| MAF BANCORP INC Item 1A Risk Factors The Company is subject to certain risks |
| In addition to the factors discussed below, please see the discussion under “Item 7A Quantitative and Qualitative Disclosure about Market Risk” beginning on page 1 |
| These risks and uncertainties, along with the other information in our Form 10-K, should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements |
| We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations |
| The Bank is subject to extensive regulation, supervision and examination by the Office of Thrift Supervision, its chartering authority, and by the Federal Deposit Insurance Corporation, as insurer of its deposits |
| Such regulation and supervision govern the activities in which an institution and its holding company may engage, and are not intended to protect the interests of investors in our common stock |
| Regulatory authorities have broad discretion in their supervisory and enforcement activities, including the authority to impose restrictions on our operations, to classify our assets which may affect the level of our allowance for loan losses, to limit our dividends or impose higher capital requirements on us, to limit acquisition activities we may propose and to impose penalties for noncompliance |
| In addition, we are likely to continue to incur significant operational costs related to compliance as the risks and burden of regulatory compliance have increased significantly in recent years |
| Regulatory changes, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations |
| Unanticipated changes in interest rates could reduce our profitability and affect the value of our assets |
| Our net interest income, which is our primary source of revenue, depends on the spread between the interest we earn on loans and investments and the interest we pay on deposits and borrowings |
| For this reason, the level of our earnings is highly susceptible to changes in interest rates which generally impact our interest-earning assets and our interest-bearing liabilities differently |
| While we actively manage this sensitivity to interest rate risk as a key part of our business strategy, unanticipated changes in interest rates and changes in the yield curve may have a material adverse affect on our results of operation |
| Changes in the level of interest rates also may negatively affect our ability to originate mortgage loans, the value of our assets and our ability to realize gains from the sale of loans |
| Competition from financial institutions and other financial service providers may adversely affect our growth and profitability |
| The banking business is highly competitive and we experience competition in each of our markets from many other financial institutions |
| We compete with community banks, savings and loan associations, credit unions, mortgage banking firms, mortgage brokers, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other regional, super-regional, national and international financial institutions that operate offices in our primary 29 ______________________________________________________________________ [57]Table of Contents market areas and elsewhere |
| While we believe we can and do successfully compete with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of lesser geographic diversification and inability to spread our marketing costs across a broader market |
| We compete with these institutions both in attracting deposits and in originating loans |
| A key part of our strategy is to compete by concentrating our marketing efforts in our primary markets with local advertisements, broad product offerings, community support, personal contacts, and flexibility and responsiveness in working with local customers, but competition has made it more difficult for us to grow our customer base without adjusting our pricing |
| In addition, in recent years we have encountered many de novo banks in our market areas that tend to price their loans and deposits aggressively in order to attract customers |
| Price competition for loans and deposits causes us to earn less on our loans and pay more on our deposits, which reduces net interest income |
| If the value of real estate in the suburban Chicago and suburban Milwaukee areas were to decline precipitously, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on us |
| With most of our real estate loans concentrated in suburban Chicago and suburban Milwaukee areas, a decline in local economic conditions or the demand for real estate in these markets could adversely affect the value of the collateral securing our loans |
| A decline in property values could diminish our ability to recover fully on defaulted loans by selling the real estate collateral and we might suffer greater losses on defaulted loans as a result |
| A decline in local economic and market conditions may have a greater effect on our earnings and capital than on the earnings and capital of institutions whose real estate loan portfolios are more geographically diverse |
| High loan-to-value ratios on a growing portion of our residential mortgage and home equity portfolios expose us to greater risk of loss |
| A growing number of our residential mortgage loans are secured by liens on mortgage properties in which the borrowers have little or no equity which may lead to a higher incidence of default on these loans |
| Some of our mortgage and home equity loans or lines of credit may have, either alone or when added to existing senior lien balances, a post-funding combined loan-to-value ratio of up to 100prca of the value of the home securing the loan |
| At December 31, 2005, approximately dlra429dtta3 million, or 8prca, of our dlra5dtta59 billion single-family residential mortgage loan portfolio, including equity loans, had original loan-to-value ratios in excess of 90prca (based on total line available) and no private mortgage insurance |
| Depending on our loan sale activity and customer usage of undrawn equity lines, based on current origination trends we expect that the percent of our loan portfolio comprised of higher loan to value loans is likely to increase in 2006 |
| We may experience a higher risk of loss on these loans since our ability to recover against the collateral is more sensitive to declining property values than for loans with lower combined loan-to-value ratios |
| Our ability to service our holding company debt and pay dividends to our shareholders is substantially dependent on dividends from the Bank, and these dividends are subject to regulatory limits |
| Since January 1, 2005, we have added an additional dlra112 million of debt at our holding company as part of our capital management strategy designed to increase shareholder returns |
| We are largely dependent on the receipt of dividends from Mid America Bank in order to service this debt and the availability of dividends from the Bank is limited by various statutes and regulations |
| In the event that the Bank is unable to pay dividends to us, we may not be able to service our debt, fund additional real estate development activities, complete planned stock buybacks or pay dividends on our common stock |
| Our allowance for loan losses is based on our estimates of future losses inherent in our portfolio, and actual losses we incur could exceed these estimates |
| Like all financial institutions, we maintain an allowance for loan losses we deem adequate to cover losses inherent in our portfolio from loans that may not be repaid in their entirety |
| In evaluating the adequacy of our allowance for loan losses on a quarterly basis, in addition to numerous quantitative factors we take into account, we also consider many qualitative factors, such as general business and economic conditions, general real estate market trends and other matters which are by their nature more subjective and susceptible to change |
| In addition, our estimates of the risk of loss and amount of loss on 30 ______________________________________________________________________ [58]Table of Contents some of our commercial loans require us to assess our borrowers’ abilities to successfully execute their business models through changing economic environments, competitive challenges and other factors outside our control |
| Because of the degree of uncertainty in the assumptions we make and the factors we consider, the losses we actually incur may exceed our estimates and our allowance for loan losses may prove insufficient to absorb these losses |
| Income from our real estate development business has proven more volatile in recent periods than other sources of income |
| Historically, a significant source of our non-interest income has been income from our real estate development projects involving the acquisition and development of raw land into residential lots for sale to home builders |
| We often develop these projects in multiple phases over a period of years and must obtain municipal zoning, engineering and other approvals to proceed with our plans |
| We do not control the municipal process and may not be able to accurately predict the timing and cost involved, particularly in communities where the process may be less well established like we have encountered with our Springbank project in Plainfield, Illinois |
| Delays in the approval process, as well as potential weather-related or other delays outside our control, may prolong the project timeline and increase our development costs and may interfere with the planned marketing of lots in different units |
| While we believe our real estate development activities offer us opportunity for attractive return on the capital we invest in this business, delays have caused more volatility to our income from real estate development in 2004 and 2005 than in prior years when our projects were not as large |
| We are likely to continue to experience quarterly fluctuations in earnings in 2006 as we expect higher income from real estate development in the second half of the year based on current estimates of the timing of anticipated lot sale closings in our Springbank project |
| Our acquisition strategy exposes us to certain risks |
| We have acquired a number of other banking companies in recent years and we may pursue selective acquisitions of other financial institutions in the future |
| Acquisitions can present certain managerial and operational challenges |
| While we evaluate acquisition opportunities across a variety of parameters, including our assessment of the potential impact on our financial condition as well as our prospective financial performance, our results may suffer as a result of an acquisition if we are not effective in integrating the acquired operations into our business and converting data processing systems to our platform as planned, or if we fail to achieve anticipated cost savings or revenue enhancements |
| In addition, we anticipate that future acquisitions, if any, will likely be valued at a premium to book value and at a premium to current market value, which may result in book value per share dilution and possible short-term earnings per share dilution for our shareholders depending on the transaction structure and pricing |
| Breaches of our computer and network security may result in compromises of information which could have a material adverse effect on our business |
| We depend heavily in our daily operations on our automated information systems, networks and telecommunications systems which support the evaluation, acquisition, monitoring, collection and administration of our loan and deposit servicing portfolios, general accounting and other management controls |
| We also outsource some data and payment processing to third parties |
| While we have implemented extensive policies and procedures designed to limit the impact of system failures or disruptions as well as information security measures to safeguard these systems, if we or our vendors encounter technological difficulties or security breaches, our ability to accurately process and account for customer transactions and to protect customer personal information could be compromised, and this could have a material adverse effect on our business |
| In addition, a failure or interruption of these systems or a failure of data integrity could subject us to customer complaints, potential lawsuits or increased regulatory scrutiny and could damage our reputation, making it more difficult for us to compete successfully |