**Exhibit 13**

 

**2002 ANNUAL REPORT**

 

 

**[LOGO]**

 

 

 

FIRST SECURITYFED FINANCIAL, INC.

 

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**TABLE OF CONTENTS**

 
| President’s Message                                                                    |
|---------------------------------------------------------------------------------------------|
| Selected Consolidated Financial Information                                                 |
| Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
| Consolidated Financial Statements                                                           |
| Shareholder Information                                                                     |
| Corporate Information                                                                       |

 

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**FROMYOUR PRESIDENT**

 

 

ToOur Stockholders, Depositors and Friends,

 

I am very pleased to bring you this annual report for the year endedDecember 31, 2002 for First SecurityFed Financial, Inc. and its subsidiaryFirst Security Federal Savings Bank.  Asyou will note from the report, we had another banner year with record earnings.

 

Competition in the financial marketplace continues to intensify.  Even though mega-banks invaded theChicagoland market, our Company’s assets increased to $464.3 million atDecember 31, 2002 compared to $431.3 million at December 31, 2001, an increaseof $33.0 million or 7.65%.  Consolidatednet income for 2002 was a record $8.0 million compared to net income of $6.8million for the year ended December 31, 2001. Basic earnings per share for the year ended December 31, 2002 increasedto $2.20 as compared to basic earnings per share of $1.68 for the year endedDecember 31, 2001, an increase of 30.95%. The increase in basic earnings per share was attributable to higher netincome and a decrease in the average shares outstanding.  In 2002, the Company repurchased 185,936shares in the open market at an average price of $21.84 per share.  The Company’s return on equity increased to10.77% in 2002, a substantial increase from 8.83% in 2001.  I am also pleased to report that wemaintained a low non-interest expense, which resulted in an efficiency ratio of37%.

 

Our loan department had another strong year, having originated $92.7million in mortgage loans and disbursed $24.8 million in constructionloans.  The year was also noted forrecord refinancing and substantial paydowns. Net loans receivable increased by $14.1 million from $287.5 million atDecember 31, 2001 to $301.6 million at December 31, 2002.  The increase in construction loans and linesof credit in this low interest rate environment should reduce our interest raterisk in the event of higher interest rates in the future.  The level of non-performing loans as apercentage of gross loans increased slightly from 0.63% in 2001 to 0.67% in2002.  The allowance for loan lossesincreased to $2.9 million or 0.96% of loans and the Company had loancharge-offs of only $4,000 during the year ended December 31, 2002.

 

Our vision for 2003 is to continue to do more of the same positivethings we did in 2002.  Loan productionwill continue to be a major focus. While we may not, in this highly competitive market, add substantiallyto our portfolio, we are geared to a healthy level of loan production andprepared to make loans for sale in the secondary market.  In December 2002, we completed theconstruction of our new Branch at Plum Grove and Kirchoff Roads, in Palatine,Illinois.  This one-acre corner facilitywith ample parking, drive-up lanes, 24-hour ATM service and night depository,which was opened to service the public in January 2003, will allow us toincrease our market share in this northwest suburban area.

 

The market treated the Company well during the year.  First SecurityFed Financial, Inc, (FSFF)entered the year by trading at $20.00 or 87% of book value.  By the end of 2002, the stock was trading at$24.30 or 125% of book value.  I believethe improvement in stock price is directly related to our continued, consistentand positive accomplishments noted above. It is my firm belief that if the Company continues to do well, as it hasdone over the last few years, there is reason to expect continued growth inshareholder value.

 

The Company remains committed to servicing the needs of our customersand our communities.  Personal andefficient service has always been and shall always remain our primary mission.  Our continued personal involvement invarious community activities and the charitable donations made by the Company’snon-for-profit affiliate, The Heritage Foundation of First Security FederalSavings Bank, to numerous charitable and civic organizations result in apriceless asset, and special bond with the loyalty of our communities.

 

In closing, I wish to express my thanks to our stockholders andcustomers for their continued support and enthusiasm.  And, of course, as is always the case, my sincere thanks andcontinued gratitude to the Members of the Board, the Officers, and employees,whose dedication, ability, energy and competitive spirit have brought us to ourlevel of success and will assure continued growth and excellence.

 

 
|   | Sincerely,                              |
|--------|-----------------------------------------|
|   |                                    |
|   | Julian  E. Kulas                        |
|   | *President and Chief Executive Officer* |

 

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**SELECTED CONSOLIDATED FINANCIAL INFORMATION**

 

Set forth below are selected financial andother data of First SecurityFed Financial, Inc. The financial data is derivedin part from, and should be read in conjunction with, the ConsolidatedFinancial Statements and Notes to the Consolidated Financial Statements  presented elsewhere in this Annual Report.

 
|                               |   | **At December  31,**                      |    |
|------------------------------------|--------|-------------------------------------------|---------|
|                               |   | **2002**                                  |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                               |   | **(In  Thousands Except Per Share Data)** |    |
|                               |   |                                      |    |   |   |   |   |   |   |   |   |
| Selected Financial Condition Data: |   |                                      |    |   |   |   |   |   |   |   |   |
|                               |   |                                      |    |   |   |   |   |   |   |   |   |
| Total assets                       |   | $                                         | 464,301 |   | $ | 431,275 |   | $ | 403,663 |   | $ | 372,292 |   | $ | 338,050 |   |
| Cash and cash equivalents          |   | 27,817                                    |    | 9,421 |   | 6,102 |   | 6,257 |   | 24,830 |   |
| Loans receivable, net(1)           |   | 301,642                                   |    | 287,450 |   | 275,454 |   | 241,168 |   | 218,311 |   |
| Mortgage-backed securities:        |   |                                      |    |   |   |   |   |   |   |   |   |
| Held-to-maturity                   |   | 11,880                                    |    | 17,880 |   | 5,424 |   | 7,577 |   | 11,587 |   |
| Available-for-sale                 |   | 12,780                                    |    | 5,996 |   | 7,602 |   | 9,410 |   | 12,410 |   |
| Investment securities:             |   |                                      |    |   |   |   |   |   |   |   |   |
| Held-to-maturity                   |   | 57,246                                    |    | 74,336 |   | 72,882 |   | 85,331 |   | 46,680 |   |
| Available-for-sale                 |   | 29,848                                    |    | 15,745 |   | 24,292 |   | 11,212 |   | 13,933 |   |
| Deposits                           |   | 290,612                                   |    | 268,857 |   | 252,662 |   | 238,123 |   | 220,495 |   |
| Total borrowings                   |   | 92,105                                    |    | 83,600 |   | 64,600 |   | 46,300 |   | 29,000 |   |
| Shareholders equity                |   | 75,932                                    |    | 72,038 |   | 80,249 |   | 83,156 |   | 84,587 |   |
|                                    |        |                                           |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                                  The allowance for loan losses at December 31,2002, 2001, 2000, 1999, and 1998, was $2,937,000, $2,806,000, $2,561,000,$2,315,000, and $2,069,000, respectively.

 
|                                                 |   | **Year Ended  December 31,**              |   |
|------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                 |   | **2002**                                  |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                 |   | **(In  Thousands Except Per Share Data)** |   |
|                                                 |   |                                      |   |   |   |   |   |   |   |   |   |
| Selected Operations Data:                            |   |                                      |   |   |   |   |   |   |   |   |   |
|                                                 |   |                                      |   |   |   |   |   |   |   |   |   |
| Total interest income                                |   | $                                         | 30,900 |   | $ | 30,437 |   | $ | 29,000 |   | $ | 25,285 |   | $ | 24,059 |   |
| Total interest expense                               |   | 12,646                                    |   | 14,716 |   | 14,312 |   | 11,037 |   | 10,296 |   |
| Net interest income                                  |   | 18,254                                    |   | 15,721 |   | 14,688 |   | 14,248 |   | 13,763 |   |
| Provision for loan losses                            |   | 127                                       |   | 144 |   | 246 |   | 246 |   | 246 |   |
| Net interest income after provision for loan  losses |   | 18,127                                    |   | 15,577 |   | 14,442 |   | 14,002 |   | 13,517 |   |
| Deposit service charges                              |   | 491                                       |   | 364 |   | 372 |   | 368 |   | 416 |   |
| Gain (loss) on sales of  securities             |   | 53                                        |   | 81 |   | (46 | ) | 12 |   | 40 |   |
| Other non-interest income                            |   | 405                                       |   | 690 |   | 311 |   | 430 |   | 356 |   |
| Total non-interest income                            |   | 949                                       |   | 1,135 |   | 637 |   | 810 |   | 812 |   |
| Total non-interest expense                           |   | 7,100                                     |   | 6,554 |   | 6,087 |   | 6,102 |   | 5,887 |   |
| Income before taxes                                  |   | 11,976                                    |   | 10,158 |   | 8,992 |   | 8,710 |   | 8,442 |   |
| Income tax provision                                 |   | 3,958                                     |   | 3,396 |   | 2,989 |   | 3,028 |   | 3,098 |   |
| Net income                                           |   | $                                         | 8,018  |   | $ | 6,762 |   | $ | 6,003 |   | $ | 5,682 |   | $ | 5,344 |   |
|                                                 |   |                                      |   |   |   |   |   |   |   |   |   |
| Basic earnings per share                             |   | 2.20                                      |   | 1.68 |   | 1.28 |   | 1.14 |   | 0.93 |   |
| Diluted earnings per share                           |   | 2.15                                      |   | 1.67 |   | 1.28 |   | 1.14 |   | 0.93 |   |

 

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|                                                                             |   | **Year Ended December 31,** |   |
|----------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                             |   | **2002**                         |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| Selected Financial Ratios and Other Data:                                        |   |                             |   |   |   |   |   |   |   |   |   |
|                                                                             |   |                             |   |   |   |   |   |   |   |   |   |
| Performance Ratios:                                                              |   |                             |   |   |   |   |   |   |   |   |   |
| Return on assets (ratio of net income toaverage total assets)                    |   | 1.79                             | %      | 1.63 | % | 1.54 | % | 1.61 | % | 1.62 | % |
| Return on equity (ratio of net income toaverage equity)                          |   | 10.77                            |   | 8.83 |   | 7.34 |   | 6.82 |   | 5.97 |   |
| Dividend payout ratio                                                            |   | 25.52                            |   | 32.89 |   | 42.16 |   | 35.08 |   | 7.62 |   |
| Interest rate spread information:                                                |   |                             |   |   |   |   |   |   |   |   |   |
| Average during period                                                            |   | 3.81                             |   | 3.25 |   | 2.94 |   | 3.31 |   | 3.28 |   |
| Net interest margin(1)                                                           |   | 4.48                             |   | 4.13 |   | 4.04 |   | 4.36 |   | 4.37 |   |
| Ratio of operating expense to average totalassets                                |   | 1.58                             |   | 1.58 |   | 1.56 |   | 1.73 |   | 1.79 |   |
| Efficiency ratio(2)                                                              |   | .37                              |   | .39 |   | .40 |   | .40 |   | .40 |   |
| Ratio of average interest-earning assets toaverage interest-bearing  liabilities |   | 122.81                           |   | 123.91 |   | 129.24 |   | 132.19 |   | 135.90 |   |
|                                                                             |   |                             |   |   |   |   |   |   |   |   |   |
| Quality Ratios:                                                                  |   |                             |   |   |   |   |   |   |   |   |   |
| Non-performing assets to total assets at endof period                            |   | .44                              |   | .42 |   | .39 |   | .37 |   | .30 |   |
| Allowance for loan losses to non-performingloans at end of period                |   | 142.71                           |   | 153.25 |   | 164.38 |   | 166.19 |   | 203.24 |   |
| Allowance for loan losses to gross loansreceivable at end of period              |   | .96                              |   | .96 |   | .93 |   | .96 |   | .93 |   |
|                                                                             |   |                             |   |   |   |   |   |   |   |   |   |
| Capital Ratios:                                                                  |   |                             |   |   |   |   |   |   |   |   |   |
| Equity to total assets at end of period                                          |   | 16.35                            |   | 16.70 |   | 19.88 |   | 22.34 |   | 25.03 |   |
| Average equity to average assets                                                 |   | 16.57                            |   | 18.47 |   | 20.96 |   | 23.57 |   | 27.18 |   |

 

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(1)                                  Net interest income divided by averageinterest-earning assets.

(2)                                  The efficiency ratio represents non-interestexpense divided by the sum of net interest income and non-interest income.

 

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**MANAGEMENT’S DISCUSSION AND ANALYSIS****OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**General**

 

First SecurityFed Financial, Inc. (the“Company”) became the holding company for First Security Federal Savings Bank(the “Bank” or “First Security”) upon the completion of the conversion of theBank from a federally chartered mutual savings bank to a federally charteredstock savings bank (the “Conversion”) on October 30, 1997.   The financial condition and operatingresults of the Company are primarily dependent upon the financial condition andoperating results of the Bank.  TheCompany’s primary business activity to date has been limited to its ownershipof the Bank and a portfolio of investment securities.

 

The Bank is a financial intermediary engagedprimarily in attracting deposits from the general public and using suchdeposits to originate one-to-four family residential mortgages and, to a lesserextent, multi-family, commercial real estate, construction, home equity loans,consumer and other loans primarily in its market area.  The Bank also uses these deposits to acquiremortgage backed and other securities. The Bank’s revenues are derived principally from interest earned onloans and mortgage-backed and other securities.  The operations of the Bank are influenced significantly bygeneral economic conditions and by policies of financial institution regulatoryagencies, including the Office of Thrift Supervision (OTS) and the FederalDeposit Insurance Corporation (FDIC). The Bank’s cost of funds is influenced by interest rates on competinginvestments and general market interest rates. Lending activities are affected by the demand for financing of realestate and other types of loans, which in turn is affected by the interestrates at which such financings may be offered.

 

The Bank’s net interest income is dependentprimarily upon the difference or spread between the average yield earnedon  loans receivable and securities, andthe average rate paid on deposits and Federal Home Loan Bank (FHLB) advances,as well as the relative amounts of such assets and liabilities.  The Bank, like other thrift institutions, issubject to interest rate risk to the degree that its interest-bearingliabilities mature or reprice at different times, or on a different basis, thanits interest-earning assets.

 

**Business Strategy**

 

The Bank seeks to obtain a competitiveadvantage in its deposit gathering and lending operations by maintaining a highlevel of community involvement and by offering a high level of personalservice.

 

In its deposit gathering operations, the Bankuses community outreach and customer service in an attempt to build andmaintain passbook and other non-certificate accounts.  These accounts generally carry lower costs than certificateaccounts and are believed to represent primarily “core” deposits that are lessvulnerable to interest rate changes (and competition from other financialproducts) than certificate accounts.

 

In its lending operations, the Bank seeks toobtain high quality residential and, to a lesser extent, other loans bymaintaining a high level of local visibility, offering a high level of customer

 

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service and limiting its secondary market activities. In recent years,as a result of these efforts, the Bank’s outstanding loan balances haveincreased.  At the same time, assetquality has remained high.

 

**Comparison of Financial Condition at December31, 2002 and December 31, 2001**

 

Total assets at December 31, 2002 were $464.3million compared to $431.3 million at December 31, 2001, an increase of $33.0million or 7.65%. The increase in total assets was due primarily to increasesof $18.4 million in cash and cash equivalents, $14.1 million in loan  receivable and $2.6 million in FHLB stock,partially offset by a decrease of $2.2 million in securities.

 

Net loans receivable increased by $14.1million from $287.5 million at December 31,2001 to $301.6 million at December31, 2002. The increase was primarily due to the disbursement of $24.8 millionto fund construction loans, as well as the disbursement of $92.7 million tofund mortgage loans and a net increase in equity line of credit loans of $9.5million partially offset by $16.4 million in paydowns on construction loans and$96.6 million in paydowns on mortgage loans. The net increase in loansreceivable was largely a result of a low interest rate environment and a stronglocal real estate market.  Due to thislow interest rate environment, $23.4 million of the Bank’s mortgage loans wererefinanced during the past year.  Therefinancings contributed to the decrease of 30 basis points in the average rateearned on loans receivable.

 

Cash and cash equivalents increased by $18.4million due to the inflow of funds from the calls of securities, increasedpaydowns on mortgage-backed securities, and the net increase in depositsaccounts and Federal Home Loan Bank advances. The funds were deposited in overnight federal funds and interest-bearingaccounts with other financial institutions awaiting redeployment into mortgage loans and agency, municipal andmortgage backed-securities.

 

Federal Home Loan Bank stock increased by$2.6 million primarily due to stock purchases by the Bank. Also contributing tothis increase in stock were stock dividends received from the Federal Home LoanBank.  The stock issued by the FederalHome Loan Bank is liquid and pays a competitive quarterly dividend.

 

Premises and equipment increased by $1.1million primarily due to the purchase and remodeling of a building in Palatine,Illinois for the Bank’s relocated northwest suburban office.  The remodeled office is located in veryclose proximity to the Bank’s current Rolling Meadows branch, but is a muchlarger, free standing facility.

 

Securities decreased by $2.2 million from$114.0 million at December 31, 2001 to $111.8 million at December 31, 2002. The decrease was primarily due to the maturity and call of $28.1 millionin agency securities, the sale of $3.2 million in municipal and mortgage-backedsecurities and paydowns of $9.6 million on mortgage-backed securities,partially offset by the purchase of $23.1 million in agency securities, $8.9million in mortgage-backed securities, $5.4 million in municipal securities andan increase of $913,000 in the fair market value of available-for-salesecurities.

 

Total liabilities at December 31, 2002 were$388.4 million compared to $359.2 million at December 31, 2001, an increase of$29.2 million. The increase in liabilities was due primarily to

 

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increases of $21.7 million in deposits, $8.5 million in Federal HomeLoan Bank advances partially offset by a decrease of $1.1 million in accruedinterest payable and other liabilities.

 

Accrued interest payable and otherliabilities decreased primarily due to the lower rates being paid on thevarious types of deposit products offered by the Bank.  The lower rates resulted in lower interestexpense resulting in lower accrued interest payable.

 

Deposits increased due to a special 13 monthcertificate being offered by the Bank, increased marketing efforts and due tothe less volatile and less risky nature of deposit accounts in comparison toother types of consumer investment vehicles. The Bank utilized additional Federal Home Loan Bank advances due to lowrates being charged on these types of borrowings. The proceeds  were then used to fund a portion of the loangrowth described above.

 

Shareholders’ equity at December 31, 2002 was$75.9 million compared to $72.0 million at December 31, 2001, an increase of$3.9 million. The increase in equity was due primarily to net income of $8.0million for the period partially offset by the Company’s repurchase ofoutstanding common stock of $4.1 million. Equity at December 31, 2002 was alsoimpacted by dividends on the Company’s common stock.  Four cash dividends totaling $2.0 million were declared duringthe year ended December 31, 2002. The dividends were paid to stockholders inApril, July, and October 2002, and January 2003.

 

**Comparison of Operating Results for the YearsEnded December 31,  2002 and December31, 2001**

 

***General****.* Net income for the year ended December 31, 2002 was $8.0 millioncompared to net income of $6.8 million for the year ended December 31, 2001, anincrease of $1.2 million. The increase in net income was attributable primarilyto an increase in net interest income partially offset by a decrease innoninterest income and increases in noninterest expense and income tax expense.Basic earnings per share for the year ended December 31, 2002 increased to$2.20 as compared to basic earnings per share of $1.68 for the year endedDecember 31, 2001, an increase of 30.95%. Diluted earnings per share for the year ended December 31, 2002increased to $2.15 as compared to diluted earnings per share of $1.67 for theyear ended December 31, 2001, an increase of 28.74%.  The increase in basic and diluted earnings per share wasattributable to higher net income and a decrease in the average sharesoutstanding as a result of the Company’s repurchasing 185,936 shares of itscommon stock in the open market during 2002.

 

***Interest Income****.* Interest income for the year ended December 31, 2002 was $30.9million compared to $30.4 million for the year ended December 31, 2001, anincrease of $500,000. The increase in interest income was primarily due to anincrease in the average balance of interest earning assets from $399.5 millionfor the year ended December 31, 2001 to $429.2 million for the year endedDecember 31, 2002 due to the investment of funds in loans, mortgage-backed,municipal and agency securities and Federal Home Loan Bank stock. Interestincome on loans increased by $465,000 primarily due to an increase in thevolume of loans receivable.  Even thoughthere was an increase of 5.9% in the average balance of outstanding loansreceivable for the year ended December 31, 2002, as compared to the year endedDecember 31, 2001, the increase in interest income on loans

 

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was significantly offset by the declining interest rate environmentexisting during the past year resulting in a 30 basis point decrease in theaverage rate earned on loans receivable. Interest income on mortgage-backed securities increased by $244,000 dueto increases in the outstanding balances of mortgage-backed securities.  Interest income on taxable securitiesdecreased by $691,000 due primarily to decreases in the average interest ratespaid by the issuers on these securities resulting in a 71 basis point decreasein the average rate earned on federal agency securities and a 129 basis pointdecrease in the average rate earned on mutual funds.  Also contributing to the decrease in interest income onsecurities was a decrease in the average outstanding balances of the Company’staxable securities portfolio resulting from calls of these securities by theissuing agencies. Interest income on tax-exempt securities increased by$374,000 primarily due to increases in the average balances of thesesecurities. Interest income from Federal Home Loan Bank dividends increased by$294,000 due primarily to increases in the average balances of Federal HomeLoan Bank stock.  Interest income onfederal funds sold and other interest earning assets decreased by $223,000 dueto decreases in the average balances of federal funds sold and interest-bearingdeposits with other financial institutions. Also contributing to the decrease in interest income on federal fundssold and other interest earning assets were decreases in the average interestrates paid on these deposits resulting in a 209 basis point decrease in theaverage rate earned on interest-bearing deposit accounts in other financialinstitutions and a 193 basis point decrease in federal funds sold.

 

***Interest Expense****. *Interestexpense for the year ended December 31, 2002 was $12.6 million compared to$14.7 million for the year ended December 31, 2001, a decrease of $2.1 million.The decrease in interest expense was due primarily to a decrease in the averageinterest rate paid on interest-bearing liabilities.  Contributing to the decrease in interest expense was the maturityof customer’s certificates of deposit during the year and the reinvestment ofthose funds into certificates paying lower rates of interest.  This decrease in interest expense due tolower rates of interest was partially offset by a $27.1 million increase in theaverage balance of interest-bearing liabilities from $322.4 for the year endedDecember 31, 2001 to $349.5 million for the year ended December 31, 2002.

 

Interest expense on deposits decreased by$3.0 million due to a decrease in the weighted average cost of deposits,reflecting lower market rates of interest. Interest expense on Federal HomeLoan Bank advances increased by $912,000 due to increases in the balances ofFederal Home Loan Bank advances, which were used to fund loan growth. Eventhough the balances of both deposits and Federal Home Loan Bank advancesincreased, the impact on interest expense was moderated by the falling interestrate environment during 2002 resulting in a lower cost of funds for the Bank.The average cost of funds decreased 94 basis points from 4.56% for the yearended December 31, 2001 to 3.62% for the year ended December 31, 2002.

 

***Net Interest Income.**** *Netinterest income for the year ended December 31, 2002 was $18.3 million, whichrepresented an increase of $2.6 million from net interest income of  $15.7 million for the year ended December31, 2001. The ratio of average interest earning assets to average interestbearing liabilities decreased slightly to 122.81% in 2002 from 123.91% in 2001.However, the interest spread increased to 3.81% in 2002 from 3.25% in 2001.

 

***Provision for LoanLosses.*** The provision for loan losses for the yearended December 31, 2002 was $127,000 compared to $144,000 for the year endedDecember 31, 2001, a decrease of

 

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$17,000.   Non-performing assetsat December 31, 2002 totaled $2.1 million or 0.44% of assets.  The loan loss allowance as of December 31,2002 was $2.9 million or 0.96% of gross loans, compared with $2.8 million atDecember 31, 2001 or 0.96% of gross loans.

 

On a quarterly basis, management of the Bankmeets to review the adequacy of the allowance for loan losses. Managementclassifies commercial real estate and construction loans in compliance withregulatory classifications. Classified loans are individually reviewed toarrive at specific reserves for those loans. Once the specific portion of theallowance is calculated, management calculates a historical portion for eachloan category based on loan loss history, peer data, current economicconditions and trends in portfolio, including delinquencies and impairments andreal estate values in the Bank’s market area as well as changes in thecomposition of the loan portfolio. In addition, various regulatory agencies, asan integral part of their examination processes, periodically review the Bank’sallowance for losses on loans. Such agencies may require the Bank to provideadditions to the allowance based upon judgements which differ from those ofmanagement.  Additions were made to theloan loss provision due to increases in nonperforming assets and in the outstandingbalances of commercial real estate and construction loans.  The outstanding balance of commercial realestate loans increased by $19.7 million and the outstanding balance ofconstruction loans increased by $9.1 million. Since these types of loans expose the Bank to a higher degree of risk,additional loan loss provisions were made. Although management believes the allowance for loan losses reflectedprobable incurred losses on existing loans at December 31, 2002, there can beno assurance that such losses will not exceed estimated amounts.

 

***Noninterest Income.*****Noninterest income for the year endedDecember 31, 2002 was $949,000 compared to $1,135,000 for the year endedDecember 31, 2001, a decrease of $186,000. The decrease in noninterest incomewas due primarily to a $286,000 net gain on the sale of real estate held forexpansion that had been recorded in 2001 partially offset by an increase of$127,000 in deposit service charges in 2002. The increase in deposit service charges is due primarily to changes madeeffective in January 2002 relative to non-sufficient fund, research, accountmaintenance and other service fees charges by the Bank.  Also contributing to the decrease innoninterest income was a $28,000 decrease in the net gain on sales and calls ofsecurities.

 

***Noninterest Expense.*****Noninterest expense for the year endedDecember 31, 2002 was $7.1 million compared to noninterest expense of $6.6million for the year ended December 31, 2001, an increase of $546,000.Compensation and benefits expense increased by $410,000 partially due to anincrease in ESOP expense resulting from an increase in the Company’s stockprice, the hiring of additional bank personnel as a result of the continuinggrowth of the Bank and normal annual salary adjustments for existing Bankpersonnel. Other expense increased by $113,000 partially due to a $78,000write-off of obsolete computer equipment made necessary by a company-widereplacement of all computers.

 

***Income taxes.***** Income taxes were $4.0 million for the year ended December 31,2002 compared to $3.4 million for the year ended December 31, 2001, an increaseof $562,000. The increase in provision for income taxes was due primarily to anincrease of $1.8 million in pretax earnings. The effective tax rate on income for the year ended December 31, 2002was 33.1% compared to an effective tax rate of 33.4% for the year endedDecember 31, 2001.

 

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**Comparison of Financial Condition at December31, 2001 and December 31, 2000**

 

Total assets at December 31, 2001 were $431.3million compared to $403.7 million at December 31, 2000, an increase of $27.6million or 6.84%. The increase in total assets was due primarily to increasesof $3.3 million in cash and cash equivalents, $3.8 million in securities, $12.0in loans receivable and $8.9 million in Federal Home Loan Bank (FHLB) stock,partially offset by a decrease of $300,000 in premises and equipment.

 

Net loans receivable increased by $12.0million from $275.5 million at December 31, 2000 to $287.5 million at December31, 2001. The increase was due to the disbursement of $17.4 million to fundconstruction loans, as well as the disbursement of $97.0 million to fundmortgage loans and a net increase in equity line of credit loans of $4.2million offset by $12.6 million in paydowns on construction loans and $94.2million in paydowns on mortgage and other loans. The net increase in loansreceivable was largely a result of a low interest rate environment and a stronglocal real estate market.

 

Securities increased by $3.8 million from$110.2 million at December 31, 2000 to $114.0 million at December 31, 2001. Theincrease in securities was due primarily to the purchase of $42.7 million inmunicipal and agency securities and $17.8 million in mortgage backed securitiespartially offset by the maturity and call of $50.1 million in agencysecurities, the sale of $1.0 million in securities and paydowns of $5.6 millionon mortgage backed securities. Management believes that the securities were redeemeddue to the falling interest rate environment existing during the year. Cash andcash equivalents increased by $3.3 million primarily due to the inflow of fundsfrom the calls of securities and paydowns on mortgages along with increases indeposit accounts. The funds were deposited in interest-bearing accounts withother financial institutions and overnight federal funds awaiting redeploymentinto mortgage loans, agency and municipal securities and mortgage backedsecurities. Federal Home Loan Bank stock increased by $8.9 million primarilydue to stock purchases by the Bank. The stock issued by the Federal Home LoanBank is liquid and pays a competitive quarterly dividend. Premises andequipment decreased by $300,000 partially due to the sale of real estate heldfor future expansion and due to depreciation booked on the Company’s fixedassets.

 

Total liabilities at December 31, 2001 were$359.2 million compared to $323.4 million at December 31, 2000, an increase of$35.8 million. The increase in liabilities was due primarily to increases of$16.2 million in deposits, $19.0 million in Federal Home Loan Bank advances and$1.0 million in accrued interest payable and other liabilities partially offsetby a decrease of $400,000 in advance payments by borrowers for taxes andinsurance.

 

Deposits increased due to the less volatileand less risky nature of these accounts in comparison to other types ofconsumer investment vehicles. Federal Home Loan Bank advances increased due tolow rates being charged on these types of borrowings. The advances were thenredeployed into higher yielding mortgage loan products.

 

Shareholders’ equity at December 31, 2001 was$72.0 million compared to $80.2 million at December 31, 2000, a decrease of$8.2 million. The decrease in equity was due primarily to the Company’srepurchase of outstanding common stock of $14.2 million partially offset by netincome

 

9

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of $6.8 million for the period. Equity at December 31, 2001 was alsoimpacted by dividends on the Company’s common stock. Four cash dividendstotaling $2.2 million were declared during the year ended December 31, 2001.The dividends were paid to stockholders in April, July and October 2001, andJanuary 2002.

 

**Comparison of Operating Results for the YearsEnded December 31,  2001 and December31, 2000**

 

***General.***** Net income for the year ended December 31, 2001 was $6.8 millioncompared to net income of $6.0 million for the year ended December 31, 2000, anincrease of $759,000. The increase in net income was attributable to increasesin net interest income and noninterest income partially offset by increases innoninterest expense and income tax expense. Basic earnings per share for theyear ended December 31, 2001 increased to $1.68 as compared to earnings pershare of $1.28 for the year ended December 31, 2000, an increase of 31.25%. Theincrease in earnings per share is attributable to higher net income and adecrease in the average shares outstanding as the Company continued to repurchaseits common stock in the open market during 2001.

 

***Interest Income.**** *Interestincome for the year ended December 31, 2001 was $30.4 million compared to $29.0million for the year ended December 31, 2000, an increase of $1.4 million. Theincrease in interest income was due primarily to an increase in the averagebalance of interest earning assets from $379.9 million for the year endedDecember 31, 2000 to $399.5 million for the year ended December 31, 2001 due tothe investment of funds in loans, overnight federal funds and Federal Home LoanBank stock. Interest income on loans increased by $1.9 million primarily due toan increase in the average loan balance. Interest income on taxable securitiesdecreased by $1.1 million due primarily to decreases in the average outstandingbalances of the Company’s taxable securities portfolio resulting from calls ofthese securities by the issuing agencies. Interest income on tax-exemptsecurities increased by $221,000 due primarily to increases in the average balancesof these securities. Interest income on other interest earning assets increasedby $444,000 due to increases in the average balances of Federal Home Loan Bankstock, interest-bearing accounts with the Federal Home Loan Bank and fundsinvested in overnight federal funds.

 

***Interest Expense.**** *Interestexpense for the year ended December 31, 2001 was $14.7 million compared to$14.3 million for the year ended December 31, 2000, an increase of $404,000.The increase in interest expense was due to a $28.5 million increase in theaverage balance of interest-bearing liabilities from $293.9 million for theyear ended December 31, 2000 to $322.4 million for the year ended December 31,2001. Interest expense on deposits increased by $99,000 due primarily toincreases in average deposit balances. Interest expense on Federal Home LoanBank advances increased by $305,000 due to increases in the balances of FederalHome Loan Bank advances which were used to fund loan growth and to purchasesecurities. Even though the balances of both deposits and Federal Home LoanBank advances increased, the impact on interest expense was moderated by thefalling interest rate environment during 2001 resulting in a lower cost offunds for the Bank. The average cost of funds decreased 31 basis points from4.87% for the year ended December 31, 2000 to 4.56% for the year ended December31,2001 due to the lower interest rate environment.

 

10

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***Net Interest Income.**** *Netinterest income for the year ended December 31, 2001 was $15.7 million whichrepresented an increase of $1.0 million from net interest income of  $14.7 million for the year ended December31, 2000. The ratio of average interest earning assets to average interestbearing liabilities decreased to 123.91% in 2001 from 129.24% in 2000. However,the interest spread increased to 3.25% in 2001 from 2.94% in 2000. The primaryreason for the decrease in the ratio of interest earning assets to interestbearing liabilities was the Company’s repurchase of outstanding common stock.Even though the stock repurchases decreased the ratio of interest earningassets to interest bearing liabilities, they were accretive to book value pershare since all the stock was purchased at prices that were below book value.

 

***Provision for LoanLosses.*** The provision for loan losses for the yearended December 31, 2001 was $144,000 compared to $246,000 for the year endedDecember 31, 2000, a decrease of $102,000. The change was due in part to arecovery of $143,000, which the Company received in August 2001, from theliquidation of Allied Fidelity Insurance Company, which had guaranteed theprincipal and interest payments on a loan previously charged off in which theBank owned a participation interest.

 

On a quarterly basis, management of the Bankmeets to review the adequacy of the allowance for loan losses. Managementclassifies loans in compliance with regulatory classifications. Classifiedloans are individually reviewed to arrive at specific reserves for those loans.Once the specific portion of the allowance is calculated, management calculatesa historical portion for each loan category based on loan loss history, peerdata, current economic conditions and trends in portfolio, includingdelinquencies and impairments and real estate values in the Bank’s market areaas well as changes in the composition of the loan portfolio. In addition,various regulatory agencies, as an integral part of their examinationprocesses, periodically review the Bank’s allowance for losses on loans. Suchagencies may require the Bank to provide additions to the allowance based uponjudgements which differ from those of management. Although management believesthe allowance for loan losses was at a level adequate to absorb probable incurredlosses on existing loans at December 31, 2001, there can be no assurance thatsuch losses will not exceed estimated amounts.

 

***Noninterest Income.*****Noninterest income for the year endedDecember 31, 2001 was $1.1 million compared to $637,000 for the year endedDecember 31, 2000, an increase of $498,000. The increase in noninterest incomewas due primarily to a $286,000 gain on the sale of real estate held for futureexpansion along with a net increase in the gain on the sale of securities of$127,000. Also contributing to the increase in noninterest income was anincrease in other income of $139,000 primarily due to an increase in mortgagemodification fee income, which was partially offset by a decrease of $41,000 inthe gain on sale of real estate owned.

 

***Noninterest Expense.*****Noninterest expense for the year endedDecember 31, 2001 was $6.6 million compared to noninterest expense of $6.1million for the year ended December 31, 2000, an increase of $467,000.Compensation and benefits expense increased by $245,000 partially due to anincrease in ESOP expense resulting from an increase in the Company’s stockprice, the hiring of additional bank personnel as a result of the continuinggrowth of the Bank and due to normal annual salary adjustments for existing Bankpersonnel. Occupancy and equipment expense increased by $36,000 due toincreases in natural gas and other utility prices and due to increases inbuilding maintenance such as snow plowing and snow removal in early 2001. Dataprocessing expense

 

11

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increased by $90,000 due to the temporary use of information technologyspecialists to assist the Bank in upgrading its data processing systems and dueto an annual contractual adjustment by the Bank’s data processing serviceprovider in the cost of on-line data processing services. Data processingexpense was also affected by fees incurred by the Bank for the performance ofinformation technology security audits on its computer network. Other expenseincreased by $91,000 due to increases in appraisal fees as a result ofincreases in mortgage loan and construction loan volume. Also contributing tothe increase in other expense were increases in service fees charged to theCompany and the Bank by its correspondent banks.

 

***Income taxes.***** Income taxes were $3.4 million for the year ended December 31,2001 compared to $3.0 million for the year ended December 31, 2000, an increaseof $407,000. The increase in provision for income taxes was primarily due to anincrease of $1.2 million in pretax earnings.

 

12

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The following table presents, for the periods indicated, the totaldollar amount of interest income from average interest-earning assets and theresultant yields, as well as the interest expense on average interest-bearingliabilities, expressed both in dollars and rates.  A tax equivalent of 34% was used to compute the yield onmunicipal securities. No other tax equivalent adjustments were made.  All average balances are daily averagebalances.  Non-accruing loans have beenincluded in the table as loans carrying a zero yield.

 
|                                    |   | **Year Ended  December 31,** |    |
|-----------------------------------------|--------|-----------------------------------|---------|
|                                    |   | **2002**                          |    | **2001** |   | **2000** |   |
|                                    |   | **Average  Outstanding  Balance** |    | **Interest  Earned/  Paid** |   | **Yield/  Rate** |   | **Average  Outstanding  Balance** |   | **Interest  Earned/  Paid** |   | **Yield/  Rate** |   | **Average  Outstanding  Balance** |   | **Interest  Earned/  Paid** |   | **Yield/  Rate** |   |
|                                    |   | **(Dollars in  Thousands)**       |    |
|                                    |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-Earning Assets:                |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                     |   | $                                 | 299,693 |   | $ | 23,974 |   | 8.00 | % | $ | 283,072 |   | $ | 23,509 |   | 8.30 | % | $ | 261,241 |   | $ | 21,597 |   | 8.27 | % |
| Mortgage-backed securities &CMOs(2) |   | 22,801                            |    | 1,254 |   | 5.50 |   | 15,598 |   | 1,010 |   | 6.48 |   | 15,363 |   | 1,046 |   | 6.81 |   |
| Mutual funds(2)                         |   | 3,172                             |    | 133 |   | 4.19 |   | 3,172 |   | 174 |   | 5.49 |   | 3,172 |   | 170 |   | 5.36 |   |
| Agencies/other(2)                       |   | 48,473                            |    | 2,846 |   | 5.87 |   | 53,098 |   | 3,496 |   | 6.58 |   | 70,809 |   | 4,604 |   | 6.50 |   |
| Municipal securities(2)                 |   | 36,974                            |    | 2,853 |   | 7.72 |   | 29,713 |   | 2,288 |   | 7.70 |   | 25,036 |   | 1,953 |   | 7.80 |   |
| Federal funds sold                      |   | 3,781                             |    | 62 |   | 1.64 |   | 5,799 |   | 207 |   | 3.57 |   | 28 |   | 1 |   | 3.58 |   |
| Deposits with other institutions        |   | 1,740                             |    | 42 |   | 2.41 |   | 2,687 |   | 120 |   | 4.48 |   | 1,353 |   | 75 |   | 5.54 |   |
| FHLB stock                              |   | 12,534                            |    | 705 |   | 5.62 |   | 6,321 |   | 411 |   | 6.50 |   | 2,871 |   | 218 |   | 7.59 |   |
| Total interest-earning assets           |   | 429,168                           |    | 31,869 |   | 7.43 |   | 399,460 |   | 31,215 |   | 7.81 |   | 379,873 |   | 29,664 |   | 7.81 |   |
| Non-interest earning assets             |   | 20,013                            |    |   |   |   |   | 15,183 |   |   |   |   |   | 10,042 |   |   |   |   |   |
| Total assets                            |   | $                                 | 449,181 |   |   |   |   |   | $ | 414,643 |   |   |   |   |   | $ | 389,915 |   |   |   |   |   |
|                                    |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-Bearing Liabilities:           |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market                            |   | 5,132                             |    | 118 |   | 2.30 |   | 4,269 |   | 125 |   | 2.94 |   | 3,667 |   | 110 |   | 3.00 |   |
| NOW                                     |   | 14,401                            |    | 147 |   | 1.02 |   | 13,920 |   | 194 |   | 1.39 |   | 12,825 |   | 253 |   | 1.97 |   |
| Passbook savings                        |   | 88,448                            |    | 2,500 |   | 2.83 |   | 79,004 |   | 2,152 |   | 2.72 |   | 76,581 |   | 2,319 |   | 3.03 |   |
| Certificates of deposit                 |   | 154,585                           |    | 5,249 |   | 3.40 |   | 157,174 |   | 8,525 |   | 5.42 |   | 144,256 |   | 8,215 |   | 5.69 |   |
| FHLB advances                           |   | 86,904                            |    | 4,632 |   | 5.33 |   | 68,003 |   | 3,720 |   | 5.47 |   | 56,597 |   | 3,415 |   | 6.03 |   |
| Total interest-bearing liabilities      |   | 349,470                           |    | 12,646 |   | 3.62 |   | 322,370 |   | 14,716 |   | 4.56 |   | 293,926 |   | 14,312 |   | 4.87 |   |
| Non-interest bearing liabilities        |   | 25,262                            |    |   |   |   |   | 15,700 |   |   |   |   |   | 14,253 |   |   |   |   |   |
| Total liabilities                       |   | 374,732                           |    |   |   |   |   | 338,070 |   |   |   |   |   | 308,179 |   |   |   |   |   |
|                                    |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity                                  |   | 74,449                            |    |   |   |   |   | 76,573 |   |   |   |   |   | 81,736 |   |   |   |   |   |
| Total liabilities and equity            |   | $                                 | 449,181 |   |   |   |   |   | $ | 414,643 |   |   |   |   |   | $ | 389,915 |   |   |   |   |   |
|                                    |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest-earning spread             |   |                              |    |   |   | 3.81 | % |   |   |   |   | 3.25 | % |   |   |   |   | 2.94 | % |
| Margin                                  |   |                              |    | $ | 19,223 |   | 4.48 | % |   |   | $ | 16,499 |   | 4.13 | % |   |   | $ | 15,352 |   | 4.04 | % |
| Assets to liabilities                   |   | 122.81                            | %       |   |   |   |   | 123.91 | % |   |   |   |   | 129.24 | % |   |   |   |   |

 

----

(1)  Calculated net of deferred loan fees, loansin process and the allowance for loan losses.

(2)  Calculated based on amortized cost.

 

13

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The following schedule presents the dollar amount of changes in interestincome and interest expense for major components of interest-earning assets andinterest-bearing liabilities.  Itdistinguishes between the changes related to outstanding balances and those dueto the changes in interest rates.  Foreach category of interest-earning assets and interest-bearing liabilities,information is provided on changes attributable to (i) changes in volume (*i.e.*, changes in volume multiplied by oldrate) and (ii) changes in rate (i.e., changes in rate multiplied by oldvolume).  For purposes of this table,changes attributable to both rate and volume, which cannot be segregated, havebeen allocated proportionately to the change due to volume and the change dueto rate.

 
|                                        |   | **Year Ended  December 31,**     |   |
|---------------------------------------------|--------|----------------------------------|--------|
|                                        |   | **2001 vs.  2002**               |   | **2000 vs.  2001** |   | **1999 vs.  2000** |   |
|                                        |   | **Increase  (Decrease)  Due to** |   | **Total  Increase** |   | **Increase  (Decrease)  Due to** |   | **Total  Increase** |   | **Increase********(Decrease)  Due to** |   | **Total  Increase** |   |
|                                        |   | **Volume**                       |   | **Rate** |   | **(Decrease)** |   | **Volume** |   | **Rate** |   | **(Decrease)** |   | **Volume** |   | **Rate** |   | **(Decrease)** |   |
|                                        |   | **(Dollars in  Thousands)**      |   |
| Interest-earning assets:                    |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                            |   | $                                | 1,349  |   | $ | (884 | ) | $ | 465 |   | $ | 1,813 |   | $ | 99 |   | $ | 1,912 |   | $ | 2,681 |   | $ | 274 |   | $ | 2,955 |   |
| Mortgage-backed securities & CMO’s |   | 413                              |   | (169 | ) | 244 |   | 16 |   | (52 | ) | (36 | ) | (344 | ) | 95 |   | (249 | ) |
| Mutual funds                                |   | —                           |   | (41 | ) | (41 | ) | — |   | 4 |   | 4 |   | — |   | (9 | ) | (9 | ) |
| Agencies and other                          |   | (290                             | )      | (360 | ) | (650 | ) | (1,165 | ) | 57 |   | (1,108 | ) | 774 |   | 85 |   | 859 |   |
| Municipal securities                        |   | 560                              |   | 5 |   | 565 |   | 360 |   | (25 | ) | 335 |   | 496 |   | (20 | ) | 476 |   |
| Federal funds sold                          |   | (57                              | )      | (88 | ) | (145 | ) | 206 |   | — |   | 206 |   | (100 | ) | (22 | ) | (122 | ) |
| Deposits with other institutions            |   | (34                              | )      | (44 | ) | (78 | ) | 62 |   | (17 | ) | 45 |   | (129 | ) | 23 |   | (106 | ) |
| FHLB stock                                  |   | 356                              |   | (62 | ) | 294 |   | 228 |   | (35 | ) | 193 |   | 51 |   | 22 |   | 73 |   |
| Total interest-earning assets               |   | 2,297                            |   | (1,643 | ) | 654 |   | 1,520 |   | 31 |   | 1,551 |   | 3,429 |   | 448 |   | 3,877 |   |
|                                        |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:               |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market                                |   | 23                               |   | (30 | ) | (7 | ) | 18 |   | (3 | ) | 15 |   | (15 | ) | 6 |   | (9 | ) |
| NOW                                         |   | 6                                |   | (53 | ) | (47 | ) | 20 |   | (79 | ) | (59 | ) | 18 |   | 1 |   | 19 |   |
| Passbook Savings                            |   | 265                              |   | 83 |   | 348 |   | 72 |   | (239 | ) | (167 | ) | 10 |   | (41 | ) | (31 | ) |
| Certificates of deposit                     |   | (138                             | )      | (3,138 | ) | (3,276 | ) | 713 |   | (403 | ) | 310 |   | 803 |   | 949 |   | 1,752 |   |
| Advances                                    |   | 1,010                            |   | (98 | ) | 912 |   | 644 |   | (339 | ) | 305 |   | 1,306 |   | 238 |   | 1,544 |   |
| Total interest bearing liabilities          |   | 1,166                            |   | (3,236 | ) | (2,070 | ) | 1,467 |   | (1,063 | ) | 404 |   | 2,122 |   | 1,153 |   | 3,275 |   |
|                                        |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest/spread                         |   | $                                | 1,131  |   | $ | 1,593 |   | $ | 2,724 |   | $ | 53 |   | $ | 1,094 |   | $ | 1,147 |   | $ | 1,307 |   | $ | (705 | ) | $ | 602 |   |

 

14

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**Quantitative and Qualitative DisclosuresAbout Market Risk**

 

In an attempt to manage its exposure tochanges in interest rates, management monitors the Company’s interest raterisk.  The Board of Directors reviews atleast quarterly the Company’s interest rate risk position andprofitability.  The Board of Directorsalso reviews the Company’s portfolio, formulates investment strategies andoversees the timing and implementation of transactions to assure attainment ofthe Company’s objectives in the most effective manner.  In addition, the Board reviews on aquarterly basis the Company’s asset/liability position, including simulationsof the effect of various interest rate scenarios on the Company’s capital.

 

In managing its asset/liability mix, theCompany, depending on the relationship between long- and short-term interestrates, market conditions and consumer preference, often places more emphasis onmanaging short term net interest margin than on better matching the interestrate sensitivity of its assets and liabilities in an effort to enhance netinterest income.  Management believesthat the increased net interest income resulting from a mismatch in thematurity of its asset and liability portfolios can, during periods of decliningor stable interest rates, provide high enough returns to justify the increasedexposure to sudden and unexpected increases in interest rates.

 

The Board has taken a number of steps tomanage the Company’s vulnerability to changes in interest rates.  First, the Company has long used communityoutreach, customer service and marketing efforts to increase the Company’spassbook and other non-certificate accounts. At December 31, 2002, $131.6  millionor 45.29% of the Company’s deposits consisted of passbook, NOW and money marketaccounts.  The Company believes thatthese accounts represent “core” deposits which are generally somewhat lessinterest rate sensitive than other types of deposit accounts.  Second, while the Company continues tooriginate 30-year fixed-rate residential loans for portfolio as a result ofconsumer demand, an increasing proportion of the Company’s residential loanshave terms of 15 years or less or carry adjustable interest rates.  Therefore, the Company may consider sellingloans into the secondary market and retaining the servicing rights.  Third, the Company continues to use FHLBadvances, to extend the term to repricing of its liabilities. At December 31,2002, the Company had $65.3 million of fixed rate advances with a remainingterm to maturity of three  years ormore. The average term to maturity or call of the Company’s fixed rateadvances, was 3.9 years at December 31, 2002. Finally, the Company has recently increased its holdings ofconstruction,  multi-family, commercialreal estate and consumer  loans. Theseloans generally have shorter terms to maturity than one-to-four family residentialloans.

 

Management utilizes the net portfolio value(NPV) analysis to quantify interest rate risk. In essence, this approachcalculates the difference between the present value of liabilities, expectedcash flows from assets and cash flows from off-balance sheet contracts. Theanalysis estimates how the Bank’s net portfolio value responds to changes ininterest rates. The current interest rate scenarios used in the NPV analysisassume an instantaneous and sustained parallel shift in the Treasury yieldcurve of plus and minus 100, 200, and 300 basis points in 100 basis point increments.

 

At December 31, 2002 and 2001, the yield onthe three month Treasury bill was below 2.00%. As a result, the net portfoliovalue analysis was unable to produce results for the minus 200 and minus 300basis point scenarios for the quarters ending December 31, 2002 and 2001.

 

15

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Presented below, as of December 31, 2002 andDecember 31, 2001, is an analysis of the Bank’s estimated interest rate risk asmeasured by changes in NPV for instantaneous and sustained parallel shifts ininterest rates up 300 basis points and down 100 basis points, in 100 pointincrements.

 

2002

 

| **Assumed Change  in Interest Rates** |   | **$ Amount**               |   | **$ Change in  NPV** |   | **% Change  inNPV** |   |
|---------------------------------------|--------|----------------------------|--------|----------------------|--------|---------------------|--------|
| **(Basis Points)**                    |   | **(Dollars in Thousands)** |   |
|                                  |   |                       |   |                 |   |                |   |
| +300                                  |   | $                          | 66,597 |                 | $      | <15,159          | >   | <19 | >% |
| +200                                  |   | 73,833                     |   | <7,923            | >   | <10              | >   |
| +100                                  |   | 79,531                     |   | <2,225            | >   | <3               | >   |
| —                                |   | 81,756                     |   | —               |   | —              |   |
| –100                             |   | 82,521                     |   | 765                  |   | 1                   |   |
| –200                             |   | —                     |   | —               |   | —              |   |
| –300                             |   | —                     |   | —               |   | —              |   |
|                                       |        |                            |        |                      |        |                     |        |  |  |

 

 

2001

 

| **Assumed Change  in Interest Rates** |   | **$ Amount**               |   | **$ Change in  NPV** |   | **% Change  inNPV** |   |
|---------------------------------------|--------|----------------------------|--------|----------------------|--------|---------------------|--------|
| **(Basis Points)**                    |   | **(Dollars in Thousands)** |   |
|                                  |   |                       |   |                 |   |                |   |
| +300                                  |   | $                          | 65,973 |                 | $      | <30,323          | >   | <31 | >% |
| +200                                  |   | 75,768                     |   | <20,528           | >   | <21              | >   |
| +100                                  |   | 86,167                     |   | < 10,129          | >   | <11              | >   |
| —                                |   | 96,296                     |   | —               |   | —              |   |
| –100                             |   | 102,825                    |   | 6,529                |   | 7                   |   |
| –200                             |   | —                     |   | —               |   | —              |   |
| –300                             |   | —                     |   | —               |   | —              |   |
|                                       |        |                            |        |                      |        |                     |        |  |  |

 

 

Certain assumptions utilized in assessing theinterest rate risk of thrift institutions were employed in preparing thepreceding table.  These assumptionsrelate to interest rates, loan prepayment rates, deposit decay rates, and themarket values of certain assets under the various interest rate scenarios.  It was also assumed that delinquency rateswill not change as a result of changes in interest rates although there can beno assurance that this will be the case. Even if interest rates change in the designated amounts, there can be noassurance that the Company’s assets and liabilities would perform as set forthabove.  In addition, a change in U.S.Treasury rates in the designated amounts accompanied by a change in the shapeof the Treasury yield curve would cause significantly different changes to theNPV than indicated above.

 

16

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**Liquidity and Capital Resources**

 

The Company’s primary sources of funds aredeposits and proceeds from principal and interest payments on loans andmortgage-backed securities.  Whilematurities and scheduled amortization of loans and securities are predictablesources of funds, deposit flows and mortgage prepayments are greatly influencedby general interest rates, economic conditions and competition.  First Security generally manages the pricingof its deposits to be competitive and to increase core deposit relationships.

 

Liquidity management is both a daily and long-termresponsibility of management.  FirstSecurity adjusts its investments in liquid assets based upon management’sassessment of (i) expected loan demand, (ii) expected deposit flows, (iii)yields available on interest-earning deposits and investment securities, and(iv) the objectives of its asset/liability management program.  Excess liquid assets are invested generallyin interest-earning overnight deposits and short- and intermediate-termU.S. Government and agency obligations and mortgage-backed securities of shortduration.  If First Security requiresfunds beyond its ability to generate them internally, it has additionalborrowing capacity with the FHLB of Chicago. Additional borrowings with the FHLB may require additional collateral tobe pledged to the FHLB.

 

The Company’s cash flows are comprised ofthree primary classifications:  cashflows from operating activities, investing activities and financing activities.Cash flows provided by operating activities were $8.7 million, $9.0 million,and $8.3 million for the years ended December 31, 2002, 2001, and 2000, respectively.Net cash used in investing activities consisted primarily of disbursements forloan originations, the purchase of investments and mortgage-backedsecurities and property and equipment expenditures on the Company’s newPalatine branch.  The cash used ininvesting activities was offset by principal collections on loans, proceedsfrom maturation and sales of securities and paydowns on mortgage-backedsecurities. Net cash from financing activities consisted primarily fromincreases in net deposits and advances from FHLB of Chicago partially offset byrepurchases of Company common stock and the payment of dividends.

 

The Company’s most liquid assets are cash andcash equivalents.  The levels of theseassets are dependent on the Company’s operating, financing, lending andinvesting activities during any given period. At December 31, 2002, cash and short-term investments totaled$27.8 million.  The Company has othersources of liquidity if a need for additional funds arises, includingsecurities maturing within one year and the repayment of loans.  The Company may also utilize the sale ofsecurities available-for-sale and FHLB advances as sources offunds.

 

**Commitments**

 

At December 31, 2002 the Company hadoutstanding commitments to originate mortgage loans of $9.8 million, $9.0million of which had fixed interest rates. As of the same date, the Companyalso had construction loans in process of $10.2 million, all of which hadfloating interest rates based on prime rate and $14.9 million in unused linesof credit for home equity loans. Finally, as of December 31, 2002, the Company had $5.9 million incommitments to fund construction loans. These loans are to be secured byproperties located in its market area. The Company anticipates that

 

17

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it will have sufficient funds available to meet its current loancommitments.  Loan commitments have, inrecent periods, been funded through liquidity or through FHLB advances.

 

Certificates of deposit which are scheduled to mature in one year orless from December 31, 2002 totaled $128.1 million.  Management believes, based on past experience, that a significantportion of such deposits will remain with the Company.  Based on the foregoing, in addition to theCompany’s high level of core deposits and capital, the Company considers itsliquidity and capital resources sufficient to meet its outstanding short-termand long-term needs.  During the thirdquarter of 2002, the Bank implemented a secured letter of credit program.  The outstanding letters of credit are fullysecured by customers’ deposit accounts at the Bank.  At December 31, 2002, the Bank had outstanding secured letters ofcredit of $137,490.

 

The following tables disclose contractual obligations and commercialcommitments of the Company as of December 31, 2002:

 

|                          |   | **Total** |   | **Less Than  1 Year** |   | **1 - 3  Years** |   | **4 - 5  Years** |   | **After  5 Years** |   |
|-------------------------------|--------|-----------|--------|-----------------------|--------|------------------|--------|------------------|--------|--------------------|--------|
| FHLB Advances                 |   | $         | 92,105 |                  | — |             | $      | 26,800           |   | $                  | 39,305 |   | $ | 26,000 |   |
|                          |   |      |   |                  |   |             |   |             |   |               |   |   |   |   |   |
| Total contractual obligations |   | $         | 92,105 |                  | — |             | $      | 26,800           |   | $                  | 39,305 |   | $ | 26,000 |   |

 

 

|                                   |   | **Total  Amounts  Committed** |   | **Less Than  1 Year** |   | **1 - 3 Years** |   | **4 - 5 Years** |   | **After  5 Years** | ** ** |
|----------------------------------------|--------|-------------------------------|--------|-----------------------|--------|-----------------|--------|-----------------|--------|--------------------|------------|
| Lines of credit                        |   | $                             | 14,905 |                  | $      | 664             |   | $               | 4,736  |               | $          | 9,505 |   | — |   |
|                                   |   |                          |   |                  |   |            |   |            |   |               |       |
| Mortgage Loans                         |   | 9,794                         |   | 9,794                 |   | —          |   | —          |   | —             |       |
|                                   |   |                          |   |                  |   |            |   |            |   |               |       |
| Construction Loans in Process          |   | 10,227                        |   | 10,227                |   | —          |   | —          |   | —             |       |
|                                   |   |                          |   |                  |   |            |   |            |   |               |       |
| Letters of Credit                      |   | 137                           |   | 137                   |   | —          |   | —          |   | —             |       |
|                                   |   |                          |   |                  |   |            |   |            |   |               |       |
| Commitments to Fund Construction Loans |   | 5,892                         |   | 5,892                 |   | —          |   | —          |   | —             |       |
|                                   |   |                          |   |                  |   |            |   |            |   |               |       |
| Total commercial commitments           |   | $                             | 40,955 |                  | $      | 26,714          |   | $               | 4,736  |               | $          | 9,505 |   | — |   |

 

First Security is subject to variousregulatory capital requirements imposed by the OTS.  At December 31, 2002, First Security was in compliance with allapplicable capital requirements.  SeeNote 10 of the Notes to Consolidated Financial Statements.

 

18

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**Impact of Inflation and Changing Prices**

 

The consolidated financial statements andrelated data herein have been prepared in accordance with accounting principlesgenerally accepted in the United States of America, which require themeasurement of financial position and results of operations in terms ofhistorical dollars, without considering changes in the relative purchasingpower of money over time due to inflation. Unlike most industrial companies,virtually all of the assets and liabilities of the Company are monetary innature. Therefore, interest rates have a more significant impact on a financialinstitution’s performance than the effects of general levels of inflation.Interest rates do not necessarily move in the same direction or in the samemagnitude as the prices of goods and services. In the current interest rateenvironment, the liquidity and maturity structure and quality of the Company’sassets and liabilities are critical to the maintenance of acceptableperformance levels.

 

**Safe Harbor Statement**

 

This report contains certain forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933 asamended, and Section 21E of the Securities Exchange Act of 1934, asamended.  The Company intends suchforward-looking statements to be covered by the safe harbor provisions forforward-looking statements contained in the Private Securities Litigation  Reform Act of 1995, and is including thisstatement for purposes of these safe harbor provisions.  Forward-looking statements, which are basedon certain assumptions and describe future plans, strategies, and expectationsof the Company, are generally identifiable by use of the words “believe”,“expect”, “intend”, “anticipate”, “estimate”, “project” or similarexpressions.  The Company’s ability topredict results or the actual effect of future plans or strategies isinherently uncertain.  Factors thatcould have a material adverse effect on the operations and future prospects ofthe Company and the subsidiaries include, but are not limited to, changes in:interest rates, general economic conditions, the legislative/regulatorysituation, monetary and fiscal policies of the U.S. Government, includingpolicies of the U.S. Treasury and the Federal Reserve Board, the quality orcomposition of the loan or investment portfolios, demand for loan products,prevailing real estate values, demographic changes, deposit flows, competition,demand for financial services in the Company’s market area and accountingprinciples, policies and guidelines. These risks and uncertainties should be considered in evaluatingforward-looking statements and undue reliance should not be placed on suchstatements.  Further information concerningthe Company and its business, including additional factors that couldmaterially affect the Company’s financial results, is included in the Company’sfilings with the Securities and Exchange Commission.

 

**New Accounting Pronouncements**

 

FASB Statements (FAS) 148, Accounting forStock-Based Compensation-Transition and Disclosure was issued in December2002.  Management is currently studyingthe requirements of FAS 148.  It appliesto annual financial statements for interim periods beginning after December 15,2002.  The statement requires moreprominent disclosure of how an entity’s accounting policy for compensationaffects net income; amends FAS 123 to provide three choices regarding how toadopt FAS 123; and amends APB 28 Interim Financial Reporting, to requirecompanies still using APB Opinion 25 for stock based compensation to providetabular disclosure in interim financial

 

19

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statements of the effects that using FAS 123 would have on compensationexpense, net income, and earnings per share.

 

20

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REPORT OF INDEPENDENT AUDITORS

 

Board of Directors

First SecurityFed Financial, Inc.

Chicago, Illinois

 

We have audited the accompanying consolidated balance sheets of FirstSecurityFed Financial, Inc. as of December 31, 2002 and 2001, and the relatedconsolidated statements of income, comprehensive income, shareholders’ equity,and cash flows for each of the three years in the period ended December 31,2002.  These financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of FirstSecurityFed Financial, Inc. at December 31, 2002 and 2001, and the results ofits operations and its cash flows for each of the three years in the periodended December 31, 2002, in conformity with accounting principlesgenerally accepted in the United States of America.

 

As discussed in Note 2 to the consolidated financial statements, theCompany changed its method of accounting for derivative instruments on January1, 2000 to conform with Statement of Financial Accounting Standards No. 133.

 

 

Crowe, Chizek and Company LLP

 

Oak Brook, Illinois

January 31, 2003

 

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FIRST SECURITYFED FINANCIAL INC.

### **CONSOLIDATEDBALANCE SHEETS**

December 31, 2002 and 2001

(Dollars in thousands, except share data)

 
|                                                                                                     |   | **2002** |    | **2001** |   |
|----------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| **ASSETS**                                                                                               |   |     |    |     |   |
| Cash and due from banks                                                                                  |   | $        | 16,557  |     | $      | 7,070 |   |
| Interest-bearing deposit accounts in other  financial institutions                                       |   | 5,631    |    | 1,423    |   |
| Federal funds sold                                                                                       |   | 5,629    |    | 928      |   |
| Total cash and cash equivalents                                                                          |   | 27,817   |    | 9,421    |   |
|                                                                                                     |   |     |    |     |   |
| Securities available-for-sale                                                                            |   | 42,628   |    | 21,741   |   |
| Securities held-to-maturity (fair  value:  $72,362 in 2002 and $92,579 in  2001)                    |   | 69,126   |    | 92,216   |   |
| Loans receivable, net                                                                                    |   | 301,642  |    | 287,450  |   |
| Federal Home Loan Bank stock, at cost                                                                    |   | 14,788   |    | 12,162   |   |
| Premises and equipment, net                                                                              |   | 4,349    |    | 3,204    |   |
| Accrued interest receivable                                                                              |   | 3,319    |    | 3,177    |   |
| Other assets                                                                                             |   | 632      |    | 1,904    |   |
|                                                                                                     |   |     |    |     |   |
| Total assets                                                                                             |   | $        | 464,301 |     | $      | 431,275 |   |
|                                                                                                     |   |     |    |     |   |
| **LIABILITIES**                                                                                          |   |     |    |     |   |
| Deposits                                                                                                 |   |     |    |     |   |
| Non-interest-bearing                                                                                     |   | $        | 9,601   |     | $      | 10,069 |   |
| Interest-bearing                                                                                         |   | 281,011  |    | 258,788  |   |
| Total deposits                                                                                           |   | 290,612  |    | 268,857  |   |
| Advance payments by borrowers for taxes and  insurance                                                   |   | 2,832    |    | 2,880    |   |
| Advances from Federal Home Loan Bank                                                                     |   | 92,105   |    | 83,600   |   |
| Accrued interest payable and other  liabilities                                                          |   | 2,820    |    | 3,900    |   |
| Total liabilities                                                                                        |   | 388,369  |    | 359,237  |   |
|                                                                                                     |   |     |    |     |   |
| SHAREHOLDERS’ EQUITY                                                                                |   |     |    |     |   |
| Preferred stock, $0.01 par value per share,  500,000 shares authorized, no shares issued and outstanding |   | —   |    | —   |   |
| Common stock, $0.01 par value per share,  8,000,000 shares authorized, 6,408,000 shares issued           |   | 64       |    | 64       |   |
| Additional paid-in capital                                                                               |   | 63,269   |    | 62,922   |   |
| Unearned ESOP shares                                                                                     |   | (3,269   | )       | (3,581   | )      |
| Unearned stock awards                                                                                    |   | (1,007   | )       | (1,774   | )      |
| Treasury stock, at cost 2,455,246 shares in  2002 and 2,269,310 shares in 2001                           |   | (37,750  | )       | (33,689  | )      |
| Retained earnings                                                                                        |   | 53,896   |    | 47,924   |   |
| Accumulated other comprehensive income                                                                   |   | 729      |    | 172      |   |
| Total shareholders’ equity                                                                          |   | 75,932   |    | 72,038   |   |
|                                                                                                     |   |     |    |     |   |
| Total liabilities and shareholders’ equity                                                          |   | $        | 464,301 |     | $      | 431,275 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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FIRST SECURITYFED FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2002, 2001, and 2000

(Dollars in thousands, except per share data)

 
|                                                    |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Interest and dividend income                            |   |     |   |     |   |     |   |
| Loans                                                   |   | $        | 23,974 |     | $      | 23,509   |   | $ | 21,597 |   |
| Securities                                              |   |     |   |     |   |     |   |
| Taxable                                                 |   | 2,979    |   | 3,670    |   | 4,774    |   |
| Tax-exempt                                              |   | 1,884    |   | 1,510    |   | 1,289    |   |
| Mortgage-backed securities                              |   | 1,254    |   | 1,010    |   | 1,046    |   |
| Federal Home Loan Bank dividends                        |   | 705      |   | 411      |   | 218      |   |
| Federal funds sold and other interest  earning assets   |   | 104      |   | 327      |   | 76       |   |
|                                                    |   | 30,900   |   | 30,437   |   | 29,000   |   |
|                                                    |   |     |   |     |   |     |   |
| Interest expense                                        |   |     |   |     |   |     |   |
| NOW and money market                                    |   | 265      |   | 319      |   | 363      |   |
| Passbook savings                                        |   | 2,500    |   | 2,152    |   | 2,319    |   |
| Certificates of deposit                                 |   | 5,249    |   | 8,525    |   | 8,215    |   |
| Federal Home Loan Bank advances                         |   | 4,632    |   | 3,720    |   | 3,415    |   |
|                                                    |   | 12,646   |   | 14,716   |   | 14,312   |   |
|                                                    |   |     |   |     |   |     |   |
| **Net interest income**                                 |   | 18,254   |   | 15,721   |   | 14,688   |   |
|                                                    |   |     |   |     |   |     |   |
| Provision for loan losses                               |   | 127      |   | 144      |   | 246      |   |
|                                                    |   |     |   |     |   |     |   |
| **Net interest income after provision for loan losses** |   | 18,127   |   | 15,577   |   | 14,442   |   |
|                                                    |   |     |   |     |   |     |   |
| Noninterest income                                      |   |     |   |     |   |     |   |
| Deposit service charges                                 |   | 491      |   | 364      |   | 372      |   |
| Insurance commissions                                   |   | 86       |   | 44       |   | 49       |   |
| Net gain (loss) on sales and calls of  securities       |   | 53       |   | 81       |   | (46      | )      |
| Gain on sale of real estate held for  expansion         |   | —   |   | 286      |   | —   |   |
| Net gain on sale of real estate owned                   |   | —   |   | —   |   | 41       |   |
| Other income                                            |   | 319      |   | 360      |   | 221      |   |
|                                                    |   | 949      |   | 1,135    |   | 637      |   |
|                                                    |   |     |   |     |   |     |   |
| Noninterest expense                                     |   |     |   |     |   |     |   |
| Compensation and benefits                               |   | 4,471    |   | 4,061    |   | 3,816    |   |
| Occupancy and equipment                                 |   | 743      |   | 731      |   | 695      |   |
| Data processing                                         |   | 397      |   | 396      |   | 306      |   |
| Federal insurance premiums                              |   | 144      |   | 134      |   | 129      |   |
| Other expense                                           |   | 1,345    |   | 1,232    |   | 1,141    |   |
|                                                    |   | 7,100    |   | 6,554    |   | 6,087    |   |
|                                                    |   |     |   |     |   |     |   |
| **Income before income taxes**                          |   | 11,976   |   | 10,158   |   | 8,992    |   |
|                                                    |   |     |   |     |   |     |   |
| Income tax expense                                      |   | 3,958    |   | 3,396    |   | 2,989    |   |
|                                                    |   |     |   |     |   |     |   |
| **Net income**                                          |   | $        | 8,018  |     | $      | 6,762    |   | $ | 6,003 |   |
|                                                    |   |     |   |     |   |     |   |
| Earnings per share                                      |   |     |   |     |   |     |   |
| Basic                                                   |   | $        | 2.20   |     | $      | 1.68     |   | $ | 1.28 |   |
| Diluted                                                 |   | $        | 2.15   |     | $      | 1.67     |   | $ | 1.28 |   |

 

See accompanying notes to consolidated financial statements.

 

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FIRST SECURITYFED FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years ended December 31, 2002, 2001, and 2000

(Dollars in thousands, except per share data)

 
|                                                                                                                                           |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                                                                           |   |     |   |     |   |     |   |
| Net income                                                                                                                                     |   | $        | 8,018  |     | $      | 6,762    |   | $ | 6,003 |   |
|                                                                                                                                           |   |     |   |     |   |     |   |
| Other comprehensive income                                                                                                                     |   |     |   |     |   |     |   |
| Unrealized holding gains and losses on securities available-for-sale                                                                           |   | 966      |   | 281      |   | 1,248    |   |
| Change in unrealized gains/losses on securities resulting from the  reclassification of securities from held-to-maturity to available-for-sale |   | —   |   | —   |   | (220     | )      |
| Reclassification adjustments for (gains)  and losses recognized in income                                                                      |   | (53      | )      | (81      | )      | 46       |   |
| Net unrealized gains and losses                                                                                                                |   | 913      |   | 200      |   | 1,074    |   |
| Tax effect                                                                                                                                     |   | (356     | )      | (78      | )      | (419     | )      |
|                                                                                                                                           |   | 557      |   | 122      |   | 655      |   |
|                                                                                                                                           |   |     |   |     |   |     |   |
| Comprehensive income                                                                                                                           |   | $        | 8,575  |     | $      | 6,884    |   | $ | 6,658 |   |

 

See accompanying notes to consolidated financial statements.

 

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FIRST SECURITYFED FINANCIAL, INC.

CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY

Years endedDecember 31, 2002, 2001, and 2000

(Dollars in thousands, except share data)

 
|                                                                                                                                                               |   | **Common  Stock** |   | **Additional  Paid-in  Capital** | ** ** | **Unearned  ESOP  Shares** | ** ** | **Unearned  Stock  Awards** | ** ** | **Treasury  Stock** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other Com-  prehensive  Income  (Loss)** | ** ** | **Total  Share-  holders’  Equity** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|----------------------------------|------------|----------------------------|------------|-----------------------------|------------|---------------------|------------|------------------------|------------|---------------------------------------------------------|------------|------------------------------------------|------------|
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Balance at January 1, 2000                                                                                                                                         |   | $                 | 64     |                             | $          | 64,324                     |       | $                           | (4,239     | )                   | $          | (3,075                 | )          | $                                                       | (13,227    | )                                        | $          | 39,914 |   | $ | (605 | ) | $ | 83,156 |   |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Net income                                                                                                                                                         |   | —            |   | —                           |       | —                     |       | —                      |       | —              |       | 6,003                  |       | —                                                  |       | 6,003                                    |       |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| ESOP shares earned                                                                                                                                                 |   | —            |   | 87                               |       | 333                        |       | —                      |       | —              |       | —                 |       | —                                                  |       | 420                                      |       |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Stock awards earned                                                                                                                                                |   | —            |   | —                           |       | —                     |       | 722                         |       | —              |       | —                 |       | —                                                  |       | 722                                      |       |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Issuance of stock to Foundation, net of related tax benefit                                                                                                        |   | —            |   | (1,766                           | )          | —                     |       | —                      |       | 1,957               |       | —                 |       | —                                                  |       | 191                                      |       |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Purchase of 499,005 shares of treasury stock                                                                                                                       |   | —            |   | —                           |       | —                     |       | —                      |       | (8,367              | )          | —                 |       | —                                                  |       | (8,367                                   | )          |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Dividends declared ($.51 per share)                                                                                                                                |   | —            |   | —                           |       | —                     |       | —                      |       | —              |       | (2,531                 | )          | —                                                  |       | (2,531                                   | )          |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Change  in unrealized gains/losses on securities resulting from the reclassification  of securities from held-to-maturity toavailable-for-sale, net of tax effects |   | —            |   | —                           |       | —                     |       | —                      |       | —              |       | —                 |       | (134                                                    | )          | (134                                     | )          |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Change  in fair value of securities, net of reclassification and tax effects                                                                                       |   | —            |   | —                           |       | —                     |       | —                      |       | —              |       | —                 |       | 789                                                     |       | 789                                      |       |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Balance at December 31, 2000                                                                                                                                       |   | 64                |   | 62,645                           |       | (3,906                     | )          | (2,353                      | )          | (19,637             | )          | 43,386                 |       | 50                                                      |       | 80,249                                   |       |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| ESOP shares earned                                                                                                                                                 |   | —            |   | 246                              |       | 325                        |       | —                      |       | —              |       | —                 |       | —                                                  |       | 571                                      |       |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Issuance of stock awards                                                                                                                                           |   | —            |   | 31                               |       | —                     |       | (142                        | )          | 111                 |       | —                 |       | —                                                  |       | —                                   |       |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Stock awards earned                                                                                                                                                |   | —            |   | —                           |       | —                     |       | 721                         |       | —              |       | —                 |       | —                                                  |       | 721                                      |       |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Net income                                                                                                                                                         |   | —            |   | —                           |       | —                     |       | —                      |       | —              |       | 6,762                  |       | —                                                  |       | 6,762                                    |       |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Purchase of 790,945 shares of treasury stock                                                                                                                       |   | —            |   | —                           |       | —                     |       | —                      |       | (14,163             | )          | —                 |       | —                                                  |       | (14,163                                  | )          |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Dividends declared ($.52 per share)                                                                                                                                |   | —            |   | —                           |       | —                     |       | —                      |       | —              |       | (2,224                 | )          | —                                                  |       | (2,224                                   | )          |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Change  in fair value of securities, net of income taxes and reclassification effects                                                                              |   | —            |   | —                           |       | —                     |       | —                      |       | —              |       | —                 |       | 122                                                     |       | 122                                      |       |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Balance at December 31, 2001                                                                                                                                       |   | $                 | 64     |                             | $          | 62,922                     |       | $                           | (3,581     | )                   | $          | (1,774                 | )          | $                                                       | (33,689    | )                                        | $          | 47,924 |   | $ | 172 |   | $ | 72,038 |   |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Balance at January 1, 2002                                                                                                                                         |   | $                 | 64     |                             | $          | 62,922                     |       | $                           | (3,581     | )                   | $          | (1,774                 | )          | $                                                       | (33,689    | )                                        | $          | 47,924 |   | $ | 172 |   | $ | 72,038 |   |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| ESOP shares earned                                                                                                                                                 |   | —            |   | 347                              |       | 312                        |       | —                      |       | —              |       | —                 |       | —                                                  |       | 659                                      |       |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Stock awards earned                                                                                                                                                |   | —            |   | —                           |       | —                     |       | 767                         |       | —              |       | —                 |       | —                                                  |       | 767                                      |       |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Net income                                                                                                                                                         |   | —            |   | —                           |       | —                     |       | —                      |       | —              |       | 8,018                  |       | —                                                  |       | 8,018                                    |       |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Purchase of 185,936 shares of treasury stock                                                                                                                       |   | —            |   | —                           |       | —                     |       | —                      |       | (4,061              | )          | —                 |       | —                                                  |       | (4,061                                   | )          |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Dividends declared ($.52 per share)                                                                                                                                |   | —            |   | —                           |       | —                     |       | —                      |       | —              |       | (2,046                 | )          | —                                                  |       | (2,046                                   | )          |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Change in fair value of securities, net of income taxes and  reclassification effects                                                                              |   | —            |   | —                           |       | —                     |       | —                      |       | —              |       | —                 |       | 557                                                     |       | 557                                      |       |
|                                                                                                                                                               |   |              |   |                             |       |                       |       |                        |       |                |       |                   |       |                                                    |       |                                     |       |
| Balance at December 31, 2002                                                                                                                                       |   | $                 | 64     |                             | $          | 63,269                     |       | $                           | (3,269     | )                   | $          | (1,007                 | )          | $                                                       | (37,750    | )                                        | $          | 53,896 |   | $ | 729 |   | $ | 75,932 |   |

 

See accompanying notes to consolidated financial statements.

 

25

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FIRST SECURITYFED FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2002, 2001, and 2000

(Dollars in thousands)

 
|                                                                                                      |   | **2002** |       | **2001** |       | **2000** |       |
|-----------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
| **Cash flows from operating activities**                                                                  |   |     |       |     |       |     |       |
| Net income                                                                                                |   | $        | 8,018      |     | $          | 6,762    |       | $ | 6,003 |   |
| Adjustments to reconcile net income to net  cash from operating activities                                |   |     |       |     |       |     |       |
| Depreciation and amortization of intangibles                                                              |   | 349      |       | 320      |       | 326      |       |
| Net amortization of securities                                                                            |   | (286     | )          | (32      | )          | 83       |       |
| Net (gain) loss on sales and calls of  securities                                                         |   | (53      | )          | (81      | )          | 46       |       |
| Provision for loan losses                                                                                 |   | 127      |       | 144      |       | 246      |       |
| Net gain on real estate owned                                                                             |   | —   |       | —   |       | (41      | )          |
| Net gain on sale of real estate held for  expansion                                                       |   | —   |       | (286     | )          | —   |       |
| Deferred loan origination fees                                                                            |   | 131      |       | 188      |       | 303      |       |
| Provision for deferred income taxes                                                                       |   | 405      |       | 90       |       | (94      | )          |
| Federal Home Loan Bank stock dividend                                                                     |   | (705     | )          | (332     | )          | (151     | )          |
| ESOP compensation expense                                                                                 |   | 659      |       | 571      |       | 420      |       |
| Stock award compensation expense                                                                          |   | 767      |       | 721      |       | 722      |       |
| Net change in                                                                                             |   |     |       |     |       |     |       |
| Accrued interest receivable                                                                               |   | (142     | )          | 169      |       | (370     | )          |
| Other assets                                                                                              |   | 480      |       | (391     | )          | 421      |       |
| Accrued interest payable and other  liabilities                                                           |   | (1,065   | )          | 1,110    |       | 365      |       |
| Net cash from operating activities                                                                        |   | 8,685    |       | 8,953    |       | 8,279    |       |
|                                                                                                      |   |     |       |     |       |     |       |
| **Cash flows from investing activities**                                                                  |   |     |       |     |       |     |       |
| Purchase of securities available-for-sale                                                                 |   | (32,377  | )          | (2,759   | )          | (4,642   | )          |
| Purchase of securities held-to-maturity                                                                   |   | (5,025   | )          | (60,143  | )          | (500     | )          |
| Proceeds from sales of securities  available-for-sale                                                     |   | 3,189    |       | 3,558    |       | 3,408    |       |
| Proceeds from calls and maturities of  securities                                                         |   | 28,115   |       | 50,065   |       | 2,480    |       |
| Proceeds from sale of real estate owned                                                                   |   | —   |       | —   |       | 108      |       |
| Net loan originations                                                                                     |   | (14,450  | )          | (12,328  | )          | (34,835  | )          |
| Principal payments on mortgage-backed and  related securities                                             |   | 9,553    |       | 5,835    |       | 3,527    |       |
| Purchase of Federal Home Loan Bank stock                                                                  |   | (1,921   | )          | (8,500   | )          | (864     | )          |
| Proceeds from sale of real estate held for  expansion                                                     |   | —   |       | 415      |       | —   |       |
| Property and equipment expenditures                                                                       |   | (1,463   | )          | (103     | )          | (131     | )          |
| Net cash from investing activities                                                                        |   | (14,379  | )          | (23,960  | )          | (31,449  | )          |
|                                                                                                      |   |     | ** ** |     | ** ** |     | ** ** |
| **Cash flows from financing activities**                                                                  |   |     | ** ** |     | ** ** |     | ** ** |
| Net change in deposits                                                                                    |   | 21,755   |       | 16,195   |       | 14,539   |       |
| Net change in advance payments by borrowers  for taxes and insurance                                      |   | (48      | )          | (375     | )          | 444      |       |
| Change in advances from Federal Home Loan  Bank                                                           |   | 8,505    |       | 19,000   |       | 18,300   |       |
| Dividends paid                                                                                            |   | (2,061   | )          | (2,331   | )          | (1,901   | )          |
| Purchase of treasury stock                                                                                |   | (4,061   | )          | (14,163  | )          | (8,367   | )          |
| Net cash from financing activities                                                                        |   | 24,090   |       | 18,326   |       | 23,015   |       |
|                                                                                                      |   |     |       |     |       |     |       |
| Net change in cash and cash equivalents                                                                   |   | $        | 18,396     |     | $          | 3,319    |       | $ | (155 | ) |
|                                                                                                      |   |     |       |     |       |     |       |
| Cash and cash equivalents at beginning of  year                                                           |   | 9,421    |       | 6,102    |       | 6,257    |       |
|                                                                                                      |   |     |       |     |       |     |       |
| **Cash and cash equivalents****at end of  year**                                                          |   | $        | 27,817     |     | $          | 9,421    |       | $ | 6,102 |   |
|                                                                                                      |   |     |       |     |       |     |       |
| Supplemental disclosures of cash flow  information:                                                       |   |     |       |     |       |     |       |
| Cash paid during the year for                                                                             |   |     |       |     |       |     |       |
| Interest                                                                                                  |   | $        | 12,814     |     | $          | 14,741   |       | $ | 14,110 |   |
| Income taxes                                                                                              |   | 3,703    |       | 3,095    |       | 2,933    |       |
|                                                                                                      |   |     |       |     |       |     |       |
| Supplemental noncash disclosures:                                                                         |   |     |       |     |       |     |       |
| Noncash transfer of securities from  held-to-maturity to available-for-sale upon adoption of SFAS No. 133 |   | —   |       | —   |       | 15,606   |       |

 

See accompanying notes to consolidated financial statements.

 

26

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FIRST SECURITYFED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2002, 2001, and 2000

(Table amounts in thousands, except per share data)

 

**NOTE1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Principles ofConsolidation and Nature of Business:  The consolidated financial statementsinclude the accounts of First SecurityFed Financial, Inc. (the Company) and itswholly owned subsidiary, First Security Federal Savings Bank (the Bank), andthe Bank’s wholly owned subsidiary, Western Security Service Corporation.  Significant intercompany accounts andtransactions have been eliminated.  Theonly business of the Company is the ownership of the Bank.  The Bank’s revenues primarily arise frominterest income from real estate loans and securities, with operationsconducted through its main office and three branches located in Cook County,Illinois and one branch located in Philadelphia, Pennsylvania.  Other financial instruments, which potentiallyrepresent concentrations of credit risk, include deposit accounts in otherfinancial institutions and federal funds sold.

 

Use ofEstimates:  Inpreparing financial statements in conformity with accounting principlesgenerally accepted in the United States of America, management must make estimatesand assumptions.  These estimates andassumptions affect the amounts reported for assets, liabilities, income, andexpenses, as well as affecting the disclosures provided.  Actual results could differ from the currentestimates.  The collectibility of loans,allowance for loan losses, fair values of financial instruments, and status ofcontingencies are particularly subject to change.

 

Securities:  Securities are classified asheld-to-maturity when the Company has the positive intent and ability to holdthose securities to maturity. Accordingly, they are stated at cost, adjusted for amortization ofpremiums and accretion of discounts. All other securities are classified as available-for-sale since theCompany may decide to sell those securities in response to changes in marketinterest rates, liquidity needs, changes in yields or alternative investments,and for other reasons.  These securitiesare carried at fair value with unrealized holding gains and losses, net of tax,reported as other comprehensive income. Realized gains and losses on disposition are based on the net proceedsand the adjusted carrying amounts of the securities sold, using the specificidentification method.  Other securitiessuch as Federal Home Loan Bank stock are carried at cost.

 

Loans:  Loans that management has the intent andability to hold for the foreseeable future or until maturity or payoff arereported at the principal balance outstanding, net of unearned interest,deferred loan fees and costs, and an allowance for loan losses.  Loans held for sale are reported at thelower of cost or market, on an aggregate basis.

 

Interest income is reported onthe interest method and includes amortization of net deferred loan fees andcosts over the loan term.  Interestincome is not reported when full loan repayment is in doubt, typically when theloan is impaired or payments are over 90 days past due unless the credit iswell-secured and in process of collection. In all cases, loans are placed on nonaccrual or charged-off at anearlier date if collection of principal or interest is considered doubtful.

 

27

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All interest accrued but notreceived for loans placed on nonaccrual is reversed against interestincome.  Interest received on such loansis accounted for on the cash-basis or cost-recovery method, until qualifyingfor return to accrual.  Loans arereturned to accrual status when all the principal and interest amountscontractually due are brought current and future payments are reasonablyassured.

 

28

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Allowance forLoan Losses: The allowance for loan losses is a valuation allowance for probableincurred credit losses, increased by the provision for loan losses anddecreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan lossexperience, the nature and volume of the portfolio, information about specificborrower situations and estimated collateral values, economic conditions, andother factors.  Allocations of theallowance may be made for specific loans, but the entire allowance is availablefor any loan that, in management’s judgment, should be charged off.  Loan losses are charged against theallowance when management believes that the uncollectibility of a loan balanceis confirmed.

 

A loan is impaired when fullpayment under the loan terms is not expected. Construction and commercial real estate loans are individually evaluatedfor impairment.  If a loan is impaired,a portion of the allowance is allocated so that the loan is reported, net, atthe present value of estimated future cash flows using the loan’s existing rateor at the fair value of collateral if repayment is expected solely from thecollateral.  Large groups of smallerbalance homogeneous loans, such as consumer and residential real estate loans,are collectively evaluated for impairment, and accordingly, they are notseparately identified for impairment disclosures.

 

Real EstateOwned:  Realestate owned represents property obtained through foreclosure or in settlementof debt obligations and is carried at the lower of cost (fair value at date offoreclosure) or fair value less estimated selling expenses.  Valuation allowances are recognized when thefair value less selling expenses is less than the cost of the asset.  Changes in the valuation allowance arecharged or credited to income.

 

Premises andEquipment: Land is carried at cost. Premises and equipment are stated at cost less accumulateddepreciation.  Buildings and relatedcomponents are depreciated using the straight-line method with useful livesranging from 30 to 50 years.  Furniture,fixtures and equipment are depreciated using the straight-line (or accelerated)method with useful lives ranging from 3 to 20 years.

 

Long-TermAssets:** **Premisesand equipment and other long-term assets are reviewed for impairment whenevents indicate that their carrying amount may not be recoverable from futureundiscounted cash flows.  If impaired,the assets are recorded at fair value.

 

Income Taxes:  The provision for income taxes is based onan asset and liability approach, which requires the recognition of deferred taxassets and liabilities for the expected future tax consequences of temporarydifferences between the carrying amounts and the tax bases of assets andliabilities.  A valuation allowance, ifnecessary, reduces deferred tax assets to the amount expected to be realized.

 

29

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Employee StockOwnership Plan: The cost of shares issued to the ESOP but not yet allocated toparticipants is presented in the consolidated balance sheet as a reduction ofshareholders’ equity.  Compensationexpense is recorded based on the market price of the shares as they are committedto be released for allocation to participant accounts.  The difference between the market price andthe costs of shares committed to be released is recorded as an adjustment topaid-in capital.

 

30

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Shares are consideredoutstanding for earnings per share calculations as they are committed to bereleased; unallocated shares are not considered outstanding.

 

StockCompensation: Employee compensation expense under stock options is reported using theintrinsic value method.  No stock-basedcompensation cost is reflected in net income, as all options granted had anexercise price equal to or greater than the market price of the underlyingcommon stock at date of grant.  Thefollowing table illustrates the effect on net income and earnings per share ifexpense was measured using the fair value recognition provisions of FASBStatement No. 123, *Accounting forStock-Based Compensation.*

 
|                                                                                      |   | **2002** |   | **2001** |   | **2000** |   |
|-------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                      |   |     |   |     |   |     |   |
| Net income as reported                                                                    |   | $        | 8,018  |     | $      | 6,762    |   | $ | 6,003 |   |
| Deduct:   Stock-based compensation expense determined under fair value based  method |   | 427      |   | 419      |   | 412      |   |
| Pro forma net income                                                                      |   | 7,591    |   | 6,343    |   | 5,591    |   |
|                                                                                      |   |     |   |     |   |     |   |
| Basic earnings per share as reported                                                      |   | 2.20     |   | 1.68     |   | 1.28     |   |
| Pro forma basic earnings per share                                                        |   | 2.08     |   | 1.57     |   | 1.19     |   |
|                                                                                      |   |     |   |     |   |     |   |
| Diluted earnings per share as reported                                                    |   | 2.15     |   | 1.67     |   | 1.28     |   |
| Pro forma diluted earning per share                                                       |   | 2.04     |   | 1.56     |   | 1.19     |   |
|                                                                                           |        |          |        |          |        |          |        |  |  |  |

 

The $4.86 per share fair valueof options granted in 2001 was estimated at the date of grant using theBlack-Scholes option pricing model using the following assumptions:  expected volatility factor of the expectedmarket price of the Company’s common stock of 20.32%, risk-free interest rateof 5.22%, expected option term of ten years, and a dividend yield of 2.90%.

 

The Black-Scholes optionpricing valuation model was developed for use in estimating the fair value oftraded options that have no vesting restrictions and are fullytransferable.  In addition, optionvaluation models require the input of highly subjective assumptions includingthe expected stock price volatility. Because changes in the subjective input assumptions can materiallyaffect the fair value estimate, in management’s opinion, the existing models donot necessarily provide a reliable single measure of the fair value of itsstock options.

 

Off-Balance-SheetFinancial Instruments:  Financial instruments include off-balance-sheet creditinstruments, such as commitments to make loans and standby letters of credit,issued to meet customer financing needs. The face amount for these items represents the exposure to loss, 

 

31

----

 

before considering customercollateral or ability to repay.  Suchfinancial instruments are recorded when they are funded.

 

32

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Statement ofCash Flows: Cash and cash equivalents include cash on hand, amounts due from banks,and daily federal funds sold.  TheCompany reports net cash flows for customer loan transactions, deposittransactions, and time deposits in other financial institutions.

 

Earnings PerShare:  Basicearnings per share is computed by dividing net income available to commonshareholders by the weighted average number of shares outstanding during theperiod.  ESOP shares are considered outstanding for this calculation unlessunearned.  Diluted earnings pershare is computed using the weighted number of shares determined for the basiccomputation plus the number of shares of common stock that would be issuedassuming all contingently issuable shares having a dilutive effect on earningsper share were outstanding during the period.

 

ComprehensiveIncome (Loss): Comprehensive income (loss) consists of net income and othercomprehensive income (loss).  Othercomprehensive income (loss) includes unrealized gains and losses on securitiesavailable-for-sale, net of tax, which are also recognized as separatecomponents of equity.

 

Fair Value ofFinancial Instruments:  Fair values of financial instruments are estimated using relevantmarket information and other assumptions, as more fully disclosed in a separatenote.  Fair value estimates involveuncertainties and matters of significant judgment regarding interest rates,credit risk, prepayments, and other factors, especially in the absence of broadmarkets for particular items.  Changesin assumptions or in market conditions could significantly affect theestimates.

 

OperatingSegments: While the chief decision-makers monitor the revenue streams of the variousproducts and services, the identifiable segments are not material andoperations are managed and financial performance is evaluated on a company-widebasis.  Accordingly, all of thefinancial service operations are considered by management to be aggregated inone reportable operating segment.

 

Newly IssuedBut Not Yet Effective Accounting Standards:  New accounting standards on asset retirementobligations, restructuring activities and exit costs, operating leases, andearly extinguishment of debt were issued in 2002.  Management determined that when the new accounting standards areadopted in 2003, they will not have a material impact on the Company’sfinancial condition or results of operations.

 

Reclassifications:  Some items in the prior year financialstatements were reclassified to conform to the current presentation.

 

33

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**NOTE2 - SECURITIES**

 

TheCompany’s securities at year end are as follows:

 
|                                     |   | **2002**            |   |
|------------------------------------------|--------|---------------------|--------|
|                                     |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair  Value** |   |
| Securities available-for-sale            |   |                |   |   |   |   |   |   |   |
| U.S. Treasury                            |   | $                   | 258    |   | $ | 103 |   | $ | — |   | $ | 361 |   |
| U.S. government agencies                 |   | 14,753              |   | 232 |   | (3 | ) | 14,982 |   |
| Municipal                                |   | 10,385              |   | 684 |   | (5 | ) | 11,064 |   |
| Corporate                                |   |                |   |   |   |   |   |   |   |
| Mutual funds                             |   | 3,157               |   | 137 |   | — |   | 3,294 |   |
| Other equity securities                  |   | 119                 |   | 28 |   | — |   | 147 |   |
|                                     |   | 28,672              |   | 1,184 |   | (8 | ) | 29,848 |   |
| Mortgage-backed securities               |   |                |   |   |   |   |   |   |   |
| Federal Home Loan Mortgage Corporation   |   | 2,978               |   | 4 |   | (62 | ) | 2,920 |   |
| Government National Mortgage Association |   | 846                 |   | 11 |   | (1 | ) | 856 |   |
| Federal National Mortgage Association    |   | 8,937               |   | 83 |   | (16 | ) | 9,004 |   |
|                                     |   | 12,761              |   | 98 |   | (79 | ) | 12,780 |   |
|                                     |   |                |   |   |   |   |   |   |   |
|                                     |   | $                   | 41,433 |   | $ | 1,282 |   | $ | (87 | ) | $ | 42,628 |   |
|                                     |   |                |   |   |   |   |   |   |   |
| Securities held-to-maturity              |   |                |   |   |   |   |   |   |   |
| U.S. government agencies                 |   | $                   | 28,474 |   | $ | 1,061 |   | $ | (1 | ) | $ | 29,534 |   |
| Municipal                                |   | 28,772              |   | 1,795 |   | (9 | ) | 30,558 |   |
|                                     |   | 57,246              |   | 2,856 |   | (10 | ) | 60,092 |   |
| Mortgage-backed securities               |   |                |   |   |   |   |   |   |   |
| Federal Home Loan Mortgage Corporation   |   | 2,836               |   | 85 |   | (14 | ) | 2,907 |   |
| Government National Mortgage Association |   | 8,043               |   | 275 |   | — |   | 8,318 |   |
| Federal National Mortgage Association    |   | 1,001               |   | 44 |   | — |   | 1,045 |   |
|                                     |   | 11,880              |   | 404 |   | (14 | ) | 12,270 |   |
|                                     |   |                |   |   |   |   |   |   |   |
|                                     |   | $                   | 69,126 |   | $ | 3,260 |   | $ | (24 | ) | $ | 72,362 |   |

 

34

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|                                     |   | **2001**            |   |
|------------------------------------------|--------|---------------------|--------|
|                                     |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair  Value** |   |
| Securities available-for-sale            |   |                |   |   |   |   |   |   |   |
| U.S. Treasury                            |   | $                   | 258    |   | $ | 90 |   | $ | — |   | $ | 348 |   |
| U.S. government agencies                 |   | 3,000               |   | 78 |   | — |   | 3,078 |   |
| Municipal                                |   | 8,640               |   | 133 |   | (36 | ) | 8,737 |   |
| Corporate                                |   | 250                 |   | 10 |   | — |   | 260 |   |
| Mutual funds                             |   | 3,172               |   | 26 |   | (16 | ) | 3,182 |   |
| Other equity securities                  |   | 119                 |   | 21 |   | — |   | 140 |   |
|                                     |   | 15,439              |   | 358 |   | (52 | ) | 15,745 |   |
| Mortgage-backed securities               |   |                |   |   |   |   |   |   |   |
| Federal Home Loan Mortgage Corporation   |   | 2,976               |   | 24 |   | (62 | ) | 2,938 |   |
| Government National Mortgage Association |   | 774                 |   | 23 |   | (3 | ) | 794 |   |
| Federal National Mortgage Association    |   | 2,270               |   | 4 |   | (10 | ) | 2,264 |   |
|                                     |   | 6,020               |   | 51 |   | (75 | ) | 5,996 |   |
|                                     |   |                |   |   |   |   |   |   |   |
|                                     |   | $                   | 21,459 |   | $ | 409 |   | $ | (127 | ) | $ | 21,741 |   |
|                                     |   |                |   |   |   |   |   |   |   |
| Securities held-to-maturity              |   |                |   |   |   |   |   |   |   |
| U.S. government agencies                 |   | $                   | 46,223 |   | $ | 556 |   | $ | (72 | ) | $ | 46,707 |   |
| Municipal                                |   | 28,113              |   | 412 |   | (553 | ) | 27,972 |   |
|                                     |   | 74,336              |   | 968 |   | (625 | ) | 74,679 |   |
| Mortgage-backed securities               |   |                |   |   |   |   |   |   |   |
| Federal Home Loan Mortgage Corporation   |   | 2,708               |   | 21 |   | (13 | ) | 2,716 |   |
| Government National Mortgage Association |   | 13,285              |   | 113 |   | (121 | ) | 13,277 |   |
| Federal National Mortgage Association    |   | 1,716               |   | 21 |   | (1 | ) | 1,736 |   |
| Collateralized mortgage obligations      |   | 171                 |   | 1 |   | (1 | ) | 171 |   |
|                                     |   | 17,880              |   | 156 |   | (136 | ) | 17,900 |   |
|                                     |   |                |   |   |   |   |   |   |   |
|                                     |   | $                   | 92,216 |   | $ | 1,124 |   | $ | (761 | ) | $ | 92,579 |   |

 

Sales of securities aresummarized as follows:

 
|                  |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------|--------|----------|--------|----------|--------|----------|--------|
|                  |   |     |   |     |   |     |   |
| Proceeds              |   | $        | 3,189  |     | $      | 3,558    |   | $ | 3,408 |   |
| Gross realized gains  |   | 56       |   | 81       |   | 3        |   |
| Gross realized losses |   | 3        |   | —   |   | 49       |   |
|                       |        |          |        |          |        |          |        |  |  |  |

 

The carrying values and fairvalues of debt securities as of December 31, 2002, by contractual maturity, areshown below.  Expected maturities willdiffer from contractual maturities because borrowers may have the right to callor prepay obligations with or without call or prepayment penalties.

 

35

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|                                                                |   | **Amortized  Cost** |   | **Fair  Value** |   |
|---------------------------------------------------------------------|--------|---------------------|--------|-----------------|--------|
| Securities available-for-sale                                       |   |                |   |            |   |
| Due in one year or less                                             |   | $                   | — |            | $      | — |   |
| Due after one year through five years                               |   | 3,725               |   | 3,812           |   |
| Due after five years through ten years                              |   | 9,061               |   | 9,268           |   |
| Due after ten years                                                 |   | 12,610              |   | 13,327          |   |
|                                                                |   | 25,396              |   | 26,407          |   |
|                                                                |   |                |   |            |   |
| Mutual funds                                                        |   | 3,157               |   | 3,294           |   |
| Other equity securities                                             |   | 119                 |   | 147             |   |
| Mortgage-backed securities                                          |   | 12,761              |   | 12,780          |   |
|                                                                |   | 16,037              |   | 16,221          |   |
|                                                                |   |                |   |            |   |
|                                                                |   | $                   | 41,433 |            | $      | 42,628 |   |
|                                                                |   |                |   |            |   |
| Securities held-to-maturity                                         |   |                |   |            |   |
| Due in one year or less                                             |   | $                   | — |            | $      | — |   |
| Due after one year through five years                               |   | 3,740               |   | 3,899           |   |
| Due after five years through ten years                              |   | 25,231              |   | 26,453          |   |
| Due after ten years                                                 |   | 28,275              |   | 29,740          |   |
|                                                                |   | 57,246              |   | 60,092          |   |
| Mortgage-backed securities and  collateralized mortgage obligations |   | 11,880              |   | 12,270          |   |
|                                                                |   |                |   |            |   |
|                                                                |   | $                   | 69,126 |            | $      | 72,362 |   |

 

Securities in the amount of$12,015,000 and $21,996,000 were pledged to secure government deposits atDecember 31, 2002 and 2001, respectively.

 

Effective January 1, 2000, theCompany adopted the provisions of Statement of Financial Accounting Standards(SFAS) No. 133, *Accounting for DerivativeInstruments and Hedging Activities.* As permitted by SFAS No. 133, the Company reclassified a portion of itssecurities held-to-maturity to securities available-for-sale.  The securities that were reclassified had anamortized cost of $15,606,000 and a fair value of $15,386,000 at January 1,2000.  The Company did not engage inhedging activities in 2002, 2001, or 2000.

 

36

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**NOTE3 - LOANS RECEIVABLE**

 

Loans receivable consisted ofthe following:

 
|                               |   | **2002** |    | **2001** |   |
|------------------------------------|--------|----------|---------|----------|--------|
| First mortgage loans               |   |     |    |     |   |
| One-to-four-family residences      |   | $        | 188,449 |     | $      | 207,067 |   |
| Multifamily residences             |   | 33,464   |    | 28,659   |   |
| Commercial real estate             |   | 52,208   |    | 32,477   |   |
| Construction loans                 |   | 32,486   |    | 23,371   |   |
|                               |   | 306,607  |    | 291,574  |   |
| Home equity loans                  |   | 8,704    |    | 8,847    |   |
| Net deferred loan origination fees |   | (2,122   | )       | (1,991   | )      |
| Construction loans in process      |   | (10,227  | )       | (9,576   | )      |
| Total mortgage loans               |   | 302,962  |    | 288,854  |   |
| Consumer and other loans           |   | 1,617    |    | 1,402    |   |
| Allowance for loan losses          |   | (2,937   | )       | (2,806   | )      |
|                               |   |     |    |     |   |
|                               |   | $        | 301,642 |     | $      | 287,450 |   |

 

The principal balance of loanson nonaccrual status at December 31, 2002 and 2001 approximated $1,095,000 and$639,000.  Loans greater than 90 dayspast due and still accruing interest approximated $963,000 and $1,192,000 at December31, 2002 and 2001.

 

**NOTE 4 - ALLOWANCE FOR LOAN LOSSES**

 

Activity in the allowance forloan losses is summarized as follows:

 
|                       |   | **2002** |   | **2001** |   | **2000** |   |
|----------------------------|--------|----------|--------|----------|--------|----------|--------|
|                       |   |     |   |     |   |     |   |
| Balance, beginning of year |   | $        | 2,806  |     | $      | 2,561    |   | $ | 2,315 |   |
| Provision for loan losses  |   | 127      |   | 144      |   | 246      |   |
| Recoveries                 |   | 8        |   | 143      |   | —   |   |
| Charge-offs                |   | (4       | )      | (42      | )      | —   |   |
|                       |   |     |   |     |   |     |   |
| Balance, end of year       |   | $        | 2,937  |     | $      | 2,806    |   | $ | 2,561 |   |

 

Impaired loans totaled $296,000at December 31, 2002 and $546,000 at December 31, 2001.  The average balance of impaired loans andthe interest income that would have been recognized are not material for anyperiod presented.  There was noallowance allocated for impaired loans at December 31, 2002 or 2001.

 

37

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**NOTE5 - PREMISES AND EQUIPMENT**

 

Premises and equipmentconsisted of the following:

 
|                                      |   | **2002** |   | **2001** |   |
|-------------------------------------------|--------|----------|--------|----------|--------|
|                                      |   |     |   |     |   |
| Land                                      |   | $        | 545    |     | $      | 545 |   |
| Buildings and improvements                |   | 3,745    |   | 3,701    |   |
| Furniture and equipment                   |   | 2,769    |   | 2,702    |   |
| Real estate acquired for future expansion |   | 248      |   | 280      |   |
| Construction in progress                  |   | 1,160    |   | —   |   |
| Total cost                                |   | 8,467    |   | 7,228    |   |
| Less accumulated depreciation             |   | (4,118   | )      | (4,024   | )      |
|                                      |   |     |   |     |   |
|                                      |   | $        | 4,349  |     | $      | 3,204 |   |

 

**NOTE6 - DEPOSITS**

 

Certificate of deposit accountswith balances of $100,000 or more totaled approximately $54,350,000 and$56,740,000 at December 31, 2002 and 2001, respectively.

 

At December 31, 2002, thescheduled maturities of certificates of deposit are as follows:

 
| 2003   |   | $      | 128,108 |   |
|--------|--------|--------|---------|--------|
| 2004   |   | 10,427 |    |
| 2005   |   | 5,924  |    |
| 2006   |   | 1,251  |    |
| 2007   |   | 13,320 |    |
|   |   |   |    |
|   |   | $      | 159,030 |   |

 

**NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK**

 

Advances from the Federal HomeLoan Bank of Chicago at year end were as follows:

 
|                                                                                                       |   | **December 31,** |   |
|------------------------------------------------------------------------------------------------------------|--------|------------------|--------|
| **Description**                                                                                            |   | **2002**         |   | **2001** |   |
|                                                                                                       |   |             |   |   |   |
| Floating, matures October 2002; 6.00%  interest rate                                                       |   | $                | — |   | $ | 1,500 |   |
| Floating, matures November 2002; 5.75%  interest rate                                                      |   | —           |   | 2,500 |   |
| Floating, matures October 2005; 5.25%  interest rate                                                       |   | 2,000            |   | 2,000 |   |
| Floating, matures July 2008; 5.18% interest  rate                                                          |   | 2,000            |   | 2,000 |   |
| Fixed terms; matures February 2002 through November 2011; range of  rates 3.62% to 6.18%; averaging 5.11%  |   | —           |   | 75,600 |   |
| Fixed terms; matures September 2004 through  November 2011; range of rates 3.20% to 6.18%; averaging 4.94% |   | 88,105           |   | — |   |
|                                                                                                       |   |             |   |   |   |
|                                                                                                       |   | $                | 92,105 |   | $ | 83,600 |   |

 

38

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Scheduled repayments andmaturities of the Federal Home Loan Bank of Chicago advances atDecember 31, 2002 are as follows:

 
| 2004       |   | $      | 10,000 |   |
|------------|--------|--------|--------|--------|
| 2005       |   | 16,800 |   |
| 2006       |   | 22,500 |   |
| 2007       |   | 16,805 |   |
| Thereafter |   | 26,000 |   |
|       |   |   |   |
|       |   | $      | 92,105 |   |

 

The Company maintains acollateral pledge agreement covering advances whereby the Company has agreed toat all times keep on hand, free of all other pledges, liens, and encumbrances,whole first mortgage loans on improved residential property not more than 90days delinquent, aggregating no less than 167% of the outstanding advances fromthe Federal Home Loan Bank of Chicago. At December 31, 2002, $25,000,000 of Federal Home Loan Bank advances hadvarious call provisions with an average term to call date of 3.4 months.

 

**NOTE8 - INCOME TAXES**

 

Income tax expense is asfollows:

 
|                          |   | **2002** |   | **2001** |   | **2000** |   |
|-------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current                       |   |     |   |     |   |     |   |
| Federal                       |   | $        | 2,909  |     | $      | 2,701    |   | $ | 2,633 |   |
| State                         |   | 644      |   | 605      |   | 450      |   |
| Deferred                      |   | 465      |   | 210      |   | (94      | )      |
| Change in valuation allowance |   | (60      | )      | (120     | )      | —   |   |
|                          |   |     |   |     |   |     |   |
|                          |   | $        | 3,958  |     | $      | 3,396    |   | $ | 2,989 |   |

 

A reconciliation of income taxexpense and amounts computed by applying the statutory federal income tax rateto income before taxes follows:

 
|                                                   |   | **2002** |   | **2001** |   | **2000** |   |
|--------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Income taxes computed at statutory rate of 34%         |   | $        | 4,072  |     | 34.0   | %        | $      | 3,454 |   | 34.0 | % | $ | 3,057 |   | 34.0 | % |
| Tax-exempt income                                      |   | (584     | )      | (4.9     | )      | (456     | )      | (4.5 | ) | (395 | ) | (4.4 | ) |
| State income taxes, net of federal income  tax benefit |   | 457      |   | 3.8      |   | 455      |   | 4.5 |   | 364 |   | 4.0 |   |
| Change in valuation allowance                          |   | (60      | )      | (.5      | )      | (120     | )      | (1.2 | ) | — |   | — |   |
| Other                                                  |   | 73       |   | .6       |   | 63       |   | .6 |   | (37 | ) | (.4 | ) |
|                                                   |   |     |   |     |   |     |   |   |   |   |   |   |   |
|                                                   |   | $        | 3,958  |     | 33.0   | %        | $      | 3,396 |   | 33.4 | % | $ | 2,989 |   | 33.2 | % |

 

39

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The net deferred tax assetincluded in the accompanying consolidated balance sheets consists of the following:

 
|                                              |   | **2002** |   | **2001** |   |
|---------------------------------------------------|--------|----------|--------|----------|--------|
| Deferred tax assets                               |   |     |   |     |   |
| Allowance for loan losses                         |   | $        | 1,001  |     | $      | 857 |   |
| Amortization of intangible assets                 |   | 57       |   | 43       |   |
| Contribution carryforward                         |   | 248      |   | 630      |   |
| Other                                             |   | 369      |   | 427      |   |
|                                              |   | 1,675    |   | 1,957    |   |
| Deferred tax liabilities                          |   |     |   |     |   |
| Depreciation                                      |   | (40      | )      | (85      | )      |
| Federal Home Loan Bank stock dividends            |   | (581     | )      | (308     | )      |
| Loan fees                                         |   | (232     | )      | (277     | )      |
| Unrealized gain on securities  available-for-sale |   | (466     | )      | (110     | )      |
|                                              |   | (1,319   | )      | (780     | )      |
|                                              |   |     |   |     |   |
| Valuation allowance on deferred tax assets        |   | —   |   | (60      | )      |
|                                              |   |     |   |     |   |
| Total net deferred tax asset                      |   | $        | 356    |     | $      | 1,117 |   |

 

The Company has qualified underprovisions of the Internal Revenue Code which permit it to deduct from taxableincome a provision for bad debts that differs from the provision charged toincome in the financial statements. Retained earnings at December 31, 2002 include approximately $2,023,000for which no deferred federal income tax liability has been recorded.

 

**NOTE9 - COMMITMENTS AND CONTINGENCIES**

 

The Company is party tofinancial instruments with off-balance-sheet risk in the normal course ofbusiness to meet financing needs of its customers.  These financial instruments include commitments to fund loans andpreviously approved unused lines of credit. The Company’s exposure to credit loss in the event of nonperformance bythe parties to these financial instruments is represented by the contractualamount of the instruments.  The Companyuses the same credit policy for commitments as it uses for on-balance-sheetitems.  The contract amount of thesefinancial instruments is summarized as follows:

 

40

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|                                                                 |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                 |   |     |   |     |   |
| Commitments to extend credit                                         |   | $        | 15,686 |     | $      | 10,127 |   |
| Unused lines of credit, including  commitments on construction loans |   | 25,132   |   | 14,851   |   |
| Letters of credit                                                    |   | 137      |   | —   |   |
|                                                                      |        |          |        |          |        |  |  |

 

At December 31, 2002,commitments to extend credit consist primarily of fixed-rate loan commitmentswith rates ranging from 5.88% to 9.50%. These commitments are due to expire within 60 days of issuance.  Since many commitments expire without beingused, the amounts above do not necessarily represent future cashcommitments.  Collateral may be obtainedupon exercise of a commitment.  Theamount of collateral is determined by management and may include commercial andresidential real estate and other business and consumer assets.

 

The Company’s principal loancustomers are located in Chicago, Illinois and Philadelphia, Pennsylvania.  Most loans are secured by specificcollateral, including residential and commercial real estate.

 

**NOTE10 - REGULATORY MATTERS**

 

The Bank is subject to variousregulatory capital requirements administered by the federal bankingagencies.  Failure to meet minimumcapital requirements can initiate certain mandatory, and possibly additionaldiscretionary, actions by regulators that, if undertaken, could have a directmaterial effect on the Bank’s financial statements.  Under capital adequacy guidelines and the regulatory frameworkfor prompt corrective action, the Bank must meet specific capital guidelinesthat involve quantitative measures of the Bank’s assets, liabilities, andcertain off-balance-sheet items as calculated under regulatory accountingpractices.  The Bank’s capital amountsand classifications are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors.

 

As of December 31, 2002, themost recent notification from the Office of Thrift Supervision categorized theBank as well capitalized under the regulatory framework for prompt correctiveaction.  To be categorized as wellcapitalized, the Bank must maintain minimum total risk-based, Tier Irisk-based, and Tier I leverage ratios as set forth in the following table.  There are no conditions or events since thatnotification that management believes have changed the Bank’s category.

 

41

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The Bank’s actual capitalamounts and ratios are presented in the following table.

 
|                                              |   | **Actual** |   | **For Capital  Adequacy Purposes** |   | **To Be Well Capitalized  Under Prompt Corrective  Action Provisions** |   |
|---------------------------------------------------|--------|------------|--------|------------------------------------|--------|------------------------------------------------------------------------|--------|
|                                              |   | **Amount** |   | **Ratio**                          |   | **Amount**                                                             |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                              |   |       |   |                               |   |                                                                   |   |   |   |   |   |   |   |
| As of December 31, 2002:                          |   |       |   |                               |   |                                                                   |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)           |   | $          | 68,856 |                               | 26.7   | %                                                                      | $      | 20,642 |   | 8.0 | % | $ | 25,802 |   | 10.0 | % |
| Tier I capital (to risk-weighted assets)          |   | 65,919     |   | 25.5                               |   | 10,321                                                                 |   | 4.0 |   | 15,481 |   | 6.0 |   |
| Tier I (core) capital (to adjusted total  assets) |   | 65,919     |   | 14.4                               |   | 18,266                                                                 |   | 4.0 |   | 22,833 |   | 5.0 |   |
|                                              |   |       |   |                               |   |                                                                   |   |   |   |   |   |   |   |
| As of December 31, 2001:                          |   |       |   |                               |   |                                                                   |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)           |   | $          | 76,138 |                               | 31.6   | %                                                                      | $      | 19,266 |   | 8.0 | % | $ | 24,082 |   | 10.0 | % |
| Tier I capital (to risk-weighted assets)          |   | 73,332     |   | 30.5                               |   | 9,633                                                                  |   | 4.0 |   | 14,449 |   | 6.0 |   |
| Tier I (core) capital (to adjusted total  assets) |   | 73,332     |   | 16.8                               |   | 17,468                                                                 |   | 4.0 |   | 21,835 |   | 5.0 |   |

 

The Company may not declare orpay cash dividends on or repurchase any of its shares of capital stock if theeffect thereof would cause its net worth to be reduced below applicableregulatory requirements or the amount of the liquidation account if such adeclaration and payment would otherwise violate regulatory requirements.

 

**NOTE11 - EARNINGS PER COMMON SHARE**

 

A reconciliation of thenumerator and denominator of the earnings per common share computation for theyears ended December 31, 2002, 2001, and 2000 is presented below.

 
|                                            |   | **2002**  |       | **2001**   |       | **2000**  |       |
|-------------------------------------------------|--------|-----------|------------|------------|------------|-----------|------------|
| **Basic earnings per common share**             |   |      | ** ** |       | ** ** |      | ** ** |
| **Net income**                                  |   | **$**     | **8,018**  | ** ** | **$**      | **6,762** | ** ** | **$** | **6,003** | ** ** |
|                                            |   |      | ** ** |       | ** ** |      | ** ** |
| **Weighted average common shares  outstanding** |   | **3,641** | ** ** | **4,034**  | ** ** | **4,682** | ** ** |
|                                            |   |      | ** ** |       | ** ** |      | ** ** |
| **Basic earnings per share**                    |   | **$**     | **2.20**   | ** ** | **$**      | **1.68**  | ** ** | **$** | **1.28** | ** ** |
|                                            |   |      | ** ** |       | ** ** |      | ** ** |
| **Diluted**                                     |   |      | ** ** |       | ** ** |      | ** ** |
| **Net income**                                  |   | **$**     | **8,018**  | ** ** | **$**      | **6,762** | ** ** | **$** | **6,003** | ** ** |

 

42

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|                                                                                |   | **2002**  |       | **2001**   |       | **2000**   |       |
|-------------------------------------------------------------------------------------|--------|-----------|------------|------------|------------|------------|------------|
| **Weighted average common shares  outstanding for basic earnings per common share** |   | **3,641** | ** ** | **4,034**  | ** ** | **4,682**  | ** ** |
| **Add:  Dilutive effects of assumed exercises of stock options**               |   | **82**    | ** ** | **23**     | ** ** | **—** | ** ** |
| **Add:  Dilutive effects of assumed exercise of stock awards**                 |   | **5**     | ** ** | **3**      | ** ** | **—** | ** ** |
|                                                                                |   |      | ** ** |       | ** ** |       | ** ** |
| **Average shares and dilutive  potential common shares**                            |   | **3,728** | ** ** | **4,060**  | ** ** | **4,682**  | ** ** |
|                                                                                |   |      | ** ** |       | ** ** |       | ** ** |
| **Diluted earnings per common  share**                                              |   | **$**     | **2.15**   | ** ** | **$**      | **1.67**   | ** ** | **$** | **1.28** | ** ** |
|                                                                                     |        |           |            |            |            |            |            |  |  |  |

 

The Company’s outstanding stockoptions and stock awards were not considered in the computations of dilutedearnings per share in 2000 because the effects of assumed exercise would havebeen antidilutive.

 

**NOTE12 - RELATED PARTY TRANSACTIONS**

 

The Company has lendingtransactions with directors, executive officers, and their associates.  Activity in these accounts is summarized asfollows for the year ended December 31, 2002.

 
| Balance at beginning of year |   | $      | 373    |   |
|------------------------------|--------|--------|--------|--------|
| Loans disbursed              |   | 393    |   |
| Principal repayments         |   | (410   | )      |
|                         |   |   |   |
| Balance at end of year       |   | $      | 356    |   |

 

Certainemployees of the Company sit on the Board of Directors of the HeritageFoundation (the Foundation), a non-for profit affiliate of the Bank, whichmakes grants to community organizations. Included in accrued interest and other liabilities is an account payableto the Foundation in the amount of $900,000. The Foundation also has deposits with the Bank totaling $669,000 andstock in the Company.

 

43

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**NOTE 13 - STOCK-BASED COMPENSATION PLANS**

 

As part of the conversiontransaction, the Company established an employee stock ownership plan (ESOP)for the benefit of substantially all employees.  The ESOP borrowed $5,126,400 from the Company and used thosefunds to acquire 512,640 shares of the Company’s stock at $10 per share.

 

44

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**Shares issued to the ESOP are allocated to ESOPparticipants based on principal and interest repayments made by the ESOP on theloan from the Company.  The loan issecured by shares purchased with the loan proceeds and will be repaid by theESOP with funds from the Company’s discretionary contributions to the ESOP andearnings on ESOP assets.  Principalpayments are scheduled to occur over a twenty-year period.  However, in the event the Company’scontributions exceed the minimum debt service requirements, additionalprincipal payments will be made.**

 

Information regarding sharesreleased and shares held by the ESOP at December 31 is as follows:

 
|                                       |   | **2002** |       | **2001**   |       | **2000**  |       |
|--------------------------------------------|--------|----------|------------|------------|------------|-----------|------------|
|                                       |   |     | ** ** |       | ** ** |      | ** ** |
| **Shares released**                        |   | **31**   | ** ** | **32**     | ** ** | **30**    | ** ** |
| **Average fair value of shares  released** |   | **$**    | **21.14**  | ** ** | **$**      | **17.59** | ** ** | **$** | **12.62** | ** ** |
| **Compensation expense**                   |   | **659**  | ** ** | **571**    | ** ** | **420**   | ** ** |
|                                       |   |     | ** ** |       | ** ** |      | ** ** |
| **Allocated shares**                       |   | **182**  | ** ** | **151**    | ** ** | **119**   | ** ** |
| **Unallocated shares**                     |   | **331**  | ** ** | **362**    | ** ** | **394**   | ** ** |
|                                       |   |     | ** ** |       | ** ** |      | ** ** |
| **Total ESOP shares**                      |   | **513**  | ** ** | **513**    | ** ** | **513**   | ** ** |
|                                       |   |     | ** ** |       | ** ** |      | ** ** |
| **Fair value of unallocated  shares**      |   | **$**    | **8,035**  | ** ** | **$**      | **7,227** | ** ** | **$** | **5,846** | ** ** |

 

During 1998, the Companyadopted a stock option plan under the terms of which shares of the Company’scommon stock were reserved for issuance. The options became exercisable on a cumulative basis in equalinstallments over a five-year period from the date of grant.  The options expire 10 years from the date ofgrant.

 

A summary of the status of theCompany’s stock option plan and changes during the years are presented below:

 
|                                                            |   | **2002**   |       | **2001**                               |       | **2000**   |       |
|-----------------------------------------------------------------|--------|------------|------------|----------------------------------------|------------|------------|------------|
|                                                            |   | **Shares** |       | **Weighted  Average  Exercise  Price** |       | **Shares** |       | **Weighted  Average  Exercise  Price** |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   |
| **Outstanding at beginning of  year**                           |   | **544**    | ** ** | **$**                                  | **16.79**  | ** ** | **519**    | ** ** | **$** | **16.69** | ** ** | **519** | ** ** | **$** | **16.69** | ** ** |
| **Granted**                                                     |   | **—** | ** ** | **—**                             | ** ** | **25**     | ** ** | **18.90** | ** ** | **—** | ** ** | **—** | ** ** |
| **Outstanding at end of year**                                  |   | **544**    | ** ** | **$**                                  | **16.79**  | ** ** | **544**    | ** ** | **$** | **16.79** | ** ** | **519** | ** ** | **$** | **16.69** | ** ** |
| **Options exercisable at end of  year**                         |   | **420**    | ** ** |                                   | ** ** | **311**    | ** ** |   | ** ** | **208** | ** ** |   | ** ** |
|                                                            |   |       | ** ** |                                   | ** ** |       | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Weighted-average fair value of  options granted during year** |   | **$**      | **—** | ** **                             |       | ** ** | **$**      | **4.86** | ** ** |   | ** ** | **$** | **—** | ** ** |   | ** ** |
|                                                                 |        |            |            |                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

45

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These options are not fullyvested.  The exercise price equals themarket value at the date the options were granted.  Options outstanding at year-end 2002 were as follows:

 
| **Prices**                  |   | **Number** |       | **Weighted  Average  Remaining  Contractual  Life in Years** |       |
|-----------------------------|--------|------------|------------|--------------------------------------------------------------|------------|
|                        |   |       | ** ** |                                                         | ** ** |
| **$16.69**                  |   | **519**    | ** ** | **5.3**                                                      | ** ** |
| **$18.90**                  |   | **25**     | ** ** | **8.5**                                                      | ** ** |
|                        |   |       | ** ** |                                                         | ** ** |
| **Outstanding at year end** |   | **544**    | ** ** | **5.5**                                                      | ** ** |

 

In connection with theconversion to stock ownership, the Company adopted a Management Recognition andRetention Plan (MRP).  In 1998, theCompany contributed $4.3 million allowing the MRP to acquire 256,320 shares ofcommon stock of the Company, at an average cost of $16.69 per share, to beawarded to directors and key employees. The Company awarded 216,166 shares during 1998 and 7,500 shares during2001.  These shares generally vest overa five-year period.  The unamortizedcost of shares not yet earned (vested) is reported as a reduction ofshareholders’ equity.  MRP compensationexpense totaled $767,000, $721,000, and $722,000 for the years ended December31, 2002, 2001, and 2000.

 

**NOTE14 - FAIR VALUES OF FINANCIAL INSTRUMENTS**

 

The carrying amount andestimated fair value of financial instruments as of December 31 are asfollows:

 
|                                    |   | **2002**             |   | **2001**                   |   |
|-----------------------------------------|--------|----------------------|--------|----------------------------|--------|
|                                    |   | **Carrying  Amount** |   | **Estimated  Fair  Value** |   | **Carrying  Amount** |   | **Estimated  Fair  Value** |   |
| Financial assets                        |   |                 |   |                       |   |   |   |   |   |
| Cash and cash equivalents               |   | $                    | 27,817 |                       | $      | 27,817 |   | $ | 9,421 |   | $ | 9,421 |   |
| Securities available-for-sale           |   | 42,628               |   | 42,628                     |   | 21,741 |   | 21,741 |   |
| Securities held-to-maturity             |   | 69,126               |   | 73,362                     |   | 92,216 |   | 92,579 |   |
| Federal Home Loan Bank stock            |   | 14,788               |   | 14,788                     |   | 12,162 |   | 12,162 |   |
| Loans, net of allowance for loan losses |   | 301,642              |   | 304,057                    |   | 287,450 |   | 291,949 |   |
| Accrued interest receivable             |   | 3,319                |   | 3,319                      |   | 3,177 |   | 3,177 |   |
|                                    |   |                 |   |                       |   |   |   |   |   |
| Financial liabilities                   |   |                 |   |                       |   |   |   |   |   |
| Deposits                                |   | (290,612             | )      | (293,095                   | )      | (268,857 | ) | (270,971 | ) |
| Advance payments by borrowers for taxes |   |                 |   |                       |   |   |   |   |   |
| and insurance                           |   | (2,832               | )      | (2,832                     | )      | (2,880 | ) | (2,880 | ) |
| Advances from Federal Home Loan Bank    |   | (92,105              | )      | (97,497                    | )      | (83,600 | ) | (83,007 | ) |
| Accrued interest payable                |   | (647                 | )      | (647                       | )      | (815 | ) | (815 | ) |
|                                         |        |                      |        |                            |        |  |  |  |  |  |  |  |  |

 

46

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Themethods and assumptions used to estimate fair value are described as follows:

 

Carryingamount is the estimated fair value for cash and cash equivalents, short-termborrowings, Federal Home Loan Bank stock, accrued interest receivable andpayable, demand deposits, short-term debt, and variable rate loans or depositsthat reprice frequently and fully. Security fair values are based on market prices or dealer quotes and, ifno such information is available, on the rate and term of the security andinformation about the issuer.  For fixedrate loans or deposits and for variable rate loans or deposits with infrequentrepricing or repricing limits, fair value is based on discounted cash flowsusing current market rates applied to the estimated life and credit risk.  Fair values for impaired loans are estimatedusing discounted cash flow analysis or underlying collateral values.  The fair value of debt is based on currentrates for similar financing.  The fairvalue of off-balance-sheet items is based on the current fees or costs thatwould be charged to enter into or terminate such arrangements, which are notmaterial.

 

Other assets and liabilities ofthe Company not defined as financial instruments, such as property andequipment, are not included in the above disclosures.  Also not included are nonfinancial instruments typically notrecognized in financial statements such as the value of core deposits, customergoodwill, and similar items.

 

While the above estimates arebased on judgments of the most appropriate factors, there is no assurance thatif the Company disposed of these items, the fair value would have beenachieved, because the market value may differ depending on the circumstances.  The fair values at year end should notnecessarily be considered to apply at subsequent dates.

 

47

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**NOTE15 - PARENT COMPANY FINANCIAL STATEMENTS**

 

Presented below are thecondensed balance sheets, statements of income, and statements of cash flowsfor First SecurityFed Financial, Inc.

 

CONDENSED BALANCE SHEETS

December 31, 2002 and 2001

 
|                                          |   | **2002** |   | **2001** |   |
|-----------------------------------------------|--------|----------|--------|----------|--------|
| **ASSETS**                                    |   |     |   |     |   |
| Cash and cash equivalents                     |   | $        | 766    |     | $      | 1,020 |   |
| Securities available-for-sale                 |   | 7,466    |   | 7,949    |   |
| ESOP loan                                     |   | 3,588    |   | 3,845    |   |
| Investment in bank subsidiary                 |   | 66,362   |   | 74,354   |   |
| Accrued interest receivable and other  assets |   | 438      |   | 995      |   |
|                                          |   |     |   |     |   |
|                                          |   | $        | 78,620 |     | $      | 88,163 |   |
|                                          |   |     |   |     |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY** |   |     |   |     |   |
| Note payable to bank subsidiary               |   | $        | 2,180  |     | $      | 15,591 |   |
| Accrued expenses and other liabilities        |   | 508      |   | 534      |   |
| Shareholders’ equity                     |   | 75,932   |   | 72,038   |   |
|                                          |   |     |   |     |   |
|                                          |   | $        | 78,620 |     | $      | 88,163 |   |

 

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CONDENSED STATEMENTS OF INCOME

For the years ended December 31, 2002, 2001, and 2000

 
|                                                                                       |   | **2002** |   | **2001** |   | **2000** |       |
|--------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|------------|
| Income                                                                                     |   |     |   |     |   |     |       |
| Dividend from subsidiary                                                                   |   | $        | 17,500 |     | $      | —   |       | $ | 10,501 |   |
| Interest on securities                                                                     |   | 398      |   | 456      |   | 465      |       |
| Interest on ESOP loan                                                                      |   | 264      |   | 274      |   | 295      |       |
| Gain (loss) on sale of securities                                                          |   | 20       |   | 81       |   | (16      | )          |
| Other income                                                                               |   | —   |   | —   |   | —   |       |
| Total income                                                                               |   | 18,182   |   | 811      |   | 11,245   |       |
|                                                                                       |   |     |   |     |   |     |       |
| Expenses                                                                                   |   |     |   |     |   |     |       |
| Interest expense on note payable                                                           |   | 263      |   | 283      |   | —   |       |
| Other operating expenses                                                                   |   | 356      |   | 305      |   | 134      |       |
|                                                                                       |   | 619      |   | 588      |   | 134      |       |
|                                                                                       |   |     |   |     |   |     |       |
| **Income before income taxes and equity in  undistributed earnings of bank subsidiary**    |   | 17,563   |   | 223      |   | 11,111   | ** ** |
|                                                                                       |   |     |   |     |   |     |       |
| Income tax expense (benefit)                                                               |   | (99      | )      | (63      | )      | 91       |       |
|                                                                                       |   |     |   |     |   |     |       |
| **Income before equity in undistributed  earnings of bank subsidiary**                     |   | 17,662   |   | 286      |   | 11,020   |       |
|                                                                                       |   |     |   |     |   |     |       |
| Equity in undistributed earnings  (distributions in excess of earnings) of bank subsidiary |   | (9,644   | )      | 6,476    |   | (5,017   | )          |
|                                                                                       |   |     |   |     |   |     |       |
| **Net income**                                                                             |   | $        | 8,018  |     | $      | 6,762    |       | $ | 6,003 |   |

 

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CONDENSED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2002, 2001, and 2000

 
|                                                                                      |   | **2002** |   | **2001** |   | **2000** |   |
|-------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **Operating activities**                                                                  |   |     |   |     |   |     |   |
| Net income                                                                                |   | $        | 8,018  |     | $      | 6,762    |   | $ | 6,003 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities         |   |     |   |     |   |     |   |
| (Equity in undistributed earnings)  distribution in excess of earnings of bank subsidiary |   | 9,644    |   | (6,476   | )      | 5,017    |   |
| Net accretion                                                                             |   | (100     | )      | (112     | )      | (3       | )      |
| (Gain) loss on sales of securities                                                        |   | (20      | )      | (81      | )      | 16       |   |
| Change in                                                                                 |   |     |   |     |   |     |   |
| Other assets                                                                              |   | 459      |   | 743      |   | (658     | )      |
| Other liabilities                                                                         |   | (13,535  | )      | 14,961   |   | 23       |   |
| Net cash from operating activities                                                        |   | 4,466    |   | 15,797   |   | 10,398   |   |
|                                                                                      |   |     |   |     |   |     |   |
| **Investing activities**                                                                  |   |     |   |     |   |     |   |
| Purchase of securities available-for-sale                                                 |   | (2,075   | )      | (2,759   | )      | (925     | )      |
| Proceeds from maturities and calls                                                        |   | 250      |   | —   |   | —   |   |
| Proceeds from sales of securities                                                         |   | 2,970    |   | 3,558    |   | 848      |   |
| Payment received on loan to ESOP                                                          |   | 257      |   | 256      |   | 256      |   |
| Net cash from investing activities                                                        |   | 1,402    |   | 1,055    |   | 179      |   |
|                                                                                      |   |     |   |     |   |     |   |
| **Financing activities**                                                                  |   |     |   |     |   |     |   |
| Dividends paid                                                                            |   | (2,061   | )      | (2,331   | )      | (1,901   | )      |
| Purchase of treasury stock                                                                |   | (4,061   | )      | (14,163  | )      | (8,367   | )      |
| Net cash from financing activities                                                        |   | (6,122   | )      | (16,494  | )      | (10,268  | )      |
|                                                                                      |   |     |   |     |   |     |   |
| Net change in cash and cash equivalents                                                   |   | (254     | )      | 358      |   | 309      |   |
|                                                                                      |   |     |   |     |   |     |   |
| Cash and cash equivalents at beginning of  year                                           |   | 1,020    |   | 662      |   | 353      |   |
|                                                                                      |   |     |   |     |   |     |   |
| **Cash and cash equivalents at end of year**                                              |   | $        | 766    |     | $      | 1,020    |   | $ | 662 |   |

 

50

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**NOTE16 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)**

 
|           |   |                 |   | **Net  Interest  Income** |            |   |        | **Earnings  Per Share** |   |
|----------------|--------|----------------------|--------|---------------------------|-----------------|--------|-------------|-------------------------|--------|
|           |   | **Interest  Income** |   |                      | **Net  Income** |   |        |
|           |   |                 |   |                      | **Basic**       |   | **Diluted** |                    |
|           |   |                 |   |                      |            |   |        |                    |   |   |   |
| 2002           |   |                 |   |                      |            |   |        |                    |   |   |   |
| First quarter  |   | $                    | 7,632  |                      | $               | 4,420  |        | $                       | 1,907  |   | $ | .52 |   | $ | .51 |   |
| Second quarter |   | 7,587                |   | 4,418                     |            | 1,976  |        | .53                     |   | .52 |   |
| Third quarter  |   | 7,788                |   | 4,592                     |            | 2,065  |        | .57                     |   | .56 |   |
| Fourth quarter |   | 7,893                |   | 4,824                     |            | 2,070  |        | .58                     |   | .56 |   |
|           |   |                 |   |                      |            |   |        |                    |   |   |   |
| 2001           |   |                 |   |                      |            |   |        |                    |   |   |   |
| First quarter  |   | $                    | 7,542  |                      | $               | 3,735  |        | $                       | 1,675  |   | $ | .39 |   | $ | .39 |   |
| Second quarter |   | 7,554                |   | 3,788                     |            | 1,545  |        | .38                     |   | .37 |   |
| Third quarter  |   | 7,591                |   | 3,917                     |            | 1,620  |        | .42                     |   | .41 |   |
| Fourth quarter |   | 7,750                |   | 4,281                     |            | 1,922  |        | .51                     |   | .50 |   |

 

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**FIRST SECURITYFED FINANCIAL, INC.**

**SHAREHOLDERINFORMATION**

 

**ANNUALMEETING**

 

The Annual Meeting of Shareholders will be held at 4:30 p.m., localtime on April 24, 2003 at the Main Office of the Company, located at 936 N.Western Avenue, Chicago, Illinois 60622.

 

**STOCKLISTING**

 

First SecurityFed Financial, Inc. common stock is traded on the NasdaqStock Market under the symbol “FSFF.”

 

**PRICERANGE OF COMMON STOCK**

 

As of February 28, 2003 there were approximately 695 shareholders ofrecord and 3,952,754 outstanding shares of common stock.

 

The following table sets forth the high and low sales prices anddividends paid per share of common stock during the periods indicated.  The stock price information was provided bythe NASD, Inc.

 
| **Quarter  Ended** |   | **High** |   | **Low** |   | **Dividend  Declared** |   |
|--------------------|--------|----------|--------|---------|--------|------------------------|--------|
|               |   |     |   |    |   |                   |   |
| March 31, 2001     |   | 15.75    |   | 14.63   |   | .12¢              |   |
| June 30, 2001      |   | 19.34    |   | 15.63   |   | .13¢              |   |
| September 30, 2001 |   | 20.49    |   | 17.25   |   | .13¢              |   |
| December 31, 2001  |   | 20.00    |   | 16.91   |   | .13¢              |   |
| March 31, 2002     |   | 20.75    |   | 19.00   |   | .13¢              |   |
| June 30, 2002      |   | 22.22    |   | 19.51   |   | .13¢              |   |
| September 30, 2002 |   | 22.45    |   | 20.97   |   | .13¢              |   |
| December 31, 2002  |   | 24.30    |   | 21.44   |   | .13¢              |   |

 

The payment of cash dividendsis dependent on the results of operations and financial condition of theCompany, tax considerations, industry standards, economic conditions, generalbusiness practices and other factors. Dividend payments decisions are made withconsideration of a variety of factors including earnings, financial condition,market considerations and regulatory restrictions.

 

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| **TRANSFER AGENT **Registrar and Transfer Co.  10 Commerce Drive  Cranford, NJ  07016                             | **SHAREHOLDERS AND GENERAL INQUIRIES**Peter Ilnyckyj  First SecurityFed Financial, Inc.  936 North Western Avenue  Chicago, Illinois 60622-4695  (773) 772-4500 |
|-----------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                        |                                                                                                                                                            |
| **SPECIAL COUNSEL**Gardner Carton & Douglas LLC  1301 K Street, N. W.  Suite 900 East  Washington, DC   20005 | **INDEPENDENT AUDITORS**Crowe, Chizek and Company LLP  One Mid America Plaza  P.O. Box 3697  Oak Brook, Illinois 60522-3697                                     |

 

**ANNUAL ANDOTHER REPORTS**

 

A copy of First SecurityFedFinancial, Inc.’s Annual Report on Form 10-K for the year endedDecember 31, 2002, as filed with the Securities and Exchange Commission, may beobtained without charge by contacting Peter Ilnyckyj, First SecurityFedFinancial, Inc., 936 North Western Avenue, Chicago, Illinois 60622-4695

 

**FIRST SECURITYFED FINANCIAL, INC.**

**CORPORATEINFORMATION**

 

**COMPANY ANDBANK ADDRESS**

 
| 936 North Western Avenue      | Telephone: (773) 772-4500 |
|-------------------------------|---------------------------|
| Chicago, Illinois  60622-4695 | Fax: (773) 772-0487       |

 

**DIRECTORSOF THE BOARD**

 
| Steve Babyk                                                    | Julian Kulas                                                                 |
|----------------------------------------------------------------|------------------------------------------------------------------------------|
| *Director of Fleet Leasing  Union Tank Car Company*            | *President and Chief Executive Officer  First Security Federal Savings Bank* |
|                                                           |                                                                         |
| Lila Maria Bodnar                                              | Paul Nadzikewycz                                                             |
| *Accountant, MBA*                                              | *Self-Employed Real Estate Investor*                                         |
|                                                           |                                                                         |
| Myron Dobrowolsky                                              | Jaroslav H. Sydorenko                                                        |
| *Civil Engineer  Dames and Moore*                              | *Financial Services Manager  Wesco Distribution*                             |
|                                                           |                                                                         |
| Terry Gawryk                                                   | Chrysta Wereszczak                                                           |
| *Attorney*                                                     | *Co-owner, B&B Formica*                                                  |
|                                                           |                                                                         |
| George Kawka                                                   |                                                                         |
| *Senior Architectural/Engineering  Project Manager  CH2M Hill* |                                                                         |

 

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**CORPORATEOFFICERS**

 
| Julian Kulas                                    | Harry I. Kucewicz                            |
|-------------------------------------------------|----------------------------------------------|
| *President and Chief Executive Officer*         | *Treasurer and Chief Financial Officer*      |
|                                            |                                         |
| Mary H. Korb                                    | Irene S. Subota                              |
| *Vice President-Lending*                        | *Vice President - Savings*              |
|                                            |                                         |
| Adrian Hawryliw                                 | Paul T. Bandriwsky                           |
| *Vice President - Philadelphia  Branch Manager* | *Vice President and Chief Operating Officer* |
|                                            |                                         |
| Peter Ilnyckyj                                  |                                         |
| *Vice President-Investor Relations*             |                                         |

 

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