**EXHIBIT 13**

** **

**ANNUAL REPORT**

 

 

 

 

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**2001 ANNUALREPORT**

 

 

 

 

 

**[LOGO]**

 

 

 

 

 

 

 

 

 

 

FIRSTSECURITYFED FINANCIAL, INC.

 

 

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**TABLEOF 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**

 

 

 

To Our Stockholders, Depositors and Friends,

 

We have entered the new year, but the old definitely will never beforgotten. Our country won’t forget the events of September 11 and all thatfollowed. During this period of uncertainty, insecurity and apprehension, U.S.citizens are reexamining and becoming more apprehensive of their freedoms,increasingly knowledgeable and understanding of that beyond their borders, andare reassessing many aspects of their everyday lives. Recently we went throughan economic expansion unmatched in our history. Now, we are slowly coming outof a mild recession and there is a resounding call for a return tofundamentals.

 

I am happy to report that the tragic events of 2001 had no major impacton the performance of our Bank and I am pleased to bring you this annual reportof First SecurityFed Financial, Inc. and its subsidiary 1st SecurityFederal Savings Bank for the period ending December 31,2001.

 

As you review the financial pages of this report you will find thatFirst SecurityFed Financial, Inc. had another very successful year. Our totalassets as of December 31, 2001 increased to $431.3 million as compared to$403.7 million, an increase of $27.6 million or 6.84%. Consolidated net incomefor 2001was a record $6.8 million or $1.68 per share, as compared to $6.0million or $1.28 per share in year 2000. This 31% increase in earnings pershare was primarily attributable to higher interest income, higher non-interestincome, and the repurchase of the Company’s stock. The Company’s return onequity increased to 8.83% in 2001, a substantial increase from 7.34% in 2000.The Company’s efficiency ratio was  at39% for 2001 as compared to 40% in the prior year.

 

The Loan Department had a very strong year, originating $127.0 millionin new loans and increasing loans receivable by $12.0 million.  However, due to lower mortgage rates thatcaused significant refinancing, this increase in loans receivable did not matchthe increase achieved in year 2000. The level of non-performing assets as apercentage of total assets increased from 0.39% in 2000 to 0.42% in 2001. Nomortgage loan losses were sustained in 2001.

 

I firmly believe that our continued growth, steady good earnings,increased return on equity and other sound fundamentals have been recognized bythe market and  have significantlyincreased shareholder value during year 2001. The Company repurchased 798,445shares of its outstanding common stock during the year and paid a quarterlydividend on the common stock of $0.13 per share. The Company is currently engagedin a repurchase program and will continue to evaluate future stock repurchasesbased on their effects on shareholder value.

 

The Company has achieved its success through the efforts of itssubsidiary, 1st Security Federal Savings Bank. The Bank is committedto serve the needs of our customers and our communities. Personal and efficientservice has always been and shall always remain its primary mission.

 

2001 was a very successful year for First SecurityFed Financial, Inc.,a year in which we increased returns to the Company while building shareholdervalue . I want to thank our employees, Directors, and Officers for achievingthat goal. Above all I want to thank you, our shareholders and our customers,for your support and encouragement.

 

 

Sincerely,

 

 

 

Julian E. Kulas

*President and Chief Executive Officer*

 

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                                                 **SELECTEDCONSOLIDATED 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 Consolidated FinancialStatements and Notes to the Consolidated Financial Statements  presented elsewhere in this Annual Report.

 
|                               |   | **At December  31,** |    |
|------------------------------------|--------|----------------------|---------|
|                               |   | **2001**             |    | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                               |   | **(In  Thousands)**  |    |
|                               |   |                 |    |   |   |   |   |   |   |   |   |
| Selected Financial Condition Data: |   |                 |    |   |   |   |   |   |   |   |   |
|                               |   |                 |    |   |   |   |   |   |   |   |   |
| Total assets                       |   | $                    | 431,275 |   | $ | 403,663 |   | $ | 372,292 |   | $ | 338,050 |   | $ | 315,849 |   |
| Cash and cash equivalents          |   | 9,421                |    | 6,102 |   | 6,257 |   | 24,830 |   | 30,090 |   |
| Loans receivable, net(1)           |   | 287,450              |    | 275,454 |   | 241,168 |   | 218,311 |   | 186,259 |   |
| Mortgage-backed securities:        |   |                 |    |   |   |   |   |   |   |   |   |
| Held-to-maturity                   |   | 17,880               |    | 5,424 |   | 7,577 |   | 11,587 |   | 18,551 |   |
| Available-for-sale                 |   | 5,996                |    | 7,602 |   | 9,410 |   | 12,410 |   | 16,733 |   |
| Investment securities:             |   |                 |    |   |   |   |   |   |   |   |   |
| Held-to-maturity                   |   | 74,336               |    | 72,882 |   | 85,331 |   | 46,680 |   | 38,471 |   |
| Available-for-sale                 |   | 15,745               |    | 24,292 |   | 11,212 |   | 13,933 |   | 15,728 |   |
| Deposits                           |   | 268,857              |    | 252,662 |   | 238,123 |   | 220,495 |   | 210,100 |   |
| Total borrowings                   |   | 83,600               |    | 64,600 |   | 46,300 |   | 29,000 |   | 10,000 |   |
| Shareholders equity                |   | 72,038               |    | 80,249 |   | 83,156 |   | 84,587 |   | 91,872 |   |
|                                    |        |                      |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                                  The allowance for loan losses at December 31,2001, 2000, 1999, 1998, and 1997, was $2,806,000, $2,561,000, $2,315,000,$2,069,000, and $1,828,000, respectively.

** **
|                                                |   | **Year Ended  December 31,** |       |     |
|-----------------------------------------------------|--------|------------------------------|------------|----------|
|                                                |   | **2001**                     |       | **2000** |   | **1999** |   | **1998** |   | **1997** |   |   |
|                                                |   | **(In Thousands)**           |       |     |
|                                                |   |                         | ** ** |     | ** ** |   | ** ** |   | ** ** |   | ** ** | ** ** |
| Selected Operations Data:                           |   |                         | ** ** |     | ** ** |   | ** ** |   | ** ** |   | ** ** | ** ** |
|                                                |   |                         | ** ** |     | ** ** |   | ** ** |   | ** ** |   | ** ** | ** ** |
| Total interest income                               |   | $                            | 30,437     |     | $ | 29,000 |   | $ | 25,285 |   | $ | 24,059 |   | $ | 20,674 |   |   |
| Total interest expense                              |   | 14,716                       |       | 14,312   |   | 11,037 |   | 10,296 |   | 10,129 |   |   |
| Net interest income                                 |   | 15,721                       |       | 14,688   |   | 14,248 |   | 13,763 |   | 10,545 |   |   |
| Provision for loan losses                           |   | 144                          |       | 246      |   | 246 |   | 246 |   | 738 |   |   |
| Net interest income after  provision for loanlosses |   | 15,577                       |       | 14,442   |   | 14,002 |   | 13,517 |   | 9,807 |   |   |
| Deposit service charges                             |   | 364                          |       | 372      |   | 368 |   | 416 |   | 371 |   |   |
| Gain (loss) on sales  of  securities           |   | 81                           |       | (46      | ) | 12 |   | 40 |   | (32 | ) |   |
| Other non-interest income                           |   | 690                          |       | 311      |   | 430 |   | 356 |   | 253 |   |   |
| Total non-interest income                           |   | 1,135                        |       | 637      |   | 810 |   | 812 |   | 592 |   |   |
| Total non-interest expense                          |   | 6,554                        |       | 6,087    |   | 6,102 |   | 5,887 |   | 7,557(1 | ) |   |
| Income before taxes                                 |   | 10,158                       |       | 8,992    |   | 8,710 |   | 8,442 |   | 2,842 |   |   |
| Income tax provision                                |   | 3,396                        |       | 2,989    |   | 3,028 |   | 3,098 |   | 1,017 |   |   |
| Net income                                          |   | $                            | 6,762      |     | $ | 6,003 |   | $ | 5,682 |   | $ | 5,344 |   | $ | 1,825 |   |   |
|                                                |   |                         |       |     |   |   |   |   |   |   |   |   |
| Basic earnings per share                            |   | 1.68                         |       | 1.28     |   | 1.14 |   | 0.93 |   | (0.11 | ) |   |
| Diluted earnings per share                          |   | 1.67                         |       | 1.28     |   | 1.14 |   | 0.93 |   | (0.11 | ) |   |
|                                                     |        |                              |            |          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)  Includes $2.5 million accrual for stock contribution to TheHeritage Foundation of First Security Federal Savings Bank.

 

 

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|                                                                              |   | **Year Ended  December 31,** |       |
|-----------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                              |   | **2001**                          |       | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
| Selected Financial Ratios  and Other Data:                                        |   |                              | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                                                                              |   |                              | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Performance Ratios:                                                               |   |                              |       |   |   |   |   |   |   |   |   |
| Return on assets (ratio of  net income toaverage total assets)                    |   | 1.63                              | %          | 1.54 | % | 1.61 | % | 1.62 | % | .64 | % |
| Return on equity (ratio of  net income toaverage equity)                          |   | 8.83                              |       | 7.34 |   | 6.82 |   | 5.97 |   | 4.66 |   |
| Dividend payout ratio                                                             |   | 32.89                             |       | 42.16 |   | 35.08 |   | 7.62 |   | 3⁄4 |   |
| Interest rate spread  information:                                                |   |                              |       |   |   |   |   |   |   |   |   |
| Average during period                                                             |   | 3.25                              |       | 2.94 |   | 3.31 |   | 3.28 |   | 3.34 |   |
| Net interest margin(1)                                                            |   | 4.13                              |       | 4.04 |   | 4.36 |   | 4.37 |   | 3.97 |   |
| Ratio of operating expense  to average totalassets                                |   | 1.58                              |       | 1.56 |   | 1.73 |   | 1.79 |   | 2.66 |   |
| Efficiency ratio(2)                                                               |   | .39                               |       | .40 |   | .40 |   | .40 |   | .68 |   |
| Ratio of average  interest-earning assets toaverage interest-bearing  liabilities |   | 123.91                            |       | 129.24 |   | 132.19 |   | 135.90 |   | 116.50 |   |
|                                                                              |   |                              |       |   |   |   |   |   |   |   |   |
| Quality Ratios:                                                                   |   |                              |       |   |   |   |   |   |   |   |   |
| Non-performing assets to  total assets at endof period                            |   | .42                               |       | .39 |   | .37 |   | .30 |   | .46 |   |
| Allowance for loan losses  to non-performingloans at end of period                |   | 153.25                            |       | 164.38 |   | 166.19 |   | 203.24 |   | 124.86 |   |
| Allowance for loan losses  to gross loansreceivable at end of period              |   | .96                               |       | .93 |   | .96 |   | .93 |   | .96 |   |
|                                                                              |   |                              |       |   |   |   |   |   |   |   |   |
| Capital Ratios:                                                                   |   |                              |       |   |   |   |   |   |   |   |   |
| Equity to total assets at  end of period                                          |   | 16.70                             |       | 19.88 |   | 22.34 |   | 25.03 |   | 29.10 |   |
| Average equity to average  assets                                                 |   | 18.47                             |       | 20.96 |   | 23.57 |   | 27.18 |   | 13.81 |   |
|                                                                              |   |                              |       |   |   |   |   |   |   |   |   |
|                                                                                   |        |                                   |            |  |  |  |  |  |  |  |  |  |

** **

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(1)      Netinterest income divided by average interest-earning assets.

(2)      Theefficiency ratio represents non-interest expense divided by the sum of netinterest income and non-interest income.

 

 

 

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**                                                       MANAGEMENT’SDISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**General**

 

FirstSecurityFed Financial, Inc. (the “Company”) became the holding company forFirst Security Federal Savings Bank (the “Bank” or “First Security”) upon thecompletion of the conversion of the Bank from a federally chartered mutualsavings bank to a federally chartered stock savings bank (the “Conversion”) onOctober 30, 1997.   The financialcondition and operating results of the Company are primarily dependent upon thefinancial condition and operating results of the Bank.  The Company’s primary business activity todate has been limited to its ownership of the Bank and a portfolio of investmentsecurities.

 

The Bank is afinancial intermediary engaged primarily in attracting deposits from thegeneral public and using such deposits to originate one-to-four familyresidential mortgages and, to a significantly lesser extent, multi-family,commercial real estate, construction, consumer and other loans primarily in itsmarket area.  The Bank also uses thesedeposits to acquire mortgage backed and other securities.  The Bank’s revenues are derived principallyfrom interest earned on loans and mortgage-backed and other securities. The operations of the Bank are influenced significantly by generaleconomic conditions and by policies of financial institution regulatoryagencies, including the OTS and 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 netinterest income is dependent primarily upon the difference or spread betweenthe average yield earned on  loansreceivable and securities , and the average rate paid on deposits, as well asthe relative amounts of such assets and liabilities.  The Bank, like other thrift institutions, is subject to interestrate risk to the degree that its interest-bearing liabilities mature or repriceat different times, or on a different basis, than its interest-earning assets.

 

**BusinessStrategy**

 

The Bank seeksto obtain a competitive advantage in its deposit gathering and lendingoperations by maintaining a high level of community involvement and by offeringa high level of personal service.

 

In its depositgathering operations, the Bank uses community outreach and customer service in anattempt to build and maintain passbook and other non-certificate accounts.  These accounts generally carry lower coststhan certificate accounts and are believed to represent primarily “core”deposits that are less vulnerable to interest rate changes (and competitionfrom other financial products) than certificate accounts.

 

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In its lendingoperations, the Bank seeks to obtain high quality residential and, to a lesserextent, other loans by maintaining a high level of local visibility, offering ahigh level of customer service and limiting its secondary market activities. Inrecent years, as a result of these efforts, the Bank’s outstanding loanbalances have increased.  At the sametime, asset quality has remained high.

 

**Comparisonof Financial Condition at December 31, 2001 and December 31, 2000**

 

Total assets atDecember 31, 2001 were $431.3 million compared to $403.7 million at December31, 2000, an increase of $27.6 million or 6.84%. The increase in total assetswas due primarily to increases of $3.3 million in cash and cash equivalents,$3.8 million in securities, $12.0 in loans receivable and $8.9 million inFederal Home Loan Bank (FHLB) stock, partially offset by a decrease of $300,000in premises and equipment.

 

Net loansreceivable increased by $12.0 million from $275.5 million at December 31,2000to $287.5 million at December 31, 2001. The increase was due to thedisbursement of $17.4 million to fund construction loans, as well as thedisbursement of $97.0 million to fund mortgage loans and a net increase inequity line of credit loans of $4.2 million offset by $12.6 million in paydownson construction loans and $94.2 million in paydowns on mortgage and otherloans. The net increase in loans receivable was largely a result of a lowinterest rate environment and a strong local real estate market.

 

Securitiesincreased by $3.8 million from $110.2 million at December 31, 2000 to $114.0million at December 31, 2001. The increase in securities was due primarily tothe purchase of $42.7 million in municipal and agency securities and $17.8million in mortgage backed securities partially offset by the maturity and callof $50.1 million in agency securities, the sale of $1.0 million in securitiesand paydowns of $5.6 million on mortgage backed securities. Management believesthat the securities were redeemed due to the falling interest rate environmentexisting during the year. Cash and cash equivalents increased by $3.3 millionprimarily due to the inflow of funds from the calls of securities and paydownson mortgages along with increases in deposit accounts. The funds were depositedin interest-bearing accounts with other financial institutions and overnightfederal funds awaiting redeployment into mortgage loans, agency and municipalsecurities and mortgage backed securities. Federal Home Loan Bank Stockincreased by $8.9 million primarily due to stock purchases by the Bank. Thestock issued by the Federal Home Loan Bank is liquid and pays a competitivequarterly dividend. Premises and equipment decreased by $300,000 partially dueto the sale of real estate held for future expansion and due to depreciationbooked on the company’s fixed assets.

 

Totalliabilities at December 31, 2001 were $359.2 million compared to $323.4 millionat December 31, 2000, an increase of $35.8 million. The increase in liabilitieswas due primarily to increases of $16.2 million in deposits, $19.0 million inFederal Home Loan Bank advances and $1.0 million in accrued interest payable andother liabilities partially offset by a decrease of $400,000 in advancepayments by borrowers for taxes and insurance.

 

Depositsincreased due to the less volatile and less risky nature of these accounts incomparison to other types of consumer investment vehicles. Federal Home LoanBank advances increased due to low rates being charged on these types ofborrowings. The advances were then redeployed into higher yielding mortgageloan products.

 

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Shareholdersequity at December 31, 2001 was $72.0 million compared to $80.2 million atDecember 31, 2000, a decrease of $8.2 million. The decrease in equity was dueprimarily to the Company’s repurchase of outstanding common stock of $14.2million partially offset by net income of $6.8 million for the period. Equityat December 31, 2001 was also impacted by dividends on the Company’s commonstock. Four cash dividends totaling $2.2 million were declared during the yearended  December 31, 2001. The dividendswere paid to stockholders in April, July and October 2001, and January 2002.

 

 

**Comparisonof Operating Results for the Years Ended December 31,  2001 and December 31, 2000**

 

***General.***** **Net income for the year ended December 31, 2001 was $6.8million compared to net income of $6.0 million for the year ended December 31,2000, an increase of $759,000. The increase in net income was attributable toincreases in net interest income and noninterest income partially offset byincreases in noninterest expense and income tax expense. Basic earnings pershare for the year ended December 31, 2001 increased to $1.68 as compared toearnings per share of $1.28 for the year ended December 31, 2000, an increaseof 31.25%. The increase in earnings per share is attributable to higher netincome and a decrease in the average shares outstanding as the Companycontinued to repurchase its common stock in the open market during 2001.

 

***Interest Income.**** *Interest income for the year ended December 31, 2001 was$30.4 million compared to $29.0 million for the year ended December 31, 2000,an increase of $1.4 million. The increase in interest income was primarily dueto an increase in the average balance of interest earning assets from $379.9million for the year ended December 31, 2000 to $399.5 million for the yearended December 31, 2001 due to the investment of funds in loans, overnightfederal funds and Federal Home Loan Bank stock. Interest income on loansincreased by $1.9 million primarily due to an increase in the average loanbalance. Interest income on taxable securities decreased by $1.1 millionprimarily due to decreases 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$221,000 primarily due to increases in the average balances of thesesecurities. Interest income on other interest earning assets increased by$444,000 due to increases in the average balances of Federal Home Loan Bank stock,interest-bearing accounts with the Federal Home Loan Bank and funds invested inovernight federal funds.

 

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***Interest Expense. ***Interest expense for the year ended December 31, 2001was $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 the average balance of interest-bearingliabilities  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 primarily due 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.

 

***Net Interest Income. ***Net interest income for theyear ended December 31,2001 was $15.7 million which represented an increase of$1.0 million from net interest income of $14.7 million for the year ended December 31, 2000. The ratio of averageinterest earning assets to average interest bearing liabilities decreased to123.91% in 2001 from 129.24% in 2000. However, the interest spread increased to3.25% in 2001 from 2.94% in 2000. The primary reason for the decrease in theratio of interest earning assets to interest bearing liabilities was theCompany’s repurchase of outstanding common stock. Even though the stockrepurchases decreased the ratio of interest earning assets to interest bearingliabilities, they were accretive to book value per share  since allthe stock was purchased at prices which were below book value.

 

***Provision for Loan Losses.*******The provision for loanlosses for the year ended December 31, 2001 was $144,000 compared to $246,000for the year ended December 31, 2000, a decrease of $102,000. The change wasdue in part to a recovery of $143,000, which the Company received in August2001, from the liquidation of Allied Fidelity Insurance Company, which hadguaranteed the principal and interest payments on a loan previously charged offin which the Bank owned a participation interest.

 

On a quarterlybasis, management of the Bank meets to review the adequacy of the allowance forloan losses. Management classifies loans in compliance with regulatory classifications.Classified loans are individually reviewed to arrive at specific reserves forthose loans. Once the specific portion of the allowance is calculated,management calculates a historical portion for each loan category based on loanloss history, peer data, current economic conditions and trends in portfolio,including delinquencies and impairments and real estate values in the Bank’smarket area as well as changes in the composition of the loan portfolio. Inaddition, various regulatory agencies, as an integral part of their examinationprocess, 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 probableincurred losses on existing loans at December 31, 2001, there can be noassurance that such losses will not exceed estimated amounts.

 

***Noninterest Income.***Noninterest income for theyear ended December 31, 2001 was $1,135,000 compared to $637,000 for the yearended December 31, 2000, an increase of $498,000. The increase in noninterestincome was due primarily to a $286,000 gain on the sale of real estate held forfuture expansion along with a net increase in the gain on the sale ofsecurities of $127,000. Also contributing to the increase in noninterest incomewas an increase in other income of $139,000 primarily due to an increase inmortgage modification fee income which was partially offset by a decrease of$41,000 in the gain on sale of real estate owned.

 

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***Noninterest Expense.***Noninterest expense for theyear ended December 31, 2001 was $6.6 million compared to noninterest expenseof $6.1 million 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 existingBank personnel. 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 increased by $90,000 due to the temporary use of informationtechnology specialists to assist the Bank in upgrading its data processingsystems and due to an annual contractual adjustment by the Bank’s dataprocessing service provider in the cost of on-line data processing services.Data processing expense was also affected by fees incurred by the Bank for theperformance of information technology security audits on its computer network.Other expense increase by $91,000 due to increases in appraisal fees as aresult of increases in mortgage loan and construction loan volume. Alsocontributing to the increase in other expense were increases in service feescharged to the Company and the Bank by its correspondent banks.

 

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

 

**Comparisonof Financial Condition at December 31, 2000 and December 31, 1999**

 

Total assets atDecember 31,2000 were $403.7 million compared to $372.3 million at December31,1999, an increase of $31.4 million or 8.43%. The increase in total assetsprimarily reflected  increases of $34.3million in loans receivable and $1.0 million in Federal Home Loan Bankstock,  partially offset by a decreaseof $3.3 million in securities. Funding for the increases in assets was providedby increases in Federal Home Loan Bank advances and deposits.

 

Totalliabilities at December 31,2000 were $323.4 million compared to $289.1 millionat December 31, 1999, an increase of $34.3 million or 11.86%. The change inliabilities consisted of  increases of$14.5 million in deposit accounts and $18.3 million in Federal Home Loan Bankadvances along with increases of $1.0 million in accrued interest payable andother liabilities.

 

Total equity atDecember 31, 2000 was $80.2 million compared to $83.2 million at  December 31, 1999, a decrease of $3.0million. The decrease was primarily due to the Company’s  repurchase of outstanding common stock of$8.4 million and $2.5 million of dividends declared. These decreases werepartially offset by net income of $6.0 million.

 

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**Comparisonof Operating Results for the Years Ended December 31,  2000 and December 31, 1999**

 

***General.***Net income for the yearended December 31, 2000 was $6.0 million compared to net income of $5.7 millionfor the year ended December 31, 1999, an increase of $300,000. The increase innet income was primarily due to an increase of $440,000 in net interest incomeoffset by a decrease of $173,000 in noninterest income. Earnings per share forthe year ended December 31, 2000 increased to $1.28 as compared to earnings pershare of $1.14 for the year ended December 31, 1999, an increase of 12.28%. Theincrease in earnings per share is attributable to higher net income and adecrease in the average shares outstanding as the Company continued torepurchase common stock in the open market during 2000.

 

***Interest Income*****.**Interest income for the yearended December 31, 2000 was $29.0 million compared to $25.3 million for theyear ended December 31, 1999, an increase of $3.7 million or 14.6%. Theincrease in interest income was primarily due to an increase in the averagebalance of interest earning assets from $338.6 million for the year endedDecember 31, 1999 to $379.9 million for the year ended December 31, 2000 due tothe investment of funds in loans and securities. The average balance of loansincreased $32.4 million to $261.2 million for the year ended December 31, 2000from $228.8 million for the year ended December 31, 1999. In addition, theaverage balances of municipal and government agency securities increased by$18.3 million, but were partially offset by a $5.1 million decrease in mortgagebacked securities. The average yield on interest earning assets increased to7.81% for the year ended December 31, 2000 from 7.62% for the year endedDecember 31, 1999, as a result of the increasing interest rate environmentduring the past year.

 

***Interest Expense.*******Interest expense for theyear ended December 31, 2000 was $14.3 million compared to $11.0 million forthe year ended December 31, 1999, an increase of $3.3 million. The increase ininterest expense was due to an increase in the average balance ofinterest-bearing liabilities of $37.8 million from $256.1 million for the yearended December 31, 1999 to $293.9 million for the year ended December 31, 2000.Further adding to the increase in interest expense was an increase in theaverage cost of funds from 4.31% for the year ended December 31, 1999 to4.87%  for the year ended December 31,2000. The average cost of funds increased due to the increasing interest rateenvironment and also due to the increased average balance of Federal Home LoanBank borrowings which have higher interest rates than certificate of depositaccounts.

 

***Net interest Income.***Net interest income of $14.7million for the year ended December 31, 2000 represented an increase of$440,000 from the $14.2 million reported for the year ended December 31, 1999.The ratio of average interest earning assets to average interest bearingliabilities decreased to 129.24% in 2000 from 132.19% in 1999 and the interestspread tightened to 2.94% in 2000 from 3.31% in 1999. The primary reason forthe decrease in the ratio of interest -earning assets to interest-bearingliabilities was the Company’s repurchase of outstanding common stock. Eventhough the repurchases decreased the above ratio and net interest margin, theywere accretive to shareholder book value since all the stock was purchased atprices which were below book value.

 

9

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***Provision for Loan Losses.***** **The provision for loan losses for the year endedDecember 31, 2000 was $246,000 and remained consistent with the year endedDecember 31, 1999.

 

The amount ofthe provision and allowance for estimated losses on loans is influenced bycurrent economic conditions, actual loss experience, industry trends and otherfactors, including real estate values, in the Bank’s market area. In addition,various regulatory agencies, as an integral part of their examination process,periodically review the Bank’s allowance for estimated losses on loans. Suchagencies may require the Bank to provide additions to the allowance based uponjudgements which differ from those of management. Although management uses thebest information available and maintains the Bank’s allowance for losses at alevel it believes adequate to provide for losses, future adjustments to theallowance may be necessary due to economic, operating, regulatory and otherconditions that may be beyond the Bank’s control.

 

***Non-Interest Income.*****Noninterest income for theyear ended December 31, 2000 was $637,000 compared to $810,000 for the yearended December 31, 1999, a decrease of $173,000. The decrease in noninterestincome is primarily due to a decrease of $165,000 in prepayment fees oncommercial loans. Contributing to the decrease in noninterest income was areduction of $58,000 in the net gain on sales and calls of securities partiallyoffset by a $41,000 increase in the net gain on the sale of real estate owned.

 

***Non-Interest Expense.***** **Non-interest expense for the year ended December 31,2000 was $6.1 million and remained fairly consistent with noninterest expenseof $6.1 million for the year ended December 31, 1999.**Compensation and benefits expense increased by $194,000partially due to the hiring of additional bank personnel as a result of thecontinuing growth of the Bank and due to standard annual salary adjustments forexisting bank personnel. Data processing expense decreased by $36,000 primarilydue to non-recurring costs associated with Year 2000 testing and revisionswhich occurred in 1999. Federal deposit insurance premiums decreased by $75,000due to the reduced FDIC assessment which was effective as of January 1,2000.

 

***Income Taxes.***** **The provision for income taxes for the year endedDecember 31, 2000 was $3.0 million and remained fairly consistent with theprovision of $3.0 million for the year ended December 31, 1999.

 

 

 

10

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The following table presents,for the periods indicated, the total dollar amount of interest income fromaverage interest-earning assets and the resultant yields, as well as the interestexpense on average interest-bearing liabilities, expressed both in dollars andrates.  A tax equivalent of 34% was usedto compute the yield on municipal securities. No other tax equivalentadjustments were made.  All averagebalances are daily average balances. Non-accruing loans have been included in the table as loans carrying azero yield.

** **
|                                     |   | **Year Ended  December 31,**             |    |
|------------------------------------------|--------|-----------------------------------------------|---------|
|                                     |   | **2001**                                      |    | **2000** |   | **1999** |   |
|                                     |   | **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)                     |   | $                                             | 283,072 |   | $ | 23,509 |   | 8.30 | % | $ | 261,241 |   | $ | 21,597 |   | 8.27 | % | $ | 228,768 |   | $ | 18,642 |   | 8.15 | % |
| Mortgage-backed  securities &CMOs(1) |   | 15,598                                        |    | 1,010 |   | 6.48 |   | 15,363 |   | 1,046 |   | 6.81 |   | 20,498 |   | 1,295 |   | 6.32 |   |
| Mutual funds(1)                          |   | 3,172                                         |    | 175 |   | 5.51 |   | 3,172 |   | 170 |   | 5.36 |   | 3,172 |   | 179 |   | 5.64 |   |
| Agencies/Other(1)                        |   | 53,098                                        |    | 3,496 |   | 6.58 |   | 70,809 |   | 4,604 |   | 6.50 |   | 58,876 |   | 3,745 |   | 6.36 |   |
| Municipal  securities(1)                 |   | 29,713                                        |    | 2,288 |   | 7.70 |   | 25,036 |   | 1,953 |   | 7.80 |   | 18,684 |   | 1,477 |   | 7.91 |   |
| Federal funds  sold                      |   | 5,799                                         |    | 206 |   | 3.56 |   | 28 |   | 1 |   | 3.58 |   | 2,666 |   | 123 |   | 4.61 |   |
| Deposits with other  institutions        |   | 2,687                                         |    | 120 |   | 4.48 |   | 1,353 |   | 75 |   | 5.54 |   | 3,744 |   | 181 |   | 4.83 |   |
| FHLB stock                               |   | 6,321                                         |    | 411 |   | 6.50 |   | 2,871 |   | 218 |   | 7.59 |   | 2,176 |   | 145 |   | 6.66 |   |
| Total interest-earning  assets           |   | 399,460                                       |    | 31,215 |   | 7.81 |   | 379,873 |   | 29,664 |   | 7.81 |   | 338,584 |   | 25,787 |   | 7.62 |   |
| Non-interest earning assets              |   | 15,183                                        |    |   |   |   |   | 10,042 |   |   |   |   |   | 14,841 |   |   |   |   |   |
| Total assets                             |   | $                                             | 414,643 |   |   |   |   |   | $ | 389,915 |   |   |   |   |   | $ | 353,425 |   |   |   |   |   |
|                                     |   |                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-Bearing  Liabilities:           |   |                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market                             |   | 4,269                                         |    | 125 |   | 2.94 |   | 3,667 |   | 110 |   | 3.00 |   | $ | 4,180 |   | 119 |   | 2.85 |   |
| NOW                                      |   | 13,920                                        |    | 194 |   | 1.39 |   | 12,825 |   | 253 |   | 1.97 |   | 11,928 |   | 234 |   | 1.96 |   |
| Passbook savings                         |   | 79,004                                        |    | 2,152 |   | 2.72 |   | 76,581 |   | 2,319 |   | 3.03 |   | 76,259 |   | 2,350 |   | 3.08 |   |
| Certificates of Deposit                  |   | 157,174                                       |    | 8,525 |   | 5.42 |   | 144,256 |   | 8,215 |   | 5.69 |   | 129,163 |   | 6,463 |   | 5.00 |   |
| FHLB  Advances                      |   | 68,003                                        |    | 3,720 |   | 5.47 |   | 56,597 |   | 3,415 |   | 6.03 |   | 34,607 |   | 1,871 |   | 5.41 |   |
| Total interest-bearing  liabilities      |   | 322,370                                       |    | 14,716 |   | 4.56 |   | 293,926 |   | 14,312 |   | 4.87 |   | 256,137 |   | 11,037 |   | 4.31 |   |
| Non-interest bearing  liabilities        |   | 15,700                                        |    |   |   |   |   | 14,253 |   |   |   |   |   | 13,990 |   |   |   |   |   |
| Total liabilities                        |   | 338,070                                       |    |   |   |   |   | 308,179 |   |   |   |   |   | 270,127 |   |   |   |   |   |
|                                     |   |                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity                                   |   | 76,573                                        |    |   |   |   |   | 81,736 |   |   |   |   |   | 83,298 |   |   |   |   |   |
| Total liabilities and  equity            |   | $                                             | 414,643 |   |   |   |   |   | $ | 389,915 |   |   |   |   |   | $ | 353,425 |   |   |   |   |   |
|                                     |   |                                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest-earning spread              |   |                                          |    | $ | 16,499 |   | 3.25 | % |   |   | $ | 15,352 |   | 2.94 | % |   |   | $ | 14,750 |   | 3.31 | % |
| Margin                                   |   |                                          |    |   |   | 4.13 | % |   |   |   |   | 4.04 | % |   |   |   |   | 4.36 | % |
| Assets to liabilities                    |   | 123.91                                        | %       |   |   |   |   | 129.24 | % |   |   |   |   | 132.19 | % |   |   |   |   |
|                                          |        |                                               |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)  Calculated based on amortizedcost.

 

11

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The following schedulepresents the dollar amount of changes in interest income and interest expensefor major components of interest-earning assets and interest-bearingliabilities.  It distinguishes betweenthe changes related to outstanding balances and that due to the changes ininterest rates.  For each category ofinterest-earning assets and interest-bearing liabilities, information isprovided 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,**     |   |
|----------------------------------------------|--------|----------------------------------|--------|
|                                         |   | **2000 vs. 2001**                |   | **1999 vs. 2000** |   | **1998 vs. 1999** |   |
|                                         |   | **Increase  (Decrease)  Due to** |   | **Total********Increase (Decrease)** |   | **Increase  (Decrease)  Due to** | **Total********Increase  (Decrease)** |   | **Increase  (Decrease)  Due to** |   | **Total  Increase** |   |
|                                         |   | **Volume**                       |   | **Rate** | **Volume** |   | **Rate** |   | **Volume** |   | **Rate** |   | **(Decrease)** |   |
|                                         |   | **(Dollars in  Thousands)**      |   |
| Interest-earning assets:                     |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                             |   | $1,813                           |   | $99 |   | $1,912 |   | $2,681 |   | $274 |   | $2,955 |   | $1,725 |   | $(224 | ) | $1,501 |   |
| Mortgage-backed securities  & CMO’s |   | 16                               |   | (52 | ) | (36 | ) | (344 | ) | 95 |   | (249 | ) | (531 | ) | (116 | ) | (647 | ) |
| Mutual funds                                 |   | —                           |   | 5 |   | 5 |   | — |   | (9 | ) | (9 | ) | — |   | (9 | ) | (9 | ) |
| Agencies and other                           |   | (1,165                           | )      | 57 |   | (1,108 | ) | 774 |   | 85 |   | 859 |   | 527 |   | (171 | ) | 356 |   |
| Municipal securities                         |   | 360                              |   | (25 | ) | 335 |   | 496 |   | (20 | ) | 476 |   | 614 |   | 51 |   | 665 |   |
| Federal funds sold                           |   | 205                              |   | — |   | 205 |   | (100 | ) | (22 | ) | (122 | ) | (222 | ) | (50 | ) | (272 | ) |
| Deposits with other  institutions            |   | 62                               |   | (17 | ) | 45 |   | (129 | ) | 23 |   | (106 | ) | (65 | ) | (92 | ) | (157 | ) |
| FHLB stock                                   |   | 228                              |   | (35 | ) | 193 |   | 51 |   | 22 |   | 73 |   | 13 |   | 2 |   | 15 |   |
| Total interest-earning  assets               |   | 1,519                            |   | 32 |   | 1,551 |   | 3,429 |   | 448 |   | 3,877 |   | 2,061 |   | (609 | ) | 1,452 |   |
|                                         |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:               |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market                                 |   | 18                               |   | (3 | ) | 15 |   | (15 | ) | 6 |   | (9 | ) | (22 | ) | 2 |   | (20 | ) |
| NOW                                          |   | 20                               |   | (79 | ) | (59 | ) | 18 |   | 1 |   | 19 |   | 19 |   | (30 | ) | (11 | ) |
| Passbook Savings                             |   | 72                               |   | (239 | ) | (167 | ) | 10 |   | (41 | ) | (31 | ) | 146 |   | 41 |   | 187 |   |
| Certificates of deposit                      |   | 713                              |   | (403 | ) | 310 |   | 803 |   | 949 |   | 1,752 |   | 332 |   | (513 | ) | (181 | ) |
| Advances                                     |   | 644                              |   | (339 | ) | 305 |   | 1,306 |   | 238 |   | 1,544 |   | 696 |   | 70 |   | 766 |   |
| Total interest bearing  liabilities          |   | 1,467                            |   | (1,063 | ) | 404 |   | 2,122 |   | 1,153 |   | 3,275 |   | 1,171 |   | (430 | ) | 741 |   |
|                                         |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest/spread                          |   | $52                              |   | $1,095 |   | $1,147 |   | $1,307 |   | $(705 | ) | $602 |   | $890 |   | $(179 | ) | $711 |   |

 

12

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**Quantitativeand Qualitative Disclosures About Market Risk**

 

In an attempt to manage the Company’s exposure to changes in interest rates, management monitors the Company’sinterest rate risk.  The Board ofDirectors reviews at least quarterly the Company’s interest rate risk positionand profitability.  The Board ofDirectors also reviews the Company’s portfolio, formulates investmentstrategies and oversees the timing and implementation of transactions to assureattainment of the 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, the Company, depending on therelationship between long- and short-term interest rates, market conditions andconsumer preference, often places more emphasis on managing short term netinterest margin than on better matching the interest rate sensitivity of itsassets and liabilities in an effort to enhance net interest income.  Management believes that the increased netinterest income resulting from a mismatch in the maturity of its asset andliability portfolios can, during periods of declining or stable interest rates,provide high enough returns to justify the increased exposure to sudden andunexpected increases in interest rates.

 

The Board has taken a number of steps to manage the Company’svulnerability to changes in interest rates. First, the Company has long used community outreach, customer serviceand marketing efforts to increase the Company’s passbook and othernon-certificate accounts.  At December31, 2001, $112.6  million or 41.9% ofthe 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.  Third, the Company has recently used FHLBadvances, to extend the term to repricing of its liabilities. At December 31,2001, the Company had $62.6 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 4.7 years at December 31, 2001. 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 familyresidential loans.

 

Management utilizes the net portfolio value (NPV)analysis to quantifyinterest rate risk. In essence, this approach calculates the difference betweenthe present value of liabilities, expected cash flows from assets and cashflows from off balance sheet contracts. The analysis estimates how the Bank’snet portfolio value responds to changes in interest rates. The current interestrate scenarios used in the NPV analysis assume an instantaneous and sustainedparallel shift in the Treasury yield curve of plus and minus 100, 200, and 300basis points in 100 basis point increments.

 

On December 31, 2001, the yield on the three month Treasury bill was1.72%. As a result, the net portfolio value analysis was unable to produceresults for the minus 200 and minus 300 basis point scenarios for the quarterending December 31, 2001.

 

13

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Presented below, as of December 31, 2001, is an analysis of the Bank’sestimated interest rate risk as measured by changes in NPV for instantaneousand sustained parallel shifts in interest rates up 300 basis points and down100 basis points, in 100 point increments. Also presented below, as of December31, 2000, is an analysis of the Bank’s estimated interest rate risk as measuredby changes in NPV for instantaneous and sustained parallel shift in interestrates, up and down 300 basis points in 100 point increments.

 

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                                   |   | —                     |   | —               |   | —              |   |
|                                        |        |                            |        |                      |        |                     |        |  |  |

 

 

 

2000

 
| **Assumed  Change  in Interest Rates** |   | **$ Amount**               |   | **$ Change in  NPV** |   | **% Change  inNPV** |   |
|----------------------------------------|--------|----------------------------|--------|----------------------|--------|---------------------|--------|
| **(Basis  Points)**                    |   | **(Dollars in Thousands)** |   |                 |   |
|                                   |   |                       |   |                 |   |                |   |
| +300                                   |   | $                          | 54,786 |                 | $      | (26,324             | )      | (32% | ) |
| +200                                   |   | 63,655                     |   | (17,455              | )      | (22                 | )      |
| +100                                   |   | 72,778                     |   | (8,332               | )      | (10                 | )      |
| —                                 |   | 81,110                     |   | —               |   | —              |   |
| -100                                   |   | 86,661                     |   | 5,551                |   | 7                   |   |
| -200                                   |   | 91,762                     |   | 10,652               |   | 13                  |   |
| -300                                   |   | 98,665                     |   | 17,555               |   | 22                  |   |
|                                        |        |                            |        |                      |        |                     |        |  |  |

 

 

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.

 

14

----

 

 

**Liquidity and Capital Resources**

 

The Company’s primary sources of funds aredeposits and proceeds from principal and interest payments on loans and mortgage–backedsecurities.  While maturities andscheduled amortization of loans and securities are predictable sources offunds, deposit flows and mortgage prepayments are greatly influenced by generalinterest rates, economic conditions and competition.  First Security generally manages the pricing of its deposits tobe 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 ofshort duration.  If First Securityrequires funds beyond its ability to generate them internally, it hasadditional borrowing capacity with the FHLB of Chicago.

 

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 $9.0 million, $8.3 million,and $6.5 million for the years ended December 31, 2001, 2000, and 1999,respectively. Net cash used in investing activities consisted primarily ofdisbursements for loan originations and the purchase of investments andmortgage–backed securities, offset by principal collections on loans,proceeds from 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 bypurchases of Treasury Stock and the payment of dividends.

 

The Company’s most liquid assets are cash andshort–term investments.  Thelevels of these assets are dependent on the Company’s operating, financing,lending and investing activities during any given period.  At December 31, 2001, cash and short–terminvestments totaled $9.4 million.  TheCompany has other sources of liquidity if a need for additional funds arises,including securities maturing within one year and the repayment of loans.  The Company may also utilize the sale ofsecurities available–for–sale and FHLB advances as a source offunds.

 

At December 31, 2001 the Company hadoutstanding commitments to originate loans of $10.1 million, all of which hadfixed interest rates. As of the same date, the Company also had outstandingcommitments to fund construction loans of $9.6 million, all of which hadfloating interest rates based on prime rate and $5.3 million in unused lines ofcredit for home equity loans.  Theseloans are to be secured by properties located in its market area.  The Company anticipates that it will havesufficient funds available to meet its current loan commitments.  Loan commitments have, in recent periods,been funded through liquidity or through FHLB advances.  Certificates of deposit which are scheduledto mature in one year or less from December 31, 2001 totaled $136.8million.  Management believes, based onpast experience, that a significant portion of such deposits will remain withthe Company.  Based on the foregoing, inaddition to the Company’s high level of core deposits and capital, the Companyconsiders its liquidity and capital resources sufficient to meet itsoutstanding short-term and long-term needs.

 

15

----

 

 

The following tables disclose contractualobligations and commercial commitments of the Company as of December 31, 2001:

 
|                          |   | **Total** |   | **Less Than  1 Year** |   | **1 - 3  Years** |   | **4 - 5  Years** |   | **After********5 Years** |   |
|-------------------------------|--------|-----------|--------|-----------------------|--------|------------------|--------|------------------|--------|--------------------------|--------|
| FHLB Advances                 |   | $         | 83,600 |                  | $      | 9,000            |   | $                | 10,000 |                     | $      | 37,600 |   | $ | 27,000 |   |
| Total contractual obligations |   | $         | 83,600 |                  | $      | 9,000            |   | $                | 10,000 |                     | $      | 37,600 |   | $ | 27,000 |   |

 

 
|                         |   | **Total  Amounts  Committed** |   | **Less Than  1 Year** |   | **1 - 3  Years** |   | **4 - 5  Years** |   | **After********5 Years** |   |
|------------------------------|--------|-------------------------------|--------|-----------------------|--------|------------------|--------|------------------|--------|--------------------------|--------|
| Lines of credit              |   | $                             | 14,407 |                  | $      | 1,354            |   | $                | 2,843  |                     | $      | 10,210 |   | — |   |
| Mortgage Loans               |   | 10,100                        |   | 10,100                |   | —           |   | —           |   | —                   |   |
| Construction Loans           |   | 9,600                         |   | 9,600                 |   | —           |   | —           |   | —                   |   |
| Total commercial commitments |   | $                             | 34,107 |                  | $      | 21,054           |   | $                | 2,843  |                     | $      | 10,210 |   | — |   |

 

 

 

First Security is subject to variousregulatory capital requirements imposed by the OTS.  At December 31, 2001, First Security was in compliance with allapplicable capital requirements on a fully phased–in basis.  See Note 10 of the Notes toConsolidated Financial Statements.

 

16

----

 

**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, virtuallyall of the assets and liabilities of the Company are monetary in nature.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, as amended.  The Company intends such forward-lookingstatements to be covered by the safe harbor provisions for forward-lookingstatements 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 whichcould have a material adverse effect on the operations and future prospects of theCompany 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 informationconcerning the Company and its business, including additional factors thatcould materially affect the Company’s financial results, is included in theCompany’s filings with the Securities and Exchange Commission.

 

 

**New Accounting Pronouncements**

 

In July 2001, Statement of FinancialAccounting Standards (SFAS) No.141, “Business Combinations” and SFAS No. 142,“Goodwill and Other Intangible Assets” were issued by the Financial AccountingStandards Board (FASB). SFAS No. 141, “Business Combinations”, no longerpermits the use of pooling-of-interests method and requires that all businesscombinations initiated after June 30, 2001 be accounted for under the purchasemethod. This accounting standard will have no effect on the Company’s financialstatements unless the Company enters into a business combination transaction.

 

SFAS No. 142, “Goodwill and Other IntangibleAssets”, requires that goodwill no longer be amortized to earnings, but insteadbe reviewed for impairment. The amortization of goodwill ceases upon adoptionof the Statement, which for most companies will be January 1, 2002. Thispronouncement will not have a material effect on the Company’s financialstatements.

 

17

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                                                                   **FIRST SECURITYFED FINANCIAL, INC.**

**SHAREHOLDERINFORMATION**

 

**ANNUAL MEETING**

 

The Annual Meeting of Shareholders will beheld at 3:30 p.m., local time on April 18, 2002 at the Main Office of theCompany, located at 936 N. Western Avenue, Chicago, Illinois 60622.

 

**STOCK LISTING**

 

First SecurityFed Financial, Inc. common stockis traded on the Nasdaq Stock Market under the symbol “FSFF.”

 

**PRICE RANGE OF COMMON STOCK**

 

As of February 28, 2002  there were approximately 726 shareholders ofrecord and 4,138,690 outstanding shares of common stock.

 

The following table sets forth the high andlow sales prices and dividends paid per share of common stock during theperiods indicated.  The stock priceinformation was provided by the NASD, Inc.

 
| **Quarter Ended**   |   | **High** |   | **Low** |   | **Dividend Declared** |
|---------------------|--------|----------|--------|---------|--------|-----------------------|
| March 31,  2000     |   | 11.38    |   | 10.75   |   | .12¢             |
| June 30,  2000      |   | 13.00    |   | 10.81   |   | .13¢             |
| September  30, 2000 |   | 15.25    |   | 12.44   |   | .13¢             |
| December 31,  2000  |   | 15.09    |   | 13.56   |   | .13¢             |
| March 31,  2001     |   | 15.75    |   | 14.63   |   | .13¢             |
| June 30,  2001      |   | 19.34    |   | 15.63   |   | .13¢             |
| September  30, 2001 |   | 20.49    |   | 17.25   |   | .13¢             |
| December 31,  2001  |   | 20.00    |   | 16.91   |   | .13¢             |
|                     |        |          |        |         |        |                       |  |  |

 

The payment of cash dividends is dependent onthe results of operations and financial condition of the Company, taxconsiderations, industry standards, economic conditions, general businesspractices and other factors. Dividend payments decisions are made withconsideration of a variety of factors including earnings, financial condition,market considerations and regulatory restrictions.

 

18

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REPORT OF INDEPENDENT AUDITORS

 

Board of Directors

First SecurityFed Financial,Inc.

Chicago, Illinois

 

We have audited theaccompanying consolidated balance sheets of First SecurityFed Financial, Inc.as of December 31, 2001 and 2000, and the related consolidated statements ofincome, comprehensive income, shareholders' equity, and cash flows for each ofthe three years in the period ended December 31, 2001.  These financial statements are theresponsibility of the Company's management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of First SecurityFed Financial, Inc.at December 31, 2001 and 2000, and the results of its operations and its cashflows for each of the three years in the period ended December 31, 2001,in conformity with accounting principles generally accepted in the UnitedStates of America.

 

As discussed in Note 2 to theconsolidated financial statements, the Company changed its method of accountingfor derivative instruments on January 1, 2000 to conform with Statement ofFinancial Accounting Standards No. 133.

 

Crowe, Chizekand Company LLP

 

Oak Brook, Illinois

February 1, 2002

 

19

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FIRST SECURITYFED FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2001 and 2000

(Dollars in thousands, except share data)

 
|                                                                                                     |   | **2001** |    | **2000** |   |
|----------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| **ASSETS**                                                                                               |   |     |    |     |   |
| Cash and due from banks                                                                                  |   | $        | 7,070   |     | $      | 4,749 |   |
| Interest-bearing deposit accounts in other  financial institutions                                       |   | 1,423    |    | 1,353    |   |
| Federal funds sold                                                                                       |   | 928      |    | —   |   |
| Total cash and cash equivalents                                                                          |   | 9,421    |    | 6,102    |   |
|                                                                                                     |   |     |    |     |   |
| Securities available-for-sale                                                                            |   | 21,741   |    | 31,894   |   |
| Securities held-to-maturity (fair  value:  $92,579 in 2001and $77,869 in  2000)                     |   | 92,216   |    | 78,306   |   |
| Loans receivable, net                                                                                    |   | 287,450  |    | 275,454  |   |
| Federal Home Loan Bank stock, at cost                                                                    |   | 12,162   |    | 3,330    |   |
| Premises and equipment, net                                                                              |   | 3,204    |    | 3,513    |   |
| Accrued interest receivable                                                                              |   | 3,177    |    | 3,346    |   |
| Other assets                                                                                             |   | 1,904    |    | 1,718    |   |
|                                                                                                     |   |     |    |     |   |
| Total assets                                                                                             |   | $        | 431,275 |     | $      | 403,663 |   |
|                                                                                                     |   |     |    |     |   |
| **LIABILITIES**                                                                                          |   |     |    |     |   |
| Deposits                                                                                                 |   |     |    |     |   |
| Non-interest-bearing                                                                                     |   | $        | 10,069  |     | $      | 7,152 |   |
| Interest-bearing                                                                                         |   | 258,788  |    | 245,510  |   |
| Total deposits                                                                                           |   | 268,857  |    | 252,662  |   |
| Advance payments by borrowers for taxes and  insurance                                                   |   | 2,880    |    | 3,255    |   |
| Advances from Federal Home Loan Bank                                                                     |   | 83,600   |    | 64,600   |   |
| Accrued interest payable and other  liabilities                                                          |   | 3,900    |    | 2,897    |   |
| Total liabilities                                                                                        |   | 359,237  |    | 323,414  |   |
|                                                                                                     |   |     |    |     |   |
| **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                                                                               |   | 62,922   |    | 62,645   |   |
| Unearned ESOP shares                                                                                     |   | (3,581   | )       | (3,906   | )      |
| Unearned stock awards                                                                                    |   | (1,774   | )       | (2,353   | )      |
| Treasury stock, at cost (2,269,310 shares  in 2001 and 1,478,365 shares in 2000)                         |   | (33,689  | )       | (19,637  | )      |
| Retained earnings                                                                                        |   | 47,924   |    | 43,386   |   |
| Accumulated other comprehensive income                                                                   |   | 172      |    | 50       |   |
| Total shareholders' equity                                                                               |   | 72,038   |    | 80,249   |   |
|                                                                                                     |   |     |    |     |   |
| Total liabilities and shareholders' equity                                                               |   | $        | 431,275 |     | $      | 403,663 |   |

 

See accompanying notes to consolidated financial statements.

 

20

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FIRST SECURITYFED FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2001, 2000, and 1999

(Dollars in thousands, except per share data)

 
|                                                     |   | **2001** |   | **2000** |   | **1999** |   |
|----------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Interest and dividend income                             |   |     |   |     |   |     |   |
| Loans                                                    |   | $        | 23,509 |     | $      | 21,597   |   | $ | 18,642 |   |
| Securities                                               |   |     |   |     |   |     |   |
| Taxable                                                  |   | 3,670    |   | 4,774    |   | 3,923    |   |
| Tax-exempt                                               |   | 1,510    |   | 1,289    |   | 975      |   |
| Mortgage-backed securities                               |   | 1,010    |   | 1,046    |   | 1,295    |   |
| Federal Home Loan Bank dividends                         |   | 411      |   | 218      |   | 145      |   |
| Federal funds sold and other interest  earning assets    |   | 327      |   | 76       |   | 305      |   |
|                                                     |   | 30,437   |   | 29,000   |   | 25,285   |   |
|                                                     |   |     |   |     |   |     |   |
| Interest expense                                         |   |     |   |     |   |     |   |
| NOW and money market                                     |   | 319      |   | 363      |   | 353      |   |
| Passbook savings                                         |   | 2,152    |   | 2,319    |   | 2,350    |   |
| Certificates of deposit                                  |   | 8,525    |   | 8,215    |   | 6,463    |   |
| Federal Home Loan Bank advances                          |   | 3,720    |   | 3,415    |   | 1,871    |   |
|                                                     |   | 14,716   |   | 14,312   |   | 11,037   |   |
|                                                     |   |     |   |     |   |     |   |
| **Net interest income**                                  |   | 15,721   |   | 14,688   |   | 14,248   |   |
|                                                     |   |     |   |     |   |     |   |
| Provision for loan losses                                |   | 144      |   | 246      |   | 246      |   |
|                                                     |   |     |   |     |   |     |   |
| **Net interest income after provision for  loan losses** |   | 15,577   |   | 14,442   |   | 14,002   |   |
|                                                     |   |     |   |     |   |     |   |
| Noninterest income                                       |   |     |   |     |   |     |   |
| Deposit service charges                                  |   | 364      |   | 372      |   | 368      |   |
| Insurance commissions                                    |   | 44       |   | 49       |   | 53       |   |
| Net gain (loss) on sales and calls of  securities        |   | 81       |   | (46      | )      | 12       |   |
| Gain on sale of real estate held for  expansion          |   | 286      |   | —   |   | —   |   |
| Net gain on sale of real estate owned                    |   | —   |   | 41       |   | —   |   |
| Other income                                             |   | 360      |   | 221      |   | 377      |   |
|                                                     |   | 1,135    |   | 637      |   | 810      |   |
|                                                     |   |     |   |     |   |     |   |
| Noninterest expense                                      |   |     |   |     |   |     |   |
| Compensation and benefits                                |   | 4,061    |   | 3,816    |   | 3,622    |   |
| Occupancy and equipment                                  |   | 731      |   | 695      |   | 695      |   |
| Data processing                                          |   | 396      |   | 306      |   | 342      |   |
| Federal insurance premiums                               |   | 134      |   | 129      |   | 204      |   |
| Other expense                                            |   | 1,232    |   | 1,141    |   | 1,239    |   |
|                                                     |   | 6,554    |   | 6,087    |   | 6,102    |   |
|                                                     |   |     |   |     |   |     |   |
| **Income before income taxes**                           |   | 10,158   |   | 8,992    |   | 8,710    |   |
|                                                     |   |     |   |     |   |     |   |
| Income tax expense                                       |   | 3,396    |   | 2,989    |   | 3,028    |   |
|                                                     |   |     |   |     |   |     |   |
| **Net income**                                           |   | $        | 6,762  |     | $      | 6,003    |   | $ | 5,682 |   |
|                                                     |   |     |   |     |   |     |   |
| Earnings per share                                       |   |     |   |     |   |     |   |
| Basic                                                    |   | $        | 1.68   |     | $      | 1.28     |   | $ | 1.14 |   |
| Diluted                                                  |   | $        | 1.67   |     | $      | 1.28     |   | $ | 1.14 |   |

 

See accompanying notes to consolidated financial statements.

 

20

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years ended December 31, 2001, 2000, and 1999

(Dollars in thousands, except per share date)
|                                                                                                                                            |   | **2001** |   | **2000** |   | **1999** |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|---------|
| Net income                                                                                                                                      |   | $        | 6,762  |     | $      | 6,003    |    | $ | 5,682 |   |
|                                                                                                                                            |   |     |   |     |   |     |    |
| Other comprehensive income                                                                                                                      |   |     |   |     |   |     |    |
| Unrealized  holding gains and losses on securities available-for-sale                                                                           |   | 281      |   | 1,248    |   | (933     | )       |
| 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                                                                       |   | (81      | )      | 46       |   | (12      | )       |
| Net unrealized gains and losses                                                                                                                 |   | 200      |   | 1,074    |   | (945     | )       |
| Tax effect                                                                                                                                      |   | (78      | )      | (419     | )      | 368      |    |
|                                                                                                                                            |   | 122      |   | 655      |   | (577     | )  |
|                                                                                                                                            |   |     |   |     |   |     |    |
| Comprehensive income                                                                                                                            |   | $        | 6,884  |     | $      | 6,658    |    | $ | 5,105 |   |
|                                                                                                                                                 |        |          |        |          |        |          |         |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

 

21

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FIRST SECURITYFED FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Years ended December 31, 2001, 2000, and 1999

(Dollars in thousands, except per 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, 1999                                                                                                                                         |   | $                 | 64     |                           | $      | 64,952                    |   | $                          | (4,582 | )                   | $      | (3,810                 | )      | $                                                     | (8,234  | )                                | $      | 36,225 |   | $ | (28 | ) | $ | 84,587 |   |
|                                                                                                                                                               |   |              |   |                           |   |                      |   |                       |   |                |   |                   |   |                                                  |    |                             |   |
| Net income                                                                                                                                                         |   | —            |   | —                         |   | —                    |   | —                     |   | —              |   | 5,682                  |   | —                                                |    | 5,682                            |   |
|                                                                                                                                                               |   |              |   |                           |   |                      |   |                       |   |                |   |                   |   |                                                  |    |                             |   |
| ESOP shares earned                                                                                                                                                 |   | —            |   | 60                             |   | 343                       |   | —                     |   | —              |   | —                 |   | —                                                |    | 403                              |   |
|                                                                                                                                                               |   |              |   |                           |   |                      |   |                       |   |                |   |                   |   |                                                  |    |                             |   |
| Stock awards earned                                                                                                                                                |   | —            |   | —                         |   | —                    |   | 735                        |   | —              |   | —                 |   | —                                                |    | 735                              |   |
|                                                                                                                                                               |   |              |   |                           |   |                      |   |                       |   |                |   |                   |   |                                                  |    |                             |   |
| Issuance of stock to Foundation, net of related tax benefit                                                                                                        |   | —            |   | (688                           | )      | —                    |   | —                     |   | 712                 |   | —                 |   | —                                                |    | 24                               |   |
|                                                                                                                                                               |   |              |   |                           |   |                      |   |                       |   |                |   |                   |   |                                                  |    |                             |   |
| Purchase of treasury stock                                                                                                                                         |   | —            |   | —                         |   | —                    |   | —                     |   | (5,705              | )      | —                 |   | —                                                |    | (5,705                           | )      |
|                                                                                                                                                               |   |              |   |                           |   |                      |   |                       |   |                |   |                   |   |                                                  |    |                             |   |
| Dividends declared ($.38 per share)                                                                                                                                |   | —            |   | —                         |   | —                    |   | —                     |   | —              |   | (1,993                 | )      | —                                                |    | (1,993                           | )      |
|                                                                                                                                                               |   |              |   |                           |   |                      |   |                       |   |                |   |                   |   |                                                  |    |                             |   |
| Change in fair value of securities, net of reclass-ification and tax  effects                                                                                      |   | —            |   | —                         |   | —                    |   | —                     |   | —              |   | —                 |   | (577                                                  | )       | (577                             | )      |
|                                                                                                                                                               |   |              |   |                           |   |                      |   |                       |   |                |   |                   |   |                                                  |    |                             |   |
| Balance at December 31, 1999                                                                                                                                       |   | 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 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  eclassification of securities from held-to-maturity to available-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 |   |
|                                                                                                                                                               |   |              |   |                           |   |                      |   |                       |   |                |   |                   |   |                                                  |    |                             |   |
| Balance at January 1, 2001                                                                                                                                         |   | $                 | 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 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 |   |

 

See accompanying notes to consolidated financial statements.

 

22

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FIRST SECURITYFED FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2001, 2000, and 1999

(Dollars in thousands)

 
|                                                                                                      |   | **2001** |   | **2000** |   | **1999** |   |
|-----------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **Cash flows from operating activities**                                                                  |   |     |   |     |   |     |   |
| Net income                                                                                                |   | $        | 6,762  |     | $      | 6,003    |   | $ | 5,682 |   |
| Adjustments to reconcile net income to net  cash from operating activities                                |   |     |   |     |   |     |   |
| Depreciation and amortization of  intangibles                                                             |   | 320      |   | 326      |   | 381      |   |
| Net amortization of securities                                                                            |   | (32      | )      | 83       |   | 190      |   |
| Net (gain) loss on sales and calls of  securities                                                         |   | (81      | )      | 46       |   | (12      | )      |
| Provision for loan losses                                                                                 |   | 144      |   | 246      |   | 246      |   |
| Net gain on real estate owned                                                                             |   | —   |   | (41      | )      | —   |   |
| Net gain on sale of real estate held for  expansion                                                       |   | (286     | )      | —   |   | —   |   |
| Deferred loan origination fees                                                                            |   | 188      |   | 303      |   | 11       |   |
| Provision for deferred income taxes                                                                       |   | 90       |   | (94      | )      | 26       |   |
| Federal Home Loan Bank stock dividend                                                                     |   | (332     | )      | (151     | )      | —   |   |
| ESOP compensation expense                                                                                 |   | 571      |   | 420      |   | 403      |   |
| Stock award compensation expense                                                                          |   | 721      |   | 722      |   | 735      |   |
| Net change in                                                                                             |   |     |   |     |   |     |   |
| Accrued interest receivable                                                                               |   | 169      |   | (370     | )      | (501     | )      |
| Other assets                                                                                              |   | (391     | )      | 421      |   | (463     | )      |
| Accrued interest payable and other  liabilities                                                           |   | 1,110    |   | 365      |   | (214     | )      |
| Net cash from operating activities                                                                        |   | 8,953    |   | 8,279    |   | 6,484    |   |
|                                                                                                      |   |     |   |     |   |     |   |
| **Cash flows from investing activities**                                                                  |   |     |   |     |   |     |   |
| Purchase of securities available-for-sale                                                                 |   | (2,759   | )      | (4,642   | )      | (1,062   | )      |
| Purchase of securities held-to-maturity                                                                   |   | (60,143  | )      | (500     | )      | (50,311  | )      |
| Proceeds from sales of securities  available-for-sale                                                     |   | 3,558    |   | 3,408    |   | 4,373    |   |
| Proceeds from calls and maturities of  securities                                                         |   | 50,065   |   | 2,480    |   | 10,278   |   |
| Proceeds from sale of real estate owned                                                                   |   | —   |   | 108      |   | —   |   |
| Net loan originations                                                                                     |   | (12,328  | )      | (34,835  | )      | (23,180  | )      |
| Principal payments on mortgage-backed and  related securities                                             |   | 5,835    |   | 3,527    |   | 6,680    |   |
| Change in time deposits in other financial  institutions                                                  |   | —   |   | —   |   | 200      |   |
| Purchase of Federal Home Loan Bank stock                                                                  |   | (8,500   | )      | (864     | )      | (184     | )      |
| Proceeds from sale of real estate held for  expansion                                                     |   | 415      |   | —   |   | —   |   |
| Property and equipment expenditures                                                                       |   | (103     | )      | (131     | )      | (40      | )      |
| Net cash from investing activities                                                                        |   | (23,960  | )      | (31,449  | )      | (53,246  | )      |
|                                                                                                      |   |     |   |     |   |     |   |
| **Cash flows from financing activities**                                                                  |   |     |   |     |   |     |   |
| Net change in deposits                                                                                    |   | 16,195   |   | 14,539   |   | 17,628   |   |
| Net change in advance payments by borrowers  for taxes and insurance                                      |   | (375     | )      | 444      |   | 379      |   |
| Change in advances from Federal Home Loan Bank                                                            |   | 19,000   |   | 18,300   |   | 17,300   |   |
| Dividends paid                                                                                            |   | (2,331   | )      | (1,901   | )      | (1,413   | )      |
| Purchase of treasury stock                                                                                |   | (14,163  | )      | (8,367   | )      | (5,705   | )      |
| Net cash from financing activities                                                                        |   | 18,326   |   | 23,015   |   | 28,189   |   |
|                                                                                                      |   |     |   |     |   |     |   |
| Net change in cash and cash equivalents                                                                   |   | $        | 3,319  |     | $      | (155     | )      | $ | (18,573 | ) |
|                                                                                                      |   |     |   |     |   |     |   |
| Cash and cash equivalents at beginning of  year                                                           |   | 6,102    |   | 6,257    |   | 24,830   |   |
|                                                                                                      |   |     |   |     |   |     |   |
| **Cash and cash equivalents****at end of  year**                                                          |   | $        | 9,421  |     | $      | 6,102    |   | $ | 6,257 |   |
|                                                                                                      |   |     |   |     |   |     |   |
| Supplemental disclosures of cash flow  information:                                                       |   |     |   |     |   |     |   |
| Cash paid during the year for                                                                             |   |     |   |     |   |     |   |
| Interest                                                                                                  |   | $        | 14,741 |     | $      | 14,110   |   | $ | 11,027 |   |
| Income taxes                                                                                              |   | 3,095    |   | 2,933    |   | 3,054    |   |
|                                                                                                      |   |     |   |     |   |     |   |
| 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.

 

23

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FIRST SECURITYFED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

 December 31, 2001, 2000, and1999

(Table amounts in thousands, except per share data)

 

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

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.

 

Use ofEstimates:  Inpreparing financial statements in conformity with accounting principlesgenerally accepted in the United States of America, management must makeestimates and assumptions.  Theseestimates and assumptions affect the amounts reported for assets, liabilities,income, and expenses, 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 past due over 90 days.  Payments received on such loans are reportedas principal reductions.

 

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.

 

24

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A loan is impaired when fullpayment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similarnature such as residential mortgage, consumer, and credit card loans, and on anindividual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so thatthe loan is reported, net, at the present value of estimated future cash flowsusing the loan's existing rate or at the fair value of collateral if repaymentis expected solely from the collateral.

 

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: Premises and equipment are stated at cost less accumulateddepreciation.  Depreciation is computedusing the straight-line method over the estimated useful lives of therespective premises and equipment.

 

Goodwill and Core Deposit Intangible: Goodwill and the core deposit intangibles result from the application ofpurchase accounting principles to the acquisition of assets and assumption ofliabilities from the Resolution Trust Corporation.  Goodwill represents the excess of acquisition cost over the fairvalue of net assets of the branch and is amortized over 25 years using thestraight-line method.  The premium paidto acquire core deposits is being amortized over ten years on an acceleratedmethod.  Net intangible assets atDecember 31, 2001 and 2000 aggregated $117,000 and $154,000, respectively.

 

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.

 

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 arecommitted to 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. 

 

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

 

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.

 

25

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Earnings Per Share:  Basic earnings per share iscomputed by dividing net income available to common shareholders by theweighted average number of shares outstanding during the period.  Diluted earnings per share is computed usingthe weighted number of shares determined for the basic computation plus thenumber of shares of common stock that would be issued assuming all contingentlyissuable shares having a dilutive effect on earnings per share were outstandingduring 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.  

 

New AccountingPronouncements: A new accounting standard requires all business combinations to berecorded using the purchase method of accounting for any transaction initiatedafter June 30, 2001.  Under thepurchase method, all identifiable tangible and intangible assets andliabilities of the acquired company must be recorded at fair value at date ofacquisition, and the excess of cost over fair value of net assets acquired isrecorded as goodwill.  Identifiableintangible assets must be separated from goodwill.  Identifiable intangible assets with finite useful lives will beamortized under the new standard, whereas goodwill, both amounts previouslyrecorded and future amounts purchased, will cease being amortized starting in2002.  Annual impairment testing will berequired for goodwill with impairment being recorded if the carrying amount ofgoodwill exceeds its implied fair value. The Company will continue to amortize the goodwill and core depositintangible resulting from the acquisition of a branch from the Resolution TrustCorporation in accordance with Statement of Financial Accounting Standards No.72.

 

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

 

**NOTE 2 - SECURITIES**

** **

TheCompany's securities at year end are as follows:

 
|                                     |   | **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 |   |

 

26

----

 
|                                     |   | **2000**      |   |
|------------------------------------------|--------|---------------|--------|
|                                     |   |          |   | **Gross** |   | **Gross** |   |   |   |
|                                     |   | **Amortized** |   | **Unrealized** |   | **Unrealized** |   | **Fair** |   |
|                                     |   | **Cost**      |   | **Gains** |   | **Losses** |   | **Value** |   |
| Securities available-for-sale            |   |          |   |   |   |   |   |   |   |
| U.S. Treasury                            |   | $             | 258    |   | $ | 94 |   | $ | — |   | $ | 352 |   |
| U.S. government agencies                 |   | 10,850        |   | 15 |   | (32 | ) | 10,833 |   |
| Municipal                                |   | 9,100         |   | 281 |   | (16 | ) | 9,365 |   |
| Corporate                                |   | 250           |   | — |   | (18 | ) | 232 |   |
| Mutual funds                             |   | 3,172         |   | — |   | (44 | ) | 3,128 |   |
| Other equity securities                  |   | 369           |   | 13 |   | — |   | 382 |   |
|                                     |   | 23,999        |   | 403 |   | (110 | )  | 24,292 |   |
| Mortgage-backed securities               |   |          |   |   |   |   |   |   |   |
| Federal Home Loan Mortgage Corporation   |   | 3,900         |   | 5 |   | (144 | ) | 3,761 |   |
| Government National Mortgage Association |   | 1,146         |   | 13 |   | (8 | ) | 1,151 |   |
| Federal National Mortgage Association    |   | 2,767         |   | — |   | (77 | ) | 2,690 |   |
|                                     |   | 7,813         |   | 18 |   | (229 | )  | 7,602 |   |
|                                     |   |          |   |   |   |   |   |   |   |
|                                     |   | $             | 31,812 |   | $ | 421 |   | $ | (339 | )  | $ | 31,894 |   |
|                                     |   |          |   |   |   |   |   |   |   |
| Securities held-to-maturity              |   |          |   |   |   |   |   |   |   |
| U.S. government agencies                 |   | $             | 57,164 |   | $ | 121 |   | $ | (766 | ) | $ | 56,519 |   |
| Municipal                                |   | 15,718        |   | 310 |   | (167 | ) | 15,861 |   |
|                                     |   | 72,882        |   | 431 |   | (933 | )  | 72,380 |   |
| Mortgage-backed securities               |   |          |   |   |   |   |   |   |   |
| Federal Home Loan Mortgage Corporation   |   | 1,278         |   | 17 |   | (1 | ) | 1,294 |   |
| Government National Mortgage Association |   | 2,902         |   | 72 |   | (10 | ) | 2,964 |   |
| Federal National Mortgage Association    |   | 624           |   | 4 |   | (1 | ) | 627 |   |
| Collateralized mortgage obligations      |   | 620           |   | — |   | (16 | ) | 604 |   |
|                                     |   | 5,424         |   | 93 |   | (28 | )  | 5,489 |   |
|                                     |   |          |   |   |   |   |   |   |   |
|                                     |   | $             | 78,306 |   | $ | 524 |   | $ | (961 | ) | $ | 77,869 |   |

 

27

----

 

Salesof securities are summarized as follows:

 
|                  |   | **2001** |   | **2000** |   | **1999** |   |
|-----------------------|--------|----------|--------|----------|--------|----------|--------|
| Proceeds              |   | $        | 3,558  |     | $      | 3,408    |   | $ | 4,373 |   |
| Gross realized gains  |   | 81       |   | 3        |   | 23       |   |
| Gross realized losses |   | —   |   | 49       |   | 11       |   |
|                       |        |          |        |          |        |          |        |  |  |  |

 

The carrying values and fairvalues of debt securities as of December 31, 2001, 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.

 
|                                                                |   | **Amortized   Cost** |   | **Fair   Value** |   |
|---------------------------------------------------------------------|--------|----------------------|--------|------------------|--------|
| Securities available-for-sale                                       |   |                 |   |             |   |
| Due in one year or less                                             |   | $                    | 2,000  |             | $      | 2,069 |   |
| Due after one year through five years                               |   | 1,663                |   | 1,713            |   |
| Due after five years through ten years                              |   | 696                  |   | 731              |   |
| Due after ten years                                                 |   | 7,789                |   | 7,910            |   |
|                                                                |   | 12,148               |   | 12,423           |   |
|                                                                |   |                 |   |             |   |
| Mutual funds                                                        |   | 3,172                |   | 3,182            |   |
| Other equity securities                                             |   | 119                  |   | 140              |   |
| Mortgage-backed securities                                          |   | 6,020                |   | 5,996            |   |
|                                                                |   | 9,311                |   | 9,318            |   |
|                                                                |   |                 |   |             |   |
|                                                                |   | $                    | 21,459 |             | $      | 21,741 |   |
|                                                                |   |                 |   |             |   |
| Securities held-to-maturity                                         |   |                 |   |             |   |
| Due in one year or less                                             |   | $                    | 530    |             | $      | 532 |   |
| Due after one year through five years                               |   | 2,929                |   | 3,026            |   |
| Due after five years through ten years                              |   | 35,861               |   | 36,363           |   |
| Due after ten years                                                 |   | 35,016               |   | 34,758           |   |
|                                                                |   | 74,336               |   | 74,679           |   |
|                                                                |   |                 |   |             |   |
| Mortgage-backed securities and  collateralized mortgage obligations |   | 17,880               |   | 17,900           |   |
|                                                                |   |                 |   |             |   |
|                                                                |   | $                    | 92,216 |             | $      | 92,579 |   |

 

28

----

 

Securities in the amount of$21,996,000 and $23,944,000 were pledged to secure government deposits atDecember 31, 2001 and 2000, 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 2001 or 2000.

 

**NOTE 3 - LOANS RECEIVABLE**

 

Loansreceivable consisted of the following:

 
|                               |   | **2001** |    | **2000** |   |
|------------------------------------|--------|----------|---------|----------|--------|
| First mortgage loans               |   |     |    |     |   |
| One-to-four-family residences      |   | $        | 207,067 |     | $      | 212,863 |   |
| Multifamily residences             |   | 28,659   |    | 19,272   |   |
| Commercial real estate             |   | 32,477   |    | 29,817   |   |
| Construction loans                 |   | 23,371   |    | 11,745   |   |
|                               |   | 291,574  |    | 273,697  |   |
| Home equity loans                  |   | 8,847    |    | 7,147    |   |
| Net deferred loan origination fees |   | (1,991   | )       | (1,803   | )      |
| Construction loans in process      |   | (9,576   | )       | (2,777   | )      |
| Total mortgage loans               |   | 288,854  |    | 276,264  |   |
| Consumer and other loans           |   | 1,402    |    | 1,751    |   |
| Allowance for loan losses          |   | (2,806   | )       | (2,561   | )      |
|                               |   |     |    |     |   |
|                               |   | $        | 287,450 |     | $      | 275,454 |   |

 

29

----

 

The principal balance of loanson nonaccrual status at December 31, 2001 and 2000 approximated $639,000and $1,025,000, respectively.  The Companymaintains an allowance for uncollected interest for mortgage loans withpayments past due.  The allowance wasapproximately $168,000 and $123,000 at December 31, 2001 and 2000,respectively.

 

**NOTE 4 - ALLOWANCE FOR LOAN LOSSES**

 

Activity in the allowance forloan losses is summarized as follows:

 
|                       |   | **2001** |   | **2000** |   | **1999** |   |
|----------------------------|--------|----------|--------|----------|--------|----------|--------|
| Balance, beginning of year |   | $        | 2,561  |     | $      | 2,315    |   | $ | 2,069 |   |
| Provision for loan losses  |   | 144      |   | 246      |   | 246      |   |
| Recoveries                 |   | 143      |   | —   |   | —   |   |
| Charge-offs                |   | (42      | )      | —   |   | —   |   |
|                       |   |     |   |     |   |     |   |
| Balance, end of year       |   | $        | 2,806  |     | $      | 2,561    |   | $ | 2,315 |   |

 

Impairedloans totaled $546,000 at December 31, 2001 and $409,000 at December 31,2000.  The average balance of impairedloans and the interest income that would have been recognized are not materialfor any period presented.  There was noallowance allocated for impaired loans at December 31, 2001.

** **

**NOTE5 - PREMISES AND EQUIPMENT**

 

Premises and equipmentconsisted of the following:

 
|                                      |   | **2001** |   | **2000** |   |
|-------------------------------------------|--------|----------|--------|----------|--------|
| Land                                      |   | $        | 545    |     | $      | 545 |   |
| Buildings and improvements                |   | 3,701    |   | 3,684    |   |
| Furniture and equipment                   |   | 2,702    |   | 2,648    |   |
| Real estate acquired for future expansion |   | 280      |   | 377      |   |
| Total cost                                |   | 7,228    |   | 7,254    |   |
| Less accumulated depreciation             |   | (4,024   | )      | (3,741   | )      |
|                                      |   |     |   |     |   |
|                                      |   | $        | 3,204  |     | $      | 3,513 |   |

 

30

----

 

**NOTE6 - DEPOSITS**

 

Certificate of deposit accountswith balances of $100,000 or more totaled approximately $56,740,000 and$54,399,000 at December 31, 2001 and 2000, respectively.  

 

At December 31, 2001, thescheduled maturities of certificates of deposit are as follows:

 

| 2002   |   | $      | 136,836 |   |
|--------|--------|--------|---------|--------|
| 2003   |   | 8,595  |    |
| 2004   |   | 4,850  |    |
| 2005   |   | 4,785  |    |
| 2006   |   | 1,162  |    |
|   |   |   |    |
|   |   | $      | 156,228 |   |

 

**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**                                                                                           |   | **2001**         |   | **2000** |   |
| Floating, matures March 2001; 6.64%  interest rate                                                        |   | $                | — |   | $ | 1,500 |   |
| Floating, matures October 2002; 6.00%  interest rate                                                      |   | 1,500            |   | 1,500 |   |
| Floating, matures November 2002; 5.75%  interest rate                                                     |   | 2,500            |   | 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 |   |
| Open line                                                                                                 |   | —           |   | 16,300 |   |
| Fixed terms, matures February 2002 through  November 2011; range of rates 3.62% to 6.18%; averaging 5.11% |   | 75,600           |   | — |   |
| Fixed terms; matures February 2001 through  October 2008; range of rates 4.30% to 6.58%; averaging 5.60%  |   | —           |   | 38,800 |   |
|                                                                                                      |   |             |   |   |   |
|                                                                                                      |   | $                | 83,600 |   | $ | 64,600 |   |

 

31

----

 

Scheduled repayments andmaturities of the Federal Home Loan Bank of Chicago advances atDecember 31, 2001 are as follows:

 

| 2002       |   | $      | 10,000 |   |
|------------|--------|--------|--------|--------|
| 2004       |   | 10,000 |   |
| 2005       |   | 16,800 |   |
| 2006       |   | 20,800 |   |
| Thereafter |   | 26,000 |   |
|       |   |   |   |
|       |   | $      | 83,600 |   |

 

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, 2001, $25,000,000 of Federal Home Loan Bank advances hadvarious call provisions with an average term to call date of 3.5 months.

 

**NOTE8 - INCOME TAXES**

 

Incometax expense is as follows:

 
|                          |   | **2001** |   | **2000** |   | **1999** |   |
|-------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current                       |   |     |   |     |   |     |   |
| Federal                       |   | $        | 2,701  |     | $      | 2,633    |   | $ | 2,502 |   |
| State                         |   | 605      |   | 450      |   | 500      |   |
| Deferred                      |   | 210      |   | (94      | )      | 26       |   |
| Change in valuation allowance |   | (120     | )      | —   |   | —   |   |
|                          |   |     |   |     |   |     |   |
|                          |   | $        | 3,396  |     | $      | 2,989    |   | $ | 3,028 |   |

 

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

 
|                                                   |   | **2001** |   | **2000** |   | **1999** |   |
|--------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Income taxes computed at statutory  rate of 34%        |   | $        | 3,454  |     | 34.0   | %        | $      | 3,057 |   | 34.0 | % | $ | 2,961 |   | 34.0 | % |
| Tax-exempt income                                      |   | (456     | )      | (4.5     | )      | (395     | )      | (4.4 | ) | (307 | ) | (3.5 | ) |
|                                                   |   |     |   |     |   |     |   |   |   |   |   |   |   |
| State income taxes, net of federal income  tax benefit |   | 455      |   | 4.5      |   | 364      |   | 4.0 |   | 378 |   | 4.3 |   |
| Change in valuation allowance                          |   | (120     | )      | (1.2     | )      | —   |   | — |   | — |   | — |   |
| Other                                                  |   | 63       |   | .6       |   | (37      | )      | (.4 | ) | (4 | ) | — |   |
|                                                   |   |     |   |     |   |     |   |   |   |   |   |   |   |
|                                                   |   | $        | 3,396  |     | 33.4   | %        | $      | 2,989 |   | 33.2 | % | $ | 3,028 |   | 34.8 | % |

 

32

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

 
|                                              |   | **2001** |   | **2000** |    |
|---------------------------------------------------|--------|----------|--------|----------|---------|
| Deferred tax assets                               |   |     |   |     |    |
| Allowance for loan losses                         |   | $        | 857    |     | $       | 705 |   |
| Amortization of intangible assets                 |   | 43       |   | 50       |    |
| Contribution carryforward                         |   | 630      |   | 970      |    |
| Other                                             |   | 427      |   | 399      |    |
|                                              |   | 1,957    |   | 2,124    |    |
| Deferred tax liabilities                          |   |     |   |     |    |
| Depreciation                                      |   | (85      | )      | (115     | )       |
| Federal Home Loan Bank stock dividends            |   | (308     | )      | (149     | )       |
| Loan fees                                         |   | (277     | )      | (363     | )       |
| Unrealized gain on securities  available-for-sale |   | (110     | )      | (32      | )       |
|                                              |   | (780     | )      | (659     | )  |
|                                              |   |     |   |     |    |
| Valuation allowance on deferred tax assets        |   | (60      | )      | (180     | )       |
|                                              |   |     |   |     |    |
| Total net deferred tax asset                      |   | $        | 1,117  |     | $       | 1,285 |   |

 

The valuation allowance atDecember 31, 2001 and 2000 reflects management's estimate of temporarydeductible differences that may not be realized.

 

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, 2001 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:

 

33

----

 

|                         |   | **2001** |   | **2000** |   |
|------------------------------|--------|----------|--------|----------|--------|
| Commitments to extend credit |   | $        | 10,127 |     | $      | 4,053 |   |
| Unused lines of credit       |   | 14,851   |   | 10,556   |   |
|                              |        |          |        |          |        |  |  |

 

At December 31, 2001,commitments to extend credit consist primarily of fixed-rate loan commitmentswith rates ranging from 5.99% to 8.50%. 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 amounts andclassifications are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors.

 

As of December 31, 2001, 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 followingtable.  There are no conditions orevents since that notification that management believes have changed the Bank'scategory.

 

34

----

 

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, 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 |   |
|                                              |   |       | ** ** |                                 | ** ** |                                                                      | ** ** |   | ** ** |   | ** ** |   | ** ** |
| As of December 31, 2000:                          |   |       |       |                                 |       |                                                                      |       |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)           |   | $          | 67,855     |                                 | 33.6       | %                                                                         | $          | 16,150 |   | 8.0 | % | $ | 20,188 |   | 10.0 | % |
| Tier I capital (to risk-weighted assets)          |   | 65,341     |       | 32.4                                 |       | 8,075                                                                     |       | 4.0 |   | 12,133 |   | 6.0 |   |
| Tier I (core) capital (to adjusted total  assets) |   | 65,341     |       | 16.6                                 |       | 15,719                                                                    |       | 4.0 |   | 19,649 |   | 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.

 

35

----

 

**NOTE11 - EARNINGS PER COMMON SHARE**

 

Areconciliation of the numerator and denominator of the earnings per commonshare computation for the years ended December 31, 2001, 2000, and 1999 ispresented below**.**

 
|                                                                            |   | **2001** |   | **2000** |   | **1999** |   |
|---------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Basic earnings per common share                                                 |   |     |   |     |   |     |   |
| Net income                                                                      |   | $        | 6,762  |     | $      | 6,003    |   | $ | 5,682 |   |
|                                                                            |   |     |   |     |   |     |   |
| Weighted average common shares  outstanding                                     |   | 4,034    |   | 4,682    |   | 4,834    |   |
| Add:  shares committed to be issued to charitable foundation               |   | —   |   | —   |   | 150      |   |
|                                                                            |   |     |   |     |   |     |   |
| Total weighted average common  shares outstanding                               |   | 4,034    |   | 4,682    |   | 4,984    |   |
|                                                                            |   |     |   |     |   |     |   |
| Basic earnings per share                                                        |   | $        | 1.68   |     | $      | 1.28     |   | $ | 1.14 |   |
|                                                                            |   |     |   |     |   |     |   |
| Diluted                                                                         |   |     |   |     |   |     |   |
| Net income                                                                      |   | $        | 6,762  |     | $      | 6,003    |   | $ | 5,682 |   |
|                                                                            |   |     |   |     |   |     |   |
| Weighted average common shares  outstanding for basic earnings per common share |   | 4,034    |   | 4,682    |   | 4,984    |   |
| Add:  Dilutive effects of assumed exercises of stock options               |   | 23       |   | —   |   | —   |   |
| Add:  Dilutive effects of assumed exercise of stock awards                 |   | 3        |   | —   |   | —   |   |
|                                                                            |   |     |   |     |   |     |   |
| Average shares and dilutive  potential common shares                            |   | 4,060    |   | 4,682    |   | 4,984    |   |
|                                                                            |   |     |   |     |   |     |   |
| Diluted earnings per common  share                                              |   | $        | 1.67   |     | $      | 1.28     |   | $ | 1.14 |   |

 

TheCompany's outstanding stock options and stock awards were not considered in thecomputations of diluted earnings per share in 2000 or 1999 because the effectsof assumed exercise would have been 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, 2001.

 

| Balance at beginning of year |   | $      | 411    |   |
|------------------------------|--------|--------|--------|--------|
| Loans disbursed              |   | 21     |   |
| Principal repayments         |   | (59    | )      |
|                         |   |   |   |
| Balance at end of year       |   | $      | 373    |   |

 

36

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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.

 

Sharesissued to the ESOP are allocated to ESOP participants based on principal andinterest repayments made by the ESOP on the loan from the Company.  The loan is secured by shares purchased withthe loan proceeds and will be repaid by the ESOP with funds from the Company'sdiscretionary contributions to the ESOP and earnings on ESOP assets.  Principal payments are scheduled to occurover a twenty-year period.  However, inthe event the Company's contributions exceed the minimum debt servicerequirements, additional principal payments will be made.

 

Informationregarding shares released and shares held by the ESOP at December 31 is asfollows:

** **
|                                   |   | **2001** |   | **2000** |   | **1999** |   |
|----------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Shares released                        |   | 32       |   | 33       |   | 34       |   |
| Average fair value of shares  released |   | $        | 17.59  |     | $      | 12.62    |   | $ | 11.75 |   |
| Compensation expense                   |   | 571      |   | 420      |   | 403      |   |
|                                   |   |     |   |     |   |     |   |
| Allocated shares                       |   | 154      |   | 122      |   | 89       |   |
| Unallocated shares                     |   | 359      |   | 391      |   | 424      |   |
| Total ESOP shares                      |   | 513      |   | 513      |   | 513      |   |
|                                   |   |     |   |     |   |     |   |
| Fair value of unallocated  shares      |   | $        | 7,167  |     | $      | 5,810    |   | $ | 4,662 |   |

** **

During1998, the Company adopted a stock option plan under the terms of which sharesof the Company’s common stock were reserved for issuance.  The options became exercisable on acumulative basis in equal installments over a five-year period from the date ofgrant.  The options expire 10 years fromthe date of grant.

** **

Asummary of the status of the Company’s stock option plan and changes during theyears are presented below:

 
|                                                        |   | **2001**   |   | **2000**             |   | **1999**   |   |
|-------------------------------------------------------------|--------|------------|--------|----------------------|--------|------------|--------|
|                                                        |   | **Shares** |   | **Exercise   Price** |   | **Shares** |   | **Exercise  Price** |   | **Shares** |   | **Exercise   Price** |   |
| Outstanding at beginning of  year                           |   | 519        |   | $                    | 16.69  |       | 519    |   | $ | 16.69 |   | 519 |   | $ | 16.69 |   |
| Granted                                                     |   | 25         |   | 18.90                |   | —     |   | — |   | — |   | — |   |
| Outstanding at end of year                                  |   | 544        |   | $                    | 16.79  |       | 519    |   | $ | 16.69 |   | 519 |   | $ | 16.69 |   |
| Options exercisable at end of  year                         |   | 311        |   |                 |   | 208        |   |   |   | 104 |   |   |   |
| Weighted-average fair value of  options granted during year |   | $          | 4.86   |                 |   |       | $      | — |   |   |   | $ | — |   |   |   |
|                                                             |        |            |        |                      |        |            |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

37

----

 

Theseoptions are not fully vested.  Theexercise price equals the market value at the date the options weregranted.  Options outstanding atyear-end 2001 were as follows**:**

** **

|                    |   |       | **Outstanding** |                                                          |
|-------------------------|--------|------------|-----------------|---------------------------------------------------------------|
| **Exercise  Prices**    |   | **Number** |            | **Weighted  Average  Remaining   Contractual  Life in Years** |   |
| $16.69                  |   | 519        |            | 6.3                                                           |   |
| $18.90                  |   | 25         |            | 10.0                                                          |   |
|                    |   |       |            |                                                          |   |
| Outstanding at year end |   | 544        |            | 6.3                                                           |   |

** **

The$4.86 per share fair value of options granted in 2001 was estimated at the dateof grant using the Black-Scholes option pricing model using the followingassumptions:  expected volatility factorof the expected market price of the Company's common stock of 20.32%, risk-freeinterest rate of 5.22%, expected option term of ten years, and a dividend yieldof 2.90%.

 

The$6.48 per share fair value of options granted in 1998 was estimated at the dateof grant using the Black-Scholes option pricing model using the followingassumptions:  expected volatility factorof the expected market price of the Company's common stock of 7.46%, risk-freeinterest rate of 5.67%, expected option term of ten years, and a dividend yieldof 0%.

 

TheBlack-Scholes option pricing valuation model was developed for use inestimating the fair value of traded options that have no vesting restrictionsand are fully transferable.  Inaddition, option valuation models require the input of highly subjectiveassumptions including the expected stock price volatility.  Because changes in the subjective inputassumptions can materially affect the fair value estimate, in management'sopinion, the existing models do not necessarily provide a reliable singlemeasure of the fair value of its stock options.

 

TheCompany applies APB Opinion 25 and related Interpretations in accounting forits stock option plan.  Accordingly, nocompensation cost has been recognized at the date of grant.  Had compensation cost been determined basedon the fair value at the grant dates for awards under the plan in 2001 and 2000consistent with the method of SFAS No. 123, *Accountingfor Stock Based Compensation*, the Company’s net income and earningsper share would have been reduced to the pro forma amounts in the tablebelow.  For purposes of pro formadisclosure, the estimated fair value of the options is amortized to expenseover the options' vesting period.

 

38

----

 

|                                      |   | **2001** |   | **2000** |   | **1999** |   |
|-------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net income as reported                    |   | $        | 6,762  |     | $      | 6,003    |   | $ | 5,682 |   |
| Pro forma net income                 |   | 6,077    |   | 5,329    |   | 5,009    |   |
| Earnings per share as reported,  basic    |   | 1.68     |   | 1.28     |   | 1.14     |   |
| Earnings per share as reported,  diluted  |   | 1.67     |   | 1.28     |   | 1.14     |   |
| Pro forma earnings per  share, basic |   | 1.51     |   | 1.14     |   | 1.01     |   |
| Pro forma earnings per share,  diluted    |   | 1.50     |   | 1.14     |   | 1.01     |   |
|                                           |        |          |        |          |        |          |        |  |  |  |

 

Inconnection with the conversion to stock ownership, the Company adopted aManagement Recognition and Retention Plan (MRP).  In 1998, the Company contributed $4.3 million allowing the MRP toacquire 256,320 shares of common stock of the Company, at an average cost of$16.69 per share, to be awarded to directors and key employees.  The Company awarded 216,166 shares during1998 and 7,500 shares during 2001. These shares generally vest over a five-year period.  The unamortized cost of shares not yet earned(vested) is reported as a reduction of shareholders' equity.  MRP compensation expense totaled $721,000,$722,000, and $735,000 for the years ended December 31, 2001, 2000, and 1999.

 

**NOTE14 - FAIR VALUES OF FINANCIAL INSTRUMENTS**

 

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

 
|                                                   |   | **2001**             |   | **2000**                   |   |
|--------------------------------------------------------|--------|----------------------|--------|----------------------------|--------|
|                                                   |   | **Carrying  Amount** |   | **Estimated  Fair  Value** |   | **Carrying   Amount** |   | **Estimated  Fair   Value** |   |
| Financial assets                                       |   |                 |   |                       |   |   |   |   |   |
| Cash and cash equivalents                              |   | $                    | 9,421  |                       | $      | 9,421 |   | $ | 6,102 |   | $ | 6,102 |   |
| Securities available-for-sale                          |   | 21,741               |   | 21,741                     |   | 31,894 |   | 31,894 |   |
| Securities held-to-maturity                            |   | 92,216               |   | 92,579                     |   | 78,306 |   | 77,869 |   |
| Loans, net of allowance for loan losses                |   | 287,450              |   | 291,949                    |   | 275,454 |   | 275,046 |   |
| Accrued interest receivable                            |   | 3,177                |   | 3,177                      |   | 3,346 |   | 3,346 |   |
|                                                   |   |                 |   |                       |   |   |   |   |   |
| Financial liabilities                                  |   |                 |   |                       |   |   |   |   |   |
| NOW and money market accounts                          |   | (28,666              | )      | (28,666                    | )      | (24,642 | ) | (24,642 | ) |
| Savings deposits                                       |   | (83,963              | )      | (83,963                    | )      | (77,261 | ) | (77,261 | ) |
| Time deposits                                          |   | (156,228             | )      | (158,342                   | )      | (150,759 | ) | (151,287 | ) |
| Advance payments by borrowers for taxes and  insurance |   | (2,880               | )      | (2,880                     | )      | (3,255 | ) | (3,255 | ) |
| Advances from Federal Home Loan Bank                   |   | (83,600              | )      | (83,007                    | )      | (64,600 | ) | (66,282 | ) |
| Accrued interest payable                               |   | (815                 | )      | (815                       | )      | (840 | ) | (840 | ) |
|                                                        |        |                      |        |                            |        |  |  |  |  |  |  |  |  |

 

39

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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.

 

40

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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, 2001 and 2000

 
|                                          |   | **2001** |   | **2000** |   |
|-----------------------------------------------|--------|----------|--------|----------|--------|
| **ASSETS**                                    |   |     |   |     |   |
| Cash and cash equivalents                     |   | $        | 1,020  |     | $      | 662 |   |
| Securities available-for-sale                 |   | 7,949    |   | 8,696    |   |
| ESOP loan                                     |   | 3,845    |   | 4,101    |   |
| Investment in bank subsidiary                 |   | 74,354   |   | 66,377   |   |
| Accrued interest receivable and other  assets |   | 995      |   | 1,684    |   |
|                                          |   |     |   |     |   |
|                                          |   | $        | 88,163 |     | $      | 81,520 |   |
|                                          |   |     |   |     |   |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**      |   |     |   |     |   |
| Note payable to bank subsidiary               |   | $        | 15,591 |     | $      | **—** |   |
| Accrued expenses and other liabilities        |   | 534      |   | 1,271    |   |
| Shareholders' equity                          |   | 72,038   |   | 80,249   |   |
|                                          |   |     |   |     |   |
|                                          |   | $        | 88,163 |     | $      | 81,520 |   |

 

41

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CONDENSED STATEMENTS OF INCOME

For the years ended December 31, 2001, 2000, and 1999

 
|                                                                                       |   | **2001** |       | **2000** |       | **1999** |       |
|--------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
| Income                                                                                     |   |     |       |     |       |     |       |
| Dividend from subsidiary                                                                   |   | $        | —     |     | $          | 10,501   |       | $ | 3,500 |   |
| Interest on securities                                                                     |   | 456      |       | 465      |       | 505      |       |
| Interest on ESOP loan                                                                      |   | 274      |       | 295      |       | 312      |       |
| Gain (loss) on sale of securities                                                          |   | 81       |       | (16      | )          | 19       |       |
| Other income                                                                               |   | —   |       | —   |       | 1        |       |
| Total income                                                                               |   | 811      |       | 11,245   |       | 4,337    |       |
|                                                                                       |   |     |       |     |       |     |       |
| Expenses                                                                                   |   |     |       |     |       |     |       |
| Interest expense on note payable                                                           |   | 283      |       | —   |       | —   |       |
| Other operating expenses                                                                   |   | 305      |       | 134      |       | 184      |       |
|                                                                                       |   | 588      |       | 134      |       | 184      |       |
|                                                                                       |   |     |       |     |       |     |       |
| **Income before income taxes and equity in  undistributed earnings of bank subsidiary**    |   | 223      |       | 11,111   |       | 4,153    |       |
|                                                                                       |   |     |       |     |       |     |       |
| Income tax expense (benefit)                                                               |   | (63      | )          | 91       |       | 125      |       |
|                                                                                       |   |     |       |     |       |     |       |
| **Income before equity in undistributed  earnings of bank subsidiary**                     |   | 286      |       | 11,020   |       | 4,028    |       |
|                                                                                       |   |     | ** ** |     | ** ** |     | ** ** |
| Equity in undistributed earnings  (distributions in excess of earnings) of bank subsidiary |   | 6,476    |       | (5,017   | )          | 1,654    |       |
|                                                                                       |   |     |       |     |       |     |       |
| **Net income**                                                                             |   | $        | 6,762      |     | $          | 6,003    |       | $ | 5,682 |   |

 

42

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** **

**NOTE15 - PARENT COMPANY FINANCIAL STATEMENT**(Continued)

 

CONDENSED STATEMENTS OF CASH FLOWS

For the years ended Demcember 31, 2001, 2000, 1999

 
| **Operating activities**                                                                  |   |    | ** ** |    | ** ** |   | ** ** |
|-------------------------------------------------------------------------------------------|--------|---------|------------|---------|------------|--------|------------|
| Net income                                                                                |   | $       | 6,762      |    | $          | 6,003  |       | $ | 5,682 |   |
|                                                                                      |   |    |       |    |       |   |       |
| Adjustments to reconcile net income to net  cash provided by operating activities         |   |    |       |    |       |   |       |
| (Equity in undistributed earnings)  distribution in excess of earnings of bank subsidiary |   | (6,476  | )          | 5,017   |       | (1,654 |       |
| Net accretion                                                                             |   | (112    | )          | (3      | )          | (3     | )          |
| (Gain) loss on sales of securities                                                        |   | (81     | )          | 16      |       | (19    | )          |
| Change in                                                                                 |   |    |       |    |       |   |       |
| Other assets                                                                              |   | 743     |       | (658    | )          | 388    | )          |
| Other liabilities                                                                         |   | 14,961  |       | 23      |       | (213   | )          |
| Net cash from operating activities                                                        |   | 15,797  |       | 10,398  |       | 4,181  |       |
|                                                                                      |   |    |       |    |       |   |       |
| **Investing activities**                                                                  |   |    |       |    |       |   |       |
| Purchase of securities available-for-sale                                                 |   | (2,759  | )          | (925    | )          | (1,062 | )          |
| Proceeds from sales of securities                                                         |   | 3,558   |       | 848     |       | 2,931  |       |
| Payment received on loan to ESOP                                                          |   | 256     |       | 256     |       | 257    |       |
| Net cash from investing activities                                                        |   | 1,055   |       | 179     |       | 2,126  |       |
|                                                                                      |   |    |       |    |       |   |       |
| **Financing activities**                                                                  |   |    |       |    |       |   |       |
| Dividends paid                                                                            |   | (2,331  | )          | (1,901  | )          | (1,413 | )          |
| Purchase of treasury stock                                                                |   | (14,163 | )          | (8,367  | )          | (5,705 | )          |
| Net cash from financing activities                                                        |   | (16,494 | )          | (10,268 | )          | (7,118 | )          |
|                                                                                      |   |    |       |    |       |   |       |
| Net change in cash and cash equivalents                                                   |   | 358     |       | 309     |       | (811   | )          |
|                                                                                      |   |    |       |    |       |   |       |
| Cash and cash equivalents at beginning of  year                                           |   | 662     |       | 353     |       | 1,164  |       |
|                                                                                      |   |    |       |    |       |   |       |
| **Cash and cash equivalents at end of year**                                              |   | $       | 1,020      |    | $          | 662    |       | $ | 353 |   |

 

43

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

 
|           |   | **Interest** |   | **Net  Interest** |   | **Net**    |   | **Earnings  Per Share** |   |
|----------------|--------|--------------|--------|-------------------|--------|------------|--------|-------------------------|--------|
|           |   | **Income**   |   | **Income**        |   | **Income** |   | **Basic**               |   | **Diluted** |   |
| 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 |   |
|           |   |         |   |              |   |       |   |                    |   |   |   |
| 2000           |   |         |   |              |   |       |   |                    |   |   |   |
| First quarter  |   | $            | 6,802  |              | $      | 3,595      |   | $                       | 1,427  |   | $ | .29 |   | $ | .29 |   |
| Second quarter |   | 7,092        |   | 3,651             |   | 1,486      |   | .31                     |   | .31 |   |
| Third quarter  |   | 7,375        |   | 3,631             |   | 1,486      |   | .32                     |   | .32 |   |
| Fourth quarter |   | 7,731        |   | 3,811             |   | 1,604      |   | .36                     |   | .36 |   |

 

44

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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**

 

Jenkins and Gilchrist  1919 Pennsylvania Ave., NW  Suite #600  Washington, DC20006 |   | **INDEPENDENT AUDITORS**

 

Crowe, Chizek and Company LLP  One Mid America Plaza  P.O. Box 3697  Oak Brook, Illinois 60522-3697                                             |

 

**ANNUALAND OTHER REPORTS**

 

A copy of FirstSecurityFed Financial, Inc.’s Annual Report on Form 10–K for theyear ended December 31, 2001, as filed with the Securities and ExchangeCommission, may be obtained without charge by contacting Peter Ilnyckyj, FirstSecurityFed Financial, Inc., 936 North Western Avenue, Chicago, Illinois60622-4695

 

**FIRSTSECURITYFED FINANCIAL, INC.CORPORATE INFORMATION**

 

**COMPANYAND BANK ADDRESS**

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

 

 

            

 

 
|                                           |   |                                           |
|------------------------------------------------|--------|------------------------------------------------|
| **DIRECTORS OF THE BOARD**                     |   |                                           |
|                                           |   |                                           |
| Steve Babyk                                    |   | Julian Kulas                                   |
| *Director  of Fleet Leasing*                   |   | *President  and Chief Executive Officer First* |
| *Union  Tank Car Company*                      |   | *Security  Federal Savings Bank*          |
|                                           |   |                                           |
| Lila Maria Bodnar                              |   | Paul Nadzikewycz                               |
| *Accountant,  MBA*                             |   | *Self-Employed  Real Estate Investor*     |
|                                           |   |                                           |
| Myron Dobrowolsky                              |   | Jaroslav H. Sydorenko                          |
| *Construction  Project Manager*                |   | *Credit  Manager Kanematsu USA*           |
| *Dames  and Moore*                        |   |                                           |
|                                           |   |                                           |
| Terry Gawryk                                   |   | Chrysta Wereszczak                             |
| *Attorney*                                |   | *Co-owner,  B&B Formica*              |
|                                           |   |                                           |
| George Kawka                                   |   |                                           |
| *Senior  Architectural/Engineering*            |   |                                           |
| *Project  Manager CH2M Hill*    |   |                                           |
|                                           |   |                                           |
| **EXECUTIVE OFFICERS**                         |   |                                           |
|                                           |   |                                           |
| 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*               |   | *Vice  President and Chief Operating*          |
| *Branch  Manager*                              |   | *Officer*                                      |

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