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UNITED STATES
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, 2004
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 filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes [X] No [ ]
Based upon the closing price of the registrant's common stock as of June 30,
2004, the aggregate market value of the voting stock held by non affiliates of
the registrant was $1.3 billion.*
The number of shares of Common Stock outstanding as of March 11,
2005: 32,704,225
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DOCUMENTS INCORPORATED BY REFERENCE
PART III - Portions of the Proxy Statement for the Annual Meeting of
Shareholders to be held on April 27, 2005 are incorporated by reference into
Part III hereof.
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*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
PAGE
PART I
ITEM 1. BUSINESS ...............................................................................................1
ITEM 2. PROPERTIES ............................................................................................28
ITEM 3. LEGAL PROCEEDINGS .....................................................................................28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................................................28
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES .....................................................28
ITEM 6. SELECTED FINANCIAL DATA ...............................................................................29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .............................................................................31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............................................45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...........................................................49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES .............................................................................85
ITEM 9A. CONTROLS AND PROCEDURES ...............................................................................85
ITEM 9B. OTHER INFORMATION. ....................................................................................85
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ....................................................85
ITEM 11. EXECUTIVE COMPENSATION ................................................................................86
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS .......................................................................86
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................................................86
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ................................................................86
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES ...........................................................87
SIGNATURES ..........................................................................................................91
i
PART I
ITEM 1. BUSINESS
GENERAL
MAF Bancorp, Inc. was incorporated under the laws of the state of Delaware
in 1989, as the holding company for Mid America Bank, fsb ("Bank"), our banking
subsidiary. The Bank, which was organized as a mutual savings and loan
association and has been operating in the Chicago area since 1922, formed the
holding company in connection with its conversion from a mutual to stock savings
institution. Over the last ten years, the Bank has grown from 14 branches and
$1.65 billion in total assets at December 31, 1994 to 72 branches and $9.68
billion in assets at December 31, 2004. Today, the Bank is one of the largest
community-oriented financial institutions in the Chicago and Milwaukee
metropolitan areas and serves both retail and business banking customers. We
also engage in residential real estate land development through our subsidiary,
MAF Developments, Inc. ("MAFD"), a business we started at the Bank in 1974.
The Company's executive offices are located at 55th Street and Holmes
Avenue, Clarendon Hills, Illinois 60514-1500. The Company's telephone number is
(630) 325-7300.
In Illinois, the Bank now operates 49 branches located in residential
neighborhoods in the City of Chicago and throughout suburban communities in the
Chicago metropolitan area. We have significant market penetration in northwest
Chicago and west and southwest suburban areas of Cook, DuPage, Will and Kane
counties. In Wisconsin, the Bank serves communities in the Milwaukee area
through 23 retail branches under the name of St. Francis Bank, a division of Mid
America Bank, fsb. All of our locations are full-service branches, many of which
offer customers the convenience of drive-up facilities.
We have grown our franchise through de novo branching, acquisitions of
other financial institutions and branch acquisitions. We have completed four
acquisitions since November 2001, including two in 2003 -- Fidelity Bancorp,
Inc. and St. Francis Capital Corporation -- and Chesterfield Financial Corp.
late in 2004. The table below provides information regarding these acquisitions:
TOTAL
NUMBER OF ACQUISITION ASSETS AT
ACQUIRED COMPANY BRANCHES MARKET AREA DATE CLOSING
- --------------------------- --------- --------------- --------------- -------------
Chesterfield Financial Corp... 3 Chicago, IL October 2004 $ 354,221
St. Francis Capital Corp...... 23 Milwaukee, WI December 2003 2,190,627
Fidelity Bancorp.............. 4 Chicago, IL July 2003 612,869
Mid Town Bancorp.............. 4 Chicago, IL November 2001 307,469
We intend to continue to pursue acquisition opportunities to strengthen our
market share in the greater Chicago and Milwaukee metropolitan areas and may
consider selective acquisitions that present strategic growth opportunities in
other attractive markets in the Midwest.
We also purchased one branch office in 2003 (with deposits of $8.5 million)
and have opened nine de novo offices in the past three years: two in 2002, four
in 2003, and three in 2004. Our selective branching strategy is to seek out
attractive locations, generally either in high traffic grocery store anchored
retail centers or at intersections with convenient drive-in access, in
communities where we believe we have opportunity to gain deposit market share
through a new facility. We tend to target areas that we believe are not yet
fully served by other banking organizations and offer an attractive deposit base
or potential growth. We have plans underway to open four additional branches
over the next 12 months or so, including two in Chicago, one in Downers Grove,
Illinois, a west suburb of Chicago, and one in Pewaukee, Wisconsin, a
fast-growing community west of Milwaukee.
As we have grown over the past four years, we have successfully
transitioned our business from a traditional savings and loan engaged primarily
in one- to four-family residential mortgage lending to a more diversified
consumer and business bank, retaining our emphasis on community-oriented,
responsive customer service. We offer a wide variety of checking, savings and
other deposit accounts as well as investment services and securities brokerage,
general insurance services and other financial services targeted to individuals,
families and small- to medium-sized businesses in our primary market areas. With
a consistent focus on growth in core deposits in our deposit gathering strategy,
we have succeeded in shifting our deposit mix to a higher concentration of lower
cost deposits such as checking and money market accounts with less emphasis on
certificates of deposit. We expect this trend to continue as we
1
continue to build our business banking unit and work to attract higher levels of
commercial deposits. At December 31, 2004, core deposits (checking, passbook and
money market accounts) comprised 60% of our total deposits, while retail
certificates of deposits accounted for 40% of the total.
Our lending strategy focuses primarily on loans secured by real estate in
our market areas. We originate residential one- to four-family mortgage loans,
home equity loans, and equity lines of credit for our portfolio and for sale
into the secondary market. We also target multi-family mortgage and residential
construction loans and, through our Business Banking unit that we started in
2001, commercial real estate, land development and commercial loans. We expect
these higher-yielding business lending categories to comprise a larger portion
of our loan portfolio as we continue to grow. The acquisitions of Mid Town,
Fidelity and St. Francis contributed significantly to the change in our asset
mix, increasing our multi-family mortgages, home equity loans and commercial
real estate and business loans and reducing the concentration of one- to
four-family mortgage loans in our total loan portfolio. At December 31, 2004,
58% of total loans were comprised of one- to four-family mortgages compared to
88% in 2000.
For segment information regarding the Company's two lines of business
(banking and land development), see "Note 18. Segment Information" to the
audited consolidated financial statements of the Company included in "Item 8.
Financial Statements and Supplementary Data."
COMPETITION
We face increasing competition for retail and business banking customers
and deposit accounts and loan originations. Several national financial
institutions have been pursuing aggressive de novo branching plans that have
heightened competitive pressures in the Company's market areas, particularly in
the Chicago area. Competition for deposit accounts comes primarily from other
banks, credit unions, money market mutual funds, and insurance companies
(primarily in the form of annuity products). We compete for both retail and
business banking customers on the basis of 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 residential loan products comes primarily from local and
national mortgage brokers, other banking institutions and mortgage banking
companies. In Business Banking, we primarily compete for loans with commercial
lenders at local small and mid-sized banking organizations. Competitive factors
for loans include interest rates, terms, fees and customer service.
LENDING ACTIVITIES
We work with customers and business clients to provide a wide range of
lending products designed to meet their individual requirements, while adhering
to our internal underwriting standards that have allowed us to maintain strong
credit quality and minimize credit losses historically.
RESIDENTIAL LENDING. We have been and continue to be one of the largest
originators of residential mortgages in our market area. We typically sell a
significant portion of our one- to four-family mortgage production into the
secondary market. We have worked to develop a broader base of investors to
include not only Federal National Mortgage Association ("Fannie Mae"), Federal
Home Loan Mortgage Corporation ("Freddie Mac") and the Federal Home Loan Bank
Mortgage Partnership Program ("MPF"), but also commercial and investment banks,
as well as other private investors to provide outlets for most of our products,
including non-conforming and adjustable-rate loans.
We offer a variety of fixed-rate mortgage loans with amortization terms
ranging from 10 to 30 years. We generally set our interest rates on fixed-rate
loans daily based on secondary market prices and market conditions. It is our
policy to sell almost all of our 30- and 20-year and a large portion of our
15-year fixed-rate loan originations to manage our interest rate risk exposure,
but we usually retain the serving rights on the loans we sell. At December 31,
2004, we had approximately $1.04 billion of fixed-rate one- to four-family
mortgage loans in our loan portfolio. These consisted of $159.2 million of
30-year mortgages, $18.0 million of 20-year mortgages and $297.2 million of
15-year mortgages. The remaining $565.5 million includes 10-year mortgages and
seven year balloon mortgages, which we typically keep in portfolio.
We also offer a variety of ARM loans with 30- and 40-year amortization
terms that have initial rates which are fixed for a period of one to seven
years, with annual adjustments (and periodic and lifetime caps) thereafter. At
December 31, 2004, $2.98 billion, or 74% of our one- to four-family portfolio
were adjustable rate loans, including $1.36 billion of 3/1 ARMs and $1.45
billion of 5/1 ARMs. During
2
2004, we began to offer ARM loans with interest-only features, meaning they
require no principal amortization. We generally price our ARM loans to the
secondary market prices, but may more aggressively price from time to time to
provide growth in our loan portfolio. Despite the benefits of ARM loans,
particularly those with shorter initial fixed-rate periods, for asset/liability
management purposes, 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.
We attract most of our residential mortgage loan customers through
commissioned loan officers and cross-selling to banking customers, although we
use loan-by-phone and the Internet to attract a small but increasing volume of
our business. Our underwriting for residential loans generally conforms with
secondary market standards to maintain high credit quality, and limit our
liquidity risk related to selling or securitizing our originations.
We generally require a customer to obtain private mortgage insurance (PMI)
for loans with loan-to-value ratios in excess of 80%, or we may choose to
self-insure based on FICO score or obtain lender paid private mortgage insurance
and charge the customer a higher interest rate to compensate for the greater
risk of these loans. The Bank has a mortgage reinsurance subsidiary that shares
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 on insured portions of these loans. For the year ended
December 31, 2004, 2003 and 2002, this activity generated pre-tax income of $2.7
million, $2.0 million and $906,000, respectively. At December 31, 2004, we had
$425 million of one- to four-family loans, or 11% of total one- to four-family
mortgage loans, with greater than 80% LTV without PMI.
An important part of our business strategy is our commitment to community
lending initiatives. We offer various innovative and flexible home mortgage
products and participate in or actively support many special lending programs
designed to promote affordable homeownership and address the needs of
underserved communities in the markets we serve. In February 2003 we set an
aggressive community lending target of $3 billion of loan volume for our CRA
assessment area in Chicago and surrounding areas over a six-year period. To
date, we have fulfilled $1.7 billion of that goal. In conjunction with our
acquisition of St. Francis, we announced a community lending goal of $500
million in loans over a five-year period to Milwaukee area communities and
neighborhoods and have achieved approximately $50 million of that goal to date.
These programs include 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.
Many loans we make in our community lending programs tend to have higher
loan-to-value ratios.
HOME EQUITY LENDING. Our consumer lending is primarily focused on home
equity loans and equity lines of credit. In 2000, we made a strategic decision
to expand our level of equity line activity in an effort to capitalize on our
penetration of residential lending production in our primary market areas and to
reduce interest rate risk exposure, as home equity loans are variable rate
products generally tied to the prime rate. We have also recently begun to
originate home equity lines through wholesale broker arrangements. Our growth
opportunities with this product stem from steady to strong growth in real estate
values in our markets in recent years. At December 31, 2004, we had $1.28
billion of amounts outstanding under home equity lines of credit compared to
$898.5 million at December 31, 2003. At December 31, 2004, the average
utilization rate on our equity line portfolio was 55.8% compared to 52.0% at
December 31, 2003. We underwrite our home equity loans in a similar fashion to
our residential production, by looking at our customer's ability to repay the
loan, including FICO score, and by the combined loan-to-value ratio of the loan
taking into account any first mortgage loan. We do not make home equity loans
where the combined loan-to-value ratio exceeds 100%. We use a tiered pricing
schedule that uses a combination of a customer's FICO score and combined
loan-to-value ratios to determine the rate on an equity line of credit.
We are generally required to maintain higher capital levels to support home
equity lines of credit than for residential mortgages and must take into account
the entire approved amount of the equity line, not just the amount drawn at any
given time.
COMMERCIAL REAL ESTATE. We lend on various commercial properties, including
small office buildings, warehouses, industrial/manufacturing buildings, land
acquisition and development, and other improved non-residential properties.
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
3
seeks to minimize these risks by lending primarily on owner-occupied or existing
income-producing properties and generally restricts such loans to properties in
our market areas.
Commercial real estate loans tend to be much larger than our average
residential loan, and involve a greater degree of risk than residential mortgage
loans with respect to the determination of the market value of the collateral
and the nature of underlying cash flow assumptions. Our underwriting of
commercial real estate loans is a robust process and is less homogeneous than
generally found in our residential loan unit. We use outside appraisers with
pertinent expertise for the underwriting of our commercial real estate
properties. Our credit analysis also includes a review of the property's ability
to service debt, the capacity of the borrower to generate income elsewhere and
where applicable, the strength of any personal guarantor(s). We generally seek a
net operating income to debt service ratio of 1.15 times, exclusive of other
outside income. In instances where the coverage ratio is lower, we will tend to
charge a higher rate of interest to compensate us for the increased level of
risk.
CONSTRUCTION AND LAND LENDING. Our construction and land lending are both
focused on one- to four-family residences, and are primarily originated in our
market areas. This lending focuses on planned construction of owner occupied
properties where qualified contractors are involved, and loans are structured to
be converted to permanent loans at the end of the construction phase, or repaid.
Our construction loans tend to be adjustable-rate, with interest only
requirements during the construction phase. The maximum loan-to-value during
construction is generally limited to 80% LTV. Loan proceeds are disbursed in
increments as construction progresses, inspections are completed and lien
waivers obtained.
Our land lending includes loans to developers for the development of
residential subdivisions in our market area, as well as loans to builders and
individuals. At December 31, 2004, loans to developers aggregated $15.1 million,
or 23.3% of our land loans. These loans carry 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 these loans are floating rate based on the prime
rate or LIBOR. Loans generally are made to existing 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.
Construction and land development loans involve higher risks than
residential mortgages because 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 local
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. 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 BUSINESS LENDING. The Bank originates a variety of commercial
loans, including working capital financing, equipment loans, real estate loans
and selected personal loans for executives, professionals and entrepreneurs.
Collateral can take many forms, such as real estate, business or personal
assets, or in some cases loans may be unsecured. Typically, we target small-to
medium-sized, privately held businesses in our primary market areas and seek to
establish full service commercial loan and deposit relationships. We are seeking
to grow our commercial lending portfolio, as management believes this type of
lending can provide higher yield opportunities than residential loans and is an
important component in helping to maintain a balanced loan portfolio.
Commercial loans can contain risk factors unique to the business of each
borrower. In order to mitigate these risks, we seek to gain an understanding of
the business of each borrower, place appropriate value on collateral taken and
structure the loan properly to make sure that collateral values are maintained
while loans are outstanding. Appropriate documentation of commercial loans is
also important to protect our interests. Our credit approval process for
commercial loans is comprehensive.
4
Our underwriting process includes an evaluation of the borrower's historical and
projected balance sheet, income statement, liquidity and cash flow as well as
the strength of the collateral to determine the level of creditworthiness of the
borrower. We typically review the current and future cash needs of the borrower,
the business strategy, management's ability to execute the strategies, and the
strength of the guarantors. While our loan policy has guidelines for advances on
different types of collateral, we establish eligible asset values on a
case-by-case basis for each borrower. Generally, commercial business loans are
secured by a first priority security interest in all the assets of the borrower
and also include the personal guarantees of business owners. Additionally, the
Bank may provide letter of credit services to certain borrowers on a
case-by-case basis.
MULTI-FAMILY LENDING. The Bank originates multi-family residential mortgage
loans in its market areas. At December 31, 2004, the Bank had multi-family loans
of $647.4 million, including a portfolio of purchased participating interests of
$3.7 million related to low-income housing. Multi-family loans represent 9.4% of
total loans receivable at December 31, 2004. Multi-family residential mortgage
loans are generally ARM loans with interest rates with initial fixed rate terms
of three to ten years, amortization periods of up to 25 years and balloon
maturity dates of five to ten years and carry a loan-to-value ratio not greater
than 80%. The Bank generally requires a net operating income to debt service
ratio of at least 1.0 times.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Bank's loan portfolio by loan type at the dates indicated. The table
reflects the change in the loan portfolio mix resulting from the increased
emphasis on equity lines of credit since 2000, the formation of a Business
Banking unit in 2001, and the impact from acquisitions that closed in 2003.
These acquisitions quickened the pace of loan diversification away from one- to
four-family mortgage loans that started in 2000.
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------- ------------------- ------------------- ------------------- -------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF AMOUNT OF OF OF OF
AMOUNT TOTAL TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
(Dollars in thousands)
One- to four-family.... $4,024,322 58.38% $3,924,965 61.31% $3,470,937 78.70% $3,559,466 82.33% $3,807,980 88.33%
Equity lines of
credit............... 1,276,647 18.52 898,452 14.03 387,025 8.78 258,884 5.99 146,020 3.39
Home equity loans...... 55,136 .80 67,119 1.05 32,120 .73 52,216 1.21 64,465 1.49
Multi-family........... 647,382 9.40 621,255 9.70 260,318 5.90 197,685 4.57 173,072 4.01
Commercial real
estate............... 505,214 7.33 521,438 8.14 142,493 3.23 140,128 3.24 41,223 .96
Construction........... 164,995 2.39 127,525 2.00 48,179 1.09 43,756 1.01 29,566 .69
Land................... 64,765 .94 75,012 1.17 42,530 .96 44,494 1.0 40,497 .94
Consumer............... 7,650 .11 38,238 .60 6,255 .14 7,975 .19 4,783 .11
Commercial
business loans....... 147,345 2.13 128,266 2.00 20,592 .47 18,596 .43 3,528 .08
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total loans
receivable........ 6,893,456 100.00% 6,402,270 100.00% 4,410,449 100.00% 4,323,200 100.00% 4,311,134 100.00%
====== ====== ====== ====== ======
Less:
Loans in process 34,143 59,733 30,689 21,678 12,912
Unearned discounts,
premiums and
deferred
loan fees,
net............. (19,201) (16,614) (2,875) (4,555) (7,076)
--------- --------- --------- --------- ---------
Loans receivable,
net................ $6,878,514 6,359,151 4,382,635 4,306,077 4,305,298
========= ========= ========= ========= =========
5
The following table shows the breakdown of fixed-rate and adjustable-rate
loans for certain loan categories as of the dates indicated.
DECEMBER 31,
-------------------------------------------------------------
2004 2003 2002
------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ------- ---------- ------- ---------- -------
(Dollars in thousands)
Multi-family:
Adjustable-rate.......... $ 572,507 88.4% $ 489,354 78.8% $ 160,543 61.7%
Fixed-rate............... 74,875 11.6 131,901 21.2 99,775 38.3
------- ----- ------- ----- ------- -----
Total multi-family.... 647,382 100.0 621,255 100.0 260,318 100.0
======= ===== ======= ===== ======= =====
Commercial real estate:
Adjustable-rate.......... 381,861 75.6 391,356 75.1 62,990 44.2
Fixed-rate............... 123,353 24.4 130,082 24.9 79,503 55.8
------- ----- ------- ----- ------- -----
Total commercial
real estate.......... 505,214 100.0 508,398 100.0 142,493 100.0
======= ===== ======= ===== ======= =====
Construction:
Adjustable-rate.......... 113,950 69.1 81,770 64.1 31,796 66.0
Fixed-rate............... 51,045 30.9 45,755 35.9 16,383 34.0
------- ----- ------- ----- ------- -----
Total construction.... 164,995 100.0 127,525 100.0 48,179 100.0
======= ===== ======= ===== ======= =====
Commercial business loans:
Adjustable-rate.......... 74,664 50.7 63,821 49.8 16,160 78.5
Fixed-rate............... 72,681 49.3 64,445 50.2 4,432 21.5
------- ----- ------- ----- ------- -----
Total commercial
business........... $ 147,345 100.0% $128,266 100.0% $ 20,592 100.0%
======= ===== ======= ===== ======= =====
LOAN MATURITY. The following table shows the principal amount of loans for
loan categories other than one- to four-family mortgages and consumer loans, by
contractual final maturity at December 31, 2004. Because the principal amounts
shown are not reduced for earlier scheduled principal repayments, this table is
not indicative of the timing of expected repayments on these loans.
AT DECEMBER 31, 2004
------------------------------------------------------------
DUE
AFTER TOTAL
DUE IN 1 YEAR DUE DUE TOTAL
1 YEAR THROUGH AFTER AFTER AMOUNT
OR LESS 5 YEARS 5 YEARS 1 YEAR DUE
-------- -------- --------- --------- ---------
(Dollars in thousands)
Multi-family............. $ 3,205 15,387 628,790 644,177 647,382
Commercial real estate... 46,962 169,377 288,875 458,252 505,214
Construction............. 2,314 97,347 65,334 162,681 164,995
Land .................... 8,031 36,099 20,635 56,734 64,765
Commercial business
loans................... 59,132 71,348 16,865 88,213 147,345
-------- ------- --------- --------- ---------
Total.................. $119,644 389,558 1,020,499 1,410,057 1,529,701
======== ======= ========= ========= =========
Of the $1.41 billion of loans shown in the table above with contractual final
maturities after one year, $968,144, or 68.7%, are adjustable rate loans and
$441,913, or 31.3%, are fixed rate loans.
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 Fannie Mae and Freddie Mac 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 such environmental issues which
subject it to potential material liability at this time.
Environmental concerns such as asbestos containing material, underground
storage tanks, mold, and lead-based paint can pose a health risk to tenants and
negatively impact the collateral value of security property. To mitigate this
risk to the Bank, loan policies call for management to consider all relevant
factors in order to determine whether an environmental review is needed and, if
so, the scope and detail, prior to the Bank's 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
6
Phase I environmental exam is generally required as part of the loan approval
process, with further investigation in the form of a Phase II exam taking place
as dictated therein.
SECONDARY MARKET AND LOAN SERVICING ACTIVITIES
ORIGINATIONS, PURCHASES AND SALES OF MORTGAGE LOANS. Our origination
volumes, and the mix of fixed-rate and ARM products in our originations, is
significantly dependent on the interest rate environment and the expected level
of future interest rates. We originate the majority of our mortgage loan and
home equity line production through our internal sales force of commissioned
loan officers. We also have established relationships with a number of mortgage
brokers operating in our market areas from whom we purchase loans, primarily
home equity products, based on our published rate sheets and in conformity with
our underwriting guidelines. Our strategy is to further develop this wholesale
channel in Illinois and Wisconsin to expand our home equity line production.
From time to time, we may also purchase mortgage loans from other institutions,
usually in whole loan transactions where we assume the servicing, although we
expect to continue to originate the majority of our mortgage and home equity
loan production.
We generally originate more residential mortgages than we desire to keep in
our loan portfolio, particularly in times of significant refinancing activity
such as 2002 and 2003 and in other periods where consumers' preference is
oriented toward longer-term fixed rate products that we typically choose to
sell. We also sell ARM loan production from time to time depending on market
conditions and our interest rate management strategy. Loan sales also provide a
source of liquidity for the Bank. In 2005, we intend to pursue opportunities to
sell home equity products into the secondary market as part of our increased
focus on home equity lending, although the secondary market for this product is
not yet as well developed as that for residential mortgages. We currently expect
to complete our first sale of home equity lines of credit during the first
quarter of 2005.
In the last two years we have generally sold most of our conforming and
non-conforming, or jumbo, long-term fixed-rate loan originations. The Bank
generally sells its conforming long term fixed-rate production to Freddie Mac,
Fannie Mae, or the MPF program of the Federal Home Loan Bank of Chicago. (We
refer to these agencies collectively as "GSEs," or government sponsored
entities.) Since 2001, we have been selling most of our non-conforming long term
fixed-rate production to private investors.
The following table shows the Bank's one- to four-family mortgage and home
equity originations and purchases and loan sale activity for the periods
indicated.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2004 2003 2002
-------------------- --------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ----------- ------- ---------- --------
(Dollars in thousands)
ORIGINATIONS AND PURCHASES:
One- to four-family mortgages
Adjustable-rate............... $ 1,481,547 62% $ 1,790,163 45% $ 1,459,668 48%
Fixed-rate.................... 905,182 38 2,188,658 55 1,588,769 52
--------- --- --------- --- --------- ---
Total...................... $ 2,386,729 100% $ 3,978,821 100% $ 3,048,437 100%
========= === ========= === ========= ===
Equity lines of credit(1)........ $ 1,151,971 $ 592,167 $ 383,102
Home equity loans................ 17,381 7,982 15,908
========= ========= =========
LOANS SOLD:
One- to four-family loans
Adjustable-rate(2)............ $ 264,292 29% $ 162,056 9% $ 55,981 4%
Fixed-rate(2)................. 649,789 71 1,604,896 91 1,251,547 96
--------- --- --------- --- --------- ---
Total loans sold(2)........ $ 914,081 100% $ 1,766,952 100% $ 1,307,528 100%
========= === ========= === ========= ===
- ------------------
(1) Represents total disbursements during the year on all home equity lines,
including amounts related to lines newly originated during the year and
lines previously outstanding. This does not reflect any unused amounts that
remain available at year end.
(2) Loans sold include one- to four-family originations that are swapped into
mortgage-backed securities and sold simultaneously and does not include
$252.8 million for 2004 of Bank originated loans swapped into
mortgage-backed securities and held in portfolio.
In 2003 and most of 2004, the Bank retained the majority of our 15-year
fixed-rate originations in portfolio as management was willing to absorb the
interest rate risk in this product with the change in asset mix and increase in
core deposit levels. Of the fixed-rate originations in 2004, $729.0 million, or
81%, conformed to the requirements for sale to Fannie Mae and Freddie Mac and
$171.0 million, or 19%, were non-conforming. The Bank's "nonconforming" loans
are generally designated as such because the principal loan balance exceeds
$333,700 ($359,650 as of January 1, 2005), which is the Freddie Mac, Fannie Mae,
and MPF purchase limit, and not because the loans present increased risk of
default to the
7
Bank. Loans with such higher balances generally carry interest rates from
one-eighth to three-eighths of one percent higher than similar, conforming
fixed-rate loans.
We often enter into forward commitments for loan sales based on our
mortgage production pipeline. The majority of our loans are sold without
recourse, except those loans sold through the MPF program, where the Bank
retains a limited level of risk in exchange for better pricing on the loans
sold. At December 31, 2004, the Bank had approximately $12.7 million in net
credit risk exposure on loans it has sold through the MPF program.
SWAPS FOR MORTGAGE-BACKED SECURITIES. The Bank may from time to time
exchange or swap loans out of portfolio into mortgage-backed securities,
primarily with Fannie Mae and Freddie Mac. The mortgage-backed securities may
then be sold simultaneously, or held as mortgage-backed securities available for
sale or held to maturity. 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 $49.0 million in loans
receivable, compared to $76.9 million for the year ended December 31, 2003. The
Bank also swapped $252.8 million of 15-year fixed rate loans into
mortgage-backed securities held to maturity to help manage the Bank's risk-based
capital position in addition to providing collateral for borrowings. In 2003,
the Bank swapped $85.3 million of long-term fixed-rate prepayment penalty
protected loans that were in their final year of prepayment protection into
mortgage-backed securities and sold them.
LOAN SERVICING. The Bank typically retains servicing rights on loans that
it sells into the secondary market. Loan servicing fee income is generated from
loans that the Bank has originated and sold, and includes fees for the
collection and remittance of mortgage payments, insurance premiums and real
estate taxes. The Bank receives a monthly 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 loans
being serviced. 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, which is recorded as a decrease to loan servicing fee income. In
addition, mortgage servicing rights are assessed quarterly 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,
----------------------------------------
2004 2003 2002
----------- ----------- -----------
(Dollars in thousands)
Gross servicing revenue......................... $ 9,312 6,983 4,742
Amortization of mortgage servicing rights....... (8,081) (12,922) (7,214)
Valuation allowance on mortgage
servicing rights.............................. -- (940) (2,300)
Recovery of mortgage servicing rights........... 2,072 2,070 --
----------- ----------- -----------
Loan servicing fee income (expense), net..... $ 3,303 (4,809) (4,772)
=========== =========== ===========
As a percentage of average loans serviced
for others:
Gross servicing revenue...................... .277% .278 .275
Amortization of mortgage servicing rights.... (.241) (.515) (.419)
Valuation allowance on mortgage
servicing rights.......................... -- (.037) (.134)
Recovery of mortgage servicing rights........ .062 .082 --
----------- ----------- -----------
Loan servicing fee income (expense), net.. .098 (.192) (.278)
=========== =========== ===========
Average balance of loans serviced for others.... $ 3,357,002 2,509,345 1,722,503
Loans serviced for others at end of year(1)..... 3,641,445 3,330,039 2,021,512
Average service fee at year end................. .28% .26 .26
Mortgage servicing rights at end of year, net... 25,697 24,128 12,960
Mortgage servicing rights as a percentage of
mortgage loans serviced for others........... .71 .72 .64
Multiple of average servicing fee at year end... 2.5x 2.8x 2.5x
Weighted-average interest rate on loans
serviced for others.......................... 5.70% 5.89 6.63
=========== =========== ===========
- ------------------
(1) One- to four-family loans.
8
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
DELINQUENT LOANS. 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. When a loan payment is delinquent for three or more
monthly installments, the Bank will generally initiate foreclosure proceedings
and cease accruing interest. At December 31, 2004, 2003, and 2002, delinquencies
in the Bank's portfolio were as follows:
61-90 DAYS 91 OR MORE DAYS(2)
----------------------------- -----------------------------
PRINCIPAL AS A PRINCIPAL AS A
BALANCE PERCENT BALANCE PERCENT
NUMBER OF OF NUMBER OF OF
OF DELINQUENT TOTAL OF DELINQUENT TOTAL
LOANS LOANS LOANS(1) LOANS LOANS LOANS(1)
------- ---------- ------- ------ ---------- ---------
(Dollars in thousands)
December 31, 2004........ 93 $ 8,557 .12% 283 $ 31,473 .45%
December 31, 2003........ 43 4,851 .08 255 32,787 .51
December 31, 2002........ 51 4,577 .10 200 25,394 .58
- ------------------
(1) Percentage represents principal balance of delinquent loans to total loans
outstanding.
(2) The 91 or More Days category includes all loans on non-accrual regardless
of days past due.
NON-PERFORMING ASSETS. The table below sets forth information regarding
non-performing assets held by the Bank at the dates indicated.
DECEMBER 31,
-----------------------------------------------------
2004 2003 2002 2001 2000(1)
-------- ------- ------- ------- -------
(Dollars in thousands)
Non-accrual loans: (2)
One- to four-family................... $ 23,629 27,106 22,448 17,944 15,517
Equity lines of credit................ 3,449 1,874 569 590 574
Home equity loans..................... 875 777 552 321 109
Multi-family.......................... 1,826 478 32 41 238
Commercial real estate................ 1,294 1,503 742 -- 27
Construction.......................... -- -- 153 378 149
Land.................................. -- -- -- 166 93
Consumer loans........................ 79 471 38 11 2
Commercial business loans............. 321 578 860 -- --
------ ------ ------ ------ ------
Total.............................. $ 31,473 32,787 25,394 19,451 16,709
====== ====== ====== ====== ======
Non-performing loans to total loans...... .46% .51 .58 .45 .39
====== ====== ====== ====== ======
Non-accrual investment securities........ $ -- 7,697 -- -- --
====== ====== ====== ====== ======
Foreclosed real estate:
One- to four-family................... $ 1,487 3,200 2,366 1,405 1,762
Commercial real estate................ -- -- -- -- 46
------ ------ ------ ------ ------
Total foreclosed real estate,
net of reserves.................. $ 1,487 3,200 2,366 1,405 1,808
====== ====== ====== ====== ======
Total non-performing assets.............. $ 32,960 43,684 27,760 20,856 18,517
====== ====== ====== ====== ======
Total non-performing assets to
total assets........................... .34% .49 .47 .37 .36
====== ====== ====== ====== ======
- ------------------
(1) Non-accrual one- to four-family loans at December 31, 2000 includes $1.7
million of accruing loans 91 days or more overdue. Since January 1, 2001,
the Bank does not accrue interest on loans more than 91 days past due.
(2) Consists of loans in the process of foreclosure or for which interest is
otherwise deemed uncollectible.
NON-ACCRUAL LOANS. A loan (whether considered impaired or not) is
classified as non-accrual. Generally, when a loan is 91 days or more past due,
in the process of foreclosure, or in bankruptcy, or when collectibility is
otherwise in doubt, the full amount of previously accrued but unpaid interest on
non-accrual loans is deducted from interest income. Income is subsequently
recorded to the extent cash payments are received, or at the time when the loan
is brought current in accordance with its original terms. This policy is applied
consistently for all types of loans in the Bank's loan portfolio.
For each of the years ended December 31, 2004, 2003 and 2002, the amount of
interest income that would have been recorded on non-accrual loans if these
loans were performing in accordance with their terms amounted to $1.4 million.
For the years ended December 31, 2004, 2003 and 2002, interest income on
non-accrual loans that was actually collected and recorded amounted to $630,000,
$718,000 and $562,000, respectively.
9
The majority of our non-performing loans are secured by residential real
estate which we generally regard as presenting lower risk of credit loss due to
the nature of the collateral. Ratios for loans secured by one- to four- family
residential properties were as follows:
DECEMBER 31,
---------------
2004 2003
---- ----
One- to four-family loans as a percentage of total loans(1)................. 78% 77%
Non-performing one- to four-family loans as a percentage of total
non-performing loans(1).................................................... 89 92
Percentage of non-performing one- to four-family loans with private
mortgage insurance or other guarantees..................................... 46 42
Average loan-to-value of non-performing one- to four-family loans without
private mortgage insurance or other guarantees............................. 66 65
== ==
- ------------------
(1) Includes equity lines of credit and home equity loans.
IMPAIRED LOANS. The Bank considers a loan impaired when, based on current
information and events, it is probable that the Bank will be unable to collect
all amounts due according to the contractual terms of the loan. Impairment for
loans considered individually significant and that exhibit probable or observed
credit weaknesses 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. If the determined fair
value of an impaired loan is less than the carrying value of the loan and a loss
has deemed to have occurred, the Bank charges off the principal amount of the
loan in excess of fair value or net realizable value. 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. These homogeneous loans are
excluded from the impaired loan disclosures. The Bank uses these criteria on
one- to four-family residential loans, consumer loans, smaller multi-family
residential loans, and land loans. At December 31, 2004 and 2003, the Company
had $3.4 million and $2.6 million of impaired loans, respectively. The average
balance of impaired loans for 2004 and 2003 was $2.7 million and $1.8 million,
respectively.
NON-ACCRUAL INVESTMENT SECURITIES. In addition to non-performing loans,
included in non-performing assets at December 31, 2003, were two
aircraft-related asset-backed securities totaling $7.7 million that were on
non-accrual status and classified as substandard. One of these securities, with
a December 31, 2003 carrying value of $6.7 million, was written down by $3.0
million in the fourth quarter of 2002, and the other with a December 31, 2003
carrying value of $1.0 million was written down by $5.0 million in the first
quarter of 2003 and by an additional $1.9 million in the third quarter of 2003
due to continued declines in its estimated market value. A third security
written down by $3.1 million in the first quarter of 2003, which management had
classified as special mention, was not included in non-performing assets, was
current as to principal and interest payments at December 31, 2003 and was still
accruing interest. The December 31, 2003 carrying value of this collateralized
bond obligation security was $4.9 million after the $3.1 million writedown. All
three securities were sold during 2004 at a net gain of $2.7 million.
CLASSIFIED ASSETS. The federal regulators have adopted a classification
system for problem assets of insured institutions, which 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 the value of the
collateral pledged, if any. "Substandard" assets include those 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
addition, a "special mention" category consists of assets, which currently do
not expose the Company to a sufficient degree of risk to warrant adverse
classification, but do possess credit deficiencies deserving management's close
attention.
In connection with the filing of its periodic reports with the OTS, the
Bank regularly reviews the problem assets in its portfolio to determine whether
any loans or investments require classification in accordance with applicable
regulations. At December 31, 2004 and 2003, all of the Bank's non-performing
loans were classified as substandard. In addition, at December 31, 2004, the
Bank had
10
classified $4.4 million of multi-family loans and $24.8 million of commercial
loans as substandard for regulatory purposes that were still accruing interest.
The Bank also had $1.6 million of commercial loans classified as doubtful of
which $113,000 were non-accrual and the remaining $1.5 million were still
accruing interest. Special mention loans at December 31, 2004 and 2003 totaled
$10.2 million and $39.1 million, respectively.
ALLOWANCE FOR LOAN LOSSES. In evaluating the adequacy of the allowance for
loan losses and determining the related provision for loan losses, if any,
management considers: (1) subjective factors, including local and general
economic business factors and trends, portfolio concentrations and changes in
the size and/or general terms of the loan portfolio, (2) historical loss
experience and the change in the mix of the overall portfolio composition over
the last five years, (3) specific allocations based upon probable losses
identified during the credit review of the business banking portfolio, and (4)
delinquency in the portfolio and the composition of non-performing loans
including the percent of non-performing loans with supplemental mortgage
insurance. Larger loans, typically secured by commercial real estate, that
exhibit probable or observed credit weaknesses are subject to individual review.
In addition, various regulatory agencies, as an integral part 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 at December 31,
2004. 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 allowance for loan losses totaled $36.3 million at December 31, 2004,
or .53% of total loans receivable, exclusive of loans held for sale, and $34.6
million, or .54% of total loans receivable at December 31, 2003. An analysis of
the changes in the allowance for loan losses for the years indicated is
presented in the table below.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance at beginning of year...... $ 34,555 19,483 19,607 18,258 17,276
Charge-offs:
One- to four-family............ (241) (67) (78) (87) (136)
Equity lines of credit......... (76) (44) (67) -- (102)
Home equity loans.............. (168) -- (26) -- --
Consumer....................... (80) (110) (22) (17) (18)
Multi-family................... (174) -- -- -- (275)
Commercial real estate......... (41) -- -- -- --
Commercial business loans...... (311) (148) (424) -- --
------ ------ ------ ------ ------
(1,091) (369) (617) (104) (531)
------ ------ ------ ------ ------
Recoveries:
One- to four-family............ 54 29 60 39 9
Equity lines of credit......... 18 26 10 -- --
Home equity loans.............. 1 -- -- -- --
Consumer....................... 29 4 2 6 4
Multi-family................... 93 -- -- -- --
Commercial real estate......... 8 -- 15 -- --
Commercial business loans...... 76 11 106 -- --
------ ------ ------ ------ ------
279 70 193 45 13
------ ------ ------ ------ ------
Charge-offs, net of recoveries.... (812) (299) (424) (59) (518)
Provision for loan losses......... 1,215 -- 300 -- 1,500
Additions related to acquisitions. 1,297 15,371 -- 1,408 --
------ ------ ------ ------ ------
Balance at end of year............ $ 36,255 34,555 19,483 19,607 18,258
====== ====== ====== ====== ======
Net charge-offs to average
loans outstanding.............. .01% .01 .01 .00 .01
Allowance for loan losses to
total loans receivable,
exclusive of one- to
four-family loans held
for sale....................... .53 .54 .44 .45 .42
Allowance for loan losses to
total non-performing loans..... 115.18 105.39 76.72 100.80 109.27
====== ====== ====== ====== ======
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 of reserves allocated to a particular
11
category may not be indicative of actual future losses, and amounts allocated to
particular categories may change from year to year based on changes in
management's assessment of the risk characteristics of the loan portfolio. An
unallocated reserve is maintained to recognize the imprecision in measuring and
estimating loss when evaluating reserves for individual loans or categories of
loans. The allocation methods used during 2004, 2003 and 2002 were generally
consistent. The increase in the amount of the allowance and changes in the
allocation of the allowance among loan categories at December 31, 2004 compared
to December 31, 2003 primarily reflect the additional allowance resulting from
the Chesterfield acquisition and changes in the loan portfolio composition. The
allowance allocations as a percentage of one- to four-family mortgage loans and
home equity lines of credit decreased based on management's assessment of the
improving economic conditions, the quality of underlying collateral, delinquency
and loss experience. The unallocated reserve decreased in 2004 based on
consideration of the improving economic conditions.
AT DECEMBER 31,
---------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------ ------------------ ------------------- ------------------ -------------------
LOAN LOAN LOAN LOAN LOAN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
AS % OF AS % OF AS % OF AS % OF AS % OF
TOTAL TOTAL TOTAL TOTAL TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- -------- --------- -------- --------- --------- --------- -------- --------- --------
(Dollars in thousands)
One- to
four-family...... $ 8,627 58.38% $ 8,594 61.31% $ 9,062 78.70% $ 9,755 82.33% $ 9,803 88.33%
Equity lines of
credit........... 6,758 18.52 5,420 14.03 2,080 8.78 1,448 5.99 1,142 3.39
Home equity loans... 329 .80 320 1.05 216 .73 293 1.21 333 1.49
Multi-family........ 3,912 9.40 3,721 9.65 2,030 5.90 1,730 4.57 1,480 4.01
Commercial
real estate 10,960 7.33 11,304 7.94 2,846 3.23 2,646 3.24 1,978 .96
Construction........ 1,691 2.39 759 2.34 426 1.09 501 1.01 401 .69
Land................ 807 .94 870 1.17 531 .96 656 1.03 606 .94
Consumer............ 47 .11 191 .60 80 .14 63 .19 100 .11
Commercial
business......... 2,180 2.13 2,087 2.00 397 .47 250 .43 -- .08
Unallocated
reserve.......... 944 N/A 1,289 N/A 1,815 N/A 2,265 N/A 2,415 N/A
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total............ $ 36,255 100.00% $ 34,555 100.00% $ 19,483 100.00% $ 19,607 100.00% $ 18,258 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
At December 31, 2004, the Bank's loan portfolio consisted of $4.06 billion
of one- to four-family real estate loans, with an additional $1.23 billion of
equity lines of credit or home equity loans on one- to four-family real estate
and other consumer loans. At December 31, 2004, 46% of the one- to four-family
non-performing loans carried private mortgage insurance or government
guarantees. The average loan-to-value ratio on the one- to four-family
non-performing loans without supplemental mortgage insurance was 66%. 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 on these loans to be low. The
remaining 22.0% of the Bank's portfolio, or $1.53 billion, 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.
Net income of the Company could be affected if management's estimate of the
amount of loss that may be incurred is materially different than actual results,
which could require an additional provision for loan losses. Management believes
the allowance for loan losses is adequate at December 31, 2004. However, future
adjustments to the allowance may be necessary based on changes in economic
conditions and the impact of such changes may have on the Bank's borrowers.
INVESTMENT ACTIVITIES
Our strategy is to use our investment and mortgage-backed securities
portfolios as stable sources of interest income and to provide flexibility in
managing our interest rate risk and liquidity needs. For this reason, we keep
our portfolios relatively short-term in nature and seek to limit exposure to
credit risk. These portfolios represented a combined 19.2% of our total assets
at December 31, 2004 compared to 19.3% at December 31, 2003. We maintain a
majority of our investment and mortgage-backed securities in an available for
sale portfolio, and we may sell these securities for liquidity needs, to alter
asset/liability management strategies or to manage risk-based capital levels.
The classification of investments and mortgage-backed securities as held to
maturity, available for sale, or trading is made at the time of purchase based
upon management's intent at that time. At December 31, 2004, $389.0 million of
investment securities classified as available for sale had a cost basis of
$389.2 million. At December 31,
12
2004, we had $245.0 million of mortgage-backed securities in a held to maturity
portfolio. The loans underlying these securities are loans we originated and
swapped into mortgage-backed securities.
We owned $278.9 million of stock in the FHLB of Chicago at December 31,
2004, which is carried at cost, representing 2.9% of total assets and 28.6% of
stockholders' equity. At December 31, 2004, we were required to hold a minimum
of $109.4 million based on our outstanding advances from the FHLB of Chicago.
The Bank may, subject to the discretion of the FHLB of Chicago, redeem at par
any capital stock greater than our required investment. While our voluntary
investment has yielded us a higher than market return in recent years, in mid
2004, we began reducing our voluntary stock position at the recommendation of
our asset liability committee ("ALCO") in order to lower the investment
concentration that resulted from our 2003 acquisitions. We redeemed $125.7
million of FHLB of Chicago stock in 2004 and expect to redeem another $45.0
million of stock in the first quarter of 2005.
The following table sets forth certain information regarding the carrying
value of our investment and mortgage-backed securities portfolios at the dates
indicated.
DECEMBER 31,
------------------------------
2004 2003 2002
--------- -------- --------
(Dollars in thousands)
Investment securities available for sale:
U.S. Government securities............... $ 127,782 155,432 91,189
U.S. Agency securities................... 154,871 73,494 7,951
Asset-backed securities.................. 19,988 47,738 62,530
Corporate debt securities................ 7,320 7,809 65,422
Bank trust preferred securities.......... 61,928 62,668 58,230
Marketable equity securities............. 17,070 18,193 22,913
--------- -------- -------
Total investment securities........... $ 388,959 365,334 308,235
========= ======= =======
Stock in FHLB of Chicago.................... $ 278,916 384,643 169,708
========= ======= =======
Mortgage-backed securities
Available for sale....................... $ 948,168 971,969 365,638
Held to maturity......................... $ 245,021 -- --
--------- ------- -------
Total mortgage-backed
securities.......................... $1,193,189 971,969 365,638
========= ======= =======
The table below sets forth information regarding the carrying value,
weighted average yields based on amortized cost, and maturities of the Company's
investment and mortgage-backed securities.
AT DECEMBER 31, 2004
-----------------------------------------------------------------------------------------------------------------
ONE YEAR OR LESS 1 TO 5 YEARS 5 TO 10 YEARS MORE THAN 10 YEARS TOTAL INVESTMENT SECURITIES
------------------ ------------------ ------------------ ------------------ -------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE LIFE IN CARRYING FAIR AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD YEARS VALUE VALUE YIELD
-------- --------- -------- --------- -------- --------- -------- --------- -------- -------- --------- --------
(Dollars in thousands)
U.S.
Government
securities.. $ 11,883 4.26% $ 114,783 3.20% $ 1,116 3.74% $ -- --% 2.69 $ 127,782 $ 127,782 3.30%
U.S. Agency
securities.. 2,895 2.24 146,907 3.20 -- -- 5,069 3.17 3.22 154,871 154,871 3.18
Asset-backed
securities.. -- -- 13,107 2.89 -- -- 6,881 5.81 10.61 19,988 19,988 3.90
Corporate debt
securities.. 571 47.00 6,749 12.12 -- -- -- -- 2.55 7,320 7,320 14.85
Bank trust
preferred
securities.. -- -- -- -- -- -- 61,928 4.49 27.24 61,928 61,928 4.49
Marketable
equity
securities:(1)
GSE
preferred
stock....... -- -- -- -- -- -- 16,521 3.17 -- 16,521 16,521 3.17
Other...... -- -- -- -- -- -- 549 -- -- 549 549 --
Stock in FHLB
of Chicago(2) -- -- -- -- -- -- 278,916 5.50 -- 278,916 278,916 5.50
Mortgage-backed
securities
available
for sale(3).. 220,918 4.21 411,221 4.19 223,197 4.21 92,832 4.20 2.96 948,168 948,168 4.08
Mortgage-backed
securities
held to
maturity(3).. 32,233 4.62 98,494 4.61 75,261 4.57 39,033 4.59 4.48 245,021 244,615 4.59
======= ==== ======= ==== ======= ==== ======= ==== ==== ========= ========= ====
Total....... $268,500 4.33% 791,261 3.96 299,574 4.30 501,729 4.96 4.21 $1,861,064 $1,860,658 4.28%
======= ==== ======= ==== ======= ==== ======= ==== ==== ========= ========= ====
- ------------------
(1) Marketable equity securities and Stock in the FHLB of Chicago with no
stated maturity are included in the "More than 10 Years" category. These
securities are excluded in the calculation of average life.
(2) The yield reflects the fourth quarter 2004 FHLB dividend of 5.50% which was
declared in January 2005 and paid in February 2005.
(3) The repricing distributions and yields to maturity of mortgaged-backed
securities are based upon estimated future cash flow and prepayments.
Actual repricings and yields of the securities may differ from that
reflected in the table depending upon actual interest rates and prepayment
speeds.
The bank trust preferred securities shown in the tables above represent
investments in several different pools of collateralized debt securities
consisting of primarily 30-year capital securities issued by
13
various banks, thrifts and insurance companies. The underlying pool of issuers
of the collateralized debt securities are well diversified as to asset size and
geography. These securities are primarily LIBOR-indexed floating rate securities
and contain an issuer call provision at par anytime after five years. The
individual issuers of trust preferred securities have the ability to defer
interest payments for up to 20 consecutive quarters in certain circumstances. At
December 31, 2003, $365.3 million of investment securities classified as
available for sale had a cost basis of $364.2 million.
During 2004, the Company recorded a $2.0 million other-than-temporary
impairment on two Freddie Mac floating-rate preferred stock securities with an
aggregate carrying value of $8.8 million. The Company recorded the writedown
because the current yield on these securities is below market interest rates,
the fair value has been below cost for an extended period, and a recovery in
fair value is not assumed within a reasonably short period of time. During 2003,
the Company wrote down a $9.3 million floating-rate debt security by $6.9
million due to insufficient cash flow underlying the repayment of the security.
This security was collateralized by various aircraft assets and leases. Another
$7.4 million floating-rate security collateralized debt obligation which was
secured by various high-yield debt securities was written down by $3.1 million
during 2003. A charge taken in 2002 relating to a third $8.5 million
floating-rate security in default following its maturity in December 2002. This
security was collateralized by various aircraft leased to a major carrier that
filed bankruptcy in the fourth quarter of 2002. These three securities were sold
in 2004 at a gain of $2.7 million.
The Bank has a wholly-owned subsidiary organized as a Nevada corporation
that was acquired in the St. Francis acquisition. This subsidiary holds and
manages a portfolio of our investment securities. At December 31, 2004, the
Bank's total investment in the Nevada subsidiary was approximately $426.5
million, and the subsidiary had assets of $428.5 million consisting primarily of
mortgage-backed securities.
Wisconsin does not require consolidated tax returns and because the
subsidiary is out of state, its income has not been subject to state income tax
in Wisconsin. From time to time legislation has been proposed that would require
consolidated reporting requirements in Wisconsin. Representatives of the
Wisconsin Department of Revenue have indicated that the Department may revoke
its previously issued favorable tax rulings relating to such Nevada
subsidiaries, even though there has not been any intervening change in law. The
Department also has implemented a program for the audit of Wisconsin financial
institutions that have subsidiaries incorporated and located in Nevada, and may
seek to assert a basis for imposition of Wisconsin income taxes on income from
those operations, either retroactively or prospectively. The Company is not
currently under audit by the Department.
In addition to our investment securities and mortgage-backed securities
portfolios, we maintain a portion of our assets in more liquid investments for
daily liquidity management. 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.
DEPOSITS AND BORROWED FUNDS
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,
interest-bearing and non-interest bearing checking accounts, money market and
certificate accounts. The Bank has historically only solicited deposits from its
market areas and has not used brokered deposits. However, at December 31, 2004,
the Bank had $5.0 million of brokered deposits remaining as a result of the St.
Francis acquisition. The Bank relies primarily on competitive pricing policies,
advertising, and customer service to attract and retain deposits. The flow of
deposits is influenced significantly by general economic conditions, changes in
money market and prevailing interest rates and competition. In the last several
years, the Bank has emphasized growth in core accounts, defined as commercial
and non-interest bearing checking accounts, interest-bearing checking accounts,
money market accounts, and passbooks. We have increased our advertising and
marketing promotions and have introduced more competitively priced, higher rate
checking and money market products. At December 31, 2004, the ratio of core
deposits to total deposits increased to 59.6% compared to 58.2% at December 31,
2003, primarily due to the success of the Bank's new high rate checking account
product. At December 31, 2004, the Bank had $326.2 million of
14
certificates of deposit at an average rate of 2.61% with original maturities of
13 to 23 months, that contain a one-time option for the owner to increase the
interest rate to current rates.
The following table sets forth the composition of deposits by type at the
dates indicated and the change in the dollar amount of deposits for the periods
shown:
AT OR FOR THE
AT OR FOR THE YEAR ENDED AT OR FOR THE YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------------- ------------------------------ ---------------------
% OF INCREASE % OF INCREASE % OF
AMOUNT DEPOSITS (DECREASE) AMOUNT DEPOSITS (DECREASE) AMOUNT DEPOSITS
--------- --------- ---------- --------- --------- ---------- ---------- ---------
(Dollars in thousands)
Commercial checking....... $ 239,249 4.0% $ 22,760 $ 216,489 3.9% $ 66,484 $ 150,005 4.0%
Non-interest bearing
checking............... 250,569 4.2 32,123 218,446 3.9 79,327 139,119 3.7
Interest-bearing
checking................ 972,009 16.4 416,334 555,675 10.0 192,786 362,889 9.7
Commercial money markets.. 64,810 1.1 45,298 19,512 .3 (3,056) 22,568 .6
Money markets............. 611,507 10.3 (273,709) 885,216 15.9 449,640 435,576 11.6
Passbooks................. 1,399,099 23.6 45,218 1,353,881 24.2 347,291 1,006,590 26.8
--------- ----- ------- --------- ----- --------- --------- -----
Total core deposits.... 3,537,243 59.6 288,024 3,249,219 58.2 1,132,472 2,116,747 56.4
Certificates of deposit... 2,395,605 40.4 71,880 2,323,725 41.7 689,448 1,634,277 43.6
--------- ----- ------- --------- ----- --------- --------- -----
Unamortized premium...... 2,860 -- (4,651) 7,511 .1 7,298 213 --
Total deposits......... $ 5,935,708 100.0% $ 355,253 $ 5,580,455 100.0% $ 1,829,218 $ 3,751,237 100.0%
========= ===== ======= ========= ===== ========= ========= =====
The following table sets forth the distribution and the weighted-average
nominal interest rates of the Bank's average deposits for the years indicated:
YEAR ENDED
-----------------------------------------------------------------------------------------------
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------------- ----------------------------- ------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED PERCENT WEIGHTED
OF AVERAGE OF AVERAGE OF AVERAGE
AVERAGE TOTAL NOMINAL AVERAGE TOTAL NOMINAL AVERAGE TOTAL NOMINAL
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
----------- -------- -------- ---------- -------- --------- --------- ---------- ---------
(Dollars in thousands)
Commercial checking........... $ 236,300 4.15% --% $ 167,743 4.07% --% $ 124,801 3.41% --%
Non-interest bearing
checking.................... 226,661 3.98 -- 161,400 3.91 -- 124,726 3.41 --
Interest-bearing checking..... 824,603 14.49 .84 410,261 9.95 .59 334,882 9.15 .81
Money markets................. 690,950 12.14 .76 494,676 12.00 1.06 436,317 11.92 1.93
Commercial money markets...... 72,062 1.27 1.13 20,151 .49 1.36 26,456 .72 2.30
Passbooks..................... 1,364,904 24.00 .58 1,144,729 27.76 .81 936,512 25.58 1.68
--------- ------ ---- --------- ------ ---- --------- ------ ----
Total checking, money
market and passbook
accounts................ 3,415,480 60.03 .62 2,398,960 58.18 .72 1,983,694 54.19 1.39
--------- ------ ---- --------- ------ ---- --------- ------ ----
Certificates with original
maturities of:
6 months or less........... 406,613 7.15 1.25 383,347 9.30 1.20 357,187 9.76 2.23
7 to 12 months............. 730,816 12.85 2.26 380,965 9.24 2.49 248,200 6.78 3.36
Greater than 1 to 3 years.. 956,551 16.81 2.41 784,688 19.03 2.75 944,075 25.79 4.28
Greater than 3 years....... 179,802 3.16 4.36 175,126 4.25 4.61 127,410 3.48 5.31
--------- ------ ---- --------- ------ ---- --------- ------ ----
Total certificates of
deposits.............. 2,273,782 39.97 2.31 1,724,126 41.82 2.54 1,676,872 45.81 3.79
--------- ------ ---- --------- ------ ---- --------- ------ ----
Total average deposits.....$ 5,689,262 100.00% 1.29% $ 4,123,086 100.00% 1.48% $ 3,660,566 100.00% 2.48%
========= ====== ==== ========= ====== ==== ========= ====== ====
The following table presents, by various interest rate categories, the
amount of certificates of deposit outstanding at December 31, 2004, 2003, and
2002, and the periods to maturity of the certificates of deposit outstanding at
December 31, 2004:
DECEMBER 31, PERIOD TO MATURITY AS OF DECEMBER 31, 2004
-------------------------------- ------------------------------------------
WITHIN
ONE 1 TO 3 OVER 3
2004 2003 2002 YEAR YEARS YEARS TOTAL
--------- --------- --------- --------- ------- ------- ---------
(Dollars in thousands)
Certificates of deposit:
Up to 1.99%.......... $ 653,304 1,056,024 330,189 647,527 5,674 103 653,304
2.00% to 2.99%....... 1,100,135 479,922 543,576 780,610 315,947 3,578 1,100,135
3.00% to 3.99%....... 394,822 433,245 338,585 109,245 199,616 85,961 394,822
4.00% and greater.... 247,344 354,534 421,927 129,671 83,207 34,466 247,344
--------- --------- --------- --------- ------- ------- ---------
Total............. $ 2,395,605 2,323,725 1,634,277 1,667,053 604,444 124,108 2,395,605
========= ========= ========= ========= ======= ======= =========
At December 31, 2004, the Bank had outstanding $533.3 million in
certificate of deposit accounts in amounts of $100,000 or more maturing as
follows:
PERIOD TO MATURITY AMOUNT
- --------------------------------------- -------------
(Dollars in
thousands)
Three months or less.................. $ 135,210
Over three through six months......... 80,696
Over six through 12 months............ 148,014
Over 12 months........................ 169,342
-------
Total.............................. $ 533,262
=======
15
BORROWED FUNDS. Although deposits are the Bank's primary source of funds,
we also utilize borrowings, such as advances from FHLB of Chicago, and to a
lesser extent, reverse repurchase agreements, when they are a less costly source
of funds than retail deposits or when we have opportunities to reinvest borrowed
funds at a positive rate of return.
FEDERAL HOME LOAN BANK OF CHICAGO ADVANCES. The Bank obtains advances from
the FHLB of Chicago secured by its capital stock investment 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, 2004, the Bank's FHLB of Chicago advances totaled
$2.19 billion, or 22.6% of total assets, compared to $2.10 billion, or 23.6% of
total assets at December 31, 2003.
Included in FHLB of Chicago advances at December 31, 2004 are $365.0
million of fixed-rate advances with original scheduled maturities of 5 to 10
years, which mature beyond 2005 and are putable at the discretion of the FHLB of
Chicago as follows: $290.0 million at 4.90% in 2005, $75.0 million at 2.94% in
2006. The average term to maturity on these advances is 49 months, while the
average term to put is seven months. At inception, the Bank receives a lower
cost of borrowing on such advances than on similar termed non-putable advances,
in return for granting the FHLB of Chicago the option to put the advances prior
to their final maturity. If put, the FHLB of Chicago will provide replacement
funding, should the Bank want or need to refinance the borrowing, at the then
prevailing market rate of interest for the remaining term to maturity of the
advances, subject to standard terms and conditions. Of the FHLB advances we had
outstanding at December 31, 2004, we expect $50.0 million (with an average rate
of 2.52%) is likely to be put back to us in 2005.
UNSECURED TERM BANK LOAN AND LINE OF CREDIT. In 2004, the Company
renegotiated and increased its unsecured term bank loan by $25.0 million in
conjunction with its acquisition of Chesterfield Financial. 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, 2004, the
interest rate is currently one-month LIBOR plus 110 basis points, or 3.29%. At
December 31, 2004, the balance of the unsecured term loan is $70.0 million and
the scheduled principal payments of $7.0 million are due on December 31, of each
year from 2005 through 2010 with a final balloon payment of $28.0 million due on
December 31, 2011. Prepayments of principal are allowed without penalty at the
end of any repricing period.
In conjunction with the unsecured term bank loan, the Company also
maintains a $55.0 million one-year unsecured revolving line of credit that
matures October 31, 2005. The line is generally renewable at maturity at the
mutual agreement of the Company and the lender. The loan provides for an
interest rate of one, two, three, six or twelve-month LIBOR at the option of the
borrower plus 95 basis points and may be prepaid at the end of any repricing
period. At December 31, 2004, there is a $10.0 million outstanding balance on
the line of credit at an interest rate of 3.43%.
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 to certain restrictions on
additional indebtedness and agreed not to pledge any stock of the Bank or MAF
Developments for any purpose. At December 31, 2004, the Company was in
compliance with these covenants.
16
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. These
reverse repurchase agreements are treated as financings and are reflected on our
balance sheet as other borrowings. The securities underlying the agreements are
delivered to the dealers who arrange the transaction and continue to be
reflected as assets on our balance sheet. The usual terms of these agreements
require us, generally after a short period of time, to repurchase the same
securities at a predetermined price or yield. In conjunction with the St.
Francis acquisition in 2003, the Bank assumed $105.0 million of reverse
repurchase agreements. The following table presents certain information
regarding reverse repurchase agreements as of the end of and for the periods
indicated:
YEAR ENDED DECEMBER 31,
--------------------------------
2004 2003 2002
--------- --------- ---------
(Dollars in thousands)
Balance at end of period........... $ 300,000 $ 105,000 --
Maximum month-end balance.......... 300,000 105,000 --
Average balance ................... 195,492 105,000 --
Weighted average rate at end of
period.......................... 2.42% 1.64% --
Weighted average rate on average
balance......................... 1.69 1.64 --
At December 31, 2004, our reverse repurchase agreements were all floating
rate and had maturities ranging from fifteen months to 4.8 years. The interest
rate on $225.0 million of these agreements is indexed to prime and ranges from
prime minus 275 basis points to prime minus 280 basis points. The remaining
$75.0 million have interest rates ranging from three-month LIBOR minus 50 basis
points to three-month LIBOR minus 75 basis points. The LIBOR indexed repurchase
agreements are putable quarterly in 2006. At December 31, 2004, reverse
repurchase agreements were collateralized by investment, mortgage-backed and
collateralized mortgage obligation ("CMO")securities with a carrying value of
$315.0 million and a market value of $313.7 million. We intend to continue to
use reverse repurchase agreements as an additional funding source.
For certain customers with significant funds available for deposit at the
Bank, the Bank offers "retail" repurchase agreements under which the Bank
collateralizes its obligation to repay the customer funds with U.S. government
or agency securities. The retail repurchases, which totaled $24.9 million at
December 31, 2004, are collateralized by one mortgage-backed security and two
CMO securities with a carrying value of $21.9 million and market value of $21.9
million.
The following table is a summary of the Company's borrowed funds at
December 31, 2004 and 2003. The weighted average rates are contractual rates and
are not adjusted for purchase accounting adjustments. The unamortized premium
was created in 2003 as purchase accounting adjustments in the acquisitions of
Fidelity and St. Francis. At December 31, 2004, the effective borrowing costs,
including amortization of the premium, were 3.70% compared to 3.80% at
December 31, 2003.
DECEMBER 31, 2004 DECEMBER 31, 2003
---------------------------------- ---------------------
INTEREST WEIGHTED WEIGHTED
RATE AVERAGE AVERAGE
RANGE RATE AMOUNT RATE AMOUNT
------------ ------- ---------- --------- -----------
(Dollars in thousands)
Fixed-rate advances from FHLB due:
Within 1 year................. 2.24% - 7.20% 5.34% $ 613,125 5.32% $ 390,000
1 to 2 years.................. 1.83 - 6.82 3.56 560,000 5.34 619,375
2 to 3 years.................. 3.23 - 3.89 3.57 210,000 4.30 210,000
3 to 4 years.................. 2.49 - 5.86 4.78 425,000 3.82 150,000
4 to 5 years.................. 2.54 - 5.86 4.67 75,000 4.90 375,000
5 to 6 years.................. 2.77 - 5.42 3.65 105,000 4.67 75,000
6 to 7 years.................. -- -- -- 3.65 105,000
------------ ---- --------- ---- ---------
Total fixed rate advances.. 1.83 - 7.20 4.42 1,988,125 4.90 1,924,375
Adjustable-rate advances from
FHLB due:
Within 1 year................. 2.16 - 2.31 2.23 100,000 1.16 30,000
1 to 2 years.................. 2.17 - 2.63 2.40 100,000 1.19 100,000
2 to 3 years.................. -- -- -- 1.21 50,000
------------ ---- --------- ---- ---------
Total adjustable rate
advances................. 2.16 - 2.63 2.32 200,000 1.19 180,000
--------- ---------
Total advances from FHLB... 1.83% - 7.20% 4.22 2,188,125 4.58 2,104,375
============
Unsecured term bank loan......... 3.29 70,000 2.26 45,000
Unsecured line of credit......... 3.43 10,000 2.17 10,000
Other borrowings................. 2.35 325,662 1.55 120,977
Unamortized premium.............. -- 6,880 -- 19,075
---- --------- ---- ---------
Total borrowed funds....... 3.96% $ 2,600,667 4.36% $ 2,299,427
==== ========= ==== =========
17
REAL ESTATE DEVELOPMENT
We engage 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. We started this business in 1974 and
since that time have developed and sold over 6,300 lots in 23 different
subdivisions primarily in the western suburbs of Chicago. MAFD typically acts as
sole principal or as a joint venture partner in our development projects.
Historically, we have provided essentially all of the capital for a joint
venture and receive in exchange an ownership interest in the joint venture which
entitles us 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.
The following is a summary as of December 31, 2004, of our pending
residential real estate projects:
LOTS
DATE NUMBER REMAINING
LAND LOTS FOR INVESTMENT
DESCRIPTION OF PROJECT ACQUIRED SOLD SALE BALANCE
- ------------------------------------------- ------------ ------- --------- ----------
(Dollars in thousands)
SPRINGBANK OF PLAINFIELD
1,599 residential lots; 281
multi-family units and 45.8 acres
for commercial development........... 12/02-11/04 -- 1,599 $ 34,654
SHENANDOAH
326 residential lots.................... 6/00 322 4 221
TALLGRASS OF NAPERVILLE
952 residential lots; 19.3 acres for
multi-family homes; 12.8 acres for
commercial development(1)............ 11/96-8/01 949 3 216
------
$ 35,091
======
- ------------------
(1) All of the multi-family and commercial acreage has been previously sold.
SPRINGBANK OF PLAINFIELD. This project consists of 950 acres in Plainfield,
Illinois, located in Will County southwest of Chicago along the fast-developing
I-55 corridor. The project received local zoning and plan approvals in the
fourth quarter of 2004, approximately six months later than we anticipated due
to various delays in the municipal planning process. We commenced development
work in December 2004. The project is expected to have approximately 1,599
single-family residential lots and 281 multi-family units with an additional
45.8 acres zoned for commercial development. During the first quarter of 2005,
we offered a total of 305 lots for sale in two phases. To date, 148 of these
lots are currently under contract to be sold. Lot sale closings are expected to
begin in the third quarter of 2005.
The aggregate purchase price of contracts for land in this development is
$38.3 million, of which $33.2 million has been disbursed to date, including $9.2
million disbursed in 2004 and $21.0 million disbursed in 2003. The investment
balance also includes engineering, survey and other preliminary development
costs. Based on the current plans for this project and the existing land
purchase contracts, current estimated future developments costs (including the
remaining land acquisition costs) are approximately $57 million.
SHENANDOAH. This project consists of approximately 326 single-family lots,
also in Plainfield, Illinois. Development began in mid 2002, and to date, we
have sold 322 lots. There were no lots under contract at December 31, 2004. We
anticipate the remaining four lots in this development will be sold by the third
quarter of 2005. We estimate an additional $2.7 million of final improvements
will be made to complete this project.
TALLGRASS OF NAPERVILLE. This project consists of 447 acres in three
separate parcels in Naperville, Illinois. The project also had 19.3 acres
available for multi-family units, as well as 12.8 acres of commercially-zoned
land which we sold in bulk to developers. Only three residential lots remained
at December 31, 2004. Currently, we estimate an additional $903,000 of
disbursements will be necessary to complete this project.
18
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 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 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. 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 and 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 noninsured 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 for institutions receiving the highest
rating on the CAMEL financial institution rating system, and 4% leverage
19
(core capital) ratio for all other institutions, 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, 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. 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. The acquisitions of Fidelity, St. Francis and
Chesterfield did not have a significant impact on capital adequacy levels.
At December 31, 2004 and 2003, the Bank was in compliance with the current
capital requirements as follows:
DECEMBER 31, 2004 DECEMBER 31, 2003
------------------------- ----------------------
PERCENT PERCENT
OF OF
AMOUNT ASSETS AMOUNT ASSETS
---------- ---------- ---------- ----------
(Dollars in thousands)
Stockholder's equity of the Bank....... $ 983,865 10.22% $ 896,783 10.10%
========= ===== ========= =====
Tangible capital....................... $ 664,449 7.14 $ 615,582 7.16
Tangible capital requirement .......... 139,642 1.50 129,000 1.50
--------- ----- --------- -----
Excess................................. $ 524,807 5.64% $ 486,582 5.66%
========= ===== ========= =====
Core capital........................... $ 664,449 7.14 $ 615,582 7.16
Core capital requirement............... 372,379 4.00 343,999 4.00
--------- ----- --------- -----
Excess................................. $ 292,070 3.14% $ 271,583 3.16%
========= ===== ========= =====
Core and supplementary capital......... $ 687,500 11.30 $ 640,413 11.45
Risk based capital requirement......... 486,665 8.00 447,366 8.00
--------- ----- --------- -----
Excess................................. $ 200,835 3.30% $ 193,047 3.45%
========= ===== ========= =====
Total Bank assets...................... $ 9,629,108 $ 8,882,976
Adjusted total Bank assets............. 9,309,466 8,599,968
Total risk weighted assets............. 6,402,954 5,875,087
Adjusted total risk weighted assets.... 6,083,312 5,592,079
The following table reflects the adjustments required to reconcile the
Bank's stockholder's equity to the Bank's regulatory capital as of December 31,
2004:
TANGIBLE CORE RISK-BASED
--------- ----------- ----------
(Dollars in thousands)
Stockholder's equity of the Bank........ $ 983,865 983,865 983,865
Goodwill and core deposit intangibles... (318,231) (318,231) (318,231)
Non-permissible subsidiary deduction.... (392) (392) (392)
Non-includible purchased mortgage
servicing rights..................... (2,570) (2,570) (2,570)
Regulatory capital adjustment for
available for sale securities........ 1,777 1,777 1,777
Recourse on loan sales.................. -- -- (13,204)
General allowance for loan losses....... -- -- 36,255
------- ------- -------
Regulatory capital................... $ 664,449 664,449 687,500
======= ======= =======
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 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
20
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 the first quarter of 2005, BIF and SAIF deposits will be
assessed a FICO payment of 1.44 basis points.
As a result of the Funds Act and the FDI Act, the FDIC voted to effectively
lower SAIF assessments in a range of 0 to 27 basis points as of January 1, 1997.
The Bank's assessment rate for the year ended December 31, 2004 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.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act, or the CRA, a
financial institution has a continuing and affirmative obligation, consistent
with its safe and sound operation, to help meet the credit needs of its entire
community, including low- and moderate-income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions,
or limit an institution's discretion to develop the types of products and
services that it believes are best suited to its particular community that are
consistent with the CRA. Institutions are rated on their performance in meeting
the needs of their communities. Performance is tested in three areas: (a)
lending, which evaluates the institution's record of making loans in its
assessment areas; (b) investment, which evaluates the institution's record of
investing in community development projects, affordable housing and programs
benefiting low or moderate income individuals and businesses; and (c) service,
which evaluates the institution's delivery of services to residents of its
communities through its branches, ATMs and other offices. The CRA requires each
federal banking agency, in connection with its examination of a financial
institution, to assess and assign one of four ratings to the institution's
record of meeting the credit needs of its community and to take this record into
account in evaluating certain applications by the institution, including
applications for charters, branches and other deposit facilities, relocations,
mergers, consolidations, acquisitions of assets or assumptions of liabilities,
and savings and loan holding company acquisitions. The CRA also requires that
all institutions publicly disclose their CRA ratings. The Bank
21
received a "satisfactory" rating on its CRA performance evaluation prepared by
the OTS on August 13, 2002, the most recent report the Bank has received.
IMPACT OF THE GRAMM-LEACH-BLILEY ACT. The Gramm-Leach-Bliley Act, or the
GLB Act, significantly reformed 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. The Company has developed policies and procedures to comply
with the implementing regulations promulgated by the OTS and the other federal
regulators with regard to customer privacy.
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.
BANK SECRECY ACT. Under the Bank Secrecy Act ("BSA"), a financial
institution is required to have systems in place to detect certain transactions,
based on the size and nature of the transaction. Financial institutions are
generally required to report cash transactions involving more than $10,000 to
the United States Treasury. In addition, a financial institution is required to
file suspicious activity reports for transactions that involve $5,000 or more
and which the financial institution knows, suspects or has reason to suspect the
transaction involves illegal funds, is designed to evade the requirements of the
BSA or has no lawful purpose. The USA Patriot Act of 2001, enacted in response
to the September 11, 2001 terrorist attacks, requires bank regulators to
consider a financial institution's compliance with the BSA when reviewing
applications from financial institutions.
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,
2004, the Bank's legal lending limit on loans to any one borrower was $103.2
million, although we have set a "house" limit of $50 million by policy. At
December 31, 2004, the Bank's largest aggregate outstanding balance of loans to
any one borrower was $24.2 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
22
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 restrictions and may be
required to convert to a bank charter. As of December 31, 2004, the Bank
maintained 87.2% 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 a savings institution, 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, if the institution would not be well-capitalized after the
distribution. The regulations provide that an institution (i) which is not
eligible for expedited treatment; or (ii) for which its total amount of capital
distributions for the applicable calendar year exceeds its net income for that
year to date plus its retained income for the preceding 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. Based on the large dividend we received from the Bank to fund a
portion of the acquisition of Chesterfield in October 2004, any dividends in
2005 in excess of the Bank's year to date net income will be subject to OTS
approval.
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 $1.3 million, $1.0
million and $820,000 in 2004, 2003 and 2002, respectively.
BRANCHING. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute.
Generally, a federal savings institution which meets the QTL test, may establish
or acquire branches in states other than its home state. 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.
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
certain 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
23
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 OTS requires that a savings association file a written safety and
soundness compliance plan within 30 days of receiving a request for a compliance
plan from the OTS.
CONSUMER LENDING LAWS. Our subsidiaries also are subject to many federal
and state consumer protection statutes and regulations including the Equal
Credit Opportunity Act, the Fair Housing Act, the Truth in Lending Act, the
Truth in Savings Act, the Real Estate Settlement Procedures Act and the Home
Mortgage Disclosure Act. Among other things, these acts:
o require lenders to disclose credit terms in meaningful and consistent
ways;
o prohibit discrimination against an applicant in any consumer or
business credit transaction;
o prohibit discrimination in housing-related lending activities;
o require certain lenders to collect and report applicant and borrower
data regarding loans for home purchases or improvement projects;
o require lenders to provide borrowers with information regarding the
nature and cost of real estate settlements;
o prohibit certain lending practices and limit escrow account amounts
with respect to real estate transactions; and
o prescribe possible penalties for violations of the requirements of
consumer protection statutes and regulations.
FEDERAL FAIR LENDING LAWS. The federal fair lending laws prohibit
discriminatory lending practices. The Equal Credit Opportunity Act prohibits
discrimination against an applicant in any credit transaction, whether for
consumer or business purposes, on the basis of race, color, religion, national
origin, sex, marital status, age (except in limited circumstances), receipt of
income from public assistance programs or good faith exercise of any rights
under the Consumer Credit Protection Act. Under the Fair Housing Act, it is
unlawful for any lender to discriminate in its housing-related lending
activities against any person because of race, color, religion, national origin,
sex, handicap or familial status. Among other things, these laws prohibit a
lender from denying or discouraging credit on a discriminatory basis, making
excessively low appraisals of property based on racial considerations, or
charging excessive rates or imposing more stringent loan terms or conditions on
a discriminatory basis. In addition to private actions by aggrieved borrowers or
applicants for actual and punitive damages, the U.S. Department of Justice and
other regulatory agencies can take enforcement action seeking injunctive and
other equitable relief for alleged violations. The Bank is subject to an Agreed
Consent Order that it entered into on December 30, 2002, to resolve allegations
by the Department of Justice that the Bank had violated the fair lending laws
based on the level of the Bank's lending in minority areas during the period
1996-2000. The Bank denied all alleged violations. The Agreed Consent Order
required the Bank to undertake a number of actions over the next five years to
promote its home mortgage lending in communities with significant minority
populations, including:
24
o Open or acquire two branch offices in minority areas within 30 months.
o Implement a targeted advertising campaign to increase home mortgage
lending.
o Provide $10 million in benefits to borrowers under special lending
programs to help residents of minority areas achieve home ownership
(which may include subsidized interest rates, down payment and closing
cost assistance, and prime rate loans to borrowers with below prime
credit).
o Contribute $500,000 over the five year period 2003-2008 to homebuyer
education and counseling programs, and conduct an assessment of the
home mortgage credit needs of residents in minority areas.
The Bank is in compliance with all terms of the Order. Since the Order was
entered by the court, the Bank has opened two branch offices within minority
areas, conducted an assessment of home mortgage credit needs of residents in
minority areas, and implemented a targeted marketing campaign to increase
mortgage lending. The Bank fully satisfied the $10 million financial benefits
requirement in 2003 through special lending programs designed to help minority
residents achieve homeownership and is continuing to offer special community
lending programs targeted to minority and low-income borrowers in its market
areas.
HOME MORTGAGE DISCLOSURE ACT. The federal Home Mortgage Disclosure Act grew
out of public concern over credit shortages in certain urban neighborhoods. One
purpose of the Home Mortgage Disclosure Act is to provide public information
that will help show whether financial institutions are serving the housing
credit needs of the neighborhoods and communities in which they are located. The
Home Mortgage Disclosure Act also includes a "fair lending" aspect that requires
the collection and disclosure of data about applicant and borrower
characteristics as a way of identifying possible discriminatory lending patterns
and enforcing anti-discrimination statutes. The Home Mortgage Disclosure Act
requires institutions to report data regarding applications for loans for the
purchase or improvement of one- to four-family and multi-family dwellings, as
well as information concerning originations and purchases of such loans. Federal
bank regulators rely, in part, upon data provided under the Home Mortgage
Disclosure Act to determine whether depository institutions engage in
discriminatory lending practices.
The appropriate federal banking agency, or in some cases, HUD, enforces
compliance with the Home Mortgage Disclosure Act and implements its regulations.
Administrative sanctions, including civil money penalties, may be imposed by
supervisory agencies for violations of this act.
REAL ESTATE SETTLEMENT PROCEDURES ACT. The federal Real Estate Settlement
Procedures Act, or RESPA, requires lenders to provide borrowers with disclosures
regarding the nature and cost of real estate settlements. RESPA also prohibits
certain abusive practices, such as kickbacks, and place limitations on the
amount of escrow accounts. Violations of RESPA may result in imposition of
penalties, including: (1) civil liability equal to three times the amount of any
charge paid for the settlement services or civil liability of up to $1,000 per
claimant, depending on the violation; (2) awards of court costs and attorneys'
fees; and (3) fines of not more than $10,000 or imprisonment for not more than
one year, or both.
TRUTH IN LENDING ACT. The federal Truth in Lending Act is designed to
ensure that credit terms are disclosed in a meaningful way so that consumers may
compare credit terms more readily and knowledgeably. As result of the act, all
creditors must use the same credit terminology and expressions of rates, and
disclose the annual percentage rate, the finance charge, the amount financed,
the total of payments and the payment schedule for each proposed loan.
Violations of the Truth in Lending Act may result in regulatory sanctions
and in the imposition of both civil and, in the case of willful violations,
criminal penalties. Under certain circumstances, the Truth in Lending Act and
Federal Reserve Regulation Z also provide a consumer with a right of rescission,
which if exercised would require the creditor to reimburse any amount paid by
the consumer to the creditor or to a third party in connection with the
offending transaction, including finance charges, application fees, commitment
fees, title search fees and appraisal fees. Consumers may also seek actual and
punitive damages for violations of the Truth in Lending Act.
25
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 the FHLB of Chicago 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 of Chicago, whichever is greater. At
December 31, 2004, the Bank had advances from the FHLB of Chicago with aggregate
outstanding principal balances of $2.19 billion, and the Bank's investment in
FHLB of Chicago stock of $278.9 million was $169.5 million in excess of its
minimum requirement. FHLB of Chicago advances must be secured by specified types
of collateral and are available to member institutions primarily for the purpose
of providing funds for residential housing finance. FHLB of Chicago also
purchases mortgages in the secondary market through its MPF program. The Bank
has sold loans to MPF since 1998. See discussion beginning on page 7 "Secondary
Market and Loan Servicing Activities".
The FHLBs are required to provide funds to cover certain obligations on
bonds issued by the Resolution Funding Corporation 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. In addition, regulatory directives, capital
requirements and net income of the FHLB of Chicago affects its ability to pay
dividends to us. For the years ended December 31, 2004, 2003, 2002, we received
stock dividends paid by the FHLB of Chicago in the amount of $23.1 million,
$14.4 million and $8.3 million, respectively, based on the Bank's investment in
FHLB of Chicago stock which has varied over time. If FHLB dividends were
reduced, or interest on future FHLB advances increased, the Bank's net interest
income might also be reduced.
Allen H. Koranda, Chief Executive Officer of the Company, was elected in
1997 by the Illinois member institutions to serve as one of their allotted
representatives on the 16-member Board of Directors of the FHLB of Chicago. In
January 2004, the Board of Directors of the FHLB of Chicago elected Mr. Koranda
to serve as its Chairman for a two-year term.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily checking accounts). The Federal Reserve Board regulations generally
require that reserves be maintained against aggregate transaction accounts as
follows: for accounts aggregating $47.6 million or less (subject to adjustment
by the Federal Reserve Board) the reserve requirement is 3%; and for accounts
greater than $47.6 million, the reserve requirement is currently $1,428,000 plus
10% (subject to adjustment by the Federal Reserve Board) against that portion of
total transaction accounts in excess of $47.6 million. The first $7.0 million of
otherwise reserveable 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.
26
EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the executive officers of the Company and the Bank are
listed below.
YEAR OF
NAME AGE EMPLOYMENT POSITION AND BACKGROUND
- --------------------- ----- ---------- ----------------------------------------------------------------------------
Allen H. Koranda 58 1972 Chairman of the Board and Chief Executive Officer.
Kenneth Koranda 55 1972 Vice Chairman of the Board and President of the Company; President and
Director of the Bank. Mr. Koranda is the brother of Allen Koranda.
Jerry A. Weberling 53 1984 Executive Vice President, Chief Financial Officer and Director. Prior
to joining the Bank, Mr. Weberling, a CPA, spent 10 years as an auditor of
financial institutions, mortgage banking and real estate companies for a
large public accounting firm.
James Allen 46 2001 Senior Vice President-Business Banking. Mr. Allen was previously Senior
Vice President - Corporate Banking at Old Kent Bank where he worked in
northern Illinois commercial markets from 1997 to 2001.
Gerard J. Buccino 43 1990 Senior Vice President-Risk Management. Prior to joining the Bank, Mr.
Buccino, a CPA, conducted audits of financial institutions, brokerage
and mutual funds for a large public accounting firm where he worked for
six years.
Jennifer R. Evans 46 2004 Senior Vice President and General Counsel. Ms. Evans was previously a
partner/shareholder in the law firm of Vedder, Price, Kaufman &
Kammholz, P.C., Chicago, Illinois, where she practiced corporate and
securities law for more than 20 years, specializing in the
representation of financial services companies.
William Haider 54 1984 Senior Vice President; President of MAFD.
Michael J. Janssen 45 1989 Senior Vice President-Investor Relations and Taxation.
David W. Kohlsaat 50 1976 Senior Vice President-Administration.
Thomas Miers 53 1979 Senior Vice President-Retail Banking.
Kenneth Rusdal 63 1987 Senior Vice President-Operations and Information Systems. Prior to
joining the Bank, Mr. Rusdal served as Vice-President of Software
Development for FISERV, Inc., a large data processing provider.
Sharon Wheeler 52 1971 Senior Vice President-Residential Lending.
Christine Roberg 53 1980 First Vice President and Controller.
EMPLOYEES
The Bank employed a total of 2,160 full-time equivalent employees as of
December 31, 2004. Management considers its relationship with its employees to
be excellent.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report, including the discussion 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. MAF Bancorp, Inc. ("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. These 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
27
and actual results may differ from those predicted. The Company undertakes no
obligation to update these forward-looking statements in the future.
Factors which could have a material adverse effect on operations and could
affect management's outlook or future prospects of the Company and its
subsidiaries include, but are not limited to, higher than expected overhead,
infrastructure and compliance costs, unanticipated changes in interest rates or
further flattening of the yield curve, demand for loan products, unanticipated
changes in secondary mortgage market conditions, deposit flows, competition,
adverse federal or state legislative or regulatory developments, monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and Federal Reserve Board, deteriorating economic conditions which could result
in increased delinquencies in the Company's loan portfolio, the quality or
composition of Company's loan or investment portfolios, demand for financial
services and residential real estate in Company's market area, 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
Our internet address is www.mafbancorp.com. We make available through this
address, free of charge, our annual report on Form 10-K, proxy statement,
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 with, or furnished to, the SEC. Our Code of Ethics and
other corporate governance information is also available on our website.
ITEM 2. PROPERTIES
All of our facilities are located in the greater Chicago-Milwaukee
metropolitan areas. At December 31, 2004, we own the majority of our 72 banking
offices and lease others under individual lease arrangements. We also own our
executive office building in Clarendon Hills, Illinois, and lease additional
corporate offices in Downers Grove, Illinois, both located in the western
suburbs of Chicago. We believe that all of our facilities are suitable and
adequate for our operational needs.
See Note 9 in "Item 8. Financial Statement and Supplementary Data" for
additional information about the Company's properties.
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, none of these
actions is likely to have a material adverse effect on our consolidated
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the Nasdaq Stock Market under the symbol "MAFB."
As of March 11, 2005, we had 3,970 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.
YEAR ENDED DECEMBER 31, 2004 YEAR ENDED DECEMBER 31, 2003
-------------------------------------- ---------------------------------------
HIGH LOW CLOSE DIVIDEND HIGH LOW CLOSE DIVIDEND
------ ----- ----- -------- ------ ------ ------ --------
First Quarter.... $44.95 41.51 43.46 .21 35.43 32.61 33.65 .18
Second Quarter... 44.89 40.52 42.68 .21 38.09 32.90 37.07 .18
Third Quarter.... 44.30 39.27 43.13 .21 40.40 36.97 38.20 .18
Fourth Quarter... 47.25 42.42 44.82 .21 44.80 38.20 41.90 .18
28
We declared $0.84 per share in dividends during the year ended December 31,
2004, and $0.72 per share in dividends for the year ended December 31, 2003. Our
ability to pay cash dividends depends in part 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."
The following table sets forth information in connection with purchases
made by, or on behalf of, the Company, or any affiliated purchaser of the
Company, of shares of our common stock within the fourth quarter of the year
ended December 31, 2004.
TOTAL NUMBER
OF SHARES
PURCHASED AS MAXIMUM
PART OF NUMBER OF
TOTAL PUBLICLY SHARES THAT MAY
NUMBER OF AVERAGE ANNOUNCED YET BE PURCHASED
SHARES PRICE PAID PLANS OR UNDER THE PLANS
PERIOD PURCHASED(1) PER SHARE PROGRAMS OR PROGRAMS(2)
- ----------------------------------------------- ----------- ---------- ------------- ---------------
October 1, 2004 through October 31, 2004....... -- $ -- -- 101,400
November 1, 2004 through November 30, 2004..... 233,900 43.71 233,900 367,500
December 1, 2004 through December 31, 2004..... 228,412 44.35 223,500 144,000
------- ----- ------- -------
Total....................................... 462,312 $ 44.03 457,400 144,000
======= ----- ======= =======
- -----------------
(1) The table reflects 4,912 shares purchased pursuant to surrender of shares
in payment of option exercise price and does not include 3,997 shares
subject to options surrendered in payment of withholding tax.
(2) The Company's Board of Directors approved the repurchase of up to 1.6
million shares in May 2003. This program was completed with the purchase of
the remaining 101,400 shares in November 2004. We announced a new stock
repurchase plan in November 2004 that authorized the repurchase of up to
500,000 shares of our common stock. The table does not reflect shares
authorized for repurchase under the 1.2 million share repurchase program we
announced in January 2005. Unless earlier terminated by the Board of
Directors, these programs will expire when we have completed the repurchase
of all shares authorized thereunder.
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,
----------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share data)
SELECTED FINANCIAL DATA:
Total assets................................ $ 9,681,384 8,933,585 5,937,181 5,595,039 5,195,588
Loans receivable, net....................... 6,881,780 6,369,107 4,530,932 4,447,575 4,328,114
Mortgage-backed securities available for
sale..................................... 948,169 971,969 365,638 142,158 104,385
Mortgage-backed securities held to
maturity.................................. 245,021 -- -- -- --
Interest bearing deposits................... 56,089 57,988 28,210 29,367 53,392
Federal funds sold.......................... 42,854 19,684 100,205 112,765 139,268
Investment securities available for sale.... 388,959 365,334 308,235 355,416 187,127
Stock in Federal Home Loan Bank of Chicago.. 278,916 384,643 169,708 132,081 84,775
Real estate held for development or sale.... 35,091 32,093 14,938 12,993 12,718
Goodwill and core deposit intangibles....... 318,231 276,549 101,967 105,670 68,864
Deposits.................................... 5,935,708 5,580,455 3,751,237 3,557,997 2,974,213
Borrowed funds.............................. 2,600,667 2,299,427 1,556,500 1,470,500 1,728,900
Stockholders' equity........................ 974,386 901,604 501,458 435,873 387,729
Book value per share........................ 29.28 27.27 21.57 18.97 16.78
Tangible book value per share............... 19.72 18.90 17.18 14.37 13.81
29
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share data)
SELECTED OPERATING DATA:
Interest income............................. $ 421,173 316,430 329,490 345,736 343,103
Interest expense............................ 159,885 136,952 171,465 214,489 217,173
---------- --------- --------- --------- ---------
Net interest income...................... 261,288 179,478 158,025 131,247 125,930
Provision for loan losses................... 1,215 -- 300 -- 1,500
---------- --------- --------- --------- ---------
Net interest income after provision for
loan losses........................... 260,073 179,478 157,725 131,247 124,430
Non-interest income:
Gain on sale of loans receivable......... 9,294 25,948 16,330 8,691 1,108
Net gain (loss) on sale and writedown
of investment and mortgage-
backed securities..................... 1,322 (937) 119 877 (444)
Gain on sale of loan servicing rights.... -- -- -- -- 4,442
Income from real estate operations....... 6,657 11,325 9,717 11,484 9,536
Deposit account service charges.......... 34,112 24,552 22,239 16,535 12,715
Loan servicing fee income (expense)...... 1,231 (5,939) (2,472) (371) 1,686
Valuation (allowance) recovery of
mortgage servicing rights............. 2,072 1,130 (2,300) (904) --
Foreclosed real estate................... 506 365 179 347 258
Brokerage commissions.................... 4,094 3,587 2,702 2,371 2,322
Other.................................... 16,998 11,602 9,849 8,088 5,820
---------- --------- --------- --------- ---------
Total non-interest income............. 76,286 71,633 56,363 47,118 37,443
Non-interest expense:
Compensation and benefits................ 96,502 70,573 59,098 48,221 41,197
Office occupancy and equipment........... 27,984 15,410 11,670 9,011 8,124
Advertising and promotion................ 9,079 6,466 4,844 4,355 3,569
Amortization of goodwill and core
deposit intangibles(1)................ 3,002 1,732 1,649 4,578 4,475
Other.................................... 47,481 26,016 22,081 17,259 15,638
---------- --------- --------- --------- ---------
Total non-interest expense............ 184,048 120,197 99,342 83,424 73,003
---------- --------- --------- --------- ---------
Income before income taxes............ 152,311 130,914 114,746 94,941 88,870
Income taxes................................ 50,789 47,481 40,775 35,466 32,311
---------- --------- --------- --------- ---------
Net income............................ $ 101,522 83,433 73,971 59,475 56,559
========== ========= ========= ========= =========
Basic earnings per share.................... $ 3.09 3.35 3.19 2.62 2.43
========== ========= ========= ========= =========
Diluted earnings per share.................. $ 3.01 3.26 3.11 2.56 2.40
========== ========= ========= ========= =========
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets...................... 1.10% 1.29 1.29 1.14 1.14
Return on average equity...................... 10.98 14.18 15.83 14.82 15.57
Average stockholders' equity to
average assets............................. 9.98 9.09 8.14 7.70 7.34
Stockholders' equity to total assets.......... 10.06 10.09 8.45 7.79 7.46
Tangible stockholders' equity to tangible
assets..................................... 7.01 7.22 6.85 6.02 6.22
Tangible and core capital to total assets
(Bank only)................................ 7.14 7.16 6.78 6.44 6.32
Risk based capital ratio (Bank only).......... 11.30 11.45 11.85 11.31 11.98
Interest rate spread for the period........... 2.85 2.69 2.59 2.22 2.30
Net interest margin........................... 3.06 2.96 2.92 2.64 2.68
Average interest-earning assets to average
interest-bearing liabilities............... 110.82 111.90 110.50 109.62 108.10
Non-interest expense to average assets........ 1.99 1.86 1.73 1.60 1.48
Non-interest expense to average assets and
average loans serviced for others.......... 1.46 1.46 1.33 1.33 1.22
Efficiency ratio(2) .......................... 54.74 47.69 46.36 47.00 44.56
Ratio of earnings to fixed charges:
Including interest on deposits............. 1.91x 1.93x 1.66x 1.44x 1.41x
Excluding interest on deposits............. 2.61x 2.65x 2.38x 2.00x 1.86x
Non-performing loans to total loans at
year end................................... .46% .51 .58 .45 .39
Non-performing assets to total assets at
year end................................... .34 .49 .47 .37 .36
Cumulative one-year gap at year end........... (3.98) (1.59) 10.23 (3.57) (5.18)
Number of deposit accounts at year end........ 586,590 564,696 393,801 377,015 339,340
Mortgage loans serviced for others at
year end................................... $3,641,445 3,330,039 2,021,512 1,401,607 785,350
Loan originations and purchases............... 4,228,462 4,993,675 3,691,170 2,827,594 1,484,220
Number of retail banking offices at
year end................................... 72 66 34 32 27
STOCK PRICE AND DIVIDEND INFORMATION:
High.......................................... $ 47.25 44.80 40.11 32.73 30.00
Low........................................... 39.27 32.61 28.60 24.30 15.50
Close......................................... 44.82 41.90 34.00 29.50 28.44
Cash dividends declared per share............. .84 .72 .60 .46 .39
Dividend payout ratio......................... 27.91% 22.09 19.29 17.56 16.05
- ------------------
(1) Beginning January 1, 2002, the Company no longer amortizes goodwill after
adoption of SFAS Nos. 142 and 147.
(2) The efficiency ratio is calculated by dividing non-interest expense by the
sum of net interest income and non-interest income, excluding net
gain/(loss) on sale and writedown of mortgage-backed and investment
securities.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
information as of and for the three years ended December 31, 2004 included in
Item 6. "Selected Financial Data" and Item 8. "Financial Statements and
Supplementary Data."
OVERVIEW
Our primary source of revenue is net interest income, which is
predominately interest income from loans receivable, and investment securities
(including mortgage-backed securities), offset by interest expense on deposits
and wholesale borrowings. Our ability to grow net interest income is tied to
volumes of loans and deposits we generate in our market areas, as well as the
pricing of these products, which is primarily driven by the general level of
market interest rates. To augment our earnings, we generate fee income from
customers related to the various banking products and services we offer. We also
generate profits from mortgage banking related activity, such as gains on the
sale of mortgage loans, and subsequent fees earned from loan servicing activity.
Another key source of revenue for us has been income from our real estate
development operations, although this revenue has declined as a percentage of
our total non-interest income as we have grown.
The decline in our earnings per share in 2004 was largely due to the rapid
decline in overall single-family mortgage loan production that we experienced,
reflective of the national trend in the home lending market. A spike in
long-term interest rates during the second quarter of 2004 curtailed the level
of refinance activity compared to the levels of the previous few years. The
lower production volumes dramatically decreased the level of loan sale profits
achieved in 2004, compared to 2003, as well as limited the expected and desired
level of growth to the Bank's balance sheet in 2004. Assuming interest rates
continue to rise in 2005, we expect that one- to four-family mortgage loan
volumes generated by the Bank in 2005 will be less than that in 2004, leading to
smaller one- to four-family loan sale profits than those generated in 2004.
Despite lower than anticipated loan growth during 2004, we achieved a
further shift in our loan mix during the year away from single-family mortgages,
reducing our interest rate sensitivity, as we reduced our concentration in one-
to four-family mortgages to 58.6% at the end of 2004, compared to 61.6% at the
end of 2003. As part of our loan portfolio diversification strategy, we
increased our outstanding equity line of credit balances over 40% compared to
2003. Our strategic decision to expand this product several years ago, by
targeted cross-selling to single-family mortgage borrowers and more recently
through wholesale brokers, led to the rapid growth experienced in 2004. We also
achieved significant growth in our business banking lending, particularly in our
Illinois markets.
Deposit growth proved challenging in 2004 due to the highly competitive
landscape which continues in the Chicago banking markets. Total deposits
increased by $355.3 million in 2004, with organic growth of $149.6 million
excluding the planned runoff of $65 million of brokered CDs obtained through
acquisitions with the balance of $270.7 million being acquired in the
Chesterfield acquisition. We continue to focus on our core deposit growth, and
ended 2004 with over 59% of our deposits in core accounts.
Our 2004 results were also adversely impacted by delays in municipal
approvals on our new real estate development project, which we finally received
in November 2004, six months later than expected. Income from real estate in
2004 was $5.7 million lower than in 2003. This project is now underway and lot
sale closings are expected to commence in the third quarter of 2005.
We spent a good part of 2004 integrating the operations of St. Francis and
had higher relative operating costs prior to conversion. Our successful data
processing conversion at the end of May 2004 achieved cost efficiencies which
should benefit us in 2005. In addition, the cost of regulation has increased
dramatically primarily due to the new requirements for internal control
evaluations under the Sarbanes-Oxley Act of 2002. We significantly expanded our
internal audit and compliance functions during the year, engaged outside
consultants to assist in our Sarbanes-Oxley 404 implementation and incurred
higher related audit fees. We devoted a great deal of resources in the latter
half of 2004 performing the necessary effort and implementing enhanced
procedures to ensure our compliance with this legislation. Coupled with slower
balance sheet growth, our efficiency ratio increased to 54.7% for 2004, compared
to 47.7% for 2003. While we expect our efficiency ratio to decline somewhat in
2005, we expect to continue to be impacted by rising non-interest expenses
related to de novo branch expansion,
31
higher regulatory costs and expensing of stock options as we work to achieve
operational efficiencies through the process improvement project we have
recently undertaken.
ACQUISITIONS
Our results have been significantly impacted by our growth through
acquisition of other financial institutions. The following table summarizes
financial information relating to our recent acquisitions:
DATA GOODWILL
PROCESSING AND
ACQUISITION CONVERSION ACQUIRED ACQUIRED INTANGIBLES
SELLING ENTITY DATE COMPLETION DEPOSITS LOANS RECORDED
- --------------------------------- ----------------- -------------- ------------ ----------- -----------
(In thousands)
Chesterfield Financial Corp(1)... October 31,2004 November 2004 $ 270,711 $ 140,699 $ 45,940
St. Francis Capital Corp(2)...... December 1, 2003 May 2004 1,294,517 1,243,549 131,218
Fidelity Bancorp(3).............. July 21, 2003 August 2003 434,573 338,123 44,840
Mid Town Bancorp(4).............. November 30,2001 February 2002 270,318 210,020 39,328
- -------------------
(1) We acquired Chesterfield Financial Corp. for $128.4 million. We issued
981,467 shares of stock and paid $85.7 million in cash for the purchase,
$25 million of which was funded with an increase in our bank term loan.
(2) We acquired St. Francis Capital Corporation by issuing 7.5 million shares
in an all-stock transaction valued at $358 million.
(3) We acquired Fidelity Bancorp, Inc. by issuing 2.8 million shares in an
all-stock transaction valued at $115 million.
(4) We acquired Mid Town Bancorp, Inc. for $69.0 million. We issued 494,867
shares of stock and paid $13.8 million in cash.
As it has in recent years, we expect 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 markets we serve, or which allow us to expand
outside our current primary market areas of Chicago, Milwaukee and their
surrounding areas. Management intends to review acquisition opportunities across
a variety of parameters, including the potential impact on its financial
condition as well as its financial performance in the future. It is anticipated
that future acquisitions, if any, will likely be valued at a premium to book
value, and at a premium to current market value. Acquisitions made by the
Company may include some book value per share dilution and possible short-term
earnings per share dilution for the Company's shareholders depending on
structure, pricing, the level of cost savings and revenue enhancements that are
achieved, and the Company's success and timing in integrating the operations of
businesses acquired.
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 U.S generally accepted accounting
principles, 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 requires that management
make estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expense, as well as related disclosures of
contingencies. Management's judgment is based on historical experience, terms of
existing contracts, market trends, and other information available. The Company
believes that of its significant accounting policies, the following may involve
a higher degree of judgment and complexity.
ALLOWANCE FOR LOAN LOSSES. 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 terms of the loan portfolio, (2) historical loss
experience and the change in the mix of the overall portfolio composition over
the last five years, (3) specific allocations based upon probable losses
identified during the review of the portfolio, and (4) delinquency in the
portfolio and the composition of non-performing loans including the percent of
non-performing loans with supplemental mortgage insurance. The allowance for
loan losses is established through a provision for loan losses 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.
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. The estimated value is also
affected by additional assumptions relating to loan prepayment speeds, earnings
on escrow funds, as well as the discount rate
32
used to present value the estimated future cash flow stream. Subsequent to the
establishment of this asset, management reviews the fair value of mortgage
servicing rights on a quarterly basis using current prepayment speed, cash flow
and discount rate estimates. Changes in these estimates impact fair value, and
could require the Bank to record a valuation allowance or recovery. Net
recoveries of $2.1 million and $1.1 million were recorded in 2004 and 2003
respectively. 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 changing estimates increase the fair
value of mortgage servicing rights.
VALUATION OF GOODWILL AND INTANGIBLE ASSETS. In accounting for acquisitions
of other companies, we generally record as assets on our financial statements
both goodwill and identifiable intangible assets such as core deposit
intangibles. The amounts we record are based on our estimates of the fair value
of assets and liabilities acquired. The valuation techniques we use to determine
the carrying value of tangible and intangible assets and liabilities acquired in
acquisitions and the estimated lives of the identifiable intangible assets
involve a number of subjective judgments such as estimates for discount rates,
projected future cash flows and time period of useful lives, all of which are
susceptible to change based on changes in economic conditions and other factors.
Core deposit and other identifiable intangible assets are amortized to expense
over their estimated useful lives and are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset exceeds the remaining value we are reasonably likely to realize.
Similarly, on an annual basis we evaluate whether the carrying value of our
goodwill has become impaired, in which case we reduce its carrying value through
a charge to our earnings. Goodwill is evaluated for impairment at the segment
reporting level, and all of our goodwill is recorded in our banking segment.
While we believe the assumptions and estimates we used are reasonable,
using different assumptions or estimates for these valuations would have
resulted in our recording different amounts of goodwill and core deposit
intangibles and could have impacted our amortization expense. For example, if we
had assumed faster prepayment speeds of mortgage loans we acquired in the
Fidelity or St. Francis acquisition, the value of the mortgage loans we acquired
would have been less and the goodwill we recorded would have been greater.
Similarly, if we had assumed greater deposit run off rates, we may have recorded
lower core deposit intangibles, but might have shortened our estimate of the
average life of this intangible asset and may have increased our amortization
expense in 2004. Any changes in the assumptions and estimates which we use in
future periods to determine the carrying value of our goodwill and identifiable
intangible assets which adversely affect their value or shortens estimated lives
would adversely affect our results of operations. At December 31, 2004, our
goodwill was $305.2 million and our identifiable intangible assets (core
deposits) amounted to $13.1 million. We recorded $3.0 million of amortization of
core deposit intangibles during 2004 and $1.7 million during 2003. There was no
goodwill impairment recorded in 2004 or 2003.
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, including capitalized interest and 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 in the project as a whole. 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 duration of the
project, changes in rules or requirements of the communities where the projects
reside, soil and weather conditions, increased project budgets, as well as the
general level of inflation. The change in lot sale profits on past sales that
result from 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.
Additionally, management periodically evaluates the net realizable value from
each project by considering other factors, such as pace of lot absorption,
sources of funding and timing of disbursements. A charge to current earnings
would occur if this evaluation indicated a project's net realizable value did
not exceed its recorded cost. Currently, the net realizable value of each land
development project the Company is engaged in exceeds the recorded cost of the
project.
33
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------
2004 2003 2002
-------- -------- --------
(Dollars in thousands,
except per share data)
Net income........................ $101,522 $83,433 $73,971
Diluted earnings per share........ 3.01 3.26 3.11
Return on average assets......... 1.10% 1.29% 1.29%
Return on average equity......... 10.98 14.18 15.83
Our net income was $101.5 million in 2004, 21.7% higher than 2003 net
income of $83.4 million. However, diluted earnings per share decreased 7.6% to
$3.01 per share in 2004 compared to $3.26 in 2003, as the weighted average
number of diluted shares outstanding increased to 33.7 million in 2004, up 32%
from 25.6 million in 2003. The increase in shares outstanding is due to the
Fidelity and St. Francis acquisitions completed in the second half of 2003 and
the acquisition of Chesterfield in late 2004.
Net interest income grew 45.6% to $261.3 million for 2004 compared to
$179.5 million in 2003, due to a 41% increase in average interest-earning assets
as well as expansion in the net interest margin in 2004 to 3.06% from 2.96% in
2003.
Non-interest income increased to $76.3 million in 2004 from $71.6 million
for 2003, or 6.5%. The primary drivers of non-interest income at the Company are
mortgage banking related income, such as gain on sale of loans and loan
servicing fee income, deposit and loan product-related fee income, and real
estate development operations. Due to rising interest rates in 2004, income
related to mortgage production and servicing (combined), decreased to $12.6
million, from $21.1 million in 2003, a decrease of $8.5 million. Additionally,
income from real estate operations decreased due to unforeseen delays in
receiving approval in our most recent development. Offsetting these declines was
growth in fee income on deposit and loan products, primarily due to our recent
acquisitions, and to a lesser extent, the growth in fee income from our business
banking unit.
Non-interest expense also increased primarily due to the acquisitions of
Fidelity, St. Francis and Chesterfield. Non-interest expense totaled $184.0
million for 2004, compared to $120.2 million in 2003, an increase of $63.9
million, or 53.1%. In addition to the increased expenses from our acquisitions,
normal salary increases, increased medical costs, additional occupancy expenses
incurred to position the company for future growth, our de novo branching
strategy and higher Sarbanes-Oxley related compliance costs contributed to
higher expenses in 2004.
Income tax expense increased to $50.8 million for 2004, compared to $47.5
million for 2003, while the Company's effective tax rate decreased to 33.3% in
2004 compared to 36.3% for 2003, primarily due to tax benefits from investments
in affordable housing projects that we acquired in the St. Francis transaction,
and the resolution of certain prior years' income tax matters.
NET INTEREST INCOME
Net interest income is the principal source of earnings for the Company,
and consists primarily 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 long-term U.S. Treasury rates are significantly greater then
short-term U.S. Treasury rates, due to funding costs being more directly tied to
shorter-term rates, while single-family mortgage loans are tied to intermediate
to longer-term rates. The increase in the balances of equity lines of credit,
which are tied to the Prime rate, as well as commercial business loans, which
are more often tied to Prime or 3-month LIBOR, are helping the Bank manage its
level of interest rate risk. Additionally, higher levels of core deposits, which
tend to be less sensitive to interest rate movements and levels, allow the Bank
to improve and/or maintain its level of net interest income over an extended
period of time and changing interest rate environment. Net interest income
before the provision for loan losses was $261.3 million in 2004, $179.5 million
in 2003 and $158.0 million in 2002. The net interest margin (net interest income
divided by average interest-earning assets) for the same periods was 3.06%,
2.96%, and 2.92%, respectively. The net interest
34
spread was 2.85%, 2.69%, and 2.59%, respectively. The net interest margin
exceeds the net interest spread in any given period because of non-interest
bearing deposit accounts, and stockholders' equity, neither of which cost the
company interest expense, but support interest-earning assets.
The following table is a summary of 6-month and 10-year U.S. Government
yields and is provided to illustrate information about the market rates related
to the Bank's pricing of interest-earning assets and interest-bearing
liabilities.
U. S. TREASURY RATES
2004 2003 2002
------------------------------ ------------------------------ -------------------------------
6 MONTHS 10 YEARS SPREAD 6 MONTHS 10 YEARS SPREAD 6 MONTHS 10 YEARS SPREAD
-------- -------- ------ -------- -------- ------ -------- -------- ------
Average..... 1.60% 4.26% 2.46% 1.07% 4.00% 2.93% 1.70% 4.59% 2.89%
Close....... 2.58% 4.22% 1.64% 1.02% 4.25% 3.23% 1.21% 3.82% 2.61%
During 2004, beginning in the second quarter, the shorter end of the
Treasury yield curve began to increase in response to continued strengthening of
the U.S. economy, and the commencement of a tightening monetary policy by the
Federal Reserve Board, which by year end had increased its target Federal Funds
rate to 2.50%, an increase of 150 basis points from its recent historic low of
1% that occurred during a good part of 2003. After the initial impact of a
tightening monetary policy increased the 10-year Treasury note to 4.87% by
mid-year, recognition of continued stable prices in the economy saw the 10-year
Treasury note settle back to its level of 4.22% by year end, and led to a sharp
decrease in the spread from 6-month Treasury bills to 10-year notes of 1.64%.
With the cost of core deposits lagging the increase in short-term rates, the
Bank was able to benefit from rising asset yields due to increases in the prime
rate, which helped increase its net interest spread and margin.
During 2003, U.S. Treasury rates continued their decline to historic lows
through June. Continued economic weakness, and very low inflation fueled
continued low federal funds rates, and rallied the rate on 10-year Treasury
notes to 3.11% at mid-year. In the second half of the year, the 10-year Treasury
note sold off in reaction to improving economic conditions and increasing U.S.
budget deficits to close the year at 4.25%. During this time, however,
short-term interest rates stayed at their historic low levels, leading to the
large spread of 3.23% between the rate on 6-month Treasury bills and 10-year
Treasury notes at the end of the year. On an average basis, the spread was very
consistent with 2002, which is part of the reason the Bank's net interest margin
remained stable. The interest rate scenario in 2003 enabled the Bank to continue
to reprice certificate of deposits lower, refinance maturing borrowings at lower
rates, and lower the rates offered on its core deposits. However, the very high
level of refinance activity fueled by lower long-term interest rates offset most
of the lower funding costs achieved.
During 2002, the U.S. Treasury curve maintained the steepness between
short- and long-term rates that had begun during 2001. This allowed the Bank to
benefit from the impact of low short-term rates on its cost of funds more so
than in 2001, as the Bank aggressively reduced rates offered on its core
accounts and experienced a decline in certificate of deposit costs as high-rate
certificates of deposit matured and repriced to lower rates. Each of these
factors was more than enough to offset the decline in asset yields due to
refinance activity driven by declining long-term interest rates, as well as the
decline in yield on ARM loans, which generally reprice off of short-term
Treasury rates, and continued decreases in yield on equity lines of credit tied
to the prime rate.
35
AVERAGE BALANCE SHEETS. The following table 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 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, 2004 includes
fees that are considered adjustments to yield.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------- AT DECEMBER 31,
2004 2003 2002 2004
----------------------------- ---------------------------- ---------------------------- ------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST BALANCE COST
----------- -------- -------- ----------- -------- ------- ---------- -------- -------- --------- -------
(Dollars in thousands)
ASSETS:
Loans receivable......$ 6,721,514 343,011 5.10% $ 4,917,662 272,687 5.55% $ 4,446,989 288,790 6.49% $ 6,918,035 5.22
Mortgage-backed
securities.......... 1,008,800 38,802 3.85 407,012 14,651 3.60 239,299 11,295 4.72 1,193,189 4.08
Stock in FHLB of
Chicago.............. 356,435 23,092 6.57 239,206 14,362 6.09 157,050 8,287 5.35 278,916 5.50
Investment
securities.......... 358,022 13,233 3.70 293,545 9,904 3.37 345,921 16,081 4.65 388,959 3.66
Interest-bearing
deposits............. 64,714 1,683 2.60 94,087 2,474 2.63 93,647 2,131 2.28 56,089 2.21
Federal funds sold.... 41,866 1,352 3.23 114,260 2,352 2.06 126,971 2,906 2.29 42,854 2.10
--------- ------- --------- ------- --------- ------- ---------
Total interest-
earning assets..... 8,551,351 421,173 4.92 6,065,772 316,430 5.22 5,409,877 329,490 6.09 8,878,042 4.97
Non-interest
earning assets...... 707,928 403,926 329,522 803,342
--------- --------- --------- ---------
Total assets.........$ 9,259,279 $ 6,469,698 $ 5,739,399 $ 9,681,384
========= ========= ========= =========
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Deposits.............. 5,226,301 73,872 1.41 3,794,205 61,011 1.61 3,413,331 90,963 2.66 5,445,891 1.56
Borrowed funds........ 2,487,727 86,013 3.46 1,626,695 75,941 4.67 1,482,487 80,502 5.43 2,600,667 3.70
--------- ------- --------- ------- --------- ------ ---------
Total interest-
bearing
liabilities........ 7,714,028 159,885 2.07 5,420,900 136,952 2.53 4,895,818 171,465 3.50 8,046,558 2.25
Non-interest
bearing deposits.... 462,961 328,881 247,235 489,817
Other liabilities..... 157,828 131,654 129,164 170,623
--------- --------- --------- ---------
Total liabilities.... 8,334,817 5,881,435 5,272,217 8,706,998
Stockholders' equity . 924,462 588,263 467,182 974,386
--------- --------- --------- ---------
Liabilities and
stockholders'
equity ............$ 9,259,279 $ 6,469,698 $ 5,739,399 $ 9,681,384
========= ========= ========= =========
Net interest income/
interest rate
spread.............. $ 261,288 2.85% $ 179,478 2.69% $158,025 2.59% 2.72%
======= ==== ======= ==== ======= ==== ====
Net earning assets/
net yield on
average interest-
earning assets .....$ 837,323 3.06% $ 644,872 2.96% $ 514,059 2.92% $ 831,484
========= ==== ========= ==== ========= ==== =========
Ratio of interest-
earning assets to
interest-bearing
liabilities......... 110.85% 110.90% 110.50% 110.33%
======= ======= ======= =========
RATE/VOLUME ANALYSIS. The table below shows the impact of changes in
interest-earning assets and interest-bearing liabilities and changes in interest
rates on the Bank's interest income and interest expense during the periods
indicated. 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, 2004 VS. 2003 DECEMBER 31, 2003 VS. 2002
---------------------------- ---------------------------
CHANGE CHANGE CHANGE CHANGE
DUE DUE DUE DUE
TOTAL TO TO TOTAL TO TO
CHANGE VOLUME RATE CHANGE VOLUME RATE
-------- ------ ------ ------- ------- ------
(Dollars in thousands)
INTEREST-INCOME:
Loans receivable....... $ 70,324 93,476 (23,152) $ (16,103) 28,690 (44,793)
Mortgage-backed
securities.......... 24,151 23,081 1,070 3,356 6,512 (3,156)
Stock in FHLB of
Chicago............. 8,730 7,519 1,211 6,075 4,807 1,268
Investment securities.. 3,329 2,320 1,009 (6,177) (2,197) (3,980)
Interest-bearing
deposits............ (791) (764) (27) 343 10 333
Federal funds sold..... (1,000) (1,937) 937 (554) (276) (278)
------- ------- ------- ------- ------ -------
Total interest
income............. 104,743 123,695 (18,952) (13,060) 37,546 (50,606)
------- ------- ------- ------- ------ -------
INTEREST-EXPENSE:
Deposits............... 12,861 21,039 (8,178) (29,952) 9,266 (39,218)
Borrowed funds......... 10,072 33,199 (23,127) (4,561) 7,381 (11,942)
------- ------- ------- ------- ------ -------
Total interest
expense............. 22,933 54,238 (31,305) (34,513) 16,647 (51,160)
------- ------- ------- ------- ------ -------
Net interest
income........... $ 81,810 69,457 12,353 $ 21,453 20,899 554
======= ======= ======= ======= ====== =======
2004 VERSUS 2003. Net interest income was $261.3 million in 2004, compared
to $179.5 million in 2003, an increase of $81.8 million, and was primarily
driven by an increase in average interest-earning assets of $2.48 billion.
Additionally, the net interest margin increased 10 basis points to 3.06% in 2004
36
due to a continued period of generally lower short-term interest rates that led
to the decrease in the cost of funds at a faster rate than the decline in
interest-earning assets.
The acquisitions of Fidelity and St. Francis during 2003 added nearly $2.7
billion in interest-earning assets, which impacted the entire year in 2004
compared to 2003, and led to a majority of the increase in net interest income
from a volume perspective. As shown in the table above, of the $81.8 million
increase in net interest income, a net $69.5 million was due to increases in
average balances of interest-earning assets and interest-bearing liabilities.
The table also shows the remaining $12.4 million of the increase is due to the
increase in the net interest spread, as costs of funds declined faster ($31.3
million), compared to the decline in interest-earning assets ($18.9 million).
The overall average yield on interest-earning assets decreased 30 basis
points to 4.92% in 2004. Although interest rates rose during the second half of
2004, refinance activity continued during the first half of the year, drove
average yields lower. Additionally, much of the growth in the loan portfolio was
loans tied to the prime rate, which averaged 4.34% during 2004, which led to a
decline in the yield on loans receivable of 45 basis points to 5.10% for 2004.
The increase in yields on mortgage-backed securities is due to the swap of
15-year mortgages originated by the Bank and held in mortgage-backed securities
held to maturity in 2004 with net yields in excess of 4.5%.
Average interest-earning assets increased $2.48 billion in 2004 to $8.55
billion. The increase in the average balance of loans receivable accounted for
$1.80 billion of this increase, and was due mainly to the acquisitions from
2003, in addition to organic growth of equity lines of credit and business
loans. The increase in the average balance of mortgage-backed securities of
$601.8 million is due to the 2003 acquisitions, as well as approximately $252.8
million of loans swapped into securities during 2004, while the net increase in
the average balance of investment securities of $64.5 million is due solely to
the 2003 acquisitions. The increase in the average balance of stock in FHLB of
Chicago is primarily due to the $168.5 million acquired in the 2003 acquisitions
offset by $125.7 million of stock redemptions during 2004.
The overall cost of interest-bearing liabilities declined 46 basis points
to 2.07% for 2004. The cost of deposits dropped 20 basis points, as the Bank's
cost of core deposits were reduced in early 2004 with continued low short-term
interest rates, and have not been increased in step with rising short-term rates
later in 2004. The cost of borrowed funds decreased 121 basis points to 3.46%
due to the maturity of higher cost borrowings from previous years and greater
use of floating rate borrowings. Due to the increase in monthly floating rate
loans many new borrowings in 2004 were shorter-term funding tied to 3-month
LIBOR and the prime rate, which currently carry interest rates well below the
average cost in 2004. As rates rise, the cost of these borrowings will increase,
but at a pace expected to closely match the rise in yields on corresponding
floating rate assets.
Average interest-bearing liabilities increased $2.29 billion to $7.71
billion in 2004 resulting primarily from a $1.43 billion increase in average
deposits related to the acquisitions in 2003. (Average non-interest bearing
deposits increased $134.1 million in 2004.) Organic growth accounted for
approximately $149.6 million of the increase and was offset by the runoff of $65
million of brokered certificates of deposit. The increase in the average balance
of borrowed funds of $861.0 million in 2004 was due in part to 2003
acquisitions, although these borrowings were also used to fund a part of the
asset growth generated in 2004 from primarily equity lines of credit.
2003 VERSUS 2002. Net interest income was $179.5 million in 2003, compared
to $158.0 million in 2002, an increase of $21.5 million, and was primarily
driven by an increase in average interest-earning assets of $655.9 million.
Interest rates dropped dramatically during 2003 compared to 2002, and our net
interest margin expanded by 4 basis points to 2.96% for 2003, compared to 2.92%
for 2002.
The overall yield on interest-earning assets declined 87 basis points in
2003 to 5.22%, as refinance activity reached historic highs, and dramatically
increased prepayments of higher yielding loans in our loan portfolio. The new
ARM loans replacing these prepayments were at substantially lower yields, as we
sold most of our long-term fixed-rate loans into the secondary market.
Additionally, the large growth in our equity line of credit portfolio (tied to
prime) yielded less than 4.50% during most of 2003, well below our average loan
portfolio yield. Similar declines in the yield on our investment and
mortgage-backed securities portfolios were seen as calls were exercised on some
of our investment securities, and prepayments increased in our mortgage-backed
securities portfolios due to falling interest rates.
37
Average interest-earning assets increased $655.9 million predominately in
our loan portfolio and mortgage-backed securities portfolio. Growth in our loan
portfolio were accomplished by increases in equity line of credit balances,
business loans, and commercial real estate, as we saw very high prepayments in
our single-family loan portfolio due to refinance activity discussed above. We
relied more on mortgage-backed securities in 2003 to invest the high level of
cash inflows from prepayments during most of the year.
The overall cost of interest-bearing liabilities declined 97 basis points
to 2.53% in 2003, due to the average cost of deposits dropping over 100 basis
points. The low interest rate environment in 2003 enabled us to reduce the rate
paid on our core deposits, renew maturing certificate accounts at lower rates,
and increase the amount of core deposits in our deposit mix, all of which
contributed to the drop in average cost. Our average cost of borrowed funds
declined at a less rapid pace (76 basis points), as our portfolio contains more
fixed-rate borrowings, many of which did not mature in 2003. The decline in cost
was also helped by our increased use of adjustable-rate borrowings tied to LIBOR
and prime due to falling rates during most of 2003.
Average interest-bearing liabilities increased $525.1 million, with $380.9
million due to an increase in average deposits, of which $295 million was due to
our acquisitions. The remainder of the deposit growth in 2003 was primarily in
core deposit accounts. Average borrowings increased by $144.2 million, most of
which was due to our acquisitions.
PROVISION FOR LOAN LOSSES
The company recorded a provision for loan losses and net charge-offs as
follows for the three years ended December 31 as shown below:
YEAR ENDED DECEMBER 31,
--------------------------
2004 2003 2002
------ ------- ------
(Dollars in thousands)
Provision for loan losses........... $1,215 $ -- $ 300
Net charge-offs..................... 812 299 424
Charge-offs to average loans........ .01% .01% .01%
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 terms of the loan portfolio, (2) historical loss experience and the
change in the mix of the overall portfolio composition over the last five years,
(3) specific allocations based upon probable losses identified during the review
of the portfolio, and (4) delinquency in the portfolio and the composition of
non-performing loans including the percent of non-performing loans with
supplemental mortgage insurance. The table below shows the total allowance for
loan losses and selected percentages for the periods indicated:
YEAR ENDED DECEMBER 31,
----------------------------
2004 2003 2002
-------- -------- -------
(Dollars in thousands)
Allowance for loan losses........................ $ 36,255 $ 34,555 $ 19,483
Percent of allowance for loan losses to
non-performing loans.......................... 115.2% 105.4% 76.7%
Percent of allowance for loan losses to loans
receivable, exclusive of loans held for sale.. .53% .54% .44%
Based on the above evaluation, the provision for loan losses increased to
$1.2 million in 2004, compared to $0 in 2003. We also acquired $1.3 million in
allowance for loan losses in our acquisition of Chesterfield. The acquired
allowances in the Fidelity and St. Francis acquisitions in 2003 were the primary
reason for the increase in the allowance for loan losses in 2003 and the
percentage of allowance for loan losses to loans receivable and to
non-performing loans.
NON-INTEREST INCOME AND EXPENSE
2004 VERSUS 2003. Non-interest income is another significant source of
revenue for the Company. It consists primarily of fees earned on deposit
products and services, gains and losses from asset sale activity and income from
real estate operations. Non-interest income increased $4.7 million or 6.5% for
the year ended December 31, 2004 compared to the year ended December 31, 2003.
38
The table below shows the composition of non-interest income for the
periods indicated.
PERCENTAGE
YEAR ENDED DECEMBER 31, INCREASE (DECREASE)
------------------------------- ------------------
2004 2003 2002 2004 2003
------- ------- ------- -------- --------
(Dollar in thousands)
Net gain (loss) on sale and
writedown of assets:
Loans receivable...................... $ 9,294 25,948 16,330 (64.2)% 58.9%
Mortgage-backed securities............ 500 6,006 39 (91.7) NM
Investment securities................. 822 (6,943) 80 (111.8) NM
Foreclosed real estate................ 506 365 179 38.6 103.9
Income from real estate operations....... 6,657 11,325 9,717 (41.2) 16.5
Deposit account service charges.......... 34,112 24,552 22,239 38.9 10.4
Brokerage commissions.................... 4,094 3,587 2,702 14.1 32.8
Other loan fees.......................... 5,775 4,767 3,635 21.1 31.1
Loan servicing fee (expense)............. 1,231 (5,939) (2,472) (120.7) 140.3
Valuation recovery (allowance) on
mortgage servicing rights............. 2,072 1,130 (2,300) (83.4) (149.1)
Other income:
Bank owned life insurance............. 1,642 1,315 1,440 24.9 (8.7)
Insurance commissions................. 616 480 461 28.3 4.1
Safe deposit box fees................. 820 656 612 25.0 7.2
Title agency fees..................... 524 1,329 805 (60.6) 65.1
Real estate owned operations, net..... (158) (149) (86) 6.0 73.3
Assumed premium income................ 1,938 1,482 981 30.8 51.1
Real estate held for investment
income(1).......................... 3,950 328 -- NM --
Other................................. 1,891 1,394 2,001 35.7 (30.3)
------ ------ ------ ----- ----
Total other income................ 11,223 6,835 6,214 3.3 29.0
------ ------ ------ ----- ----
Total non-interest income................ $ 76,286 71,633 56,363 6.5% 27.1%
====== ====== ====== ===== ====
- ------------------
(1) Income from investments in affordable housing properties in Wisconsin.
Although our total non-interest income increased slightly in 2004, we saw a
sharp decline in mortgage-banking related income in 2004 due to the spike in
long-term interest rates mid-year, which curtailed the refinance wave
experienced during 2003 and 2002. Loan sale volume dropped to $914.1 million in
2004 compared to $1.77 billion in 2003, and led to a reduction in the gain on
sale of loans of $16.7 million. Lower prepayments due to rising rates had the
opposite impact on our loan servicing fee income and fair value adjustments
related to our loan servicing portfolio. Income from these items increased a
combined $8.1 million. Our loans serviced for others portfolio grew to $3.64
billion at the end of 2004, up 9.3% from 2003. Due to the anticipated rising
rate environment, we currently expect lower loan sale volume in 2005 compared to
our volume in 2004, which will likely lead to lower loan sale profits.
Offsetting this trend, due to expected lower prepayment speeds, is an expected
increase in our loans serviced for others portfolio, and a corresponding
increase expected in loan servicing fee income.
Assumed premium income, which represents the portion we share of insurance
premiums earned by various private mortgage insurance companies, increased over
30% due to growth in loans for which we reinsure some of the credit risk.
Deposit account service charge income increased $9.6 million in 2004 and is
primarily due to fee income on deposit accounts we acquired in our mergers with
Fidelity and St. Francis. Total checking accounts grew 6.3% in 2004.
Other loan fee income was $5.8 million in 2004, an increase of $1.0 million
over 2003, despite a $1.2 million decline in loan modification (streamlined
refinances) fee income in 2004. Contributing to the improvement were fees
related to our growing equity line of credit portfolio and our business banking
unit.
Income from real estate operations for the last three years is detailed
below by project:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2004 2003 2002
--------------- --------------- --------------
LOTS INCOME LOTS INCOME LOTS INCOME
SOLD (LOSS) SOLD (LOSS) SOLD (LOSS)
---- ------ ---- ------ ---- ------
(Dollars in thousands)
Tallgrass of Naperville:
Single-family........... 13 $ 1,175 33 $ 2,559 120 $ 7,409
Multi-family and
commercial........... 1 460 3 2,584 1 2,161
Shenandoah................. 126 5,022 196 6,182 -- 147
--- ----- ---- ------ ---- -----
140 $ 6,657 232 $ 11,325 121 $ 9,717
=== ===== ==== ====== ==== =====
39
During 2004, as expected, we sold fewer lots in both Tallgrass of
Naperville and Shenandoah, as each of these subdivisions was selling lots from
their final units. Additionally, with the majority of sales in the lower margin
Shenandoah development in 2004, overall profit margins on lot sales declined. In
2003, profits were boosted by the sale of three parcels of commercial land. We
had expected to commence sales of lots in our newest subdivision, Springbank
(Plainfield, IL), in late 2004, but were delayed in receiving the necessary
municipal approvals, which were not obtained until November 2004. We expect lot
sales to commence in Springbank in the third quarter of 2005, and to contribute
profit margins closer to those earned in our Shenandoah project than the higher
margins in our Tallgrass project.
Gain on sale of mortgage-backed securities of $500,000 in 2004 was a sharp
decline from the 2003 gain of $6.0 million. In 2003, we had sold $259 million of
mortgage-backed securities available for sale as a means of managing our
interest rate risk. The gain on sale of investments in 2004 was $822,000
compared to the $6.9 million net loss recorded in 2003. In 2003, we incurred
other-than- temporary impairment writedown losses on two corporate debt
securities totaling $10.0 million, which were offset by gains from the sale of
investment securities of $3.1 million. In 2004, we sold certain corporate debt
securities that had incurred other-than-temporary impairment writedowns in 2003
and 2002 at a net gain of $2.7 million that was substantially offset by a $2.0
million other-than-temporary impairment writedown on $8.8 million of Freddie Mac
floating rate preferred stock securities.
The table below shows the composition of non-interest expense for the
periods indicated.
PERCENTAGE
YEAR ENDED DECEMBER 31, INCREASE (DECREASE)
------------------------------- --------------------
2004 2003 2002 2004 2003
--------- -------- -------- --------- --------
(Dollars in thousands)
Compensation.................................. $ 74,295 54,344 46,452 36.7% 17.0%
Employee benefits............................. 22,207 16,229 12,646 36.8 28.3
------- ------- ------
Total compensation and benefits......... 96,502 70,573 59,098 36.7 19.4
------- ------- ------
Occupancy expense............................. 19,717 10,510 7,976 87.6 31.8
Furniture, fixture and equipment expense...... 8,267 4,900 3,694 68.7 32.6
Advertising and promotion..................... 9,079 6,466 4,844 40.4 33.5
Data processing............................... 8,012 4,255 3,655 88.3 16.4
Amortization of core deposit intangibles...... 3,002 1,732 1,649 73.3 5.0
Other expenses:
Professional fees.......................... 4,756 2,468 2,841 92.7 (13.1)
Stationery, brochures and supplies......... 3,210 2,409 1,983 33.3 21.5
Postage.................................... 2,810 2,261 1,899 24.3 19.1
Telephone.................................. 3,200 2,172 1,632 47.3 33.1
Transaction fraud losses................... 3,084 1,896 2,026 62.7 (6.4)
Correspondent banking services............. 1,596 1,186 1,050 34.6 13.0
Title fees, recording fees and credit
report expense.......................... 1,937 1,003 884 93.1 13.5
Security expense........................... 1,464 979 631 49.5 55.2
ATM network fees........................... 1,262 301 522 319.3 (42.3)
Insurance costs............................ 1,635 914 497 78.9 83.9
FDIC premiums and OTS assessment........... 2,224 1,671 1,487 33.1 12.4
Real estate held for
investment expenses(1).................. 4,215 287 -- NM 100.0
Other...................................... 8,076 4,214 2,974 91.6 41.7
------- ------- ------ ---- ------
Total other expenses.................... 39,469 21,761 18,426 81.4 18.1
------- ------- ------ ---- ------
$ 184,048 120,197 99,342 53.1 21.0
======= ======= ====== ==== ======
Non-interest expense
to average assets............... 1.99% 1.86 1.73
Net overhead ratio(2)............. 1.16 .75 .75
Efficiency ratio.................. 54.74 47.69 46.36
Average FTEs...................... 2,088 1,547 1,295
- ------------------
(1) Expenses related to investments in affordable housing properties in
Wisconsin.
(2) Non-interest expense less non-interest income divided by average total
assets.
Non-interest expense increased 53.1% in 2004, primarily due to the impact
of the two acquisitions closed in the second half of 2003.
Compensation and benefit costs increased 36.7% in 2004, as our average
full-time equivalent number of employees increased 35%. We were able to reduce
certain duplicative positions during 2004 relating to our St. Francis
acquisition, but many of these positions were not eliminated until mid-year. The
opening of four de novo branches in 2003 and three more in 2004 contributed to
the higher headcount.
Our occupancy and equipment costs increased over 80% in 2004. In addition
to higher costs resulting from the acquired branches, we incurred approximately
$750,000 of duplicative occupancy costs
40
during the year that have now been eliminated. Occupancy costs have also
increased due to the new corporate offices we began leasing in March 2004 to
handle the growth in our company and to position us for growth in the future. We
upgraded some of our existing facilities and also incurred costs related to our
de novo branch locations.
We experienced an 88% increase in our data processing costs as we ran dual
data processing operations with St. Francis for nearly half the year, incurred
system conversion expenses and installed a second mainframe computer to enhance
our disaster recovery capabilities. We expect these expenses to be lower in
2005, as the redundant costs associated with the St. Francis acquisition were
eliminated in May 2004 upon the completion of our data processing integration.
We also incurred significant costs related to the regulatory requirements
of the Sarbanes-Oxley Act. These costs are most notabe in the increase in our
professional expenses, although we also hired a number of people to enhance our
internal control structure, contributing to higher compensation and benefits
expense.
2003 VERSUS 2002. Non-interest income increased 27.1% from 2002 to 2003 and
was attributable to higher gains on the sale of loans, income from real estate
operations and deposit account service charges, somewhat offset by lower net
gains on the sale and writedown of mortgage-backed and investment securities.
Loan sales in 2003 were driven by the high level of loan originations due
to falling interest rates and resulted in the 59% increase in gains. Even though
the average balance of loans serviced for others increased 46% in 2003, falling
interest rates led to higher amortization of capitalized mortgage servicing
rights than in 2002, which exceeded the gross servicing fee income received. The
net loan servicing fee expense was somewhat offset by a recovery of prior
valuation allowances recorded as refinance activity slowed at the end of 2003.
We recorded a net gain of $6.0 million on the sale of $259.0 million of
mortgage-backed securities in 2003 compared to gains of $39,000 from $14.8
million of sales in 2002. Included in the $259.0 million of mortgage-backed
securities sold in 2003 were $85.3 million of prepayment-protected fixed-rate
mortgages swapped into mortgage-backed securities, which were subsequently sold
along with an additional $60.9 million of similar mortgage-backed securities.
These sales were undertaken to improve the Bank's interest rate risk position by
lengthening its asset duration to better match the Bank's increased liability
duration at that time, as average lives of these loans and related
mortgage-backed securities had become very short due to high prepayment speeds.
Income from real estate operations increased 16.5% from 2002 to 2003
primarily due to the development and sale of 196 lots in the Shenandoah
development, which was the first year of sales in the project, and the sale of
three commercial parcels in the Tallgrass of Naperville project.
A net loss on the sale and writedown of investment securities of $6.9
million was recorded in 2003, compared to net gains of $80,000 in 2002. Net
gains on the sale of securities in 2003 of $3.1 million were offset by $10.0
million of other-than-temporary writedowns on $16.7 million of floating-rate
debt securities. Net gains on the sale of investment securities of $2.9 million
in 2002 were offset by a $3.0 million other-than-temporary impairment writedown
on a corporate debt security.
Non-interest expense increased 21% from 2002 to 2003 due to increases in
most operating categories primarily as a result of branches acquired and opened
during 2003.
Compensation and benefits increased 19.4% from 2002 to 2003 due to a 19.5%
increase in average full-time equivalent employees. Occupancy and equipment
costs rose due to increased maintenance and operating costs throughout the
branch network and loan processing centers. Advertising costs increased due to
increased market research, a result of competitive pressures and radio and
newspaper advertising expenses related to our efforts in brand recognition
strategy.
LIQUIDITY AND CAPITAL RESOURCES
Our holding company manages liquidity and capital resources to provide
funds necessary for holding company debt service on borrowings, cash dividends
to stockholders, funding for our land development operation, and planned
repurchases of common stock. Our major sources of liquidity at our holding
company are dividends from the Bank, which are subject to regulatory
limitations, and to a lesser
41
extent, cash flow from our land development operation. Additionally, we maintain
a $55.0 million unsecured line of credit with a Chicago-based commercial bank
under which we had $45.0 million of remaining availability at December 31, 2004.
See page 16 for more information relating to this bank line of credit. We expect
to increase the ratio of our debt to equity capital during 2005 with the
issuance of pooled trust preferred securities as we implement our stock
repurchase programs.
During 2004, we received $127.0 million in dividends from the Bank,
including a $52.0 million special dividend paid to fund a portion of the
purchase price for the Chesterfield acquisition. As a result, at December 31,
2004, the Bank had no retained earnings available for payment of dividends
without prior regulatory approval. Any dividend payments from the Bank in 2005
in excess of the Bank's year to date net income when aggregated with prior
dividends will be subject to OTS approval.
We manage liquidity at the Bank to ensure that adequate funds are available
to meet normal operating requirements, as well as unexpected loan demand or
deposit withdrawals by our customers, and other contractual obligations or
commitments, on a timely and cost-effective manner. Our primary sources of funds
are deposits, wholesale borrowings, principal repayments on loans and
mortgage-backed securities, as well as proceeds from the sale of loans and
investment securities. We manage our liquidity through regular review of loan
originations and payoffs, deposit flows, and anticipated movements in interest
rates, efforts that are aimed at forecasting when liquidity needs may occur and
satisfying these liquidity needs while attempting to minimize funding risk.
While the Bank's scheduled loan and mortgage-backed securities amortization
and maturing certificates of deposit are a relatively predictable source of
funds, core deposit flows, loan and mortgage-backed securities prepayments are
greatly influenced by economic conditions, the general level of interest rates
and competition. The Bank utilizes particular sources of funds based on
comparative costs and availability. The Bank expects to continue diversifying
its funding sources in 2005 through increased use of other wholesale borrowing
sources, including reverse repurchase agreements and brokered certificates of
deposits.
At December 31, 2004, the Bank has approximately $843.8 million of
potential additional borrowing capacity from the FHLB of Chicago and
approximately $462.1 million of available collateral capacity under its one- to
four-family blanket pledge agreement, including consideration of the additional
collateral capacity related to its excess investment in FHLB of Chicago stock.
The Bank also has the ability to pledge other mortgage-backed and investment
securities, as well as certain multi-family mortgage loans. Additional
borrowings from the FHLB of Chicago are subject to the Bank's compliance
underwriting, collateral, capital stock and other policies set forth in the FHLB
of Chicago credit guide at the time of the borrowing request. In addition, the
Bank has $80 million of various short-term lines of credit with other
correspondent banks. The Bank also has additional capacity to obtain other
borrowings through the pledge of investment or mortgage-backed securities.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS AND CONTINGENCIES
Through the normal course of business we enter into certain contractual
obligations and other commitments. These obligations generally relate to the
funding of operations through deposits or borrowings. The Bank historically
renews in excess of 80% of its certificates of deposit, upon maturity, as its
certificates of deposit are primarily retail orientated accounts rather than
more rate-sensitive brokered certificates. As such, the scheduled $1.67 billion
of maturing certificates of deposit in 2005 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 advances, which it will normally do in the normal
course of business if its loan portfolio is growing and out pacing deposit
growth. Should its loan portfolio growth be slower, due to prepayments in its
loan portfolio, the Bank may have adequate liquidity to repay its maturing
advances.
42
CONTRACTUAL OBLIGATIONS. The following table shows our contractual
obligations coming due in the periods indicated at December 31, 2004:
LESS
THAN 1 TO 3 3 TO 5 AFTER
TOTAL 1 YEAR YEARS YEARS 5 YEARS
----------- --------- ---------- --------- ---------
(Dollars in thousands)
Certificates of deposit................... $ 2,395,605 1,667,053 604,444 110,406 13,702
FHLB of Chicago advances.................. 2,188,125 713,125 870,000 500,000 105,000
Unsecured bank term loan and line of
credit................................. 80,000 17,000 14,000 14,000 35,000
Other borrowings.......................... 325,661 25,661 225,000 75,000 --
Purchase obligations...................... 12,576 6,165 6,171 240 --
Real estate development land purchase
contracts(1)........................... 19,724 4,459 15,265 -- --
Post retirement benefit plans............. 3,547 49 328 490 2,680
Operating leases.......................... 99,000 7,900 14,700 13,900 62,500
--------- --------- --------- ------- --------
Total.................................. $ 5,124,238 2,441,412 1,749,908 714,036 218,882
========= ========= ========= ======= =======
- ------------------
(1) Reflects contractual obligations to purchase remaining land and related
contracted improvements to date. This figure does not include the remaining
additional costs of land development improvements not currently under
contract, estimated at $53.2 million.
Purchase obligations reflect payment obligations under agreements to
purchase goods or services in determinable amounts at fixed prices that are
enforceable and legally binding on the Company. At December 31, 2004, they
include items such as service agreements, employment agreements, maintenance
contracts, software licensing agreements and contracts for data processing and
services.
Real estate development costs are funded primarily by sales of previously
developed lots, and to a lesser extent, borrowings or capital investments from
the Company. It is currently anticipated that the Company will be required to
supplement the cash flow from the sales of developed lots and bulk land parcels
in inventory with borrowings from the Company. Real estate development costs
shown in the table above include $19.0 million related to binding land purchase
contracts. We currently expect to incur approximately $72.9 million in estimated
future disbursements related to the current and planned future phases of our
existing real estate development projects, the majority of which are not
contractual obligations at the present time.
Post retirement benefits include benefits for employees and/or directors
under the Company's Supplemental Executive Retirement Plan and Long Term Medical
Plan.
COMMITMENTS AND CONTINGENCIES. The following table shows certain
off-balance sheet commitments and contingencies of the Company and the Bank as
of December 31, 2004:
LESS
THAN 1 TO 3 3 TO 5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
---------- -------- -------- ------- -------
(Dollars in thousands)
One- to four-family mortgage
commitments..................... $ 497,869 497,869 -- -- --
Equity line and equity loan
commitments..................... 108,732 108,732 -- -- --
Unused portion of equity lines of
credit(2)....................... 1,012,042 30,584 122,126 87,061 772,271
Commercial business lines(2)....... 252,861 153,396 56,186 23,278 20,001
Letters of credit(1)............... 86,056 29,367 43,830 6,049 6,810
Commercial business loan
commitments..................... 43,791 43,791 -- -- --
Contingent liability under
recourse provisions............. 82,660 82,660 -- -- --
--------- ------- ------- ------- -------
Total........................... $ 2,084,011 946,399 222,142 116,388 799,082
========= ======= ======= ======= =======
- ------------------
(1) Letters of Credit include $5.6 million related to land development
projects.
(2) Amounts are shown based on time to maturity for amounts if used. Reflects
the maximum amount of potential liability for credit losses at December 31,
2004 that we have retained relating to an aggregate $873.3 million of one-
to four-family loans. We have either sold the loans to investors with
recourse or have assumed a layer of credit risk through private mortgage
insurance in force in the Bank's captive reinsurance subsidiary. Our loss
experience to date under such recourse provisions has been immaterial.
At December 31, 2004, the Bank has approximately $247.0 million of cash and
liquidity, $73.8 million of commitments to sell loans, as well as additional
borrowing capacity from the FHLB of Chicago and other wholesale borrowing
sources. These sources are also available for the funding of unused equity lines
of credit. However, the Bank does not expect all of these lines to be used based
on historical levels of total line usage by its customers. Recourse provisions
include credit risk related to $44.1 million of loans sold with recourse to
investors, $12.7 million of credit risk relating to loans sold to the MPF
program and $25.9 million of credit risk related to loans with private mortgage
insurance in force in the Bank's captive reinsurance subsidiary.
43
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.
RECENT ACCOUNTING STANDARDS
In March 2004, the FASB ratified the consensus reached by the Emerging
Issues Task Force on Issue 03-1, "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments" ("EITF 03-1"). EITF 03-1 provides
guidance for determining when an investment is considered impaired, whether that
impairment is other-than-temporary, and measuring an impairment loss. An
investment is considered impaired if the fair value of the investment is less
than its cost. Generally, an impairment is considered other-than-temporary
unless: (a) the investor has the ability and intent to hold an investment for a
reasonable period of time sufficient for a forecasted recovery of fair value up
to (or beyond) the cost of the investment; and (b) evidence indicating that the
cost of the investment is recoverable within a reasonable period of time
outweighs evidence to the contrary. If impairment is determined to be
other-than-temporary, then an impairment loss is recognized equal to the
difference between the investment's cost and its fair value. The guidance also
includes accounting considerations subsequent to recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments.
With the release of FASB Staff Position ("FSP") EITF Issue 03-1-1 on
September 30, 2004, the FASB staff delayed the effective date of the
other-than-temporary impairment evaluation guidance of EITF 03-1 (which was
initially to be applied prospectively to all current and future investments in
interim and annual reporting periods beginning after June 15, 2004). FSP EITF
03-1 delays the effective date of the measurement and recognition guidance until
certain implementation issues are addressed and a final FSP providing
implementation guidance is issued. The disclosure requirements of EITF 03-1
remain in effect and are presented in Notes 3 and 4 of this Form 10-K for the
periods ended December 31, 2004 and December 31, 2003. The amount of any
other-than-temporary impairment that may need to be recognized in the future
will be dependent on market conditions, the occurrence of certain events or
changes in circumstances relative to an investee, the final guidance issued by
the FASB, and the Company's intent and ability to hold the impaired investments
at the time of the valuation.
In March 2004, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 105 ("SAB No. 105"), "Application of Accounting
Principles to Loan Commitments." SAB 105 prohibits the inclusion of estimated
servicing cash flows and internally-developed intangible assets within the
valuation of interest rate lock commitments under Statement of Financial
Accounting Standard No. 133. SAB No. 105 is effective for disclosures and
interest rate lock commitments initiated after March 31, 2004. The Bank adopted
SAB 105 effective April 1, 2004 and the adoption did not have a material impact
on the financial statements for the year ended December 31, 2004. The Bank
previously included a portion of the value of the associated servicing cash
flows when recognizing saleable loan commitments at inception and throughout
their life. This impact will not affect the ongoing economic value of the
business.
In December 2003, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued AICPA Statement of
Position No. 03-3, " Accounting for Certain Loans or Debt Securities Acquired in
a Transfer" ("SOP 03-3 "). SOP 03-3 was issued to address accounting for
differences between the contractual cash flows and the cash flows expected to be
collected of certain loans and debt securities (structured as loans) when
acquired in a transfer, if those differences are attributable, at least in part,
to credit quality. As such, SOP 03-3 applies to such loans and debt securities
acquired in purchase business combinations and does not apply to originated
loans. The application of SOP 03-3 could reduce the interest income that is
recognized for certain loans and debt securities by requiring that acquired
loans and debt securities be recorded at their fair value defined as the present
value of future cash flows net of expected credit losses. As a result, an
allowance for loan losses would not be recognized at acquisition. Subsequent to
the initial acquisition, increases in expected cash flows generally would be
recognized prospectively through adjustment of the yield on the loan or debt
security
44
over its remaining life. Decreases in expected cash flows would be recognized as
impairment. SOP 03-3 is effective for loans and debt securities acquired in
fiscal years beginning after December 15, 2004, with early application
encouraged. The Company will apply this SOP for prospective acquisitions.
In December 2004, the FASB issued Statement No. 123 (revised 2004),
"Shared-Based Payment" ("SFAS No. 123R"). SFAS No. 123R is a revision of SFAS
No. 123, "Accounting for Stock Based Compensation", supersedes APB 25 and amends
FASB Statement No. 95, "Statement of Cash Flows." SFAS No. 123R establishes
standards for the accounting for transactions in which an entity (i) exchanges
its equity instruments for goods or services, or (ii) incurs liabilities in
exchange for goods or services that are based on the fair value of the entity's
equity instruments or that may be settled by the issuance of the equity
instruments. SFAS No. 123R eliminates the ability to account for stock-based
compensation using APB 25 and requires that such transactions be recognized as
compensation cost in the income statement based on their fair values on the date
of the grant. The effective date of SFAS No. 123R is the first reporting period
beginning after June 15, 2005, which is third quarter 2005 for calendar year
companies, although early adopting is allowed. SFAS No. 123R permits companies
to adopt the recognition requirements using either a "modified prospective"
method or a "modified retrospective" method. Under the "modified prospective"
method, compensation cost is recognized in the financial statements beginning
with the effective date, based on the requirements of SFAS No. 123R for all
shared-based payments granted after that date, and based on the requirements of
SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS
No. 123R. Under the "modified retrospective" method, the requirements are the
same as under the "modified prospective" method, but also permits entities to
restate financial statement of previous periods based on pro forma disclosures
made in accordance with SFAS No. 123.
The Company currently utilizes a standard option-pricing model (i.e.,
Black-Scholes) to measure the fair value of stock options granted. While SFAS
No. 123R permits entities to continue to use such a model, the standard also
permits the use of a "lattice" model. The Company expects to evaluate the
alternative models, including the underlying valuation assumptions and has not
yet determined which model it will use to measure the fair value of stock
options upon the adoption of SFAS No. 123R.
The Company currently expects to adopt SFAS No. 123R effective July 1,
2005; however, the Company has not yet determined which of the aforementioned
recognition methods it will use. The Company currently uses the intrinsic value
method as permitted by APB 25 to account for its share-based payments to
employees, and as such, generally recognizes no compensation expense for
employee stock options. Accordingly, adopting SFAS No. 123R will result in the
Company recording compensation cost for employee stock options. Subject to a
complete review of the requirements of SFAS No. 123R, based on stock options
granted through December 31, 2004, the Company expects that the adoption of SFAS
No. 123R on July 1, 2005, would reduce pre-tax net income by $1.5 million for
2005. We will also incur additional expense to the extent that additional stock
option awards are made. Future levels of compensation cost recognized related to
share-based compensation awards (including the aforementioned expected costs
during the period of adoption) may be impacted by new awards and/or
modifications, repurchases and cancellations of existing awards before and after
the adoption of this standard. Had the Company adopted stock option expensing in
prior periods, the impact would have approximated that as presented in the SFAS
No. 123 disclosure of pro-forma net income and earnings per share in Note 1,
"Summary of Accounting Policies," of this Form 10-K. For additional information
regarding the Company's stock-based compensation plans, refer to Note 16,
"Officer, Director and Employee Benefit Plans," of this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK. The Company's primary market risk arises from interest rate
risk, which is measured and managed in various ways. Management's goal, through
policies established by the Asset/Liability Management Committee of the Board of
Directors (ALCO), is to maximize net interest income at a commensurate level of
risk, while staying within established interest rate risk policy limits
prescribed by the ALCO.
The Company uses a variety of measurement and modeling techniques that
estimate the impact of future movements in interest rates on the net interest
income of the Company. Generally, the Company measures parallel movements in
interest rates in 100 basis point increments over a one-year time horizon.
45
One of the techniques used in measuring the sensitivity of net interest
income to changes in interest rates is interest rate sensitivity (static) gap
analysis. The static 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. We utilize our static gap analysis as means of managing our
interest rate risk at a cumulative one-year time horizon. In this analysis,
maturities of assets and liabilities are adjusted for the estimated impact of
embedded options that are contained in certain financial instrument on the
Company's balance sheet. These include prepayment assumptions on real estate
loans, and mortgage-backed securities, call options embedded in investment
securities, and put options embedded in certain borrowings. Because of the level
of financial instruments with embedded options on our balance sheet, certain
shortcomings are inherent in using gap analysis to quantify exposure to interest
rate risk. In our loan portfolio, we do not necessarily know how people are
going to behave as interest rates change. Changes in interest rates may impact
cash flow on a lag basis, or lead future interest rate movements, and our
expected lives of our non-maturity core deposit accounts may not prove to be as
long-term as we assume them to be in our gap analysis. However, we still believe
static gap analysis remains a useful tool for us to help manage our interest
rate risk.
Generally, a positive one-year gap, where more interest-earning assets are
repricing or maturing during one-year period than interest-bearing liabilities,
would tend to result in a reduction in net interest income in a period of
falling interest rates. Conversely, during a period of rising interest rates, a
positive one-year gap would likely result in an improvement in net interest
income. Our goal is to maintain our cumulative one-year gap within the range of
(15)% to 15%, although we will begin to alter ALCO strategies in our
interest-sensitive portfolios, if the gap exceeds (10)% to 10%, recognizing that
marginal decisions made by management take some time to impact the Company's
overall static gap position. Our loan portfolio tends to impact the movement in
our static gap over a range of changing interest rates, due to the predominance
of one- to four-family mortgage loans that allow the customer to prepay without
penalty. We have mitigated the impact one- to four-family loans can have on our
gap by 1) reducing their concentration as a percentage of our overall loan
portfolio, 2) limiting our exposure to long-term fixed-rate mortgage loans, and
3) expanding our equity line of credit and business loan portfolios, that
generally carry more frequent interest rate adjustments, adjustable rates and/or
shorter maturities.
Currently we do not use derivative financial instruments such as interest
rate swaps, caps, floors, options or similar financial instruments, to manage
our interest rate risk, or periodic net interest income. We do use forward
commitments with the GSEs when selling our loan production originated for sale.
The tables on the next pages set forth the scheduled repricing or maturity
of the Bank's assets and liabilities at December 31, 2004 and 2003. Prepayment
assumptions on loans receivable are based on models developed from our internal
prepayment experience, while prepayment assumptions on mortgage-backed
securities and the impact of embedded put options on borrowings and call options
on investments are based on current market information. In addition, we use the
withdrawal assumptions used by the Office of Thrift Supervision with respect to
interest-bearing and non-interest bearing checking and passbook accounts, which
are annual rates of 17.0%, 17.0%, 17.0%, 16.0%, and 33.0%, respectively,
although we consider them to be conservative.
46
DECEMBER 31, 2004
--------------------------------------------------------------------------
< 1/2 1/2 - 1 1 - 3 3 - 5
YR. YR. YRS. YRS. 5+ YRS. TOTAL
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Interest-earning assets:
Loans receivable held for sale -- -- -- 1,899 37,632 39,521
Loans receivable.............. 2,256,709 591,340 1,890,590 1,602,719 537,156 6,878,514
Mortgage-backed securities.... 141,764 111,387 282,062 227,653 430,323 1,193,189
Investment securities......... 111,238 656 137,166 126,577 13,322 388,959
Stock in FHLB of Chicago...... 278,916 -- -- -- -- 278,916
Interest-bearing deposits..... 37,698 -- -- -- -- 37,698
Federal funds sold............ 42,854 -- -- -- -- 42,854
--------- --------- --------- --------- --------- ---------
Total interest-earning
assets................... 2,869,179 703,383 2,309,818 1,958,838 1,018,433 8,859,651
Impact of hedging
activities(1).............. 39,521 -- -- (1,889) (37,632) --
--------- --------- --------- --------- --------- ---------
Total net interest-earning
assets, adjusted for
impact of hedging
activities............... 2,908,700 703,383 2,309,818 1,956,949 980,801 8,859,651
Interest-bearing liabilities:
Interest-bearing checking
accounts................... 82,620 75,598 276,688 171,873 365,230 972,009
Money market accounts......... 676,317 -- -- -- -- 676,317
Passbook accounts............. 118,923 108,815 398,263 247,391 525,707 1,399,099
Certificate accounts.......... 961,579 708,332 604,449 110,502 13,603 2,398,465
FHLB advances................. 477,869 391,846 845,290 450,000 30,000 2,195,005
Other borrowings.............. 395,057 104 10,214 33 254 405,662
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities.............. 2,712,365 1,284,695 2,134,904 979,799 934,794 8,046,557
--------- --------- --------- --------- --------- ---------
Interest sensitivity gap......... $ 196,335 (581,312) 174,914 977,150 46,007 813,094
========= ========= ========= ========= ========= =========
Cumulative gap................... $ 196,335 (384,977) (210,063) 767,087 813,094
========= ========= ========= ========= =========
Cumulative gap as a percentage
of total assets............... 2.03% (3.98) (2.17) 7.92 8.40
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities.. 107.24% 90.37 96.57 110.79 110.10
- ------------------
(1) Represents forward commitments to sell mortgage loans.
DECEMBER 31, 2003
--------------------------------------------------------------------------
< 1/2 1/2 - 1 1 - 3 3 - 5
YR. YR. YRS. YRS. 5+ YRS. TOTAL
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Interest-earning assets:
Loans receivable held for
sale..................... -- -- -- -- 44,511 44,511
Loans receivable............ 1,743,470 648,284 2,121,604 1,103,882 741,911 6,359,151
Mortgage-backed securities.. 131,036 110,756 300,385 180,359 249,433 971,969
Investment securities....... 183,265 1,736 87,546 74,894 17,893 365,334
Stock in FHLB of Chicago.... 384,643 -- -- -- -- 384,643
Interest-bearing deposits... 57,988 -- -- -- -- 57,988
Federal funds sold.......... 19,684 -- -- -- -- 19,684
--------- --------- --------- --------- --------- ---------
Total interest-earning
assets................. 2,520,086 760,776 2,509,535 1,359,135 1,053,748 8,203,280
Impact of hedging activities(1) 44,511 -- -- -- (44,511) --
--------- --------- --------- --------- --------- ---------
Total net
interest-earning
assets, adjusted for
impact of hedging
activities............. 2,564,597 760,776 2,509,535 1,359,135 1,009,237 8,203,280
Interest-bearing liabilities:
Interest-bearing checking
accounts................. 47,394 43,341 158,628 98,536 209,389 557,288
Money market accounts....... 891,135 -- -- -- -- 891,135
Passbook accounts........... 116,246 106,365 389,295 241,821 513,869 1,367,596
Certificate accounts........ 975,279 543,786 670,933 127,111 14,108 2,331,217
FHLB advances............... 334,615 284,351 924,484 500,000 80,000 2,123,450
Other borrowings............ 95,239 30,000 50,112 236 390 175,977
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities ........... 2,459,908 1,007,843 2,193,452 967,704 817,756 7,446,663
--------- --------- --------- --------- --------- ---------
Interest sensitivity gap....... $ 104,689 (247,067) 316,083 391,431 191,481 756,617
========= ========= ========= ========= ========= =========
Cumulative gap................. $ 104,689 (142,378) 173,705 565,136 756,617
========= ========= ========= ========= =========
Cumulative gap as a percentage
of total assets............. 1.17% (1.59) 1.94 6.33 8.47
Cumulative net
interest-earning assets as
a percentage of
interest-bearing
liabilities ................ 104.26% 95.89 103.07 108.53 110.16
- ------------------
(1) Represents forward commitments to sell mortgage loans.
Our cumulative one-year gap at December 31, 2004 is (3.98)%, slightly more
negative than the (1.59)% one-year gap at December 31, 2003. Although our
negative gap has increased, we consider the amount of increase acceptable given
the rise in interest rates during 2004, as we expect a certain amount of
extension in our estimated loan maturities (because prepayments have slowed),
and our term funding against these loans gets shorter as time passes, which
shortens their maturity. Because we are controlling our extension risk through
limiting our investment in long-term mortgage loans, and expanding our
short-term interest sensitive equity lines of credit and business loan
portfolios, we are maintaining our gap at an acceptable level. Our negative gap
position indicates that if interest rates rose, without us
47
making any additional managerial decisions regarding our ALCO strategy, our net
interest margin would decline slightly over the next 12 months.
In addition to static gap analysis, we model the impact of instantaneous
parallel shifts in yield curve changes in interest rates (assuming interest
rates rise and fall in increments of 100 basis points), on anticipated net
interest income over a 12-month horizon. These models are more robust than our
static gap analysis, in that we are modeling underlying cash flows in each of
our interest-sensitive portfolios under these changing rate environments. This
includes adjusting anticipated prepayments, analyzing put and call exercises,
changing expected business volumes and mix (such as the mix in loan originations
between ARMs and fixed-rate), as well as modeling anticipated changes in
interest rates paid on core deposit accounts, whose rates do not necessarily
move in any relationship to movements in Treasury rates. We compare these
results to our results assuming flat interest rates. Our modeling as of December
31, 2004 indicates that net interest income would decrease by approximately 1.7%
if interest rates rose 100 basis points instantaneously, while if rates
instantaneously fell by 100 basis points, net interest income would decline by
approximately 1.6%.
A third measurement of our interest rate risk we use is Net Portfolio Value
Analysis. Under OTS Thrift Bulletin 13a, we are required to measure our interest
rate risk assuming various increases and decreases in general interest rates,
and their effect on our market value of portfolio equity. The Board of Directors
has established limits to changes in Net Portfolio Value ("NPV"), (including
limits regarding the change in net interest income discussed above), 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, 2004 and 2003, the Bank was well within the Board
approved limits. NPV 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, including a core deposit intangible on the Bank's core
deposit balances.
Net Portfolio Value Analysis measures our interest rate risk by calculating
the estimated change in the NPV of our cash flows from interest sensitive assets
and liabilities, as well as certain off-balance sheet items, in the event of a
shock in interest rates ranging from 100 to 200 basis points. We use a 200 basis
point movement up or down as our means of measuring overall NPV interest-rate
risk. (100 basis points downward recently due to historically low interest
rates). The table below shows the change in NPV applying various instantaneous
rate shocks to the Bank's interest-earning assets and interest-bearing
liabilities as of December 31, 2004 and 2003.
ESTIMATED PERCENTAGE
INCREASE INCREASE
(DECREASE) IN (DECREASE) IN
ESTIMATED NPV NPV NPV
-------------------- ------------------ -----------------
CHANGE IN INTEREST RATE 2004 2003 2004 2003 2004 2003
- ---------------------------------- --------- --------- -------- -------- -------- ------
(Dollars in thousands)
200 basis point rise............. $ 908,356 830,554 (114,270) (121,351) (11)% (13)%
100 basis point rise............. 980,829 916,929 (41,796) (34,976) (4) (4)
Base scenario.................... 1,022,626 951,905 -- -- -- --
100 basis point decline.......... 994,350 925,378 (28,275) (26,527) (3) (3)
Our change in NPV assuming a 200 basis point shock in interest rates
remains relatively consistent at the end of 2004 as it did in 2003. Long-term
interest rates were very similar at the end of 2004 as they were at the end of
2003, which maintained our expected levels of cash flows from our loan
portfolio, although we are modeling lower expected prepayments at the end of
2004 when compared to 2003. Additionally helping our NPV at the end of 2004
compared to 2003 is a rise in short-term interest rates, which has increased our
base scenario value of off-balance sheet core deposit values. The decline in NPV
in an up 200 basis point scenario remains comparative to 2003, as long-term
interest rates are nearly the same at the end of 2004 and 2003, and our loan
durations (as well as our borrowing durations) have remained relatively steady,
even with the rise in short-term interest rates. On the asset side of our
balance sheet, this is primarily due to slightly longer one- to four-family loan
duration at the end of 2004 being offset by the increase in short-term loans
tied to prime, while maintaining our borrowing duration as rates rose by funding
balance sheet growth in 2004 with both short and medium term funding.
48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
Report of Management Regarding Internal Control Over Financial Reporting....50
Reports of Independent Registered Public Accounting Firm....................51
Consolidated Statements of Financial Condition..............................53
Consolidated Statements of Operations.......................................54
Consolidated Statements of Changes in Stockholders' Equity..................55
Consolidated Statements of Cash Flows.......................................56
49
REPORT OF MANAGEMENT REGARDING INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of MAF Bancorp, Inc. is responsible for the preparation,
integrity, and fair presentation of the consolidated financial statements
included in this annual report. The consolidated financial statements and notes
included in this annual report have been prepared in conformity with United
States generally accepted accounting principles and necessarily include some
amounts that are based on management's best estimates and judgments.
In order to produce reliable financial statements, management is
responsible for establishing and maintaining effective internal control over
financial reporting. Management evaluates the effectiveness of internal control
over financial reporting and tests for reliability of recorded financial
information through a program of ongoing internal audits. Any system of internal
control, no matter how well designed, has inherent limitations, including the
possibility that a control can be circumvented or overridden and misstatements
due to error or fraud may occur and not be detected. Also, because of changes in
conditions, internal control effectiveness may vary over time. Accordingly, even
an effective system of internal control will provide only reasonable assurance
with respect to financial statement preparation.
Management assessed the Company's internal control over financial reporting
as of December 31, 2004, as required by Section 404 of the Sarbanes-Oxley Act of
2002, based on the criteria for effective internal control over financial
reporting described in the "Internal Control-Integrated Framework," adopted by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this assessment, management concludes that, as of December 31, 2004,
the Company's internal control over financial reporting is effective.
KPMG LLP, the independent registered public accounting firm that audited
the Company's consolidated financial statements, has issued an attestation
report on management's assessment of the Company's internal control over
financial reporting.
Allen H. Koranda Jerry A. Weberling
Chairman and Chief Executive Officer Executive Vice President and
Chief Financial Officer
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholders and Board of Directors
MAF Bancorp, Inc.
We have audited management's assessment, included in the accompanying
Report of Management Regarding Internal Control Over Financial Reporting, that
MAF Bancorp, Inc. and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated statements
of financial condition of MAF Bancorp, Inc. and subsidiaries as of December 31,
2004 and 2003, 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, 2004, and our report dated March 14, 2005 expressed an
unqualified opinion on those consolidated financial statements.
KPMG LLP
Chicago, Illinois
March 14, 2005
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholders and 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, 2004 and
2003, 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, 2004. 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 standards of the Public Company
Accounting Oversight Board (United States). 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 the Company
as of December 31, 2004 and 2003, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated March 14, 2005 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
KPMG LLP
Chicago, Illinois
March 14, 2005
52
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-----------------------------
2004 2003
-------------- -------------
(Dollars in thousands)
ASSETS
Cash and due from banks.......................................................... $ 148,055 144,290
Interest-bearing deposits........................................................ 56,089 57,988
Federal funds sold............................................................... 42,854 19,684
--------- ---------
Total cash and cash equivalents............................................... 246,998 221,962
Investment securities available for sale, at fair value.......................... 388,959 365,334
Stock in Federal Home Loan Bank of Chicago, at cost.............................. 278,916 384,643
Mortgage-backed securities available for sale, at fair value..................... 948,168 971,969
Mortgage-backed securities held to maturity (fair value $244,615)................ 245,021 --
Loans receivable held for sale................................................... 39,521 44,511
Loans receivable, net............................................................ 6,878,514 6,359,151
Allowance for loan losses........................................................ (36,255) (34,555)
--------- ---------
Loans receivable, net of allowance for loan losses............................ 6,842,259 6,324,596
--------- ---------
Accrued interest receivable...................................................... 34,888 31,168
Foreclosed real estate........................................................... 1,487 3,200
Real estate held for development or sale......................................... 35,091 32,093
Premises and equipment, net...................................................... 140,898 122,817
Other assets..................................................................... 135,249 130,615
Goodwill......................................................................... 305,166 262,488
Intangibles...................................................................... 38,763 38,189
--------- ---------
$ 9,681,384 8,933,585
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits......................................................................... $ 5,935,708 5,580,455
Borrowed funds................................................................... 2,600,667 2,299,427
Advances by borrowers for taxes and insurance.................................... 43,285 41,149
Accrued expenses and other liabilities........................................... 127,338 110,950
--------- ---------
Total liabilities............................................................. 8,706,998 8,031,981
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; 33,634,642 and
33,063,853 shares issued; 33,273,235 and 33,063,853 shares outstanding........ 336 331
Additional paid-in capital....................................................... 522,047 495,747
Retained earnings, substantially restricted...................................... 468,408 402,402
Stock in Gain Deferral Plan; 245,467 and 240,879 shares.......................... 1,211 1,015
Accumulated other comprehensive income (loss), net of tax........................ (1,676) 2,109
Treasury stock, at cost; 361,407 shares in 2004.................................. (15,940) --
--------- ---------
Total stockholders' equity.................................................... 974,386 901,604
--------- ---------
$ 9,681,384 8,933,585
========= =========
See accompanying Notes to Consolidated Financial Statements.
53
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
--------- ---------- --------
(Dollars in thousands,
except per share data)
Interest income:
Loans receivable............................................. $ 343,011 272,687 288,790
Mortgage-backed securities available for sale................ 35,465 14,651 11,295
Mortgage-backed securities held to maturity................. 3,337 -- --
Federal Home Loan Bank of Chicago stock...................... 23,092 14,362 8,287
Investment securities available for sale..................... 13,233 9,904 16,081
Interest-bearing deposits and federal funds sold............. 3,035 4,826 5,037
------- ------- -------
Total interest income..................................... 421,173 316,430 329,490
Interest expense:
Deposits..................................................... 73,872 61,011 90,963
Borrowed funds............................................... 86,013 75,941 80,502
------- ------- -------
Total interest expense.................................... 159,885 136,952 171,465
------- ------- -------
Net interest income....................................... 261,288 179,478 158,025
Provision for loan losses....................................... 1,215 -- 300
------- ------- -------
Net interest income after provision for loan losses....... 260,073 179,478 157,725
Non-interest income:
Net gain (loss) on sale and writedown of:
Loans receivable.......................................... 9,294 25,948 16,330
Mortgage-backed securities................................ 500 6,006 39
Investment securities..................................... 822 (6,943) 80
Foreclosed real estate.................................... 506 365 179
Income from real estate operations........................... 6,657 11,325 9,717
Deposit account service charges.............................. 34,112 24,552 22,239
Loan servicing fee income (expense).......................... 1,231 (5,939) (2,472)
Valuation recovery (allowance) on mortgage servicing rights.. 2,072 1,130 (2,300)
Other loan fees.............................................. 5,775 4,767 3,635
Brokerage commissions........................................ 4,094 3,587 2,702
Other........................................................ 11,223 6,835 6,214
------- ------- -------
Total non-interest income................................. 76,286 71,633 56,363
Non-interest expense:
Compensation and benefits.................................... 96,502 70,573 59,098
Office occupancy and equipment............................... 27,984 15,410 11,670
Advertising and promotion.................................... 9,079 6,466 4,844
Data processing.............................................. 8,012 4,255 3,655
Amortization of core deposit intangibles..................... 3,002 1,732 1,649
Other........................................................ 39,469 21,761 18,426
------- ------- -------
Total non-interest expense................................ 184,048 120,197 99,342
------- ------- -------
Income before income taxes................................ 152,311 130,914 114,746
Income taxes.................................................... 50,789 47,481 40,775
------- ------- -------
Net income................................................ $ 101,522 83,433 73,971
======= ======= =======
Basic earnings per share........................................ $ 3.09 3.35 3.19
======= ======= =======
Diluted earnings per share...................................... $ 3.01 3.26 3.11
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
54
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMU-
LATED
OTHER
COMPRE-
ADDITIONAL GAIN HENSIVE
COMMON PAID-IN RETAINED DEFERRAL INCOME TREASURY
STOCK CAPITAL EARNINGS PLAN (LOSS) STOCK TOTAL
--------- ----------- -------- -------- -------- -------- --------
(Dollars in thousands)
Balance at December 31, 2001.......... $ 254 201,468 286,535 718 3,672 (56,774) 435,873
Comprehensive income:
Net income......................... -- -- 73,971 -- -- -- 73,971
Other comprehensive income, net of
tax:
Unrealized holding gain during
the year...................... -- -- -- -- 1,224 -- 1,224
Reclassification adjustment of
gains included in net income.. -- -- -- -- (77) -- (77)
--- ------- ------- ----- ----- ------- -------
Total comprehensive income......... -- -- 73,971 -- 1,147 -- 75,118
--- ------- ------- ----- ----- ------- -------
Exercise of 331,611 stock options,
and reissuance of treasury stock... -- -- (3,785) -- -- 4,976 1,191
Tax benefits from stock-related
compensation....................... -- 1,829 -- -- -- -- 1,829
Impact of exercise of acquisition
carry-over options................. -- 1,413 -- -- -- -- 1,413
Purchase of 5,105 shares of treasury
stock.............................. -- -- -- -- -- (168) (168)
Cash dividends declared, $0.60 per
share.............................. -- -- (13,939) -- -- -- (13,939)
Dividends paid to Gain Deferral Plan.. -- -- 8 133 -- -- 141
--- ------- ------- ----- ----- ------- -------
Balance at December 31, 2002.......... 254 204,710 342,790 851 4,819 (51,966) 501,458
--- ------- ------- ----- ----- ------- -------
Comprehensive income:
Net income......................... -- -- 83,433 -- -- -- 83,433
Other comprehensive income, net of
tax:
Unrealized holding loss during
the year...................... -- -- -- -- (3,307) -- (3,307)
Reclassification adjustment of
losses included in net income. -- -- -- -- 597 -- 597
--- ------- ------- ----- ----- ------- -------
Total comprehensive income......... -- -- 83,433 -- (2,710) -- 80,723
--- ------- ------- ----- ----- ------- -------
Exercise of 313,344 stock options and
reissuance of treasury stock....... -- -- (4,903) -- -- 9,017 4,114
Allocation of 33,896 treasury shares
to deferred compensation plan...... -- -- -- -- -- 820 820
Issuance of 2,826,109 and 7,489,043
shares for acquisition of Fidelity
Bancorp and St. Francis Bancorp,
respectively, and conversion of
acquired entities stock options.... 77 289,577 -- -- -- 73,074 362,728
Purchase of 805,00 shares of treasury
stock.............................. -- -- -- -- -- (30,945) (30,945)
Tax benefits from stock-related
compensation....................... -- 1,460 -- -- -- -- 1,460
Cash dividends declared, $0.72 per
share.............................. -- -- (18,926) -- -- -- (18,926)
Dividends paid to Gain Deferral Plan.. -- -- 8 164 -- 172
--- ------- ------- ----- ----- ------- -------
Balance at December 31, 2003.......... 331 495,747 402,402 1,015 2,109 -- 901,604
--- ------- ------- ----- ----- ------- -------
Comprehensive income:
Net income......................... -- -- 101,522 -- -- -- 101,522
Other comprehensive income, net of
tax:
Unrealized holding loss during
the year...................... -- -- -- -- (2,904) -- (2,904)
Reclassification adjustment of
gains included in net income.. -- -- -- -- (881) -- (881)
--- ------- ------- ----- ----- ------- -------
Total comprehensive income......... -- -- 101,522 -- (3,785) -- 97,737
--- ------- ------- ----- ----- ------- -------
Exercise of 425,282 stock options and
reissuance of treasury stock....... -- 1,162 (7,849) -- -- 13,711 7,024
Issuance of 981,467 shares for
acquisition of Chesterfield
Financial Corp..................... 5 23,114 -- -- -- 19,523 42,642
Purchase of 1,151,000 shares of
treasury stock..................... -- -- -- -- -- (49,174) (49,174)
Tax benefits from stock-related
compensation....................... -- 2,024 -- -- -- -- 2,024
Cash dividends declared, $0.84 per
share.............................. -- -- (27,668) -- -- -- (27,668)
Dividends paid to Gain Deferral Plan.. -- -- 1 196 -- -- 197
--- ------- ------- ----- ----- ------- -------
Balance at December 31, 2004.......... $ 336 522,047 468,408 1,211 (1,676) (15,940) 974,386
=== ======= ======= ===== ===== ======= =======
See accompanying Notes to Consolidated Financial Statements.
55
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
------------- ----------- ----------
(Dollars in thousands)
OPERATING ACTIVITIES:
Net income..................................................... $ 101,522 83,433 73,971
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of premiums, discounts and deferred loan fees.. (15,940) (13,841) 5,013
Provision for loan losses................................... 1,215 -- 300
FHLB of Chicago stock dividends............................. (17,877) (16,432) (7,627)
Net gain on sale of loans receivable........................ (9,294) (25,948) (16,330)
Net gain on sale of investment and mortgage-backed
securities............................................... (3,308) (9,125) (3,105)
Other than temporary impairment writedown on investment
securities............................................... 1,988 10,062 2,986
Net gain on real estate held for development or sale........ (6,657) (11,325) (9,717)
Amortization and impairment (recovery) of mortgage
servicing rights, net.................................... 6,010 11,792 9,514
Depreciation and amortization............................... 13,666 8,163 6,523
Amortization of core deposit intangibles.................... 3,002 1,732 1,649
Deferred income tax expense................................. 7,468 6,432 8,900
Increase (decrease) in accrued interest receivable.......... (3,720) 5,950 1,248
Net increase (decrease) in other assets and liabilities,
net of effects from acquisitions......................... (9,485) 8,365 (24,193)
Loans originated and purchased for sale........................ (909,291) (1,640,055) --
Sale of loans originated and purchased for sale................ 919,743 1,783,732 1,314,617
---------- ---------- ---------
Net cash provided by operating activities................... 79,042 202,935 50,453
---------- ---------- ---------
INVESTING ACTIVITIES:
Loans originated and purchased for investment.................. (3,313,955) (3,372,494) (2,361,305)
Principal repayments on loans receivable....................... 2,685,375 2,908,791 2,218,226
Principal repayments on mortgage-backed securities............. 278,184 242,594 69,355
Proceeds from maturities of investment securities available
for sale.................................................... 90,741 106,157 88,025
Proceeds from sale of:
Investment securities available for sale.................... 48,551 53,218 67,891
Mortgage-backed securities available for sale............... 34,470 258,956 14,822
Real estate held for development or sale.................... 21,737 34,392 30,420
Stock in Federal Home Loan Bank of Chicago.................. 125,690 -- --
Purchases of:
Investment securities available for sale.................... (153,650) (142,845) (117,261)
Mortgage-backed securities available for sale............... (252,983) (224,296) (232,049)
Stock in Federal Home Loan Bank of Chicago.................. -- (30,000) (30,000)
Real estate held for development or sale.................... (10,257) (30,833) (14,118)
Premises and equipment...................................... (23,361) (21,905) (14,429)
Proceeds from acquisitions, net of cash paid................... 80,373 10,167 --
---------- ---------- ---------
Net cash used in investing activities.......................... (389,085) (208,098) (280,423)
---------- ---------- ---------
FINANCING ACTIVITIES:
Proceeds from:
FHLB of Chicago advances.................................... 1,207,500 430,000 460,000
Unsecured bank term loan.................................... 25,000 -- --
Unsecured line of credit.................................... 17,000 20,000 --
Repayments of:
FHLB of Chicago advances.................................... (1,123,750) (390,500) (360,000)
Unsecured bank term loan.................................... -- (6,000) (4,000)
Unsecured line of credit.................................... (17,000) (10,000) (10,000)
Net increase (decrease) in other borrowings.................... 204,685 (43,718) --
Net increase in deposits....................................... 88,640 17,724 193,630
Increase (decrease) in advances by borrowers for taxes and
insurance................................................... 1,030 (10,539) (784)
56
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
------------- ----------- ----------
(Dollars in thousands)
Proceeds from exercise of stock options........................ 7,559 4,718 2,366
Purchase of treasury stock..................................... (49,174) (30,945) (168)
Cash dividends paid............................................ (26,411) (16,295) (13,066)
---------- ---------- ---------
Net cash provided by (used in) financing activities......... 335,079 (35,555) 267,978
---------- ---------- ---------
Increase (decrease) in cash and cash equivalents............... 25,036 (40,718) 38,008
Cash and cash equivalents at beginning of year.............. 221,962 262,680 224,672
---------- ---------- ---------
Cash and cash equivalents at end of year.................... $ 246,998 221,962 262,680
========== ========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits and borrowed funds..................... $ 140,769 131,497 171,432
Income taxes................................................ 16,419 49,431 30,774
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate...... 3,801 6,106 3,998
Loans receivable swapped into mortgage-backed securities.... 301,750 162,164 126,433
Treasury stock received for withholding tax liability
related to stock option exercises (12,224, 15,893, and
30,033 shares)........................................... 536 605 1,175
Treasury stock received for stock option exercises (34,143,
30,466, and 26,292 shares)............................... 1,508 1,216 959
========== ========== =========
ACQUISITIONS:
Assets acquired................................................ 352,126 2,856,688 --
Common stock issued for acquisitions........................... 42,642 362,728 --
Cash paid for purchase of stock................................ (80,034) -- --
Cash acquired.................................................. 160,407 10,167 --
---------- ---------- ---------
Net cash received from acquisitions......................... $ 80,373 10,167 --
========== ========== =========
See accompanying Notes to Consolidated Financial Statements.
57
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 wholly-owned subsidiaries.
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,
the accounting for real estate development and the valuation and impairment of
goodwill and intangibles. 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. The Bank's reserve
requirements of $15.9 million at December 31, 2004 and $15.5 million at December
31, 2003 were met with funds on deposit in a pass-through account at the Federal
Home Loan Bank of Chicago as well as vault cash.
The Bank is also required to keep a compensating balance based on the
average daily remittance of checks issued for daily operating activities with a
third party. This balance was $16.8 million at December 31, 2004 and $20.6
million at December 31, 2003.
INVESTMENT AND MORTGAGE-BACKED SECURITIES. All investment and
mortgage-backed securities are classified as available for sale or held to
maturity. Investments and mortgage-backed securities that are categorized as
available for sale are carried at fair value, with unrealized gains and losses
reflected in stockholders' equity, net of tax. Held to maturity securities
include 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 financial statements.
Losses on securities that are deemed other-than-temporary are recognized in the
statement of operations, with a new cost basis established in the statement of
financial condition.
Investments and mortgage-backed securities are adjusted for amortization of
premiums, accretion of discounts, and the amortization of purchase accounting
adjustments to the earlier of call or maturity, or in the case of
mortgage-related securities, over the estimated life of the security 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 executes "swap" transactions with the Federal National Mortgage
Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation
("Freddie Mac") to exchange whole mortgage loans originated by the Bank for
mortgage-backed securities guaranteed by the agencies, for which the Bank pays a
guarantee fee.
LOANS RECEIVABLE HELD FOR SALE. The Bank sells, generally without recourse,
whole loans and participation interests in mortgage loans that it originates
mainly to GSEs such as Fannie Mae and Freddie Mac. The Bank sells various loans,
with recourse, to the Federal Home Loan Bank Mortgage Partnership Program
("MPF") in which it retains a limited and specified level of credit risk. 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, primarily with Fannie Mae, to
sell mortgage loans originated by the Bank at a specific time and specific price
in the future. Loans subject to forward sales
58
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
are classified as held for sale. Unrealized losses, if any, on forward
commitments are included in gain 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 and costs, loans in
process and the allowance for loan losses.
Loan fees and certain direct loan origination costs are deferred at
origination, 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.
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. Purchase accounting premiums or discounts are
amortized over the contractual term of loans receivable acquired, adjusted for
anticipated prepayments, using the level-yield method.
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 or management becomes aware of facts or
circumstances that may adversely impact the collectibility of principal or
interest on loans. 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 bankruptcy or 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.
The Bank considers a loan impaired when, based on current information and
events, it is probable that the Bank 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, smaller 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.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is increased by
charges to operations and decreased by charge-offs, net of recoveries. 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 terms of the
loan portfolio, (2) historical loss experience and the change in the mix of the
overall portfolio composition over the last five years, (3) specific allocations
based upon probable losses identified during the review of the portfolio, and
(4) delinquency in the portfolio and the composition of non-performing loans
including the percent of non-performing loans with supplemental mortgage
insurance. Larger loans, typically secured by commercial real estate, that
exhibit probable or observed credit weaknesses are subject to individual review.
In addition, various regulatory agencies, as an integral part 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 using 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 estimated cost to dispose at the date of foreclosure,
establishing a new cost basis. Management periodically performs valuations and
an allowance for loss is established if the carrying value of a property exceeds
its estimated fair value less cost to dispose. At December 31, 2004 and 2003 all
foreclosed real estate properties are one- to four-family residences.
59
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 per lot is calculated as the current investment
in the particular development unit plus anticipated costs to complete the
development unit, which includes capitalized interest, divided by the total
number of lots to be sold in the unit. Periodic reviews are made as to a
development's estimated costs to complete. The change in lot sale profits on
past sales that results from changes in estimated costs is recognized in the
period of change as either a charge or an addition to income from real estate
operations. Included in earnings is a calculation of interest income, which is
recognized as a contra expense, representing the interest cost for funds that
would normally be invested in interest-earning assets, but is instead consumed
as capital in developing a land development project. This interest cost is
included in the total cost of the project.
PREMISES AND EQUIPMENT. Land is carried at cost. Buildings, leasehold
improvements, furniture, fixtures, and equipment are carried at cost, less
accumulated depreciation and amortization. Purchase of premises and equipment
are recorded at market value for business acquisitions. 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
amortized using the straight-line method over the lesser of the life of the
leasehold improvement or the term of the related lease.
AFFORDABLE HOUSING INVESTMENTS. Affordable housing investments included in
other assets represent multi-family rental properties (affordable housing
projects) in which a subsidiary of the Company has investor interests. The
financial condition, results of operations and cash flows of each LLP or LLC is
consolidated in the Company's financial statements. The properties are recorded
at cost less accumulated depreciation. The Company evaluates the recoverability
of the carrying value on a regular basis. If the recoverability was determined
to be in doubt, a valuation allowance would be established. Depreciation expense
is provided on a straight-line basis over the estimated useful life of the
assets. The operations of the properties tend to generate an aggregate net loss
before income taxes, but contribute income tax credits, which lowers the
Company's effective tax rate. Once established, the credits on each property
last for ten years and reduce the consolidated federal tax liability of the
Company. The Company is obligated to keep the projects' low-rent structure in
place for a period of time after the ten-year tax credit period.
PREMIUMS ON DEPOSITS AND BORROWINGS. Amortization of purchase accounting
adjustments on deposits and borrowings are amortized using the level-yield
method over the estimated term to maturity.
GOODWILL AND INTANGIBLES. Goodwill represents the excess of the purchase
price over the fair value of the net identifiable assets acquired in business
combinations or branch acquisitions. Core deposit intangibles represent the
value assigned to the core deposit base acquired. The valuation techniques we
use to determine the carrying value of tangible and intangible assets and
liabilities acquired in acquisitions and the estimated lives of the identifiable
intangible assets involve a number of subjective judgments such as estimates for
discount rates, projected future cash flows and time period of useful lives, all
of which are susceptible to change based on changes in economic conditions and
other factors.
Both goodwill and core deposit intangibles are recognized as a result of
the purchase method of accounting for business combinations. Core deposit
intangibles have finite lives and are amortized on an accelerated basis to
expense over the estimated life of the core deposit which approximates ten
years.
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.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," and SFAS No. 147 "Acquisitions
of Certain Financial Institutions" effective January 1, 2002. Under SFAS No.
142, goodwill and indefinite life intangibles are no longer amortized but are
subject to impairment tests on at least an annual basis. Any impairment of
goodwill or intangibles will
60
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
be recognized as an expense in the period of impairment. The most recent
evaluation was completed as of May 31, 2004. No impairment was deemed necessary
as a result of the Company's analysis.
SFAS No. 147 amends SFAS No. 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions," to remove the acquisition of financial
institutions from the scope of that statement and provides guidance on the
accounting for the impairment or disposal of acquired long term customer
relationship intangible assets. SFAS No. 147 requires acquisitions of financial
institutions that meet the definition of a business combination to be accounted
for in accordance with SFAS Nos. 141 and 142. The provisions were effective on
October 1, 2002. Adoption of Statement No. 147 required restatement of earnings
for each quarter since adoption of SFAS No. 142. The Company adopted SFAS No.
147 on October 1, 2002 and earnings for each of the first three quarters of 2002
were restated by approximately $163,000 (pre-tax) to eliminate goodwill
amortization on branch acquisitions.
MORTGAGE SERVICING RIGHTS. Mortgage servicing rights are initially
capitalized upon acquisition, based upon their estimated value, and are
subsequently amortized over the estimated life of the loan servicing income
stream, using the level-yield method. The estimated value takes into
consideration contractually known amounts, such as loan balance, term, contract
rate, and escrow funds with the Bank for the payment of taxes and insurance. The
balance of mortgage servicing rights is included in the consolidated statement
of financial condition in intangible assets. The Bank conducts periodic
impairment analyses 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, ancillary income, 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 estimated fair value.
INCOME TAXES. The Company and its subsidiaries file a consolidated federal
income tax return, except for MAF Realty Co., L.L.C.- IV, a REIT, which is
required to file a separate 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 primarily utilizes forward
commitments to sell mortgage loans and to a lesser extent, interest rate futures
contracts, primarily U.S. Treasury bond futures, as part of its mortgage loan
origination hedging strategy. Loan commitments and forward sales are accounted
for 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 statement of financial condition 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.
61
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEGMENTS. The Company uses the management approach for determining segment
reporting. Based on the management approach, the Company operates two separate
lines of business, banking and land development operations.
STOCK OPTION AND EQUITY-BASED PLANS. The Company has various stock-based
compensation plans pursuant to which stock options and other equity-based awards
have been granted.
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 (except on restricted stock unit
awards) has been recognized for stock options granted under its plans. The
Company anticipates adopting the fair value method of expense recognition as of
July 1, 2005, in accordance with SFAS No. 123R, "Share-Based Payment," which is
effective as of the first interim or annual reporting period that begins after
June 15, 2005. SFAS No. 123R eliminates the ability to account for stock-based
compensation using APB 25 and requires that such transactions be recognized as
compensation cost in the income statement based on their fair values on the date
of the grant. Had the Company elected to record compensation expense for stock
option grants based on the fair value at the grant dates for stock option awards
under those plans consistent with the method of SFAS No. 148, 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,
-------------------------------
2004 2003 2002
-------- -------- --------
(Dollars in thousands, except
per share data)
Net income
As reported.................................................. $ 101,522 83,433 73,971
Deduct: total stock option employee compensation expense
determined under fair value-based method for all awards,
net of related tax effects................................ 6,805 4,075 2,845
------- ------- ------
Pro-forma.................................................... $ 94,717 79,358 71,126
======= ======= ======
Basic earnings per share
As reported.................................................. $ 3.09 3.35 3.19
Pro-forma.................................................... 2.88 3.18 3.07
Diluted earnings per share
As reported.................................................. 3.01 3.26 3.11
Pro-forma.................................................... 2.88 3.18 3.07
======= ======= ======
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, 2004, 2003, and 2002, respectively:
dividend yield of 1.88%, 1.73% and 1.75%; expected volatility of 25.91%, 26.57%,
and 26.56%; risk-free interest rates of 4.20%, 3.86%, and 3.44%; expected life
of 7.5 years for each period.
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 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 393,750, 317,700 and 577,021, at
December 31, 2004, 2003 and 2002, respectively.
YEAR ENDED DECEMBER 31, 2004 YEAR ENDED DECEMBER 31, 2003 YEAR ENDED DECEMBER 31, 2002
--------------------------------- -------------------------------- ----------------------------------
PER PER PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ---------- ------------- ------ ----------- ------------ ------
(Dollars in thousands, except share data)
Basic earnings per
share:
Income available to
common
shareholders..... $ 101,522 32,897,164 $ 3.09 $ 83,433 24,920,150 $ 3.35 $ 73,971 23,162,422 $ 3.19
==== ==== ====
Effect of dilutive
securities-
Stock options......... 809,405 672,595 585,989
---------- ---------- ---------
Diluted earnings per
share:
Income available to
common
shareholders
plus assumed
conversions...... $ 101,522 33,706,569 $ 3.01 $ 83,433 25,592,745 $ 3.26 $ 73,971 23,748,411 $ 3.11
======= ========== ===== ======= ========== ==== ====== ========== ===
62
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. BUSINESS COMBINATIONS
On March 31, 2003, the Company purchased a branch of UmbrellaBank, fsb in
Chicago, IL. The transaction involved the purchase of approximately $8.5 million
in deposits and the assumption of the lease for the branch facility.
On July 21, 2003, the Company acquired Fidelity Bancorp, Inc. in an
all-stock transaction, valued at $115 million. A total of 2,826,109 shares of
common stock were issued. Goodwill and core deposit intangibles of $44.8 million
were recorded in the transaction. In connection with the merger, Fidelity's bank
subsidiary, Fidelity Federal Savings Bank, was merged into the Bank. The merger
provided five additional branch locations in the Chicago area. At acquisition
date, Fidelity had assets of $612.9 million, deposits of $434.6 million and
stockholders' equity of $59.6 million.
On December 1, 2003 the Company acquired St. Francis Capital Corporation in
an all-stock transaction, valued at $358 million. A total of 7,489,043 shares of
common stock were issued, $16.2 million was paid out for stock option
cancellations, and $131.2 million of goodwill and core deposit intangibles were
generated in the transaction. The merger gave the Company 23 branch offices in
the Milwaukee, Wisconsin area. In connection with the merger, St. Francis's bank
subsidiary, St. Francis Bank, was merged into the Bank. At acquisition date, St.
Francis had assets of $2.19 billion, deposits of $1.29 billion, and
stockholders' equity of $191.1 million.
On October 31, 2004, the Company acquired Chesterfield Financial Corp. in a
transaction valued at $128.4 million and payable 65% in cash and 35% in MAF
common stock. The aggregate transaction value, including stock options, totaled
approximately $128.4 million, represented by $85.7 million in cash and
approximately 982,000 shares of MAF Bancorp common stock. Goodwill and core
deposit intangibles of $45.9 million were generated in the transaction. The
merger provided three additional branch locations in the Chicago area. At
acquisition date, Chesterfield had assets of $354.2 million, deposits of $270.7
million and stockholders' equity of $73.3 million.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale are summarized below:
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------------------------- -----------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED --------------- FAIR AMORTIZED -------------- FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---------- ----- ------ ------- ---------- ------ ------ -------
(Dollars in thousands)
U.S. Government securities. $ 128,020 291 (529) 127,782 $ 154,287 1,424 (279) 155,432
U.S. Agency securities..... 155,511 116 (756) 154,871 73,547 134 (187) 73,494
Asset-backed securities.... 19,949 41 (2) 19,988 47,067 1,939 (1,268) 47,738
Corporate debt securities.. 7,208 112 - 7,320 7,683 126 - 7,809
Bank trust preferred
securities.............. 61,339 595 (6) 61,928 62,330 381 (43) 62,668
GSE preferred stock........ 17,167 153 (250) 17,070 19,242 438 (1,487) 18,193
------- ----- ------ ------- ------- ----- ------ -------
$ 389,194 1,308 (1,543) 388,959 $ 364,156 4,442 (3,264) 365,334
======= ===== ====== ======= ======= ===== ====== =======
The Company did not have any investment securities classified as held to
maturity or trading at December 31, 2004 or December 31, 2003.
63
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The amortized cost and fair value of securities at December 31, 2004,
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, 2004, the Company had $245.3
million of investment securities with call options, of which $180.0 million were
callable within one year.
AMORTIZED FAIR
COST VALUE
---------- ---------
(Dollars in thousands)
Debt securities:
Under one year........... $ 15,299 15,349
Over 1 to 5 years........ 269,337 268,439
Over 5 to 10 years....... - -
Over 10 years............ 67,442 68,113
------- -------
Total debt securities. 352,078 351,901
Asset-backed securities..... 19,949 19,988
GSE preferred stock......... 17,167 17,070
------- -------
Total investment
securities.......... $ 389,194 388,959
======= =======
Activity in the sales of investment securities available for sale is as
follows:
YEAR ENDED DECEMBER 31,
------------------------------
2004 2003 2002
------- ------- -------
(Dollars in thousands)
Total proceeds on sale......... $ 48,551 53,218 67,891
====== ====== ======
Gross realized gains........... $ 3,475 3,451 3,176
Gross realized losses.......... (665) (332) (110)
----- ------ -----
Net gain on sale............... 2,810 3,119 3,066
Losses deemed
other-than-temporary........ (1,988) (10,062) (2,986)
----- ------ -----
Net gain (loss)................ $ 822 (6,943) 80
===== ====== =====
During 2004, the Company recorded a $2.0 million other-than-temporary
impairment writedown on two Freddie Mac floating rate preferred stock securities
with an aggregate carrying value of $8.8 million. The Company recorded the
writedown in accordance with U.S. generally accepted according principles,
because the current yield on these securities is below market interest rates,
the fair value has been below cost for an extended period, and a recovery in
fair value is not assumed within a reasonably short period of time. During 2003,
the Company wrote down a $9.3 million floating-rate debt security by $6.9
million due to insufficient cash flow underlying the repayment of the security.
This security was collateralized by various aircraft assets and leases. Another
$7.4 million floating-rate security collateralized debt obligation which was
secured by various high yield debt securities was written down by $3.1 million
during 2003. The charge of $3.0 million taken in 2002 related to a third $8.5
million floating-rate security that was in default following its maturity in
December 2002. This security was collateralized by various aircraft leased to a
major carrier that filed bankruptcy in the fourth quarter of 2002. These three
securities were sold in 2004 at a gain of $2.7 million.
The following table discloses the securities in the Company's investment
portfolio that have unrealized losses aggregated by each category of investment
as of December 31, 2004:
AGGREGATE UNREALIZED LOSSES ON INVESTMENT SECURITIES
--------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
----------------------- --------------------- ---------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
DESCRIPTION OF SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES
- ------------------------------ ---------- ---------- -------- ---------- ------- ----------
(Dollars in thousands)
U.S. Government securities.... $ 73,058 (404) 4,875 (125) 77,933 (529)
U.S. Agency securities........ 117,008 (756) -- -- 117,008 (756)
Asset-backed securities....... 3,676 (2) -- -- 3,676 (2)
Bank trust preferred
securities................. 4,994 (6) -- -- 4,994 (6)
GSE preferred stock........... 9,750 (250) -- -- 9,750 (250)
------- ------ ----- ---- ------- ------
$ 208,486 (1,418) 4,875 (125) 213,361 (1,543)
======= ====== ===== ==== ======= ======
Because the securities in the investment portfolio are classified as
available for sale, and carried at fair value with unrealized losses, net of
related tax effects, recorded in stockholders' equity, any charge to earnings in
the future if the securities would be deemed by management to be
other-than-temporarily impaired would not be expected to have a significant
impact on stockholders' equity at December 31,
64
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2004. None of the unrealized losses are related to credit deterioration. The
Bank has the ability and intent to hold these securities until market values
recover.
4. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE OR HELD TO MATURITY
Mortgage-backed securities available for sale and held to maturity are
summarized below:
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------------------------- -----------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED --------------- FAIR AMORTIZED ---------------- FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---------- ----- -------- ------- ---------- ------ -------- -------
(Dollars in thousands)
Available for sale:
Pass-through
certificates:
Fannie Mae......... $ 231,300 1,054 (1,197) 231,157 287,884 1,793 (479) 289,198
Freddie Mac........ 45,933 425 (170) 46,188 50,471 848 (7) 51,312
Other.............. 20,594 59 (174) 20,479 24,965 147 (121) 24,991
Collateralized
mortgage obligations:
Agency CMOs........ 511,917 489 (2,197) 510,209 454,993 1,115 (1,373) 454,735
Private issue CMOs.. 140,910 115 (890) 140,135 151,398 435 (100) 151,733
------- ----- ------ ------- ------- ----- ------ -------
$ 950,654 2,142 (4,628) 948,168 969,711 4,338 (2,080) 971,969
======= ===== ====== ======= ======= ===== ====== =======
Held to maturity:
Fannie Mae
pass-through
certificates......... $ 245,021 -- (406) 244,615 -- -- -- --
======= ===== ====== ======= ======= ===== ====== =======
During the years ended December 31, 2004, and 2003, the Bank swapped $49.0
million, and $76.9 million, respectively, of primarily fixed-rate loans it
originated into mortgage-backed securities which were sold in the same period.
Additionally, in 2004 and 2003 the Bank swapped $252.8 million and $85.3
million, respectively, of fixed-rate loans into mortgage-backed securities that
were added to the held to maturity portfolio. Included in mortgage-backed
securities held to maturity at December 31, 2004 are $245.1 million of loans
originated by the Bank.
Activity in the sales of mortgage-backed securities available for sale
is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2004 2003 2002
--------- -------- -------
(Dollars in thousands)
Total proceeds on sale........... $ 34,470 258,956 14,822
====== ======= ======
Gross realized gains............. $ 500 6,006 39
Gross realized losses............ -- -- --
------ ------- ------
Net gain......................... $ 500 6,006 39
====== ======= ======
The following table discloses the securities in the Company's available for
sale portfolio that have unrealized losses aggregated by each category of
investment as of December 31, 2004:
AGGREGATE UNREALIZED LOSSES ON MORTGAGE-BACKED SECURITIES
--------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
----------------------- --------------------- ---------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
DESCRIPTION OF SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES
- ------------------------------ ---------- ---------- -------- ---------- ------- ----------
(Dollars in thousands)
Pass-through certificates:
Fannie Mae................ $ 135,898 (895) 8,735 (302) 144,633 (1,197)
Freddie Mac............... 13,041 (170) -- -- 13,041 (170)
Other..................... 15,335 (174) -- -- 15,335 (174)
------- ------ ----- ------ ------- ------
164,274 (1,239) 8,735 (302) 173,009 (1,541)
------- ------ ----- ------ ------- ------
Collateralized mortgage
obligations:
Agency CMOs............... 298,118 (1,615) 39,599 (582) 337,717 (2,197)
Private issue CMOs........ 81,125 (649) 14,016 (241) 95,141 (890)
------- ------ ----- ------ ------- ------
379,243 (2,264) 53,615 (823) 432,858 (3,087)
------- ------ ----- ------ ------- ------
$ 543,517 (3,503) 62,350 (1,125) 605,867 (4,628)
======= ====== ===== ====== ======= ======
Because the securities identified in the table above are classified as
available for sale, and carried at fair value with unrealized losses, net of
related tax effects, recorded in stockholders' equity, any charge to earnings in
the future if the securities would be deemed by management to be
other-than-temporarily impaired would not be expected to have a significant
impact on stockholders' equity. None of the unrealized losses is related to
credit deterioration. The Bank has the ability and intent to hold these
securities until market values recover.
65
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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,
2004 the Bank had $37.6 million of fixed-rate loans with a weighted average rate
of 5.70% and $1.9 million of adjustable-rate loans with a weighted average rate
of 4.93% classified as held for sale. At December 31, 2003 the Bank had $44.5
million of fixed-rate loans with a weighted average rate of 6.00% classified as
held for sale.
6. LOANS RECEIVABLE
Loans receivable are summarized as follows:
DECEMBER 31,
-------------------------
2004 2003
------------- ----------
(Dollars in thousands)
One- to four-family................................. $ 4,024,322 $ 3,924,965
Equity lines of credit.............................. 1,276,647 898,452
Home equity loans................................... 55,136 67,119
Multi-family........................................ 647,382 621,255
Commercial.......................................... 505,214 521,438
Construction....................................... 164,995 127,525
Land............................................... 64,765 75,012
--------- ---------
Consumer loans...................................... 7,650 38,238
Commercial business loans........................... 147,345 128,266
--------- ---------
Total loans receivable........................ 6,893,456 6,402,270
Less:
Loans in process................................. 34,143 59,733
Unearned discounts, premiums
and deferred loan fees, net..................... (19,201) (16,614)
--------- ---------
Loans receivable, net............................... $ 6,878,514 $ 6,359,151
========= =========
Adjustable-rate loans included in loans receivable totaled $5.47 billion at
December 31, 2004 and $4.64 billion at December 31, 2003.
ALLOWANCE FOR LOAN LOSSES. Activity in the allowance for loan losses is
summarized as follows for the years indicated:
YEAR ENDED DECEMBER 31,
-------------------------------
2004 2003 2002
-------- -------- --------
(Dollars in thousands)
Balance at beginning of year.. $ 34,555 19,483 19,607
Provision for loan losses..... 1,215 -- 300
Balance acquired in
acquisitions............... 1,297 15,371 --
Charge-offs................... (1,091) (369) (617)
Recoveries.................... 279 70 193
------ ------ ------
Balance at end of year........ $ 36,255 34,555 19,483
====== ====== ======
At December 31, 2004, 2003 and 2002, the Bank had $31.5 million, $32.8
million and $25.4 million, respectively, in loans that were on non-accrual
status. Interest income that would have been recorded on non-accrual loans
amounted to $1.4 million for each of the years ended December 31, 2004, 2003 and
2002, respectively, had these loans been accruing under their contractual terms.
Interest income recognized on non-accrual loans and included in interest income
was $630,000, $718,000 and $562,000, for the years ended December 31, 2004, 2003
and 2002, respectively.
At December 31, 2004 and 2003, there were no commitments to lend additional
funds to borrowers whose loans were determined to be non-performing. At December
31, 2004 and 2003, the Company had $3.4 million and $2.6 million of impaired
loans, respectively. There were no specific reserves established for these
loans. The average balance of impaired loans for 2004 and 2003 was $2.7 million
and $1.8 million, respectively.
66
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
DECEMBER 31,
-------------------
2004 2003
-------- -------
(Dollars in thousands)
Investment securities available for sale.. $ 3,768 3,319
Mortgage-backed securities available
for sale............................... 3,379 3,544
Mortgage-backed securities held to
maturity............................... 933 --
Loans receivable.......................... 28,998 26,780
Reserve for uncollected interest on loans
receivable............................. (2,190) (2,475)
------ ------
$ 34,888 31,168
====== ======
8. REAL ESTATE HELD FOR DEVELOPMENT OR SALE
The carrying value of the Company's investment in real estate held for
development or sale by project is as follows:
DECEMBER 31,
-------------------
2004 2003
-------- -------
(Dollars in thousands)
Springbank of Plainfield......... $ 34,654 26,411
Tallgrass of Naperville.......... 216 2,231
Shenandoah....................... 221 3,451
------ ------
$ 35,091 32,093
====== ======
Income from real estate operations by project for the years indicated is as
follows:
YEAR ENDED DECEMBER 31,
------------------------
2004 2003 2002
------ ------ ------
(Dollars in thousands)
Shenandoah..................... $ 5,022 6,182 147
Tallgrass of Naperville........ 1,635 5,143 9,570
----- ----- -----
$ 6,657 11,325 9,717
===== ====== =====
Interest capitalized to real estate held for development or sale amounted
to $8,000, $-0- and $96,000 for the years ended December 31, 2004, 2003 and
2002, respectively.
9. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
ESTIMATED DECEMBER 31,
USEFUL ---------------------
LIFE 2004 2003
--------- ---------- ---------
(Dollars in thousands)
Land................................... $ 30,368 23,249
Office buildings....................... 10-50 years 69,080 64,081
Furniture, fixtures and equipment...... 1-20 years 55,780 47,565
Computer equipment..................... 2-10 years 14,257 9,917
Leasehold improvements................. 1-27 years 16,573 12,751
------- -------
Total premises and equipment,
at cost........................... 186,058 157,563
Less: accumulated depreciation
and amortization.................... (45,160) (34,746)
------- -------
$ 140,898 122,817
======= =======
Depreciation and amortization of premises and equipment, included in data
processing expense and office occupancy and equipment expense, totaled $13.7
million, $8.2 million and $6.5 million for the years ended December 31, 2004,
2003 and 2002, respectively. Occupancy expense is reduced by rental income from
leased premises totaling $982,000, $1.0 million and $1.1 million for the years
ended December 31, 2004, 2003 and 2002, respectively.
67
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Bank is obligated under non-cancelable leases primarily for office
space. Rent expense under these leases for the years ended December 31, 2004,
2003 and 2002, was $8.2 million, $3.6 million, and $2.6 million, respectively.
The projected minimum rentals under existing leases as of December 31, 2004 is
as follows (in thousands):
YEAR ENDED
DECEMBER 31,
-----------
2005................... $ 7,900
2006................... 7,500
2007................... 7,200
2008................... 7,100
2009................... 6,800
2010 and thereafter.... 62,500
10. GOODWILL AND INTANGIBLES
The changes in the carrying amount of goodwill, by segment, for the years
ended December 31, 2004 and 2003 are as follows:
LAND
BANKING DEVELOPMENT TOTAL
--------- ----------- --------
(Dollars in thousands)
Balance at December 31, 2002............... $ 94,796 -- $ 94,796
Addition related to Umbrella acquisition 587 -- 587
Addition related to Fidelity acquisition 43,265 -- 43,265
Addition related to St. Francis
acquisition.......................... 124,312 -- 124,312
Adjustments related to prior
acquisitions......................... (472) -- (472)
------- ------ -------
Balance at December 31, 2003............... 262,488 -- 262,488
------- ------ -------
Addition related to Chesterfield
acquisition.......................... 43,922 -- 43,922
Adjustments related to prior
acquisitions......................... (1,244) -- (1,244)
------- ------ -------
Balance at December 31, 2004............... $ 305,166 -- $ 305,166
======= ====== =======
The changes in the carrying amount of intangibles for the years ended
December 31, 2004 and 2003 are as follows:
CORE MORTGAGE
DEPOSIT SERVICING
INTANGIBLES RIGHTS TOTAL
----------- --------- ---------
(Dollars in thousands)
Balance at December 31, 2002..... $ 7,170 12,960 20,130
Additions........................ 8,623 22,960 31,583
Amortization expense............. (1,732) (12,922) (14,654)
Valuation allowance recovery,
net........................... -- 1,130 1,130
------ ------ ------
Balance at December 31, 2003..... 14,061 24,128 38,189
------ ------ ------
Additions........................ 2,007 7,683 9,690
Amortization expense............. (3,002) (8,186) (11,188)
Valuation allowance recovery,
net........................... -- 2,072 2,072
------ ------ ------
Balance at December 31, 2004..... $ 13,066 25,697 38,763
====== ====== ======
The following is a summary of intangible assets subject to amortization:
AS OF DECEMBER 31, 2004 AS OF DECEMBER 31, 2003
------------------------- -------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- ------------ -------- ------------
(Dollars in thousands)
Core deposit
intangibles......... $ 26,577 (13,511) 24,570 (10,509)
Mortgage servicing
rights(1)........... 31,890 (6,193) 26,988 (2,860)
------ -------- ------ -------
Total............... $ 58,467 (19,704) 51,558 (13,369)
====== ======= ====== =======
- ------------------
(1) The gross carrying amounts at December 31, 2004 and 2003 are net of
impairment reserves of $171,000 and $2.2 million respectively.
68
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Amortization expense for core deposit intangibles and mortgage servicing
rights for the year ended December 31, 2004 and estimates for the five years
thereafter are as follows. These estimates relate to the carrying value of the
Bank's core deposit intangibles and mortgage servicing rights as of December 31,
2004.
CORE MORTGAGE
DEPOSIT SERVICING
INTANGIBLES RIGHTS
----------- ---------
(Dollars in thousands)
Aggregate Amortization Expense:
For the Year ended December 31, 2004.......... $ 3,002 8,186
Estimated Amortization Expense:
For the Year Ended December 31, 2005.......... 2,900 5,200
For the Year Ended December 31, 2006.......... 2,200 4,200
For the Year Ended December 31, 2007.......... 1,600 3,800
For the Year Ended December 31, 2008.......... 1,400 3,500
For the Year Ended December 31, 2009.......... 1,200 3,200
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 principal and interest payments to the various
investors. Mortgage loans serviced for others are not included in the
accompanying consolidated statement of financial condition. The unpaid principal
balances of these loans were $3.64 billion, $3.33 billion and $2.02 billion, at
December 31, 2004, 2003 and 2002, respectively. Non-interest bearing custodial
balances maintained in connection with mortgage loans serviced for others
(included in deposits) were $47.2 million and $40.0 million at December 31, 2004
and 2003, respectively.
11. DEPOSITS
The following table is a summary of the Company's deposits at December 31,
2004 and 2003. The weighted average rates are contractual rates and are not
adjusted for the effect of purchase accounting adjustments. The unamortized
premium was created as part of the purchase accounting adjustments in the
acquisitions of Chesterfield, Fidelity, St. Francis and Mid Town to mark the
deposits to fair value.
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------------------- -----------------------------
WEIGHTED WEIGHTED
% OF AVERAGE % OF AVERAGE
AMOUNT TOTAL RATE AMOUNT TOTAL RATE
---------- ------- -------- -------- ------- --------
(Dollars in thousands)
Commercial checking..... $ 239,249 4.0% -- $ 216,489 3.9% --
Non-interest bearing
checking............. 250,569 4.2 -- 218,446 3.9 --
Interest bearing
checking............. 972,009 16.4 .94 555,675 10.0 .42
Commercial money markets 64,810 1.1 1.34 19,512 .3 .28
Money markets........... 611,507 10.3 .97 885,216 15.9 .79
Passbooks............... 1,399,099 23.6 .57 1,353,881 24.2 .66
--------- ----- ------ --------- ----- -----
3,537,243 59.6 .68 3,249,219 58.2 .56
--------- ----- ------ --------- ----- -----
Certificate accounts:
Up to 1.99%.......... 653,304 11.0 1.74 1,056,024 19.0 1.44
2.00% to 2.99%....... 1,100,135 18.5 2.46 479,922 8.6 2.54
3.00% to 3.99%....... 394,822 6.7 3.42 433,245 7.8 3.48
4.00% and greater.... 247,344 4.2 4.77 354,534 6.3 4.76
--------- ----- ------ --------- ----- -----
2,395,605 40.4 2.66 2,323,725 41.7 2.55
--------- ----- ------ --------- ----- -----
Unamortized premium..... 2,860 -- -- 7,511 .1 --
--------- ----- ------ --------- ----- -----
Total deposits....... $ 5,935,708 100.0% 1.48%$ 5,580,455 100.0% 1.39%
========= ===== ====== ========= ====== ======
The aggregate amount of certificates of deposit with denominations of
$100,000 or greater (jumbo certificates) was $533.3 million and $536.4 million
at December 31, 2004 and 2003, respectively.
69
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Scheduled maturities of certificate accounts at December 31, 2004 are as
follows (in thousands):
12 months or less......... $ 1,667,053
13 to 24 months........... 469,969
25 to 36 months........... 134,475
Over 36 months............ 124,108
---------
$ 2,395,605
=========
The certificate of deposit categories above include $5.0 million of
brokered deposits at December 31, 2004, which consists of one brokered CD. At
December 31, 2004, the original maturity of the brokered certificate was 3.0
years. There are three months remaining to the maturity and the interest rate is
4.30%.
Interest expense on deposit accounts is summarized as follows for the
periods indicated:
YEAR ENDED DECEMBER 31,
---------------------------
2004 2003 2002
-------- -------- -------
(Dollars in thousands)
Interest-bearing checking.. $ 6,960 2,441 2,732
Money markets.............. 6,099 5,505 9,006
Passbooks.................. 7,970 9,276 15,733
Certificates............... 52,843 43,789 63,492
------ ------ ------
$ 73,872 61,011 90,963
====== ====== ======
At December 31, 2004, U.S. Treasury Notes, Freddie Mac and Fannie Mae
mortgage-backed securities, as well as mortgage loans with an aggregate carrying
value of $46.5 million and fair value of $46.1 million, were pledged as
collateral for certain jumbo certificates.
12. BORROWED FUNDS
The following table is a summary of the Company's borrowed funds at
December 31, 2004 and 2003. The weighted average rates are contractual rates and
are not adjusted for the effect of purchase accounting adjustments. The
unamortized premium was created as part of the purchase accounting adjustments
in the acquisitions of Fidelity and St. Francis to mark the borrowings to fair
value.
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------------------------- ----------------------
INTEREST WEIGHTED WEIGHTED
RATE AVERAGE AVERAGE
RANGE RATE AMOUNT RATE AMOUNT
------------ -------- ---------- --------- ------------
(Dollars in thousands)
Fixed-rate advances from FHLB due:
Within 1 year............... 2.24% - 7.20% 5.34% $ 613,125 5.32% $ 390,000
1 to 2 years................ 1.83 - 6.82 3.56 560,000 5.34 619,375
2 to 3 years................ 3.23 - 3.89 3.57 210,000 4.30 210,000
3 to 4 years................ 2.49 - 5.86 4.78 425,000 3.82 150,000
4 to 5 years................ 2.54 - 5.86 4.67 75,000 4.90 375,000
5 to 6 years................ 2.77 - 5.42 3.65 105,000 4.67 75,000
6 to 7 years................ -- -- -- 3.65 105,000
------------ ---- --------- ---- ---------
Total fixed rate advances 1.83 - 7.20 4.42 1,988,125 4.90 1,924,375
Adjustable-rate advances from
FHLB due:
Within 1 year............... 2.16 - 2.31 2.23 100,000 1.16 30,000
1 to 2 years................ 2.17 - 2.63 2.40 100,000 1.19 100,000
2 to 3 years................ -- -- -- 1.21 50,000
------------ ---- --------- ---- ---------
Total adjustable rate
advances............... 2.16 - 2.63 2.32 200,000 1.19 180,000
------------ ---- --------- ---- ---------
Total advances from FHLB. 1.83% - 7.20% 4.22 2,188,125 4.58 2,104,375
============ ---- --------- ---- ---------
Unsecured term bank loan....... 3.29 70,000 2.26 45,000
Unsecured line of credit....... 3.43 10,000 2.17 10,000
Other borrowings............... 2.35 325,662 1.55 120,977
Unamortized premium............ -- 6,880 -- 19,075
---- --------- ---- --------
Total borrowed funds..... 3.96% $ 2,600,667 4.36% $ 2,299,427
==== ========= ==== =========
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
70
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
FHLB of Chicago is pledged as additional collateral for these advances. At
December 31, 2004, no securities were pledged for these borrowings.
Included in FHLB of Chicago advances at December 31, 2004 are $365.0
million of fixed-rate advances with original scheduled maturities of 5 to 10
years, which are putable at the discretion of the FHLB of Chicago as follows:
$290.0 million at 4.90% in 2005 and, $75.0 million at 2.94% in 2006. At
inception, the Bank receives a lower cost of borrowing on such advances than on
similar termed non-putable advances, in return for granting the FHLB of Chicago
the option to put the advances back to the Bank prior to their final maturity.
At December 31, 2004, the Bank had $200.0 million of adjustable-rate advances
that are indexed to rates ranging from the three-month London interbank offering
rate ("LIBOR") flat to plus four basis points. The table above shows all
advances at their final contracted maturity, excluding of the putable feature.
UNSECURED TERM BANK LOAN. In 2004, the Company renegotiated its unsecured
term bank loan in conjunction with its acquisition of Chesterfield Financial. At
December 31, 2004, the Company has a $70.0 million unsecured term loan with a
final maturity of December 31, 2011. The loan agreement provides for an interest
rate of one, two, three, six or twelve-month LIBOR plus 110 basis points at the
option of the Company at each reprice date. At December 31, 2004, the interest
rate is currently one-month LIBOR plus 110 basis points, or 3.29%. At December
31, 2004, the balance of the unsecured term loan is $70.0 million and the first
scheduled principal payment of $7.0 million is due on December 31, 2005.
Prepayments of principal are allowed without penalty at the end of any repricing
period. At December 31, 2003, the balance of the unsecured term loan was $45.0
million.
Scheduled principal repayments on the unsecured term bank loan are as
follows as of December 31, 2004 (in thousands):
DECEMBER 31,
---------------
2005........... $ 7,000
2006........... 7,000
2007........... 7,000
2008........... 7,000
2009........... 7,000
2010........... 7,000
2011........... 28,000
------
$ 70,000
======
UNSECURED LINE OF CREDIT. In conjunction with the term bank loan, the
Company also maintains a $55.0 million one-year unsecured revolving line of
credit, which matures on October 31, 2005. The line is generally renewable at
maturity at the mutual agreement of the Company and the lender. The balance
outstanding on the line of credit was $10.0 million at December 31, 2004 and
2003. This line of credit provides for interest rates of one, two, three, six or
twelve-month LIBOR plus 95 basis points. At December 31, 2004, the interest rate
is currently one-month LIBOR plus 95 basis points or 3.43%.
The term bank loan and line of credit 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 to
certain restrictions on additional indebtedness and agreed not to pledge any
stock of the Bank or MAF Developments for any purpose. At December 31, 2004, the
Company was in compliance with these covenants.
71
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
OTHER BORROWINGS:
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 usual
terms of agreements require the seller, generally after a short period of time,
to repurchase the same securities at a predetermined price or yield. The
following table presents certain information regarding reverse repurchase
agreements as of and for the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------------
2004 2003 2002
--------- --------- -------
(Dollars in thousands)
Balance at end of period........... $ 300,000 $ 105,000 --
Maximum month-end balance.......... 300,000 105,000 --
Average balance.................... 195,492 105,000 --
Weighted average rate at end of
period.......................... 2.42% 1.64% N/A
Weighted average rate on average
balance......................... 1.69 1.64 N/A
At December 31, 2004, all reverse repurchase agreements are floating rate
and have maturities ranging from fifteen months to 4.8 years. The interest rate
on $225.0 million of these agreements is tied to the prime rate and ranges from
prime minus 275 basis points to prime minus 280 basis points. The remaining
$75.0 million have interest rates ranging from three-month LIBOR minus 50 basis
points to three-month LIBOR minus 75 basis points. The LIBOR-based repurchase
agreements are putable at the discretion of the lender quarterly starting in
2006. At December 31, 2004, reverse repurchase agreements were collateralized by
investment, mortgage-backed and CMO securities with a carrying value of $315.0
million and fair value of $313.7 million. Securities sold under agreements to
repurchase were delivered for escrow to the broker-dealer who arranged the
transactions.
RETAIL REPURCHASE AGREEMENTS. For certain customers with significant funds
available for deposit at the Bank, the Bank offers "retail" repurchase
agreements under which the Bank collateralizes its obligation to repay the
customer funds with U.S. government or agency securities. The retail
repurchases, which totaled $24.9 million at December 31, 2004, are
collateralized by one mortgage-backed security and two CMO securities with a
carrying value of $21.9 million and fair value of $21.9 million.
Interest expense on borrowed funds is summarized as follows for the periods
indicated:
YEAR ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
(Dollars in thousands)
FHLB of Chicago
advances........... $ 84,296 74,554 78,765
Unsecured term bank
loan............... 1,312 1,210 1,634
Unsecured line of
credit............. 144 33 103
Other borrowings(1)... 261 144 --
------ ------ ------
$ 86,013 75,941 80,502
====== ====== ======
- ------------------
(1) Other borrowings expense includes interest expense on retail repurchase
agreements, reverse repurchase agreements, and for the year ended December
31, 2003, federal funds purchased and treasury tax & loan advances.
13. 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, when possible, and by
estimating a percentage of fallout when determining the amount of forward
commitments
72
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
to sell. The following is a summary of the Bank's forward sales commitment
activity for the periods indicated:
YEAR ENDED DECEMBER 31,
--------------------------------------
2004 2003 2002
----------- ----------- -----------
(Dollars in thousands)
Balance at beginning of year........ $ 66,433 317,263 195,888
New forward commitments to deliver
loans............................ 1,174,197 1,516,124 1,428,901
Loans delivered to satisfy forward
commitments...................... (1,166,869) (1,766,954) (1,307,526)
--------- --------- ---------
Balance at end of year.............. $ 73,761 66,433 317,263
========= ========= =========
Loan commitments and forward sales are accounted for as derivative
instruments with adjustments included in gain on sale of loans at each period
end. At December 31, 2004 and 2003, the net fair value adjustment of locked
commitments and forward sales was ($198,000) and ($84,000), respectively.
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 years ended
December 31, 2004, 2003 and 2002 are $-0-, $77,000 and $(66,000) of net futures
gains, (losses), respectively, from hedging activities. At December 31, 2004 and
2003, the Bank had no deferred gains or losses on futures contracts. The
following is a summary of the notional amount of interest rate futures contract
activity for the periods indicated:
YEAR ENDED DECEMBER 31,
------------------------------
2004 2003 2002
--------- --------- --------
(Dollars in thousands)
Balance at beginning of year. $ -- 1,000 --
Interest rate futures
contracts sold............ -- 9,500 49,700
Interest rate futures
contracts closed.......... -- (10,500) (48,700)
------ ------- -------
Balance at end of year....... $ -- -- 1,000
====== ======= =======
14. INCOME TAXES
Income tax expense is summarized below:
YEAR ENDED DECEMBER 31,
------------------------------
2004 2003 2002
--------- --------- --------
(Dollars in thousands)
Current:
Federal................ $ 42,022 38,052 28,088
State.................. 1,299 2,997 3,787
------ ------ ------
43,321 41,049 31,875
------ ------ ------
Deferred:
Federal................ 5,609 4,544 8,445
State.................. 1,859 1,888 455
------ ------ ------
7,468 6,432 8,900
------ ------ ------
Total income tax
expense........... $ 50,789 47,481 40,775
====== ====== ======
Retained earnings at December 31, 2004 include $89.4 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 $34.9 million.
73
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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,
---------------------------
2004 2003 2002
------- ------ -------
Federal income tax rate............ 35.0% 35.0 35.0
Items affecting effective income
tax rate:
State income taxes, net of
federal benefit.............. 1.4 2.4 2.4
Affordable housing tax credits.. (2.0) (0.2) --
Other items, net................ (1.1) (0.9) (1.9)
---- ---- ----
Effective income tax rate.......... 33.3% 36.3 35.5
==== ==== ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2004 and 2003 are presented below:
DECEMBER 31,
--------------------
2004 2003
--------- ---------
(Dollars in thousands)
Deferred tax assets:
Deferred compensation...................... $ 10,915 10,002
Allowance for loan losses.................. 13,954 13,742
Unrealized loss on securities available
for sale................................ 1,046 --
Book versus tax basis of securities........ 2,095 7,244
Book versus tax basis on borrowings........ 2,677 7,351
Book versus tax basis on deposits.......... 1,135 2,984
State net operating losses................. 1,851 1,695
Other...................................... 1,108 586
------- -------
Total deferred tax assets..................... 34,781 43,604
Valuation allowance........................ (1,825) (1,660)
------- -------
Total deferred tax assets net of
valuation allowance................... 32,956 41,944
Deferred tax liabilities:
REIT dividends............................. (5,902) (11,467)
Loan origination fees and expenses......... (3,546) (1,614)
Book versus tax basis of land and fixed
assets.................................. (13,937) (10,480)
Book versus tax basis of capitalized
servicing............................... (9,554) (5,671)
Book versus tax basis of intangible assets. (5,940) (5,999)
Book versus tax basis in FHLB stock........ (19,033) (22,650)
Book versus tax basis of loans receivable.. (2,217) (3,255)
Unrealized gain on securities available
for sale................................ -- (1,329)
Other...................................... (2,855) (1,604)
------- -------
Total deferred tax liabilities.......... (62,984) (64,069)
------- -------
Net deferred tax liability.............. $ (30,028) (22,125)
======= =======
At December 31, 2004, deferred tax assets include approximately $39.2
million of various state net operating loss carryforwards, primarily from
acquired companies, which begin to expire in 2006 through 2019. These deferred
tax assets are reduced by a valuation allowance to the extent full realization
is in doubt. If the acquired net operating losses with a related valuation
allowance are subsequently utilized, the related recognized tax benefits will be
allocated to reduce goodwill.
Based upon historical taxable income as well as projections of future
taxable income, management believes that it is more likely than not that the
deferred tax assets, net of the valuation allowance, will be fully realized.
15. REGULATORY CAPITAL
The Bank is subject to regulatory capital requirements by 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
74
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, 2004.
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 PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
----------------- ------------------ -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ------ ------- ------ -------- ------
(Dollars in thousands)
As of December 31, 2004:
Tangible capital (to total
assets)................. $ 664,449 7.14% =>$139,642 =>1.50% N/A
Core capital (to total
assets)................. $ 664,449 7.14% =>$372,379 =>4.00% =>$465,473 => 5.00%
Total capital (to
risk-weighted assets)... $ 687,500 11.30% =>$486,665 =>8.00% =>$608,331 => 10.00%
Core capital (to
risk-weighted assets)... $ 664,449 10.92% N/A =>$364,999 => 6.00%
As of December 31, 2003:
Tangible capital (to total
assets)................. $ 615,582 7.16% =>$129,000 =>1.50% N/A
Core capital (to total
assets)................. $ 615,582 7.16% =>$343,999 =>4.00% =>$429,998 => 5.00%
Total capital (to
risk-weighted assets)... $ 640,413 11.45% =>$447,366 =>8.00% =>$559,208 =>10.00%
Core capital (to
risk-weighted assets)... $ 615,582 11.01% N/A =>$335,525 => 6.00%
OTS regulations provide various standards under which the Bank may declare
and pay dividends to the Company. During 2005, the amount of dividends the
subsidiaries can pay to the Company without prior approval of the OTS is limited
to 2005 eligible net profits, as defined, and adjusted retained 2004 and 2003
net income from its subsidiaries. At December 31, 2004, under this standard, no
portion of the Bank's retained earnings were available for dividend declaration
primarily due to the special dividend of $52.0 million to fund the acquisition
of Chesterfield Financial Corp.
As of December 31, 2004 and 2003, 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. The
acquisitions of Chesterfield in 2004, and Fidelity and St. Francis in 2003, did
not negatively impact capital adequacy levels.
16. 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, 2004, 2003 and 2002, total contributions to the ESOP were $680,000,
$580,000, and $640,000, respectively, which were expensed. The ESOP purchased
16,237, 13,000 and 16,211 of the Company's shares for the years ended December
31, 2004, 2003 and 2002, respectively.
PROFIT SHARING PLAN/401(K) PLAN. The Mid America Bank, fsb Profit
Sharing/401(k) Plan allows employees to make pre-tax or after-tax contributions
to the plan, 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 over a six year period based on an
employee's years of service. The Bank made discretionary and matching
contributions of $2.7 million, $2.3 million, and $1.9 million for the years
ended December 31, 2004, 2003, and 2002, respectively.
QUALIFIED RETIREMENT PLANS OF ACQUIRED COMPANIES. As a result of the
mergers with Fidelity Bancorp and St. Francis Capital Corporation during 2003,
the Company, through Mid America Bank, became the plan sponsor of the Fidelity
ESOP, the Fidelity 401(k) Plan, the Fidelity Retirement Plan, the St. Francis
ESOP and the St. Francis Savings and Retirement Plan. The Fidelity ESOP and
401(k) plans
75
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
were merged into the Mid America ESOP and Mid America Profit Sharing Plan,
respectively, in November 2003. The St. Francis ESOP and St. Francis Savings and
Retirement Plan were merged into the Mid America ESOP and Mid America Profit
Sharing Plan, respectively, during 2004. The Fidelity Retirement Plan has been
terminated and distributions to plan participants are currently expected to be
made during 2005. The Company recorded expenses for contributions made to these
plans of $-0- and $162,000 for 2004 and 2003, respectively.
Following the merger with Chesterfield Financial Corp. in 2004, the Company
became the plan sponsor of the Chesterfield ESOP and Chesterfield Profit Sharing
Plan. Both of these plans have been terminated and distributions are expected to
be made to plan participants during 2005. The Company did not record any
contribution expense for these plans during 2004.
INCENTIVE PLAN/STOCK OPTION PLANS. Prior to 2003, the Company and its
shareholders adopted various stock option plans for the benefit of employees and
directors of the Bank. Vesting for options awarded under such plans generally
occurred over a period of approximately three years, except for option grants to
non-employee directors, which were immediately exercisable.
In July 2003, the Company adopted the MAF Bancorp Incentive Compensation
Plan (the "Incentive Plan"), which was later approved by shareholders in
November 2003. All stock option and equity awards are now made under the
Incentive Plan. Under the Incentive Plan, a variety of different types of awards
may be granted to directors and employees, including stock options, stock
appreciation rights, restricted shares, performance shares, restricted and
performance share units, cash awards, awards under deferred compensation or
similar plans, and other incentive awards.
The plan provides that the total number of shares of common stock which may
be issued pursuant to awards under the plan may not exceed 800,000 shares, plus
such number of shares of common stock that have already been authorized and
previously approved by MAF's shareholders and are available for issuance under
MAF's 2000 Stock Option Plan.
Of the shares authorized for issuance under the Incentive Plan, up to 25%
may be issued with respect to awards of restricted stock and restricted stock
units. In the case of stock option awards, 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. Vesting periods are determined at
the discretion of the Company's Compensation Committee. For the initial stock
options awards granted under the Incentive Plan in 2003, the vesting period was
established as two years. The stock options awarded during 2004 were immediately
vested on the date of grant.
In conjunction with the Company's acquisitions, certain outstanding stock
options of the acquired institutions were converted into stock options of the
Company based on the transactions' exchange ratios and other terms of the merger
agreements. The value of these stock options was included in the purchase price
of the transactions.
A summary of shares subject to stock options and stock option activity in
the Incentive Plan and all other stock option plans of the Company, (including
plans of acquired entities assumed by the Company as a result of the conversion
of stock options) follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2004 2003 2002
--------------------- -------------------- ----------------------
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
Beginning of year................. 3,273,345 $ 27.44 2,894,035 $ 25.66 2,700,611 $ 22.05
Options granted................... 474,500 44.61 350,700 41.79 532,500 34.25
Acquiree options converted........ -- -- 367,286 20.80 -- --
Options exercised................. (216,872) 21.21 (226,990) 18.98 (249,542) 11.75
Converted options exercised....... (208,405) 21.44 (86,354) 18.84 (82,069) 4.78
Options cancelled................. (15,242) 32.72 (25,332) 30.77 (7,465) 27.06
--------- ----- --------- ----- --------- -----
End of year....................... 3,307,326 $ 30.67 3,273,345 $ 27.44 2,894,035 $ 25.66
========= ===== ========= ===== ========= =====
Options exercisable............... 2,992,325 30.14 2,495,117 25.29 1,822,685 22.89
========= ===== ========= ===== ========= =====
Fair value of options granted
during year.................... $ 13.21 $ 12.58 $ 9.91
===== ===== =====
76
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In addition to the outstanding stock options shown in the table above,
there were 503,479 shares available for grant under the Incentive Plan as of
December 31, 2004. Cancelled stock options increase the number of shares
available for grant under the Incentive Plan.
At December 31, 2004 the following stock options are outstanding:
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
- ------------------- ------------ ---------------- ---------------- ---------------- --------
$ 10.78 to 18.36 285,148 1.97 $ 14.14 285,148 $ 14.14
19.68 to 23.90 464,383 4.07 22.36 460,483 22.35
25.22 to 27.70 636,671 5.16 26.36 636,671 26.36
28.16 to 44.87 1,921,124 8.07 36.56 1,610,023 36.69
--------- ---- ----- --------- -----
3,307,326 6.42 $ 30.67 2,992,325 $ 30.14
========= ==== ===== ========= =====
During 2003 and 2004, the Company also granted restricted stock units
("RSUs") to non-executive employees pursuant to the Incentive Plan. An RSU award
entitles a recipient to receive a like number of shares of MAF Bancorp stock on
certain designated vesting dates, assuming the recipient is still employed with
the Company on such dates. RSUs granted in 2003 and 2004 vest on various dates
during a period that ends five years from the date of grant. The following is a
summary of outstanding RSUs:
YEAR ENDED
DECEMBER 31,
---------------
2004 2003
------ ------
Beginning of year.......... 26,258 --
RSUs granted............... 26,040 26,458
RSUs vested................ (4,850) --
RSUs cancelled............. (4,946) (200)
------ ------
End of year................ 42,502 26,258
====== ======
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. Dividends paid on MAF Bancorp
shares deferred through the Gain Deferral Plan are recorded as compensation
expense and reinvested in MAF Bancorp shares. The Company's obligation to issue
the deferred MAF Bancorp shares in the future is recorded in stockholders'
equity as the sum of (a) the number of shares purchased with reinvested
dividends multiplied by the purchase price of such shares, and (b) the number of
shares deferred in option exercise transactions multiplied by the exercise price
of the related stock options. Subsequent to December 31, 2004, on February 1,
2005, the Gain Deferral Plan was terminated, the assets of the Plan, which were
invested in shares of the Company's common stock, were distributed in kind to
the two Plan participants upon termination.
DEFERRED COMPENSATION PLANS. The Bank maintains deferred compensation plans
for directors, executive officers and certain other corporate officers. The
deferred compensation plans allow directors to defer all of their director
compensation and other participants to defer up to 25% of their salary and
certain bonuses. Plan participants have the option to have their deferred
amounts earn interest at 130% (110% effective January 1, 2005) of the Moody's
corporate bond rate or to earn a total return based on an investment in MAF
Bancorp common stock. The Bank also offers a deferred compensation plan to other
selected employees that has similar terms but provides for a lower interest
crediting rate and no stock investment option. In addition, the Bank is the
successor to various deferred compensation plans of acquired companies.
Amounts deferred remain the property of the Bank. At December 31, 2004 and
2003, the Company had invested $19.3 million and $17.6 million, respectively in
bank-owned life insurance that may be used to satisfy obligations of the
deferred compensation plans, including certain death benefits. At December 31,
2004, and 2003 the Company had an aggregate liability to the participants of the
deferred compensation plans totaling $15.6 million and $13.6 million,
respectively, including the value of common stock attributable to participants'
accounts based on the fair market value of the common stock
77
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
at the time of deferral. For the years ended December 31, 2004, 2003 and 2002,
benefit expenses related to these plans were $1.1 million, $1.0 million and
$868,000, respectively.
POST RETIREMENT BENEFITS. 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.
The Bank also provides a long term medical plan for the purpose of
providing employees post retirement medical benefits. If retirement occurs prior
to age 65, but at least age 55 with 10 years of service, the retiree pays 100%
of the premium cost of the plan for lifetime. If retirement occurs at 65 or
later, the retiree pays the following percentage of premium costs based on
service at retirement:
CONTRIBUTION
YEARS OF SERVICE PERCENTAGE
-------------------- ------------
10-19............. 100%
20-24............. 90%
25-29............. 75%
30+............... 60%
Members of the board of directors pay a majority of the cost for both
pre-65 and post-65 coverage. The benefits under the retiree benefit plan are not
pre-funded and there are no plan assets. Benefits are funded on a pay-as-you-go
basis. The Bank's long term Medical Plan was amended January 1, 2005, to
eliminate the retiree subsidy for all non-retired participants effective January
1, 2006. Current retirees as well as 2005 retirees are grandfathered under the
subsidy provisions.
The following table sets forth the change in benefit obligations and the
related assumptions for the SERP and long term medical plan for the periods
indicated:
YEAR ENDED DECEMBER 31,
-------------------------------------------
SERP LONG TERM MEDICAL
-------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- ---------
(Dollars in thousands)
Projected benefit obligation -
beginning of year................ $ 4,924 3,797 1,538 909
Service cost........................ 664 556 98 62
Interest cost....................... 307 256 101 67
Plan amendments..................... -- -- (1,432) --
Actuarial losses.................... 549 320 258 206
Acquisitions........................ -- -- -- 308
Benefits paid....................... (15) (5) (28) (14)
----- ----- ----- -----
Projected benefit obligation - end
of year.......................... $ 6,429 4,924 535 1,538
===== ===== ===== =====
Funded status....................... (6,429) (4,924) (535) (1,538)
Unrecognized transition obligation.. -- -- -- 54
Unrecognized prior-service cost..... -- -- (1,384) --
Unrecognized loss................... 1,119 578 880 649
----- ----- ----- -----
Accrued benefit cost................ (5,310) (4,346) (1,039) (835)
===== ===== ===== =====
Weighted average assumptions:
Discount rate....................... 6.25% 6.75 6.25 6.75
Rate of compensation increase....... 4.50 4.50 N/A N/A
===== ===== ===== =====
The prescription contribution paid by Bank employees and directors is not
actuarially equivalent to Medicare Part D, as defined by the Medicare
Prescription Drug Improvement and Modernization Act of 2003. Therefore, the Bank
does not qualify for the government subsidy of 28%.
78
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The components of the net periodic benefit cost of post retirement plans
are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------
SERP LONG TERM MEDICAL
-------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- ---------
(Dollars in thousands)
Service cost........................ $ 664 556 98 62
Interest cost....................... 307 256 101 67
Amortization of unrecognized net
transition obligation............ -- -- 6 6
Unrecognized net loss............... 8 -- 28 20
--- --- --- ---
Net periodic benefit cost........... $ 979 812 233 155
=== === === ===
The projected future benefit payments related to the SERP and long term
medical plan for the next five years and the total payment thereafter are as
follows (in thousands):
LONG
FOR THE YEAR ENDED TERM
DECEMBER 31, SERP MEDICAL
------------------- -------- --------
2005.............. $ 15 34
2006.............. 80 38
2007.............. 170 40
2008.............. 170 42
2009.............. 235 43
2010 - 2014....... $ 2,460 220
17. COMMITMENTS AND CONTINGENCIES
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.
The contractual amounts of credit-related financial instruments, such as
commitments to extend credit and letters of credit, represent the amounts of
potential loss should the contract be fully drawn upon, the customer default, or
the value of any existing collateral become worthless.
Commitments to originate and purchase loans of $650.4 million at December
31, 2004, represent amounts which the Bank plans to fund within the normal
commitment period of 30 to 90 days of which $174.8 million were fixed-rate, with
rates ranging from 4.75% to 7.75%, and $475.6 million were adjustable-rate loans
with rates ranging from 4.00% to 9.75%. At December 31, 2004 prospective
borrowers had locked the interest rate on $44.7 million of fixed-rate loans,
with rates ranging from 4.50% to 6.50%, and $67.8 million of adjustable-rate
loans, with rates ranging from 4.00% to 7.13%. At December 31, 2004 the bank
also had outstanding commitments to originate $107.5 million of floating-rate
equity lines of credit. Because the credit worthiness of each customer is
reviewed prior to extension of the commitment, the Bank adequately controls its
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, when possible, a fee to fix the
interest rate. The Bank also estimates a percentage of fallout when determining
the amount of forward commitments to enter into. At December 31, 2004, forward
commitments to sell mortgage loans for future delivery were $73.8 million, of
which $39.5 million are related to loans held for sale, and $34.3 million are
unfunded as of December 31, 2004.
The Bank has approved, but unused home equity lines of credit of $1.01
billion at December 31, 2004. Approval of equity lines is based on underwriting
standards that generally do not allow total borrowings, including the equity
line of credit to exceed 85% 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
79
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
interest rate. In addition, the Bank has $252.9 million in approved, but unused
commercial business lines.
At December 31, 2004, the Bank had standby letters of credit, excluding
land development, totaling $80.5 million. Two of these standby letters of credit
total $13.3 million, and enhance two industrial revenue bond financings of
commercial real estate in the Bank's market. At December 31, 2004, the Bank had
pledged investment and mortgage-backed securities with an aggregate carrying
value and fair value of $25.2 million and $25.0 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 in the
normal course of business, as performance under the letters of credit creates a
first position lien in favor of the Bank. Additionally, at December 31, 2004,
the Company had standby letters of credit totaling $5.6 million, which ensure
the completion of land development improvements on behalf of MAF Developments,
Inc.
At December 31, 2004, the Bank had $12.7 million of credit risk related to
loans sold to the MPF program and $44.1 million of loans sold with recourse to
investors. There are no expected losses and no reported liability at December
31, 2004 and 2003 for such exposure. Additionally the Bank had $25.9 million of
credit risk related to loans with private mortgage insurance in force in the
Bank's captive reinsurance subsidiary.
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, 2004 and
2003, loans representing 78.3% and 82.8%, respectively, of the Bank's total
loans receivable were located in the State of Illinois and 17.8% and 12.4%,
respectively, were located in the State of Wisconsin.
There are various matters of litigation pending against the Bank that have
arisen during the normal course of business. Management believes that the
liability, if any resulting from these matters will not be material to the
consolidated financial position or results of operation of the Bank.
18. SEGMENT INFORMATION
The Company utilizes the "management approach" for segment reporting. This
approach is based on the way that management of the Company organizes lines of
business for making operating decisions and assessing performance.
Currently, the Company has two segments. The Banking segment includes
lending and deposit gathering operations, as well as other financial services
offered to individuals and business customers. The land development segment
consists primarily of acquiring, obtaining necessary zoning and regulatory
approvals, and improving raw land into developed residential lots for sale to
builders. All goodwill is assigned to the banking segment. Selected segment
information is included in the table below:
YEAR ENDED DECEMBER 31, 2004
----------------------------------------------
LAND ELIM- CONSOLIDATED
BANKING DEVELOPMENT INATIONS TOTAL
---------- ----------- -------- -----------
(Dollars in thousands)
Interest income.................. $ 421,173 -- -- 421,173
Interest expense................. 159,885 -- -- 159,885
--------- ----- --------- ---------
Net interest income.............. 261,288 -- -- 261,288
Provision for loan losses........ 1,215 -- -- 1,215
--------- ----- --------- ---------
Net interest income after
provision..................... 260,073 -- -- 260,073
Non-interest income.............. 69,587 6,699 -- 76,286
Non-interest expense............. 182,468 1,580 -- 184,048
--------- ----- --------- ---------
Income before income taxes....... 147,192 5,119 -- 152,311
Income tax expense............... 48,754 2,035 -- 50,789
--------- ------ --------- ---------
Net income....................... $ 98,438 3,084 -- 101,522
========= ====== ========= =========
Average assets................... $ 9,223,273 36,006 -- 9,259,279
========= ====== ========= =========
80
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEAR ENDED DECEMBER 31, 2003
----------------------------------------------
LAND ELIM- CONSOLIDATED
BANKING DEVELOPMENT INATIONS TOTAL
---------- ----------- -------- -----------
(Dollars in thousands)
Interest income..................$ 316,430 -- -- 316,430
Interest expense................. 136,952 -- -- 136,952
--------- ------ ---------- ---------
Net interest income.............. 179,478 -- -- 179,478
Non-interest income.............. 60,308 11,325 -- 71,633
Non-interest expense............. 118,839 1,358 -- 120,197
--------- ------ ---------- ---------
Income before income taxes....... 120,947 9,967 -- 130,914
Income tax expense............... 43,528 3,953 -- 47,481
--------- ------ ---------- ---------
Net income.......................$ 77,419 6,014 -- 83,433
========= ====== ========== =========
Average assets...................$ 6,447,358 22,340 -- 6,469,698
========= ====== ========== =========
YEAR ENDED DECEMBER 31, 2002
----------------------------------------------
LAND ELIM- CONSOLIDATED
BANKING DEVELOPMENT INATIONS TOTAL
---------- ----------- -------- -----------
(Dollars in thousands)
Interest income..................$ 329,490 -- -- 329,490
Interest expense................. 171,369 96 -- 171,465
--------- ------ ---------- ---------
Net interest income (expense).... 158,121 (96) -- 158,025
Provision for loan losses........ 300 -- -- 300
--------- ------ ---------- ---------
Net interest income after
provision..................... 157,821 (96) -- 157,725
Non-interest income.............. 46,646 9,717 -- 56,363
Non-interest expense............. 98,177 1,165 -- 99,342
--------- ------ ---------- ---------
Income before income taxes....... 106,290 8,456 -- 114,746
Income tax expense............... 37,421 3,354 -- 40,775
--------- ------ ---------- ---------
Net income.......................$ 68,869 5,102 -- 73,971
========= ====== ========== =========
Average assets...................$ 5,725,359 14,040 -- 5,739,399
========= ====== ========== =========
19. 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 values.
81
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The estimated fair values of the Company's financial instruments as of
December 31, 2004 and 2003 are set forth in the following table below.
DECEMBER 31, 2004 DECEMBER 31, 2003
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- --------- ----------- ---------
(Dollars in thousands)
Financial assets:
Cash and cash
equivalents........... $ 246,998 246,998 221,962 221,962
Investment securities
available for sale.... 388,959 388,959 365,334 365,334
Stock in FHLB of Chicago. 278,916 278,916 384,643 384,643
Mortgage-backed
securities available
for sale.............. 948,168 948,168 971,969 971,969
Mortgage-backed
securities held to
maturity.............. 245,021 244,645 -- --
Loans receivable held
for sale.............. 39,521 39,521 44,511 44,511
Loans receivable......... 6,878,514 6,932,702 6,359,151 6,520,305
Interest receivable...... 34,888 34,888 31,168 31,168
--------- --------- --------- ---------
Total financial
assets............. $ 9,060,985 9,114,797 8,378,738 8,539,892
========= ========= ========= =========
Financial liabilities:
Non-maturity deposits.... $ 3,537,243 3,537,243 3,249,219 3,249,219
Deposits with stated
maturities............ 2,398,465 2,397,663 2,331,236 2,349,507
Borrowed funds........... 2,600,667 2,545,908 2,299,427 2,374,666
Interest payable......... 9,023 9,023 9,575 9,575
---------- --------- ----------- ---------
Total financial
liabilities......... $ 8,545,398 8,489,837 7,889,457 7,982,967
========= ========= ========= =========
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 values of
these financial instruments were estimated using quoted market prices, when
available. 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, checking 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, 2004 and 2003, the fair
value of the Bank's mortgage loan commitments of $650.4 million and $561.7
million, respectively, was $558,000 and $1.8 million, respectively, which
represents the differential between the committed value and value at current
rates. The fair value of the standby letters
82
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
of credit approximate the recorded amounts of related fees and are not material
at December 31, 2004 and 2003.
20. RELATED PARTY TRANSACTIONS
The Company, through its subsidiary bank, has made loans and had
transactions with certain of its directors and officers. However, all such loans
and transactions were made in the ordinary course of business on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons and did not involve more
than the normal risk of collectibility or present other unfavorable features.
Included in loans receivable are loans to directors and executive officers of
$4.9 million and $5.7 million at December 31, 2004 and 2003, respectively. New
loans originated or acquired through acquisition during the current year totaled
$981,000, offset by repayments of $1.7 million.
Since November 2001, the Company has leased space in a commercial and
residential building in which a current director of the Bank had a limited
partnership interest until the sale of the building in August 2004. The Company
paid rental expense to the partnership in the amount of $292,000, $435,000, and
$348,000 in 2004, 2003 and 2002, respectively.
A director of the Company is a partner in a law firm that provides legal
services to the Company and the Bank. Total fees paid to this law firm were
$381,600, $381,880 and $278,577 for the years ended December 31, 2004, 2003 and
2002, respectively. The same law firm leases office space from the Company and
paid rents in the amount of $115,992 for each of the years ended December 31,
2002, 2003 and 2004.
The Company obtains sign maintenance services from a business that is
controlled by a director of the Company who serves as its chief executive
officer. The Company paid fees of approximately $70,000 to this firm in 2004.
The Company and the Bank also employ various relatives of certain executive
officers and directors and pay them compensation commensurate with their
positions at the Bank and the Company.
21. PARENT COMPANY ONLY FINANCIAL INFORMATION
The information as of December 31, 2004, and 2003, and for the years ended
December 31, 2004, 2003, and 2002, presented below should be read in conjunction
with the other Notes to Consolidated Financial Statements.
DECEMBER 31,
-----------------------
CONDENSED STATEMENTS OF FINANCIAL CONDITION 2004 2003
----------- ----------
(Dollars in thousands)
Assets:
Cash and cash equivalents........................ $ 23,106 13,118
Investment securities............................ 6,266 6,641
Equity in net assets of subsidiaries............. 1,026,511 932,163
Other assets..................................... 8,655 13,039
--------- -------
$ 1,064,538 964,961
========= =======
Liabilities and Stockholders' Equity:
Liabilities:
Borrowed funds................................... $ 80,000 55,000
Accrued expenses................................. 10,152 8,357
--------- -------
Total liabilities................................ 90,152 63,357
--------- -------
Stockholders' equity:
Common stock..................................... 336 331
Additional paid-in capital....................... 522,047 495,747
Retained earnings, substantially restricted...... 468,408 402,402
Stock in Gain Deferral Plan...................... 1,211 1,015
Accumulated other comprehensive
income (loss), net............................ (1,676) 2,109
Treasury stock................................... (15,940) --
--------- -------
Total stockholders' equity....................... 974,386 901,604
--------- -------
$ 1,064,538 964,961
========= =======
83
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31,
----------------------------------
CONDENSED STATEMENTS OF OPERATIONS 2004 2003 2002
--------- ---------- ---------
(Dollars in thousands)
Dividend income from subsidiaries..................... $ 128,000 55,000 35,000
Interest income....................................... 517 553 716
Interest expense...................................... 1,456 1,243 1,739
------- ------ ------
Net interest and dividend income................... 127,061 54,310 33,977
Gain on sale of investments, net...................... 67 883 179
Non-interest expense.................................. 3,063 2,562 2,403
------- ------ ------
Net income before income tax benefit and equity in
undistributed earnings of subsidiaries.......... 124,065 52,631 31,753
Income tax benefit.................................... (2,066) (1,188) (1,333)
------- ------ ------
Net income before equity (deficit) in
undistributed earnings of subsidiaries.......... 126,131 53,819 33,086
Equity (deficit) in undistributed earnings of
subsidiaries....................................... (24,609) 29,614 40,885
------- ------ ------
Net income......................................... $ 101,522 83,433 73,971
======= ====== ======
DECEMBER 31,
----------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 2004 2003 2002
--------- ---------- ---------
(Dollars in thousands)
Operating activities:
Net income......................................... $ 101,522 83,433 73,971
Deficit (equity) in undistributed earnings of
subsidiaries.................................... 24,609 (29,614) (40,885)
Gain on sale of investment securities.............. (67) (882) (179)
Net decrease (increase) in other assets and
liabilities, net of effects from
acquisitions.................................... 1,371 (11,216) (1,476)
------- ------- ------
Net cash provided by operating activities....... 127,435 41,721 31,431
Investing activities:
Proceeds from sale of and maturities of investment
securities...................................... 625 4,353 1,554
Loans to subsidiaries less repayments, net......... (1,200) 1,000 (855)
Purchases of investment securities................. -- -- (1,329)
Payment for acquisitions, net of cash acquired..... (73,846) (9,394) --
------- ------- ------
Net cash used in investing activities........... (74,421) (4,041) (630)
Financing activities:
Proceeds from exercise of stock options............ 7,559 4,718 2,366
Proceeds from borrowings........................... 35,000 10,000 --
Repayment of borrowings............................ (10,000) (6,000) (14,000)
Purchase of treasury stock......................... (49,174) (30,945) (168)
Cash dividends paid................................ (26,411) (16,295) (13,066)
------- ------- -------
Net cash used in financing activities........... (43,026) (38,522) (24,868)
------- ------- -------
Increase (decrease) in cash and cash equivalents 9,988 (842) 5,933
Cash and cash equivalents at beginning of year........ 13,118 13,960 8,027
------- ------- -------
Cash and cash equivalents at end of year.............. $ 23,106 13,118 13,960
======= ======= =======
22. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following are the consolidated results of operations on a quarterly
basis:
YEAR ENDED DECEMBER 31, 2004 YEAR ENDED DECEMBER 31, 2003
---------------------------------------- ---------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
---------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
Interest income............ $ 102,007 103,378 105,639 110,149 $ 77,026 73,925 78,160 87,319
Interest expense........... 37,978 38,208 41,080 42,619 35,971 33,362 33,252 34,367
------- ------ ------ ------ ------ ------ ------ ------
Net interest income..... 64,029 65,170 64,559 67,530 41,055 40,563 44,908 52,952
Provision for loan losses.. 300 280 350 285 -- -- -- --
------- ------ ------ ------ ------ ------ ------ ------
Net interest income
after provision for
loan losses.......... 63,729 64,890 64,209 67,245 41,055 40,563 44,908 52,952
Net gain on sale of assets. 5,249 1,694 3,208 971 7,119 8,841 6,345 3,071
Income from real estate
operations.............. 1,102 2,509 1,650 1,396 1,635 1,687 3,010 4,993
Deposit account service
charges................. 7,856 8,721 8,848 8,687 5,439 5,960 6,051 7,102
Other income............... 6,188 6,158 5,810 6,239 1,822 485 1,617 6,456
------- ------ ------ ------ ------ ------ ------ ------
Total non-interest
income.................. 20,395 19,082 19,516 17,293 16,015 16,973 17,023 21,622
Non-interest expense....... 46,890 45,184 45,463 46,511 26,675 26,744 29,409 37,369
------- ------ ------ ------ ------ ------ ------ ------
Income before income
taxes................ 37,234 38,788 38,262 38,027 30,395 30,792 32,522 37,205
Income tax expense......... 12,440 12,818 12,676 12,855 11,107 11,253 12,016 13,105
------- ------ ------ ------ ------ ------ ------ ------
Net income.............. $ 24,794 25,970 25,586 25,172 $ 19,288 19,539 20,506 24,100
======= ====== ====== ====== ====== ====== ====== ======
Basic earnings per share... $ .75 .79 .78 .76 .83 .84 .82 .86
======= ====== ====== ====== ====== ====== ====== ======
Diluted earnings per share. $ .73 .77 .77 .74 .81 .82 .79 .84
======= ====== ====== ====== ====== ====== ====== ======
Cash dividends declared
per share............... $ .21 .21 .21 .21 .18 .18 .18 .18
======= ====== ====== ====== ====== ====== ====== ======
84
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of December 31, 2004, our Chief Executive Officer and Chief Financial
Officer carried out an evaluation under their supervision, with the
participation of other members of management as they deemed appropriate, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as contemplated by Rule 13a-15(e) under the Securities Exchange
Act of 1934. Based upon, and as of the date of that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective, in all material respects, in
timely alerting them to material information relating to the Company (and its
consolidated subsidiaries) and in ensuring that information required to be
included in the periodic reports the Company files or submits to the SEC under
the Securities Exchange Act is recorded, processed, summarized and reported as
required.
As of December 31, 2004, we also evaluated the effectiveness of our
internal controls over financial reporting as required by Section 404 of the
Sarbanes-Oxley Act and Rule 13a-15(f) under the Securities Exchange Act of 1934.
The report of our Chief Executive Officer and Chief Financial Officer regarding
management's internal control assessment is included in Item 8 and incorporated
herein by reference.
In order to produce reliable financial statements, management is
responsible for establishing and maintaining effective internal controls over
financial reporting. Management evaluates the effectiveness of its system of
internal control over financial reporting and tests for reliability of recorded
financial information through a program of ongoing internal audits. Actions are
taken to address potential control deficiencies that are identified. During
fourth quarter 2004, we implemented enhanced reconciliation controls along with
a strengthened information technology change management process to improve
controls over ongoing modification to programs and data. Any system of internal
control, no matter how well designed, has inherent limitations, including the
possibility that a control can be circumvented or overridden and misstatements
due to error or fraud may occur and not be detected. Also, because of changes in
conditions, internal control effectiveness may vary over time. Accordingly, even
an effective system of internal control will provide only reasonable assurance
with respect to financial statement preparation.
The Audit Committee, consisting entirely of independent directors, meets
regularly with management, internal auditors and the independent registered
public accounting firm, and reviews audit plans and results, as well as
management's actions taken in discharging responsibilities for accounting,
financial reporting, and internal control. KPMG LLP, independent registered
public accounting firm, and the Company's internal auditors have direct and
confidential access to the Audit Committee at all times to discuss the results
of their examinations.
ITEM 9B. OTHER INFORMATION.
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 headings "Election of Directors" and
"Transactions with Certain Related Persons and Other Information" the
information included therein is incorporated herein by reference. Information
regarding the executive officers of the Company included in this Form 10-K is
included in "Item 1. Business." Information regarding beneficial ownership
reporting compliance is included in the Company's proxy statement under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance" and the
information included therein is incorporated by reference.
The Company has adopted a code of ethics as required by the listing
standards of the Nasdaq National Market and the SEC. This code applies to all of
its directors, officers and employees. The
85
Company has also adopted a charter for each of its audit committee,
administrative/compensation committee and nominating and corporate governance
committee and has posted the code of ethics and the committee charters on the
Company's website at www.mafbancorp.com. The Company will post on its website
any amendments to the code of ethics and waivers, if any, applicable to any of
its directors or executive officers. The foregoing information will also be
available in print and free of charge to any shareholder who requests such
information.
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," and "Executive Compensation" (excluding "Executive
Compensation-Compensation Committee Report" and "Executive Compensation-Stock
Performance Graph") and the information included therein is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and
management is included in the Company'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.
EQUITY COMPENSATION PLANS
The following table summarizes certain information about the equity
compensation plans of the Company as of December 31, 2004:
NUMBER OF NUMBER OF SECURITIES
SECURITIES TO WEIGHTED-AVERAGE REMAINING AVAILABLE
BE ISSUED UPON EXERCISE FOR FUTURE ISSUANCE
EXERCISE OF PRICE OF UNDER EQUITY
OUTSTANDING OUTSTANDING COMPENSATION PLANS
OPTIONS, OPTIONS, (EXCLUDING SECURITIES
WARRANTS AND WARRANTS REFLECTED IN
PLAN CATEGORY RIGHTS AND RIGHTS COLUMN (A))
- ------------------------------------------- -------------- ---------------- ---------------------
(A) (B) (C)
Equity compensation plans approved by
security holders......................... 3,352,178(1)(2) $30.29 501,229
Equity compensation plans not approved by
security holders......................... -- -- 15,217(3)
---------- ----- -------
Total....................................... 3,352,178 $30.29 516,446
========= ===== =======
- ------------------
(1) Includes 72,532 stock options exercisable at a weighted average price of
$21.29 per share relating to options granted under plans of acquired
entities that were converted into MAF Bancorp stock options. No further
grants will be made under such plans.
(2) Includes 42,602 restricted stock units granted to certain non-executive
employees.
(3) Represents shares reserved for issuance under deferred compensation plans,
which shares may be issued to executive officers and directors, if any,
electing to defer cash compensation otherwise payable to them. The number
of shares allocated to plan participants is determined based on the fair
market value of shares at the time of compensation deferral.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
included in the Company's proxy statement under the heading "Transactions with
Certain Related Persons and Other Information," and the information included
therein is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding fees paid to the independent auditors and the
pre-approval policies and procedures of the Company's audit committee is
included in the Company's proxy statement under the heading "Independent
Auditors," and the information included therein is incorporated herein by
reference.
86
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(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, 2004
and 2003.
Consolidated Statements of Operations for the years ended December 31,
2004, 2003 and 2002.
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 2004, 2003 and 2002.
Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003 and 2002.
Notes to Consolidated Financial Statements.
Report of Management Regarding Internal Controls Over Financial
Reporting.
Report of Independent Registered Public Accounting Firm.
Report of Independent Registered Public Accounting Firm on Internal
Controls over Financial Reporting.
(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. 2. Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession
2.1 Agreement and Plan of Merger by and among MAF Bancorp, Inc., Classic
Acquisition Corp. and Chesterfield Financial Corp. dated as of June 5,
2004. (Incorporated herein by reference to Exhibit 99.2 to
Registrant's Form 8-K dated June 5, 2004).
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. (Incorporated herein by reference to
Exhibit No. 3 to Registrant's September 30, 2003 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. 10.4
to Registrant's June 30, 1992 Form 10-K).*
- ------------------
* Indicates management contracts or compensatory plans or arrangements required
to be filed as an exhibit.
87
10.2 MAF Bancorp, Inc. 1990 Incentive Stock Option Plan, as amended.
(Incorporated herein by reference to Exhibit No. 10.2 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). *
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. 10.3 to Registrant's December 31, 2000 Form 10-K).*
10.4 MAF Bancorp, Inc. 1993 Amended and Restated Premium Price Stock Option
Plan, as amended. (Incorporated herein by reference to Exhibit No.
10.5 to Registrant's December 31, 1998 Form 10-K).*
10.5 Amendment dated June 22, 1999 to the MAF Bancorp, Inc. 1993 Amended
and Restated Premium Price Stock Option Plan, as amended.
(Incorporated herein by reference to Exhibit No. 10.3 to Registrant's
June 30, 1999 Form 10-Q).*
10.6 Amendment dated May 23, 2000 to the MAF Bancorp, Inc. 1993 Amended and
Restated Premium Price Stock Option Plan, as amended. (Incorporated
herein by reference to Exhibit No. 10.5 to Registrant's December 31,
2000 Form 10-K).*
10.7 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).*
10.8 MAF Bancorp, Inc. Incentive Compensation Plan. (Incorporated herein by
reference to Exhibit 10.1 to Registrant's Form S-4/A dated October 14,
2003, Registration No. 333-108742).*
10.9 Form of Non-Qualified Stock Option Agreement.* +
10.10 Form of Incentive Stock Option Agreement.*+
10.11 Form of Annual Incentive Compensation Award Agreement.*+
10.12 Form of Long-Term Incentive Compensation Award Agreement.*+
10.13 St. Francis Capital Corporation 1993 Incentive Stock Option Plan.
(Incorporated herein by reference to Exhibit 4.3 to the Form S-8
Registration Statement filed by St. Francis Capital Corporation with
the Commission on September 29, 1993, Registration No. 33-70012).*
10.14 St. Francis Capital Corporation 1997 Stock Option Plan, as amended.
(Incorporated herein by reference to Exhibit 1 to Amendment No. 1 to
the Form S-8 Registration Statement filed by St. Francis Capital
Corporation with the Commission on April 2, 1999, Registration No.
333-24057).*
10.15 Reliance Bancshares, Inc. 1997 Stock Option Plan. (Incorporated herein
by reference to Exhibit 4.2 to the Form S-8 Registration Statement
filed by Reliance Bancshares, Inc. with the Commission on June 3,
1997, Registration No. 333-28375).*
10.16 Amendment dated November 21, 2003 to the St. Francis Capital
Corporation 1993 Incentive Stock Option Plan, 1997 Stock Option Plan,
as amended, and the Reliance Bancshares, Inc. 1997 Stock Option Plan.
(Incorporated herein by reference to Exhibit 99.4 to the Form S-8
Registration Statement filed by MAF Bancorp, Inc. with the Commission
on December 5, 2003, Registration No. 333-110986). *
10.17 Credit Agreement dated as of November 30, 2001, as amended through
November 29, 2002, between MAF Bancorp, Inc. and Harris Trust and
Savings Bank. (Incorporated herein by reference to Exhibit No. 10.6 to
Registrant's Form 10-K for the year ended December 31, 2002).
- ------------------
* Indicates management contracts or compensatory plans or arrangements required
to be filed as an exhibit.
+ Filed herewith.
88
10.18 Amendment dated November 28, 2003, to the Credit Agreement dated as of
November 30, 2001, as amended, between MAF Bancorp, Inc. and Harris
Trust and Savings Bank. (Incorporated herein by reference to Exhibit
No. 10.20 to Registrant's Form 10-K for the year ended December 31,
2003).
10.19 Amendment dated November 1, 2004, to the Credit Agreement dated as of
November 30, 2001, as amended, between MAF Bancorp, Inc. and Harris
Trust and Savings Bank. +
10.20 Mid America Federal Savings and Loan Association Deferred Compensation
Trust Agreement. (Incorporated herein by reference to Exhibit No. 10.8
to Registrant's June 30, 1990 Form 10-K). *
10.21 Amendment dated May 16, 2001 to the Mid America Bank, fsb Deferred
Compensation Trust Agreement. (Incorporated herein by reference to
Exhibit No. 10.2 to Registrant's June 30, 2001 Form 10-Q). *
10.22 Mid America Bank, fsb Directors' Deferred Compensation Plan.
(Incorporated herein by reference to Exhibit No. 10.10 to Registrant's
December 31, 1997 Form 10-K). *
10.23 Mid America Bank, fsb Executive Deferred Compensation Plan.
(Incorporated herein by reference to Exhibit No. 10.11 to Registrant's
December 31, 1997 Form 10-K).*
10.24 Deferred Compensation Agreement dated January 1, 1999 between St.
Francis Bank, F.S.B. and Thomas R. Perz. (Incorporated herein by
reference to Exhibit No. 10.25 to Registrant's Form 10-K for the year
ended December 31, 2003).*
10.25 Deferred Compensation Agreements dated January 1, 1998, January 1,
1996, January 19, 1994 and November 18, 1987 between St. Francis
Capital Corporation, St. Francis Bank, F.S.B., Bank Wisconsin and
Thomas R. Perz. (Incorporated herein by reference to Exhibit No. 10.26
to Registrant's Form 10-K for the year ended December 31, 2003).*
10.26 Deferred Compensation Agreement dated January 1, 1996, as amended,
between St. Francis Capital Corporation, St. Francis Bank, F.S.B.,
Bank Wisconsin and Edward W. Mentzer. *+
10.27 MAF Bancorp, Inc. Shareholder Value Long-Term Incentive Plan, as
amended. (Incorporated herein by reference to Exhibit No. 10.10 to
Registrant's December 31, 1999 Form 10-K).*
10.28 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. 10.15 to Registrant's December 31, 2000 Form
10-K).*
10.29 Mid America Bank, fsb Supplemental Executive Retirement Plan, as
amended. (Incorporated herein by reference to Exhibit No. 10.13 to
Registrant's December 31, 1998 Form 10-K). *
10.30 Amendment dated March 27, 2001 to the Mid America Bank, fsb
Supplemental Executive Retirement Plan, as amended. (Incorporated
herein by reference to Exhibit No. 10.1 to Registrant's March 31, 2001
Form 10-Q).*
10.31 Fidelity Federal Savings Bank Supplemental Retirement Plan, as
amended. (Incorporated herein by reference to Exhibit No. 10.33 to
Registrant's Form 10-K for the year ended December 31, 2003).*
10.32 Form of Employment Agreement, as amended, between MAF Bancorp, Inc.
and Allen Koranda, Kenneth Koranda and Jerry Weberling.*+
10.33 Form of Employment Agreement, as amended, between Mid America Bank,
fsb and Allen Koranda, Kenneth Koranda and Jerry Weberling.*+
- ------------------
* Indicates management contracts or compensatory plans or arrangements required
to be filed as an exhibit.
+ Filed herewith.
89
10.34 Form of Special Termination Agreement, as amended, between MAF
Bancorp, Inc., and Kenneth Rusdal and various officers. *+
10.35 Form of Special Termination Agreement, as amended, between Mid America
Bank, fsb, and Kenneth Rusdal and various officers. *+
10.36 Employment Agreement between MAF Bancorp, Inc. and Thomas R. Perz.
(Incorporated herein by reference to Exhibit No. 10.38 to Registrant's
Form 10-K for the year ended December 31, 2003).*
10.37 Employment Agreement between Mid America Bank, fsb and Thomas R. Perz.
(Incorporated herein by reference to Exhibit No. 10.39 to Registrant's
Form 10-K for the year ended December 31, 2003).*
10.38 Agreement Regarding Post-Employment Restrictive Covenants between MAF
Bancorp, Inc. and Thomas R. Perz. (Incorporated herein by reference to
Exhibit No. 10.40 to Registrant's Form 10-K for the year ended
December 31, 2003).*
10.39 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. 10.19 to Registrant's December 31,
1998 Form 10-K).*
10.40 Amendment dated October 19, 2001 to the 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. 10.20 to Registrant's December 31, 2001 Form
10-K). *
10.41 Amendment dated March 23, 2004 to the 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. 10.1 to Registrant's March 31, 2004 Form
10-Q). *
Exhibit No. 12 Statements re: Computation of ratio of earnings
to fixed charges. +
Exhibit No. 21 Subsidiaries of the Registrant.+
Exhibit No. 23 Consent of KPMG LLP.+
Exhibit No. 24 Power of Attorney (Included on Signature Page)
Exhibit No. 31.1 Certification of Chief Executive Officer.+
Exhibit No. 31.2 Certification of Chief Financial Officer.+
Exhibit No. 32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+
- ------------------
* Indicates management contracts or compensatory plans or arrangements required
to be filed as an exhibit.
+ Filed herewith.
90
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 15, 2005
-------------------------------------
(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.
/s/ Allen H. Koranda March 15, 2005
- ---------------------------------------- --------------------
Allen H. Koranda (Date)
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ Jerry A. Weberling March 15, 2005
- ---------------------------------------- --------------------
Jerry A. Weberling (Date)
Executive Vice President and
Chief Financial Officer and Director
(Principal Financial Officer)
/s/ Christine Roberg March 15, 2005
- --------------------------------------- --------------------
Christine Roberg (Date)
First Vice President and Controller
(Principal Accounting Officer)
- --------------------------------------- --------------------
Kenneth R. Koranda (Date)
Vice Chairman of the Board
/s/ Robert J. Bowles, M.D. March 15, 2005
- --------------------------------------- --------------------
Robert J. Bowles, M.D. (Date)
Director
/s/ David C. Burba March 15, 2005
- --------------------------------------- --------------------
David C. Burba (Date)
Director
91
/s/ David J. Drury March 15, 2005
- --------------------------------------- --------------------
David J. Drury (Date)
Director
/s/ Terry A. Ekl March 15, 2005
- --------------------------------------- --------------------
Terry A. Ekl (Date)
Director
/s/ Harris W. Fawell March 15, 2005
- --------------------------------------- --------------------
Harris W. Fawell (Date)
Director
/s/ Joe F. Hanauer March 15, 2005
- --------------------------------------- --------------------
Joe F. Hanauer (Date)
Director
/s/ Barbara L. Lamb March 15, 2005
- --------------------------------------- --------------------
Barbara L. Lamb (Date)
Director
/s/ Thomas R. Perz March 15, 2005
- --------------------------------------- --------------------
Thomas R. Perz (Date)
Director
/s/ Raymond S. Stolarczyk March 15, 2005
- --------------------------------------- --------------------
Raymond S. Stolarczyk (Date)
Director
/s/ F. William Trescott March 15, 2005
- --------------------------------------- --------------------
F. William Trescott (Date)
Director
/s/ Lois B. Vasto March 15, 2005
- --------------------------------------- --------------------
Lois B. Vasto (Date)
Director
/s/ Andrew J. Zych March 15, 2005
- --------------------------------------- --------------------
Andrew J. Zych (Date)
Director
92