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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
COMMISSION FILE NUMBER 0-18121
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MAF BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3664868
(State of Incorporation) (IRS Employer Identification No.)
55TH STREET & HOLMES AVENUE, CLARENDON HILLS, ILLINOIS 60514-1500
TELEPHONE NUMBER (630) 325-7300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
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 check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes [X] No [ ]
Based upon the closing price of the registrant's common stock as of June 30,
2004, the aggregate market value of the voting stock held by non affiliates of
the registrant was $1.3 billion.*
The number of shares of Common Stock outstanding as of March 11,
2005: 32,704,225
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DOCUMENTS INCORPORATED BY REFERENCE
PART III - Portions of the Proxy Statement for the Annual Meeting of
Shareholders to be held on April 27, 2005 are incorporated by reference into
Part III hereof.
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*Solely for purposes of this calculation, all executive officers and directors
of the registrant are considered to be affiliates. Except to the extent shares
have been allocated to the plan accounts of directors and executive officers,
the affiliate holdings do not include shares held in certain employee benefit
plans administered by plan committees that include executive officers.
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MAF BANCORP, INC. AND SUBSIDIARIES
FORM 10-K
PAGE
PART I
ITEM 1. BUSINESS ...............................................................................................1
ITEM 2. PROPERTIES ............................................................................................28
ITEM 3. LEGAL PROCEEDINGS .....................................................................................28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................................................28
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES .....................................................28
ITEM 6. SELECTED FINANCIAL DATA ...............................................................................29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .............................................................................31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............................................45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...........................................................49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES .............................................................................85
ITEM 9A. CONTROLS AND PROCEDURES ...............................................................................85
ITEM 9B. OTHER INFORMATION. ....................................................................................85
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ....................................................85
ITEM 11. EXECUTIVE COMPENSATION ................................................................................86
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS .......................................................................86
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................................................86
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ................................................................86
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES ...........................................................87
SIGNATURES ..........................................................................................................91
i
PART I
ITEM 1. BUSINESS
GENERAL
MAF Bancorp, Inc. was incorporated under the laws of the state of Delaware
in 1989, as the holding company for Mid America Bank, fsb ("Bank"), our banking
subsidiary. The Bank, which was organized as a mutual savings and loan
association and has been operating in the Chicago area since 1922, formed the
holding company in connection with its conversion from a mutual to stock savings
institution. Over the last ten years, the Bank has grown from 14 branches and
$1.65 billion in total assets at December 31, 1994 to 72 branches and $9.68
billion in assets at December 31, 2004. Today, the Bank is one of the largest
community-oriented financial institutions in the Chicago and Milwaukee
metropolitan areas and serves both retail and business banking customers. We
also engage in residential real estate land development through our subsidiary,
MAF Developments, Inc. ("MAFD"), a business we started at the Bank in 1974.
The Company's executive offices are located at 55th Street and Holmes
Avenue, Clarendon Hills, Illinois 60514-1500. The Company's telephone number is
(630) 325-7300.
In Illinois, the Bank now operates 49 branches located in residential
neighborhoods in the City of Chicago and throughout suburban communities in the
Chicago metropolitan area. We have significant market penetration in northwest
Chicago and west and southwest suburban areas of Cook, DuPage, Will and Kane
counties. In Wisconsin, the Bank serves communities in the Milwaukee area
through 23 retail branches under the name of St. Francis Bank, a division of Mid
America Bank, fsb. All of our locations are full-service branches, many of which
offer customers the convenience of drive-up facilities.
We have grown our franchise through de novo branching, acquisitions of
other financial institutions and branch acquisitions. We have completed four
acquisitions since November 2001, including two in 2003 -- Fidelity Bancorp,
Inc. and St. Francis Capital Corporation -- and Chesterfield Financial Corp.
late in 2004. The table below provides information regarding these acquisitions:
TOTAL
NUMBER OF ACQUISITION ASSETS AT
ACQUIRED COMPANY BRANCHES MARKET AREA DATE CLOSING
- --------------------------- --------- --------------- --------------- -------------
Chesterfield Financial Corp... 3 Chicago, IL October 2004 $ 354,221
St. Francis Capital Corp...... 23 Milwaukee, WI December 2003 2,190,627
Fidelity Bancorp.............. 4 Chicago, IL July 2003 612,869
Mid Town Bancorp.............. 4 Chicago, IL November 2001 307,469
We intend to continue to pursue acquisition opportunities to strengthen our
market share in the greater Chicago and Milwaukee metropolitan areas and may
consider selective acquisitions that present strategic growth opportunities in
other attractive markets in the Midwest.
We also purchased one branch office in 2003 (with deposits of $8.5 million)
and have opened nine de novo offices in the past three years: two in 2002, four
in 2003, and three in 2004. Our selective branching strategy is to seek out
attractive locations, generally either in high traffic grocery store anchored
retail centers or at intersections with convenient drive-in access, in
communities where we believe we have opportunity to gain deposit market share
through a new facility. We tend to target areas that we believe are not yet
fully served by other banking organizations and offer an attractive deposit base
or potential growth. We have plans underway to open four additional branches
over the next 12 months or so, including two in Chicago, one in Downers Grove,
Illinois, a west suburb of Chicago, and one in Pewaukee, Wisconsin, a
fast-growing community west of Milwaukee.
As we have grown over the past four years, we have successfully
transitioned our business from a traditional savings and loan engaged primarily
in one- to four-family residential mortgage lending to a more diversified
consumer and business bank, retaining our emphasis on community-oriented,
responsive customer service. We offer a wide variety of checking, savings and
other deposit accounts as well as investment services and securities brokerage,
general insurance services and other financial services targeted to individuals,
families and small- to medium-sized businesses in our primary market areas. With
a consistent focus on growth in core deposits in our deposit gathering strategy,
we have succeeded in shifting our deposit mix to a higher concentration of lower
cost deposits such as checking and money market accounts with less emphasis on
certificates of deposit. We expect this trend to continue as we
1
continue to build our business banking unit and work to attract higher levels of
commercial deposits. At December 31, 2004, core deposits (checking, passbook and
money market accounts) comprised 60% of our total deposits, while retail
certificates of deposits accounted for 40% of the total.
Our lending strategy focuses primarily on loans secured by real estate in
our market areas. We originate residential one- to four-family mortgage loans,
home equity loans, and equity lines of credit for our portfolio and for sale
into the secondary market. We also target multi-family mortgage and residential
construction loans and, through our Business Banking unit that we started in
2001, commercial real estate, land development and commercial loans. We expect
these higher-yielding business lending categories to comprise a larger portion
of our loan portfolio as we continue to grow. The acquisitions of Mid Town,
Fidelity and St. Francis contributed significantly to the change in our asset
mix, increasing our multi-family mortgages, home equity loans and commercial
real estate and business loans and reducing the concentration of one- to
four-family mortgage loans in our total loan portfolio. At December 31, 2004,
58% of total loans were comprised of one- to four-family mortgages compared to
88% in 2000.
For segment information regarding the Company's two lines of business
(banking and land development), see "Note 18. Segment Information" to the
audited consolidated financial statements of the Company included in "Item 8.
Financial Statements and Supplementary Data."
COMPETITION
We face increasing competition for retail and business banking customers
and deposit accounts and loan originations. Several national financial
institutions have been pursuing aggressive de novo branching plans that have
heightened competitive pressures in the Company's market areas, particularly in
the Chicago area. Competition for deposit accounts comes primarily from other
banks, credit unions, money market mutual funds, and insurance companies
(primarily in the form of annuity products). We compete for both retail and
business banking customers on the basis of interest rates offered, pricing of
fees and services, convenience of branch locations, access to ATMs, ability to
access services through multiple distribution channels and office hours.
Competition for residential loan products comes primarily from local and
national mortgage brokers, other banking institutions and mortgage banking
companies. In Business Banking, we primarily compete for loans with commercial
lenders at local small and mid-sized banking organizations. Competitive factors
for loans include interest rates, terms, fees and customer service.
LENDING ACTIVITIES
We work with customers and business clients to provide a wide range of
lending products designed to meet their individual requirements, while adhering
to our internal underwriting standards that have allowed us to maintain strong
credit quality and minimize credit losses historically.
RESIDENTIAL LENDING. We have been and continue to be one of the largest
originators of residential mortgages in our market area. We typically sell a
significant portion of our one- to four-family mortgage production into the
secondary market. We have worked to develop a broader base of investors to
include not only Federal National Mortgage Association ("Fannie Mae"), Federal
Home Loan Mortgage Corporation ("Freddie Mac") and the Federal Home Loan Bank
Mortgage Partnership Program ("MPF"), but also commercial and investment banks,
as well as other private investors to provide outlets for most of our products,
including non-conforming and adjustable-rate loans.
We offer a variety of fixed-rate mortgage loans with amortization terms
ranging from 10 to 30 years. We generally set our interest rates on fixed-rate
loans daily based on secondary market prices and market conditions. It is our
policy to sell almost all of our 30- and 20-year and a large portion of our
15-year fixed-rate loan originations to manage our interest rate risk exposure,
but we usually retain the serving rights on the loans we sell. At December 31,
2004, we had approximately $1.04 billion of fixed-rate one- to four-family
mortgage loans in our loan portfolio. These consisted of $159.2 million of
30-year mortgages, $18.0 million of 20-year mortgages and $297.2 million of
15-year mortgages. The remaining $565.5 million includes 10-year mortgages and
seven year balloon mortgages, which we typically keep in portfolio.
We also offer a variety of ARM loans with 30- and 40-year amortization
terms that have initial rates which are fixed for a period of one to seven
years, with annual adjustments (and periodic and lifetime caps) thereafter. At
December 31, 2004, $2.98 billion, or 74% of our one- to four-family portfolio
were adjustable rate loans, including $1.36 billion of 3/1 ARMs and $1.45
billion of 5/1 ARMs. During
2
2004, we began to offer ARM loans with interest-only features, meaning they
require no principal amortization. We generally price our ARM loans to the
secondary market prices, but may more aggressively price from time to time to
provide growth in our loan portfolio. Despite the benefits of ARM loans,
particularly those with shorter initial fixed-rate periods, for asset/liability
management purposes, they do pose potential additional risks, primarily because
as interest rates rise, the underlying payment requirements of the borrower
rise, thereby increasing the potential risk of default.
We attract most of our residential mortgage loan customers through
commissioned loan officers and cross-selling to banking customers, although we
use loan-by-phone and the Internet to attract a small but increasing volume of
our business. Our underwriting for residential loans generally conforms with
secondary market standards to maintain high credit quality, and limit our
liquidity risk related to selling or securitizing our originations.
We generally require a customer to obtain private mortgage insurance (PMI)
for loans with loan-to-value ratios in excess of 80%, or we may choose to
self-insure based on FICO score or obtain lender paid private mortgage insurance
and charge the customer a higher interest rate to compensate for the greater
risk of these loans. The Bank has a mortgage reinsurance subsidiary that shares
in a portion of the insurance premiums earned by various private mortgage
insurance companies on loans originated by the Bank, in return for assuming a
second-tier layer of risk on insured portions of these loans. For the year ended
December 31, 2004, 2003 and 2002, this activity generated pre-tax income of $2.7
million, $2.0 million and $906,000, respectively. At December 31, 2004, we had
$425 million of one- to four-family loans, or 11% of total one- to four-family
mortgage loans, with greater than 80% LTV without PMI.
An important part of our business strategy is our commitment to community
lending initiatives. We offer various innovative and flexible home mortgage
products and participate in or actively support many special lending programs
designed to promote affordable homeownership and address the needs of
underserved communities in the markets we serve. In February 2003 we set an
aggressive community lending target of $3 billion of loan volume for our CRA
assessment area in Chicago and surrounding areas over a six-year period. To
date, we have fulfilled $1.7 billion of that goal. In conjunction with our
acquisition of St. Francis, we announced a community lending goal of $500
million in loans over a five-year period to Milwaukee area communities and
neighborhoods and have achieved approximately $50 million of that goal to date.
These programs include single and multi-family home mortgage loans in
low-to-moderate income census tracts, loans in predominantly minority
communities, and loans to borrowers whose income is below 80% of median income.
Many loans we make in our community lending programs tend to have higher
loan-to-value ratios.
HOME EQUITY LENDING. Our consumer lending is primarily focused on home
equity loans and equity lines of credit. In 2000, we made a strategic decision
to expand our level of equity line activity in an effort to capitalize on our
penetration of residential lending production in our primary market areas and to
reduce interest rate risk exposure, as home equity loans are variable rate
products generally tied to the prime rate. We have also recently begun to
originate home equity lines through wholesale broker arrangements. Our growth
opportunities with this product stem from steady to strong growth in real estate
values in our markets in recent years. At December 31, 2004, we had $1.28
billion of amounts outstanding under home equity lines of credit compared to
$898.5 million at December 31, 2003. At December 31, 2004, the average
utilization rate on our equity line portfolio was 55.8% compared to 52.0% at
December 31, 2003. We underwrite our home equity loans in a similar fashion to
our residential production, by looking at our customer's ability to repay the
loan, including FICO score, and by the combined loan-to-value ratio of the loan
taking into account any first mortgage loan. We do not make home equity loans
where the combined loan-to-value ratio exceeds 100%. We use a tiered pricing
schedule that uses a combination of a customer's FICO score and combined
loan-to-value ratios to determine the rate on an equity line of credit.
We are generally required to maintain higher capital levels to support home
equity lines of credit than for residential mortgages and must take into account
the entire approved amount of the equity line, not just the amount drawn at any
given time.
COMMERCIAL REAL ESTATE. We lend on various commercial properties, including
small office buildings, warehouses, industrial/manufacturing buildings, land
acquisition and development, and other improved non-residential properties.
Because payments on loans secured by commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. The Bank
3
seeks to minimize these risks by lending primarily on owner-occupied or existing
income-producing properties and generally restricts such loans to properties in
our market areas.
Commercial real estate loans tend to be much larger than our average
residential loan, and involve a greater degree of risk than residential mortgage
loans with respect to the determination of the market value of the collateral
and the nature of underlying cash flow assumptions. Our underwriting of
commercial real estate loans is a robust process and is less homogeneous than
generally found in our residential loan unit. We use outside appraisers with
pertinent expertise for the underwriting of our commercial real estate
properties. Our credit analysis also includes a review of the property's ability
to service debt, the capacity of the borrower to generate income elsewhere and
where applicable, the strength of any personal guarantor(s). We generally seek a
net operating income to debt service ratio of 1.15 times, exclusive of other
outside income. In instances where the coverage ratio is lower, we will tend to
charge a higher rate of interest to compensate us for the increased level of
risk.
CONSTRUCTION AND LAND LENDING. Our construction and land lending are both
focused on one- to four-family residences, and are primarily originated in our
market areas. This lending focuses on planned construction of owner occupied
properties where qualified contractors are involved, and loans are structured to
be converted to permanent loans at the end of the construction phase, or repaid.
Our construction loans tend to be adjustable-rate, with interest only
requirements during the construction phase. The maximum loan-to-value during
construction is generally limited to 80% LTV. Loan proceeds are disbursed in
increments as construction progresses, inspections are completed and lien
waivers obtained.
Our land lending includes loans to developers for the development of
residential subdivisions in our market area, as well as loans to builders and
individuals. At December 31, 2004, loans to developers aggregated $15.1 million,
or 23.3% of our land loans. These loans carry terms of three to five years.
Under Bank policy, the loan-to-value ratio may not exceed 80% and is generally
less than 75%. The majority of these loans are floating rate based on the prime
rate or LIBOR. Loans generally are made to existing customers of the Bank and
developers with whom the Bank has had long standing relationships. The Bank
requires an independent appraisal of the property and feasibility studies may be
required to determine the profit potential of the development project.
Construction and land development loans involve higher risks than
residential mortgages because loan funds are advanced upon the security of the
project under construction, which is of uncertain value prior to its completion.
Because of the uncertainties inherent in estimating construction costs as well
as the market value of the completed project and the effects of local
governmental regulation of real property, it is relatively difficult to evaluate
accurately the total funds required to complete a project and the related
loan-to-value ratio. Construction and land development lending often involves
the disbursement of substantial funds with repayment dependent, in part, on the
success of the ultimate project rather than the ability of the borrower or
guarantor to repay principal and interest. If the Bank is forced to foreclose on
a project prior to or at completion due to a default, there can be no assurance
that the Bank will be able to recover all of the unpaid balance of, and accrued
interest on, the loan as well as related foreclosure and holding costs. In
addition, the Bank may be required to fund additional amounts to complete the
project and may have to hold the property for an unspecified period of time. The
Bank has attempted to address these risks through its underwriting procedures
and its limited amount of construction lending on multi-family and commercial
real estate properties.
COMMERCIAL BUSINESS LENDING. The Bank originates a variety of commercial
loans, including working capital financing, equipment loans, real estate loans
and selected personal loans for executives, professionals and entrepreneurs.
Collateral can take many forms, such as real estate, business or personal
assets, or in some cases loans may be unsecured. Typically, we target small-to
medium-sized, privately held businesses in our primary market areas and seek to
establish full service commercial loan and deposit relationships. We are seeking
to grow our commercial lending portfolio, as management believes this type of
lending can provide higher yield opportunities than residential loans and is an
important component in helping to maintain a balanced loan portfolio.
Commercial loans can contain risk factors unique to the business of each
borrower. In order to mitigate these risks, we seek to gain an understanding of
the business of each borrower, place appropriate value on collateral taken and
structure the loan properly to make sure that collateral values are maintained
while loans are outstanding. Appropriate documentation of commercial loans is
also important to protect our interests. Our credit approval process for
commercial loans is comprehensive.
4
Our underwriting process includes an evaluation of the borrower's historical and
projected balance sheet, income statement, liquidity and cash flow as well as
the strength of the collateral to determine the level of creditworthiness of the
borrower. We typically review the current and future cash needs of the borrower,
the business strategy, management's ability to execute the strategies, and the
strength of the guarantors. While our loan policy has guidelines for advances on
different types of collateral, we establish eligible asset values on a
case-by-case basis for each borrower. Generally, commercial business loans are
secured by a first priority security interest in all the assets of the borrower
and also include the personal guarantees of business owners. Additionally, the
Bank may provide letter of credit services to certain borrowers on a
case-by-case basis.
MULTI-FAMILY LENDING. The Bank originates multi-family residential mortgage
loans in its market areas. At December 31, 2004, the Bank had multi-family loans
of $647.4 million, including a portfolio of purchased participating interests of
$3.7 million related to low-income housing. Multi-family loans represent 9.4% of
total loans receivable at December 31, 2004. Multi-family residential mortgage
loans are generally ARM loans with interest rates with initial fixed rate terms
of three to ten years, amortization periods of up to 25 years and balloon
maturity dates of five to ten years and carry a loan-to-value ratio not greater
than 80%. The Bank generally requires a net operating income to debt service
ratio of at least 1.0 times.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Bank's loan portfolio by loan type at the dates indicated. The table
reflects the change in the loan portfolio mix resulting from the increased
emphasis on equity lines of credit since 2000, the formation of a Business
Banking unit in 2001, and the impact from acquisitions that closed in 2003.
These acquisitions quickened the pace of loan diversification away from one- to
four-family mortgage loans that started in 2000.
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------- ------------------- ------------------- ------------------- -------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF AMOUNT OF OF OF OF
AMOUNT TOTAL TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
(Dollars in thousands)
One- to four-family.... $4,024,322 58.38% $3,924,965 61.31% $3,470,937 78.70% $3,559,466 82.33% $3,807,980 88.33%
Equity lines of
credit............... 1,276,647 18.52 898,452 14.03 387,025 8.78 258,884 5.99 146,020 3.39
Home equity loans...... 55,136 .80 67,119 1.05 32,120 .73 52,216 1.21 64,465 1.49
Multi-family........... 647,382 9.40 621,255 9.70 260,318 5.90 197,685 4.57 173,072 4.01
Commercial real
estate............... 505,214 7.33 521,438 8.14 142,493 3.23 140,128 3.24 41,223 .96
Construction........... 164,995 2.39 127,525 2.00 48,179 1.09 43,756 1.01 29,566 .69
Land................... 64,765 .94 75,012 1.17 42,530 .96 44,494 1.0 40,497 .94
Consumer............... 7,650 .11 38,238 .60 6,255 .14 7,975 .19 4,783 .11
Commercial
business loans....... 147,345 2.13 128,266 2.00 20,592 .47 18,596 .43 3,528 .08
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total loans
receivable........ 6,893,456 100.00% 6,402,270 100.00% 4,410,449 100.00% 4,323,200 100.00% 4,311,134 100.00%
====== ====== ====== ====== ======
Less:
Loans in process 34,143 59,733 30,689 21,678 12,912
Unearned discounts,
premiums and
deferred
loan fees,
net............. (19,201) (16,614) (2,875) (4,555) (7,076)
--------- --------- --------- --------- ---------
Loans receivable,
net................ $6,878,514 6,359,151 4,382,635 4,306,077 4,305,298
========= ========= ========= ========= =========
5
The following table shows the breakdown of fixed-rate and adjustable-rate
loans for certain loan categories as of the dates indicated.
DECEMBER 31,
-------------------------------------------------------------
2004 2003 2002
------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ------- ---------- ------- ---------- -------
(Dollars in thousands)
Multi-family:
Adjustable-rate.......... $ 572,507 88.4% $ 489,354 78.8% $ 160,543 61.7%
Fixed-rate............... 74,875 11.6 131,901 21.2 99,775 38.3
------- ----- ------- ----- ------- -----
Total multi-family.... 647,382 100.0 621,255 100.0 260,318 100.0
======= ===== ======= ===== ======= =====
Commercial real estate:
Adjustable-rate.......... 381,861 75.6 391,356 75.1 62,990 44.2
Fixed-rate............... 123,353 24.4 130,082 24.9 79,503 55.8
------- ----- ------- ----- ------- -----
Total commercial
real estate.......... 505,214 100.0 508,398 100.0 142,493 100.0
======= ===== ======= ===== ======= =====
Construction:
Adjustable-rate.......... 113,950 69.1 81,770 64.1 31,796 66.0
Fixed-rate............... 51,045 30.9 45,755 35.9 16,383 34.0
------- ----- ------- ----- ------- -----
Total construction.... 164,995 100.0 127,525 100.0 48,179 100.0
======= ===== ======= ===== ======= =====
Commercial business loans:
Adjustable-rate.......... 74,664 50.7 63,821 49.8 16,160 78.5
Fixed-rate............... 72,681 49.3 64,445 50.2 4,432 21.5
------- ----- ------- ----- ------- -----
Total commercial
business........... $ 147,345 100.0% $128,266 100.0% $ 20,592 100.0%
======= ===== ======= ===== ======= =====
LOAN MATURITY. The following table shows the principal amount of loans for
loan categories other than one- to four-family mortgages and consumer loans, by
contractual final maturity at December 31, 2004. Because the principal amounts
shown are not reduced for earlier scheduled principal repayments, this table is
not indicative of the timing of expected repayments on these loans.
AT DECEMBER 31, 2004
------------------------------------------------------------
DUE
AFTER TOTAL
DUE IN 1 YEAR DUE DUE TOTAL
1 YEAR THROUGH AFTER AFTER AMOUNT
OR LESS 5 YEARS 5 YEARS 1 YEAR DUE
-------- -------- --------- --------- ---------
(Dollars in thousands)
Multi-family............. $ 3,205 15,387 628,790 644,177 647,382
Commercial real estate... 46,962 169,377 288,875 458,252 505,214
Construction............. 2,314 97,347 65,334 162,681 164,995
Land .................... 8,031 36,099 20,635 56,734 64,765
Commercial business
loans................... 59,132 71,348 16,865 88,213 147,345
-------- ------- --------- --------- ---------
Total.................. $119,644 389,558 1,020,499 1,410,057 1,529,701
======== ======= ========= ========= =========
Of the $1.41 billion of loans shown in the table above with contractual final
maturities after one year, $968,144, or 68.7%, are adjustable rate loans and
$441,913, or 31.3%, are fixed rate loans.
ENVIRONMENTAL ISSUES. The Bank encounters certain environmental risks in
its lending activities. Under federal and state environmental laws, lenders may
become liable for the costs of cleaning up hazardous materials found on security
property. Although environmental risks are usually associated with industrial
and commercial loans, risks may be substantial for residential lenders like the
Bank if environmental contamination makes the security property unsuitable for
use. This could also have an effect on nearby property values. In accordance
with Fannie Mae and Freddie Mac guidelines, appraisals for single family
residences on which the Bank lends include comments on environmental influences.
The Bank attempts to control its risk by training its appraisers and
underwriters to be cognizant of signs indicative of environmental hazards. No
assurance can be given, however, that the values of properties securing loans in
the Bank's portfolio will not be adversely affected by unforeseen environmental
risks, although the Bank is unaware of any such environmental issues which
subject it to potential material liability at this time.
Environmental concerns such as asbestos containing material, underground
storage tanks, mold, and lead-based paint can pose a health risk to tenants and
negatively impact the collateral value of security property. To mitigate this
risk to the Bank, loan policies call for management to consider all relevant
factors in order to determine whether an environmental review is needed and, if
so, the scope and detail, prior to the Bank's origination of commercial and
multi-family loans. The relevant factors include, but are not limited to, the
following: age of property, use of property, location of property, knowledge of
subject area, borrower(s) financial capacity to withstand potential clean-up
costs, loan amount and loan-to-value ratio of the proposed loan. For loans in
excess of $1.0 million, a satisfactory
6
Phase I environmental exam is generally required as part of the loan approval
process, with further investigation in the form of a Phase II exam taking place
as dictated therein.
SECONDARY MARKET AND LOAN SERVICING ACTIVITIES
ORIGINATIONS, PURCHASES AND SALES OF MORTGAGE LOANS. Our origination
volumes, and the mix of fixed-rate and ARM products in our originations, is
significantly dependent on the interest rate environment and the expected level
of future interest rates. We originate the majority of our mortgage loan and
home equity line production through our internal sales force of commissioned
loan officers. We also have established relationships with a number of mortgage
brokers operating in our market areas from whom we purchase loans, primarily
home equity products, based on our published rate sheets and in conformity with
our underwriting guidelines. Our strategy is to further develop this wholesale
channel in Illinois and Wisconsin to expand our home equity line production.
From time to time, we may also purchase mortgage loans from other institutions,
usually in whole loan transactions where we assume the servicing, although we
expect to continue to originate the majority of our mortgage and home equity
loan production.
We generally originate more residential mortgages than we desire to keep in
our loan portfolio, particularly in times of significant refinancing activity
such as 2002 and 2003 and in other periods where consumers' preference is
oriented toward longer-term fixed rate products that we typically choose to
sell. We also sell ARM loan production from time to time depending on market
conditions and our interest rate management strategy. Loan sales also provide a
source of liquidity for the Bank. In 2005, we intend to pursue opportunities to
sell home equity products into the secondary market as part of our increased
focus on home equity lending, although the secondary market for this product is
not yet as well developed as that for residential mortgages. We currently expect
to complete our first sale of home equity lines of credit during the first
quarter of 2005.
In the last two years we have generally sold most of our conforming and
non-conforming, or jumbo, long-term fixed-rate loan originations. The Bank
generally sells its conforming long term fixed-rate production to Freddie Mac,
Fannie Mae, or the MPF program of the Federal Home Loan Bank of Chicago. (We
refer to these agencies collectively as "GSEs," or government sponsored
entities.) Since 2001, we have been selling most of our non-conforming long term
fixed-rate production to private investors.
The following table shows the Bank's one- to four-family mortgage and home
equity originations and purchases and loan sale activity for the periods
indicated.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2004 2003 2002
-------------------- --------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ----------- ------- ---------- --------
(Dollars in thousands)
ORIGINATIONS AND PURCHASES:
One- to four-family mortgages
Adjustable-rate............... $ 1,481,547 62% $ 1,790,163 45% $ 1,459,668 48%
Fixed-rate.................... 905,182 38 2,188,658 55 1,588,769 52
--------- --- --------- --- --------- ---
Total...................... $ 2,386,729 100% $ 3,978,821 100% $ 3,048,437 100%
========= === ========= === ========= ===
Equity lines of credit(1)........ $ 1,151,971 $ 592,167 $ 383,102
Home equity loans................ 17,381 7,982 15,908
========= ========= =========
LOANS SOLD:
One- to four-family loans
Adjustable-rate(2)............ $ 264,292 29% $ 162,056 9% $ 55,981 4%
Fixed-rate(2)................. 649,789 71 1,604,896 91 1,251,547 96
--------- --- --------- --- --------- ---
Total loans sold(2)........ $ 914,081 100% $ 1,766,952 100% $ 1,307,528 100%
========= === ========= === ========= ===
- ------------------
(1) Represents total disbursements during the year on all home equity lines,
including amounts related to lines newly originated during the year and
lines previously outstanding. This does not reflect any unused amounts that
remain available at year end.
(2) Loans sold include one- to four-family originations that are swapped into
mortgage-backed securities and sold simultaneously and does not include
$252.8 million for 2004 of Bank originated loans swapped into
mortgage-backed securities and held in portfolio.
In 2003 and most of 2004, the Bank retained the majority of our 15-year
fixed-rate originations in portfolio as management was willing to absorb the
interest rate risk in this product with the change in asset mix and increase in
core deposit levels. Of the fixed-rate originations in 2004, $729.0 million, or
81%, conformed to the requirements for sale to Fannie Mae and Freddie Mac and
$171.0 million, or 19%, were non-conforming. The Bank's "nonconforming" loans
are generally designated as such because the principal loan balance exceeds
$333,700 ($359,650 as of January 1, 2005), which is the Freddie Mac, Fannie Mae,
and MPF purchase limit, and not because the loans present increased risk of
default to the
7
Bank. Loans with such higher balances generally carry interest rates from
one-eighth to three-eighths of one percent higher than similar, conforming
fixed-rate loans.
We often enter into forward commitments for loan sales based on our
mortgage production pipeline. The majority of our loans are sold without
recourse, except those loans sold through the MPF program, where the Bank
retains a limited level of risk in exchange for better pricing on the loans
sold. At December 31, 2004, the Bank had approximately $12.7 million in net
credit risk exposure on loans it has sold through the MPF program.
SWAPS FOR MORTGAGE-BACKED SECURITIES. The Bank may from time to time
exchange or swap loans out of portfolio into mortgage-backed securities,
primarily with Fannie Mae and Freddie Mac. The mortgage-backed securities may
then be sold simultaneously, or held as mortgage-backed securities available for
sale or held to maturity. Generally, the mortgage-backed securities are used to
collateralize borrowings and deposits or are sold in the secondary market to
raise additional funds. Swap activity by the Bank is governed by pricing levels
in the secondary mortgage market for whole mortgage loans versus securitized
mortgage loans, as well as the level of rates for collateralized borrowings.
During the current year, the Bank swapped and sold $49.0 million in loans
receivable, compared to $76.9 million for the year ended December 31, 2003. The
Bank also swapped $252.8 million of 15-year fixed rate loans into
mortgage-backed securities held to maturity to help manage the Bank's risk-based
capital position in addition to providing collateral for borrowings. In 2003,
the Bank swapped $85.3 million of long-term fixed-rate prepayment penalty
protected loans that were in their final year of prepayment protection into
mortgage-backed securities and sold them.
LOAN SERVICING. The Bank typically retains servicing rights on loans that
it sells into the secondary market. Loan servicing fee income is generated from
loans that the Bank has originated and sold, and includes fees for the
collection and remittance of mortgage payments, insurance premiums and real
estate taxes. The Bank receives a monthly servicing fee for performing the
aforementioned services equal to at least .25% for fixed-rate mortgages and .25%
to .375% for ARM loans on the outstanding principal balance of the sold loans
being serviced. Costs of servicing loans for others are charged to expense as
incurred. The Bank is required to capitalize mortgage servicing rights upon the
sale of loans based on assumptions as to fee income earned, estimated prepayment
speeds of the underlying mortgage loans, and the cost of servicing. Mortgage
servicing rights are amortized based on the estimated life of the loan servicing
income stream, which is recorded as a decrease to loan servicing fee income. In
addition, mortgage servicing rights are assessed quarterly for impairment, with
any impairment or recovery recognized through a valuation allowance.
The following table shows the components of loan servicing fee income in
dollars and as a percentage of loans serviced for others, as well as other
information regarding loans serviced for others for the years indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------
2004 2003 2002
----------- ----------- -----------
(Dollars in thousands)
Gross servicing revenue......................... $ 9,312 6,983 4,742
Amortization of mortgage servicing rights....... (8,081) (12,922) (7,214)
Valuation allowance on mortgage
servicing rights.............................. -- (940) (2,300)
Recovery of mortgage servicing rights........... 2,072 2,070 --
----------- ----------- -----------
Loan servicing fee income (expense), net..... $ 3,303 (4,809) (4,772)
=========== =========== ===========
As a percentage of average loans serviced
for others:
Gross servicing revenue...................... .277% .278 .275
Amortization of mortgage servicing rights.... (.241) (.515) (.419)
Valuation allowance on mortgage
servicing rights.......................... -- (.037) (.134)
Recovery of mortgage servicing rights........ .062 .082 --
----------- ----------- -----------
Loan servicing fee income (expense), net.. .098 (.192) (.278)
=========== =========== ===========
Average balance of loans serviced for others.... $ 3,357,002 2,509,345 1,722,503
Loans serviced for others at end of year(1)..... 3,641,445 3,330,039 2,021,512
Average service fee at year end................. .28% .26 .26
Mortgage servicing rights at end of year, net... 25,697 24,128 12,960
Mortgage servicing rights as a percentage of
mortgage loans serviced for others........... .71 .72 .64
Multiple of average servicing fee at year end... 2.5x 2.8x 2.5x
Weighted-average interest rate on loans
serviced for others.......................... 5.70% 5.89 6.63
=========== =========== ===========
- ------------------
(1) One- to four-family loans.
8
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
DELINQUENT LOANS. When a borrower fails to make a required payment by the
end of the month in which the payment is due, the Bank generally institutes
collection procedures. When a loan payment is delinquent for three or more
monthly installments, the Bank will generally initiate foreclosure proceedings
and cease accruing interest. At December 31, 2004, 2003, and 2002, delinquencies
in the Bank's portfolio were as follows:
61-90 DAYS 91 OR MORE DAYS(2)
----------------------------- -----------------------------
PRINCIPAL AS A PRINCIPAL AS A
BALANCE PERCENT BALANCE PERCENT
NUMBER OF OF NUMBER OF OF
OF DELINQUENT TOTAL OF DELINQUENT TOTAL
LOANS LOANS LOANS(1) LOANS LOANS LOANS(1)
------- ---------- ------- ------ ---------- ---------
(Dollars in thousands)
December 31, 2004........ 93 $ 8,557 .12% 283 $ 31,473 .45%
December 31, 2003........ 43 4,851 .08 255 32,787 .51
December 31, 2002........ 51 4,577 .10 200 25,394 .58
- ------------------
(1) Percentage represents principal balance of delinquent loans to total loans
outstanding.
(2) The 91 or More Days category includes all loans on non-accrual regardless
of days past due.
NON-PERFORMING ASSETS. The table below sets forth information regarding
non-performing assets held by the Bank at the dates indicated.
DECEMBER 31,
-----------------------------------------------------
2004 2003 2002 2001 2000(1)
-------- ------- ------- ------- -------
(Dollars in thousands)
Non-accrual loans: (2)
One- to four-family................... $ 23,629 27,106 22,448 17,944 15,517
Equity lines of credit................ 3,449 1,874 569 590 574
Home equity loans..................... 875 777 552 321 109
Multi-family.......................... 1,826 478 32 41 238
Commercial real estate................ 1,294 1,503 742 -- 27
Construction.......................... -- -- 153 378 149
Land.................................. -- -- -- 166 93
Consumer loans........................ 79 471 38 11 2
Commercial business loans............. 321 578 860 -- --
------ ------ ------ ------ ------
Total.............................. $ 31,473 32,787 25,394 19,451 16,709
====== ====== ====== ====== ======
Non-performing loans to total loans...... .46% .51 .58 .45 .39
====== ====== ====== ====== ======
Non-accrual investment securities........ $ -- 7,697 -- -- --
====== ====== ====== ====== ======
Foreclosed real estate:
One- to four-family................... $ 1,487 3,200 2,366 1,405 1,762
Commercial real estate................ -- -- -- -- 46
------ ------ ------ ------ ------
Total foreclosed real estate,
net of reserves.................. $ 1,487 3,200 2,366 1,405 1,808
====== ====== ====== ====== ======
Total non-performing assets.............. $ 32,960 43,684 27,760 20,856 18,517
====== ====== ====== ====== ======
Total non-performing assets to
total assets........................... .34% .49 .47 .37 .36
====== ====== ====== ====== ======
- ------------------
(1) Non-accrual one- to four-family loans at December 31, 2000 includes $1.7
million of accruing loans 91 days or more overdue. Since January 1, 2001,
the Bank does not accrue interest on loans more than 91 days past due.
(2) Consists of loans in the process of foreclosure or for which interest is
otherwise deemed uncollectible.
NON-ACCRUAL LOANS. A loan (whether considered impaired or not) is
classified as non-accrual. Generally, when a loan is 91 days or more past due,
in the process of foreclosure, or in bankruptcy, or when collectibility is
otherwise in doubt, the full amount of previously accrued but unpaid interest on
non-accrual loans 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 each of the years ended December 31, 2004, 2003 and 2002, the amount of
interest income that would have been recorded on non-accrual loans if these
loans were performing in accordance with their terms amounted to $1.4 million.
For the years ended December 31, 2004, 2003 and 2002, interest income on
non-accrual loans that was actually collected and recorded amounted to $630,000,
$718,000 and $562,000, respectively.
9
The majority of our non-performing loans are secured by residential real
estate which we generally regard as presenting lower risk of credit loss due to
the nature of the collateral. Ratios for loans secured by one- to four- family
residential properties were as follows:
DECEMBER 31,
---------------
2004 2003
---- ----
One- to four-family loans as a percentage of total loans(1)................. 78% 77%
Non-performing one- to four-family loans as a percentage of total
non-performing loans(1).................................................... 89 92
Percentage of non-performing one- to four-family loans with private
mortgage insurance or other guarantees..................................... 46 42
Average loan-to-value of non-performing one- to four-family loans without
private mortgage insurance or other guarantees............................. 66 65
== ==
- ------------------
(1) Includes equity lines of credit and home equity loans.
IMPAIRED LOANS. The Bank considers a loan impaired when, based on current
information and events, it is probable that the Bank will be unable to collect
all amounts due according to the contractual terms of the loan. Impairment for
loans considered individually significant and that exhibit probable or observed
credit weaknesses are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or the fair value
of the collateral if the loan is collateral dependent. If the determined fair
value of an impaired loan is less than the carrying value of the loan and a loss
has deemed to have occurred, the Bank charges off the principal amount of the
loan in excess of fair value or net realizable value. For loans that are not
individually significant (i.e. loans under $1.0 million), and represent a
homogeneous population, the Bank evaluates impairment collectively based on
management reports on the level and extent of delinquencies, as well as
historical loss experience for these types of loans. These homogeneous loans are
excluded from the impaired loan disclosures. The Bank uses these criteria on
one- to four-family residential loans, consumer loans, smaller multi-family
residential loans, and land loans. At December 31, 2004 and 2003, the Company
had $3.4 million and $2.6 million of impaired loans, respectively. The average
balance of impaired loans for 2004 and 2003 was $2.7 million and $1.8 million,
respectively.
NON-ACCRUAL INVESTMENT SECURITIES. In addition to non-performing loans,
included in non-performing assets at December 31, 2003, were two
aircraft-related asset-backed securities totaling $7.7 million that were on
non-accrual status and classified as substandard. One of these securities, with
a December 31, 2003 carrying value of $6.7 million, was written down by $3.0
million in the fourth quarter of 2002, and the other with a December 31, 2003
carrying value of $1.0 million was written down by $5.0 million in the first
quarter of 2003 and by an additional $1.9 million in the third quarter of 2003
due to continued declines in its estimated market value. A third security
written down by $3.1 million in the first quarter of 2003, which management had
classified as special mention, was not included in non-performing assets, was
current as to principal and interest payments at December 31, 2003 and was still
accruing interest. The December 31, 2003 carrying value of this collateralized
bond obligation security was $4.9 million after the $3.1 million writedown. All
three securities were sold during 2004 at a net gain of $2.7 million.
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 "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
addition, a "special mention" category consists of assets, which currently do
not expose the Company to a sufficient degree of risk to warrant adverse
classification, but do possess credit deficiencies deserving management's close
attention.
In connection with the filing of its periodic reports with the OTS, the
Bank regularly reviews the problem assets in its portfolio to determine whether
any loans or investments require classification in accordance with applicable
regulations. At December 31, 2004 and 2003, all of the Bank's non-performing
loans were classified as substandard. In addition, at December 31, 2004, the
Bank had
10
classified $4.4 million of multi-family loans and $24.8 million of commercial
loans as substandard for regulatory purposes that were still accruing interest.
The Bank also had $1.6 million of commercial loans classified as doubtful of
which $113,000 were non-accrual and the remaining $1.5 million were still
accruing interest. Special mention loans at December 31, 2004 and 2003 totaled
$10.2 million and $39.1 million, respectively.
ALLOWANCE FOR LOAN LOSSES. In evaluating the adequacy of the allowance for
loan losses and determining the related provision for loan losses, if any,
management considers: (1) subjective factors, including local and general
economic business factors and trends, portfolio concentrations and changes in
the size and/or general terms of the loan portfolio, (2) historical loss
experience and the change in the mix of the overall portfolio composition over
the last five years, (3) specific allocations based upon probable losses
identified during the credit review of the business banking 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. Larger loans, typically secured by commercial real estate, that
exhibit probable or observed credit weaknesses are subject to individual review.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments about information available to them at the time of their
examination. In the opinion of management, the allowance, when taken as a whole,
is adequate to absorb probable losses in the loan portfolio at December 31,
2004. While management uses available information to recognize losses on loans,
future adjustments to the allowance for loan losses may be necessary based on
changes in economic conditions and the impact of such change on the Bank's
borrowers.
The allowance for loan losses totaled $36.3 million at December 31, 2004,
or .53% of total loans receivable, exclusive of loans held for sale, and $34.6
million, or .54% of total loans receivable at December 31, 2003. An analysis of
the changes in the allowance for loan losses for the years indicated is
presented in the table below.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance at beginning of year...... $ 34,555 19,483 19,607 18,258 17,276
Charge-offs:
One- to four-family............ (241) (67) (78) (87) (136)
Equity lines of credit......... (76) (44) (67) -- (102)
Home equity loans.............. (168) -- (26) -- --
Consumer....................... (80) (110) (22) (17) (18)
Multi-family................... (174) -- -- -- (275)
Commercial real estate......... (41) -- -- -- --
Commercial business loans...... (311) (148) (424) -- --
------ ------ ------ ------ ------
(1,091) (369) (617) (104) (531)
------ ------ ------ ------ ------
Recoveries:
One- to four-family............ 54 29 60 39 9
Equity lines of credit......... 18 26 10 -- --
Home equity loans.............. 1 -- -- -- --
Consumer....................... 29 4 2 6 4
Multi-family................... 93 -- -- -- --
Commercial real estate......... 8 -- 15 -- --
Commercial business loans...... 76 11 106 -- --
------ ------ ------ ------ ------
279 70 193 45 13
------ ------ ------ ------ ------
Charge-offs, net of recoveries.... (812) (299) (424) (59) (518)
Provision for loan losses......... 1,215 -- 300 -- 1,500
Additions related to acquisitions. 1,297 15,371 -- 1,408 --
------ ------ ------ ------ ------
Balance at end of year............ $ 36,255 34,555 19,483 19,607 18,258
====== ====== ====== ====== ======
Net charge-offs to average
loans outstanding.............. .01% .01 .01 .00 .01
Allowance for loan losses to
total loans receivable,
exclusive of one- to
four-family loans held
for sale....................... .53 .54 .44 .45 .42
Allowance for loan losses to
total non-performing loans..... 115.18 105.39 76.72 100.80 109.27
====== ====== ====== ====== ======
The following table sets forth the Company's allocation of its allowance
for loan losses. This allocation is based on management's subjective estimates.
The amount of reserves allocated to a particular
11
category may not be indicative of actual future losses, and amounts allocated to
particular categories may change from year to year based on changes in
management's assessment of the risk characteristics of the loan portfolio. An
unallocated reserve is maintained to recognize the imprecision in measuring and
estimating loss when evaluating reserves for individual loans or categories of
loans. The allocation methods used during 2004, 2003 and 2002 were generally
consistent. The increase in the amount of the allowance and changes in the
allocation of the allowance among loan categories at December 31, 2004 compared
to December 31, 2003 primarily reflect the additional allowance resulting from
the Chesterfield acquisition and changes in the loan portfolio composition. The
allowance allocations as a percentage of one- to four-family mortgage loans and
home equity lines of credit decreased based on management's assessment of the
improving economic conditions, the quality of underlying collateral, delinquency
and loss experience. The unallocated reserve decreased in 2004 based on
consideration of the improving economic conditions.
AT DECEMBER 31,
---------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------ ------------------ ------------------- ------------------ -------------------
LOAN LOAN LOAN LOAN LOAN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
AS % OF AS % OF AS % OF AS % OF AS % OF
TOTAL TOTAL TOTAL TOTAL TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- -------- --------- -------- --------- --------- --------- -------- --------- --------
(Dollars in thousands)
One- to
four-family...... $ 8,627 58.38% $ 8,594 61.31% $ 9,062 78.70% $ 9,755 82.33% $ 9,803 88.33%
Equity lines of
credit........... 6,758 18.52 5,420 14.03 2,080 8.78 1,448 5.99 1,142 3.39
Home equity loans... 329 .80 320 1.05 216 .73 293 1.21 333 1.49
Multi-family........ 3,912 9.40 3,721 9.65 2,030 5.90 1,730 4.57 1,480 4.01
Commercial
real estate 10,960 7.33 11,304 7.94 2,846 3.23 2,646 3.24 1,978 .96
Construction........ 1,691 2.39 759 2.34 426 1.09 501 1.01 401 .69
Land................ 807 .94 870 1.17 531 .96 656 1.03 606 .94
Consumer............ 47 .11 191 .60 80 .14 63 .19 100 .11
Commercial
business......... 2,180 2.13 2,087 2.00 397 .47 250 .43 -- .08
Unallocated
reserve.......... 944 N/A 1,289 N/A 1,815 N/A 2,265 N/A 2,415 N/A
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total............ $ 36,255 100.00% $ 34,555 100.00% $ 19,483 100.00% $ 19,607 100.00% $ 18,258 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
At December 31, 2004, the Bank's loan portfolio consisted of $4.06 billion
of one- to four-family real estate loans, with an additional $1.23 billion of
equity lines of credit or home equity loans on one- to four-family real estate
and other consumer loans. At December 31, 2004, 46% 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 66%. Based on
the Bank's underwriting standards, overall loan-to-value ratios, concentration
of lending primarily in its market area, and historically low charge off
experience, management considers the risk of loss on these loans to be low. The
remaining 22.0% of the Bank's portfolio, or $1.53 billion, consist of
multi-family mortgage, commercial real estate, construction, land, and to a
lesser extent, commercial business loans. These loans generally tend to exhibit
greater risk of loss than do one- to four-family loans, primarily because such
loans typically carry higher loan balances and repayment is dependent, in large
part, on sufficient income to cover operating expenses. In addition, economic
events and government regulations, which are outside the control of the Bank and
the borrower, could impact the security of the loan or the future cash flow of
affected properties.
Net income of the Company could be affected if management's estimate of the
amount of loss that may be incurred is materially different than actual results,
which could require an additional provision for loan losses. Management believes
the allowance for loan losses is adequate at December 31, 2004. However, future
adjustments to the allowance may be necessary based on changes in economic
conditions and the impact of such changes may have on the Bank's borrowers.
INVESTMENT ACTIVITIES
Our strategy is to use our investment and mortgage-backed securities
portfolios as stable sources of interest income and to provide flexibility in
managing our interest rate risk and liquidity needs. For this reason, we keep
our portfolios relatively short-term in nature and seek to limit exposure to
credit risk. These portfolios represented a combined 19.2% of our total assets
at December 31, 2004 compared to 19.3% at December 31, 2003. We maintain a
majority of our investment and mortgage-backed securities in an available for
sale portfolio, and we may sell these securities for liquidity needs, to alter
asset/liability management strategies or to manage risk-based capital levels.
The classification of investments and mortgage-backed securities as held to
maturity, available for sale, or trading is made at the time of purchase based
upon management's intent at that time. At December 31, 2004, $389.0 million of
investment securities classified as available for sale had a cost basis of
$389.2 million. At December 31,
12
2004, we had $245.0 million of mortgage-backed securities in a held to maturity
portfolio. The loans underlying these securities are loans we originated and
swapped into mortgage-backed securities.
We owned $278.9 million of stock in the FHLB of Chicago at December 31,
2004, which is carried at cost, representing 2.9% of total assets and 28.6% of
stockholders' equity. At December 31, 2004, we were required to hold a minimum
of $109.4 million based on our outstanding advances from the FHLB of Chicago.
The Bank may, subject to the discretion of the FHLB of Chicago, redeem at par
any capital stock greater than our required investment. While our voluntary
investment has yielded us a higher than market return in recent years, in mid
2004, we began reducing our voluntary stock position at the recommendation of
our asset liability committee ("ALCO") in order to lower the investment
concentration that resulted from our 2003 acquisitions. We redeemed $125.7
million of FHLB of Chicago stock in 2004 and expect to redeem another $45.0
million of stock in the first quarter of 2005.
The following table sets forth certain information regarding the carrying
value of our investment and mortgage-backed securities portfolios at the dates
indicated.
DECEMBER 31,
------------------------------
2004 2003 2002
--------- -------- --------
(Dollars in thousands)
Investment securities available for sale:
U.S. Government securities............... $ 127,782 155,432 91,189
U.S. Agency securities................... 154,871 73,494 7,951
Asset-backed securities.................. 19,988 47,738 62,530
Corporate debt securities................ 7,320 7,809 65,422
Bank trust preferred securities.......... 61,928 62,668 58,230
Marketable equity securities............. 17,070 18,193 22,913
--------- -------- -------
Total investment securities........... $ 388,959 365,334 308,235
========= ======= =======
Stock in FHLB of Chicago.................... $ 278,916 384,643 169,708
========= ======= =======
Mortgage-backed securities
Available for sale....................... $ 948,168 971,969 365,638
Held to maturity......................... $ 245,021 -- --
--------- ------- -------
Total mortgage-backed
securities.......................... $1,193,189 971,969 365,638
========= ======= =======
The table below sets forth information regarding the carrying value,
weighted average yields based on amortized cost, and maturities of the Company's
investment and mortgage-backed securities.
AT DECEMBER 31, 2004
-----------------------------------------------------------------------------------------------------------------
ONE YEAR OR LESS 1 TO 5 YEARS 5 TO 10 YEARS MORE THAN 10 YEARS TOTAL INVESTMENT SECURITIES
------------------ ------------------ ------------------ ------------------ -------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE LIFE IN CARRYING FAIR AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD YEARS VALUE VALUE YIELD
-------- --------- -------- --------- -------- --------- -------- --------- -------- -------- --------- --------
(Dollars in thousands)
U.S.
Government
securities.. $ 11,883 4.26% $ 114,783 3.20% $ 1,116 3.74% $ -- --% 2.69 $ 127,782 $ 127,782 3.30%
U.S. Agency
securities.. 2,895 2.24 146,907 3.20 -- -- 5,069 3.17 3.22 154,871 154,871 3.18
Asset-backed
securities.. -- -- 13,107 2.89 -- -- 6,881 5.81 10.61 19,988 19,988 3.90
Corporate debt
securities.. 571 47.00 6,749 12.12 -- -- -- -- 2.55 7,320 7,320 14.85
Bank trust
preferred
securities.. -- -- -- -- -- -- 61,928 4.49 27.24 61,928 61,928 4.49
Marketable
equity
securities:(1)
GSE
preferred
stock....... -- -- -- -- -- -- 16,521 3.17 -- 16,521 16,521 3.17
Other...... -- -- -- -- -- -- 549 -- -- 549 549 --
Stock in FHLB
of Chicago(2) -- -- -- -- -- -- 278,916 5.50 -- 278,916 278,916 5.50
Mortgage-backed
securities
available
for sale(3).. 220,918 4.21 411,221 4.19 223,197 4.21 92,832 4.20 2.96 948,168 948,168 4.08
Mortgage-backed
securities
held to
maturity(3).. 32,233 4.62 98,494 4.61 75,261 4.57 39,033 4.59 4.48 245,021 244,615 4.59
======= ==== ======= ==== ======= ==== ======= ==== ==== ========= ========= ====
Total....... $268,500 4.33% 791,261 3.96 299,574 4.30 501,729 4.96 4.21 $1,861,064 $1,860,658 4.28%
======= ==== ======= ==== ======= ==== ======= ==== ==== ========= ========= ====
- ------------------
(1) Marketable equity securities and Stock in the FHLB of Chicago with no
stated maturity are included in the "More than 10 Years" category. These
securities are excluded in the calculation of average life.
(2) The yield reflects the fourth quarter 2004 FHLB dividend of 5.50% which was
declared in January 2005 and paid in February 2005.
(3) The repricing distributions and yields to maturity of mortgaged-backed
securities are based upon estimated future cash flow and prepayments.
Actual repricings and yields of the securities may differ from that
reflected in the table depending upon actual interest rates and prepayment
speeds.
The bank trust preferred securities shown in the tables above represent
investments in several different pools of collateralized debt securities
consisting of primarily 30-year capital securities issued by
13
various banks, thrifts and insurance companies. The underlying pool of issuers
of the collateralized debt securities are well diversified as to asset size and
geography. These securities are primarily LIBOR-indexed floating rate securities
and contain an issuer call provision at par anytime after five years. The
individual issuers of trust preferred securities have the ability to defer
interest payments for up to 20 consecutive quarters in certain circumstances. At
December 31, 2003, $365.3 million of investment securities classified as
available for sale had a cost basis of $364.2 million.
During 2004, the Company recorded a $2.0 million other-than-temporary
impairment on two Freddie Mac floating-rate preferred stock securities with an
aggregate carrying value of $8.8 million. The Company recorded the writedown
because the current yield on these securities is below market interest rates,
the fair value has been below cost for an extended period, and a recovery in
fair value is not assumed within a reasonably short period of time. During 2003,
the Company wrote down a $9.3 million floating-rate debt security by $6.9
million due to insufficient cash flow underlying the repayment of the security.
This security was collateralized by various aircraft assets and leases. Another
$7.4 million floating-rate security collateralized debt obligation which was
secured by various high-yield debt securities was written down by $3.1 million
during 2003. A charge taken in 2002 relating to a third $8.5 million
floating-rate security in default following its maturity in December 2002. This
security was collateralized by various aircraft leased to a major carrier that
filed bankruptcy in the fourth quarter of 2002. These three securities were sold
in 2004 at a gain of $2.7 million.
The Bank has a wholly-owned subsidiary organized as a Nevada corporation
that was acquired in the St. Francis acquisition. This subsidiary holds and
manages a portfolio of our investment securities. At December 31, 2004, the
Bank's total investment in the Nevada subsidiary was approximately $426.5
million, and the subsidiary had assets of $428.5 million consisting primarily of
mortgage-backed securities.
Wisconsin does not require consolidated tax returns and because the
subsidiary is out of state, its income has not been subject to state income tax
in Wisconsin. From time to time legislation has been proposed that would require
consolidated reporting requirements in Wisconsin. Representatives of the
Wisconsin Department of Revenue have indicated that the Department may revoke
its previously issued favorable tax rulings relating to such Nevada
subsidiaries, even though there has not been any intervening change in law. The
Department also has implemented a program for the audit of Wisconsin financial
institutions that have subsidiaries incorporated and located in Nevada, and may
seek to assert a basis for imposition of Wisconsin income taxes on income from
those operations, either retroactively or prospectively. The Company is not
currently under audit by the Department.
In addition to our investment securities and mortgage-backed securities
portfolios, we maintain a portion of our assets in more liquid investments for
daily liquidity management. The Bank's liquid investments include
interest-bearing deposits, primarily at the Federal Home Loan Bank of Chicago,
federal funds sold and U.S. Government and federal agency obligations. The Bank
invests overnight federal funds with two large commercial banks in Chicago,
based upon periodic review of these institutions' financial condition. The Bank
generally limits overnight federal funds sold investments to $100.0 million at
any one institution.
DEPOSITS AND BORROWED FUNDS
DEPOSITS. The Bank offers a variety of deposit accounts having a wide range
of interest rates and terms. The Bank's deposits consist of passbook accounts,
interest-bearing and non-interest bearing checking accounts, money market and
certificate accounts. The Bank has historically only solicited deposits from its
market areas and has not used brokered deposits. However, at December 31, 2004,
the Bank had $5.0 million of brokered deposits remaining as a result of the St.
Francis acquisition. The Bank relies primarily on competitive pricing policies,
advertising, and customer service to attract and retain deposits. The flow of
deposits is influenced significantly by general economic conditions, changes in
money market and prevailing interest rates and competition. In the last several
years, the Bank has emphasized growth in core accounts, defined as commercial
and non-interest bearing checking accounts, interest-bearing checking accounts,
money market accounts, and passbooks. We have increased our advertising and
marketing promotions and have introduced more competitively priced, higher rate
checking and money market products. At December 31, 2004, the ratio of core
deposits to total deposits increased to 59.6% compared to 58.2% at December 31,
2003, primarily due to the success of the Bank's new high rate checking account
product. At December 31, 2004, the Bank had $326.2 million of
14
certificates of deposit at an average rate of 2.61% with original maturities of
13 to 23 months, that contain a one-time option for the owner to increase the
interest rate to current rates.
The following table sets forth the composition of deposits by type at the
dates indicated and the change in the dollar amount of deposits for the periods
shown:
AT OR FOR THE
AT OR FOR THE YEAR ENDED AT OR FOR THE YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------------- ------------------------------ ---------------------
% OF INCREASE % OF INCREASE % OF
AMOUNT DEPOSITS (DECREASE) AMOUNT DEPOSITS (DECREASE) AMOUNT DEPOSITS
--------- --------- ---------- --------- --------- ---------- ---------- ---------
(Dollars in thousands)
Commercial checking....... $ 239,249 4.0% $ 22,760 $ 216,489 3.9% $ 66,484 $ 150,005 4.0%
Non-interest bearing
checking............... 250,569 4.2 32,123 218,446 3.9 79,327 139,119 3.7
Interest-bearing
checking................ 972,009 16.4 416,334 555,675 10.0 192,786 362,889 9.7
Commercial money markets.. 64,810 1.1 45,298 19,512 .3 (3,056) 22,568 .6
Money markets............. 611,507 10.3 (273,709) 885,216 15.9 449,640 435,576 11.6
Passbooks................. 1,399,099 23.6 45,218 1,353,881 24.2 347,291 1,006,590 26.8
--------- ----- ------- --------- ----- --------- --------- -----
Total core deposits.... 3,537,243 59.6 288,024 3,249,219 58.2 1,132,472 2,116,747 56.4
Certificates of deposit... 2,395,605 40.4 71,880 2,323,725 41.7 689,448 1,634,277 43.6
--------- ----- ------- --------- ----- --------- --------- -----
Unamortized premium...... 2,860 -- (4,651) 7,511 .1 7,298 213 --
Total deposits......... $ 5,935,708 100.0% $ 355,253 $ 5,580,455 100.0% $ 1,829,218 $ 3,751,237 100.0%
========= ===== ======= ========= ===== ========= ========= =====
The following table sets forth the distribution and the weighted-average
nominal interest rates of the Bank's average deposits for the years indicated:
YEAR ENDED
-----------------------------------------------------------------------------------------------
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------------- ----------------------------- ------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED PERCENT WEIGHTED
OF AVERAGE OF AVERAGE OF AVERAGE
AVERAGE TOTAL NOMINAL AVERAGE TOTAL NOMINAL AVERAGE TOTAL NOMINAL
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
----------- -------- -------- ---------- -------- --------- --------- ---------- ---------
(Dollars in thousands)
Commercial checking........... $ 236,300 4.15% --% $ 167,743 4.07% --% $ 124,801 3.41% --%
Non-interest bearing
checking.................... 226,661 3.98 -- 161,400 3.91 -- 124,726 3.41 --
Interest-bearing checking..... 824,603 14.49 .84 410,261 9.95 .59 334,882 9.15 .81
Money markets................. 690,950 12.14 .76 494,676 12.00 1.06 436,317 11.92 1.93
Commercial money markets...... 72,062 1.27 1.13 20,151 .49 1.36 26,456 .72 2.30
Passbooks..................... 1,364,904 24.00 .58 1,144,729 27.76 .81 936,512 25.58 1.68
--------- ------ ---- --------- ------ ---- --------- ------ ----
Total checking, money
market and passbook
accounts................ 3,415,480 60.03 .62 2,398,960 58.18 .72 1,983,694 54.19 1.39
--------- ------ ---- --------- ------ ---- --------- ------ ----
Certificates with original
maturities of:
6 months or less........... 406,613 7.15 1.25 383,347 9.30 1.20 357,187 9.76 2.23
7 to 12 months............. 730,816 12.85 2.26 380,965 9.24 2.49 248,200 6.78 3.36
Greater than 1 to 3 years.. 956,551 16.81 2.41 784,688 19.03 2.75 944,075 25.79 4.28
Greater than 3 years....... 179,802 3.16 4.36 175,126 4.25 4.61 127,410 3.48 5.31
--------- ------ ---- --------- ------ ---- --------- ------ ----
Total certificates of
deposits.............. 2,273,782 39.97 2.31 1,724,126 41.82 2.54 1,676,872 45.81 3.79
--------- ------ ---- --------- ------ ---- --------- ------ ----
Total average deposits.....$ 5,689,262 100.00% 1.29% $ 4,123,086 100.00% 1.48% $ 3,660,566 100.00% 2.48%
========= ====== ==== ========= ====== ==== ========= ====== ====
The following table presents, by various interest rate categories, the
amount of certificates of deposit outstanding at December 31, 2004, 2003, and
2002, and the periods to maturity of the certificates of deposit outstanding at
December 31, 2004:
DECEMBER 31, PERIOD TO MATURITY AS OF DECEMBER 31, 2004
-------------------------------- ------------------------------------------
WITHIN
ONE 1 TO 3 OVER 3
2004 2003 2002 YEAR YEARS YEARS TOTAL
--------- --------- --------- --------- ------- ------- ---------
(Dollars in thousands)
Certificates of deposit:
Up to 1.99%.......... $ 653,304 1,056,024 330,189 647,527 5,674 103 653,304
2.00% to 2.99%....... 1,100,135 479,922 543,576 780,610 315,947 3,578 1,100,135
3.00% to 3.99%....... 394,822 433,245 338,585 109,245 199,616 85,961 394,822
4.00% and greater.... 247,344 354,534 421,927 129,671 83,207 34,466 247,344
--------- --------- --------- --------- ------- ------- ---------
Total............. $ 2,395,605 2,323,725 1,634,277 1,667,053 604,444 124,108 2,395,605
========= ========= ========= ========= ======= ======= =========
At December 31, 2004, the Bank had outstanding $533.3 million in
certificate of deposit accounts in amounts of $100,000 or more maturing as
follows:
PERIOD TO MATURITY AMOUNT
- --------------------------------------- -------------
(Dollars in
thousands)
Three months or less.................. $ 135,210
Over three through six months......... 80,696
Over six through 12 months............ 148,014
Over 12 months........................ 169,342
-------
Total.............................. $ 533,262
=======
15
BORROWED FUNDS. Although deposits are the Bank's primary source of funds,
we also utilize borrowings, such as advances from FHLB of Chicago, and to a
lesser extent, reverse repurchase agreements, when they are a less costly source
of funds than retail deposits or when we have opportunities to reinvest borrowed
funds at a positive rate of return.
FEDERAL HOME LOAN BANK OF CHICAGO ADVANCES. The Bank obtains advances from
the FHLB of Chicago secured by its capital stock investment in the FHLB of
Chicago and a blanket pledge of certain of its mortgage loans. See "Regulation
and Supervision--Federal Home Loan Bank System." Such advances are made pursuant
to several different credit programs, each of which has its own interest rate
and range of maturities. The maximum amount that the FHLB of Chicago will
advance to member institutions, including the Bank, for purposes other than
meeting withdrawals, fluctuates from time to time in accordance with the
policies of the FHLB of Chicago. The maximum amount of FHLB of Chicago advances
to a member institution generally is reduced by secured borrowings from any
other source. At December 31, 2004, the Bank's FHLB of Chicago advances totaled
$2.19 billion, or 22.6% of total assets, compared to $2.10 billion, or 23.6% of
total assets at December 31, 2003.
Included in FHLB of Chicago advances at December 31, 2004 are $365.0
million of fixed-rate advances with original scheduled maturities of 5 to 10
years, which mature beyond 2005 and are putable at the discretion of the FHLB of
Chicago as follows: $290.0 million at 4.90% in 2005, $75.0 million at 2.94% in
2006. The average term to maturity on these advances is 49 months, while the
average term to put is seven months. At inception, the Bank receives a lower
cost of borrowing on such advances than on similar termed non-putable advances,
in return for granting the FHLB of Chicago the option to put the advances prior
to their final maturity. If put, the FHLB of Chicago will provide replacement
funding, should the Bank want or need to refinance the borrowing, at the then
prevailing market rate of interest for the remaining term to maturity of the
advances, subject to standard terms and conditions. Of the FHLB advances we had
outstanding at December 31, 2004, we expect $50.0 million (with an average rate
of 2.52%) is likely to be put back to us in 2005.
UNSECURED TERM BANK LOAN AND LINE OF CREDIT. In 2004, the Company
renegotiated and increased its unsecured term bank loan by $25.0 million in
conjunction with its acquisition of Chesterfield Financial. The loan agreement
provides for an interest rate of one, two, three, six or twelve-month LIBOR at
the option of the borrower plus 110 basis points. At December 31, 2004, the
interest rate is currently one-month LIBOR plus 110 basis points, or 3.29%. At
December 31, 2004, the balance of the unsecured term loan is $70.0 million and
the scheduled principal payments of $7.0 million are due on December 31, of each
year from 2005 through 2010 with a final balloon payment of $28.0 million due on
December 31, 2011. Prepayments of principal are allowed without penalty at the
end of any repricing period.
In conjunction with the unsecured term bank loan, the Company also
maintains a $55.0 million one-year unsecured revolving line of credit that
matures October 31, 2005. The line is generally renewable at maturity at the
mutual agreement of the Company and the lender. The loan provides for an
interest rate of one, two, three, six or twelve-month LIBOR at the option of the
borrower plus 95 basis points and may be prepaid at the end of any repricing
period. At December 31, 2004, there is a $10.0 million outstanding balance on
the line of credit at an interest rate of 3.43%.
The credit agreement contains covenants that, among other things, require
the Company to maintain a minimum stockholders' equity balance and to obtain
certain minimum operating results, as well as requiring the Bank to maintain
"well capitalized" regulatory capital levels and certain non-performing asset
ratios. In addition, the Company has agreed to certain restrictions on
additional indebtedness and agreed not to pledge any stock of the Bank or MAF
Developments for any purpose. At December 31, 2004, the Company was in
compliance with these covenants.
16
REVERSE REPURCHASE AGREEMENTS. The Bank enters into sales of securities
under agreements to repurchase the identical securities ("reverse repurchase
agreements") with nationally recognized primary securities dealers. These
reverse repurchase agreements are treated as financings and are reflected on our
balance sheet as other borrowings. The securities underlying the agreements are
delivered to the dealers who arrange the transaction and continue to be
reflected as assets on our balance sheet. The usual terms of these agreements
require us, generally after a short period of time, to repurchase the same
securities at a predetermined price or yield. In conjunction with the St.
Francis acquisition in 2003, the Bank assumed $105.0 million of reverse
repurchase agreements. The following table presents certain information
regarding reverse repurchase agreements as of the end of and for the periods
indicated:
YEAR ENDED DECEMBER 31,
--------------------------------
2004 2003 2002
--------- --------- ---------
(Dollars in thousands)
Balance at end of period........... $ 300,000 $ 105,000 --
Maximum month-end balance.......... 300,000 105,000 --
Average balance ................... 195,492 105,000 --
Weighted average rate at end of
period.......................... 2.42% 1.64% --
Weighted average rate on average
balance......................... 1.69 1.64 --
At December 31, 2004, our reverse repurchase agreements were all floating
rate and had maturities ranging from fifteen months to 4.8 years. The interest
rate on $225.0 million of these agreements is indexed to prime and ranges from
prime minus 275 basis points to prime minus 280 basis points. The remaining
$75.0 million have interest rates ranging from three-month LIBOR minus 50 basis
points to three-month LIBOR minus 75 basis points. The LIBOR indexed repurchase
agreements are putable quarterly in 2006. At December 31, 2004, reverse
repurchase agreements were collateralized by investment, mortgage-backed and
collateralized mortgage obligation ("CMO")securities with a carrying value of
$315.0 million and a market value of $313.7 million. We intend to continue to
use reverse repurchase agreements as an additional funding source.
For certain customers with significant funds available for deposit at the
Bank, the Bank offers "retail" repurchase agreements under which the Bank
collateralizes its obligation to repay the customer funds with U.S. government
or agency securities. The retail repurchases, which totaled $24.9 million at
December 31, 2004, are collateralized by one mortgage-backed security and two
CMO securities with a carrying value of $21.9 million and market value of $21.9
million.
The following table is a summary of the Company's borrowed funds at
December 31, 2004 and 2003. The weighted average rates are contractual rates and
are not adjusted for purchase accounting adjustments. The unamortized premium
was created in 2003 as purchase accounting adjustments in the acquisitions of
Fidelity and St. Francis. At December 31, 2004, the effective borrowing costs,
including amortization of the premium, were 3.70% compared to 3.80% at
December 31, 2003.
DECEMBER 31, 2004 DECEMBER 31, 2003
---------------------------------- ---------------------
INTEREST WEIGHTED WEIGHTED
RATE AVERAGE AVERAGE
RANGE RATE AMOUNT RATE AMOUNT
------------ ------- ---------- --------- -----------
(Dollars in thousands)
Fixed-rate advances from FHLB due:
Within 1 year................. 2.24% - 7.20% 5.34% $ 613,125 5.32% $ 390,000
1 to 2 years.................. 1.83 - 6.82 3.56 560,000 5.34 619,375
2 to 3 years.................. 3.23 - 3.89 3.57 210,000 4.30 210,000
3 to 4 years.................. 2.49 - 5.86 4.78 425,000 3.82 150,000
4 to 5 years.................. 2.54 - 5.86 4.67 75,000 4.90 375,000
5 to 6 years.................. 2.77 - 5.42 3.65 105,000 4.67 75,000
6 to 7 years.................. -- -- -- 3.65 105,000
------------ ---- --------- ---- ---------
Total fixed rate advances.. 1.83 - 7.20 4.42 1,988,125 4.90 1,924,375
Adjustable-rate advances from
FHLB due:
Within 1 year................. 2.16 - 2.31 2.23 100,000 1.16 30,000
1 to 2 years.................. 2.17 - 2.63 2.40 100,000 1.19 100,000
2 to 3 years.................. -- -- -- 1.21 50,000
------------ ---- --------- ---- ---------
Total adjustable rate
advances................. 2.16 - 2.63 2.32 200,000 1.19 180,000
--------- ---------
Total advances from FHLB... 1.83% - 7.20% 4.22 2,188,125 4.58 2,104,375
============
Unsecured term bank loan......... 3.29 70,000 2.26 45,000
Unsecured line of credit......... 3.43 10,000 2.17 10,000
Other borrowings................. 2.35 325,662 1.55 120,977
Unamortized premium.............. -- 6,880 -- 19,075
---- --------- ---- ---------
Total borrowed funds....... 3.96% $ 2,600,667 4.36% $ 2,299,427
==== ========= ==== =========
17
REAL ESTATE DEVELOPMENT
We engage in the business of purchasing unimproved land for development
into residential subdivisions of single-family lots primarily through MAFD, a
wholly-owned subsidiary of the Company. We started this business in 1974 and
since that time have developed and sold over 6,300 lots in 23 different
subdivisions primarily in the western suburbs of Chicago. MAFD typically acts as
sole principal or as a joint venture partner in our development projects.
Historically, we have provided essentially all of the capital for a joint
venture and receive in exchange an ownership interest in the joint venture which
entitles us to a percentage of the profit or loss generated by the project,
generally 50-60%, with the exact percentage based upon a number of factors,
including characteristics of the venture, the perceived risks involved, and the
time to completion. The net profits are generally defined in the joint venture
agreement as the gross profits of the joint venture from sales, less all
expenses, loan repayments and capital contributions. In addition, MAFD may from
time to time invest in residential real estate projects, typically structured as
limited partnership investments, managed by unaffiliated parties.
The following is a summary as of December 31, 2004, of our pending
residential real estate projects:
LOTS
DATE NUMBER REMAINING
LAND LOTS FOR INVESTMENT
DESCRIPTION OF PROJECT ACQUIRED SOLD SALE BALANCE
- ------------------------------------------- ------------ ------- --------- ----------
(Dollars in thousands)
SPRINGBANK OF PLAINFIELD
1,599 residential lots; 281
multi-family units and 45.8 acres
for commercial development........... 12/02-11/04 -- 1,599 $ 34,654
SHENANDOAH
326 residential lots.................... 6/00 322 4 221
TALLGRASS OF NAPERVILLE
952 residential lots; 19.3 acres for
multi-family homes; 12.8 acres for
commercial development(1)............ 11/96-8/01 949 3 216
------
$ 35,091
======
- ------------------
(1) All of the multi-family and commercial acreage has been previously sold.
SPRINGBANK OF PLAINFIELD. This project consists of 950 acres in Plainfield,
Illinois, located in Will County southwest of Chicago along the fast-developing
I-55 corridor. The project received local zoning and plan approvals in the
fourth quarter of 2004, approximately six months later than we anticipated due
to various delays in the municipal planning process. We commenced development
work in December 2004. The project is expected to have approximately 1,599
single-family residential lots and 281 multi-family units with an additional
45.8 acres zoned for commercial development. During the first quarter of 2005,
we offered a total of 305 lots for sale in two phases. To date, 148 of these
lots are currently under contract to be sold. Lot sale closings are expected to
begin in the third quarter of 2005.
The aggregate purchase price of contracts for land in this development is
$38.3 million, of which $33.2 million has been disbursed to date, including $9.2
million disbursed in 2004 and $21.0 million disbursed in 2003. The investment
balance also includes engineering, survey and other preliminary development
costs. Based on the current plans for this project and the existing land
purchase contracts, current estimated future developments costs (including the
remaining land acquisition costs) are approximately $57 million.
SHENANDOAH. This project consists of approximately 326 single-family lots,
also in Plainfield, Illinois. Development began in mid 2002, and to date, we
have sold 322 lots. There were no lots under contract at December 31, 2004. We
anticipate the remaining four lots in this development will be sold by the third
quarter of 2005. We estimate an additional $2.7 million of final improvements
will be made to complete this project.
TALLGRASS OF NAPERVILLE. This project consists of 447 acres in three
separate parcels in Naperville, Illinois. The project also had 19.3 acres
available for multi-family units, as well as 12.8 acres of commercially-zoned
land which we sold in bulk to developers. Only three residential lots remained
at December 31, 2004. Currently, we estimate an additional $903,000 of
disbursements will be necessary to complete this project.
18
REGULATION AND SUPERVISION
GENERAL. The Company, as a savings and loan holding company, is required to
file certain reports with, and otherwise comply with the rules and regulations
of, the OTS under the Home Owners' Loan Act (the "HOLA"). In addition, the
activities of savings institutions, such as the Bank, are governed by the HOLA
and the Federal Deposit Insurance Act ("FDI Act").
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer.
The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its
deposit accounts are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") managed by the FDIC. The Bank must file reports with the
OTS and the FDIC concerning its activities and financial condition in addition
to obtaining regulatory approvals prior to entering into certain transactions
such as mergers with, or acquisitions of, other savings institutions. The OTS
and/or the FDIC conduct periodic examinations to test the Bank's compliance with
various regulatory requirements. This 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 and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
FDIC or the Congress, could have a material adverse impact on the Company, the
Bank and their operations. Certain regulatory requirements applicable to the
Bank and to the Company are referred to below or elsewhere herein. The
description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth in this Form 10-K does not
purport to be a complete description of such statutes and regulations and their
effects on the Bank and the Company.
HOLDING COMPANY REGULATION. The Company is a nondiversified unitary savings
and loan holding company within the meaning of the HOLA. As a unitary savings
and loan holding company, the Company generally will not be restricted under
existing laws as to the types of business activities in which it may engage,
provided that the Bank continues to be a qualified thrift lender ("QTL"). See
"Federal Savings Institution Regulation--QTL Test." Upon any non-supervisory
acquisition by the Company of another savings institution or savings bank that
meets the QTL test and is deemed to be a savings institution by the OTS, the
Company would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and would be subject to
limitations on the types of business activities in which it could engage. The
HOLA limits the activities of a multiple savings and loan holding company and
its non insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act of
1956, as amended ("BHC Act"), subject to the prior approval of the OTS, and
activities authorized by OTS regulation. No multiple savings and loan holding
company may acquire more than 5% of the voting stock of a company engaged in
impermissible activities.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; or acquiring or retaining control of
a depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved and the effect of the acquisition of the
institution on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restricti