**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-K**

 
| ý | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|-------------------------------------------------------------------------------------------|
|   |                                                                                      |
|   | **For  the Fiscal Year Ended December 31, 2001**                                          |

 

**OR**

 
| o      | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | **For  the transition period from                                       to                                       .** |

 

**Commission File Number 0-23063**

 

**FIRST SECURITYFED FINANCIAL,INC.**

(Exact Name of Registrant as Specified in its Charter)

 

| **Delaware**                                                                        | **36–4177515**                     |
|-------------------------------------------------------------------------------------|-----------------------------------------|
| (State or Other Jurisdiction of Incorporation or Organization)                      | (I.R.S. Employer Identification Number) |
|                                                                                |                                    |
| **936 North Western Avenue, Chicago, Illinois**                                     | **60622**                               |
| (Address of Principal Executive Offices)                                            | Zip Code                                |
|                                                                                |                                    |
| Registrant’s  telephone number, including area code:   **(773) 772-4500** |

 

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| Securities  Registered Pursuant to Section 12(b) of the Act: |
|--------------------------------------------------------------|
|                                                         |
| **None**                                                     |
|                                                         |
| Securities  Registered Pursuant to Section 12(g) of the Act: |
|                                                         |   |
| **Common  Stock, par value $.01 per share**                  |
| (Title of Class)                                             |

 

Indicate by check mark whether the Registrant (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding twelve months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchrequirements for the past 90 days.

YES  ý NO  o.

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,and will not be contained, to the best of Registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. o

 

As of February 28, 2002, the Registrant had 4,138,690 shares of CommonStock issued and outstanding.

 

The aggregate market value of the voting stock held by non-affiliates ofthe Registrant, computed by reference to the closing price of such stock onFebruary 28, 2002 was $65.3 million. (The exclusion from such amount of themarket value of the shares owned by any person shall not be deemed an admissionby the Registrant that such person is an affiliate of the Registrant.)

 

**DOCUMENTSINCORPORATED BY REFERENCE**

PART II of Form 10-K - Annual Report to Stockholders for the fiscal yearended December 31, 2001.

PART III of Form 10-K - Proxy Statement for 2002 Annual Meeting ofStockholders.

 

 

FORWARD-LOOKING STATEMENTS

 

First SecurityFed Financial, Inc. (“FirstSecurityFed” or the “Company”), and its wholly-owned subsidiary, First SecurityFederal  First Savings Bank (“FirstSecurity” or the “Bank”), may from time to time make written or oral“forward-looking statements,” including statements contained in its filingswith the Securities and Exchange Commission. These forward-looking statements may be included in this Annual Reporton Form 10-K and the exhibits attached to it, in First SecurityFed’s reports toshareholders and in other communications, which are made in good faith by uspursuant to the “safe harbor” provisions of the Private Securities LitigationReform Act of 1995.

 

These forward-looking statements includestatements about our beliefs, plans, objectives, goals, expectations,anticipations, estimates and intentions, that are subject to significant risksand uncertainties, and are subject to change based on various factors, some ofwhich are beyond our control.  The words“may”, “could”, “should”, “would”, “believe”, “anticipate”, “estimate”,“expect”, “intend”, “plan” and similar expressions are intended to identifyforward-looking statements. The following factors, among others, could causeour financial performance to differ materially from the plans, objectives,expectations, estimates and intentions expressed in the forward-lookingstatements:

 

•                                          the strength of the United States economy in general and the strength ofthe local economies in which we conduct operations;

•                                          the effects of, and changes in, trade, monetary and fiscal policies andlaws, including interest rate policies of the Federal Reserve Board;

•                                          inflation, interest rate, market and monetary fluctuations;

•                                          the timely development of and acceptance of our new products andservices and the perceived overall value of these products and services byusers, including the features, pricing and quality compared to competitors’products and services;

•                                          the willingness of users to substitute our products and services forproducts and services of our competitors;

•                                          our success in gaining regulatory approval of our products and services,when required;

•                                          the impact of changes in financial services’ laws and regulations(including laws concerning taxes, banking, securities and insurance);

•                                          the impact of technological changes;

•                                          acquisitions;

•                                          changes in consumer spending and saving habits; and

•                                          our success at managing the risks involved in the foregoing.

 

The list of important factors stated above is notexclusive.  We do not undertake toupdate any forward-looking statement, whether written or oral, that may be madefrom time to time by or on behalf of First SecurityFed or First Security.

 

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**PART I**

 

**Item 1****.  Business**

 

**General**

 

First SecurityFed Financial, Inc., which we referto as the Company, is a Delaware corporation that was formed in 1997 by FirstSecurity Federal Savings Bank for the purpose of becoming a savings and loanholding company.  The Company owns allof the outstanding capital stock of First Security Federal Savings Bank, whichwe refer to as First Security or the Bank.

 

As a community-oriented financial institution,First Security seeks to serve the financial needs of communities in itsethnically diverse market area.  We haveachieved a significant penetration in our market area by engaging in substantialcommunity service activities and targeting marketing initiatives focused ongroups within our market area.

 

Our business involves attracting deposits from thegeneral public and using such deposits, together with other funds, to originateprimarily one- to four-family residential mortgage loans and, to a lesserextent, multi-family and commercial real estate, construction, consumer andother loans in our market area. We also invest in mortgage-backed and othersecurities and other permissible investments.

 

The Bank offers a variety of accounts having arange of interest rates and terms.  Ourdeposits include passbook and NOW accounts, money market accounts andcertificate accounts with terms of three months to five years.  We solicit deposits only in our primarymarket area and do not accept brokered deposits.

 

**Market Area**

 

Our main office is located in Chicago, Illinoisand our branch offices are located in Chicago, Illinois, Philadelphia,Pennsylvania and Rolling Meadows, Illinois.

 

Our Western Avenue office is located on the nearnorthwest side of Chicago in the “Ukrainian Village” community, a middle-incomecommunity where the Bank has focused its operations since 1964.  This community is located approximately twoand one half miles to the northwest of downtown Chicago and approximately threemiles west of Lake Michigan.  Themajority of the community’s many businesses are small and local companies.  Residences within the community consistprimarily of two- to four-family flats and single family homes although thereare also mid-size apartment buildings. Real estate values within this community have risen sharply over thelast ten years as “gentrification” has begun to occur as a result of thecommunity’s proximity to downtown Chicago.

 

Our Milwaukee Avenue office was opened in 1993 andis located in the “Norwood Park” neighborhood of Chicago.  This community is a stable middle incomearea which also has many residents of Eastern European descent.  Residences within the community consistprimarily of single family homes as well as two and three flats and smallapartment buildings.  This area islocated approximately eight miles northwest of downtown Chicago.

 

3

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Our Philadelphia branch was acquired in 1994through a purchase from the Resolution Trust Corporation.  The branch is located in a moderate incomeneighborhood of Philadelphia known as “Rhawnhurst.”  The community is home to many persons of Eastern Europeanheritage, including new immigrants.  Residenceswithin the community consist primarily of single family row houses and, to alesser extent, small apartment buildings.

 

Our suburban Chicago branch was opened in 1977 andis located in Rolling Meadows, Illinois, an upper middle class community locatedto the northwest of Chicago, near the western border of Palatine,Illinois.  Over the last 20 years,Rolling Meadows has experienced significant population and commercialgrowth.  However, as a result ofcompetition, the branch’s deposit and loan growth has been modest.

 

**Lending Activities**

 

***General.***  Our principal lending activityis originating for our portfolio fixed and, to a much lesser extent, adjustablerate (“ARM”) mortgage loans secured by one- to four-family residences locatedprimarily in our market area.  FirstSecurity also originates multi-family and commercial real estate, construction,home equity, consumer and other loans in its market area. At December 31, 2001,our loans receivable, net totaled $287.5 million.  See “- Originations of Loans.”

 

4

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The following table sets forth the composition ofthe Bank’s loan portfolio in dollar amounts and in percentages as of the datesindicated.

 
|                          |   | **December  31,**           |          |
|-------------------------------|--------|-----------------------------|---------------|
|                          |   | **2001**                    |          | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                          |   | **Amount**                  |          | **Percent** |   | **Amount** |   | **Percent** |   | **Amount** |   | **Percent** |   | **Amount** |   | **Percent** |   | **Amount** |   | **Percent** | ** ** |
|                          |   | **(Dollars  in thousands)** |          |
| Real Estate Loans:            |   |                        |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One- to four-family           |   | $                           |  207,067 |   | 68.60 | % | $ |  212,863 |   | 75.32 | % | $ |  200,201 |   | 80.58 | % | $ |  182,452 |   | 82.23 | % | $ |  154,819 |   | 81.66 |   |
| Construction                  |   | 23,371                      |          | 7.74 |   | 11,745 |   | 4.16 |   | 3,800 |   | 1.53 |   | — |   | — |   | — |   | — |   |
| Multi-family                  |   | 28,659                      |          | 9.50 |   | 19,272 |   | 6.82 |   | 13,389 |   | 5.39 |   | 11,313 |   | 5.10 |   | 10,999 |   | 5.80 |   |
| Commercial                    |   | 24,546                      |          | 8.13 |   | 20,845 |   | 7.38 |   | 15,304 |   | 6.16 |   | 11,535 |   | 5.20 |   | 9,308 |   | 4.91 |   |
| Mixed use(1)                  |   | 7,931                       |          | 2.63 |   | 8,972 |   | 3.17 |   | 9,084 |   | 3.65 |   | 9,898 |   | 4.46 |   | 7,927 |   | 4.18 |   |
| Total real estate loans       |   | 291,574                     |          | 96.60 |   | 273,697 |   | 96.85 |   | 241,778 |   | 97.31 |   | 215,198 |   | 96.99 |   | 183,053 |   | 96.55 |   |
|                          |   |                        |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consumer loans:               |   |                        |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Share loans                   |   | 1,004                       |          | 0.33 |   | 1,368 |   | 0.48 |   | 1,164 |   | .47 |   | 1,091 |   | 0.49 |   | 1,421 |   | 0.75 |   |
| Automobile                    |   | —                      |          | — |   | — |   | — |   | 3 |   | .01 |   | 14 |   | 0.01 |   | 41 |   | 0.01 |   |
| Home equity                   |   | 8,847                       |          | 2.93 |   | 7,147 |   | 2.53 |   | 5,103 |   | 2.05 |   | 5,158 |   | 2.32 |   | 4,602 |   | 2.43 |   |
| Home improvement              |   | —                      |          | — |   | — |   | — |   | — |   | — |   | 10 |   | 0.01 |   | 6 |   | 0.01 |   |
| Other                         |   | 398                         |          | 0.14 |   | 383 |   | 0.14 |   | 402 |   | .16 |   | 398 |   | 0.18 |   | 379 |   | 0.20 |   |
| Total consumer loans          |   | 10,249                      |          | 3.40 |   | 8,898 |   | 3.15 |   | 6,672 |   | 2.69 |   | 6,671 |   | 3.01 |   | 6,449 |   | 3.40 |   |
| Loans secured by leases       |   | —                      |          | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 81 |   | 0.05 |   |
| Total loans                   |   | 301,823                     |          | 100.00 | % | 282,595 |   | 100.00 | % | 248,450 |   | 100.00 | % | 221,869 |   | 100.00 | % | 189,583 |   | 100.00 | % |
|                          |   |                        |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Less:                         |   |                        |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Construction loans in process |   | 9,576                       |          |   |   | 2,777 |   |   |   | 3,467 |   |   |   | — |   |   |   | — |   |   |   |
| Deferred fees and discounts   |   | 1,991                       |          |   |   | 1,803 |   |   |   | 1,500 |   |   |   | 1,489 |   |   |   | 1,496 |   |   |   |
| Allowance for losses          |   | 2,806                       |          |   |   | 2,561 |   |   |   | 2,315 |   |   |   | 2,069 |   |   |   | 1,828 |   |   |   |
| Total loans receivable, net   |   | $ 287,450                   |          |   |   | 275,454 |   |   |   | $ 241,168 |   |   |   | 218,311 |   |   |   | $ 186,259 |   |   |   |
|                               |        |                             |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1) Mixed use refers to real estate on which the borrower both resides andconducts a business.

 

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The following table shows the composition of the Bank’s loan portfolioby fixed- and adjustable-rate at the dates indicated.

 
|                          |   | **December  31,**           |    |
|-------------------------------|--------|-----------------------------|---------|
|                          |   | **2001**                    |    | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                          |   | **Amount**                  |    | **Percent** |   | **Amount** |   | **Percent** |   | **Amount** |   | **Percent** |   | **Amount** |   | **Percent** |   | **Amount** |   | **Percent** |   |
|                          |   | **(Dollars in  Thousands)** |    |
| Fixed-Rate Loans:             |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Real estate:                  |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One- to four-family           |   | $                           | 202,753 |   | 67.18 | % | $ | 204,971 |   | 72.53 | % | $ | 193,552 |   | 77.90 | % | $ | 175,246 |   | 78.99 | % | $ | 143,882 |   | 75.89 | % |
| Multi-family                  |   | 28,659                      |    | 9.50 |   | 19,272 |   | 6.82 |   | 13,389 |   | 5.39 |   | 11,313 |   | 5.10 |   | 10,999 |   | 5.80 |   |
| Commercial                    |   | 16,615                      |    | 5.50 |   | 15,740 |   | 5.57 |   | 12,668 |   | 5.10 |   | 8,625 |   | 3.89 |   | 7,649 |   | 4.04 |   |
| Mixed use(1)                  |   | 7,931                       |    | 2.63 |   | 8,972 |   | 3.17 |   | 9,084 |   | 3.66 |   | 9,444 |   | 4.26 |   | 7,446 |   | 3.93 |   |
| Total real estate loans       |   | 255,958                     |    | 84.81 |   | 248,955 |   | 88.09 |   | 228,693 |   | 92.05 |   | 204,628 |   | 92.24 |   | 169,976 |   | 89.66 |   |
| Consumer                      |   | 1,402                       |    | 0.46 |   | 1,751 |   | 0.62 |   | 1,569 |   | 0.63 |   | 1,513 |   | 0.68 |   | 1,847 |   | 0.97 |   |
| Loans secured by leases       |   | —                      |    | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 81 |   | 0.04 |   |
| Total fixed-rate loans        |   | 257,360                     |    | 85.27 |   | 250,706 |   | 88.71 |   | 230,262 |   | 92.68 |   | 206,141 |   | 92.92 |   | 171,904 |   | 90.67 |   |
|                          |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjustable-Rate Loans         |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Real estate:                  |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One-to-four-family            |   | 4,314                       |    | 1.43 |   | 7,892 |   | 2.79 |   | 6,649 |   | 2.68 |   | 7,206 |   | 3.25 |   | 10,937 |   | 5.77 |   |
| Multi-family                  |   | —                      |    | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Commercial                    |   | 7,931                       |    | 2.63 |   | 5,105 |   | 1.81 |   | 2,636 |   | 1.06 |   | 2,910 |   | 1.31 |   | 1,659 |   | 0.88 |   |
| Mixed use                     |   | —                      |    | — |   | — |   | — |   | — |   | — |   | 454 |   | 0.20 |   | 481 |   | 0.25 |   |
| Construction                  |   | 23,371                      |    | 7.74 |   | 11,745 |   | 4.16 |   | 3,800 |   | 1.53 |   | — |   | — |   | — |   | — |   |
| Consumer                      |   | 8,847                       |    | 2.93 |   | 7,147 |   | 2.53 |   | 5,103 |   | 2.05 |   | 5,158 |   | 2.32 |   | 4,602 |   | 2.43 |   |
| Total adjustable-rate loans   |   | 44,463                      |    | 14.73 |   | 31,889 |   | 11.29 |   | 18,188 |   | 7.32 |   | 15,728 |   | 7.08 |   | 17,679 |   | 9.33 |   |
| Total loans                   |   | 301,823                     |    | 100.00 | % | 282,595 |   | 100.00 | % | 248,450 |   | 100.00 | % | 221,869 |   | 100.00 | % | 189,583 |   | 100.00 | % |
|                          |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Less:                         |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Construction loans in process |   | 9,576                       |    |   |   | 2,777 |   |   |   | 3,467 |   |   |   | — |   |   |   | — |   |   |   |
| Deferred fees and discounts   |   | 1,991                       |    |   |   | 1,803 |   |   |   | 1,500 |   |   |   | 1,489 |   |   |   | 1,496 |   |   |   |
| Allowance for losses          |   | 2,806                       |    |   |   | 2,561 |   |   |   | 2,315 |   |   |   | 2,069 |   |   |   | 1,828 |   |   |   |
| Total loans receivable, net   |   | $                           | 287,450 |   |   |   | $ | 275,454 |   |   |   | $ | 241,168 |   |   |   | $ | 218,311 |   |   |   | $ | 186,259 |   |   |   |

 

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The following schedule illustrates the interest rate sensitivity of theBank’s loan portfolio at December 31, 2001. Mortgages which have adjustable or renegotiable interest rates are shownas maturing in the period during which the final payment is due.  The schedule does not reflect the effects ofpossible prepayments or enforcement of due-on-sale clauses.

 
|                                         |   | **One- to  four-family********Residential** |    | **Multi-family,    Construction and********Commercial  Real********Estate** |   | **Consumer** |   | **Total**                               |   |
|----------------------------------------------|--------|---------------------------------------------|---------|-----------------------------------------------------------------------------|--------|--------------|--------|-----------------------------------------|--------|
|                                         |   | **Amount**                                  |    | **Weighted********Average********Rate**                                     |   | **Amount**   |   | **Weighted********Average********Rate** |   | **Amount** |   | **Weighted********Average********Rate** |   | **Amount** |   | **Weighted********Average********Rate** |   |
| **Due During   Years Ending   December 31,** |   | **(Dollars  in Thousands)**                 |    |
| 2002                                         |   | $                                           | 2,460   |                                                                        | 7.49   | %            | $      | 28,414                                  |   | 6.52 | % | $ | 1,942 |   | 8.79 | % | $ | 32,816 |   | 6.73 | % |
| 2003 to 2004                                 |   | 8,567                                       |    | 8.08                                                                        |   | 11,835       |   | 8.59                                    |   | 1,697 |   | 8.42 |   | 22,099 |   | 8.38 |   |
| 2005 and 2006                                |   | 8,729                                       |    | 7.29                                                                        |   | 23,287       |   | 8.55                                    |   | 6,610 |   | 8.32 |   | 38,626 |   | 8.23 |   |
| 2007 to 2011                                 |   | 15,976                                      |    | 7.36                                                                        |   | 7,534        |   | 9.18                                    |   | — |   | — |   | 23,510 |   | 7.94 |   |
| 2012 to 2021                                 |   | 52,890                                      |    | 7.05                                                                        |   | 4,985        |   | 8.34                                    |   | — |   | — |   | 57,875 |   | 7.16 |   |
| 2022 and following                           |   | 118,445                                     |    | 7.55                                                                        |   | 8,452        |   | 7.91                                    |   | — |   | — |   | 126,897 |   | 7.57 |   |
| Total                                        |   | $                                           | 207,067 |                                                                        | 7.42   |         | $      | 84,507                                  |   | 7.85 |   | $ | 10,249 |   | 8.43 |   | $ | 301,823 |   | 7.57 |   |

 

The total amount of loans due after December 31, 2002 which havepredetermined interest rates is $253.1 million, while the total amount of loansdue after such date which have floating or adjustable interest rates is $15.9million.

 

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Under federal law, the aggregate amount of loans that we are permittedto make to any one borrower is generally limited to 15% of unimpaired capitaland surplus (25% if the security for such loan has a “readily ascertainable”value or 30% for certain residential development loans).  At December 31, 2001, based on the above,the Bank’s regulatory loans-to-one borrower limit was approximately $11.2million.  On the same date, the Bank hadno borrowers with outstanding balances in excess of this amount.   As of December 31, 2001, the largest dollaramount outstanding or committed to be lent to one borrower or, group of relatedborrowers, was $2.6 million, secured by mortgage loans on several multi-familyresidential properties in the metropolitan Chicago area.  At December 31, 2001, this loan wasperforming in accordance with its terms.  As of the same date,there were 24 other lending relationships with carrying values in excess of$1.0 million.

 

All of the Bank’s lending is subject to its written underwritingstandards and to loan origination procedures. Decisions on loan applications are made on the basis of detailed applicationsand property valuations (consistent with the Bank’s appraisal policy). The loanapplications are designed primarily to determine the borrower’s ability torepay, and the more significant items on the application are verified throughuse of credit reports, financial statements, tax returns or confirmations. ** **Allmortgage loans currently originated by First Security are approved by the loancommittee, currently comprised of Directors Babyk, Gawryk and Nadzikewycz andVice President Korb, and ratified by the full Board of Directors.

 

The Bank requires title insurance or other evidence of title on itsmortgage loans, as well as fire and extended coverage casualty insurance inamounts at least equal to the principal amount of the loan or the value ofimprovements on the property, depending on the type of loan.  The Bank also requires flood insurance toprotect the property securing its interest when the property is located in aflood plain.

 

***One- to Four-Family Residential RealEstate Lending.***  Thecornerstone of our lending program is the origination of loans secured bymortgages on owner-occupied one- to four-family residences. Historically, theBank focused its residential lending activities on fixed rate loans with termsup to 30 years.  In the 1980s, in orderto reduce the average term to repricing of its assets, the Bank began to offer15 year and 10 year fixed rate loans as well as ARMs (although, as a result ofcustomer preference, the ARM loan volume has been limited).  Substantially all of our one- to four-familyresidential mortgage originations are secured by properties located in ourmarket area.  All mortgage loanscurrently originated by the Bank are retained and serviced by it.

 

We currently offer fixed-rate mortgage loans with maturities from 10 to30 years.  We also offer fixed rateballoon products with a 30 year amortization schedule which are due in three orfive years and which, under certain circumstances, may be extended for anadditional term of up to three or five years, as applicable.  As of December 31, 2001, we had $16.7 millionof fixed rate loans with original terms of 10 years or less (most of which werethree or five year balloon loans), $66.8 million of fixed rate loans withoriginal terms of 10-15 years and $119.3 million of fixed rate loans withoriginal terms of more than 15 years. See “– Originations of Loans.”

 

We also originate fixed rate home equity loans with terms of up to tenyears. These loans are written so that the total balance does not exceed thelesser of $50,000 or 75% of the appraised value of the security property whencombined with the balance of the first mortgage lien.  At December 31, 2001, we had $2.6 million of home equity loans,all of which are classified in the tabular data as one- to four-family residentialloans.

 

8

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The Bank also offers ARM loans which carry interest rates which adjustat a margin (generally 250 basis points) over the yield on the One Year and theThree Year Average Monthly U.S. Treasury Constant Maturity Indexes(“CMT”).   Such loans may carry terms tomaturity of up to 30 years. The ARM loans currently offered by the Bank providefor a cap on annual interest rate changes of 200 basis points and a lifetimecap generally of 600 basis points over the initial rate.  Initial interest rates offered on  our ARM loans may be approximately 100-150basis points below the fully indexed rate, although borrowers are qualified atthe fully indexed rate.   As a result,the risk of default on these loans may increase as interest rates increase. AtDecember 31, 2001, one- to four-family ARMs totaled $4.3 million or 1.43% ofthe Bank’s total loan portfolio.

 

We generally lend up to 95% of the lesser of the sales price orappraised value of the security property on owner occupied one- to four-familyloans; provided, however, that private mortgage insurance is obtained in anamount sufficient to reduce our exposure to not more than 80% of the salesprice or appraised value, as applicable.  The loan-to-value ratio on non-owner occupied, one- to four-family loansis generally 80% of the lesser of the sales price or appraised value of thesecurity property.   Non-owner occupiedone- to four-family loans may pose a greater risk to the Bank than traditionalowner occupied one- to four-family loans. In underwriting one- to four-family residential real estate loans, wecurrently evaluate the borrower’s ability to make principal, interest andescrow payments, the borrower’s credit history, the value of the property thatwill secure the loan and debt to income ratios.

 

Residential loans do not currently include prepayment penalties, arenon-assumable and do not produce negative amortization.  Our underwriting practices do not comply inevery way with those required by most purchasers in the secondary market.  For instance, the Bank, on occasion, willlend to borrowers that have income/debt service ratios below that required bymany secondary market purchasers.  Inthat event, we require that the borrower have other attributes which justifyapproving a loan, such as a favorable repayment record with the Bank onprevious lending relationships, favorable cash flow, a low loan to value ratioor other assets which can be used as additional collateral.  We have found that non-compliance withsecondary market standards at the time of origination does not in and of itselfcause credit problems since the Bank has engaged in this type of lending formany years and our overall delinquency experience on these loans has beensatisfactory to date.  In addition,these loans, once seasoned, generally are saleable on the secondarymarket.  Furthermore, we have found thatthese policies and procedures help us maintain and improve our customerrelations, and the Bank’s reputation in the communities we serve.

 

While we seek to originate most of our one- to four-family residentialloans in amounts which are less than or equal to the applicable Federal HomeLoan Mortgage Corporation maximum, we do make one- to four-family residentialloans in amounts in excess of such maximum. Our delinquency experience on such loans has been similar to ourexperience on our other residential loans.

 

Our residential mortgage loans customarily include due-on-sale clausesgiving us the right to declare the loan immediately due and payable in theevent that, among other things, the borrower sells or otherwise disposes of theproperty subject to the mortgage and the loan is not repaid.

 

***Multi-family and Commercial RealEstate Lending.***   In orderto increase the yield of its loan portfolio and to complement residentiallending opportunities, the Bank originates permanent multi-family andcommercial real estate loans secured by properties in its primary market area.** **Asa result of the strong economy in our Chicago market area, increased customerdemand and an increased emphasis on this lending on our part, we have been ableto increase our holdings of these types of loans over the last severalyears.  At December 31, 2001, we hadmulti-family loans totaling $28.7 million, or 9.50% of our total loan 

 

9

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portfolio, and $32.5 million in commercial and mixed use real estateloans, representing 10.76% of the total loan portfolio.

 

Our multi-family loan portfolio consists primarily of loans secured by24 or fewer units.  Our  commercial real estate loans  are primarily secured by retail stores,small office buildings, store/apartment complexes, taverns and store frontoffices.

 

Our multi-family real estate loans generally carry a maximum term offive years and have fixed rates; most of these loans are five year balloonswith a 25 year or more amortization schedule. These loans are generally made in amounts of up to 75% of the lesser ofthe appraised value or the purchase price of the property.  Most of our commercial real estate loans arefive year balloon loans with fixed rates of interest.****Also included in our commercial real estate loans are $7.9million of lines of credit secured by commercial real estate with floatinginterest rates tied to the prime rate of interest.  Commercial real estate loans are generally made in amounts up to75% of the lesser of the appraised value or the purchase price of the property.

 

Appraisals on properties securing multi-family and commercial realestate loans in excess of $250,000 are performed by an independent appraiserdesignated by our at the time the loan is made.  All appraisals on multi-family and commercial real estate loansare reviewed by our loan committee.  Inaddition, our underwriting procedures require verification of the borrower’scredit history, income and financial statements, banking relationships,references and income projections for the property.  We obtain personal guarantees on these loans.

 

At December 31, 2001, our largest commercial real estate ormulti-family loan outstanding totaled $1.2 million and was secured by a 16 unitapartment building located in Chicago, Illinois.  The loan was performing in accordance with its terms as of thatdate.

 

Multi-family and commercial real estate loans may present a higherlevel of risk than loans secured by one- to four-family residences.  This greater risk is due to several factors,including the concentration of principal in a limited number of loans andborrowers, the effects of general economic conditions on income producingproperties and the increased difficulty of evaluating and monitoring thesetypes of loans.

 

***Construction Lending.*** We originate construction loans to builders,developers and individuals to finance development of one to four family,multi-family and, to a lesser extent, small commercial properties.  Most of these loans do not have prearrangedtakeout financing at the time of commitment and most of the underlying projectsdo not have tenants or buyers at the time of commitment.

 

We significantly increased our construction lending activities over thelast several years primarily as a result of a favorable economic climate,particularly within our Chicago market area. These loans generally carry interest rates that float with the primerate of interest and have maturities of one year or less.

 

The Bank requires independent appraisals with a loan to value ratio notin excess of 80%.   Disbursements aremade in increments as construction progresses, and inspections warrant. Landloans do not exceed 60% of the appraised value or actual cost.

 

As of December 31, 2001, the Bank had committed $23.4 million toborrowers for construction loans.  As ofthis same date, $13.8 million of the committed funds have been disbursed.

 

10

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***Consumer Lending.***  Management believes that offering consumerloan products helps to expand the Bank’s customer base and to create strongerties to its existing customer base. In addition, because consumer loansgenerally have shorter terms to maturity and carry higher rates of interestthan do residential mortgage loans, they can be valuable asset/liabilitymanagement tools.  We originate avariety of different types of consumer loans, including home equity lines ofcredit, and deposit account loans for household and personal purposes.  Due to the tax advantages to the borrower ofhome equity lines of credit, we have focused our recent consumer lendingactivities primarily on home equity lines of credit.  At December 31, 2001 consumer loans totaled $10.2 million or3.40% of total loans outstanding.

 

Consumer loan terms vary according to the type and value of collateral,length of contract and creditworthiness of the borrower.  Other than the home equity lines of credit,the Bank’s consumer loans are made at fixed interest rates, with terms of up tofive years.

 

Our home equity lines of credit are written so that the totalcommitment amount, when combined with the balance of the first mortgage lien,may not exceed 80% of the appraised value of the property.  These loans are written with fixed terms ofup to five years and carry interest rates that float with the prime rate ofinterest.  At December 31, 2001, ourhome equity lines of credit totaled $8.8 million outstanding, or 2.93% of ourtotal loan portfolio.

 

The underwriting standards we employ for consumer loans include adetermination of the applicant’s payment history on other debts and ability tomeet existing obligations and payments on the proposed loan.  Although creditworthiness of the applicantis of primary consideration, the underwriting process also includes acomparison of the value of the security, if any, in relation to the proposedloan amount. Consumer loans may entail greater credit risk than do residentialmortgage loans, particularly in the case of consumer loans which areunsecured.  In addition, consumer loancollections are dependent on the borrower’s continuing financial stability, andthus are more likely to be affected by adverse personal circumstances.  Furthermore, the application of variousfederal and state laws, including bankruptcy and insolvency laws, may limit theamount which can be recovered on such loans.

 

**Originations of Loans**

 

Real estate loans are originated by our staff through walk-ins andreferrals from existing customers or real estate agents.

 

Our ability to originate loans is dependent upon customer demand forloans in our market and to a lesser extent, customer service and marketingefforts.  Demand is affected by both thelocal economy and the interest rate environment.  As a result of the strong real estate market in our primarymarket areas and our emphasis on customer service and community outreach, theBank has experienced significant loan growth in recent years.   See “3⁄4 Market Area.”  However, as a result of consumer demand,most recent originations have carried fixed rather than adjustable rates.  Under current policy, all loans we originateare retained in our portfolio. See “3⁄4 One- to Four- Family ResidentialLending” and “Management’s Discussion and Analysis of Financial Condition andResults of Operations - Asset/Liability Management” in the Annual Reportattached as Exhibit 13 hereto.

 

As a reflection of our emphasis on customer service, we have not soldloans in the past  but may do so in thefuture to manage interest rate risk. Servicing of such loans would be retainedby us.

 

11

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The following table shows the loan origination, purchase and repaymentactivities of the Bank for the periods indicated.

 

|                                    |   | **Year Ended  December 31,** |   |
|-----------------------------------------|--------|------------------------------|--------|
|                                    |   | **2001**                     |   | **2000** |   | **1999** |   |
|                                    |   | **(In  Thousands)**          |   |
| Originations by type:                   |   |                         |   |   |   |   |   |
|  Adjustable  rate:                 |   |                         |   |   |   |   |   |
| Real estate - one- to four-family       |   | $                            | 18,288 |   | $ | 3,030 |   | $ | 2,543 |   |
| - multi-family                          |   | 5,001                        |   | — |   | — |   |
| - commercial                            |   | 1,250                        |   | — |   | — |   |
| Total adjustable rate                   |   | 24,539                       |   | 3,030 |   | 2,543 |   |
|  Fixed  rate:                      |   |                         |   |   |   |   |   |
| Real estate - one- to four-family       |   | 72,718                       |   | 57,544 |   | 62,460 |   |
| - multi-family                          |   | 13,460                       |   | 10,230 |   | 5,953 |   |
| - commercial                            |   | 10,600                       |   | 12,911 |   | 6,096 |   |
| Non-real estate - consumer              |   | 5,721                        |   | 1,538 |   | 2,451 |   |
| Total fixed-rate                        |   | 102,499                      |   | 82,223 |   | 76,960 |   |
| Total loans originated                  |   | 127,038                      |   | 85,253 |   | 79,503 |   |
|                                    |   |                         |   |   |   |   |   |
| Principal repayments                    |   | (114,615                     | )      | (50,420 | ) | (56,390 | ) |
|                                    |   |                         |   |   |   |   |   |
| Increase (decrease) in other items, net |   | (427                         | )      | (547 | ) | (256 | ) |
| Net increase                            |   | $                            | 11,996 |   | $ | 34,286 |   | $ | 22,857 |   |

 

**Delinquencies and Non-Performing Assets**

 

***Delinquency Procedures.***** **When a borrower fails tomake a required payment on a loan, we attempt to cure the delinquency bycontacting the borrower.  Generally, ourpersonnel work with the delinquent borrower on a case by case basis to solvethe delinquency.  Generally, a latenotice is sent on all delinquent loans followed by a phone call after thethirtieth day of delinquency. Additional written and verbal contacts may be made with the borrowerbetween 30 and 60 days after the due date.  If the loan is contractually delinquent for 90 days, we mayinstitute appropriate action to foreclose on the property.  Generally, after 120 days, foreclosureprocedures are initiated.  Ifforeclosed, the property is sold at public sale and may be purchased by theBank.

 

Real estate we acquire as a result of foreclosure or by deed in lieu offoreclosure is classified as real estate owned until it is sold.  When property is acquired by foreclosure ordeed in lieu of foreclosure, it is recorded at the lower of cost or fair valueless estimated selling costs.  Afteracquisition, all costs incurred in maintaining the property are expensed.  Costs relating to the development andimprovement of the property, however, are capitalized.

 

12

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The following table sets forth the Bank’s loan delinquencies by type,by amount and by percentage of type at December 31, 2001.

 
|                |   | **Loans  Delinquent For:**  |   | **Total  Loans Delinquent********60 Days or  More** |   |
|---------------------|--------|-----------------------------|--------|-----------------------------------------------------|--------|
|                |   | **60-89 Days**              |   | **90 Days  and Over**                               |   |   |
|                |   | **Number**                  |   | **Amount**                                          |   | **Percent of    Loan   Category** |   | **Number** |   | **Amount** |   | **Percent of    Loan   Category** |   | **Number** |   | **Amount** |   | **Percent of    Loan   Category** |   |
|                |   | **(Dollars  in Thousands)** |   |
| Real Estate:        |   |                        |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One- to four-family |   | 14                          |   | $                                                   | 1,009  |   | 0.49 | % | 13 |   | $ | 887 |   | 0.43 | % | 27 |   | $ | 1,896 |   | 0.92 | % |
| Commercial          |   | 2                           |   | 195                                                 |   | 0.79 | % | 2 |   | 465 |   | 1.89 | % | 4 |   | 660 |   | 2.69 | % |
| Mixed Use           |   | —                      |   | —                                              |   | — |   | 1 |   | 81 |   | 1.02 | % | 1 |   | 81 |   | 1.02 | % |
| Consumer            |   | —                      |   | —                                              |   | — |   | 8 |   | 7 |   | 0.06 | % | 8 |   | 7 |   | 0.06 | % |
|                |   |                        |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total               |   | 16                          |   | $                                                   | 1,204  |   | 0.40 | % | 24 |   | $ | 1,440 |   | 0.48 | % | 40 |   | $ | 2,644 |   | 0.88 | % |

 

13

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***Classification of Assets*****.**  Federal regulations requirethat each savings institution classify its own assets on a regular basis.  In addition, in connection with examinationsof savings institutions, OTS and FDIC examiners have authority to identifyproblem assets and, if appropriate, require them to be classified.  There are three classifications for problemassets:  Substandard, Doubtful andLoss.  Substandard assets have one ormore defined weaknesses and are characterized by the distinct possibility thatwe will sustain some loss if the deficiencies are not corrected.  Doubtful assets have the weaknesses ofSubstandard assets, with the additional characteristics that the weaknessesmake collection or liquidation in full on the basis of currently existingfacts, conditions and values questionable, and there is a high possibility ofloss.  An asset classified Loss isconsidered uncollectible and of such little value that continuance as an asseton the balance sheet of the institution is not warranted.  Assets classified as Substandard or Doubtfulrequire the institution to establish prudent general allowances for loanlosses.  If an asset or portion thereofis classified as a loss, the institution charges off such amount against theloan loss allowance.  If an institutiondoes not agree with an examiner’s classification of an asset, it may appealthis determination to the District Director of the OTS.

 

On the basis of management’s review of its assets, at December 31,2001, it had classified a total of $1.4 million of its loan and other assets asfollows:

 

|                    |   | **At********December  31,********2001** |   |
|-------------------------|--------|-----------------------------------------|--------|
|                    |   | **(In Thousands)**                      |   |
| Substandard             |   | $                                       | 1,435  |   |
| Doubtful assets         |   | 5                                       |   |
| Loss assets             |   | —                                  |   |
|  Total             |   | $                                       | 1,440  |   |
| General loss allowance  |   | $                                       | 2,806  |   |
| Specific loss allowance |   | $                                       | — |   |
| Recoveries, net         |   | $                                       | (101   | ) |

 

Our classified assets consist of the non-performing loans referred tobelow.

 

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***Non-Performing Assets.***  The table below sets forth the amounts andcategories of non-performing assets in our loan portfolio.  Accrued interest on loans delinquent 90 daysor more is credited to an interest reserve account which offsets the amount ofcapitalized interest in loans receivable. See Note 3 of the Notes to Consolidated Financial Statements in theAnnual Report attached as Exhibit 13 hereto. Foreclosed assets include assetsacquired in settlement of loans.

 
|                                       |   | **December  31,**          |   |
|--------------------------------------------|--------|----------------------------|--------|
|                                       |   | **2001**                   |   | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                                       |   | **(Dollars in Thousands)** |   |
| Non-accruing loans:                        |   |                       |   |   |   |   |   |   |   |   |   |
| One- to four-family                        |   | $                          | 433    |   | $ | 680 |   | $ | — |   | $ | 9 |   | $ | 9 |   |
| Commercial real estate                     |   | 206                        |   | 110 |   | — |   | — |   | — |   |
| Mixed Use                                  |   | —                     |   | 235 |   | — |   | — |   | — |   |
| Total                                      |   | 639                        |   | 1,025 |   | — |   | 9 |   | 9 |   |
|                                       |   |                       |   |   |   |   |   |   |   |   |   |
| Accruing loans delinquent 90 days or more: |   |                       |   |   |   |   |   |   |   |   |   |
| One- to four-family                        |   | 454                        |   | 208 |   | 934 |   | 459 |   | 614 |   |
| Multi-family                               |   | —                     |   | — |   | 25 |   | 224 |   | — |   |
| Commercial real estate                     |   | 259                        |   | 237 |   | 360 |   | 313 |   | 566 |   |
| Mixed Use                                  |   | 81                         |   | 82 |   | — |   | — |   | — |   |
| Consumer                                   |   | 7                          |   | 9 |   | 8 |   | 7 |   | 194 |   |
| Total                                      |   | 801                        |   | 536 |   | 1,327 |   | 1,003 |   | 1,374 |   |
|                                       |   |                       |   |   |   |   |   |   |   |   |   |
| Foreclosed assets:                         |   |                       |   |   |   |   |   |   |   |   |   |
| One- to four-family                        |   | —                     |   | — |   | 66 |   | — |   | — |   |
| Commercial real estate                     |   | —                     |   | — |   | — |   | — |   | — |   |
| Total                                      |   | —                     |   | — |   | 66 |   | — |   | — |   |
|                                       |   |                       |   |   |   |   |   |   |   |   |   |
| Non-performing leases                      |   | —                     |   | — |   | — |   | — |   | 81 |   |
|                                       |   |                       |   |   |   |   |   |   |   |   |   |
| Total non-performing assets                |   | $                          | 1,440  |   | $ | 1,561 |   | $ | 1,393 |   | $ | 1,012 |   | $ | 1,464 |   |
|                                       |   |                       |   |   |   |   |   |   |   |   |   |
| Total as a percentage of total assets      |   | 0.33                       | %      | 0.39 | % | 0.37 | % | 0.30 | % | 0.46 | % |

 

For the years ended December 31, 2001 and December 31, 2000, grossinterest income (less additions to the interest reserve) which would have beenrecorded had the non-accruing loans (and accruing loans delinquent 90 days ormore) been current in accordance with their original terms amounted to $168,000and $123,000, respectively.  No interestincome was recognized on non-accruing loans for the years ended December 31,2001 and December 31, 2000, respectively.

 

***Other Loans of Concern.***  In addition to the non-performing assets setforth in the table above, as of December 31, 2001, there were no otherloans with respect to which known information about the possible creditproblems of the borrowers or the cash flows of the security properties havecaused management to have concerns as to the ability of the borrowers to complywith present loan repayment terms and which may result in the future inclusionof such items in the non-performing asset categories.

 

Management considers its non-performing and “of concern” assets inestablishing its allowance for loan losses.

 

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The following table sets forth an analysis of our allowance for loanlosses.

 
|                                                                                                    |   | **Year Ended  December 31,** |   |
|---------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                    |   | **2001**                     |   | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                                                                                                    |   | **(Dollars in Thousands)**   |   |
| Balance at beginning of period                                                                          |   | $                            | 2,561  |   | $ | 2,315 |   | $ | 2,069 |   | $ | 1,828 |   | $ | 1,520 |   |
|                                                                                                    |   |                         |   |   |   |   |   |   |   |   |   |
| Charge-offs:                                                                                            |   |                         |   |   |   |   |   |   |   |   |   |
| One- to four-family                                                                                     |   | —                       |   | — |   | — |   | — |   | — |   |
| Multi-family                                                                                            |   | —                       |   | — |   | — |   | — |   | — |   |
| Commercial real estate                                                                                  |   | 42                           |   | — |   | — |   | — |   | — |   |
| Construction or development                                                                             |   | —                       |   | — |   | — |   | — |   | — |   |
| Consumer                                                                                                |   | —                       |   | — |   | — |   | 5 |   | 2 |   |
| Leases                                                                                                  |   | —                       |   | — |   | — |   | — |   | 432 |   |
|                                                                                                    |   | 42                           |   | — |   | — |   | 5 |   | 434 |   |
|                                                                                                    |   |                         |   |   |   |   |   |   |   |   |   |
| Recoveries:                                                                                             |   |                         |   |   |   |   |   |   |   |   |   |
| One- to four-family                                                                                     |   | —                       |   | — |   | — |   | — |   | — |   |
| Multi-family                                                                                            |   | —                       |   | — |   | — |   | — |   | — |   |
| Commercial real estate                                                                                  |   | —                       |   | — |   | — |   | — |   | — |   |
| Construction or development                                                                             |   | 143                          |   | — |   | — |   | — |   | — |   |
| Consumer                                                                                                |   | —                       |   | — |   | — |   | — |   | 4 |   |
| Leases                                                                                                  |   | —                       |   | — |   | — |   | — |   | — |   |
|                                                                                                    |   | 143                          |   | — |   | — |   | — |   | 4 |   |
|                                                                                                    |   |                         |   |   |   |   |   |   |   |   |   |
| Net (charge-offs) recoveries                                                                            |   | 101                          |   | — |   | — |   | (5 | ) | (430 | ) |
| Additions charged to operations                                                                         |   | 144                          |   | 246 |   | 246 |   | 246 |   | 738 |   |
| Balance at end of period                                                                                |   | $                            | 2,806  |   | $ | 2,561 |   | $ | 2,315 |   | $ | 2,069 |   | $ | 1,828 |   |
|                                                                                                    |   |                         |   |   |   |   |   |   |   |   |   |
| Ratio of net charge-offs (recoveries) during the  period to average loans outstanding during the period |   | (0.04                        | )%     | — | % | — | % | — | % | 0.25 | % |
|                                                                                                    |   |                         |   |   |   |   |   |   |   |   |   |
| Ratio of net charge-offs (recoveries) during the  period to average non-performing assets               |   | (6.96                        | )%     | — | % | — | % | 0.38 | % | 21.12 | % |

 

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The distribution of our allowance for losses on loans at the datesindicated is summarized as follows:

 
|                                  |   | **December  31,**                      |   |
|---------------------------------------|--------|----------------------------------------|--------|
|                                  |   | **2001**                               |   | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                                  |   | **Amount of  Loan   Loss   Allowance** |   | **Loan   Amounts by   Category** |   | **Percent   of Loans  in Each  Category  of Total   Loans** |   | **Amount of  Loan   Loss   Allowance** |   | **Loan   Amounts by   Category** |   | **Percent  of Loans  in Each   Category  of Total  Loans** |   | **Amount of  Loan   Loss   Allowance** |   | **Loan   Amounts by   Category** |   | **Percent   of Loans in Each   Category of Total   Loans** |   | **Amount of  Loan   Loss   Allowance** |   | **Loan   Amounts by   Category** |   | **Percent   of Loans  in Each   Category of Total   Loans** |   | **Amount of  Loan   Loss   Allowance** |   | **Loan   Amounts by   Category** |   | **Percent   of Loans in Each   Category of Total   Loans** |   |
|                                  |   | **(Dollars  in Thousands)**            |   |
| One-to four-family                    |   | $                                      | 839    |   | $ | 207,067 |   | 70.85 | % | $ | 872 |   | $ | 212,863 |   | 76.07 | % | $ | 823 |   | $ | 200,201 |   | 81.71 | % | $ | 736 |   | $ | 182,452 |   | 82.23 | % | $ | 572 |   | $ | 154,819 |   | 81.66 | % |
| Multi-family                          |   | 172                                    |   | 28,659 |   | 9.81 |   | 116 |   | 19,272 |   | 6.89 |   | 80 |   | 13,389 |   | 5.47 |   | 83 |   | 11,313 |   | 5.10 |   | 67 |   | 10,999 |   | 5.80 |   |
| Commercial and mixed use  real estate |   | 490                                    |   | 32,477 |   | 11.11 |   | 473 |   | 29,817 |   | 10.66 |   | 607 |   | 24,388 |   | 9.95 |   | 483 |   | 21,433 |   | 9.66 |   | 448 |   | 17,235 |   | 9.09 |   |
| Construction                          |   | 710                                    |   | 13,795 |   | 4.72 |   | 448 |   | 8,968 |   | 3.20 |   | 33 |   | 333 |   | 0.14 |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Consumer                              |   | 76                                     |   | 10,249 |   | 3.51 |   | 35 |   | 8,904 |   | 3.18 |   | 107 |   | 6,680 |   | 2.73 |   | 112 |   | 6,680 |   | 3.01 |   | 80 |   | 6,464 |   | 3.41 |   |
| Loans secured byleases                |   | —                                 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 40 |   | 81 |   | 0.04 |   |
| Unallocated                           |   | 519                                    |   | — |   | — |   | 617 |   | — |   | — |   | 665 |   | — |   | — |   | 655 |   | — |   | — |   | 621 |   | — |   | — |   |
| Total                                 |   | $                                      | 2,806  |   | $ | 292,247 |   | 100 | % | $ | 2,561 |   | $ | 279,824 |   | 100.00 | % | $ | 2,315 |   | $ | 244,991 |   | 100.00 | % | $ | 2,069 |   | $ | 221,878 |   | 100.00 | % | $ | 1,828 |   | $ | 189,598 |   | 100.00 | % |

 

17

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The allowance for loan losses is established through a provision forloan losses charged to earnings based on management’s evaluation of the riskinherent in its entire loan portfolio. Such evaluation, which includes a review of all loans of which fullcollectibility may not be reasonably assured, considers the market value of theunderlying collateral, growth and composition of the loan portfolio,delinquency trends, adverse situations that may affect the borrower’s abilityto repay, prevailing economic conditions and other factors that warrantrecognition in providing for an adequate allowance for loan losses.  In determining the general reserves underthese policies, historical charge-offs and recoveries, changes in the mix andlevels of the various types of loans, collateral values in the current loanportfolio and current economic conditions are considered.

 

While we believe that we use the best information available todetermine the allowance for loan losses, unforeseen economic and marketconditions could result in adjustments to the allowance for loan losses, andnet earnings could be significantly affected, if circumstances differsubstantially from the assumptions used in making the final determination.

 

**Securities Activities**

 

***General.***  Generally, the investment policy of theCompany is to invest funds among categories of investments based upon itsasset/liability management policies, investment quality, loan and depositvolume, liquidity needs and performance objectives. ** **In accordance with ourasset/liability management policy, we have recently focused a significant partof our investment activities on instruments with terms to repricing or maturityof five years or less and municipal securities which are exempt from federaltaxes.

 

Our securities are classified into two categories: held-to-maturity andavailable-for-sale.  Securities that wehave the positive intent and ability to hold to maturity are classified asheld-to-maturity and reported at amortized cost.  All other securities not classified as held-to-maturity areclassified as available-for-sale.  AtDecember 31, 2001, we had $21.7 million of securities classified as available-for-sale.  Available-for-sale securities are reportedat fair value with unrealized gains and losses included, on an after-tax basis,in a separate component of shareholders’ equity.

 

***Mortgage-Backed and RelatedSecurities*****.**  In order to supplement our lending activities and achieve ourasset/liability management goals, we invest in mortgage-backed and relatedsecurities.  As of December 31, 2001,all of the mortgage-backed and related securities we owned were issued, insuredor guaranteed either directly or indirectly by a federal agency or are rated“AAA” by a nationally recognized credit rating agency.  However, it should be noted that, while a(direct or indirect) federal guarantee or a high credit rating may indicate ahigh degree of protection against default, they do not indicate that thesecurities will be protected from declines in value based on changes ininterest rates or prepayment speeds.

 

Consistent with our asset/liability management strategy, at December31, 2001, $6.0 million, or 25.13% of our mortgage-backed and related securitieswere classified available-for-sale.  Inaddition, on the same date, $2.9 million or 12.15% of our mortgage-backed andrelated securities carried adjustable rates. Finally, as discussed further below, at December 31, 2001, we had$171,000 of collateralized mortgage obligations (“CMOs”) with anticipatedaverage lives of five years or less. For additional information regarding our mortgage-backed securitiesportfolio, see Note 2 of the Notes to Consolidated Financial Statements in theAnnual Report attached as Exhibit 13 hereto.

 

Our CMOs are securities derived by reallocating the cash flows frommortgage-backed securities or pools of mortgage loans in order to createmultiple classes, or tranches, of securities with coupon rates and averagelives that differ from the underlying collateral as a whole.  The terms to maturity of any

 

18

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particulartranche is dependent upon the prepayment speed of the underlying collateral aswell as the structure of the particular CMO. Although a significant proportion of our CMOs  are interests in tranches which have been structured (through theuse of cash flow priority and “support” tranches) to give somewhat morepredictable cash flows, the cash flow and hence the value of CMOs is subject tochange.

 

We have invested in CMOs as an alternative to mortgage loans andconventional mortgage-backed securities as part of our asset/liabilitymanagement strategy. ** **Management believes that,depending on market conditions, CMOs may represent attractive investmentalternatives relative to other investments due to the wide variety of maturityand repayment options available.  Inparticular, we have from time to time concluded that short and intermediateduration CMOs (five year or less average life) often represent a bettercombination of rate and duration than adjustable rate mortgage-backedsecurities.

 

To assess price volatility, the Federal Financial InstitutionsExamination Council (“FFIEC”) requires an annual “stress” test of mortgagederivative securities.  This policy,which has been adopted by the OTS, requires us to annually test our CMOs, andother mortgage-related securities to determine whether they are high-risk ornonhigh-risk securities.  Mortgagederivative products with an average life or price volatility in excess of abenchmark 30-year, mortgage-backed, pass-through security are consideredhigh-risk mortgage securities.  Underthe policy, savings institutions may generally only invest in low-risk mortgagesecurities in order to reduce interest rate risk.  In addition, all high-risk mortgage securities acquired afterFebruary 9, 1992 which are classified as high risk at the time of purchase mustbe carried in the institution’s trading account or as assetsavailable-for-sale.  At December 31,2001, the most recent quarterly test date, none of our mortgage-backedsecurities were classified as “high-risk.”

 

19

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Thefollowing table sets forth the composition of our mortgage-backed securities atthe dates indicated.

 
|                                            |   | **December  31,**           |   |
|-------------------------------------------------|--------|-----------------------------|--------|
|                                            |   | **2001**                    |   | **2000** |   | **1999** |   |
|                                            |   | **Carrying   Value**        |   | **% of   Total** |   | **Carrying   Value** |   | **% of   Total** |   | **Carrying   Value** |   | **% of   Total** |   |
|                                            |   | **(Dollars in  Thousands)** |   |
| Mortgage-backed securities held-to- maturity:   |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| GNMA                                            |   | $                           | 13,285 |   | 55.64 | % | $ | 2,902 |   | 22.28 | % | $ | 3,530 |   | 20.77 | % |
| FNMA                                            |   | 1,716                       |   | 7.19 |   | 624 |   | 4.79 |   | 1,043 |   | 6.14 |   |
| FHLMC                                           |   | 2,708                       |   | 11.34 |   | 1,278 |   | 9.81 |   | 1,846 |   | 10.87 |   |
| CMOs                                            |   | 171                         |   | 0.72 |   | 620 |   | 4.76 |   | 1,158 |   | 6.82 |   |
|                                            |   | 17,880                      |   | 74.89 |   | 5,424 |   | 41.64 |   | 7,577 |   | 44.60 |   |
| Mortgage-backed securities available-for- sale: |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| GNMA                                            |   | 794                         |   | 3.32 |   | 1,151 |   | 8.84 |   | 1,371 |   | 8.07 |   |
| FNMA                                            |   | 2,264                       |   | 9.48 |   | 2,690 |   | 20.65 |   | 3,489 |   | 20.54 |   |
| FHLMC                                           |   | 2,938                       |   | 12.31 |   | 3,761 |   | 28.87 |   | 4,550 |   | 26.79 |   |
| CMOs                                            |   | —                      |   | — |   | — |   | — |   | — |   | — |   |
|                                            |   | 5,996                       |   | 25.11 |   | 7,602 |   | 58.36 |   | 9,410 |   | 55.40 |   |
|                                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Total mortgage-backed securities                |   | $                           | 23,876 |   | 100.00 | % | $ | 13,026 |   | 100.00 | % | $ | 16,987 |   | 100.00 | % |

 

20

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The following table sets forth the contractual maturities of ourmortgage-backed securities at December 31, 2001.

 
|                                      |   | **Due in**              |   | **December  31, 2001**    |   |
|-------------------------------------------|--------|-------------------------|--------|---------------------------|--------|
|                                      |   | **6 Months  or   Less** |   | **6 Months  to   1 Year** |   | **1 to 3   Years** |   | **3 to 5   Years** |   | **5 to 10   Years** |   | **10 to 20   Years** |   | **Over 20   Years** |   | **Amortized   Cost** |   | **Carrying   Value** |   |
|                                      |   | **(In  Thousands)**     |   |
| Federal  Home Loan Mortgage Corporation   |   | $                       | — |                      | $      | — |   | $ | 142 |   | $ | — |   | $ | 414 |   | $ | 3,618 |   | $ | 1,510 |   | $ | 5,684 |   | $ | 5,646 |   |
| Federal  National Mortgage Association    |   | —                  |   | —                    |   | 100 |   | 47 |   | 19 |   | 1,553 |   | 2,267 |   | 3,986 |   | 3,980 |   |
| Government  National Mortgage Association |   | —                  |   | —                    |   | — |   | 151 |   | 3 |   | 999 |   | 12,906 |   | 14,059 |   | 14,079 |   |
| CMOs                                      |   | —                  |   | —                    |   | — |   | 1 |   | — |   | 170 |   | — |   | 171 |   | 171 |   |
|                                      |   |                    |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                     |   | $                       | — |                      | $      | — |   | $ | 242 |   | $ | 199 |   | $ | 436 |   | $ | 6,340 |   | $ | 16,683 |   | $ | 23,900 |   | $ | 23,876 |   |

 

21

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As of December 31, 2001, we did not have any mortgage-backed securitiesin excess of 10% of retained earnings except for FHLMC issues, amounting to$5.6 million and GNMA issues amounting to $14.1 million.

 

The market values of a portion of our mortgage-backed securitiesheld-to-maturity have been from time to time lower than their carrying values.****However, for financial reporting purposes,such declines in value are considered to be temporary in nature since they havebeen due to changes in interest rates rather than credit concerns.  See Note 2 of the Notes to ConsolidatedFinancial Statements in the Annual Report attached as Exhibit 13 hereto.

 

The following table shows our mortgage-backed securities purchase, saleand repayment activities for the periods indicated.

 

|                        |   | **Year Ended  December 31,** |   |
|-----------------------------|--------|------------------------------|--------|
|                        |   | **2001**                     |   | **2000** |   | **1999** |   |
|                        |   | **(In  Thousands)**          |   |
| Purchases:                  |   |                         |   |   |   |   |   |
| Adjustable-rate             |   | $                            | — |   | $ | — |   | $ | — |   |
| Fixed-rate                  |   | 15,879                       |   | — |   | — |   |
| CMOs                        |   | —                       |   | — |   | — |   |
| Total purchases             |   | 15,879                       |   | — |   | — |   |
|                        |   |                         |   |   |   |   |   |
| Principal repayments        |   | (5,675                       | )      | (4,046 | ) | (6,680 | ) |
| Discount/premium net change |   | 462                          |   | (53 | ) | (260 | ) |
| Fair value net change       |   | 184                          |   | 138 |   | (70 | ) |
| Net increase (decrease)     |   | $                            | 10,850 |   | $ | (3,961 | ) | $ | (7,010 | ) |

 

Our holdings of mortgage-backed securities are approximately 5.54% ofour total assets.  Since pass-throughmortgage-backed securities generally carry a yield approximately 50 to 100basis points below that of the corresponding type of residential loan (due tothe implied federal agency guarantee fee and the retention of a servicingspread by the loan servicer), and our CMOs also carry lower yields (due to theimplied federal agency guarantee and because such securities tend to haveshorter actual durations than 30 year loans), in the event that the proportionof our assets consisting of mortgage-backed and related securities increases,our asset yields could be somewhat adversely affected. We will evaluate mortgage-backedand related securities purchases in the future based on our asset/liabilityobjectives, market conditions and alternative investment opportunities.

 

***Other Securities.***  In order to complement our lending andmortgage-backed securities activities, and to increase our holdings of shortand intermediate term assets, we invest in liquid investments and inhigh-quality investments, such as U.S. Treasury and agency obligations.   At December 31, 2001 and December 31,2000, our securities portfolio totaled $90.1 million and $97.2 million,respectively.  At December 31, 2001, wedid not own any other securities of a single issuer which exceeded 10% of ourretained earnings, other than federal agency obligations.  See Note 2 of the Notes to ConsolidatedFinancial Statements in the Annual Report attached as Exhibit 13 hereto foradditional information regarding our other securities portfolio.

 

The following table sets forth the composition of our other securitiesand other earning assets at the dates indicated.

 

22

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|                                        |   | **December  31,**          |   |
|---------------------------------------------|--------|----------------------------|--------|
|                                        |   | **2001**                   |   | **2000** |   | **1999** |   |
|                                        |   | **Carrying   Value**       |   | **% of   Total** |   | **Carrying   Value** |   | **% of   Total** |   | **Carrying   Value** |   | **% of   Total** |   |
|                                        |   | **(Dollars in Thousands)** |   |
| Securities held-to-maturity:                |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| Federal agency obligations                  |   | $                          | 46,223 |   | 51.31 | % | $ | 57,164 |   | 58.83 | % | $ | 69,763 |   | 72.26 | % |
| Municipal bonds                             |   | 28,113                     |   | 31.21 |   | 15,718 |   | 16.17 |   | 15,568 |   | 16.13 |   |
|                                        |   | 74,336                     |   | 82.52 |   | 72,882 |   | 75.00 |   | 85,331 |   | 88.39 |   |
| Securities available-for sale:              |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| US government securities                    |   | 3,426                      |   | 3.80 |   | 11,185 |   | 11.51 |   | 335 |   | .35 |   |
| Mutual funds                                |   | 3,182                      |   | 3.53 |   | 3,128 |   | 3.22 |   | 2,998 |   | 3.11 |   |
| Municipal bonds                             |   | 8,737                      |   | 9.70 |   | 9,365 |   | 9.64 |   | 7,370 |   | 7.62 |   |
| Corporate notes                             |   | 260                        |   | 0.29 |   | 232 |   | 0.24 |   | 230 |   | .24 |   |
| Other equity                                |   | 140                        |   | 0.16 |   | 382 |   | 0.39 |   | 279 |   | .29 |   |
|                                        |   | 15,745                     |   | 17.48 |   | 24,292 |   | 25.00 |   | 11,212 |   | 11.61 |   |
| Total securities                            |   | $                          | 90,081 |   | 100.00 | % | $ | 97,174 |   | 100.00 | % | $ | 96,543 |   | 100.00 | % |
|                                        |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| Other earning assets:                       |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning deposits with banks        |   | $                          | 1,423  |   | 9.81 | % | $ | 1,353 |   | 28.89 | % | $ | 1,571 |   | 38.45 | % |
| FHLB stock                                  |   | 12,162                     |   | 83.80 |   | 3,330 |   | 71.11 |   | 2,315 |   | 56.66 |   |
| Federal funds sold                          |   | 928                        |   | 6.39 |   | — |   | — |   | 200 |   | 4.89 |   |
| Time deposit in other financialinstitutions |   | —                     |   | — |   | — |   | — |   | —— |   | — |   |
| Total                                       |   | $                          | 14,513 |   | 100.00 | % | $ | 4,683 |   | 100.00 | % | $ | 4,086 |   | 100.00 | % |

 

23

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The composition and remaining maturities of our other securitiesportfolio, excluding mutual funds, equity securities and FHLB stock, isindicated in the following table.

 
|                        |   | **December  31, 2001**      |   |
|-----------------------------|--------|-----------------------------|--------|
|                        |   | **Less Than  1 Year**       |   | **1 to 5   Years** |   | **5 to 10   Years** |   | **Over 10   years** |   | **Total  Securities** |   |
|                        |   | **Amortized   Cost**        |   | **Amortized   Cost** | ** ** | **Amortized   Cost** | ** ** | **Amortized   Cost** | ** ** | **Amortized   Cost** | ** ** | **Fair   Value** |   |
|                        |   | **(Dollars  in Thousands)** |   |
| US  Treasury                |   | $                           | — |   | $ | — |   | $ | — |   | $ | 258 |   | $ | 258 |   | $ | 348 |   |
| Federal  agency obligations |   | 2,530                       |   | 3,000 |   | 32,236 |   | 11,457 |   | 49,223 |   | 49,785 |   |
| Municipal  bonds            |   | —                      |   | 1,342 |   | 4,321 |   | 31,090 |   | 36,753 |   | 36,709 |   |
| Corporate  notes            |   | —                      |   | 250 |   | — |   | — |   | 250 |   | 260 |   |
| Total  securities           |   | $                           | 2,530  |   | $ | 4,592 |   | $ | 36,557 |   | $ | 42,805 |   | $ | 86,484 | (1) | $ | 87,102 |   |
| Weighted  average yield     |   | 6.056                       | %      | 6.353 | % | 6.361 | % | 5.515 | % | 5.933 | % |   |   |

 

----

(1)     Includes $77.8 million of callablesecurities.

 

See Note 2 of Notes to the Consolidated Financial Statements inthe Annual Report attached as Exhibit 13 hereto for a discussion of oursecurities portfolio.

 

**Sources of Funds**

 

***General.***  The Bank’s primary sources of funds aredeposits, payments (including prepayments) of loan principal, interest earnedon loans and securities, repayments of securities, borrowings and fundsprovided from operations.

 

***Deposits.***  We offer deposit accounts having a widerange of interest rates and terms.  TheBank’s deposits consist of passbook, NOW, money market and various certificateaccounts.  We rely primarily oncompetitive pricing, customer service and community outreach to attract andretain these deposits.  The Bank’scustomers may access their accounts through any of our five offices and fiveautomated teller machines (“ATMs”).   In addition, our customers may access their accounts through severalnationwide ATM networks.  The Bank onlysolicits deposits in its market area and does not currently use brokers toobtain deposits.

 

We manage the pricing of our deposits in keeping with ourasset/liability management, profitability and growth objectives.****  The variety of deposit accounts offered by the Bank has allowedus to be competitive in obtaining funds and to respond with flexibility tochanges in consumer demand.  However, assome customers have become more interest rate conscious, the Bank has becomemore susceptible to short-term fluctuations in its certificate of depositflows.

 

Management believes that the “core” portion of our regular savings, NOWand money market accounts, which amounted to $112.6 million or 41.9% of totaldeposits at December 31, 2001, can have a lower cost and be more resistant tointerest rate changes (and competing non-depository financial products) thancertificate accounts.  We utilizecustomer service, community outreach and marketing initiatives in an effort tobuild and maintain the volume of such deposits.  However, there can be no assurance as to whether we will be ableto maintain or increase our core deposits in the future.

 

24

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The table below sets forth the Bank’s deposit flows for the periodsindicated.

 

|                         |   | **Year Ended  December 31,** |    |
|------------------------------|--------|------------------------------|---------|
|                         |   | **2001**                     |    | **2000** |   | **1999** |   |
|                         |   | **(Dollars  In Thousands)**  |    |
| Opening  balance             |   | $                            | 252,662 |   | $ | 238,123 |   | $ | 220,495 |   |
| Deposits                     |   | 439,561                      |    | 426,788 |   | 403,756 |   |
| Withdrawals                  |   | (434,362                     | )       | (423,146 | ) | (395,294 | ) |
| Interest  credited           |   | 10,996                       |    | 10,897 |   | 9,166 |   |
|                         |   |                         |    |   |   |   |   |
| Ending  balance              |   | $                            | 268,857 |   | $ | 252,662 |   | $ | 238,123 |   |
|                         |   |                         |    |   |   |   |   |
| Net  increase (decrease)     |   | $                            | 16,195  |   | $ | 14,539 |   | $ | 17,628 |   |
|                         |   |                         |    |   |   |   |   |
| Percent  increase (decrease) |   | 6.41                         | %       | 6.11 | % | 7.99 | % |

 

The following table sets forth the dollar amount of savings deposits inthe Bank as of the dates indicated.

 
|                               |   | **December  31,**           |    |
|------------------------------------|--------|-----------------------------|---------|
|                               |   | **2001**                    |    | **2000** |   | **1999** |   |
|                               |   | **Amount**                  |    | **Percent   of Total** |   | **Amount** |   | **Percent   of Total** |   | **Amount** |   | **Percent   of Total** |   |
|                               |   | **(Dollars  in Thousands)** |    |
| Transactions  and Savings Deposits |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Passbook  Accounts 2.50%           |   | $                           | 83,963  |   | 31.2 | % | $ | 77,232 |   | 30.5 | % | $ | 75,180 |   | 31.6 | % |
| NOW  Accounts 1.00%                |   | 23,946                      |    | 8.9 |   | 20,456 |   | 8.1 |   | 18,281 |   | 7.7 |   |
| Money  Market Accounts 2.43%       |   | 4,720                       |    | 1.8 |   | 4,215 |   | 1.7 |   | 3,651 |   | 1.5 |   |
|                               |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Total  Non-Certificates            |   | 112,629                     |    | 41.9 |   | 101,903 |   | 40.3 |   | 97,112 |   | 40.8 |   |
|                               |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Certificates:                      |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| 0.00  - 3.99%                      |   | 73,044                      |    | 27.2 |   | — |   | — |   | — |   | — |   |
| 4.00  - 5.99%                      |   | 70,067                      |    | 26.0 |   | 97,125 |   | 38.5 |   | 124,269 |   | 52.2 |   |
| 6.00  - 7.99%                      |   | 13,075                      |    | 4.9 |   | 53,585 |   | 21.2 |   | 16,693 |   | 7.0 |   |
| 8.00  - 9.00%                      |   | 42                          |    | — |   | 49 |   | — |   | 49 |   | — |   |
|                               |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Total  Certificates                |   | 156,228                     |    | 58.1 |   | 150,759 |   | 59.7 |   | 141,011 |   | 59.2 |   |
|                               |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Total  Deposits                    |   | $                           | 268,857 |   | 100.0 | % | $ | 252,662 |   | 100.0 | % | $ | 238,123 |   | 100.0 | % |

 

25

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The following table shows rate and maturity information for ourcertificates of deposit as of December 31, 2001

 

|         |   | **Less Than********1 Year** |    | **1 to 2********Years** |   | **2 to 3********Years** |   | **3 to 4********Years** |   | **4 to 5********Years** |   | **Total** |   |
|--------------|--------|-----------------------------|---------|-------------------------|--------|-------------------------|--------|-------------------------|--------|-------------------------|--------|-----------|--------|
|         |   | **(Dollars  in Thousands)** |    |
| 2.00 - 2.99% |   | $                           | 14,811  |                    | $      | —                  |   | —                  |   | $                       | — |      | $      | — |   | $ | 14,811 |   |
| 3.00 - 3.99% |   | 56,872                      |    | 1,214                   |   | 136                     |   | 11                      |   | —                  |   | 58,233    |   |
| 4.00 - 4.99% |   | 36,716                      |    | 2,351                   |   | 591                     |   | —                  |   | 886                     |   | 40,544    |   |
| 5.00 - 5.99% |   | 24,546                      |    | 4,021                   |   | 431                     |   | 275                     |   | 250                     |   | 29,523    |   |
| 6.00 - 6.99% |   | 2,958                       |    | 1,009                   |   | 3,650                   |   | 4,499                   |   | 26                      |   | 12,142    |   |
| 7.00 - 7.99% |   | 933                         |    | —                  |   | —                  |   | —                  |   | —                  |   | 933       |   |
| 8.00 - 8.99% |   | —                      |    | —                  |   | 42                      |   | —                  |   | —                  |   | 42        |   |
|         |   | $                           | 136,836 |                    | $      | 8,595                   |   | $                       | 4,850  |                    | $      | 4,785     |   | $ | 1,162 |   | $ | 156,228 |   |
|              |        |                             |         |                         |        |                         |        |                         |        |                         |        |           |        |  |  |  |  |  |  |

 

The following table indicates the amount of our certificates of depositand other deposits by time remaining until maturity as of December 31, 2001.

 
|                                             |   | **Maturity**                |   |                                 |   |
|--------------------------------------------------|--------|-----------------------------|--------|--------------------------------------|--------|
|                                             |   | **3 Months********or Less** |   | **Over********3 to 6********Months** |   | **Over********6 to 12********Months** |   | **Over********12   Months** |   | **Total** |   |
|                                             |   | **(In Thousands)**          |   |
| Certificates of deposit less than  $100,000 |   | $                           | 33,512 |                                 | $      | 24,077 |   | $ | 28,046 |   | $ | 13,853 |   | $ | 99,488 |   |
| Certificates of deposit $100,000 or more    |   | 17,474                      |   | 20,004                               |   | 13,723 |   | 5,539 |   | 56,740 |   |
| Total certificates of deposit                    |   | $                           | 50,986 |                                 | $      | 44,081 |   | $ | 41,769 |   | $ | 19,392 |   | $ | 156,228 |   |

 

For additional information regarding the composition of our deposits,see Note 6 of the Notes to the Consolidated Financial Statements in theAnnual Report attached as Exhibit 13 hereto.

 

***Borrowings.***  Our other available sources of funds includeadvances from the FHLB of Chicago and other borrowings.  Our FHLB advances to date have primarilyconsisted of subsidized borrowings to fund special housing programs.****As a member of the FHLB of Chicago, theBank is required to own capital stock in the FHLB of Chicago and is authorizedto apply for advances from the FHLB of Chicago.  Each FHLB credit program has its own interest rate, which may befixed or variable, and range of maturities. The FHLB of Chicago may prescribe the acceptable uses for theseadvances, as well as limitations on the size of the advances and repaymentprovisions.   At December 31, 2001, theweighted average term to maturity of our FHLB advances was 56.7 months.  See Note 7 of the Notes to ConsolidatedFinancial Statements in the Annual Report attached as Exhibit 13 hereto.

 

26

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The following table sets forth the maximum month-end balance andaverage balance of FHLB advances for the periods indicated.

 
|                                            |   | **Year Ended  December 31,** |   |
|-------------------------------------------------|--------|------------------------------|--------|
|                                            |   | **2001**                     |   | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                                            |   | **(Dollars In Thousands)**   |
| Maximum Balance:                                |   |                         |   |   |   |   |   |   |   |   |   |
| FHLB Advances                                   |   | $                            | 83,600 |   | $ | 65,850 |   | $ | 46,300 |   | $ | 29,000 |   | $ | 12,000 |   |
|                                            |   |                         |   |   |   |   |   |   |   |   |   |
| Average Balance:                                |   |                         |   |   |   |   |   |   |   |   |   |
| FHLB Advances                                   |   | $                            | 68,003 |   | $ | 56,597 |   | $ | 34,607 |   | $ | 21,667 |   | $ | 9,548 |   |
|                                            |   |                         |   |   |   |   |   |   |   |   |   |
| Weighted average interest rate of FHLB advances |   | 5.47                         | %      | 6.03 | % | 5.41 | % | 5.10 | % | 5.72 | % |

 

**Subsidiary Activities**

 

As a federally chartered savings bank, First Security is permitted byOTS regulations to invest up to 2% of its assets in the stock of, or loans to,service corporation subsidiaries, and may invest an additional 1% of its assetsin service corporations where such additional funds are used for inner-city orcommunity development purposes.  Inaddition to investments in service corporations, federal institutions arepermitted to invest an unlimited amount in operating subsidiaries engagedsolely in activities which a federal savings association may engage indirectly.

 

At December 31, 2001, First Security had one wholly owned servicecorporation, Western Security Service Corporation (“Western” or the“Subsidiary”). Western, an Illinois corporation, was incorporated in November1977 for the purpose of offering customers and members of the general publiccredit, life, mortgage and disability insurance.  First Security’s investment in Western was $53,516 as of December31, 2001.  Western recognized net incomeof $24,919 during the year ended December 31, 2001 and $1,665 during the yearended December 31, 2000.

 

**Competition**

 

We face strong competition both in originating real estate loans and inattracting deposits.  Competition inoriginating loans comes primarily from credit unions, mortgage bankers,commercial banks and other savings institutions, which also make loans securedby real estate located in our market area. First Security competes for loans principally on the basis of theinterest rates and loan fees it charges, the types of loans it originates,community outreach and the quality of services it provides to borrowers.

 

Competition for those deposits is principally from credit unions,commercial banks, mutual funds, securities firms and other savings institutionslocated in the same communities.  Theability of the Bank to attract and retain deposits depends on its ability toprovide an investment opportunity that satisfies the requirements of investorsas to rate of return, liquidity, risk, convenient locations and otherfactors.  We compete for these depositsby offering competitive rates, convenient business hours, community outreachand a customer oriented staff.

 

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**Regulations - General**

 

First Security is a federally chartered savings bank, the deposits ofwhich are federally insured and backed by the full faith and credit of theUnited States Government.  Accordingly,First Security is subject to broad federal regulation and oversight extendingto all its operations.  First Securityis a member of the Federal Home Loan Bank (“FHLB”) of Chicago and is subject tocertain limited regulation by the Board of Governors of the Federal ReserveSystem (“Federal Reserve Board”).  Asthe savings and loan holding company of First Security, the Company also issubject to federal regulation and oversight. The purpose of the regulation of the Company and other holding companiesis to protect subsidiary savings associations. First Security is a member of the Savings Association Insurance Fund(“SAIF”) and the deposits of First Security are insured by the Federal DepositInsurance Corporation (“FDIC”).  As aresult, the FDIC has certain regulatory and examination authority over FirstSecurity.

 

Certain of these regulatory requirements and restrictions are discussedbelow or elsewhere in this document.

 

**Federal Regulation of Savings Associations**

 

The Office of Thrift Supervision (“OTS”) has extensive authority overthe operations of savings associations. As part of this authority, First Security is required to file periodicreports with the OTS and is subject to periodic examinations by the OTS and theFDIC.   When these examinations areconducted by the OTS and the FDIC, the examiners may require First Security toprovide for higher general or specific loan loss reserves.  All savings associations are subject to asemi-annual assessment, based upon the savings association’s total assets, tofund the operations of the OTS.

 

The OTS also has extensive enforcement authority over all savingsinstitutions and their holding companies, including First Security and theCompany.  This enforcement authorityincludes, among other things, the ability to assess civil money penalties, toissue cease-and-desist or removal orders and to initiate injunctiveactions.  In general, these enforcementactions may be initiated for violations of laws and regulations and unsafe orunsound practices.  Other actions orinactions may provide the basis for enforcement action, including misleading oruntimely reports filed with the OTS. Except under certain circumstances, public disclosure of finalenforcement actions by the OTS is required.

 

In addition, the investment, lending and branching authority of FirstSecurity is prescribed by federal laws and it is prohibited from engaging inany activities not permitted by such laws. For instance, no savings institution may invest in non-investment gradecorporate debt securities.  In addition,the permissible level of investment by federal associations in loans secured bynon-residential real property may not exceed 400% of total capital, except withapproval of the OTS.  Federal savingsassociations are also generally authorized to branch nationwide.  First Security is in compliance with thenoted restrictions.

 

First Security’s general permissible lending limit forloans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpairedcapital and surplus (except for loans fully secured by certain readilymarketable collateral, in which case this limit is increased to 25% ofunimpaired capital and surplus).  AtDecember 31, 2001, First Security’s lending limit under this restriction was approximately$11.2 million. First Security is in compliance with the loans-to-one-borrowerlimitation.

 

The OTS, as well as the other federal banking agencies, has adoptedguidelines establishing safety and soundness standards on such matters as loanunderwriting and documentation, asset quality, internal controls and auditsystems, interest rate risk exposure and compensation and other employeebenefits.  Any institution which failsto comply with these standards must submit a compliance plan.

 

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**Insurance of Accounts and Regulation by the FDIC**

 

First Security is a member of the SAIF, which is administered by theFDIC.  Deposits are insured up toapplicable limits by the FDIC and such insurance is backed by the full faithand credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums and isauthorized to conduct examinations of and to require reporting by FDIC-insuredinstitutions.  It also may prohibit anyFDIC-insured institution from engaging in any activity the FDIC determines byregulation or order to pose a serious risk to the FDIC.  The FDIC also has the authority to initiateenforcement actions against savings associations, after giving the OTS anopportunity to take such action, and may terminate the deposit insurance if itdetermines that the institution has engaged in unsafe or unsound practices oris in an unsafe or unsound condition.

 

The FDIC’s deposit insurance premiums are assessed through a risk-basedsystem under which all insured depository institutions are placed into one ofnine categories and assessed insurance premiums based upon their level ofcapital and supervisory evaluation. Under the system, institutions classified as well capitalized (*i.e.*, a core capital ratio of at least 5%,a ratio of Tier 1 or core capital to risk-weighted assets (“Tier 1risk-based capital”) of at least 6% and a risk-based capital ratio of at least10%) and considered healthy pay the lowest premium while institutions that areless than adequately capitalized (*i.e.*,core or Tier 1 risk-based capital ratios of less than 4% or a risk-basedcapital ratio of less than 8%) and considered of substantial supervisoryconcern pay the highest premium.  Riskclassification of all insured institutions will be made by the FDIC for eachsemi-annual assessment period.

 

The FDIC is authorized to increase assessment rates, on a semiannualbasis, if it determines that the reserve ratio of the SAIF will be less thanthe designated reserve ratio of 1.25% of SAIF-insured deposits.  In setting these increased assessments, theFDIC must seek to restore the reserve ratio to that designated reserve level,or such higher reserve ratio as established by the FDIC.  The FDIC may also impose special assessmentson SAIF members to repay amounts borrowed from the United States Treasury orfor any other reason deemed necessary by the FDIC.

 

Effective January 1, 1997, the premium schedule for Bank Insurance Fund(“BIF”) and SAIF insured institutions ranged from 0 to 27 basis points.  In addition, all BIF and SAIF insuredinstitutions are required to pay a financing corporation assessment in order tofund the interest on Bonds issued to resolve the thrift failures in the1980s.   Prior to January 1, 2000, SAIFmembers paid about 6 basis points for each $100 of Domestic deposits.  The assessment  was  reduced to 2.12 basispoints as of January 1, 2000, when BIF insured institutions began to fullyparticipate in the assessment.  As ofJanuary 1, 2002, the assessment stood at 1.82 basis points.  These assessments, which may be revisedbased upon the level of BIF and SAIF deposits will continue until the bondsmature in the year 2017.

 

**Regulatory Capital Requirements**

 

Federally insured savings associations, such as First Security arerequired to maintain a minimum level of regulatory capital. The OTS hasestablished capital standards which require the Bank to maintain minimumamounts and ratios of total and Tier I capital to risk-weighted assets and ofTier I capital to qualifying total assets (leverage ratio). These capitalrequirements must be generally as stringent as the comparable capitalrequirements for national banks. The OTS is also authorized to impose capitalrequirements in excess of these standards on individual associations on acase-by-case basis.

 

The capital regulations require a leverage ratio of 4% of adjustedtotal assets (as defined by regulation). Tier I capital, used to calculate theleverage ratio, generally includes common stockholders’ equity and retainedincome and certain noncumulative perpetual preferred stock and related income.In

 

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addition, all intangible assets, other than a limited amount ofpurchased mortgage servicing rights, must be deducted from Tier I capital forcalculating compliance with the requirement. At December 31, 2001, FirstSecurity had $117,000 of intangible assets recorded as assets on its financialstatements, as a result of its acquisition of assets and assumption ofliabilities from the Resolution Trust Corporation in 1994.

 

The OTS regulations establish special capitalization requirements forsavings associations that own subsidiaries. In determining compliance with thecapital requirements, all subsidiaries engaged solely in activities permissiblefor national banks or engaged in certain other activities solely as agent forits customers are “includable” subsidiaries that are consolidated for capitalpurposes in proportion to the association’s level of ownership. For excludablesubsidiaries the debt and equity investments in such subsidiaries are deductedfrom assets and capital.   At December31, 2001 First SecurityFed had no deductions for non-includable subsidiaries.

 

At December 31, 2001, First Security had Tier I capital of $73.3million or 16.8% of adjusted total assets, which is approximately $55.8 millionabove the minimum requirement of 4% of adjusted total assets in effect on thedate.

 

The capital standards also require Tier I capital equal to at least 4%of risk-weighted assets.

 

At December 31, 2001, First Security had Tier I capital equal to $73.3million or 30.5% of risk-weighted assets, which is $63.7 million above theminimum Tier I risk-based capital ratio of 4% in effect on that date.

 

The OTS risk-based requirement requires savings associations to havetotal capital of at least 8% of risk-weighted assets.  Total capital consists of core capital, as defined above, andsupplementary capital.  Supplementarycapital consists of certain permanent and maturing capital instruments that donot qualify as core capital and general valuation loan and lease lossallowances up to a maximum of 1.25% of risk-weighted assets.  Supplementary capital may be used to satisfythe risk-based requirement only to the extent of core capital.  The OTS is also authorized to require asavings association to maintain an additional amount of total capital toaccount for concentration of credit risk and the risk of non-traditionalactivities.  At December 31, 2001, FirstSecurity had $2.8 million of general loss reserves of which $2.8 millionqualifies as supplementary capital, which was less than 1.25% of risk-weightedassets.

 

Certain exclusions from capital and assets are required to be made forthe purpose of calculating total capital. Such exclusions consist of equity investments (as defined by regulation)and that portion of land loans and nonresidential construction loans in excessof an 80% loan-to-value ratio and reciprocal holdings of qualifying capitalinstruments.  First Security had no suchexclusions from capital and assets at December 31, 2001.

 

In determining the amount of risk-weighted assets, all assets,including certain off-balance sheet items, will be multiplied by a risk weight,ranging from 0% to 100%, based on the risk inherent in the type of asset.  For example, the OTS has assigned a riskweight of 50% for prudently underwritten permanent one- to four-family firstlien mortgage loans not more than 90 days delinquent and having a loan to valueratio of not more than 80% at origination unless insured to such ratio by aninsurer approved by the FNMA or FHLMC.

 

On December 31, 2001, First Security had total risk-based capital ofapproximately $76.1 million (including $73.3 million in core capital and $2.8million in qualifying supplementary capital) and risk-weighted assets of $240.8million; or total capital of 31.6% of risk-weighted assets.  This amount was $56.9 million above the 8%requirement in effect on that date.

 

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The OTS and the FDIC are authorized and, under certain circumstancesrequired, to take certain actions against savings associations that fail tomeet their capital requirements.  TheOTS is generally required to take action to restrict the activities of an“undercapitalized association” (generally defined to be one with less thaneither a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio oran 8% risk-based capital ratio).  Anysuch association must submit a capital restoration plan and until such plan isapproved by the OTS may not increase its assets, acquire another institution,establish a branch or engage in any new activities, and generally may not makecapital distributions.  The OTS isauthorized to impose the additional restrictions that are applicable tosignificantly undercapitalized associations.

 

As a condition to the approval of the capital restoration plan, anycompany controlling an undercapitalized association must agree that it willenter into a limited capital maintenance guarantee with respect to theinstitution’s achievement of its capital requirements.

 

Any savings association that fails to comply with its capital plan oris “significantly undercapitalized” (*i.e.*,Tier 1 risk-based or core capital ratios of less than 3% or a risk-basedcapital ratio of less than 6%) must be made subject to one or more ofadditional specified actions and operating restrictions which may cover allaspects of its operations and include a forced merger or acquisition of theassociation.  An association thatbecomes “critically undercapitalized” (*i.e.*,a tangible capital ratio of 2% or less) is subject to further mandatoryrestrictions on its activities in addition to those applicable to significantlyundercapitalized associations.  Inaddition, the OTS must appoint a receiver (or conservator with the concurrenceof the FDIC) for a savings association, with certain limited exceptions, within90 days after it becomes critically undercapitalized.  Any undercapitalized association is also subject to the generalenforcement authority of the OTS and the FDIC, including the appointment of aconservator or a receiver.

 

The OTS is also generally authorized to reclassify an association intoa lower capital category and impose the restrictions applicable to suchcategory if the institution is engaged in unsafe or unsound practices or is inan unsafe or unsound condition.

 

The imposition by the OTS or the FDIC of any of these measures on theAssociation may have substantial adverse effects on its operations andprofitability.

 

**Limitations on Dividends and Other Capital Distributions**

 

OTS regulations impose various restrictions on savings associationswith respect to their ability to make distributions of capital, which includedividends, stock redemptions or repurchases, cash-out mergers and other transactionscharged to the capital account.  OTSregulations also prohibit a savings association from declaring or paying anydividends or from repurchasing any of its stock if, as a result, the regulatorycapital of the association would be reduced below the amount required to bemaintained for the liquidation account established in connection with itsmutual to stock conversion.

 

Generally, savings associations, such as First Security, that beforeand after the proposed distribution remain well-capitalized, may make capitaldistributions during any calendar year equal to 100% of net income for theyear-to-date plus retained net income for the two preceding years.  However, an association deemed to be in needof more than normal supervision by the OTS may have its dividend authorityrestricted by the OTS.  First Securitymay pay dividends in accordance with this general authority.

 

Savings associations proposing to make any capital distribution neednot submit written notice to the OTS prior to such distribution unless they arenot a subsidiary of a holding company or would not remain well capitalizedfollowing the distribution 30 days prior to such distribution.  Savings associations

 

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that do not, or would not meet their current minimum capitalrequirements following a proposed capital distribution, however, must obtainOTS approval prior to making such distribution.  The OTS may object to the distribution during that 30-day periodbased on safety and soundness concerns. See “- Regulatory Capital Requirements.”

 

**Liquidity**

 

Prior to the passage of the Financial Regulatory Relief and EconomicEfficiency Act of 2000 on December 27, 2000, all savings associations,including First Security, were required to maintain an average daily balance ofliquid assets equal to a certain percentage of the average daily balance of itsliquidity base during the preceding calendar quarter or a percentage of theamount of its liquidity base at the end of the preceding quarter.  For a discussion of what First Securityincludes in liquid assets, see “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations - Liquidity and CapitalResources” in the Annual Report attached as Exhibit 13 hereto. This liquidasset ratio requirement would vary from time to time (between 4% and 10%)depending upon economic conditions and savings flows of all savingsassociations.  At the time the rule wasin effect, the minimum liquid asset ratio was 4%.

 

**Qualified Thrift Lender Test**

 

All savings associations, including First Security, are required tomeet a qualified thrift lender (“QTL”) test to avoid certain restrictions ontheir operations.  This test requires asavings association to have at least 65% of its portfolio assets (as defined byregulation) in qualified thrift investments on a monthly average for nine outof every 12 months on a rolling basis. As an alternative, the savings association may maintain 60% of itsassets in those assets specified in Section 7701(a)(19) of the Internal RevenueCode.  Under either test, such assetsprimarily consist of residential housing related loans and investments.  At December 31, 2001, First Security met thetest and has always met the test since its effectiveness.

 

Any savings association that fails to meet the QTL test must convert toa national bank charter, unless it requalifies as a QTL and thereafter remainsa QTL.  If such an association has notyet requalified or converted to a national bank, its new investments andactivities are limited to those permissible for both a savings association anda national bank, and it is limited to national bank branching rights in itshome state.  In addition, theassociation is immediately ineligible to receive any new FHLB borrowings and issubject to national bank limits for payment of dividends.  If such association has not requalified orconverted to a national bank within three years after the failure, it mustdivest of all investments and cease all activities not permissible for a nationalbank.  If any association that fails theQTL test is controlled by a holding company, then within one year after thefailure, the holding company must register as a bank holding company and becomesubject to all restrictions on bank holding companies.  See “- Holding Company Regulation.”

 

**Community Reinvestment Act**

 

Under the Community Reinvestment Act (“CRA”), every FDIC insuredinstitution has a continuing and affirmative obligation consistent with safeand sound banking practices to help meet the credit needs of its entirecommunity, including low and moderate income neighborhoods.  The CRA does not establish specific lendingrequirements or programs for financial institutions nor does it limit aninstitution’s discretion to develop the types of products and services that itbelieves are best suited to its particular community, consistent with theCRA.  The CRA requires the OTS, inconnection with the examination of First Security, to assess the institution’srecord of meeting the credit needs of its community and to take such recordinto account in its evaluation of certain applications, such as a merger or theestablishment of a

 

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branch, by First Security.  Anunsatisfactory rating may be used as the basis for the denial of an applicationby the OTS.

 

The federal banking agencies, including the OTS, have recently revisedthe CRA regulations and the methodology for determining an institution’scompliance with the CRA.  Due to theheightened attention being given to the CRA in the past few years, FirstSecurity may be required to devote additional funds for investment and lendingin its local community.  First Securitywas examined for CRA compliance in July 2001 and received a rating ofsatisfactory.

 

**Transactions with Affiliates**

 

Generally, transactions between a savings bank or its subsidiaries andits affiliates are required to be on terms as favorable to the bank astransactions with non-affiliates.  Inaddition, certain of these transactions, such as loans to an affiliate, arerestricted to a percentage of the bank’s capital.  Affiliates of First Security include the Company and any companywhich is under common control with First Security.  In addition, a savings bank may not lend to any affiliate engagedin activities not permissible for a bank holding company or acquire thesecurities of most affiliates.  The OTShas the discretion to treat subsidiaries of savings banks as affiliates on acase by case basis.

 

Certain transactions with directors, officers or controlling personsare also subject to conflict of interest regulations enforced by the OTS.  These conflict of interest regulations andother statutes also impose restrictions on loans to such persons and theirrelated interests.  Among other things,such loans must be made on terms substantially the same as for loans tounaffiliated individuals.

 

**Holding Company Regulation**

 

The Company is a unitary savings and loan holding company subject toregulatory oversight by the OTS.  Assuch, the Company is required to register and file reports with the OTS and issubject to regulation and examination by the OTS.  In addition, the OTS has enforcement authority over the Companyand its non-savings association subsidiaries which also permits the OTS to restrictor prohibit activities that are determined to be a serious risk to thesubsidiary savings association.

 

As a unitary savings and loan holding company, the Company generally isnot subject to activity restrictions. If the Company acquires control of another savings association as aseparate subsidiary, it would become a multiple savings and loan holdingcompany, and the activities of the Company and any of its subsidiaries (otherthan First Security or any other SAIF-insured savings association) would becomesubject to such restrictions unless such other associations each qualify as aQTL and were acquired in a supervisory acquisition.

 

If First Security fails the QTL test, the Company must obtain theapproval of the OTS prior to continuing after such failure, directly or throughits other subsidiaries, any business activity other than those approved formultiple savings and loan holding companies or their subsidiaries.  In addition, within one year of such failurethe Company must register as, and will become subject to, the restrictionsapplicable to bank holding companies. The activities authorized for a bank holding company are more limitedthan are the activities authorized for a unitary or multiple savings and loanholding company.  See “- QualifiedThrift Lender Test.”

 

The Company must obtain approval from the OTS before acquiring controlof any other SAIF-insured association. Such acquisitions are generally prohibited if they result in a multiplesavings and loan holding company controlling savings associations in more thanone state.  However, such interstate

 

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acquisitions are permitted based on specific state authorization or ina supervisory acquisition of a failing savings association.

 

**Federal Securities Law**

 

The stock of the Company is registered with the SEC under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”).  The Company is subject to the information,proxy solicitation, insider trading restrictions and other requirements of theSEC under the Exchange Act.

 

First SecurityFed Financial, Inc. stock held by persons who areaffiliates (generally officers, directors and principal stockholders) of theCompany may not be resold without registration or unless sold in accordancewith certain resale restrictions.  Ifthe Company meets specified current public information requirements, eachaffiliate of the Company is able to sell in the public market, withoutregistration, a limited number of shares in any three-month period.

 

**Federal Reserve System**

 

The Federal Reserve Board requires all depository institutions tomaintain non-interest bearing reserves at specified levels against theirtransaction accounts (primarily checking, NOW and Super NOW checkingaccounts).  At December 31, 2001, FirstSecurity was in compliance with these reserve requirements.  The balances maintained to meet the reserverequirements imposed by the Federal Reserve Board may be used to satisfyliquidity requirements that may be imposed by the OTS.  See “-Liquidity.”

 

Savings associations are authorized to borrow from the Federal ReserveBank “discount window,” but Federal Reserve Board regulations requireassociations to exhaust other reasonable alternative sources of funds,including FHLB borrowings, before borrowing from the Federal Reserve Bank.

 

**Federal Home Loan Bank System**

 

First Security is a member of the FHLB of Chicago, which is one of 12regional FHLBs, that administers the home financing credit function of savingsassociations.  Each FHLB serves as areserve or central bank for its members within its assigned region.  It is funded primarily from proceeds derivedfrom the sale of consolidated obligations of the FHLB System.  It makes loans to members (*i.e.*, advances) in accordance with policiesand procedures, established by the board of directors of the FHLB, which aresubject to the oversight of the Federal Housing Finance Board.  All advances from the FHLB are required tobe fully secured by sufficient collateral as determined by the FHLB.  In addition, all long-term advances arerequired to provide funds for residential home financing.

 

As a member, First Security is required to purchase and maintain stockin the FHLB of Chicago.  AtDecember 31, 2001, First Security had $12.2 million in FHLB stock, whichwas in compliance with this requirement. In past years, First Security has received substantial dividends on itsFHLB stock. Over the past five calendar years such dividends have averaged6.83% and were 6.50% for calendar year 2001. As a result of its holdings, the Bank could borrow up to $244 millionfrom the FHLB.

 

Under federal law the FHLBs are required to provide funds for theresolution of troubled savings associations and to contribute to low- andmoderately priced housing programs through direct loans or interest subsidieson advances targeted for community investment and low- and moderate-incomehousing projects.  These contributionshave affected adversely the level of FHLB dividends paid and could continue todo so in the future.  Thesecontributions could also have an adverse effect on the value of FHLB stock in

 

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the future.  A reduction invalue of First Security’s FHLB stock may result in a corresponding reduction inFirst Security’s capital.

 

For the year ended December 31, 2001, dividends paid by the FHLBof Chicago to First Security totaled $411,000, which constitutes a $193,200increase from the amount of dividends received in calendar year 2000.

 

**Federal and State Taxation**

 

Savings associations such as First Security  that meet certain conditions prescribed by the Internal RevenueCode of 1986, as amended (the “Code”), were previously  permitted to establish reserves for baddebts and to make annual additions thereto which may, within specified formulalimits, be taken as a deduction in computing taxable income for federal incometax purposes.  The amount of the baddebt reserve deduction is computed under the experience method.  Under the experience method, the bad debtreserve deduction is an amount determined under a formula based generally uponthe bad debts actually sustained by the savings association over a period ofyears.

 

In addition to the regular income tax, corporations, including savingsassociations such as First Security, generally are subject to a minimumtax.  An alternative minimum tax isimposed at a minimum tax rate of 20% on alternative minimum taxable income,which is the sum of a corporation’s regular taxable income (with certainadjustments) and tax preference items, less any available exemption.  The alternative minimum tax is imposed tothe extent it exceeds the corporation’s regular income tax and net operatinglosses can offset no more than 90% of alternative minimum taxable income.

 

A portion of the Bank’s reserves for losses on loans may not, withoutadverse tax consequences, be utilized for the payment of cash dividends orother distributions to a shareholder (including distributions on redemption,dissolution or liquidation) or for any other purpose (except to absorb bad debtlosses).  As of December 31, 2001,First Security’s excess for tax purposes totaled approximately $2.0 million.

 

First Security files its federal, state and local income tax returns ona calendar year basis using the accrual method of accounting.

 

First Security has not been audited by the IRS with respect toconsolidated federal income tax returns in the past five years. With respect toyears examined by the IRS, either all deficiencies have been satisfied orsufficient reserves have been established to satisfy asserteddeficiencies.   In the opinion ofmanagement, any examination of still open returns (including returns ofsubsidiary and predecessors of, or entities merged into, First Security) wouldnot result in a deficiency which could have a material adverse effect on thefinancial condition of First Security and its consolidated subsidiary.

 

***Illinois Taxation***.  For Illinois income tax purposes, the Bankis taxed at an effective rate equal to 7.18% of Illinois taxable income.   For these purposes, “Illinois TaxableIncome” generally means federal taxable income, subject to certain adjustments(including the addition of interest income on state and municipal obligationsand the exclusion of interest income on United States Treasury obligations).

 

***Delaware Taxation***.  As a Delaware holding company, the Companyis exempted from Delaware corporate income tax but is required to file anannual report with and pay an annual fee to the State of Delaware.  The Company is also subject to an annualfranchise tax imposed by the State of Delaware.

 

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**Employees**

 

At December 31, 2001, the Company, including its subsidiaries, had atotal of 96 employees, including 25 part-time employees.  Our employees are not represented by anycollective bargaining group.  Management considers its employee relations to be good.

 

**Executive Officers of the Corporation Who Are Not Directors**

 

The business experience of each executive officer who is not also a directoris set forth below.

 

Harry Kucewicz.  Mr. Kucewicz,age 45, is currently serving as the Treasurer and Chief Financial Officer ofboth the Corporation and Bank.  He beganworking at the Bank in 1978 as the Controller. He was elected Treasurer and Chief Financial Officer in 1990.  Mr. Kucewicz is responsible for all of theCorporation’s and Bank’s financial and accounting functions.

 

Mary H. Korb.  Ms. Korb, age 54,is currently Vice President of the Corporation and Vice President - Lending ofthe Bank.  Ms. Korb supervises allaspects of the Bank’s lending operations, including lending compliance.  Ms. Korb has been with the Bank since 1970,and has served in her present capacity since March 1991.

 

Irene S. Subota.  Ms. Subota,age 55, currently serves as Vice President of the Corporation and as VicePresident - Savings of the Bank.  Ms.Subota is in charge of all aspects of the Bank’s savings function, includingcompliance.  Ms. Subota has beenemployed by the Bank since 1973, and has served in her current position since1992.

 

Adrian Hawryliw.  Mr. Hawryliw,age 65, has served as Philadelphia Branch Manager of the Bank since 1994 whenthe Philadelphia, Pennsylvania branch was acquired from the Resolution TrustCorporation, and is currently a Vice President of the Bank and of theCorporation.  Mr. Hawryliw isresponsible for supervising operations of the Philadelphia, Pennsylvaniabranch, including business development, retail deposits, real estate lending,accounting and marketing.  He has over34 years of banking experience in the Philadelphia area, holding variouspositions including Chief Financial Officer and Vice President/Investments forother area institutions.

 

Paul T. Bandriwsky.  Mr.Bandriwsky, age 46, is currently Vice President and Chief Operating Officer ofboth the Corporation and the Bank.   Hebegan working at the Bank in 2000 and was appointed to his present capacity atthat time.  Mr. Bandriwsky has over 20years of experience in banking management, lending and real estate.  His is responsible for the day-to-dayoperations of the Bank’s retail banking branches, human resources andmarketing/advertising.

 

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**Item 2.****             Properties**

 

The following table sets forth information concerning the main officeand each branch office of the Bank at December 31, 2001.  At December 31, 2001, the Bank’s premiseshad an aggregate net book value of approximately $2.5 million.

 
| **Location**                                          |   | **Year********Acquired/********Established** |   | **Owned or********Leased** |   | **Net Book Value at********December 31, 2001** |   | **Deposits** |   |
|-------------------------------------------------------|--------|----------------------------------------------|--------|----------------------------|--------|------------------------------------------------|--------|--------------|--------|
|                                                  |   | **(In Thousands)**                           |   |
| *Main Office:*                                        |   |                                         |   |                       |   |                                           |   |         |   |
|                                                  |   |                                         |   |                       |   |                                           |   |         |   |
| 936 North Western AvenueChicago, Illinois 60622-4695  |   | 1964                                         |   | Owned                      |   | $                                              | 818    |         | $      | 171,247 |   |
|                                                  |   |                                         |   |                       |   |                                           |   |         |   |
| *Branch Offices:*                                     |   |                                         |   |                       |   |                                           |   |         |   |
|                                                  |   |                                         |   |                       |   |                                           |   |         |   |
| 2166 Plum Grove RoadRolling Meadows, Illinois 60008   |   | 1977                                         |   | Leased                     | (1)    | —                                         |   | 12,197       |   |
|                                                  |   |                                         |   |                       |   |                                           |   |         |   |
| 820 N. Western AvenueChicago, Illinois 60622          |   | 1983                                         |   | Owned                      |   | 197                                            |   | 2,463        |   |
|                                                  |   |                                         |   |                       |   |                                           |   |         |   |
| 5670 N. Milwaukee AvenueChicago, Illinois  60646 |   | 1993                                         |   | Owned                      |   | 993                                            |   | 18,103       |   |
|                                                  |   |                                         |   |                       |   |                                           |   |         |   |
| 7918 Bustleton AvenuePhiladelphia, Pennsylvania 19152 |   | 1994                                         |   | Owned                      |   | 511                                            |   | 64,847       |   |
|                                                       |        |                                              |        |                            |        |                                                |        |              |        |  |  |

 

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(1)     The lease expires in July2003.

 

We believe that our current facilities areadequate to meet our present and foreseeable future needs.  However, in the future, we may consider theaddition of one or more new branches within the Chicago or Philadelphia areaswhether through purchase, acquisition or otherwise.

 

The Bank’s depositor and borrower customerfiles are maintained by an independent data processing company.  The net book value of the data processingand computer equipment utilized by the Bank at December 31, 2001 wasapproximately $264,100.

 

**Item 3.****             Legal Proceedings**

 

From time to time, First Security is involvedas plaintiff or defendant in various legal proceedings arising in the normalcourse of its business.  While theultimate outcome of these various legal proceedings cannot be predicted withcertainty, it is the opinion of management that the resolution of these legalactions should not have a material effect on the Company’s and the Bank’sfinancial position or results of operations.

 

37

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**Item 4.****             Submission of Matters to a Voteof Security Holders**

 

No matter was submitted to a vote of securityholders, through the solicitation of proxies or otherwise, during the quarterended December 31, 2001.

 

**PART II**

 

**Item 5.****             Market for Registrant’s CommonEquity and Related Stockholder Matters**

 

Pages 47 and 48 of the attached 2001 AnnualReport to Stockholders is herein incorporated by reference.

 

**Item 6.****             Selected Financial Data**

 

Pages 2 and 3 of the attached 2001 AnnualReport to Stockholders is herein incorporated by reference.

 

**Item 7.****             Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

Pages 4 through 17 of the attached 2001Annual Report to Stockholders is herein incorporated by reference.

 

**Item 8.****             Financial Statements andSupplementary Data**

 

Pages 18 through 46 of the attached 2001Annual Report to Stockholders is herein incorporated by reference.

 

**Item 9.****             Changes in and DisagreementsWith Accountants on Accounting and Financial Disclosure**

 

There has been no Current Report on Form 8-Kfiled within 24 months prior to the date of the most recent financial statementsreporting a change of accountants and/or reporting disagreements on any matterof accounting principle or financial statement disclosure.

 

**PART III**

 

**Item 10.****           Directors and Executive Officersof the Registrant**

 

**Directors**

 

Information concerning Directors of theCorporation is incorporated herein by reference from the definitive ProxyStatement for the Annual Meeting of Stockholders to be held in April 2002 acopy of which will be filed not later than 120 days after the close of thefiscal year.

 

**Executive Officers**

 

Information regarding the business experienceof the executive officers of the Corporation and the Bank who are not alsodirectors contained in Part I of this Form 10-K is incorporated herein byreference.

 

38

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**Section 16(a) Beneficial Ownership Reporting Compliance**

 

Section 16(a) of the Securities Exchange Actof 1934 requires the Company’s directors and executive officers, and personswho own more than 10% of the Company’s Common Stock (or any other equitysecurities, of which there is none), to file with the SEC initial reports ofownership and reports of changes in ownership of the Company’s CommonStock.  Officers, directors and greaterthan 10% shareholders are required by SEC regulations to furnish the Companywith copies of all Section 16(a) forms they file.

 

To the Company’s knowledge, based solely on areview of the copies of such reports furnished to the Company and writtenrepresentations that no other reports were required during the fiscal yearended December 31, 2001, all Section 16(a) filing requirements applicable toits officers, directors and greater than 10% beneficial owners were compliedwith except that Paul T. Bandriwsky inadvertently filed a late Form 5 regardingan award of restricted stock and a grant of stock options received during thefiscal year ended December 31, 2001.

 

**Item 11.****           Executive Compensation**

 

Information concerning executive compensationis incorporated herein by reference from the definitive Proxy Statement for theAnnual Meeting of Stockholders to be held in April, 2002, a copy of which willbe filed not later than 120 days after the close of the fiscal year.

 

**Item 12.****           Security Ownership of CertainBeneficial Owners and Management**

 

Information concerning security ownership ofcertain beneficial owners and management is incorporated herein by referencefrom the definitive Proxy Statement for the Annual Meeting of Stockholders tobe held in April, 2002, a copy of which will be filed not later than 120 daysafter the close of the fiscal year.

 

**Item 13.****           Certain Relationships and RelatedTransactions**

 

Information concerning certain relationshipsand related transactions is incorporated herein by reference from thedefinitive Proxy Statement for the Annual Meeting of Stockholders to be held inApril, 2002 a copy of which will be filed not later than 120 days after theclose of the fiscal year.

 

**PART IV**

 

**Item 14.****           Exhibits, Financial StatementSchedules and Reports on Form 8-K**

 

**(a)(1)  Financial Statements:**

 

The following financial statements areincluded in this Form 10-K:

 

1.       Five-YearSummary of Selected Consolidated Financial Data.

2.       Reportof Independent Auditors

3.       ConsolidatedBalance Sheets at December 31, 2001 and 2000.

4.       ConsolidatedStatements of Income for the fiscal years ended December 31, 2001, 2000 and1999.

5.       ConsolidatedStatements of Comprehensive Income for the fiscal years ended December 31,2001, 2000 and 1999.

 

39

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6.       ConsolidatedStatements of Shareholders’ Equity for the fiscal years ended December 31,2001, 2000 and 1999.

7.       ConsolidatedStatements of Cash Flows for the fiscal years ended December 31, 2001, 2000 and1999.

8.       Notesto Consolidated Financial Statements.

 

**(a)(2)Financial Statement Schedules****:**

 

All financial statement schedules have beenomitted as the required information is inapplicable or has been included in theNotes to Consolidated Financial Statements.

 

**(a)(3)Exhibits****:**

 

See Exhibit Index.

 

**(b)  Reports on Form 8-K**:

 

There were no current reports on Form 8-K filed by the Corporation during thequarter ended December 31, 2001.

 

40

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**SIGNATURES**

 

Pursuant to the requirements of Section 15(d)of the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| /s/  Julian E. Kulas                             |           |                                              | /s/  Steve Babyk           |   |
|--------------------------------------------------|----------------|---------------------------------------------------|----------------------------|--------|
| Julian  E. Kulas                                 |           | Steve  Babyk                                      |
| President,  Chief Executive Officer and Director |           | Director                                     |
| *(Principal Executive Officer)*                  |           |                                              |
|                                             |           |                                              |
| Date:                                            | April  1, 2002 |                                              |                       | Date:  | April  1, 2002 |   |
|                                             |           |                                              |
|                                             |           |                                              |
| /s/  Lila Maria Bodnar                           |           |                                              | /s/  Myron Dobrowolsky     |   |
| Lila  Maria Bodnar                               |           | Myron  Dobrowolsky                                |
| Recording  Secretary and Director           |           | Director                                     |
|                                             |           |                                              |
| Date:                                            | April  1, 2002 |                                              |                       | Date:  | April  1, 2002 |   |
|                                             |           |                                              |
|                                             |           |                                              |
| /s/  Terry Gawryk                                |           |                                              | /s/  George Kawka          |   |
| Terry  Gawryk                                    |           | George  Kawka                                     |
| Secretary  and Director                     |           | Director                                     |
|                                             |           |                                              |
| Date:                                            | April  1, 2002 |                                              |                       | Date:  | April  1, 2002 |   |
|                                             |           |                                              |
|                                             |           |                                              |
| /s/  Paul Nadzikewycz                            |           |                                              | /s/  Jaroslav H. Sydorenko |   |
| Paul  Nadzikewycz                                |           | Jaroslav  H. Sydorenko                            |
| Chairman  of the Board                      |           | Director                                     |
|                                             |           |                                              |
| Date:                                            | April  1, 2002 |                                              |                       | Date:  | April  1, 2002 |   |
|                                             |           |                                              |
|                                             |           |                                              |
| /s/  Chrysta Wereszczak                          |           |                                              | /s/  Harry Kucewicz        |   |
| Chrysta  Wereszczak                              |           | Harry  Kucewicz                                   |
| Director                                    |           | Principal  Financial and Accounting Officer  |
|                                             |           |                                              |
| Date:                                            | April  1, 2002 |                                              |                       | Date:  | April  1, 2002 |   |

 

41

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**EXHIBITINDEX**

 
| **Regulation********S-K********Exhibit********Number** |   | **Document**                                                                                                    |   | **Reference to********Prior Filing********or Exhibit********Number********Attached********Hereto** |   |
|--------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|
| 2                                                      |   | Plan  of acquisition, reorganization, arrangement, liquidation or succession                                    |   | None                                                                                               |   |
| 3(a)                                                   |   | Certificate  of Incorporation                                                                                   |   | *                                                                                                  |   |
| 3(b)                                                   |   | By-Laws                                                                                                         |   | **                                                                                                 |   |
| 4                                                      |   | Instruments  defining the right of security holders, including debentures                                       |   | *                                                                                                  |   |
| 9                                                      |   | Voting  Trust Agreement                                                                                         |   | None                                                                                               |   |
| 10                                                     |   | Executive  Compensation Plans and Arrangements                                                                  |   |                                                                                               |   |
|                                                   |   | (a)  Employment Agreement between Julian E.  Kulas and the Bank.                                           |   | *                                                                                                  |   |
|                                                   |   | (b)  Change-In-Control Severance Agreement  between Harry I.Kucewicz  and     the Bank |   | *                                                                                                  |   |
|                                                   |   | (c)  Change-In-Control Severance Agreement  between Mary H.Korb and the  Bank                              |   | *                                                                                                  |   |
|                                                   |   | (d)  Change-In-Control Severance Agreement  between Irene S. Subotaand the Bank                            |   | *                                                                                                  |   |
|                                                   |   | (e)  Change-In-Control Severance Agreement  between Adrian Hawryliw and the Bank                           |   | *                                                                                                  |   |
|                                                   |   | (f)  1998 Stock Option and Incentive Plan                                                                  |   | ***                                                                                                |   |
|                                                   |   | (g)  1998 Recognition and Retention Plan                                                                   |   | ***                                                                                                |   |
| 11                                                     |   | Statement  re:  computation of per share earnings                                                          |   | None                                                                                               |   |
| 12                                                     |   | Statement  re:  computation of ratios                                                                      |   | Not required                                                                                       |   |
| 13                                                     |   | Annual  Report to Security Holders                                                                              |   | 13                                                                                                 |   |
| 16                                                     |   | Letter  re:  change in certifying accountants                                                              |   | None                                                                                               |   |
| 18                                                     |   | Letter  re:  change in accounting principles                                                               |   | None                                                                                               |   |
| 21                                                     |   | Subsidiaries  of Registrant                                                                                     |   | 21                                                                                                 |   |
| 22                                                     |   | Published  report regarding matters submitted to vote of security holders                                       |   | None                                                                                               |   |
| 23                                                     |   | Consent  of Independent Auditor                                                                                 |   | —                                                                                             |   |
| 24                                                     |   | Power  of Attorney                                                                                              |   | Not Required                                                                                       |   |
| 99                                                     |   | Additional  Exhibits                                                                                            |   | None                                                                                               |   |

 

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*                                         Filed as an Exhibit to theCompany’s Form S-1 Registration Statement filed on July 21, 1997 (File No.333-31739) pursuant to Section 5 of the Securities Act of 1933.  All of such previously filed documents arehereby incorporated herein by reference in accordance with Item 601 ofRegulation S-K.

**                                  Filed as anExhibit to the Company’s Form 10-Q Quarterly report filed on November 15,1999(File No. 000-23063) pursuant to Section 12 of the Securities Exchange Act of1934. All of such previously filed documents are hereby incorporated byreference in accordance with Item 601 of Regulation S-K.

 

***                           Filed as anExhibit to the Company’s Definitive Proxy Statement on Schedule 14A on March24, 1998 (File No. 0-23063).  All ofsuch previously filed documents are hereby incorporated herein by reference inaccordance with Item 601 of Regulation S-K.

 

42

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