===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-18121
MAF BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3664868
(State of Incorporation) (I.R.S. Employer
Identification No.)
55TH STREET & HOLMES AVENUE
CLARENDON HILLS, ILLINOIS 60514
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number: (630) 325-7300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, par value $.01
per share, was 33,559,885 at November 5, 2004.
===============================================================================
MAF BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
Part I. Financial Information Page
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 2004 and December 31, 2003 (unaudited)....... 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2004 and 2003 (unaudited)............. 4
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2004 (unaudited)......... 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2004 and 2003 (unaudited)........ 6
Notes to Consolidated Financial Statements (unaudited) .......... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 35
Item 4. Controls and Procedures.......................................... 36
Part II. Other Information
- ------- -----------------
Item 1. Legal Proceedings................................................ 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...... 36
Item 3. Defaults Upon Senior Securities.................................. 36
Item 4. Submission of Matters to a Vote of Security Holders.............. 37
Item 5. Other Information................................................ 37
Item 6. Exhibits......................................................... 37
Signature Page................................................... 38
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2004 2003
---------------- ---------------
ASSETS
- ------
Cash and due from banks $ 118,461 144,290
Interest-bearing deposits 67,614 57,988
Federal funds sold 42,767 19,684
-------------- -------------
Total cash and cash equivalents 228,842 221,962
-------------- -------------
Investment securities available for sale, at fair value 345,713 365,334
Stock in Federal Home Loan Bank of Chicago, at cost 321,681 384,643
Mortgage-backed securities available for sale, at fair value 920,643 971,969
Mortgage-backed securities held to maturity (fair value of $98,544) 98,617 -
Loans receivable held for sale 53,830 44,511
Loans receivable, net of allowance for losses of $34,936 and $34,555 6,716,440 6,324,596
Accrued interest receivable 33,329 31,168
Foreclosed real estate 1,135 3,200
Real estate held for development or sale 37,179 32,093
Premises and equipment, net 133,096 122,817
Goodwill 262,368 262,488
Intangibles, net 37,345 38,189
Other assets 130,596 130,615
-------------- -------------
$ 9,320,814 8,933,585
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits $ 5,640,231 5,580,455
Borrowed funds 2,559,229 2,299,427
Advances by borrowers for taxes and insurance 54,975 41,149
Accrued expenses and other liabilities 132,434 110,950
-------------- -------------
Total liabilities 8,386,869 8,031,981
-------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000
shares; none outstanding - -
Common stock, $.01 par value;
80,000,000 shares authorized; 33,121,465 and 33,063,853 shares
issued; 32,649,961 and 33,063,853 shares outstanding 331 331
Additional paid-in capital 497,981 495,747
Retained earnings, substantially restricted 452,762 402,402
Accumulated other comprehensive income, net of tax 1,368 2,109
Stock in Gain Deferral Plan; 244,304 and 240,879 shares 1,160 1,015
Treasury stock, at cost; 471,504 shares at September 30, 2004 (19,657) -
-------------- -------------
Total stockholders' equity 933,945 901,604
-------------- -------------
$ 9,320,814 8,933,585
============== =============
See accompanying notes to unaudited consolidated financial statements.
3
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------
2004 2003 2004 2003
-------------- ------------ ------------ -----------
Interest income:
Loans receivable $ 86,135 67,922 253,045 199,211
Mortgage-backed securities held to maturity 1,079 - 2,253 -
Mortgage-backed securities available for sale 8,750 3,158 26,297 9,415
Investment securities available for sale 8,911 6,210 27,337 17,052
Interest-bearing deposits and federal funds sold 764 870 2,092 3,433
----------- ----------- ----------- -----------
Total interest income 105,639 78,160 311,024 229,111
----------- ----------- ----------- -----------
Interest expense:
Deposits 18,908 14,510 53,514 46,327
Borrowed funds 22,172 18,742 63,752 56,258
----------- ----------- ----------- -----------
Total interest expense 41,080 33,252 117,266 102,585
----------- ----------- ----------- -----------
Net interest income 64,559 44,908 193,758 126,526
Provision for loan losses 350 - 930 -
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 64,209 44,908 192,828 126,526
Non-interest income:
Net gain (loss) on sale or writedown of:
Loans receivable held for sale 2,978 7,138 6,434 22,940
Mortgage-backed securities - 645 489 5,997
Investment securities 3 (1,516) 2,805 (6,943)
Foreclosed real estate 227 78 423 311
Income from real estate operations 1,650 3,009 5,261 6,332
Deposit account service charges 8,848 6,051 25,425 17,450
Loan servicing fee income (expense) 584 (2,640) 710 (6,056)
Valuation recovery (allowance)
of mortgage servicing rights - - 1,755 (940)
Brokerage commissions 1,044 982 3,142 2,361
Other 4,182 3,276 12,549 8,559
----------- ----------- ----------- -----------
Total non-interest income 19,516 17,023 58,993 50,011
----------- ----------- ----------- -----------
Non-interest expense:
Compensation and benefits 23,083 17,134 72,723 48,426
Office occupancy and equipment 7,420 3,717 20,645 10,701
Advertising and promotion 2,452 1,700 7,453 4,798
Data processing 1,598 1,036 6,005 3,001
Other 10,180 5,401 28,510 14,732
Amortization of core deposit intangibles 730 421 2,201 1,170
----------- ----------- ----------- -----------
Total non-interest expense 45,463 29,409 137,537 82,828
----------- ----------- ----------- -----------
Income before income taxes 38,262 32,522 114,284 93,709
Income tax expense 12,676 12,016 37,934 34,376
----------- ----------- ----------- -----------
Net income $ 25,586 20,506 76,350 59,333
=========== =========== =========== ===========
Basic earnings per share $ .78 .82 2.33 2.48
=========== =========== =========== ===========
Diluted earnings per share $ .77 .79 2.27 2.42
=========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
4
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2004
ACCUMULATED STOCK IN
ADDITIONAL OTHER GAIN
COMMON PAID-IN RETAINED COMPREHENSIVE DEFERRAL TREASURY
STOCK CAPITAL EARNINGS INCOME (LOSS) PLAN STOCK TOTAL
-------- --------- ---------- ------------- --------- --------- -------
Balance at December 31, 2003 $ 331 495,747 402,402 2,109 1,015 - 901,604
-------- --------- ---------- --------- ------ ------- ---------
Comprehensive income:
Net income - - 76,350 - - - 76,350
Other comprehensive income, net
of tax:
Unrealized holding gain during
the period - - - 1,457 - - 1,457
Less: reclassification adjustment
of realized gain included in
net income - - - (2,198) - - (2,198)
-------- --------- ---------- --------- ------ ------- ---------
Total comprehensive income - - 76,350 (741) - - 75,609
-------- --------- ---------- --------- ------ ------- ---------
Exercise of 317,166 stock options,
issuing 57,612 new shares and
reissuance of 259,554 shares of
treasury stock - - (5,332) - - 9,392 4,060
Impact of exercise of acquisition
carry-over options - 1,162 - - - - 1,162
Tax benefits from stock-related
compensation - 1,072 - - - - 1,072
Purchase of 693,600 shares of
treasury stock - - - - - (29,049) (29,049)
Cash dividends declared ($.63 per share) - - (20,658) - - - (20,658)
Dividends paid to gain deferral plan - - - - 145 - 145
-------- --------- ---------- --------- ------ ------- ---------
Balance at September 30, 2004 $ 331 497,981 452,762 1,368 1,160 (19,657) 933,945
======== ========= ========== ========= ====== ======= =========
See accompanying notes to unaudited consolidated financial statements.
5
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar in thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2004 2003
------------ -----------
Operating activities:
Net income $ 76,350 59,333
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,032 5,715
Provision for loan losses 930 -
FHLB of Chicago stock dividend (12,038) (11,786)
Deferred income tax (benefit) expense 8,259 (5,530)
Amortization of core deposit intangibles 2,201 1,170
Net amortization of premiums, discounts, and deferred loan fees (10,311) 4,231
Amortization and valuation recovery of mortgage servicing rights, net 4,454 12,040
Net gain on sale of loans receivable held for sale (6,434) (22,940)
Net (gain) loss on sale of investment securities
and mortgage-backed securities (3,294) 946
Net gain on real estate held for development or sale (5,261) (6,332)
(Increase) decrease in accrued interest receivable (2,161) 5,574
Net increase (decrease) in other assets and liabilities 4,405 6,832
Loans purchased for sale (7,125) -
Loans originated for sale (706,784) (1,464,659)
Sale of loans originated and purchased for sale 707,957 1,371,110
------------ -----------
Net cash provided by (used in) operating activities 61,180 (44,296)
------------ -----------
Investing activities:
Loans originated for investment (2,447,297) (2,494,587)
Principal repayments on loans receivable 1,951,429 2,212,346
Principal repayments on mortgage-backed securities 214,602 198,426
Proceeds from maturities of investment securities available for sale 73,891 86,256
Proceeds from sale or redemption of:
Investment securities available for sale 48,537 53,219
Stock in FHLB of Chicago 75,000 -
Mortgage-backed securities available for sale 18,522 258,810
Real estate held for development or sale 17,382 20,979
Purchases of:
Investment securities available for sale (100,748) (107,687)
Stock in FHLB of Chicago - (30,000)
Mortgage-backed securities available for sale (177,940) (162,704)
Real estate held for development or sale (10,500) (20,158)
Premises and equipment (19,031) (18,216)
Proceeds from acquisitions, net of cash acquired - 8,987
----------- -----------
Net cash provided by (used in) investing activities $ (356,153) 5,671
----------- -----------
(continued)
6
MAF BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollar in thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2004 2003
------------ -----------
Financing activities:
Proceeds from FHLB of Chicago advances $ 945,000 175,000
Repayment of FHLB of Chicago advances (819,688) (130,500)
Net change in other borrowings 143,833 (11,200)
Net addition of deposits 61,977 68,286
(Increase) decrease in advances by borrowers for taxes and insurance 13,826 (20,390)
Proceeds from exercise of stock options 5,571 3,082
Purchase of treasury stock (29,049) (30,753)
Cash dividends paid (19,617) (11,734)
----------- -----------
Net cash provided by financing activities 301,853 41,791
----------- ----------
Increase in cash and cash equivalents 6,880 3,166
Cash and cash equivalents at beginning of period 221,962 262,680
----------- ----------
Cash and cash equivalents at end of period $ 228,842 265,846
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds $ 101,284 101,501
Income taxes 7,463 35,803
Summary of non-cash transactions:
Transfer of loans receivable to foreclosed real estate 2,989 2,745
Loans receivable swapped into mortgage-backed securities $ 147,315 134,419
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
7
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2004 and 2003
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) necessary for a fair presentation have been
included. The results of operations for the three and nine months ended
September 30, 2004 are not necessarily indicative of results that may be
expected for the year ending December 31, 2004.
The consolidated financial statements include the accounts of MAF Bancorp,
Inc. ("Company"), Mid America Bank, fsb including its subsidiaries ("Bank") and
MAF Developments, Inc. ("MAFD"), for the three and nine month periods ended
September 30, 2004 and 2003 and as of September 30, 2004 and December 31, 2003.
All material intercompany balances and transactions have been eliminated in
consolidation.
(2) EARNINGS PER SHARE
Earnings per share is determined by dividing net income for the period by
the weighted average number of shares outstanding. Stock options and restricted
stock units are regarded as potential common stock and are considered in the
diluted earnings per share calculations to the extent that they have a dilutive
effect. Weighted average shares used in calculating earnings per share are
summarized below for the periods indicated:
THREE MONTHS ENDED SEPTEMBER 30,
2004 2003
---------------------------------------- ------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(Dollars in thousands, except per share data)
Basic earnings per share:
Income available to
common shareholders $ 25,586 32,618,611 $ .78 $ 20,506 25,154,529 $ .82
==== ========= ====
Effect of dilutive securities:
Stock options and restricted
stock units 750,598 670,141
------------ ------------
Diluted earnings per share:
Income available to common
shareholders $ 25,586 33,369,209 $ .77 $ 20,506 25,824,670 $ .79
========= ============ ==== ========= ============ ====
NINE MONTHS ENDED SEPTEMBER 30,
2004 2003
---------------------------------------- ------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(Dollars in thousands, except per share data)
Basic earnings per share:
Income available to
common shareholders $ 76,350 32,807,778 $ 2.33 $ 59,333 23,909,848 $ 2.48
==== ========= ====
Effect of dilutive securities:
Stock options and restricted
stock units 813,896 601,733
------------ ------------
Diluted earnings per share:
Income available to common
shareholders $ 76,350 33,621,674 $ 2.27 $ 59,333 24,511,581 $ 2.42
========= ========== ==== ========= ========== =====
8
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2004 and 2003
(Unaudited)
(3) COMMITMENTS AND CONTINGENCIES
At September 30, 2004, the Bank had outstanding commitments to originate
loans of $608.1 million, of which $224.4 million were fixed-rate loans and
$383.7 million were hybrid adjustable-rate loans with initial fixed-rate terms
of 3, 5 or 7 years. Prospective borrowers had locked the interest rate on $159.3
million of these commitments, of which $66.9 million were fixed-rate loans, with
rates ranging from 4.0% to 7.125%, and $92.5 million were adjustable rate loans
with rates ranging from 3.0% to 7.0%. The interest rates on the remaining
commitments of $448.8 million float at current market rates. At September 30,
2004, the Bank had outstanding forward commitments to sell $79.5 million of
fixed-rate mortgage loans and $24.4 million of adjustable-rate mortgage loans.
At September 30, 2004, the Bank also had outstanding commitments to originate
$130.3 million of floating rate equity lines of credit.
At September 30, 2004, the Bank had outstanding standby letters of credit
totaling $71.3 million. Of this amount $42.2 million is comprised of letters of
credit to enhance developers' industrial revenue bond financings of commercial
real estate in the Bank's market. Additionally, the Company had outstanding
standby letters of credit totaling $4.8 million related to real estate
development improvements.
The Company could face potential loss equal to the contractual amounts of
contingent credit-related financial instruments such as commitments to extend
credit, and letters of credit, if the loans are actually originated or the
contracts are fully drawn upon, and the customers default and the value of any
existing collateral become worthless.
At September 30, 2004, the Bank had $12.4 million of credit risk related to
loans sold to the Federal Home Loan Bank Mortgage Partnership Finance Program
("MPF"), $47.8 million of loans sold with full recourse to other investors, and
approximately $23.5 million of credit risk related to reinsurance obligations on
loans with private mortgage insurance in force.
(4) STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, interest-bearing deposits and federal funds sold.
Generally, federal funds are sold for one-day periods and interest-bearing
deposits mature within one day to three months.
(5) RECLASSIFICATIONS
Certain reclassifications of 2003 amounts have been made to conform with
the current period presentation.
9
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2004 and 2003
(Unaudited)
(6) SEGMENT INFORMATION
The Company utilizes the "management approach" for segment reporting. This
approach is based on the way that management of the Company organizes lines of
business for making operating decisions and assessing performance. Currently,
the Company has two segments. The Banking segment includes lending and deposit
gathering operations as well as other financial services offered to individual
and business customers. The land development segment consists primarily of land
acquisitions, obtaining necessary zoning and regulatory approvals and improving
raw land into developed residential lots for sale to builders. All goodwill has
been allocated to the Banking segment. Selected segment information is included
in the tables below:
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
--------------------------------------------- ---------------------------------------------
LAND CONSOLIDATED LAND CONSOLIDATED
BANKING DEVELOPMENT TOTAL BANKING DEVELOPMENT TOTAL
------- ----------- ----- ------- ----------- -----
(In thousands) (In thousands)
Interest income $ 105,639 - 105,639 78,160 - 78,160
Interest expense 41,080 - 41,080 33,252 - 33,252
----------- ------- ----------- ----------- -------- -----------
Net interest income 64,559 - 64,559 44,908 - 44,908
Provision for loan losses 350 - 350 - - -
Non-interest income 17,866 1,650 19,516 14,014 3,009 17,023
Non-interest expense 45,082 381 45,463 29,062 347 29,409
----------- ------- ----------- ----------- -------- -----------
Income before income taxes 36,993 1,269 38,262 29,860 2,662 32,522
Income tax expense 12,172 504 12,676 10,960 1,056 12,016
----------- ------- ----------- ----------- -------- -----------
Net income $ 24,821 765 25,586 18,900 1,606 20,506
=========== ======= =========== =========== ========= ===========
Average assets $ 9,272,464 38,287 9,310,751 6,529,986 24,063 6,554,049
=========== ======= =========== =========== ========= ===========
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
--------------------------------------------- ---------------------------------------------
LAND CONSOLIDATED LAND CONSOLIDATED
BANKING DEVELOPMENT TOTAL BANKING DEVELOPMENT TOTAL
------- ----------- ----- ------- ----------- -----
(In thousands) (In thousands)
Interest income $ 311,024 - 311,024 229,111 - 229,111
Interest expense 117,266 - 117,266 102,585 - 102,585
----------- ------- ----------- ----------- -------- -----------
Net interest income 193,758 - 193,758 126,526 - 126,526
Provision for loan losses 930 - 930 - - -
Non-interest income 53,732 5,261 58,993 43,679 6,332 50,011
Non-interest expense 136,368 1,169 137,537 81,774 1,054 82,828
----------- ------- ----------- ----------- -------- -----------
Income before income taxes 110,192 4,092 114,284 88,431 5,278 93,709
Income tax expense 36,308 1,626 37,934 32,282 2,094 34,376
----------- ------- ----------- ----------- -------- -----------
Net income $ 73,884 2,466 76,350 56,149 3,184 59,333
=========== ======= =========== =========== ======== ===========
Average assets 9,126,816 35,812 9,162,628 6,130,047 21,122 6,151,169
=========== ======= =========== =========== ======== ===========
(7) GOODWILL AND INTANGIBLE ASSETS
Goodwill had a net carrying amount of $262.4 million at September 30, 2004.
The Company evaluates goodwill for impairment at least annually. An evaluation
was completed as of May 31, 2004. No impairment was deemed necessary as a result
of the Company's analysis.
All of the Company's goodwill is in the Banking segment. For the nine
months ended September 30, 2004 compared to December 31, 2003, the balance of
goodwill decreased by $120,000 due to adjustments related to amounts recorded in
connection with previous acquisitions.
10
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2004 and 2003
(Unaudited)
The changes in the net carrying amounts of intangible assets are as
follows:
MORTGAGE
CORE DEPOSIT SERVICING
INTANGIBLES RIGHTS(1) TOTAL
------------- ------------ ---------
(Dollars in thousands)
Balance at December 31, 2003 $ 14,061 24,128 38,189
Additions - 5,811 5,811
Amortization expense (2,201) (6,209) (8,410)
Valuation recovery - 1,755 1,755
--------- --------- ---------
Balance at September 30, 2004 $ 11,860 25,485 37,345
========== ========= =========
The following is a summary of intangible assets subject to amortization:
AS OF SEPTEMBER 30, 2004 AS OF DECEMBER 31, 2003
---------------------------------------- ------------------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
-------- ------------ -------- -------- ------------ --------
(Dollars in thousands)
Core deposit intangibles $ 24,570 (12,710) 11,860 24,570 (10,509) 14,061
Mortgage servicing rights(1) 30,822 (5,337) 25,485 26,988 (2,860) 24,128
-------- --------- --------- -------- --------- ---------
Total $ 55,392 (18,047) 37,345 51,558 (13,369) 38,189
======== ========= ========= ======== ========= =========
<FN>
- ------------------------
(1) The carrying amounts for September 30, 2004 and December 31, 2003 are net
of impairment reserves of $488,000 and $2.2 million, respectively.
</FN>
Amortization expense for core deposit intangibles and mortgage servicing
rights for the nine months ended September 30, 2004 and estimates for the three
months ending December 31, 2004 and five years thereafter are as follows. These
estimates are based on the net carrying amount of the Bank's core deposit
intangibles and mortgage servicing rights as of September 30, 2004.
CORE MORTGAGE
DEPOSIT SERVICING
INTANGIBLES RIGHTS
----------- ----------
(Dollars in thousands)
AGGREGATE AMORTIZATION EXPENSE:
For the nine months ended September 30, 2004 $ 2,201 6,209
ESTIMATED AMORTIZATION EXPENSE:
For the three months ending December 31, 2004 729 1,500
For the Year Ending:
December 31, 2005 2,500 4,800
December 31, 2006 1,900 4,100
December 31, 2007 1,300 3,700
December 31, 2008 1,200 3,400
December 31, 2009 1,100 3,100
======== =======
11
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2004 and 2003
(Unaudited)
(8) STOCK OPTION PLANS
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its stock option
plans. Accordingly, no compensation cost has been recognized for its awards
under stock option plans. Had compensation cost for the Company's stock option
plans been determined based on the fair value at the grant dates, using the
Black Scholes valuation methodology, for awards under those plans applying the
alternative method of SFAS No. 123, "Accounting for Stock-Based Compensation,"
as amended by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure," the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated in the table below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
2004 2003 2004 2003
----------- ---------- ---------- ---------
(Dollars in thousands, except per share data)
Net income, as reported $ 25,586 20,506 76,350 59,333
Deduct: total stock option employee compensation
expense determined under Black Scholes
method for all awards, net of related tax effects 806 819 2,799 2,431
-------- -------- --------- --------
Pro-forma net income $ 24,780 19,687 73,551 56,902
======== ======== ========= ========
Basic Earnings per Share
As Reported .78 .82 2.33 2.48
Pro-forma .76 .78 2.24 2.38
Diluted Earnings Per Share
As Reported .77 .79 2.27 2.42
Pro-forma .76 .78 2.24 2.38
=== === ==== ====
(9) POST-RETIREMENT PLANS
The Bank sponsors a supplemental executive retirement plan ("SERP") for the
purpose of providing certain retirement benefits to executive officers and other
corporate officers approved by the Board of Directors. The Bank also provides
employees and directors post retirement medical benefits. The components of the
net periodic benefit cost of post-retirement plans are as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- -------------------------------------
RETIREMENT RETIREMENT
SERP MEDICAL BENEFITS SERP MEDICAL BENEFITS
--------------- ---------------- --------------- ----------------
2004 2003 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
Service cost $ 168 139 25 16 504 417 75 48
Interest cost 77 64 25 17 231 192 75 51
Amortization of unrecognized
net transition obligation - - 2 2 - - 6 6
Unrecognized net loss - - 6 5 - - 18 13
----- ----- ----- ----- ----- ----- ----- -----
Net periodic benefit cost $ 245 203 58 40 735 609 174 118
===== ===== ===== ===== ===== ===== ===== =====
(10) NEW ACCOUNTING PRONOUNCEMENTS
In December 2003, the American Institute of Certified Public Accountants
("AICPA") released Statement of Position 03-3, "Accounting for Certain Loans or
Debt Securities Acquired in a Transfer" ("SOP 03-3"). SOP 03-3 addresses
accounting for differences between contractual cash flows and cash flows
expected to be collected from an investors initial investment in loans or debt
securities acquired in a transfer if those differences are attributable to
credit quality. SOP 03-3 is effective for loans acquired in fiscal years
beginning after December 15, 2004. Adoption of this Statement is not expected to
have a material impact on the Company's consolidated financial statements.
In March 2004, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 105 ("SAB No. 105"), "Application of Accounting
Principles to Loan Commitments." SAB 105 prohibits the
12
MAF BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2004 and 2003
(Unaudited)
inclusion of estimated servicing cash flows and internally-developed intangible
assets within the valuation of interest rate lock commitments under Statement of
Financial Accounting Standard No. 133. SAB No. 105 is effective for disclosures
and interest rate lock commitments initiated after March 31, 2004. The Bank
adopted SAB 105 effective April 1, 2004 and the adoption did not have a material
impact on the financial statements for the three and nine months ended September
30, 2004. The adoption will not affect the ongoing economic value of the
business. The Bank previously included a portion of the value of the associated
servicing cash flows when recognizing saleable loan commitments at inception and
throughout their life.
In March 2004, the FASB reached a consensus on EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
("EITF 03-1"). EITF 03-1 provides guidance for determining when an investment is
impaired and whether the impairment is other than temporary. EITF 03-1 also
incorporates into its consensus the required disclosures about unrealized losses
on investments announced by the EITF in late 2003 and adds new disclosure
requirements relating to cost-method investments. The new disclosure
requirements are effective for annual reporting periods ending after June 15,
2004 and the new impairment accounting guidance was to become effective for
reporting periods beginning after June 15, 2004. In September 2004, the FASB
delayed the effective date of EITF 03-1 for measurement and recognition of
impairment losses until implementation guidance is issued. We do not expect the
adoption of the impairment guidance contained in EITF 03-1 to have a material
impact on our financial position or results of operations.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report, in Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere contains, and other periodic
reports and press releases of the Company may contain, forward-looking
statements (within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended), which involve significant risks and uncertainties. The
Company intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and is including this statement for purposes of
invoking these safe harbor provisions. These forward-looking statements, which
are based on certain assumptions and describe future plans, strategies and
expectations of the Company, are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project," "plan," or
similar expressions. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain and actual results
may differ from those predicted. The Company undertakes no obligation to update
these forward-looking statements in the future. Factors which could have a
material adverse effect on operations and could affect management's outlook or
future prospects of the Company and its subsidiaries include, but are not
limited to, higher than expected overhead, infrastructure and compliance costs,
difficulties implementing the Company's business model in the Milwaukee area
markets, unanticipated changes in interest rates or further flattening of the
yield curve, less than anticipated balance sheet growth, demand for loan
products, unanticipated changes in secondary mortgage market conditions, deposit
flows, competition, adverse federal or state legislative or regulatory
developments, monetary and fiscal policies of the U.S. Government, including
policies of the U.S. Treasury and Federal Reserve Board, higher than expected
costs or unanticipated difficulties associated with the integration of
Chesterfield Financial Corp. ("Chesterfield") into the Company, deteriorating
economic conditions which could result in increased delinquencies in the
Company's loan portfolio, the quality or composition of the Company's loan or
investment portfolios, demand for financial services and residential real estate
in the Company's market area, unanticipated slowdowns in real estate lot sales
or problems in closing pending real estate contracts, delays in real estate
development projects, the possible short-term dilutive effect of other potential
acquisitions, if any, and changes in accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements.
GENERAL
MAF Bancorp, Inc. ("Company"), incorporated under the laws of the state of
Delaware, is a registered savings and loan holding company. The Company engages
in banking activities through its subsidiary, Mid America Bank, fsb ("Bank"),
and residential land development business through its subsidiary, MAF
Developments, Inc. ("MAFD").
The Bank offers various financial services to retail and business banking
customers through a network of 72 branches in Illinois and southeastern
Wisconsin. As of November 1, 2004, the Illinois franchise is comprised of 49
branches in the Chicago metropolitan area, including 16 locations in the City of
Chicago, a strong presence in suburban western Cook County and DuPage County, an
increasing penetration of the rapidly-growing Will and Kane Counties, as well as
a presence in the north and southwest suburbs of Chicago. In Wisconsin, the Bank
serves communities in Milwaukee and Waukesha Counties and portions of Ozaukee,
Washington and Walworth Counties through 23 retail branches under the name of
St. Francis Bank, a division of Mid America Bank, fsb. The Bank currently has
plans to open four de novo branches during 2005 as it continues to expand its
presence in the Chicago and Milwaukee metropolitan areas. The Bank's principal
lending activity has traditionally been one-to four-family residential loans. In
2001, the Bank formed a commercial
14
business lending unit to target lending and deposit relationships with small to
medium sized businesses in its primary market areas. To an increasing extent,
the Bank also makes multi-family mortgage, commercial real estate, commercial,
residential construction, land acquisition and development and a variety of
consumer loans. The 2003 acquisitions of Fidelity Bancorp ("Fidelity") and St.
Francis Capital Corporation ("St. Francis"), in particular, have significantly
changed the asset mix and expanded the lending focus of the Bank. These
acquisitions added a large amount of multi-family, commercial real estate,
construction, land loans and commercial business loans, and a lesser amount of
one- to four-family loans to the Bank's portfolio. Through various wholly-owned
subsidiaries, the Bank offers insurance services and investment services to the
Bank's loan customers. The Bank also operates a captive reinsurance company,
which shares in a portion of mortgage insurance premiums received by certain
mortgage insurance companies on the Bank's mortgage loan originations in return
for assuming some of the risk of loss.
Effective October 31, 2004, the Company completed its previously announced
acquisition of Chesterfield Financial Corp. ("Chesterfield"). In the
transaction, each share of Chesterfield Financial common stock has been
converted into the right to receive $20.48 and 0.2536 shares of MAF Bancorp
common stock. The aggregate value of the transaction, including stock options,
totaled approximately $128.5 million, represented by $85.8 million in cash and
approximately 983,000 shares of MAF Bancorp common stock. As part of the
transaction, Chesterfield Federal Savings and Loan Association of Chicago, a
wholly-owned subsidiary of Chesterfield Financial, has been merged into Mid
America Bank, a wholly-owned subsidiary of MAF Bancorp. The merger provides the
Bank with three additional locations, in the Beverly neighborhood of Chicago as
well as in suburban Palos Hills and Frankfort, Illinois.
As it has in recent years, the Company expects to continue to search for
and evaluate potential acquisition opportunities that could enhance franchise
value and may periodically be presented with opportunities to acquire other
institutions, branches or deposits in the Chicago or Milwaukee metropolitan
areas or which allow the Company to expand outside its current primary market
areas. Management intends to review acquisition opportunities across a variety
of parameters, including the potential impact on its financial condition as well
as its financial performance in the future. It is anticipated that future
acquisitions, if any, will likely be valued at a premium to book value, and
generally at a premium to current market value. As such, management anticipates
that acquisitions made by the Company could involve some short-term book value
per share dilution and may involve earnings per share dilution depending on the
Company's timing and success in integrating the operations of businesses
acquired and the level of cost savings and revenue enhancements that may be
achieved.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of financial condition and results of
operations of the Company is based upon its consolidated financial statements,
which have been prepared in conformity with accounting principles generally
accepted in the United States of America, and are more fully described in Note 1
of the consolidated financial statements found in the Company's Form 10-K for
the fiscal year ended December 31, 2003 in "Item 8. Financial Statements and
Supplementary Data." The preparation of these consolidated financial statements
requires that management make estimates and assumptions that affect the reported
amounts of assets, liabilities, income and expense, as well as related
disclosures of contingencies. Management's judgment is based on historical
experience, terms of existing contracts, market trends, and other information
available to management. The Company believes that of its significant accounting
policies, the following involve a higher degree of judgment and complexity.
Allowance for loan losses. The allowance for loan losses is established
through a provision for loan losses to provide a reserve against estimated
losses in the Bank's loans receivable portfolio. The allowance for loan losses
reflects management's estimate of adequate reserves to cover probable losses
inherent in the Bank's loan portfolio. In evaluating the adequacy of the
allowance
15
for loan losses and determining the related provision for loan losses,
management considers portfolio concentrations and changes in the mix of the
overall portfolio by applying certain loss factors to different categories of
loans and allocates specific reserves for certain non-performing loans to the
extent less than full collectibility of the loan balance is considered probable.
In establishing the loss factors, management considers: (1) subjective factors,
including local and general economic business factors and trends, and changes in
the size and/or general terms of loans in the portfolio, (2) historical loss
experience, and (3) delinquency in the portfolio and the composition of
non-performing loans, including the percent of non-performing loans with
supplemental mortgage insurance. An unallocated reserve is maintained as
considered appropriate to recognize the imprecision of measuring and estimating
loss when evaluating reserves for individual loans or categories of loans.
Valuation of mortgage servicing rights. The Bank capitalizes the estimated
value of mortgage servicing rights upon the sale of loans. The Bank's estimated
value takes into consideration contractually known amounts, such as loan
balance, term, contract rate, and whether the customer escrows funds with the
Bank for the payment of taxes and insurance. These estimates are impacted by
loan prepayment speeds, earnings on escrow funds, as well as the discount rate
used to present value the cash flow stream. Subsequent to the establishment of
this asset, management reviews the fair value of mortgage servicing rights on a
quarterly basis using current prepayment speed, cash flow and discount rate
estimates. Changes in these estimates impact fair value, and could require the
Bank to record a valuation allowance or recovery. A recovery of $1.8 million was
recorded in the first nine months of 2004 compared to a $940,000 valuation
allowance recorded in the prior year period. Should estimates assumed by
management regarding future prepayment speeds on the underlying loans supporting
the mortgage servicing rights prove to be incorrect, additional valuation
allowances may be necessary, or conversely, the remaining $488,000 valuation
allowance could be recovered if changing estimates increase the fair value of
mortgage servicing rights.
Real estate held for development. Profits from lot sales in the Company's
real estate developments are based on cash received less the estimated cost of
sales per lot in the development, including capitalized interest and an estimate
of projected costs to be incurred in the future. The estimate of future costs is
subject to change and is reviewed on a quarterly basis. Estimates are subject to
change for various reasons, including changes in the estimated duration of the
project, changes in rules or requirements of the communities where the projects
reside, soil and weather conditions, increased project budgets, as well as the
general level of inflation. For those real estate developments that have
produced lot sales, changes in estimated future costs are recognized in the
period of that change as either a charge or an addition to income from real
estate operations. Additionally, management periodically evaluates the net
realizable value from each project by considering other factors, such as pace of
lot absorption, sources of funding and timing of disbursements, in evaluating
the net realizable value of a development at the end of a reporting period. A
charge to current earnings would occur if this evaluation indicated a project's
net realizable value did not exceed its recorded cost. Currently, the net
realizable value of each land development project the Company is engaged in
exceeds the recorded cost of the project.
16
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2004 AND 2003
OVERVIEW
The following table highlights results of operations of the Company and its
subsidiaries for the three and nine months ended September 30, 2004 and 2003.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
------------- ------------- -------------- ------------
(Dollars in thousands, except per share data)
Net income $ 25,586 20,506 76,350 59,333
Diluted earnings per share .77 .79 2.27 2.42
Average diluted shares
outstanding 33,369,209 25,824,670 33,621,674 24,511,581
Interest rate spread 2.80% 2.67 2.85 2.63
Net interest margin 3.00 2.92 3.05 2.92
Average assets $ 9,310,751 6,554,049 9,162,628 6,151,169
Average interest-earning assets 8,593,867 6,141,847 8,466,420 5,782,512
Average loans 6,798,504 5,049,184 6,641,028 4,697,927
Average deposits 5,202,504 3,846,976 5,186,117 3,613,130
Return on average assets(1) 1.10% 1.25 1.11 1.29
Return on average equity(1) 11.24 13.74 11.17 14.55
Efficiency ratio(2) 54.10 46.83 55.13 46.67
Loan originations $ 972,886 1,585,506 3,169,547 4,033,727
Loan sales 313,029 475,032 704,002 1,354,008
Gain on sale of loans 2,978 7,138 6,434 22,940
========== ========== ========== ==========
<FN>
- -------------------
(1) Annualized.
(2) The efficiency ratio is calculated by dividing non-interest expense by the
sum of net interest income and non-interest income, excluding net gain/
(loss) on sale and writedown of mortgage-backed and investment securities.
</FN>
o Results for the 2004 periods reflect the completion of the St. Francis
merger in December 2003 and the Fidelity merger in July 2003. While net
income increased compared to the prior year periods, earnings per share for
the 2004 periods was impacted by approximately 10.3 million additional
average shares outstanding compared to the comparable 2003 periods as a
result of the 2003 mergers.
o Growth in the Company's balance sheet during 2004, and in net interest
income as a result, has been less than originally projected for the year
due to declining mortgage loan volume. Loan originations were $3.17 billion
for the nine months ended September 30, 2004 compared to $4.03 billion for
the prior year period due to the decrease in mortgage loan demand,
particularly refinance activity which comprised a significant portion of
loan volume in 2003 and the beginning of 2004.
o Profits on loan sales for the three and nine months ended September 30,
2004 have declined significantly compared to the prior year due to the
decrease in loan origination volume as well as the lower profit margins
largely due to the increased portion of adjustable rate loans in the mix of
loans sold. The decrease in mortgage banking income has been partially
offset by higher loan servicing fee income.
o The Company's efficiency ratio was 55.1% for the nine-months ended
September 30, 2004 compared to 46.7% for the prior year period primarily
due to increased costs related to the Company's market expansion and growth
year over year and the added cost of management personnel and
infrastructure needed to facilitate this growth and to address the
increased compliance burden under new regulations. The Company's efficiency
ratio has also been impacted in 2004 by decreased non-interest income as a
percentage of total income, primarily due to lower loan sale gains and
delays in real estate development projects. With completion of the
integration of the St. Francis operations, management expects improvement
in the efficiency ratio for 2005.
17
o The expansion of the spread and net interest margin are attributable to the
low interest rate environment and positive slope of the U.S. Treasury yield
curve present during most of the past twelve months, growth in core
deposits and the impact of lower cost funding from the St. Francis
acquisition, as well as a shift in the mix of the loan portfolio toward
higher-yielding consumer loans and business banking loans, due in part to
the impact of the acquisitions.
o The Company currently expects earnings per share for 2004 to be in the
range of $3.05 to $3.10 per diluted share with income from real estate
operations estimated to be in the range of $1.0-1.5 million for the fourth
quarter of 2004, with no income being generated this year from the
Company's Springbank development.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income increased to $64.2 million for the three months ended
September 30, 2004, from $44.9 million for the three months ended September 30,
2003. The increase is primarily due to a 39.9% increase, of $2.0 billion, in
interest-earning assets primarily due to the acquisition of St. Francis in
December 2003. In addition, both the Bank's interest rate spread and net
interest margin improved during the third quarter of 2004 compared to the prior
year, primarily due to lower U.S. Treasury rates that have allowed the Bank to
reduce its cost of funds faster than the decline in yield on interest-earning
assets. The Bank's interest rate spread improved to 2.80% compared to 2.67% in
the prior year quarter, while the net interest margin improved to 3.00% for the
quarter compared to 2.92% the previous year quarter.
The average yield on interest-earning assets declined to 4.90% for the
three months ended September 30, 2004, from 5.08% for the three-month period
ended September 30, 2003. This decline is primarily attributable to a decline in
the yield on loans receivable, as declining long-term Treasury rates led to high
levels of prepayments of higher yielding loans during most of 2003. Most of the
loans added to the portfolio over the last 12 months have initial rates below
the overall portfolio yield. Average balances of loans for the third quarter of
2004 increased $1.75 billion compared to the third quarter of 2003. Most of the
growth is due to the Bank's acquisitions. The remainder of the growth in the
Bank's loan portfolio has come from increased balances in home equity lines of
credit which are monthly floating rate loans based on the Prime rate. At
September 30, 2004, the Bank has approximately $1.4 billion and $281 million in
loans tied to the Prime rate and 3-month LIBOR, respectively. As interest rates
have begun to rise from the record lows of 2003, and the Federal Funds rate has
been increased by .75% to 1.75% (which has led to an increase in the Prime rate
from 4.00% to 4.75%) in 2004, management expects the yield on loans receivable
to trend higher over the next few quarters.
Offsetting the decline in the yield on loans receivable are increases in
the yields on mortgage-backed securities, investment securities, and stock in
the FHLB of Chicago. The average balances in these three portfolios grew
primarily due to the 2003 acquisitions. The yield on mortgage-backed securities
improved to 3.99% for the 2004 quarter due to slightly higher long-term interest
rates than for the same period in 2003. Lower rates in 2003 spurred excessive
prepayment speeds, which dramatically lowered the yield on this portfolio to
2.90% for the prior period quarter. The yield on investment securities rose to
3.70% for the 2004 quarter, compared to 3.38% for the 2003 quarter. The average
yield improved due to trending higher interest rates, as the duration in this
portfolio is shorter than the other interest-sensitive asset portfolios. The
Bank's average investment in FHLB of Chicago stock was $98 million higher during
the current quarter than the year ago quarter. During the third quarter of 2004,
the Bank redeemed $45 million in stock which impacted net interest margin as the
proceeds from the stock redemptions were being reinvested in lower yielding
assets. The current dividend rate on FHLB stock is 6%.
The cost of interest-bearing liabilities decreased to 2.10% for the three
months ended September 30, 2004 from 2.41% for the three months ended September
30, 2003. The average rate paid on both deposits and borrowed funds have been
positively impacted by continued low short-term
18
interest rates, as well as the lower cost funding added in the St. Francis
merger. The low short-term interest rate environment over the last 12 months has
allowed the Bank to reprice higher-cost maturing certificates of deposits and to
reduce the amounts paid on passbook and money market accounts relative to the
prior year. These actions, together with an increase in core deposits, have
reduced the Bank's cost of deposits to an average of 1.44% for the three months
ended September 30, 2004 compared to 1.50% for the third quarter of 2003.
Similarly, the 113 basis point reduction in the cost of borrowed funds was due
to the impact of the St. Francis merger and maturities of higher cost FHLB of
Chicago advances being offset by lower cost fixed rate borrowings, as well as
adjustable rate borrowings indexed to LIBOR and the Prime rate. The Bank has
increased its use of shorter-term borrowings in its funding mix due to the
increase in floating rate loans, primarily in the form of home equity lines of
credit and business lines of credit.
Net interest income increased to $193.8 million for the nine months ended
September 30, 2004, from $126.5 million for the nine months ended September 30,
2003. The increase is due to the 46% increase in interest-earning assets,
primarily due to the Bank's acquisitions in 2003. In addition, the Bank's spread
and net interest margin each increased during the 2004 nine-month period to
2.85% and 3.05%, respectively, from 2.63% and 2.92% for the prior year
nine-month period.
The average yield on interest earning assets decreased to 4.89% for the
nine months ended September 30, 2004 from 5.29% for the 2003 period. The low
interest rate environment experienced throughout 2003 led to a high level of
prepayments in the Bank's loan and mortgage-backed securities portfolios, as
well as call options being exercised in its investment portfolio. In the loan
portfolio, the higher level of prepayments and recent declines in mortgage loan
volume negatively impacted the Bank's growth in average loans receivable. For
the nine months ended September 30, 2004, the $1.9 billion increase in loans
receivable is primarily due to the Bank's acquisitions. The yield on the
portfolio decreased to 5.08% for 2004 compared to 5.66% for 2003.
Yields on mortgage-backed securities improved to 3.83% for the 2004
nine-month period, compared to 3.53% for the 2003 period. Average balance
increased $550 million, primarily due to the acquisition of St. Francis, and
management's strategy of trying to maintain the portfolios size, rather than
increase it during a period of low interest rates. This is similar to the
approach in the investment portfolio. The large increase in the average balance
of stock in the FHLB of Chicago was due to the acquisitions in 2003, while the
yield increase in 2004 was specifically due to the higher declared dividend rate
of the FHLB of Chicago. The Bank plans to continue to systematically redeem a
portion of its FHLB stock investment over the next six months in order to reduce
its investment concentration.
The cost of interest bearing liabilities declined 62 basis points to 2.04%
for the nine months ended September 30, 2004, compared to 2.66% for the 2003
period, as lower interest rates led management to lower its cost of repricing
certificates of deposit, and decrease the rate offered on its core deposit
accounts when compared to rates offered in 2003. However, with the rise in
short-term interest rates witnessed recently, the Bank expects its cost of
deposits to begin to increase in the near future, as it is currently offering
certificates of deposit at higher rates than earlier in 2004, and is
experiencing an increase in its cost of money market and checking accounts due
to the rise in short-term interest rates and competition for those accounts in
the local marketplace.
The cost of borrowed funds decreased 142 basis points due to maturities of
high cost fixed-rate advances being refinanced into lower cost borrowings due to
falling interest rates in 2004, as well as a shortening of duration in the
portfolio, due primarily to the use of Prime and LIBOR-based borrowings, as the
Bank has increased the amount of floating rate loans in its portfolio.
19
AVERAGE BALANCES/RATES
The following table reflects the average yield on assets and average cost
of liabilities for the periods indicated. Average yields and costs are derived
by dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown. Average balances are derived from average
daily balances. All yields/costs include fees which are considered adjustments
to yield.
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
2004 2003
---------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ------ ------- -------- --------
(Dollars in thousands)
ASSETS:
Interest-earning assets:
Loans receivable $ 6,798,504 86,135 5.06% $ 5,049,184 67,922 5.38%
Mortgage-backed securities 986,290 9,829 3.99 436,232 3,158 2.90
Investment securities 345,294 3,221 3.70 277,147 2,360 3.38
Stock in FHLB of Chicago 349,081 5,690 6.47 251,057 3,850 6.08
Interest-bearing deposits 62,282 415 2.64 79,836 452 2.25
Federal funds sold 52,416 349 2.64 48,391 418 3.43
---------- -------- ---------- -------
Total interest-earning assets 8,593,867 105,639 4.90 6,141,847 78,160 5.08
Non-interest earning assets 716,884 412,202
---------- ----------
Total assets $ 9,310,751 $ 6,554,049
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits 5,202,504 18,908 1.44 3,846,976 14,510 1.50
Borrowed funds 2,558,156 22,172 3.44 1,623,479 18,742 4.58
---------- -------- ---------- -------
Total interest-bearing
liabilities 7,760,660 41,080 2.10 5,470,455 33,252 2.41
---------- -------- ---------- -------
Non-interest bearing deposits 474,159 350,277
Other liabilities 165,144 136,422
---------- ----------
Total liabilities 8,399,963 5,957,154
Stockholders' equity 910,788 596,895
---------- ----------
Liabilities and
stockholders' equity $ 9,310,751 $ 6,554,049
========== ==========
Net interest income/
interest rate spread $ 64,559 2.80% $ 44,908 2.67%
======= ====== ======= =====
Net earning assets/
net yield on average
interest-earning assets $ 833,207 3.00% $ 671,392 2.92%
========== ====== ========== =====
Ratio of interest-earning
assets to interest-bearing
liabilities 110.74% 112.27%
====== ======
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------- AT
2004 2003 SEPT. 30, 2004
----------------------------------- ------------------------------------ -------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE COST
------- ------- -------- ------- ------- -------- ------ ------
(Dollars in thousands)
ASSETS:
Interest-earning assets:
Loans receivable $ 6,641,028 253,045 5.08% $ 4,697,927 199,211 5.66% $ 6,805,206 5.12%
Mortgage-backed securities 992,623 28,550 3.83 355,655 9,415 3.53 1,019,260 4.05
Investment securities 352,768 9,610 3.63 290,478 7,986 3.68 345,713 3.64
Stock in FHLB of Chicago 373,810 17,727 6.41 216,572 9,066 5.66 321,681 6.00
Interest-bearing deposits 62,993 1,196 2.53 102,945 1,510 1.96 67,614 1.59
Federal funds sold 43,198 896 2.76 118,935 1,923 2.16 42,767 1.57
---------- -------- ---------- ------- ----------
Total interest-earning assets 8,466,420 311,024 4.89 5,782,512 229,111 5.29 8,602,241 4.92
Non-interest earning assets 696,208 368,657 718,573
---------- ---------- ----------
Total assets $ 9,162,628 $ 6,151,169 $ 9,320,814
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits 5,186,117 53,514 1.37 3,613,130 46,327 1.71 5,157,004 1.47
Borrowed funds 2,460,283 63,752 3.45 1,543,079 56,258 4.87 2,559,229 3.51
---------- -------- ---------- ------- ----------
Total interest-bearing
liabilities 7,646,400 117,266 2.04 5,156,209 102,585 2.66 7,716,233 2.15
---------- -------- ---------- ------- ----------
Non-interest bearing deposits 456,185 316,131 483,227
Other liabilities 149,062 135,134 187,409
---------- ---------- ----------
Total liabilities 8,251,647 5,607,474 8,386,869
Stockholders' equity 910,981 543,695 933,945
---------- ---------- ----------
Liabilities and
stockholders' equity $ 9,162,628 $ 6,151,169 $ 9,320,814
========== ========== ==========
Net interest income/
interest rate spread $ 193,758 2.85% $126,526 2.63% 2.78%
======== ===== ======== ===== =====
Net earning assets/
net yield on average
interest-earning assets $ 820,020 3.05% $ 626,303 2.92% $ 886,008 N/A
======== ===== ========== ===== ========== =====
Ratio of interest-earning
assets to interest-bearing
liabilities 110.72% 112.15% 118.48%
====== ====== ======
20
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The following table describes the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rates
(changes in rates multiplied by prior volume), and (iii) the net change. Changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2004
COMPARED TO COMPARED TO
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
INCREASE (DECREASE) INCREASE (DECREASE)
--------------------------------- ----------------------------
VOLUME RATE NET VOLUME RATE NET
---------- -------- -------- -------- -------- -------
(Dollars in thousands)
INTEREST-EARNING ASSETS:
Loans receivable $ 22,458 (4,245) 18,213 75,765 (21,931) 53,834
Mortgage-backed securities 5,137 1,534 6,671 18,253 882 19,135
Investment securities 620 241 861 1,726 (102) 1,624
Stock in FHLB of Chicago 1,585 255 1,840 7,321 1,340 8,661
Interest-bearing deposits (109) 72 (37) (682) 368 (314)
Federal funds sold 32 (101) (69) (1,461) 434 (1,027)
-------- -------- -------- ------- ------- -------
Total 29,723 (2,244) 27,479 100,922 (19,009) 81,913
-------- -------- -------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
Deposits 4,936 (538) 4,398 17,591 (10,404) 7,187
Borrowed funds 8,860 (5,430) 3,430 27,111 (19,617) 7,494
-------- -------- -------- ------- ------- -------
Total 13,796 (5,968) 7,828 44,702 (30,021) 14,681
-------- -------- -------- ------- ------- -------
Net change in net interest income $ 15,927 3,724 19,651 56,220 11,012 67,232
======== ======== ======== ======= ======= =======
PROVISION FOR LOAN LOSSES
The Bank recorded $350,000 in provision for loan losses during the third
quarter of 2004 compared to no provision in the prior year third quarter. Net
charge-offs for the three months ended September 30, 2004 were $135,000 compared
to $18,000 for the three months ended September 30, 2003. At September 30, 2004,
the Bank's allowance for loan losses was $34.9 million, which equaled .52% of
total loans receivable, compared to $34.6 million, or .54% at December 31, 2003,
and $21.4 million or .43% at September 30, 2003. The Bank recorded $930,000 in
provision for loan losses during the nine months ended September 30, 2004
compared to no provision in the prior year nine-month period. The provisions
recorded in 2004 were primarily due to the change in the mix of loans as a
percentage of total loans and non-performing loans, as well as chargeoffs during
the year.
NON-INTEREST INCOME
Non-interest income increased $2.5 million, or 14.6% to $19.5 million in
the third quarter of 2004, compared to $17.0 million for the quarter ended
September 30, 2003, due to increased mortgage-servicing related income,
additional income from a $15 million investment in bank owned life insurance, as
well as higher volume of deposit account service charges, offset by lower loan
sale gains and income from real estate operations. Last year's results were
highlighted by significant loan sale gains reflecting high loan sale volume
occurring during a declining interest rate environment, offset by high loan
servicing amortization expenses and a write down of an investment security.
Non-interest income totaled $59.0 million for the nine months ended September
30, 2004, or 18.0% more than the $50.0 million for the previous year period.
Gains on the sale of mortgage-backed securities were $489,000 for the current
nine-month period compared to $6.0 million for the prior year period. The
current year period included net gains on the sale of investment securities of
$2.8 million compared to $6.9 million of losses from sales and other than
temporary write-downs of investment securities in the prior year period.
21
LOAN SALES AND SERVICING
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------- ------------ ------------ ------------
(Dollars in thousands)
Fixed-rate loans sold $ 158,562 434,925 495,300 1,313,901
Adjustable rate loans sold 154,467 40,107 208,702 40,107
----------- ----------- ----------- ------------
Total loans sold $ 313,029 475,032 704,002 1,354,008
=========== =========== =========== ============
Loan sale gains $ 2,978 7,138 6,434 22,940
Margin on loan sales 95bp 150 91 169
Loan servicing fee income (expense) $ 584 (2,640) 710 (6,056)
Valuation recovery (allowance) on
mortgage servicing rights - - 1,755 (940)
A decline in overall loan origination volume due to a reduction in
refinance activity, as well as a consumer shift toward adjustable-rate mortgage
loans led to a reduced volume of loans sold and lower loan sale profits for the
three and nine months ended September 30, 2004 compared to the same periods
ended September 30, 2003. Additionally, the mix of loans sold has moved toward
hybrid 3/1 and 5/1 ARM loans, as these are being originated in the market at a
larger percentage than in 2003. The margin on ARM loan sales tend to be lower
than on long term fixed-rate loans. As such, profits on loan sales have declined
at a higher rate than the reduction in loan sale volumes. Management expects
this trend to continue into 2005.
Slower prepayments in 2004 has resulted in less amortization of mortgage
servicing rights, which lead to an increase in loan servicing fee income to
$584,000 for the current quarter compared to expense of $2.6 million in the
prior year quarter and $710,000 of income compared to $6.1 million of expense
for the nine months ended September 2004 and 2003, respectively.
Slower expected prepayments also led to a $1.8 million recovery of
valuation reserves on servicing rights for the nine months ended September 30,
2004 compared to a $940,000 valuation allowance for the nine months ended
September 30, 2003.
DEPOSIT ACCOUNT SERVICE CHARGES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------- ------------ ------------ ------------
(Dollars in thousands)
Service charges $ 8,848 6,051 $ 25,425 17,450
AT
--------------------------------------------------------------------------
SEPTEMBER 30, 2004 DECEMBER 31, 2003 SEPTEMBER 30, 2003
------------------ ----------------- ------------------
Number of checking accounts 240,400 230,600 171,400
Deposit account service fees are higher than the third quarter of 2003,
primarily due to accounts acquired in the St. Francis merger. Considerable
competition for checking accounts, particularly in the Chicago market, along
with trending higher average per account balances in the Bank's checking
accounts, has significantly slowed the rate of growth in deposit fees.
22
REAL ESTATE DEVELOPMENT OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------- ------------ ------------ ------------
(Dollars in thousands)
Real estate development income $ 1,650 3,009 5,261 6,332
Residential lot sales 28 75 117 161
AT SEPTEMBER 30,
----------------------------
2004 2003
------------- ------------
(Dollars in thousands)
Pending lot sales at quarter end 11 57
Investment in real estate $ 37,179 27,475
During the nine months ended September 30, 2004, 111 lots of 117 total lots
sold were in the Shenandoah development. At September 30, 2004, 10 lots remain
to be sold in Tallgrass and 19 lots remaining in Shenandoah. The increase in the
balance of investment in real estate as compared to a year ago relates primarily
to land purchases for the Springbank joint venture development in Plainfield,
Illinois.
In October 2004, the Company received approval from the village of
Plainfield for the Springbank project where approximately 1,600 residential
lots, 300 multi-family lots and other commercial parcels are planned.
Development in Springbank will begin in the fourth quarter of 2004. The Company
had expected to receive the necessary municipal approvals earlier in 2004. As a
result of the delay, lot sale closings are now expected to begin early in the
third quarter of 2005. Profits previously expected to be reported in 2004 are
expected to be recorded in 2005, as estimated revenues and costs did not
materially change due to this delay. The Company currently expects income from
real estate operations of approximately $1.0 - $1.5 million for the fourth
quarter of 2004.
SECURITIES SALES/WRITEDOWNS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2004 2003 2004 2003
--------- -------- --------- --------
(Dollars in thousands)
INVESTMENT SECURITIES:
Net gains (losses) on sale/
writedowns - total $ 3 (1,516) 2,805 (6,943)
Other than temporary writedowns - - - (8,182)
Net gains (losses) on sale $ 3 (1,516) 2,805 1,239
MORTGAGE-BACKED SECURITIES:
Net gains on sale - total $ - 645 489 5,997
During the nine months ended September 30, 2004, the Company sold three
investment securities on which it had previously taken
other-than-temporary-impairment writedowns in 2002 and 2003. The net gain from
the sale of these three securities was $2.7 million. In the first quarter of
2003, the Bank had written two of these securities down by $8.1 million.
Gains on the sale of mortgage-backed securities were $489,000 for the nine
months ended September 30, 2004 compared to $6.0 million for the prior year
period. During the prior year nine-month period, the Company swapped into
mortgage-backed securities a total of $85.3 million of prepayment-protected
fixed-rate mortgages, which were subsequently sold along with an additional
$60.9 million of similar mortgage-backed securities resulting in the gain for
that period. These sales were undertaken to improve the Company's interest rate
risk position by lengthening its asset duration to better match the Company's
increased liability duration, as the average lives of these loans and related
mortgage-backed securities had become very short due to high prepayment speed
throughout 2003.
23
NON-INTEREST EXPENSE
The efficiency ratio for the three-month period ended September 30, 2004
was 54.1% compared to 46.8% for the third quarter of 2003 and for the nine-month
period ended September 30, 2004 was 55.13% compared to 46.7% for the prior year
period. The higher efficiency ratio in the 2004 periods primarily reflects
higher costs associated with operating the St. Francis locations, especially
prior to the data processing conversion, the impact of the new branch openings,
increased burden of regulatory compliance costs and significantly lower
non-interest income as a percentage of total income, primarily due to lower loan
sale gains and delays in real estate development projects. As the integration of
the St. Francis operations continues, management expects further improvement in
the efficiency ratio for 2005.
Non-interest expense increased $16.1 million, or 54.6% to $45.5 million for
the three months ended September 30, 2004 compared to $29.4 million for the
three months ended September 30, 2003. The increase is primarily attributable to
significant growth in operations from the acquisition of St. Francis in December
2003. The added cost of management personnel and infrastructure needed to
facilitate this growth and to address the increased compliance burden under new
regulations also added to the increase. Non-interest expense increased $54.7
million, or 66.1% to $137.5 million for the nine months ended September 30, 2004
compared to $82.8 million for the nine months ended September 30, 2003 due to
the considerable growth from market expansion over the past year. The table
below indicates the composition of non-interest expense for the three- and
nine-month periods indicated.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ------------------------
2004 2003 2004 2003
-------- --------- --------- ---------
(Dollars in thousands)
Compensation $ 17,801 13,190 55,922 36,911
Employee benefits 5,282 3,944 16,801 11,515
-------- --------- --------- ---------
Total compensation and benefits 23,083 17,134 72,723 48,426
-------- --------- --------- ---------
Occupancy expense 5,026 2,589 14,469 7,435
Furniture, fixture and equipment expense 2,394 1,128 6,176 3,266
Advertising and promotion 2,452 1,700 7,453 4,798
Data processing 1,598 1,036 6,005 3,001
Amortization of core deposit intangibles 730 421 2,201 1,170
Other expenses:
Professional fees 1,065 688 3,416 1,781
Stationery, brochures and supplies 749 652 2,480 1,694
Postage 678 542 2,237 1,591
Telephone 836 540 2,326 1,545
Fraud and bad check write-offs 503 572 2,024 1,380
Correspondent banking services 334 298 1,172 842
Title fees, recording fees and
credit report expense 645 282 1,489 808
OTS assessment fees 333 251 987 698
Security expense 382 265 1,093 623
Courier service 224 90 608 215
Insurance costs 369 272 1,204 584
Federal deposit insurance premiums 215 180 664 502
Real estate held for
investment expenses(1) 968 - 2,840 -
Other 2,879 769 5,970 2,469
-------- --------- --------- ---------
Total other expenses 10,180 5,401 28,510 14,732
-------- --------- --------- ---------
$ 45,463 29,409 137,537 82,828
======== ========= ========= =========
<FN>
- ------------------------
(1) Expenses from SF Equities, a subsidiary of the Bank that invests in
affordable housing properties throughout Wisconsin. Revenues from these
properties prior to tax credits received were $1.0 million, and $3.0
million for the three and nine months ended September 30, 2004,
respectively.
</FN>
24
Compensation and benefits increased 35% and 52% for the three and nine
months ended September 30, 2004 compared to previous year periods, respectively.
The percentage increase for the three-month period is lower than the nine-month
period, reflecting the savings realized upon completing the St. Francis data
processing systems integration in May 2004.
Occupancy costs doubled over the prior year due to the costs related to
operating 68 branches, compared to 43 branches at September 30, 2003, and 33
branches at December 31, 2002, rent expenses for St. Francis corporate offices
and dual loan operation facilities in Illinois. The St. Francis corporate office
lease expired on September 30, 2004 and leases on former Illinois loan operation
centers expired on October 31, 2004. The Bank now leases one facility for loan
and deposit operations.
Advertising and promotion expenses increased 44% from the prior year
quarter and 55% from the same period a year ago due to a decision to increase
the marketing expenditures in light of the more competitive retail banking
market in Chicago, costs related to new product advertising, and the launch of
advertising in the Milwaukee area.
Data processing cost increases were related to the St. Francis systems
conversion, the installation of two new mainframe computers, a new disaster
recovery system, increased data processing costs due to branch expansion and
additional data lines. Data processing costs for the three months ended
September 30, 2004 reflect the first full quarter of savings subsequent to the
May 31, 2004 systems conversion and although higher than the prior year period
by 54%, are significantly lower than the 100% increase for the nine months ended
September 30, 2004 as compared to the prior year.
The increase in other expense during the 2004 periods includes a $1.2
million expense recorded in the third quarter of 2004 to correct accumulated
errors in ATM network processing expenses. The recording errors, which relate to
processing activity following conversion to a new ATM network processor in the
second quarter of 2002, were discovered as a result of recently enhanced
reconcilement procedures stemming from ongoing internal control reviews. The
impact of the errors in any individual quarter was not material to the results
previously reported for that quarter.
INCOME TAX EXPENSE
Income tax expense totaled $12.7 million for the three months ended
September 30, 2004, equal to an effective income tax rate of 33.1%, compared to
$12.0 million or an effective income tax rate of 36.9% for the three months
ended September 30, 2003. The decline in the effective income tax rate is
primarily due to tax benefits generated from St. Francis Equity Properties' low
income and senior housing projects and to a lesser extent, from the resolution
of certain prior years' income tax matters.
Income tax expense totaled $37.9 million for the nine months ended
September 30, 2004, equal to an effective income tax rate of 33.2%, compared to
$34.4 million or an effective income tax rate of 36.7% for the nine months ended
September 30, 2003. The same reasons cited for the decline in the effective
income tax rate for the current quarter gave rise to the decrease in rate for
the nine-month period.
25
CHANGES IN FINANCIAL CONDITION
Total assets of the Company were $9.32 billion at September 30, 2004, an
increase of $387.7 million, or 4.3% from $8.93 billion at December 31, 2003.
This increase has been driven by an increase in loans receivable, primarily
equity lines of credit and multifamily loans. The growth in loans receivable was
funded primarily with an increase in borrowed funds, and to a lesser extent with
deposit growth. While core deposits grew $166.9 million during the nine months
ended September 30, 2004 due in large part to the successful introduction of a
new high-rate checking account product, certificates of deposit declined by
$107.2 million, including a $65 million decrease in brokered certificates of
deposit that management allowed to run off. A summary of the significant changes
in the Company's financial condition is as follows:
AMOUNT PERCENTAGE
SEPTEMBER 30, DECEMBER 31, INCREASE/ INCREASE/
2004 2003 (DECREASE) (DECREASE)
------------- ------------- ---------- ----------
(Dollars in thousands)
ASSETS:
Cash and cash equivalents $ 228,842 221,962 6,880 3.1%
Investment securities 345,713 365,334 (19,621) (5.4)
Stock in FHLB of Chicago 321,681 384,643 (62,962) (16.4)
Mortgage-backed securities 1,019,260 971,969 47,291 4.9
Loans receivable 6,770,270 6,369,107 401,163 6.3
Goodwill and intangibles 299,713 300,677 (964) -
Other 335,335 319,893 15,442 4.8
------------- ----------- ---------- -----
Total Assets $ 9,320,814 8,933,585 387,229 4.3
============= =========== ========== =====
LIABILITIES AND EQUITY:
Deposits $ 5,640,231 5,580,455 59,776 1.1%
Borrowed funds 2,559,229 2,299,427 259,802 11.3
Other liabilities 187,409 152,099 35,310 23.2
------------- ----------- ---------- -----
Total Liabilities 8,386,869 8,031,981 354,888 4.4
Stockholders' equity 933,945 901,604 32,341 3.6
------------- ----------- ---------- -----
Total Liabilities and Equity $ 9,320,814 8,933,585 387,229 4.3
============= =========== ========== =====
In addition to the $401.2 million of loans added to the loans receivable
portfolio, another $104.6 million of 15-year fixed-rate loans were swapped into
a mortgage-backed security and are held in portfolio classified as held to
maturity.
26
LOANS RECEIVABLE. The following table sets forth the composition of the Bank's
loans receivable portfolio in dollar amounts at the dates indicated.
AT
----------------------------------------------------------------
9/30/04 6/30/04 3/31/04 12/31/03 9/30/03
------- ------- ------- -------- -------
(Dollars in thousands)
Real estate loans:
One- to four-family:
Held for investment $ 4,005,420 4,028,947 3,930,288 3,924,965 3,644,518
Held for sale 53,830 106,831 36,696 44,511 277,792
Multi-family 653,483 648,401 624,304 611,845 469,249
Commercial 525,025 511,553 497,454 508,398 156,562
Construction 140,117 149,263 155,210 149,975 65,400
Land 69,641 78,113 75,910 75,012 39,035
----------- ----------- ----------- ----------- -----------
Total real estate loans 5,447,516 5,523,108 5,319,862 5,314,706 4,652,556
----------- ----------- ----------- ----------- -----------
Consumer loans:
Equity lines of credit 1,173,390 1,061,368 977,574 898,452 508,690
Home equity loans 55,033 62,793 61,167 67,119 24,883
Other 7,661 11,831 27,028 38,238 4,439
----------- ----------- ----------- ----------- -----------
Total consumer loans 1,236,084 1,135,992 1,065,769 1,003,809 538,012
Commercial business loans 138,906 134,496 138,122 128,266 31,915
----------- ----------- ----------- ----------- -----------
Total loans receivable 6,822,506 6,793,596 6,523,753 6,446,781 5,222,483
Unearned discounts, premiums
and deferred loan fees, net 18,105 17,144 14,944 16,614 8,652
Loans in process (35,405) (45,090) (50,050) (59,733) (28,398)
Allowance for loan losses (34,936) (34,721) (34,437) (34,555) (21,372)
----------- ----------- ----------- ----------- -----------
Loans receivable, net $ 6,770,270 6,730,929 6,454,210 6,369,107 5,181,365
=========== =========== =========== =========== ===========
One- to four-family mortgage loans
as a percentage of total loans 59.5% 60.9 60.8 61.6 75.1
=========== =========== =========== =========== ===========
The above table reflects the continuing shift in the loan portfolio mix
resulting from the 2003 acquisitions. These acquisitions resulted in further
loan diversification away from one- to-four family real estate loans that
accelerated the diversification efforts that began in 2000 with an increased
emphasis on originating equity lines of credit and the formation of a business
banking department in 2001. Since December 31, 1999, the concentration in one-
to-four family mortgage loans has been reduced from 89.4% to 59.5% at September
30, 2004.
DEPOSITS. The following table sets forth the composition of the deposit
portfolio at September 30, 2004 and December 31, 2003. The percent of core
deposits to total deposits has increased from 58.2% at December 31, 2003 to
60.6% at September 30, 2004 primarily reflecting the Bank's successful efforts
to attract checking accounts.
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------------------------- -------------------------------------
WEIGHTED % OF WEIGHTED % OF INCREASE
AMOUNT AVERAGE RATE DEPOSITS AMOUNT AVERAGE RATE DEPOSITS (DECREASE)
----------- ------------ ---------- --------- ------------ ---------- ----------
(Dollars in thousands)
Non-interest bearing
checking $ 483,227 -% 8.6% $ 434,935 -% 7.8% $ 48,292
NOW accounts 888,231 .85 15.7 555,675 .42 10.0 332,556
Money market accounts 704,210 .84 12.5 904,728 .78 16.2 (200,518)
Passbook accounts 1,340,489 .55 23.8 1,353,881 .66 24.2 (13,392)
----------- ------ ------ ----------- ----- ------- ----------
Total core deposits 3,416,157 .62 60.6 3,249,219 .57 58.2 166,938
Certificate accounts 2,220,678 2.48 39.3 2,323,725 2.34 41.8 (107,162)
Unamortized premium 3,396 - .1 7,511 - - -
----------- ------ ------ ----------- ----- ------- ----------
Total deposits $ 5,640,231 1.36% 100.0% $ 5,580,455 1.31% 100.0% $ 59,776
=========== ====== ====== =========== ===== ======= ==========
27
BORROWED FUNDS. The following is a summary of the Company's borrowed funds at
September 30, 2004 and December 31, 2003:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
-------------------------- ---------------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
----------- ------------- ------------ -------------
(Dollars in thousands)
Federal Home Loan Bank advances:
Fixed rate $ 1,974,688 3.96% $ 1,924,375 4.90%
Floating rate 255,000 1.86 180,000 1.19
----------- ------ ----------- ------
Total FHLB advances 2,229,688 3.72 2,104,375 4.58
Other borrowings - floating rate 274,809 1.85 120,977 1.55
Unsecured term loan 45,000 3.01 45,000 2.26
Unsecured line - - 10,000 2.17
Unamortized premium 9,732 - 19,075 -
----------- ------- ----------- ------
Total borrowed funds $ 2,559,229 3.51% $ 2,299,427 4.36%
=========== ====== =========== ======
ASSET QUALITY
NON-PERFORMING ASSETS. The Bank ceases the accrual of interest when, based
on current information and events, it is probable that the Bank will be unable
to collect all amounts due according to the contractual terms of the loan.
Generally, when a loan is 90 days or more past due, in the process of
foreclosure, or in bankruptcy, the full amount of previously accrued but unpaid
interest is deducted from interest income. For commercial real estate,
construction, large multi-family loans, and business loans, subsequent cash
payments are applied first to principal until recovery of principal is assured
and then to interest income. For one-to four-family residential loans, consumer
loans, smaller multi-family residential loans and land loans, income is
subsequently recorded to the extent cash payments are received, or at the time
when the loan is brought current in accordance with its original terms.
Additionally, the Bank considers the classification of investment securities,
should they show signs of deteriorating quality.
The following table sets forth information regarding non-accrual loans,
non-accrual investment securities, and foreclosed real estate of the Bank.
AT
------------------------------------------------------------
9/30/04 6/30/04 3/31/04 12/31/03 9/30/03
------- ------- ------- -------- -------
(Dollars in thousands)
Non-performing loans:
Non-accrual loans:
One- to four-family $ 22,984 24,206 24,604 27,107 24,198
Multi-family 1,288 1,035 1,338 477 493
Commercial real estate 1,578 273 1,118 1,504 139
Consumer loans 4,254 2,755 2,720 3,122 1,709
Commercial business loans 453 675 479 577 1,079
------- ------- ------- ------- -------
Total non-performing loans: 30,557 28,944 30,259 32,787 27,618
Non-accrual investment securities - - - 7,697 8,544
Foreclosed real estate (One- to four-family) 1,135 2,208 1,920 3,200 520
------- ------- ------- ------- -------
Total non-performing assets 31,692 31,152 32,179 43,684 36,682
======= ======= ======= ======= =======
Non-performing loans to total loans .45% .43 .47 .51 .56
======= ======= ======= ======= =======
Non-performing loans and foreclosed real estate
to total loans and foreclosed real estate .47% .47 .50 .56 .57
======= ======= ======= ======= =======
Total non-performing assets to total assets .34% .33 .35 .49 .55
======= ======= ======= ======= =======
Allowance for loan losses to total loans receivable,
exclusive of one- to four-family loans held for sale .52% .52 .53 .54 .43
======= ======= ======= ======= =======
Allowance for loan losses to non-performing loans 114.32% 119.95 113.80 105.39 77.38
======= ======= ======= ======= =======
28
Non-performing loans decreased $2.2 million to $30.6 million, or .45% of
total loans receivable at September 30, 2004, compared to $32.8 million, or .51%
of loans receivable at December 31, 2003, and increased $3.0 million from $27.6
million, or .56% of total loans receivable at September 30, 2003. The increase
in the dollar amount of non-performing loans year over year is primarily due to
increases in one-to four-family, multi-family and consumer loans acquired in the
St. Francis and Fidelity acquisitions and are not indicative of deterioration in
overall loan portfolio quality. Non-performing assets were $31.7 million or .34%
of total assets at September 30, 2004, compared to $43.7 million or .49% of
total assets at December 31, 2003, and $36.7 million or .55% of total assets at
September 30, 2003. The decrease in non-performing assets from December 31, 2003
to September 30, 2004 is primarily due to the sale of two non-accrual aircraft
related investment securities in the first quarter of 2004.
For the quarter ended September 30, 2004, interest on non-accrual loans
that would have been recorded as income, had they been performing according to
their original terms, amounted to $493,000, compared to $481,000 for the three
months ended September 30, 2003. For the nine months ended September 30, 2004
and 2003, interest on non-accrual loans that would have been recorded as income,
had they been performing according to their original terms, amounted to $1.2
million.
NON-PERFORMING RESIDENTIAL LOANS. Ratios for loans secured by one-to-four family
residential properties were as follows:
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2004 2003 2003
---- ---- ----
Percentage of loans receivable secured by
residential real estate:
One- to four-family loans 60% 62 75
Multi-family loans 10 9 9
Home equity loans and lines of credit 18 15 10
---- ----- ----
Total 88% 86 94
==== ===== ====
Non-performing loans secured by residential real estate
as a percentage of total non-performing loans 87% 88 87
Non-performing loans secured by residential real estate
with private mortgage insurance or other guarantees 40 42 41
Average loan-to-value of non-performing loans secured
by residential real estate without private mortgage
insurance or other guarantees 66 65 71
CLASSIFIED ASSETS. The federal regulators have adopted a classification
system for problem assets of insured institutions. Under this classification
system, problem assets of insured institutions are classified as "substandard,"
"doubtful" or "loss." In addition, a "special mention" category consists of
assets, which currently do not expose the Company to a sufficient degree of risk
to warrant classification, but do possess deficiencies or other characteristics
deserving management's close attention.
In connection with the filing of its periodic reports with the Office of
Thrift Supervision ("OTS"), the Bank regularly reviews the problem loans in its
portfolio to determine whether any loans require classification in accordance
with applicable regulations. At September 30, 2004, of the Bank's $30.6 million
in non-performing loans, $30.3 million were classified substandard and $250,000
were classified doubtful. At December 31, 2003, all of the Bank's $32.8 million
of non-performing loans
29
were classified as substandard. In addition, at September 30, 2004 and December
31, 2003, the Bank classified $30.0 million and $6.3 million, respectively, of
commercial and multi-family real estate, land development and commercial
business loans on accrual basis as substandard for regulatory purposes. The
increase is due to various developments that could affect future loan
performance. These loans are generally performing in accordance with the terms
of the loan agreement and are adequately secured based on the current value of
the underlying collateral. In addition, the Bank classified three affordable
housing related real estate projects included in other assets aggregating $1.7
million as substandard for regulatory purposes at September 30, 2004. The Bank
also classified portions of other loans totaling $1.4 million and $750,000 as
doubtful at September 30, 2004 and December 31, 2003 respectively. Special
mention loans at September 30, 2004 and December 31, 2003 totaled $8.5 million
and $39.1 million, respectively.
ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized in the following
table for the three and nine months ended September 30, 2004 and 2003.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Dollars in thousands)
Balance at beginning of period $ 34,721 19,379 34,555 19,483
Acquired through merger - 2,011 - 2,011
Provision for loan losses 350 - 930 -
Charge-offs (205) (49) (799) (176)
Recoveries 70 31 250 54
------- -------- -------- --------
Balance at end of period $ 34,936 21,372 34,936 21,372
======= ======== ======== ========
The allowance for loan losses to total loans at September 30, 2004 was
..52%, a decrease from .54% at December 31, 2003. The allowance for loan losses
to non-performing loans increased to 114.32% at September 30, 2004, from 105.39%
at December 31, 2003, reflecting the decline in non-performing assets.
LIQUIDITY AND CAPITAL RESOURCES
At the holding company level, the Company's principal sources of funds are
dividends from the Bank and its credit facility with an unaffiliated commercial
bank. On November 1, 2004, the Company increased the amount of its term note
under this facility to $70.0 million, the unpaid principal balance of which was
$45.0 million at September 30, 2004, and used the $25.0 million in additional
funds to pay a portion of the Chesterfield merger consideration. The balance of
the cash portion of the merger consideration was paid out of excess liquidity at
Chesterfield.
During the nine months ended September 30, 2004 the Bank paid cash
dividends of $60.0 million to the holding company. The Company's principal uses
of funds during the nine months ended September 30, 2004 were cash dividends to
shareholders and stock repurchases. During the nine months ended September 30,
2004, the Company repurchased 693,600 shares of its common stock at an average
price of $41.88 per share, for a total of $29.0 million, and declared common
stock dividends of $.63 per share, for a total of $20.7 million.
The Bank's principal sources of funds are deposits, advances from the FHLB
of Chicago and other borrowings, principal repayments on loans and
mortgage-backed securities, proceeds from the sale of loans, and funds provided
by operations. While scheduled loan and mortgage-backed securities amortization
and maturing investment securities are a relatively predictable source of funds,
deposit flows as well as loan and mortgage-backed securities prepayments are
greatly influenced by economic conditions, the general level of interest rates
and competition. Decisions to sell investment
30
securities and other assets are also generally market driven, although the Bank
may at times sell these assets for asset/liability management purposes or as a
source of liquidity.
The Bank utilizes particular sources of funds based on comparative costs
and availability. The Bank generally manages the pricing of its deposits to
maintain a steady to increasing deposit portfolio in the aggregate, but has from
time to time decided not to pay rates on deposits as high as its competition,
and when necessary, to supplement deposits with longer term and/or other
alternative sources of funds such as FHLB advances and other borrowings. The
Bank currently expects that due to increased competition for deposits in its
markets, that more of its growth is expected to be funded with higher cost
wholesale borrowings.
The Bank has a concentration in its investment portfolio in stock of the
FHLB of Chicago ("FHLBC"). Consistent with plans previously disclosed in its
2003 Form 10-K, the Bank has continued to reduce its investment in FHLBC stock
and expects to continue its plan over the next six months as the FHLBC
approaches implementation of its new capital structure which is currently
expected by mid 2005. At September 30, 2004, the Bank had $321.7 million
invested in FHLBC stock of which $210.2 million was in excess of the minimum
investment required as collateral for its FHLB borrowings as of that date.
During the nine months ended September 30, 2004, the Bank redeemed $75.0 million
in stock. A significant portion of the excess investment resulted from the
Fidelity and St. Francis acquisitions, as they maintained investments in excess
of their required minimums due to the high rate of dividends being paid by the
FHLBC. The Bank may, at the FHLBC's discretion, redeem at par any capital stock
greater than its required investment or sell it to other FHLBC members. The Bank
monitors the financial results and interest rate risk position of the FHLBC on a
quarterly basis.
During the nine months ended September 30, 2004, the Bank originated loans
totaling $3.17 billion compared with $4.03 billion during the same period in
2003. Loan sales, for the nine months ended September 30, 2004, were $704.0
million, compared to $1.35 billion for the prior year period. These decreases
are the direct result of higher interest rates, which have dramatically reduced
refinance activity. Management does not foresee a return to 2003 volume levels
in the near future.
Since December 31, 2003, the Bank has experienced a $46.5 million increase
in loan commitments which totaled $608.1 million at September 30, 2004, compared
to $561.7 million at December 31, 2003. At September 30, 2004, the Company
believes that it has sufficient cash to fund its outstanding commitments or will
be able to obtain the necessary funds from outside sources to meet its cash
requirements. At September 30, 2004, the Bank had $12.4 million of credit risk
related to loans sold to the MPF program with recourse provisions, $47.8 million
of credit risk related to loans sold with recourse to other investors and
approximately $23.5 million of credit risk related to loans with private
mortgage insurance in force.
The following table lists the commitments and contingencies of the Company
and the Bank as of September 30, 2004:
LESS THAN 1 TO 3 4 TO 5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
------------ ---------- --------- -------- -----------
(Dollars in thousands)
New loan commitments $ 608,134 608,134 - - -
New equity line of credit commitments 130,329 130,329 - - -
Unused equity lines of credit balances(1) 956,397 30,558 111,562 91,849 722,428
Commercial business lines(1) 236,338 108,683 69,369 37,282 21,004
Letters of credit (2) 65,995 25,131 27,111 6,943 6,810
Recourse provisions 71,250 71,250 - - -
----------- ---------- -------- -------- ----------
Total $ 2,068,443 974,085 208,042 136,074 750,242
=========== ========== ======== ======== ==========
<FN>
- --------------------------
(1) Balances shown are at the remaining maturity of the commitment. New equity
lines generally have maturities of 10 years.
(2) Letters of credit include $4.8 million related to the Company's land
development projects.
</FN>
31
ASSET/LIABILITY MANAGEMENT
As part of its normal operations, the Bank is subject to interest-rate risk
on the interest-sensitive assets it invests in and the interest-sensitive
liabilities it borrows. The Bank's exposure to interest rate risk is reviewed at
least quarterly by the Bank's asset/liability management committee ("ALCO") of
the Board of Directors of the Company. The ALCO, which also includes certain
members of senior management with financial expertise, monitors the rate and
sensitivity repricing characteristics of the individual asset and liability
portfolios the Bank maintains and determines risk management strategies.
The Bank utilizes an interest rate sensitivity gap analysis to monitor the
relationship of maturing or repricing interest-earning assets and
interest-bearing liabilities, while maintaining an acceptable interest rate
spread. Interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing within a specific period
of time and the amount of interest-bearing liabilities maturing or repricing
within that same period of time, and is usually analyzed at a period of one
year. Generally, a positive gap, where more interest-earning assets are
repricing or maturing than interest-bearing liabilities, would tend to result in
a reduction in net interest income in a period of falling interest rates.
Conversely, during a period of rising interest rates, a positive gap would
likely result in an improvement in net interest income. Management's goal is to
maintain its cumulative one-year gap within the range of (15)% to 15%. The gap
ratio fluctuates as a result of market conditions and management's decisions
based on its expectation of future interest rate trends, as well as the impact
of the interest rate risk position of acquired institutions. The Bank's
asset/liability management strategy emphasizes the origination of one- to
four-family adjustable-rate loans and other loans which have shorter terms to
maturity or reprice more frequently than fixed-rate mortgage loans, yet provide
a positive margin over the Bank's cost of funds, for its own portfolio.
Historically, the Bank has generally sold its conforming long-term fixed-rate
loan originations in the secondary market in order to improve and maintain its
interest rate sensitivity levels.
The Bank, except as noted below, has not used derivative financial
instruments such as interest rate swaps, caps, floors, options or similar
financial instruments to manage its interest rate risk. However, in conjunction
with its origination and sale strategy discussed above, management does hedge
the Bank's exposure to interest rate risk primarily by committing to sell
fixed-rate mortgage loans for future delivery. Under these commitments, the Bank
agrees to sell fixed-rate mortgage loans at a specified price and at a specified
future date. The sale of fixed-rate mortgage loans for future delivery has
enabled the Bank to continue to originate new mortgage loans, and to generate
gains on sale of these loans as well as loan servicing fee income, while
maintaining its gap ratio within the parameters discussed above. Most of these
forward sale commitments are conducted with Fannie Mae, Freddie Mac and the MPF
with respect to loans that conform to the requirements of these government
agencies. The forward commitment of mortgage loans presents a risk to the Bank
if the Bank is not able to deliver the mortgage loans by the commitment
expiration date. If this should occur, the Bank would be required to pay a fee
to the buyer. The Bank attempts to mitigate this risk by charging potential
retail borrowers a 1% fee to fix the interest rate. The Bank also estimates a
percentage of fallout when determining the amount of forward commitments to
enter into.
The table on the next page sets forth the scheduled repricing or maturity
of the Bank's assets and liabilities at September 30, 2004 and management's
assumptions regarding prepayment percentages on loans and mortgage-backed
securities, based on its current experience in these portfolios. The Bank uses
the withdrawal assumptions used by the OTS with respect to NOW, checking and
passbook accounts, which are 17.0%, 17.0%, 17.0%, 16.0%, and 33.0%,
respectively, although they are considered conservative by the ALCO. Fixed rate
investment securities and borrowings that contain call or put provisions are
generally shown in the category relating to their respective final maturities or
expected put or call option being exercised. However, $5.2 million of
investments with final maturities averaging 37 months, but callable in six
months or less are categorized in the six months or less category, in
anticipation of their calls. At September 30, 2004, the Bank had $685.0 million
of FHLB advances that contain various put positions exercisable at the option of
the FHLB of Chicago. At
32
September 30, 2004, $55 million are shown in the less than six-months or less
category, $25 million are shown in the six-month to one-year category and $125
million are shown in the one- to three-year category relating to their put
option date based on the expected exercise of the put option by the FHLB of
Chicago and the remaining $480 million are shown in the category relating to
their final maturities.
The effect of these assumptions is to quantify the dollar amount of items
that are interest-sensitive and may be repriced within each of the periods
specified. Certain shortcomings are inherent in using gap analysis to quantify
exposure to interest rate risk. For example, although certain assets and
liabilities may have similar maturities or repricings in the table, they may
react differently to actual changes in market interest rates. The interest rates
on certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind
changes in market rates. This is especially true in circumstances where
management has a certain amount of control over interest rates, such as the
pricing of deposits. Additionally, certain assets such as hybrid adjustable-rate
mortgage loans have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. Finally, as interest rates
change, actual loan prepayment rates may differ significantly from those rates
assumed by management for presentation purposes in the table.
Though management believes that its asset/liability management strategies
help to mitigate the potential negative effects of changes in interest rates on
the Bank's operations, a decrease in long term interest rates in the near term
may adversely affect the Bank's operations because prepayments on
higher-yielding mortgage-related assets would likely accelerate and would be
reinvested at lower rates. Conversely, increases in long-term interest rates
could benefit the Bank's operation primarily due to a slowing of prepayments on
higher yielding loans receivable and mortgage-backed securities and rates
adjusting upward and new loans would be originated at higher rates, although the
higher rates may also dampen the level of new originations.
33
AT SEPTEMBER 30, 2004
MORE THAN MORE THAN MORE THAN
6 MONTHS 6 MONTHS 1 YEAR 3 YEARS TO MORE THAN
OR LESS TO 1 YEAR TO 3 YEARS 5 YEARS 5 YEARS TOTAL
-------- ---------- ---------- ---------- ---------- ---------
(Dollars in thousands)
Interest-earning assets:
Real estate loans $ 909,291 563,928 2,000,630 1,336,038 617,140 5,427,027
Consumer loans 1,185,788 5,818 20,658 14,044 12,608 1,238,916
Commercial business loans 96,421 8,828 19,344 13,145 1,525 139,263
Mortgage-backed securities 123,475 103,468 255,964 200,183 336,170 1,019,260
Interest-bearing deposits 67,614 - - - - 67,614
Federal funds sold 42,767 - - - - 42,767
Stock in FHLB of Chicago 321,681 - - - - 321,681
Investment securities 115,395 595 97,670 107,363 24,690 345,713
---------- --------- ---------- ---------- ---------- ----------
Total interest-earning assets 2,862,432 682,637 2,394,266 1,670,773 992,133 8,602,241
Impact of hedging activity(1) 53,830 - (12,202) (9,761) (31,867) -
Total net interest-earning
assets adjusted for impact
of hedging activities 2,916,262 682,637 2,382,064 1,661,012 960,266 8,602,241
---------- --------- ---------- ---------- ---------- ----------
Interest-bearing liabilities:
NOW and checking accounts 75,500 69,081 252,841 157,059 333,750 888,231
Money market accounts 704,210 - - - - 704,210
Passbook accounts 113,753 104,273 381,637 237,064 503,762 1,340,489
Certificate accounts 867,651 589,306 648,190 104,991 13,936 2,224,074
FHLB advances 570,704 282,990 1,005,726 350,000 30,000 2,239,420
Other borrowings 269,247 58 50,216 33 255 319,809
---------- --------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 2,601,065 1,045,708 2,338,610 849,147 881,703 7,716,233
---------- --------- ---------- ---------- ---------- ----------
Interest sensitivity gap $ 315,197 (363,071) 43,454 811,865 78,563 886,008
========== ========== ========== ========== ========== ==========
Cumulative gap $ 315,197 (47,874) (4,420) 807,445 886,008
========== ========== ========== ========== ==========
Cumulative gap assets as a percentage
of total assets 3.38% (.51) (.05) 8.66 9.51
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 112.12% 98.69 99.93 111.81 111.48
=========== ========= ========== ========== ==========
AT DECEMBER 31, 2003
- --------------------
Cumulative gap $ 104,689 (142,378) 173,705 565,136 756,617
========== ========== ========== ========== ==========
Cumulative gap assets as a percentage
of total assets 1.17% (1.59) 1.94 6.33 8.47
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 104.26% 95.89 103.07 108.53 110.16
========== ========== ========== ========== ==========
<FN>
- --------------------------
(1) Represents forward commitments to sell long-term fixed-rate as well as 3-1
and 5-1 adjustable rate mortgages loans.
</FN>
34
REGULATORY CAPITAL. Savings associations must satisfy three different measures
of capital adequacy: core and tangible capital to total assets ratios as well as
a regulatory capital to total risk-weighted assets ratio. The minimum level
required for each of these capital standards is established by regulation. The
Company has managed its balance sheet so as to reasonably exceed these minimums
although it could operate at closer limits if it chose. The acquisitions of
Fidelity and St. Francis did not have a significant impact on capital adequacy
levels.
The Bank's actual capital amounts and ratios, as well as minimum amounts and
ratios required for capital adequacy and prompt corrective action provisions are
presented below:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- ---------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ------- --------- ------- --------- -------
(Dollars in thousands)
As of September 30, 2004:
Tangible capital
(to total assets) $ 633,526 7.05% =>$ 134,877 =>1.50% N/A
Core capital
(to total assets) $ 633,526 7.05% =>$ 359,672 =>4.00% =>$ 449,591 =>5.00%
Total capital
(to risk-weighted assets) $ 655,754 10.78% =>$ 486,801 =>8.00% =>$ 608,501 =>10.00%
Core capital
(to risk-weighted assets) $ 633,526 10.41% N/A =>$ 365,100 =>6.00%
As of December 31, 2003:
Tangible capital
(to total assets) $ 615,582 7.16% =>$ 129,000 =>1.50% N/A
Core capital
(to total assets) $ 615,582 7.16% =>$ 343,999 =>4.00% =>$ 429,998 =>5.00%
Total capital
(to risk-weighted assets) $ 640,413 11.45% =>$ 447,366 =>8.00% =>$ 559,208 =>10.00%
Core capital
(to risk-weighted assets) $ 615,582 11.01% N/A =>$ 335,525 =>6.00%
A reconciliation of consolidated stockholder's equity of the Bank for
financial reporting purposes to capital available to the Bank to meet regulatory
capital requirements is as follows:
SEPTEMBER 30, DECEMBER 31,
2004 2003
----------- -----------
(Dollars in thousands)
Stockholder's equity of the Bank $ 911,791 896,783
Goodwill and core deposit intangibles (274,226) (276,549)
Non-permissible subsidiary deduction (383) (252)
Non-includable mortgage servicing rights (2,549) (2,413)
Regulatory capital adjustment for available
for sale securities (1,106) (1,987)
Recourse on loan sales (12,709) (9,682)
General loan loss reserves 34,936 34,513
----------- -----------
Core and supplementary capital $ 655,754 640,413
=========== ===========
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A quantitative and qualitative analysis about market risk is included in
the Company's December 31, 2003 Form 10-K. There have been no material changes
in the assumptions used or in the results of market risk analysis as of
September 30, 2004 since December 31, 2003. See "Asset/Liability Management" in
Item 2, for a further discussion of the Company's interest rate sensitivity gap
analysis.
35
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's Chief
Executive Officer and Chief Financial Officer carried out an evaluation under
their supervision, with the participation of other members of management as they
deemed appropriate, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as contemplated by Rule 13a-15
under the Securities Exchange Act of 1934. Based upon, and as of the date of
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective,
in all material respects, in timely alerting them to material information
relating to the Company (and its consolidated subsidiaries) and in ensuring that
information required to be included in the periodic reports the Company files or
submits to the SEC under the Securities Exchange Act is recorded, processed,
summarized and reported as required.
PART II - OTHER INFORMATION
- -----------------------------
Item 1. Legal Proceedings. Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information in connection with purchases of
the Company's common stock made by, or on behalf of, the Company during the
third quarter of the fiscal year ending December 31, 2004.
MAXIMUM NUMBER
TOTAL NUMBER (OR APPROXIMATE
OF SHARES DOLLAR VALUE)
TOTAL PURCHASED AS OF SHARES
NUMBER OF AVERAGE PART OF PUBLICLY THAT MAY YET BE
SHARES PRICE PAID ANNOUNCED PLANS PURCHASED UNDER THE
PERIOD PURCHASED(1) PER SHARE OR PROGRAMS(2) PLANS OR PROGRAMS(2)
------ --------- --------- -------------- --------------------
July 1, 2004
through
July 31, 2004 7,800 $ 40.19 7,800 212,200
August 1, 2004
through
August 30, 2004 110,800 39.99 110,800 101,400
September 1, 2004
through
September 30, 2004 - n/a - 101,400
---------- -------- ----------- -----------
Total 118,600 $ 40.00 118,600 101,400
========== ======== =========== ===========
<FN>
- --------------------------
(1) The table does not include 466 shares subject to options surrendered in
payment of withholding tax.
(2) Information relates to the stock repurchase plan publicly announced by the
Company in May 2003, which authorized the purchase of up to 1.6 million
shares of common stock.
</FN>
Item 3. Defaults Upon Senior Securities. Not applicable.
36
Item 4. Submission of Matters to a Vote of Security Holders. Not applicable.
Item 5. Other Information. None.
Item 6. Exhibits
Exhibit No. 3. Certificate of Incorporation and By-laws.
(i) Restated Certificate of Incorporation. (Incorporated herein
by reference to Exhibit 3.1 to Registrant's Form 8-K (File
No. 0-18121) dated December 19, 2000.)
(ii) Amended and Restated By-laws of Registrant. (Incorporated
herein by reference to Exhibit No. 3 to Registrant's
September 30, 2003 Form 10-Q (File No. 0-18121).)
Exhibit No. 31.1. Certification of Chief Executive Officer.+
Exhibit No. 31.2. Certification of Chief Financial Officer.+
Exhibit No. 32.1. Certification of Chief Executive Officer and
Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.+
- ----------------------
+ Filed herewith.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAF Bancorp. Inc.
-----------------------------------
(Registrant)
Date: November 9, 2004 By: /s/ Allen H. Koranda
---------------- -----------------------------------
Allen H. Koranda
Chairman of the Board and
Chief Executive Officer
Date: November 9, 2004 By: /s/ Jerry A. Weberling
---------------- -----------------------------------
Jerry A. Weberling
Executive Vice President and
Chief Financial Officer
38