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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, 2002

Commission file number 0-18121

MAF Bancorp, Inc.

(Exact name of registrant as specified in its charter)

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 filing requirements for the past 90 days.  Yes  þ    No  ¨

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  þ    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 June 30, 2002, the aggregate market value of the voting stock held by non-affiliates of the registrant was $763,356,290.*

The number of shares of Common Stock outstanding as of March 7, 2003: 23,273,236

Documents Incorporated by Reference

PART III—Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on April 30, 2003 are incorporated by reference into Part III hereof.

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MAF BANCORP, INC. AND SUBSIDIARIES

FORM 10-K

Index

Part I.

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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 operations and could affect management’s outlook or future prospects of the Company and its subsidiaries include, but are not limited to, difficulties in achieving anticipated cost savings related to the operation of the acquired banking offices of Fidelity Bancorp or higher than expected costs related to the Fidelity transaction, unanticipated changes in interest rates, or flattening of the yield curve, deteriorating economic conditions which could result in increased delinquencies in MAF’s or Fidelity’s loan portfolio, legislative/regulatory developments, 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 MAF’s or Fidelity’s loan or investment portfolios, or further deterioration in the value of investment securities, demand for loan products, secondary mortgage market conditions, deposit flows, competition, demand for financial services and residential real estate in MAF’s and Fidelity’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 other potential acquisitions, if any, 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.

Available Information

The Company’s internet address is www.mafbancorp.com. The Company makes available through this address, free of charge, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or (15)d of the Exchange Act as soon as reasonably practicable after such material is electronically filed, or furnished to, the SEC.

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 $5.91 billion in assets, the Bank is one of the largest community-oriented 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 Bank offers various financial services to its customers through a network of branches in suburban and urban communities in the Chicago metropolitan area, including 11 locations on the north and northwest side of the City of Chicago, a strong presence in western Cook County and affluent DuPage County, and increasing penetration of the rapidly-growing collar

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counties of Will and Kane as well as a presence in the southwest suburbs of Chicago. With the addition of two new branches in 2002, the Bank had 34 retail banking offices at December 31, 2002. The Bank continues to expand its footprint in the greater Chicago Metropolitan area. The Bank currently has plans to open an additional five new banking offices during 2003 with sites now under construction or in development, and expects to add six additional banking locations upon consummation of pending acquisitions anticipated to close during 2003. The Bank 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. 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 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.

In November 2001, the Company purchased Mid Town Bancorp (“Mid Town”), which had four banking offices 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. As part of the financing of this acquisition, the Company replaced its unsecured bank term loan and revolving line of credit facility with a $55.0 million unsecured bank term loan, and a $40.0 million unsecured line of credit. Mid Town was merged into the Company and its banking subsidiary was merged into the Bank.

On December 17, 2002, the Company announced it had reached an agreement to acquire Fidelity Bancorp, Inc. in an all-stock transaction valued at approximately $101 million on the date of announcement. The Company expects to repurchase 850,000 of the shares to be issued in the transaction, representing approximately 3.3% of its projected outstanding shares after the merger. The transaction is subject to regulatory approval and is expected to close in mid-2003 and be neutral to earnings per share for 2003 and approximately 1-2% accretive to earnings per share in 2004, in each case assuming completion of the stock repurchases. At December 31, 2002, Fidelity had assets of $730 million, deposits of $463 million and five branch offices in the Chicago area. The merger transaction provides for Fidelity to be merged into the Company and its banking subsidiary to be merged into the Bank.

On February 17, 2003, the Company announced that the Bank had entered into an agreement to purchase a branch of UmbrellaBank, fsb in Chicago, IL. The transaction involves the purchase of approximately $7 million in deposits. The transaction is subject to regulatory approval and is expected to close in March or April 2003.

For financial information regarding the Company’s two separate lines of business (banking and land development), see “Note 19. 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 Office of Thrift Supervision (“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

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establish a comprehensive framework of activities in which the Bank can engage and is designed primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities. Any change in such regulation, whether by the OTS, the FDIC or Congress, could have a material impact on the Bank and its operations. 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. Several large financial institutions have recently announced aggressive de novo branching plans that if completed will heighten the competitive pressures in the Chicago market. 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, pricing of fees and services, convenience of branch locations, access to ATMs, ability to access services through multiple distribution channels and office hours. Competition for loan products comes primarily from mortgage brokers, other savings institutions, commercial banks and mortgage banking companies. Competitive factors for loans include interest rates, terms, fees, and customer service.

Lending Activities

General.    The Bank’s lending activities reflect its focus as a retail banking institution servicing 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 2002, due to continued expansion into new lending markets, as well as a large volume of refinancings in response to historically low interest rates. 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 fixed-rate 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 the 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. This strategy has enabled the Bank to enhance the yields of its portfolio, shorten the duration of the Bank’s loan portfolio, and increase 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, residential construction and land acquisition and development 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, 2002, the Bank’s total loan portfolio was $4.5 billion, representing over 76% of the total assets of the Company.

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Loan Portfolio Composition. The following table sets forth the composition of the Bank’s loan portfolio in dollar amounts and in percentages at the dates indicated:

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The following table shows the composition of the Bank’s fixed- and adjustable-rate loan portfolio as of the dates indicated.

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Loan Maturity.    The following table shows the contractual final maturity of the Bank’s loan portfolio at December 31, 2002. The loan amounts do not reflect the timing of scheduled monthly principal repayment amounts. Principal repayments and prepayments on mortgage loans totaled $2.22 billion, $1.88 billion, and $704.4 million, for the years ended December 31, 2002, 2001 and 2000, 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.

The following table sets forth at December 31, 2002 the dollar amount of loans receivable held for investment due after one year, and whether such loans have fixed or adjustable interest rates.

Residential Lending.    The Bank 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 also offers a variety of adjustable-rate mortgage loans. 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

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has been advantageous to the Bank during heavy refinancing periods, 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 $3.0 million must be approved by the Loan Committee of the Board of Directors. In underwriting residential real estate loans, the Bank evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan. Potential borrowers are qualified for ARM loans and fixed-rate loans based on the initial or stated rate of the loan, except for one-year ARM loans 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 generally 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. However, the Bank has also started offering loans up to 100% loan-to-value under an affordable access program. In many instances under this program, loans up to 100% of the purchase price are available for borrowers, particularly those who live in historically underserved communities. At December 31, 2002, the Bank has $122.7 million, or 3.4% of one- to four-family mortgage loans that have a loan-to-value ratio of greater than 80% without mortgage insurance. Included in that amount are $63.8 million of loans with greater than 90% loan-to-value ratios. The Bank self-insures certain loans with greater credit quality and loan-to-value ratios between 80% and 90%, by charging a slightly higher interest rate. In 2001, the Bank formed a captive reinsurance subsidiary to accept a 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 to certain mortgage insurance companies. See “Subsidiary Activities—Mid America Re, Inc.” for more information.

As part of its community lending effort, the Bank participates in or actively supports many special lending programs designed to promote affordable homeownership and to address the needs of underserved communities in the markets it serves. Under these programs, the Bank offers various innovative and flexible home mortgage products that primarily benefit low-to

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middle-income borrowers, including high loan-to-value mortgages as discussed above. In February 2003, in anticipation of continued growth of its business, the Bank established an increased community lending goal of $3 billion of mortgage loan originations in its CRA assessment area over the next six years. This goal includes single and multi-family home mortgage loans in low-to-moderate income census tracts, loans in predominantly minority communities, and loans to borrowers whose income is below 80% of median income. This goal was set assuming continued access to financing, mortgage purchase and affordable housing programs through FNMA, FHLMC and MPF, continued access to secondary mortgage market outlets, continued adequacy of other funding sources critical to the Bank’s lending capacity, and favorable housing market and affordable interest rate conditions.

Multi-family Lending.    The Bank originates multi-family residential mortgage loans in its market area. At December 31, 2002, the Bank had multi-family loans of $260.3 million, including a portfolio of purchased participating interests of $2.0 million related to low-income housing. Multi-family loans represent 5.7% of total loans receivable at December 31, 2002. ARM loans represented 61.7% of the multi-family residential loan portfolio at December 31, 2002. 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, 2002, the Bank had $48.2 million of construction loans of which $42.9 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, 2002, the Bank’s construction and land loans totaled $90.7 million, or 2.0%, of total loans receivable.

The Bank uses loan 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, 2002, the Bank had land loans to developers totaling $18.3 million. Of this amount, the largest aggregate amount of land acquisition and development loans to a single developer amounted to $17.6 million. In addition to land loans, this borrower had construction loans with the Bank totaling $4.9 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, 2002, the Bank had land loans outstanding to local builders totaling $8.9 million. Such loans are generally for terms of up to three years and are generally granted at rates similar to rates quoted for 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

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December 31, 2002, the Bank had land loans to individuals totaling $15.3 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 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, 2002, the Bank had $142.5 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, 2002, the Bank’s ten largest commercial real estate loans totaled $27.4 million, all of which are current and performing in accordance with their original terms.

Consumer Lending.    The Bank’s consumer lending is primarily home equity lines of credit and fixed-rate second mortgage loans and to a limited extent, auto loans and unsecured consumer loans. On December 31, 2002, outstanding balances on home equity lines represented $387.0 million or 8.5% 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

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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 $32.1 million of primarily fixed-rate second mortgage loans that amortize over a three to ten year period.

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. The adherence to this policy is monitored on a weekly basis by a committee of senior management and loan officers that are responsible for the review and approval of new loans up to $3.0 million. A committee consisting of members of the Bank’s Board of Directors approves loans up to $5 million and loans over $5 million must be approved by the Board of Directors. In addition, a loan grading system was established for reviewing and assessing portfolio credit quality for all commercial business loans. A loan review committee of senior management and loan officers of the Bank was also 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, 2002, the Bank’s portfolio of commercial business loans was $20.6 million.

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 $1.5 million, a satisfactory Phase I environmental exam is frequently required as part of the loan approval process, with further investigation in the form of a Phase II exam taking place as dictated therein.

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Originations, Purchases, Sales, Swaps of Mortgage Loans and Mortgage-Backed Securities.    The Bank originates 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 nonconforming 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 mortgage bankers, 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, 2002, the Bank has retained approximately $7.2 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 that are either sold simultaneously or held as mortgage-backed-securities available for sale. 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 $58.8 million in loans receivable, compared to $76.7 million for the year ended December 31, 2001. Additionally, in 2002 the Bank swapped $67.6 million of long term fixed-rate prepayment penalty protected loans that are in their final year of prepayment protection into mortgage-backed securities that were owned by the Bank as of December 31, 2002.

In 2002, the Bank originated $3.69 billion in loans receivable, compared to $2.83 billion in 2001. During 2002, with the continued decrease in interest rates, fixed-rate mortgage loan originations were $1.63 billion compared to $1.74 billion for the previous year, as customers continued to take advantage of the ability to lock in historically low long-term mortgage rates. During 2002, originations of adjustable rate mortgage loans were $1.61 billion compared to $826.6 million for 2001. Of the fixed-rate originations in 2002, $1.13 billion, or 71.0%, conformed to the requirements for sale to FNMA and FHLMC and $461.1 million, or 29.0%, 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 $300,700 ($322,700 as of January 1, 2003), which is the FHLMC, FNMA, and MPF purchase limit, and not because the loans present increased risk of default to the Bank. 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. The Bank generally sells its conforming fixed-rate production to FHLMC, FNMA, and MPF and recently began to sell a portion of its non-conforming production to non-government agency investors. Generally, prior to 2001, nonconforming loans were held in the Bank’s loan portfolio. During the current year, the Bank sold $1.31 billion of loans into the secondary market, compared to $1.02 billion in 2001.

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, 2002, the amortized cost of mortgage-backed securities totaled $358.3 million, or 6.0% of total assets. At December 31, 2002, the Bank’s mortgage-backed securities portfolio had a market value of $365.6 million.

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Table of Contents

The following table sets forth the Bank’s originations, purchases, sales, swaps and principal repayments of loans receivable for the periods indicated.