UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 1, 2003
MAF BANCORP, INC.
(Exact name of registrant as specified in its charter)
_____________________________
DELAWARE 0-18121 36-3664868
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
55TH STREET & HOLMES AVENUE
CLARENDON HILLS, ILLINOIS 60514
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (630) 325-7300
NOT APPLICABLE
(Former name or former address, if changed since last year)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
------------------------------------
On December 1, 2003, MAF Bancorp, Inc. ("MAF") consummated its
acquisition of St. Francis Capital Corporation ("St. Francis") pursuant to the
Agreement and Plan of Reorganization, dated as of May 20, 2003, by and among MAF
and St. Francis (the "Merger Agreement"). The merger was completed through the
merger of St. Francis with and into MAF, with MAF being the surviving
corporation in the merger. Pursuant to the terms of the Merger Agreement, each
issued and outstanding share of St. Francis common stock at the effective time
of the merger has been converted into the right to receive 0.79 shares of MAF
common stock, resulting in the issuance of approximately 7.5 million shares of
MAF common stock out of MAF's treasury shares and authorized but unissued
shares. The aggregate transaction value totaled approximately $357.7 million
based on the MAF closing stock price on December 1, 2003. A copy of the press
release issued by MAF announcing the completion of the acquisition is attached
hereto as Exhibit 99.1.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
-----------------------------------------------------------------
(a) Financial Statements of Businesses Acquired.
The Independent Auditors' Report dated October 24, 2003 and
the following audited financial statements of St. Francis
Capital Corporation are included herein:
i. Independent Auditors' Report;
ii. Consolidated Statements of Financial Condition as of
September 30, 2003 and 2002;
iii. Consolidated Statements of Income for the years ended
September 30, 2003, 2002 and 2001;
iv. Consolidated Statements of Changes in Shareholders'
Equity and Comprehensive Income for the years ended
September 30, 2003, 2002 and 2001;
v. Consolidated Statements of Cash Flows for the years
ended September 30, 2003, 2002 and 2001; and
vi. Notes to Consolidated Financial Statements.
(b) The required pro forma financial information regarding the
acquisition of St. Francis is not yet available and will be
filed by amendment to this report no later than February 16,
2004.
2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
St. Francis Capital Corporation:
We have audited the accompanying consolidated statements of financial condition
of St. Francis Capital Corporation and Subsidiary (the "Company") as of
September 30, 2003 and 2002, and the related consolidated statements of income,
changes in shareholders' equity and comprehensive income, and cash flows for
each of the years in the three-year period ended September 30, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of St. Francis Capital
Corporation and Subsidiary as of September 30, 2003 and 2002, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 2003 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Notes 1 and 21 to the consolidated financial statements, the
Company changed its method of accounting for goodwill in fiscal 2002.
/s/ KPMG LLP
Milwaukee, Wisconsin
October 24, 2003
3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
- ---------------------------------------------------------------------------------------------------------------
September 30,
(In thousands, except share data) 2003 2002
- ---------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks (note 3)............................................... $ 39,739 $ 43,515
Federal funds sold and overnight deposits...................................... 735 2,320
------------- --------------
Cash and cash equivalents...................................................... 40,474 45,835
------------- --------------
Assets available for sale, at fair value:
Debt and equity securities (notes 4 and 10)................................. 72,956 16,596
Mortgage-backed and related securities (notes 5 and 10)..................... 569,140 618,580
Mortgage loans held for sale, at lower of cost or market (note 6).............. 19,634 65,006
Securities held to maturity, at amortized cost:
Mortgage-backed and related securities (fair value of $64,240
and $91,318, respectively) (notes 5 and 10)............................. 64,150 90,246
Loans receivable, net (notes 6 and 10)......................................... 1,205,327 1,257,466
Federal Home Loan Bank stock, at cost.......................................... 112,727 90,784
Accrued interest receivable (note 7)........................................... 7,451 8,483
Foreclosed properties.......................................................... 1,102 1,908
Real estate held for investment................................................ 31,327 32,803
Premises and equipment, net (note 8)........................................... 31,165 29,824
Receivable for securities sales................................................ - 48,089
Other assets (notes 12 and 21)................................................. 36,974 33,497
------------- --------------
Total assets................................................................... $ 2,192,427 $ 2,339,117
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits (note 9).............................................................. $ 1,351,543 $ 1,416,979
Short term borrowings (note 10)................................................ 616,950 605,236
Long term borrowings (note 10)................................................. 6,819 36,827
Advances from borrowers for taxes and insurance................................ 8,391 9,886
Payable for securities purchases............................................... - 71,544
Accrued interest payable and other liabilities (notes 9 and 16)................ 14,680 19,564
------------- --------------
Total liabilities.............................................................. 1,998,383 2,160,036
------------- --------------
Commitments and contingencies (note 17)........................................ - -
Shareholders' equity:
Preferred stock $.01 par value:
Authorized, 6,000,000 shares
None issued................................................................. - -
Common stock $.01 par value:
Authorized 24,000,000 shares
Issued 14,579,240 shares
Outstanding, 9,477,226 and 9,350,873 shares, respectively................... 146 146
Additional paid-in-capital..................................................... 89,897 89,324
Retained earnings, substantially restricted (note 13).......................... 177,030 160,494
Accumulated other comprehensive income (loss).................................. (2,267) 1,632
Treasury stock, at cost (5,102,014 and 5,228,367 shares, respectively)(note 15) (70,762) (72,515)
------------- --------------
Total shareholders' equity..................................................... 194,044 179,081
------------- --------------
Total liabilities and shareholders' equity..................................... $ 2,192,427 $ 2,339,117
============= ==============
See accompanying Notes to Consolidated Financial Statements
4
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
- -------------------------------------------------------------------------------------------------------------------
Years Ended September 30,
----------------------------------------
(In thousands, except per share data) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans (note 6)................................................... $ 77,983 $ 87,901 $ 103,631
Mortgage-backed and related securities........................... 18,301 29,955 47,478
Debt and equity securities....................................... 1,133 1,812 7,595
Federal funds sold and overnight deposits........................ 53 44 158
Federal Home Loan Bank stock..................................... 6,028 3,433 2,265
Trading account securities....................................... - - 8
------------ ----------- -------------
Total interest and dividend income..................................... 103,498 123,145 161,135
Interest expense:
Deposits (note 9)................................................ 25,911 36,287 66,239
Advances and other borrowings.................................... 29,869 31,132 41,352
------------ ----------- -------------
Total interest expense................................................. 55,780 67,419 107,591
------------ ----------- -------------
Net interest income before provision for loan losses................... 47,718 55,726 53,544
Provision for loan losses (note 6)..................................... 662 3,289 5,527
------------ ----------- -------------
Net interest income.................................................... 47,056 52,437 48,017
------------ ----------- -------------
Other operating income (expense), net:
Loan servicing and loan related fees............................. 5,922 4,282 3,298
Mortgage servicing impairment (note 21).......................... (2,475) (3,100) -
Depository fees and service charges.............................. 7,867 5,586 5,318
Securities gains, net (notes 4 and 5)............................ 2,584 1,312 996
Gain on sales of loans (note 6).................................. 19,315 12,751 6,055
Insurance, annuity and brokerage commissions..................... 1,549 1,556 1,238
Gain (loss) on foreclosed properties............................. (41) 69 (17)
Income from real estate held for investment...................... 3,649 3,190 3,026
Other income..................................................... 503 750 1,422
------------ ----------- -------------
Total other operating income, net...................................... 38,873 26,396 21,336
------------ ----------- -------------
General and administrative expenses:
Compensation and other employee benefits......................... 30,241 27,349 22,284
Occupancy expenses, including depreciation....................... 5,085 4,907 4,718
Furniture and equipment, including depreciation.................. 4,125 3,874 4,250
Real estate held for investment expenses......................... 3,891 3,120 3,114
Telephone and postage............................................ 1,789 1,548 1,530
Data processing.................................................. 985 1,735 1,738
Other general and administrative expenses (note 11).............. 5,724 5,561 6,684
------------ ----------- -------------
Total general and administrative expenses.............................. 51,840 48,094 44,318
------------ ----------- -------------
Income before income tax expense and cumulative effect of
change in accounting principle.................................... 34,089 30,739 25,035
Income tax expense (note 12)........................................... 9,809 8,867 6,967
------------ ----------- -------------
Income before cumulative effect of change in accounting principle...... $ 24,280 $ 21,872 $ 18,068
Cumulative effect of a change in accounting for derivative
instruments and hedging activities (net of income taxes of $55)... - - (84)
------------ ----------- -------------
Net income............................................................. $ 24,280 $ 21,872 $ 17,984
============ =========== =============
Basic earnings per share (note 14):
Before cumulative effect of a change in accounting principle...... $ 2.58 $ 2.36 $ 1.93
Cumulative effect of a change in accounting principle............. - - (0.01)
------------ ----------- -------------
$ 2.58 $ 2.36 $ 1.92
============ =========== =============
Diluted earnings per share (note 14):
Before cumulative effect of a change in accounting principle...... $ 2.45 $ 2.25 $ 1.88
Cumulative effect of a change in accounting principle............. - - (0.01)
------------ ----------- -------------
$ 2.45 $ 2.25 $ 1.87
============ =========== =============
See accompanying Notes to Consolidated Financial Statements
5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in
Shareholders' Equity and Comprehensive Income
- -----------------------------------------------------------------------------------------------------------------------------
Accumulated
Shares of Other
Common Additional Comprehensive
Stock Common Paid-In Retained Income/ Treasury
Outstanding Stock Capital Earnings (Loss) Stock Total
----------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2000... 9,437,197 $ 146 $ 88,799 $ 130,399 $ (18,923) $ (69,498) $ 130,923
Net income...................... - - - 17,984 - - 17,984
Change in unrealized gain on
securities available for
sale....................... - - - - 33,660 - 33,660
Reclassification adjustment for
gains realized in net
income.................... - - - - (996) - (996)
Income taxes.................... - - - - (12,604) - (12,604)
---------
Comprehensive income............ 38,044
Cash dividend - $0.40 per share. - - - (3,753) - - (3,753)
Purchase of treasury stock...... (258,353) - - - - (5,166) (5,166)
Exercise of stock options, net.. 29,400 - 27 - - 400 427
--------- ----- --------- ----------- ---------- --------- ---------
BALANCE AT SEPTEMBER 30, 2001... 9,208,244 $ 146 $ 88,826 $ 144,630 $ 1,137 $ (74,264) $ 160,475
Net income...................... - - - 21,872 - - 21,872
Change in unrealized gain on
securities available for
sale....................... - - - - 1,988 - 1,988
Reclassification adjustment for
gains realized in net
income..................... - - - - (1,312) - (1,312)
Income taxes.................... - - - - (181) - (181)
----------
Comprehensive income............ 22,367
Cash dividend - $0.60 per share. - - - (5,559) - - (5,559)
Purchase of treasury stock...... (32,459) - - - - (679) (679)
Exercise of stock options, net.. 175,088 - 498 (449) - 2,428 2,477
--------- ----- --------- ----------- ---------- --------- ----------
BALANCE AT SEPTEMBER 30, 2002... 9,350,873 $ 146 $ 89,324 $ 160,494 $ 1,632 $ (72,515) $ 179,081
Net income...................... - - - 24,280 - - 24,280
Change in unrealized loss on
securities available for
sale....................... - - - - (3,679) - (3,679)
Reclassification adjustment for
gains realized in net
income..................... - - - - (2,584) - (2,584)
Income taxes.................... - - - - 2,364 - 2,364
----------
Comprehensive income............ 20,381
Cash dividend - $0.80 per share. - - - (7,529) - - (7,529)
Exercise of stock options, net.. 126,353 - 573 (215) - 1,753 2,111
--------- ----- --------- ----------- ---------- --------- ----------
BALANCE AT SEPTEMBER 30, 2003... 9,477,226 $ 146 $ 89,897 $ 177,030 $ (2,267) $ (70,762) $ 194,044
========= ===== ========= =========== ========== ========= ==========
See accompanying Notes to Consolidated Financial Statements
6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended September 30,
-----------------------------------------
2003 2002 2001
-----------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 24,280 $ 21,872 $ 17,984
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses.................................... 662 3,289 5,527
Depreciation, accretion and amortization..................... 15,942 8,171 7,932
Deferred income taxes........................................ 6,465 (507) (7,546)
Securities gains............................................. (2,584) (1,312) (996)
Originations of loans held for sale.......................... (1,298,571) (819,349) (462,999)
Proceeds from sales of loans held for sale................... 1,363,258 786,068 458,146
Gain on sales of loans....................................... (19,315) (12,751) (6,055)
Impairment write-down on mortgage servicing rights........... 2,475 3,100 -
Stock dividends received on Federal Home Loan Bank stock..... (6,943) (3,093) (2,273)
Other, net................................................... (20,676) (9,095) (5,889)
------------- ------------ -----------
Net cash provided by (used in) operating activities.............. 64,993 (23,607) 3,831
------------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage-backed and related securities
held to maturity.......................................... (64,630) (67,204) (82,598)
Principal repayments on mortgage-backed and related
securities held to maturity.................................. 90,726 72,342 14,302
Purchases of mortgage-backed securities available for sale..... (1,049,392) (398,668) (42,071)
Proceeds from sales of mortgage-backed securities
available for sale........................................... 443,595 157,114 104,425
Principal repayments on mortgage-backed securities
available for sale........................................... 625,382 264,106 125,052
Purchases of debt and equity securities available for sale..... (118,491) (69,296) (5,480)
Proceeds from sales of debt and equity securities available
for sale..................................................... 32,275 12,321 30,663
Proceeds from maturities of debt and equity securities
available for sale........................................... 29,993 82,008 153,720
Purchases of Federal Home Loan Bank stock...................... (15,000) (25,000) (30,000)
Purchases of loans............................................. (582,075) (341,249) (201,050)
Decrease in loans, net of loans held for sale.................. 632,383 321,683 260,452
Increase in real estate held for investment.................... (182) (7,916) (462)
Purchases of premises and equipment, net....................... (4,295) (2,963) (2,286)
------------- ------------ -----------
Net cash provided by (used in) investing activities.............. 20,289 (2,722) 324,667
------------- ------------ -----------
See accompanying Notes to Consolidated Financial Statements
7
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended September 30,
-----------------------------------------
2003 2002 2001
-----------------------------------------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits....................................... (65,436) (32,341) (23,093)
Proceeds from advances and other borrowings.................... 407,388 223,668 623,324
Repayments on advances and other borrowings.................... (463,329) (222,918) (670,574)
Increase (decrease) in securities sold under agreements
to repurchase............................................... 37,647 69,880 (245,993)
Decrease in advances from borrowers for taxes
and insurance................................................ (1,495) (464) (317)
Dividends paid................................................. (7,529) (5,559) (3,753)
Stock option transactions...................................... 2,111 2,477 427
Purchase of treasury stock..................................... - (679) (5,166)
-------------- ------------- -----------
Net cash provided by (used in) financing activities.............. (90,643) 34,064 (325,145)
-------------- ------------- -----------
Increase (decrease) in cash and cash equivalents................. (5,361) 7,735 3,353
Cash and cash equivalents:
Beginning of year............................................ 45,835 38,100 34,747
-------------- ------------- -----------
End of year.................................................. $ 40,474 $ 45,835 $ 38,100
============== ============= ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest..................................................... $ 56,856 $ 70,568 $108,981
Income taxes................................................. 4,001 12,355 14,915
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing
and financing activities:
Mortgage loans secured as mortgage-backed securities......... $ - $ - $ 1,432
Transfer from loans to foreclosed properties................. 1,831 2,124 656
Transfer of mortgage loans to mortgage loans held for sale... 59,728 94,996 90,962
Transfer of debt securities to assets available for sale..... - - 510
See accompanying Notes to Consolidated Financial Statements
8
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of St. Francis Capital Corporation and
Subsidiary (the "Company") conform to accounting principles generally accepted
in the United States of America and to general practice within the banking
industry. The Company provides a full range of banking and related financial
services to individual and corporate customers through its network of bank
affiliates. The Company is subject to competition from other financial
institutions and is regulated by federal and state banking agencies and
undergoes periodic examinations by those agencies. The following is a
description of the more significant of those policies that the Company follows
in preparing and presenting its consolidated financial statements. In preparing
the consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiary, St. Francis Bank, F.S.B. ("Bank"), the Bank's
subsidiaries, SF Investment Corp. ("SF Investment"), SF Insurance Services
Corp., St. Francis Mortgage Corp ("SFMC") and St. Francis Equity Properties
("SFEP") and limited partnerships which are all more than 50% owned by SFEP. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
(b) Statements of Cash Flows
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand, interest-bearing deposits with the Federal
Home Loan Bank-Chicago ("FHLB") and other financial institutions and federal
funds sold.
(c) Trading Account Securities
Trading account securities include debt securities which are held for resale in
anticipation of short-term market movements. Trading account securities are
stated at fair value. Gains and losses, both realized and unrealized, are
included in securities gains (losses).
(d) Securities Held to Maturity and Available For Sale
Management determines the appropriate classification of debt and equity
securities at the time of purchase. Debt securities are classified as held to
maturity when the Company has the positive intent and ability to hold the
securities to maturity. Held to maturity securities are stated at amortized
cost.
Debt securities not classified as held to maturity, or debt and marketable
equity securities not classified as trading are classified as available for
sale. Available for sale securities are stated at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity and accumulated other comprehensive income (loss).
The cost of debt securities classified as held to maturity or available for sale
is adjusted for amortization of premiums and accretion of discounts to maturity,
or in the case of mortgage-backed and related securities, over the estimated
life of the security. Such amortization is based on a level-yield method and is
included in interest income from the respective security. Interest and dividends
are included in interest and dividend income from investments. Realized gains
are included in securities gains (losses). The cost of securities sold is based
on the specific identification method.
In determining if declines in value of securities are other than temporary,
management estimates future cash flows to be generated by pools of loans
underlying the securities. Included in this evaluation are such factors as i)
estimated loan prepayment rates, ii) a review of delinquencies, foreclosures,
repossessions and recovery rates relative to the underlying mortgage loans
collateralizing each security, iii) the level of available subordination or
other credit enhancements, iv) an assessment of the servicer of the underlying
mortgage portfolio and v) the rating assigned to each security by independent
national rating agencies.
(e) Loans Held For Sale
Mortgage loans held for sale generally consist of certain fixed-rate and
adjustable-rate first mortgage loans. Mortgage loans held for sale are carried
at the lower of cost (less principal payments received) or market value, as
determined by outstanding commitments from investors or current quoted investor
yield requirements on an aggregate basis.
9
(f) Loans and Fees and Income on Loans
Loans are carried at the outstanding principal amount reduced by purchased
discount, deferred fees, unearned insurance premiums, loans in process and the
allowance for loan losses. Loans sold with recourse are derecognized at the time
of sale. The estimated liability related to recourse provisions is periodically
evaluated with increases charged to expense. Loans for which management has the
intent and ability to hold for the foreseeable future or until maturity or
repayment are carried at their unpaid principal balances. Interest on loans is
recorded as income in the period earned.
Loans are normally placed on non-accrual status when contractually past due 90
days or more as to interest or principal payments. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact the
collectibility of principal or interest on loans, it is management's practice to
place such loans on non-accrual status immediately, rather than delaying such
action until the loans become 90 days past due. Previously accrued and
uncollected interest on such loans is reversed, amortization of related loan
fees is suspended, and income is recorded only to the extent that interest
payments are subsequently received in cash and a determination has been made
that the principal balance of the loan is collectible. If collectibility of the
principal is in doubt, payments received are applied to loan principal.
A loan is impaired when, based on current information and events, it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement, including principal and interest. The
Company defines impaired loans as commercial, commercial real estate and
multi-family loans that are on nonaccrual status. Large groups of homogeneous
loans, such as residential one- to four-family, home equity and consumer loans
are collectively evaluated for impairment.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amounts amortized as an adjustment of the related
loan's yield. These amounts are amortized to income using the level yield
method, over the contractual life of the related loans. Discounts on purchased
loans are amortized using a method which approximates level yield. Unamortized
discounts on purchased loans which prepay are amortized immediately.
Loan origination fees and costs associated with loans sold are deferred and
recognized at the time of sale as a component of gain or loss on the sale of
loans. Fees for the servicing of loans are recognized as income when earned.
(g) Mortgage Servicing Rights
The Bank recognizes as a separate asset the rights to service mortgage loans for
others. Mortgage servicing rights are not subject to SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142") but rather, are amortized over their
expected life and subject to periodic impairment testing. Amortization expense
for the mortgage servicing rights asset are based on assumptions made during
each reporting period. Such assumptions include, but are not limited to, the
current level of interest rates and the forecast prepayment speeds as estimated
by major mortgage dealers. Actual amortization expense is also affected by the
amount of loans sold with servicing retained. For the purpose of evaluating
impairment of mortgage servicing rights, serviced loans are stratified based
upon loan type. Mortgage servicing rights are carried at the lower of cost or
market value and are included in other assets on the consolidated statements of
financial condition. Amortization expense is included in loan servicing and loan
related fees on the consolidated statements of income. Mortgage servicing
impairment write-down/recovery is recorded on the consolidated statements of
income as mortgage servicing impairment.
(h) Intangibles
Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS No. 142 provides that intangible
assets with finite useful lives be amortized and that goodwill and intangible
assets with indefinite lives will not be amortized, but rather will be tested at
least annually for impairment. As required under SFAS No. 142, the Company
discontinued the amortization of goodwill with a net carrying value of $12.9
million at October 1, 2001 and annual amortization of approximately $1.2 million
that resulted from business combinations prior to the adoption of SFAS No. 141,
"Business Combinations" ("SFAS No. 141"). The Company evaluates goodwill for
impairment at least annually. (See Note 21) If goodwill is considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the goodwill exceeds the implied fair value of the goodwill.
10
Prior to the adoption of SFAS No. 142 on October 1, 2001, the Company had
recorded goodwill of $17.9 million and accumulated amortization of $5.0 million.
Goodwill, net of accumulated amortization, at September 30, 2001 was $12.9
million.
Effective October 1, 2002, the Company adopted SFAS No. 147, "Acquisitions of
Certain Financial Institutions" ("SFAS No. 147"). SFAS No. 147 amends SFAS No.
72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," to
remove the acquisition of financial institutions from the scope of that
Statement and provides guidance on the accounting for the impairment or disposal
of acquired long-term customer-relationship intangible assets. Except for
transactions between two or more mutual enterprises, SFAS No. 147 requires
acquisitions of financial institutions that meet the definition of a business
combination to be accounted for in accordance with SFAS No. 141 and SFAS No.
142.
Prior to the adoption of SFAS No. 142, the excess of the purchase price over the
fair value of net assets of subsidiaries acquired consisted primarily of
goodwill that was being amortized on a straight-line method. Goodwill was
amortized to operating expense over periods of 15 to 25 years. The Company
reviewed long-lived assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances indicated that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value, less costs to sell.
(i) Allowance for Loan Losses
The allowance for loan losses is maintained at a level adequate to provide for
loan losses through charges to operating expense. The allowance is based upon
past loan loss experience and other factors which, in management's judgment,
deserve current recognition in estimating loan losses. Such other factors
considered by management include size and character of the loan portfolio,
changes in the level of impaired and non-performing loans, the risk inherent in
specific loans, concentrations of loans to specific borrowers or industries,
existing economic conditions, and historical losses on each portfolio category.
In connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties which
collateralize loans. With respect to loans which are deemed impaired, the
calculation of allowance levels is based upon the discounted present value of
expected cash flows received from the debtor or other measures of value such as
market prices or collateral values.
Management believes, based upon all relevant and available information, that the
allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to or reductions in
the allowance may be necessary based on changes in economic conditions beyond
management's control. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowance
for losses on loans. Such agencies may require the Company to recognize
additions to the allowance based on their judgments about information available
to them at the time of their examination.
(j) Derivative Instruments
Under SFAS No. 133, all derivative instruments are recorded at fair value on the
statement of financial condition. For those derivative instruments that qualify
as fair value hedges, the Company measures the effectiveness of these hedges on
a periodic basis. The effective portion of the hedge is recorded as an
adjustment to the carrying value of the hedged item. Any difference between the
fair value change of the hedge versus the fair value change of the hedged item
is considered to be the "ineffective" portion of the hedge. The ineffective
portion of the hedge is recorded as an increase or decrease in the related
income statement classification of the item being hedged. If the ineffectiveness
of a hedge exceeds certain levels as described in the accounting standard, the
derivative would no longer be eligible for hedge treatment and future changes in
fair value of the derivative would be recorded on the income statement.
For those derivative instruments that do not qualify as hedges, changes in the
fair value are recorded in the related income statement classification of the
item being hedged. Fees received on options written are deferred at the time the
fees are received and recognized in other operating income at the earlier of the
settlement or the expiration of the contract.
11
(k) Foreclosed Properties
Foreclosed properties (which were acquired by foreclosure or by deed in lieu of
foreclosure) are initially recorded at the lower of the carrying value of the
related loan balance or the fair market value of the real estate acquired less
the estimated costs to sell the real estate at the date title is received. Costs
relating to the development and improvement of the property are capitalized.
Income and expenses incurred in connection with holding and operating the
property are charged to expense. Valuations are periodically performed by
management and independent third parties and an allowance for loss is
established by a charge to expense if the carrying value of a property exceeds
its fair value less estimated costs to sell.
(l) Real Estate Held for Investment
Real estate held for investment represents multi-family rental property
(affordable housing projects) that SFEP owns, operates and develops as a limited
partner. The properties are recorded at cost less accumulated depreciation. The
Company evaluates the recoverability of the carrying value on a regular basis.
If the recoverability was determined to be in doubt, a valuation allowance would
be established by way of a charge to expense. Depreciation expense is provided
on a straight-line basis over the estimated useful life of the assets.
Expenditures for normal repairs and maintenance are charged to expense as
incurred.
The financial condition, results of operations and cash flows of each LLP or LLC
is consolidated in the Company's financial statements. The operations of the
properties are not expected to contribute significantly to the Company's net
income before income taxes. However, the properties do contribute in the form of
income tax credits, which lower the Company's effective tax rate. Once
established, the credits on each property last for ten years and are passed
through from the LLP or LLC to SFEP and reduce the consolidated federal tax
liability of the Company.
(m) Premises and Equipment
Premises and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization expense are provided on a
straight-line basis over the estimated useful lives of the assets. The cost of
leasehold improvements is amortized on the straight-line basis over the lesser
of the term of the respective lease or the estimated economic life of the
improvements.
Expenditures for normal repairs and maintenance are charged to expense as
incurred. When properties are retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the respective accounts and the
resulting gain or loss is recorded in income.
(n) Federal Home Loan Bank Stock
The Company's investment in FHLB stock meets the minimum amount required by
current regulation and is carried at cost which is its redeemable (fair) value
since the market for this stock is limited.
(o) Income Taxes
The Company and its Subsidiary file a consolidated Federal income tax return.
Federal income tax expense is allocated to the Bank and its subsidiaries based
on an intercompany tax sharing agreement. Each Bank subsidiary files separate
state and local income or franchise tax returns.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to the differences between the financial statement
carrying amount of assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date.
Affordable housing tax credits are recognized as a reduction of income tax
expense in the year they are available to be used in the Company's consolidated
income tax return.
(p) Stock-based Compensation Plans
The Company has various stock based compensation plans that authorize the
granting of stock options, restricted stock, and other stock based awards to
eligible employees. As permitted, the Company has elected not to follow the
recognition provisions of SFAS No. 148, "Accounting for Stock Based Compensation
- - Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS No.
148") which requires a fair-value based method of accounting for stock options
and equity awards, but follows APB No. 25, "Accounting for Stock Issued to
Employees," and related interpretations to account for its stock based
compensation plans. Pursuant to the disclosure requirements of SFAS No. 148, the
12
Company has included in Note 16 the effect of the fair value of employee
stock-based compensation plans on net income and earnings per share on a pro
forma basis as if the fair value based method of accounting defined in SFAS No.
148 was applied.
(q) Advertising and Promotion
In the ordinary course of business the Company incurs costs for advertising and
promotion expenses. It is the Company's policy to expense all advertising and
promotion expenditures as incurred.
(r) Future Accounting Pronouncements
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No.
146") requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the Standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. Adoption of this Standard
did not materially affect the results of operations or financial position of the
Company.
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123" ("SFAS No. 148") amends SFAS Statement No.
123, "Accounting for Stock-Based Compensation," to provide alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, this SFAS amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure requirements
are required for fiscal years ending after December 15, 2002 and are included in
Note 16 to these consolidated financial statements.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS No. 149") amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement No. 133. The amendments
set forth in SFAS No. 149 improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly. SFAS No.
149 will result in more consistent reporting of contracts that are derivatives
in their entirety or that contain embedded derivatives that warrant separate
accounting. SFAS No. 149 is to be applied prospectively and is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. Adoption of this Standard did not
materially affect the results of operations or financial position of the
Company.
The FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS No. 150"). This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability. Many of those instruments were previously classified as equity.
SFAS No. 150 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. For mandatorily redeemable
financial instruments the effective date has been deferred indefinitely.
Adoption of this Standard did not materially affect the results of operations,
financial position or liquidity of the Company.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), an
interpretation of FASB Statements Nos. 5, 57 and 107, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This Interpretation expands the disclosures to be made
by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability for the fair value of an obligation assumed under a guarantee. FIN 45
clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"
related to guarantees. In general, FIN 45 applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying instrument
that is related to an asset, liability, or equity security of the guaranteed
party. The disclosure requirements of FIN 45 were effective for the Company as
of December 31, 2002, and require disclosure of the nature if the guarantee, the
maximum potential amount of future payments that the guarantor could be required
to make under the guarantee, and the current amount of the liability, if any,
for the guarantor's obligation under the guarantee. The recognition requirements
of FIN 45 are applied prospectively to guarantees issued or modified after
December 31, 2002. Adoption of this Interpretation did not materially affect the
results of operations or financial position of the Company.
13
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
provisions of this interpretation, as subsequently amended, were effective upon
issuance for new variable interest entities and for fiscal years ending after
December 15, 2003, for existing variable interest entities. Adoption of this
Interpretation did not materially affect the results of operations, financial
position or liquidity of the Company.
(s) Reclassification
Certain amounts for prior years have been reclassified to conform to the 2003
presentation.
(2) MERGER WITH MAF BANCORP, INC.
On May 21, 2003, St. Francis Capital Corporation and MAF Bancorp, Inc. ("MAFB")
announced that MAFB has agreed to acquire the Company in an all-stock
transaction with a fixed exchange ratio. Based on the closing price of MAFB's
common stock on September 30, 2003, the transaction is valued at approximately
$304 million. Pursuant to a definitive agreement between the two companies, the
Company will merge into MAFB, with MAFB to be the surviving corporation. As a
result of the merger, each issued and outstanding share of St. Francis Capital
Corporation common stock will be converted into the right to receive 0.79 shares
of MAFB common stock. The Company and MAFB have now received all regulatory
approvals necessary for completion of the merger. If the merger is approved by
the Company's shareholders at a special meeting scheduled to be held November
26, 2003 and by MAFB's shareholders at a special meeting scheduled to be held
November 25, 2003, it is anticipated the merger will be consummated shortly
thereafter.
(3) RESTRICTIONS ON CASH AND DUE FROM BANKS
The Corporation's bank subsidiary is required to maintain certain vault cash and
reserve balances with the Federal Reserve Bank to meet specific reserve
requirements. These requirements approximated $6.7 million at September 30,
2003.
14
(4) DEBT AND EQUITY SECURITIES
The following is a summary of available for sale debt and equity securities:
Amortized Gross Unrealized
(In thousands) Cost Gains (Losses) Fair Value
- -----------------------------------------------------------------------------------------------------------
At September 30, 2003:
Available for sale:
U.S. Treasury obligations and obligations
of U.S. Government agencies............. $ 72,446 $ 199 $ - $ 72,645
Marketable equity securities .............. 311 - - 311
------------ ------------ ------------ ------------
$ 72,757 $ 199 $ - $ 72,956
============ ============ ============ ============
At September 30, 2002:
Available for sale:
U.S. Treasury obligations and obligations
of U.S. Government agencies............. $ 13,001 $ 61 $ - $ 13,062
Marketable equity securities .............. 3,534 - - 3,534
------------ ------------ ------------ ------------
$ 16,535 $ 61 $ - $ 16,596
============ ============ ============ ============
The amortized cost and fair value of debt and equity securities available for
sale at September 30, 2003, by contractual maturity, are as follows:
Amortized
(In thousands) Cost Fair Value
- --------------------------------------------------------------------------------
Greater than one year but less than five years.. $ 72,446 $ 72,645
Marketable equity securities.................... 311 311
-------------- ---------------
$ 72,757 $ 72,956
============== ===============
During the years ended September 30, 2003, 2002 and 2001, proceeds from the sale
of available for sale debt and equity securities were $32.3 million, $12.3
million and $30.7 million, respectively. The gross realized gains on such sales
totaled $57,000, zero, and $6,000 in 2003, 2002 and 2001, respectively. There
were no gross realized losses on such sales in 2003, 2002 and 2001.
Under SFAS No. 133, the Company was allowed a one-time opportunity to reclassify
investment assets from held to maturity to available for sale. The Company
reclassified all municipal securities held to maturity upon the adoption of SFAS
No. 133 to available for sale as of October 1, 2000. The amortized cost and fair
value of the securities transferred was $510,000 and $522,000, respectively.
During the quarter ended March 31, 2001, all municipal securities held by the
Company were sold.
15
(5) MORTGAGE-BACKED AND RELATED SECURITIES
The following is a summary of available for sale mortgage-backed and related
securities and held to maturity mortgage-backed and related securities:
Amortized Gross Unrealized
(In thousands) Cost Gains (Losses) Fair Value
- ------------------------------------------------------------------------------------------------------------
At September 30, 2003:
Available for sale:
Participation certificates:
GNMA................................. $ 11,984 $ 173 $ - $ 12,157
FNMA................................. 67,883 - (1,254) 66,629
Private issue....................... 130,565 78 (1,297) 129,346
REMICs:
FNMA................................ 129,783 192 (810) 129,165
FHLMC............................... 120,994 186 (757) 120,423
Private issue....................... 111,780 212 (572) 111,420
------------- -------------- ------------- --------------
$ 572,989 $ 841 $ (4,690) $ 569,140
============= ============== ============= ==============
Held to maturity:
Participation certificates:
GNMA................................. $ 2,748 $ 139 $ - $ 2,887
REMICs:
FNMA................................. 11,265 197 (1) 11,461
FHLMC................................ 19,446 67 (73) 19,440
Private issue....................... 30,691 10 (249) 30,452
------------- -------------- ------------- --------------
$ 64,150 $ 413 $ (323) $ 64,240
============= ============== ============= ==============
At September 30, 2002:
Available for sale:
Participation certificates:
FNMA................................. $ 35,998 $ 63 $ - $ 36,061
Private issue....................... 12,905 - (429) 12,476
REMICs:
GNMA................................. 20,018 204 - 20,222
FNMA................................ 13,391 194 - 13,585
FHLMC............................... 135,975 413 (413) 135,975
Private issue....................... 397,706 3,177 (658) 400,225
CMO residual............................ 36 - - 36
------------- -------------- ------------- --------------
$ 616,029 $ 4,051 $ (1,500) $ 618,580
============= ============== ============= ==============
Held to maturity:
Participation certificates:
GNMA.................................. $ 7,518 $ 349 $ - $ 7,867
REMICs:
FNMA.................................. 16,616 120 - 16,736
Private issue........................ 66,112 603 - 66,715
------------- -------------- ------------- --------------
$ 90,246 $ 1,072 $ - $ 91,318
============= ============== ============= ==============
During the years ended September 30, 2003, 2002 and 2001, proceeds from the sale
of available for sale mortgage-backed and related securities were $443.6
million, $157.1 million and $104.4 million, respectively. The gross realized
gains on such sales totaled $2.0 million, $1.1 million and $689,000 in 2003,
2002 and 2001, respectively. The gross realized losses on such sales totaled
$145,000, $51,000 and $49,000 in 2003, 2002 and 2001, respectively.
At September 30, 2003 and 2002, $401.8 million and $466.1 million, respectively,
of mortgage-related securities were pledged as collateral for FHLB advances.
16
(6) LOANS RECEIVABLE
Loans receivable are summarized as follows:
September 30,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------------------------------
First mortgage - one- to four-family.................................. $ 167,242 $ 251,702
First mortgage - residential construction.............................. 61,749 62,973
First mortgage - multi-family.......................................... 151,252 158,320
Commercial real estate................................................ 402,259 395,473
Home equity........................................................... 323,966 276,437
Commercial............................................................ 102,735 148,716
Consumer secured by real estate........................................ 48,761 56,231
Interim financing and consumer loans.................................. 32,870 25,055
Indirect autos......................................................... 1,237 5,598
Education............................................................. 2,218 917
------------- -------------
Total gross loans................................................... 1,294,399 1,381,422
------------- -------------
Less:
Loans in process.................................................... 54,493 43,644
Unearned insurance premiums......................................... 49 86
Deferred loan and guarantee fees.................................... 530 607
Purchased loan discount............................................. 259 401
Allowance for loan losses........................................... 14,107 14,212
------------- -------------
Total deductions.................................................... 69,438 58,950
------------- -------------
Total loans receivable................................................ 1,224,961 1,322,472
Less: First mortgage loans held for sale............................. 19,634 65,006
------------- -------------
Loans receivable, net................................................. $ 1,205,327 $ 1,257,466
============= =============
Activity in the allowance for loan losses is as follows:
Years Ended September 30,
-------------------------------------------
(In thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------
Balance at beginning of year............................ $ 14,212 $ 11,686 $ 10,404
Provision charged to expense.......................... 662 3,289 5,527
Charge-offs........................................... (834) (900) (4,296)
Recoveries............................................. 67 137 51
------------- ------------- -------------
Balance at end of year.................................. $ 14,107 $ 14,212 $ 11,686
============= ============= =============
Non-performing loans totaled approximately $3.1 million and $2.2 million at
September 30, 2003 and 2002, respectively. Impaired loans totaled $197,000 and
$2.0 million at September 30, 2003 and 2002, respectively. Impaired loans had
associated reserves of $20,000 and $696,000 at September 30, 2003 and 2002,
respectively. During 2003, 2002 and 2001 the average balance of impaired loans
was $1.3 million, $6.3 million and $11.0 million, respectively. Interest income
on impaired loans for the years ended September 30, 2003, 2002 and 2001 was
$51,000, $231,000 and $211,000, respectively. Interest income on impaired loans
is recognized only to the extent that payments are expected to exceed the amount
of principal due on the loans.
The effect of non-performing loans on interest income is as follows:
Years Ended September 30,
--------------------------------------------
(In thousands) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
Interest at original contractual rate........................ $ 283 $ 211 $ 1,380
Interest collected........................................... 220 52 147
------------- ------------- -------------
Net reduction of interest income......................... $ 63 $ 159 $ 1,233
============= ============= =============
17
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans are summarized as follows:
September 30,
(In thousands) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
Mortgage loans underlying pass-through securities - FNMA.... $ 13,978 $ 35,496 $ 64,335
Mortgage loan portfolios serviced for:
FNMA.................................................... 831,790 700,677 522,251
WHEDA................................................... 23,420 31,416 34,592
Other investors......................................... 842 1,101 1,291
------------- ------------- -------------
Total loans serviced for others......................... $ 870,030 $ 768,690 $ 622,469
============= ============= =============
Custodial escrow balances maintained in connection with the
foregoing loan servicing and included in demand deposits. $ 18,605 $ 19,461 $ 17,861
============= ============= =============
At September 30, 2003, 2002 and 2001, mortgage loan portfolios serviced for FNMA
includes $42.4 million, $12.3 million and $15.1 million, respectively of
mortgage loans sold with recourse.
In the ordinary course of business the Bank extends credit to directors,
executive officers of the Company and the Bank, or their related affiliates.
These loans were made on substantially the same terms, including rates and
collateral, as those prevailing at the time for comparable transactions with
other unrelated customers, and do not involve more than the normal risk of
collection. These loans to related parties are summarized as follows:
Year Ended
September 30,
(In thousands) 2003
- ------------------------------------------------------------------------------------------- ----------------
Balance at beginning of year........................................................... $ 3,574
New loans.............................................................................. 6,251
Repayments............................................................................. (4,198)
----------------
Balance at end of year................................................................. $ 5,627
================
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
September 30,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------------------------------
Mortgage-backed and related securities............................... $ 2,135 $ 2,582
Loans receivable..................................................... 4,861 5,834
Debt and equity securities............................................ 454 67
-------------- --------------
$ 7,451 $ 8,483
============== ==============
18
(8) PREMISES AND EQUIPMENT
A summary of premises and equipment, at cost, follows:
September 30,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------------------------------
Land and land improvements........................................... $ 5,780 $ 4,837
Office buildings and improvements.................................... 22,090 20,687
Furniture, fixtures and equipment.................................... 26,388 24,383
Leasehold improvements............................................... 5,416 5,472
-------------- --------------
59,674 55,379
Accumulated depreciation and amortization........................ (28,509) (25,555)
-------------- --------------
$ 31,165 $ 29,824
============== ==============
Range of depreciable lives:
Computer equipment and software 3 years
Office buildings and improvements 5 - 40 years
Furniture, fixtures and equipment 5 - 10 years
Leasehold improvements 5 - 40 years
(9) DEPOSITS
Deposit accounts are summarized as follows:
September 30,
-----------------------------------------------------------------------------------
(Dollars in thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------------------
Average Average
Stated Stated
Rate Amount Percent Rate Amount Percent
- ----------------------------------------------------------------------------------------------------------------
Demand deposits:
Non-interest bearing.. - $ 126,214 9.3 % - $ 113,125 8.0 %
Interest bearing...... 0.16 % 101,844 7.5 0.26 % 94,015 6.6
Passbook accounts........ 0.55 106,636 7.9 0.70 93,865 6.6
Money market
demand accounts....... 0.54 387,794 28.7 0.93 380,783 26.9
Certificates............. 3.17 629,055 46.6 3.48 735,191 51.9
------------- ---------- ------------- ----------
Total deposits........... 1.69 % $ 1,351,543 100.0% 2.12 % $ 1,416,979 100.0%
============= ========== ============= ==========
The certificates category above includes approximately $72.8 million and $191.4
million of brokered deposits at average stated rates of 3.36% and 2.59% at
September 30, 2003 and 2002, respectively. At September 30, 2003, original
maturities of brokered certificates range from three months to three years.
Aggregate annual maturities of certificate accounts at September 30, 2003 are as
follows:
Average
Stated
Maturities during year ended September 30: Amount Rate
- ------------------------------------------ --------------- ------------
(In thousands)
2004............................................... $ 435,225 2.96%
2005............................................... 107,831 3.44
2006............................................... 44,428 3.73
2007............................................... 15,542 4.33
2008............................................... 25,871 3.99
Thereafter......................................... 158 8.00
---------------
$ 629,055
===============
Certificates, net of brokered deposits, include approximately $108.7 million and
$94.9 million in denominations of $100,000 or more at September 30, 2003 and
2002, respectively.
19
Interest expense on deposits is as follows:
Years Ended September 30,
(In thousands) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------
Demand deposits............................................. $ 216 $ 306 $ 477
Money market demand accounts................................ 2,370 5,349 17,091
Passbook accounts........................................... 471 676 1,556
Certificates of deposit.................................... 22,854 29,956 47,115
-------------- -------------- -------------
$25,911 $36,287 $66,239
============== ============== =============
Accrued interest payable on deposits totaled approximately $779,000 and $1.8
million at September 30, 2003 and 2002, respectively.
(10) SHORT AND LONG TERM BORROWINGS
Advances and other borrowings consist of the following:
(Dollars in thousands) Weighted Average
Interest Rate Maturity/Call Date
-------------------------
September 30, in fiscal September 30,
------------------------- ------------------------
Description 2003 2002 year ended 2003 2002
- -------------------------------------------------------------------------------------------------------------
Reverse repurchase agreements.... - % 1.80 % 2003 $ - $ 44,880
0.75 2.00 2004 105,000 25,000
Retail repurchase agreements..... - 1.74 2003 - 5,290
1.00 - 2004 9,713 -
Bank line of credit.............. - 2.99 2003 - 14,000
Advances from Federal Home
Loan Bank Of Chicago.......... - 5.48 2003 - 501,250
5.45 - 2004 476,250 -
4.75 4.75 2005 4,688 10,938
Federal funds purchased.......... 1.31 2.13 Daily overnight 25,600 38,100
Federal Reserve Bank
Treasury tax & loan advances... 0.53 1.19 Daily overnight 387 1,716
Mortgages payable................ 6.36 6.93 2006 - 2019 2,131 889
----------- -----------
$623,769 $642,063
Less: short term borrowings...... 616,950 605,236
----------- -----------
Long term borrowings............. $ 6,819 $ 36,827
=========== ===========
The Company is required to maintain as collateral unencumbered one- to
four-family mortgage loans and mortgage-related securities such that the
outstanding balance of FHLB advances does not exceed 60% of the book value of
unencumbered one- to four-family mortgage loans and 100% of the market value of
mortgage-related securities. In addition, these notes are collateralized by all
FHLB stock. At September 30, 2003 and 2002, $147.2 million and $237.3 million,
respectively, of mortgage loans and $401.8 million and $466.1 million,
respectively, of mortgage-related securities were pledged as collateral for FHLB
advances. FHLB advances are subject to a prepayment penalty if they are repaid
prior to maturity. The maximum amount of borrowings from the FHLB at any month
end during the years ended September 30, 2003 and 2002 was approximately $540.6
million and $535.3 million, respectively. The approximate average amount
outstanding was $516.8 million and $523.0 million for those same years. The
weighted average interest rate was 5.36% and 5.49% during those years. The table
above is presented at maturity date or call date, whichever is earlier. Included
in the FHLB advances that mature in fiscal year 2003 are $445.0 million of
convertible fixed rate advances ("CFA"). A CFA is an advance that allows the
FHLB to demand repayment prior to the stated maturity date in accordance with
its contractual terms. At September 30, 2003, the $445.0 million of outstanding
CFAs have a maturity of 2005 to 2011 and are
20
callable by the FHLB during fiscal year 2004 and quarterly thereafter.
The Federal Reserve Bank advances are collateralized by agency debt securities
with a carrying value of $2.0 million at September 30, 2003 and 2002.
Reverse repurchase agreements averaged $93.4 million and $40.3 million based on
average daily balances during the years ended September 30, 2003 and 2002,
respectively. The maximum amount outstanding at any month-end was $105.0 million
and $70.8 million during those years, respectively. The average balances are
calculated based on daily balances. Securities sold under agreements to
repurchase were delivered for escrow to the broker-dealer who arranged the
transactions.
Federal funds purchased averaged $19.6 million and $15.6 million for the years
ended September 30, 2003 and 2002, respectively. The maximum outstanding at any
month-end was $42.9 million and $38.1 million during those years, respectively.
The Bank line of credit averaged $7.8 million and $21.6 million for the years
ended September 30, 2003 and 2002, respectively. The maximum amount outstanding
at any month-end was $14.0 million and $32.0 million during the years ended
September 30, 2003 and 2002, respectively. The line of credit allows for
individual advances of one to six months at rates tied to equivalent term LIBOR
indices and is collateralized by the stock of the Bank. The line of credit
allows for up to $40.0 million in borrowings.
(11) OTHER GENERAL AND ADMINISTRATIVE EXPENSES
Other general and administrative expenses are as follows:
Years Ended September 30,
-------------------------------------------
(In thousands) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
Federal deposit insurance premiums............................ $ 227 $ 254 $ 617
Advertising.................................................. 735 957 919
Stationery, printing and office supplies..................... 655 701 674
Insurance and surety bond premiums............................ 321 274 228
Professional fees and services................................ 1,127 521 377
Supervisory assessment........................................ 377 367 458
Amortization of intangible assets............................. 45 - 1,233
Organization dues and subscriptions........................... 161 151 165
Consumer lending.............................................. 325 272 352
Other ........................................................ 1,751 2,064 1,661
------------- ------------- -------------
$ 5,724 $ 5,561 $ 6,684
============= ============= =============
(12) INCOME TAXES
Income tax expense (benefit) consists of the following:
- -----------------------------------------------------------------------------------------------------------
(In thousands) Federal State Total
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 2003
Current...................................................... $ 2,520 $ 824 $ 3,344
Deferred..................................................... 5,411 1,054 6,465
------------ ------------- ------------
$ 7,931 $ 1,878 $ 9,809
============ ============= ============
YEAR ENDED SEPTEMBER 30, 2002
Current...................................................... $ 7,992 $ 1,382 $ 9,374
Deferred..................................................... (489) (18) (507)
------------ ------------- ------------
$ 7,503 $ 1,364 $ 8,867
============ ============= ============
YEAR ENDED SEPTEMBER 30, 2001
Current...................................................... $12,760 $ 1,753 $14,513
Deferred..................................................... (6,323) (1,223) (7,546)
------------ ------------- ------------
$ 6,437 $ 530 $ 6,967
============ ============= ============
21
Actual income tax expense differs from the "expected" income tax expense
computed by applying the statutory Federal corporate tax rate to income before
income tax expense, as follows:
- -------------------------------------------------------------------------------------------------------
Years Ended September 30,
(In thousands) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------
Federal income tax expense at statutory rate of 35%...... $ 11,931 $ 10,759 $ 8,762
State income taxes, net of Federal income tax benefit.... 1,221 887 345
Tax exempt interest...................................... (25) (71) (79)
ESOP dividend deduction.................................. (376) - -
Acquisition intangible amortization...................... - - 228
Nondeductible acquisition costs.......................... 93 - -
Affordable housing credits............................... (3,052) (2,690) (2,609)
Other, net............................................... 17 (18) 320
------------- ------------- -------------
$ 9,809 $ 8,867 $ 6,967
============= ============= =============
Included in other liabilities is a net deferred tax liability of $1.7 million
and included in other assets is a net deferred tax asset of $2.5 million at
September 30, 2003 and 2002, respectively. The tax effects of temporary
differences that give rise to significant portions of deferred tax assets and
deferred tax liabilities are presented below:
- ------------------------------------------------------------------------------------------------------------
September 30,
(In thousands) 2003 2002
- ------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Allowance for loan losses................................................ $ 5,922 $ 5,717
Deferred interest and fee income......................................... - 1,479
Net operating losses..................................................... 1,640 1,508
Valuation adjustments and reserves....................................... - 47
Accrued expenses......................................................... 51 47
Deferred compensation.................................................... 476 499
Non-qualified stock option exercise...................................... 568 292
Unrealized losses on available for sale securities....................... 23 -
-------------- --------------
Gross deferred tax asset................................................. 8,680 9,589
Less valuation allowance................................................. (1,640) (1,508)
-------------- --------------
Net deferred tax asset................................................... 7,040 8,081
DEFERRED TAX LIABILITIES:
Fixed asset tax basis adjustments........................................ (1,966) (1,760)
FHLB stock tax basis adjustment.......................................... (5,687) (3,267)
Unrealized gains on available for sale securities........................ - (18)
Deferred interest and fee income......................................... (40) -
Acquisition intangible amortization...................................... (338) (169)
Other.................................................................... (688) (392)
-------------- --------------
Gross deferred tax liability............................................. (8,719) (5,606)
-------------- --------------
Net deferred tax asset (liability)....................................... $ (1,679) $ 2,475
============== ==============
At September 30, 2003 and 2002, deferred tax assets include approximately $32.1
million and $29.4 million of various state net operating loss carry forwards
respectively, which begin to expire in 2007 and are reduced by the valuation
allowance to the extent full realization is in doubt.
22
(13) SHAREHOLDERS' EQUITY
In accordance with federal regulations, at the time the Bank converted from a
federal mutual savings bank to a federal stock savings bank, the Bank
established a liquidation account equal to its retained earnings of $63.0
million to provide a limited priority claim for the benefit of qualifying
depositors who maintain their deposit accounts at the Bank after conversion. The
liquidation account is reduced annually to the extent that eligible account
holders have reduced their qualifying deposits. Subsequent increases will not
restore an eligible account holder's interest in the liquidation account. In the
unlikely event of a complete liquidation of the Bank, and only in such event,
each eligible account holder would receive from the liquidation account a
liquidation distribution based on his or her proportionate share of the then
remaining qualifying deposits. At September 30, 2003, the balance of the
liquidation account was approximately $15.8 million. Under current regulations,
the Bank is not permitted to pay dividends on its stock if the effect would
reduce its regulatory capital below the liquidation account.
Office of Thrift Supervision ("OTS") regulations also provide that an
institution that exceeds all fully phased-in capital requirements before and
after a proposed capital distribution could, and after prior notice but without
approval by the OTS, make capital distributions during the calendar year of up
to 100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar year.
Any additional capital distributions would require prior regulatory approval.
During the year ended September 30, 2003, the Bank paid dividends to the Company
totaling $20.0 million. As of September 30, 2003, retained earnings of the Bank
of approximately $36.0 million were free of restriction and available for
dividend payments.
Unlike the Bank, the Company is not subject to these regulatory restrictions on
the payment of dividends to its shareholders. However, the Company's source of
funds for future dividends may depend upon dividends from the Bank.
Under the Internal Revenue Code and the Wisconsin Statutes, for tax years
beginning before 1996, the Company was permitted to deduct an annual addition to
a reserve for bad debts. This amount differed from the provision for loan losses
recorded for financial accounting purposes. Under prior law, bad debt deductions
for income tax purposes were included in taxable income of later years only if
the bad debt reserves were used for purposes other than to absorb bad debt
losses. Because the Company did not intend to use the reserve for purposes other
than to absorb losses, no deferred income taxes were provided. Shareholders'
equity at September 30, 2003 includes approximately $21.9 million, for which no
federal or state income taxes were provided. Under SFAS No. 109, deferred income
taxes have been provided on certain additions to the tax reserve for bad debts.
The Small Business Job Protection Act of 1996 repealed the bad debt reserve
method for tax years beginning after 1995. The Bank will not be required to
recapture into income any of the restricted amounts previously deducted except
in the unlikely event of a partial or complete liquidation of the Bank or if
nondividend distributions to shareholders exceed current and accumulated
earnings and profits.
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the Company's and the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company's and the Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of September 30, 2003 and 2002, that the Company and the
Bank meet all capital adequacy requirements to which they are subject.
As of September 30, 2003 and 2002, the most recent notification from the OTS
categorized the Bank as well-capitalized under the regulatory framework for
prompt corrective action. A well-capitalized
23
institution significantly exceeds the required minimum level for each relevant
capital measure. There are no conditions or events since that notification that
management believes have changed the institution's category.
The following table summarizes the Bank's capital ratios and the ratios required
by federal regulations:
To Be Adequately To Be Well
Capitalized Under Capitalized Under
Prompt Corrective Prompt Corrective
Actual Action Provisions Action Provisions
---------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- --------- ------------ --------- ------------ ---------
(Dollars in thousands)
As of September 30, 2003:
> or = to > or = to > or = to > or = to
Tangible capital.............. $ 181,615 8.33% $ 87,187 4.0% $ 108,984 5.0%
> or = to > or = to > or = to > or = to
Core capital ................. 181,615 8.33% 87,187 4.0% 108,984 5.0%
> or = to > or = to > or = to > or = to
Tier 1 risk-based capital..... 181,615 11.36% 63,947 4.0% 95,920 6.0%
> or = to > or = to > or = to > or = to
Total risk-based capital...... 195,437 12.22% 127,894 8.0% 159,867 10.0%
As of September 30, 2002:
> or = to > or = to > or = to > or = to
Tangible capital.............. $ 175,889 7.57% $ 92,971 4.0% $ 116,214 5.0%
> or = to > or = to > or = to > or = to
Core capital ................. 175,889 7.57% 92,971 4.0% 116,214 5.0%
> or = to > or = to > or = to > or = to
Tier 1 risk-based capital..... 175,889 10.56% 66,646 4.0% 99,968 6.0%
> or = to > or = to > or = to > or = to
Total risk-based capital...... 189,793 11.39% 133,291 8.0% 166,614 10.0%
On September 25, 1997, the Company's Board of Directors adopted a shareholders'
rights plan (the "Rights Plan"). Under the terms of the Rights Plan, the Board
of Directors declared a dividend of one preferred share purchase right for each
outstanding share of common stock. Upon becoming exercisable, each right
entitles shareholders to buy one one-hundredth of a share of the Company's
preferred stock at an exercise price of $150. Rights do not become exercisable
until eleven business days after any person or group has acquired, commenced, or
announced its intention to commence a tender or exchange offer to acquire 15% or
more of the Company's common stock, or in the event a person or group owning 10%
or more of the Company's common stock is deemed to be "adverse" to the Company.
If the rights become exercisable, holders of each right, other than the
acquiror, upon payment of the exercise price, will have the right to purchase
the Company's common stock (in lieu of preferred shares) having a value equal to
two times the exercise price. If the Company is acquired in a merger, share
exchange or other business combination or 50% or more of its consolidated assets
or earning power are sold, rights holders, other than the acquiring or adverse
person or group, will be entitled to purchase the acquiror's shares at a similar
discount. If the rights become exercisable, the Company may also exchange
rights, other than those held by the acquiring or adverse person or group, in
whole or in part, at an exchange ratio of one share of the Company's common
stock per right held. Rights are redeemable by the Company at any time until
they are exercisable at the exchange rate of $.01 per right. Issuance of the
rights has no immediate dilutive effect, does not currently affect reported
earnings per share, is not taxable to the Company or its shareholders, and will
not change the way in which the Company's shares are traded. The rights expire
ten years from the date of issuance. The Company's shareholders' rights plan
will be canceled as a condition of the merger with MAF Bancorp, Inc. discussed
in Note 2.
(14) EARNINGS PER SHARE
Basic earnings per share of common stock have been determined by dividing net
income by the weighted average number of shares of common stock outstanding
during the year. Diluted earnings per share of common stock have been determined
by dividing net income by the weighted average number of shares of common stock
outstanding during the year, adjusted for the dilutive effect of outstanding
stock options.
24
The computation of earnings per common share for the years ended September 30 is
as follows:
2003 2002 2001
--------------- --------------- ----------------
Income before cumulative effect of change in
accounting principle................................. $24,280,000 $21,872,000 $18,068,000
Cumulative effect of change in accounting principle.... - - (84,000)
--------------- --------------- ----------------
Net income............................................. $24,280,000 $21,872,000 $17,984,000
=============== =============== ================
Common shares issued................................... 14,579,240 14,579,240 14,579,240
Weighted average treasury shares....................... 5,167,228 5,317,188 5,198,116
--------------- --------------- ----------------
Weighted average common shares outstanding
during the year...................................... 9,412,012 9,262,052 9,381,124
Effect of dilutive stock options outstanding........... 501,467 465,039 252,096
--------------- --------------- ----------------
Diluted weighted average common shares.................
outstanding during the year.......................... 9,913,479 9,727,091 9,633,220
=============== =============== ================
Basic earnings per share:
Before cumulative effect of a change in accounting
principle........................................ $ 2.58 $ 2.36 $ 1.93
Cumulative effect of a change in accounting principle - - (0.01)
--------------- --------------- ----------------
$ 2.58 $ 2.36 $ 1.92
=============== =============== ================
Diluted earnings per share:
Before cumulative effect of a change in accounting
principle........................................ $ 2.45 $ 2.25 $ 1.88
Cumulative effect of a change in accounting principle - - (0.01)
--------------- --------------- ----------------
$ 2.45 $ 2.25 $ 1.87
=============== =============== ================
(15) STOCK REPURCHASE PROGRAM
On June 30, 2000, the Company announced a share repurchase program for its
common stock whereby the Company may purchase up to 5% of the outstanding common
stock, or approximately 485,000 shares, commencing June 30, 2001. The
repurchased shares became treasury shares and are to be used for the exercise of
stock options under the stock option plan and for general corporate purposes.
The share repurchase program was completed on September 20, 2002 at an average
price of $17.16 per share. This was the eleventh such repurchase program that
the Company has undertaken. At September 30, 2002, an aggregate of 7,002,204
shares had been repurchased in all such repurchase programs at an average price
of $13.48. No shares were repurchased in 2003 under this program. On September
18, 2001, the Company announced a share repurchase program for its common stock
whereby the Company may purchase up to 5% of the outstanding stock, or
approximately 460,000 shares. The repurchase program started on September 20,
2001. At September 30, 2002, 70,300 shares had been repurchased at an average
price of $20.78 per share. No shares were repurchased in 2003 under this
program.
25
(16) EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLANS:
The Company has a defined contribution pension plan which covers substantially
all employees who are at least 21 years of age and have completed 1,000 hours or
more of service each year. Company contributions are based on a set percentage
of each participant's compensation for the plan year. Plan expense for the years
ended September 2003, 2002 and 2001 was approximately $1.2 million, $916,000 and
$336,000, respectively.
The Company also has a defined contribution savings plan for substantially all
employees. The plan is qualified under Section 401(k) of the Internal Revenue
Code. Participation in the plan requires that an employee be at least 21 years
of age and have completed one month of service. Participants may elect to defer
a portion of their compensation (between 2% and 10%) and contribute this amount
to the plan. Under the plan, the Company will match the contribution made by
each employee up to fifty percent of 6% of the eligible employee's annual
compensation. Plan expense for the years ended September 30, 2003, 2002 and 2001
was approximately $428,000, $403,000 and $272,000, respectively.
The aggregate benefit payable to any employee of both defined contribution plans
is dependent upon the rates of contribution, the earnings of the fund and the
length of time such employee continues as a participant.
OFFICER DEFERRED COMPENSATION PLAN:
The Company has deferred compensation plans covering certain officers of the
Company. These arrangements provide for monthly payments to be made upon
retirement or reaching certain age levels for periods of 10 to 15 years. A
liability is recorded for the present value of the future payments under these
agreements, amounting to $619,000 and $677,000, respectively at September 30,
2003 and 2002. The Company owns insurance policies on the lives of these
officers, which have cash surrender values of approximately $2.6 million and
$2.5 million, respectively at September 30, 2003 and 2002, and are intended to
fund these benefits. Plan expense for the years ended September 30, 2003, 2002
and 2001 was approximately $52,000, $54,000 and $56,000, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN:
In conjunction with the conversion of the Bank to a stock savings bank, an
employee stock ownership plan ("ESOP") was adopted covering all employees of the
Company who have attained age 21 and completed one year of service during which
they work at least 1,000 hours. The Bank made cash contributions to the ESOP
plan based on a set percentage of each participant's compensation for the plan
year. All dividends received by the ESOP are allocated to the participants. All
contributions and dividends are used to purchase additional shares of stock.
ESOP compensation expense for the years ended September 30, 2003, 2002 and 2001
was $372,000, $327,000 and $188,000, respectively.
STOCK OPTION PLANS:
The Company has adopted stock option plans for the benefit of directors and
officers of the Company. The option exercise price cannot be less than the fair
value of the underlying common stock as of the date of the option grant, and the
maximum term cannot exceed ten years. Stock options awarded to directors may be
exercised at any time or on a cumulative basis over varying time periods,
provided the grantee remains a director of the Company. The stock options
awarded to officers are exercisable on a cumulative basis over varying time
periods, depending on the individual option grant terms, which may include
provisions for acceleration of vesting periods.
26
At September 30, 2003, 62,930 shares were reserved for future grants. Further
information concerning the options is as follows:
Option Price
Shares Per Share
------ ---------
Shares under option
September 30, 2000......................................... 1,700,148 $ 5.00 - 21.31
Options granted.......................................... 10,000 13.88 - 22.00
Options canceled......................................... (65,850) 18.88
Options exercised........................................ (29,400) 5.00 - 15.62
------------- -----------------
September 30, 2001......................................... 1,614,898 5.00 - 22.00
Options granted.......................................... - -
Options canceled......................................... (11,302) 15.62 - 18.50
Options exercised........................................ (175,088) 5.00 - 19.00
------------- -----------------
September 30, 2002......................................... 1,428,508 5.00 - 22.00
Options granted.......................................... - -
Options canceled......................................... (2,280) 18.88
Options exercised........................................ (126,353) 5.00 - 20.25
------------- -----------------
September 30, 2003......................................... 1,299,875 $ 8.38 - 22.00
============= =================
Options exercisable at September 30, 2003.................. 1,195,759 $ 8.38 - 22.00
============= =================
The following table summarizes information about stock options outstanding at
September 30, 2003:
Options Outstanding Options Exercisable
---------------------------------------------- --------------------------------
Weighted Weighted
Exercise Number Average Average Number Average
Price Range Outstanding Exercise Price Life* Outstanding Exercise Price
- ------------------- --------------- ---------------- ------------ --------------- ----------------
$ 8.38 17,000 $ 8.38 0.83 17,000 $ 8.38
13.13-14.50 661,172 14.31 4.37 639,119 14.33
15.62-18.50 21,694 17.72 5.21 21,694 17.72
18.88 475,275 18.88 5.41 401,878 18.88
19.19-22.00 124,734 20.14 5.20 116,068 20.02
--------------- ---------------- --------------- ----------------
1,299,875 $ 16.52 1,195,759 $ 16.39
=============== ================ =============== ================
*Average contractual life remaining in years
27
For purposes of providing the pro forma disclosures required under SFAS No. 148,
"Accounting for Stock Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123," the fair value of stock options granted
was estimated using the Black-Scholes option pricing model. There were no
options granted during fiscal years 2003 and 2002. The per share
weighted-average fair value of stock options granted during 2001 was $5.13 on
the date of grant with the following weighted-average assumptions used for
grants:
September 30,
2001
-----------------
Expected dividend yield........... 1.88%
Risk-free interest rate........... 4.44%
Expected lives.................... 10 years
Expected volatility............... 15%
Had compensation cost for the Company's stock-based plans been determined in
accordance with SFAS No. 148, net income and earnings per share would have been
reduced to the pro forma amounts indicated below. This pro forma net income
reflects only options granted in the fiscal years 1997 through 2003. Therefore,
the full impact of calculating compensation cost under SFAS No. 148 is not
reflected in the pro-forma net income and earnings per share amounts.
Years Ended September 30,
2003 2002 2001
---------------- ----------------- ----------------
Net Income As reported............. $ 24,280,000 $ 21,872,000 $ 17,984,000
Pro forma............... $ 23,867,000 $ 21,201,000 $ 17,295,000
Basic earnings per share As reported............. $ 2.58 $ 2.36 $ 1.92
Pro forma............... $ 2.54 $ 2.29 $ 1.85
Diluted earnings per share As reported............. $ 2.45 $ 2.25 $ 1.87
Pro forma............... $ 2.41 $ 2.18 $ 1.80
(17) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND OTHER COMMITMENTS
The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated financial statements. The contractual or notional
amounts of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for the commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as it does for instruments reflected in the consolidated financial statements.
28
Contractual or Notional
Amount(s)
September 30,
2003 2002
--------------- --------------
(In thousands)
Financial instruments whose contract amounts
represent credit risk, are as follows:
Commitments to extend credit:
Fixed-rate loans................................. $ 18,217 $ 69,156
Variable-rate loans.............................. 29,987 41,824
Mortgage loans sold with recourse................... 42,429 12,334
Guarantees under IRB issues........................ 29,525 36,581
Standby letters of credit.......................... 12,367 7,906
Unused and open-ended lines of credit:
Consumer......................................... 302,312 273,704
Commercial....................................... 84,372 66,411
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates of 45 days or less or other termination
clauses and may require a fee. Fixed-rate loan commitments as of September 30,
2003 have interest rates ranging from 4.13% to 8.25%. Because some commitments
expire without being drawn upon, the total commitment amounts do not necessarily
represent cash requirements. The Company evaluates the creditworthiness of each
customer on a case-by-case basis. The amount of collateral obtained if deemed
necessary by the Company upon extension of credit is based on management's
credit evaluation of the counterparty. The Company generally extends credit on a
secured basis. Collateral obtained consists primarily of one- to four-family
residences and other residential and commercial real estate.
Loans sold with recourse represent one- to four-family mortgage loans that are
sold to secondary market agencies, primarily FNMA, with the servicing of these
loans being retained by the Company. The Company receives a larger servicing
spread on those loans being serviced then it would if the loans had been sold
without recourse.
The Company has entered into agreements whereby, for an initial and annual fee,
it will guarantee payment for an industrial development revenue bond issue
("IRB"). The IRBs are issued by municipalities to finance real estate owned by a
third party. Potential loss on a guarantee is the notional amount of the
guarantee less the value of the real estate collateral. At September 30, 2003,
appraised values of the real estate collateral exceeded the amount of the
guarantees.
Standby letters of credit are conditional commitments that the Company issues to
guarantee the performance of a customer to a third-party. The guarantees
frequently support public and private borrowing arrangements. The Company
receives an initial and annual fee for the guarantee. The guarantees generally
have a term of approximately one year and may be automatically renewable within
a specified period of time. Potential loss on a guarantee is the notional amount
of the guarantee less the value of the collateral. Since the conditions
requiring the Company to fund letters of credit may not occur, the Company
expects its future cash requirements to be less than the total outstanding
commitments.
The unused and open consumer lines of credit are conditional commitments issued
by the Company for extensions of credit such as home equity, auto, credit card
or other similar consumer type financing. Furthermore, the unused and open
commercial lines of credit are also conditional commitments issued by the
Company for extensions of credit such as working capital, equipment or other
similar commercial type financing. The credit risk involved in extending lines
of credit is essentially the same as that involved in extending loan facilities
to customers. Collateral held for these commitments may include, but may not be
limited to, real estate, investment securities, equipment, accounts receivable,
inventory and Company deposits.
29
The Company's primary business activities include granting residential mortgage
and consumer loans to customers located within the proximity of their branch
locations, primarily within the State of Wisconsin. Approximately $119.8 million
of commercial real estate and multi-family loans are outside Wisconsin as of
September 30, 2003.
In the normal course of business, various legal proceedings involving the
Company are pending. Management, based upon advice from legal counsel, does not
anticipate any significant losses as a result of these actions.
The Company leases 15 offices under agreements which expire at various dates
through August 2056, with ten leases having renewable options. Rent expense
under these agreements totaled approximately $1.4 million, $1.4 million and $1.3
million for the years ended September 30, 2003, 2002 and 2001, respectively.
The future minimum rental commitments as of September 30, 2003 under these
leases for the next five years and thereafter, are as follows:
Years Ended September 30, Amount
-----------------------------------------------------
(In thousands)
2004............................... $ 1,041
2005............................... 653
2006............................... 632
2007............................... 621
2008............................... 608
2009 and thereafter................ 8,563
(18) FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" (SFAS No.
107), requires disclosure of fair value information about financial instruments,
whether or not recognized on the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are materially affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. SFAS No. 107 excludes certain financial instruments and all
non-financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent, and should not be
interpreted to represent, the underlying value of the Company.
30
The following table presents the estimates of fair value of financial
instruments at September 30, 2003:
- -----------------------------------------------------------------------------------------------------------
Carrying Fair
(In thousands) Value Value
- -----------------------------------------------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents................................................... $ 39,739 $ 39,739
Debt and equity securities.................................................. 72,956 72,956
Mortgage-backed and related securities...................................... 633,290 633,380
Mortgage loans held for sale................................................ 19,634 19,634
Loans receivable............................................................ 1,205,327 1,224,907
Federal Home Loan Bank stock................................................ 112,727 112,727
Financial Liabilities:
Certificate accounts........................................................ 629,055 641,029
Other deposit accounts...................................................... 722,488 722,488
Advances and other borrowings............................................... 623,769 669,485
- -----------------------------------------------------------------------------------------------------------
Contractual
or Notional Carrying Fair
(In thousands) Amount Value Value
- -----------------------------------------------------------------------------------------------------------
Off-Balance Sheet Items:
Commitments to extend credit................................... $ 48,204 - *
Unused and open-ended lines of credit.......................... 386,684 - *
* Amount is not material.
The following table presents the estimates of fair value of financial
instruments at September 30, 2002:
- -----------------------------------------------------------------------------------------------------------
Carrying Fair
(In thousands) Value Value
- -----------------------------------------------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents................................................... $ 45,835 $ 45,835
Debt and equity securities.................................................. 16,596 16,596
Mortgage-backed and related securities...................................... 708,826 709,898
Mortgage loans held for sale................................................ 65,006 65,006
Loans receivable............................................................ 1,257,466 1,280,121
Federal Home Loan Bank stock................................................ 90,784 90,784
Financial Liabilities:
Certificate accounts........................................................ 735,191 749,197
Other deposit accounts...................................................... 681,788 681,788
Advances and other borrowings............................................... 642,063 697,065
- -----------------------------------------------------------------------------------------------------------
Contractual
or Notional Carrying Fair
(In thousands) Amount Value Value
- -----------------------------------------------------------------------------------------------------------
Off-Balance Sheet Items:
Commitments to extend credit................................... $110,980 - *
Unused and open-ended lines of credit.......................... 340,115 - *
* Amount is not material.
31
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the statement of
financial condition for cash and short-term instruments approximate those
assets' fair values.
DEBT AND EQUITY AND MORTGAGE-BACKED AND RELATED SECURITIES: Fair values for debt
and equity and mortgage-backed and related securities are based on quoted market
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
MORTGAGE LOANS HELD FOR SALE: The fair values for mortgage loans held for sale
are based on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan characteristics.
LOANS RECEIVABLE: For variable-rate mortgage loans that reprice frequently and
with no significant change in credit risk, fair values are based on carrying
values. The fair values for residential mortgage loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The fair values
for commercial real estate loans, rental property mortgage loans, and consumer
and other loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
FEDERAL HOME LOAN BANK STOCK: FHLB stock is carried at cost which is its
redeemable (fair) value since the market for this stock is limited.
CERTIFICATE ACCOUNTS: The fair values of fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities of the outstanding certificates of deposit. In accordance
with SFAS No. 107, the fair value of liabilities cannot be less than the
carrying value.
OTHER DEPOSITS: The fair values disclosed for other deposits, which include
interest and non-interest checking accounts, passbook accounts and money market
accounts, are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying value amounts).
FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS: The fair values of the
Company's long-term borrowings are estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
OFF-BALANCE SHEET ITEMS: The fair value of the Company's off-balance sheet
instruments are based on quoted market prices and fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the credit standing of the related counterparty.
The fair value estimates are presented for on-balance sheet financial
instruments without attempting to estimate the value of the Company's long-term
relationships with depositors and the benefit that results from low-cost funding
provided by deposit liabilities.
32
(19) SEGMENT INFORMATION
The Company's operations include four strategic business segments: Retail
Banking, Commercial Banking, Mortgage Banking and Investments. Financial
performance is primarily based on the individual segments direct contribution to
Company net income. The Company's segments do not include the operations of the
parent holding company, nor the operations of the Bank's operating subsidiaries.
Capital is not allocated to the segments and thus net interest income related to
the free funding associated with capital is not included in the individual
segments. The Company only charges the segments with direct expenses. Costs
associated with administrative and centralized back-office support areas of the
Bank are not allocated to the segments. Income taxes are allocated to the
segments based on the Bank's effective tax rate prior to the consolidation with
its affordable housing subsidiary.
The Retail Banking segment consists of the Bank's retail deposits, branch and
ATM network, consumer lending operations, annuity and brokerage services and
call center. The segment includes a much higher level of interest-bearing
liabilities than earning assets. The Company views this segment as a significant
funding vehicle for the other lending segments. The Company's transfer pricing
model has the effect of viewing this segment as a comparison to the cost of
wholesale funds.
The Commercial Banking segment consists of the Bank's commercial, commercial
real estate and multi-family lending operations. It also includes the lending
aspects of the Company's affordable housing subsidiary.
The Mortgage Banking segment consists of the Bank's single-family mortgage
lending operation. Single-family lending consists of three primary operations:
portfolio lending, lending for sale in the secondary market and loan servicing.
The Investment segment consists of the Company's portfolio of mortgage-backed
and related securities, its debt and equity securities and other short-term
investments. This segment also includes the Company's wholesale sources of
funding including FHLB advances, brokered certificates of deposits, reverse
repurchase agreements and federal funds purchased.
33
- ------------------------------------- ------------- ------------- -------------- ------------- --------------
BUSINESS SEGMENTS Retail Commercial Mortgage Total
(In thousands) Banking Banking Banking Investments Segments
- ------------------------------------- ------------- ------------- -------------- ------------- --------------
Year ended September 30, 2003
Net interest income (expense)..... $ 13,936 $ 27,610 $ 9,452 $ (8,056) $ 42,942
Provision for loan losses......... 153 145 364 - 662
Other operating income............ 10,610 1,865 16,355 2,584 31,414
General and administrative expenses 24,020 3,709 6,360 756 34,845
Income tax expense (benefit)...... 129 8,825 6,697 (2,145) 13,506
------------- ------------- -------------- ------------- --------------
Segment profit (loss)............. $ 244 $ 16,796 $ 12,386 $ (4,083) $ 25,343
============= ============= ============== ============= ==============
Goodwill.......................... $ 13,182 $ - $ - $ - $ 13,182
============= ============= ============== ============= ==============
Segment average assets............ $ 386,970 $ 676,667 $ 225,191 $ 759,245 $2,048,073
============= ============= ============== ============= ==============
Year ended September 30, 2002
Net interest income (expense)..... $ 15,013 $ 25,602 $ 9,717 $ (2,103) $ 48,229
Provision for loan losses......... 1,386 1,804 99 - 3,289
Other operating income............ 8,268 1,142 9,603 1,312 20,325
General and administrative expenses 22,880 3,522 5,358 781 32,541
Income tax expense (benefit)...... (343) 7,453 4,855 (547) 11,418
------------- ------------- -------------- ------------- --------------
Segment profit (loss)............. $ (643) $ 13,966 $ 9,009 $ (1,025) $ 21,306
============= ============= ============== ============= ==============
Goodwill.......................... $ 13,182 $ - $ - $ - $ 13,182
============= ============= ============== ============= ==============
Segment average assets............ $ 343,421 $ 673,008 $ 270,857 $ 772,076 $2,059,362
============= ============= ============== ============= ==============
Year ended September 30, 2001
Net interest income............... $ 21,101 $ 15,811 $ 8,072 $ 3,505 $ 48,489
Provision for loan losses......... 886 4,145 496 - 5,527
Other operating income............ 7,418 1,121 6,169 860 15,568
General and administrative expenses 21,532 2,908 4,318 946 29,704
Income tax expense................ 1,938 3,138 3,003 1,086 9,165
------------- ------------- -------------- ------------- --------------
Segment profit.................... $ 4,163 $ 6,741 $ 6,424 $ 2,333 $ 19,661
============= ============= ============== ============= ==============
Goodwill.......................... $ 13,351 $ - $ - $ - $ 13,351
============= ============= ============== ============= ==============
Segment average assets............ $ 322,932 $ 599,661 $ 391,391 $ 935,781 $2,249,765
============= ============= ============== ============= ==============
34
RECONCILEMENT OF SEGMENT INFORMATION TO FINANCIAL STATEMENTS
Years Ended September 30,
2003 2002 2001
- ---------------------------------------------------------- --------------- ----------------- ----------------
(In thousands)
NET INTEREST INCOME AND OTHER OPERATING INCOME
Total for segments..................................... $ 74,356 $ 68,554 $ 64,057
Unallocated transfer pricing credit (primarily on
capital)............................................... 5,369 8,886 8,191
Income from affordable housing subsidiary.............. 3,649 3,190 3,026
Holding company interest expense....................... (237) (833) (2,265)
Elimination of intercompany interest income............ (1,151) (1,064) (1,383)
Other.................................................. 4,605 3,389 3,254
--------------- ----------------- ----------------
Consolidated total revenue............................. $ 86,591 $ 82,122 $ 74,880
=============== ================= ================
PROFIT
Total for segments..................................... $ 25,343 $ 21,306 $ 19,661
Unallocated transfer pricing credit (primarily on
capital)............................................... 3,221 5,332 4,915
Unallocated administrative and centralized support
costs (a)............................................ (5,090) (5,449) (5,556)
Holding company net loss............................... (975) (1,096) (1,887)
Elimination of intercompany interest income............ (691) (638) (830)
Affordable housing tax credits......................... 3,052 2,690 2,609
Other.................................................. (580) (273) (928)
--------------- ----------------- ----------------
Consolidated net income................................ $ 24,280 $ 21,872 $ 17,984
=============== ================= ================
AVERAGE ASSETS
Total for segments..................................... $2,048,073 $2,059,362 $2,249,765
Elimination of intercompany loans...................... (16,287) (15,381) (13,346)
Other assets not allocated............................. 201,715 161,747 117,518
--------------- ----------------- ----------------
Consolidated average assets............................ $2,233,501 $2,205,728 $2,353,937
=============== ================= ================
<FN>
(a) After-tax effect of $8.5 million, $9.1 million and $9.3 million of
general and administrative expenses for the years ended September 30,
2003, 2002 and 2001, respectively.
</FN>
(20) DERIVATIVE AND HEDGING ACTIVITIES
Effective October 1, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The Company utilizes derivative
hedging instruments in the course of its asset/liability management. The hedging
instruments primarily used by the Company are interest rate swap agreements
which are used to convert fixed-rate payments or receipts to variable-rate
payments or receipts and thus hedge the Company's fair market value of the item
being hedged and certain forward loan sale commitments which hedge the change in
fair value of loans held for sale. The items being hedged generally expose the
Company to variability in fair value in rising or declining interest rate
environments.
The Company's mortgage banking activities include the issuance of commitments to
extend residential mortgage loans. When the loan is originated or purchased, it
may be recorded as a mortgage loan held for sale. The loans held for sale are
hedged with forward contracts and a fair value hedge is designated. The Company
is in a short position with forward contracts, whereby the Company agrees to
sell mortgage loans held for sale at a pre-established price at some future
date, and in a long position with the mortgage loans held for sale. The hedging
relationship is highly effective and hedges changes in the fair value of the
mortgage loans held for sale due to interest rate changes. The change in fair
value of mortgage loans held for sale is included in the consolidated statements
of income in gain on sales of loans.
The Company measures the effectiveness of its hedges on a periodic basis. Any
difference between the fair value change of the hedge versus the fair value
change of the hedged item is considered to be the "ineffective" portion of the
hedge. The ineffective portion of the hedge is recorded as an increase or
decrease in the related income statement classification of the item being
hedged. If the ineffectiveness of a hedge exceeds certain levels the derivative
would no longer be eligible for hedge treatment and future changes in fair value
of the derivative would be recorded in the statement of income.
The Company's commitments to originate mortgage loans held-for-sale and forward
loan sale commitments are considered derivatives under the accounting standards.
As such, the change in fair value of such commitments, are recorded as an
adjustment to the gains on the sale of loans.
35
As of the adoption date of SFAS No. 133, the Company had two interest rate swap
agreements that were not considered hedges under the accounting standard. Both
agreements were terminated during the quarter ended December 31, 2001. The fair
value of the agreements as of October 1, 2000 is included in the cumulative
effect of an accounting change and the change in fair value during the quarter
is included in securities gains (losses) in the income statement.
Upon adoption of SFAS No. 133, the Company recorded the cumulative effect of an
accounting change in an amount equal to the accounting effects of the Statement
as of the beginning of the fiscal year. The cumulative effect, net of taxes, was
a decrease in net income of $84,000 for the year ended September 30, 2001.
During the years ended September 30, 2003 and 2002, the Company recorded the
effects of the ineffectiveness of any hedge transaction as part of the income
statement line item pertaining to each item. The individual changes in value
resulted in an increase of $1,000 and $9,000 in interest expense on deposits for
the years ended September 30, 2003 and 2002, respectively.
(21) GOODWILL AND INTANGIBLE ASSETS
Effective October 1, 2001, the Company adopted Financial Accounting Statement
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142
provides that intangible assets with finite useful lives be amortized and that
goodwill and intangible assets with indefinite lives will not be amortized, but
will rather be tested at least annually for impairment. As required under SFAS
No. 142, the Company discontinued the amortization of goodwill with a net
carrying value of $12.9 million at October 1, 2001 and annual amortization of
approximately $1.2 million that resulted from business combinations prior to the
adoption of SFAS No. 141. The Company evaluates goodwill for impairment at least
annually. Impairment testing of goodwill was completed as of September 30, 2003
and 2002 and resulted in no impairment, therefore, goodwill has a net carrying
value of $12.9 million at September 30, 2003.
Net income and earnings per share adjusted for the adoption of SFAS No. 142 is
as follows:
Years Ended September 30,
------------------------------------------------
2003 2002 2001
-------------- -------------- ---------------
(In thousands, except per share data)
Net income, as reported.................................. $ 24,280 $ 21,872 $ 17,984
Add back: Goodwill amortization, net of tax benefit...... - - 1,030
-------------- -------------- ---------------
Adjusted net income...................................... $ 24,280 $ 21,872 $ 19,014
============== ============== ===============
BASIC EARNINGS PER SHARE:
Net income, as reported............................. $ 2.58 $ 2.36 $ 1.92
Goodwill amortization, net of tax benefit........... - - 0.11
-------------- -------------- ---------------
Adjusted net income................................. $ 2.58 $ 2.36 $ 2.03
============== ============== ===============
DILUTED EARNINGS PER SHARE:
Net income, as reported............................. $ 2.45 $ 2.25 $ 1.87
Goodwill amortization, net of tax benefit........... - - 0.11
-------------- -------------- ---------------
Adjusted net income................................. $ 2.45 $ 2.25 $ 1.98
============== ============== ===============
In addition to goodwill, the Company's other intangible assets consist of
mortgage servicing rights and other intangible assets from business combinations
which are included in other assets on the consolidated balance sheet. Mortgage
servicing rights are not subject to SFAS No. 142 but rather, are amortized over
their expected life and subject to periodic impairment testing. The results for
the years ended September 30, 2003 and 2002 include a $2.5 million and $3.1
million charge, respectively, related to impairment write-downs of the Company's
mortgage servicing rights. The write-down was the result of an increase in
forecasted prepayment speeds, which resulted primarily from the current lower
interest rate environment. At September 30, 2003 and 2002 the valuation reserve
totaled $5.6 million and $3.1 million, respectively.
The Company's other intangible assets resulted from the purchase of deposits.
This acquisition did not meet the definition of a business combination under
SFAS No. 147, "Acquisition of Certain Financial Institutions," therefore, it is
not required to be accounted for in accordance with SFAS No. 141 and SFAS No.
142. Changes in the carrying value of capitalized mortgage servicing rights are
summarized as follows:
36
Years Ended September 30,
(In thousands) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
Balance at beginning of year.................................. $ 6,145 $ 6,287 $ 4,575
Servicing rights capitalized.............................. 8,061 4,926 3,086
Amortization of servicing rights.......................... (2,774) (1,968) (1,374)
Impairment of servicing rights............................ (2,475) (3,100) -
------------- ------------- -------------
Balance at end of year........................................ $ 8,957 $ 6,145 $ 6,287
============= ============= =============
Market value at end of year................................... $ 10,420 $ 6,496 $ 6,963
============= ============= =============
Intangible assets from business combinations, carrying and
market value............................................... $ 415 $ 460 $ 460
============= ============= =============
Amortization expense for the mortgage servicing rights asset are based on
assumptions made during each reporting period. Such assumptions include, but are
not limited to, the current level of interest rates and the forecast prepayment
speeds as estimated by major mortgage dealers. Actual amortization expense is
also affected by the amount of loans sold with servicing retained. At September
30, 2003, the Company services $870 million in mortgage loans for others,
compared to $768.7 million at September 30, 2002. Intangible assets from
business combinations are amortized on a straight-line method.
Actual amortization expense is as follows:
Years Ended September 30,
(In thousands) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
Amortization of mortgage servicing rights..................... $ 2,774 $ 1,968 $ 1,374
Amortization of intangible assets from business combinations.. 45 - -
The following table shows the future estimated amortization expense for
originated mortgage servicing rights based on existing balances and the interest
rate environment as of September 30, 2003. The Company's actual amortization
expense in any given period may be significantly different from the estimated
amounts displayed depending on changes in mortgage interest rates, estimated
prepayment speeds, additional recognition of servicing on loans sold in the
future and market conditions.
Estimated future amortization expense:
Years Ended September 30, Amount
- ------------------------------------------------------------ ---------------
(In thousands)
2004.................................................... $ 2,736
2005.................................................... 1,403
2006.................................................... 1,074
2007.................................................... 821
2008.................................................... 626
2009 and thereafter..................................... 2,297
37
(22) FINANCIAL INFORMATION OF ST. FRANCIS CAPITAL CORPORATION (PARENT ONLY)
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands) 2003 2002
- -----------------------------------------------------------------------------------------------------------
ASSETS
Cash, all with Bank........................................................... $ 1,715 $ 2,713
Investment in subsidiary, at equity........................................... 192,654 190,703
Accrued interest receivable and other assets.................................. 32 27
------------- ------------
Total assets............................................................ $194,401 $193,443
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Advances and other borrowings............................................. $ - $ 14,000
Accrued interest and other liabilities.................................... 357 362
------------- -------------
Total liabilities....................................................... 357 14,362
------------- -------------
Shareholders' equity:
Common stock.............................................................. 146 146
Additional paid-in capital................................................ 89,897 89,324
Retained earnings, substantially restricted............................... 177,030 160,494
Accumulated other comprehensive income (loss)............................. (2,267) 1,632
Treasury stock, at cost................................................... (70,762) (72,515)
------------- ------------
Total shareholders' equity.............................................. 194,044 179,081
------------- -------------
Total liabilities and shareholders' equity.............................. $194,401 $193,443
============= =============
STATEMENTS OF INCOME
Years Ended September 30,
(In thousands) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
Dividends received from Bank................................. $ 20,000 $ 26,000 $ 12,000
Interest and other dividend income........................... 24 44 84
Other income................................................. 14 - -
Interest expense on advances and other borrowings............ (237) (833) (2,266)
General and administrative expenses.......................... (1,158) (897) (721)
------------- ------------- --------------
Income before income tax expense and equity in
undistributed earnings of subsidiary.................... 18,643 24,314 9,097
Income tax benefit........................................... (382) (590) (1,016)
------------- ------------- --------------
Income before equity in undistributed earnings of
subsidiary.............................................. 19,025 24,904 10,113
Equity in undistributed earnings of subsidiary............... 5,255 (3,032) 7,871
------------- ------------- --------------
Net income................................................... $ 24,280 $ 21,872 $ 17,984
============= ============= ==============
38
STATEMENTS OF CASH FLOWS
Years Ended September 30,
(In thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income................................................. $ 24,280 $ 21,872 $ 17,984
Adjustments to reconcile net income to cash provided
by operations:
Equity in undistributed earnings of subsidiary.......... (5,255) 3,032 (7,871)
Decrease in liabilities................................. (4) (137) (116)
Other, net.............................................. (601) (291) (26)
------------- ------------- --------------
Cash provided by operations................................ 18,420 24,476 9,971
------------- ------------- --------------
Cash flows from financing activities:
Stock option transactions.................................. 2,111 2,477 427
Proceeds from advances and other borrowings................ 16,000 54,000 125,000
Repayments from advances and other borrowings.............. (30,000) (76,000) (125,000)
Purchase of treasury stock................................. - (679) (5,166)
Dividends paid............................................. (7,529) (5,559) (3,753)
------------- ------------- --------------
Cash used in financing activities.......................... (19,418) (25,761) (8,492)
------------- ------------- --------------
Increase (decrease) in cash................................ (998) (1,285) 1,479
Cash at beginning of year.................................. 2,713 3,998 2,519
------------- ------------- --------------
Cash at end of year........................................ $ 1,715 $ 2,713 $ 3,998
============= ============= ==============
39
(23) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
For the quarter ended,
---------------------------------------------------------------------------------
Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, Dec 31,
2003 2003 2003 2002 2002 2002 2002 2001
---------------------------------------------------------------------------------
(In thousands, except per share data and market prices)
Interest and dividend income $24,227 $25,196 $25,666 $28,409 $29,822 $30,636 $29,976 $32,711
Interest expense............ 13,180 13,435 14,001 15,164 15,765 16,249 16,734 18,671
---------------------------------------------------------------------------------
Net interest income........ 11,047 11,761 11,665 13,245 14,057 14,387 13,242 14,040
Provision for loan losses.. 25 84 172 381 556 913 909 911
---------------------------------------------------------------------------------
Net interest income after
provision for loan
losses................ 11,022 11,677 11,493 12,864 13,501 13,474 12,333 13,129
Securities gains (losses)... (61) 1,301 1,166 178 256 322 677 57
Gain on sales of loans held
for sale, net......... 2,881 5,858 5,634 4,942 5,201 2,273 2,074 3,203
Other operating income..... 6,139 3,900 3,691 3,244 1,911 2,690 3,602 4,130
---------------------------------------------------------------------------------
Total other operating income 8,959 11,059 10,491 8,364 7,368 5,285 6,353 7,390
General and administrative
expenses............... 12,592 13,337 13,152 12,759 12,272 11,912 11,967 11,943
---------------------------------------------------------------------------------
Income before income tax
expense............... 7,389 9,399 8,832 8,469 8,597 6,847 6,719 8,576
Income tax expense......... 2,000 2,878 2,540 2,391 2,710 1,783 1,792 2,582
---------------------------------------------------------------------------------
Net income................. $ 5,389 $ 6,521 $ 6,292 $ 6,078 $ 5,887 $ 5,064 $ 4,927 $ 5,994
=================================================================================
Basic earnings per share: (1) $ 0.57 $ 0.69 $ 0.67 $ 0.65 $ 0.63 $ 0.55 $ 0.53 $ 0.65
Diluted earnings per share:
(2)......................... $ 0.54 $ 0.66 $ 0.64 $ 0.62 $ 0.60 $ 0.52 $ 0.51 $ 0.62
Weighted average shares -
basic....................... 9,474,342 9,420,265 9,391,722 9,361,366 9,348,097 9,291,005 9,229,437 9,179,274
Weighted average shares -
diluted..................... 10,067,476 9,927,120 9,820,376 9,788,694 9,796,911 9,785,807 9,694,565 9,621,097
Market Information:
High.................. $ 31.55 $ 29.61 $ 25.01 $ 24.15 $ 25.09 $ 25.20 $ 23.71 $ 23.13
Low................... 29.44 22.70 22.80 20.88 20.51 22.12 22.00 20.25
Close................. 29.44 29.07 22.83 23.42 23.01 24.79 23.71 23.13
- ------------------------------
<FN>
(1) Basic earnings per share of common stock have been determined by dividing
net income for the period by the weighted average number of shares of common
stock outstanding during the period.
(2) Diluted earnings per share of common stock have been determined by dividing
net income for the period by the weighted average number of shares of common
stock outstanding during the period adjusted for the dilutive effect of
outstanding stock options.
</FN>
On October 24, 2003, the Company declared a dividend of $0.06 per share on the
Company's common stock for the quarter ended September 30, 2003. The dividend
was payable on November 20, 2003 to shareholders of record as of November 10,
2003.
40
(c) Exhibits:
2.1 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 MAF
Bancorp, Inc.'s Current Report on Form 8-K filed on May 21,
2003).
23.1 Consent of KPMG LLP.
99.1 Press Release dated December 1, 2003.
41
SIGNATURE
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 hereunto duly authorized.
MAF BANCORP, INC.
By: /s/ Jerry A. Weberling
----------------------------
Jerry A. Weberling
Executive Vice President and
Chief Financial Officer
Date: December 3, 2003
42
INDEX TO EXHIBITS
-----------------
Exhibit
- -------
Exhibit 2.1 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 MAF Bancorp, Inc.'s Current Report on Form 8-K filed on May
21, 2003).
Exhibit 23.1 Consent of KPMG LLP.
Exhibit 99.1 Press Release dated December 1, 2003.
43