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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from July 1, 1996 to December 31, 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 60514-1596
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 March 3,
1997, the aggregate market value of the voting stock held by non-affiliates of
the registrant was $332,163,054.*
The number of shares of Common Stock outstanding as of March 3, 1997:
10,460,019
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DOCUMENTS INCORPORATED BY REFERENCE
PART III--Portions of the Proxy Statement for the Annual Meeting of
Shareholders to be held on April 30, 1997 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.
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PART I
ITEM 1. BUSINESS
GENERAL
MAF Bancorp, Inc. ("Company"), is a registered savings and loan holding
company incorporated under the laws of the state of Delaware and is primarily
engaged in the consumer banking business through its wholly-owned subsidiary,
Mid America Federal Savings Bank ("Bank") and secondarily, in the residential
real estate development business through MAF Developments, Inc. ("MAF
Developments"). As of December 31, 1996, the Company changed its fiscal year
to coincide with the calendar year, compared to the June 30 fiscal year it
followed in the past. As such, this report is the transition report for the
six month period from July 1, 1996 to December 31, 1996.
On May 30, 1996, the Company 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 were 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, 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 primarily residential real estate development
activities. Additionally, the Bank operates an insurance agency, Mid America
Insurance Agency, Inc., which provides general insurance services, and an
investment 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 60514-1596. The telephone number is (630)
325-7300.
MARKET DATA
Based on total assets at December 31, 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.
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,
2
commercial banks, money market mutual 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
comes 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.
THRIFT RECAPITALIZATION AND RECHARTERING LEGISLATION. On September 30, 1996,
the President signed the Deposit Insurance Funds Act of 1996 (the "Funds
Act"), which, among other things, imposed a special one-time assessment on
SAIF members, including the Bank, to recapitalize the SAIF. As required by the
Funds Act, the FDIC imposed a special assessment of 65.7 basis points on SAIF
assessable deposits held as of March 31, 1995, payable November 27, 1996. The
special assessment recorded by the Bank amounted to $14.2 million on a pre-tax
basis, and $8.7 million, or $.81 per fully-diluted share on an after-tax
basis, and was reflected in the quarter ended September 30, 1996.
The Funds Act also provides that the BIF and SAIF will merge on January 1,
1999 if there are no more savings associations as of that date. The
legislation also requires that the Department of Treasury submit a report to
Congress by March 31, 1997 that makes recommendations regarding a common
financial institutions charter, including whether the separate charters for
thrifts and banks should be abolished. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The bills would require
federal savings institutions to convert to a national bank or some type of
state charter by a specified date (January 1, 1998 in one bill, June 30, 1998
in the other) or they would automatically become national banks. Converted
federal thrifts would generally be required to conform their activities to
those permitted for the charter selected and divestiture of nonconforming
assets would be required over a two year period, subject to two possible one-
year extensions. State chartered thrifts would become subject to the same
federal regulation as applies to state commercial banks. Holding companies for
savings institutions would become subject to the same regulation as holding
companies that control commercial banks, with a limited grandfather provision
for unitary savings and loan holding company activities. The Bank is unable to
predict whether such legislation would be enacted, the extent to which the
legislation would restrict or disrupt its operations or whether the BIF and
SAIF funds will eventually merge.
3
EXECUTIVE OFFICERS OF THE REGISTRANT
The following executive officers were employed by the Company and the Bank
as of January 1, 1997.
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............. 47 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................ 45 Senior Vice President of the Company and the
Bank
Kenneth Rusdal.............. 55 Senior Vice President of the Company and the
Bank
Lois B. Vasto (1)........... 62 Senior Vice President and Director of the
Company and the Bank
Sharon Wheeler.............. 44 Senior Vice President of the Company and the
Bank
Gail Brzostek............... 48 First Vice President of the Bank
Alan W. Schatz.............. 38 First Vice President of the Bank
Diane Stutte................ 48 First Vice President of the Bank
Carolyn Pihera.............. 54 Vice President and Corporate Secretary of the
Company and the Bank
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(1) Lois B. Vasto retired on January 3, 1997.
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 has been Senior Vice President and Controller of the
Company and the Bank since July 1996. Prior to that he was First Vice
President and Controller of the Company and the Bank from July 1993 to
4
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 has been Senior Vice President of the Company and the Bank
since 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, MAF Developments, and NW Financial, 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 has been Senior Vice President--Investor Relations and
Taxation of the Company and the Bank since 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 has been Senior Vice President--Administration since 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.
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. She retired from the Company and the Bank on January
3, 1997.
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.
Gail Brzostek has been First Vice President--Check Operations and VISA
services since July 1996. Prior to that she was Vice President--Check
Operations since 1985. She joined the Bank in 1967.
Alan W. Schatz has been First Vice President--Secondary Marketing of the
Bank since 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.
Diane Stutte has been First Vice President--Teller Operations since July
1996. Prior to that, she was Vice President--Teller Operations of the Bank
since 1985. She joined the Bank in 1970.
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.
Employees
The Bank employs a total of 809 full time equivalent employees as of
December 31, 1996. Management considers its relationship with its employees to
be excellent.
5
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 office location in Clarendon Hills, Illinois. In February 1997,
the Bank moved and centralized its loan processing and servicing operations in
a new 30,000 square foot leased office building in Naperville, Illinois. The
Bank has its own data processing facilities. The data processing equipment
primarily consists of mainframe hardware, network servers, personal computers
and ATMs. At December 31, 1996, the data processing equipment owned has a net
book value of $2.7 million.
The following table sets forth information regarding the Bank's executive
office and its 20 branches. At December 31, 1996, the net book value of the
Bank's premises and related equipment was $32.3 million.
NET BOOK VALUE
DATE LEASED DATE LEASE % OF TOTAL DECEMBER 31,
LOCATION OR ACQUIRED EXPIRES DEPOSITS 1996
-------- ----------- ---------- ---------- --------------
(DOLLARS IN
THOUSANDS)
EXECUTIVE AND HOME OFFICE
55th Street and Holmes Avenue
Clarendon Hills, Illinois
60514........................ 1975/1986 owned 11.66% $ 4,780
BRANCHES
Chicago, Illinois
2300 North Western Avenue.... 1996(1) owned 5.58 700
3844 West Belmont Avenue..... 1996(1) owned 11.51 538
6333 North Milwaukee Avenue.. 1996(1) 2001 4.86 65
5075 South Archer Avenue..... 1996(1) owned 7.49 801
Norridge, Illinois
4100 North Harlem Avenue..... 1996(1) 1998 5.50 6
Cicero, Illinois
5900/5847 West Cermak Road... 1939/1978 owned 13.97 1,197
4830 West Cermak Road........ 1970 owned 1.77 453
Berwyn, Illinois
6620 West Ogden Avenue....... 1996 owned 0.41 1,300
6650 West Cermak Avenue ..... 1996(1) owned 3.66 557
Riverside, Illinois
40 East Burlington........... 1977 owned 4.41 948
LaGrange Park, Illinois
1921 East 31st Street........ 1981 owned 4.49 874
Western Springs, Illinois
40 West 47th Street.......... 1978 owned 3.55 796
Naperville, Illinois
1001 South Washington........ 1974 owned 7.65 1,870
9 East Ogden Avenue.......... 1982 owned 1.79 953
1308 S. Naperville Blvd. ... 1987 owned 2.63 1,479
3040 Book Road............... 1993 1997 0.76 761
Wheaton, Illinois
250 East Roosevelt Road...... 1977 owned 3.78 951
161 Danada Square East....... 1988 2009 1.57 321
St. Charles, Illinois
2600 East Main Street........ 1979 owned 2.96 2,130
Other fixed assets........... -- 10,822
------ -------
Total...................... 100.00% $32,302
====== =======
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(1) Acquired in the acquisition of NSBI.
6
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
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 March 3, 1997,
the Company had 1,824 stockholders of record. The table below shows the
reported high and low sales prices of the common stock during the periods
indicated.
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1996 JUNE 30, 1996
----------------- -------------
HIGH LOW HIGH LOW
----------------- -------------
First Quarter................................ 26.50 22.25 25.50 20.68
Second Quarter............................... 35.25 26.00 26.25 24.00
Third Quarter................................ N/A N/A 25.50 24.50
Fourth Quarter............................... N/A N/A 27.00 24.00
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 $0.18 per share in dividends during the six months
ended December 31, 1996, and $0.32 per share in dividends during the year
ended June 30, 1996. 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 of Financial Condition and Results of Operations-Regulation and
Supervision--Federal Savings Institution Regulation--Limitation on Capital
Distributions."
7
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."
JUNE 30,
DECEMBER 31, ---------------------------------------------
1996 1996 1995 1994 1993
---------------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL DATA:
Total assets........... $3,230,341 3,117,149 1,783,076 1,586,334 1,544,439
Loans receivable, net.. 2,430,113 2,293,399 1,267,453 1,010,992 963,680
Mortgage-backed securi-
ties.................. 359,587 418,102 307,390 347,902 362,172
Interest-bearing depos-
its................... 55,285 37,496 10,465 29,922 43,312
Federal funds sold..... 24,700 5,700 9,360 17,450 12,625
Investment securities.. 171,818 171,251 90,319 97,260 69,606
Real estate held for
development or sale... 28,112 26,620 11,454 6,404 14,174
Deposits............... 2,262,226 2,254,100 1,313,306 1,292,531 1,290,072
Borrowed funds......... 632,897 537,696 307,024 149,856 117,581
Subordinated capital
notes, net............ 26,709 26,676 20,100 20,027 19,962
Stockholders' equity... 250,625 242,226 105,419 95,150 85,002
Book value per share... 23.89 23.42 19.19 16.77 14.49
Tangible book value per
share................. 20.62 19.98 19.19 16.77 14.49
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------------------------------
1996 1996 1995 1994 1993
---------------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SELECTED OPERATING DATA:
Interest income......... $ 112,827 143,095 114,963 103,778 112,854
Interest expense........ 68,631 93,221 73,367 69,694 74,311
---------- ---------- ---------- ---------- ----------
Net interest income.... 44,196 49,874 41,596 34,084 38,543
Provision for loan loss-
es..................... 700 700 475 1,200 2,700
---------- ---------- ---------- ---------- ----------
Net interest income af-
ter provision for loan
losses................ 43,496 49,174 41,121 32,884 35,843
Non-interest income:
Gain (loss) on sale of
loans receivable and
mortgage-backed secu-
rities................ (32) 198 (56) 3,135 5,364
Income from real estate
operations............ 4,133 4,786 7,497 7,719 3,427
Gain (loss) on sale and
writedown of:
Investment securi-
ties................. 251 188 (231) 200 (717)
Foreclosed real es-
tate................. 161 50 181 145 (1,624)
Deposit account service
charges............... 3,219 4,894 3,347 2,414 2,091
Loan servicing fee in-
come.................. 1,249 2,394 2,373 2,456 2,566
Other.................. 2,978 4,590 3,539 3,579 3,206
---------- ---------- ---------- ---------- ----------
Total non-interest in-
come................. 11,959 17,100 16,650 19,648 14,313
Non-interest expense:
Compensation and bene-
fits.................. 14,503 21,209 18,257 16,954 15,138
Office occupancy and
equipment............. 2,652 3,774 3,522 3,569 3,539
Federal deposit insur-
ance premiums......... 2,338 3,255 3,003 2,996 2,430
Special SAIF assess-
ment.................. 14,216 -- -- -- --
Other.................. 7,369 9,548 8,630 7,797 7,136
---------- ---------- ---------- ---------- ----------
Total non-interest ex-
pense................ 41,078 37,786 33,412 31,316 28,243
---------- ---------- ---------- ---------- ----------
Income before income
taxes and other
items................ 14,377 28,488 24,359 21,216 21,913
Income taxes............ 5,602 10,805 9,316 7,766 8,402
---------- ---------- ---------- ---------- ----------
Income before other
items................. 8,775 17,683 15,043 13,450 13,511
Other items (1)......... -- (474) -- -- 435
---------- ---------- ---------- ---------- ----------
Net income............. $ 8,775 17,209 15,043 13,450 13,946
========== ========== ========== ========== ==========
Primary earnings per
share.................. $ .81 2.76 2.54 2.22 2.27
========== ========== ========== ========== ==========
Fully-diluted earnings
per share.............. $ .81 2.76 2.54 2.22 2.26
========== ========== ========== ========== ==========
8
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------------------
1996(2) 1996 1995 1994 1993
---------------- --------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL
RATIOS AND OTHER DATA:
Return on average
assets................. 1.11%(/3/) .85% .90% .85% .91%
Return on average
equity................. 14.18(/3/) 14.21 15.22 14.80 17.80
Average stockholders'
equity to average
assets................. 7.80 6.00 5.91 5.75 5.09
Stockholders' equity to
total assets........... 7.76 7.77 5.91 6.00 5.50
Tangible and core
capital to total assets
(Bank only)............ 6.96 7.02 5.64 5.90 5.71
Risk-based capital ratio
(Bank only)............ 15.05 15.36 12.07 13.24 12.77
Interest rate spread
during period......... 2.64 2.24 2.29 1.99 2.38
Net yield on average
interest-earning
assets................. 2.96 2.62 2.62 2.29 2.66
Average interest-earning
assets to average
interest-bearing
liabilities........... 107.98 107.83 107.22 106.48 105.55
Non-interest expense to
average assets......... 1.70(/3/) 1.87 2.00 1.98 1.83
Non-interest expense to
average assets and
average loans serviced
for others............. 1.27(/3/) 1.27 1.31 1.31 1.18
Efficiency ratio........ 47.79(/3/) 56.58 57.14 58.50 52.72
Ratio of earnings to
fixed charges:
Including interest on
deposits.............. 1.41x(/3/) 1.30x 1.32x 1.30x 1.29x
Excluding interest on
deposits.............. 2.35x(/3/) 1.93x 2.34x 2.24x 2.43x
Non-performing loans to
total loans............ .55 .56 .57 .83 1.37
Non-performing assets to
total assets........... .46 .44 .42 .75 1.26
Cumulative one-year
gap.................... 7.50 5.22 4.89 1.84 4.06
Number of deposit
accounts............... 259,041 255,960 164,592 148,519 149,218
Mortgage loans serviced
for others............. $1,045,740 1,040,260 887,887 823,924 828,776
Loan originations....... 469,452 989,753 585,882 813,689 809,486
Full-service customer
service facilities..... 20 20 13 13 12
STOCK PRICE AND DIVIDEND
INFORMATION:
High.................... $ 35.25 27.00 21.70 22.27 17.42
Low..................... 22.25 20.68 16.36 16.07 8.37
Close................... 34.75 24.50 21.36 20.91 16.36
Cash dividends per
share.................. .18 .32 .291 -- --
Dividend payout ratio... 22.22% 11.59% 11.46% -- --
- --------
(1) Other items for the year ended June 30, 1996 represents a $474,000
extraordinary charge for the early extinguishment of debt. Other items for
the year ended June 30, 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.
(2) Ratios for the six months ended December 31, 1996 are annualized.
(3) Excludes the effect of the special SAIF assessment of $14.2 million ($8.7
million after tax) for the six months ended December 31, 1996. Including
the impact of the special SAIF assessment, the Company's actual ratios
were as follows: Return on average assets of .56%; Return on average
equity of 7.12%; Non-interest expense to average assets of 2.60%; Non-
interest expense to average assets and average loans serviced for others
of 1.95%; Efficiency ratio of 73.09%; Ratio of earnings to fixed charges
including interest on deposits of 1.20x; and Ratio of earnings to fixed
charges excluding interest on deposits of 1.67x.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As of December 31, 1996, the Company changed its fiscal year to coincide
with the calendar year, compared to the June 30 fiscal year it followed in the
past. Management's discussion and analysis of financial condition and results
of operations will compare the current six month transition period to the
prior year unaudited six month period, as well as analyze the fiscal year
ended June 30, 1996 compared to June 30, 1995.
OVERVIEW
Net income for the Company was $8.8 million, or $.81 per fully-diluted share
for the six months ended December 31, 1996, compared to $7.8 million or, $1.33
per fully-diluted share for the six months ended December 31, 1995. The
current six month period includes an after-tax charge of $8.7 million, or $.81
per fully-diluted share for the one-time special SAIF assessment, which was
assessed to all SAIF-insured savings institutions. Without this charge,
operating earnings were $17.4 million, or $1.61 per share. For the year ended
June 30, 1996, net income was $17.2 million, or $2.76 per fully-diluted share,
compared to $15.0 million, or $2.54 per fully-diluted share for the year ended
June 30, 1995. On an operating basis, the Company earned $2.84 per fully-
diluted share for the year ended June 30, 1996, before consideration of a
$474,000 or $0.08 per share extraordinary loss on the early repayment of
subordinated capital notes.
The current six month period includes the full impact of the Company's
acquisition of NSBI in May 1996, and includes the following highlights:
. Net interest income improved to $44.2 million, compared to $22.3 million
for the six months ended December 31, 1995, primarily due to the
acquisition of NSBI.
. The Company's average net interest margin improved to 2.96%, compared to
an average net interest margin of 2.52% for the prior six month period,
reflecting the addition of NSBI's low-cost deposit base.
. Income from real estate operations increased 46.6% to $4.1 million, due
to the sale of the 13-acre Ashbury commercial site, sales in the
Company's newest subdivision, Harmony Grove, and the real estate projects
acquired in the merger with NSBI.
. Deposit account service charges increased 35.8% to $3.2 million, due to
continued growth in the Bank's checking account base.
. Non-interest expenses declined as a percentage of average assets, to
1.70%, primarily due to the asset growth from the merger, while
recognizing expense savings due to the merger.
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 of 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 date of December
31, 2003, and amortizes on an increasing basis beginning in December 1997. 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 core deposit intangible assets aggregating $35.9 million
as a result of the transaction.
NET INTEREST INCOME
Net interest income is the principal source of earnings for the Company, and
consists of interest income on loans receivable, mortgage-backed and
investment 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
10
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 to $44.2
million for the six months ended December 31, 1996, compared to $22.3 million
for the six months ended December 31, 1995, due primarily to the merger with
NSBI. The net interest margin (net interest income divided by average
interest-earning assets) for the current six month period was 2.96%, compared
to 2.52% for the prior six month period. The increase in the net interest
margin during the six months ended December 31, 1996 is primarily due to the
addition of NSBI, which helped lower the Bank's average cost of deposits via
its high percentage of low cost core deposits. The average yield on interest-
earning assets increased 1 basis point during the current six month period,
while the average cost of funds declined 45 basis points. Net interest income
was $49.9 million for the year ended June 30, 1996, compared to $41.6 million
for the year ended June 30, 1995. The net interest margin remained constant at
2.62% for the years ended June 30, 1996 and 1995. The stability in the net
interest margin between the years ended June 30, 1996 and 1995 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.
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. 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 rate (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.
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1996 VS. 1995 JUNE 30, 1996 VS. 1995
--------------------------- ------------------------
DUE TO DUE TO
TOTAL ----------------- TOTAL ---------------
CHANGE VOLUME RATE CHANGE VOLUME RATE
--------- ----------------- -------- -------- ------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans receivable........ $ 38,466 39,293 (827) 28,955 27,454 1,501
Mortgage-backed securi-
ties................... 4,242 3,273 969 (1,456) (1,961) 505
Investment securities... 2,374 2,178 196 1,129 859 270
Interest-bearing depos-
its.................... 890 1,180 (290) (4) (593) 589
Federal funds sold...... 38 197 (159) (475) (771) 296
--------- -------- -------- ------- ------- ------
Total................... 46,010 46,121 (111) 28,149 24,988 3,161
--------- -------- -------- ------- ------- ------
INTEREST-BEARING LIABIL-
ITIES:
Deposits................ 17,516 20,213 (2,697) 7,531 4,699 2,832
Borrowed funds.......... 6,487 7,360 (873) 12,323 12,871 (548)
--------- -------- -------- ------- ------- ------
Total................... 24,003 27,573 (3,570) 19,854 17,570 2,284
--------- -------- -------- ------- ------- ------
Net change in net inter-
est income............. $ 22,007 18,548 3,459 8,295 7,418 877
========= ======== ======== ======= ======= ======
The average yield on interest-earning assets remained steady for the six
months ended December 31, 1996 at 7.53% compared to 7.52% for the six months
ended December 31, 1995. The average yield on loans receivable decreased 12
basis points between the six month periods, while the average balance of loans
receivable increased $1.02 billion. The increase in average balance is
primarily due to the acquisition of NSBI, which had $749.7 million of loans
receivable, as well as the Bank holding more of its fixed-rate loan
originations for investment.
11
The average yield on mortgage-backed securities increased 62 basis points,
primarily due to NSBI's predominately fixed-rate mortgage-backed securities
portfolio. The increase in the average balance of mortgage-backed securities
of $97.2 million is solely due to the acquisition of NSBI. The average yield
on investment securities increased 38 basis points, while the average balance
increased $65.6 million, due to the acquisition of NSBI, whose investment
portfolio had a higher yield due to longer duration.
The average cost of deposits decreased 40 basis points to 4.38% for the six
months ended December 31, 1996 compared to the six months ended December 31,
1995. The primary reason for the decrease is due to the acquisition of NSBI,
which had a lower cost of deposits than the Bank. The $907.4 million increase
in average deposit balances is primarily due to the acquisition, as the Bank
acquired $872.0 million of deposits from NSBI. The average cost of borrowed
funds declined 43 basis points to 6.71% for the six months ended December 31,
1996, while the average balance of borrowed funds increased $215.2 million.
The increase in the average balance of borrowed funds is primarily due to
borrowings for the acquisition, as well as funding for the increase in loan
originations held for investment purposes.
The average yield on interest-earning assets improved during the year ended
June 30, 1996 to 7.49% compared to 7.21% for the year ended June 30, 1995. The
improvement was primarily due to a 13 basis point increase in the average
yield on loans receivable and a 16 basis point increase in the average yield
on mortgage-backed securities, due to upward repricing of adjustable-rate
loans and mortgage-backed securities owned by the Bank. Average loans
receivable increased by $352.6 million, or 31.1% for the year ended June 30,
1996, while average mortgage-backed securities decreased $31.3 million, as the
Bank was able to increase earning assets with higher loan originations held
for investment purposes rather than through the purchase of mortgage-backed
securities. The average balance of investment securities, interest-bearing
deposits and federal funds sold was relatively consistent for the year ended
June 30, 1996 compared to 1995.
The average cost of savings deposits increased 22 basis points during the
year ended June 30, 1996, compared to the year ended June 30, 1995, primarily
due to increased rates on certificates of deposits. Because of the inability
to increase savings deposits during the years ended June 30, 1996 and 1995,
the increase in interest-earning assets was funded with borrowed funds,
primarily FHLB of Chicago advances, and a limited amount of reverse repurchase
agreements. Average borrowings increased $183.3 million during the year ended
June 30, 1996. These additional borrowings 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 for the year ended June 30, 1996 is a $35.0 million
unsecured term bank loan which was obtained for the acquisition of NSBI. The
loan carried 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.
12
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 December 31, 1996 includes fees which are considered
adjustments to yield.
SIX MONTHS ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995
---------------------------- ----------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning
assets:
Loans
receivable...... $2,372,072 91,783 7.74% $1,356,409 53,317 7.86%
Mortgage-backed
securities...... 388,237 13,368 6.89 291,067 9,126 6.27
Investment
securities (1).. 161,275 5,390 6.54 95,723 3,016 6.16
Interest-bearing
deposits........ 55,020 1,805 6.42 20,434 915 8.75
Federal funds
sold............ 20,099 659 6.41 14,612 621 8.32
---------- -------- ---------- -------
Total interest-
earning assets.. 2,996,703 113,005 7.53 1,778,245 66,995 7.52
Non-interest
earning assets... 163,984 80,950
---------- ----------
Total assets.... $3,160,687 $1,859,195
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing
liabilities:
Deposits........ 2,170,234 47,967 4.38 1,262,786 30,451 4.78
Borrowed funds
and subordinated
debt............ 605,083 20,664 6.71 389,924 14,177 7.14
---------- -------- ---------- -------
Total interest-
bearing
liabilities..... 2,775,317 68,631 4.89 1,652,710 44,628 5.34
---- ----
Non-interest
bearing
deposits......... 70,462 54,730
Other
liabilities...... 68,378 42,526
---------- ----------
Total
liabilities..... 2,914,157 1,749,966
Stockholders'
equity........... 246,530 109,229
---------- ----------
Liabilities and
stockholders'
equity.......... $3,160,687 $1,859,195
========== ==========
Net interest
income/interest
rate spread...... $ 44,374 2.64% $22,367 2.18%
======== ==== ======= ====
Net earning
assets/net yield
on average
interest-earning
assets........... $ 221,386 2.96% $ 125,535 2.52%
========== ==== ========== ====
Ratio of
interest-earning
assets to
interest-bearing
liabilities..... 107.98% 107.60%
========== ==========
- ----
YEAR ENDED JUNE 30,
------------------------------------------------------ AT DECEMBER 31,
1996 1995 1996
---------------------------- ------------------------- -------------------
AVERAGE
AVERAGE YIELD/ AVERAGE Yield/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE Cost
---------- -------- ------- ---------- -------- ---- ---------- -------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning
assets:
Loans
receivable...... $1,485,309 115,466 7.77% $1,132,669 86,511 7.64% $2,448,027 7.79%
Mortgage-backed
securities...... 289,759 18,291 6.31 321,074 19,747 6.15 359,587 6.95
Investment
securities (1).. 100,671 6,382 6.34 86,932 5,253 6.04 171,818 6.80
Interest-bearing
deposits........ 24,128 2,064 8.55 32,205 2,068 6.42 55,285 5.22
Federal funds
sold............ 14,088 1,121 7.96 24,389 1,596 6.54 24,700 5.25
---------- -------- ---------- -------- ----------
Total interest-
earning assets.. 1,913,955 143,324 7.49 1,597,269 115,175 7.21 3,059,417 7.56
Non-interest
earning assets... 104,543 75,098 170,924
---------- ---------- ----------
Total assets.... $2,018,498 $1,672,367 $3,230,341
========== ========== ==========
LIABILITIES AND ST
Interest-bearing
liabilities:
Deposits........ 1,350,501 63,325 4.69 1,248,513 55,794 4.47 2,195,885 4.41
Borrowed funds
and subordinated
debt............ 424,461 29,896 7.04 241,141 17,573 7.26 659,606 6.72
---------- -------- ---------- -------- ----------
Total interest-
bearing
liabilities..... 1,774,962 93,221 5.25 1,489,654 73,367 4.92 2,855,491 4.94
---- -------- ---- ----------
Non-interest
bearing
deposits......... 57,665 47,576 66,341
Other
liabilities...... 64,729 36,320 57,884
---------- ---------- ----------
Total
liabilities..... 1,897,356 1,573,550 2,979,716
Stockholders'
equity........... 121,142 98,817 250,625
---------- ---------- ----------
Liabilities and
stockholders'
equity.......... $2,018,498 $1,672,367 $3,230,341
========== ========== ==========
Net interest
income/interest
rate spread...... $ 50,103 2.24% $ 41,808 2.29% 2.62%
======== ==== ======== ====
Net earning
assets/net yield
on average
interest-earning
assets........... $ 138,993 2.62% $ 107,615 2.62% $ 203,926 N/A
========== ==== ========== ==== ========== ====
Ratio of
interest-earning
assets to
interest-bearing
liabilities..... 107.83% 107.22% 107.14%
========== ========== ==========
- ----
(1) Includes $30.7 million, $16.2 million, $18.7 million, $10.4 million, and
$30.7 million of Stock in Federal Home Loan Bank of Chicago for the six
months ended December 31, 1996 and 1995, years ended June 30, 1996, 1995,
and at December 31, 1996, respectively.
13
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 Company recorded a provision for loan
losses of $700,000 for the six months ended December 31, 1996, compared to
$250,000 for the prior six month period. The increase in the provision is due
to loan portfolio growth. For the year ended June 30, 1996, the Company
recorded a provision of $700,000, compared to $475,000 for the year ended June
30, 1995, primarily due to the growth of the Bank's loan portfolio during the
year. The ratio of the allowance for loan losses to total loans receivable
decreased slightly to .73% at December 31, 1996, compared to .75% at June 30,
1996, and .73% at June 30, 1995. The ratio of the allowance for loan losses to
non-performing loans declined to 133.1% at December 31, 1996, compared to
134.5% at June 30, 1996 and 128.2% at June 30, 1995.
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 $12.0 million for the six months ended
December 31, 1996 compared to $8.8 million for the six months ended December
31, 1995, and $17.1 million compared to $16.7 million for the years ended June
30, 1996 and 1995, respectively. The table below shows the composition of non-
interest income for the periods indicated.
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
------------------- --------------------
1996 1995 1996 1995
--------- -------- --------- ---------
(IN THOUSANDS)
Gain (loss) on sale of:
Loans receivable.................. $ 264 178 203 (56)
Mortgage-backed securities........ (296) 57 (5) --
Investment securities............. 251 45 188 (231)
Foreclosed real estate............ 161 21 50 181
Income from real estate operations.. 4,133 2,820 4,786 7,497
Deposit account service charges..... 3,219 2,370 4,894 3,347
Loan servicing fee income........... 1,249 1,164 2,394 2,373
Brokerage commissions............... 924 750 1,711 1,383
Mortgage loan late charges and other
loan fees.......................... 666 459 948 759
Insurance commissions............... 235 211 412 432
Safety deposit box fees............. 143 140 273 271
Loss on real estate owned opera-
tions, net......................... (51) (11) (17) (5)
Other............................... 1,061 550 1,263 699
--------- ------- --------- ---------
$ 11,959 8,754 17,100 16,650
========= ======= ========= =========
The Bank recorded a net loss on the sale of loans receivable and mortgage-
backed securities for the six months ended December 31, 1996 of $32,000
compared to a net gain of $235,000 for the prior six month period. The loss is
primarily due to the sale of $16.9 million of adjustable-rate and fixed-rate
CMOs, which were classified as available for sale, at a loss of $301,000.
Without the loss, a net gain on sale of $269,000 was recognized from the
Bank's secondary market activity. The Bank sold loans totaling $65.5 million
during the current six month period, compared to $155.2 million in the prior
year period. Although loan sale volume declined during the current six month
period, the average margins on sale improved, primarily due to the adoption of
SFAS No. 122 on July 1, 1996, which requires the Bank to allocate its basis in
a loan to the principal balance of the loan, as well as to the value of the
related loan servicing rights. The Bank recorded a net gain on
14
the sale of loans receivable and mortgage-backed securities of $198,000 for
the year ended June 30, 1996 compared to a loss of $56,000 for the year ended
June 30, 1995. During the year ended June 30, 1996, due to refinance activity,
loan sale volume increased 68.9%, compared to the prior year period. During
the year ended June 30, 1996, the Bank sold $269.2 million of loans, compared
to $95.2 million in the prior year period. 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 represent the sale of loans originated by the Bank and swapped into
mortgage-backed securities prior to sale. The Bank swapped and sold $8.2
million during the six months ended December 31, 1996, compared to $14.3
million for the six months ended December 31, 1995. For the year ended June
30, 1996, the Bank swapped and sold $41.2 million of loans into mortgage-
backed securities. The Bank had no swap activity during the year ended June
30, 1995.
The Company had net gains on the sale of investment securities during the
six months ended December 31, 1996 of $251,000, compared to $45,000 during the
prior six month period, primarily due to the sale of marketable equity
securities. The Company had net gains on the sale of investment securities
during the year ended June 30, 1996 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. 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.
Income from real estate operations increased $1.3 million to $4.1 million
for the six months ended December 31, 1996, compared to the six months ended
December 31, 1995, while decreasing $2.7 million to $4.8 million for the year
ended June 30, 1996 compared to the year ended June 30, 1995. A summary of
income from real estate operations is as follows:
SIX MONTHS ENDED DECEMBER 31, YEAR ENDED JUNE 30,
------------------------------- ------------------------
1996 1995 1996 1995
--------------- --------------- ----------- -----------
LOTS LOTS LOTS INCOME LOTS
SOLD INCOME SOLD INCOME SOLD (LOSS) SOLD INCOME
------ -------- ------ -------- ---- ------ ---- ------
(DOLLARS IN THOUSANDS)
Clow Creek Farm......... 10 $ 261 75 $ 1,675 145 $3,537 81 $1,711
Harmony Grove........... 75 760 -- -- -- -- -- --
Ashbury................. 23 1,624 24 1,064 34 1,392 134 5,364
Woods of Rivermist...... 3 157 -- -- -- -- 6 374
Scott's Crossing........ -- -- -- -- -- -- 1 39
Creekside of Remington.. -- -- 27 81 27 81 6 9
Woodbridge.............. 26 349 -- -- 10 85 -- --
Reigate Woods........... 15 826 -- -- 2 98 -- --
Fields of Ambria........ 13 156 -- -- 2 17 -- --
Other................... -- -- -- -- -- (424) -- --
----- -------- ----- -------- --- ------ --- ------
165 $ 4,133 126 $ 2,820 220 $4,786 228 $7,497
===== ======== ===== ======== === ====== === ======
During the six months ended December 31, 1996, the Company sold its first
lots in the 386-lot Harmony Grove subdivision, located in Naperville,
Illinois. At December 31, 1996, an additional 52 lots are under contract.
Sales in the Clow Creek Farm subdivision slowed during the current six month
period, compared to the prior six month period, as well as the prior annual
periods due to the near completion of the project. Income from the Ashbury
subdivision during the current six month period includes $728,000 from the
sale of a 13-acre commercial site adjacent to the subdivision. At December 31,
1996, only 8 of the 1,115 lots in Ashbury remain unsold, all of which are
under contract. The three sales in the Woods of Rivermist subdivision during
the current six month period leave 7 lots remaining in this 31-lot
subdivision, of which 3 are under contract. The Creekside
15
of Remington project, located in Bolingbrook, Illinois, just east of
Naperville, had strong sales early in 1996, but has since slowed. Margins on
these lots are much lower than previous projects, due to these being smaller,
lower priced lots, as well as sharing the development costs and profits with a
joint venture partner. The Scott's Crossing subdivision was sold out as of
June 30, 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. Activity in these three projects were within management's
expectations during the six months ended December 31, 1996. The other loss of
$424,000 during the year ended June 30, 1996 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 35.8% to $3.2 million for the six
months ended December 31, 1996 compared to $2.4 million for the previous six
month period, which followed a 46.2% increase for the year ended June 30, 1996
compared to the year ended June 30, 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, as well as an increase in the number of
NSF items during the periods.
Loan servicing fee income is generated from loans which the Bank has
originated and sold, or from purchased servicing. Loan servicing fee income
increased 7.30% during the current six month period to $1.2 million when
compared to the prior six month period. For the year ended June 30, 1996, loan
servicing fee income was $2.4 million, consistent with the results for the
year ended June 30, 1995. The average balance of loans serviced for others was
$1.05 billion, $963.8 million, and $881.0 million, for the six months ended
December 31, 1996, and the year ended June 30, 1996 and 1995, respectively.
The increase in average loans serviced during the six months ended December
31, 1996 and the year ended June 30, 1996 is due to sales of loans originated
by the Bank. Despite an increase in the average balance of loans serviced for
others, loan servicing fee income has remained relatively stable due to the
continued reduction in the average loan servicing fee, due to new sales
containing only .25% in servicing fees, as well as the reduction in income
from the amortization of purchased servicing rights, and capitalized servicing
rights from wholesale loan originations. Amortization of mortgage servicing
rights totaled $156,000 for the six months ended December 31, 1996 compared to
$122,000 for the six months ended December 31, 1995, and $253,000 for the year
ended June 30, 1996, compared to $109,000 for the year ended June 30, 1995.
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. Commission revenue improved to $924,000 for the six months
ended December 31, 1996, compared to $750,000 for the prior six month period.
Commissions were $1.7 million for the year ended June 30, 1996, compared to
$1.4 million for the year ended June 30, 1995. The improvement in commissions
is due to increased sales of mutual funds and other non-traditional products.
The Bank has increased the number of locations which provide INVEST services.
In addition, the Bank is sharing in a greater percentage of current commission
revenue and trailer fee income on past mutual fund sales with INVEST.
16
NON-INTEREST EXPENSE
Non-interest expense increased $23.8 million to $41.1 million for the six
months ended December 31, 1996, compared to the six months ended December 31,
1995. Included in the increase is the impact of the one-time assessment to
recapitalize the SAIF of $14.2 million. The remainder of the increase is
primarily due to the acquisition of NSBI. Non-interest expense for the year
ended June 30, 1996 was $4.4 million, or 13.1% greater than non-interest
expense for the year ended June 30, 1995. The table below shows the
composition of non-interest expense for the periods indicated.
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
------------------------------------
1996 1995 1996 1995
-------- ----------------- ---------
(IN THOUSANDS)
Compensation............................. $ 11,657 7,645 16,790 14,474
Employee benefits........................ 2,846 2,052 4,419 3,783
-------- ------- --------- ---------
Total compensation and benefits........ 14,503 9,697 21,209 18,257
Occupancy expense........................ 1,715 1,056 2,469 2,274
Furniture, fixture and equipment ex-
pense................................... 937 699 1,305 1,248
Federal deposit insurance premiums....... 2,338 1,523 3,255 3,003
Special SAIF assessment.................. 14,216 -- -- --
Advertising and promotion................ 1,025 916 1,746 1,760
Data processing.......................... 1,032 760 1,683 1,473
Professional fees........................ 449 362 904 751
Postage.................................. 509 342 872 659
Stationery, brochures and supplies....... 514 425 857 618
ATM network fees......................... 277 266 527 523
Telephone................................ 274 200 413 349
Insurance costs.......................... 254 137 260 298
Amortization of goodwill................. 679 -- 113 --
Amortization of core deposit intangible
709..................................... -- 122 -- --
Other.................................... 1,647 890 2,051 2,199
-------- ------- --------- ---------
$ 41,078 17,273 37,786 33,412
======== ======= ========= =========
Compensation and benefits increased 49.6% to $14.5 million for the six
months ended December 31, 1996, primarily due to the acquisition of NSBI. The
increase is primarily a function of the increased headcount of the Bank, due
to the addition of the six branches acquired in the merger with NSBI, as well
as a new branch opened by the Bank, and the addition of support staff.
Employee benefits expense increased $794,000, although the ratio of benefit
costs to compensation costs decline slightly to 24.4% for the current six
month period, compared to 26.8% for the prior six month period. The $3.0
million, or 16.2% increase during the year ended June 30, 1996 was primarily
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 the 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.
Occupancy costs increased $659,000 to $1.7 million for the six months ended
December 31, 1996, primarily due to costs related to the six locations
acquired with NSBI and one new branch opened by the Bank in Berwyn, Illinois
in March, 1996. Occupancy costs remained relatively constant between the years
ended June 30, 1996 and 1995.
During the six months ended December 31, 1996, Congress enacted legislation
which recapitalized the SAIF with a one-time special assessment of 65.7 basis
points on deposit balances as of March 31, 1995. This charge
17
equaled $14.2 million for the Bank. Without this assessment, FDIC insurance
premiums were $2.3 million for the current six month period, compared to $1.5
million for the prior six period. The increase is due to the acquisition of
$872.0 million of deposits from NSBI, offset in part by the partial refund of
the Bank's deposit insurance assessment in the last quarter of the current
period. FDIC insurance premiums increased slightly in 1996, compared to 1995.
The Bank's rate for deposit insurance has been unchanged since June 30, 1995.
Data processing expense increased $272,000, or 35.8% during the six months
ended December 31, 1996. The increase is due to increased depreciation expense
on equipment installed in the Company's new Berwyn branch, as well as the
branches acquired with NSBI. Data processing expense rose $210,000, or 14.3%
in 1996, due to the upgrading of data processing systems during the year ended
June 30, 1996. The Bank utilizes personal computers in 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 and other back office
productivity.
As a result of the merger with NSBI, the Bank established a core deposit
intangible on non-maturity deposit liabilities, and goodwill as required under
the purchase method of accounting. During the six months ended December 31,
1996, the Company amortized $709,000 of core deposit intangible, and $679,000
of goodwill amortization against operations. The Bank is amortizing its core
deposit intangible on an accelerated method over 10 years, while amortizing
goodwill on the straight-line method over a 20 year period. The amounts for
the year ended June 30, 1996 represent one month's amortization.
Other operating expenses increased $1.3 million for the six months ended
December 31, 1996 to $3.9 million. The increase is primarily due to additional
expenses primarily associated with the acquisition of NSBI and its impact on
costs such as postage, stationary and supplies, and insurance expense. The
$487,000 increase during the year ended June 30, 1996 was due to the addition
of operating overhead associated with the acquisition of NSBI (for one month),
as well as the internal growth in the Bank's loan portfolio and checking
account base, which led to an increased amount of overhead expenses.
INCOME TAXES
For the six months ended December 31, 1996, income tax expense totaled $5.6
million, equal to an effective income tax rate of 39.0%, compared to $5.2
million attributable to income from continuing operations for the six months
ended December 31, 1995, or an effective income tax rate of 38.6%. 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.
REVIEW OF FINANCIAL CONDITION
Total assets increased $113.2 million, or 3.6% to $3.2 billion at December
31, 1996, compared to $3.1 billion at June 30, 1996. The increase was
primarily due to growth in loans receivable, which were funded primarily with
borrowed funds.
Cash, interest-bearing deposits and federal funds sold increased a combined
$30.9 million to $125.7 million at December 31, 1996. Year-end cash increased
in anticipation of the repayment of $40.0 million of FHLB of Chicago advances
in January, 1997.
Investment securities classified as held to maturity decreased $30.2
million, to $72.0 million as of December 31, 1996. The decrease is due to
maturities of $32.4 million of U.S. Government and agency securities, offset
by $1.5 million of purchases of U.S. Government and agency securities.
Investment securities available for sale increased $30.8 million to $69.0
million at December 31, 1996. Increases due to purchases of $39.3 million of
U.S. Government Agency securities, as well as non-mortgage backed
collateralized assets, were offset by sales of $2.0 million of marketable
equity securities and maturities of $7.2 million. Net unrealized gains in the
available for sale portfolio were $593,000 at December 31, 1996.
18
Mortgage-backed securities classified as held to maturity decreased $26.7
million to $266.7 million as of December 31, 1996. The decrease is primarily
due to amortization and prepayments. Due to the Bank's ability to originate
sufficient amounts of mortgage loans for its own portfolio, the Bank did not
purchase any mortgage-backed securities during the six months ended December
31, 1996.
Mortgage-backed securities classified as available for sale decreased $31.8
million to $92.9 million at December 31, 1996, from $124.7 at June 30, 1996.
The decrease is primarily due the sale of $16.9 of adjustable and fixed-rate
CMOs, as well as normal amortization and prepayments. At December 31, 1996,
net unrealized losses in the available for sale portfolio were $352,000.
Included in total mortgage-backed securities at December 31, 1996 are $170.0
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
December 31, 1996 are $14.0 million, and $24.1 million of FHLMC securities
with an average yield of 8.39%, and 8.92% 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"), respectively. 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 6.0%, or $136.7 million to $2.4 billion at
December 31, 1996. Loan origination and purchase volume (through the Bank's
wholesale loan division) was $469.5 million, offset by amortization and
prepayments of $266.0 million, as well as sales of $65.5 million, during the
six months ended December 31, 1996. 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 six month period, the Bank held for
investment a substantial portion of its retail fixed-rate loan originations,
which led to the increase in the outstanding balance of loans receivable held
for investment purposes.
The allowance for loan losses increased to $17.9 million as of December 31,
1996, due to a current period provision for loan losses of $700,000, offset by
net charge-offs of $40,000. As of December 31, 1996, the Bank's ratio of the
allowance for loan losses to total non-performing loans was 133.1%, compared
to 134.5% as of June 30, 1996. In addition, the ratio of the allowance for
loan losses to total loans was relatively consistent at .73% at December 31,
1996, compared to .75% at June 30, 1996. During the six months ended December
31, 1996, the Bank allocated $1.5 million of its allowance for loan losses to
a specific allowance for loss against a second mortgage on a commercial real
estate loan.
19
Real estate held for development or sale increased $1.5 million to $28.1
million at December 31, 1996. A summary of real estate held for development or
sale is as follows:
DECEMBER 31, JUNE 30,
1996 1996
------------ --------
(IN THOUSANDS)
MAF Developments, Inc.:
Harmony Grove........................................ $ 4,164 5,104
Clow Creek Farm...................................... 717 1,168
Creekside of Remington............................... 1,760 1,807
Other................................................ 4,392 --
------- ------
11,033 8,079
------- ------
Mid America Developments, Inc.:
Ashbury.............................................. 122 1,196
Woods of Rivermist................................... 546 755
------- ------
668 1,951
------- ------
NW Financial, Inc.:
Reigate Woods........................................ 6,263 7,734
Woodbridge........................................... 8,348 6,475
Fields of Ambria..................................... 1,800 2,381
------- ------
16,411 16,590
------- ------
$28,112 26,620
======= ======
Activity at MAF Developments, which is owned by the Company, was primarily
in the Harmony Grove subdivision, as the Company sold the first 75 lots of the
development, which were offset in part by continued development costs of the
project. At December 31, 1996, development of the first of three units is
substantially complete, with 52 lots under contract. The decline in Clow Creek
Farm is due to the successful sale of a majority of the lots in this project.
At December 31, 1996, there are 24 lots remaining, of which 8 are under
contract. Creekside of Remington's investment decreased slightly due to a
refund of costs. There was no sales activity, and little development costs
incurred during the current six month period. There are 3 lots pending sale in
Creekside at December 31, 1996, with 134 lots remaining which are unsold. The
other category consists of the first payment for land in a proposed joint
venture in Naperville, Illinois. The Company closed on a second parcel of land
for this same joint venture in January 1997, for approximately $7.0 million.
At the current time, this land is expected to be developed near the completion
of the Harmony Grove project sometime in 1998 or 1999.
Mid America Developments is nearing the completion of its operations with
the continued sales in Ashbury and Woods of Rivermist. At December 31, 1996,
all of the remaining 8 lots of Ashbury are under contract, with sales expected
to close in 1997. The Woods of Rivermist development is completely developed,
with 3 of the 7 remaining lots under contract at December 31, 1996.
NW Financial's projects continued to be developed during the six months
ended December 31, 1996, with additional funds disbursed for home construction
offset by sales activity. Sales activity in Reigate Woods and Fields of Ambria
led to a decline in each development's investment balance. Substantially all
underground improvements are complete in these two projects. In Woodbridge,
although there were 26 sales, the investment balance increased due to the
underground development costs disbursed during the current six month period in
the final unit (70 lots) of the subdivision.
Premises and equipment increased $1.1 million to $32.3 million at December
31, 1996, due to purchases of $2.5 million, offset by depreciation of $1.4
million. Costs were directed toward continued upgrading of the Company's data
processing system, building improvements necessary due to the merger with
NSBI, as well as land acquisition for the new permanent Ashbury branch.
20
Cost in excess of fair value of net assets acquired (goodwill) decreased to
$26.3 million at June 30, 1996, due to amortization of $679,000, offset by
additional acquisition expenses of $125,000. Goodwill is being amortized over
a 20 year period using the straight-line method.
Deposits increased $8.1 million to $2.26 billion as of December 31, 1996.
The increase is due to interest credited on deposits of $45.0 million, offset
by net outflows of deposits of $36.7 million during the six months ended
December 31, 1996, and $257,000 in amortization of purchase accounting
premiums on certificates of deposits.
Borrowed funds, which consist primarily of FHLB of Chicago advances, as well
as CMO bonds payable, and reverse repurchase agreements, increased $95.2
million, to $632.9 million at December 31, 1996. During the current six month
period, the Bank borrowed an additional $60.0 million (net) of FHLB of Chicago
advances, primarily to fund loan volume held for investment purposes. As of
December 31, 1996, the Bank has $480.5 million of FHLB of Chicago advances at
a weighted average rate and term of 6.44%, and 2.7 years, respectively,
compared to $420.5 million of FHLB of Chicago advances at a weighted average
rate and term of 6.40%, and 2.2 years, respectively, as of June 30, 1996. The
Bank also increased its balance of reverse repurchase agreements by $40.0
million to $79.8 million at December 31, 1996. At December 31, 1996, these
borrowings have an average life of 17 months and an average cost of 6.55%.
Offsetting these increases was the repayment of CMO bonds payable issued by
MAFC and NWAC, totaling $5.0 million during the six months ended December 31,
1996.
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 addition to traditional retail originations, the Bank also operates
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, the Bank sells
selected conforming long-term fixed-rate mortgage loans and a limited amount
of ARM loans in the secondary market, primarily to the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). The volume of current loan originations sold into the secondary
market varies over time based on the Bank's available cash or borrowing
capacity, as well as in response to the Bank's asset/liability management
strategy.
During the six months ended December 31, 1996, the Bank originated and
purchased $213.2 million in fixed-rate one- to four-family residential
mortgage loans, of which $152.0 million, or 71.3%, conformed to the
requirements for sale to FNMA and FHLMC and $61.2 million, or 28.7%, did not
conform to the requirements of these agencies. During the six months ended
December 31, 1996, the Bank sold $65.5 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 ($214,600 as of January 1,
1997), which is the 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 45 states, Puerto
Rico and the District of Colombia. 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. Due to normal amortization and prepayments, this portfolio has a
balance of $595.0 million at December 31, 1996.
21
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 December 31, 1996, the Bank's net loans receivable amounted to $2.4
billion, excluding $359.6 million in mortgage-backed securities.
22
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:
JUNE 30,
----------------------------------------------------------------------------
DECEMBER 31, 1996 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- ------- ---------- ------- ---------- ------- ---------- ------- -------- -------
(DOLLARS IN THOUSANDS)
REAL ESTATE LOANS:
One- to four-family:
Held for investment... $2,160,525 87.93% $2,032,102 87.57% $1,032,233 80.25% $ 835,369 81.28% $735,526 74.77%
Held for sale......... 6,495 0.26 9,314 0.40 24,984 1.94 8,739 0.85 68,165 6.93
Multi-family........... 92,968 3.78 94,713 4.08 67,248 5.23 49,864 4.85 46,043 4.68
Commercial............. 46,313 1.89 46,101 1.99 47,273 3.68 52,090 5.07 56,687 5.76
Construction........... 17,263 0.70 16,090 0.69 19,984 1.55 13,860 1.35 12,460 1.27
Land................... 25,685 1.05 26,644 1.15 19,281 1.50 15,453 1.50 17,873 1.82
---------- ------ ---------- ------ ---------- ------ ---------- ------ -------- ------
Total real estate
loans................ 2,349,249 95.61 2,224,964 95.88 1,211,003 94.15 975,375 94.90 936,754 95.23
---------- ------ ---------- ------ ---------- ------ ---------- ------ -------- ------
OTHER LOANS:
Consumer loans:
Equity lines of
credit................ 86,614 3.53 79,193 3.41 66,710 5.19 46,451 4.52 41,164 4.18
Home equity loans..... 14,251 0.58 10,525 0.45 4,335 0.34 1,112 0.11 2,040 0.21
Other................. 5,009 0.20 4,110 0.18 2,652 0.20 2,471 0.24 2,483 0.25
---------- ------ ---------- ------ ---------- ------ ---------- ------ -------- ------
Total consumer
loans................ 105,874 4.31 93,828 4.04 73,697 5.73 50,034 4.87 45,687 4.64
Commercial business
loans.................. 1,871 0.08 1,821 0.08 1,560 0.12 2,341 0.23 1,241 0.13
---------- ------ ---------- ------ ---------- ------ ---------- ------ -------- ------
Total other loans.... 107,745 4.39 95,649 4.12 75,257 5.85 52,375 5.10 46,928 4.77
---------- ------ ---------- ------ ---------- ------ ---------- ------ -------- ------
Total loans
receivable........... 2,456,994 100.00% 2,320,613 100.00% 1,286,260 100.00% 1,027,750 100.00% 983,682 100.00%
====== ====== ====== ====== ======
LESS:
Loans in process....... 7,620 6,715 8,728 5,161 7,592
Unearned discounts,
premiums and deferred
loan fees, net......... 1,347 3,245 882 2,818 4,417
Allowance for loan
losses................. 17,914 17,254 9,197 8,779 7,993
---------- ---------- ---------- ---------- --------
Loans receivable, net... $2,430,113 $2,293,399 $1,267,453 $1,010,992 $963,680
========== ========== ========== ========== ========
MORTGAGE-BACKED
SECURITIES:
GNMA held to maturity.. $ 3,248 3,637 -- -- --
FHLMC held to
maturity............... 138,963 157,468 31,560 38,789 90,444
FHLMC available for
sale................... 7,425 8,052 -- -- --
FNMA held to maturity.. 29,343 32,044 16,296 19,283 40,445
FNMA available for
sale................... 12,029 13,565 -- -- 4,108
CMOs held to maturity.. 95,104 100,232 196,096 289,830 227,175
CMOs available for
sale................... 73,475 103,104 63,438 -- --
---------- ---------- ---------- ---------- --------
Total mortgage-backed
securities.............. $ 359,587 418,102 307,390 347,902 362,172
========== ========== ========== ========== ========
23
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.
JUNE 30,
--------------------------------------
DECEMBER 31, 1996 1996 1995
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
ADJUSTABLE-RATE LOANS:
Real estate:
One-to four-family.... $1,534,435 62.45% $1,513,732 65.23% $ 728,383 56.63%
Multi-family.......... 67,762 2.76 68,058 2.93 63,030 4.90
Commercial............ 20,424 .83 20,178 .87 25,245 1.96
Construction.......... 15,749 .64 11,812 .51 5,837 .45
Land.................. 16,430 .67 14,872 .64 6,782 .53
---------- ------ ---------- ------ ---------- ------
Total adjustable-rate
real estate loans... 1,654,800 67.35 1,628,652 70.18 829,277 64.47
Consumer............... 88,368 3.60 79,883 3.44 66,775 5.19
Commercial business.... 1,257 .05 911 .04 829 .07
---------- ------ ---------- ------ ---------- ------
Total adjustable-rate
loans receivable.... 1,744,425 71.00 1,709,446 73.66 896,881 69.73
---------- ------ ---------- ------ ---------- ------
FIXED-RATE LOANS:
Real estate:
One-to four-family.... 626,090 25.48 518,370 22.34 303,850 23.62
One-to four-family
held for sale........ 6,495 .26 9,314 .40 24,984 1.94
Multi-family.......... 25,206 1.03 26,655 1.15 4,218 .33
Commercial............ 25,889 1.05 25,923 1.12 22,028 1.71
Construction.......... 1,514 .06 4,278 .18 14,147 1.10
Land.................. 9,255 .38 11,772 .51 12,499 .97
---------- ------ ---------- ------ ---------- ------
Total fixed-rate real
estate loans........ 694,449 28.26 596,312 25.70 381,726 29.67
Consumer............... 17,506 .71 13,945 .60 6,922 .54
Commercial business.... 614 .03 910 .04 731 .06
---------- ------ ---------- ------ ---------- ------
Total fixed-rate
loans receivable.... 712,569 29.00 611,167 26.34 389,379 30.27
---------- ------ ---------- ------ ---------- ------
Total loans
receivable.......... 2,456,994 100.00% 2,320,613 100.00% 1,286,260 100.00%
====== ====== ======
LESS:
Loans in process....... 7,620 6,715 8,728
Unearned discounts,
premiums and deferred
loan fees, net........ 1,347 3,245 882
Allowance for loan
losses................ 17,914 17,254 9,197
---------- ---------- ----------
Loans receivable,
net................. $2,430,113 $2,293,399 $1,267,453
========== ========== ==========
MORTGAGE-BACKED
SECURITIES:
Adjustable-rate........ 149,919 41.80% $ 165,905 39.77% $ 102,614 33.42%
Fixed-rate held by the
Bank.................. 170,686 47.59 207,032 49.63 183,924 59.91
Fixed-rate held by
finance subsidiaries
(1)................... 38,073 10.61 44,202 10.60 20,470 6.67
---------- ------ ---------- ------ ---------- ------
Total mortgage-backed
securities.......... 358,678 100.00% 417,139 100.00% 307,008 100.00%
====== ====== ====== ===
Plus unamortized
premiums............... 909 963 382
---------- ---------- ----------
Mortgage-backed
securities, net..... $ 359,587 $ 418,102 $ 307,390
========== ========== ==========
SUMMARY:
Adjustable rate loans:
Loans receivable...... $1,744,425 62.80% $1,709,446 63.46% $ 896,881 57.03%
Mortgage-backed
securities........... 149,919 5.40 165,905 6.16 102,614 6.52
---------- ------ ---------- ------ ---------- ------
Total adjustable-rate
loans............... 1,894,344 68.20 1,875,351 69.62 999,495 63.55
Fixed-rate loans:
Loans receivable...... 712,569 25.65 611,167 22.69 389,379 24.76
Mortgage-backed
securities (2)....... 170,686 6.15 207,032 7.69 183,924 11.69
---------- ------ ---------- ------ ---------- ------
Total fixed-rate
loans............... 883,255 31.80 818,199 30.38 573,303 36.45
---------- ------ ---------- ------ ---------- ------
Total loan portfolio
(2)................. $2,777,599 100.00% $2,693,550 100.00% $1,572,798 100.00%
========== ====== ========== ====== ========== ======
- -------
(1) See "Subsidiary activities--Mid America Finance Corporation and
Northwestern Acceptance Corporation."
(2) Excludes the fixed-rate mortgage-backed securities held by MAFC and NWAC,
which are duration matched.
24
LOAN MATURITY
The following table shows the contractual maturity of the Bank's loan
portfolio at December 31, 1996. The table does not include principal
repayments. Principal repayments and prepayments on mortgage loans totaled
$266.0 million, $394.3 million and $231.2 million, for the six months ended
December 31, 1996, and the years ended June 30, 1996 and 1995, respectively.
AT DECEMBER 31, 1996
-----------------------------------------------------------------------
REAL ESTATE MORTGAGE LOANS OTHER LOANS
----------------------------------------- -----------------
ONE-TO COMM-
FOUR- MULTI- COMM- CON- ERCIAL
FAMILY FAMILY ERCIAL STRUCTION LAND CONSUMER BUSINESS TOTAL
---------- ------ ------ --------- ------ -------- -------- -----------
(IN THOUSANDS)
Amount due:
One year or less....... $ 580 96 721 14,803 1,456 3,276 449 21,381
---------- ------ ------ ------ ------ ------- ----- -----------
After one year:
1 year to 2 years..... 416 645 7,591 2,460 3,238 1,070 647 16,067
2 years to 3 years.... 369 4,331 582 -- 16,308 866 93 22,549
3 years to 5 years.... 24,851 3,470 3,216 -- 101 5,085 190 36,913
5 years to 10 years... 216,716 12,312 10,067 -- 1,061 65,225 492 305,873
10 years to 20 years.. 199,415 29,470 19,224 -- 3,311 30,352 -- 281,772
Over 20 years......... 1,718,178 42,644 4,912 -- 210 -- -- 1,765,944
---------- ------ ------ ------ ------ ------- ----- -----------
Total after 1 year... 2,159,945 92,872 45,592 2,460 24,229 102,598 1,422 2,429,118
---------- ------ ------ ------ ------ ------- ----- -----------
Total amount due..... $2,160,525 92,968 46,313 17,263 25,685 105,874 1,871 2,450,499
========== ====== ====== ====== ====== ======= =====
Less:
Loans in process....... 7,620
Deferred yield
adjustments........... 1,347
Allowance for loan
losses................ 17,914
-----------
Total loans held for
investment............ 2,423,618
Mortgage loans held for
sale................... 6,495
-----------
Total loans, net....... $ 2,430,113
===========
The following table sets forth at December 31, 1996 the dollar amount of
gross loans receivable held for investment due after December 31, 1997, and
whether such loans have fixed interest rates or adjustable interest rates.
DUE AFTER DECEMBER 31, 1997
-----------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- ---------
(IN THOUSANDS)
Real estate loans:
One-to four-family............................... $625,516 1,534,429 2,159,945
Multi-family..................................... 25,347 67,525 92,872
Commercial....................................... 25,168 20,424 45,592
Construction..................................... 1,090 1,370 2,460
Land............................................. 7,799 16,430 24,229
Consumer.......................................... 15,984 86,614 102,598
Commercial business............................... 613 809 1,422
-------- --------- ---------
Total loans receivable........................... $701,517 1,727,601 2,429,118
======== ========= =========
25
Retail Residential Mortgage Lending. The Bank focuses its lending efforts
primarily on the retail origination of loans secured by first mortgages on
owner-occupied, one-to four-family residences. Residential loan originations
are generated by the Bank's marketing efforts, its present customers, walk-in
customers and referrals from real estate brokers and builders. The Bank's loan
officers are compensated primarily through commissions, based on the level of
loans originated in accordance with the Bank's lending standards. At December
31, 1996, the Bank's one-to four-family residential mortgage loans totaled
$2.2 billion, or 88.2% of the Bank's total loans receivable. The Bank
emphasizes the origination of conventional ARM loans and shorter-term to
maturity or repricing and jumbo loans for retention in its portfolio and
fixed-rate conforming loans for both portfolio purposes as well as for sale in
the secondary market. The Bank's retail residential mortgage originations are
predominantly in the Bank's market area. During the six months ended December
31, 1996, the Bank originated $108.5 million of residential ARM loans,
representing 43.0% of the total loans originated by the Bank during that
period. During the same period, the Bank originated $113.8 million of fixed-
rate residential mortgage loans, representing 45.1% of the total mortgage
loans originated by the Bank during that period.
The Bank currently makes adjustable-rate one- to four-family residential
mortgage loans. The Bank also offers FHA and VA guaranteed loans, although at
December 31, 1996, such loans represented less than 1.5% of the Bank's total
loans receivable. The Bank currently offers a number of ARM loan programs
under which the interest rate may be fixed for the initial one-, three-, five-
or seven-year period. Most of the Bank's residential ARM loans adjust on an
annual basis following the initial one-, three- or five-year fixed-rate
period. The Bank also offered, until recently, ARM loans that are fixed for an
initial five- or seven-year period that reprice once at the end of the initial
period for the remaining 25 or 23 year term based on a spread above the weekly
average of U.S. Treasury securities adjusted to a constant maturity of ten
years (the "ten year Treasury constant maturity index"). The Bank's ARM loans
generally carry an initial interest rate which is less than the fully indexed
rate for the loan. The initial discount rate is determined by the Bank in
accordance with market and competitive factors. After the initial fixed-rate
period, the interest rates on the ARM loans that adjust annually reprice based
on a spread above the published weekly average yield on United States Treasury
securities, adjusted to a constant maturity of one year (the "one-year
Treasury constant maturity index"). Interest rates and origination fees on ARM
loans are priced to be competitive in the local market. These loans are
subject to limitations on annual interest rate adjustments of 2%, as well as a
lifetime interest rate cap adjustment of either 6% or 7%, and are originated
for terms of up to 30 years. At December 31, 1996, the weighted average term
to repricing of the Bank's ARM loan portfolio was 1.37 years.
The Bank also offers fixed-rate mortgage loans with terms to maturity of 10,
15, 20 and 30 years and fixed-rate balloon loans that mature after seven
years. The Bank's fixed-rate loan products generally offer a monthly repayment
option. Interest rates charged on fixed-rate loans are competitively priced on
a daily basis based on secondary market prices and market conditions. The Bank
generally originates its fixed-rate and adjustable-rate mortgage loans in a
form consistent with secondary market standards.
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.
The Bank has enforced due-on-sale clauses in its mortgage contracts for the
purpose of increasing its loan portfolio yield, often through the
authorization of assumptions of existing loans at higher rates of interest and
the imposition of assumption fees. ARM loans may be assumed provided home
buyers meet the Bank's underwriting standards and the applicable fees are
paid.
Loan applications are reviewed in accordance with the underwriting standards
approved by the Bank's Board of Directors and which generally conform to FNMA
standards. Loans in excess of $500,000 must be approved by a senior officer
and loans in excess of $1.0 million must be approved by the Loan Committee of
the Board of Directors. In underwriting residential real estate loans, the
Bank evaluates both the borrower's ability to make monthly payments and the
value of the property securing the loan. Potential borrowers are qualified for
ARM loans and fixed-rate loans based on the initial or stated rate of the
loan, except for one-year ARM loans
26
with a loan-to-value ratio in excess of 70% and a term greater than 15 years,
in which case the borrower is qualified at 2% above the initial note rate.
Upon receipt of a completed loan application from a prospective borrower,
credit reports are ordered and income, employment and financial information is
verified in accordance with FNMA standards. An appraisal of the real estate
intended to secure the proposed loan is undertaken by a Bank appraiser or an
independent appraiser previously approved by the Bank. It is the Bank's policy
to obtain title insurance on all mortgage loans. Borrowers also must obtain
hazard (including fire) insurance prior to closing. The Bank also requires
flood insurance on a property located in special flood hazard areas. Borrowers
are required to advance funds on a monthly basis together with each payment of
principal and interest through a mortgage escrow account from which the Bank
makes disbursements for items such as real estate taxes and hazard insurance
premiums as they become due. The Bank has adopted a policy of limiting the
loan-to-value ratio on originated loans and refinanced loans to 97% and
requiring that loans exceeding 80% of the appraised value of the property or
its purchase price, whichever is less, be insured by a mortgage insurance
company approved by the FNMA in an amount sufficient to reduce the Bank's
exposure to no greater than the 75% level. Despite the benefits of ARM loans
to the Bank's asset/liability management program, they do pose potential
additional risks, primarily because as interest rates rise, the underlying
payment requirements of the borrower rise, thereby increasing the potential of
default.
Wholesale Residential Lending. In 1994, the Bank commenced a wholesale loan
origination division which purchases loans from brokers and correspondents for
a fee generally ranging from 1.25% to 1.50%. Generally, the Bank offers the
same type of loan products, both fixed-rate and adjustable-rate loans, at
interest