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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
Commission file number 0-18121
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MAF Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-3664868
(State of incorporation) (IRS Employer identification No.)
55th Street & Holmes Avenue, Clarendon Hills, Illinois 60514-1500
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
(Title of Class)
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
[X]
filing requirements for the past 90 days. Yes __________ 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 8,
2002, the aggregate market value of the voting stock held by non-affiliates of
the registrant was $665,917,422.*
The number of shares of Common Stock outstanding as of March 8, 2002: 23,084,024
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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 May 1, 2002 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. Except to the extent shares
have been allocated to the plan accounts of directors and executive officers,
the affiliate holdings do not include shares held in certain employee benefit
plans administered by plan committees that include executive officers.
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MAF BANCORP, INC. AND SUBSIDIARIES
FORM 10-K
Index
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Part I. Page
----
Item 1. Business........................................................ 3
Item 2. Properties...................................................... 37
Item 3. Legal Proceedings............................................... 37
Item 4. Submission of Matters to a Vote of Security Holders............. 37
Part II.
Item 5. Market for the Registrant's Common Stock and Related
Stockholders Matters......................................... 37
Item 6. Selected Financial Data......................................... 38
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation........................... 40
Item 7A. Quantatative and Qualitative Disclosures about Market Risk...... 57
Item 8. Financial Statements and Supplementary Data..................... 61
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures......................... 95
Part III.
Item 10. Directors and Executive Officers of the Registrant.............. 95
Item 11. Executive Compensation.......................................... 95
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 95
Item 13. Certain Relationships and Related Transactions.................. 95
Part IV.
Item 14. Exhibits, Financial Statements and Reports on Form 8-K.......... 95
Signature Page............................................................ 100
2
ITEM 1. BUSINESS
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This report, in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere, contains, and other periodic
reports and press releases of the Company may contain, certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Company intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and is including this statement for purposes of
invoking these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Company, are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project," "plan," or
similar expressions. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain, and actual results
may differ from those predicted. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, unanticipated changes in interest
rates, deteriorating economic conditions which could result in increased
delinquencies in the Company's loan portfolio, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
Company's loan or investment portfolios, demand for loan products and secondary
mortgage market conditions, deposit flows, competition, demand for financial
services and residential real estate in the Company's market area, unanticipated
slowdowns in real estate lot sales or problems in closing pending real estate
contracts, delays in real estate development projects, the possible short-term
dilutive effect of potential acquisitions, and changes in accounting principles,
policies and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements. The Company undertakes no obligation to update forward-looking
statements for the effect of future events.
GENERAL
MAF Bancorp. Inc. ("Company"), was incorporated under the laws of the state
of Delaware in 1989. The Company is a registered savings and loan holding
company primarily engaged in the retail banking business through its
wholly-owned subsidiary, Mid America Bank, fsb ("Bank") and, to a lesser extent,
in the residential real estate development business through MAF Developments,
Inc. ("MAFD"). With $5.6 billion in assets, the Bank is one of the largest
financial institutions in the Chicago metropolitan area. The Company's executive
offices are located at 55th Street and Holmes Avenue, Clarendon Hills, Illinois
60514-1500. The telephone number is (630) 325-7300.
The Company's primary assets are its investments in the Bank, as well as in
MAFD. The Company also maintains a small investment portfolio. The Company has a
$55.0 million unsecured term loan outstanding, as well as the use of a $40.0
million unsecured line of credit related to funding for past acquisitions, and
stock repurchase programs. The Company relies primarily on dividends from the
Bank, and to a lesser extent, dividends from MAFD and earnings on investments to
meet its funding requirements for acquisitions, debt service, operating
expenses, common stock repurchases, and dividend payments to common
shareholders. The Bank pays dividends to the Company periodically (historically
quarterly). During 2001, the Company received $52.5 million in dividends from
the Bank, and $1.6 million from MAFD. In 2001, the Company declared $10.5
million of cash dividends, or $.46 per share. The Company has periodically
repurchased shares of its common stock since 1993, and has a current repurchase
plan that allows for the purchase of up to 500,000 shares of common stock. To
date, 33,100 shares have been repurchased under this most recent program, at an
average price of $26.12 per share. The Company has utilized shares repurchased
primarily for acquisitions, and to a lesser extent for stock option exercises.
To date, no shares in treasury have been cancelled.
3
In November 2001, the Company purchased Mid Town Bancorp ("Mid Town") in
Chicago, Illinois, for a total of $69.0 million. The acquisition was funded with
$13.8 million in common stock and $55.2 million in cash. The Company
restructured its $29.4 million unsecured bank term loan, and $35.0 million line
of credit facility with a $55.0 million unsecured bank term loan, and a $40.0
million line of credit as part of the financing of this acquisition. Currently,
the Company is paying interest at the three-month London Interbank Offering Rate
("LIBOR") plus 110 basis points, for its $55.0 million outstanding on its
unsecured bank term loan, and three-month LIBOR plus 100 basis points for the
$10.0 million drawn on its line of credit. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" under Item 7. of this report.
The Bank is a consumer-oriented financial institution offering various
financial services to its customers through 32 retail banking offices at
December 31, 2001. The Bank continues to expand its coverage of the greater
Chicago Metropolitan area, now with 11 locations on the north and northwest side
of Chicago, a strong presence in western Cook County and affluent DuPage County,
and increasing penetration of the rapidly-growing collar counties of Will and
Kane Counties as well as the southwest suburbs of Chicago. It is principally
engaged in the business of attracting deposits from the general public and using
such deposits, along with other borrowings, to make loans secured by real
estate, primarily one- to four-family residential mortgage loans. To a lesser
extent, the Bank also makes multi-family mortgage, commercial, residential
construction, land acquisition and development as well as consumer loans,
primarily home equity loans and lines of credit. In 2001, the Bank formed a
commercial business lending unit to target lending and deposit relationships
with small to medium-sized businesses in its primary market areas. The Bank also
has been in the business of real estate development, most recently through NW
Financial, Inc. Under OTS regulations, investments in subsidiaries engaged in
non-permissible activities for national banks, including real estate development
activities, are deducted from regulatory capital. As such, the Bank has been
performing its new real estate development projects through MAFD, while winding
down previous projects under the Bank. The final piece of real estate for
development at the Bank subsidiary level was sold during December 2001.
Additionally, the Bank operates an insurance agency, Mid America Insurance
Agency, Inc., which provides general insurance services, a title agency, Centre
Point Title Services, Inc., which provides limited title search services for
certain refinanced loan transactions of the Bank's loan customers, and Mid
America Investment Services, Inc. ("Mid America Investments"), which offers
investment services and securities brokerage primarily to Bank customers through
its affiliation with INVEST, a registered broker-dealer. In 2001, the Bank
formed Mid America, Re Inc., a wholly-owned captive reinsurance company, which
will share in a portion of mortgage insurance premiums received by certain
mortgage insurance companies on the Bank's mortgage loan originations in return
for assuming some of the risk of loss. The Company acquired two wholly-owned
subsidiaries of Mid Town at the time of acquisition: Mid Town Development
Corporation ("MTDC"), and Equitable Finance Corporation ("EFC"). MTDC's primary
activity was making mezzanine financing loans on commercial real estate
properties that the Bank was making the first mortgage on. EFC's primary
activity was making various types of "sub-prime" loans, generally short-term
unsecured personal loans. The Company does not intend to continue the activities
of these two subsidiaries and will wind down their operations as the loans
mature.
For financial information regarding the Company's two separate lines of
business (retail banking and land development), see "Note 20. Segment
Information" to the audited consolidated financial statements of the Company
included in "Item 8. Financial Statements and Supplementary Data."
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 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
4
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.
See "Regulation and Supervision - Federal Savings Institution Regulation" for
more information. 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.
COMPETITION
The Bank is faced with increasing competition in attracting retail customer
business, including deposit accounts and loan originations. Competition for
deposit accounts comes primarily from other savings institutions, commercial
banks, money market 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 mortgage brokers, other savings institutions, commercial banks and mortgage
banking companies. Factors affecting business include interest rates, terms,
fees, and customer service.
LENDING ACTIVITIES
General. The Bank's lending activities reflect its focus as a retail
banking institution serving its local market area by concentrating on
residential mortgage lending. The Bank is one of the largest originators of
residential mortgages in its market area. The Bank had record residential loan
originations in 2001, due to continued expansion into new lending markets, as
well as a large volume of refinancings in response to falling interest rates in
2001. The Bank's residential originations are generally conducted through its
branch retail network using primarily commissioned loan officers. The Bank has
traditionally held its originations of adjustable-rate or shorter-term mortgage
loans for its portfolio and sold a portion of its long-term fixed-rate loans
directly into the secondary market. The Bank originates long-term fixed-rate
mortgage loans in response to customer demand; however, the Bank sells selected
conforming and non-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 to a lesser extent, the Federal Home Loan
Mortgage Corporation ("FHLMC"), and Federal Home Loan Bank Mortgage Partnership
Program ("MPF"). The volume of current loan originations sold into the
secondary market varies over time based on the Bank's available cash or
borrowing capacity, Bank capital ratios, as well as in response to the Bank's
asset/liability management strategy. Consumer loans, primarily equity lines of
credit and short-term fixed-rate home equity loans, have been emphasized for
portfolio purposes over the past three years as a means of enhancing loan
yields, and shortening the duration of the Bank's loan portfolio, and
increasing the interest-sensitivity of its loan portfolio, as these loans are
generally based on the prime rate of interest plus or minus a stated margin.
The Bank also originates multi-family loans, and to a lesser extent, commercial
real estate, construction and land loans. In 2001, the Bank expanded into
commercial business lending, hiring a group of seasoned lenders from a
commercial bank to pursue loans and deposits from small to medium-sized
businesses in the Bank's primary market area. Through the acquisition of Mid
Town, the Bank acquired $8.9 million in commercial business loans, as well as
$73.6 million in commercial real estate loans.
At December 31, 2001, the Bank's total loan portfolio was $4.4 billion,
representing over 79% of the total assets of the Company.
5
Loan Portfolio Composition. The following table sets forth the composition of
the Bank's loans receivable portfolio in dollar amounts and in percentages at
the dates indicated:
December 31,
----------------------------------------------------------------------
2001 2000 1999
----------------------------------------------------------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
---------- ------ ---------- ------ ---------- ------
(Dollars in thousands)
Real estate loans:
One- to four-family:
Held for investment $3,559,466 79.38% $3,807,980 87.50% $3,479,425 89.05%
Held for sale 161,105 3.59 41,074 .94 12,601 .32
Multi-family 197,685 4.41 173,072 3.98 164,878 4.22
Commercial 139,608 3.11 41,223 .95 38,817 .99
Construction 43,756 .98 29,566 .67 27,707 .71
Land 44,494 .99 40,497 .93 28,602 .73
---------- ------ ---------- ------ ---------- ------
Total real estate loans 4,146,114 92.46 4,133,412 94.97 3,752,030 96.02
---------- ------ ---------- ------ ---------- ------
Consumer loans:
Equity lines of credit 258,884 5.77 146,020 3.36 99,099 2.54
Home equity loans 52,216 1.16 64,465 1.48 48,397 1.24
Other 7,975 .18 4,783 .11 4,757 .12
---------- ------ ---------- ------ ---------- -------
Total consumer loans 319,075 7.11 215,268 4.95 152,253 3.90
Commercial business loans 19,116 .43 3,528 .08 3,132 .08
---------- ------ ---------- ------ ---------- -------
Total loans receivable 4,484,305 100.00% 4,352,208 100.00% 3,907,415 100.00%
====== ====== ======
Less:
Loans in process 21,678 12,912 11,893
Unearned discounts, premiums
and deferred loan fees, net (4,555) (7,076) (6,323)
Allowance for loan losses 19,607 18,258 17,276
---------- ---------- ----------
Loans receivable, net $4,447,575 $4,328,114 $3,884,569
========== ========== ==========
December 31,
-----------------------------------------
1998 1997
------------------- -------------------
Percent Percent
of of
Amount Total Amount Total
---------- ------ ---------- ------
Real estate loans:
One- to four-family:
Held for investment $2,877,482 86.07% $2,408,393 88.27%
Held for sale 89,406 2.67 6,537 0.24
Multi-family 137,254 4.11 105,051 3.85
Commercial 43,069 1.29 35,839 1.31
Construction 28,429 0.85 17,263 0.63
Land 24,765 0.74 24,425 0.90
---------- ------ ---------- ------
Total real estate loans 3,200,405 95.73 2,597,508 95.20
---------- ------ ---------- ------
Consumer loans:
Equity lines of credit 91,915 2.75 88,106 3.23
Home equity loans 42,398 1.27 34,447 1.26
Other 6,015 0.18 5,793 .21
---------- ------ ---------- ------
Total consumer loans 140,328 4.20 128,346 4.70
Commercial business loans 2,356 0.07 2,659 0.10
---------- ------ ---------- ------
Total loans receivable 3,343,089 100.00% 2,728,513 100.00%
====== ======
Less:
Loans in process 10,698 6,683
Unearned discounts, premiums (3,455) (772)
and deferred loan fees, net
Allowance for loan losses 16,770 15,475
---------- ----------
Loans receivable, net $3,319,076 $2,707,127
========== ==========
6
The following table shows the composition of the Bank's fixed- and
adjustable-rate loan portfolio as of the dates indicated.
December 31,
-------------------------------------------------------------------
2001 2000 1999
--------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- -------
(Dollars in thousands)
Adjustable-rate loans:
Real estate:
One- to four-family $1,613,251 35.98% $1,950,183 44.81% $1,614,377 41.33%
Multi-family 111,311 2.48 111,660 2.57 102,112 2.61
Commercial 60,180 1.34 22,175 .51 19,889 .51
Construction 30,524 .68 15,456 .35 27,399 .70
Land 36,484 .81 24,997 .57 19,220 .48
---------- ------ ---------- ------ ---------- ------
Total adjustable-rate real estate loans 1,851,750 41.29 2,124,471 48.81 1,782,997 45.63
Consumer 234,642 5.23 148,005 3.40 100,936 2.59
Commercial business 16,266 .36 3,434 .08 2,303 .05
---------- ------ ---------- ------ ---------- ------
Total adjustable-rate loans receivable 2,102,658 46.88 2,275,910 52.29 1,886,236 48.27
---------- ------ ---------- ------ ---------- ------
Fixed-rate loans:
Real estate:
One- to four-family 1,946,215 43.40 1,857,797 42.69 1,865,048 47.72
One- to four-family held for sale 161,105 3.59 41,074 .94 12,601 .32
Multi-family 86,374 1.93 61,412 1.41 62,766 1.61
Commercial 79,428 1.77 19,048 .44 18,928 .48
Construction 13,232 .30 14,110 .32 308 .01
Land 8,010 .18 15,500 .36 9,382 .25
---------- ------ ---------- ------ ---------- ------
Total fixed-rate real estate loans 2,294,364 51.17 2,008,941 46.16 1,969,033 50.39
Consumer 84,433 1.88 67,263 1.55 51,317 1.31
Commercial business 2,850 .07 94 - 829 .03
---------- ------ ---------- ------ ---------- ------
Total fixed-rate loans receivable 2,381,647 53.12 2,076,298 47.71 2,021,179 51.73
---------- ------ ---------- ------ ---------- ------
Total loans receivable 4,484,305 100.00% 4,352,208 100.00% 3,907,415 100.00%
====== ====== ======
Less:
Loans in process 21,678 12,912 11,893
Unearned discounts, premiums and
deferred loan fees, net (4,555) (7,076) (6,323)
Allowance for loan losses 19,607 18,258 17,276
---------- ---------- ----------
Loans receivable, net $4,447,575 $ 4,328,114 $3,884,569
========== ========== ==========
7
Loan Maturity. The following table shows the contractual final maturity of
the Bank's loan portfolio at December 31, 2001. The loan amounts do not reflect
scheduled monthly principal repayment amounts. Principal repayments and
prepayments on mortgage loans totaled $1.88 billion, $704.4 million, and $737.0
million, for the years ended December 31, 2001, 2000 and 1999, respectively.
Based on these amounts, management believes the information in the following
table is not indicative of what the actual repayments on these loans will be.
At December 31, 2001
---------------------------------------------------------------------------------
Real Estate Mortgage 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 $ 4,335 3,250 21,077 36,701 648 10,933 14,271 91,215
---------- ------- ------- ------ ------ ------- ------ ---------
After one year
1 year to 5 years 212,080 31,713 67,281 7,055 37,075 87,370 4,628 447,202
Over 5 years 3,343,051 162,722 51,250 - 6,771 220,772 217 3,784,783
---------- ------- ------- ------ ------ ------- ------ ----------
Total after 1 year 3,555,131 194,435 118,531 7,055 43,846 308,142 4,845 4,231,985
---------- ------- ------- ------ ------ ------- ------ ---------
Total amount due $ 3,559,466 197,685 139,608 43,756 44,494 319,075 19,116 4,323,200
========== ======= ======= ====== ====== ======= ====== =========
Less:
Loans in process 21,678
Deferred cost adjustments (4,555)
Allowance for loan losses 19,607
---------
Total loans receivable, net 4,286,470
Mortgage loans held for sale 161,105
---------
Total loans, net $4,447,575
=========
The following table sets forth at December 31, 2001 the dollar amount of
loans receivable held for investment due after one year, and whether such loans
have fixed or adjustable interest rates.
Due after one year
---------------------------------------------
Fixed Adjustable Total
---------- ---------- ---------
(In thousands)
Real estate loans:
One- to four-family $ 1,925,093 1,630,038 3,555,131
Multi-family 67,757 126,678 194,435
Commercial 72,237 46,294 118,531
Construction - 7,055 7,055
Land 7,367 36,479 43,846
Consumer 79,090 229,052 308,142
Commercial business 1,371 3,474 4,845
--------- --------- ---------
Total loans receivable $ 2,152,915 2,079,070 4,231,985
========= ========= =========
8
Residential Lending. 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 and some loans carry a prepayment penalty for the first
five years of the loan. 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 offers a mortgage loan modification program that allows the
borrower to receive a reduced interest rate, change in term, or a change in loan
program, in lieu of refinancing the original loan. The borrower is charged a fee
that varies based upon the modifications made, including an appraisal fee when
the Bank requires a reappraisal of the collateral. The program has been
advantageous to the Bank during the current year, by enabling the Bank to meet
customer demand for loan refinancings, limiting the disruption to its loan
operations for loan customers who are borrowing for home purchases, as well as
reducing the costs associated with refinance activity of existing borrowers.
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 homebuyers 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 $1.5 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 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. 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 risk of
default.
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 underwriting 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 requires
flood insurance on a property located in special flood hazard areas. Borrowers
are generally 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 first mortgage 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, generally be insured by a mortgage insurance company
approved by FNMA in an amount sufficient to reduce the Bank's exposure to no
greater than the 75% level. At December 31, 2001, the Bank has $143.0 million,
or 3.5% of one- to four-family mortgage loans that have a loan-to-value ratio of
greater than 80% without mortgage insurance. Recently, the Bank formed a captive
reinsurance subsidiary to accept a small, second-tier layer of risk on mortgage
loans with mortgage insurance, in exchange for a portion of the mortgage
insurance premiums paid by the customer
9
to certain mortgage insurance companies. See "Subsidiary Activities - Mid
America Re, Inc." for more information.
Multi-family Lending. The Bank originates multi-family residential mortgage
loans in its market area. At December 31, 2001, the Bank had multi-family loans
of $197.7 million, including a portfolio of purchased participating interests of
$2.0 million related to low-income housing. Multi-family loans represent 4.4% of
total loans receivable at December 31, 2001. ARM loans represented 56.3% of the
multi-family residential loan portfolio at December 31, 2001. Multi-family loans
are generally offered with initial fixed-rate periods of one, three, five, seven
and ten years. Multi-family residential mortgage loans are made for terms to
maturity of up to 25 years and carry a loan-to-value ratio not greater than 80%.
The Bank requires a positive net operating income to debt service ratio for
loans secured by multi-family residential property. Loans secured by properties
of five or more units are qualified on the basis of rental income generated by
the property.
Construction and Land Lending. The Bank originates loans to finance the
construction of one- to four-family residences, primarily in its market area. At
December 31, 2001, the Bank had $43.8 million of construction loans of which
$34.8 million financed the construction of one- to four-family residences. The
Bank also originates loans for the acquisition and development of unimproved
property to be used primarily for residential purposes in cases where the Bank
is to provide the construction funds to improve the properties. At December 31,
2001, the Bank's construction and land loans totaled $88.3 million, or 2.0%, of
total loans receivable.
The Bank uses underwriting and construction loan guidelines for financing
primarily individual, owner-occupied houses where qualified contractors are
involved. Construction loans are structured either to be converted to permanent
loans at the end of the construction phase or to be paid off upon receiving
financing from another financial institution. Construction loans are based on
the appraised value of the property, as determined by either an independent
appraiser, or an appraiser on staff at the Bank, and an analysis of the
potential marketability and profitability of the project. Construction loans
generally have terms of up to 12 months, with extensions as needed. Loan
proceeds are disbursed in increments as construction progresses and as
inspections warrant.
Land loans include loans to developers for the development of residential
subdivisions in the Bank's market area. At December 31, 2001, the Bank had land
loans to developers totaling $23.1 million. At December 31, 2001, the largest
aggregate amount of land acquisition and development loans to a single developer
amounted to $22.4 million. In addition, this borrower had construction loans
with the Bank totaling $4.3 million. Loans to developers are generally
short-term loans with terms of three to five years. Under Bank policy, the
loan-to-value ratio may not exceed 80% and is generally less than 75%. The
majority of such loans are floating rate based on the prime rate or LIBOR. Loans
generally are made to customers of the Bank and developers with whom the Bank
has had long-standing relationships. The Bank requires an independent appraisal
of the property and feasibility studies may be required to determine the profit
potential of the development project.
Land loans are also made to local builders for the purchase of improved
lots. At December 31, 2001, the Bank had land loans outstanding to local
builders totaling $10.8 million. Such loans are generally for terms of up to
three years and are generally granted at rates similar to rates quoted for ARM
residential mortgage loans. The loan-to-value ratio on such loans is limited to
75%. Land loans for the purchase of fully improved lots are also made to
individuals. At December 31, 2001, the Bank had land loans to individuals
totaling $10.6 million. Such loans are made for up to 15-year terms with
adjustable or fixed interest rates that are made at the prevailing rates for
one- to four-family residential loans.
Construction and land development loans afford the Bank the opportunity to
increase the interest rate sensitivity of its loan portfolio and to receive
yields higher than those obtainable on ARM loans secured by existing residential
properties. These higher yields correspond to the higher risks associated with
10
construction lending. Construction and land development loans involve additional
risks attributable to the fact that loan funds are advanced upon the security of
the project under construction, which is of uncertain value prior to its
completion. Because of the uncertainties inherent in estimating construction
costs as well as the market value of the completed project and the effects of
governmental regulation of real property, it is relatively difficult to evaluate
accurately the total funds required to complete a project and the related
loan-to-value ratio. As a result of the foregoing, construction and land
development lending often involves the disbursement of substantial funds with
repayment dependent, in part, on the success of the ultimate project rather than
the ability of the borrower or guarantor to repay principal and interest. If the
Bank is forced to foreclose on a project prior to or at completion due to a
default, there can be no assurance that the Bank will be able to recover all of
the unpaid balance of, and accrued interest on, the loan as well as related
foreclosure and holding costs. In addition, the Bank may be required to fund
additional amounts to complete the project and may have to hold the property for
an unspecified period of time. The Bank has attempted to address these risks
through its underwriting procedures and its limited amount of construction
lending on multi-family and commercial real estate properties.
Commercial Real Estate Lending. In connection with the Bank's policy of
maintaining an interest-rate sensitive loan portfolio, the Bank has originated
loans secured by commercial real estate, which generally carry a higher yield
and are made for a shorter term than fixed-rate one- to four-family residential
loans. At December 31, 2001, the Bank had $139.6 million of commercial real
estate loans. Historically, the Bank's policy has been to originate commercial
real estate loans on a limited basis. During 2001, the Bank's commercial real
estate portfolio increased by $73.6 million due primarily to the acquisition of
Mid Town. The Company may increase its commercial real estate lending in the
future in conjunction with its new business banking unit described below.
Commercial real estate loans are generally made in amounts up to 80% of the
appraised value of the property, as determined by an independent appraiser
previously approved by the Bank. Currently, all of the Bank's commercial real
estate loans are secured by improved properties located in the Chicago
metropolitan area. The Bank often requires borrowers to provide their personal
guarantees on loans made for commercial real estate.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than residential mortgage loans. Because
payments on loans secured by commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. The Bank seeks to minimize these risks by lending primarily on
existing income-producing properties and generally restricting such loans to
properties in the Chicago area. The Bank analyzes the financial condition of the
borrower and the reliability and predictability of the net income generated by
the security property in determining whether to extend credit. In
addition, the Bank generally requires a net operating income to debt service
ratio of at least 1.15 times. At December 31, 2001, the Bank's ten largest
commercial real estate loans totaled $32.1 million, all of which are current and
performing in accordance with their original terms.
Consumer Lending. The Bank's other lending activities consist of consumer
lending, primarily home equity lines of credit and fixed-rate second mortgage
loans. On December 31, 2001, outstanding balances on home equity lines
represented $258.9 million or 5.8% of the Bank's total loan portfolio. Home
equity lines of credit are generally extended up to 85% of the appraised value
of the property, less existing liens, generally at interest rates which range
from the designated prime rate minus .50% to plus .50%, based on balances drawn.
To a lesser extent, the Bank offers home equity lines of credit at greater than
85% of the appraised value of the property. The interest rate on 85%-100%
loan-to-value lines of credit is the designated prime rate plus 1.50% to 3.50%.
The Bank uses the same underwriting standards for home equity lines of credit as
it uses for residential mortgage loans. Other home equity loans consist of $52.2
million of primarily fixed-rate second mortgage loans that amortize over a three
to ten year period.
11
Commercial Business Lending. In 2001, in an effort to continue to expand
the lending services offered by the Bank, the Bank started a commercial business
lending unit by hiring a team of seasoned lending professionals from a
commercial bank. The focus of the Bank in this area of lending is to provide
lending and deposit services to small and medium-sized businesses in the
Chicagoland area, some of which already had a deposit relationship with the
Bank. Commercial business loans may be secured by business assets or real
estate, or in some instances, be unsecured. The Bank obtains personal guarantees
in situations where the business assets are not considered to be sufficient
collateral. Additionally, the Bank may provide letter of credit services to
certain lenders on a case-by-case basis.
Commercial business lending carries increased risks compared to other forms
of lending the Bank offers. Principal and interest repayment is often dependent
on strong and consistent management teams that can change quickly due to the
size of the companies targeted by the Bank. In addition, slowing economic
conditions could adversely impact these borrowers. As part of the initiation of
this unit, a comprehensive credit policy was established and approved by the
Board of Directors of the Bank for new commercial business loans, and is
monitored on a weekly basis by a committee of senior management that is
responsible for the approval of new loans. In addition, a credit scoring system
was established for reviewing previously approved and outstanding loans. A
committee of senior management of the Bank has been established to periodically
monitor credit quality of commercial business loans including loans on the
Bank's "watch list" to determine actions to be taken, including collection,
additional collateral, and accrual status. At December 31, 2001, the Bank's
portfolio of commercial business loans was $19.1 million, of which $8.9 million
was attributed to the acquisition of Mid Town.
Environmental Issues. The Bank encounters certain environmental risks in
its lending activities. Under federal and state environmental laws, lenders may
become liable for the costs of cleaning up hazardous materials found on security
property. Although environmental risks are usually associated with industrial
and commercial loans, risks may be substantial for residential lenders like the
Bank if environmental contamination makes the security property unsuitable for
use. This could also have an effect on nearby property values. In accordance
with FNMA and FHLMC guidelines, appraisals for single-family residences on which
the Bank lends include comments on environmental influences. The Bank attempts
to control its risk by training its appraisers and underwriters to be cognizant
of signs indicative of environmental hazards. No assurance can be given,
however, that the values of properties securing loans in the Bank's portfolio
will not be adversely affected by unforeseen environmental risks, although the
Bank is unaware of any material environmental issues which would subject it to
liability at this time.
Environmental concerns such as asbestos containing material, underground
storage tanks and lead based paint can pose a health risk to tenants and
negatively impact the collateral value of security property. Generally, the use
of these materials has been eliminated since 1978. All relevant factors in order
to determine whether an environmental review is needed and, if so, the scope and
detail, is considered prior to the origination of commercial and multi-family
loans. The relevant factors include, but are not limited to, the following: age
of property, use of property, location of property, knowledge of subject area,
borrower(s) financial capacity to withstand potential clean-up costs, loan
amount and loan-to-value ratio of the proposed loan. For loans in excess of $1.0
million, a satisfactory Phase I environmental exam is required as part of the
loan approval process, with further investigation in the form of a Phase II exam
taking place as dictated therein.
12
Originations, Purchases, Sales, Swaps of Mortgage Loans and
Mortgage-Backed Securities. The Bank originates and purchases both ARM and
fixed-rate loans. Its ability to originate loans is dependent upon the relative
customer demand for fixed-rate or ARM loans in the origination and purchase
market, which is affected by the term structure (short-term compared to
long-term) of interest rates as well as the current and expected future level of
interest rates. The Bank sells selected conforming and non-conforming long-term
fixed-rate and a limited amount of ARM mortgage loans in the secondary mortgage
market to manage its interest rate risk exposure. These loan sales also allow
the Bank to continue to make loans when deposit flows decline or funds are not
otherwise available for lending. Generally, the loans are sold for cash or
securitized and sold in the secondary mortgage market to investors such as FNMA,
FHLMC, and MPF as well as investment banks and other financial institutions. The
large majority of these loans are sold without recourse, except those loans sold
to MPF, where the Bank maintains a very limited level of risk in exchange for
better pricing on the loans sold. At December 31, 2001, the Bank has
approximately $6.6 million in net credit risk exposure on loans it has sold to
MPF.
The Bank has also exchanged or swapped loans out of its portfolio for
mortgage-backed securities primarily with FNMA and FHLMC. Generally, the
mortgage-backed securities are used to collateralize borrowings and deposits or
are sold in the secondary market to raise additional funds. Swap activity by the
Bank is governed by pricing levels in the secondary mortgage market for whole
mortgage loans versus securitized mortgage loans, as well as the level of rates
for collateralized borrowings. During the current year, the Bank swapped and
sold $76.7 million in loans receivable, compared to $9.3 million for the year
ended December 31, 2000.
In 2001, the Bank originated and purchased $2.83 billion in loans
receivable, compared to $1.48 billion in 2000. During 2001, with the decrease in
interest rates, fixed-rate mortgage loan originations accelerated to $1.71
billion, or 69.9% of total loan originations, compared to $466.9 million or
39.4% of total loan originations in 2000, as customers took advantage of the
ability to lock in historically low long-term mortgage rates. Of the fixed-rate
originations in 2001, $1.1 billion, or 65.1%, conformed to the requirements for
sale to FNMA and FHLMC and $597.4 million, or 34.9%, did not conform to the
requirements of these agencies. The Bank's "nonconforming" loans are generally
designated as such because the principal loan balance exceeds $275,000 ($300,700
as of January 1, 2002), which is the FHLMC, FNMA, and MPF purchase limit, and
not because the loans present increased risk of default to the Bank. Generally,
prior to 2001, nonconforming loans were held in the Bank's loan portfolio. In
2001, the Bank began selling non-conforming long-term fixed rate loans into the
secondary market. Loans with such excess balances generally carry interest rates
from one-eighth to three-eighths of one percent higher than similar, conforming
fixed-rate loans. Due to record fixed-rate originations, loan sale activity
soared in 2001. During the current year, the Bank sold $1.02 billion of loans
into the secondary market, compared to $335.7 million in 2000.
All of the mortgage-backed securities and collateralized mortgage
obligations, ("CMOs") in the Bank's portfolio are issued by or have collateral
backed by FNMA, FHLMC or GNMA, or are backed with whole loan collateral and have
an investment grade rating. At December 31, 2001, the amortized cost of
mortgage-backed securities totaled $140.9 million, or 2.5% of total assets. At
December 31, 2001, the Bank's mortgage-backed securities portfolio had a market
value of $142.2 million.
13
The following table sets forth the Bank's originations, purchases, sales,
swaps and principal repayments of loans receivable for the periods indicated.
Year Ended December 31,
--------------------------------------------
2001 2000 1999
--------- --------- ---------
(In thousands)
Loans originated:
Adjustable-rate loans originated:
One- to four-family $ 735,463 638,097 432,649
Multi-family 27,736 22,005 34,129
Commercial real estate 17,717 6,585 4,620
Construction 17,453 25,702 31,366
Land 30,272 26,195 14,389
Commercial business 7,147 118 1,030
Consumer 196,381 135,947 76,252
--------- --------- ---------
Total adjustable-rate loans originated 1,032,169 854,649 594,435
Fixed-rate loans originated:
One- to four-family 1,708,663 466,913 712,942
Multi-family 6,230 6,014 9,229
Commercial real estate 15,417 1,982 938
Construction 16,071 14,759 -
Land 6,274 15,952 10,589
Commercial business 790 - -
Consumer 41,980 50,393 38,579
--------- --------- ---------
Total fixed-rate loans originated 1,795,425 556,013 772,277
--------- --------- ---------
Total loans originated 2,827,594 1,410,662 1,366,712
Loans purchased:
Fixed-rate one- to four-family real estate - 3,220 36,521
Adjustable-rate one- to four-family real estate - 69,669 307,567
Other - 669 537
--------- --------- ---------
Total loans purchased - 73,558 344,625
--------- --------- ---------
Total loans originated and purchased 2,827,594 1,484,220 1,711,337
--------- --------- ---------
Loans acquired through acquisitions 210,020 5,292 399
--------- --------- ---------
Loans sold:
One- to four-family 940,952 326,375 340,308
Consumer loans 476 596 1,023
--------- --------- ---------
Total loans sold 941,428 326,971 341,331
Mortgage loan swaps (fixed rate) 76,670 9,290 62,583
Transfer to foreclosed real estate and charge-offs 2,756 4,038 6,540
Amortization and prepayments 1,884,663 704,420 736,956
--------- --------- ---------
Total loans sold, swaps, transfers,
amortization and prepayments 2,905,517 1,044,719 1,147,410
--------- --------- ---------
Net increase $ 132,097 444,793 564,326
========= ========= =========
14
Loan servicing fee income. Loan servicing fee income is generated from
loans that the Bank has originated and sold, or from purchased servicing rights,
and includes fees for the collection and remittance of mortgage payments,
insurance policies and real estate taxes. Typically, the Bank receives a
servicing fee for performing the aforementioned services equal to at least .25%
for fixed-rate mortgages and .25% to .375% for ARM loans on the outstanding
principal balance of the sold loan being serviced. Servicing fees are included
in income as loan payments are received. Costs of servicing loans for others are
charged to expense as incurred. The Bank is required to capitalize mortgage
servicing rights upon the sale of loans based on assumptions as to fee income
earned, estimated prepayment speeds of the underlying mortgage loans, and the
cost of servicing. Mortgage servicing rights are amortized based on the
estimated life of the loan servicing income stream, and recorded as a decrease
to loan servicing fee income. In addition, mortgage servicing rights are
periodically assessed for impairment, with any impairment or recovery recognized
through a valuation allowance. The following table shows the components of loan
servicing fee income in dollars and as a percentage of loans serviced for
others, as well as other information regarding loans serviced for others for the
years indicated:
Year Ended December 31,
------------------------------------------
2001 2000 1999
--------- --------- ---------
(Dollars in thousands)
Gross servicing revenue $ 3,083 2,724 3,032
Amortization of mortgage servicing rights (3,454) (1,038) (1,271)
Valuation allowance on mortgage servicing rights (904) - -
Recovery of valuation allowance of mortgage servicing rights - - 900
--------- --------- ---------
Loan servicing fee income (expense), net $ (1,275) 1,686 2,661
=========== ========= =========
As a percentage of average loans serviced for others:
Gross servicing revenue .291% .259% .264%
Amortization of mortgage servicing rights (.326) (.099) (.111)
Valuation allowance on mortgage servicing rights (.085) - -
Recovery of valuation allowance of mortgage servicing rights - - .078
--------- --------- ---------
Loan servicing fee income (expense), net (.120)% .160% .231%
=========== ========= =========
Loan sales for the year $ 1,019,145 335,665 402,891
=========== ========= =========
Average balance of loans serviced for others $ 1,060,194 1,050,287 1,148,514
Loans serviced for others at end of year 1,401,607 785,350 1,226,874
Mortgage servicing rights at end of year, net 10,531 5,107 7,334
Weighted average interest rate of loans serviced for others 7.10% 7.55% 7.28%
=========== ========= =========
Sales of Mortgage Servicing Rights. The Bank has generally maintained the
strategy of keeping the servicing on the loans it originates and sells into the
secondary market as a means of cross-selling loan customers other Bank products.
However, in 2000, the Bank sold approximately $600 million of mortgage servicing
rights at a pre-tax gain of $4.4 million, to take advantage of aggressive
pricing for servicing rights, and as a hedge against lower interest rates. While
the Bank still intends to grow its loan servicing portfolio, as it did in 2001,
management may periodically review opportunities to sell servicing rights in the
future.
15
Asset Quality and Allowance for Loan Losses
Collection procedures. When a borrower fails to make a required payment by
the end of the month in which the payment is due, the Bank generally institutes
collection procedures. The Bank will send a late notice, and in most cases,
delinquencies are cured promptly; however, if a loan has been delinquent for
more than 60 days, the Bank contacts the borrower in order to determine the
reason for the delinquency and to effect a cure, and, where appropriate, reviews
the condition of the property and the financial circumstances of the borrower.
Based upon the results of any such investigation, the Bank may: (1) accept a
repayment program for the arrearage from the borrower; (2) seek evidence, in the
form of a listing contract, of efforts by the borrower to sell the property if
the borrower has stated that he is attempting to sell; (3) request a deed in
lieu of foreclosure; or (4) initiate foreclosure proceedings. When a loan
payment is delinquent for three or more monthly installments, the Bank will
initiate foreclosure proceedings. Interest income on loans is reduced by the
full amount of accrued and uncollected interest on loans that are in process of
foreclosure or otherwise determined to be uncollectible.
Delinquent Loans. At December 31, 2001, 2000, and 1999, delinquencies in
the Bank's portfolio were as follows:
61-90 Days 91 or More Days
------------------------------- --------------------------------
Principal Principal
Number Balance of Percent Number Balance of Percent
of Delinquent of of Delinquent of
Loans Loans Total/1/ Loans Loans Total/1/
--------- --------- -------- -------- --------- --------
(Dollars in thousands)
December 31, 2001 62 $8,058 .18 % 158 $19,388 .42%
December 31, 2000 50 4,084 .10 115 14,764 .34
December 31, 1999 63 6,280 .16 130 13,224 .34
== ===== == ====== ===
- ---------------------
/1/ Percentage represents principal balance of delinquent loans to total loans
outstanding.
Non-Performing Loans. A loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan. For loans that
are not individually significant (i.e. loans under $1.0 million), and represent
a homogeneous population, the Bank evaluates impairment collectively based on
management reports on the level and extent of delinquencies, as well as
historical loss experience for these types of loans. The Bank uses these
criteria on one- to four-family residential loans, consumer loans, multi-family
residential loans, and land loans. Impairment for loans considered individually
significant as well as commercial real estate and commercial business loans are
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate, or the fair value of the collateral if the
loan is collateral dependent. Charge-offs of principal occur when a loss has
occurred as a result of the book value exceeding the fair value.
A loan (whether considered impaired or not) is classified as non-accrual
when collectibility is in doubt or, when the borrower becomes 91 days past due
on contractual principal or interest payments. When a loan is placed on
non-accrual status, or in the process of foreclosure, previously accrued but
unpaid interest is reversed against interest income. Income is subsequently
recorded to the extent cash payments are received, or at a time when the loan is
brought current in accordance with its original terms.
16
The following table sets forth information regarding non-accrual loans,
loans which are 91 days or more delinquent but on which the Bank is accruing
interest, and foreclosed real estate held by the Bank at the dates indicated.
Since January 1, 2001, the Bank does not accrue interest on loans more than 90
days overdue.
December 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(Dollars in thousands)
One- to four-family and multi-family loans:
Non-accrual loans (1) $ 17,985 14,023 12,548 10,641 7,039
Accruing loans 91 or more days overdue - 1,732 771 1,381 2,071
-------- -------- -------- -------- --------
Total 17,985 15,755 13,319 12,022 9,110
-------- -------- -------- -------- --------
Commercial real estate, construction and land loans:
Non-accrual loans (1) 544 269 607 1,284 1,240
Accruing loans 91 or more days overdue - - - - -
-------- -------- -------- -------- --------
Total 544 269 607 1,284 1,240
-------- -------- -------- -------- --------
Other loans:
Non-accrual loans (1) 922 683 1,683 721 181
Accruing loans 91 or more days overdue - 2 41 22 124
-------- -------- -------- -------- --------
Total 922 685 1,724 743 305
-------- -------- -------- -------- --------
Total non-performing loans:
Non-accrual loans (1) 19,451 14,975 14,838 12,646 8,460
Accruing loans 91 or more days overdue - 1,734 812 1,403 2,195
-------- -------- -------- -------- --------
Total $ 19,451 16,709 15,650 14,049 10,655
======== ======== ======== ======== ========
Non-accrual loans to total loans .45% .35% .38% .39% .31%
Accruing loans 91 or more days overdue to total loans - .04 .02 .04 .08
-------- -------- -------- -------- --------
Non-performing loans to total loans .45% .39% .40% .43% .39%
======== ======== ======== ======== ========
Foreclosed real estate:
One- to four-family $ 1,405 1,762 1,220 1,736 489
Commercial real estate - 46 6,195 6,621 -
-------- -------- -------- -------- --------
Total foreclosed real estate, net of reserves $ 1,405 1,808 7,415 8,357 489
======== ======== ======== ======== ========
Total non-performing assets $ 20,856 18,517 23,065 22,406 11,144
======== ======== ======== ======== ========
Total non-performing assets to total assets .37% .36% .50% .54% .32%
======== ======== ======== ======== ========
- ------------------------------------
/1/ Consists of loans in the process of foreclosure or for which interest is
otherwise deemed uncollectible.
For the years ended December 31, 2001, 2000 and 1999, the amount of
interest income that would have been recorded on non-accrual loans amounted to
$1.1 million, $768,000 and $703,000 respectively, if the loans had been current.
For the year ended December 31, 2001, interest income on non-accrual loans
actually collected that was recorded amounted to $351,000.
Subsequent to December 31, 2001, one commercial real estate loan and a
secured line of credit to the same borrower aggregating $4.4 million were placed
on non-accrual status due to the borrower being in violation of certain loan
covenants. The Bank has a first mortgage lien on the property, a corporate
guarantee of a subsidiary company and several unlimited personal guarantees. The
Bank expects to be repaid in full from the net proceeds from the sale of the
property in the next 12-15 months.
Classified Assets. The federal regulators have adopted a classification
system for problem assets of insured institutions that covers all problem assets
and requires certain reserves. Under this classification system, problem assets
of insured institutions are classified as "substandard," "doubtful" or "loss."
An asset is considered "substandard" if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those
17
characterized by the "distinct possibility" that the insured institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss
reserve is not warranted.
In connection with the filing of its periodic reports with the OTS, the
Bank regularly reviews the problem loans in its portfolio to determine whether
any loans require classification in accordance with applicable regulations. At
December 31, 2001 and 2000, all of the Bank's non-performing loans were
classified as substandard.
Allowance for Loan Losses. The Bank maintains an allowance for loan losses
in an amount deemed prudent by management. The allowance for loan losses is
established through a provision for loan losses based on management's periodic
evaluation of the risk inherent in its loan portfolio and changes in the nature
and volume of its loan activity. Such evaluation, which includes a review of all
loans of which full collectibility may not be reasonably assured, considers
among other matters, the estimated fair value of the underlying collateral,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an adequate loan loss allowance. Based on
such evaluation and consideration of these various factors, including the lack
of loan portfolio growth, exclusive of the Mid Town acquisition, the lowest
level of net charge-offs in 10 years and continued stable level of
non-performing loans concentrated in one- to four-family mortgages, the Bank did
not make a provision for loan losses in 2001. The $1.3 million increase in the
allowance for loan losses in 2001 was primarily due to the $1.4 million
allowance acquired in the Mid Town acquisition. While management uses available
information to recognize losses on loans, future adjustments to the allowance
for loan losses may be necessary based on changes in economic conditions and the
impact of such change on the Bank's borrowers.
The following table analyzes the Bank's allowance for loan losses for the
years indicated.
Year Ended December 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- -------- --------
(Dollars in thousands)
Balance at beginning of year $ 18,258 17,276 16,770 15,475 17,914
Charge-offs:
One- to four-family (87) (136) (522) (290) (637)
Commercial real estate - - (88) (25) (2,994)
Multi-family - (275) - - -
Consumer (17) (120) (101) (87) (81)
------- ------- ------- -------- --------
(104) (531) (711) (402) (3,712)
------- ------- ------- -------- --------
Recoveries:
One- to four-family 39 9 105 1 106
Commercial real estate - - - - 5
Consumer 6 4 12 50 12
------- ------- ------- -------- --------
45 13 117 51 123
------- ------- ------- -------- --------
Charge-offs, net of recoveries (59) (518) (594) (351) (3,589)
Provision for loan losses - 1,500 1,100 800 1,150
Balance related to acquisition 1,408 - - 846 -
------- ------- ------- -------- --------
Balance at end of year $ 19,607 18,258 17,276 16,770 15,475
======= ======= ======= ======== ========
Net charge-offs to average loans outstanding .00% .01 .02 .01 .14
Allowance for loan losses to total loans receivable .45 .42 .44 .52 .57
Allowance for loan losses to total non-performing loans 100.80 109.27 110.39 119.37 145.24
Allowance for loan losses to total non-performing assets 94.01 98.60 74.90 74.85 138.86
======= ======= ======= ======== ========
18
At December 31, 2001, the Bank maintained no specific reserves on its loan
portfolio. The following table sets forth the Company's allocation of its
allowance for loan losses. This allocation is based on management's subjective
estimates. The amount allocated to a particular category should not be
interpreted as the only amount available for future charge-offs that may occur
within that category: it may not be indicative of future charge-off trends and
it may change from year to year based on management's assessment of the risk
characteristics of the loan portfolio. The allocation methods used for December
31, 2001, 2000 and 1999 were generally consistent. The change in amounts
allocated to various loan types in 2001 was primarily due to the allocation of
the Mid Town allowance for loan losses.
At December 31,
-----------------------------------------------------------------------------------
2001 2000 1999
------------------------- ------------------------- --------------------------
Loan category Loan category Loan category
as a % of as a % of as a % of
Allowance Total Loans Allowance Total Loans Allowance Total Loans
--------- -------------- --------- --------------- ---------- --------------
(Dollars in thousands)
One- to four-family residential $ 9,755 82.97 $ 9,803 88.44 % $ 8,705 89.37%
Multi-family 1,730 4.41 1,480 3.98 1,235 4.22
Commercial real estate 2,646 3.11 1,978 .95 2,078 0.99
Construction 501 .98 401 .67 256 0.71
Land 656 .99 606 .93 346 0.73
Consumer 1,804 7.11 1,575 4.95 1,085 3.90
Commercial business 250 .43 - .08 - .08
Unallocated portion 2,265 NA 2,415 NA 3,571 NA
------ ------ ------ ------ ------ ------
Total $ 19,607 100.00% $ 18,258 100.00% $ 17,276 100.00%
====== ====== ====== ====== ====== ======
At December 31, 2001, the Bank's loan portfolio consisted of 83.0% of one-
to four-family real estate loans, with an additional 7.1% being equity lines of
credit or home equity loans on one- to four-family real estate and other
consumer loans. Based on the Bank's underwriting standards, overall
loan-to-value ratios, concentration of lending primarily in its market area,
and historically low charge-off experience, management considers the risk of
loss due to these loans as minimal. The remaining 9.9% of the Bank's portfolio,
or $444.7 million, consist of multi-family mortgage, commercial real estate,
construction, land, and to a lesser extent, commercial business loans. These
loans generally tend to exhibit greater risk of loss than do one- to
four-family loans, primarily because such loans typically carry higher loan
balances and repayment is dependent, in large part, on sufficient income to
cover operating expenses. In addition, economic events and government
regulations, which are outside the control of the Bank and the borrower, could
impact the security of the loan or the future cash flow of affected properties.
Management has addressed these risks through its underwriting standards.
In its multi-family loan portfolio, the Bank has traditionally limited its
lending to small apartment buildings (less than 36 units) which management
believes have lower risk than larger properties. At December 31, 2001, in the
Bank's $197.7 million multi-family portfolio, only 11 loans are on properties
greater than 36 units. The average multi-family loan is $320,000. With respect
to construction and land loans, although a change in economic conditions could
impact the collateral value of the Bank's loans, a large percentage of this
collateral is on one- to four family residential properties whose values tend to
be more stable during times of economic difficulty. The Bank's commercial real
estate portfolio grew during 2001 due to the acquisition of Mid Town. Loans
secured by commercial real estate properties generally involve a greater degree
of risk than residential mortgage loans. Because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy. The Bank
seeks to minimize these risks by lending primarily on existing income-producing
properties and generally restricting such loans to properties in the Chicago
area.
Net income of the Company could be affected if management's estimate of the
number of loans with loss, or the estimate of the amount of loss that may be
incurred are materially different, which could require an additional provision
for loan losses. Management believes the allowance for loan losses is
19
adequate at December 31, 2001. However, future adjustments to the allowance may
be necessary based on changes in economic conditions and the impact such
changes may have on the Bank's borrowers.
INVESTMENT ACTIVITIES
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest in commercial paper, investment
grade corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly. The Bank is required to maintain liquid assets at
prudent levels based on its operations.
The Bank's liquid investments include interest-bearing deposits, primarily
at the Federal Home Loan Bank of Chicago, federal funds sold and U.S. Government
and federal agency obligations. The Bank invests overnight federal funds with
two large commercial banks in Chicago, based upon periodic review of these
institutions' financial condition. The Bank generally limits overnight federal
funds sold investments to $100.0 million at any one institution.
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's
asset/liability management policies, investment quality and marketability,
liquidity needs and performance objectives.
The following table sets forth certain information regarding the book value
of the Company's and the Bank's liquidity and investment securities portfolio at
the dates indicated. At December 31, 2001 and 2000, the fair value of the
investment securities portfolio was $355.5 million and $187.8 million,
respectively.
December 31,
------------------------------------
2001 2000 1999
------- ------- -------
(In thousands)
Interest-bearing deposits $ 29,367 53,392 51,306
======= ======= =======
Federal funds sold $ 112,765 139,268 35,013
======= ======= =======
Investment securities:
Available for sale:
U.S. Government and agency securities $ 141,530 81,255 78,618
Asset-backed securities 81,670 80,614 105,241
Corporate debt securities 71,309 - -
Bank trust preferred securities 40,899 2,704 731
Marketable equity securities 20,053 9,921 9,515
------- ------- -------
Total investments available for sale 355,461 174,494 194,105
------- ------- -------
Held to maturity:
U.S. Government and agency securities - 9,986 9,983
Corporate debt securities - 2,647 2,016
------- ------- -------
Total investments held to maturity - 12,633 11,999
------- ------- -------
Total investment securities $ 355,461 187,127 206,104
======= ======= =======
Stock in the FHLB of Chicago $ 132,081 84,775 75,025
======= ======= =======
20
The table below sets forth information regarding the carrying value,
weighted average yields based on amortized cost, and maturities of the Company's
investment securities. At December 31, 2001, all investment securities are
classified as available for sale.
At December 31, 2001
-------------------------------------------------------------------------------------
One Year 1 to 5 to More than
or Less 5 Years 10 Years 10 Years
------------------- ------------------- ------------------- --------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- ------ --------- ------ ------- ----- ------- -------
(Dollars in thousands)
U.S. Government and agency
securities $ 14,084 3.67% $ 106,114 5.44% $ 16,265 3.81% $ 5,067 2.70%
Asset-backed securities 10,098 5.88 8,412 2.30 33,882 3.12 29,278 4.32
Corporate debt securities - - 55,362 6.81 15,947 6.28 - -
Bank trust preferred securities - - - - - - 40,899 4.37
Marketable equity securities /1/
Common stock - - - - - - 4,930 2.57
Preferred stock - - - - - - 15,123 4.01
------ ---- ------- ---- ------ ---- ------ ----
Total $ 24,182 4.59% $ 169,888 5.73% $ 66,094 4.05% $ 95,297 4.12%
====== ==== ======= ==== ====== ==== ====== ====
---------------------------------------------
Total Investment Securities
---------------------------------------------
Average Weighted
Life Carrying Market Average
in Years Value Value Yield
-------- ---------- --------- -----
U.S. Government and agency
securities 3.63 $ 141,530 $ 141,530 4.94%
Asset-backed securities 12.40 81,670 81,670 3.82
Corporate debt securities 3.82 71,309 71,309 6.69
Bank trust preferred securities 26.16 40,899 40,899 4.37
Marketable equity securities (1)
Common stock - 4,930 4,930 2.57
Preferred stock - 15,123 15,123 4.01
------- ------- ------- ----
Total 10.28 $ 355,461 $ 355,461 4.89%
======= ======= ======= ====
- ----------------------
/1/ Marketable equity securities with no stated maturity are included in the
"More than 10 Years" category.
21
The classification of investments as held to maturity, available for sale,
or trading is made at the time of purchase based upon management's intent at
that time. On January 1, 2001, as allowed under the adoption of Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Investments and Hedging Activaties," the Bank transferred its remaining
investment securities previously in its held to maturity portfolio into its
available for sale portfolio. At December 31, 2001, $355.5 million of investment
securities were classified as available for sale and recorded at fair value
(cost basis of $350.6 million). At December 31, 2000, $174.5 million were
classified as available for sale (cost basis of $172.3 million). Stock in the
FHLB of Chicago is carried at cost.
SOURCES OF FUNDS
The Bank's primary sources of funds are deposits, amortization and
prepayment of loan principal (including mortgage-backed securities), borrowings
from the FHLB of Chicago, sales of mortgage loans, sales or maturities of
investment securities, mortgage-backed securities and short-term investments,
and funds provided from operations. At December 31, 2001, deposits accounted for
69.2% of total interest-bearing liabilities, up significantly from 62.1% as of
December 30, 2000, due to strong deposit inflows during 2001, less reliance on
borrowed funds as well as the acquisition of Mid Town, which had $270.3 million
of deposits at acquisition.
Deposits. The Bank offers a variety of deposit accounts having a wide range
of interest rates and terms. The Bank's deposits consist of passbook accounts,
NOW and checking accounts, money market and certificate accounts. The Bank only
solicits deposits from its market area and does not use brokers to obtain
deposits. The Bank relies primarily on competitive pricing policies,
advertising, and customer service to attract and retain these deposits. The flow
of deposits is influenced significantly by general economic conditions, changes
in money market and prevailing interest rates and competition. Recently, the
Bank has emphasized growth in core accounts, defined as commercial and
non-interest checking accounts, NOW accounts, money market accounts, and
passbooks by increased advertising and marketing of checking accounts, and the
addition of a more competitively priced money market product. In addition, the
ratio of core deposits to total deposits was enhanced with the acquisition of
Mid Town in 2001, which had 83% of their deposits in core accounts at
acquisition.
The following table sets forth the balances and percentages of the various
types of deposits offered by the Bank at the date indicated and the change in
the dollar amount of deposits between such dates:
December 31, 2001 December 31, 2000 December 31, 1999
------------------------------- ----------------------------------- --------------------
% of % of Increase % of
Amount Deposits Increase Amount Deposits (Decrease) Amount Deposits
---------- -------- -------- --------- -------- ---------- --------- ---------
Commercial checking $ 128,214 3.6% $ 79,742 $ 48,472 1.6% $ (604) $ 49,076 1.8%
Non-interest checking 121,066 3.4 28,595 92,471 3.1 23,626 68,845 2.6
NOW accounts 324,991 9.1 74,495 250,496 8.4 27,955 222,541 8.2
Money market accounts 368,672 10.4 139,614 229,058 7.7 66,755 162,303 6.0
Passbook accounts 898,073 25.3 159,467 738,606 24.9 12,430 726,176 26.9
--------- ----- ------- --------- ----- ------- --------- -----
Total core deposits 1,841,016 51.8 481,913 1,359,103 45.7 130,162 1,228,941 45.5
Certificate accounts, net 1,716,981 48.2 101,871 1,615,110 54.3 144,809 1,470,301 54.5
--------- ----- ------- --------- ----- ------- --------- -----
Total deposits $ 3,557,997 100.0% $ 583,784 $ 2,974,213 100.0% $ 274,971 $ 2,699,242 100.0%
========= ===== ======= ========= ===== ======= ========= =====
22
Deposit Portfolio. The following table sets forth the distribution and the
weighted average nominal interest rates of the Bank's average deposit accounts
for the years indicated:
Year Ended
----------------------------------------------------------------------
December 31, 2001 December 31, 2000
--------------------------------- ---------------------------------
Percent Weighted Percent Weighted
of Average of Average
Average Total Nominal Average Total Nominal
Balance Deposits Rate Balance Deposits Rate
----------- -------- ------- ----------- -------- -------
(Dollars in thousands)
Commercial checking accounts $ 70,359 2.25% - % $ 55,367 1.95% - %
Non-interest bearing checking 93,632 3.00 - 76,440 2.70 -
Interest bearing NOW accounts 245,719 7.87 1.03 223,358 7.88 1.22
Money market accounts 279,281 8.94 3.49 190,693 6.73 3.87
Passbook accounts 775,419 24.83 2.32 741,453 26.17 2.48
----------- ------- ----------- ------
Total checking, money market and
passbook accounts 1,464,410 46.89 1.73 1,287,311 45.43 1.92
----------- ------- ----------- ------
Certificate accounts with original maturities of:
6 months or less 506,087 16.21 4.50 323,096 11.40 5.24
7 to 12 months 238,010 7.62 5.31 478,393 16.89 5.50
Greater than 1 to 3 years 809,134 25.91 6.05 623,630 22.01 5.90
Greater than 3 years 105,097 3.37 5.69 120,853 4.27 5.78
----------- ------- ----------- ------
Total certificates of deposits 1,658,328 53.11 5.45 1,545,972 54.57 5.63
----------- ------- -----------
Total deposits $ 3,122,738 100.00% 3.86% $ 2,833,283 100.00% 4.08%
=========== ======= ==== =========== ====== ====
----------------------------------
December 31, 1999
----------------------------------
Percent Weighted
of Average
Average Total Nominal
Balance Deposits Rate
---------- -------- -------
Commercial checking accounts $ 50,252 1.89% - %
Non-interest bearing checking 62,508 2.34 -
Interest bearing NOW accounts 210,525 7.90 1.28
Money market accounts 158,991 5.96 3.40
Passbook accounts 737,322 27.65 2.48
---------- -------
Total checking, money market and
passbook accounts 1,219,598 45.74 1.98
---------- -------
Certificate accounts with original maturities of:
6 months or less 343,199 12.87 4.47
7 to 12 months 435,454 16.33 4.84
Greater than 1 to 3 years 511,750 19.19 5.40
Greater than 3 years 156,491 5.87 5.95
---------- -------
Total certificates of deposits 1,446,894 54.26 5.07
---------- -------
Total deposits $ 2,666,492 100.00% 3.74%
========== ======= ====
23
The following table presents, by various interest rate categories, the
amount of certificate accounts outstanding at December 31, 2001, 2000, and 1999,
and the periods to maturity of the certificate accounts outstanding at December
31, 2001:
Period to Maturity December 31, 2001
December 31, ----------------------------------------------
---------------------------------- Within 1 to 3 Over
2001 2000 1999 One Year Years 3 Years Total
---------- --------- --------- --------- ------- ------ ---------
(In thousands)
Certificate accounts:
Less than 5.00% $ 1,008,672 71,102 525,916 818,500 178,726 11,446 1,008,672
5.00% to 5.99% 225,792 693,431 774,505 166,039 45,812 13,941 225,792
6.00% to 6.99% 437,890 806,635 130,976 363,928 55,982 17,980 437,890
7.00% and greater 44,024 43,664 37,945 21,677 22,026 321 44,024
---------- --------- --------- --------- ------- ------ ---------
Total $ 1,716,378 1,614,832 1,469,342 1,370,144 302,546 43,688 1,716,378
========== ========= ========= ========= ======= ====== =========
At December 31, 2001, the Bank had outstanding $319.1 million in
certificate accounts in amounts of $100,000 or more maturing as follows:
Period to Maturity Amount
------------------ --------------
(In thousands)
Three months or less $ 101,083
Over three through six months 65,132
Over six through 12 months 90,154
Over 12 months 62,690
--------
Total $ 319,059
========
Borrowings. Although deposits are the Bank's primary source of funds, the
Bank's policy has been to utilize borrowings, such as advances from FHLB of
Chicago, and reverse repurchase agreements, when they are a less costly source
of funds or can be reinvested at a positive rate of return.
Federal Home Loan Bank of Chicago Advances. The Bank obtains advances from
the FHLB of Chicago upon the security of its capital stock in the FHLB of
Chicago and a blanket pledge of certain of its mortgage loans. See "Regulation
and Supervision - Federal Home Loan Bank System." Such advances are made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB of
Chicago will advance to member institutions, including the Bank, for purposes
other than meeting withdrawals, fluctuates from time to time in accordance with
the policies of the FHLB of Chicago. The maximum amount of FHLB of Chicago
advances to a member institution generally is reduced by secured borrowings from
any other source. At December 31, 2001, the Bank's FHLB of Chicago advances
totaled $1.4 billion, representing 25.1% of total assets, compared to $1.7
billion, or 32.6% of total assets at December 31, 2000.
Included in FHLB of Chicago advances at December 31, 2001 are $560.0
million of fixed-rate advances with original scheduled maturities of 4 to 10
years, callable at the discretion of the FHLB of Chicago as follows: $190.0
million at 5.41% in 2002, $240.0 million at 5.87% in 2003, $80.0 million at
5.35% in 2004 and $50.0 million at 5.56% in 2005. The average term to maturity
on these advances is 5.8 years, while the average term to call is 1.5 years. At
inception, the Bank receives a lower cost of borrowing on such advances than on
similar termed non-callable advances, in return for granting the FHLB of Chicago
the right to call the advances prior to their final maturity. If called, the
FHLB of Chicago will provide replacement funding at the then prevailing market
rate of interest for the remaining term to maturity of the advances, subject to
standard terms and conditions.
24
Unsecured Term Bank Loan and Line of Credit. Since 1995, the Company has
maintained an unsecured bank term loan and line of credit facility for funding
of a prior acquisition. During the current year, with the acquisition of Mid
Town for $69.0 million, of which 80% was paid in cash, the Company repaid the
remaining $29.4 million on its unsecured term bank loan, and borrowed $55.0
million under a new unsecured term bank loan agreement. The loan provides for an
interest rate of one, two, three, six or twelve-month LIBOR, at the option of
the borrower, plus 110 basis points, payable at the end of the repricing period.
At December 31, 2001, the interest rate is currently three month LIBOR plus 110
basis points. The remaining principal amount outstanding at December 31, 2001
was $55.0 million. The loan requires increasing annual principal payments with
$11.0 million due at the final maturity of the loan on December 31, 2008.
Prepayments of principal are allowed without penalty at the end of any repricing
period.
In conjunction with the unsecured term bank loan, the Company now maintains
a $40.0 million one-year unsecured revolving line of credit that matures
annually on November 30. Prior to the acquisition of Mid Town, the Company
maintained a $35.0 million unsecured line of credit. The loan provides for an
interest rate of one, two, three, six or twelve-month LIBOR at the option of the
borrower plus 100 basis points and payable at the end of the repricing period.
At December 31, 2001, the interest rate is currently three-month LIBOR plus 100
basis points. At December 31, 2001, $10.0 million is outstanding on the line of
credit.
The credit agreement contains covenants that, among other things, require
the Company to maintain a minimum stockholders' equity balance and to obtain
certain minimum operating results, as well as requiring the Bank to maintain
"well capitalized" regulatory capital levels and certain non-performing asset
ratios. In addition, the Company has agreed not to pledge any stock of the Bank
or MAFD for any purpose. At December 31, 2001, the Company was in compliance
with these covenants.
A summary of the Company's borrowed funds at December 31, 2001 and 2000 is
as follows:
December 31, 2001 December 31, 2000
---------------------------------------- ----------------------
Weighted Weighted
Interest Rate Average Average
Range Rate Amount Rate Amount
--------------- -------- ----------- -------- ---------
(Dollars in thousands)
Fixed-rate advances from FHLB due:
Within 1 year 5.99% - 7.40% 6.46% $ 280,000 6.37% $ 365,000
1 to 2 years 4.87 - 6.78 6.08 135,500 6.43 305,000
2 to 3 years 4.81 - 7.22 6.30 260,000 6.35 55,500
3 to 4 years 4.70 - 7.20 6.01 205,000 6.61 205,000
4 to 5 years 5.37 - 6.82 6.16 55,000 6.16 195,000
5 to 6 years - - - - - 6.82 30,000
6 to 7 years 4.81 - 5.86 5.28 310,000 - -
7 to 8 years 5.61 - 5.86 5.73 50,000 5.26 285,000
Greater than 8 years 5.42 - 5.42 5.42 30,000 5.62 80,000
------------- --------- ---------
Total fixed rate advances 4.70 - 7.40 5.98 1,325,500 6.15 1,520,500
Adjustable-rate advances from FHLB due:
Within 1 year 1.93 - 2.32 2.11 80,000 6.81 100,000
1 to 2 years - - - - - 6.87 25,000
Greater than 2 years - - - - - 6.58 50,000
------------- --------- ---------
Total adjustable rate advances 1.93 - 2.32 2.11 80,000 6.75 175,000
------------- --------- ---------
Total advances from FHLB 1.93% - 7.40% 5.76 1,405,500 6.21 1,695,500
============= ========= =========
Unsecured term bank loan 3.16 55,000 7.72 29,400
Unsecured line of credit 3.06 10,000 7.71 4,000
--------- ---------
Total borrowed funds 5.64% $1,470,500 6.24% $1,728,900
==== ========= ==== =========
25
Subsidiary Activities
MAF Developments. The Company engages in the business of purchasing
unimproved land for development into residential subdivisions of single-family
lots primarily through MAFD, a wholly-owned subsidiary of the Company. The
Company has been engaged in this activity since 1974, and since that time has
developed and sold over 5,900 lots in 24 different subdivisions primarily in the
western suburbs of Chicago. The subsidiary acts as sole principal or as a joint
venture partner in their developments. The subsidiary historically has provided
essentially all of the capital for a joint venture and receive in exchange an
ownership interest in the joint venture which entitles it to a percentage of the
profit or loss generated by the project, generally 50-60%, with the exact
percentage based upon a number of factors, including characteristics of the
venture, the perceived risks involved, and the time to completion. The net
profits are generally defined in the joint venture agreement as the gross
profits of the joint venture from sales, less all expenses, loan repayments and
capital contributions. In addition, MAFD may from time to time invest in
residential real estate projects, typically structured as limited partnership
investments, managed by unaffiliated parties.
OTS regulations impose restrictions on the Bank's participation in real
estate development activities. See "Regulation and Supervision - Federal Savings
Institution Regulation - Capital Requirements." In 1993, the Company formed a
wholly-owned subsidiary, MAFD, to continue its land development activities. As a
subsidiary of the Company, the activities of MAFD are not restricted by OTS
regulations as they are for the Bank.
NW Financial, a wholly-owned subsidiary of the Bank, developed unimproved
land into residential subdivisions, as well constructed single-family homesites
on the improved lots. Its final project also included commercial land for
development. During 2001, NW Financial sold the final commercial parcels in this
project. Currently, the Company plans to conduct its future real estate
development activity solely through MAFD.
The following is a summary as of December 31, 2001, of the residential real
estate projects MAFD currently has an interest in:
Lots
Date Number Number Available For
Land Total Lots Sold but or Sale Investment
Description of Project Acquired Lots Sold Not Closed Sold Balance
- ---------------------- -------- ---- ---- ---------- ---- -------
(Dollars in thousands)
Tallgrass of Naperville 11/96-8/01 951 783 78 90 $ 8,498
951 residential lots; 19.3 acres
for townhomes; 12.8 acres
for commercial
Shenandoah 6/00 326 - - 326 4,495
Proposed 326 residential lots
------
$ 12,993
======
During the years ended December 31, 2001, 2000, and 1999, Bank real estate
subsidiaries paid aggregate dividends of $-0-, $3.8 million, and $9.0 million,
respectively, to the Bank. The remaining investment at December 31, 2001 is a
deduction for the Bank in computing its regulatory capital requirements,
currently $2.1 million. This deduction was $2.4 million at December 31, 2000.
26
The following is a description of the projects currently under development:
Tallgrass of Naperville. MAFD with a venture partner who shares in 40% of
the profits, has invested in 447 acres in three separate parcels from 1996 to
2001 for the development of 951 residential lots in Naperville, Illinois. The
project also has 19.3 acres available for townhomes, as well as 12.8 acres of
commercially-zoned land which are expected to be sold in bulk sales to
developers. As of December 31, 2001, the Company's investment was $8.5 million.
Currently, the Company estimates an additional $9.5 million of disbursements
will be made to complete this project. Such amounts are not recorded in the
consolidated financial statements.
Shenandoah. MAFD purchased land for a planned development of approximately
326 single-family lots in Plainfield, Illinois in June 2000 for $4.4 million.
There is no venture partner in this property. Development is expected to begin
in mid 2002, with lot sales commencing in late 2002 or early 2003. Currently,
the Company estimates an additional $12.8 million of disbursements will be made
to complete this project. Such amounts are not recorded in the consolidated
financial statements.
The following is a description of the project completed in 2001:
Woodbridge. Woodbridge consists of 341 acres of land in Elgin, Illinois.
The project was developed through NW Financial, with a developer who shares in
50% of the project's profits. The project includes 232 acres for the
construction of 531 single-family homes, which is complete, and 48 acres of
commercial-zoned property. In December 2001, the remaining commercial lot was
sold at a pretax profit of $501,000.
The following is a description of a planned development project subject to
purchase contracts:
At December 31, 2001, MAFD has entered into multiple real estate purchase
contracts related to the acquisition of approximately 780 acres of vacant land
in a far western suburb of Chicago. The aggregate purchase price of these
contracts is $28.4 million. The contracts contain various contingencies
regarding soil tests, environmental testing, zoning etc., and provide for the
takedown of the land in staggered closings over a four-year period. The proposed
development is in its early planning stages and may entail the acquisition of
additional land in the future. The Company is actively pursuing and expects to
receive the required zoning and desired plat with the local planning commission
to develop this project with a joint venture partner. Assuming the Company
proceeds with this project, based on the existing purchase contracts, current
estimated total developments costs (including land acquisition) are
approximately $68 million. The project will include single-family residential
lots, multi family and commercial parcels along with various other amenities and
be developed in units over an eight-year period.
Mid America Insurance Agency. Mid America Insurance Agency, Inc. ("Mid
America Insurance") is an indirect wholly owned subsidiary of the Bank that
provides insurance brokerage services, including personal and commercial
insurance products, to the Bank's customers. For the years ended December 31,
2001, 2000 and 1999, Mid America Insurance generated pre-tax income of $64,000,
$113,000, and $75,000, respectively.
Mid America Investments. The Bank, through Mid America Investments, is a
subscriber to INVEST, a registered broker-dealer that provides certain
securities brokerage and investment advisory services under its INVEST service
mark to the general public. Through this program and licensed dual employees,
these services are offered to customers of the Bank. Presently 15 investment
executives are employed and operate from certain Bank locations. Revenues are
generated from the sales of securities products in the form of commissions
which are apportioned between INVEST and the Bank. For the years ended December
31, 2001, 2000 and 1999, pre-tax income from INVEST operations was $374,000,
$448,000 and $836,000, respectively.
27
Mid America Re., Inc. The Bank, through Mid America Investments, formed Mid
America Re., Inc. ("Mid America Re"), as a wholly-owned mortgage reinsurance
subsidiary to share in a portion of the insurance premiums earned by various
private mortgage insurance companies on loans originated by the Bank, in return
for assuming a second-tier layer of risk of loss on insured portions of these
loans. The Bank generally requires a borrower to obtain private mortgage
insurance to cover excess principal amounts if the loan principal exceeds
certain loan-to-value ratios, typically 80%. At December 31, 2001, the Bank had
second-tier mortgage insurance risk of $2.6 million. For the year ended December
31, 2001, pre-tax income from Mid America Re was diminimus due to expensed
start-up costs. Based on the limited losses historically incurred by the Bank on
mortgage loans with mortgage insurance, as well as the expected amount of loans
to be added in 2002, the Company expects pre-tax income from Mid America Re to
increase to approximately $600,000 in 2002.
MAF Realty Co. L.L.C. - IV. The Bank formed MAF Realty Co. L.L.C. - IV
("Realty IV") as a real estate investment trust in July 1999 as the result of
proactive tax planning. Realty IV was capitalized through the contribution of
participation interests in mortgage loans owned by the Bank. The primary assets
of Realty IV as of December 31, 2001 consist of the remaining balances of these
participation interests. The common membership interests and 89% of the
preferred membership interests in Realty IV are owned by MAF Realty Co. L.L.C. -
III, which was formed in July 1999 as a holding company for Realty IV. The
remaining 11% preferred membership interests, valued at approximately $110,000,
were distributed equally in 2000 to 110 individuals who are directors, employees
or former employees of the Company and its subsidiaries. All of the assets of
Realty IV are included in loans and accrued interest receivable on the Company's
consolidated balance sheet, and the value attributable to the minority interest
is included in other liabilities. The distribution of the preferred interests
and the dividends paid to the minority interest holders are included in the
Company's income statement. These amounts totaled $8,800 in 2001 and $118,800 in
2000.
Mid Town Development Corporation. The Company acquired Mid Town Development
Corporation in conjunction with the acquisition of Mid Town. The subsidiary's
activities were primarily providing mezzanine financing for real estate
investments, primarily for existing Bank customers. Loan balances acquired
totaled $1.6 million. The Company does not intend to pursue additional mezzanine
financing arrangements in the future.
Equitable Finance Corporation. The Company acquired Equitable Finance
Corporation in conjunction with the acquisition of Mid Town. The subsidiary's
activities were making various types of "sub-prime" loans, generally short-term
unsecured personal loans. Loan balances acquired were $1.3 million. The Company
does not intend to pursue additional loans in this line of business in the
future.
REGULATION AND SUPERVISION
GENERAL
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS under the Home Owners' Loan Act (the "HOLA"). In addition, the activities of
savings institutions, such as the Bank, are governed by the HOLA and the Federal
Deposit Insurance Act ("FDI Act").
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer.
The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its
deposit accounts are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") managed by the FDIC. The Bank must file reports with the
OTS and the FDIC concerning its activities and financial condition in addition
to obtaining regulatory approvals prior to entering into certain transactions
such as mergers with, or acquisitions of, other savings institutions. The OTS
and/or the FDIC conduct periodic examinations to test the Bank's
28
compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Company, the Bank and
their operations. Certain of the regulatory requirements applicable to the Bank
and to the Company are referred to below or elsewhere herein. The description
of statutory provisions and regulations applicable to savings institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on the
Bank and the Company.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally will not be restricted under existing laws as to the types
of business activities in which it may engage, provided that the Bank continues
to be a qualified thrift lender ("QTL"). See "Federal Savings Institution
Regulation - QTL Test." Upon any non-supervisory acquisition by the Company of
another savings institution or savings bank that meets the QTL test and is
deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to limitations on the types of
business activities in which it could engage. The HOLA limits the activities of
a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act of 1956, as amended ("BHC
Act"), subject to the prior approval of the OTS, and activities authorized by
OTS regulation and no multiple savings and loan holding company may acquire more
than 5% of the voting stock of a company engaged in impermissible activities.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; or acquiring or retaining control of
a depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition of the
institution on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions, as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
FEDERAL SAVINGS INSTITUTION REGULATION
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core capital) ratio and an 8% risk-based capital ratio. In
addition, the prompt corrective action standards discussed below also establish,
in effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital
ratio (3% for institutions receiving the highest rating on the CAMEL financial
institution rating system), and,
29
together with the risk-based capital standard itself, a 4% Tier I risk-based
capital standard. The OTS regulations also require that, in meeting the
leverage ratio, tangible and risk-based capital standards, institutions must
generally deduct investments in and loans to subsidiaries engaged in activities
as principal that are not permissible for a national bank. For the Bank, this
includes its $2.1 million investment in NW Financial at December 31, 2001,
which the Bank must deduct from regulatory capital for purposes of calculating
its capital requirements. The risk-based capital standard for savings
institutions requires the maintenance of Tier I (core) and total capital (which
is defined as core capital and supplementary capital) to risk-weighted assets
of at least 4% and 8%, respectively.
At December 31, 2001 and 2000, the Bank was in compliance with the current
capital requirements as follows:
December 31, 2001 December 31, 2000
------------------------ ------------------------
Percent of Percent of
Amount Assets Amount Assets
---------- -------- ----------- ---------
(Dollars in thousands)
Stockholder's equity of the Bank $ 462,707 8.32% $ 394,474 7.63%
========= ====== ======= ======
Tangible capital $ 350,825 6.44% $ 321,931 6.32%
Tangible capital requirement 81,686 1.50 76,408 1.50
--------- ------ ------- ----
Excess $ 269,139 4.94% $ 245,523 4.82%
========= ====== ======= ====
Core capital $ 350,825 6.44% $ 321,931 6.32%
Core capital requirement 163,372 3.00 152,816 3.00
--------- ------ ------- ----
Excess $ 187,453 3.44% $ 169,115 3.32%
========= ====== ======= ====
Core and supplementary capital $ 364,365 11.31% $ 336,801 11.98%
Risk-based capital requirement 257,691 8.00 224,878 8.00
--------- ------ ------- ----
Excess $ 106,674 3.31% $ 111,923 3.98%
========= ====== ======= ====
Total Bank assets $ 5,559,787 $ 5,168,163
Adjusted total Bank assets 5,445,742 5,093,883
Total risk-weighted assets 3,335,188 2,885,260
Adjusted total risk-weighted assets 3,221,143 2,810,981
The following table reflects the Bank's regulatory capital as of December
31, 2001 as it relates to these three capital requirements:
Risk-
Tangible Core Based
--------- ------------ ---------
(In thousands)
Stockholder's equity of the Bank $ 462,707 462,707 462,707
Goodwill and core deposit intangibles (105,670) (105,670) (105,670)
Non-permissible subsidiary deduction (2,055) (2,055) (2,055)
Non-includible purchased mortgage servicing rights (1,052) (1,052) (1,052)
Regulatory capital adjustment for available for sale securities (3,105) (3,105) (3,105)
Recourse on loan sales - - (5,901)
General allowance for loan losses - - 19,441
--------- --------- -------
Regulatory capital $ 350,825 350,825 364,365
========= ========= =======
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution is
considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at
30
least 5%, and it is not subject to any order or directive by the OTS to meet a
specific capital level. A savings institution generally is considered
"adequately capitalized" if its ratio of total capital to risk-weighted assets
is at least 8%, its ratio of Tier I (core) capital to risk-weighted assets is
at least 4%, and its ratio of core capital to total assets is at least 4% (3%
if the institution receives the highest CAMEL rating). A savings institution
that has a ratio of total capital to weighted assets of less than 8%, a ratio
of Tier I (core) capital to risk-weighted assets of less than 4% or a ratio of
core capital to total assets of less than 4% (3% or less for institutions with
the highest examination rating) is considered to be "undercapitalized." A
savings institution that has a total risk-based capital ratio less than 6%, a
Tier 1 risk-based capital ratio of less than 3% or a leverage ratio that is
less than 3% is considered to be "significantly undercapitalized," and a
savings institution that has a tangible capital to assets ratio equal to or
less than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The OTS could also take any one of a
number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
Insurance of Deposit Accounts. The FDIC has adopted a risk-based deposit
insurance system that assesses deposit insurance premiums according to the
level of risk involved in an institution's activities. An institution's risk
category is based upon whether the institution is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" and one of three
supervisory subcategories within each capital group. The supervisory subgroup
to which an institution is assigned is based on a supervisory evaluation and
information which the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance fund. Based on
its capital and supervisory subgroups, each Bank Insurance Fund ("BIF") and
SAIF member institution is assigned an annual FDIC assessment rate, with an
institution in the highest category (i.e., well-capitalized and healthy)
receiving the lowest rates and an institution in the lowest category (i.e.,
undercapitalized and posing substantial supervisory concern) receiving the
highest rates. The FDIC has authority to further raise premiums if deemed
necessary. If such action is taken, it could have an adverse effect on the
earnings of the Bank.
The Deposit Insurance Funds Act of 1996 (the "Funds Act") imposed a
special one-time assessment on SAIF members, including the Bank, to
recapitalize the SAIF. The SAIF was undercapitalized due primarily to a
statutory requirement that SAIF members make payments on bonds issued in the
late 1980's by the Financing Corporation ("FICO") to recapitalize the
predecessor to SAIF. The Funds Act spreads the obligations for payment of the
FICO bonds across all SAIF and BIF members. As of January 1, 2001, BIF and SAIF
deposits were assessed for a FICO payment of 1.96 basis points.
As a result of the Funds Act and the FDI Act, the FDIC voted to
effectively lower SAIF assessments to 0 to 27 basis points as of January 1,
1997. The Bank's assessment rate for the year ended December 31, 2001 was the
lowest available to well-capitalized financial institutions. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated
any applicable law, regulation, rule, order or condition imposed by the FDIC or
the OTS. The management of the Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
31
Impact of the Gramm-Leach-Bliley Act. On November 12, 1999, the
Gramm-Leach-Bliley Act (the "GLB Act") was signed into law. The GLB Act
significantly reforms various aspects of the financial services business,
including, but not limited to: (i) the establishment of a new framework under
which bank holding companies and, subject to numerous restrictions, banks can
own securities firms, insurance companies and other financial companies; (ii)
subjecting banks to the same securities regulation as other providers of
securities products; and (iii) prohibiting new unitary savings and loan holding
companies from engaging in nonfinancial activities or affiliating with
nonfinancial entities.
The provisions in the GLB Act permitting full affiliations between bank
holding companies or banks and other financial companies do not increase the
Company's authority to affiliate with securities firms, insurance companies or
other financial companies. As a unitary savings and loan holding company, the
Company was generally permitted to have such affiliations prior to the
enactment of the GLB Act. It is expected, however, that these provisions will
benefit the Company's competitors.
The prohibition on the ability of new unitary savings and loan holding
companies to engage in nonfinancial activities or affiliating with nonfinancial
entities generally applies only to savings and loan holding companies that were
not, or had not submitted an application to become, savings and loan holding
companies as of May 4, 1999. Since the Company was treated as a unitary savings
and loan holding company prior to that date, the GLB Act will not prohibit the
Company from engaging in nonfinancial activities or acquiring nonfinancial
subsidiaries. However, the GLB Act generally restricts any nonfinancial entity
from acquiring the Company unless such nonfinancial entity was, or had
submitted an application to become a savings and loan holding company as of May
4, 1999.
The GLB Act imposed new requirements on financial institutions with
respect to customer privacy by generally prohibiting disclosure of customer
information to non-affiliated third parties unless the customer has been given
the opportunity to object and has not objected to such disclosure. Financial
institutions are further required to disclose their privacy policies to
customers annually. Final regulations have been passed regarding customer
privacy under the GLB Act, however, compliance with such privacy regulations
were voluntary until July, 2001.
The Company does not believe that the GLB Act will have a material adverse
affect upon its operations in the near term. However, to the extent the GLB Act
permits banks, securities firms and insurance companies to affiliate, the
financial services industry may experience further consolidation. This could
result in a growing number of larger financial institutions that offer a wider
variety of financial services than the Company currently offers and that can
aggressively compete in the markets the Company currently serves.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if such loan is secured by readily-marketable collateral,
which is defined to include certain financial instruments and bullion. At
December 31, 2001, the Bank's limit on loans to one borrower was $55.0 million.
At December 31, 2001, the Bank's largest aggregate outstanding balance of loans
to any one borrower was $28.4 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings and loan association is required to either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" (total assets less (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period. A savings institution that fails the QTL test is
subject to certain operating
32
restrictions and may be required to convert to a bank charter. As of
December 31, 2001, the Bank maintained 91.1% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger and other
distributions charged against capital. The regulations provide that an
institution (i) which is not eligible for expedited treatment; or (ii) which
its total amount of capital distributions for a calendar year exceeds its net
income for that year to date plus its retained income for the proceeding two
years; or (iii) which would not be at least adequately capitalized following
the distribution; or (iv) which would violate a prohibition contained in a
statute, regulation or agreement between the institution and the OTS by
performing the capital distribution, must submit an application to the OTS to
receive approval of the capital distribution. Under any other circumstances,
the Bank would be required to provide a written notice to the OTS 30 days prior
to the capital distribution.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessment, paid on a
semi-annual basis, is computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank were $755,000,
$661,000, and $577,000 in 2001, 2000 and 1999 respectively.
Branching. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and
23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount
of covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A, and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders, as well as entities such persons control, is governed by
Sections 22(g) and 22(h) of the FRA and Regulation O thereunder. Among other
things, such loans are generally required to be made on terms substantially the
same as those offered to unaffiliated individuals and to not involve more than
the normal risk of repayment. Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to such persons based, in part,
on the Bank's capital position and requires certain board approval procedures
to be followed.
33
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers and/or
directors to institution of proceedings for receivership, conservatorship or
termination of deposit insurance. Civil penalties cover a wide range of
violations and may amount to as much as $1 million per day in certain
circumstances. Under the FDI Act, the FDIC has the authority to recommend to
the Director of the OTS enforcement action to be taken with respect to a
particular savings institution. If action is not taken by the Director, the
FDIC has authority to take such action under certain circumstances. Federal law
also establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address
problems at insured depository institutions before capital becomes impaired.
The standards set forth in the Guidelines address internal controls and
information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; asset quality;
earnings and compensation, fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final rule establishes deadlines for the
submission and review of such safety and soundness compliance plans when such
plans are required.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB of Chicago, is required to
acquire and hold shares of capital stock in that FHLB in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20
of its advances (borrowings) from the FHLB-Chicago, whichever is greater. At
December 31, 2001, the Bank was in compliance with this requirement, with an
investment in FHLB of Chicago stock of $132.1 million. FHLB of Chicago advances
must be secured by specified types of collateral and may be obtained primarily
for the purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds to cover certain obligations on
bonds issued to fund the resolution of insolvent thrifts and to contribute
funds for affordable housing programs. These requirements could reduce the
amount of dividends that the FHLBs pay to their members and could also result
in the FHLBs imposing a higher rate of interest on advances to their members.
For the years ended December 31, 2001, 2000, and 1999, dividends from the FHLB
of Chicago to the Bank amounted to $6.7 million, $6.1 million, and $3.9
million, respectively. If FHLB dividends were reduced, or interest on future
FHLB advances increased, the Bank's net interest income might also be reduced.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $41.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $41.3 million, the reserve requirement is
currently $1,239,000 plus 10% (subject to adjustment by the Federal
34
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $41.3 million, as the first $5.7 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board)
are exempted from the reserve requirements. The Bank is in compliance with
the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are listed below.
Name Age Position(s) Held
---- --- ----------------
Allen H. Koranda 55 Chairman of the Board and Chief
Executive Officer of the Company
and the Bank
Kenneth Koranda 52 President and Director of the
Company and the Bank
David C. Burba 54 Executive Vice President and
Director of the Company and the
Bank
Jerry A. Weberling 50 Executive Vice President, Chief
Financial Officer and Director of
the Company and the Bank
Gerard J. Buccino 40 Senior Vice President of the
Company and the Bank
William Haider 50 Senior Vice President of the
Company and the Bank;
President of NW Financial and MAFD
Michael J. Janssen 42 Senior Vice President of the
Company and the Bank
David W. Kohlsaat 47 Senior Vice President of the
Company and the Bank
Thomas Miers 50 Senior Vice President of the
Company and the Bank
Kenneth Rusdal 60 Senior Vice President of the
Company and the Bank
Sharon Wheeler 49 Senior Vice President of the
Company and the Bank
Christine Roberg 50 First Vice President and
Controller of the Company and
the Bank
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 their 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 Investments. Mr. Koranda holds Bachelor of Arts and Juris Doctor
degrees from Northwestern University. Mr. Koranda is the brother of Kenneth
Koranda.
35
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 Investments. 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.
David C. Burba joined the Company as Executive Vice President on January
1, 1999 in conjunction with the acquisition of Westco. He had previously served
as Chairman of the Board and President of Westco since 1992 and President of
First Federal Savings and Loan of Westchester since 1978. Mr. Burba holds a
Bachelor of Arts degree from Carthage College.
Jerry A. Weberling has been Executive Vice President and Chief Financial
Officer of the Company and the Bank since July 1993. 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 - Risk Management of the
Company and the Bank since July 2000. Prior to that he was Senior Vice
President and Controller of the Company and the Bank since July 1996. He joined
the Bank in 1990. 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. He joined the Bank in 1984. He is President of MAFD and NW Financial,
managing the real estate development activities of the Company. Mr. Haider
holds a Bachelor of Science degree from Southern Illinois University.
Michael J. Janssen has been Senior Vice President - Investor Relations and
Taxation of the Company and the Bank since July 1996. He joined the Bank in
1989. 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 in 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 joined the Bank in 1976. Mr. Kohlsaat
holds a Bachelor of Science degree from Southern Methodist University.
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.
He joined the Bank in 1979. Mr. Miers holds a Bachelor of Science degree from
George Williams College.
Kenneth Rusdal has been Senior Vice President of the Company since April
1993 and Senior Vice President-Operations and Information Systems since January
1992. He joined the Bank in 1987.
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.
Christine Roberg has been First Vice President and Controller of the
Company and the Bank since July 2000. Prior to that time, she was Assistant
Controller since July 1992. She joined the Bank in 1980. She is a certified
public accountant. Ms. Roberg holds a Bachelor of Arts degree from Benedictine
University and a Master of Business Administration degree from Northern
Illinois University.
EMPLOYEES
The Bank employs a total of 1,241 full time equivalent employees as of
December 31, 2001. Management considers its relationship with its employees to
be excellent.
36
ITEM 2. PROPERTIES
The Company's business is conducted through 32 retail banking offices,
including the Company's executive office location in Clarendon Hills, Illinois,
and two loan processing and servicing centers located in Naperville, Illinois,
which the Bank leases. The Bank has its own data processing equipment that
consists primarily of mainframe hardware, network servers, personal computers
and ATMs. At December 31, 2001, the data processing equipment has a net book
value of $4.6 million.
At December 31, 2001, the Bank owns the buildings and land for 21 of its
bank branch offices and owned the buildings but leased the land for two of its
bank branch offices. The properties related to the bank branch offices owned by
the Bank had a depreciated cost of approximately $29.0 million at December 31,
2001. The Bank leases the remaining nine bank branch offices, all of which are
well maintained. At December 31, 2001, the aggregate net book value of
leasehold improvements associated with leased bank branch facilities was $7.2
million. See Note 10 in "Item 8. Financial Statement and Supplementary Data."
The Bank, as the successor to Mid Town, leases a portion of a commercial
and residential building consisting of approximately 30,789 square feet on a
triple net lease basis. The term of the lease is set to expire on June 30,
2024. The property is beneficially-owned by a limited partnership in which the
former Chief Executive Officer of Mid Town, who is a current director of the
Bank has a limited partnership interest. The Company has incurred rental
expense on this property of $29,800 since the acquisition date.
ITEM 3. LEGAL PROCEEDINGS
There are various actions pending against the Company or its subsidiaries
in the normal course of business but in the opinion of management, these
actions are unlikely, individually or in the aggregate, to have a material
adverse effect on 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 trades on the Nasdaq Stock Market under the
symbol "MAFB." As of March 8, 2002, the Company had 1,874 shareholders of
record. The table below shows the reported high and low sales prices of the
common stock during the periods indicated as well as the period end closing
sales prices.
December 31, 2001 December 31, 2000
---------------------------------------- -------------------------------------------
High Low Close Dividend High Low Close Dividend
------ ------ -------- ---------- -------- -------- -------- ----------
First Quarter $ 29.00 24.81 27.38 .10 21.00 15.50 16.19 .09
Second Quarter 31.25 25.69 30.70 .12 19.94 15.50 18.19 .10
Third Quarter 32.73 24.30 28.66 .12 25.00 17.88 24.88 .10
Fourth Quarter 30.25 26.10 29.50 .12 30.00 20.50 28.44 .10
The Company declared $0.46 per share in dividends during the year ended
December 31, 2001, and $0.39 per share in dividends for the year ended December
31, 2000. 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 regulatory restrictions. See "Item 1. Business - Regulation and
Supervision - Federal Savings Institution Regulation - Limitation on Capital
Distributions."
37
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."
December 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ----------
(Dollars in thousands, except per share data)
Selected Financial Data:
Total assets $ 5,595,039 5,195,588 4,658,065 4,121,087 3,457,664
Loans receivable, net 4,447,575 4,328,114 3,884,569 3,319,076 2,707,127
Mortgage-backed securities 142,158 104,385 133,954 183,603 283,008
Interest-bearing deposits 29,367 53,392 51,306 24,564 57,197
Federal funds sold 112,765 139,268 35,013 79,140 50,000
Investment securities 487,542 271,902 281,129 260,945 177,803
Real estate held for development
or sale 12,993 12,718 15,889 25,134 31,197
Deposits 3,557,997 2,974,213 2,699,242 2,656,872 2,337,013
Borrowed funds 1,470,500 1,728,900 1,526,363 1,034,500 770,013
Subordinated capital notes, net - - - - 26,779
Stockholders' equity 435,873 387,729 352,921 344,996 263,411
Book value per share 18.97 16.78 14.76 13.81 11.70
Tangible book value per share/1/ 14.37 13.80 12.20 11.32 10.31
Year Ended December 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ----------
(Dollars in thousands, except per share data)
Selected Operating Data:
Interest income $ 345,736 343,103 285,092 247,263 238,987
Interest expense 214,489 217,173 168,401 150,575 145,216
--------- --------- --------- --------- ---------
Net interest income 131,247 125,930 116,691 96,688 93,771
Provision for loan losses - 1,500 1,100 800 1,150
--------- --------- --------- --------- ---------
Net interest income after provision
for loan losses 131,247 124,430 115,591 95,888 92,621
Non-interest income:
Gain on sale of loans receivable
and mortgage-backed securities 8,689 408 2,583 3,204 432
Gain on sale of investment securities 879 256 1,776 816 404
Gain on sale of loan servicing rights - 4,442 - - -
Income from real estate operations 11,484 9,536 9,630 4,517 6,876
Deposit account service charges 16,535 12,715 10,200 8,626 7,217
Loan servicing fee income (expense) (371) 1,686 1,761 1,400 2,278
Valuation (allowance) recovery of mortgage
servicing rights (904) - 900 (1,269) -
Other 10,806 8,400 7,994 8,256 5,438
--------- --------- --------- --------- ---------
Total non-interest income 47,118 37,443 34,844 25,550 22,645
Non-interest expense:
Compensation and benefits 48,221 41,197 37,845 34,494 30,472
Office occupancy and equipment 9,011 8,124 7,274 6,645 6,203
Advertising and promotion 4,355 3,569 3,149 2,281 2,737
Amortization of intangible assets 4,578 4,475 3,884 2,411 2,637
Other 17,259 15,638 15,528 13,112 12,562
--------- --------- --------- --------- ---------
Total non-interest expense 83,424 73,003 67,680 58,943 54,611
--------- --------- --------- --------- ---------
Income before income taxes
and extraordinary item 94,941 88,870 82,755 62,495 60,655
Income taxes 35,466 32,311 31,210 23,793 22,707
--------- --------- --------- --------- ---------
Income before extraordinary item 59,475 56,559 51,545 38,702 37,948
Extraordinary item/2/ - - - (456) -
--------- --------- --------- --------- ---------
Net income $ 59,475 56,559 51,545 38,246 37,948
========= ========= ========= ========= =========
Basic earnings per share $ 2.62 2.43 2.13 1.70 1.64
========= ========= ========= ========= =========
Diluted earnings per share $ 2.56 2.40 2.07 1.65 1.59
========= ========= ========= ========= =========
38
Year Ended December 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
------- --------- --------- ---------- ----------
(Dollars in thousands, except per share data)
Selected Financial Ratios and
Other Data:
Return on average assets 1.14% 1.14% 1.20% 1.07% 1.14%
Return on average equity 14.82 15.57 14.98 13.87 14.69
Average stockholders' equity
to average assets 7.70 7.34 8.03 7.73 7.79
Stockholders' equity to total assets 7.79 7.46 7.58 8.37 7.62
Tangible and core capital to
total assets (Bank only) 6.44 6.32 6.32 6.67 6.88
Risk-based capital ratio (Bank only) 11.31 11.98 12.32 13.42 14.34
Interest rate spread during period 2.22 2.30 2.52 2.47 2.62
Net yield on average interest-earning assets 2.64 2.68 2.88 2.85 2.98
Average interest-earning assets to average
interest-bearing liabilities 109.62 108.10 108.56 108.62 107.99
Non-interest expense to average assets 1.60 1.48 1.58 1.65 1.65
Non-interest expense to average assets
and average loans serviced for others 1.33 1.22 1.25 1.28 1.26
Efficiency ratio 47.00 44.56 45.19 48.54 47.07
Ratio of earnings to fixed charges:
Including interest on deposits 1.44x 1.41x 1.48x 1.41x 1.41x
Excluding interest on deposits 2.00x 1.86x 2.18x 2.11x 2.26x
Non-performing loans to total loans .45% .39 .40 .43 .39
Non-performing assets to total assets .37 .36 .50 .54 .32
Cumulative one-year gap (3.57) (5.18) (11.47) (4.23) (.80)
Number of deposit accounts 377,015 339,340 314,396 305,411 275,055
Mortgage loans serviced for others $ 1,401,607 785,350 1,226,874 1,065,126 997,204
Loan originations and purchases 2,827,594 1,484,220 1,711,337 1,754,009 1,091,824
Retail banking offices 32 27 25 24 22
Stock Price and Dividend Information:
High $ 32.73 30.00 27.50 29.25 24.46
Low 24.30 15.50 18.88 18.75 14.78
Close 29.50 28.44 20.94 26.50 23.58
Cash dividends declared per share .46 .39 .34 .257 .18
Dividend payout ratio 17.56% 16.05% 15.96% 15.12% 10.98%
- ----------------------------------
/1/ In computing tangible book value per share, the Company excludes goodwill
and core deposit intangible assets from stockholders' equity.
/2/ The extraordinary item in the year ended December 31, 1998 represent charges
for the early extinguishment of debt, net of tax benefits.
39
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW AND OUTLOOK
The Company attained record earnings of $2.56 per diluted share in 2001
despite volatile interest rates, an economic slowdown, and the attacks on the
U.S. in September 2001. The Federal Reserve Board cut the federal funds rate a
record 11 times during 2001, leading to some of the lowest short-term interest
rates in decades, and dramatically changing the slope of the Treasury yield
curve. The Company remained focused on its core businesses in 2001, namely
attracting deposits, originating mortgage loans, and enhancing its earnings
stream with increased fee income. Highlights for 2001 are as follows.
. The Company completed its acquisition of Mid Town in November
2001. Mid Town, with $307 million in assets, and $270 in deposits
added 4 branches within the city of Chicago limits, complementing
locations from previous acquisitions, as well as allowing the
Bank to enter lakefront markets on Chicago's north side.
. The Bank originated a record $2.8 billion in mortgage loans in
response to a dramatic increase in refinance activity due to a
decline in long-term interest rates in the second half of the
year. The long-term rates initially fell due to the slowing U.S.
economy and continued to fall after the attacks on the U.S. in
September 2001.
. The record loan production was nearly 70% fixed-rate, or $1.7
billion, which led to the Bank selling a record $1.02 billion of
mortgage loans into the secondary market as part of its long-term
strategy of managing its interest-rate risk by selling long-term
fixed rate mortgages. Sales netted a profit of $8.7 million in
2001, compared to $1.1 million in 2000.
. Through a 21.8% increase in the number of checking accounts, the
Bank increased fee income by 30.0% to $16.5 million in 2001.
. Despite a slowing U.S. economy, the housing market remained
relatively firm during 2001, and the Company's land development
operations posted record earnings of $11.5 million in 2001,
primarily from income from the Company's Tallgrass of Naperville
residential project.
Given the current state of the U.S. economy, and expected economic
recovery in the second half of 2002, and assuming the current interest rate
environment continues, the Company expects modest increases in loans receivable
and improved net interest margin over the balance of the year. Based on this,
coupled with expected continued strong results from its real estate development
operations, and giving effect to full cost-savings benefits relating to Mid
Town for the remainder of the year, the Company is currently projecting results
for 2002 in the range of $3.00-$3.05 per diluted share.
ACQUISITIONS AND EXPANSION ACTIVITY
The Company's acquisitions and branch purchases during the past three
years are listed as follows:
Intangibles
Selling Entity Transaction Date Completed Deposits Loans Recorded
- ------------------------ ----------------- ----------------- -------- --------- ---------------
(In thousands)
Mid Town Bancorp Acquisition November 2001 $ 270,318 210,020 41,384
M&I Bank, FSB Branch purchases April 2000 89,800 5,292 12,139
Northern Trust Company Branch purchase September 1999 22,200 399 3,057
======== ======= ==========
40
As it has in recent years, the Company expects to continue to search for
and evaluate potential acquisition opportunities that will enhance franchise
value and may periodically be presented with opportunities to acquire other
institutions, branches or deposits in the market it serves, or which allow the
Company to expand outside its current primary market areas of DuPage County and
the City of Chicago. Management intends to review acquisition opportunities
across a variety of parameters, including the potential impact on its financial
condition as well as its financial performance in the future. It is anticipated
that future acquisitions, if any, will likely be valued at a premium to book
value, and many times at a premium to current market value. As such, management
anticipates that acquisitions made by the Company may include some book value
per share dilution and earnings per share dilution for the Company's
shareholders depending on the Company's success in integrating the operations
of businesses acquired and the level of cost savings and revenue enhancements
that may be achieved.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in conformity with accounting principles generally
accepted in the United States of America, and are more fully described in Note
1 of the consolidated financial statements found in "Item 8. Financial
Statements and Supplementary Data." The preparation of these consolidated
financial statements require that management make estimates and assumptions
that affect the reported amounts of assets, liabilities, income and expense, as
well as related disclosures of contingencies. These estimates are based on
historical experience, terms of existing contracts, market trends, and other
information available to management. The Company believes that of its
significant accounting policies, the following may involve a higher degree of
judgment and complexity.
Allowance for loan losses. The allowance for loan losses is established
through a provision for loan losses that reduces net interest income to provide
a reserve against estimated losses in the Bank's loans receivable portfolio.
The allowance for loan losses reflects management's estimate of the reserves
needed to cover probable losses inherent in the Bank's loan portfolio. In
determining an adequate level of loss reserves, management periodically
evaluates the adequacy of the allowance based on the Bank's past loan loss
experience, known and inherent risks in the loan portfolio, adverse situations
that may affect the borrower's ability to repay, estimated value of any
underlying collateral, and current economic conditions.
Valuation of mortgage servicing rights. The Bank capitalizes the
estimated value of mortgage servicing rights upon the sale of loans. The Bank's
estimated value takes into consideration contractually known amounts, such as
loan balance, term, contract rate, and whether the customer escrows funds with
the Bank for the payment of taxes and insurance. These estimates are impacted
by loan prepayment speeds, earnings on escrow funds, as well as the discount
rate used to present value the cash flow stream. Subsequent to the
establishment of this asset, management reviews the fair value of mortgage
servicing rights on a quarterly basis. Changes in these estimates impact fair
value, and could require the Bank to record a valuation allowance, as it did
for $904,000 in 2001. Should estimates assumed by management regarding future
prepayment speeds on the underlying loans supporting the mortgage servicing
rights prove to be incorrect, additional valuation allowances could occur, or
contrarily, valuation allowances could be recovered if estimates increase the
fair value of mortgage servicing rights.
41
Real estate held for development. Profits from lot sales in the Company's
real estate developments are based on cash received less the cost of sales per
lot that usually includes an estimate of future costs to be incurred. This is
especially true at the outset of a project, where few actual costs have been
incurred. The estimate of total project costs is reviewed on a quarterly basis
by project management. Estimates are subject to change for various reasons,
including the length of the project, changes in rules or requirements of the
communities where the projects reside, soil and weather conditions, as well as
the general level of inflation. Changes in future estimated costs are
recognized in the period of change as either a charge or an addition to income
from real estate operations.
NET INCOME
Net income for the Company was $59.5 million, or $2.56 per diluted share
($2.62 per basic share) for the year ended December 31, 2001, an increase of
6.7% over the prior year's net income of $56.6 million, or $2.40 per diluted
share ($2.43 per basic share) and $51.5 million, or $2.07 per diluted share
($2.13 per basic share) for the year ended December 31, 1999. Earnings for 2000
include a $4.4 million pre-tax gain, or $.11 per diluted share, related to the
bulk sale of mortgage servicing rights. Excluding this gain, diluted earnings
per share for 2001 grew 12% over 2000.
NET INTEREST INCOME
Net interest income is the principal source of earnings for the Company,
and consists of interest income on loans receivable and 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 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 that fund such
investments.
Generally, the Bank is able to increase net interest income at a faster
pace when the spread between short-term and long-term interest rates is
positive, due to funding costs being more directly tied to shorter-term rates,
while loans are tied to intermediate to longer-term rates. During 2001, the
U.S. Treasury yield curve went through a dramatic change from 2000 in both the
general level of interest rates and the spread between short term and long-term
interest rates. In 2000, the Bank operated in an interest rate environment that
had shrinking to negative spreads between short and long-term interest rates,
which put pressure on its cost of funds, and narrowed spreads on ARM loans. By
the end of 2000, the U.S. Treasury yield curve was inverted between the 6-month
Treasury bill and 10-year Treasury Note by 68 basis points. Beginning in early
2001, with the slowing of the U.S. economy, the Federal Reserve Board began
aggressively lowering its target federal funds rate in an effort to stimulate
the economy. These cuts were exacerbated by the attacks on the U.S. in
September 2001. By the end of 2001, the slope in the U.S. Treasury yield curve
between the 6-month Treasury bill and 10-year Treasury Note was 327 basis
points. The impact on the Bank's net interest income in 2001 was a combination
of a decrease in the cost of core deposits, such as passbooks, money markets,
and NOW accounts, the downward repricing of maturing certificates of deposits,
the downward repricing of ARM loans, as well as shift in loan origination
activity towards long-term fixed rate mortgages. Loan prepayments and sales
soared with the drop in mortgage rates, and slowed the growth of the bank's
loan portfolio. However, the deposit inflows, coupled with the slower loan
growth, allowed the Bank to reduce its reliance on higher cost advances from
the FHLB of Chicago. The overall impact of these effects was a relatively flat
net interest margin for 2001, when compared to 2000.
42
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, 2001 includes fees which are considered adjustments
to yield.
Year Ended December 31,
------------------------------------------------------------------------------------
2001 2000
------------------------------------------------------------------------------------
Average Average
Yield/ Yield/
Balance Interest Cost Balance Interest Cost Balance
--------- -------- ----- --------- -------- ------- -----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable $ 4,319,795 307,780 7.12% $ 4,164,443 304,349 7.31% $ 3,565,375
Mortgage-backed securities 123,616 7,229 5.85 118,200 7,957 6.73 151,119
Investment securities /1/ 377,164 22,960 6.09 274,021 19,782 7.22 265,011
Interest-bearing deposits 39,139 1,914 4.89 33,212 2,459 7.40 27,969
Federal funds sold 115,564 6,133 5.31 115,857 8,704 7.51 51,860
--------- -------- --------- -------- -----------
Total interest-earning assets 4,975,278 346,016 6.95 4,705,733 343,251 7.29 4,061,334
Non-interest earning assets 239,197 242,499 222,357
--------- --------- ------------
Total assets $ 5,214,475 $ 4,948,232 $ 4,283,691
========= ========= =========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 2,958,748 120,664 4.09 2,701,476 115,509 4.26 2,553,732
Borrowed funds 1,580,106 93,825 5.94 1,651,852 101,664 6.15 1,187,262
--------- -------- --------- -------- -----------
Total interest-bearing liabilities 4,538,854 214,489 4.73 4,353,328 217,173 4.98 3,740,994
Non-interest bearing deposits 163,990 131,807 112,760
Other liabilities 110,333 99,886 85,831
--------- --------- -----------
Total liabilities 4,813,177 4,585,021 3,939,585
Stockholders' equity 401,298 363,211 344,106
--------- --------- -----------
Liabilities and stockholders' equity $ 5,214,475 $ 4,948,232 $ 4,283,691
========= ========= =========
Net interest income/interest rate spread $ 131,527 2.22% $ 126,078 2.30%
------- ---- ------- ----
Net earning assets/net yield on average
interest-earning assets $ 436,424 2.64% $ 352,405 2.68% $ 320,340
------- ---- ------- ---- -------
Ratio of interest-earning assets to
interest-bearing liabilities 109.62% 108.10% 108.56%
====== ====== ======
At December 31,
--------------------------------------------
1999 2001
--------------------------------------------
Average
Yield/ Yield/
Interest Cost Balance Cost
---------- -------- ----------- -------
Assets:
Interest-earning assets:
Loans receivable 253,499 7.11% $ 4,467,182 6.93%
Mortgage-backed securities 9,433 6.24 142,158 5.64
Investment securities ((1)) 16,551 6.25 487,542 4.94
Interest-bearing deposits 1,961 7.01 29,367 2.06
Federal funds sold 3,796 7.32 112,765 1.68
--------- -----------
Total interest-earning assets 285,240 7.02 5,239,014 6.57
Non-interest earning assets 356,025
-----------
Total assets $ 5,595,039
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits 99,665 3.90 3,308,717 3.26%
Borrowed funds 68,736 5.79 1,470,500 5.63
--------- -----------
Total interest-bearing liabilities 168,401 4.50 4,779,217 3.99
Non-interest bearing deposits 249,280
Other liabilities 130,669
-----------
Total liabilities 5,159,166
Stockholders' equity 435,873
-----------
Liabilities and stockholders' equity $ 5,595,039
-----------
Net interest income/interest rate spread $ 116,839 2.52% 2.58%
------- ----
Net earning assets/net yield on average
interest-earning assets 2.88% $ 459,797
---- -------
Ratio of interest-earning assets to
interest-bearing liabilities 109.62%
------
- -------------------------------------
/1/ Includes average balances of $106.9 million, $81.0 million and $57.7
million stock in Federal Home Loan Bank of Chicago for the years ended
December 31, 2001, 2000 and 1999, respectively. At December 31, 2001,
the Bank owned $132.1 million of FHLB stock. Income on a tax
equivalent basis is computed assuming an effective tax rate of
approximately 40%.
43
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.
Year Ended Year Ended
December 31, 2001 vs. 2000 December 31, 2000 vs. 1999
---------------------------- ----------------------------
Total Change Due To Total Change Due To
------------------ ------------------
Change Volume Rate Change Volume Rate
-------- -------- -------- -------- -------- -------
(In thousands)
Interest-earning assets:
Loans receivable $ 3,431 11,183 (7,752) 50,850 43,613 7,237
Mortgage-backed securities (728) 352 (1,080) (1,476) (2,173) 697
Investment securities 3,178 6,622 (3,444) 3,231 579 2,652
Interest-bearing deposits (545) 388 (933) 498 384 114
Federal funds sold (2,571) (22) (2,549) 4,908 4,805 103
------ ------ ------- ------ ------ ------
Total interest income 2,765 18,523 (15,758) 58,011 47,208 10,803
------ ------ ------- ------ ------ ------
Interest-bearing liabilities:
Deposits 5,155 10,204 (5,049) 15,844 5,974 9,870
Borrowed funds (7,839) (4,330) (3,509) 32,928 28,358 4,570
------ ------ ------- ------ ------ ------
Total interest expense (2,684) 5,874 (8,558) 48,772 34,332 14,440
------ ------ ------- ------ ------ ------
Net change $ 5,449 12,649 (7,200) 9,239 12,876 (3,637)
====== ====== ====== ====== ====== ======
Net interest income before the provision for loan losses was $131.2
million in 2001, $125.9 million in 2000 and $116.7 million in 1999. The net
interest margin (net interest income divided by average interest-earning
assets) for the same periods was 2.64%, 2.68%, and 2.88%, respectively.
Interest income on loans receivable increased $3.4 million in 2001 to
$307.8 million when compared to 2000. In 2001, the 19 basis point decline in
the average yield on loans receivable was offset by a $155.4 million increase
in the average balance of loans receivable. This growth rate in loans
receivable was below the levels recorded in recent years, due to heavy
refinance activity during the second half of 2001, as prepayments and sales of
fixed-rate loans both increased dramatically. The decline in average yield was
due in part to these same prepayments, as well as the downward repricing of ARM
loans during the year. During 2000, loan income increased $50.9 million, to
$304.3 million, as average balances increased $599.1 million, and the average
yield on loans increased 20 basis points. Loan growth in 2000 was attributable
to higher overall interest rates leading to more ARM loan originations that the
Bank held in portfolio.
Interest income from mortgage-backed securities decreased in 2001 to $7.2
million, from $8.0 million in 2000, and $9.4 million in 1999. The decline in
mortgage-backed securities income is primarily due to the decline in the
average yield, as many of the Bank's investments are in shorter-term,
adjustable-rate securities, which repriced downward in 2001 due to sharply
falling short-term interest rates. The Bank purchased $62.1 million in
mortgage-backed securities in late 2001, to invest funds received from heavy
prepayments and sales of fixed-rate originations. In previous years, when loan
originations and lower prepayments allowed for growth in the Bank's loan
portfolio, fewer funds were allocated to the purchase of mortgage-backed
securities.
44
Interest income from investment securities increased $3.0 million, or
15.5% in 2001 to $22.7 million, while increasing $3.2 million, or 19.7% in 2000
and $3.0, or 21.9% million in 1999. In 2001, the average balance of investments
grew by $103.1 million in response to heavy loan prepayments and sales leading
to higher available levels of cash. The Bank deployed this cash into investment
securities such as corporate debt securities, Bank trust preferred securities,
preferred stock, and asset-backed securities, as well as investment in the
stock in the FHLB of Chicago. The average yield on investment securities
declined 113 basis points during 2001. During 2000, the increase in income
compared to 1999 was primarily due to increases in the investment in FHLB
stock.
Interest income from federal funds sold and interest-bearing deposits
decreased $3.1 million in 2001 to $8.0 million, while increasing $5.4 million
in 2000, from $5.8 million in 1999. The average balance of liquid investments
were $154.7 million, $149.1 million and $79.8 million in 2001, 2000 and 1999,
respectively. The decline in 2001 is primarily due to lower short-term interest
rates as a result of decreases in the federal funds rate, while in 2000 the
increase in income was predominately due to higher average balances of
liquidity.
Interest expense on deposits increased by $5.2 million to $120.7 million
in 2001, due to an increase in average balances of $257.3 million, offset by a
decrease in the average cost of deposits of 17 basis points. The Bank
experienced strong deposit inflows during 2001, even in the wake of falling
interest rates, as consumers looked for safer investments in response to a weak
stock market, and the uncertainty of world events. The decline in the average
cost of deposits was due to the maturing of higher coupon certificates of
deposits, as well as a decrease in the rates paid on the Banks core deposits.
In 2000, when interest rates were generally rising, the average cost of
deposits rose 38 basis points, while average deposits grew $147.7 million to
$2.70 billion, of which $89.8 million was attributable to branch acquisitions.
Higher costs were generally attributable to certificates of deposits, as well
as a new higher rate money market product offered. Interest expense on deposits
grew $15.8 million to $115.5 million in 2000 compared to $99.7 million in 1999.
Interest expense on borrowed funds decreased $7.8 million to $93.8 million
in 2001, while increasing $32.9 million in 2000 to $101.7 million, compared to
$68.7 million in 1999. Average borrowings decreased $71.7 million in 2001,
while the average cost declined 21 basis points. The decline in average balance
is due to slower loan growth, as well as deposit inflows, which both allowed
the Bank to repay, instead of refinancing, certain maturing FHLB of Chicago
advances throughout 2001. In 2000, the average balance of borrowings increased
$464.6 million in conjunction with the Bank increasing its loans receivable
portfolio.
The low interest rate environment, coupled with the current positive slope
in the Treasury yield curve, is expected to have a modest improved impact on
the Bank's net interest margin during 2002. Although short-term rates are not
expected to decline further, maturing certificates of deposit continue to
reprice lower, as well as maturing advances from the FHLB of Chicago.
Additionally, management expects moderate loan growth in 2002, as customers are
expected to slowly move toward ARM loans. Management anticipates that this loan
growth will be at more favorable net interest spreads than in past years.
PROVISION FOR LOAN LOSSES
A provision for loan losses is recorded as necessary to maintain a loan
loss reserve management considers adequate to provide coverage for probable
losses inherent in the Bank's loan portfolio. The Company recorded a provision
for loan losses of $-0- in 2001, compared to $1.5 million in 2000, and $1.1
million in 1999. Net charge-offs were $59,000, $518,000 and $594,000 in 2001,
2000 and 1999, respectively. In evaluating the adequacy of the allowance for
loan losses and determining, if any, the related provision for loan losses,
management considers: (1) subjective factors, including local and general
economic business factors and trends, portfolio concentrations and changes in
the size and/or general
45
terms of the loan portfolio, (2) historical loss experience, which has ranged
from 0 to 14 basis points as a percentage of outstanding loans over the past
five years, and (3) specific allocations based upon probable losses identified
during the review of the portfolio. At December 31, 2001, the Bank's allowance
for loan losses was $19.6 million, or 100.8% of non-performing loans and .45%
of total loans, compared to $18.3 million, or 109.3% of non-performing loans
and .42% of total loans at December 31, 2000. The Bank added $1.4 million to
its loan loss reserve with the acquisition of Mid Town.
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 asset sale activity and income from real estate operations. Although
changes in interest rates can have an impact on revenues from these sources,
the impact is generally less than the impact on net interest income.
Non-interest income was $47.1 million, $37.4 million, and $34.8 million for the
years ended December 31, 2001, 2000 and 1999, respectively.
The table below shows the composition of non-interest income for the
periods indicated.
Percentage
Year Ended December 31, Increase (Decrease)
------------------------------- ---------------------
2001 2000 1999 2001 2000
-------- -------- -------- --------- ---------
(In thousands)
Gain (loss) on sale of assets:
Loans receivable $ 8,691 1,108 2,583 684.4% (57.1)%
Mortgage-backed securities (2) (700) - 99.7 (100.0)
Investment securities 879 256 1,776 243.4 (85.6)
Foreclosed real estate 347 258 (57) 34.5 N/A
Loan servicing rights - 4,442 - (100.0) 100.0
Income from real estate operations 11,484 9,536 9,630 21.3 (1.0)
-------- -------- -------- ------- ------
Total gain on sale of assets and income
From real estate operations 21,399 14,900 13,932 43.6 6.9
-------- -------- -------- ------- ------
Deposit account service charges 16,535 12,715 10,200 30.0 24.7
Brokerage commissions 2,371 2,322 2,566 2.1 (9.5)
Mortgage loan related fees 2,950 1,738 2,040 69.7 (14.8)
Loan servicing fee income (expense) (371) 1,686 1,761 N/A (4.3)
Valuation (allowance) recovery
of mortgage servicing rights (904) - 900 (100.0) (100.0)
Bank owned life insurance 1,440 1,320 1,210 9.1 9.1
Insurance commissions 596 594 527 0.3 12.7
Safe deposit box fees 476 446 405 6.7 10.1
Title agency fees 541 97 208 457.7 (53.4)
Real estate owned operations, net (166) (246) (216) 32.5 (13.9)
Other 2,251 1,871 1,311 41.9 29.6
-------- -------- -------- ------- ------
$ 47,118 37,443 34,844 25.8% 7.5%
======== ======== ======== ======= ======
Gain on sale of loans and mortgage-backed securities. The Bank recorded a
net gain on the sale of loans receivable of $8.7 million in 2001, compared to
$1.1 million in 2000, and $2.6 million in 1999. Loan sales were $1.02 billion,
$335.7 million, and $402.9 million, in 2001, 2000, and 1999, respectively.
Sales in the current year were driven by the high level of fixed-rate loan
originations made due to falling interest rates. The Company believes that
during 2002, interest rates will stabilize, decreasing the percentage of
long-term fixed rate loan originations, thereby reducing sales volumes and
gains in 2002 compared to the amounts recorded in 2001. The $700,000 loss on
mortgage-backed securities in 2000 is the result of a sale of a $9.3 million
floating rate CMO which was more appropriate for a positively sloped yield
curve environment. The security was sold to redeploy the proceeds into higher
yielding assets.
46
Gains and losses on loans receivable include gains and losses from the
sale of loans originated by the Bank and swapped into mortgage-backed
securities prior to sale. The Bank swapped and sold $76.7 million in 2001
compared to $9.3 million in 2000, and $62.6 million in 1999. The decision to
sell swaps versus whole loans to FNMA or FHLMC is based primarily on price
differences at the time of sale, and sales are executed in the manner that
maximizes profit to the Bank. The Bank has generally held few of these
mortgage-backed securities relating to loans that it originated and swapped in
its portfolio.
Gain on sale of investment securities. The Company had net gains on the
sale of investment securities of $879,000 in 2001, compared to $256,000 in
2000, and $1.8 million in 1999. Net gains in these periods have been generated
primarily from the sale of equity securities. During 2001, the gains generated
were from the sales of equity and corporate debt securities. During 2000
management elected to sell portions of its equity holdings in light of market
conditions, as well as generate funds for its stock buyback program.
Income from real estate operations. Income from real estate operations
was $11.5 million in 2001, $9.5 million in 2000 and $9.6 million in 1999,
related to the projects shown below:
Year Ended December 31,
---------------------------------------------------------------
2001 2000 1999
------------------ ------------------ -------------------
Lots Income Lots Income Lots Income
Sold (Loss) Sold (Loss) Sold (Loss)
------ -------- ------ --------- ------ ----------
(Dollars in thousands)
Tallgrass of Naperville 205 $ 10,712 306 $ 8,699 252 $ 3,457
Woodbridge - 501 - 418 - 5,163
Hannaford Farm - 271 - - - -
Reigate Woods - - 10 210 11 509
Harmony Grove - - - 104 7 479
Creekside of Remington - - 75 105 42 172
Ashbury - - - - - (150)
------ ------- ------ ------ ------ ------
205 $ 11,484 391 $ 9,536 312 $ 9,630
====== ======= ====== ====== ====== ======
The 951-lot Tallgrass of Naperville project concluded its third straight
year of solid lot sales, with 205 lots sales generating $10.7 million in income
for 2001. Average profit margins on sales in this project have steadily
increased since 1999 due to the high demand for lots in this area driving up
lot prices, while construction costs have remained stable compared to original
estimates. To date, 783 lots have been sold, and an additional 78 lots are
under contract at December 31, 2001. Tallgrass also has 12.8 acres of
commercially-zoned land, as well as 19.3 acres zoned multi-family. Management
currently expects continued strong lot sales in Tallgrass during 2002, and,
including the expected bulk sales of the commercial and multi-family acreage,
expects pre-tax income from real estate development in the range of $10.0-$12.0
million.
In 2001, the Bank sold its final two commercial parcels in the Woodbridge
subdivision. One parcel was sold to the Bank, with no profit recognized, that
will be used for a future branch site in 2003. Profits in 2000 and 1999 also
represent sales of commercial properties in Woodbridge. The $271,000 profit
recognized in the Hannaford Farm project represents a gain from the sale of
undeveloped land after the Company decided not to develop this parcel into
residential lots when it did not get the desired zoning for this project. The
Reigate Woods, Harmony Grove, Creekside of Remington and Ashbury projects were
all completed in previous years.
Deposit account service charges. Deposit account service charges
increased to $16.5 million in 2001, compared to $12.7 million in 2000, and
$10.2 million in 1999. The primary source of these fees is from checking
account charges for non-sufficient funds, service charges, sustained overdraft
fees, debit card usage, and automated teller machine services. Increases are a
function of a higher number of checking
47
accounts, new fees charged for services, as well as increases in existing fee
schedules. The number of checking accounts maintained by the Bank was 128,500
(exclusive of Mid Town), 116,000 and 103,000 at December 31, 2001, 2000, and
1999, respectively. Based on the addition of approximately 12,000 checking
accounts from the Mid Town acquisition, as well as fee increases instituted by
the Bank as of January 1, 2002, management anticipates that deposit account
service charges will grow by 30% to 35% in 2002.
Brokerage commissions. 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 increased
slightly to $2.4 million in 2001, compared to $2.3 million in 2000, and $2.6
million in 1999. Flat revenues in 2001 are attributable to less than favorable
equity markets and consumer desire for less risky investments, especially in
the wake of the terrorist attacks on the U.S. in September 2001. The decline in
revenue in 2000 was attributable to broker turnover, stock market declines, as
well as competition for brokerage services from discount and internet brokerage
companies.
Mortgage loan related fees. Mortgage loan related fees include late
charge income on loans owned and serviced by the Bank, inspection fee income
for construction loans and loan modification income for refinance transactions.
Income from these sources was $3.0 million in 2001, $1.7 million in 2000 and
$2.0 million in 1999. The increase in 2001 was due to the high levels of
refinance activity that the Bank was able to direct to its modification
department. In lieu of a full refinance transaction, the Bank, for a fee, will
modify certain contractual terms of a customer's loan. The Bank treats the
modified loan as if it was paid off, and amortizes any remaining deferred fees
or expenses as interest income. The primary reason for the decrease in 2000
compared to 1999 was the reduction of refinancings in 2000 due to higher
interest rates. With the recent stabilizing interest rate environment,
management expects fee income from loan modifications to be lower in 2002
compared to the current year.
Loan servicing fee income (expense). Loan servicing fee income was a loss
of $(371,000) in 2001, compared to income of $1.7 million in 2000, and $1.8
million in 1999. Despite an 8.1% increase in the average balance of loans
serviced for others during 2001, the Bank recorded a loss for the year, as
accelerated amortization of capitalized mortgage servicing rights due to higher
than estimated prepayments more than offset loan servicing fees earned. In
addition to the expense recognized, a valuation allowance was recorded in 2001
for a total of $904,000. The decline in 2000 compared to 1999 was primarily due
to a lower average balance of loans serviced for others in 2000, due to a bulk
sale of approximately $600.0 million in servicing rights in 2000. During 1999,
the Bank also recorded a $900,000 recovery of a previously recorded impairment
to servicing rights valuation allowance. The average balance of loans serviced
for others was $1.06 billion, $1.05 billion, and $1.15 billion for the years
ended December 31, 2001, 2000, and 1999, respectively. Management currently
expects long-term mortgage rates to stabilize in 2002, leading to slower
prepayments in its loans serviced for others portfolio. As a result, management
expects loan servicing fee income in 2002 to exceed 2001.
Income from Bank owned life insurance. The Bank invested $20.0 million in
bank owned life insurance ("BOLI") to help fund the cost of certain employee
benefit plan expenses. The Bank's BOLI investment consists of the purchase of
life insurance on the lives of certain employees from an insurance carrier with
a Standard and Poors rating of AA+. The Company is the sole beneficiary of the
life insurance policies. Income is recorded on this investment based on
increases in the cash surrender value ("CSV") of the life insurance policies.
To the benefit of the Company, this income is free from income taxes. Death
benefits paid to the Company will be revenue in the periods received, if any.
In 2001, CSV income recognized on these life insurance policies totaled $1.4
million compared to $1.3 million in 2000, and $1.2 million in 1999.
48
Title agency fees. The Bank offers limited title search services,
primarily on refinance transactions, as agent. Income from this service is
generated on a loan by loan basis, and totaled $541,000, $97,000, and $208,000
for the years ended December 31, 2001, 2000 and 1999, respectively. The large
increase in 2001 is directly related to the increase in refinance activity in
2001 due to falling interest rates. Similarly, the decline in income in 2000
compared to 1999 was due to less refinance activity in the 2000 loan
originations compared to 1999.
Other non-interest income. Other non-interest income includes various
other fees charged to customers for money orders, savings bonds, travelers
checks, wire transfers, as well as the preferred return on limited partnership
investments in residential real estate projects. The primary reason for the
increase in other income in 2001 was due to additional limited partnership
investments made in 2000.
NON-INTEREST EXPENSE
Non-interest expense was $83.4 million in 2001, $73.0 million in 2000 and
$67.7 million in 1999. The table below shows the composition of non-interest
expense for the periods indicated.
Percentage
Year Ended December 31, Increase (Decrease)
--------------------------------- -------------------
2001 2000 1999 2001 2000
-------- ------- ------- ------ ------
(In thousands)
Compensation $ 37,521 32,181 29,435 16.6% 9.3
Employee benefits 10,700 9,016 8,410 18.7 7.2
-------- ------- ------- ------ ------
Total compensation and benefits 48,221 41,197 37,845 17.0 8.9
-------- ------- ------- ------ ------
Occupancy expense 6,120 5,610 4,929 9.1 13.8
Furniture, fixture and equipment expense 2,891 2,514 2,345 15.0 7.2
Advertising and promotion 4,355 3,569 3,149 22.0 13.3
Data processing 3,103 3,034 2,611 2.3 16.2
Federal deposit insurance premiums 617 604 1,585 2.2 (61.9)
Amortization of goodwill 3,245 3,118 2,648 4.1 17.7
Amortization of core deposit intangible 1,333 1,357 1,236 (1.8) 9.8
Other expenses:
Professional fees 1,518 1,583 1,657 (4.1) (4.5)
Stationery, brochures and supplies 1,641 1,340 1,236 22.5 8.4
Postage 1,473 1,281 1,423 15.0 (10.0)
Telephone 1,208 1,200 1,158 0.7 3.6
OTS assessment fees 755 661 577 14.2 14.6
Correspondent banking services 767 608 500 26.2 21.6
ATM network fees 600 562 518 6.8 8.5
Insurance costs 491 492 485 (0.2) 1.4
Other 5,086 4,273 3,778 19.0 13.1
-------- ------- ------- ------ ------
Total other expenses 13,539 12,000 11,332 12.8 5.9
-------- ------- ------- ------ ------
$ 83,424 73,003 67,680 14.3% 7.9
======== ======= ======= ====== ========
Compensation expense. Compensation expense was $37.5 million in 2001,
compared to $32.2 million in 2000 and $29.4 million in 1999. Increases in 2001
are attributable to numerous factors, including a full year of operations at
two branches purchased in 2000, the start-up of the Bank's business banking
unit, increased loan department and secondary market department compensation
due to record loan origination and sale volumes, as well as normal salary
increases. The increase in 2000 compared to 1999 was due in part to branch
acquisitions in 1999 as well as normal salary increases.
49
Employee benefits expense. Employee benefits expense increased $1.7
million to $10.7 million in 2001 compared to $9.0 million in 2000. The increase
is due to higher medical expense, employer taxes, and retirement plan
contributions. The $606,000 increase in 2000 compared to 1999 is primarily
attributable to increased medical expense of $385,000 as well as a $120,000
increase in the Bank's contribution to its ESOP and profit sharing plans.
Occupancy and equipment expense. Occupancy expenses increased $510,000,
or 9.1%, during 2001 due to increased operating costs related to a full year
expense from the previous year's branch acquisitions, current year branch
purchases, as well as higher real estate taxes throughout the Bank's branch
network. Occupancy expenses increased $681,000 between 2000 and 1999 primarily
due to rent expense related to the Bank's centralized loan processing center.
Advertising and promotion expense. Advertising and promotion expenses
increased $786,000 to $4.4 million in 2001, compared to $3.6 million in 2000.
The primary reason for the increase is higher newspaper and billboard
advertising expenses related to the Bank's efforts in promoting its brand
recognition strategy. This advertising initiative began in May 1999 and is also
the primary reason for a $420,000 increase in advertising and promotion expense
in 2000 compared to 1999.
Data processing expense. Data processing expenses increased slightly to
$3.1 million in 2001, compared to $3.0 million in 2000, and $2.6 million in
1999. The Bank maintains its own data processing capability, and costs relate
primarily to depreciation of equipment and communication costs for data
transmission between branch locations, as well as the Company's network.
FDIC insurance expense. FDIC insurance increased $13,000 to $617,000 in
2001, due to slightly larger average deposit balances in 2001 compared to 2000.
We expect this expense to increase in 2002 due to higher average deposits
following the Mid Town acquisition. The $981,000 decrease in expense in 2000
compared to 1999 was primarily due to a 67% decrease in its insurance
assessment rate effective January 1, 2000. The Bank has paid the lowest rate
allowed by regulation for savings institutions over the past three years and
expects to continue to qualify for the lowest rate.
Amortization of goodwill. Amortization of goodwill increased $127,000 to
$3.2 million in 2001, primarily due to the Bank's branch purchases in 2000.
Amortization of goodwill in 2000 increased $470,000 from 1999 primarily due to a
branch purchase made in 1999. Under Statement of Financial Accounting
Standards, ("SFAS") No. 142, the Company will cease amortizing goodwill on past
acquisitions, in addition to not amortizing the goodwill created in the
acquisition of Mid Town. As such, management expects amortization of goodwill
to decrease by approximately $2.6 million to $650,000 in 2002. The continued
amortization relates to prior branch purchases.
Amortization of core deposit intangible. Amortization of core deposit
intangibles was $1.3 million, $1.4 million and $1.2 million for the years ended
December 31, 2001, 2000 and 1999, respectively. The Bank recognizes a core
deposit intangible in any Bank or branch acquisition transaction, and amortizes
it on an accelerated method over 10 years.
Other non-interest expense. Other non-interest expense includes costs
such as stationary and supplies, postage and telephone expenses incurred in the
day-to-day operations of the Company. These costs totaled $13.5 million in
2001, compared to $12.0 million in 2000, and $11.3 million in 1999. The
increases in 2001 are primarily due to higher loan volume and expanded branch
locations that added costs to the Bank's operations, while the increases in
2000 were primarily related to branch additions in 1999.
50
Income taxes
Income tax expense was $35.5 million in 2001, (effective income tax rate
of 37.4%) compared to $32.3 million in 2000 (effective income tax rate of
36.4%). The higher effective income tax rate in the current year compared to a
year ago was primarily the result of greater state income taxes in 2001 and the
recognition in the prior period of income tax benefits relating to the
resolution of certain prior years' income tax issues. Income tax expense was
$31.2 million in 1999, equal to an effective income tax rate of 37.7%.
Review of Financial Condition
Total assets increased $399.5 million, or 7.69%, to $5.6 billion at
December 31, 2001, compared to $5.2 billion at December 31, 2000, primarily due
to the acquisition of Mid Town Bancorp, which added $307 million in total
assets in November 2001, and to a lesser extent an increase in the deposit
balances of the Bank. Management expects growth in total assets to moderately
increase in 2002, as prepayments in loans receivable are expected to slow,
which should allow the Bank's loan portfolio to expand with funding from either
increased deposits, or borrowings.
Cash, interest-bearing deposits and federal funds sold decreased a
combined $45.8 million to $224.7 million at December 31, 2001. Although
short-term liquidity declined during 2001, it remains relatively higher than
normal due to high loan prepayments during the fourth quarter, limited
alternatives for higher yielding short-term investments and maturing FHLB of
Chicago advances in the first quarter of 2002 that management expects to repay.
At December 31, 2001, the balance of investment securities classified as
available for sale grew to $355.5 million from $174.5 million at December 31,
2000. Upon the adoption of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," all $12.6 million of the remaining investment
securities previously classified as held to maturity were transferred into the
Bank's available for sale portfolio. Additionally, Mid Town's investment
securities added approximately $52.5 million to this portfolio as of the end of
the year. The Bank has been increasing the amount of investment securities in
its balance sheet as a means of reinvesting higher liquidity, as well as to
help diversify interest-rate risk from mortgage-related cash flows. The
purchases during the current year were primarily investment grade corporate
debt securities, Bank trust preferred securities, preferred stock, as well as a
limited amount of asset-backed securities. Purchases totaled $274.9 million in
2001, while maturities were $158.2 million. This portfolio is carried at fair
value, and had a cost basis of $350.6 million at December 31, 2001.
At December 31, 2001, the Bank held $132.1 million in stock in the FHLB of
Chicago, compared to $84.8 million at December 31, 2000. Of the increase, $10.7
million is attributable to the acquisition of Mid Town. Over and above its
required investment of stock in the FHLB of Chicago, the Bank, during 2001,
made a discretionary purchase of $30.0 million of stock, seeking to enhance its
overall yield of interest-earning assets, as dividend rates over the past
quarters have been well above the short-term U.S. Treasury rates. Discretionary
investments in the stock of the FHLB of Chicago are able to be redeemed upon
request at par value.
At December 31, 2001, mortgage-backed securities classified as available
for sale increased $118.1 million to $142.2 million. Upon the adoption of SFAS
No. 133, all $80.3 million of the remaining mortgage-backed securities
previously classified as held to maturity were transferred into the Bank's
available for sale portfolio. The remainder of the increase is primarily due to
a limited amount of purchases during the current year, as the low interest rate
environment made it difficult to grow the Bank's whole loan portfolio.
Purchases of $62.1 million consisted primarily of mortgage-backed securities as
well as CMOs.
51
Included in total mortgage-backed securities at December 31, 2001 are
$85.5 million of CMO's with a weighted average life of 5.4 years that 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.
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 investments and the net interest spread obtained.
Loans receivable increased 2.8%, or $119.5 million to $4.4 billion at
December 31, 2001. The increase was due to the acquisition of Mid Town, which
added approximately $210.0 million of balances in November 2001. Without the
acquisition, total loans receivable declined approximately $85.0 million due to
heavy prepayments in the loan portfolio as loans were refinanced in the falling
interest rate environment in the second half of 2001. The Bank originated $2.8
billion of mortgage loans during the current year. This volume was more than
offset by amortization and prepayments of $1.88 billion, and sales of $1.02
billion. The loans sold represent primarily long-term fixed-rate mortgages that
are sold as a means of limiting interest-rate risk and generating gains on sale
of loans and servicing fee income in the future. Loans held for sale increased
to $161.1 million at December 31, 2001 compared to $41.1 million at December
31, 2000 due to the higher levels of fixed-rate loan originations.
The allowance for loan losses increased $1.3 million to $19.6 million as
of December 31, 2001. The increase is due to the acquisition of Mid Town that
had an allowance for loan losses of $1.4 million, offset by net charge-offs of
$59,000. As of December 31, 2001, the Bank's ratio of the allowance for loan
losses to total non-performing loans was 100.8%, compared to 109.3% as of
December 31, 2000. The ratio of the allowance for loan losses to total loans
increased to .45% at December 31, 2001, compared to .42% at December 31, 2000.
Management believes that the current allowance for loan losses is adequate.
Real estate held for development or sale increased $275,000 to $13.0
million at December 31, 2001. A summary of real estate held for development or
sale is as follows:
December 31,
-------------------------
2001 2000
------- -------
(In thousands)
Tallgrass of Naperville $ 8,498 8,041
Shenandoah 4,495 4,387
Woodbridge - 290
------- -------
$ 12,993 12,718
======= =======
The increase in the 951-lot Tallgrass of Naperville project is primarily
due to continued expenditures on development costs in the project during the
current year. The Company sold 205 lots during 2001 and has an additional 78
lots under contract at December 31, 2001. The carrying value of Tallgrass
remained increased year over year due to continued development costs incurred
in 2001. Land for a new planned development of approximately 326 lots in
Plainfield, Illinois known now as the Shenandoah project, was acquired in 2000
with development expected to begin in 2002. The decrease in the Woodbridge
project is
52
due to the sales of the remaining two commercial parcels in this
project. The remaining three acres were sold during 2001 at approximately
$501,000 of pre-tax profit.
Premises and equipment increased $14.9 million to $63.8 million at
December 31, 2001. Of the increase, approximately $9.6 million was due to the
acquisition of Mid Town. The remainder of the increase was due to additions of
$10.3 million, and approximately $1.7 million of these costs were for the
construction of the new branch site in Romeoville. The additions were offset by
depreciation and amortization of $4.9 million. The Bank currently has plans to
build seven new branch sites over the next few years.
Foreclosed real estate decreased to $1.4 million at December 31, 2001,
compared to $1.8 million at December 31, 2000. Foreclosed real estate at
December 31, 2001 consists of seven single-family dwellings.
Intangible assets increased $36.8 million to $105.7 million at December
31, 2001. The increase is due to the recording of goodwill and core deposit
intangibles of $41.4 million in conjunction with the acquisition of Mid Town
offset by amortization of intangibles totaling $4.6 million. At December 31,
2001, the Company has $85.0 million of goodwill, including the $38.1 million
created in the acquisition of Mid Town, which will no longer be amortized under
the new accounting rules promulgated by SFAS No. 142. Instead, this balance of
goodwill will be subject to periodic impairment analysis in the future.
Deposits increased $583.8 million to $3.56 billion as of December 31,
2001, or 19.6%. The acquisition of Mid Town added $270 million to deposits in
November 2001. Additionally, the Bank experienced strong inflows during 2001.
The Bank experienced a 61.0% increase in money market accounts as a result of a
well received competitively priced product, and in total increased its
percentage of core deposits (passbooks, money market and NOW accounts) to total
deposits to 51.8% at December 31, 2001, compared to 45.7% at December 31, 2000.
Borrowed funds decreased $258.4 million, or 15.0%, to $1.5 billion at
December 31, 2001. The reduction in borrowings is primarily attributable to
slow asset growth, as loan prepayments held down the growth in loans
receivable, as well as deposit inflows, which were used to fund the limited
asset growth the Bank incurred in 2001. As of December 31, 2001, the Bank had
$1.41 billion of FHLB of Chicago advances at a weighted average rate and term
to maturity of 5.76% and 3.4 years, respectively, compared to $1.7 billion at a
weighted average rate and term to maturity of 6.21% and 3.4 years,
respectively, as of December 31, 2000. Of the FHLB advances at December 31,
2001, $560.0 million of advances, with a weighted average term to maturity of
5.8 years, contain various call provisions, with a weighted average term to
call of 1.5 years. The calls are most likely exercised by the issuer in a
period of rising interest rates, and at December 31, 2001 have terms making
their early calls unlikely. Offsetting this decrease was an increase in the
Company's unsecured bank term loan and line of credit by a combined $31.6
million, primarily due to the acquisition of Mid Town.
Stockholders' equity of the Company grew to $435.9 million at December 31,
2001, compared to $387.7 million at December 31, 2000, an increase of $48.2
million. The increase in stockholders' equity is primarily due to comprehensive
income of $61.7 million reflecting increased value on securities available for
sale at December 31, 2001, and the issuance of $13.8 million of common stock in
the acquisition of Mid Town, offset by the repurchase of $21.3 million of
common stock and the payment of cash dividends of $9.9 million.
53
Liquidity and Capital Resources
The Company's principal assets are its investments in the Bank and MAFD.
To the extent that it does not generate significant earnings outside of these
subsidiaries, the Company's liquidity position is primarily dependent on
dividends from the Bank and, to a lesser extent, dividends from MAFD.
The Bank's ability to pay dividends to the Company is dependent on its
ability to generate earnings, and to meet regulatory restrictions. See "Item 1.
Business - Regulation and Supervision - Federal Savings Institution Regulation
- - Limitation on Capital Distributions" for a detail of these restrictions. The
Bank has not been restricted by these limitations in funding the necessary
amounts needed by the Company for its operations, and does not expect to be
limited in the future. At December 31, 2001, under current OTS dividend
regulations, the Bank has $35.2 million of retained earnings available for
dividend declarations. The Company received $52.5 million in dividends from the
Bank in 2001, compared to $20.0 million in 2000, and $35.0 million in 1999. In
addition, in 2001, the Company received $1.6 million in dividends from MAFD.
The primary uses of funds at the Company consist of principal and interest
payments on borrowed funds, cash dividends, and stock repurchases. The Company
has also funded loans to and investments in MAFD from time to time. To the
extent the Company has excess cash at any time, it will invest funds in
investment securities, marketable equity securities or other interest-earning
assets.
The Company has used stock repurchase programs as a means of providing for
future acquisitions, stock option exercises, and other general corporate
purposes. During 2001, the Company repurchased 645,100 of its common shares for
a total of $17.3 million (average price of $26.82), compared to 1,070,300
shares for a total of $19.1 million (average price of $17.82 per share) in
2000. The totals for 2001 include 45,000 shares and 20,000 shares purchased on
May 1, 2001, from Allen Koranda, the Company's Chief Executive Officer and
Kenneth Koranda, the Company's President, respectively. The purchase price of
such shares totaled approximately $1.2 million for shares purchased from Allen
Koranda and $537,000 for shares purchased from Ken Koranda. The terms of these
private transactions were approved by the disinterested members of the Board.
The sale of shares by Allen Koranda was related to his marital dissolution
agreement. The sale of shares by Kenneth Koranda was related to the
satisfaction of various tax obligations and personal financial planning. The
Company has used stock repurchase programs as a means of providing for future
acquisitions, stock option exercises, and other general corporate purposes.
Cash dividends paid to common shareholders totaled $9.9 million ($.46 per
share declared) in 2001, compared to $8.8 million ($.39 per share declared) in
2000. The increase is primarily due to a 15% increase in the cash dividend rate
in 2001 compared to 2000. The most recent quarterly dividend of $.12 per share
was paid on January 3, 2002. The payment of cash dividends is subject to the
discretion of the Board of Directors and depends on a variety of factors,
including operating results, financial position, and the ability of the Bank to
pay dividends up to the holding company. In January 2002, the Company announced
a 25% increase in the quarterly cash dividend to $.15 per share beginning with
its next quarterly dividend payable in April 2002.
The Bank's principal sources of funds are deposits, advances from the FHLB
of Chicago, principal repayments on loans and mortgage-backed securities,
proceeds from the sale of loans, investment securities, and funds provided by
operations. While scheduled loan and mortgage-backed securities amortization
and maturing interest-bearing deposits are a relatively predictable source of
funds, deposit flows and loan and mortgage-backed securities prepayments are
greatly influenced by economic conditions, the general level of interest rates
and competition. The Bank utilizes particular sources of funds based on
comparative costs and availability.
54
Cash flows from operating activities primarily include net income for the
year, adjusted for items in net income that did not impact cash, as well as cash
flow activity from mortgage banking activity. The Bank originated and purchased
$1.14 billion of loans for sale, and received $1.02 billion in proceeds from
sales and swaps during 2001. The Bank had $161.1 million of loans held for sale
at December 31, 2001, up from $41.1 million at December 31, 2000. The increase
in loans held for sale is due to declining interest rates that have led to an
increase in fixed-rate loan originations. Most of these loans will be sold in
the first quarter of 2002.
Cash used in investing activities reflects the impact of loans and
investments acquired for the Bank's interest-earning asset portfolios, as well
as cash flows from asset sales, real estate held for development activity and
the impact of acquisitions. Cash provided by investing activities totaled a net
$9.7 million in 2001, compared to a net use of $270.2 million in 2000. During
the current year, the Bank originated and purchased $1.67 billion of loans for
investment, which were offset by $1.88 billion of loan amortization and
prepayments. The higher prepayments led to available liquidity, which was used
to purchase investment and mortgage-backed securities, as well as to repay
certain maturing borrowings. Cash flow from the Company's land development
operations was positive, as sales of property of $37.3 million were offset by
expenditures for land acquisition and development of $16.5 million.
Cash provided from financing activities for Bank operations are primarily
in the form of savings deposits, FHLB of Chicago advances and to a lesser
extent, reverse repurchase agreements. Cash provided from financing activities
totaled a net $28.0 million in 2001, compared to $370.3 million in 2000. During
the current year net deposits increased $313.1 million, and, coupled with
minimal loan growth, allowed the Bank to repay a net $290.0 million of FHLB of
Chicago advances. Additionally, the acquisition of Mid Town led to a net
increase in the Company's unsecured term bank loan of $25.6 million, offset by
purchases of the Company's stock totaling $17.3 million and dividends to
shareholders totaling $9.9 million.
The following table lists contractual obligations coming due in the
periods indicated at December 31, 2001:
Less than 1 to 3 4 to 5 After 5
Total 1 Year Years Years Years
----------- ----------- ----------- ----------- -----------
(In thousands)
Certificate of deposits $ 1,716,378 1,370,144 302,546 37,784 5,904
Core deposits 1,591,736 1,591,736 - - -
FHLB of Chicago advances 1,405,500 360,000 395,500 260,000 390,000
Unsecured bank term loan and line of credit 65,000 14,000 13,000 16,000 22,000
Operating leases 25,200 2,500 4,200 2,900 15,600
----------- ----------- ----------- ----------- -----------
Total $ 4,803,814 3,338,380 715,246 316,684 433,504
=========== =========== =========== =========== ===========
The Bank historically renews a majority of its certificates upon maturity,
as it does not rely on rate-sensitive brokered certificates for its funding,
but rather retail oriented amounts. Additionally, its core deposits which do
not have a stated contractual maturity, have generally been very stable over
time, and are not expected to be redeemed in large amounts during 2002. As
such, the scheduled $1.37 billion of maturing certificates of deposits in 2002,
as well as the balances of core deposits are not expected to put a burden on
the Bank's cash needs. The Bank has the ability to refinance any advance coming
due with the FHLB of Chicago, which it will normally do in the course of
business if its loan portfolio is growing. Should its loan portfolio growth be
slower, due to prepayments in its loan portfolio, the Bank will have adequate
liquidity to repay its maturing advances. The unsecured bank term loan and line
of credit amounts are repaid through the normal course of business primarily
through dividends from the Bank. Net savings outflows, if any, as well as
expected loan portfolio growth in 2002 could also be met by additional advances
from the FHLB of Chicago. At December 31, 2001, the Bank has approximately
$800.0 million of borrowing capacity from the FHLB of Chicago.
55
The following table lists the off-balance sheet commitments of the Company
and the Bank as of December 31, 2001:
Less than 1 to 3 4 to 5 After 5
Total 1 Year Years Years Years
----------- ----------- ----------- ----------- ----------
(In thousands)
Mortgage loan commitments $ 478,890 478,890 - - -
Unused equity lines of credit balances 254,706 8,379 21,262 21,700 203,365
Commercial business lines 11,051 9,858 353 532 308
Letters of credit /1/ 24,529 17,027 612 6,890 -
Commercial business loan commitments 6,273 6,273 - - -
Real estate development costs /1/ 90,314 21,248 51,842 10,406 6,818
----------- ----------- ----------- ----------- ----------
$ 865,763 541,675 74,069 39,528 210,491
=========== =========== =========== =========== ==========
- ---------------------------------------------
/1/ Letters of Credit include $9.0 million of land development projects which
are also included in real estate development costs
Mortgage loan commitments are funded in the normal course of business
through existing liquidity, sales of long-term fixed-rate loans, and
prepayments of existing loans. These sources of funds change when ARM
originations are higher, at which time the Bank will rely more on funding from
the FHLB of Chicago. At December 31, 2001, the Bank has approximately $224.7
million of cash and liquidity, $195.9 million of commitments to sell loans, as
well as additional borrowing capacity from the FHLB of Chicago. These sources
are also available for the funding of unused equity line of credits. However,
the Bank does not expect all of these lines to be used based on historical
levels of total lines used by its customers. Real estate development costs
represent estimated future disbursements related to current and future planned
projects and do not, in most cases, reflect contractual obligations at the
present time. Real estate development costs are funded primarily by sales of
previously developed lots, and to a lesser extent, borrowings from the Company.
It is currently anticipated that cash flow from developed lots in inventory
will cover the costs of land development in 2002. However, should lot sales of
existing inventory slow, MAFD would ultimately rely on borrowings from the
Company, who's funding capacity is limited to its unsecured bank line of
credit, or additional dividends from the Bank. In addition, MAFD would also be
able to stop incurring development costs related to future units.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related consolidated information
are prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. Unlike most industrial companies, virtually
all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant effect on a
financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In September 2000, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." SFAS No. 140 supercedes and replaces FASB
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Accordingly, SFAS No. 140 is now the
authoritative accounting literature for transfers and servicing of financial
assets and extinguishments of liabilities. SFAS No. 140 also includes several
additional disclosure requirements in the area of securitized financial assets
and collateral arrangements. The provisions of SFAS No. 140 related to
transfers of financial assets are to be applied to all transfers of financial
assets occurring after March 31, 2001. The collateral recognition and
disclosure provisions in SFAS No. 140 are effective for fiscal years ending
after
56
December 15, 2000. Upon adoption, this pronouncement did not have a material
impact on the Company's consolidated financial statements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," that
eliminates the pooling of interests method of accounting for business
combinations with limited exceptions for combinations initiated prior to July
1, 2001. In addition, it clarifies the criteria for recognition of intangible
assets separately from goodwill. This statement is effective for business
combinations completed after June 30, 2001. The Company followed this
pronouncement in accounting for its acquisition of Mid Town, and it did not
have a material impact on the consolidated financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which discontinues the amortization of goodwill and indefinite lived
intangible assets and initiates an annual review for impairment, unless more
periodic reviews are warranted. Intangible assets with determinable useful
lives will continue to be amortized. The amortization provisions of this
pronouncement apply to goodwill and intangible assets acquired after June 30,
2001. As such, the Company followed this pronouncement in accounting for its
acquisition of Mid Town. At December 31, 2001, the Company has $96.9 million of
goodwill. Upon adoption of SFAS No. 142 as of January 1, 2002 for goodwill
existing prior to June 30, 2001, the Company has ceased amortization on $46.9
million of goodwill. The impact of this will be to reduce amortization of
goodwill in 2002 by $2.6 million, or approximately $.11 per diluted share
compared to 2001. In addition, the Company is required to perform an impairment
review of goodwill balances upon adoption of SFAS 142. The review is expected
to be complete in the first quarter of 2002. The Company does not expect to
record an impairment charge upon completion of the review. However, there can
be no assurance that, at the time the review is completed, a material
impairment charge may not be recorded.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses the financial accounting and
reporting for obligations related to the retirement of tangible long-lived
assets and the related asset retirement costs. The statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Adoption of this statement is not expected to have a material effect on the
Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment and Disposal of Long-Term Assets." This Statement supercedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," as well as the accounting and reporting
of the Accounting Principles Board (APB) Opinion No. 30, "Reporting the Results
of Operations- Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
This statement eliminates the allocation of goodwill to long-lived assets to be
tested for impairment and details both a probability-weighted and
"primary-asset" approach to estimate cash flows in testing for impairment of
long-lived assets. SFAS No. 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001. As such, the Company will
adopt the provisions of SFAS No. 144 on January 1, 2002. The Company does not
expect these provisions to have a material impact on its consolidated financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/Liability Management and GAP Analysis. As part of its normal
operations, the Bank is subject to interest-rate risk on the interest-sensitive
assets it invests in and the interest-sensitive liabilities it borrows. The
Bank's exposure to interest rate risk is reviewed at least quarterly by the
Bank's asset/liability management committee ("ALCO") and the Board of Directors
of the Company. The ALCO, which includes members of senior management, monitors
the rate and sensitivity repricing characteristics of the individual asset and
liability portfolios the Bank maintains and determines risk management
strategies.
57
The Bank utilizes an interest rate sensitivity gap analysis to monitor the
relationship of maturing or repricing interest-earning assets and
interest-bearing liabilities, while maintaining an acceptable interest rate
spread. Interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing within a specific
period of time and the amount of interest-bearing liabilities maturing or
repricing within that same period of time, and is usually analyzed at a period
of one year. Generally, a negative gap, where more interest-bearing liabilities
are repricing or maturing than interest-earning assets, would tend to result in
a reduction in net interest income in a period of rising interest rates.
Conversely, during a period of falling interest rates, a negative gap would
likely result in an improvement in net interest income. Management's goal is to
maintain its cumulative one-year gap within the range of (15)% to 15%. The gap
ratio fluctuates as a result of market conditions and management's expectation
of future interest rate trends. The Bank's asset/liability management strategy
emphasizes the origination of one- to four-family adjustable-rate loans and
other loans which have shorter terms to maturity or reprice more frequently
than fixed-rate mortgage loans, yet provide a positive margin over the Bank's
cost of funds, for its own portfolio. Historically, the Bank has generally sold
its conforming fixed-rate loan originations in the secondary market in order to
maintain its interest rate sensitivity levels. During the eighteen to
twenty-four month period ended June 30, 1999, the Bank had been retaining the
majority of the non-conforming, fixed-rate originations and all of the
prepayment protected fixed-rate loan originations in portfolio for investment
purposes to help utilize the Bank's higher capital base resulting from the
merger with Northwestern. These fixed rate loans were funded with intermediate
to longer-term fixed rate FHLB advances, some of which contained call options
at the discretion of the FHLB of Chicago.
The Bank, except as noted below, has not used derivative financial
instruments such as swaps, caps, floors, options or similar financial
instruments to manage its interest rate risk. However, in conjunction with its
origination and sale strategy discussed above, management does hedge the Bank's
exposure to interest rate risk primarily by committing to sell fixed-rate
mortgage loans for future delivery. Under these commitments, the Bank agrees to
sell fixed-rate loans at a specified price and at a specified future date. The
sale of fixed-rate mortgage loans for future delivery has enabled the Bank to
continue to originate new mortgage loans, and to generate gains on sale of
these loans as well as loan servicing fee income, while maintaining its gap
ratio within the parameters discussed above. Most of these forward sale
commitments are conducted with FNMA, FHLMC and MPF with respect to loans that
conform to the requirements of these government agencies. The forward
commitment of mortgage loans presents a risk to the Bank if the Bank is not
able to deliver the mortgage loans by the commitment expiration date. If this
should occur, the Bank would be required to pay a fee to the buyer. The Bank
attempts to mitigate this risk by charging potential retail borrowers a 1% fee
to lock in the interest rate, or by requiring the interest rate to float at
market rates until shortly before closing. In addition, the Bank uses U.S.
Treasury bond futures contracts to hedge some of the mortgage pipeline
exposure. These futures contracts are used to hedge mortgage loan production in
those circumstances where loans are not sold forward as described above.
The table on the next page sets forth the scheduled repricing or maturity
of the Bank's assets and liabilities at December 31, 2001. The table uses
management's assumptions regarding prepayment percentages on loans and
mortgage-backed securities, based on its current experience in these
portfolios. The Bank uses the withdrawal assumptions used by the FHLB of
Chicago with respect to NOW, checking and passbook accounts, which are annual
rates of 17.0%, 17.0%, 17.0%, 16.0%, and 33.0%, respectively. Investment
securities and FHLB advances that contain call provisions at the option of the
issuer or lender are generally shown in the category relating to their
respective final maturities. $25.0 million of FHLB advances with final
maturities in more than five years, but callable in calendar 2002 are
categorized as $25.0 million due in 6 months or less, in anticipation of them
being called.
58
The effect of these assumptions is to quantify the dollar amount of items
that are interest-sensitive and may be repriced within each of the periods
specified. Certain shortcomings are inherent in using gap analysis to quantify
exposure to interest rate risk. For example, although certain assets and
liabilities may have similar maturities or repricings in the table, they may
react differently to actual changes in market interest rates. The interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. This is especially true in circumstances where
management has a certain amount of control over interest rates, such as the
pricing of deposits. Additionally, certain assets such as hybrid
adjustable-rate mortgage loans have features that restrict changes in interest
rates on a short-term basis and over the life of the asset. Finally, as
interest rates change, loan prepayment rates will differ from those rates
assumed by management in the table.
Although management believes that its asset/liability management
strategies mitigate the potential effects of changes in interest rates on the
Bank's operations, material and prolonged increases in interest rates may
adversely affect the Bank's operations because the Bank's interest-bearing
liabilities which mature or reprice within one year are currently greater than
the Bank's interest-earning assets which mature or reprice within the same
period. Conversely, decreases in interest rates could benefit the Bank's
operation as maturing interest-bearing liabilities are replaced at lower costs.
December 31, 2001
-------------------------------------------------------------------
* 1/2 Yr. 1/2-1 Yr. 1-3 Yrs. 3-5 Yrs. 5+ Yrs. Total
---------- --------- -------- -------- -------- -----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable $ 962,529 542,993 1,029,949 762,986 1,168,725 4,467,182
Mortgage-backed securities 66,316 12,363 19,019 13,313 31,147 142,158
Investment securities/1/ 280,748 13,786 92,180 47,280 53,548 487,542
Interest-bearing deposits 29,367 - - - - 29,367
Federal funds sold 112,765 - - - - 112,765
--------- -------- --------- ------- --------- ---------
Total interest-earning assets 1,451,725 569,142 1,141,148 823,579 1,253,420 5,239,014
Impact of hedging activities/2/ 161,105 - - - (161,105) -
--------- -------- --------- ------- --------- ---------
Total net interest-earning assets,
adjusted for impact of hedging activities 1,612,830 569,142 1,141,148 823,579 1,092,315 5,239,014
Interest-bearing liabilities:
NOW and checking accounts 27,665 25,313 92,647 57,550 121,816 324,991
Money market accounts 368,672 - - - - 368,672
Passbook accounts 77,542 69,745 255,267 158,566 336,953 898,073
Certificate accounts 856,613 506,342 310,745 37,377 5,904 1,716,981
FHLB advances 220,000 165,000 395,500 260,000 365,000 1,405,500
Other borrowings 65,000 - - - - 65,000
--------- -------- --------- ------- --------- ---------
Total interest-bearing liabilities 1,615,492 766,400 1,054,159 513,493 829,673 4,779,217
--------- -------- --------- ------- --------- ---------
Interest sensitivity gap $ (2,662) (197,258) 86,989 310,086 262,642 459,797
--------- -------- --------- ------- --------- ---------
Cumulative gap $ (2,662) (199,920) (112,931) 197,155 459,797
========= ======== ========= ======= =========
Cumulative gap as a percentage
of total assets (.05)% (3.57) (2.02) 3.52 8.22
Cumulative net interest-earning assets as
a percentage of interest-bearing liabilities 99.84% 91.61 96.71 104.99 109.62
/1/ Includes $132.1 million of stock in FHLB of Chicago in 6 months or less.
/2/ Represents forward commitments to sell long-term fixed-rate mortgage loans.
The Bank's cumulative one-year gap was a negative $199.9 million or
(3.57)%, of total assets at December 31, 2001, compared with a negative $269.2
million or (5.18)% of total assets at December 31, 2000. During 2001, the Bank
maintained its modest negative gap position, as higher prepayment speeds
shortened the expected cash flows in the Bank's loans receivable portfolio,
which was offset by the acquisition and internally generated increases in core
deposit accounts, primarily money market accounts, which increased $481.9
million during 2001.
59
Net Portfolio Value Analysis. Under OTS Thrift Bulletin 13a, the Bank is
required to measure its interest rate risk assuming various increases and
decreases in general interest rates, and the effect on net interest income and
market value of portfolio equity. The Board of Directors has established limits
to changes in Net Portfolio Value ("NPV") and net interest income across a
range of hypothetical interest rate changes. If estimated changes to NPV and
net interest income are not within these limits, the Board may direct
management to adjust its asset/liability mix to bring its interest rate risk
within Board limits. At December 31, 2001, the Bank was within the Board
approval limits.
Interest rate sensitivity analysis is used to measure the Bank's interest
rate risk by calculating the estimated change in the NPV of its cash flows from
interest sensitive assets and liabilities, as well as certain off-balance sheet
items, in the event of a series of sudden and sustained changes in interest
rates ranging from 100 to 300 basis points. Management assumes that a 200 basis
point movement up or down is considered reasonable and plausible for purposes
of reviewing its overall interest-rate risk. For its analysis at December 31,
2001, the down 200 basis point analysis was excluded given the current low
interest rate environment making that analysis meaningless. NPV is the market
value of portfolio equity and is computed as the difference between the market
value of assets and the market value of liabilities, adjusted for the value of
off-balance sheet items. The table below shows the change in NPV applying
various rate shocks to the Bank's interest-earning assets and interest-bearing
liabilities as of December 31, 2001 and 2000.
Estimated Increase Percentage Increase
Change in Estimated NPV (Decrease) in NPV (Decrease) in NPV
---------------------- ---------------------- ----------------------
Interest rate 2001 2000 2001 2000 2001 2000
- -------------------------- -------- --------- --------- --------- -------- ---------
(Dollars in thousands)
200 basis point rise $ 437,985 317,033 (143,092) (113,593) (25)% (26)%
100 basis point rise 526,771 386,263 (54,307) (44,363) (9) (10)
Base scenario 581,078 430,626 - - - -
100 basis point decline 627,074 437,684 45,997 7,659 8 2
The Bank's net portfolio value ("NPV") at December 31, 2001 increased
$150.5 million to $581.1 million. The increase is due to (1) a $68.2 million
increase in the Bank's stockholders' equity, (2) the emphasis on adding
adjustable rate loans, primarily home equity lines of credit to the Bank's loan
portfolio, and (3) the positive effect of the decreases in market interest
rates during the current year. The percentage decline in NPV at the 100 and 200
basis point rise scenarios remained relatively constant between 2001 and 2000.
The Bank was able to maintain its interest sensitivity levels in 2001, due to
continued adherence to its policy of emphasizing adjustable rate or short-term
loans in its loan portfolio, as well as emphasizing growth in core deposit
accounts, which become more valuable in a rising rate environment.
Interest rate risk is the most significant market risk affecting the Bank.
Other types of market risk, such as foreign currency exchange risk and
commodity price risk, do not arise in the normal course of the Company's
business activities and operations.
60
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
--------------------
2001 2000
--------- ---------
(In thousands)
Assets
Cash and due from banks $ 82,540 77,860
Interest-bearing deposits 29,367 53,392
Federal funds sold 112,765 139,268
--------- ---------
Total cash and cash equivalents 224,672 270,520
Investment securities, at amortized cost
(fair value of $13,290 at December 31, 2000) - 12,633
Investment securities available for sale, at fair value 355,461 174,494
Stock in Federal Home Loan Bank of Chicago, at cost 132,081 84,775
Mortgage-backed securities, at amortized cost
(fair value of $79,137 at December 31, 2000) - 80,301
Mortgage-backed securities available for sale, at fair value 142,158 24,084
Loans receivable held for sale 161,105 41,074
Loans receivable, net of allowance for loan losses of $19,607 and $18,258 4,286,470 4,287,040
Accrued interest receivable 28,761 27,888
Foreclosed real estate 1,405 1,808
Real estate held for development or sale 12,993 12,718
Premises and equipment, net 63,815 48,904
Other assets 80,448 60,485
Intangible assets, net of accumulated amortization of $19,608 and $15,030 105,670 68,864
--------- ---------
$ 5,595,039 5,195,588
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 3,557,997 2,974,213
Borrowed funds 1,470,500 1,728,900
Advances by borrowers for taxes and insurance 38,484 38,354
Accrued expenses and other liabilities 92,185 66,392
--------- ---------
Total liabilities 5,159,166 4,807,859
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued or outstanding - -
Common stock, $.01 par value;
80,000,000 shares authorized; 25,420,650 shares issued;
22,982,634 and 23,110,022 shares outstanding 254 254
Additional paid-in capital 201,468 198,068
Retained earnings, substantially restricted 286,742 237,867
Stock in Gain Deferral Plan; 223,453 shares 511 511
Accumulated other comprehensive income, net of tax 3,672 1,435
Treasury stock, at cost; 2,661,469 and 2,534,081 shares (56,774) (50,406)
--------- ---------
Total stockholders' equity 435,873 387,729
--------- ---------
$ 5,595,039 5,195,588
========= =========
See accompanying Notes to Consolidated Financial Statements.
61
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-------------------------------------------
2001 2000 1999
--------- ------- -------
(Dollars in thousands, except per share data)
Interest income:
Loans receivable $ 307,780 304,349 253,499
Mortgage-backed securities held to maturity - 5,740 6,625
Mortgage-backed securities available for sale 7,229 2,217 2,808
Investment securities held to maturity - 7,199 4,837
Investment securities available for sale 22,680 12,435 11,566
Interest-bearing deposits and federal funds sold 8,047 11,163 5,757
-------- ------- -------
Total interest income 345,736 343,103 285,092
Interest expense:
Deposits 120,664 115,509 99,665
Borrowed funds 93,825 101,664 68,736
-------- ------- -------
Total interest expense 214,489 217,173 168,401
-------- ------- -------
Net interest income 131,247 125,930 116,691
Provision for loan losses - 1,500 1,100
-------- ------- -------
Net interest income after provision for loan losses 131,247 124,430 115,591
Non-interest income:
Gain (loss) on sale of:
Loans receivable held for sale 8,691 1,108 2,583
Mortgage-backed securities (2) (700) -
Investment securities 879 256 1,776
Foreclosed real estate 347 258 (57)
Loan servicing rights - 4,442 -
Income from real estate operations 11,484 9,536 9,630
Deposit account service charges 16,535 12,715 10,200
Loan servicing fee income (expense) (371) 1,686 1,761
Valuation (allowance) recovery of mortgage servicing rights (904) - 900
Brokerage commissions 2,371 2,322 2,566
Other 8,088 5,820 5,485
-------- ------- -------
Total non-interest income 47,118 37,443 34,844
Non-interest expense:
Compensation and benefits 48,221 41,197 37,845
Office occupancy and equipment 9,011 8,124 7,274
Advertising and promotion 4,355 3,569 3,149
Data processing 3,103 3,034 2,611
Federal deposit insurance premiums 617 604 1,585
Amortization of intangible assets 4,578 4,475 3,884
Other 13,539 12,000 11,332
-------- ------- -------
Total non-interest expense 83,424 73,003 67,680
-------- ------- -------
Income before income taxes 94,941 88,870 82,755
Income taxes 35,466 32,311 31,210
-------- ------- -------
Net income $ 59,475 56,559 51,545
======== ======= =======
Basic earnings per share $ 2.62 2.43 2.13
======== ======= =======
Diluted earnings per share $ 2.56 2.40 2.07
======== ======= =======
See accompanying Notes to Consolidated Financial Statements.
62
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
other
Additional Gain compre-
Common paid-in Retained Deferral hensive Treasury
stock capital earnings Plan income(loss) stock Total
------ ------- ------- ----- ------------- ----- -------
(Dollars in thousands)
Balance at December 31, 1998 $ 254 191,473 159,935 - 425 (7,091) 344,996
---- ------- ------- --- ------ ------- -------
Comprehensive income:
Net income - - 51,545 - - - 51,545
Other comprehensive loss, net of tax:
Unrealized holding loss during the year - - - - (2,994) - (2,994)
Less: reclassification adjustment of gains
included in net income - - - - (1,106) - (1,106)
---- ------- ------- --- ------ ------- -------
Total comprehensive income (loss) - - 51,545 - (4,100) - 47,445
---- ------- ------- --- ------ ------- -------
Exercise of 525,801 stock options, and
reissuance of treasury stock - - (5,143) 511 - 5,525 893
Tax benefits from stock-related compensation - 1,008 - - - - 1,008
Impact of exercise of acquisition carry-over options - 2,393 - - - - 2,393
Purchase of 1,565,591 shares of treasury stock - - - - - (35,633) (35,633)
Cash dividends declared, $0.34 per share - - (8,221) - - - (8,221)
Dividends paid to Gain Deferral Plan - - 40 - - - 40
---- ------- ------- --- ------ ------- -------
Balance at December 31, 1999 254 194,874 198,156 511 (3,675) (37,199) 352,921
---- ------- ------- --- ------ ------- -------
Comprehensive income:
Net income - - 56,559 - - - 56,559
Other comprehensive income, net of tax:
Unrealized holding gain during the year - - - - 4,827 - 4,827
Less: reclassification adjustment of loss
included in net income - - - - 283 - 283
---- ------- ------- --- ------ ------- -------
Total comprehensive income - - 56,559 - 5,110 - 61,669
---- ------- ------- --- ------ ------- -------
Exercise of 425,279 stock options, and
reissuance of treasury stock - - (7,866) - - 8,087 221
Tax benefits from stock-related compensation - 2,425 - - - - 2,425
Impact of exercise of acquisition carry-over options - 769 - - - - 769
Purchase of 1,070,300 shares of treasury stock - - - - - (21,294) (21,294)
Cash dividends declared, $0.39 per share - - (9,072) - - - (9,072)
Dividends paid to Gain Deferral Plan - - 90 - - - 90
---- ------- ------- --- ------ ------- -------
Balance at December 31, 2000 254 198,068 237,867 511 1,435 (50,406) 387,729
Comprehensive income:
Net income - - 59,475 - - - 59,475
Other comprehensive income, net of tax:
Unrealized holding gain during the year - - - - 2,786 - 2,786
Less: reclassification adjustment of gains
included in net income - - - - (549) - (549)
---- ------- ------- --- ------ ------- -------
Total comprehensive income - - 59,475 - 2,237 - 61,712
---- ------- ------- --- ------ ------- -------
Issuance of 494,867 shares for acquisition of
Mid Town Bancorp, Inc. - 3,257 - - - 10,543 13,800
Exercise of 54,242 stock options, and
reissuance of treasury stock - - (251) - - 1,083 832
Tax benefits from stock-related compensation - 143 - - - - 143
Purchase of 645,100 shares of treasury stock - - - - - (17,994) (17,994)
Cash dividends declared, $0.46 per share - - (10,455) - - - (10,455)
Dividends paid to Gain Deferral Plan - - 106 - - - 106
---- ------- ------- --- ------ ------- --------
Balance at December 31, 2001 $ 254 201,468 286,742 511 3,672 (56,774) 435,873
==== ======= ======= === ====== ======== ========
See accompanying Notes to Consolidated Financial Statements.
63
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------
2001 2000 1999
------------- ----------- ----------
(In thousands)
Operating activities:
Net income $ 59,475 56,559 51,545
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of premiums, discounts and deferred loan fees 7,157 1,248 1,107
Provision for loan losses - 1,500 1,100
FHLB of Chicago stock dividends (6,597) (4,359) -
Net gain on sale of loans and mortgage-backed securities (8,689) (408) (2,583)
Net gain on sale of investment securities, net (879) (256) (1,776)
Net gain on real estate held for development or sale (11,484) (9,536) (9,630)
Gain on sale of loan servicing rights - (4,442) -
Impairment (recovery) of mortgage servicing rights 904 - (900)
Depreciation and amortization 5,021 4,467 3,982
Amortization of intangible assets 4,578 4,475 3,884
Deferred income tax expense 12,050 662 1,505
Increase in accrued interest receivable (873) (4,148) (2,195)
Net increase in other assets and liabilities,
net of effects from acquisitions (25,955) (4,100) (18,841)
Loans purchased for sale - (10,442) (23,306)
Loans originated for sale (1,140,195) (353,696) (229,424)
Sale of loans originated and purchased for sale 1,021,927 334,817 402,890
----------- ---------- ----------
Net cash provided by (used in) operating activities (83,560) 12,341 177,358
----------- ---------- ----------
Investing activities:
Loans originated for investment (1,672,688) (1,055,442) (1,138,206)
Principal repayments on loans receivable 1,884,663 704,420 736,956
Principal repayments on mortgage-backed securities 29,539 25,010 49,142
Proceeds from maturities of investment securities available for sale 158,241 47,526 54,499
Proceeds from maturities of investment securities held to maturity - - 10,251
Proceeds from sale of:
Loans receivable - - 1,023
Investment securities available for sale 6,515 2,201 34,825
Mortgage backed securities available for sale - 9,300 -
Real estate held for development or sale 37,316 43,813 46,352
Purchases of:
Loans receivable held for investment - (63,117) (320,782)
Investment securities available for sale (274,902) (22,000) (89,289)
Investment securities held to maturity - (631) (11,066)
Mortgage-backed securities available for sale (62,127) - -
Mortgage-backed securities held to maturity - (4,808) -
Stock in Federal Home Loan Bank of Chicago (30,000) (5,391) (24,147)
Real estate held for development or sale (16,490) (23,567) (15,724)
Premises and equipment (10,340) (8,382) (5,652)
Proceeds (payment) for acquisitions, net of cash acquired (40,037) 80,903 18,734
----------- ---------- ----------
Net cash provided by (used in) investing activities 9,690 (270,165) (653,084)
----------- ---------- ----------
(Continued)
64
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Year Ended December 31,
-------------------------------------------
2001 2000 1999
------------ ------------ -----------
(In thousands)
Financing activities:
Proceeds from:
FHLB of Chicago advances $ 145,000 475,000 790,000
Unsecured bank term loan 55,000 - -
Unsecured line of credit 16,000 15,000 21,000
Repayments of:
FHLB of Chicago advances (435,000) (260,000) (285,000)
Unsecured term bank loan (29,400) (500) (3,100)
Unsecured line of credit (10,000) (11,000) (21,000)
Net decrease in reverse repurchase agreements - (9,963) (10,037)
Net increase in deposits 313,139 185,852 21,877
Increase in advances by borrowers for taxes and insurance (348) 3,587 4,191
Proceeds from exercise of stock options 832 221 893
Purchase of treasury stock (17,301) (19,071) (35,147)
Cash dividends paid (9,900) (8,822) (7,610)
--------- --------- --------
Net cash provided by financing activities 28,022 370,304 476,067
--------- --------- --------
Increase (decrease) in cash and cash equivalents (45,848) 112,480 341
Cash and cash equivalents at beginning of year 270,520 158,040 157,699
--------- --------- --------
Cash and cash equivalents at end of year $ 224,672 270,520 158,040
========= ========= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowed funds $ 215,492 214,755 165,509
Income taxes 22,008 30,861 27,801
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate 2,697 3,520 5,945
Loans receivable swapped into mortgage-backed securities 76,670 9,290 62,583
Loans receivable transferred to held for sale - - 74,379
Investment securities transferred to available for sale 12,633 - -
Mortgage-backed securities transferred to available for sale 80,301 - -
Treasury stock received for withholding tax liability related to
stock option exercises (1,267, 109,552 and 21,829 shares) 40 2,202 486
Treasury stock received for stock option exercises
(1,339, 48,775 and 33,100 shares) 36 989 718
Acquisitions:
Assets acquired 307,469 - -
Common stock issued for acquisition 13,800 - -
Cash paid for purchase of stock (58,161) - -
Cash acquired 18,124 - -
--------- --------- --------
Net cash used for acquisitions $ (40,037) - -
========= ========= ========
See accompanying Notes to Consolidated Financial Statements
65
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of MAF Bancorp, Inc. ("Company") and its four wholly-owned
subsidiaries, Mid America Bank, fsb ("Bank"), MAF Developments, Inc., Equitable
Finance Corporation ("EFC"), Mid Town Development Corporation ("MTDC"), as well
as the Bank's wholly-owned subsidiaries, Mid America Investment Services, Inc.
("Mid America Investments"), Mid America Re, Inc., Mid America Finance
Corporation ("MAFC"), Mid America Insurance Agency, Inc., Mid America Mortgage
Securities, Inc., NW Financial, Inc. ("NW Financial"), Northwestern Acceptance
Corporation ("NWAC"), Centre Point Title Services, Inc., MAF Realty Co., LLC
III, and MAF Realty Co., LLC IV. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain reclassifications
of prior year amounts have been made to conform to the current year
presentation.
Use of Estimates. The preparation of the consolidated financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Estimates most susceptible to change are in the determination of the
Bank's allowance for loan losses, the valuation of mortgage servicing rights,
and the accounting for real estate development. Actual results could differ from
those estimates.
Statement of Cash Flows. For purposes of reporting cash flows, cash and
cash equivalents include cash and due from banks, interest-bearing deposits and
federal funds sold. Generally, federal funds are sold for one-day periods and
interest-bearing deposits mature within one day to three months.
Restrictions on Cash. Based on the types and amounts of deposits received,
the Bank maintains vault cash and non-interest bearing cash balances in
accordance with Federal Reserve Bank reserve requirements. At December 31, 2001
and 2000, the Bank's reserve requirements were met with funds on deposit at the
Federal Home Loan Bank as well as vault cash.
Investment and Mortgage-Backed Securities. All investment securities and
mortgage-backed securities are classified in one of three categories: trading,
held to maturity, or available for sale. Trading securities include investment
and mortgage-backed securities that the Company has purchased and holds for the
purpose of selling in the future. These investments are carried at fair value,
with unrealized gains and losses reflected in income in the current period. Held
to maturity securities include investment and mortgage-backed securities which
the Company has the positive intent and ability to hold to maturity. These
investments are carried at amortized cost, with no recognition of unrealized
gains or losses in the consolidated financial statements. All other investment
and mortgage-backed securities are classified as available for sale. These
investments are carried at fair value, with unrealized gains and losses
reflected in stockholders' equity, net of tax. Securities that have losses
deemed other than temporary are recognized as losses in the statement of
operations and a new cost basis is established.
Amortization of premiums, accretion of discounts, and the amortization of
purchase accounting adjustments for investment and mortgage-backed securities
acquired are recognized in interest income over the period to maturity for
investment securities, or the estimated life of mortgage-backed securities using
the level-yield method. Gains and losses on sales of investment securities,
mortgage-backed securities, and equity securities are determined using the
specific identification method.
The Bank arranges for "swap" transactions with the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC") which involve the exchange of whole mortgage loans originated by the
Bank for mortgage-backed securities.
66
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Loans receivable held for sale. The Bank sells, generally without recourse,
whole loans and participation interests in mortgage loans that it originates.
Loans originated are identified as either held for investment or sale upon
origination. Loans which the Bank intends to sell before maturity are classified
as held for sale, and are carried at the lower of cost, adjusted for applicable
deferred loan fees or expenses, or estimated market value in the aggregate.
The Bank enters into forward commitments to sell mortgage loans primarily
with FNMA to deliver mortgage loans originated by the Bank at a specific time
and specific price in the future. Loans subject to forward sales are classified
as held for sale. Unrealized losses, if any, on forward commitments are included
in gain (loss) on sale of mortgage loans in the period the loans are committed.
Loans Receivable. Loans receivable are stated at unpaid principal balances
less unearned discounts, deferred loan origination fees, loans in process and
the allowance for loan losses.
Discounts on loans receivable are amortized to interest income using the
level-yield method over the remaining period to contractual maturity, adjusted
for anticipated prepayments. Amortization of purchase accounting discounts are
being amortized over the contractual term of loans receivable acquired, adjusted
for anticipated prepayments, using the level-yield method. Loan fees and certain
direct loan origination costs are deferred, and the net deferred fee or cost is
recognized as an adjustment to yield using the level-yield method over the
contractual life of the loans.
The Bank considers a loan impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan. For loans which are not
individually significant (i.e. loans under $1.0 million) and represent a
homogeneous population, the Bank evaluates impairment collectively based on
management reports on the volume and extent of delinquencies, as well as
historical loss experience for these types of loans. The Bank uses this criteria
on one- to four-family residential loans, consumer loans, multi-family
residential loans, and land loans. Impairment for loans considered individually
significant, as well as commercial real estate and commercial business loans,
are measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate, or the fair value of the collateral if
the loan is collateral dependent. Charge-offs of principal occur when a loss has
deemed to have occurred as a result of the book value exceeding the fair value
or net realizable value. There were no impaired loans as of December 31, 2001 or
2000.
The accrual of interest income for all loans is discontinued when there is
clear indication that the borrower's cash flow may not be sufficient to meet
payments as they become due. A loan (whether considered impaired or not) is
classified as non-accrual when the borrower becomes 91 days past due. When a
loan is placed on non-accrual status, or is in the process of foreclosure,
previously accrued but unpaid interest is reversed against interest income.
Income is subsequently recorded to the extent cash payments are received, if the
entire principal balance is considered collectible, or at a time when the loan
is brought current in accordance with its original terms.
Allowance for Loan Losses. The allowance for loan losses is increased by
charges to operations and decreased by charge-offs, net of recoveries. The
allowance for loan losses reflects management's estimate of the reserves needed
to cover probable losses inherent in the Bank's loan portfolio. In determining
an adequate level of loss reserves, management periodically evaluates the
adequacy of the allowance based on the Bank's past loan loss experience, known
and inherent risks in the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral, and
current economic conditions. Larger loans, typically commercially zoned, that
exhibit probable or observed credit weaknesses are subject to individual review.
In addition, various regulatory agencies, as an integral part
67
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
of their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination. In the opinion of management, the allowance, when
taken as a whole, is adequate to absorb probable losses in the loan portfolio.
Foreclosed Real Estate. Real estate properties acquired through, or in lieu
of, foreclosure are initially recorded at the lower of carrying value or fair
value less the cost to dispose at the date of foreclosure, establishing a new
cost basis. Management periodically performs valuations and an allowance for
loss is established by a charge to operations if the carrying value of a
property exceeds its estimated fair value less cost to dispose.
Real Estate Held for Development or Sale. Real estate properties held for
development or sale, are carried at the lower of cost, including capitalized
holding costs, or net realizable value. Gains and losses on individual lot sales
in a particular development are based on cash received less the estimated cost
of sales per lot. Cost of sales is calculated as the current investment in the
particular development plus anticipated costs to complete the development, which
includes capitalized interest, divided by the remaining number of lots to be
sold. Periodic reviews are made as to a development's estimated cost to
complete. Changes in future estimated costs are recognized in the period of
change as either a charge or an addition to income from real estate operations.
Premises and Equipment. Land is carried at cost. Buildings, leasehold
improvements, furniture, fixtures, and equipment are carried at cost, less
accumulated depreciation and amortization. Buildings, furniture, fixtures, and
equipment are depreciated using the straight-line method over the estimated
useful lives of the assets. The cost of leasehold improvements is being
amortized using the straight-line method over the lesser of the life of the
leasehold improvement or the term of the related lease.
Intangibles. Goodwill represents the excess of the purchase price over the
fair value of the net identifiable assets acquired in business combinations.
Core deposit intangibles represent the value assigned to the core deposit base
acquired. Each is recognized as a result of the purchase method of accounting
for business combinations.
In June 2001, the Financial Accounting Standards Board, ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," that eliminated the pooling of interests method of accounting for
business combinations with limited exceptions for combinations initiated prior
to July 1, 2001. In addition, it clarified the criteria for recognition of
intangible assets separately from goodwill. This statement was effective for
business combinations completed after June 30, 2001. The Company followed this
pronouncement in accounting for its acquisition of Mid Town.
In June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS 142 discontinues the practice of amortizing certain goodwill and
initiates an annual review for impairment. The amortization provisions apply to
goodwill and intangible assets acquired after June 30, 2001, and affects
amortization of goodwill on previous assets acquired upon adoption. The Company
adopted SFAS 142 on January 1, 2002. Core deposit intangibles are amortized on
an accelerated method over a period not to exceed 10 years. Adjustments to
goodwill after acquisition are generally made within one year of acquisition
date and are primarily related to tax adjustments on assets and liabilities
assumed in the acquisition.
68
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. The impairment is measured based on the
expected future cash flows from the use of the asset and its eventual
disposition. If expected future cash flows are less than the carrying amount of
the asset, an impairment loss is recognized based on current fair values.
Mortgage Servicing Rights. Mortgage servicing rights are initially
capitalized upon acquisition, and are subsequently amortized over the estimated
life of the loan servicing income stream, using the level-yield method. The
balance of mortgage servicing rights is included in the consolidated statements
of financial condition in other assets. The Bank conducts periodic impairment
analysis by evaluating the present value of the future economic benefit to be
derived from the servicing rights using current information regarding interest
rates, prepayment assumptions, and the cost to service such loans. For purposes
of measuring impairment, the mortgage servicing rights are stratified based on
the predominant risk characteristics of the underlying loans. The Bank
stratifies loans by interest rate, maturity, and whether the loans are fixed or
adjustable rate. A valuation allowance is recognized in the amount by which the
capitalized servicing rights for a specific stratum exceeds its fair value.
Income Taxes. The Company and its direct subsidiaries file a consolidated
federal income tax return. Deferred income taxes are provided for all
significant items of income and expense that are recognized in different periods
for financial reporting purposes and income tax reporting purposes. The asset
and liability approach is used for the financial accounting and reporting of
income taxes. This approach requires companies to take into account changes in
the tax rates when valuing the deferred income tax accounts recorded on the
consolidated statement of financial condition. In addition, it provides that a
deferred tax liability or asset shall be recognized for the estimated future tax
effects attributable to "temporary differences" and loss and tax credit
carryforwards. Temporary differences include differences between financial
statement income and tax return income which are expected to reverse in future
periods as well as differences between tax bases of assets and liabilities and
their amounts for financial reporting purposes which are also expected to be
settled in future periods. To the extent a deferred tax asset is established
which is not likely to be realized, a valuation allowance shall be established
against such asset.
Derivative Financial Instruments. The Company utilizes forward commitments
to sell mortgage loans and interest rate futures contracts, primarily U.S.
Treasury bond futures, as part of its mortgage loan origination hedging
strategy. The Company adopted SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," on January 1, 2001. Loan commitments and
forward sales are valued as derivative instruments with adjustments included in
earnings as a component of gain on sale of loans at each period end. Gains and
losses on open and closed futures positions are deferred and recognized as an
adjustment to gain (loss) on the sale of loans receivable when the underlying
loan being hedged is sold into the secondary market. All derivatives are
recognized on the consolidated balance sheet at their fair value.
Comprehensive Income. Comprehensive income includes net income plus other
comprehensive income. Other comprehensive income includes revenues, expenses,
gains and losses that under accounting principles generally accepted in the
United States of America are included in comprehensive income but excluded from
net income. The Company reports comprehensive income in its consolidated
statement of changes in stockholders' equity.
Segments. The Company uses the management approach for determining segment
reporting. Based on the management approach, the Company operates two separate
lines of business, retail banking and land development operations.
69
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Earnings Per Share. Earnings per share is determined by dividing net income
for the period by the weighted average number of shares outstanding. Stock
options are regarded as future common stock and are considered in the earnings
per share calculations only if dilutive, and are the only adjustments made to
average shares outstanding in computing diluted earnings per share.
Anti-dilutive stock options not included in the computation of diluted earnings
per share were 155,867, 485,117, and 699,082 at December 31, 2001, 2000, and
1999, respectively. Weighted average shares used in calculating earnings per
share are summarized below.
Year Ended December 31, 2001 Year Ended December 31, 2000
-------------------------------------- --------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
(Dollars in thousands, except per share data)
Basic earnings per share:
Income available to
common shareholders $ 59,475 22,691,053 $ 2.62 $ 56,559 23,311,135 $ 2.43
===== =====
Effect of dilutive securities-
Stock options 504,270 275,457
------------ -----------
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversions $ 59,475 23,195,323 $ 2.56 $ 56,559 23,586,592 $ 2.40
======== ============ ==== ======== =========== ====
Year Ended December 31, 1999
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- --------
(Dollars in thousands, except per share data)
Basic earnings per share:
Income available to
common shareholders $ 51,545 24,253,946 $ 2.13
----
Effect of dilutive securities-
Stock options 676,667
----------
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversions $ 51,545 24,930,613 $ 2.07
======== ========== =====
2. ACQUISITIONS
On November 30, 2001, the Company purchased privately held Mid Town
Bancorp, Inc. ("Mid Town") based in Chicago, Illinois for $69.0 million in the
form of 80% cash and 20% stock. A total of 494,867 shares of common stock, at a
value of $13.8 million, and cash of $55.2 million was paid to shareholders of
Mid Town. The transaction was accounted for as a purchase under SFAS No. 141 and
accordingly the goodwill generated will not be amortized into expense, rather
only assessed for impairment on a periodic basis. The transaction generated
goodwill and core deposit intangibles of $41.4 million. At acquisition date, Mid
Town had $307.5 million in total assets, $270.3 million in deposits and $33.3
million in stockholders' equity.
On April 17, 2000, the Bank purchased two branch offices from M&I Bank,
FSB, with approximately $89.8 million of deposits. The Company received
primarily cash for the deposits in the transaction. The transaction was recorded
as a purchase, and generated goodwill and a core deposit intangible of $12.1
million.
70
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On September 10, 1999, the Bank purchased a branch office from the
Northern Trust Company, with approximately $22.2 million of deposits. The
Company received primarily cash for the deposits in the transaction. The
transaction was recorded as a purchase, and generated goodwill and a core
deposit premium of $3.1 million.
3. INVESTMENT SECURITIES
Investment securities available for sale and held to maturity are
summarized below:
December 31, 2001 December 31, 2000
------------------------------------- --------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
-------- ----- ------ -------- -------- ----- ------ -------
(Dollars in thousands)
Held to maturity:
United States government
and agency obligations $ - - - - 9,986 657 - 10,643
Corporate debt securities - - - - 2,647 - - 2,647
------- ----- ------- -------- -------- ------ ----- --------
$ - - - - 12,633 657 - 13,290
======= ===== ======= ======== ======== ====== ===== ========
Available for sale:
United States government
and agency obligations $ 139,622 2,604 (696) 141,530 82,029 164 (938) 81,255
Asset-backed securities 82,346 493 (1,169) 81,670 79,617 1,455 (458) 80,614
Corporate debt securities 70,136 1,210 (37) 71,309 - - - -
Bank trust preferred securities 40,770 129 - 40,899 2,762 18 (76) 2,704
Marketable equity securities 17,769 2,573 (289) 20,053 7,881 2,581 (541) 9,921
------- ----- ------- -------- -------- ------ ------- -------
$ 350,643 7,009 (2,191) 355,461 172,289 4,218 (2,013) 174,494
======= ===== ======= ======== ======== ====== ======= ========
The amortized cost and approximate fair value of securities at December 31,
2001, by contractual maturity, are shown in the table below. Expected maturities
may differ from contractual maturities because certain borrowers have the right
to call obligations without penalty. At December 31, 2001, the Company had $74.2
million of investment securities with call options, of which $40.2 million were
callable within one year.
Amortized Fair
Cost Value
------- ------
(Dollars in thousands)
Debt securities:
Under one year $ 14,211 14,084
Over 1 to 5 years 158,592 161,475
Over 5 to 10 years 31,955 32,213
Over 10 years 45,770 45,966
Asset-backed securities 82,346 81,670
Marketable equity securities 17,769 20,053
------- -------
$ 350,643 355,461
======= =======
On January 1, 2001, upon the adoption of SFAS No. 133, the Company
transferred $12.6 million of investment securities at cost, with a fair value
of $13.3 million, previously classified in its held to maturity portfolio to
available for sale. As of December 31, 2001 and 2000, the Company recorded
unrealized gains on investment securities available for sale as increases to
stockholders' equity of $2.9 million and $1.3 million, respectively, net of
deferred income taxes of $1.9 million and $873,000.
71
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Activity in the sales of investment securities available for sale is as
follows:
Year Ended December 31,
----------------------------------------
2001 2000 1999
-------- -------- ---------
(In thousands)
Total proceeds on sale $ 6,515 2,201 34,825
======== ======== =======
Gross realized gains $ 879 336 1,789
Gross realized losses - (80) (13)
-------- -------- -------
Net gain on sale $ 879 256 1,776
======== ======== =======
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities available for sale and held to maturity are
summarized below:
December 31, 2001 December 31, 2000
------------------------------------- ----------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------- ----- ------ -------- -------- ----- ------- --------
(Dollars in thousands)
Held to maturity:
GNMA pass-through certificates $ - - - - 744 36 (1) 779
FHLMC pass-through certificates - - - - 31,523 372 (131) 31,764
FNMA pass-through certificates - - - - 15,479 280 (158) 15,601
Collateralized mortgage obligations - - - - 32,555 - (1,562) 30,993
------- ----- ------- -------- -------- ----- ------- --------
$ - - - - 80,301 688 (1,852) 79,137
======= ===== ======= ======== ======== ===== ======= ========
Available for sale:
GNMA pass-through certificates $ 3,742 45 - 3,787 - - - -
FHLMC pass-through certificates 24,298 561 (19) 24,840 2,229 24 (12) 2,241
FNMA pass-through certificates 27,820 434 (168) 28,086 2,816 67 (4) 2,879
Collateralized mortgage obligations 85,037 521 (113) 85,445 18,870 123 (29) 18,964
------- ----- -------- ------- ------ ----- ------- --------
$ 140,897 1,561 (300) 142,158 23,915 214 (45) 24,084
======= ===== ======== ======== ======== ===== ======= ========
On January 1, 2001, upon the adoption of SFAS No. 133, the Company
transferred $80.3 million of mortgage-backed securities at cost, with a fair
value of $79.1 million, previously classified in its held to maturity portfolio
to available for sale. As of December 31, 2001 and 2000, the Company recorded
unrealized gains on mortgage-backed securities available for sale as increases
to stockholders' equity of $762,000, and $102,000, respectively, net of
deferred income taxes of $499,000 and $67,000, respectively. During the years
ended December 31, 2001 and 2000, the Company recorded realized losses of
$(2,000) and $(700,000), respectively, on the sale of mortgage-backed
securities.
During the years ended December 31, 2001, 2000, and 1999, the Bank swapped
$76.7 million, $9.3 million, and $62.6 million, respectively, of loans it
originated into mortgage-backed securities, all of which were sold in the same
period swapped.
5. LOANS RECEIVABLE HELD FOR SALE
The Bank classifies loan originations that it intends to sell in the
secondary market as held for sale at the time of origination. At December 31,
2001 and 2000, the Bank had $161.1 million and $41.1 million of fixed-rate
loans classified as held for sale with weighted average rates of 6.61% and
7.64%, respectively.
72
6. LOANS RECEIVABLE
Loans receivable are summarized as follows:
December 31,
--------------------------------
2001 2000
------------ ------------
(Dollars in thousands)
Real estate loans:
One-to-four family residential $ 3,559,466 3,807,980
Multi-family 197,685 173,072
Commercial 139,608 41,223
Construction 43,756 29,566
Land 44,494 40,497
------------ ------------
Total real estate loans 3,985,009 4,092,338
Consumer loans:
Equity lines of credit 258,884 146,020
Home equity loans 52,216 64,465
Other 7,975 4,783
------------ ------------
Total consumer loans 319,075 215,268
Commercial business loans 19,116 3,528
------------ ------------
Total loans receivable 4,323,200 4,311,134
Unearned discounts, premiums, and deferred loan expenses, net 4,555 7,076
Loans in process (21,678) (12,912)
Allowance for loan losses (19,607) (18,258)
------------ ------------
$ 4,286,470 4,287,040
============ ============
Adjustable-rate loans included in loans receivable totaled $2.1 billion and
$2.3 billion at December 31, 2001 and 2000, respectively.
Allowance for loan losses. Activity in the allowance for loan losses is
summarized as follows for the periods indicated:
Year Ended December 31,
-----------------------------------------
2001 2000 1999
-------- -------- ----------
(In thousands)
Balance at beginning of year $ 18,258 17,276 16,770
Provision for loan losses - 1,500 1,100
Balance acquired in acquisition 1,408 - -
Charge-offs (104) (531) (711)
Recoveries 45 13 117
-------- ------ -----
Balance at end of year $ 19,607 18,258 17,276
======== ====== ======
At December 31, 2001 and 2000, the Bank had $19.4 million and $15.0
million of loans that were on non-accrual status. Interest income that would
have been recorded on non-accrual loans amounted to $1.1 million, $768,000, and
$703,000 for the years ended December 31, 2001, 2000 and 1999, respectively,
had these loans been accruing under their contractual terms. Interest income
that was included in net income was $351,000, $350,000 and $387,000, for the
years ended December 31, 2001, 2000 and 1999, respectively. There were no loans
outstanding as of December 31, 2001 and 2000 that the Bank considered impaired.
Loan servicing and mortgage servicing rights. The Bank services loans for
the benefit of others pursuant to loan servicing agreements. Under these
agreements, the Bank typically collects from the borrower monthly payments of
principal and interest, as well as funds for the payment of real estate taxes
and insurance. The Bank retains its loan servicing fee from these payments and
remits the balance of the
73
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
principal and interest payments to the various investors. Mortgage loans
serviced for others are not included in the accompanying consolidated
statements of financial condition. The unpaid principal balances of these loans
were $1.40 billion, $785.3 million and $1.23 billion, at December 31, 2001,
2000, and 1999, respectively. The decrease in 2000 was due to the sale of
servicing rights relating to approximately $600.0 million in mortgage loans,
resulting in a pre-tax gain of $4.4 million. Non-interest bearing custodial
balances maintained in connection with mortgage loans serviced for others
(included in deposits) were $43.7 million and $12.7 million at December 31,
2001 and 2000, respectively. At December 31, 2001, mortgage servicing rights
included a valuation allowance of $1.1 million.
Activity in mortgage servicing rights is as follows for the periods
indicated:
Year Ended December 31,
-------------------------------------
2001 2000 1999
------ ------ ------
(In thousands)
Balance at beginning of year $ 5,107 7,334 4,208
Additions 9,782 3,002 3,497
Amortization expense (3,454) (1,038) (1,271)
Carrying value of rights sold - (4,191) -
Valuation (allowance) recovery (904) - 900
------ ------ ------
Balance at end of year $ 10,531 5,107 7,334
====== ====== ======
7. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
December 31,
---------------------------
2001 2000
------- --------
(In thousands)
Investment securities $ 5,789 3,873
Mortgage-backed securities 688 619
Loans receivable 24,063 24,697
Reserve for uncollected interest (1,779) (1,301)
------- --------
$ 28,761 27,888
======= ========
8. FORECLOSED REAL ESTATE
Foreclosed real estate is summarized as follows:
December 31,
---------------------------
2001 2000
------- --------
(In thousands)
Residential real estate $ 1,405 1,762
Commercial real estate - 46
------- --------
$ 1,405 1,808
======= ========
9. REAL ESTATE HELD FOR DEVELOPMENT OR SALE
Real estate held for development or sale is summarized by project as
follows:
December 31,
---------------------------
2001 2000
------- --------
(In thousands)
Tallgrass of Naperville $ 8,498 8,041
Shenandoah 4,495 4,387
Woodbridge - 290
------- --------
$ 12,993 12,718
======= ========
74
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Income (loss) from real estate operations is summarized by project for the
periods indicated:
Year Ended December 31,
------------------------------------
2001 2000 1999
-------- -------- ------
(In thousands)
Tallgrass of Naperville $ 10,712 8,699 3,457
Woodbridge 501 418 5,163
Hannaford 271 - -
Harmony Grove - 104 479
Reigate Woods - 210 509
Ashbury - - (150)
Creekside of Remington - 105 172
-------- -------- ------
$ 11,484 9,536 9,630
======== ======== ======
Interest capitalized to real estate held for development or sale amounted
to $168,000, $256,000, and $536,000 for the years ended December 31, 2001, 2000
and 1999, respectively.
10. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
Estimated December 31,
-------------------------
Useful Life 2001 2000
--------------- -------- -------
(In thousands)
Land $ 13,718 9,280
Office buildings 20 - 50 years 36,722 36,487
Furniture, fixtures and equipment 2 - 10 years 40,758 31,964
Leasehold improvements 3 - 29 years 7,532 1,397
-------- -------
Total office properties and equipment, at cost 98,730 79,128
Less: accumulated depreciation and amortization (34,915) (30,224)
-------- -------
$ 63,815 48,904
======== =======
Depreciation and amortization of premises and equipment, included in data
processing expense and office occupancy and equipment expense was $5.0 million,
$4.5 million and $4.0 million, for the years ended December 31, 2001, 2000 and
1999, respectively. Occupancy expense is reduced by rental income from leased
premises totaling $609,000, $709,000 and $717,000 for the years ended December
31, 2001, 2000 and 1999, respectively.
The Bank is obligated under non-cancelable leases primarily for office
space. Rent expense under these leases for the years ended December 31, 2001,
2000 and 1999, was $1.4 million, $1.2 million, and $1.1 million, respectively.
The projected minimum rentals under existing leases as of December 31, 2001,
are as follows: 2002- $2.5 million; 2003- $2.3 million; 2004- $1.9 million;
2005- $1.6 million; 2006- $1.3 million; 2007 and thereafter $15.6 million.
75
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
11. INTANGIBLE ASSETS
Intangible assets are summarized as follows:
Core deposit
Goodwill Intangible Total
-------- ---------- --------
(In thousands)
Balance at December 31, 1998 $ 54,868 7,351 62,219
Adjustment related to previous acquisition (192) - (192)
Addition related to branch acquisition 2,911 146 3,057
Amortization expense (2,648) (1,236) (3,884)
-------- --------- --------
Balance at December 31, 1999 54,939 6,261 61,200
Addition related to branch acquisition 10,141 1,998 12,139
Amortization expense (3,118) (1,357) (4,475)
-------- --------- --------
Balance at December 31, 2000 61,962 6,902 68,864
Addition related to Mid Town acquisition 38,134 3,250 41,384
Amortization expense (3,245) (1,333) (4,578)
-------- --------- --------
Balance at December 31, 2001 $ 96,851 8,819 105,670
======== ========= ========
12. DEPOSITS
Deposit account balances by interest rate are summarized as follows:
December 31, 2001 December 31, 2000
---------------------------------- ------------------------
Weighted Weighted
% of Average % of Average
Amount Total Rate Amount Total Rate
--------- ----- ------ ---------- ----- ------
(Dollars in thousands)
Commercial checking accounts $ 128,214 3.6% -% $ 48,472 1.6% -%
Non-interest bearing checking 121,066 3.4 - 92,471 3.1 -
Interest bearing NOW accounts 324,991 9.1 .92 250,496 8.4 1.25
Money market accounts 368,672 10.4 2.16 229,058 7.7 4.36
Passbook accounts 898,073 25.3 2.00 738,606 24.9 2.49
--------- ------ ------ --------- ------ ------
1,841,016 51.8 1.57 1,359,103 45.7 2.32
--------- ------ ------ --------- ------ ------
Certificate accounts:
Less than 5.00% 1,008,672 28.3 3.39 71,102 2.4 4.75
5.00% to 5.99% 225,792 6.4 5.57 693,431 23.3 5.65
6.00% to 6.99% 437,890 12.3 6.61 806,635 27.1 6.45
7.00% and greater 44,024 1.2 7.11 43,664 1.5 7.11
--------- ------ ------ --------- ------ ------
1,716,378 48.2 4.59 1,614,832 54.3 6.05
--------- ------ ------ --------- ------ ------
Unamortized premium 603 - 278 -
--------- ------ --------- ------
Total deposits $ 3,557,997 100.0% 3.03% $ 2,974,213 100.0% 4.34%
========= ====== ====== ========= ====== ======
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was $319.1 million and $266.7 million at December 31,
2001 and 2000, respectively.
76
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Scheduled maturities of certificate accounts at December 31, 2001 are as
follows (in thousands):
12 months or less $ 1,370,144
13 to 24 months 237,413
25 to 36 months 65,133
Over 36 months 43,688
---------
$ 1,716,378
=========
Interest expense on deposit accounts is summarized as follows for the
periods indicated:
Year Ended December 31
-------------------------------------
2001 2000 1999
--------- ---------- --------
(In thousands)
NOW and money market accounts $ 12,272 10,100 8,042
Passbook accounts 18,022 18,383 18,268
Certificate accounts 90,370 87,026 73,355
--------- ---------- --------
$ 120,664 115,509 99,665
========= ========== ========
At December 31, 2001, U.S. Treasury Notes, FHLMC and FNMA mortgage-backed
securities, as well as mortgage loans with an aggregate carrying value and fair
value of $40.7 million, were pledged as collateral for certain jumbo
certificates.
13. BORROWED FUNDS
Borrowed funds are summarized as follows:
December 31, 2001 December 31, 2000
--------------------------------------- ----------------------
Weighted Weighted
Interest Rate Average Average
Range Rate Amount Rate Amount
--------------- ------ ---------- ------- ---------
(Dollars in thousands)
Fixed-rate advances from FHLB due:
Within 1 year 5.99% - 7.40% 6.46% $ 280,000 6.37% $ 365,000
1 to 2 years 4.87 - 6.78 6.08 135,500 6.43 305,000
2 to 3 years 4.81 - 7.22 6.30 260,000 6.35 55,500
3 to 4 years 4.70 - 7.20 6.01 205,000 6.61 205,000
4 to 5 years 5.37 - 6.82 6.16 55,000 6.16 195,000
5 to 6 years - - - - - 6.82 30,000
6 to 7 years 4.81 - 5.86 5.28 310,000 - -
7 to 8 years 5.61 - 5.86 5.73 50,000 5.26 285,000
Greater than 8 years 5.42 - 5.42 5.42 30,000 5.62 80,000
-------------- --------- ---------
Total fixed rate advances 4.70 - 7.40 5.98 1,325,500 6.15 1,520,500
Adjustable-rate advances from FHLB due:
Within 1 year 1.93 - 2.32 2.11 80,000 6.81 100,000
1 to 2 years - - - - - 6.87 25,000
Greater than 2 years - - - - - 6.58 50,000
-------------- --------- ---------
Total adjustable rate advances 1.93 - 2.32 2.11 80,000 6.75 175,000
-------------- --------- ---------
Total advances from FHLB 1.93% - 7.40% 5.76 1,405,500 6.21 1,695,500
============== --------- ---------
Unsecured term bank loan 3.16 55,000 7.72 29,400
Unsecured line of credit 3.06 10,000 7.71 4,000
--------- ---------
Total borrowed funds 5.64% $ 1,470,500 6.24% $ 1,728,900
====== ========= ===== =========
77
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Federal Home Loan Bank of Chicago Advances. The Bank has adopted a
collateral pledge agreement whereby the Bank has agreed to at all times keep on
hand, free of all other pledges, liens, and encumbrances, first mortgages with
unpaid principal balances aggregating no less than 167% of the outstanding
secured advances from the Federal Home Loan Bank ("FHLB") of Chicago. All stock
in the FHLB of Chicago is pledged as additional collateral for these advances.
At December 31, 2001, the Bank has $80.0 million of adjustable-rate advances
that are indexed to the three-month London interbank offering rate ("LIBOR").
Included in FHLB of Chicago advances at December 31, 2001 are $560.0
million of fixed-rate advances with original scheduled maturities of 4 to 10
years, which are callable at the discretion of the FHLB of Chicago as follows:
$190.0 million at 5.41% in 2002, $240.0 million at 5.87% in 2003, $80.0 million
at 5.35% in 2004 and $50.0 million at 5.56% in 2005. The Bank receives a lower
cost of borrowing on such advances than on similar non-callable long-term
advances in return for granting the FHLB of Chicago the right to call the
advances prior to their final maturity.
Unsecured Term Bank Loan. In 2001, the Company repaid its existing $29.4
million on its unsecured term bank loan, and obtained a $55.0 million unsecured
term bank loan in conjunction with its acquisition of Mid Town with a final
maturity of December 31, 2008. The loan agreement provides for an interest rate
of one, two, three, six or twelve month LIBOR at the option of the borrower
plus 110 basis points. At December 31, 2001, the interest rate is currently
three-month LIBOR plus 110 basis points. At December 31, 2001, the balance of
the unsecured term loan is $55.0 million. Prepayments of principal are allowed
without penalty at the end of any repricing period.
Scheduled principal repayments on the unsecured term bank loan are as
follows as of December 31, 2001 (in thousands):
December 31,
------------
2002 $ 4,000
2003 6,000
2004 7,000
2005 8,000
2006 8,000
2007 and thereafter 22,000
------
$ 55,000
======
Unsecured Line of Credit. In conjunction with the term bank loan, the
Company also maintains a $40.0 million one year unsecured revolving line of
credit, renewable annually on November 30. $10.0 million was outstanding on the
line of credit as of December 31, 2001 at one, two, three, six or twelve- month
LIBOR plus 1.0%. The financing agreements contain covenants that, among other
things, require the Company to maintain a minimum stockholders' equity balance
and to obtain certain minimum operating results, as well as requiring the Bank
to maintain "well capitalized" regulatory capital levels and certain
non-performing asset ratios. In addition, the Company has agreed not to pledge
any stock of the Bank or MAF Developments for any purpose. At December
31, 2001, the Company was in compliance with these covenants.
78
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Reverse Repurchase Agreements. The Bank enters into sales of securities
under agreements to repurchase the identical securities ("reverse repurchase
agreements") with nationally recognized primary securities dealers and are
treated as financings. The securities underlying the agreements are delivered to
the dealers who arrange the transaction and are reflected as assets. The
following table presents certain information regarding reverse repurchase
agreements as of and for the periods indicated:
Year Ended December 31,
--------------------------------------
2001 2000 1999
---------- --------- --------
(Dollars in thousands)
Balance at end of period $ -% - 9,963
Maximum month-end balance - 19,813 29,700
Average balance - 11,354 17,155
Weighted average rate at end of period - - 5.86
Weighted average rate on average balance - 6.23 6.20
========= ========= ========
At December 31, 2001 and 2000, the bank has no outstanding repurchase
agreements.
Interest expense on borrowed funds is summarized as follows for the periods
indicated:
Year Ended December 31,
---------------------------------------
2001 2000 1999
--------- --------- --------
(In thousands)
FHLB of Chicago advances $ 91,851 98,096 65,060
Unsecured term bank loan 1,650 2,258 2,086
Unsecured revolving line of credit 324 510 331
Other borrowings - 800 1,259
--------- --------- --------
$ 93,825 101,664 68,736
========= ========= ========
14. DERIVATIVE FINANCIAL INSTRUMENTS
The Bank enters into forward commitments to sell mortgage loans for future
delivery as a means of limiting exposure to changing interest rates between the
date a loan customer commits to a given rate, or closes the loan, whichever is
sooner, and the sale date, which is generally 10 to 60 days after the closing
date. These commitments to sell require the Bank to deliver mortgage loans at
stated coupon rates within the specified forward sale period, and subject the
Bank to risk to the extent the loans do not close. The Bank attempts to mitigate
this risk by collecting a non-refundable commitment fee, where possible, and by
estimating a percentage of fallout when determining the amount of forward
commitments to sell. The following is a summary of the Bank's forward sales
commitment activity for the periods indicated:
Year Ended December 31,
----------------------------------------
2001 2000 1999
------------ ---------- ----------
(In thousands)
Balance at beginning of year $ 47,943 20,089 112,346
New forward commitments to deliver loans 1,167,118 363,519 310,634
Loans delivered to satisfy forward commitments (1,019,173) (335,665) (402,891)
---------- ---------- ----------
Balance at end of year $ 195,888 47,943 20,089
========== ========== ==========
The Company adopted SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities," on January 1, 2001. Loan commitments and forward sales are
valued as derivative instruments with adjustments included in gain on sale of
loans at each period end. At December 31, 2001 the net fair value adjustment of
locked commitments and forward sales was $(220,000).
79
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Bank also enters into interest rate futures contracts to hedge its
exposure to price fluctuations on firm commitments to originate loans intended
for sale, that have not been covered by forward commitments to sell loans for
future delivery. Included in gain on sale of mortgage loans for the year ended
December 31, 2001, 2000 and 1999 are $(182,000), $(65,000), and $159,000, of net
futures gains (losses), respectively, from hedging activities. At December 31,
2001 and 2000, the Bank had $68,000 of net deferred gains, and $(78,000) of net
deferred losses on futures contracts, respectively. The following is a summary
of the notional amount of interest rate futures contract activity for the
periods indicated:
Year Ended December 31,
--------------------------------------
2001 2000 1999
--------- --------- ---------
(In thousands)
Balance at beginning of year $ - - 1,000
Interest rate futures contracts sold 73,500 35,400 73,700
Interest rate futures contracts closed (73,500) (35,400) (74,700)
------- --------- -------
Balance at end of year $ - - -
======= ========= =========
15. INCOME TAXES
Income tax expense is summarized below:
Year Ended December 31,
------------------------------------
2001 2000 1999
-------- ------- -------
(In thousands)
Current:
Federal $ 20,739 29,866 26,598
State 2,677 1,783 3,107
------- ------- -------
23,416 31,649 29,705
------- ------- -------
Deferred:
Federal 11,627 477 1,235
State 423 185 270
------- ------- -------
12,050 662 1,505
------- ------- -------
Total income tax expense $ 35,466 32,311 31,210
======= ======= =======
Retained earnings at December 31, 2001 include $59.4 million of tax bad
debt reserves for which no provision for income taxes has been made. If in the
future this amount or a portion thereof, is used for certain purposes other than
to absorb losses on bad debts, an income tax liability will be imposed on the
amount so used at the then current corporate income tax rate. If deferred taxes
were required to be provided on this item, the amount of this deferred tax
liability would be approximately $23.5 million.
The reasons for the differences between the effective income tax rate and
the corporate federal income tax rate are summarized in the following table:
Percentage of
Income Before Income Taxes
------------------------------------
Year Ended December 31,
------------------------------------
2001 2000 1999
------- ------- -------
Federal income tax rate 35.0% 35.0 35.0
Items affecting effective income tax rate:
State income taxes, net of federal benefit 2.1 1.4 2.6
Other items, net .3 - 0.1
------- ------- -------
Effective income tax rate 37.4% 36.4 37.7
======= ======= =======
80
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2001 and 2000 are presented below:
December 31,
-----------------------
2001 2000
--------- --------
(In thousands)
Deferred tax assets:
Deferred compensation $ 6,386 4,879
Allowance for loan losses 8,042 7,595
Book versus tax basis of real estate held for sale 90 243
Book versus tax basis of loans receivable 497 373
Other 2,028 1,144
------- --------
Total deferred tax assets 17,043 14,234
Deferred tax liabilities:
REIT Dividends (10,019) -
Loan origination fees (1,608) (3,139)
Excess of tax bad debt reserve over base year amount (1,017) (1,515)
Book versus tax basis of land and fixed assets (4,131) (2,383)
Book versus tax basis of capitalized servicing (4,418) (2,127)
Book versus tax basis of intangible assets (3,060) (2,104)
Book versus tax basis of securities (9,558) (4,472)
Other (859) (494)
------- --------
Total deferred tax liabilities (34,670) (16,234)
-------- --------
Net deferred tax liability $ (17,627) (2,000)
======== ========
16. REGULATORY CAPITAL
The Bank is subject to regulatory capital requirements under the Office of
Thrift Supervision ("OTS"). Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators, which could have a material impact on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
Quantitative measures established by the OTS to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (as set forth in the
table below) of three capital requirements: a tangible capital (as defined in
the regulations) to adjusted total assets ratio, a core capital (as defined) to
adjusted total assets ratio, and a risk-based capital (as defined) to total
risk-weighted assets ratio. The Bank met all capital adequacy requirements to
which it is subject as of December 31, 2001.
81
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Bank's actual capital amounts and ratios, as well as minimum amounts
and ratios required for capital adequacy and prompt corrective action provisions
are presented below:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
--------- -------- ---------- ---------- --------- -----------
(Dollars in thousands)
As of December 31, 2001:
Tangible capital
(to total assets) $ 350,825 6.44% ****$ 81,686 ****1.50% N/A
Core capital
(to total assets) $ 350,825 6.44% ****$163,372 ****3.00% ****$272,287 ****5.00%
Total capital
(to risk-weighted assets) $ 364,365 11.31% ****$257,691 ****8.00% ****$322,114 ****10.00%
Core capital
(to risk-weighted assets) $ 350,825 10.89% N/A ****$193,269 ****6.00%
As of December 31, 2000:
Tangible capital
(to total assets) $ 321,931 6.32% ****$ 76,408 ****1.50% N/A
Core capital
(to total assets) $ 321,931 6.32% ****$152,816 ****3.00% ****$254,694 ****5.00%
Total capital
(to risk-weighted assets) $ 336,801 11.98% ****$224,878 ****8.00% ****$281,098 ****10.00%
Core capital
(to risk-weighted assets) $ 321,931 11.45% N/A ****$168,659 ****6.00
OTS regulations require that in meeting the tangible, core and risk-based
capital standards, institutions must generally deduct investments in and loans
to subsidiaries engaged in activities not permissible for a national bank. For
the Bank, this includes its $2.1 million investment in NW Financial at December
31, 2001, and $2.4 million at December 31, 2000.
OTS regulations provide various standards under which the Bank may declare
and pay dividends to the Company. If the total amount of all dividends,
including the proposed dividend, declared by the Bank in any calendar year,
does not exceed the Bank's net income of that year to date combined with the
retained net income of the preceding two years, the Bank must file a notice of
such proposed dividend with the OTS. At December 31, 2001, $35.2 million of the
Bank's retained earnings were available for dividend declaration under this
standard. Proposed capital distributions in excess of this retained net income
standard are not prohibited but are merely subject to greater regulatory review
through an application process.
As of December 31, 2001 and 2000, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain a minimum core capital to adjusted total assets, risk-based capital to
adjusted risk-weighted assets, and core capital to adjusted risk-weighted assets
ratios as set forth in the table above. There are no conditions or events since
that notification that management believes have changed the Bank's category.
**** represents greater than or equal to.
82
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
17. OFFICER, DIRECTOR AND EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan (ESOP). The Mid America Bank, fsb ESOP covers
substantially all employees with more than one year of employment who have
attained the age of 21. Contributions to the ESOP by the Bank are currently made
to purchase additional common shares of the Company's stock. For the years ended
December 31, 2001, 2000 and 1999, total contributions to the ESOP were $1.1
million, $1.0 million, and $960,000, respectively, which were expensed. The ESOP
purchased 37,190, 60,078, and 42,308 of the Company's shares for the years ended
December 31, 2001, 2000 and 1999, respectively.
Profit Sharing Plan/401(k) Plan. The Mid America Bank, fsb Profit
Sharing/401(k) Plan allows employees to make pre-tax contributions of up to 15%
of their compensation and after-tax contributions of up to 10% of compensation,
subject to certain limitations. The Bank matches the pre-tax contributions of
employees at a rate equal to 35%, up to a $1,200 maximum matching contribution
per employee. The Bank, at its discretion, may make additional contributions.
Employees' contributions vest immediately while the Bank's contributions vest
gradually based on an employee's years of service. The Bank made discretionary
and matching contributions of $1.0 million, $1.0 million, and $960,000, for the
years ended December 31, 2001, 2000, and 1999, respectively.
Stock Option Plans. The Company and its shareholders have adopted stock
option plans for the benefit of employees and directors of the Bank.
The number of shares of common stock authorized under the combination of
the MAF Bancorp 1990 Incentive Stock Option Plan and the MAF Bancorp 2000 Stock
Option Plan ("Incentive Plans") is 4,027,791. Under each of these plans, the
option exercise price must be at least 100% of the fair market value of the
common stock on the date of grant, and the option term cannot exceed 10 years. A
summary of the stock option activity and related information in these Incentive
Plans follows:
Year Ended December 31,
-------------------------------------------------------------------------
2001 2000 1999
----------------------- ---------------------- ---------------------
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- -------- ----------- -------- ----------- --------
Beginning of year 1,218,955 $ 20.01 1,578,677 $ 16.02 1,293,676 $ 7.72
Granted 948,250 27.20 22,750 18.19 679,325 24.20
Exercised (36,253) 17.10 (364,282) 2.38 (384,264) 2.32
Cancelled (11,780) 24.91 (18,190) 24.18 (10,060) 25.11
--------- ------ --------- ------ --------- -----
End of year 2,119,172 $ 23.25 1,218,955 $ 20.01 1,578,677 $ 16.02
========= ====== ========= ====== ========= =====
Options exercisable 1,133,472 20.42 790,519 18.08 878,889 9.94
========= ====== ========= ====== ========= =====
Fair value of options
granted during year $ 11.52 $ 6.95 $ 9.88
====== ====== =====
At December 31, 2001, options for 1,022,434 shares were available for
grant under the Incentive Plans, which includes additions to the available
shares of 193,126, representing shares surrendered in connection with stock
option exercises. Cancelled shares also increase the number of shares available
for grant under the Incentive Plans.
83
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The number of shares of common stock authorized under the MAF Bancorp, Inc.
1993 Premium Price Stock Option Plan is 556,875. The option exercise price
equals 133% of the fair market value of the common stock on the date of grant
with respect to executive officers, 110% with respect to directors and 100% with
respect to non-executive employees. The option term cannot exceed 10 years. A
summary of the stock option activity and related information in the Premium Plan
follows:
Year Ended December 31,
-----------------------------------------------------------------------------------
2001 2000 1999
---------------------- -------------------------- -----------------------
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- ---------- ------------ -------- ----------
Beginning of year 517,359 $ 19.57 519,359 $ 19.54 416,612 $ 16.54
Granted - - - - 102,747 31.71
Exercised (17,989) 13.81 (2,000) 11.78 - -
-------- -------- --------- ------- ------- --------
End of year 499,370 $ 19.78 517,359 $ 19.57 519,359 $ 19.54
======== ======== ========= ======= ======= ========
Options exercisable 499,370 19.78 517,359 19.57 519,359 19.54
======== ======== ========= ======= ======= ========
Fair value of options
granted during year $ - $ - $ 7.96
======== ======= ========
At December 31, 2001, no options were available for grant under the
Premium Plan.
In conjunction with the Company's acquisitions, certain stock options
owned by individuals of the acquired institutions were carried over into stock
options of the Company based on the transactions' exchange ratios. The values
of these stock options were included in the purchase price of the transactions
as well as in additional paid-in capital in the consolidated statements of
financial condition.
A summary of the activity in these carryover stock options is as follows:
Year Ended December 31,
----------------------------------------------------------------------------------
2001 2000 1999
---------------------- ------------------------ -----------------------
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- ---------- ---------- -------- ---------
Beginning of year 82,069 $ 4.78 141,066 $ 4.51 282,603 $ 4.80
Carryover options issued - - - - - -
Exercised - - (58,997) 4.14 (141,537) 5.09
------- -------- --------- -------- ------- --------
End of year 82,069 $ 4.78 82,069 $ 4.78 141,066 $ 4.51
======= ======== ========= ======== ======= ========
Options exercisable 82,069 $ 4.78 82,069 $ 4.78 141,066 $ 4.51
======= ======== ========= ======== ======= ========
The following table summarizes information about stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
----------------------------------------------------- ----------------------------------
Weighted-Average Weighted-Average Weighted-Average
Range of Options Remaining Exercise Options Exercise
Exercise Prices Outstanding Life (yrs.) Price Exercisable Price
- ------------------- ----------- ----------- ----- ----------- ------
$ 3.77 to $ 12.43 468,093 1.99 $ 8.20 468,093 $ 8.20
14.33 to 23.47 812,551 6.56 20.27 649,308 19.81
25.22 to 35.99 1,419,967 8.68 27.63 597,510 27.97
--------- ---------
2,700,611 6.89 $ 22.05 1,714,911 $ 19.48
========= ====== ====== ========= =====
84
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its stock option
plans. Accordingly, no compensation cost has been recognized for its stock
option plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated in the table below:
Year Ended December 31,
----------------------------------------------
2001 2000 1999
-------- -------- --------
(Dollars in thousands, except per share data)
Net income As reported $ 59,475 56,559 51,545
Pro-forma 55,949 53,780 49,196
Basic earnings per share As reported 2.62 2.43 2.13
Pro-forma 2.47 2.31 2.03
Diluted earnings per share As reported 2.56 2.40 2.07
Pro-forma $ 2.47 2.27 1.97
======= ======== ========
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants during the years ended December 31, 2001, 2000, and 1999, respectively:
dividend yield of 1.63%, 2.21%, and 1.37%; expected volatility of 32.7%, 27.8%,
and 26.7%; risk-free interest rates of 5.09%, 6.28%, and 5.51%; expected life
of 10 years for each period.
Stock Option Gain Deferral Plan. The MAF Bancorp, Inc. Stock Option Gain
Deferral Plan ("Gain Deferral Plan") was adopted during 1999. The Gain Deferral
Plan combines traditional deferred compensation arrangements with stock option
exercise transactions by allowing designated executive officer participants
(currently two) to defer to a future date, the receipt of shares representing
the value of underlying MAF Bancorp stock options. The Company's obligation to
issue the deferred MAF Bancorp shares in the future is recorded in
stockholders' equity as the product of the number of shares to be issued
multiplied by the exercise price of the related stock options. Dividends paid
on MAF Bancorp shares deferred through the Gain Deferral Plan are recorded as
compensation expense.
Supplemental Executive Retirement Plan. The Bank sponsors a supplemental
executive retirement plan ("SERP") for the purpose of providing certain
retirement benefits to executive officers and other corporate officers approved
by the Board of Directors. The annual retirement plan benefit under the SERP is
calculated equal to 2% of final average salary times the years of service after
1994, or such later date that a participant enters the plan. In most cases, ten
additional years of service are credited to participants in the event of a
change in control transaction although in no event may total years of service
exceed 20 years. The maximum annual retirement benefit payable is equal to 40%
of final average salary. Benefits are payable in various forms in the event of
retirement, death, disability and separation from service, subject to certain
conditions defined in the plan. The SERP also provides for certain death
benefits to the extent such amounts exceed a participant's accrued benefit at
the time of death. The plan is unfunded, however, the Company funds life
insurance policies that may be used to satisfy obligations of the SERP.
85
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table sets forth the change in benefit obligations
and the related assumptions for the SERP for the periods indicated:
Year Ended December 31,
-----------------------------------
2001 2000 1999
------- ------- -------
(In thousands)
Projected benefit obligation - beginning of year $ 2,209 1,552 1,298
Service cost 431 351 386
Interest cost 169 125 96
Actuarial (gains) losses 156 186 (223)
Benefits paid (5) (5) (5)
------- ------- -------
Projected benefit obligation - end of year $ 2,960 2,209 1,552
======= ======= =======
Funded status (2,960) (2,209) (1,552)
Unrecognized (gain) loss 300 143 (42)
------- ------ -------
Prepaid (accrued) benefit cost $ (2,660) (2,066) (1,594)
======= ======= =======
Weighted average assumptions:
Discount rate 7.50% 8.00 7.00
Rate of compensation increase 5.00 5.00 5.00
======= ======= ======
The following sets forth the components of the net periodic benefit cost
related to the SERP:
Year Ended December 31,
--------------------------------
2001 2000 1999
------ ------- -------
(In thousands)
Service cost $ 431 351 386
Interest cost 169 125 96
Unrecognized net (gain) loss - - 10
------ ------- -------
Net periodic benefit cost $ 600 476 492
====== ======= =======
18. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK
The Bank is a party to various financial instruments with
off-balance sheet risk in the normal course of its business. These
instruments include commitments to extend credit, standby letters of
credit, and forward commitments to sell loans. These financial
instruments carry varying degrees of credit and interest-rate risk in
excess of amounts recorded in the financial statements.
Commitments to originate and purchase loans of $478.9 million
at December 31, 2001, represent amounts which the Bank plans to fund
within the normal commitment period of 30 to 90 days of which $335.4
million were fixed-rate, with rates ranging from 5.00% to 8.375%, and
$143.5 million were adjustable-rate loans. Because the credit
worthiness of each customer is reviewed prior to extension of the
commitment, the Bank adequately controls their credit risk on these
commitments, as it does for loans recorded on the balance sheet. As
part of its effort to control interest-rate risk on these
commitments, the Bank generally sells fixed-rate mortgage loan
commitments, for future delivery, at a specified price and at a
specified future date. Such commitments for future delivery present a
risk to the Bank, in the event it cannot deliver the loans during the
delivery period. This could lead to the Bank being charged a fee for
non-performance, or being forced to reprice the mortgage loans at a
lower rate, causing a loss to the Bank. The Bank seeks to mitigate
this potential loss by charging potential borrowers, at the time of
application, a fee to fix the interest rate, or by requiring the
interest rate to float at market rates until shortly before closing.
At December 31, 2001, forward commitments to sell mortgage loans for
future delivery were
86
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
$195.9 million, of which $161.1 million are related to loans held for sale,
and $34.8 million are unfunded as of December 31, 2001.
The Bank has approved, but unused, home equity lines of credit
of $254.7 million at December 31, 2001. Approval of equity lines is
based on underwriting standards that generally do not allow total
borrowings, including the equity line of credit to exceed 80% of the
current appraised value of the customer's home, which is similar to
guidelines used when the Bank originates first mortgage loans, and
are a means of controlling its credit risk on the loan. However, the
Bank offers home equity lines of credit up to 100% of the home's
current appraised value, less existing liens, at a commensurately
higher interest rate. In addition, the Bank has $11.1 million in
approved but unused commercial business lines.
At December 31, 2001, the Bank had standby letters of credit
totaling $15.5 million. Two of these standby letters of credit total
$13.3 million, and enhance a developer's industrial revenue bond
financings of commercial real estate in the Bank's market. At
December 31, 2001, the Bank had pledged mortgage-backed securities
and investment securities with an aggregate carrying value and fair
value of $22.6 million and $23.8 million respectively, as collateral
for these two standby letters of credit. Standby letters of credit
are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. The credit risk involved
in these transactions is essentially the same as that involved in
extending a loan to a customer, as performance under the letters of
credit creates a first position lien in favor of the Bank.
Additionally, at December 31, 2001, the Company had standby letters
of credit totaling $9.0 million, which ensure the completion of land
development improvements on behalf of MAF Developments, Inc.
The contractual amounts of credit-related financial
instruments such as commitments to extend credit, and letters of
credit, represent the amounts of potential accounting loss should the
contract be fully drawn upon, the customer default, and the value of
any existing collateral become worthless. At December 31, 2001, the
Bank had $6.6 million of credit risk on loans sold. Additionally, the
Bank had a $2.6 million layer of credit risk related to loans with
insurance in force.
In addition to financial instruments with off-balance sheet
risk, the Bank is exposed to varying risks with concentrations of
credit. Concentrations of credit include significant lending
activities in specific geographical areas and large extensions of
credit to individual borrowers. The Bank's loan portfolio primarily
consists of loans within its market area. At December 31, 2001 and
2000, loans representing 94.3% and 94.1%, respectively, of the Bank's
total loans receivable were located in the State of Illinois.
87
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
19. PARENT COMPANY ONLY FINANCIAL INFORMATION
The information as of December 31, 2001, and 2000, and for the
years ended December 31, 2001, 2000, and 1999, presented below should
be read in conjunction with the other Notes to Consolidated Financial
Statements.
December 31,
-----------------------------
CONDENSED STATEMENTS OF FINANCIAL CONDITION 2001 2000
---------- ----------
(In thousands)
Assets:
Cash and cash equivalents $ 8,027 2,940
Investment securities 8,808 8,957
Equity in net assets of subsidiaries 488,349 410,777
Other assets 2,879 3,861
-------- -------
$ 508,063 426,535
======== =======
Liabilities and Stockholders' Equity:
Liabilities:
Borrowed funds $ 65,000 33,400
Accrued expenses 7,190 5,406
-------- -------
Total liabilities 72,190 38,806
-------- -------
Stockholders' equity:
Common stock 254 254
Additional paid-in capital 201,468 198,068
Retained earnings, substantially restricted 286,742 237,867
Stock in Gain Deferral Plan 511 511
Accumulated other comprehensive income 3,672 1,435
Treasury stock (56,774) (50,406)
-------- -------
Total stockholders' equity 435,873 387,729
-------- -------
$ 508,063 426,535
======== =======
88
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Year Ended December 31,
-----------------------------------
CONDENSED STATEMENTS OF OPERATIONS 2001 2000 1999
--------- -------- --------
(In thousands)
Dividend income from subsidiaries $ 54,084 20,000 35,000
Interest income 643 564 1,360
Interest expense 1,978 2,775 2,436
--------- -------- --------
Net interest and dividend income 52,749 17,789 33,924
Gain on sale of investments, net 472 256 1,330
Non-interest expense 2,017 1,911 1,872
--------- -------- --------
Net income before income tax benefit and equity in
undistributed earnings of subsidiaries 51,204 16,134 33,382
Income tax benefit (1,173) (1,595) (743)
--------- -------- --------
Net income before equity in undistributed 52,377 17,729 34,125
earnings of subsidiaries
Equity in undistributed earnings of subsidiaries 7,098 38,830 17,420
--------- -------- --------
Net income $ 59,475 56,559 51,545
========= ======== ========
Year Ended December 31,
-----------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 2001 2000 1999
--------- -------- --------
(In thousands)
Operating activities:
Net income $ 59,475 56,559 51,545
Equity in undistributed earnings of subsidiaries (7,098) (38,830) (17,420)
Gain on sale of investment securities (472) (256) (1,330)
Net decrease (increase) in other assets and liabilities,
net of effects from acquisitions 377 4,932 (1,816)
--------- -------- --------
Net cash provided by operating activities 52,282 22,405 30,979
Investing activities:
Proceeds from sale of investment securities 4,104 2,201 7,036
Loans to subsidiaries less repayments 109 - -
Purchases of investment securities (2,735) (1,631) (2,676)
Payment for acquisitions, net of cash acquired (53,904) - -
--------- -------- --------
Net cash provided by (used in) investing activities (52,426) 570 4,360
Financing activities:
Proceeds from exercise of stock options 832 221 893
Proceeds from borrowings 71,000 15,000 21,000
Repayment of borrowings (39,400) (11,500) (24,100)
Purchase of treasury stock (17,301) (19,071) (35,147)
Cash dividends paid (9,900) (8,822) (7,610)
--------- -------- --------
Net cash provided by (used in) financing activities 5,231 (24,172) (44,964)
--------- -------- --------
Increase (decrease) in cash and cash equivalents 5,087 (1,197) (9,625)
Cash and cash equivalents at beginning of year 2,940 4,137 13,762
--------- -------- --------
Cash and cash equivalents at end of year $ 8,027 2,940 4,137
========= ======== ========
89
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
20. SEGMENT INFORMATION
The Company utilizes the "management approach" for segment reporting. This
approach is based on the way that a chief decision maker for the Company
organizes segments for making operating decisions and assessing performance.
The Company operates two separate lines of business. The Bank operates
primarily as a retail consumer bank, participating in mortgage loan portfolio
lending, deposit gathering and offering other financial services mainly to
individuals. Land development consists primarily of acquiring, obtaining
necessary zoning and regulatory approvals and improving of raw land into
developed residential lots for resale to builders. Selected segment information
is included in the table below:
Year Ended December 31, 2001
--------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
------- ----------- ------------ ---------
(In thousands)
Interest income $ 345,767 - (31) 345,736
Interest expense 214,321 199 (31) 214,489
------- -------- -------- ---------
Net interest income (expense) 131,446 (199) - 131,247
Non-interest income 35,634 11,484 - 47,118
Non-interest expense 82,547 877 - 83,424
------- -------- -------- ---------
Income before income taxes 84,533 10,408 - 94,941
Income tax expense 31,338 4,128 - 35,466
------- -------- -------- ---------
Net income $ 53,195 6,280 - 59,475
======= ======== ======== =========
Average assets $ 5,203,707 10,768 - 5,214,475
========= ======== ======== =========
Year Ended December 31, 2000
--------------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
------- ----------- ------------ ---------
(In thousands)
Interest income $ 343,319 - (216) 343,103
Interest expense 217,173 216 (216) 217,173
------- -------- -------- ---------
Net interest income 126,146 (216) - 125,930
Provision for loan losses 1,500 - - 1,500
------- -------- -------- ---------
Net interest income after provision 124,646 (216) - 124,430
Non-interest income 27,907 9,536 - 37,443
Non-interest expense 72,251 752 - 73,003
------- -------- -------- ---------
Income before income taxes 80,302 8,568 - 88,870
Income tax expense 28,912 3,399 - 32,311
------- -------- -------- ---------
Net income $ 51,390 5,169 - 56,559
======= ======== ======== =========
Average assets $ 4,936,570 11,662 - 4,948,232
========= ======== ======== =========
90
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Year Ended December 31, 1999
-----------------------------------------------------
Retail Land Consolidated
Banking Development Eliminations Total
------- ----------- ------------ ------------
(In thousands)
Interest income $ 286,457 - (1,365) 285,092
Interest expense 168,401 1,365 (1,365) 168,401
------- ------ ------ -------
Net interest income 118,056 (1,365) - 116,691
Provision for loan losses 1,100 - - 1,100
------- ------ ------ -------
Net interest income after provision 116,956 (1,365) - 115,591
Non-interest income 25,214 9,630 - 34,844
Non-interest expense 66,885 795 - 67,680
------- ------ ------ -------
Income before income taxes 75,285 7,470 - 82,755
Income tax expense 28,247 2,963 - 31,210
------- ------ ------ -------
Net income $ 47,038 4,507 - 51,545
======= ====== ====== =========
Average assets $4,259,190 24,501 - 4,283,691
========= ====== ====== =========
21. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments" requires the disclosure of estimated fair values of all
asset, liability and off-balance sheet financial instruments. The
estimated fair value amounts under SFAS No.107 have been determined
as of a specific point in time utilizing available market
information, assumptions and appropriate valuation methodologies.
Accordingly, the estimated fair values presented herein are not
necessarily representative of the underlying value of the Company.
Rather the disclosures are limited to reasonable estimates of the
fair value of only the Company's financial instruments. The use of
assumptions and various valuation techniques, as well as the absence
of secondary markets for certain financial instruments, will likely
reduce the comparability of fair value disclosures between financial
institutions. The Company does not plan to sell most of its assets
or settle most of its liabilities at these fair values.
The estimated fair values of the Company's financial instruments
as of December 31, 2001 and 2000 are set forth in the following table
below.
December 31, 2001 December 31, 2000
-------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- --------- ---------
(In thousands)
Financial assets:
Cash and cash equivalents $ 224,672 224,672 270,520 270,520
Investment securities 487,542 487,542 271,902 272,559
Mortgage-backed securities 140,897 142,158 104,385 103,221
Loans receivable 4,447,575 4,553,845 4,328,114 4,353,349
Interest receivable 28,761 28,761 27,888 27,888
--------- --------- --------- ---------
Total financial assets $ 5,329,447 5,436,978 5,002,809 5,027,537
========= ========= ========= =========
Financial liabilities:
Non-maturity deposits $ 1,841,016 1,841,016 1,359,103 1,359,103
Deposits with stated maturities 1,716,981 1,736,553 1,615,110 1,619,670
Borrowed funds 1,470,500 1,535,300 1,728,900 1,741,300
Interest payable 7,153 7,153 9,314 9,314
--------- --------- --------- ---------
Total financial liabilities $ 5,035,650 5,120,022 4,712,427 4,729,387
========= ========= ========= =========
91
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following methods and assumptions are used by the Company in
estimating the fair value amounts for its financial instruments.
Cash and cash equivalents. The carrying value of cash and cash
equivalents approximates fair value due to the relatively short period of time
between the origination of the instruments and their expected realization.
Investment securities and mortgage-backed securities. The fair value of
these financial instruments were estimated using quoted market prices, when
available. If quoted market prices were not available, fair value was estimated
using quoted market prices for similar assets. The fair value of FHLB of
Chicago stock is based on its redemption value.
Loans receivable. The fair value of loans receivable held for investment
is estimated based on contractual cash flows adjusted for prepayment
assumptions, discounted using the current rate at which similar loans would be
made to borrowers with similar credit ratings and remaining terms to maturity.
The fair value of mortgage loans held for sale are based on estimated values
that could be obtained in the secondary market.
Interest receivable and payable. The carrying value of interest
receivable, net of the reserve for uncollected interest, and interest payable
approximates fair value due to the relatively short period of time between
accrual and expected realization.
Deposits. The fair value of deposits with no stated maturity, such as
demand deposit, passbook savings, NOW and money market accounts, are disclosed
as the amount payable on demand. The fair value of fixed-maturity deposits is
the present value of the contractual cash flows discounted using interest rates
currently being offered for deposits with similar remaining terms to maturity.
Borrowed funds. The fair value of FHLB of Chicago advances and reverse
repurchase agreements is the present value of the contractual cash flows,
discounted by the current rate offered for similar remaining maturities. The
carrying value of the unsecured term bank loan approximates fair value due to
the short term to repricing and adjustable rate nature of the loan.
Commitments to extend credit and standby letters of credit. The fair
value of commitments to extend credit is estimated based on current levels of
interest rates versus the committed rates. As of December 31, 2001 and 2000,
the fair value of the Bank's mortgage loan commitments of $478.9 million and
$320.7 million, respectively, was $(2.0) million and $5.8 million,
respectively, which represents the differential between the committed value and
value at current rates. The fair value of the standby letters of credit
approximate the recorded amounts of related fees and are not material at
December 31, 2001 and 2000.
92
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (END)
22. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following are the consolidated results of operations on a quarterly
basis:
Year Ended December 31, 2001
-----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(Dollars in thousands, except per share amounts)
Interest income $ 89,147 87,907 85,301 83,381
Interest expense 56,649 56,056 53,010 48,774
------- ------- ------- --------
Net interest income 32,498 31,851 32,291 34,607
Provision for loan losses - - - -
------- ------- ------- --------
Net interest income after provision for loan losses 32,498 31,851 32,291 34,607
Net gain on sale of assets 1,036 2,443 2,970 3,466
Income from real estate operations 3,349 1,321 799 6,015
Other non-interest income 5,474 6,737 6,323 7,185
Non-interest expense 19,948 20,247 20,734 22,495
------- ------- ------- --------
Income before income taxes 22,409 22,105 21,649 28,778
Income tax expense 8,331 8,225 8,002 10,908
------- ------- ------- --------
Net income $ 14,078 13,880 13,647 17,870
======= ====== ======= ========
Basic earnings per share $ .61 .61 .61 .79
======= ======= ======= =======
Diluted earnings per share $ .60 .60 .59 .77
======= ======= ======= =======
Cash dividends declared per share $ .10 .12 .12 .12
======= ======= ======= =======
Stock price information:
High $ 29.00 31.25 32.73 30.25
Low 24.81 25.69 24.30 26.10
Close 27.38 30.70 28.66 29.50
Year Ended December 31, 2000
-----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(Dollars in thousands, except per share amounts)
Interest income $ 80,091 84,631 88,310 90,071
Interest expense 49,548 52,570 56,475 58,580
------- ------- ------- --------
Net interest income 30,543 32,061 31,835 31,491
Provision for loan losses 300 300 500 400
------- ------- ------- --------
Net interest income after provision for loan losses 30,243 31,761 31,335 31,091
Net gain (loss) on sale of assets 262 (421) 4,586 937
Income from real estate operations 2,475 2,701 2,625 1,735
Other non-interest income 5,022 5,538 5,975 6,008
Non-interest expense 17,686 17,997 18,438 18,882
------- ------- ------- --------
Income before income taxes 20,316 21,582 26,083 20,889
Income tax expense 7,207 7,911 9,570 7,623
------- ------- ------- --------
Net income $ 13,109 13,671 16,513 13,266
======= ======= ======= ========
Basic earnings per share $ .55 .59 .71 .57
======= ======= ======= ========
Diluted earnings per share $ .55 .58 .71 .57
======= ======= ======= ========
Cash dividends declared per share $ .09 .10 .10 .10
======= ======= ======= ========
Stock price information:
High $ 21.00 19.94 25.00 30.00
Low 15.50 15.50 17.88 20.50
Close 16.19 18.19 24.88 28.44
93
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MAF Bancorp, Inc.
We have audited the accompanying consolidated statements of financial
condition of MAF Bancorp, Inc. and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MAF
Bancorp, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Chicago, Illinois
January 25, 2002
94
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the registrant is included in the
registrant's proxy statement under the heading "Election of Directors" and the
information included therein is incorporated herein by reference. Information
regarding the executive officers of the registrant included in this Form 10-K
is included in "Item 1. Business." Information regarding beneficial ownership
reporting compliance is included in the registrant's proxy statement under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance" and the
information included therein is incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of executive officers and directors is
included in the registrant's proxy statement under the headings "Directors
Compensation," "Executive Compensation - Summary Compensation Table,"
"Executive Compensation - Compensation Committee Interlocks and Insider
Participation," "Employment and Special Termination Agreements," "Supplemental
Executive Retirement Plan," "Option Plans," and "Long Term Incentive Plan," and
the information included therein is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is included in the registrant's proxy statement under the headings
"Voting Securities," and "Security Ownership of Certain Beneficial Owners," and
"Information With Respect to Nominees, Continuing Directors and Others," and
the information included therein is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
included in the registrant's proxy statement under the heading "Transactions
with Certain Related Persons," and the information included therein is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the registrant
and its subsidiaries are filed as a part of this document under
"Item 8. Financial Statements and Supplementary Data."
Consolidated Statements of Financial Condition at December 31,
2001 and 2000.
Consolidated Statements of Operations for the years ended December
31, 2001, 2000 and 1999.
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 2001, 2000 and 1999.
95
Consolidated Statements of Cash Flows for the years ended December
31, 2001, 2000 and 1999.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not required or are not
applicable or the required information is shown in the
consolidated financial statements or notes thereto.
(a)(3) EXHIBITS
The following exhibits are either filed as part of this report or
are incorporated herein by reference:
Exhibit No. 3. Certificate of Incorporation and By-laws.
3.1 Restated Certificate of Incorporation. (Incorporated
herein by reference to Exhibit 3.1 to Registrant's Form
8-K dated December 19, 2000).
3.2 Amended and Restated By-laws of Registrant.
(Incorporated herein by reference to Exhibit No. 3 to
Registrant's March 31, 2001 Form 10-Q).
Exhibit No. 10. Material Contracts
10.1 Mid America Bank, fsb Management Recognition and
Retention Plan and Trust Agreement. (Incorporated herein
by reference to Exhibit No. 10 to Registrant's June 30,
1992 Form 10-K).*
10.2 MAF Bancorp, Inc. 1990 Incentive Stock Option Plan, as
amended. (Incorporated herein by reference to Exhibit
No. 10 to Registrant's June 30, 1999 Form 10-Q and to
Exhibit A to Registrant's Proxy Statement, dated
March 23, 1998, relating to the 1998 Annual Meeting of
Shareholders, File No. 0-18121).*
10.3 Amendment dated May 23, 2000 to the MAF Bancorp,
Inc. 1990 Incentive Stock Option Plan, as amended.
(Incorporated herein by reference to Exhibit No. 10 to
Registrant's December 31, 2000 Form 10-K).*
10.4 MAF Bancorp, Inc. 1993 Amended and Restated Premium
Price Stock Option Plan. (Incorporated herein by
reference to Exhibit No. 10 to Registrant's June 30,
1999 Form 10-Q and to Exhibit No. 10 to Registrant's
December 31, 1998 Form 10-K).*
10.5 Amendment dated May 23, 2000 to the MAF Bancorp, Inc.
1993 Amended and Restated Premium Price Stock Option
Plan. (Incorporated herein be reference to Exhibit No. 10
to Registrant's December 31, 2000 Form 10-K).*
10.6 Credit Agreement dated as of November 30, 2001, between
MAF Bancorp, Inc. and Harris Trust and Savings Bank.
96
10.7 Mid America Federal Savings and Loan Association Deferred
Compensation Trust Agreement. (Incorporated herein by
reference to Exhibit No. 10 to Registrant's June 30,
1990 Form 10-K).*
10.8 Amendment dated May 16, 2001 to the Mid America Bank, fsb
Deferred Compensation Trust Agreement. (Incorporated
herein by reference to Exhibit No. 10 to Registrant's
June 30, 2001 Form 10-Q).*
10.9 Mid America Bank, fsb Directors' Deferred Compensation
Plan. (Incorporated herein by reference to Exhibit No.
10 to Registrant's December 31, 1997 Form 10-K).*
10.10 Mid America Bank, fsb Executive Deferred Compensation
Plan. (Incorporated herein by reference to Exhibit No.
10 to Registrant's December 31, 1997 Form 10-K).*
10.11 MAF Bancorp, Inc. Executive Annual Incentive Plan.
(Incorporated herein by reference to Exhibit No. 10 to
Registrant's June 30, 1994 Form 10-K).*
10.12 Amendment dated January 30, 2001 to the MAF Bancorp,
Inc. Executive Annual Incentive Plan. (Incorporated
herein by reference to Exhibit No. 10 to Registrant's
December 31, 2000 Form 10-K).*
10.13 MAF Bancorp, Inc. Shareholder Value Long-Term Incentive
Plan, as amended. (Incorporated herein by reference to
Exhibit No. 10 to Registrant's December 31, 1999 Form
10-K).*
10.14 Amendment dated January 30, 2001 to the MAF Bancorp,
Inc. Shareholder Value Long-Term Incentive Plan, as
amended. (Incorporated herein by reference to Exhibit
No. 10 to Registrant's December 31, 2000 Form 10-K).*
10.15 Mid America Bank, fsb Supplemental Executive Retirement
Plan, as amended. (Incorporated herein by reference to
Exhibit No. 10 to Registrant's December 31, 1998 Form
10-K).*
10.16 Amendment dated March 27, 2001 to the Mid America Bank,
fsb Supplemental Executive Retirement Plan, as amended.
(Incorporated herein by reference to Exhibit No. 10 to
Registrant's March 31, 2001 Form 10-Q).*
10.17 Form of Employment Agreement, as amended, between MAF
Bancorp, Inc. and Allen Koranda, Kenneth Koranda and
Jerry Weberling.*
10.18 Form of Employment Agreement, as amended, between Mid
America Bank, fsb and Allen Koranda, Kenneth Koranda and
Jerry Weberling.*
10.19 Employment Agreement, as amended, between David C.
Burba and MAF Bancorp, Inc. (Incorporated herein by
reference to Exhibit No. 10 to Registrant's December 31,
1999 Form 10-K).*
10.20 Amendment dated October 19, 2001 to the Employment
Agreement, as amended, between David C. Burba and MAF
Bancorp, Inc. and the Agreement Regarding
Post-Employment Restrictive Covenants between MAF
Bancorp, Inc., Mid America Bank, fsb and David C.
Burba.*
10.21 Form of Special Termination Agreement, as amended,
between MAF Bancorp, Inc., and Kenneth Rusdal and
various officers.*
97
10.22 Form of Special Termination Agreement, as amended,
between Mid America Bank, fsb, and Kenneth Rusdal and
various officers.*
10.23 Agreement Regarding Post-Employment Restrictive
Covenants between MAF Bancorp, Inc., Mid America Bank,
fsb and David C. Burba. (Incorporated herein by
reference to Exhibit No. 10 to Registrant's December
31, 1998 Form 10-K).*
10.24 Westco Bancorp, Inc. 1992 Incentive Stock Option
Plan, as amended (Incorporated herein by reference to
the Post-Effective Amendment No. 1 to Form S-8
Registration Statement filed by Westco Bancorp, Inc.
with the Commission on March 17, 1995, Registration
Statement No. 33-54764 and to Exhibit 99.2 to the
Registrant's Post-Effective Amendment No. 1 on Form S-8
to Form S-4, Registration Statement No. 333-66693).*
10.25 MAF Bancorp, Inc. Stock Option Gain Deferral Plan
(Incorporated herein by reference to Exhibit No. 10 to
Registrant's June 30, 1999 Form 10-Q).*
10.26 Amendment dated March 27, 2001 to the MAF Bancorp, Inc.
Stock Option Gain Deferral Plan (Incorporated herein by
reference to Exhibit No. 10 to Registrant's March 31,
2001 Form 10-Q).*
10.27 Amendment dated February 26, 2002 to the MAF Bancorp,
Inc. Stock Option Gain Deferral Plan.*
10.28 MAF Bancorp, Inc. Stock Option Gain Deferral Plan Trust
Agreement (Incorporated herein by reference to Exhibit
No. 10 to Registrant's September 30, 1999 Form 10-Q).*
10.29 Amendment dated May 16, 2001 to the MAF Bancorp, Inc.
Stock Option Gain Deferral Plan Trust Agreement
(Incorporated herein by reference to Exhibit No. 10 to
Registrant's June 30, 2001 Form 10-Q).*
10.30 MAF Bancorp, Inc. 2000 Stock Option Plan
(Incorporated herein by reference to Exhibit B filed
as part of Registrant's Proxy Statement dated March 23,
2001, relating to the 2001 Annual Meeting of
Shareholders, File No. 0-18121).*
-------------------
* Indicates management contracts or compensatory plans or
arrangements required to be filed as an exhibit.
98
Exhibit No. 11. Statement re: Computation of Per Share Earnings for the
periods indicated:
Year Ended December 31,
----------------------------------------
2001 2000 1999
----------- ----------- -----------
Net income $ 59,475,000 56,559,000 51,545,000
=========== =========== ==========
Weighted average common shares outstanding 22,691,053 23,311,135 24,253,946
=========== ========== ==========
Basic earnings per share $ 2.62 2.43 2.13
==== ==== ====
Weighted average common shares outstanding 22,691,053 23,311,135 24,253,946
Common stock equivalents due to dilutive
effect of stock options 504,270 275,457 676,667
----------- ----------- -----------
Total weighted average common shares
and equivalents outstanding for
diluted computation 23,195,323 23,586,592 24,930,613
=========== ========== ==========
Diluted earnings per share $ 2.56 2.40 2.07
==== ==== ====
Exhibit No. 12. Statements re: Computation of ratio of earnings to fixed
charges.
Exhibit No. 21. Subsidiaries of the Registrant
A list of the Company's and the Bank's subsidiaries is included
as an exhibit to this report.
Exhibit No. 23. Consent of KPMG LLP
Exhibit No. 24. Power of Attorney (Included on Signature Page)
(b) Reports on Form 8-K
On October 18, 2001, MAF Bancorp, Inc. announced its 2001 third quarter
earnings results.
On December 3, 2001, MAF Bancorp, Inc. announced the consummation of
the merger between MAF Bancorp, Inc. and Mid Town Bancorp, Inc.
99
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MAF Bancorp, Inc.
----------------------------
(Registrant)
By: /s/ Allen H. Koranda
----------------------------
Allen H. Koranda
Chairman of the Board and
Chief Executive Officer
March 8, 2002
----------------------------
(Date)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allen H. Koranda or Kenneth Koranda or either of
them, his true and lawful attorney-in-fact and agents, with full power of
substitution and re-substitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K, and to file the same, with all exhibits thereto, and all other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming said attorneys-in-fact and agents or their substitutes
or substitute may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Allen H. Koranda March 8, 2002
---------------------------------- ----------------------------
Allen H. Koranda (Date)
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Jerry A. Weberling March 8, 2002
--------------------------------- ----------------------------
Jerry A. Weberling (Date)
Executive Vice President and
Chief Financial Officer and Director
(Principal Financial Officer)
By: /s/ Christine Roberg March 8, 2002
--------------------------------- ----------------------------
Christine Roberg (Date)
First Vice President
and Controller
(Principal Accounting Officer)
100
By: /s/ Robert Bowles, M.D. March 8, 2002
--------------------------------- ----------------------------
Robert Bowles, M.D. (Date)
Director
By: /s/ David C. Burba March 8, 2002
--------------------------------- ----------------------------
David C. Burba (Date)
Director
By: /s/ Terry Ekl March 8, 2002
--------------------------------- ----------------------------
Terry Ekl (Date)
Director
By: /s/ Joe F. Hanauer March 8, 2002
--------------------------------- ----------------------------
Joe F. Hanauer (Date)
Director
By: /s/ Kenneth Koranda March 8, 2002
--------------------------------- ----------------------------
Kenneth Koranda (Date)
Director
By: /s/ Henry Smogolski March 8, 2002
--------------------------------- ----------------------------
Henry Smogolski (Date)
Director
By: /s/ F. William Trescott March 8, 2002
--------------------------------- ----------------------------
F. William Trescott (Date)
Director
By: /s/ Lois B. Vasto March 8, 2002
--------------------------------- ----------------------------
Lois B. Vasto (Date)
Director
By: /s/ Andrew J. Zych March 8, 2002
--------------------------------- ----------------------------
Andrew J. Zych (Date)
Director
101