(4) Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, interest-bearing deposits and federal funds sold.
Generally, federal funds are sold for one-day periods and interest-bearing
deposits mature within one day to three months.
(5) Reclassifications
Certain reclassifications of 2001 amounts have been made to conform with
the current period presentation.
9
(6) Segment Information
The Company utilizes the "management approach" for segment reporting. This
approach is based on the way that a chief decision maker for the Company
organizes segments for making operating decisions and assessing performance.
The Company operates two separate lines of business. The Banking segment
represents the retail bank, participating in primarily residential mortgage
portfolio lending, deposit gathering and offering other financial services
mainly to individuals. Land development consists primarily of developing raw
land for residential use and sale to builders. All goodwill has been allocated
to the Banking segment. Selected segment information is included in the tables
below:
At or For the Three Months Ended June 30, 2002
------------------------------------------------------------
Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 81,882 - - 81,882
Interest expense 43,718 27 - 43,745
---------- ------ - ---------
Net interest income 38,164 (27) - 38,137
Non-interest income 11,434 160 - 11,594
Non-interest expense 24,151 298 - 24,449
---------- ------ - ---------
Income (loss) before income taxes 25,447 (165) - 25,282
Income tax expense (benefit) 9,060 (65) - 8,995
---------- ------ - ---------
Net income (loss) $ 16,387 (100) - 16,287
========== ====== = =========
Average assets $5,623,995 13,754 - 5,637,749
========== ====== = =========
At or For the Three Months Ended June 30, 2001
------------------------------------------------------------
Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 87,914 - (7) 87,907
Interest expense 56,010 53 (7) 56,056
---------- ----- -- ---------
Net interest income 31,904 (53) - 31,851
Non-interest income 9,180 1,321 - 10,501
Non-interest expense 20,008 239 - 20,247
---------- ----- -- ---------
Income before income taxes 21,076 1,029 - 22,105
Income tax expense 7,817 408 - 8,225
---------- ----- -- ---------
Net income $ 13,259 621 - 13,880
========== ===== == =========
Average assets $5,206,128 7,972 - 5,214,100
========== ===== == =========
10
(6) Segment Information (continued)
At or For the Six Months Ended June 30, 2002
------------------------------------------------------------
Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 163,438 - - 163,438
Interest expense 89,280 57 - 89,337
---------- ------ - ---------
Net interest income 74,158 (57) - 74,101
Provision for loan losses - - - -
---------- ------ - ---------
Net interest income after provision 74,158 (57) - 74,101
Non-interest income 22,211 3,057 - 25,268
Non-interest expense 47,518 675 - 48,193
---------- ------ - ---------
Income before income taxes 48,851 2,325 - 51,176
Income tax expense 17,424 922 - 18,346
---------- ------ - ---------
Net income $ 31,427 1,403 - 32,830
========== ====== = =========
Average assets $5,598,078 14,252 - 5,612,330
========== ====== = =========
At or For the Six Months Ended June 30, 2001
------------------------------------------------------------
Land Consolidated
Banking Development Eliminations Total
---------- ----------- ------------ ------------
(In thousands)
Interest income $ 177,073 - (19) 177,054
Interest expense 112,614 110 (19) 112,705
---------- ----- --- ---------
Net interest income 64,459 (110) - 64,349
Non-interest income 15,690 4,670 - 20,360
Non-interest expense 39,610 585 - 40,195
---------- ----- --- ---------
Income before income taxes 40,539 3,975 - 44,514
Income tax expense 14,979 1,577 - 16,556
---------- ----- --- ---------
Net income $ 25,560 2,398 - 27,958
========== ===== === =========
Average assets $5,161,726 9,888 - 5,171,614
========== ===== === =========
(7) New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Accounting Standards ("SFAS") No. 141, "Business Combinations," that
eliminated the pooling of interests method of accounting for business
combinations with limited exceptions for combinations initiated prior to July 1,
2001. In addition, it clarifies the criteria for recognition of intangible
assets separately from goodwill. This statement is effective for business
combinations completed after June 30, 2001. The Company followed this
pronouncement in accounting for its acquisition of Mid Town Bancorp ("Mid Town")
in November 2001.
11
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which discontinued the amortization of goodwill and indefinite lived
intangible assets and initiated an annual review for impairment, unless more
periodic reviews are warranted. Intangible assets with determinable useful lives
will continue to be amortized. The Company completed its evaluation for
impairment of goodwill during the six months ended June 30, 2002. An evaluation
was completed as of January 1, 2002, as well as of May 31, 2002. No impairment
was deemed necessary as a result of the Company's analysis. The Company will
evaluate goodwill for impairment at least annually. In October 2001, the FASB
decided to undertake a limited-scope project to reconsider part of the guidance
in SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions." In particular, the FASB decided to reconsider whether the
acquisition of a branch is a business combination and if goodwill recorded in
connection with a branch acquisition ("Statement 72 Goodwill") should continue
to be amortized. Currently, Statement 72 Goodwill is excluded from the scope of
SFAS No. 142. Pending further clarification from the FASB, the Company has
continued to amortize goodwill related to its branch acquisitions. The Company's
amortization of goodwill related to branch acquisitions amounted to $326,000
before tax for the six month periods ended June 30, 2002 and 2001, and is
included in the consolidated statements of income under the caption
"amortization of goodwill." The unamortized balance as of June 30, 2002 was
$11.5 million and the total expected annual amortization is $653,000 for each of
the next five years.
The following is a summary of net income and earnings per share for the
three and six months ended June 30, 2002 compared to the comparable 2001 periods
as adjusted to remove amortization of goodwill for those periods that were no
longer required to be amortized in the 2002 periods:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
2002 2001 2002 2001
------- ------ ------ ------
(Dollars in thousands, except per share data)
Net income as reported $16,287 13,880 32,830 27,958
Add back: goodwill amortization -- 648 -- 1,296
------- ------ ------ ------
Net income-adjusted 16,287 14,528 32,830 29,254
======= ====== ====== ======
Basic earnings per share of common stock:
Net income-as reported $ .70 .61 1.42 1.23
Goodwill amortization -- .03 -- .05
------- ------ ------ ------
Net income-adjusted .70 .64 1.42 1.28
======= ====== ====== ======
Diluted earnings per share of common stock:
Net income-as reported $ .68 .60 1.38 1.20
Goodwill amortization -- .03 -- .05
------- ------ ------ ------
Net income-adjusted .68 .63 1.38 1.25
======= ====== ====== ======
Amortization expense and net income of the Company for the three and six
months ended June 30, 2002 and 2001 are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
2002 2001 2002 2001
------ ------ ------- -------
(Dollars in thousands)
Goodwill amortization on branch acquisitions $ 163 163 326 326
Goodwill amortization - 648 - 1,296
Core deposit intangible amortization 409 319 833 659
Net income 16,287 13,880 32,830 27,958
======= ====== ====== ======
12
The changes in the carrying amount of goodwill, by segment, for the six
months ended June 30, 2002 are as follows:
Land
Banking Development Total
------- ----------- -----
(Dollars in thousands)
Balance as of December 31, 2001 $96,851 - 96,851
Amortization expense (326) - (326)
Adjustments related to Mid Town acquisition (1,938) - (1,938)
------- --------- ------
Balance at June 30, 2002 94,587 - 94,587
======= ========= ======
The following is a summary of intangible assets subject to amortization:
As of June 30, 2002 As of December 31, 2001
--------------------------------- --------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
(Dollars in thousands)
Core deposit intangibles $15,947 (7,961) 15,947 (7,128)
Mortgage servicing rights/(1)/ 18,313 (4,893) 13,309 (2,778)
------- ------- ------ ------
Total $34,260 (12,854) 29,256 (9,906)
======= ======= ====== ======
- ----------------------------
/(1)/ Mortgage servicing rights are included in other assets in the consolidated
statements of financial condition. Gross carrying amount for June 30, 2002
and December 31, 2001 is net of impairment reserve of $1.6 million and
$1.1 million respectively.
Amortization expense for core deposits intangibles and mortgage servicing
rights for the six months ended June 30, 2002 and estimates for the six months
ended December 31, 2002 and five years thereafter are as follows. These
estimates relate to the carrying value of the Bank's core deposit intangibles
and mortgage servicing rights as of June 30, 2002.
Core Deposit Mortgage
Intangibles Servicing Rights
------------ ----------------
(Dollars in thousands)
Aggregate Amortization Expense:
For the Six months ended June 30, 2002 $ 833 2,115
Estimated Amortization Expense:
For the Six Months Ended December 31, 2002 816 1,400
For the Year Ended December 31, 2003 1,500 2,600
For the Year Ended December 31, 2004 1,400 2,400
For the Year Ended December 31, 2005 1,300 2,200
For the Year Ended December 31, 2006 900 2,000
For the Year Ended December 31, 2007 600 1,900
====== =====
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses the financial accounting and
reporting for obligations related to the retirement of tangible long-lived
assets and the related asset retirement costs. The statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Adoption of this statement is not expected to have a material effect on the
Company's consolidated financial statements.
13
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment and Disposal of Long-Term Assets." This Statement supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," as well as the accounting and reporting of the
Accounting Principles Board (APB) Opinion No. 30, "Reporting the Results of
Operations- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This
statement eliminates the allocation of goodwill to long-lived assets to be
tested for impairment and details both a probability-weighted and
"primary-asset" approach to estimate cash flows in testing for impairment of
long-lived assets. The Company adopted SFAS No. 144 on January 1, 2002 and upon
adoption, this pronouncement did not have a material impact on the Company's
consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No.4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds SFAS No.4, "Reporting Gains and Losses
from Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. This Statement is effective for fiscal years beginning
after May 15, 2002. Adoption of this statement is not expected to have a
material effect on the Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This Statement
is effective for exit or disposal activities that are initiated after December
31, 2002. Adoption of this statement is not expected to have a material effect
on the Company's consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement Regarding Forward-Looking Information
This report, in Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere, contains, and other periodic
reports and press releases of the Company may contain, certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Company intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and is including this statement for purposes of
invoking these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Company, are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project," "plan," or
similar expressions. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain and actual results
may differ from those predicted. The Company undertakes no obligation to update
these forward-looking statements in the future. Factors which could have a
material adverse effect on operations and could affect management's outlook or
future prospects of the Company and its subsidiaries include, but are not
limited to, unanticipated changes in interest rates, deteriorating economic
conditions which could result in increased delinquencies in the Company's loan
portfolio, legislative or regulatory changes, developments related to the
pending regulatory review of the Bank's fair lending compliance, monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Federal Reserve Board, the quality or composition of the Company's loan
or investment portfolios, demand for loan products, secondary mortgage market
conditions, deposit flows, competition, demand for financial services and
residential real estate in the Company's market area, unanticipated slow downs
in real estate lot sales or problems in closing pending real estate contracts,
delays in real estate development projects, the possible short-term dilutive
effect of potential acquisitions, if any, and
14
changes in accounting principles, policies and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements.
Overview
Set forth below are highlights of the Company's second quarter performance
results:
.. Diluted EPS of $.68, up 13% from the three months ended June 30, 2001;
.. Net interest margin of 2.89%, a 33 basis point increase from June 30, 2001;
.. Return on equity of 14.2% for the quarter;
.. Strong origination volume of $726 million;
.. Deposit account service fees of $5.5 million, a 35% improvement on a
year-over-year basis;
.. Loan sale volume of $212 million, generating loan sale gains of $2.7
million;
.. Solid EPS results despite a delay in expected income from real estate
development operation
Net income increased $2.4 million to $16.3 million in the current quarter
compared to the three months ended June 30, 2001. Variances in amounts reported
in income for the three months ended June 30, 2002 compared to the three months
ended June 30, 2001 are partially attributable to the acquisition of Mid Town in
November 2001. The elimination of goodwill amortization resulting from the
implementation of SFAS No. 142 (adopted January 1, 2002) added $.03 to diluted
earnings per share for the current quarter. The improved margin is primarily
attributable to a greater decline in the Bank's average cost of funds compared
to the decline on the yield on interest earning assets.
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 retail banking business through its wholly-owned subsidiary, Mid
America Bank, fsb ("Bank"), and secondarily, in the land development business
primarily through MAF Developments, Inc.
The Bank is a consumer-oriented financial institution offering various
financial services to its customers through 33 retail banking offices. Over the
last five years, the Bank has expanded its coverage of the greater Chicago
Metropolitan area, now with 10 locations on the north and northwest side of
Chicago, a strong presence in western Cook County and DuPage County, and
increasing penetration of the rapidly-growing counties of Will and Kane Counties
as well as two branches in the southwest suburbs of Chicago. It is principally
engaged in the business of attracting deposits from the general public and using
such deposits, along with other borrowings, to make loans secured by real
estate, primarily one-to four-family residential loans. To a lesser extent, the
Bank also makes multi-family mortgage, commercial, residential construction,
land acquisition and development and a variety of consumer loans. In 2001, the
Bank formed a commercial business lending unit to target lending and deposit
relationships with small to medium sized business in its primary market areas.
On November 30, 2001, the Company completed its acquisition of Mid Town Bancorp,
which added four branches, $307 million of assets and $270 million in deposits
to the Bank's branch network. In February 2002, a new branch office was opened
in Burr Ridge, Illinois to fill a gap in existing markets and management has
current plans to open another five branches in the Chicago metropolitan area
within the next two years. The Company also participates in the following
businesses through these designated subsidiaries:
15
Subsidiary Activity
---------- --------
MAF Developments; NW Financial, Inc. Residential land development
Mid America Insurance Agency, Inc. General insurance services
Centre Point Title Services, Inc. General title services for Bank loan customers
Mid America Investments Services, Inc. INVEST affiliate investment service/brokerage
MAF Realty Co., LLC III;
MAF Realty Co., LLC IV Real estate investment trust
Mid America Re, Inc. Captive reinsurance of private mortgage insurance
The Company acquired two wholly-owned subsidiaries of Mid Town at the time
of the acquisition in 2001, Mid Town Development Corporation ("MTDC") and
Equitable Finance Corporation ("EFC"). MTDC's primary activity was making
mezzanine loans on commercial real estate properties that the Bank was making
the first mortgage on. EFC's primary activity was making various types of
"sub-prime" loans, generally short-term unsecured personal loans. The Company
does not intend to continue the activities of these two subsidiaries and will
wind down their operations as the loans mature. At June 30, 2002, the balance of
loans outstanding in these entities was $1.1 million.
As it has in recent years, the Company expects to continue to search for
and evaluate potential acquisition opportunities that could enhance franchise
value and may periodically be presented with opportunities to acquire other
institutions, branches or deposits in the Chicago metropolitan area, or which
allow the Company to expand outside its current primary market areas. Management
intends to review acquisition opportunities across a variety of parameters,
including the potential impact on its financial condition as well as its
financial performance in the future. It is anticipated that future acquisitions,
if any, will likely be valued at a premium to book value, and generally at a
premium to current market value. As such, management anticipates that
acquisitions made by the Company could involve some short-term book value per
share dilution and earnings per share dilution depending on the Company's
success in integrating the operations of businesses acquired and the level of
cost savings and revenue enhancements that may be achieved.
Regulation and Supervision
As a federally chartered savings bank, the Bank's deposits are insured up
to the applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Chicago, which is
one of the twelve regional banks for federally insured savings institutions
comprising the FHLB system. The Bank is regulated by the Office of Thrift
Supervision ("OTS") and the FDIC. The Bank is further regulated by the Board of
Governors of the Federal Reserve System as to reserves required to be maintained
against deposits and certain other matters. Such regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities. Any change in such regulation, whether by the OTS, the FDIC or
Congress could have a material impact on the Company and its operations.
Capital Standards. Savings associations must meet three capital requirements:
core and tangible capital to total assets ratios as well as a regulatory capital
to total risk-weighted assets ratio. The minimum level required for each of
these capital standards is established by regulation. The Company has managed
its balance sheet so as to reasonably exceed these minimums.
Core Capital Requirement
The core capital requirement, or the required "leverage limit," currently
requires a savings institution to maintain core capital of not less than 3% of
adjusted total assets. For the Bank, core capital generally includes common
stockholders' equity (including retained earnings), and minority interests in
the equity accounts of fully consolidated subsidiaries, less intangibles other
than certain servicing rights. Investments in and advances to
16
subsidiaries engaged in activities not permissible for national banks are also
required to be deducted in computing core capital.
Tangible Capital Requirement
Under OTS regulation, savings institutions are required to meet a minimum
tangible capital requirement of 1.5% of adjusted total assets. Tangible capital
is defined as core capital less any intangible assets, plus purchased mortgage
servicing rights in an amount includable in core capital.
Risk-Based Capital Requirement
The risk-based capital requirement provides that savings institutions
maintain total capital equal to and not less than 8% of total risk-weighted
assets. For purposes of the risk-based capital computation, total capital is
defined as core capital, as defined above, plus supplementary capital, primarily
general loan loss reserves (limited to a maximum of 1.25% of total risk-weighted
assets.) In computing total capital, the supplementary capital included cannot
exceed 100% of core capital.
At June 30, 2002, the Bank was in compliance with all of its capital
requirements as follows:
June 30, 2002 December 31, 2001
-------------------------- ------------------------
Percent of Percent of
Amount Assets Amount Assets
---------- ---------- ---------- ----------
(Dollars in thousands)
Stockholder's equity of the Bank $ 477,871 8.32% $ 462,707 8.32%
========== ===== ========== =====
Tangible capital $ 369,063 6.55% $ 350,825 6.44%
Tangible capital requirement 84,464 1.50 81,686 1.50
---------- ----- ---------- -----
Excess $ 284,599 5.05% $ 269,139 4.94%
========== ===== ========== =====
Core capital $ 369,063 6.55% $ 350,825 6.44%
Core capital requirement 168,928 3.00 163,372 3.00
---------- ----- ---------- -----
Excess $ 200,135 3.55% $ 187,453 3.44%
========== ===== ========== =====
Core and supplementary capital $ 382,256 11.95% $ 364,365 11.31%
Risk-based capital requirement 255,920 8.00 257,691 8.00
---------- ----- ---------- -----
Excess $ 126,336 3.95% $ 106,674 3.31%
========== ===== ========== =====
Total Bank assets $5,744,657 $5,559,787
Adjusted total Bank assets 5,630,933 5,445,742
Total risk-weighted assets 3,312,727 3,335,188
Adjusted total risk-weighted assets 3,199,003 3,221,143
========== ==========
17
A reconciliation of consolidated stockholder's equity of the Bank for
financial reporting purposes to capital available to the Bank to meet regulatory
capital requirements is as follows:
June 30, December 31,
2002 2001
-------- ------------
(In thousands)
Stockholder's equity of the Bank $477,871 462,707
Goodwill (94,587) (96,851)
Core deposit intangibles (7,986) (8,819)
Non-permissible subsidiary deduction (208) (2,055)
Non-includable mortgage servicing rights (1,342) (1,052)
Regulatory capital adjustment for available for sale securities (4,685) (3,105)
-------- -------
Tangible and core capital 369,063 350,825
Recourse on loan sales (6,018) (5,901)
General loan loss reserves 19,211 19,441
-------- -------
Core and supplementary capital $382,256 364,365
======== =======
Changes in Financial Condition
Total assets of the Company were $5.77 billion at June 30, 2002, an
increase of $178.1 million, or 3.2% from $5.60 billion at December 31, 2001. The
increase is due to increases in mortgage-backed securities, investment
securities and liquid investments, offset by a decrease in loans receivable,
funded by an increase in deposit balances.
Cash and short-term investments totaled a combined $327.9 million at June
30, 2002, an increase of $103.2 million from the combined balance of $224.7
million at December 31, 2001.
Investment securities available for sale increased $22.6 million to $378.0
million at June 30, 2002. The increase is primarily due to $97.0 million in
purchases of corporate debt and Bank trust preferred securities offset by
maturities and calls of $63.8 million of primarily asset-backed and U.S. Agency
securities. The Company recognized a gain of $982,000 on the sale of investment
securities available for sale during the six months ended June 30, 2002. These
gains were primarily attributable to sales of equity securities, and to a lesser
extent corporate notes and bank trust preferred securities.
Mortgage-backed securities available for sale increased $102.7 million to
$244.9 million at June 30, 2002. The increase is due to $135.8 million in
purchases of Collaterized Mortgage Obligations ("CMOs") and mortgage-backed
securities, offset by normal amortization and prepayments. The increase in CMO
purchases is primarily a result of the reinvestment of loan sale and loan
prepayment proceeds during the current six months. The Company also sold $14.8
million of CMO securities, at a gain of $39,000, during the six months ended
June 30, 2002.
Included in mortgage-backed securities classified as available for sale at
June 30, 2002, are $188.7 million of CMO securities, the majority of which are
collateralized by FNMA, FHLMC and GNMA mortgage-backed securities, and to a
lesser extent by whole loans.
Loans receivable, including loans held for sale, decreased $77.0 million
from December 31, 2001, or 1.7%, to $4.37 billion at June 30, 2002, primarily
due to a decrease in loans held for sale from $161.1 million to $52.8 million.
The Bank originated $1.40 billion of loans during the six-month period ended
June 30, 2002, compared to $1.23 billion during the prior year period. The
higher loan origination volume was primarily due to continued mortgage refinance
activity, including loan modifications, as interest rates have decreased
compared to the prior year period. The decrease in loans receivable included
amortization and prepayments totaling $903.6 million, as well as loan sales of
$576.6 million. The large decrease in loans held for sale is due to the decrease
in fixed-rate loan originations during the three months ended June 30, 2002
compared to the three months ended December 31, 2001. The Bank typically sells
its long-term fixed-rate loan originations into the secondary market.
18
The allowance for loan losses totaled $19.4 million at June 30, 2002, a
decrease of $232,000 from the balance at December 31, 2001, due to net
charge-offs for the period. The Bank's allowance for loan losses to total loans
outstanding was .44% at June 30, 2002, compared to .45% at December 31, 2001.
Non-performing loans increased $5.5 million to $25.0 million, or .57% of total
loans receivable at June 30, 2002, compared to $19.5 million, or .45% of total
loans receivable at December 31, 2001. See "Asset Quality" in this section for
an explanation of the primary reason for the increase in non-performing assets.
At June 30, 2002, 90% of the Company's loan portfolio consisted of loans secured
by one-to-four family residential properties, including 8% relating to home
equity loans and equity lines of credit. A total of 76% of non-performing assets
consisted of loans secured by one-to-four family residential properties and
one-to-four family foreclosed real estate. The ratio of the allowance for loan
losses to non-performing loans was 77.5% at June 30, 2002 compared to 100.8% at
December 31, 2001, and 109.9% at June 30, 2001.
In determining the allowance for loan losses and the related provision for
loan losses, management considers: (1) subjective factors, including local and
general economic business factors and trends, portfolio concentrations and
changes in the size and/or general terms of the loan portfolio, (2) historical
loss experience which has ranged from 1 to 14 basis points as a percentage of
outstanding loans over the last five years, and (3) specific allocations based
upon probable losses identified during the review of the portfolio. Based on
management's assessment of the adequacy of the loan loss reserve as of June 30,
2002, as well as the composition of the loan portfolio and non-performing loans,
good historical loss experience, and the low level of non-performing loans which
is expected to continue, management believes the allowance for loan losses is
adequate to provide for losses inherent in the portfolio at June 30, 2002.
Foreclosed real estate decreased $596,000 to $809,000 at June 30, 2002. The
Bank's foreclosed real estate at June 30, 2002 consists of primarily
single-family homes.
Real estate held for development or sale increased $119,000 to $13.1
million at June 30, 2002 primarily due to continued investment in development
costs in both the Tallgrass of Naperville and Shenandoah projects. A summary of
the carrying value of real estate held for development or sale follows:
June 30, December 31,
2002 2001
-------- ------------
(In thousands)
Tallgrass of Naperville $ 8,326 8,498
Shenandoah 4,786 4,495
------- ------
$13,112 12,993
======= ======
The Company closed 48 lot sales in Tallgrass of Naperville during the six
months ended June 30, 2002. At June 30, 2002, 121 lots remain in Tallgrass, with
36 under contract. Additionally, the project has 19.3 acres available for
townhomes and 12.8 acres of commercially zoned land expected to be sold, in
bulk, to developers. The Company currently expects to close on half of the
townhome acreage and all of the commercially zoned land in the fourth quarter of
2002, at an estimated profit of $3.8 million. The Shenandoah project is a
326-lot development located in Plainfield, Illinois. The increase in balance is
due to engineering fees related to the project. The Company is currently
developing the first unit of this project and expects sales to commence in late
2002 or early 2003.
At June 30, 2002, MAFD had multiple real estate purchase contracts pending
that relate to the acquisition of approximately 780 acres of vacant land in a
far western suburb of Chicago. The aggregate purchase price of these contracts
is $28.4 million. The contracts contain various contingencies, including
satisfactory soil tests, environmental testing, and necessary zoning approvals,
and provide for the takedown of the land in staggered closings over a four-year
period. The proposed development is in its early planning stages and may
19
entail the acquisition of additional land in the future. The Company is actively
pursuing and expects to receive the required zoning and desired plat with the
local planning commission to develop this project with its joint venture
partner. Assuming the Company proceeds with this project, based on the existing
purchase contracts, current estimated total developments costs (including land
acquisition) are approximately $68 million. The project will include
single-family residential lots, multi-family and commercial parcels, along with
various other amenities and is expected to be developed in a number of phases
over an eight-year period.
The Company's balance of goodwill, at June 30, 2002, includes $11.5 million
continuing to be amortized under SFAS No. 72, and $83.1 million accounted for
under SFAS No. 142. Goodwill, in total, decreased $2.3 million from December 31,
2001 to June 30, 2002. The decrease is made up of $326,000 of amortization, and
various revisions to purchase accounting adjustments totaling $1.9 million
related to the Company's Mid Town acquisition.
Deposits increased $151.4 million, to $3.71 billion at June 30, 2002. The
increase is primarily due to a $162.4 million increase in core deposit accounts
offset by an $11.0 million decrease in certificates of deposit. At June 30,
2002, the Bank's core deposits (passbooks, checking and money market accounts)
comprise $2.0 billion or 54% of deposits, compared to $1.8 million, or 52% of
deposits at December 31, 2001. After consideration of interest of $46.5 million
credited to accounts during the six months ended June 30, 2002, actual cash
inflows were $105.1 million.
Borrowed funds, which consist primarily of FHLB of Chicago advances, were
$1.47 billion at June 30, 2002 and December 31, 2001. During the six months
ended June 30, 2002, $140.0 million of advances matured and $10.0 million
previously drawn on the Company's revolving line of credit was paid off, and
these funds were replaced by $150.0 million of lower rate intermediate term,
fixed-rate FHLB of Chicago advances, as the Bank works to extend duration of its
funding. Borrowings at June 30, 2002 also include $55.0 million drawn on the
Company's unsecured bank term loan. No principal payments were paid or due on
this loan since December 31, 2001.
Stockholders' equity increased $31.5 million, or 7.2% at June 30, 2002,
primarily due to net income of $32.8 million, $3.7 million proceeds from the
exercise of stock options, an increase in accumulated other comprehensive income
of $1.8 million, reduced by cash dividends declared of $7.0 million.
20
Asset Quality
Non-Performing Assets. A loan (whether considered impaired or not) is
classified as non-accrual when collectibility is in doubt. Generally, when a
loan is 90 days or more past due, in the process of foreclosure, or in
bankruptcy, the full amount of previously accrued but unpaid interest is
deducted from interest income. Income is subsequently recorded to the extent
cash payments are received, or at the time when the loan is brought current in
accordance with its original terms. This policy is applied consistently for all
types of loans in the Bank's loan portfolio.
For the quarter ended June 30, 2002, interest on non-accrual loans that
would have been recorded as income, had they been performing according to their
original terms, amounted to $371,000, compared to $306,000 for the three months
ended June 30, 2001. For the six months ended June 30, 2002, interest on
non-accrual loans that would have been recorded as income, had they been
performing according to their original terms, amounted to $722,000 compared to
$572,000 for the six months ended June 30, 2001.
Non-performing assets increased $4.9 million to $25.8 million at June 30,
2002, from $20.9 million at December 31, 2001, primarily due to one commercial
real estate loan and a secured line of credit to the same borrower aggregating
$4.3 million. These two loans were placed on non-accrual status as of March 2002
due to the borrower being in violation of certain loan covenants. The Bank
expects to be repaid in full on both loans in the next six to nine months from
the net proceeds from the sale of the commercial real estate property.
Delinquent Loans. Delinquencies in the Bank's portfolio at the dates
indicated were as follows:
61-90 Days 91 Days or More
--------------------------------- -------------------------------------
Principal Principal
Number Balance of Percent Number Balance of Percent
Of Delinquent Of Of Delinquent Of
Loans Loans Total Loans Loans Total
-------- ----------- -------- --------- ------------ ---------
(Dollars in thousands)
June 30, 2002 55 $ 7,010 .16% 175 $ 24,760 .56%
== ===== === === ====== ===
March 31, 2002 57 $ 6,367 .15% 174 $ 25,104 .58%
== ===== === === ====== ===
December 31, 2001 62 $ 8,058 .18% 158 $ 19,388 .42%
== ===== === === ====== ===
September 30, 2001 49 $ 6,002 .14% 155 $ 17,682 .41%
== ===== === === ====== ===
June 30, 2001 37 $ 3,465 .08% 125 $ 16,397 .37%
== ===== === === ====== ===
21
Loan Portfolio Composition. The following table sets forth the composition
of the Bank's loans receivable portfolio in dollar amounts at the dates
indicated:
6/30/02 3/31/02 12/31/01 9/30/01
------------ ----------- ----------- -----------
(Dollars in thousands)
Real estate loans:
One- to four-family:
Held for investment $ 3,529,984 3,475,339 3,559,466 3,579,027
Held for sale 52,809 45,297 161,105 108,931
Multi-family 209,936 197,422 197,685 171,516
Commercial 126,113 128,233 139,608 51,060
Construction 48,936 41,846 43,756 31,969
Land 39,939 41,152 44,494 31,968
----------- --------- --------- ---------
Total real estate loans 4,007,717 3,929,289 4,146,114 3,974,471
----------- --------- --------- ---------
Consumer loans:
Equity lines of credit 317,031 278,688 258,884 193,780
Home equity loans 42,976 46,249 52,216 56,778
Other 5,971 6,835 7,975 4,827
----------- --------- --------- ---------
Total consumer loans 365,978 331,772 319,075 255,385
Commercial business loans 32,715 24,440 19,116 10,958
----------- --------- --------- ---------
Total loans receivable 4,406,410 4,285,501 4,484,305 4,240,814
Loans in process 19,427 17,276 21,678 16,582
Unearned discounts, premiums
and deferred loan fees, net (2,982) (3,016) (4,555) (4,787)
Allowance for loan losses 19,375 19,554 19,607 18,210
----------- --------- --------- ---------
Loans receivable, net $ 4,370,590 4,251,687 4,447,575 4,210,809
=========== ========= ========= =========
6/30/01 3/31/01 12/31/00
----------- ----------- ----------
(Dollars in thousands)
Real estate loans:
One- to four-family:
Held for investment 3,635,457 3,714,537 3,807,980
Held for sale 87,036 162,355 41,074
Multi-family 166,777 171,883 173,072
Commercial 49,137 46,483 41,223
Construction 28,443 31,985 29,566
Land 37,962 40,752 40,497
--------- --------- ---------
Total real estate loans 4,004,812 4,167,995 4,133,412
--------- --------- ---------
Consumer loans:
Equity lines of credit 168,875 154,009 146,020
Home equity loans 57,977 60,551 64,465
Other 4,712 4,735 4,783
--------- --------- ---------
Total consumer loans 231,564 219,295 215,268
Commercial business loans 4,362 3,162 3,528
--------- --------- ---------
Total loans receivable 4,240,738 4,390,452 4,352,208
Loans in process 14,430 12,949 12,912
Unearned discounts, premiums
and deferred loan fees, net (5,417) (6,416) (7,076)
Allowance for loan losses 18,221 18,279 18,258
--------- --------- ---------
Loans receivable, net 4,213,504 4,365,640 4,328,114
========= ========= =========
22
Non-performing assets. The following table sets forth information regarding
non-accrual loans, foreclosed real estate and non-accrual investment securities
of the Bank, and at December 31, 2000, loans which were 91 days or more
delinquent but on which the Bank continued to accrue interest.
At
--------------------------------------------------------------------
6/30/02 3/31/02 12/31/01 9/30/01 6/30/01 3/31/01 12/31/00
------- ------- -------- ------- ------- ------- --------
(In thousands)
Non-performing loans:
One- to four-family and multi-family loans:
Non-accrual loans $18,831 18,743 17,985 16,442 15,431 16,627 14,023
Accruing loans 91 days or more overdue/1/ - - - - - - 1,732
------- ------ ------ ------ ------ ------ ------
Total 18,831 18,743 17,985 16,442 15,431 16,627 15,755
------- ------ ------ ------ ------ ------ ------
Commercial real estate, construction and land loans:
Non-accrual loans 5,069 5,330 544 342 343 321 269
Accruing loans 91 days or more overdue - - - - - - -
------- ------ ------ ------ ------ ------ ------
Total 5,069 5,330 544 342 343 321 269
------- ------ ------ ------ ------ ------ ------
Other loans:
Non-accrual loans 1,090 1,144 922 961 806 921 683
Accruing loans 91 days or more overdue - - - - - - 2
------- ------ ------ ------ ------ ------ ------
Total 1,090 1,144 922 961 806 921 685
------- ------ ------ ------ ------ ------ ------
Total non-performing loans:
Non-accrual loans 24,990 25,217 19,451 17,745 16,580 17,869 14,975
Accruing loans 91 days or more overdue/1/ - - - - - - 1,734
------- ------ ------ ------ ------ ------ ------
Total $24,990 25,217 19,451 17,745 16,580 17,869 16,709
======= ====== ====== ====== ====== ====== ======
Non-accrual loans to total loans .57% .59 .45 .43 .40 .42 .35
Accruing loans 91 days or more overdue to total loans - - - - - - .04
------- ------ ------ ------ ------ ------ ------
Non-performing loans to total loans .57% .59 .45 .43 .40 .42 .39
======= ====== ====== ====== ====== ====== ======
Foreclosed real estate:
One- to four-family $ 809 2,170 1,405 1,365 1,260 1,345 1,762
Commercial, construction and land - - - - - - 46
------- ------ ------ ------ ------ ------ ------
Total $ 809 2,170 1,405 1,365 1,260 1,345 1,808
======= ====== ====== ====== ====== ====== ======
Non-performing loans and foreclosed real estate
to total loans and foreclosed real estate .59% .65 .48 .46 .43 .45 .43
======= ====== ====== ====== ====== ====== ======
Total non-performing assets $25,799 27,387 20,856 19,110 17,840 19,214 18,517
======= ====== ====== ====== ====== ====== ======
Total non-performing assets to total assets .45% .49 .37 .37 .34 .37 .36
======= ====== ====== ====== ====== ====== ======
- --------------------
/1/As of January 1, 2001, the Bank no longer accrues interest on loans 91 or more days delinquent.
23
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 borrowings or the issuance
of common stock. The Company's principal uses of funds are interest payments on
the Company's $55.0 million unsecured bank term loan, cash dividends to
shareholders, loans to and investments in MAF Developments, as well as
investment purchases, stock repurchases and debt repayments. The Company also
maintains a one-year, $40.0 million unsecured revolving line of credit from a
commercial bank, due and renewable annually on November 30. The line of credit
has an outstanding balance of $-0- as of June 30, 2002. For the six-month period
ended June 30, 2002, the Company declared common stock dividends of $.30 per
share, or $7.0 million.
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
investment securities are a relatively predictable source of funds, deposit
flows and loan and mortgage-backed securities prepayments are greatly influenced
by economic conditions, the general level of interest rates and competition. The
Bank utilizes particular sources of funds based on comparative costs and
availability. The Bank generally manages the pricing of its deposits to maintain
a steady deposit balance, but has from time to time decided not to pay rates on
deposits as high as its competition, and when necessary, to supplement deposits
with longer term and/or less expensive alternative sources of funds.
During the six months ended June 30, 2002, the Bank originated loans
totaling $1.40 billion compared with $1.23 billion during the same period a year
ago. Loan sales, and swaps of loans for securities backed by those loans, for
the six months ended June 30, 2002, were $576.6 million, compared to $499.8
million for the prior year period. The Bank has outstanding commitments to
originate loans of $620.2 million and commitments to sell or swap loans of
$103.0 million at June 30, 2002. At June 30, 2002, the Company believes that it
has sufficient cash to fund its outstanding commitments or will be able to
obtain the necessary funds from outside sources to meet its cash requirements.
Please refer to "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources" of the
Company's Form 10-K for the year ended December 31, 2001, for a discussion of
the Company's contractual obligations and off-balance sheet commitments. There
have been no material changes in contractual obligations since December 31,
2001. Significant changes in off-balance sheet commitments since December 31,
2001 include a $151.3 million increase in mortgage loan commitments, all
expiring within one year, and a $50.9 million increase in unused equity lines of
credit balances, primarily with greater than five-year maturities.
Asset/Liability Management
As part of its normal operations, the Bank is subject to interest-rate risk
on the interest-sensitive assets it invests in and the interest-sensitive
liabilities it borrows. The Bank's exposure to interest rate risk is reviewed at
least quarterly by the Bank's asset/liability management committee ("ALCO") and
the Board of Directors of the Company. The ALCO, which includes members of
senior management, monitors the rate and sensitivity repricing characteristics
of the individual asset and liability portfolios the Bank maintains and
determines risk management strategies.
The Bank utilizes an interest rate sensitivity gap analysis to monitor the
relationship of maturing or repricing interest-earning assets and
interest-bearing liabilities, while maintaining an acceptable interest rate
spread. Interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing within a specific period
of time and the amount of interest-bearing liabilities maturing or repricing
within that same period of time, and is usually analyzed at a period of one
year. Generally, a negative gap, where more interest-bearing liabilities are
repricing or maturing than interest-earning assets, would tend to result in a
reduction in net interest income in a period of rising interest rates.
Conversely, during a period of falling interest rates, a negative gap would
likely result in an improvement in net interest income. Management's goal is to
maintain its cumulative one-year gap within the range of (15)% to 15%. The gap
ratio fluctuates as a result of
24
market conditions and management's decisions based on its expectation of future
interest rate trends. The Bank's asset/liability management strategy emphasizes,
for its own portfolio, 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.
The Bank, except as noted below, has not used derivative financial
instruments such as interest rate swaps, caps, floors, options or similar
financial instruments to manage its interest rate risk. However, in conjunction
with its origination and sale strategy, management does hedge 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 addition, the Bank uses U.S. Treasury bond futures contracts and MBS
forward sale commitments to hedge some of the mortgage pipeline exposure. These
futures contracts and forward sale commitments are used to hedge mortgage loan
production in those circumstances where loans are not sold forward as described
above.
The table on the next page sets forth the scheduled repricing or maturity
of the Bank's assets and liabilities at June 30, 2002 and management's
assumptions regarding prepayment percentages on loans and mortgage-backed
securities, based on its current experience in these portfolios. The Bank uses
the withdrawal assumptions used by the FHLB of Chicago with respect to NOW,
checking and passbook accounts, which are 17.0%, 17.0%, 17.0%, 16.0%, and 33.0%,
respectively. Investment securities and FHLB advances that contain call
provisions at the option of the issuer or lender are generally shown in the
category relating to their respective final maturities. However, due to recent
volatility in market interest rates, $18.6 million of investment securities with
final maturities ranging from 20 to 75 months, but callable in 6 months or less
are categorized in the 6 months or less category and $15.4 million of
investments with a final maturity of 45 months, but callable in 6 months to one
year are categorized in the 6 months to one year category in anticipation of
their call. Additionally, $75.0 million of FHLB advances with final remaining
maturities greater than five years, but callable in one to three years are
categorized in the one to three year category in anticipation of their call.
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. Certain shortcomings are inherent in using gap analysis to quantify
exposure to interest rate risk. For example, although certain assets and
liabilities may have similar maturities or repricings in the table, they may
react differently to actual changes in market interest rates. The interest rates
on certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind
changes in market rates. This is especially true in circumstances where
management has a certain amount of control over interest rates, such as the
pricing of deposits. Additionally, certain assets such as hybrid adjustable-rate
mortgage loans have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. Finally, as interest rates
change, actual loan prepayment rates may differ significantly from those rates
assumed by management for presentation purposes in the table.
25
Management believes that its asset/liability management strategies mitigate
the potential effects of changes in interest rates on the Bank's operations and
does not believe that the following table is particularly meaningful.
At June 30, 2002
----------------------------------------------------------------------------
More Than More Than More Than
6 Months 6 Months 1 Year 3 Years to More Than
or Less to 1 Year to 3 Years 5 Years 5 Years Total
---------- --------- ---------- ------- --------- ---------
(In thousands)
Interest-earning assets:
Loans receivable $ 973,346 483,538 920,348 862,785 1,149,948 4,389,965
Mortgage-backed securities 61,423 21,808 43,640 30,649 87,383 244,903
Interest-bearing deposits 105,206 - - - - 105,206
Federal funds sold 93,353 - - - - 93,353
Investment securities (1) 355,542 36,438 80,310 22,516 48,875 543,681
---------- -------- --------- ------- --------- ---------
Total interest-earning assets 1,588,870 541,784 1,044,298 915,950 1,286,206 5,377,108
Impact of hedging activity (2) 52,809 - - - (52,809) -
---------- -------- --------- ------- --------- ---------
Total net interest-earning assets adjusted
for impact of hedging activities 1,641,679 541,784 1,044,298 915,950 1,233,397 5,377,108
---------- -------- --------- ------- --------- ---------
Interest-bearing liabilities:
NOW and checking accounts 29,563 27,050 99,005 61,499 130,687 347,804
Money market accounts 464,559 - - - - 464,559
Passbook accounts 80,216 73,397 268,634 166,869 354,596 943,712
Certificate accounts 989,067 367,784 289,083 52,936 7,079 1,705,949
FHLB advances 220,000 85,500 575,000 220,000 315,000 1,415,500
Other borrowings 55,000 - - - - 55,000
---------- -------- --------- ------- --------- ---------
Total interest-bearing liabilities 1,838,405 553,731 1,231,722 501,304 807,362 4,932,524
---------- -------- --------- ------- --------- ---------
Interest sensitivity gap $ (196,726) (11,947) (187,424) 414,646 426,035 444,584
========== ======== ========= ======= ========= =========
Cumulative gap $ (196,726) (208,673) (396,097) 18,549 444,584
========== ======== ========= ======= =========
Cumulative gap assets as a percentage
of total assets (3.41)% (3.61) (6.86) .32 7.70
Cumulative net interest-earning assets as
a percentage of interest-bearing liabilities 89.30% 91.28 89.07 100.45 109.01
========== ======== ========= ======= =========
At December 31, 2001
- --------------------
Cumulative gap $ (2,622) (199,920) (112,931) 197,155 459,797
========== ======== ========= ======= =========
Cumulative gap assets as a percentage
of total assets (0.05)% (3.57) (2.02) 3.52 8.22
Cumulative net interest-earning assets as
a percentage of interest-bearing liabilities 99.84% 91.61 96.71 104.99 109.62
========== ======== ========= ======= =========
- -----------------------------------------------
(1) Includes $165.6 million of stock in FHLB of Chicago in 6 months or less.
(2) Represents forward commitments to sell long-term fixed-rate mortgage loans.
26
Average Balances/Rates
The following table sets forth certain information relating to the Bank's
consolidated statements of financial condition and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Average yields
and costs are derived by dividing income or expense by the average balance of
assets or liabilities, respectively, for the periods shown. Average balances are
derived from average daily balances. The yield/cost at June 30, 2002 includes
fees which are considered adjustments to yield.
Three Months Ended June 30,
-----------------------------------------------------------------
2002 2001
------------------------------- -------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $4,319,198 71,563 6.63% $4,344,926 78,187 7.20%
Mortgage-backed securities 232,119 2,908 5.01 109,028 1,650 6.05
Interest-bearing deposits (1) 111,501 594 2.14 38,678 561 5.82
Federal funds sold (1) 126,984 695 2.20 134,965 1,876 5.58
Investment securities (2) 515,192 6,263 4.88 362,907 5,717 6.32
---------- ------- ---------- -------
Total interest-earning assets 5,304,994 82,023 6.19 4,990,504 87,991 7.06
Non-interest earning assets 332,755 223,596
---------- ----------
Total assets $5,637,749 $5,214,100
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 3,425,212 24,218 2.84 2,913,615 31,637 4.36
Borrowed funds 1,394,016 19,527 5.62 1,639,164 24,419 5.98
---------- ------- ---------- -------
Total interest-bearing liabilities 4,819,228 43,745 3.64 4,552,779 56,056 4.94
------- ------ ------- ------
Non-interest bearing deposits 233,409 154,417
Other liabilities 126,729 115,074
---------- ----------
Total liabilities 5,179,366 4,822,270
Stockholders' equity 458,383 391,830
---------- ----------
Liabilities and stockholders' equity $5,637,749 $5,214,100
========== ==========
Net interest income/interest rate spread $38,278 2.55% $31,935 2.12%
======= ====== ======= ======
Net earning assets/net yield on average
interest-earning assets $ 485,766 2.89% $ 437,725 2.56%
========== ====== ========== ======
Ratio of interest-earning assets to
interest-bearing liabilities 110.08% 109.61%
====== ======
Six Months Ended June 30,
-----------------------------------------------------------------
2002 2001 At June 30, 2002
------------------------------- ------------------------------ -------------------
Average Average
Average Yield/ Average Yield/ Yield/
Balance Interest Cost Balance Interest Cost Balance Cost
---------- -------- ------- ---------- -------- ------- ---------- --------
Assets:
Interest-earning assets:
Loans receivable $4,336,207 143,568 6.62% $4,356,519 158,270 7.27% $4,389,965 6.59%
Mortgage-backed securities 204,488 5,280 5.16 104,963 3,310 6.31 244,903 5.14
Interest-bearing deposits (1) 97,850 1,030 2.12 34,824 1,071 6.20 105,206 1.70
Federal funds sold (1) 153,954 1,622 2.12 122,206 3,840 6.34 93,353 1.73
Investment securities (2) 494,405 12,237 4.99 326,317 10,684 6.60 543,681 4.68
---------- -------- ---------- -------- ------ ----------
Total interest-earning assets 5,286,904 163,737 6.20 4,944,829 177,175 7.17 5,377,108 6.15
Non-interest earning assets 325,426 226,785 396,071
---------- ---------- ----------
Total assets $5,612,330 $5,171,614 $5,773,179
========== ========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 3,388,914 49,764 2.97 2,876,704 63,147 4.44 3,462,024 2.75
Borrowed funds 1,417,098 39,573 5.63 1,649,315 49,558 6.06 1,470,500 5.50
---------- -------- ---------- -------- ----------
Total interest-bearing liabilities 4,806,012 89,337 3.75 4,526,019 112,705 5.03 4,932,524 3.57
-------- ------ -------- ------ -------
Non-interest bearing deposits 227,943 144,337 247,418
Other liabilities 127,872 110,254 125,817
---------- ---------- ----------
Total liabilities 5,161,827 4,780,610 5,305,759
Stockholders' equity 450,503 391,004 467,420
---------- ---------- ----------
Liabilities and stockholders' equity $5,612,330 $5,171,614 $5,773,179
========== ========== ==========
Net interest income/interest rate spread $ 74,400 2.45% $ 64,470 2.14% 2.58%
======== ====== ======== ====== ======
Net earning assets/net yield on average
interest-earning assets $ 480,892 2.81% $ 418,810 2.61% $ 444,585 N/A
========== ====== ========== ====== ========== ======
Ratio of interest-earning assets to
interest-bearing liabilities 110.01% 109.25% 109.01%
====== ====== ======
- ----------------------------------------
(1) Includes pro-rata share of interest income received on outstanding drafts
payable.
(2) Income and yields are stated on a taxable equivalent basis.
27
Rate/Volume Analysis of Net Interest Income
The following table describes the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated, on a taxable equivalent basis. Information is provided in
each category with respect to (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate), (ii) changes attributable to
changes in rates (changes in rates multiplied by prior volume), and (iii) the
net change. Changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
Compared to Compared to
June 30, 2001 June 30, 2001
Increase (Decrease) Increase (Decrease)
------------------------------ ------------------------------
Volume Rate Net Volume Rate Net
------ ------- ------- ------ ------- -------
(In thousands)
Interest-earning assets:
Loans receivable $ (461) (6,163) (6,624) (735) (13,967) (14,702)
Mortgage-backed securities 1,585 (327) 1,258 2,661 (691) 1,970
Interest-bearing deposits 557 (524) 33 1,012 (1,053) (41)
Federal funds sold (105) (1,076) (1,181) 823 (3,041) (2,218)
Investment securities 2,049 (1,503) 546 4,621 (3,068) 1,553
------ ------- ------- ------ ------- -------
Total $3,625 (9,593) (5,968) 8,382 (21,820) (13,438)
------ ------- ------- ------ ------- -------
Interest-bearing liabilities:
Deposits 4,926 (12,345) (7,419) 10,018 (23,401) (13,383)
Borrowed funds (3,496) (1,396) (4,892) (6,649) (3,336) (9,985)
------ ------- ------- ------ ------- -------
Total 1,430 (13,741) (12,311) 3,369 (26,737) (23,368)
------ ------- ------- ------ ------- -------
Net change in net interest income $2,195 4,148 6,343 5,013 4,917 9,930
====== ======= ======= ====== ======= =======
Comparison of the Results of Operations for the Three Months Ended June 30, 2002
and 2001
General - Net income for the three months ended June 30, 2002 was $16.3
million, or $.68 per diluted share, compared to net income of $13.9 million, or
$.60 per diluted share for the three months ended June 30, 2001. On November 30,
2001, the Company completed its acquisition of Mid Town Bancorp in a transaction
that was accounted for under the purchase accounting method for financial
purposes. As a result, the current period's results include the operations of
Mid Town Bancorp while the corresponding prior year's quarter does not. The
increase in earnings per share is primarily due to higher net interest income,
deposit account service fees and loan sale gains, which were offset by lower
income from real estate operations and higher non-interest expense.
Additionally, the elimination of goodwill amortization resulting from the
implementation of SFAS No. 142 (adopted January 1, 2002) added $648,000 or $.03
to diluted earnings per share for the current quarter.
Net interest income - Net interest income was $38.1 million for the current
quarter, compared to $31.9 million for the quarter ended June 30, 2001, an
increase of $6.3 million or 19.7%. The Company's average interest-earning assets
increased to $5.30 billion for the three months ended June 30, 2002 compared to
$4.99 billion for the three months ended June 30, 2001, while the Company's net
interest margin increased to 2.89% for the current three month period, compared
to 2.74% in the first quarter of 2002 and 2.56% in the prior year period. The
improved margin is attributable to a greater decline in the Bank's average cost
of funds compared to the decline in the yield on interest-earning assets. This
reflects the shorter-term nature of the Bank's deposit
28
accounts as well as the downward repricing on its core deposit accounts, which
make up over 50% of the Bank's deposit base.
Interest income on loans receivable decreased $6.6 million as a result of a
$25.7 million decrease in average loans receivable, and a 57 basis point
decrease in the average yield. The decrease in the average balance of loans
receivable is due to the continued strong level of long-term fixed rate
originations over the past 12 months, of which the Bank sold a majority to
control its interest rate risk. The decline in the average rate is a function of
current originations being at lower interest rates, the downward repricing of
ARM loans, and prepayments of higher-rate loans due to declining interest rates.
Interest income on mortgage-backed securities increased $1.3 million to $2.9
million for the current quarter, due primarily to a $123.1 million increase in
average balances, while interest income on investment securities increased
$489,000 to $6.1 million, due to a $152.3 million increase in the average
balance of this portfolio. The increase in investment and mortgage-backed
securities balances is primarily due to purchases during the quarter as a result
of higher cash flows from loan sales and deposit inflows.
Interest income on interest-bearing deposits and federal funds sold
decreased $1.1 million even as the average balance of interest bearing deposits
and federal funds sold increased $64.8 million for the three months ended June
30, 2002 compared to the prior year period but this was offset by a 372 basis
point decrease in average yield. This increase in average balances is due to the
high level of loan prepayments and fixed rate loan sale activity which is
holding down loan portfolio growth, as well as the strong deposit flows in the
current quarter. The decrease in yield is primarily due to Federal Reserve Board
easings since January 2001. The Company currently has a high level of liquidity,
and currently expects to redeploy the excess amounts into ARM loans, investments
and mortgage-backed securities as well as to repay maturing advances and meet
seasonal real estate tax payments for mortgage loan customers.
Interest expense on deposit accounts decreased $7.4 million to $24.2
million for the second quarter of 2002, due to a $511.6 million increase in
average deposits compared to the prior year quarter, more than offset by a 152
basis point decrease in the average cost of deposits compared to the prior
year's three-month period. Approximately $267.5 million of the growth in average
deposits is attributable to the acquisition of Mid Town Bank in November 2001.
The decrease in average cost of deposits is primarily due to the downward
repricing of maturing certificates of deposit, an increase in low-cost core
deposits through acquisition and internal growth and the lower rate paid on core
deposits as short-term rates have declined. Currently, core deposits comprise
more than 50% of the Bank's deposit base. The Bank expects the average cost of
deposits to trend lower throughout the remainder of 2002.
Interest expense on borrowed funds decreased $4.9 million to $19.5 million,
as a result of a $245.1 million decrease in the average balance of borrowed
funds, and a 36 basis point decrease in the average cost of borrowed funds. The
decrease in the average balance was primarily due to a $266.8 million decrease
in the average balance of FHLB advances, as maturities were not refinanced by
the Bank, due to deposit inflows and a decrease in loans held in portfolio. The
decline in average rate is attributable to maturing FHLB advances having higher
interest rates, as the Bank tends to borrow medium term fixed-rate advances.
Provision for loan losses - Based on management's assessment of the
adequacy of the loan loss reserve as of June 30, 2002 and 2001, the Bank
provided no provision for loan losses during the second quarter of 2002 or the
2001 second quarter. Net chargeoffs during the 2002 quarter were $179,000
compared to $58,000 for the three months ended June 30, 2001. Net charge-offs
for the three months ended June 30, 2002 consisted of charge-offs of $215,000,
including $144,000 on commercial loans net, of $36,000 in recoveries.
Non-interest income - Non-interest income increased $1.1 million, or 10.4%,
to $11.6 million for the three months ended June 30, 2002, compared to $10.5
million for the three months ended June 30, 2001. Increases in
29
gains on sales of loans and investment securities, fee income from deposit
accounts and other income were offset by lower income from real estate
operations.
Gain on sale of loans increased to $2.7 million for the three months ended
June 30, 2002, compared to $1.9 million for the three months ended June 30,
2001. Although loan sale volume declined to $212.1 million for the three months
ended June 30, 2002 compared to $373.5 million for the three months ended June
30, 2001, increased margins on sales resulted in higher gains. At June 30, 2002,
a $165,000 mark-to-market adjustment is also included in gain on sale of loans
as a result of valuation of loan commitments and forward loan sale contracts
accounted for as derivative instruments in accordance with SFAS No. 133. The
Company currently expects loan originations to be strong throughout 2002.
Income from real estate operations decreased $1.2 million to $160,000 for
the three months ended June 30, 2002 compared to the prior year quarter. The
Company sold two lots in its Tallgrass of Naperville project during the three
months ended June 30, 2002, compared to 33 lots for the prior year quarter. As
previously reported, closings on approximately 36 lots expected to occur during
the second quarter were postponed due to a delay in receiving a final letter of
map revision from the Federal Emergency Management Agency ("FEMA") relating to
the remapping of the flood plain area where the subject lots are located. The
Company expects to receive the final letter of map revision and anticipates
closing the sale of these lots in the third quarter of 2002.
Deposit account service charges increased $1.4 million, or 34.6%, to $5.5
million for the three months ended June 30, 2002 compared to $4.1 million for
the prior year quarter, due to continued growth in the number of checking
accounts through acquisition and internal sales efforts, as well as fee
increases for services provided. At June 30, 2002, the Bank had 148,100 checking
accounts, compared to 122,700 at June 30, 2001.
Loan servicing fee income increased $200,000 to $137,000 for the three
months ended June 30, 2002, compared to a net expense of $(63,000) for the prior
year quarter. The average balance of loans serviced for others increased 80.6%
to $1.69 billion for the current three-month period compared to $938.0 million
for the prior year three-month period. Amortization of mortgage servicing rights
was $1.1 million for the three months ended June 30, 2002, compared to $614,000
for the prior year three-month period due to higher prepayments in the current
quarter. The Bank also recorded a $490,000 impairment reserve on mortgage
servicing rights in the current three-month period as a result of declining
interest rates accelerating higher prepayment speeds on loans in its serviced
for others portfolio. At June 30, 2002, the Bank's balance of mortgage servicing
rights was $13.4 million, net of a valuation reserve of $1.6 million. The
balance of loans serviced for others at June 30, 2002 was $1.76 billion.
Other non-interest income increased $220,000, or 10.7% to $2.3 million for
the three months ended June 30, 2002, compared to $2.1 million for the prior
year quarter. The increase is due primarily to income from the Bank's mortgage
reinsurance subsidiary, which began operations in late 2001.
Non-interest expense - Non-interest expense increased $4.2 million or 20.8%
compared to the prior year period to $24.4 million for the three months ended
June 30, 2002.
Compensation and benefits increased 25.8% or $3.0 million to $14.7 million
for the three months ended June 30, 2002, compared to the three months ended
June 30, 2001. The increase is primarily due to increased employee costs from
the Mid Town acquisition and two new branches, normal salary increases, higher
medical costs, and increased staffing costs due to increased loan origination
volume and the business banking division.
Occupancy expense increased $591,000, or 26.7% to $2.8 million for the
three months ended June 30, 2002 compared to the prior year period, primarily
due to increased operating expenses from the acquisition of Mid Town as well as
the two new branches opened in the past year.
30
Advertising and promotion expense increased $263,000 or 23.9% to $1.4
million for the three months ended June 30, 2002 compared to the three months
ended June 30, 2001 due to higher costs relating to new account openings and
radio advertising.
Data processing expense increased $101,000 or 13.5% to $847,000 for the
three months ended June 30, 2002 compared to the prior year period. The increase
is primarily due to increased depreciation expense related to additional
computer equipment at new and acquired branches.
Other non-interest expense increased $764,000 or 23.8% to $4.0 million for
the three months ended June 30, 2002 compared to the prior year period. Costs
increased due to increased professional expense and higher bad check losses,
stationery and supplies expense and correspondent bank service charges resulting
from the addition of two new branches and four acquired branches since the prior
year period.
Amortization of goodwill decreased $648,000 to $163,000 for the three months
ended June 30, 2002 compared to the three months ended June 30, 2001. The
decrease in expense over the prior period was attributable to the elimination of
certain goodwill amortization expense resulting from the implementation of SFAS
No. 142, which was adopted January 1, 2002. Amortization of core deposit
intangibles increased $90,000 to $409,000 for the three months ended June 30,
2002 compared to the prior year period primarily due to additional amortization
on the core deposit intangible recorded in the Mid Town acquisition.
Income taxes - For the three months ended June 30, 2002, income tax expense
totaled $9.0 million, or an effective income tax rate of 35.6% compared to $8.2
million, or an effective income tax rate of 37.2%, for the three months ended
June 30, 2001. The lower effective income tax rate in the current period is
primarily the result of the decrease in goodwill amortization expense. Most of
the Company's goodwill amortization expense in prior periods was not tax
deductible.
Comparison of the Results of Operation for the Six Months Ended June 30, 2002
and 2001
General - Net income for the six months ended June 30, 2002 totaled $32.8
million, or $1.38 per diluted share, compared to $28.0 million, or $1.20 per
diluted share for the six months ended June 30, 2001, an increase of $4.9
million, or 17.4%. The increase is primarily due to higher net interest income
and gains on the sale of loans and investments, offset by higher compensation
and benefit costs. Additionally, the elimination of goodwill amortization
resulting from the implementation of SFAS No. 142 (adopted January 1, 2002)
added $1.3 million or $.05 to diluted earnings per share for the current six
month period.
Net interest income - Net interest income for the six months ended June 30,
2002 was $74.1 million compared to $64.3 million for the six months ended June
30, 2001, an increase of $9.8 million. The increase is principally due to the
growth in the Company's average interest-earning assets of $356.7 million to
$4.94 billion, as well as a 20 basis point increase in the Company's net
interest margin.
Interest income on interest-earning assets decreased $13.6 million for the
six months ended June 30, 2002, compared to the six months ended June 30, 2001,
primarily attributable to a $14.7 million decline in interest income on loans
receivable. The Bank's average balance of loans receivable decreased $20.3
million to $4.36 billion for the first six months of 2002, in addition to the
average yield on loans receivable decreasing 65 basis points over the prior year
period. The decreases in average balance and rate are due to the impact of
declining interest and the downward repricing of the Company's loan portfolio
since last year, as lower interest rates have increased loan prepayments, and
driven down new origination rates. The $1.9 million increase in interest income
on mortgage-backed securities is due to a $99.5 million increase in the average
balance primarily due to purchases offset by a 115 basis point decrease in
yield. Interest income on investment securities increased $1.4 million to $11.9
million for the six months ended June 30, 2002, due to a $168.1 million increase
in the average balance for the period, offset by a 161 basis point decrease in
the average yield on this portfolio. The Bank has purchased both investments and
mortgage-backed securities in lieu of holding longer-term fixed-rate mortgage
loan originations over the past year. These purchases have carried lower yields
due to a lower interest rate
31
environment as well as shorter durations so that the Bank stabilizes its
interest rate risk, and maintains some flexibility for reinvestment should
interest rates rise.
Interest expense on interest-bearing liabilities decreased $23.4 million to
$89.3 million for the six months ended June 30, 2002. Interest expense on
deposits decreased $13.4 million, due to a $512.2 million increase in balance of
average deposits offset by a 146 basis point decrease in average cost of
deposits. The decrease in deposit costs were primarily due to the downward
repricing of certificates of deposit and the success the Company has had in
gathering low-cost core deposits. Interest expense on borrowed funds decreased
$10.0 million, reflecting a $232.2 million decrease in the average balance of
borrowed funds, primarily advances from the FHLB of Chicago, and a 43 basis
point decrease in average cost. Since June 30, 2001, $365.0 million of the
Bank's advances have matured, of which $215.0 million were refinanced with lower
rate, intermediate term fixed-rate advances.
Provision for loan losses - Based on management's assessment of the
adequacy of the loan loss reserve as of June 30, 2002 and 2001, the Bank
provided no provision for loan losses for the six months ended June 30, 2002 or
for the six months ended June 30, 2001. Net charge-offs were $232,000 for the
current year six-month period compared to $37,000 for the prior six-month
period. At June 30, 2002, 90% of the Company's loan portfolio consisted of loans
secured by one-to-four family residential properties, including 8% relating to
home equity loans and equity lines of credit. A total of 76% of non-performing
assets consisted of loans secured by one-to-four family residential properties
and one-to-four family foreclosed real estate.
Non-interest income - Non-interest income increased $4.9 million to $25.3
million for the six months ended June 30, 2002, compared to $20.4 million for
the six months ended June 30, 2001 primarily due to increased loan sale gains
and deposit fee income offset by lower income from real estate operations.
Despite a year-over-year decline in income from real estate, strong results led
to an overall increase in non-interest income of 24.1%.
Gain on sale of loans receivable was $5.0 million for the six months ended
June 30, 2002, compared to $2.6 million ended June 30, 2001, an increase of $2.4
million. The increase was due to both higher sales volume and improved profit
margins on sales. Loan sales were $576.6 million during the current six-month
period compared to $499.8 million in the prior six-month period. The increase in
loan sale activity is primarily due to a greater amount of fixed-rate
originations in the current six-month period due to falling interest rates, as
well as the higher balance of loans held for sale at December 31, 2001, most of
which were closed in the first quarter of 2002.
During the current six months, the Company recognized $982,000 of gains on
the sale of investment securities available for sale, primarily marketable
equity securities, compared to gains of $560,000 for the previous six-month
period from the sale of U.S. agency securities and, to a lesser extent,
marketable equity securities.
Income from real estate operations was $3.1 million for the six months
ended June 30, 2002, compared to income of $4.7 million for the six months ended
June 30, 2001, a decrease of $1.6 million. The decline in income from real
estate is primarily due to a delay in closings on approximately 36 real estate
lot sales in the Company's Tallgrass of Naperville project. The real estate lot
closings were postponed due to a delay in receiving a final letter of map
revision from FEMA relating to the remapping of the flood plain area where the
subject lots are located. The Company expects to receive the final letter of map
revision and anticipates closing the sale of these lots in the third quarter of
2002. Management currently expects income from real estate operations to be
$7.5-$9.0 million in pre-tax income for the second half of 2002.
Loan servicing fee income was $97,000 for the six months ended June 30,
2002 compared to a net expense of $(111,000) for the six months ended June 30,
2001. The average balance of loans serviced for others
32
increased 85.3% to $1.61 billion for the current six-month period, compared to
$868.0 million in the prior six-month period. Amortization of mortgage servicing
rights totaled $2.1 million for the 2002 six-month period, compared to $1.4
million for the prior six-month period. The Bank also recorded a $490,000
impairment charge on mortgage servicing rights in the current six-month period
as a result of declining interest rates accelerating prepayment speeds on loans
in its serviced for others portfolio compared to a $215,000 charge during the
six-months ended June 30, 2001.
Deposit account service charges increased $2.8 million or 37.4% to $10.4
million for the six months ended June 30, 2002, due to an increase in the number
of checking accounts through acquisition and internal growth, expansion of the
debit card base and related fees.
Other non-interest income increased $1.0 million or 26.5% to $4.8 million
for the six months ended June 30, 2002 primarily due to an increase in loan
related fee income and income from the Bank's mortgage reinsurance subsidiary,
which began operations in late 2001.
Non-interest expense - Non-interest expense for the six months ended June
30, 2002 increased $8.0 million or 19.9% to $48.2 million compared to $40.2
million for the six months ended June 30, 2001.
Compensation and benefits increased $5.9 million, or 25.6%, to $28.9
million, for the six months ended June 30, 2002, primarily due to normal salary
increases, higher medical costs and increased staffing costs related to the
higher loan volume as well as additional employee costs related to the
acquisition of Mid Town.
Occupancy expense increased $1.2 million, or 27.8% to $5.7 million for the
six months ended June 30, 2002. The increase in expense is primarily due to
higher rent, utility costs and depreciation expense related to the Mid Town
branches the Bank acquired in November 2001.
Advertising and promotion expense increased $202,000 or 8.6% compared to
the prior year to $2.5 million for the six months ended June 30, 2002. The
increase in cost is primarily related to increased costs for radio and newspaper
advertising as well as promotional giveaways due to increased competition.
Data processing expense increased $336,000 or 22.3%, to $1.8 million, for
the six months ended June 30, 2002 compared to the prior year, primarily due to
increased depreciation expense for computer equipment and costs associated with
upgrading equipment, as well as additional data processing costs for the
branches acquired from Mid Town prior to their integration into the Bank's
computer system.
Other non-interest expense increased $1.4 million to $7.7 million for the
six months ended June 30, 2002 compared to the prior year period. The increase
is primarily due to operations from the acquired branches, costs for stationery,
postage, correspondent bank service charges and higher bad check losses due to
an increased checking account base.
Amortization of goodwill decreased $1.3 million or $.05 per share for the
six months ended June 30, 2002 compared to the six months ended June 30, 2001.
The decrease is due to the elimination of goodwill amortization expense
resulting from the implementation of FASB No. 142 effective January 1, 2002.
Amortization of core deposit intangibles increased $174,000 to $833,000 for
the six months ended June 30, 2002 due to an increase in core deposit
intangibles as a result of the acquisition of Mid Town in November 2001.
Income taxes - The Company recorded income tax expense totaling $18.3
million for the six months ended June 30, 2002, or an effective income tax rate
of 35.8%, compared to $16.6 million for the six months ended June 30, 2001, or
an effective income tax rate of 37.2%. The lower effective income tax rate in
the current period was primarily the result of the decline in non-deductible
goodwill amortization expense in the current period.
33
Outlook for the Balance of 2002
Management reiterates its previously announced expectation that earnings
per share for 2002 should be in the range of $3.00-$3.05 per diluted share, or
an increase of 17%-19% over 2001. For the quarter ending September 30, 2002,
management currently expects to report results in the range of $.77-$.80 per
diluted share, including projected income from real estate operations of
$3.3-$3.9 million, or $.09-$.10 per diluted share.
The Company's projections for the remainder of 2002 assume modest balance
sheet growth and a relatively steep U.S. Treasury yield curve, which is expected
to result in a stable to slightly higher interest rate spread and net interest
margin. The Company is anticipating its real estate development operations will
contribute $7.5-$9.0 million in pre-tax earnings in the second half of 2002 and
also expects to report continued strong growth in fee income. The projections
also assume housing and mortgage activity in the Bank's markets remain strong
and credit quality remains good.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A comprehensive qualitative and quantitative analysis regarding market risk
is disclosed in the Company's December 31, 2001 Form 10-K. There have been no
material changes in the assumptions used or results obtained regarding market
risk since December 31, 2001.
Part II - Other Information
- -----------------------------
Item 1. Legal Proceedings.
The Company was informed on June 10, 2002, that the U.S. Department of
Justice is reviewing the Bank's mortgage lending practices as part of
its responsibilities to investigate possible discrimination on the
basis of race or national origin under the Fair Housing Act and the
Equal Credit Opportunity Act. The investigation is focused on the
level of the Bank's residential mortgage lending activity in past
years in census tracts within the Chicago metropolitan area that are
predominantly African American or African American/Hispanic. The
Company believes the Bank's mortgage lending operations have complied
at all times with the fair lending laws and is cooperating fully with
the DOJ to resolve this matter. Based on discussions to date,
management does not expect the ultimate resolution to have a material
adverse impact on its results of operation or financial condition.
Item 2. Changes in Securities. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
34
Item 4. Submission of Matters to a Vote of Security Holders.
The information required by this item with respect to the Company's
Annual Meeting of Shareholders held on April 30, 2002, was included in
Part II, Item 4 of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002 (File No. 0-18121) and is incorporated
herein by reference.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. 3. Certificate of Incorporation and By-laws.
(i) Restated Certificate of Incorporation. (Incorporated
herein by reference to Exhibit 3.1 to Registrant's Form
8-K dated December 19, 2000).
(ii) Amended and Restated By-laws of Registrant. (Incorporated
herein by reference to Exhibit No. 3 to Registrant's
March 31, 2001 Form 10-Q).
Exhibit No. 11. Statement re: Computation of per share earnings.
Three Months Six Months
Ended Ended
June 30, 2002 June 30, 2002
------------- -------------
Net income $ 16,287,000 $ 32,830,000
============== ==============
Weighted average common shares outstanding 23,154,581 23,084,701
============== ==============
Basic earnings per share $ .70 $ 1.42
============= ==============
Weighted average common shares outstanding 23,154,581 23,084,701
Common stock equivalents due to dilutive
effect of stock options 691,551 626,375
------------- -------------
Total weighted average common shares and equivalents
outstanding for diluted computation 23,846,132 23,711,076
============= ==============
Diluted earnings per share $ .68 $ 1.38
============= ==============
Exhibit No. 99.1. Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit No. 99.2. Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
35
(b) Reports on Form 8-K.
A Form 8-K was filed to report that on April 18, 2002, MAF
Bancorp, Inc. announced its 2002 first quarter earnings results,
and a copy of the press release was included as an exhibit.
A Form 8-K/A was filed to report that on April 19, 2002 a press
release was issued to correct an error within the press release
issued on April 18, 2002. A copy of the revised press release was
included as an exhibit.
A Form 8-K was filed to report that on June 11, 2002, MAF Bancorp,
Inc. issued a press release announcing its participation in the
Howe Barnes Community Bank Conference held in Chicago, Illinois on
June 13, 2002. A copy of the press release and the presentation
materials were included as an exhibit.
A Form 8-K was filed to report that on June 26, 2002, MAF Bancorp,
Inc. issued a press release announcing that it had lowered its
second quarter earnings projections due to real estate lot sales
delays, but reiterated its full year 2002 earnings per share
estimates. A copy of the press release was included as an exhibit.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAF Bancorp. Inc.
-----------------------------------
(Registrant)
Date: August 13, 2002 By: /s/ Allen H. Koranda
---------------------------- -----------------------------------
Allen H. Koranda
Chairman of the Board and
Chief Executive Officer
Date: August 13, 2002 By: /s/ Jerry A. Weberling
----------------------------- -----------------------------------
Jerry A. Weberling
Executive Vice President and
Chief Financial Officer
37