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Table of Contents
 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark one)
     
x



   
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarter ended September 30, 2002
 
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      ü     No              
 
The number of shares outstanding of the issuer’s common stock, par value $.01 per share, was 23,248,511 at November 8, 2002.
 

Table of Contents
 
MAF BANCORP, INC. AND SUBSIDIARIES
 
FORM 10-Q
 
Part I.
   
Financial Information
   
Page
Item 1.
        
       
3
       
4
       
5
       
6
       
8
Item 2.
      
15
Item 3.
      
36
Item 4.
      
36
Part II.
   
Other Information
     
Item 1.
      
36
Item 2.
      
36
Item 3.
      
36
Item 4.
      
36
Item 5.
      
36
Item 6.
      
36
       
38
       
39
 

2

Table of Contents
Part I. Financial Information
 
Item 1. Financial Statements
 
MAF BANCORP, INC. AND SUBSIDIARIES
 
Consolidated Statements of Financial Condition
 
(Dollars in thousands)
(Unaudited)
 
    
September 30, 2002
     
December 31, 2001
  
Assets 
              
Cash and due from banks
   
$
117,545
 
   
82,540
 
Interest-bearing deposits
   
 
41,790
 
   
29,367
 
Federal funds sold
   
 
61,306
 
   
112,765
 
    
  
Total cash and cash equivalents
   
 
220,641
 
   
224,672
 
    
  
                 
Investment securities available for sale, at fair value
   
 
337,129
 
   
355,461
 
Stock in Federal Home Loan Bank of Chicago, at cost
   
 
167,596
 
   
132,081
 
Mortgage-backed securities available for sale, at fair value
   
 
283,162
 
   
142,158
 
Loans receivable held for sale
   
 
132,899
 
   
161,105
 
Loans receivable, net of allowance for losses of $19,458 and $19,607
   
 
4,454,327
 
   
4,286,470
 
Accrued interest receivable
   
 
28,594
 
   
28,761
 
Foreclosed real estate
   
 
474
 
   
1,405
 
Real estate held for development or sale
   
 
10,834
 
   
12,993
 
Premises and equipment, net
   
 
70,607
 
   
63,815
 
Other assets
   
 
94,375
 
   
80,448
 
Goodwill, net of accumulated amortization of $12,970 and $12,480
   
 
94,307
 
   
96,851
 
Core deposit intangibles, net of accumulated amortization of $8,369 and $7,128
   
 
7,578
 
   
8,819
 
    
  
    
$
5,902,523
 
   
5,595,039
 
    
  
Liabilities and Stockholders’ Equity
              
Liabilities:
                
Deposits
   
$
3,697,269
 
   
3,557,997
 
Borrowed funds
   
 
1,590,500
 
   
1,470,500
 
Advances by borrowers for taxes and insurance
   
 
36,696
 
   
38,484
 
Accrued expenses and other liabilities
   
 
95,920
 
   
92,185
 
    
  
Total liabilities
   
 
5,420,385
 
   
5,159,166
 
    
  
Stockholders’ equity:
                
Preferred stock, $.01 par value; authorized 5,000,000 shares; none outstanding
   
 
—  
 
   
—  
 
Common stock, $.01 par value; authorized 80,000,000 shares; 25,420,650 shares issued; 23,244,936 and 22,982,634 shares outstanding
   
 
254
 
   
254
 
Additional paid-in capital
   
 
204,654
 
   
201,468
 
Retained earnings, substantially restricted
   
 
326,145
 
   
286,742
 
Stock in gain deferral plan; 223,453 shares
   
 
511
 
   
511
 
Accumulated other comprehensive income
   
 
2,791
 
   
3,672
 
Treasury stock, at cost; 2,399,167 and 2,661,469 shares
   
 
(52,217
)
   
(56,774
)
    
  
Total stockholders’ equity
   
 
482,138
 
   
435,873
 
    
  
    
$
5,902,523
 
   
5,595,039
 
    
  
 
 
See accompanying notes to unaudited consolidated financial statements.

3

Table of Contents
 
MAF BANCORP, INC. AND SUBSIDIARIES
 
Consolidated Statements of Operations
 
(Dollars in thousands, except per share data)
(Unaudited)
 
    
Three Months Ended
September 30,
     
Nine Months Ended September 30,
  
    
2002
     
2001
     
2002
     
2001
  
Interest income:
                              
Loans receivable
   
$
72,556
 
   
74,989
 
   
216,124
 
   
233,259
 
Mortgage-backed securities available for sale
   
 
3,095
 
   
1,962
 
   
8,375
 
   
5,272
 
Investment securities available for sale
   
 
6,177
 
   
6,354
 
   
18,115
 
   
16,917
 
Interest-bearing deposits and federal funds sold
   
 
1,138
 
   
1,996
 
   
3,790
 
   
6,907
 
    
  
  
  
Total interest income
   
 
82,966
 
   
85,301
 
   
246,404
 
   
262,355
 
    
  
  
  
Interest expense:
                              
Deposits
   
 
21,713
 
   
30,166
 
   
71,477
 
   
93,313
 
Borrowed funds
   
 
20,313
 
   
22,844
 
   
59,886
 
   
72,402
 
    
  
  
  
Total interest expense
   
 
42,026
 
   
53,010
 
   
131,363
 
   
165,715
 
    
  
  
  
Net interest income
   
 
40,940
 
   
32,291
 
   
115,041
 
   
96,640
 
Provision for loan losses
   
 
—  
 
   
—  
 
   
—  
 
   
—  
 
    
  
  
  
Net interest income after provision for loan losses
   
 
40,940
 
   
32,291
 
   
115,041
 
   
96,640
 
Non-interest income:
                              
Gain (loss) on sale of:
                              
Loans receivable held for sale
   
 
3,899
 
   
2,678
 
   
8,901
 
   
5,275
 
Mortgage-backed securities
   
 
—  
 
   
(2
)
   
39
 
   
(2
)
Investment securities
   
 
2,049
 
   
264
 
   
3,031
 
   
824
 
Foreclosed real estate
   
 
5
 
   
30
 
   
156
 
   
352
 
Income from real estate operations
   
 
3,791
 
   
799
 
   
6,848
 
   
5,469
 
Deposit account service charges
   
 
5,865
 
   
4,230
 
   
16,216
 
   
11,763
 
Loan servicing fee income (expense)
   
 
(836
)
   
118
 
   
(739
)
   
7
 
Impairment of mortgage servicing rights
   
 
(1,160
)
   
(539
)
   
(1,650
)
   
(754
)
Brokerage commissions
   
 
678
 
   
512
 
   
1,923
 
   
1,694
 
Other
   
 
2,363
 
   
2,002
 
   
7,197
 
   
5,824
 
    
  
  
  
Total non-interest income
   
 
16,654
 
   
10,092
 
   
41,922
 
   
30,452
 
    
  
  
  
Non-interest expense:
                              
Compensation and benefits
   
 
14,708
 
   
12,173
 
   
43,653
 
   
35,218
 
Office occupancy and equipment
   
 
2,940
 
   
2,169
 
   
8,608
 
   
6,603
 
Advertising and promotion
   
 
1,173
 
   
1,051
 
   
3,722
 
   
3,398
 
Data processing
   
 
926
 
   
788
 
   
2,772
 
   
2,298
 
Federal deposit insurance premiums
   
 
161
 
   
155
 
   
508
 
   
457
 
Other
   
 
5,125
 
   
3,268
 
   
12,804
 
   
9,544
 
Amortization of goodwill
   
 
164
 
   
811
 
   
490
 
   
2,433
 
Amortization of core deposit intangibles
   
 
408
 
   
319
 
   
1,241
 
   
978
 
    
  
  
  
Total non-interest expense
   
 
25,605
 
   
20,734
 
   
73,798
 
   
60,929
 
    
  
  
  
Income before income taxes
   
 
31,989
 
   
21,649
 
   
83,165
 
   
66,163
 
Income tax expense
   
 
11,438
 
   
8,002
 
   
29,784
 
   
24,558
 
    
  
  
  
Net income
   
$
20,551
 
   
13,647
 
   
53,381
 
   
41,605
 
    
  
  
  
Basic earnings per share
   
$
.88
 
   
.61
 
   
2.31
 
   
1.83
 
    
  
  
  
Diluted earnings per share
   
$
.86
 
   
.59
 
   
2.25
 
   
1.79
 
    
  
  
  
 
See accompanying notes to unaudited consolidated financial statements.

4

Table of Contents
 
MAF BANCORP, INC. AND SUBSIDIARIES
 
Consolidated Statement of Changes in Stockholders’ Equity
 
(Dollars in thousands)
(Unaudited)
 
    
Nine Months Ended September 30, 2002
  
    
Common stock
   
Additional paid-in capital
   
Retained earnings
       
Accumulated other comprehensive income
     
Stock in gain deferral plan
   
Treasury stock
     
Total
  
Balance at December 31, 2001
   
$
254
   
201,468
   
286,742
 
     
3,672
 
   
511
   
(56,774
)
   
435,873
 
Comprehensive income:
                                               
Net income
   
 
—  
   
—  
   
53,381
 
     
—  
 
   
—  
   
—  
 
   
53,381
 
Other comprehensive income, net of tax:
                                               
Unrealized holding gain during the period
   
 
—  
   
—  
   
—  
 
     
1,090
 
   
—  
   
—  
 
   
1,090
 
Less: reclassification adjustment of gains included in net income
   
 
—  
   
—  
   
—  
 
     
(1,971
)
   
—  
   
—  
 
   
(1,971
)
Total comprehensive income
   
 
—  
   
—  
   
53,381
 
     
(881
)
   
—  
   
—  
 
   
52,500
 
Exercise of 322,580 stock options and reissuance of treasury stock
   
 
—  
   
—  
   
(3,637
)
     
—  
 
   
—  
   
4,688
 
   
1,051
 
Impact of exercise of acquisition carry-over options
   
 
—  
   
1,414
   
—  
 
     
—  
 
   
—  
   
—  
 
   
1,414
 
Tax benefits from stock-related compensation
   
 
—  
   
1,772
   
—  
 
     
—  
 
   
—  
   
—  
 
   
1,772
 
Purchase of treasury stock
   
 
—  
   
—  
   
—  
 
     
—  
 
   
—  
   
(131
)
   
(131
)
Cash dividends declared ($.45 per share)
   
 
—  
   
—  
   
(10,446
)
     
—  
 
   
—  
   
—  
 
   
(10,446
)
Dividends paid to gain deferral plan
   
 
—  
   
—  
   
105
 
     
—  
 
   
—  
   
—  
 
   
105
 
Balance at September 30, 2002
   
$
254
   
204,654
   
326,145
 
     
2,791
 
   
511
   
(52,217
)  
   
482,138
 
    
  
  
    
  
  
  
 
See accompanying notes to unaudited consolidated financial statements.

5

Table of Contents
 
MAF BANCORP, INC. AND SUBSIDIARIES
 
Consolidated Statements of Cash Flows
 
(In thousands)
(Unaudited)
 
    
Nine Months Ended
September 30,
  
    
2002
     
2001
  
Operating activities:
                
Net income
   
$
53,381
 
   
41,605
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                
Depreciation and amortization
   
 
4,788
 
   
3,681
 
FHLB of Chicago stock dividend
   
 
(5,515
)
   
(4,752
)
Deferred income tax expense
   
 
4,483
 
   
928
 
Amortization of goodwill and core deposit intangibles
   
 
1,731
 
   
3,411
 
Amortization of premiums, discounts, and deferred loan fees
   
 
3,124
 
   
2,644
 
Amortization and impairment of mortgage servicing rights
   
 
5,791
 
   
2,863
 
Net gain on sale of loans receivable held for sale
   
 
(8,901
)
   
(5,273
)
Net gain on sale of investment securities and mortgage-backed securities
   
 
(3,070
)
   
(824
)
Net gain on real estate held for development or sale
   
 
(6,848
)
   
(5,469
)
Increase (decrease) in accrued interest receivable
   
 
167
 
   
(771
)
Net increase other assets and liabilities
   
 
(21,017
)
   
(9,693
)
Loans originated for sale
   
 
(809,321
)
   
(803,832
)
Loans purchased for sale
   
 
—  
 
   
(376
)
Sale of loans originated for sale
   
 
840,548
 
   
736,696
 
    
  
Net cash provided by (used in) operating activities
   
 
59,341
 
   
(39,162
)
    
  
Investing activities:
                
Loans receivable originated for investment
   
 
(1,677,627
)
   
(1,007,108
)
Principal repayments on loans receivable
   
 
1,511,732
 
   
1,192,271
 
Principal repayments on mortgage-backed securities
   
 
36,254
 
   
20,859
 
Proceeds from maturities of investment securities available for sale
   
 
84,885
 
   
50,830
 
Proceeds from sale of:
                
Investment securities available for sale
   
 
36,237
 
   
4,273
 
Mortgage-backed securities available for sale
   
 
14,822
 
   
—  
 
Real estate held for development or sale
   
 
21,647
 
   
22,215
 
Purchases of:
                
Investment securities available for sale
   
 
(109,260
)
   
(219,981
)
Mortgage-backed securities available for sale
   
 
(185,396
)
   
(62,127
)
Stock in FHLB of Chicago
   
 
(30,000
)
   
(30,000
)
Real estate held for development or sale
   
 
(6,148
)
   
(11,866
)
Premises and equipment
   
 
(10,809
)
   
(7,048
)
    
  
Net cash used in investing activities
   
$
(313,663
)
   
(47,682
)
    
  
 

6

Table of Contents
 
MAF BANCORP, INC. AND SUBSIDIARIES
 
Consolidated Statements of Cash Flows
 
(In thousands)
(Unaudited)
 
    
Nine Months Ended September 30,
  
    
2002
     
2001
  
Financing activities:
                
Proceeds from FHLB of Chicago advances
   
$
410,000
 
   
110,000
 
Proceeds from unsecured line of credit
   
 
—  
 
   
6,000
 
Repayment of FHLB of Chicago advances
   
 
(280,000
)
   
(330,000
)
Repayment of unsecured line of credit
   
 
(10,000
)
   
(4,000
)
Proceeds from exercise of stock options
   
 
2,226
 
   
653
 
Purchase of treasury stock
   
 
(131
)
   
(17,917
)
Cash dividends
   
 
(9,612
)
   
(7,222
)
Net increase in deposits
   
 
139,596
 
   
231,107
 
Decrease in advances by borrowers for taxes and insurance
   
 
(1,788
)
   
(2,904
)
    
  
Net cash provided by (used in) financing activities
   
 
250,291
 
   
(14,283
)
    
  
Decrease in cash and cash equivalents
   
 
(4,031
)
   
(101,127
)
Cash and cash equivalents at beginning of period
   
 
224,672
 
   
270,520
 
    
  
Cash and cash equivalents at end of period
   
$
220,641
 
   
169,393
 
    
  
Supplemental disclosure of cash flow information:
                
Cash paid during the period for:
                
Interest on deposits and borrowed funds
   
$
131,553
 
   
166,565
 
Income taxes
   
 
22,770
 
   
21,605
 
Summary of non-cash transactions:
                
Transfer of loans receivable to foreclosed real estate
   
 
1,862
 
   
2,097
 
Loans receivable swapped into mortgage-backed securities
   
 
17,712
 
   
72,104
 
Investments securities held-to-maturity transferred to available-for-sale
   
 
—  
 
   
12,633
 
Mortgage-backed securities held-to-maturity transferred to available-for-sale
   
$
—  
 
   
80,301
 
    
  
 
See accompanying notes to unaudited consolidated financial statements.
 

7

Table of Contents
 
MAF BANCORP, INC. AND SUBSIDIARIES
 
Notes to Unaudited Consolidated Financial Statements
 
Three and Nine Months Ended September 30, 2002 and 2001
(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, 2002 are not necessarily indicative of results that may be expected for the year ending December 31, 2002.
 
The consolidated financial statements include the accounts of MAF Bancorp, Inc. (“Company”), and its wholly-owned subsidiaries, Mid America Bank, fsb and subsidiaries (“Bank”) and MAF Developments, Inc. (“MAFD”), as of and for the three and nine month periods ended September 30, 2002 and 2001 and as of December 31, 2001. All material intercompany balances and transactions have been eliminated in consolidation.
 
(2) Earnings Per Share
 
Earnings per share is determined by dividing net income for the period by the weighted average number of shares outstanding. Stock options are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent that they have a dilutive effect. Stock options are the only adjustment made to average shares outstanding in computing diluted earnings per share. Weighted average shares used in calculating earnings per share are summarized below for the periods indicated:
 
    
Three Months Ended September 30,
    
2002
   
2001
    
Income
(Numerator)
   
Shares
(Denominator)
   
Per-Share
Amount
   
Income (Numerator)
   
Shares
(Denominator)
   
Per-Share
Amount
    
(Dollars in thousands, except per share data)
Basic earnings per share:
                                      
Income available to common shareholders
   
$
20,551
   
23,230,667
   
$
.88
   
$
13,647
   
22,510,714
   
$
.61
    
       
  
       
Effect of dilutive securities:
                                      
Stock options
          
571,860
                 
546,677
       
           
                
      
Diluted earnings per share:
                                      
Income available to common shareholders plus assumed conversions
   
$
20,551
   
23,802,527
   
$
.86
   
$
13,647
   
23,057,391
   
$
.59
    
  
  
  
  
  

8

Table of Contents
 
    
Nine Months Ended September 30,
    
2002
   
2001
    
Income
(Numerator)
   
Shares
(Denominator)
   
Per-Share
Amount
   
Income (Numerator)
   
Shares
(Denominator)
   
Per-Share
Amount
    
(Dollars in thousands, except per share data)
Basic earnings per share:
                                      
Income available to common shareholders
   
$
53,381
   
23,133,356
   
$
2.31
   
$
41,605
   
22,704,994
   
$
1.83
    
       
  
       
Effect of dilutive securities:
                                      
Stock options
          
608,204
                 
507,495
       
           
                
      
Diluted earnings per share:
                                      
Income available to common shareholders plus assumed conversions
   
$
53,381
   
23,741,560
   
$
2.25
   
$
41,605
   
23,212,489
   
$
1.79
    
  
  
  
  
  
 
(3) Commitments and Contingencies
 
At September 30, 2002, the Bank had outstanding commitments to originate one-to-four family loans of $865.4 million, of which $494.8 million were fixed-rate loans and $370.6 million were adjustable-rate loans. Prospective borrowers had locked the interest rate on $374.8 million of these commitments, of which $243.1 million were fixed rate loans, with rates ranging from 4.63% to 8.25%, and $131.5 million were adjustable rate loans with rates ranging from 3.75% to 7.75%. The interest rates on the remaining commitments of $490.0 million float at current market rates. At September 30, 2002, outstanding forward commitments to sell loans were $290.5 million.
 
At September 30, 2002, the Bank had outstanding standby letters of credit totaling $15.7 million. Of this amount $13.3 million is comprised of letters of credit to enhance a developer’s industrial revenue bond financings of commercial real estate in the Bank’s market. These two letters of credit are collateralized by mortgage-backed securities and U.S. Government and agency securities owned by the Bank. Additionally, the Company had outstanding standby letters of credit totaling $3.6 million related to real estate development improvements.
 
(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 2001 amounts have been made to conform with the current period presentation.
 
(6) Segment Information
 
The Company utilizes the “management approach” for segment reporting. This approach is based on the way that a chief decision maker for the Company organizes segments for making operating decisions and assessing performance.

9

Table of Contents
 
The Company operates two separate lines of business. The Banking segment represents the retail bank, participating in primarily residential mortgage portfolio lending, deposit gathering and offering other financial services mainly to individuals and small businesses. Land development consists primarily of developing raw land for residential use and sale to builders. All goodwill has been allocated to the Banking segment. Selected segment information is included in the tables below:
 
    
At or For the Three Months Ended September 30, 2002
    
Banking
   
Land
Development
       
Eliminations
   
Consolidated
Total
    
(In thousands)
Interest income
   
$
82,966
   
—  
 
     
—  
   
82,966
Interest expense
   
 
41,991
   
35
 
     
—  
   
42,026
    
  
    
  
Net interest income
   
 
40,975
   
(35
)
     
—  
   
40,940
Non-interest income
   
 
12,863
   
3,791
 
     
—  
   
16,654
Non-interest expense
   
 
25,347
   
258
 
     
—  
   
25,605
    
  
    
  
Income before income taxes
   
 
28,491
   
3,498
 
     
—  
   
31,989
Income tax expense
   
 
10,050
   
1,388
 
     
—  
   
11,438
    
  
    
  
Net income
   
$
18,441
   
2,110
 
     
—  
   
20,551
    
  
    
  
Average assets
   
$
5,780,150
   
13,422
 
     
—  
   
5,793,572
    
  
    
  
 
    
At or For the Three Months Ended September 30, 2001
    
Banking
     
Land
Development
       
Eliminations
     
Consolidated
Total
    
(In thousands)
Interest income
   
$
85,306
     
—  
 
     
(5
)
   
85,301
Interest expense
   
 
52,973
     
42
 
     
(5
)
   
53,010
    
    
    
  
Net interest income
   
 
32,333
     
(42
)
     
—  
 
   
32,291
Non-interest income
   
 
9,293
     
799
 
     
—  
 
   
10,092
Non-interest expense
   
 
20,631
     
103
 
     
—  
 
   
20,734
    
    
    
  
Income before income taxes
   
 
20,995
     
654
 
     
—  
 
   
21,649
Income tax expense
   
 
7,743
     
259
 
     
—  
 
   
8,002
    
    
    
  
Net income
   
$
13,252
     
395
 
     
—  
 
   
13,647
    
    
    
  
Average assets
   
$
5,185,289
     
9,873
 
     
—  
 
   
5,195,162
    
    
    
  
 

10

Table of Contents
 
(6) Segment Information (continued)
 
    
At or For the Nine Months Ended September 30, 2002
    
Banking
   
Land Development
       
Eliminations
     
Consolidated Total
    
(In thousands)
Interest income
   
$
246,404
   
—  
 
     
—  
 
   
246,404
Interest expense
   
 
131,271
   
92
 
     
—  
 
   
131,363
    
  
    
  
Net interest income
   
 
115,133
   
(92
)
     
—  
 
   
115,041
Non-interest income
   
 
35,074
   
6,848
 
     
—  
 
   
41,922
Non-interest expense
   
 
72,865
   
933
 
     
—  
 
   
73,798
    
  
    
  
Income before income taxes
   
 
77,342
   
5,823
 
     
—  
 
   
83,165
Income tax expense
   
 
27,474
   
2,310
 
     
—  
 
   
29,784
    
  
    
  
Net income
   
$
49,868
   
3,513
 
     
—  
 
   
53,381
    
  
    
  
Average assets
   
$
5,659,063
   
14,346
 
     
—  
 
   
5,673,409
    
  
    
  
    
At or For the Nine Months Ended September 30, 2001
    
Banking
   
Land Development
       
Eliminations
     
Consolidated Total
    
(In thousands)
Interest income
   
$
262,379
   
—  
 
     
(24
)
   
262,355
Interest expense
   
 
165,587
   
152
 
     
(24
)
   
165,715
    
  
    
  
Net interest income
   
 
96,792
   
(152
)
     
—  
 
   
96,640
Non-interest income
   
 
24,983
   
5,469
 
     
—  
 
   
30,452
Non-interest expense
   
 
60,241
   
688
 
     
—  
 
   
60,929
    
  
    
  
Income before income taxes
   
 
61,534
   
4,629
 
     
—  
 
   
66,163
Income tax expense
   
 
22,722
   
1,836
 
     
—  
 
   
24,558
    
  
    
  
Net income
   
$
38,812
   
2,793
 
     
—  
 
   
41,605
    
  
    
  
Average assets
   
$
5,170,441
   
9,109
 
     
—  
 
   
5,179,550
    
  
    
  
 
(7) New Accounting Pronouncements
 
Amortization of Goodwill Under SFAS No. 141 and 142
 
In September 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Accounting Standards (“SFAS”) No. 141, “Business Combinations,” that eliminated the pooling of interests method of accounting for business combinations, with limited exceptions, for combinations initiated prior to July 1, 2001. In addition, it clarifies the criteria for recognition of intangible assets separately from goodwill. This statement is effective for business combinations completed after June 30, 2001. The Company followed this pronouncement in accounting for its acquisition of Mid Town Bancorp (“Mid Town”) in November 2001.
 
In September 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which discontinued the amortization of goodwill and indefinite lived intangible assets and initiated an annual review for impairment, unless more periodic reviews are warranted. Intangible assets with determinable useful lives will continue to be amortized. The Company completed its evaluation for impairment of goodwill during the six months ended June 30, 2002. An evaluation was completed as of January 1, 2002, as well as of May 31, 2002. No impairment was deemed necessary as a result of the Company’s analysis. The Company will evaluate goodwill for impairment at least annually. In October 2001, the FASB undertook a limited-scope

11

Table of Contents
 
project to reconsider part of the guidance in SFAS No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions.” In particular, the FASB decided to reconsider whether the acquisition of a branch is a business combination and if goodwill recorded in connection with a branch acquisition (“Statement 72 Goodwill”) should continue to be amortized. As of September 30, 2002, Statement 72 Goodwill was excluded from the scope of SFAS No. 142 and the Company has continued to amortize goodwill related to its branch acquisitions. The Company’s amortization of goodwill related to branch acquisitions amounted to $490,000 before tax for the nine month periods ended September 30, 2002 and 2001, and is included in the consolidated statements of income under the caption “amortization of goodwill.” The unamortized balance as of September 30, 2002 was $11.3 million. Subsequent to September 30, 2002, the FASB released SFAS No. 147, “Acquisitions of Certain Financial Institutions-an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9” which addresses the accounting for Statement 72 Goodwill in the future. The impact to the Company is explained later in this section.
 
The following is a summary of net income and earnings per share for the three and nine months ended September 30, 2002 compared to the comparable 2001 periods as adjusted to eliminate the amortization of goodwill for those periods that were no longer required to be amortized in the 2002 periods under SFAS 142:
 
    
Three Months Ended
September 30,
   
Nine Months Ended September 30,
    
2002
   
2001
   
2002
   
2001
    
(Dollars in thousands, except per share data)
Net income as reported
   
$20,551
   
13,647
   
53,381
   
41,605
Add back: goodwill amortization
   
—  
   
648
   
—  
   
1,944
    
  
  
  
Net income-adjusted
   
$20,551
   
14,295
   
53,381
   
43,549
    
  
  
  
Basic earnings per share of common stock:
                    
Net income-as reported
   
$      .88
   
.61
   
2.31
   
1.83
Goodwill amortization
   
—  
   
.03
   
—  
   
.09
    
  
  
  
Net income-adjusted
   
$      .88
   
.64
   
2.31
   
1.92
    
  
  
  
Diluted earnings per share of common stock:
                    
Net income-as reported
   
$      .86
   
.59
   
2.25
   
1.79
Goodwill amortization
   
—  
   
.03
   
—  
   
.08
    
  
  
  
Net income-adjusted
   
$      .86
   
.62
   
2.25
   
1.87
    
  
  
  
 
Amortization expense and net income of the Company for the three and nine months ended September 30, 2002 and 2001 are as follows:
 
    
Three Months Ended September 30,
   
Nine Months Ended September 30,
    
2002
   
2001
   
2002
   
2001
    
(Dollars in thousands)
Goodwill amortization on branch acquisitions (1)
   
$
164
   
163
   
490
   
489
Goodwill amortization
   
 
—  
   
648
   
—  
   
1,944
Core deposit intangible amortization
   
 
408
   
319
   
1,241
   
978
Net income
   
 
20,551
   
13,647
   
53,381
   
41,605
    
  
  
  
(1)
 
Goodwill amortization on branch acquisitions will be eliminated and restated as of January 1, 2002 upon adoption of SFAS 147 on October 1, 2002.

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Table of Contents
 
The changes in the carrying amount of goodwill, by segment, for the nine months ended September 30, 2002 are as follows:
 
    
Banking
       
Land Development
   
Total
  
    
(Dollars in thousands)
  
Balance as of December 31, 2001
   
$
96,851
 
     
—  
   
96,851
 
Amortization expense
   
 
(490
)
     
—  
   
(490
)
Adjustments related to Mid Town acquisition
   
 
(2,054
)
     
—  
   
(2,054
)
    
    
  
Balance at September 30, 2002
   
$
94,307
 
     
—  
   
94,307
 
    
    
  
 
The following is a summary of intangible assets subject to amortization:
 
    
As of September 30, 2002
     
As of December 31, 2001
  
    
Gross Carrying Amount
   
Accumulated Amortization
     
Gross Carrying Amount
   
Accumulated Amortization
  
    
(Dollars in thousands)
  
Core deposit intangibles
   
$
15,947
   
(8,369
)
   
15,947
   
(7,128
)
Mortgage servicing rights (1)
   
 
17,769
   
(2,433
)
   
13,309
   
(2,778
)
    
  
  
  
Total
   
$
33,716
   
(10,802
)
   
29,256
   
(9,906
)
    
  
  
  
(1)
 
Mortgage servicing rights are included in other assets in the consolidated statements of financial condition. The gross carrying amount for September 30, 2002 and December 31, 2001 does not include an impairment reserve of $2.7 million and $1.1 million respectively.
 
Amortization expense for core deposit intangibles and mortgage servicing rights for the nine months ended September 30, 2002 and estimates for the three months ended December 31, 2002 and five years thereafter are as follows. These estimates relate to the carrying value of the Bank’s core deposit intangibles and mortgage servicing rights as of September 30, 2002 which will continue to be amortized following adoption of SFAS 147.
 
    
Core Deposit Intangibles
   
Mortgage Servicing Rights
    
(Dollars in thousands)
Aggregate Amortization Expense:
            
For the Nine months ended September 30, 2002
   
$
1,241
   
4,141
Estimated Amortization Expense:
            
For the Three Months Ended December 31, 2002
   
 
408
   
1,600
For the Year Ended December 31, 2003
   
 
1,500
   
3,900
For the Year Ended December 31, 2004
   
 
1,400
   
3,000
For the Year Ended December 31, 2005
   
 
1,300
   
2,300
For the Year Ended December 31, 2006
   
 
900
   
1,900
For the Year Ended December 31, 2007
   
 
600
   
1,400
    
  
 
Other New Accounting Pronouncements
 
In September 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement addresses the financial accounting and reporting for obligations related to the retirement of tangible long-lived assets and the related asset retirement costs. The statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. Adoption of this statement is not expected to have a material effect on the Company’s consolidated financial statements.

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Table of Contents
 
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment and Disposal of Long-Term Assets.” This Statement supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” as well as the accounting and reporting of the Accounting Principles Board (APB) Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” This statement eliminates the allocation of goodwill to long-lived assets to be tested for impairment and details both a probability-weighted and “primary-asset” approach to estimate cash flows in testing for impairment of long-lived assets. The Company adopted SFAS No. 144 on January 1, 2002 and upon adoption, this pronouncement did not have a material impact on the Company’s consolidated financial statements.
 
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This Statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This Statement also rescinds SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers.” This Statement amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This Statement is effective for fiscal years beginning after May 15, 2002. Adoption of this statement is not expected to have a material effect on the Company’s consolidated financial statements.
 
In September 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This Statement is effective for exit or disposal activities that are initiated after December 31, 2002. Adoption of this statement is not expected to have a material effect on the Company’s consolidated financial statements.
 
In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions—an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9.” SFAS No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions,” and FASB Interpretation No. 9, “Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method,” provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, this Statement removes acquisitions of financial institutions from the scope of both SFAS No. 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of this Statement, including branch acquisitions. In addition, this Statement amends SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS No. 144 requires for other long-lived assets that are held and used. This statement is effective on October 1, 2002. Adoption of the statement requires restatement of earnings for each quarter since adoption of SFAS No. 142. The Company adopted SFAS No. 147 on October 1, 2002 and earnings for each of the first three quarters will be restated by approximately $163,000 pre-tax each to eliminate goodwill amortization on branch acquisitions. This restatement will add $.004 of diluted earnings per share to each of the first three quarters of 2002.

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Table of Contents
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary Statement Regarding Forward-Looking Information
 
This report, in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere, contains, and other periodic reports and press releases of the Company may contain, certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the 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. 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, unanticipated changes in interest rates, deteriorating economic conditions which could result in increased delinquencies in the Company’s loan portfolio, legislative or regulatory developments, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the Company’s loan or investment portfolios, demand for loan products, secondary mortgage market conditions, deposit flows, competition, demand for financial services and residential real estate in the Company’s market area, unanticipated slow downs 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 potential acquisitions, if any, and changes in accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
 
Overview
 
Set forth below are highlights of the Company’s third quarter performance results:
 
 
•
 
Diluted EPS of $.86, up 46% from the three months ended September 30, 2001;
 
 
•
 
Net interest margin of 3.01%, a 40 basis point increase from September 30, 2001;
 
 
•
 
Return on equity of 17.3% for the quarter;
 
 
•
 
Strong loan origination volume of $1.1 billion;
 
 
•
 
Deposit account service fees of $5.9 million, a 39% improvement on a year-over-year basis;
 
 
•
 
Loan sale volume of $262 million, generating loan sale gains of $3.9 million;
 
 
•
 
Strong real estate development income of $3.8 million, as the Company neared completion in one development and began development in its new Plainfield, Illinois project
 
Net income increased $6.9 million to $20.6 million in the third quarter of 2002 compared to the three months ended September 30, 2001. Variances in amounts reported in net income for the three months ended September 30, 2002 compared to the three months ended September 30, 2001 are partially attributable to the acquisition of Mid Town in November 2001. The elimination of goodwill amortization resulting from the implementation of SFAS No. 142 (adopted January 1, 2002) added $.03 to diluted earnings per share for the 2002 quarter. The improved margin is primarily attributable to a greater decline in the Bank’s average cost of funds compared to the decline on the yield in interest earning assets.
 

15

Table of Contents
 
General
 
MAF Bancorp, Inc. (“Company”), is a registered savings and loan holding company incorporated under the laws of the state of Delaware and is primarily engaged in the retail banking business through its wholly-owned subsidiary, Mid America Bank, fsb (“Bank”), and secondarily, in the land development business primarily through MAF Developments, Inc.
 
The Bank is a consumer-oriented financial institution offering various financial services to its customers through 34 retail banking offices. Over the last five years, the Bank has expanded its coverage of the greater Chicago Metropolitan area, now with 10 locations on the north and northwest side of Chicago, a strong presence in western Cook County and DuPage County, and increasing penetration of the rapidly-growing Will and Kane Counties, as well as two branches in the southwest suburbs of Chicago. It is principally engaged in the business of attracting deposits from the general public and using such deposits, along with other borrowings, to make loans secured by real estate, primarily one-to four-family residential loans. To a lesser extent, the Bank also makes multi-family mortgage, commercial, residential construction, land acquisition and development and a variety of consumer loans. In 2001, the Bank formed a commercial business lending unit to target lending and deposit relationships with small to medium sized business in its primary market areas. On November 30, 2001, the Company completed its acquisition of Mid Town Bancorp, which added four branches, $307 million of assets and $270 million in deposits to the Bank’s branch network. In February 2002, a new branch office was opened in Burr Ridge, Illinois and in September 2002, another branch was opened in St. Charles, Illinois, to fill gaps in existing markets. Management has current plans to open another four branches in the Chicago metropolitan area within the next year. The Company also participates in the following businesses through these designated subsidiaries:
 
Subsidiary
   
Activity
MAF Developments; NW Financial, Inc.
   
Residential land development
Mid America Insurance Agency, Inc.
   
General insurance services
Centre Point Title Services, Inc.
   
General title services for Bank loan customers
Mid America Investments Services, Inc.
   
INVEST affiliate investment services/brokerage
MAF Realty Co., LLC III; MAF Realty Co., LLC IV
   
Real estate investment trust
Mid America Re, Inc.
   
Captive reinsurance of private mortgage insurance
 
The Company acquired two wholly-owned subsidiaries of Mid Town at the time of the acquisition in 2001, Mid Town Development Corporation (“MTDC”) and Equitable Finance Corporation (“EFC”). MTDC’s primary activity was making mezzanine loans on commercial real estate properties that the Bank was making the first mortgage on. EFC’s primary activity was making various types of “sub-prime” loans, generally short-term unsecured personal loans. The Company does not intend to continue the activities of these two subsidiaries and will wind down their operations as the loans mature. At September 30, 2002, the balance of loans outstanding in MTDC and EFC was $775,000.
 
As it has in recent years, the Company expects to continue to search for and evaluate potential acquisition opportunities that could enhance franchise value and may periodically be presented with opportunities to acquire other institutions, branches or deposits in the Chicago metropolitan area, or which allow the Company to expand outside its current primary market areas. Management intends to review acquisition opportunities across a variety of parameters, including the potential impact on its financial condition as well as its financial performance in the future. It is anticipated that future acquisitions, if any, will likely be valued at a premium to book value, and generally at a premium to current market value. As such, management anticipates that acquisitions made by the Company could involve some short-term book value per share dilution and earnings per share dilution depending on the Company’s success in integrating the operations of businesses acquired and the level of cost savings and revenue enhancements that may be achieved.

16

Table of Contents
 
Regulation and Supervision
 
As a federally chartered savings bank, the Bank’s deposits are insured up to the applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is a member of the Federal Home Loan Bank (“FHLB”) of Chicago, which is one of the twelve regional banks for federally insured savings institutions comprising the FHLB system. The Bank is regulated by the Office of Thrift Supervision (“OTS”) and the FDIC. The Bank is further regulated by the Board of Governors of the Federal Reserve System as to reserves required to be maintained against deposits and certain other matters. Such regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities. Any change in such regulation, whether by the OTS, the FDIC or Congress could have a material impact on the Company and its operations.
 
  Capital Standards. Savings associations must meet three capital requirements: 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.
 
    Core Capital Requirement
 
The core capital requirement, or the required “leverage limit,” currently requires a savings institution to maintain core capital of not less than 3% of adjusted total assets. For the Bank, core capital generally includes common stockholders’ equity (including retained earnings), and minority interests in the equity accounts of fully consolidated subsidiaries, less intangibles other than certain servicing rights. Investments in and advances to subsidiaries engaged in activities not permissible for national banks are also required to be deducted in computing core capital.
 
    Tangible Capital Requirement
 
Under OTS regulation, savings institutions are required to meet a minimum tangible capital requirement of 1.5% of adjusted total assets. Tangible capital is defined as core capital less any intangible assets, plus purchased mortgage servicing rights in an amount includable in core capital.
 
    Risk-Based Capital Requirement
 
The risk-based capital requirement provides that savings institutions maintain total capital equal to and not less than 8% of total risk-weighted assets. For purposes of the risk-based capital computation, total capital is defined as core capital, as defined above, plus supplementary capital, primarily general loan loss reserves (limited to a maximum of 1.25% of total risk-weighted assets.) In computing total capital, the supplementary capital included cannot exceed 100% of core capital.
 

17

Table of Contents
 
At September 30, 2002, the Bank was in compliance with all of its capital requirements as follows:
 
    
September 30, 2002
     
December 31, 2001
  
    
Amount
   
Percent of Assets
     
Amount
   
Percent of Assets
  
    
(Dollars in thousands)
  
Stockholder’s equity of the Bank
   
$
479,668
   
8.16
%
   
$
462,707
   
8.32
%
    
  
  
  
Tangible capital
   
$
373,769
   
6.48
%
   
$
350,825
   
6.44
%
Tangible capital requirement
   
 
86,516
   
1.50
 
   
 
81,686
   
1.50
 
    
  
  
  
Excess
   
$
287,253
   
4.98
%
   
$
269,139
   
4.94
%
    
  
  
  
Core capital
   
$
373,769
   
6.48
%
   
$
350,825
   
6.44
%
Core capital requirement
   
 
173,032
   
3.00
 
   
 
163,372
   
3.00
 
    
  
  
  
Excess
   
$
200,737
   
3.48
%
   
$
187,453
   
3.44
%
    
  
  
  
Core and supplementary capital
   
$
386,932
   
11.32
%
   
$
364,365
   
11.31
%
Risk-based capital requirement
   
 
273,496
   
8.00
 
   
 
257,691
   
8.00
 
    
  
  
  
Excess
   
$
113,436
   
3.32
%
   
$
106,674
   
3.31
%
    
  
  
  
Total Bank assets
   
$
5,876,186
          
$
5,559,787
       
Adjusted total Bank assets
   
 
5,767,734
          
 
5,445,742
       
Total risk-weighted assets
   
 
3,527,150
          
 
3,335,188
       
Adjusted total risk-weighted assets
   
 
3,418,697
          
 
3,221,143
       
    
         
      
 
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, 2002
     
December 31, 2001
  
    
(In thousands)
  
Stockholder’s equity of the Bank
   
$
479,668
 
   
462,707
 
Goodwill
   
 
(94,307
)
   
(96,851
)
Core deposit intangibles
   
 
(7,578
)
   
(8,819
)
Non-permissible subsidiary deduction
   
 
(208
)
   
(2,055
)
Non-includable mortgage servicing rights
   
 
(1,261
)
   
(1,052
)
Regulatory capital adjustment for available for sale securities
   
 
(2,545
)
   
(3,105
)
    
  
Tangible and core capital
   
 
373,769
 
   
350,825
 
Recourse on loan sales
   
 
(6,131
)
   
(5,901
)
General loan loss reserves
   
 
19,294
 
   
19,441
 
    
  
Core and supplementary capital
   
$
386,932
 
   
364,365
 
    
  

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Changes in Financial Condition
 
Total assets of the Company were $5.90 billion at September 30, 2002, an increase of $307.5 million, or 5.5% from $5.60 billion at December 31, 2001. The increase is due to increases in mortgage-backed securities and loans receivable, funded by an increase in deposit balances and FHLB borrowings.
 
Cash and short-term investments totaled a combined $220.6 million at September 30, 2002, a decrease of $4.0 million, or 1.8%, from the combined balance of $224.7 million at December 31, 2001.
 
Investment securities available for sale decreased $18.3 million to $337.1 million at September 30, 2002. The decrease reflects maturities and calls of $84.9 million, sales of corporate debt, equity and trust preferred securities totaling $36.2 million, as well as approximately $5.3 million of market decline, offset by $109.3 million in purchases of corporate debt, government agency and trust preferred securities. The Company recognized a gain of $3.0 million on the sale of investment securities available for sale during the nine months ended September 30, 2002, primarily attributable to gains on corporate debt securities, and to a lesser extent, equity securities.
 
Mortgage-backed securities available for sale increased $141.0 million to $283.2 million at September 30, 2002. The increase in CMOs is primarily a result of the reinvestment of loan sale and loan prepayment proceeds during the current nine months as well as approximately $5.3 million of market value increases. The Company purchased $185.4 million of Collaterized Mortgage Obligations (“CMOs”) and mortgage-backed securities, and in addition to normal amortization and prepayments in the portfolio, sold $14.8 million of CMO securities, at a gain of $39,000, during the nine months ended September 30, 2002. Included in mortgage-backed securities classified as available for sale at September 30, 2002, are $217.5 million of CMO securities, the majority of which are collateralized by FNMA, FHLMC and GNMA mortgage-backed securities, and to a lesser extent by whole loans.
 
Loans receivable, including loans held for sale, increased a net $140.0 million from December 31, 2001, or 3.1%, to $4.59 billion at September 30, 2002, while the Bank’s loans held for sale decreased 17.5% from $161.1 million to $132.9 million. The Bank originated $2.50 billion of loans during the nine-month period ended September 30, 2002, compared to $1.87 billion during the prior year period. The higher loan origination volume was primarily due to continued mortgage refinance activity, including loan modifications, as interest rates have decreased in 2002 to historical lows. The amortization and prepayments of loans during 2002 year to date has totaled $1.51 billion, and the Company has sold $838.3 million of loans. Despite higher loan origination volume for the period, loans held for sale decreased from December 31, 2001 to September 30, 2002 due to a decline in fixed-rate originations, which the Bank generally sells into the secondary market.
 
The allowance for loan losses totaled $19.5 million at September 30, 2002. The Bank’s allowance for loan losses to total loans outstanding was .42% at September 30, 2002, compared to .45% at December 31, 2001. Non-performing loans increased $9.6 million to $29.1 million, or .65% of total loans receivable at September 30, 2002, compared to $19.5 million, or .45% of total loans receivable at December 31, 2001. See “Asset Quality” in this section for a discussion regarding non-performing assets.
 
In determining the allowance for loan losses and the related provision for loan losses, management considers: (1) subjective factors, including local and general economic business factors and trends, portfolio concentrations and changes in the size and/or general terms of the loan portfolio, (2) historical loss experience which has ranged from 1 to 14 basis points as a percentage of outstanding loans over the last five years, (3) specific allocations based upon probable losses identified during the review of the portfolio, and (4) delinquency in the portfolio and the composition of non-performing loans including the percent of non-performing loans with supplemental mortgage insurance. Based on management’s assessment of the adequacy of the loan loss reserve as of September 30, 2002, as well as the composition of the loan portfolio and non-performing loans, good historical loss experience, and the low level of non-performing loans, management believes the allowance for loan losses is adequate to provide for losses inherent in the portfolio at September 30, 2002.

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Foreclosed real estate decreased $931,000 to $474,000 at September 30, 2002. The Bank’s foreclosed real estate at September 30, 2002 consisted of four single-family homes.
 
Real estate held for development or sale decreased $2.2 million to $10.8 million at September 30, 2002 primarily due to continued sales in the Tallgrass of Naperville project. A summary of the carrying value of real estate held for development or sale follows:
 
    
September 30, 2002
   
December 31, 2001
    
(In thousands)
Tallgrass of Naperville
   
$
5,767
   
8,498
Shenandoah
   
 
5,067
   
4,495
    
  
    
$
10,834
   
12,993
    
  
 
The Company closed 104 lot sales in Tallgrass of Naperville during the nine months ended September 30, 2002. At September 30, 2002, 65 lots remain in Tallgrass, with 14 under contract. Additionally, the project has 19.3 acres available for townhomes and 12.8 acres of commercially zoned land expected to be sold, in bulk, to developers. The Company currently expects to close on half of the townhome acreage in the fourth quarter of 2002, at an estimated profit of $2.0 million. The Shenandoah project is a 326-lot development located in Plainfield, Illinois. The Company is currently developing the first unit of this project. The increase in balance is due to engineering fees and excavating costs related to the project. At September 30, 2002, 75 lots in the Shenandoah project were under contract and sales are expected to be closing in early 2003.
 
At September 30, 2002, MAFD had multiple real estate purchase contracts pending that relate to the acquisition of approximately 780 acres of vacant land in a far western suburb of Chicago. The aggregate purchase price of these contracts is $28.4 million. The contracts contain various contingencies, including satisfactory soil tests, environmental testing, and necessary zoning approvals, and provide for the takedown of the land in staggered closings over a four-year period. The proposed development is in its early planning stages and may entail the acquisition of additional land in the future. The Company is actively pursuing and expects to receive the required zoning and desired plat with the local planning commission to develop this project with its joint venture partner. Assuming the Company proceeds with this project, based on the existing purchase contracts, current estimated total development costs (including land acquisition) are approximately $68 million. The project will include single-family residential lots, multi-family and commercial parcels, along with various other amenities and is expected to be developed in a number of phases over an eight-year period.
 
Goodwill decreased $2.5 million to $94.3 million at September 30, 2002. At September 30, 2002, the Company had $83.1 million of goodwill accounted for under SFAS No. 142, where amortization expense is no longer recognized and $11.3 million of goodwill still subject to amortization expense under SFAS No. 72 (See Note 7, “New Accounting Pronouncements.”) The decrease is due to $2.1 million of purchase accounting adjustments related to the Mid Town acquisition, and amortization of $490,000 related to the Bank’s goodwill accounted for under SFAS No. 72. Upon adoption of SFAS No. 147, in the fourth quarter, the Company expects to retroactively reverse the $490,000 of amortization expense recognized in 2002.
 
Deposits increased $139.3 million, to $3.70 billion at September 30, 2002. The increase is primarily due to a $205.7 million increase in core deposit accounts offset by a $71.3 million decrease in certificates of deposit. At September 30, 2002, the Bank’s core deposits (passbooks, checking and money market accounts) comprise $2.05 billion or 55.5% of deposits, compared to $1.80 billion, or 51.8% of deposits at December 31, 2001. After consideration of interest of $67.1 million credited to accounts during the nine months ended September 30, 2002, actual cash inflows were $72.5 million. The decrease in certificates of deposit is a result of aggressive pricing by competitors in the declining rate environment that the Bank decided not to match due to the availability of less expensive alternative sources of funding.

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Borrowed funds, which consist primarily of FHLB of Chicago advances, were $1.59 billion at September 30, 2002 and $1.47 billion at December 31, 2001. During the nine months ended September 30, 2002, $280.0 million of advances matured and these funds were replaced by $380.0 million of lower rate intermediate term, fixed-rate FHLB of Chicago advances, and $30.0 million of adjustable-rate advances as the Bank extends duration of its funding. In addition, $10.0 million previously drawn on the Company’s revolving line of credit was repaid during the nine months ended September 30, 2002. Borrowings at September 30, 2002 also include $55.0 million outstanding on the Company’s unsecured bank term loan.
 
Stockholders’ equity increased $46.3 million, or 10.6% at September 30, 2002, primarily due to net income of $53.4 million, $4.2 million from the exercise of stock options, reduced by cash dividends declared of $10.4 million and a $881,000 decrease in accumulated other comprehensive income. Other comprehensive income is an after-tax adjustment to stockholders’ equity for market value adjustments on available for sale securities. The decrease in accumulated other comprehensive income is primarily due to market value adjustments on three floating rate debt securities having an aggregate carrying value of $27.7 million and an estimated fair value of $22.0 million at September 30, 2002, offset by realized securities gains during the nine months ended September 30, 2002. The securities, one of which matures in the fourth quarter of 2002, are currently investment grade, although have each been subject to downgrades due to credit concerns related to the slow economy. Two of the securities are collateralized by various airline industry assets and the third is a collateralized bond obligation secured by various less than investment grade high yield securities. The market values of these securities are being negatively impacted by the difficulties in the airline industry and high yield market and the dramatic widening of corporate bond spreads. At the current time, management does not believe that any of the three investments are other than temporarily impaired, due to facts and circumstances surrounding each individual investment.
 
Asset Quality
 
Non-Performing Assets. A loan (whether considered impaired or not) is classified as non-accrual when collectibility is in doubt. Generally, when a loan is 90 days or more past due, in the process of foreclosure, or in bankruptcy, the full amount of previously accrued but unpaid interest is deducted from interest income. Income is subsequently recorded to the extent cash payments are received, or at the time when the loan is brought current in accordance with its original terms. This policy is applied consistently for all types of loans in the Bank’s loan portfolio.
 
For the quarter ended September 30, 2002, interest on non-accrual loans that would have been recorded as income, had they been performing according to their original terms, amounted to $398,000, compared to $337,000 for the three months ended September 30, 2001. For the nine months ended September 30, 2002, interest on non-accrual loans that would have been recorded as income, had they been performing according to their original terms, amounted to $1.0 million compared to $812,000 for the nine months ended September 30, 2001.
 
Non-performing assets increased $8.7 million to $29.6 million at September 30, 2002, from $20.9 million at December 31, 2001, primarily due to a $3.6 million increase in one-to-four family and multi-family loans as well as one commercial real estate loan and a secured line of credit to the same borrower aggregating $4.2 million. These two loans were placed on non-accrual status as of March 2002 due to the borrower being in violation of certain loan covenants. The borrower has entered into a sales contract for the sale of the underlying collateral at a price significantly in excess of the Bank’s loan balance and the Bank anticipates being repaid in full on both loans in the fourth quarter.
 
Classified Assets. The federal regulators have adopted a classification system for problem assets of insured institutions which covers all problem assets and requires certain reserves. Under this classification system, problem assets of insured institutions are classified as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or the value of the collateral pledged, if any. “Substandard” assets include those characterized by the

21

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“distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.
 
In connection with the filing of its periodic reports with the OTS, the Bank regularly reviews the problem loans in its portfolio to determine whether any loans require classification in accordance with applicable regulations. At September 30, 2002, all of the Bank’s non-performing loans were classified as substandard. In addition, the Bank has classified six loans to two different borrowers aggregating $2.6 million of commercial real estate and land development loans as substandard for regulatory reporting purposes. These loans are performing in accordance with the terms of the loan agreement and adequately secured by the underlying collateral.
 
At September 30, 2002, 90% of the Company’s loan portfolio consisted of loans secured by one-to-four family residential properties, including 9% relating to home equity loans and equity lines of credit. A total of 76% of non-performing assets consisted of loans secured by one-to-four family residential properties and on one-to-four family foreclosed real estate. At September 30, 2002, 56% of the one-to-four family non-performing loans carried private mortgage insurance or government guarantees. The average loan-to-value ratio on the one-to-four family non-performing loans without supplemental mortgage insurance was 70%. The ratio of the allowance for loan losses to non-performing loans was 66.9% at September 30, 2002 compared to 100.8% at December 31, 2001, and 102.6% at September 30, 2001.
 
Delinquent Loans. Delinquencies in the Bank’s portfolio at the dates indicated were as follows: