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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.
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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
======== ========= ========= ======== ========= =========
- ------------------------
(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.
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
========== ========== ========== ==========
- -------------------
(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.
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
======== ========= ========= =========
- ------------------------
(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.
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