Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended June 30, 1996 Commission file number 0-18121
-------------------
MAF Bancorp, Inc.
Delaware 36-3664868
(State of incorporation) (IRS Employer identification No.)
55th Street & Holmes Avenue, Clarendon Hills, Illinois 60514
Telephone Number (630) 325-7300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share NASDAQ
(Title of Class) (Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
-----
Based upon the closing price of the registrant's common stock as of September 4,
1996, the aggregate market value of the voting stock held by non-affiliates of
the registrant was $210,172,307.*
The number of shares of Common Stock outstanding as of September 4, 1996:
10,476,450
- --------------------------------------------------------------------------------
Documents Incorporated by Reference
PART III - Portions of the Proxy Statement for the 1996 Annual Meeting of
Shareholders to be held on October 23, 1996 are incorporated by reference into
Part III hereof.
- ---------------------------
* Solely for purposes of this calculation, all executive officers and directors
of the registrant are considered to be affiliates. Also included are shares held
by various employee benefit plans where trustees are (i) directors or executive
officers of the registrant or (ii) required to vote a portion of unallocated
shares at the direction of employees.
================================================================================
PART I
Item 1. Business
General
MAF Bancorp, Inc. ("Company"), is a registered savings and loan holding
company incorporated under the laws of the state of Delaware and is primarily
engaged in the consumer banking business through its wholly owned subsidiaries,
Mid America Federal Savings Bank ("Bank") and secondarily, in the residential
real estate development business through MAF Developments, Inc. ("MAF
Developments").
On May 30, 1996, the Company successfully completed its acquisition of N.S.
Bancorp, Inc. ("NSBI"), which was the sole shareholder of Northwestern Savings
Bank ("Northwestern"). At acquisition date, Northwestern had $749.7 million in
loans receivable, which are primarily one-to four- family residential mortgage
loans, and $872.0 million in deposits, which were serviced from six branch
locations. All but one of the branches are in markets which the Bank did not
service in the past. See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations for a more detailed review of the
acquisition.
The Bank is a consumer-oriented financial institution offering various
financial services to its customers through 20 retail banking offices. The
Bank's market area is generally defined as the western suburbs of Chicago,
including DuPage County, which has the second highest per capita income in
Illinois, as well as the northwest side of Chicago, due to the acquisition of
NSBI. It is principally engaged in the business of attracting deposits from the
general public and using such deposits, along with other borrowings, to make
loans secured by real estate, primarily one-to four-family residential mortgage
loans. To a lesser extent, the Bank also makes multi-family mortgage,
residential construction, land acquisition and development and a variety of
consumer loans. The Bank also has a small portfolio of commercial real estate.
Through three wholly owned subsidiaries, MAF Developments, Inc. ("MAF
Developments"), and Mid America Development Services, Inc. ("Mid America
Developments"), and NW Financial, Inc. ("NW Financial"), which the Company
acquired with NSBI, the Company and the Bank are also engaged in real estate
development activities. Additionally, the Bank operates an insurance agency,
Mid America Insurance Agency, Inc., which provides general insurance services,
and a brokerage operation through its affiliation with INVEST, a registered
broker-dealer.
As a federally chartered savings bank, the Bank's deposits are insured up to
the applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Chicago, which is
one of the twelve regional banks for federally insured savings institutions
comprising the FHLB system. The Bank is regulated by the Office of Thrift
Supervision ("OTS") and the FDIC. The Bank is further regulated by the Board of
Governors of the Federal Reserve System as to reserves required to be maintained
against deposits and certain other matters.
The Company's executive offices are located at 55th Street and Holmes Avenue,
Clarendon Hills, Illinois 60514. The telephone number is (630) 325-7300.
Market Data
Based on total assets at June 30, 1996, the Bank is the one of the largest
financial institutions headquartered in the Chicago metropolitan area, with its
home office located in Clarendon Hills, Illinois in the southeastern portion of
DuPage County. Through its network of 20 retail banking offices, the Bank
serves the residential, commercial and high technology sector west of Chicago,
including western Cook County, northern Will County, eastern Kane County and
DuPage County, as well as the northwest side of the City of Chicago.
2
Competition
The Bank is faced with increasing competition in attracting retail customer
business, including deposit accounts and loan originations. Competition for
deposit accounts comes primarily from other savings institutions, commercial
banks, money market funds, and insurance companies (primarily in the form of
annuity products). Factors affecting the attraction of customers include
interest rates offered, convenience of branch locations, ease of business
transactions, and office hours. Competition for loan products come primarily
from other mortgage brokers, savings institutions, commercial banks and mortgage
banking companies. Factors affecting business include interest rates, terms,
fees, customer service, and more recently, over-capacity in the loan origination
market.
Regulatory Environment
The Bank is subject to extensive regulation, supervision and examination by
the OTS, as its chartering authority and primary federal regulator, and by the
FDIC, which insures its deposits up to applicable limits. Such regulation and
supervision establish a comprehensive framework of activities in which the Bank
can engage and is designed primarily for the protection of the insurance fund
and depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities. Any change in such regulation, whether by the OTS, the FDIC or
Congress, could have a material impact on the Bank and its operations.
Legislation is pending in Congress to mitigate the effect of the Bank
Insurance Fund ("BIF") Savings Association Insurance Fund ("SAIF") premium
disparity. Under the legislation a special assessment would be imposed on the
amount of deposits held by SAIF-member institutions, including the Bank, as of a
specified date, currently March 31, 1995, to recapitalize the SAIF. The amount
of the special assessment would be left to the discretion of the FDIC but is
generally estimated at between 79 to 85 basis points of insured deposits. The
legislation would also require that the BIF and SAIF be merged, provided that
subsequent legislation is enacted requiring federal savings associations to
become national banks or state chartered banks or thrifts, and that the
Financing Insurance Company ("FICO") payments be spread across all BIF and SAIF
members. The payment of the special assessment would have the effect of
immediately reducing the capital of SAIF-member institutions, net of any tax
effect; however, it would not affect the Bank's compliance with its regulatory
capital requirements. Management cannot predict whether legislation imposing
such an assessment will be enacted, or, if enacted the specific terms of such
legislation including the amount of any special assessment and when and whether
ongoing SAIF insurance premiums will be reduced to a level equal to that of BIF
premiums. Management can also not predict whether or when the BIF and SAIF will
merge. A significant increase in SAIF insurance premiums or a significant
special assessment to recapitalize the SAIF would likely have an adverse effect
on the operating expenses of the Company. The assessment of a 79 to 85 basis
point fee to recapitalize the SAIF would result in a $10.4 million to $11.1
million payment on an after tax basis, based on deposits as of March 31, 1995.
3
Executive Officers of the Registrant
The following executive officers were employed by the Company and the Bank as
of July 1, 1996.
Name Age Position(s) Held
---- --- ----------------
Allen H. Koranda 50 Chairman of the Board and Chief Executive
Officer of the Company and the Bank
Kenneth Koranda 46 President and Director of the Company and the
Bank
Jerry A. Weberling 45 Executive Vice President and Chief Financial
Officer of the Company and the Bank
Gerard J. Buccino 35 Senior Vice President and Controller of the
Company and the Bank
William Haider 45 Senior Vice President of the Company and the
Bank; President of Mid America Developments
and MAF Developments
Michael J. Janssen 37 Senior Vice President of the Company and the
Bank
David W. Kohlsaat 42 Senior Vice President of the Company and the
Bank
Thomas Miers 44 Senior Vice President of the Company and the
Bank
Kenneth Rusdal 54 Senior Vice President of the Company and the
Bank
Lois B. Vasto 62 Senior Vice President and Director of the
Company and the Bank
Sharon Wheeler 43 Senior Vice President of the Company and the
Bank
Alan W. Schatz 38 First Vice President of the Bank
Carolyn Pihera 53 Vice President and Corporate Secretary of the
Company and the Bank
Hugo Koranda 81 Chairman Emeritus of the Bank
4
Biographical Information
Set forth below is certain information with respect to executive officers of
the Company and the Bank. Unless otherwise indicated, the principal occupation
listed for each person below has been his principal occupation for the past five
years.
Allen H. Koranda has been Chairman of the Board and Chief Executive Officer of
the Company since August, 1989, and of the Bank since May, 1984. He joined the
Bank in 1972. He is also Senior Vice President and a director of Mid America
Developments, a wholly owned subsidiary of the Bank. Mr. Koranda holds Bachelor
of Arts and Juris Doctor degrees from Northwestern University. Mr. Koranda is
the brother of Kenneth Koranda.
Kenneth Koranda has been President of the Company since August, 1989, and of
the Bank since July 1984. He joined the Bank in 1972. He is also Chairman of
Mid America Developments. Mr. Koranda holds a Bachelor of Arts degree from
Stanford University and a Juris Doctor degree from Northwestern University. Mr.
Koranda is the brother of Allen Koranda.
Jerry A. Weberling has been Executive Vice President and Chief Financial
Officer of the Company and the Bank since July 1993. Prior to that, he was
Senior Vice President of the Company since August, 1989, and Senior Vice
President and Chief Financial Officer of the Bank from March 1990 to July 1993.
He was Senior Vice President and Controller from 1986 to March 1990. He joined
the Bank in 1984. He is a certified public accountant. Mr. Weberling holds a
Bachelor of Science degree from Northern Illinois University.
Gerard J. Buccino was named Senior Vice President and Controller of the
Company and the Bank in July 1996. Prior to that he was First Vice President
and Controller of the Company and the Bank from July 1993 to July 1996 and Vice
President and Controller of the Company and the Bank from March 1990 to July
1993. He is a certified public accountant. Mr. Buccino holds a Bachelor of
Science degree from Marquette University and a Master of Business Administration
degree from the University of Chicago Graduate School of Business.
William Haider was named Senior Vice President of the Company and the Bank in
July 1996. Prior to that he was Vice President of the Company since April 1993
and of the Bank since 1987. He is President of Mid America Developments and MAF
Developments, managing the real estate development activities of the Company.
Mr. Haider holds a Bachelor of Science degree from Southern Illinois University.
He joined the Bank in 1984.
Michael J. Janssen was named Senior Vice President - Investor Relations and
Taxation of the Company and the Bank in July 1996. Prior to that he was First
Vice President - Investor Relations and Taxation of the Company and the Bank
from July 1993 to July 1996, and Vice President of the Company from March 1990
to July 1993. He is a certified public accountant. Mr. Janssen holds a
Bachelor of Business Administration degree from the University of Notre Dame,
and a Master of Science of Taxation degree from DePaul University.
David W. Kohlsaat was named Senior Vice President - Administration in July
1996. Prior to that he was First Vice President - Administration of the Company
from July 1993 to July 1996, and is responsible for retail deposit
administration and Human Resources. He has been Vice President of the Company
since April 1993 and of the Bank since 1980. Mr. Kohlsaat holds a Bachelor of
Science degree from Southern Methodist University. He joined the Bank in 1976.
5
Thomas Miers has been Senior Vice President of the Company since April 1993
and Senior Vice President-Retail Banking of the Bank since January 1992. Prior
to that he was Senior Vice President - Marketing. Mr. Miers holds a Bachelor of
Science degree from George Williams College. He joined the Bank in 1979.
Kenneth Rusdal has been Senior Vice President of the Company since April 1993
and Senior Vice President-Operations and Information System since January 1992.
Prior to that he was Senior Vice President-Information Systems from 1987 through
1991. He also served as Vice President of Software Development for FISERV,
Inc., where he was employed from 1983 to 1987.
Lois B. Vasto has been Senior Vice President of the Company since August,
1989, and Senior Vice President - Loan Operations of the Bank since May 1984.
She joined the Bank in 1953. She is also Senior Vice President of Mid America
Developments and Secretary of Mid America Insurance, wholly-owned subsidiaries
of the Bank.
Sharon Wheeler has been Senior Vice President of the Company since April 1993
and has been Senior Vice President - Residential Lending of the Bank since July
1986. She joined the Bank in 1971.
Alan W. Schatz was named First Vice President - Secondary Marketing of the
Bank in July 1996. Prior to that he was Vice President - Secondary Marketing of
the Bank from September 1992 to July 1996. Prior to that he served as the
Director of Trading and Risk Management at First Illinois Mortgage Corporation
where he was employed from 1987 until 1992. Mr. Schatz holds a Bachelor of
Science degree from the University of Illinois at Chicago and a Master of
Business Administration degree from Rosary College.
Carolyn Pihera has been Vice President since 1979 and Corporate Secretary to
the Board of Directors of the Company since August 1989, and of the Bank since
1980. She joined the Bank in 1959 and currently is also Office Manager of the
Clarendon Hills office.
Hugo Koranda is an executive officer and Chairman Emeritus of the Bank. He
served as Chairman of the Board of the Bank until 1984. He served as a
consultant to the Bank from July 1989 until April 1991. Mr. Koranda is the
father of Allen and Kenneth Koranda.
Employees
The Bank employs a total of 849 full time equivalent employees as of June 30,
1996. Management considers its relationship with its employees to be excellent.
Item 2. Properties
The Company neither owns nor leases any real property. For the time being, it
utilizes the property and equipment of the Bank without payment to the Bank.
The Bank conducts its business through 20 retail banking offices, including
its executive location in Clarendon Hills, Illinois. The Bank has its own data
processing facilities. The data processing equipment primarily consists of
mainframe hardware, personal computers and ATMs. At June 30, 1996, the data
processing equipment owned has a net book value of $2.7 million.
6
The following table sets forth information regarding the Bank's executive
office and its 20 branches. At June 30, 1996, the total net book value of the
Bank's premises and related equipment was $31.2 million.
Date Leased Date Lease % of Total Net Book Value
Location or Acquired Expires Deposits June 30,1996
-------- ------------ ---------- ----------- ------------
(dollars in thousands)
Executive and Home Office
55th Street and Holmes Avenue
Clarendon Hills, Illinois 60514 1975/1986 owned 11.05% $ 4,879
Branches
Chicago, Illinois
2300 North Western Avenue 1996 owned 5.81 2,433
3844 West Belmont Avenue 1996 owned 11.59 1,836
6333 North Milwaukee Avenue 1996 2001 4.80 73
5075 South Archer Avenue 1996 owned 7.35 1,017
Norridge, Illinois
4100 North Harlem Avenue 1996 1999 5.42 --
Cicero, Illinois
5900/5847 West Cermak Road 1939/1978 owned 14.41 1,221
4830 West Cermak Road 1970 owned 1.78 458
Berwyn, Illinois
6620 West Ogden Avenue 1996 owned 0.25 1,248
6650 West Cermak Avenue 1996 owned 3.94 1,526
Riverside, Illinois
40 East Burlington 1977 owned 4.44 967
LaGrange Park, Illinois
1921 East 31st Street 1981 owned 4.44 881
Western Springs, Illinois
40 West 47th Street 1978 owned 3.55 782
Naperville, Illinois
1001 South Washington 1974 owned 7.79 1,874
9 East Ogden Avenue 1982 owned 1.81 962
1308 S. Naperville Blvd. 1987 owned 2.65 1,493
3040 Book Road 1993 1997 .66
Wheaton, Illinois
250 East Roosevelt Road 1977 owned 3.77 970
161 Danada Square East 1988 2009 1.53 334
St. Charles, Illinois
2600 East Main Street 1979 owned 2.96 2,161
Other fixed assets -- 6,130
--------- -------
Total 100.00% $ 31,245
========= =======
7
Item 3. Legal Proceedings
There are no outstanding legal proceedings against the Company. There are
various actions pending against the Bank but, in the opinion of management, the
probable liability resulting from these suits is unlikely, individually or in
the aggregate, to have a material effect on the Bank's or the Company's
financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held a special meeting of Stockholders on May 29, 1996.
(b) Not applicable.
(c) The following matters were voted upon at the special meeting, and the
number of affirmative votes and negative votes cast with respect to the
matters follows.
(i) Approval and adoption of the Amended and Restated Agreement and Plan
of Reorganization, dated November 29, 1996, by and between MAF
Bancorp and N.S. Bancorp, Inc. pursuant to which N.S. Bancorp, Inc.
will be merged into MAF Bancorp:
For Against Abstain
--- ------- -------
4,118,600 25,257 156,227
(ii) Amendment to the Certificate of Incorporation of MAF Bancorp to
increase the number of authorized shares of its Common Stock from 20
million shares to 40 million shares:
For Against Abstain
--- ------- -------
4,169,899 90,645 39,540
(d) None.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholders
Matters
The Company's common stock is traded over-the-counter and quoted on the
NASDAQ/National Market System under the symbol "MAFB". As of September 4, 1996,
the Company had 1,798 stockholders of record. The table below shows the
reported high and low sales prices of the common stock during the periods
indicated in fiscal 1996 and 1995.
1996 1995
----------- ------------
High Low High Low
----- ----- ----- -----
First Quarter 25.50 20.68 20.91 19.32
Second Quarter 26.25 24.00 20.91 16.36
Third Quarter 25.50 24.50 21.70 17.05
Fourth Quarter 27.00 24.00 21.59 20.45
Such over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
The Company declared $0.32 per share in dividends during fiscal 1996, and
$0.291 per share in dividends during fiscal 1995. The Company's ability to pay
cash dividends primarily depends on cash dividends received from the Bank.
Dividend payments from the Bank are subject to various restrictions. See Item 7.
"Management's Discussion and Analysis-Regulation and Supervision - Federal
Savings Institution Regulation - Limitation on Capital Distributions."
8
Item 6. Selected Financial Data
The following table sets forth certain summary consolidated financial data at or
for the periods indicated. This information should be read in conjunction with
the Consolidated Financial Statements and notes thereto included herein. See
Item 8. "Financial Statements and Supplementary Data."
At June 30,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- --------- --------- ---------
(Dollars in thousands, except per share data)
Selected Financial Data:
Total assets $ 3,117,149 1,783,076 1,586,334 1,544,439 1,513,331
Loans receivable, net 2,293,399 1,267,453 1,010,992 963,680 946,038
Mortgage-backed securities 418,102 307,390 347,902 362,172 321,356
Interest-bearing deposits 37,496 10,465 29,922 43,312 71,242
Federal funds sold 5,700 9,360 17,450 12,625 11,800
Investment securities 171,251 90,319 97,260 69,606 74,784
Real estate held for development or sale 26,620 11,454 6,404 14,174 13,956
Deposits 2,254,100 1,313,306 1,292,531 1,290,072 1,268,557
Borrowed funds 537,696 307,024 149,856 117,581 130,905
Subordinated capital notes, net 26,676 20,100 20,027 19,962 19,915
Stockholders' equity 242,226 105,419 95,150 85,002 70,202
Book value per share 23.42 19.19 16.77 14.49 12.03
Tangible book value per share 19.98 19.19 16.77 14.49 12.03
For the Year Ended June 30,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
Selected Operating Data:
Interest income $ 143,095 114,963 103,778 112,854 122,602
Interest expense 93,221 73,367 69,694 74,311 87,300
---------- --------- --------- --------- ---------
Net interest income 49,874 41,596 34,084 38,543 35,302
Provision for loan losses 700 475 1,200 2,700 4,100
---------- --------- --------- --------- ---------
Net interest income after provision
for loan losses 49,174 41,121 32,884 35,843 31,202
Non-interest income:
Gain (loss) on sale of:
Loans receivable and
mortgage-backed securities 198 (56) 3,135 5,364 4,177
Loan servicing rights - - - - 1,296
Income from real estate operations 4,786 7,497 7,719 3,427 2,749
Gain (loss) on sale and writedown of:
Investment securities 188 (231) 200 (717) 68
Foreclosed real estate 50 181 145 (1,624) (880)
Loan servicing fee income 2,394 2,373 2,456 2,566 2,735
Other 9,484 6,886 5,993 5,297 5,644
---------- --------- --------- --------- ---------
Total non-interest income 17,100 16,650 19,648 14,313 15,789
Non-interest expense:
Compensation and benefits 21,209 18,257 16,954 15,138 15,815
Office occupancy and equipment 3,774 3,522 3,569 3,539 3,753
Federal deposit insurance premiums 3,255 3,003 2,996 2,430 2,699
Other 9,548 8,630 7,797 7,136 7,440
---------- --------- --------- --------- ---------
Total non-interest expense 37,786 33,412 31,316 28,243 29,707
---------- --------- --------- --------- ---------
Income before income taxes
and other items 28,488 24,359 21,216 21,913 17,284
Income taxes 10,805 9,316 7,766 8,402 8,401
---------- --------- --------- --------- ---------
Income before other items 17,683 15,043 13,450 13,511 8,883
Other items (1) (474) - - 435 913
---------- --------- --------- --------- ---------
Net income $ 17,209 15,043 13,450 13,946 9,796
========== ========= ========= ========= =========
Primary earnings per share $ 2.76 2.54 2.22 2.27 1.66
========== ========= ========= ========= =========
Fully-diluted earnings per share $ 2.76 2.54 2.22 2.26 1.63
========== ========= ========= ========= =========
9
For the Year Ended June 30,
-------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands, except per share data)
Selected Financial Ratios and
Other Data:
Return on average assets .85% .90% .85% .91% .67%
Return on average equity 14.21 15.22 14.80 17.80 15.03
Average stockholders' equity
to average assets 6.00 5.91 5.75 5.09 4.43
Stockholders' equity to total assets 7.77 5.91 6.00 5.50 4.64
Tangible and core capital to
total assets (Bank only) 7.02 5.64 5.90 5.71 5.28
Risk-based capital ratio (Bank only) 15.36 12.07 13.24 12.77 11.06
Interest rate spread during period 2.24 2.29 1.99 2.38 2.31
Net yield on average interest-earning assets 2.62 2.62 2.29 2.66 2.55
Average interest-earning assets to average
interest-bearing liabilities 107.83 107.22 106.48 105.55 103.75
Non-interest expense to average assets 1.87 2.00 1.98 1.83 2.02
Non-interest expense to average assets and
average loans serviced for others 1.27 1.31 1.31 1.18 1.23
Ratio of earnings to fixed charges:
Including interest on deposits 1.30x 1.32x 1.30x 1.29x 1.19x
Excluding interest on deposits 1.94x 2.34x 2.24x 2.43x 2.15x
Non-performing loans to total loans .56 .57 .83 1.37 1.58
Non-performing assets to total assets .44 .42 .75 1.26 1.60
Cumulative one-year gap 5.22 4.89 1.84 4.06 (1.83)
Number of deposit accounts 255,960 164,592 148,519 149,218 152,702
Mortgage loans serviced for others $1,040,260 887,887 823,924 828,776 877,649
Loan originations 989,753 585,882 813,689 809,486 650,883
Full-service customer service facilities 20 13 13 12 12
Stock Price and Dividend Information
High $ 27.00 21.70 22.27 17.42 8.94
Low 20.68 16.36 16.07 8.37 4.24
Close 24.50 21.36 20.91 16.36 8.64
Cash dividends per share .32 .291 - - -
Dividend payout ratio 11.59% 11.46% - - -
- ----------------------
(1) Other items in 1996 represents a $474,000 extraordinary charge for the early
extinguishment of debt. Other items in 1993 represents a $1.25 million
credit for the cumulative effect of a change in accounting for income taxes,
offset by an $815,000 extraordinary charge incurred on the prepayment of
debt. The other item in 1992 represents an extraordinary credit primarily
from the utilization of net operating loss carryforwards.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Net income for the Company was $17.2 million, or $2.76 per full-diluted share
for the year ended June 30, 1996, compared to $15.0 million, or $2.54 per fully-
diluted share for the year ended June 30, 1995 and $13.5 million, or $2.22 per
fully-diluted share for the year ended June 30, 1994. On an operating basis,
the Company earned $2.84 per fully-diluted share in 1996 before consideration of
a $474,000 or $0.08 per share extraordinary loss on the early repayment of
subordinated capital notes. Earnings improvements are largely a result of
improved net interest margins, and increased fee income, coupled with controlled
operating expenses. Per share income has also been improved as a result of
share repurchase programs over the past two years.
Highlights of results for the Company's performance in fiscal 1996 are as
follows:
. The Company completed the acquisition of N.S. Bancorp, opening the
Company to new, stable deposit markets characterized by loyal low cost
deposit base.
. Assets grew by $1.3 billion, due to the acquisition of NSBI, as well
as due to strong loan portfolio growth originated by the Bank.
. Loan originations increased 69% to $989.8 million in 1996, from $585.9
million in 1995, including a 131% increase in wholesale loan
originations to $360.9 million in 1996.
. Net interest income improved to $49.2 million in 1996 compared to
$41.1 million in 1995, while maintaining an average net interest
margin of 2.62% for both years.
. Deposit account service charges increased 46.2% in 1996, following a
38.6% increase in 1995, due to continued growth in the Bank's checking
account base.
. Non-interest expenses declined as a percentage of average assets
between 1996 and 1995.
Acquisition
On May 30, 1996, the Company completed its acquisition of NSBI, and its
wholly-owned subsidiary, Northwestern, for cash and stock totaling $269.7
million. The Company paid $41.18 per share of NSBI in the form of $20.1799 cash
and .8549 shares of the Company's common stock. The Company issued 5.2 million
shares in the acquisition, nearly doubling the number shares outstanding as a
result of the transaction. The cash portion of the purchase was made from
existing cash, as well as funds from Northwestern in the form of a dividend due
to their excess capital position as of the acquisition date. Additionally, the
Company obtained a $35.0 million unsecured term bank loan with a local
commercial bank. The loan has a final maturity of seven years, and amortizes on
an increasing basis beginning in 1998.
As a result of the merger, the Bank becomes the second largest independent
savings institution and the ninth largest financial institution overall in the
Chicago metropolitan area. Northwestern had $872.0 million of deposits at the
merger date, serviced from six locations in Cook County, Illinois, giving the
Bank access to markets in which it did not operate previously.
The transaction was accounted for under the purchase method. As such, on May
30, 1996, the Company valued the assets and liabilities of NSBI at fair value,
and created goodwill and other intangible assets of $35.9 million as a result of
the transaction. Amortization of these intangibles was immaterial in 1996, and
is expected to be approximately $2.8 million for fiscal 1997.
11
Net Interest Income
Net interest income is the principal source of earnings for the Company, and
consists of interest on loans, mortgage-backed and investments securities,
offset by interest expense on deposits and borrowed funds. Net interest income
fluctuates due to a variety of reasons, most notably due to the size of the
balance sheet, changes in interest rates, and to a lesser extent asset quality.
The Company seeks to increase net interest income without materially mismatching
maturities of the interest-earning assets it invests in compared to the
interest-bearing liabilities which fund such investments.
Net interest income before the provision for loan losses increased $8.3
million, or 19.9% to $49.9 million for the year ended June 30, 1996, compared to
$41.6 million for the year ended June 30, 1995. This improvement follows a $7.5
million, or 22.0% increase for the year ended June 30, 1995 compared to the year
ended June 30, 1994. The net interest margin (net interest income divided by
average interest-earning assets) remained constant at 2.62% for the years ended
June 30, 1996 and 1995, and increased from 2.29% for the year ended June 30,
1994. The stability in the net interest margin in 1996 was primarily due to a
28 basis point increase in the yield on average interest earning assets, offset
by an increase in the average cost of funds of 33 basis points. Although the
net interest spread declined by 5 basis points, this was offset by growth in the
balance of interest-earning assets over interest-bearing liabilities, due to the
increased capital level of the Bank. The major reason for the increase in the
net interest margin between 1995 and 1994 was due to the Bank's collateralized
mortgage obligation ("CMO") bonds payable. Due to accelerated prepayments of
the mortgage-backed securities which underlie the CMO bonds, the Bank needed to
accelerate amortization of the related CMO bond discount in 1994, which
significantly reduced net interest income. The net negative impact to net
interest income from the CMO bonds was $4.0 million in 1994, while only $467,000
in 1995, and $409,000 in 1996.
Rate/Volume Analysis
The table below describes the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense on a
fully taxable equivalent basis during the periods indicated.
1996 vs 1995 1995 vs 1994
------------------------ ----------------------------
Interest Total Due to Total Due to
---------------------------- -------------- -----------------
1996 1995 1994 Change Volume Rate Change Volume Rate
------ ------ ------ ------ ------ ---- ------ ------ ----
(In thousands)
Interest-earning assets:
Loans receivable $ 115,466 86,511 75,781 28,955 27,454 1,501 10,730 9,824 906
Mortgage-backed securities 18,291 19,747 20,304 (1,456) (1,961) 505 (557) (1,095) 538
Investment securities 6,382 5,253 4,958 1,129 859 270 295 (87) 382
Interest-bearing deposits 2,064 2,068 2,390 (4) (593) 589 (322) (1,155) 833
Federal funds sold 1,121 1,596 562 (475) (771) 296 1,034 646 388
------- ------- ------- ------ ------ ----- ------ ------ ------
Total interest income 143,324 115,175 103,995 28,149 24,988 3,161 11,180 8,133 3,047
------- ------- ------- ------ ------ ----- ------ ------ ------
Interest-bearing liabilities:
Deposits 63,325 55,794 53,004 7,531 4,699 2,832 2,790 276 2,514
Borrowed funds 29,896 17,573 16,690 12,323 12,871 (548) 883 6,380 (5,497)
------- ------- ------- ------ ------ ----- ------ ------ ------
Total interest expense 93,221 73,367 69,694 19,854 17,570 2,284 3,673 6,656 (2,983)
------- ------- ------- ------ ------ ----- ------ ------ ------
Net interest income $ 50,103 41,808 34,301 8,295 7,418 877 7,507 1,477 6,030
======= ======= ======= ====== ====== ===== ====== ====== ======
12
The average yield on interest-earning assets improved during 1996 to 7.49%
compared to 7.21% in 1995 and to 6.94% in 1994 due to increases in interest
rates, driven primarily by a 13 basis point increase in the yield on loans
receivable, and mostly stable average yields on other interest-earning assets,
due to the relative stability of short-term interest rates during 1996. The
increase in the average yield on interest-earning assets in 1995 was due to
increasing short-term interest rates, which had a more dramatic impact on the
yield on liquid investments, as well as increasing Treasury and Cost of Funds
Index ("COFI") indices leading to improved yields on adjustable-rate loans and
mortgage-backed securities.
The Company's average balance of investment securities, interest-bearing
deposits and federal funds sold has been relatively consistent over the past
three fiscal years, due to the addition of loans receivable over this time
period. The average balance of these assets was $138.9 million in 1996, a level
at which the Bank maintains sufficient liquidity for operating and regulatory
purposes, as well as investment securities for collateral purposes. Average
loans receivable increased by $352.6 million, or 31.1% in 1996, following a
$128.3, or 12.8% increase in 1995. The increase in 1996 was augmented by the
addition of $749.7 million of loans receivable from the NSBI merger. Increases
in loans receivable have been funded primarily with additional borrowings, due
to the lack of available liquidity and the relatively small growth in savings
deposits. As a result of increased loan origination activity, the Bank has
relied less on the purchase of mortgage-backed securities for investment
purposes. The average balance of mortgage-backed securities has declined for
the last two years, decreasing by $31.3 million in 1996, and by $18.1 million in
1995, due to normal amortization and prepayments.
The average cost of savings deposits increased 22 basis points in 1996,
primarily due to increased rates on certificates of deposits. The 20 basis
point increase in the cost of savings deposits in 1995 was due to the ability of
management to lag increases in short-term interest rates when pricing deposit
products while still remaining competitive. Average deposits remained
relatively constant between 1995 and 1994, and increased $102.0 million in 1996,
due to lower savings outflows, higher interest credited to accounts, as well as
the addition of $872.0 million in deposits from the acquisition of NSBI.
Because of the inability to increase savings deposits, the increase in
interest-earning assets in 1996 and 1995 was funded with borrowed funds,
primarily FHLB of Chicago advances, and a limited amount of reverse repurchase
agreements. Average borrowings increased $183.3 million in 1996, after
increasing $75.8 million in 1995. Additional borrowings in 1996 did lead to a
decrease in the average cost of borrowings by 22 basis points, although this is
somewhat attributable to the shorter duration of adjustable-rate advances from
the FHLB of Chicago, and short-term reverse repurchase agreements. Included in
the increase in borrowed funds in 1996 is a $35.0 million unsecured term bank
loan which was obtained for the acquisition of NSBI. The loan carries an
interest rate of the one-month London interbank offering rate ("LIBOR") plus 1%,
or 6.47% at June 30, 1996. The loan is convertible all or in part, with certain
limitations at the end of any repricing period into a fixed rate loan at the
discretion of management at 1.25% over the U.S. Treasury rate corresponding to
the term to the final maturity of the loan, which is December 31, 2003.
Offsetting the increase in borrowed funds was the continued reduction in the
Bank's CMO bonds payable issued by Mid America Finance Corporation ("MAFC"). In
1996 and 1995, the rate of prepayment on the underlying mortgage-backed
securities slowed compared to 1994, leading to a decrease in the CMO bonds
payable of $4.5 million in 1996, compared to $4.7 million in 1995 and $38.9
million in 1994. At June 30, 1996, the outstanding balance of the Bank's CMO
bonds payable issued by MAFC was $14.7 million net of unamortized discounts of
$1.2 million.
13
Average Balance Sheets
The following table sets forth certain information relating to the Company's
consolidated statements of financial condition and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Such yields
and costs are derived by dividing income or expense, on a tax equivalent basis,
by the average balance of assets or liabilities. Average balances are derived
from average daily balances, and include non-performing loans. The yield/cost at
June 30, 1996 includes fees which are considered adjustments to yield.
Year Ended June 30,
-------------------------------------------------------------------------------------
1996 1995
------------------------------------- -------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $1,485,309 115,466 7.77% $1,132,669 $ 86,511 7.64%
Mortgage-backed securities 289,759 18,291 6.31 321,074 19,747 6.15
Investment securities (1) 100,671 6,382 6.34 86,932 5,253 6.04
Interest-bearing deposits 24,128 2,064 8.55 32,205 2,068 6.42
Federal funds sold 14,088 1,121 7.96 24,389 1,596 6.54
---------- ---------- ---------- ----------
Total interest-earning assets 1,913,955 143,324 7.49 1,597,269 115,175 7.21
Non-interest earning assets 104,543 75,098
---------- ----------
Total assets $2,018,498 $1,672,367
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits 1,350,501 63,325 4.69 $1,248,513 55,794 4.47
Borrowed funds 424,461 29,896 7.04 241,141 17,573 7.26
---------- ---------- ---------- ----------
Total interest-bearing liabilities 1,774,962 93,221 5.25 1,489,654 73,367 4.92
Non-interest bearing deposits 57,665 ---------- ------ 47,576 ---------- ------
Other liabilities 64,729 36,320
---------- ----------
Total liabilities 1,897,356 1,573,550
Stockholders' equity 121,142 98,817
---------- ----------
Liabilities and stockholders' equity $2,018,498 $1,672,367
========== ==========
Net interest income/interest rate spread $ 50,103 2.24% $ 41,808 2.29%
========== ====== ========== ======
Net earning assets/net yield on average
interest-earning assets $ 138,993 2.62% $ 107,615 2.62%
========== ====== ========== ======
Ratio of interest-earning assets
to interest-bearing liabilities 107.83% 107.22%
========== ======
--------------------------------- At June 30,
1994 1996
--------------------------------- ----------------------
Average
Average Yield/ Yield/
Balance Interest Cost Balance Cost
------- -------- ---- ------- ----
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $1,004,342 $ 75,781 7.55% $2,310,653 7.64%
Mortgage-backed securities 339,182 20,304 5.99 418,102 6.91
Investment securities (1) 88,462 4,958 5.60 171,251 6.86
Interest-bearing deposits 53,638 2,390 4.46 37,496 5.89
Federal funds sold 13,065 562 4.30 5,700 5.25
---------- -------- ----------
Total interest-earning assets 1,498,689 103,995 6.94 2,943,202 7.46
Non-interest earning assets 81,251 173,947
---------- ----------
Total assets $1,579,940 $3,117,149
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits $1,242,130 53,004 4.27 $2,189,247 4.41
Borrowed funds 165,345 16,690 10.09 564,372 6.36
---------- -------- ----------
Total interest-bearing liabilities 1,407,475 69,694 4.95 2,753,619 4.81
---------- -------- ----- ----
Non-interest bearing deposits 47,517 64,853
Other liabilities 34,094 56,451
---------- ----------
Total liabilities 1,489,086 2,874,923
Stockholders' equity 90,854 242,226
---------- ----------
Liabilities and stockholders' equity $1,579,940 $3,117,149
========== ==========
Net interest income/interest rate spread $ 34,301 1.99% 2.65%
======== ===== ====
Net earning assets/net yield on average
interest-earning assets $ 91,214 2.29% $ 189,583 n/a
========== ===== ==========
Ratio of interest-earning assets
to interest-bearing liabilities 106.48% 106.88%
========== ==========
- --------------------------
(1) Includes $18.7 million, $10.4 million, and $10.7 million and $30.7
million of Stock in Federal Home Loan Bank of Chicago for the years ended June
30, 1996, 1995, and 1994 and at June 30, 1996, respectively.
14
Non-interest income
Non-interest income is another significant source of revenue for the Company.
It consists of fees earned on products and services, gains and losses from loan
sale activity and income from real estate operations. Although changes in
interest rates can have an impact on earnings from these sources, the impact is
generally not nearly as dramatic as the impact on net interest income. Non-
interest income was $17.1 million, $16.7 million and $19.6 million for the years
ended June 30, 1996, 1995 and 1994, respectively. The table below shows the
composition of non-interest income for the periods indicated.
For the Year Ended June 30,
------------------------------
1996 1995 1994
--------- --------- --------
(In thousands)
Gain (loss) on sale of loans and
mortgage-backed securities $ 198 (56) 3,135
Gain (loss) on sale and writedown of
investment securities 188 (231) 200
Gain on sale of foreclosed real estate 50 181 145
Income from real estate operations 4,786 7,497 7,719
Deposit account service charges 4,894 3,347 2,414
Loan servicing fee income 2,394 2,373 2,456
Brokerage commissions 1,711 1,383 1,682
Mortgage loan late charges and other loan fees 948 759 665
Insurance commissions 412 432 448
Safety deposit box fees 273 271 262
Loss on real estate owned operations, net (17) (5) (300)
Other 1,263 699 822
------- ------ ------
$ 17,100 16,650 19,648
======= ====== ======
The Bank recorded a net gain on the sale of loans receivable and mortgage-
backed securities in 1996 of $198,000, compared to a loss of $56,000 in 1995 and
to a gain of $3.1 million in 1994. In 1996, loan sale volume increased
dramatically, due to a 68.9% increase in loan origination volume from 1995. In
1996, the Bank sold $269.2 million of loans, compared to $95.2 million in 1995
and $343.7 million in 1994. Although loan sale volume increased, margins on
loan sales remained thin due to competitive pricing in the origination market,
which often led to the Bank originating loans at near break even.
The gains and losses on mortgage-backed securities included in the above
figures represents the sale of loans originated by the Bank and swapped into
mortgage-backed securities prior to sale. In 1996, the Bank swapped and sold
$41.2 million of loans into mortgage-backed securities. In 1995, the Bank had
no swap activity. During 1994, the Bank swapped and sold $4.8 million of loans
into mortgage-backed securities.
The Company had net gains on the sale of investment securities during the
current year of $188,000, primarily due to the sale of marketable equity
securities, compared to net losses on the sale and writedown of investment
securities during 1995 of $231,000, and net gains in 1994 of $200,000. The
losses in 1995 are primarily from the write-off of a $159,000 equity investment
in a local community housing organization and from the sale of investment
securities available for sale whose values deteriorated in the wake of rising
interest rates. These losses were offset by gains on the sale of marketable
equity securities. In 1994, the gains are primarily from the sale of marketable
equity securities.
15
Income from real estate operations decreased $2.7 million to $4.8 million in
1996, compared to $7.5 million in 1995 and $7.7 million in 1994. A summary of
income from real estate operations is as follows:
Year Ended June 30,
-------------------------------------------------------
1996 1995 1994
------------- -------------- ---------------
Lots Income Lots Lots
Sold (Loss) Sold Income Sold Income
---- ------ ---- ------ ---- ------
(Dollars in thousands)
Clow Creek Farm 145 $ 3,537 81 $ 1,711 - -
Ashbury 34 1,392 134 5,364 306 $ 6,975
Woods of Rivermist - - 6 374 15 593
Scott's Crossing - - 1 39 3 151
Creekside of Remington 27 81 6 9 - -
Woodbridge 10 85 - - - -
Reigate Woods 2 98 - - - -
Fields of Ambria 2 17 - - - -
Other - (424) - - - -
--- ----- --- ------ --- -----
220 $ 4,786 228 $ 7,497 324 $ 7,719
=== ===== === ===== === =====
The Company had strong sales in the 260-lot Clow Creek Farm subdivision during
1996, due to the near sellout of the successful 1,115-lot Ashbury subdivision
adjacent to Clow Creek Farm. As of June 30, 1996, all of the remaining 31 lots
in Ashbury are under contract, and 13 of the remaining 34 lots are under
contract in Clow Creek Farm. The Company expects both of these projects will be
closed-out during fiscal 1997. To replace these projects, the Company plans to
commence development in the 386-lot Harmony Grove subdivision in early fiscal
1997, with closings expected to begin in the first and second quarters of 1997.
A builder pre-sale in this subdivision was very successful, with 126 of the 128
lots offered to builders in the first phase under contract as of June 30, 1996.
The Creekside of Remington project, located in Bolingbrook, Illinois, just east
of Naperville, had strong sales early in 1996, but has since slowed. At June
30, 1996, there are no lots under contract. Margins on these lots are much lower
than previous projects, due to these being smaller, lower priced lots as well as
due to the sharing the development costs and profits, with a joint venture
partner. Woods of Rivermist is the Company's most upscale subdivision,
consisting of 31 lots. None of the remaining 10 lots were sold during 1996,
although 5 are under contract as of June 30, 1996. The Scott's Crossing project
was sold out in 1995.
The sales in Woodbridge, Reigate Woods, and Fields of Ambria are results from
NW Financial, the land development subsidiary of Northwestern acquired in the
acquisition of NSBI. These sales represent home sales, as NW Financial's land
development activity consists of land improvement and homesite construction.
Sales represent one month of activity. The other loss of $424,000 represents
the write-off of the Company's investment related to an option it had acquired
on two parcels of land. The Company chose not to exercise its option to
purchase the parcels following a thorough financial and market assessment of the
project.
Deposit account service charges increased 46.2% in 1996, to $4.9 million,
following a similar increase in 1995. The results are a function of an increase
in the number of checking accounts due to continued success in the Bank's direct
mail checking campaign which is designed to attract new checking accounts for
potential fee revenue. The 1996 improved results are primarily due to an
increase in NSF charges, as the Bank did not increase per item fees on most of
its transactions during 1996. In 1995, the increase in deposit account service
charges was due to an increased volume of NSF transactions, as well as an
increase in service fees per item.
16
Loan servicing fee income is generated from loans which the Bank has
originated and sold, or from purchased servicing. Loan servicing fee income
totaled $2.4 million, $2.4 million and $2.5 million for 1996, 1995 and 1994,
respectively, on average loans serviced for others of $963.8 million, $881.0
million, and $813.1 million, respectively. The increase in average loans
serviced in 1996 is due to increased sales activity in the wake of higher loan
originations. In 1995, the increase was primarily due to the bulk purchase of
$66.8 million of loan servicing rights. The consistency in income from loan
servicing over the past three years despite an increase in the average balance
of loans serviced for others is due to the continued reduction in the average
loan servicing fee, due to new sales containing only .25% in service fees, as
well as the reduction in income from the amortization of purchased servicing
premiums, and capitalized servicing premiums from wholesale loan originations.
Amortization totaled $253,000 in 1996, $109,000 in 1995, and was diminimus in
1994.
Through the Bank's affiliation with INVEST, the Bank offers non-traditional
investment products to its customers such as mutual funds, annuities and other
brokerage services. Revenues rebounded from the prior year decline to $1.7
million in 1996, compared to $1.4 million in 1995 and $1.7 million in 1994. The
improvement in 1996 over 1995 is due to increased sales of mutual funds and
other non-traditional products, as well as sharing in a greater percentage of
commissions and trailer fee income with INVEST. The decline in 1995 was
attributable to an increase in interest rates which moved certain customers into
certificate of deposit investments, as well as the uncertainty of investing in
the stock market at the record high levels reached during the last half of 1995.
Non-interest expense
Non-interest expense increased $4.4 million, or 13.1% to $37.8 million in 1996
compared to 1995. Non-interest expense in 1995 was $2.1 million, or 6.7% greater
than non-interest expense in 1994. Adding to the large increase in 1996 is one
month of operations of Northwestern. The table below shows the composition of
non-interest expense for the periods indicated.
For the Year Ended June 30,
---------------------------
1996 1995 1994
--------- ------- -------
(In thousands)
Compensation $16,790 14,474 12,975
Employee benefits 4,419 3,783 3,979
------- ------ ------
Total compensation and benefits 21,209 18,257 16,954
Occupancy expense 2,469 2,274 2,297
Furniture, fixture and equipment expense 1,305 1,248 1,272
Federal deposit insurance premiums 3,255 3,003 2,996
Advertising and promotion 1,746 1,760 1,408
Data processing 1,683 1,473 1,282
Professional fees 904 751 954
Postage 872 659 656
Stationery, brochures and supplies 857 618 599
ATM network fees 527 523 421
Telephone 413 349 329
Insurance costs 260 298 370
Other 2,051 2,199 1,778
Amortization of goodwill and core deposit
intangible 235 - -
------- ------ ------
$ 37,786 33,412 31,316
======= ====== ======
17
Compensation and benefits increased $3.0 million, or 16.2% in 1996. The
primary reason for the increase is due to an increase in loan related
compensation, most notably a $1.0 million increase in loan officer commissions,
as well as the addition of employees, primarily to staff a new branch and to
handle increased loan volume. In addition, the acquisition of NSBI increased
compensation and benefits for one month in 1996, or approximately $600,000.
Benefit costs increased $636,000 in 1996 due to additional FICA tax expense, as
well as profit sharing and SERP benefit expenses. The $1.3 million, or 7.7%
increase in 1995 was primarily due to regular annual raises for employees, as
well as a reduction in the deferral of loan origination direct costs. The number
of loans subject to deferral declined by 42.0% in 1995 from 1994 amounts.
FDIC insurance premiums increased slightly in 1996, compared to 1995 and 1994.
Insurance premium expense is strictly a function of average savings deposits
outstanding, as the Bank's insurance premium rate has remained constant for the
last three years.
Advertising expense was consistent in 1996 compared to 1995, while it
increased 25.0% in 1995 when the Bank commenced its new checking account
strategy. The Bank continued its expansive retail marketing strategy during
1996, which resulted in similar expense to 1995. The primary focus of the
marketing strategy is the use of direct mail to attract checking accounts as
well as home equity lines of credit. These increases are a response to
increased competitive pressures in the markets served by the Bank.
Data processing expenses rose $210,000, or 14.3% in 1996, after rising
$191,000 or 14.9% in 1995 due to the upgrading of data processing systems over
the past few years. The Bank has installed PC technology into many of its
operations as a means of controlling general operating expenses as well as
providing the means to improve the speed of processing transactions.
Other operating expenses increased a total of $722,000 in 1996, after a small
increase in 1995, due to the growth in the Bank's loan portfolio, as well as
checking account base, which has led to increased costs for postage, and
stationary and supplies expense. The increase in professional expense in 1996
is due to $92,000 for flood insurance certifications obtained on the Bank's loan
portfolio in response to new FNMA guidelines. Additionally, the Bank recognized
amortization of goodwill and core deposit intangible expense of $235,000 in 1996
due to the acquisition of NSBI.
Provision for loan losses
The provision for loan losses is recorded to provide coverage for losses on
loans unknown to the Bank at the current time. Over the past three years, the
Bank has maintained consistent and historically low levels of non-performing
loan balances, as well as high coverage percentages of the allowance for loan
losses to non-performing loans. The 1996 provision was $700,000, which was
slightly larger than the 1995 provision of $475,000 primarily due to the growth
of the Bank's loan portfolio during the current year. The 1995 provision for
loan losses was $475,000, compared to $1.2 million in 1994 due to a decrease in
the ratio of non-accrual loans to total loans during 1995. Asset quality in the
loan portfolio has remained excellent over the past three years. The ratio of
the allowance for loan losses to total loans receivable increased slightly to
.75% at June 30, 1996, from .73% at June 30, 1995 and .86% at June 30, 1994.
The ratio of the allowance for loan losses to non-performing loans improved to
134.5% at June 30, 1996, compared to 128.2% at June 30, 1995 and 103.3% at June
30, 1994.
18
Income taxes
For the year ended June 30, 1996, income tax expense attributable to income
from continuing operations totaled $10.8 million, equal to an effective income
tax rate of 37.9%, compared to $9.3 million, or an effective income tax rate of
38.2% for the year ended June 30, 1995, and $7.8 million, or an effective income
tax rate of 36.6% for the year ended June 30, 1994. The lower effective tax
rate in 1994 was attributable to the reversal of certain state income tax
valuation allowances.
Review of Financial Condition
Total assets increased $1.3 billion, or 74.8% to $3.1 billion at June 30,
1996, compared to $1.78 billion at June 30, 1995. The increase was due to the
acquisition of NSBI, as well as growth in loans receivable, which were funded
primarily with borrowed funds. At acquisition date, NSBI had assets
approximately $1.2 billion, and stockholders' equity of $231.6 million.
Cash, interest-bearing deposits and federal funds sold increased a total of
$35.1 million to $94.9 million at June 30, 1996. The higher cash balance is
primarily due to the acquisition, which required the maintenance of more
liquidity due to deposit growth. For most of the year, the Bank used most of
its available cash, in addition to outside borrowings to fund increased loan
volume held for investment purposes.
Investment securities classified as held to maturity increased $49.0 million,
to $102.2 million as of June 30, 1996. The increase is due to the addition of
$146.8 million of investment securities as a result of the acquisition, and
purchases of $21.7 million. Offsetting these increases were maturities of
$101.2 million, which were primarily used to fund the cash portion of the
acquisition, as well as the transferring of $18.0 million of investment
securities into the available for sale category as allowed by an implementation
guide to SFAS No. 115.
Investment securities available for sale increased $14.2 million to $38.3
million at June 30, 1996. Increases due to the transfer of $18.0 million from
investments held to maturity and purchases of $31.1 million were offset by sales
of $34.0 million, as well as the transfer of $2.5 million of the Company's stock
previously owned by NSBI into treasury stock upon acquisition. Net unrealized
gains in the available for sale portfolio were $329,000 at June 30, 1996.
Stock in the FHLB of Chicago increased $17.7 million due to the purchase of
$8.3 million of stock due to the growth in borrowings from the FHLB of Chicago,
as well as $9.7 million of stock acquired from NSBI.
Mortgage-backed securities classified as held to maturity increased $49.4
million to $293.4 million as of June 30, 1996. The increase is primarily due to
$182.1 million acquired from NSBI, offset by amortization and prepayments
totaling $23.7 million and the transfer of $108.7 million of CMOs into its
available for sale portfolio.
Mortgage-backed securities classified as available for sale increased $61.3
million to $124.7 million at June 30, 1996, from $63.4 at June 30, 1995. The
increase is primarily due the transfer of $108.7 million of CMOs into the
available for sale category, offset by amortization and prepayments of $46.1
million. At June 30, 1996, net unrealized losses in the available for sale
portfolio were $1.7 million.
19
Included in total mortgage-backed securities at June 30, 1996 are $328.1
million of CMO's which have 3-5 year weighted average lives, and are primarily
collateralized by the Federal National Mortgage Association ("FNMA"), the
Federal Home Loan Mortgage Corporation ("FHLMC") and the Government National
Mortgage Association ("GNMA") mortgage-backed securities, and to a lesser extent
by whole loans. Also included in mortgage-backed securities as of June 30, 1996
and 1995 are $44.3 million, and $20.3 million, respectively, of FHLMC securities
with an average yield of 8.54% and 8.52%, respectively, which collateralize a
similar amount of CMO bonds issued by the Bank's special purpose finance
subsidiaries, Mid America Finance Corporation ("MAFC") and Northwestern
Acceptance Corporation ("NWAC"). Principal repayments and prepayments on these
securities are available exclusively for the repayment of the CMO bonds which
they collateralize.
Investment securities and mortgage-backed securities acquired and classified
as available-for-sale represent a secondary source of liquidity to the Bank and
the Company. The market value of these securities fluctuates with interest rate
movements. Net interest income in future periods may be adversely impacted to
the extent interest rates increase and these securities are not sold with the
proceeds reinvested at the higher market rates. The decision whether to sell
the available for sale securities or not, is based on a number of factors,
including but not limited to projected funding needs, reinvestment alternatives
and the relative cost of alternative liquidity sources. Investments and
mortgage-backed securities classified as held to maturity cannot be sold except
under extraordinary and very restrictive circumstances. Generally, these
investments are acquired for investment after taking into account the Bank's
cash flow needs, the investment's projected cash flows, the Bank's overall
interest rate and maturity structure of the liability base used to fund these
investment's and the net interest spread obtained. To the extent the Bank has
been able to maintain funding costs below a market rate of interest, the
potential negative impact from rising interest rates on investments and
mortgage-backed securities held to maturity on net interest income in future
periods has been substantially mitigated.
Loans receivable increased 81.0%, or $1.0 billion to $2.3 billion at June 30,
1996. The increase was primarily due to the acquisition of NSBI, which added
$749.7 million to loans receivable as of the acquisition date. In addition,
loan origination and purchase volume (through the Bank's wholesale loan
origination division) was $989.8 million, offset by amortization and prepayments
of $394.3 million, as well as sales of $269.2 million. The loans sold represent
long-term fixed-rate mortgages, and are sold as an integral part of the Bank's
mortgage banking strategy. During the current year, the Bank originated a
larger percentage of shorter-term adjustable-rate loans, which it holds in its
portfolio than it did fixed-rate loans, which helped fuel the increase in the
outstanding balance of loans receivable held for investment purposes.
The allowance for loan losses increased to $17.3 million as of June 30, 1996,
due to the acquisition of NSBI, which had $7.7 million in its allowance for loan
losses as of the acquisition date, and a current year provision for loan losses
of $700,000. Net charge-offs in 1996 were $365,000. As of June 30, 1996, the
Bank's ratio of the allowance for loan losses to total non-performing loans was
134.5%, compared to 128.2% as of June 30, 1995. In addition, the ratio of the
allowance for loan losses to total loans was relatively consistent at .75% at
June 30, 1996, compared to .73% at June 30, 1995.
20
Real estate held for development or sale increased $15.2 million to $26.6
million at June 30, 1996. A summary of real estate held for development or sale
is as follows:
June 30,
---------------
1996 1995
------- ------
(in thousands)
MAF Developments, Inc.
Harmony Grove $ 5,104 2,536
Clow Creek Farm 1,168 3,924
Creekside of Remington 1,807 1,734
Other - 357
------- ------
8,079 8,551
------- ------
Mid America Developments, Inc.
Ashbury 1,196 2,042
Woods of Rivermist 755 861
------- ------
1,951 2,903
------- ------
NW Financial, Inc.
Reigate Woods 7,734 -
Woodbridge 6,475 -
Fields of Ambria 2,381 -
------- ------
16,590 -
------- ------
$ 26,620 11,454
======= ======
The primary reason for the increase in real estate held for development or
sale is due to the acquisition of NSBI, and its real estate subsidiary, NW
Financial. NW Financial's projects differ from those of the Bank and Company,
as they not only develop lots for single-family development, but also
participate in home construction on these developed lots as well. Currently,
management of the Bank intends to operate NW Financial's projects through their
completion. However, management does not currently plan to seek additional
projects which include home construction.
Activity at MAF Developments, owned by the Company, included the additional
purchase of land for Harmony Grove, which is currently being developed. The
Company held a builder pre-sale in June, 1996 where 128 lots in the first phase
of the project were offered. Of these lots, 126 were sold, and are scheduled to
close in the first and second quarters of 1997. The decline in Clow Creek Farm
is due to the successful sale of a majority of this project. At June 30, 1996,
there are 34 lots remaining, of which 13 are under contract. Creekside of
Remington's investment remained constant due to 27 lot sales being offset by
development costs. No sales are pending in Creekside at June 30, 1996. The
other category represented preliminary costs associated with two parcels of land
which the Company had an option to purchase. During 1996, the Company wrote-off
this investment after deciding not to exercise its right to purchase these
parcels. The write-off totaled $424,000.
Mid America Developments is nearing the completion of its operations with the
continued sales in Ashbury and Woods of Rivermist. At June 30, 1996, all of the
remaining 31 lots of Ashbury are under contract, with sales expected to close by
the end of the second quarter of 1997. The Woods of Rivermist development is
completely developed, with 5 of the 10 remaining lots under contract at June 30,
1996.
Premises and equipment increased $10.1 million to $31.2 million at June 30,
1996. The increase was primarily due to $7.9 million acquired from NSBI (at
fair value), as well as purchases of premises and equipment of $4.3 million.
The primary expenditures related to the construction of a new branch site, as
well as costs in conjunction with the Bank's upgrading of data processing
equipment and remodeling of some of the Bank's branch offices.
21
Cost in excess of fair value of net assets acquired (goodwill) increased to
$26.9 million as a result of the acquisition of NSBI in May 1996. Total
goodwill created in the acquisition amounted to $27.0 million, and is being
amortized over 20 years on a straight line basis. Amortization expense in 1996
was $113,000.
Other assets increased $19.0 million to $33.9 million at June 30, 1996, due to
$7.6 million from the acquisition of NSBI, as well as the establishment of a
core deposit premium related to the acquisition of $8.9 million, which the Bank
expects to amortize over a 10 year period on an accelerated basis.
Deposits increased $940.8 million to $2.25 billion as of June 30, 1996,
primarily due to $872.0 million of deposits acquired from NSBI. The remainder
of the increase is due to interest credited on deposits of $62.0 million, as
well as net inflows of $6.3 million during the current year.
Borrowed funds, which consist primarily of FHLB of Chicago advances, as well
as CMO bonds payable, and other short-term borrowings, increased $230.7 million,
to $537.7 million at June 30, 1996. During the current year, the Bank borrowed
an additional $160.0 million (net) of FHLB of Chicago advances, primarily to
fund loan volume held for investment purposes. As of June 30, 1996, the Bank
has $420.5 million of FHLB of Chicago advances at a weighted average rate and
term of 6.40%, and 2.2 years, respectively, compared to $260.5 million at a
weighted average rate and term of 7.06%, and 3.3 years, respectively, as of June
30, 1995. The decrease in rate and average term is due to $125.0 million of
advances being adjustable rate, which are tied to short-term interest rate
indices such as LIBOR and the prime rate. CMO bonds payable increased at net
$23.5 million, primarily due to $27.7 million from the acquisition of NSBI,
offset by $6.0 million in repayments on CMO bonds. The Bank also increased its
balance of reverse repurchase agreements by $12.1 million to $39.8 million at
June 30, 1996. These borrowings have an average life of 19 months at June 30,
1996, with an average cost of 6.74%. In addition, as part of the funding for
the acquisition of NSBI, the Company obtained a $35.0 million unsecured term
bank loan. The loan has a final maturity of December 31, 2003, and currently
has a floating interest rate at one-month LIBOR plus 1%, or 6.47% at June 30,
1996.
Subordinated capital notes increased $6.6 million to $26.7 million at June 30,
1996. During 1996, the Bank refinanced $20.9 million of its 10% subordinated
capital notes originally issued in 1993, with $27.6 million of 8.32%
subordinated notes due September 30, 2006. The early repayment of the $20.9
million of subordinated capital notes resulted in an extraordinary after-tax
loss of $474,000 due to the write-off of deferred issuance costs in the second
quarter in 1996. The 8.32% subordinated notes are callable anytime after
September 30, 1998, at par plus accrued interest. The Company received $26.6
million after consideration of $1.0 million of expenses, which were deferred and
are being amortized over the life of the notes.
Other liabilities increased $13.3 million to $32.7 million at June 30, 1996.
The primary reason for the increase is due to $7.9 million from the acquisition
of NSBI.
Stockholders' equity increased $136.8 million to $242.2 million at June 30,
1996. The increase was due to the acquisition of NSBI, which resulted in the
issuance of 5.2 million shares of common stock valued at $131.2 million,
including $3.3 million related to the carryover of stock options, as well as
earnings of $17.2 million, offset by dividends paid to shareholders and the
purchase of treasury shares through the Company's stock buyback programs.
During 1996, the Company repurchased 250,000 shares for $6.2 million. In
addition, 100,000 shares of the Company stock owned by NSBI was transferred to
treasury shares upon the acquisition of NSBI, who had held stock in the Company
at the time of acquisition.
22
Lending Activities
General. The Bank's lending activities reflect its focus as a consumer
banking institution serving its local market area by concentrating on
residential mortgage lending. Reflective of this focus, the Bank has been one
of the largest originators of residential mortgages in its market area for
years. In the past three years, the Bank started a wholesale lending operation
that purchases loans from brokers and correspondents. In connection with these
activities, the Bank emphasizes the origination of adjustable-rate or shorter-
term loans for its portfolio and sells the majority of its long-term fixed-rate
loans directly into the secondary market. It is the Bank's general policy that
approximately 60-70% of its loan portfolio have adjustable rates or terms to
repricing or maturity of seven years or less. The Bank originates and purchases
long-term fixed-rate mortgage loans in response to customer demand; however,
most conforming long-term fixed-rate mortgage loans and a limited amount of ARM
loans are sold in the secondary market, primarily to the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC").
In 1996, the Bank originated and purchased $441.9 million in fixed-rate one-
to four-family residential mortgage loans, of which $319.3 million, or 72.3%,
conformed to the requirements for sale to FNMA and FHLMC and $122.6 million, or
27.7%, did not conform to the requirements of these agencies. During the year
ended June 30, 1996, the Bank sold $267.4 million of these loans in the
secondary market. The Bank's "nonconforming" loans are generally designated as
such because the principal loan balance exceeds $207,000, which is the current
FHLMC and FNMA purchase limit, and not because the loans present increased risk
of default to the Bank. Generally, nonconforming loans are held in the Bank's
loan portfolio. Loans with such excess balances carry interest rates from one-
eighth to three-eighths of one percent higher than similar, conforming fixed-
rate loans.
As a result of its acquisition of NSBI, the Bank acquired a $749.7 million
loan portfolio. Included in the portfolio as of the acquisition date was a
$670.5 million nationwide portfolio of single-family residential mortgage loans
which had been purchased through brokers as part of NSBI's loan strategy.
Collateral for this portfolio is spread throughout 46 states and the District of
Columbia. Currently, it is not management's intent to continue the purchase
strategy utilized successfully by NSBI, rather management intends to manage this
purchased loan portfolio through its maturity.
While the Bank has primarily focused its lending activities on the origination
of loans secured by first mortgages on owner-occupied one- to four-family
residences, the Bank, to a lesser extent, also originates multi-family mortgage
loans, residential construction loans, land acquisition and development loans,
commercial real estate loans and a variety of consumer loans. At June 30, 1996,
the Bank's net loans receivable amounted to $2.3 billion, excluding $418.1
million in mortgage-backed securities.
23
Loan Portfolio Composition. The following table sets forth the composition of
the Bank's loan and mortgage-backed securities portfolio in dollar amounts and
in percentages at the dates indicated:
At June 30,
-----------------------------------------------------------------------
1996 1995 1994
----------------------- -------------------- -----------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
---------- ----------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Real estate loans:
One- to four-family:
Held for investment $2,032,102 87.57% $1,032,233 80.25% $ 835,369 81.28%
Held for sale 9,314 0.40 24,984 1.94 8,739 0.85
Multi-family 94,713 4.08 67,248 5.23 49,864 4.85
Commercial 46,101 1.99 47,273 3.68 52,090 5.07
Construction 16,090 0.69 19,984 1.55 13,860 1.35
Land 26,644 1.15 19,281 1.50 15,453 1.50
---------- ---------- ---------- --------- ---------- ---------
Total real estate
loans 2,224,964 95.88 1,211,003 94.15 975,375 94.90
---------- ---------- ---------- --------- ---------- ---------
Other loans:
Consumer loans:
Equity lines of
credit 79,193 3.41 66,710 5.19 46,451 4.52
Home equity loans 10,525 0.45 4,335 0.34 1,112 0.11
Other 4,110 0.18 2,652 0.20 2,471 0.24
---------- ---------- ---------- --------- ---------- ---------
Total consumer loans 93,828 4.04 73,697 5.73 50,034 4.87
Commercial business
loans 1,821 0.08 1,560 0.12 2,341 0.23
---------- ---------- ---------- --------- ---------- ---------
Total other loans 95,649 4.12 75,257 5.85 52,375 5.10
---------- ---------- ---------- --------- ---------- ---------
Total loans
receivable 2,320,613 100.00% 1,286,260 100.00% 1,027,750 100.00%
====== ====== ======
Less:
Loans in process 6,715 8,728 5,161
Unearned discounts,
premiums
and deferred loan
fees, net 3,245 882 2,818
Allowance for loan
losses 17,254 9,197 8,779
----------- ---------- ----------
Loans receivable, net $ 2,293,399 $ 1,267,453 $ 1,010,992
=========== ========== ==========
Mortgage-backed
securities:
GNMA held to maturity $ 3,637 - -
FHLMC held to maturity 157,468 31,560 38,789
FHLMC available for
sale 8,052 - -
FNMA held to maturity 32,044 16,296 19,283
FNMA available for
sale 13,565 - -
CMOs held to maturity 100,232 196,096 289,830
CMOs available for
sale 103,104 63,438 -
----------- ---------- ----------
Total mortgage-backed $ 418,102 307,390 347,902
=========== ========== ==========
At June 30,
---------------------------------------------
1993 1992
------------------- -------------------
Percent Percent
of of
Amount Total Amount Total
-------- -------- -------- --------
Real estate loans:
One- to four-family:
Held for investment $735,526 74.77% $704,270 73.10%
Held for sale 68,165 6.93 51,233 5.32
Multi-family 46,043 4.68 47,871 4.96
Commercial 56,687 5.76 69,985 7.26
Construction 12,460 1.27 17,171 1.78
Land 17,873 1.82 17,976 1.88
-------- ------- -------- -------
Total real estate
loans 936,754 95.23 908,506 94.30
-------- ------- -------- -------
Other loans:
Consumer loans:
Equity lines of
credit 41,164 4.18 46,299 4.80
Home equity loans 2,040 0.21 4,266 0.44
Other 2,483 0.25 3,339 0.35
-------- ------- -------- -------
Total consumer loans 45,687 4.64 53,904 5.59
Commercial business
loans 1,241 0.13 1,046 0.11
-------- ------- -------- -------
Total other loans 46,928 4.77 54,950 5.70
-------- ------- -------- -------
Total loans
receivable 983,682 100.00% 963,456 100.00%
======= =======
Less:
Loans in process 7,592 5,480
Unearned discounts,
premiums
and deferred loan
fees, net 4,417 6,202
Allowance for loan
losses 7,993 5,736
-------- --------
Loans receivable, net $ 963,680 $ 946,038
======== ========
Mortgage-backed
securities:
GNMA held to maturity - -
FHLMC held to maturity 90,444 125,450
FHLMC available for
sale - -
FNMA held to maturity 40,445 74,627
FNMA available for
sale 4,108 9,326
CMOs held to maturity 227,175 111,953
CMOs available for
sale - -
-------- --------
Total mortgage-backed 362,172 321,356
securities ======== ========
24
The following table shows the composition of the Bank's fixed- and adjustable-
rate loan portfolio as well as the Bank's mortgage-backed securities portfolio
as of the dates indicated.
At June 30,
------------------------------------------------------------------
1996 1995 1994
-------------------- ------------------- --------------------
Amount Percent Amount Percent Amount Percent
------- --------- -------- ------- -------- ---------
(Dollars in thousands)
Adjustable-rate loans:
Real estate:
One-to four-family held for investment $1,513,732 65.23% $ 728,383 56.63% $ 526,312 51.21%
Multi-family 68,058 2.93 63,030 4.90 46,927 4.57
Commercial 20,178 .87 25,245 1.96 29,391 2.86
Construction 11,812 .51 5,837 .45 5,978 .58
Land 14,872 .64 6,782 .53 4,214 .41
---------- ------ -------- ------ ---------- ------
Total adjustable-rate real estate loans 1,628,652 70.18 829,277 64.47 612,822 59.63
Consumer 79,883 3.44 66,775 5.19 46,518 4.53
Commercial business 911 .04 829 .07 2,219 .21
---------- ------ -------- ------ ---------- ------
Total adjustable-rate loans receivable 1,709,446 73.66 896,881 69.73 661,559 64.37
---------- ------ -------- ------ ---------- ------
Fixed-rate loans:
Real estate:
One-to four-family held for investment 518,370 22.34 303,850 23.62 309,057 30.07
One-to four-family held for sale 9,314 .40 24,984 1.94 8,739 .85
Multi-family 26,655 1.15 4,218 .33 2,937 .29
Commercial 25,923 1.12 22,028 1.71 22,699 2.21
Construction 4,278 .18 14,147 1.10 7,882 .77
Land 11,772 .51 12,499 .97 11,239 1.09
---------- ------ -------- ------ ---------- ------
Total fixed-rate real estate loans 596,312 25.70 381,726 29.67 362,553 35.28
Consumer 13,945 .60 6,922 .54 3,516 .34
Commercial business 910 .04 731 .06 122 .01
---------- ------ -------- ------ ---------- ------
Total fixed-rate loans receivable 611,167 26.34 389,379 30.27 366,191 35.63
---------- ------ -------- ------ ---------- ------
Total loans receivable 2,320,613 100.00% 1,286,260 100.00% 1,027,750 100.00%
====== ====== ======
Less:
Loans in process 6,715 8,728 5,161
Unearned discounts, premiums and
deferred loan fees, net 3,245 882 2,818
Allowance for loan losses 17,254 9,197 8,779
---------- -------- ---------- -
Loans receivable, net $2,293,399 $1,267,453 $ 1,010,992
=========== =========== ===========
Mortgage-backed securities:
Adjustable-rate $ 165,905 39.77% $ 102,614 33.42% $ 107,206 30.89%
Fixed-rate held by the Bank 207,032 49.63 183,924 59.91 214,687 61.87
Fixed-rate held by finance subsidiaries (1) 44,202 10.60 20,470 6.67 25,133 7.24
---------- ------ -------- ------ ---------- ------
Total mortgage-backed securities 417,139 100.00% 307,008 100.00% 347,026 100.00%
====== ====== ======
Plus unamortized premiums 963 382 876
---------- -------- ----------
Mortgage-backed securities, net $ 418,102 $ 307