MAF Bancorp (MAFB) 10-Q 2003 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarter ended June 30, 2003

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)

Delaware	36-3664868
(State of Incorporation)	(I.R.S. Employer Identification No.)
55th Street & Holmes Avenue
Clarendon Hills, Illinois	60514
(Address of Principal Executive Offices)	(Zip Code)

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.  Yes  x  No  ¨

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  x  No  ¨

The number of shares outstanding of the issuer’s common stock, par value $.01 per share, was 25,772,996 at August 8, 2003.

MAF BANCORP, INC. AND SUBSIDIARIES

FORM 10-Q

		Page
Part I.	Financial Information
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition as of June 30, 2003 and December 31, 2002 (unaudited)	3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002 (unaudited)	4
	Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2003 (unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002 (unaudited)	6
	Notes to Unaudited Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
Part II.	Other Information
Item 1.	Legal Proceedings	34
Item 2.	Changes in Securities	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Submission of Matters to a Vote of Security Holders	34
Item 5.	Other Information	34
Item 6.	Exhibits and Reports on Form 8-K	34
	Signature Page	36

2

Part I. Financial Information

Item 1. Financial Statements

MAF BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

(Dollars in thousands)

(Unaudited)

	June 30, 2003			December 31, 2002
Assets
Cash and due from banks	$	98,469		134,265
Interest-bearing deposits		87,372		28,210
Federal funds sold		73,616		100,205
Total cash and cash equivalents		259,457		262,680
Investment securities available for sale, at fair value		267,811		308,235
Stock in Federal Home Loan Bank of Chicago, at cost		207,491		169,708
Mortgage-backed securities available for sale, at fair value		315,393		365,638
Loans receivable held for sale		92,830		167,780
Loans receivable, net of allowance for losses of $19,379 and $19,483		4,521,927		4,363,152
Accrued interest receivable		22,794		27,513
Foreclosed real estate		1,345		2,366
Real estate held for development or sale		23,280		14,938
Premises and equipment, net		78,393		72,492
Other assets		64,871		67,753
Goodwill		95,375		94,796
Intangibles		20,328		20,130
	$	5,971,295		5,937,181
Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	3,836,466		3,751,237
Borrowed funds		1,471,000		1,556,500
Advances by borrowers for taxes and insurance		37,331		37,700
Accrued expenses and other liabilities		100,662		90,286
Total liabilities		5,445,459		5,435,723
Stockholders’ equity:
Preferred stock, $.01 par value; authorized 5,000,000 shares; none outstanding		—		—
Common stock, $.01 par value; authorized 80,000,000 shares; 25,420,650 shares issued; 23,201,179 and 23,252,815 shares outstanding		254		254
Additional paid-in capital		205,169		204,710
Retained earnings, substantially restricted		372,983		342,790
Accumulated other comprehensive income		1,807		4,819
Stock in gain deferral plan; 238,683 and 236,401 shares		929		851
Treasury stock, at cost; 2,219,471 and 2,167,835 shares		(55,306	)	(51,966	)
Total stockholders’ equity		525,836		501,458
	$	5,971,295		5,937,181

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)

	Three Months Ended June 30,					Six Months Ended June 30,
	2003			2002		2003		2002
Interest income:
Loans receivable	$	64,304		71,563		131,289		143,568
Mortgage-backed securities available for sale		2,734		2,908		6,257		5,280
Investment securities available for sale		5,497		6,122		10,842		11,938
Interest-bearing deposits and federal funds sold		1,390		1,289		2,563		2,652
Total interest income		73,925		81,882		150,951		163,438
Interest expense:
Deposits		14,855		24,218		31,817		49,764
Borrowed funds		18,507		19,527		37,516		39,573
Total interest expense		33,362		43,745		69,333		89,337
Net interest income		40,563		38,137		81,618		74,101
Provision for loan losses		—		—		—		—
Net interest income after provision for loan losses		40,563		38,137		81,618		74,101
Non-interest income:
Gain (loss) on sale or writedown of:
Loans receivable held for sale		8,254		2,662		15,802		5,002
Mortgage-backed securities		—		39		5,352		39
Investment securities		285		517		(5,427	)	982
Foreclosed real estate		302		124		233		151
Income from real estate operations		1,687		160		3,322		3,057
Deposit account service charges		5,960		5,527		11,399		10,351
Loan servicing fee expense, net		(2,040	)	137		(3,416	)	97
Impairment of mortgage servicing rights		(940	)	(490	)	(940	)	(490	)
Brokerage commissions		648		642		1,379		1,245
Other		2,817		2,276		5,284		4,834
Total non-interest income		16,973		11,594		32,988		25,268
Non-interest expense:
Compensation and benefits		15,654		14,719		31,292		28,945
Office occupancy and equipment		3,453		2,801		6,984		5,668
Advertising and promotion		1,777		1,362		3,098		2,549
Data processing		992		847		1,965		1,846
Federal deposit insurance premiums		161		173		322		347
Other		4,337		3,975		9,009		7,679
Amortization of core deposit intangibles		370		409		749		833
Total non-interest expense		26,744		24,286		53,419		47,867
Income before income taxes		30,792		25,445		61,187		51,502
Income tax expense		11,253		9,059		22,360		18,474
Net income	$	19,539		16,386		38,827		33,028
Basic earnings per share	$	.84		.71		1.67		1.43
Diluted earnings per share	$	.82		.69		1.63		1.39

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)

	Six Months Ended June 30, 2003
	Common stock		Additional paid-in capital	Retained earnings		Accumulated other comprehensive income		Stock in gain deferral plan	Treasury stock		Total
Balance at December 31, 2002	$	254	204,710	342,790		4,819		851	(51,966	)	501,458
Comprehensive income:
Net income		—	—	38,827		—		—	—		38,827
Other comprehensive income, net of tax:
Unrealized holding loss during the period		—	—	—		(3,060	)	—	—		(3,060	)
Less: reclassification adjustment of loss included in net income		—	—	—		48		—	—		48
Total comprehensive income		—	—	38,827		(3,012	)	—	—		35,815
Exercise of 75,272 stock options and reissuance of treasury stock		—	—	(271	)	—		—	1,268		997
Allocation of 33,896 treasury shares to deferred compensation plan		—	—	—		—		—	820		820
Tax benefits from stock-related compensation		—	459	—		—		—	—		459
Purchase of shares of treasury stock		—	—	—		—		—	(5,428	)	(5,428	)
Cash dividends declared ($.36 per share)		—	—	(8,371	)	—		—	—		(8,371	)
Dividends paid to gain deferral plan		—	—	8		—		78	—		86
Balance at June 30, 2003	$	254	205,169	372,983		1,807		929	(55,306	)	525,836

See accompanying notes to unaudited consolidated financial statements.

5

MAF BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2003			2002
Operating activities:
Net income	$	38,827		33,028
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,678		3,124
FHLB of Chicago stock dividend		(7,783	)	(3,565	)
Deferred income tax (benefit) expense		(4,658	)	185
Amortization of core deposit intangibles		749		833
Amortization of premiums, discounts, and deferred loan fees		2,891		2,005
Amortization and impairment of mortgage servicing rights		7,662		2,605
Net gain on sale of loans receivable held for sale		(15,802	)	(5,002	)
Net (gain) loss on sale of investment securities and mortgage-backed securities		75		(1,021	)
Net gain on real estate held for development or sale		(3,322	)	(3,057	)
Decrease in accrued interest receivable		4,719		325
Net decrease in other assets and liabilities		9,063		68
Loans originated for sale		(805,191	)	(467,923	)
Sale of loans originated for sale		891,568		576,941
Net cash provided by operating activities		122,476		138,546
Investing activities:
Loans receivable originated for investment		(1,642,309	)	(933,987	)
Principal repayments on loans receivable		1,399,794		903,629
Principal repayments on mortgage-backed securities		115,048		23,561
Proceeds from maturities of investment securities available for sale		59,678		63,767
Proceeds from sale of:
Investment securities available for sale		48,162		8,773
Mortgage-backed securities available for sale		151,708		14,823
Real estate held for development or sale		11,607		10,517
Purchases of:
Investment securities available for sale		(72,875	)	(97,023	)
Mortgage-backed securities available for sale		(133,013	)	(135,803	)
Stock in FHLB of Chicago		(30,000	)	(30,000	)
Real estate held for development or sale		(11,683	)	(3,493	)
Premises and equipment		(9,325	)	(6,620	)
Proceeds from acquisitions, net of cash acquired		7,968		—
Net cash used in investing activities	$	(105,240	)	(181,856	)

(continued)

6

MAF BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2003			2002
Financing activities:
Proceeds from FHLB of Chicago advances	$	—		150,000
Repayment of unsecured line of credit		—		(10,000	)
Repayment of FHLB of Chicago advances		(85,500	)	(140,000	)
Proceeds from exercise of stock options		1,174		1,881
Purchase of treasury stock		(5,428	)	(96	)
Cash dividends		(7,602	)	(6,159	)
Net increase in deposits		77,266		151,687
Decrease in advances by borrowers for taxes and insurance		(369	)	(762	)
Net cash (used in) provided by financing activities		(20,459	)	146,551
Increase (decrease) in cash and cash equivalents		(3,223	)	103,241
Cash and cash equivalents at beginning of period		262,680		224,672
Cash and cash equivalents at end of period	$	259,457		327,913
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds	$	69,958		89,738
Income taxes		25,477		18,157
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate		1,910		1,724
Loans receivable swapped into mortgage-backed securities	$	130,897		13,624

See accompanying notes to unaudited consolidated financial statements.

7

MAF BANCORP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

Three and Six Months Ended June 30, 2003 and 2002

(Unaudited)

(1) Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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 and six months ended June 30, 2003 are not necessarily indicative of results that may be expected for the year ending December 31, 2003.

The consolidated financial statements include the accounts of MAF Bancorp, Inc. (“Company”), and its wholly-owned subsidiaries, Mid America Bank, fsb and subsidiaries (“Bank”) and MAF Developments, Inc. (“MAFD”), as of and for the three and six month periods ended June 30, 2003 and 2002 and as of December 31, 2002. All material intercompany balances and transactions have been eliminated in consolidation.

(2) Earnings Per Share

Earnings per share is determined by dividing net income for the period by the weighted average number of shares outstanding. Stock options are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent that they have a dilutive effect. Stock options are the only adjustment made to average shares outstanding in computing diluted earnings per share. Weighted average shares used in calculating earnings per share are summarized below for the periods indicated:

	Three Months Ended June 30,
	2003					2002
	Income (Numerator)		Shares (Denominator)	Per-Share Amount		Income (Numerator)		Shares (Denominator)	Per-Share Amount
	(Dollars in thousands, except per share data)
Basic earnings per share:
Income available to common shareholders	$	19,539	23,274,342	$	.84	$	16,386	23,154,581	$	.71
Effect of dilutive securities:
Stock options			583,546					691,551
Diluted earnings per share:
Income available to common shareholders plus assumed conversions	$	19,539	23,857,888	$	.82	$	16,386	23,846,132	$	.69

8

	Six Months Ended June 30,
	2003					2002
	Income (Numerator)		Shares (Denominator)	Per-Share Amount		Income (Numerator)		Shares (Denominator)	Per-Share Amount
	(Dollars in thousands, except per share data)
Basic earnings per share:
Income available to common shareholders	$	38,827	23,287,507	$	1.67	$	33,028	23,084,701	$	1.43
Effect of dilutive securities:
Stock options			567,529					626,375
Diluted earnings per share:
Income available to common shareholders plus assumed conversions	$	38,827	23,855,036	$	1.63	$	33,028	23,711,076	$	1.39

(3) Commitments and Contingencies

At June 30, 2003, the Bank had outstanding commitments to originate one-to-four family loans of $1.07 billion, of which $709.5 million were fixed-rate loans and $364.7 million were adjustable-rate loans. Prospective borrowers had locked the interest rate on $513.3 million of these commitments, of which $370.5 million were fixed-rate loans, with rates ranging from 3.5% to 8.25%, and $142.8 million were adjustable rate loans with rates ranging from 2.25% to 7.25%. The interest rates on the remaining commitments of $560.7 million float at current market rates. At June 30, 2003, the Bank had outstanding forward commitments to sell $212.5 million of fixed-rate mortgage loans.

At June 30, 2003, the Bank had outstanding standby letters of credit totaling $17.6 million. Of this amount $13.3 million is comprised of letters of credit to enhance a developer’s industrial revenue bond financings of commercial real estate in the Bank’s market. These two letters of credit are collateralized by mortgage-backed securities and U.S. Government and agency securities owned by the Bank. Additionally, the Company had outstanding standby letters of credit totaling $11.8 million related to real estate development improvements.

The contractual amounts of credit-related financial instruments such as commitments to extend credit, and letters of credit, represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless. At June 30, 2003, the Bank had $9.0 million of credit risk related to loans sold to the Federal Home Loan Bank Mortgage Partnership Finance Program (“MPF”), $3.9 million of loans sold with recourse to other investors, and approximately $12.0 million of credit risk related to loans with private mortgage insurance in force.

(4) 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.

(5) Reclassifications

Certain reclassifications of 2002 amounts have been made to conform with the current period presentation.

(6) Segment Information

The Company utilizes the “management approach” for segment reporting. This approach is based on the way that a chief decision maker for the Company organizes segments for making operating decisions and assessing performance.

9

The Company operates two separate lines of business. The Banking segment represents the retail bank, participating in primarily residential mortgage portfolio lending, deposit gathering and offering other financial services mainly to individuals and small businesses. Land Development consists primarily of developing raw land for residential use and sale to builders. All goodwill has been allocated to the Banking segment. Selected segment information is included in the tables below:

	At or For the Three Months Ended June 30, 2003
	Banking		Land Development		Eliminations	Consolidated Total
	(In thousands)
Interest income	$	73,925	—		—	73,925
Interest expense		33,362	—		—	33,362
Net interest income		40,563	—		—	40,563
Non-interest income		15,286	1,687		—	16,973
Non-interest expense		26,496	248		—	26,744
Income before income taxes		29,353	1,439		—	30,792
Income tax expense		10,682	571		—	11,253
Net income	$	18,671	868		—	19,539
Average assets	$	5,944,882	21,716		—	5,966,598
	At or For the Three Months Ended June 30, 2002
	Banking		Land Development		Eliminations	Consolidated Total
	(In thousands)
Interest income	$	81,882	—		—	81,882
Interest expense		43,718	27		—	43,745
Net interest income		38,164	(27	)	—	38,137
Non-interest income		11,434	160		—	11,594
Non-interest expense		23,988	298		—	24,286
Income before income taxes		25,610	(165	)	—	25,445
Income tax expense		9,124	(65	)	—	9,059
Net income (loss)	$	16,486	(100	)	—	16,386
Average assets	$	5,623,995	13,754		—	5,637,749
	At or For the Six Months Ended June 30, 2003
	Banking		Land Development		Eliminations	Consolidated Total
	(In thousands)
Interest income	$	150,951	—		—	150,951
Interest expense		69,333	—		—	69,333
Net interest income		81,618	—		—	81,618
Non-interest income		29,666	3,322		—	32,988
Non-interest expense		52,602	817		—	53,419
Income before income taxes		58,682	2,505		—	61,187
Income tax expense		21,366	994		—	22,360
Net income	$	37,316	1,511		—	38,827
Average assets	$	5,926,764	19,626		—	5,946,390

10

	At or For the Six Months Ended June 30, 2002
	Banking		Land Development		Eliminations	Consolidated Total
	(In thousands)
Interest income	$	163,438	—		—	163,438
Interest expense		89,280	57		—	89,337
Net interest income		74,158	(57	)	—	74,101
Non-interest income		22,211	3,057		—	25,268
Non-interest expense		47,192	675		—	47,867
Income before income taxes		49,177	2,325		—	51,502
Income tax expense		17,552	922		—	18,474
Net income	$	31,625	1,403		—	33,028
Average assets	$	5,598,078	14,252		—	5,612,330

(7) Goodwill and Intangible Assets

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-an amendment of the Financial Accounting Standards Board, (“FASB”) No. 72 and 144 and FASB Interpretation No. 9, effective January 1, 2002. These pronouncements provide that intangible assets with finite lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but rather tested at least annually for impairment. As required, the Company discontinued the amortization of goodwill as of January 1, 2002 and goodwill currently has a net carrying amount of $95.4 million at June 30, 2003. The Company evaluates goodwill for impairment at least annually. An evaluation was completed as of May 31, 2003. No impairment was deemed necessary as a result of the Company’s analysis.

The changes in the carrying amount of goodwill, by segment, for the six months ended June 30, 2003 is as follows:

	Banking		Land Development	Total
	(Dollars in thousands)
Balance as of December 31, 2002	$	94,796	—	94,796
Additions		579	—	579
Balance at June 30, 2003	$	95,375	—	95,375

The changes in the carrying amount of intangibles for the six months ended June 30, 2003 is as follows:

	Core deposit Intangibles			Mortgage Servicing Rights		Total
	(Dollars in thousands)
Balance at December 31, 2002	$	7,170		12,960		20,130
Additions		85		8,524		8,609
Amortization expense		(749	)	(6,722	)	(7,471	)
Increase in valuation allowance		—		(940	)	(940	)
Balance at June 30, 2003	$	6,506		13,822		20,328

11

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

	As of June 30, 2003				As of December 31, 2002
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount	Accumulated Amortization
	(Dollars in thousands)
Core deposit intangibles	$	16,031	(9,525	)	15,947	(8,777	)
Mortgage servicing rights(1)		16,224	(2,402	)	15,207	(2,247	)
Total	$	32,255	(11,927	)	31,154	(11,024	)

⁽¹⁾ The gross carrying amounts for June 30, 2003 and December 31, 2002 are net of impairment reserves of $4.3 million and $3.4 million respectively.

Amortization expense for core deposit intangibles and mortgage servicing rights for the six months ended June 30, 2003 and estimates for the six months ended December 31, 2003 and five years thereafter are as follows. These estimates are based on the carrying value of the Bank’s core deposit intangibles and mortgage servicing rights as of June 30, 2003.

	Core Deposit Intangibles		Mortgage Servicing Rights
	(Dollars in thousands)
Aggregate Amortization Expense:
For the Six months ended June 30, 2003	$	749	6,722
Estimated Amortization Expense:
For the Six Months Ended December 31, 2003		735	3,400
For the Year Ended December 31, 2004		1,400	3,900
For the Year Ended December 31, 2005		1,300	2,000
For the Year Ended December 31, 2006		900	1,500
For the Year Ended December 31, 2007		600	1,200
For the Year Ended December 31, 2008		600	900

(8) 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, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, “Accounting for Stock-Based Compensation,” amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below:

	Three Months Ended June 30,			Six Months Ended June 30,
	2003		2002	2003	2002
	(Dollars in thousands, except per share data)
Net income, as reported	$	19,539	16,386	38,827	33,028
Deduct: total stock option employee compensation expense determined under fair value based method for all awards, net of related tax effects		839	740	1,664	1,472
Pro-forma net income		18,700	15,646	37,163	31,556
Basic Earnings per Share
As Reported		.84	.71	1.67	1.43
Pro-forma		.80	.68	1.60	1.37
Diluted Earnings Per Share
As Reported		.82	.69	1.63	1.39
Pro-forma		.80	.68	1.60	1.37

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(9) Subsequent Event

On July 21, 2003, the Company completed its previously announced acquisition of Fidelity Bancorp, Inc. (“Fidelity”), in an all-stock transaction. Approximately 2.8 million shares were issued as a result of the transaction and options to purchase Fidelity common stock outstanding at the effective time of the transaction were converted into options to purchase a total of 20,632 shares of the Company’s common stock. At acquisition date, Fidelity had $612.9 million in total assets, $434.6 million in deposits and $59.6 million in stockholders’ equity. The acquisition added five new offices to the Bank’s branch network, three in the City of Chicago and two in the suburban markets of Schaumburg and Franklin Park.

(10) New Accounting Pronouncements

In September 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This Statement is effective for exit or disposal activities that are initiated after December 31, 2002. Adoption of this statement did not have a material effect on the Company’s consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” which provides new accounting guidance on when to consolidate a variable interest entity. A variable interest entity exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics include the direct or indirect ability to make decisions about an entity’s activities through voting rights or similar rights, the obligation to absorb the expected loss of an entity if they occur, and the right to receive the expected residual return of the entity if they occur. The Company does not expect that the adoption of this Interpretation will have a material impact on its consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” The Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” In general, this Statement should be applied prospectively. The Company does not expect that the application of this Statement will materially impact its consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of this Statement is not expected to have a material effect on the Company’s consolidated financial statements.

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, certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the

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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 costs or unanticipated difficulties associated with the integration of Fidelity Bancorp into the Company, difficulties or delays in completing the acquisition of St. Francis Capital Corporation, difficulties in the integration or delays in the data processing conversion which may affect the Company’s ability to achieve anticipated cost savings related to the operation of the acquired banking offices of St. Francis, higher than expected costs related to the St. Francis transaction, unanticipated changes in interest rates or flattening of the yield curve, deteriorating economic conditions which could result in increased delinquencies in the Company’s or St. Francis’ loan portfolio, changes in purchase accounting adjustments and/or amortization periods relating to the St. Francis acquisition, legislative or regulatory developments, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the Company’s or St. Francis’ loan or investment portfolios, or further deterioration in the value of investment securities, demand for loan products, secondary mortgage market conditions, deposit flows, competition, demand for financial services and residential real estate in the Company’s and St. Francis’ market area, unanticipated slowdowns in real estate lot sales or problems in closing pending real estate contracts, delays in real estate development projects, the possible short-term dilutive effect of other potential acquisitions, if any, and changes in accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

Overview

Set forth below are highlights of the Company’s second quarter 2003 performance results:

• Diluted EPS of $.82, up 18.8% from last year’s second quarter;

• Net income of $19.5 million, up 19.2% from a year ago;

• Return on average equity of 14.97% for the quarter;

• Return on average assets of 1.31% for the quarter;

• Strong loan origination volume of $1.4 billion, a quarterly record;

• Loan sale volume of $401 million, generating gains of $8.3 million;

• Opening of two new branch offices;

• Agreement to acquire St. Francis Capital Corporation, a Milwaukee, WI-based banking organization with assets of $2.3 billion;

General

MAF Bancorp, Inc. (“Company”), is a registered savings and loan holding company incorporated under the laws of the state of Delaware and is primarily engaged in the retail banking business through its wholly-owned subsidiary, Mid America Bank, fsb (“Bank”), and in the residential land development business primarily through MAF Developments, Inc.

The Bank offers various financial services to its customers through a network of 43 branches in suburban and urban communities in the Chicago metropolitan area including 13 locations on the north and northwest side of Chicago, a strong presence in Cook County and DuPage County, and increasing penetration of the rapidly-growing Will and Kane Counties, as well as a presence in the southwest suburbs of Chicago. Management has current plans to open another banking office during 2003 with the site now in development. The Bank is principally engaged in the business of attracting deposits from the general public and using such deposits, along with other borrowings, to make loans secured by real estate, primarily one-to four-family residential loans. To a lesser

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extent, the Bank also makes multi-family mortgage, commercial, residential construction, land acquisition and development and a variety of consumer loans.

The Company also participates in the following businesses through the designated subsidiaries:

Subsidiary	Activity
MAF Developments; NW Financial, Inc.	Residential land development
Mid America Insurance Agency, Inc.	General insurance services
Centre Point Title Services, Inc.	General title services for Bank loan customers
Mid America Investments Services, Inc.	INVEST affiliate investment services/brokerage
MAF Realty Co., LLC III;
MAF Realty Co., LLC IV	Real estate investment trust
Mid America Re, Inc.	Captive reinsurance of private mortgage insurance

As it has in recent years, the Company expects 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 metropolitan area or which allow the Company to expand outside its current primary market 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 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 success in integrating the operations of businesses acquired and the level of cost savings and revenue enhancements that may be achieved. However, based on preliminary estimates of purchase accounting adjustments, the Company currently anticipates that the acquisition of St. Francis will be accretive to earnings per share in 2004.

On July 21, 2003, the Company completed the acquisition of Fidelity Bancorp in an all-stock transaction. At acquisition date, Fidelity had assets of $612.9 million, deposits of $434.6 million and five branch offices in the Chicago area. Approximately 2.8 million shares were issued as a result of the transaction and options to purchase Fidelity common stock outstanding at the effective time of the transaction were converted into options to purchase a total of 20,632 shares of the Company’s common stock.

On May 21, 2003, the Company announced that it had reached an agreement to acquire St. Francis Capital Corporation in an all-stock transaction valued at approximately $264 million on the date of the announcement. As previously disclosed, the Company expects this transaction to close in the fourth quarter of 2003. At June 30, 2003, St. Francis had assets of $2.3 billion, deposits of $1.4 billion and 22 branch offices in the Milwaukee area.

During June 2003, the Bank opened two new branch offices in the suburban Plainfield area. In July 2003 new branch offices were also opened in Skokie and Niles to expand the branch network to its present 43 locations.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations of the Company is based upon its consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America, and are more fully described in Note 1 of the consolidated financial statements found in the Company’s Form 10-K for the fiscal year ended December 31, 2002 in “Item 8. Financial Statements and Supplementary Data.” The preparation of these consolidated financial statements require that management make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense, as well as related disclosures of contingencies. Management’s judgment is based on historical experience, terms of existing contracts, market trends, and other information available to management. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity.

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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. These estimates are impacted by loan prepayment speeds, earnings on escrow funds, as well as the discount rate used to present value the cash flow stream. Subsequent to the establishment of this asset, management reviews the fair value of mortgage servicing rights on a quarterly basis 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, as it did for $2.3 million in 2002 and $904,000 in 2001. Should estimates assumed by management regarding future prepayment speeds on the underlying loans supporting the mortgage servicing rights prove to be incorrect, additional valuation allowances could occur, or contrarily, valuation allowances could be recovered if changing estimates increase the fair value of mortgage servicing rights.

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. 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 in evaluating the net realizable value of a development at the end of a reporting period. 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.

Regulation and Supervision

As a federally chartered savings bank, the Bank’s deposits are insured up to the applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is a member of the Federal Home Loan Bank (“FHLB”) of Chicago, which is one of the twelve regional banks for federally insured savings institutions comprising the FHLB system. The Bank is regulated by the Office of Thrift Supervision (“OTS”) and the FDIC. The Bank is further regulated by the Board of Governors of the Federal Reserve System as to reserves required to be maintained against deposits and certain other matters. Such 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.

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Any change in such regulation, whether by the OTS, the FDIC or Congress could have a material impact on the Company and its operations.

Capital Standards. Savings associations must satisfy three different measures of capital adequacy: core and tangible capital to total assets ratios as well as a regulatory capital to total risk-weighted assets ratio. The minimum level required for each of these capital standards is established by regulation. The Company has managed its balance sheet so as to reasonably exceed these minimums. The acquisition of Fidelity did not have a significant impact on capital adequacy levels.

Core Capital Requirement

The core capital requirement, or the required “leverage limit,” generally requires a savings institution to maintain core capital of not less than 4% of adjusted total assets. For the Bank, core capital generally includes common stockholders’ equity (including retained earnings), and minority interests in the equity accounts of fully consolidated subsidiaries, less intangibles other than certain servicing rights. Investments in and advances to subsidiaries engaged in activities not permissible for national banks are also required to be deducted in computing core capital.

Tangible Capital Requirement

Under OTS regulation, savings institutions are required to meet a minimum tangible capital requirement of 1.5% of adjusted total assets. Tangible capital is defined generally as core capital less any intangible assets, plus purchased mortgage servicing rights in an amount includable in core capital.

Risk-Based Capital Requirement

The risk-based capital requirement provides that savings institutions maintain total capital equal to and not less than 8% of total risk-weighted assets. For purposes of the risk-based capital computation, total capital is defined as core capital, as defined above, plus supplementary capital, primarily general loan loss reserves (limited to a maximum of 1.25% of total risk-weighted assets). In computing total capital, the supplementary capital included cannot exceed 100% of core capital.

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At June 30, 2003 and December 31, 2002, the Bank exceeded all of the minimum capital requirements as follows:

	June 30, 2003				December 31, 2002
	Amount		Percent of Assets		Amount		Percent of Assets
	(Dollars in thousands)
Stockholder’s equity of the Bank	$	510,900	8.60	%	$	500,746	8.47	%
Tangible capital	$	405,930	6.96	%	$	392,995	6.78	%
Tangible capital requirement		87,511	1.50			86,971	1.50
Excess	$	318,419	5.46	%	$	306,024	5.28	%
Core capital	$	405,930	6.96	%	$	392,995	6.78	%
Core capital requirement		233,362	4.00			231,923	4.00
Excess	$	172,568	2.96	%	$	161,072	2.78	%
Core and supplementary capital	$	416,962	11.73	%	$	405,959	11.85	%
Risk-based capital requirement		284,446	8.00			274,114	8.00
Excess	$	132,516	3.73	%	$	131,845	3.85	%
Total Bank assets	$	5,941,291			$	5,909,865
Adjusted total Bank assets		5,834,040				5,798,064
Total risk-weighted assets		3,662,825				3,538,222
Adjusted total risk-weighted assets		3,555,574				3,426,421

A reconciliation of consolidated stockholder’s equity of the Bank for financial reporting purposes to capital available to the Bank to meet regulatory capital requirements is as follows:

	June 30, 2003			December 31, 2002
	(In thousands)
Stockholder’s equity of the Bank	$	510,900		500,746
Goodwill and core deposit intangibles		(101,880	)	(101,967	)
Non-permissible subsidiary deduction		(210	)	(208	)
Non-includable mortgage servicing rights		(1,382	)	(1,296	)
Equity adjustment for available for sale securities		(1,498	)	(4,280	)
Tangible and core capital		405,930		392,995
Recourse on loan sales		(8,305	)	(6,477	)
General loan loss reserves		19,337		19,441
Core and supplementary capital	$	416,962		405,959

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Changes in Financial Condition

Total assets of the Company were $5.97 billion at June 30, 2003, an increase of $34.1 million, or 0.6% from $5.94 billion at December 31, 2002. The increase is due to higher balances in loans receivable and investments held by the Bank, funded by an increase in deposit balances, partially offset by decreases in mortgage-backed securities.

Cash and short-term investments totaled a combined $259.5 million at June 30, 2003, a decrease of $3.2 million, or 1.2%, from the combined balance of $262.7 million at December 31, 2002.

Investment securities available for sale decreased $40.4 million to $267.8 million at June 30, 2003. The decrease reflects maturities and calls of $59.7 million, and sales and writedowns of $53.6 million, offset by $72.9 million in purchases of equity and government agency securities. The Company recognized a gain of $2.7 million on the sale of investment securities available for sale during the six months ended June 30, 2003, primarily attributable to gains on corporate debt securities, and to a lesser extent, government agency and equity securities. This was offset, however, by aggregate write-downs for other than temporary impairment in the amount of $8.1 million in the first quarter of 2003 on the amortized cost of two floating-rate debt securities. See “Asset Quality” for further information relating to investment securities.

Mortgage-backed securities available for sale decreased $50.2 million to $315.4 million at June 30, 2003. The Company swapped into mortgage-backed securities $85.3 million of prepayment-protected fixed rate mortgage loans, which were subsequently sold during the first quarter along with an additional $60.9 million of similar mortgage-backed securities. Normal amortization and prepayments totaled $116.8 million. Purchases of collaterized mortgage obligations (“CMOs”) and mortgage-backed securities totaled $133.0 million. Included in mortgage-backed securities classified as available for sale at June 30, 2003, are $239.0 million of CMOs, the majority of which are collateralized by FNMA, FHLMC and GNMA mortgage-backed securities, and to a lesser extent by whole loans.

Loans receivable, including loans held for sale, increased $83.8 million, or 1.9%, from December 31, 2002, to $4.61 billion at June 30, 2003. The Bank originated $2.45 billion of loans during the six-month period ended June 30, 2003, compared to $1.40 billion during the prior year period. The higher loan origination volume was primarily due to continued mortgage refinance activity, including loan modifications, as interest rates have decreased to historical lows. Offsetting the originations for the year was amortization and prepayments of loans totaling $1.40 billion, and sales of $879.0 million. Loans held for sale decreased from $167.8 million at December 31, 2002 to $92.8 million at June 30, 2003. The balance at December 31, 2002 included $40 million of ARM loans, $31 million of 15-year fixed-rate loans as well as $97 million of longer term fixed-rate loans, while the balance at June 30, 2003 was comprised of primarily longer term fixed-rate loans. During 2003, the Bank has generally held 15-year fixed-rate loan originations in portfolio in lieu of investing in other lower yielding structured mortgage products.

The allowance for loan losses totaled $19.4 million and $19.5 million at June 30, 2003 and December 31, 2002 respectively. The Bank’s allowance for loan losses to total loans outstanding was .42% at June 30, 2003, compared to .44% at December 31, 2002. Non-performing loans decreased $3.0 million to $22.4 million, or .49% of total loans receivable at June 30, 2003, compared to $25.4 million, or .58% of total loans receivable at December 31, 2002. See “Asset Quality” in this section for a further discussion regarding non-performing assets.

In determining the allowance for loan losses and 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. Based on management’s assessment of the adequacy of the loan loss reserve as of June 30, 2003, as well as the composition of the loan portfolio and non-performing loans, historical

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loss experience, and the level of non-performing loans, management believes the allowance for loan losses is adequate to provide for losses inherent in the portfolio at June 30, 2003.

Foreclosed real estate decreased $1.0 million from December 31, 2002, to $1.3 million at June 30, 2003. The Bank’s foreclosed real estate at June 30, 2003 consisted of eight single-family homes.

Real estate held for development or sale increased $8.3 million from December 31, 2002, to $23.3 million at June 30, 2003 primarily due to continued project development and land acquisition. A summary of the carrying value of real estate held for development or sale follows:

	June 30, 2003		December 31, 2002
	(In thousands)
Springbank of Plainfield	$	11,288	4,049
Shenandoah		8,997	7,794
Tallgrass of Naperville		2,995	3,095
	$	23,280	14,938

The Springbank subdivision is located in Plainfield, Illinois and is currently planned to include 1,100 to 1,300 single-family residential lots as well as multi-family parcels depending on zoning ordinances and approvals. At June 30, 2003, MAF Developments, Inc. had multiple real estate purchase contracts that relate to the acquisition of approximately 894 acres of vacant land for this development. The aggregate purchase price of these contracts is $35.3 million of which $9.7 million has been funded to date. The contracts contain various contingencies, including satisfactory soil tests, environmental testing, and necessary zoning approvals, and provide for the takedown of the land in staggered closings over a four-year period. The proposed development is in its early planning stages and may entail the acquisition of additional land in the future. The Company is actively pursuing and expects to receive the required zoning and desired plat with the local planning commission in the third quarter of 2003 to develop this project with its joint venture partner. Based on the existing purchase contracts, current estimated total development costs (including land acquisition) are approximately $82.0 million. The project will include single-family residential lots, multi-family and commercial parcels, along with various other amenities, including an 18-hole golf course, and is expected to be developed in a number of phases over a six- to eight-year period with the first lot closings expected in 2004.

The Shenandoah project is a 326-lot development located in Plainfield, Illinois. The Company is currently developing and selling lots in the first unit of this project. At June 30, 2003, 69 lots in the Shenandoah project were sold and an additional 68 are under contract. Due to the rainy weather in the second quarter, 67 lots originally expected to close during the quarter did not. All of the lots currently under contract are expected to close in the third quarter of 2003.

The Company had 17 lot sales in the Tallgrass of Naperville development for the six months ended June 30, 2003, which were offset, in part, by continued development costs of the final phase of the project. At June 30, 2003, 32 single-family lots remain in Tallgrass, with four under contract. The Tallgrass development also has approximately 9 acres remaining for development of townhomes, which are under contract and expected to close in the fourth quarter of 2003 at an estimated profit of $1.8 million. There are also two parcels of commercially zoned land that total 12.8 acres and are currently under contract. The first parcel, representing approximately 4.8 acres is expected to close in the third quarter of 2003 at an estimated profit of $700,000, while the second parcel, of approximating 8.0 acres is expected to close in the fourth quarter of 2003 at an estimated profit of $700,000.

Goodwill increased $579,000 to $95.4 million at June 30, 2003, from $94.8 million at December 31, 2002 due to additional goodwill recorded as a result of a branch acquisition during the first quarter of 2003.

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Deposits increased $85.2 million, to $3.84 billion at June 30, 2003. The increase is primarily due to a $145.8 million increase in core deposit accounts offset by a $60.4 million decrease in certificates of deposit. At June 30, 2003, the Bank’s core deposits (passbooks, checking and money market accounts) total $2.26 billion or 59.0% of deposits, compared to $2.12 billion, or 56.4% of deposits at December 31, 2002. After consideration of interest of $15.9 million credited to accounts during the three months ended June 30, 2003, net cash inflows were $47.4 million, including $8.5 million acquired in the branch acquisition.

Borrowed funds, which consist primarily of $1.42 billion of FHLB of Chicago advances, were $1.47 billion at June 30, 2003 and $1.56 billion at December 31, 2002. During the six months ended June 30, 2003, $85.5 million of advances matured. Borrowings at June 30, 2003 also include $51.0 million outstanding on the Company’s unsecured bank term loan.

Stockholders’ equity increased $24.4 million, or 4.9% at June 30, 2003, primarily due to net income of $38.8 million, reduced by cash dividends declared of $8.4 million and treasury stock purchased of $5.4 million. Other comprehensive income decreased $3.0 million from December 31, 2002 to June 30, 2003 primarily due to market value decreases. See “Asset Quality” for a discussion of investments written down since December 31, 2002 and further declines since that time. During the six months ended June 30, 2003, 150,000 shares of common stock were repurchased at an average cost of $36.19 per share.

Asset Quality

Non-Performing Assets. A loan (whether considered impaired or not) is classified as non-accrual when collectibility is in doubt. Generally, when a loan is 90 days or more past due, in the process of foreclosure, or in bankruptcy, the full amount of previously accrued but unpaid interest 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. Additionally, the Bank considers the classification of investment securities, should they show signs of deteriorating quality.

Non-performing loans decreased $3.0 million to $22.4 million, or .49% of total loans receivable at June 30, 2003, compared to $25.4 million, or .58% of total loans receivable at December 31, 2002. The decrease in non-performing loans is primarily due to a decline in one-to four-family non-performing loans. Non-performing assets increased $5.0 million to $32.8 million, or .55% of total assets, at June 30, 2003, from $27.8 million or .47% of total assets at December 31, 2002, primarily due to two aircraft-related asset-backed securities currently totaling $9.1 million being placed on non-accrual and classified as substandard, offset by the reduction in non-performing loans mentioned above. One of these securities, with a June 30, 2003 carrying value of $5.8 million, was written down by $3.0 million in the fourth quarter of 2002, and the other with a June 30, 2003 carrying value of $3.3 million was written down by $5.0 million in the first quarter of 2003. Both of these securities continue to be monitored closely. One of these securities has decreased in market value since the writedown and could potentially be written down further if declines prove to be other than temporary. Based on the June 30, 2003 market value the additional writedown would have been $870,000. A third security written down in the first quarter of 2003, which management has classified as special mention and monitors closely, is not currently included in non-performing assets, was current as to principal and interest payments at June 30, 2003 and is still accruing interest. The June 30, 2003 carrying value of this collateralized bond obligation security was $5.8 million after the $3.1 million write-down.

For the quarter ended June 30, 2003, interest on non-accrual loans that would have been recorded as income, had they been performing according to their original terms, amounted to $400,000, compared to $371,000 for the three months ended June 30, 2002. For the six months ended June 30, 2003, interest on non-accrual loans that would have been recorded as income, had they been performing according to their original terms, amounted to $772,000, compared to $722,000 for the six months ended June 30, 2002.

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,”

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“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 connection with the filing of its periodic reports with the OTS, the Bank regularly reviews the problem loans in its portfolio to determine whether any loans require classification in accordance with applicable regulations. At June 30, 2003, all of the Bank’s non-performing loans were classified as substandard. In addition, the Bank has classified five loans to two different borrowers aggregating $2.0 million of commercial real estate and land development loans as substandard for regulatory purposes. These loans are performing in accordance with the terms of the loan agreement and are adequately secured based on the current value of the underlying collateral.

At June 30, 2003, 88% of the Company’s loan portfolio consisted of loans secured by one-to four-family residences. The ratio of the allowance for loan losses to non-performing loans was 86.6% at June 30, 2003 compared to 76.7% at December 31, 2002, and 77.5% at June 30, 2002.

Non-Performing Residential Properties.Ratios for loans secured by one-to-four family residential properties were as follows:

	June 30, 2003		December 31, 2002		June 30, 2002
One-to four-family loans as a percentage of total loans	88	%	89	%	90	%
Non-performing one-to-four family loans as a percentage of total non-performing loans	88		89		75
Non-performing loans with PMI or other guarantees	48		52		57
Average loan-to-value of non-performing loans without PMI or other guarantees	68		71		66

Delinquent Loans. Delinquencies in the Bank’s portfolio at the dates indicated were as follows:

	61-90 Days					91 Days or More(2)
	Number of Loans	Principal Balance of Delinquent Loans		Percent of Total Loans(1)		Number of Loans	Principal Balance of Delinquent Loans		Percent of Total Loans(1)
	(Dollars in thousands)
June 30, 2003	47	$	5,013	.11	%	177	$	22,391	.49	%
March 31, 2003	48		6,469	.15		207		25,243	.58
December 31, 2002	51		4,577	.10		200		25,394	.58
September 30, 2002	50		6,177	.13		190		29,094	.65
June 30, 2002	55		7,010	.16		172		24,990	.57

⁽¹⁾ Percentage represents principal balance of delinquent loans to total loans outstanding.

⁽²⁾ The 91 Days or More category includes all loans on non-accrual regardless of days past due.

22

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

	6/30/03			3/31/03		12/31/02		9/30/02		6/30/02
	(Dollars in thousands)
Real estate loans:
One- to four-family:
Held for investment	$	3,488,957		3,364,367		3,470,937		3,617,357		3,529,628
Held for sale		92,830		68,076		167,780		132,899		52,809
Multi-family		322,437		292,895		260,318		223,395		210,291
Commercial		150,381		147,955		142,493		145,505		139,115
Construction		51,268		51,688		48,179		50,492		48,936
Land		34,918		39,611		42,530		40,469		39,939
Total real estate loans		4,140,791		3,964,592		4,132,237		4,210,117		4,020,718
Consumer loans:
Equity lines of credit		467,942		420,533		387,025		358,985		317,031
Home equity loans		23,431		26,856		32,120		38,487		42,976
Other		5,041		6,436		6,255		4,798		5,971
Total consumer loans		496,414		453,825		425,400		402,270		365,978
Commercial business loans		22,279		22,813		20,592		18,928		19,714
Total loans receivable		4,659,484		4,441,230		4,578,229		4,631,315		4,406,410
Loans in process		28,158		28,771		30,689		27,175		19,427
Unearned discounts, premiums and deferred loan fees, net		(2,810	)	(2,586	)	(2,875	)	(2,544	)	(2,982	)
Allowance for loan losses		19,379		19,471		19,483		19,458		19,375
Loans receivable, net	$	4,614,757		4,395,574		4,530,932		4,587,226		4,370,590

Non-performing assets. The following table sets forth information regarding non-accrual loans, non-accrual investment securities, and foreclosed real estate of the Bank.

	6/30/03			3/31/03	12/31/02	9/30/02	6/30/02
	(In thousands)
Non-performing loans:
Non-accrual loans:
One- to four-family and multi-family loans	$	19,750		22,279	22,480	21,538	18,831
Commercial real estate, construction and land loans		1,551		1,769	1,755	6,306	5,069
Other loans		1,090		1,195	1,159	1,250	1,090
Total non-performing loans:	$	22,391		25,243	25,394	29,094	24,990
Non-performing loans to total loans		.49	%	.58	.58	.65	.57
Non-accrual investment securities	$	9,066		9,571	—	—	—
Foreclosed real estate:
One-to four-family	$	1,345		2,127	2,366	474	809
Commercial, construction and land		—		—	—	—	—
Total	$	1,345		2,127	2,366	474	809
Non-performing loans and foreclosed real estate to total loans and foreclosed real estate		.52	%	.63	.63	.66	.59
Total non-performing assets	$	32,802		36,941	27,760	29,568	25,799
Total non-performing assets to total assets		.55	%	.62	.47	.50	.45

23

Liquidity and Capital Resources

The Company’s principal sources of funds during the six months ended June 30, 2003 were cash dividends paid by the Bank of $25.0 million. The Company’s principal uses of funds during the six months ended June 30, 2003 were cash dividends to shareholders and interest payments on the Company’s $51.0 million unsecured bank term loan. No principal payments were paid or due on this loan since December 31, 2002. The Company has a scheduled principal payment of $6.0 million due on December 31, 2003. The Company also maintains a one-year, $40.0 million unsecured revolving line of credit from a commercial bank, due and renewable annually on November 30. The line of credit has no outstanding balance as of June 30, 2003. For the six-month period ended June 30, 2003, the Company declared common stock dividends of $.36 per share, or $8.4 million.

The Bank’s principal sources of funds are deposits, advances from the FHLB of Chicago, principal repayments on loans and mortgage-backed securities, proceeds from the sale of loans and funds provided by operations. While scheduled loan and mortgage-backed securities amortization and maturing investment securities are a relatively predictable source of funds, deposit flows as well as 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 generally manages the pricing of its deposits to maintain a steady to increasing deposit portfolio in the aggregate, but has from time to time decided not to pay rates on deposits as high as its competition, and when necessary, to supplement deposits with longer term and/or less expensive alternative sources of funds such as FHLB borrowings.

During the six months ended June 30, 2003, the Bank originated loans totaling $2.45 billion compared with $1.40 billion during the same period in 2002. Loan sales, for the six months ended June 30, 2003, were $879.0 million, compared to $576.6 million for the prior year period. The Bank had outstanding commitments to originate loans of $1.07 billion and commitments to sell loans of $212.5 million at June 30, 2003. At June 30, 2003, the Company believes that it has sufficient cash to fund its outstanding commitments or will be able to obtain the necessary funds from outside sources to meet its cash requirements. Please refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources” of the Company’s Form 10-K for the year ended December 31, 2002, for a discussion of the Company’s contractual obligations and off-balance sheet commitments. Significant changes in off-balance sheet commitments since December 31, 2002 include a $350.6 million increase in mortgage loan commitments, all expiring within one year, and a $81.6 million increase in unused equity lines of credit balances, primarily with greater than five-year maturities. At June 30, 2003, the Bank had $9.0 million of credit risk related to loans sold to the MPF program, $3.9 million of loans sold with recourse to other investors and approximately $12.0 million of credit risk related to loans with private mortgage insurance in force.

Asset/Liability Management

As part of its normal operations, the Bank is subject to interest-rate risk on the interest-sensitive assets it invests in and the interest-sensitive liabilities it borrows. The Bank’s exposure to interest rate risk is reviewed at least quarterly by the Bank’s asset/liability management committee (“ALCO”) and the Board of Directors of the Company. The ALCO, which includes members of senior management, monitors the rate and sensitivity repricing characteristics of the individual asset and liability portfolios the Bank maintains and determines risk management strategies.

The Bank, except as noted below, has not used derivative financial instruments such as interest rate swaps, caps, floors, options or similar financial instruments to manage its interest rate risk. However, in conjunction with its origination and sale strategy, management does hedge the Bank’s exposure to interest rate risk primarily by committing to sell fixed-rate mortgage loans for future delivery. Under these commitments, the Bank agrees to sell fixed-rate loans at a specified price and at a specified future date. The sale of fixed-rate mortgage loans for future delivery has

24

enabled the Bank to continue to originate new mortgage loans, and to generate gains on sale of these loans as well as loan servicing fee income, while maintaining its gap ratio within the parameters discussed above. Most of these forward sale commitments are conducted with FNMA, FHLMC and MPF with respect to loans that conform to the requirements of these government agencies. The forward commitment of mortgage loans presents a risk to the Bank if the Bank is not able to deliver the mortgage loans by the commitment expiration date. If this should occur, the Bank would be required to pay a fee to the buyer. The Bank attempts to mitigate this risk by charging potential retail borrowers a 1% fee to fix the interest rate, or by requiring the interest rate to float at market rates until shortly before closing. In addition, the Bank uses U.S. Treasury bond futures contracts and MBS forward sale commitments to hedge some of the mortgage pipeline exposure. These futures contracts and forward sale commitments are used to hedge mortgage loan production in those circumstances where loans are not sold forward as described above.

The Bank utilizes an interest rate sensitivity gap analysis to monitor the relationship of maturing or repricing interest-earning assets and interest-bearing liabilities, while maintaining an acceptable interest rate spread. Interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific period of time and the amount of interest-bearing liabilities maturing or repricing within that same period of time, and is usually analyzed at a period of one year. At June 30, 2003, the Company was positively gapped over this one-year period. Generally, a positive gap, where more interest-earning assets are repricing or maturing than interest-bearing liabilities, would tend to result in an improvement in net interest income in a period of rising interest rates. Conversely, during a period of falling interest rates, a positive gap would likely result in a reduction in net interest income. Management’s goal is to maintain its cumulative one-year gap within the range of (15)% to 15%. The gap ratio fluctuates as a result of market conditions and management’s decisions based on its expectation of future interest rate trends. The Bank’s asset/liability management strategy emphasizes, for its own portfolio, the origination of one- to four-family adjustable-rate loans and other loans which have shorter terms to maturity or reprice more frequently than fixed-rate mortgage loans, yet provide a positive margin over the Bank’s cost of funds.

The table on the next page sets forth the scheduled repricing or maturity of the Bank’s assets and liabilities at June 30, 2003 and management’s assumptions regarding prepayment percentages on loans and mortgage-backed securities, based on its current experience in these portfolios. The Bank uses the withdrawal assumptions used by the FHLB of Chicago with respect to NOW, checking and passbook accounts, which are 17.0%, 17.0%, 17.0%, 16.0%, and 33.0%, respectively. Investment securities and FHLB advances that contain call or put provisions are generally shown in the category relating to their respective final maturities. However, due to changes in market interest rates, $15.1 million of investments with a final maturity of 37 months, but callable in six months or less are categorized in the six months or less category, in anticipation of their call.

The effect of these assumptions is to quantify the dollar amount of items that are interest-sensitive and may be repriced within each of the periods specified. Certain shortcomings are inherent in using gap analysis to quantify exposure to interest rate risk. For example, although certain assets and liabilities may have similar maturities or repricings in the table, they may react differently to actual changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. This is especially true in circumstances where management has a certain amount of control over interest rates, such as the pricing of deposits. Additionally, certain assets such as hybrid adjustable-rate mortgage loans have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Finally, as interest rates change, actual loan prepayment rates may differ significantly from those rates assumed by management for presentation purposes in the table. If actual rates differ from those assumed, there may be an adverse effect on the Bank’s operations.

25

Management believes that its asset/liability management strategies mitigate the potential effects of changes in interest rates on the Bank’s operations and does not believe that the following table which is a snapshot based on a point in time is particularly useful in assessing future results.

	At June 30, 2003
	6 Months or Less			More Than 6 Months to 1 Year	More Than 1 Year to 3 Years	More Than 3 Years to 5 Years	More Than 5 Years		Total
	(In thousands)
Interest-earning assets:
Loans receivable	$	1,122,342		594,894	1,568,403	787,564	560,933		4,634,136
Mortgage-backed securities		53,382		38,446	75,634	56,969	90,962		315,393
Interest-bearing deposits		87,372		—	—	—	—		87,372
Federal funds sold		73,616		—	—	—	—		73,616
Investment securities (1)		359,626		18,301	22,949	47,039	27,387		475,302
Total interest-earning assets		1,696,338		651,641	1,666,986	891,572	679,282		5,585,819
Impact of hedging activity (2)		92,830		—	—	—	(92,830	)	—
Total net interest-earning assets adjusted for impact of hedging activities		1,789,168		651,641	1,666,986	891,572	586,452		5,585,819
Interest-bearing liabilities:
NOW and checking accounts		33,294		30,010	109,836	68,227	144,983		386,350
Money market accounts		478,487		—	—	—	—		478,487
Passbook accounts		90,827		83,797	306,695	190,512	404,838		1,076,669
Certificate accounts		726,714		209,351	550,505	75,304	12,070		1,573,944
FHLB advances		80,000		120,000	640,000	350,000	230,000		1,420,000
Other borrowings		51,000		—	—	—	—		51,000
Total interest-bearing liabilities		1,460,322		443,158	1,607,036	684,043	791,891		4,986,450
Interest sensitivity gap	$	328,846		208,483	59,950	207,529	(205,439	)	599,369
Cumulative gap	$	328,846		537,329	597,279	804,808	599,369
Cumulative gap assets as a percentage of total assets		5.51	%	9.00	10.00	13.48	10.04
Cumulative net interest-earning assets as a percentage of interest-bearing liabilities		122.52	%	128.23	117.01	119.19	112.02
At December 31, 2002
Cumulative gap	$	346,683		607,407	636,733	835,333	503,797
Cumulative gap assets as a percentage of total assets		5.84	%	10.23	10.72	14.07	8.49
Cumulative net interest-earning assets as a percentage of interest-bearing liabilities		121.53	%	129.59	118.45	120.55	110.04

⁽¹⁾ Includes $207.5 million of stock in FHLB of Chicago in 6 months or less.

⁽²⁾ Represents forward commitments to sell long-term fixed-rate mortgage loans.

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Average Balances/Rates

The following table sets forth certain information relating to the Bank’s consolidated statements of financial condition and reflects the average yield on assets and average cost of liabilities for the periods indicated. Average yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yield/cost at June 30, 2003 includes fees which are considered adjustments to yield.

	Three Months Ended June 30,												Six Months Ended June 30,
	2003						2002						2003						2002						At June 30, 2003
	Average Balance		Interest		Average Yield/ Cost		Average Balance		Interest		Average Yield/ Cost		Average Balance		Interest		Average Yield/ Cost		Average Balance		Interest		Average Yield/ Cost		Balance		Yield/ Cost
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable	$	4,533,706		64,304	5.67	%	$	4,319,198		71,563	6.63	%	$	4,519,388		131,289	5.81	%	$	4,336,207		143,568	6.62	%	$	4,634,136	5.55	%
Mortgage-backed securities		303,776		2,734	3.60			232,119		2,908	5.01			314,699		6,257	3.98			204,488		5,280	5.16			315,393	3.99
Interest-bearing deposits(1)		108,037		495	1.84			111,501		594	2.14			114,691		1,058	1.86			97,850		1,030	2.12			87,372	1.45
Federal funds sold(1)		185,282		895	1.94			126,984		695	2.20			154,791		1,505	1.96			153,954		1,622	2.12			73,616	1.20
Investment securities		482,460		5,497	4.57			515,192		6,122	4.77			496,298		10,842	4.41			494,405		11,938	4.87			475,302	4.99
Total interest-earning assets		5,613,261		73,925	5.27			5,304,994		81,882	6.18			5,599,867		150,951	5.40			5,286,904		163,438	6.19			5,585,819	5.29
Non-interest earning assets		353,337						332,755						346,523						325,426						385,476
Total assets	$	5,966,598					$	5,637,749					$	5,946,390					$	5,612,330					$	5,971,295
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Deposits		3,514,946		14,855	1.70			3,423,791		24,218	2.84			3,494,269		31,817	1.84			3,388,199		49,764	2.96			3,515,448	1.61
Borrowed funds		1,480,720		18,507	5.01			1,394,016		19,527	5.62			1,502,213		37,516	5.04			1,417,098		39,573	5.63			1,471,000	4.99
Total interest-bearing liabilities		4,995,666		33,362	2.68			4,817,807		43,745	3.64			4,996,482		69,333	2.80			4,805,297		89,337	3.75			4,986,448	2.61
Non-interest bearing deposits		312,876						234,830						298,774						228,658						321,018
Other liabilities		135,886						126,729						134,480						127,872						137,993
Total liabilities		5,444,428						5,179,366						5,429,736						5,161,827						5,445,459
Stockholders’ equity		522,170						458,383						516,654						450,503						525,836
Liabilities and stockholders’ equity	$	5,966,598					$	5,637,749					$	5,946,390					$	5,612,330					$	5,971,295
Net interest income/ interest rate spread			$	40,563	2.59	%			$	38,137	2.54	%			$	81,618	2.60	%			$	74,101	2.44	%			2.68	%
Net earning assets/net yield on average interest-earning assets	$	617,595			2.89	%	$	487,187			2.88	%	$	603,385			2.91	%	$	481,607			2.80	%	$	599,371	N/A
Ratio of interest-earning assets to interest-bearing liabilities					112.36	%					110.11	%					112.08	%					110.02	%			112.02	%

⁽¹⁾ Includes pro-rata share of interest income received on outstanding drafts payable.

27

Rate/Volume Analysis of Net Interest Income

The following table describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Bank’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume), and (iii) the net change. Changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

	Three Months Ended June 30, 2003 Compared to June 30, 2002 Increase (Decrease)							Six Months Ended June 30, 2003 Compared to June 30, 2002 Increase (Decrease)
	Volume			Rate		Net		Volume	Rate		Net
	(In thousands)
Interest-earning assets:
Loans receivable	$	3,423		(10,682	)	(7,259	)	5,872	(18,151	)	(12,279	)
Mortgage-backed securities		766		(940	)	(174	)	2,387	(1,410	)	977
Interest-bearing deposits		(18	)	(81	)	(99	)	166	(138	)	28
Federal funds sold		290		(90	)	200		9	(126	)	(117	)
Investment securities		(379	)	(246	)	(625	)	46	(1,142	)	(1,096	)
Total		4,082		(12,039	)	(7,957	)	8,480	(20,967	)	(12,487	)
Interest-bearing liabilities:
Deposits		622		(9,985	)	(9,363	)	1,526	(19,473	)	(17,947	)
Borrowed funds		1,171		(2,191	)	(1,020	)	2,311	(4,368	)	(2,057	)
Total		1,793		(12,176	)	(10,383	)	3,837	(23,841	)	(20,004	)
Net change in net interest income	$	2,289		137		2,426		4,643	2,874		7,517

Comparison of the Results of Operations for the Three Months Ended June 30, 2003 and 2002

General – Net income for the three months ended June 30, 2003 was $19.5 million, or $.82 per diluted share, compared to net income of $16.4 million, or $.69 per diluted share for the three months ended June 30, 2002. The 19.2% increase in earnings per share is primarily due to higher net interest income, loan sale gains, income from real estate development, and deposit account service fees, offset by higher mortgage servicing rights amortization, higher non-interest expense and income taxes.

Net interest income – Net interest income was $40.6 million for the current quarter, compared to $38.1 million for the quarter ended June 30, 2002, an increase of $2.4 million or 6.4%. The Company’s average interest-earning assets increased to $5.61 billion for the three months ended June 30, 2003 compared to $5.30 billion for the three months ended June 30, 2002, while the Company’s net interest margin remained stable at 2.89% for the current three month period, compared to 2.88% for the prior year quarterly period. Although there was little change in the margin period over period, the yield on total interest earning assets declined 91 basis points and the cost of interest bearing liabilities decreased 96 basis points due to the declining interest rate environment.

Interest income on loans receivable decreased $7.3 million despite a $214.5 million increase in average loans receivable. The decline in interest rates has led to a high level of prepayments on higher yielding fixed-rate loans as well as the downward repricing of ARM loans, which led to a 96 basis point decline in the average yield on loans receivable. The decrease in interest income and average yield on loans receivable was mitigated by the receipt of $732,000 of prepayment penalty

28

fee income on one-to-four family mortgage loans. Interest income on mortgage-backed securities decreased $174,000 to $2.7 million for the current quarter, due primarily to a 141 basis point decrease in average yield offset by a $71.7 million increase in average balances, while interest income on investment securities decreased $625,000 to $5.5 million due to a 20 basis point decline in average yield and a $32.7 million decrease in average balance. Both portfolios experienced a decrease in average yield due to the dramatic decrease in interest rates. The yield on mortgage-backed securities was also negatively affected by faster premium amortization on mortgage-backed securities due to these securities prepaying much faster than originally expected due to the record low interest rates. The increase in mortgage-backed securities balances is primarily due to purchases during the quarter as a result of higher cash flows from loan prepayments, loan sales and deposit inflows.

Interest expense on deposit accounts decreased $9.4 million to $14.9 million for the second quarter of 2003, despite a $91.2 million increase in average deposits compared to the prior year quarter. The 114 basis point decrease in the average cost of deposits for the second quarter of 2003 compared to the prior year’s three-month period is primarily due to the downward repricing of maturing certificates of deposit, as well as the lower interest rates paid on core deposits due to the decline in short-term rates. The Bank has been focused on increasing low-cost core deposit balances, which now comprise 59% of the Bank’s deposit base compared to 54% at June 30, 2002.

Interest expense on borrowed funds decreased $1.0 million to $18.5 million, as a result of a 61 basis point decrease in the average cost of borrowed funds offset by an $86.7 million increase in the average balance of borrowed funds, as higher coupon FHLB advances matured and were replaced with lower coupon advances.

Provision for loan losses – Based on management’s assessment of the adequacy of the loan loss reserve as of June 30, 2003 and 2002, the Bank provided no provision for loan losses during the second quarters of 2003 or 2002. Net charge-offs during the second quarter of 2003 were $92,000 compared to net charge-offs of $179,000 for the three months ended June 30, 2002.

Non-interest income – Non-interest income increased $5.4 million, or 46.4%, to $17.0 million for the three months ended June 30, 2003, compared to $11.6 million for the three months ended June 30, 2002. Increases were primarily in gains on sales of loans, income from real estate development and fee income from deposit accounts, offset by increases in loan servicing fee expense.

Gain on sale of loans increased to $8.3 million for the three months ended June 30, 2003, compared to $2.7 million for the three months ended June 30, 2002. The increased gains are due to a $189.3 million increase in loan sale volume to $401.4 million for the three months ended June 30, 2003 compared to loan sales of $212.1 million in the second quarter of 2002, as well as increased margins on sales.

During the three months ended June 30, 2003, the Company recorded a gain of $285,000 on the sale of investment securities, including corporate debt securities and to a lesser extent government agency and equity securities compared to a gain of $517,000 for the three months ended June 30, 2002 on the sale of primarily equity and corporate debt securities.

Income from real estate operations increased $1.5 million to $1.7 million for the three months ended June 30, 2003 compared to the prior year quarter. The increase is primarily due to the sale of 15 lots in the Shenandoah project and 16 Tallgrass lot sales for the three months ended June 30, 2003 compared to two lots sold in the prior year period, both in the Tallgrass project. Current quarter income from real estate was approximately $2.0 million less than expected due to the rainy weather causing a delay in the closing of 67 lots.

Deposit account service charges increased $433,000, or 7.8%, to $6.0 million for the three months ended June 30, 2003 compared to $5.5 million for the prior year quarter. The rate of growth in service charge income has slowed in recent months, due in part to increased competition and a slowdown in the rate of checking account growth. At June 30, 2003, the Bank had 161,300 checking accounts, compared to 148,000 at June 30, 2002, an increase of 8.9%.

29

In April 2003, Visa reached an agreement to settle merchant litigation regarding debit card acceptance, usage and interchange reimbursement fees. The Bank issues Visa debit cards to a large percentage of its checking account customers. The amount of interchange revenue generated for a transaction depends on whether it is signature-based (offline) or PIN-based (online). Signature-based transactions generate a higher amount of interchange revenue than PIN-based transactions. During the three months ended June 30, 2003, gross revenue from signature-based debit transactions totaled $1.2 million. The settlement includes an initial reduction in the signature-based fee collected from merchants of approximately 33% for the period August 1, 2003 through December 31, 2003. Assuming no increase in signature-based debit card volume over second-quarter levels, the decrease in fees would result in a reduction in net income of approximately $410,000 for the five-month period from August 1, 2003 to December 31, 2003. In addition, the further adjustment of interchange rates beginning January 1, 2004 may result in additional changes to interchange rates that cannot be predicted at this time. As a result, the magnitude of any financial consequences to the Bank cannot be fully ascertained at this time.

The Company recorded net loan servicing fee expense of $2.0 million for the three months ended June 30, 2003 compared to net revenue of $137,000 for the three months ended June 30, 2002, a net decrease of $2.1 million. Although the average balance of loans serviced for others increased 30% to $2.21 billion for the second quarter of 2003, which increased fees received by the Bank, amortization of mortgage servicing rights increased to $3.8 million for the 2003 quarter compared to $999,000 for the prior period due to heavy prepayments resulting from lower interest rates. During the current three-month period a $940,000 impairment writedown on mortgage servicing rights was recorded compared to a $490,000 impairment writedown in the prior year period as a result of prepayment speeds at each of those times being higher than previously expected.

Non-interest expense –Non-interest expense increased $2.5 million or 10.1% to $26.7 million, compared to $24.3 million for the three months ended June 30, 2002.

Compensation and benefits increased 6.4% or $935,000 to $15.7 million for the three months ended June 30, 2003, compared to the three months ended June 30, 2002. The increase is primarily due to normal salary increases, higher payroll taxes and medical costs and increased staffing related to new branches and higher loan volume.

Occupancy expense increased $652,000, or 23.3% to $3.5 million for the three months ended June 30, 2003 compared to the prior year period, primarily due to higher depreciation, rent expenses and general maintenance costs, increases that are largely attributable to the addition of four new branch offices and an additional loan operations center compared to the previous year period.

Advertising and promotion expense increased $415,000 or 30.5% to $1.8 million for the three months ended June 30, 2003 compared to the three months ended June 30, 2002 due to increased costs relating to market research activity and increased radio advertising.

Other non-interest expense increased $362,000 or 9.1% to $4.3 million for the three months ended June 30, 2003 compared to the prior year period. The increased costs were primarily due to higher postage and telephone expenses, as well as higher loan related costs.

Income taxes –For the three months ended June 30, 2003, income tax expense totaled $11.3 million, or an effective income tax rate of 36.5% compared to $9.1 million, or an effective income tax rate of 35.6%, for the three months ended June 30, 2002. The higher effective income tax rate in the second quarter of 2003 is primarily the result of higher state income taxes.

Comparison of the Results of Operations for the Six Months Ended June 30, 2003 and 2002

General –Net income for the six months ended June 30, 2003 was $38.8 million, or $1.63 per diluted share, compared to net income of $33.0 million, or $1.39 per diluted share for the six months ended June 30, 2002. The increase in earnings per share is primarily due to higher net interest income and gain on the sale of loans, offset by higher non-interest expense.

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Net interest income –Net interest income was $81.6 million for the six months ended June 30, 2003, compared to $74.1 million for the six months ended June 30, 2002, an increase of $7.5 million or 10.1%. The Company’s average interest-earning assets increased to $5.60 billion for the six months ended June 30, 2003, compared to $5.29 billion for the six months ended June 30, 2002, while the Company’s net interest margin increased to 2.91% compared to 2.80% for the same periods. The improved margin is attributable to a greater decline in the Bank’s average cost of funds compared to the decline in the yield on interest-earning assets, due to the shorter-term nature of the Bank’s deposit accounts and higher level of core deposit accounts.

Interest income on loans receivable decreased $12.3 million as a result of an 81 basis point decrease in the average yield offset by a $183.2 million increase in average loans receivable. The decline in the average rate is a function of current originations being at lower interest rates, the downward repricing of ARM loans and equity lines of credit, and heavy prepayments of higher-rate loans due to declining interest rates. Interest income on mortgage-backed securities increased $977,000 to $6.3 million for the current quarter, due primarily to a $110.2 million increase in average balances, while interest income on investment securities decreased $1.1 million to $10.8 million, due to a 46 basis point decrease in average yield.

The average balance of interest bearing deposits and federal funds increased $17.7 million for the six months ended June 30, 2003 compared to the prior year period offset by a 21 basis point decrease in average yield. This increase in balances is due to the high level of loan prepayments and fixed rate loan sale activity as well as deposit flows in the current quarter. The decrease in yield is due to the 75 basis points of additional Federal Reserve Board easing in the last 12 months.

Interest expense on deposit accounts decreased $17.9 million to $31.8 million for the six months ended June 30, 2003, due to a 112 basis point decrease in the average cost of deposits, offset by a $106.1 million increase in average deposits compared to the prior year period. The decrease in average cost of deposits is primarily due to the downward repricing of maturing certificates of deposit, an increase in low-cost core deposit balances and the lower rates paid on these deposits as short-term rates have declined.

Interest expense on borrowed funds decreased $2.1 million to $37.5 million, as a result of a 59 basis point decrease in the average cost of borrowed funds offset by a $85.1 million increase in the average balance of borrowed funds.

Provision for loan losses – The Bank did not have a provision for loan losses for the six months ended June 30, 2003 and 2002. Net chargeoffs during the six months ended June 30, 2003 were $104,000 compared to net chargeoffs of $232,000 for the six months ended June 30, 2002. The lack of a provision this period is due to an assessment of a number of factors, including the stable composition of the loan portfolio, good historical loss experience, and the low level of non-performing assets, which is expected to continue. There were no changes in estimation method or assumptions that impacted the provision for loan loss during the period.

Non-interest income – Non-interest income increased $7.7 million, or 30.6%, to $33.0 million for the six months ended June 30, 2003, compared to $25.3 million for the six months ended June 30, 2002. The increase is due to increased gains on sales of loans and mortgage-backed securities, higher fee income from deposit accounts and continued positive results in real estate development operations offset by increased loan servicing fee expense.

Gain on sale of loans increased to $15.8 million for the six months ended June 30, 2003, compared to $5.0 million for the six months ended June 30, 2002. A higher level of fixed-rate loan originations and declining interest rates resulting in improved profit margins led to increased profits from loan sales for the six months ended June 30, 2003 compared to 2002. Current period loan sale volume was $879.0 million.

Gain on the sale of mortgage-backed securities was $5.4 million for the six months ended June 30, 2003. During the current six-month period, the Company swapped into mortgage-backed securities a total of $85.3 million of prepayment-protected fixed-rate mortgages, which were

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subsequently sold along with an additional $60.9 million of similar mortgage-backed securities resulting in the gain for the period. These sales were undertaken to improve the Company’s interest rate risk position by lengthening its asset duration to better match the Company’s increased liability duration, as the average lives of these loans and related mortgage-backed securities had become very short due to high prepayment speeds.

During the six months ended June 30, 2003, the Company recorded a net loss of $5.4 million on investment securities, reflecting $8.1 million of other than temporary impairment write-downs on two floating-rate debt securities, partially offset by gains of $2.7 million on the sale of $48.2 million of various fixed-rate debt, equity and government securities.

Income from real estate operations increased $265,000 to $3.3 million for the six months ended June 30, 2003 compared to the six months ended June 30, 2002. The increase is due to Shenandoah lot sales, which commenced in 2003, along with higher margins on Tallgrass lots. The Company sold 17 lots in Tallgrass of Naperville project during the six months ended June 30, 2003 compared to 48 lots for the prior year period. There are 32 lots remaining to be sold in this 952-lot subdivision at June 30, 2003 of which four are under contract. In Shenandoah, the Company sold 69 lots for the six months period ending June 30, 2003. Currently, there are 68 lots under contract in the 326-lot Shenandoah subdivision. Based on the expected bulk sales of commercial and multifamily acreage in the Tallgrass project in addition to anticipated sales of residential lots in Tallgrass and Shenandoah, management currently expects that pre-tax income from real estate development for the twelve months ended December 31, 2003 should be in the range of $12-$13 million.

Deposit account service charges increased $1.0 million, or 10.1%, to $11.4 million for the six months ended June 30, 2003 compared to $10.4 million for the six months ended June 30, 2002, due to continued growth in the number of checking accounts through acquisition and internal sales efforts, as well as fee increases. At June 30, 2003, the Bank had approximately 161,300 checking accounts, compared to 148,100 at June 30, 2002.

Brokerage commissions increased $134,000, or 10.8%, to $1.4 million for the six months ended June 30, 2003 compared to the six months ended June 30, 2002. The increase in commission income is due to higher sales volumes due to improved market conditions and the addition of more seasoned brokers.

Loan servicing fee expense decreased $3.5 million to a net expense of $3.4 million for the six months ended June 30, 2003, compared to $97,000 of net revenue for the six months ended June 30, 2002. The average balance of loans serviced for others increased 34.0% to $2.16 billion for the current six-month period compared to $1.61 billion for the prior year six-month period. Amortization of mortgage servicing rights was $6.7 million for the six months ended June 30, 2003, compared to $2.1 million for the prior year six-month period due to higher prepayments in the current period. During the current six-month period a $940,000 impairment writedown on mortgage servicing rights was recorded compared to a $490,000 impairment writedown in the prior year period as a result of expected higher prepayment speeds at those times.

Other non-interest income increased $450,000, or 9.3% to $5.3 million for the six months ended June 30, 2003, compared to $4.8 million for the prior year quarter. The increase is due primarily to increased income from title agency fees, loan modification fee income from refinance transactions as well as income from the Bank’s mortgage reinsurance subsidiary.

Non-interest expense – Non-interest expense increased $5.6 million or 11.6% compared to the prior year period, to $53.4 million for the six months ended June 30, 2003.

Compensation and benefits increased 8.1% or $2.3 million to $31.3 million for the six months ended June 30, 2003, compared to the six months ended June 30, 2002. The increase is primarily due to normal salary increases, higher medical costs, and increased staffing due to increased loan origination volume and new branches.

Occupancy expense increased 1.3 million, or 23.3% to $7.0 million for the six months ended June 30, 2003 compared to the six months ended June 30, 2002, primarily due to increased

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operating expenses from the four branches and an additional loan operations center opened since the prior year period.

Data processing expense increased $119,000 or 6.5% to $2.0 million for the six months ended June 30, 2003 compared to the six months ended June 30, 2002. The increase is primarily due to increased depreciation expense related to additional computer equipment at new and acquired branches.

Other non-interest expense increased $1.3 million to $9.0 million for the six months ended June 30, 2003 compared to the six months ended June 30, 2002. Costs increased due to higher professional and loan related costs, as well as higher postage and telephone expense. Increases were primarily due to record loan volume as well as the addition of four new branches since the prior year period.

Income taxes – For the six months ended June 30, 2003, income tax expense totaled $22.4 million, or an effective income tax rate of 36.5%, compared to $18.5 million, or an effective income tax rate of 35.9%, for the six months ended June 30, 2002. The higher effective income tax rate in the current six-month period is primarily the result of higher state income taxes.

Outlook for the Balance of 2003

The Company is reiterating its previous outlook for calendar 2003, and currently expects earnings to be in the range of $3.30-$3.35 per diluted share.

The Company’s projections for 2003 assume modest balance sheet growth over 2002, and a relatively unchanged yield curve from the current level. The Company currently expects loan origination activity to remain steady in the second half of 2003, with loan refinancing activity expected to continue to be strong through the third quarter. Loan sale volume for 2003 is expected to be 10-20% ahead of 2002 levels. Assuming the economy remains sluggish and the Federal Reserve does not begin tightening monetary policy until sometime in 2004, management expects some net interest margin compression for the remainder of 2003, with the net interest margin for the full year 2003 estimated to be in a range of 2.82%-2.90%. The Company expects to report continued growth in fee income in 2003 and is currently projecting income from real estate development operations in the range of $12-$13 million for 2003. Results for this segment for the second half of 2003 are expected to substantially exceed the $3.3 million in real estate income reported in the first half based on planned closings of pending residential, multifamily and commercial sales contracts, some of which were delayed due to weather conditions. The projections also assume continued strong housing and mortgage activity in the Bank’s markets and no significant deterioration in credit quality.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

A comprehensive qualitative and quantitative analysis regarding market risk is disclosed in the Company’s December 31, 2002 Form 10-K. There have been no material changes in the assumptions used or in the results of market risk analysis as of June 30, 2003 since December 31, 2002. See “Asset/Liability Management” in Item 2., for a further discussion of the Company’s interest rate sensitivity gap analysis.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Company’s 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 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) required to be included in the periodic reports the Company is required to file and submit to the SEC under the Securities Exchange Act.

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The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, does not expect that our Disclosure Controls or our Internal Control over Financial Reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. Further, the design of a control system will take into account resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, any system of controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may require changes to address changes in conditions and other factors to remain effective, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. However, based on its most recent evaluation of controls, the Company’s management believes it has a reasonable basis to conclude that its system of controls provides reasonable assurances as to the integrity of its financial records and accounts.

Part II – Other Information

Item 1. Legal Proceedings. Not applicable.

Item 2. Changes in Securities. Not applicable.

Item 3. Defaults Upon Senior Securities. Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders.

(a) The Company held its Annual Meeting of Shareholders on April 30, 2003.

(b) The names of each director elected at the Annual Meeting for three-year terms and votes received are as follows:

	For	Withheld
Harris Fawell	20,203,639	550,299
Joe F. Hanauer	20,348,213	405,724
F. William Trescott	20,274,452	479,485
Andrew J. Zych	20,345,407	408,531

The names of the other directors, whose terms of office continued after the Annual Meeting, are as follows:

Robert Bowles	David Burba	Terry A. Ekl
Allen H. Koranda	Kenneth Koranda	Lois B. Vasto
Jerry A, Weberling

Item 5. Other Information. None.

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits.

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Exhibit No. 2. Plan of Acquisition

(i) Agreement and Plan of Reorganization by and among MAF Bancorp, Inc. and St. Francis Capital Corporation dated as of May 20, 2003 (Incorporated herein by reference to Exhibit 2.1 to Registrant’s Form 8-K dated May 21, 2003).

Exhibit No. 3. Certificate of Incorporation and By-laws.

(i) Restated Certificate of Incorporation. (Incorporated herein by reference to Exhibit 3.1 to Registrant’s Form 8-K dated December 19, 2000.)

(ii) Amended and Restated By-laws of Registrant. (Incorporated herein by reference to Exhibit No. 3 to Registrant’s March 31, 2001 Form 10-Q.)

Exhibit No. 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.

(b) Reports on Form 8-K.

A Form 8-K was filed to report that on April 22, 2003 MAF Bancorp, Inc. announced its 2003 first quarter earnings results, and a copy of the press release was included as an exhibit.

A Form 8-K was filed to report that on May 21, 2003 MAF Bancorp, Inc. announced its agreement to acquire St. Francis Capital Corporation in an all-stock transaction, and a copy of the press release, acquisition agreement and investor presentation materials were included as an exhibit.

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SIGNATURES

Pursuant to the requirements 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)
Date: August 12, 2003	By:	/s/    Allen H. Koranda
		Allen H. Koranda Chairman of the Board and Chief Executive Officer
Date: August 12, 2003	By:	/s/    Jerry A. Weberling
		Jerry A. Weberling Executive Vice President and Chief Financial Officer

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EXHIBIT INDEX

EXHIBIT NO. 2. PLAN OF ACQUISITION.

(i) Agreement and Plan of Reorganization by and among MAF Bancorp, Inc. and St. Francis Capital Corporation dated as of May 20, 2003 (Incorporated herein by reference to Exhibit 2.1 to Registrant’s Form 8-K dated May 21, 2003).

EXHIBIT NO. 3. CERTIFICATE OF INCORPORATION AND BY-LAWS.

(i) Restated Certificate of Incorporation. (Incorporated herein by reference to Exhibit 3.1 to Registrant’s Form 8-K dated December 19, 2000.)

(ii) Amended and Restated By-laws of Registrant. (Incorporated herein by reference to Exhibit No. 3 to Registrant’s June 30, 2001 Form 10-Q.)

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.