Back to GetFilings.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

or

          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-18121

MAF BANCORP, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number: (630) 325-7300

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.

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

The number of shares of common stock outstanding as of May 6, 2005: 32,287,504

                                                                                                                                                                           Page

Part I. Financial Information

Part II - Other Information

2

Part I. Financial Information

Item 1. Financial Statements

MAF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands)
(Unaudited)

        See accompanying notes to unaudited consolidated financial statements.

3

MAF BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)

        See accompanying notes to unaudited consolidated financial statements.

4

MAF BANCORP, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity
(Dollars in thousands)
(Unaudited)

        See accompanying notes to unaudited consolidated financial statements.

5

MAF BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(Dollar in thousands)
(Unaudited)

        See accompanying notes to unaudited consolidated financial statements.

6

MAF BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2005 and 2004
(Unaudited)

(1) Basis of Presentation

        The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of results that may be expected for the year ending December 31, 2005.

        The consolidated financial statements include the accounts of MAF Bancorp, Inc. (“Company”), Mid America Bank, fsb including its subsidiaries (“Bank”) and MAF Developments, Inc. (“MAFD”), for the three month periods ended March 31, 2005 and 2004 and as of March 31, 2005 and December 31, 2004. All material intercompany balances and transactions have been eliminated in consolidation.

(2) 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.

(3) Reclassifications

        Certain reclassifications of 2004 amounts have been made to conform with the current period presentation.

(4) 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 and restricted stock units are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent that they would have a dilutive effect if converted to common stock. Weighted average shares used in calculating earnings per share are summarized below for the periods indicated:

(5) Stock Option Plans

        The Company applies APB Opinion 25, “Accounting for Stock Issued to Employees,” and related Interpretations in accounting for its stock option plans. Accordingly, compensation cost is recognized on restricted stock unit awards, but no compensation expense has been recognized for stock options granted under its plans. In accordance with SEC rules, the Company anticipates adopting the fair value method of expense recognition consistent with SFAS No. 123R “Share-Based Payment,” as of January 1, 2006. 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 the fair value of stock based awards 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 on the next page:

7

(6) Commitments and Contingencies

        At March 31, 2005, we had outstanding commitments to originate loans of $779.7 million, of which $197.9 million were fixed-rate loans and $581.8 million were primarily hybrid adjustable-rate loans with initial fixed-rate terms of 3, 5 or 7 years. Prospective borrowers had locked the interest rate on $134.8 million of these commitments, of which $52.6 million were fixed-rate loans, with rates ranging from 5.0% to 7.25%, and $82.2 million were adjustable rate loans with rates ranging from 4.125% to 7.75%. The interest rates on the remaining commitments of $644.9 million float at current market rates. Included in the outstanding commitments were $62.5 million of business banking loans. At March 31, 2005, we had outstanding forward commitments to sell $72.6 million of fixed-rate mortgage loans and we had outstanding commitments to originate $139.6 million of floating rate equity lines of credit.

        At March 31, 2005, we had outstanding standby letters of credit, excluding land development, totaling $68.4 million. Of this amount $32.3 million is comprised of letters of credit to enhance developers’ industrial revenue bond financings of commercial real estate in the Bank’s market. Additionally, the Company had outstanding standby letters of credit totaling $5.6 million related to real estate development improvements.

        The Company could face potential loss equal to the contractual amounts of contingent credit-related financial instruments such as commitments to extend credit, and letters of credit, if the loans are actually originated or the contracts are fully drawn upon, and the customers default and the value of any existing collateral becomes worthless.

        At March 31, 2005, we had $13.0 million of credit risk related to loans sold to the Federal Home Loan Bank Mortgage Partnership Finance Program (“MPF”), $40.9 million of loans sold with full recourse to other investors, and approximately $27.0 million of credit risk related to reinsurance obligations on loans with private mortgage insurance in force.

(7) 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 our lending and deposit gathering operations as well as other financial services we offer to individual and business customers. The business of our Land Development segment primarily involves land acquisitions, obtaining necessary zoning and regulatory approvals and improving raw land into developed residential lots for sale to builders. All goodwill has been allocated to the Banking segment. Selected segment information is included in the table on the next page:

8

(8) Goodwill and Intangible Assets

        Goodwill had a net carrying amount of $305.2 million at March 31, 2005. All of the Company’s goodwill is in the Banking segment. The Company evaluates goodwill for impairment at least annually. An evaluation was completed as of May 31, 2004. No impairment was deemed necessary as a result of the Company’s analysis.

The changes in the net carrying amounts of intangible assets subject to amortization are as follows:

The following is a summary of intangible assets subject to amortization:

        Amortization expense for core deposit intangibles and mortgage servicing rights for the three months ended March 31, 2005 and estimates for the nine months ending December 31, 2005 and five years thereafter are as follows. These estimates are based on the net carrying amount of the Bank’s core deposit intangibles and mortgage servicing rights as of March 31, 2005.

9

(9) Post-Retirement Plans

        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 Bank also provides employees and directors post-retirement medical benefits. The components of the net periodic benefit cost of post-retirement plans are as follows:

(10) New Accounting Pronouncements

        Other-Than-Temporary Impairment. 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.

10

        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 were presented in Notes 3 and 4 of the 2004 Annual Report on Form 10-K. 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.

        Stock Based Compensation. In December 2004, the FASB issued Statement No. 123 (revised 2004), “Share-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 determined at the date of the grant. Under SEC guidance, the applicable effective date of SFAS No. 123R is the beginning of the next fiscal year after June 15, 2005. The Company anticipates adopting the fair value method of expense recognition as of January 1, 2006, in accordance with SFAS No. 123R, “Share-Based Payment,” which is effective as of the beginning of next fiscal year after June 15, 2005. 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 based on the time of vesting beginning with the effective date, under the requirements of SFAS No. 123R for all shared-based payments granted after that date and under the requirements of SFAS No. 123 for all awards granted prior to the effective date of SFAS No. 123R that vest after the effective date. Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but this method 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 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. 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 the 2004 Annual Report on Form 10-K.

        The Company currently utilizes the Black-Scholes option-pricing model 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.

        In March 2005, the SEC staff issued Staff Accounting Bulletin No. 107 ("SAB 107") regarding the interaction between SFAS No. 123R and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 provides guidance related to valuation methods (including assumptions such as expected volatility and expected term), accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of Statement 123R, the modification of employee share options prior to adoption of Statement 123R and disclosures in Management’s Discussion and Analysis of Financial Condition and Result of Operations subsequent to adoption of Statement 123R.

11

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Information

        This report, in Item 2. “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, forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended), which involve significant risks and uncertainties. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. 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 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, less than anticipated balance sheet growth, 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 the Company’s loan or investment portfolios, demand for financial services and residential real estate in the Company’s market area, unanticipated problems in closing pending real estate contracts or slowdown in real estate lot sales, 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.

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. 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.

        We offer various financial services to retail and business banking customers through a network of 72 branches in Illinois and southeastern Wisconsin. 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 expect to continue to search for and evaluate potential acquisition opportunities that could enhance franchise value and may periodically be presented with opportunities to acquire other institutions, branches or deposits in the Chicago or Milwaukee metropolitan areas or which allow the Company to expand outside its current primary market areas, as we have done in recent years. 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 generally at a premium to current market value. As such, management anticipates that acquisitions made by the Company could involve some short-term book value per share dilution and may involve earnings per share dilution depending on the Company’s timing and success in integrating the operations of businesses acquired and the level of cost savings and revenue enhancements that may be achieved.

12

Critical Accounting Policies and Estimates

        Our discussion and analysis of the Company’s financial condition and results of operations is based upon our 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 the Company’s Form 10-K for the fiscal year ended December 31, 2004 in “Item 8. Financial Statements and Supplementary Data.” The preparation of these consolidated financial statements requires that we 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. We believe that of significant accounting policies, the following involve a higher degree of judgment and complexity.

        Allowance for loan losses. We maintain an allowance for loan losses to cover management's estimate of probable losses inherent in the bank's loan portfolio. 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 that is recorded in the consolidated statement of operations.

        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. Estimated value is also affected by additional assumptions relating to loan prepayment speeds, earnings on escrow funds, as well as the discount rate 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. A recovery of $125,000 was recorded in the first three months of 2005 compared to a $555,000 recovery in the prior year period. 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 since it comprises a single component.

        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 or 2005. 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 March 31, 2005, our goodwill was $305.2 million and our identifiable intangible assets (core deposits) amounted to $12.3 million. We

13

recorded $737,000 of amortization of core deposit intangibles during the first quarter of 2005 and $740,000 during the first quarter of 2004. There was no goodwill impairment recorded in 2005 or 2004.

        Real estate held for development. Profits from lot sales in the Company’s real estate developments are based on cash received less the estimated cost of sales per lot in the development, 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 changes in lot sale profits on past sales that result from, changes in estimated future costs are recognized in the period of that 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.

Results of Operations for the Three Months Ended March 31, 2005 and 2004

Overview

        The following table highlights selected financial information for the three months ended March 31, 2005 and 2004.

14

Net Interest Income and Net Interest Margin

        Net interest income increased to $67.5 million for the three months ended March 31, 2005, from $64.0 million for the three months ended March 31, 2004, primarily due to a $635 million increase in average interest-earning assets, primarily in loans and mortgage-backed securities. Our interest rate spread declined to 2.82% compared to 2.90% in the prior year quarter, while the net interest margin declined to 3.04% for the quarter compared to 3.10% the previous year quarter.

        The average yield on interest-earning assets increased ten basis points to 5.04% for the three months ended March 31, 2005 from 4.94% for the three months ended March 31, 2004. This increase was due primarily to an increase in the yield on loans receivable and mortgage-backed securities, partially offset by a decline in the yield on investment securities. The yield on loans receivable increased to 5.22% for the first quarter of 2005 from 5.14% for the first quarter of 2004 primarily as a result of an increase in the yield on the equity line of credit portfolio, which in a rising rate environment, reprices more quickly than other components of the loan portfolio. The yield on mortgage-backed securities also benefited from rising interest rates, increasing 31 basis points to 4.05% for the three months ended March 31, 2005 from 3.74% for the three months ended March 31, 2004. The yield on investment securities declined to 5.00% for the first quarter 2005 from 5.11% for the first quarter 2004 due primarily to a decrease in the dividends earned on investments in FHLB of Chicago stock (5.5% during the first quarter of 2005 compared to 6.5% during the first quarter of 2004) as well as a decrease in the Bank’s average investment in FHLB of Chicago stock ($260.4 million in the first quarter of 2005 versus $387.9 million in the first quarter of 2004).

        The average cost of interest-bearing liabilities increased 18 basis points to 2.22% for the three months ended March 31, 2005 from 2.04% for the three months ended March 31, 2004. This increase was due primarily to an increase in the cost of deposits, partially offset by a decline in the cost of borrowed funds. The cost of deposits increased 28 basis points to 1.62% for the first quarter of 2005 from 1.34% for the first quarter of 2004 largely due to higher rates on money market accounts and certificates of deposit driven by higher short-term interest rates and more aggressive deposit pricing as the Company competes for deposit growth in its market. The cost of borrowed funds decreased eight basis points to 3.50% for the first quarter of 2005 from 3.58% for the first quarter of 2004 primarily due to the maturing of FHLB advances that had higher fixed interest rates. As previously disclosed, the Company expects that the flatter yield curve and increased competition for deposits is likely to pressure its net interest margin throughout 2005.

        The net interest margin declined during the quarter as deposits and other borrowings repriced faster than asset yields as short-term interest rates rose. The six basis point improvement in the yield on loans receivable was primarily the result of an increase in the yield on the equity line of credit portfolio, which in a rising rate environment, reprices more quickly than other components of the loan portfolio. The 11 basis point rise in the cost of deposits is largely due to higher rates on money market accounts and certificates of deposit driven by the higher short-term interest rates and more aggressive deposit pricing as the Company completes for deposit growth in its markets.

        The increase in average interest-earning assets and liabilities during the quarter were the result of the acquisition of Chesterfield Financial Corp., which closed on October 31, 2004. Average interest-earning assets grew $95 million or 1.1% during the quarter, with growth occurring primarily in the balance of mortgage-backed securities, which increased $191 million, or 18%, primarily to redeploy proceeds from loan sales and the redemption of stock in the Federal Home Loan Bank of Chicago. Average loans receivable balances declined by $50.9 million during the quarter as loan origination volumes were lower than in the fourth quarter of 2004, the Bank experienced some large, expected paydowns on business banking loans and growth in equity line of credit balances has slowed from the strong growth experienced in the last three quarters of 2004.

        The growth in average interest-earning assets during the quarter was primarily funded by deposits. Compared to the fourth quarter of 2004, the average balance of interest-bearing deposits rose by $131 million, or 2.4%, to $5.48 billion during the first quarter of 2005.

15

Average Balances/Rates

        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. Loans receivable balances include non-accrual loans. The yield/cost at March 31, 2005, includes fees that are considered adjustments to yield.

Rate/Volume Analysis of Net Interest Income

        The table below shows the impact of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in interest rates on the Bank’s interest income and interest expense for 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.