10-K 1 form10-k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2001 [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 Commission File No.: 0-21491 BIG FOOT FINANCIAL CORP. (Exact name of registrant as specified in its charter) ILLINOIS (State or other jurisdiction of incorporation or organization) 36-4108480 (I.R.S. Employer Identification No.) 1190 RFD, LONG GROVE, IL (Address of principal executive offices) 60047-7304 (Zip code) (847) 634-2100 (Registrant's telephone number including area code) Securities registered pursuant to Section 12(b) of the Act: NONE. Securities registered pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS ------------------- COMMON STOCK, $.01 PAR VALUE PER SHARE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes__X__ No ____ Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting and non-voting common equity of the Registrant by non-affiliates was approximately $13.5 million as of September 14, 2001. As of September 14, 2001, 1,509,168 shares of the Registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's 2001 Annual Report to Stockholders are incorporated by reference in Part II. Portions of the Registrant's Proxy Statement for its 2001 Annual Meeting of Stockholders are incorporated by reference in Part III. BIG FOOT FINANCIAL CORP. REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2001 TABLE OF CONTENTS

-------------------------------------------------------------------------------- FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K contains certain forward looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include: changes in general, economic and market conditions; the development of an adverse interest rate environment that adversely affects the interest rate spread or other income anticipated from the Company's operations and investments; and depositor and borrower preferences. -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS GENERAL. Big Foot Financial Corp. (the "Company"), an Illinois corporation, is the holding company for Fairfield Savings Bank, F.S.B. (the "Bank"), a federally chartered stock savings bank. On December 19, 1996 the Company issued and sold 2,512,750 shares of its common stock, $.01 par value per share (the "Common Stock"), at a price of $10.00 per share in a subscription offering. The Company's sole business activity consists of the business of the Bank. The Company also invests in long and short-term investment grade marketable securities and other liquid investments. At June 30, 2001, the Company had total assets of $223.6 million, of which $170.2 million was comprised of loans receivable and $22.4 million was comprised of mortgage-backed securities. At such date, total savings deposits were $128.2 million, borrowings were $61.0 million and stockholders' equity was $28.1 million. The Company's common stock is quoted on the National Market System of the Nasdaq Stock Market under the symbol "BFFC." Unless otherwise disclosed, the information presented in this Annual Report on Form 10-K represents the activity of the Bank for the period prior to December 19, 1996 and the activity of Big Foot Financial Corp. consolidated thereafter. Unless the context otherwise requires, all references herein to the Bank or the Company include the Company and the Bank on a consolidated basis. In connection with its public offering, the Bank changed its fiscal year-end to June 30. The Company's and the Bank's fiscal year 1997 consisted of the 11-month period beginning August 1, 1996 and ending June 30, 1997. The Company believes that it is appropriate to compare the results for the 11-month period ended June 30, 1997 with the years ending June 30, 2001, 2000, 1999 and 1998. The Bank was originally founded in 1901 as an Illinois state chartered mutual savings and loan association. On July 1, 1991, the Bank converted to a federally chartered mutual savings bank. The Bank is subject to extensive regulation, supervision and examination by the Office of Thrift Supervision (the "OTS"), its primary regulator, and the Federal Deposit Insurance Corporation (the "FDIC"), which insures its deposits. The Bank's savings deposits are insured up to the maximum allowable amount by the Savings Association Insurance Fund (the "SAIF") of the FDIC. The Bank does not have any subsidiary operations. The Bank's principal business consists of gathering savings deposits from the general public within its market area and investing those savings deposits primarily in one- to four-family residential mortgage loans, mortgage-backed securities and obligations of the U.S. Government. To a lesser extent, the Bank originates multifamily residential loans, commercial real estate loans, land, construction and development loans, consumer loans (including loans secured by savings deposits) and commercial lines of credit. The Bank's revenues are derived principally from interest on mortgage loans and mortgage-backed securities. The Bank's primary sources of funds are savings deposits, proceeds from principal and interest payments on loans, mortgage-backed and investment securities and Federal Home Loan Bank ("FHLB") advances. 3 MARKET AREA. The Bank is a community-oriented financial institution which provides a variety of financial services to meet the needs of the communities which it serves. The Bank serves three distinct geographic markets: the Chicago branch at 1601 North Milwaukee Avenue serves the near northwest side of the City of Chicago, the Norridge branch at 8301 West Lawrence serves Chicago's near northwestern suburbs and the Long Grove branch at Old McHenry Road and Route 83 serves northern Cook and southern Lake counties. The Bank's customer base may be categorized by branch location. In the Chicago branch, the customer base is largely comprised of blue collar workers and young white collar technicians and professionals. The Chicago market is experiencing new construction and a refurbishing of its existing aged housing stock and is an active mortgage market as well as a savings market. The Norridge branch serves a customer base split between blue and white collar workers where the market is well established. The Norridge market has modest prospects for growth; however, it provides the Bank with a stable source of deposits and loan demand. The Long Grove office is situated in an affluent, high growth, white collar market. This is a dynamic market which provides the Bank with significant loan demand and potential for growth opportunities in savings and lending activities. Substantially all loans originated by the Bank are secured by real estate located in Cook, DuPage and Lake counties in Illinois. COMPETITION. The Bank faces intense and increasing competition both in making loans and in attracting savings deposits. The Bank's market area has a high density of financial institutions, many of which have greater financial resources, name recognition and market presence than the Bank, and all of which are competitors of the Bank to varying degrees. The Bank's competition for loans comes principally from commercial banks, other savings banks, savings and loan associations, mortgage banking companies, finance companies and credit unions. The Bank's most direct competition for savings deposits historically has come from other savings banks, savings and loan associations, commercial banks and credit unions. In addition, the Bank faces increasing competition for savings deposits from non-bank institutions such as brokerage firms, insurance companies, money market mutual funds, other mutual funds (such as corporate and government securities funds) and annuities. Trends toward the consolidation of the banking industry and the lifting of interstate banking and branching restrictions may make it more difficult for smaller institutions, such as the Bank, to compete effectively with large national and regional banking institutions. While the Bank is subject to competition from other financial institutions which may have much greater financial and marketing resources, the Bank believes it benefits by its community bank orientation as well as its relatively high core deposit base. Management believes that the variety, depth and stability of the communities in which the Bank is located support the service and lending activities conducted by the Bank. The relative economic stability of the Bank's lending area is reflected in the small number of mortgage delinquencies experienced by the Bank. IMPACT OF THE ECONOMY ON OPERATIONS. Declines in the local economy, national economy or real estate market could adversely affect the financial condition and results of operations of the Bank, including decreased demand for loans or increased competition for good loans, increased non-performing loans and loan losses and resulting additional provisions for loan losses and for losses on foreclosed real estate. 4 LENDING ACTIVITIES LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists primarily of conventional first mortgage loans secured by one- to four-family residences. At June 30, 2001, the Bank had gross loans receivable outstanding of $170.7 million, of which $168.6 million, or 98.6% of gross loans, were one- to four-family residential mortgage loans. The remainder consisted of $0.9 million of multifamily mortgage loans, or 0.6% of gross loans; $0.3 million of commercial real estate mortgage loans, or 0.2% of gross loans; $0.8 million of home equity loans, or 0.5% of gross loans; and $88,000 of other loans, or 0.1% of gross loans. The loans that the Bank may originate are subject to federal and state laws and regulations. Interest rates charged by the Bank on loans are affected by the demand for such loans, the supply of money available for lending purposes and the rates offered by competitors. These factors are in turn affected by, among other things, economic conditions, monetary policies of the federal government, including the Board of Governors of the Federal Reserve System (the "FRB"), and legislative tax policies. All of the Bank's lending is subject to its written, nondiscriminatory underwriting standards and to loan origination procedures prescribed by the Bank's Board of Directors the majority of which, in the case of one- to four-family residential mortgage loans, conform to the Federal National Mortgage Association ("Fannie Mae") standards. Property valuations by a member of the Bank's appraisal staff or independent appraisers approved by the Board of Directors are required. Detailed loan applications are obtained to determine the borrower's ability to repay, and the more significant items on these applications are verified through the use of credit reports, financial statements and confirmations. Generally, the Bank will lend against the appraised value of property up to a maximum loan to value ratio of 95%. Private mortgage insurance is required on all loans with loan to value ratios greater than 80%. All loans are approved by the full Board of Directors. Mortgage loans originated by the Bank generally include due on sale clauses which provide the Bank with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property without the Bank's consent. Due on sale clauses are an important means of adjusting the rates of the Bank's fixed-rate mortgage loan portfolio, and the Bank has generally exercised its rights under these clauses. It is the Bank's policy to require title insurance policies certifying or insuring that the Bank has a valid first lien on the mortgaged real estate. Borrowers must also obtain hazard insurance policies prior to closing and, where necessary, flood insurance policies. Most borrowers are required to maintain a noninterest-bearing escrow account or a pledged passbook savings account with the Bank to cover charges for real estate taxes, hazard insurance premiums and assessments. Under applicable federal law, the aggregate amount of loans that the Bank is permitted to make to any one borrower is generally limited to 15% of unimpaired capital and surplus (25% if the security for such loan has a "readily ascertainable" value or 30% for certain residential development loans). At June 30, 2001, based on the above, the Bank's regulatory loans to one borrower limit was approximately $3.3 million. At June 30, 2001, the two largest dollar amounts outstanding to one borrower or group of related borrowers were approximately $500,000 and $495,000. Both of these loans are secured by one- to four-family properties located in the Bank's market area and, at June 30, 2001, were performing in accordance with their terms. 5 The following table sets forth the composition of the Bank's mortgage and other loan portfolios in dollar amounts and in percentages at the dates indicated.

---------------------- (1) Multifamily includes participation in Community Investment Corporation ("CIC") of $386,000 at June 30, 2001, $386,000 at June 30, 2000, $333,000 at June 30, 1999, $389,000 at June 30, 1998, $413,000 at June 30, 1997. CIC is a not-for-profit tax-exempt corporation whose purpose is to focus the resources and expertise of the financial community to revitalize certain neighborhoods in Chicago. MORTGAGE LOANS. At June 30, 2001, over 98.8% of the Bank's $170.6 million mortgage loan portfolio consisted of mortgage loans secured by one- to four-family residential real estate. While the Bank offers adjustable-rate mortgage products, the Bank's customer base has historically favored fixed-rate mortgage loans, which are generally priced off the Fannie Mae delivery rate with adjustments relating to local competition and the availability of funds. At June 30, 2001, approximately 97.2% of the Bank's mortgage portfolio was comprised of fixed-rate loans. The balance of the mortgage loan portfolio was comprised of adjustable rate loans, including approximately $3.6 million of one-to four-family residential mortgages, the majority of which are tied to the National Cost of Funds or Treasury Bill Indexes and adjust annually to rates from 2.5% to 2.75% over the Index. These loans carry annual caps and life-of-the-loan ceilings to protect borrowers against sudden rate volatility. Generally, adjustable rate mortgage loans pose credit risks somewhat greater than the credit risk inherent in fixed-rate loans primarily because, as interest rates rise, the underlying payments of the borrowers rise, increasing the potential for default. It is the Bank's policy to underwrite its adjustable rate mortgage loans based on the fully indexed origination rate. The Bank currently has no mortgage loans that are subject to negative amortization. Management intends to continue to emphasize fixed rate loans secured by single family owner-occupied units. The Bank also makes home equity loans. LAND, CONSTRUCTION AND DEVELOPMENT LOANS. The Bank offers a residential construction loan program for custom home buyers and builders, who typically have a longstanding business relationship with the Bank. The Bank has established additional guidelines and progress pay-out procedures for these loans in recognition of the higher degree of risk involved in making such loans. 6 MULTIFAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE. Multifamily residential and commercial real estate and land loans are generally considered to involve a higher degree of credit risk than one- to four-family residential mortgage loans. This greater risk is attributable to several factors, including the higher concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multifamily residential and commercial real estate is typically dependent upon sufficient cash flow from the related real estate project to cover operating expenses and debt service. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed), the borrower's ability to repay the loan may be impaired. Circumstances outside the borrower's control may adversely affect income from the multifamily or commercial property as well as its market value. OTHER LOANS. The Bank also makes short term fixed-rate and adjustable-rate other loans, such as loans secured by savings accounts and commercial lines of credit. These loans generally have an average life of less than two years. The shorter terms to maturity and the short term repricing periods are helpful in managing the Bank's interest rate risk. ORIGINATION OF LOANS. Loans are originated by the Bank's staff of salaried loan officers. Residential loan originations can be attributed to depositors, retail customers, telephone inquiries, newspaper ads, loan officers, and referrals from other borrowers, real estate brokers and builders. Loan applications are taken and processed at each of the Bank's offices. Historically, the bulk of all loans originated by the Bank have been retained in the Bank's portfolio. The following table sets forth the Bank's loan originations, loan sales and principal repayments for the periods indicated.

7 INCOME FROM LENDING ACTIVITIES. The Bank realizes interest income and servicing fee income from its lending activities. For the most part, interest rates charged by the Bank on loans are determined by local competition, although they also reflect general interest rates, demand for loans and availability of funds. The Bank charges service fees, late payment and other miscellaneous service fees. During the years ended June 30, 2001, 2000, and 1999, the Bank recognized fees totaling $17,000, $15,000, and $16,000, respectively. LOAN MATURITY. The following table shows the contractual maturity of the Bank's loan portfolio at June 30, 2001. Loans are shown as due based on their contractual terms to maturity rather than when interest rates are next subject to change. The table does not include prepayments or scheduled principal amortization.

The following table sets forth at June 30, 2001, the dollar amount of loans due after June 30, 2002, and whether such loans have fixed interest rates or adjustable interest rates.

8 DELINQUENCIES AND NON-PERFORMING ASSETS DELINQUENCY PROCEDURES. When a borrower fails to make a required payment on a loan, the Bank attempts to cause the deficiency to be cured by contacting the borrower. Contacts are made after a payment is more than 15 days past due, and a late charge is assessed at that time. In most cases, deficiencies are cured promptly. If the deficiency exceeds 90 days and is not cured through the Bank's normal collection procedures, the Bank may institute measures to remedy the default, including commencing a foreclosure action or accepting from the mortgagor a voluntary deed of the secured property in lieu of foreclosure. If a foreclosure action is instituted and the loan is not reinstated, paid in full or refinanced, the property is sold at a judicial sale. If the Bank acquires the property at judicial sale or accepts a voluntary deed of the secured property in lieu of foreclosure, the acquired property is then listed in the Bank's Foreclosed Real Estate ("FRE") account until it is sold. At June 30, 2001, the Bank had no FRE. The Bank is permitted to finance sales from its FRE account by "loans to facilitate," which involve a lower down payment or a longer repayment term or other more favorable features than generally would be granted under the Bank's underwriting guidelines. At June 30, 2001, the Bank had no such "loans to facilitate." The following table sets forth information with respect to the Bank's non-performing assets (which includes loans that are delinquent for 90 days or more and FRE) at the dates indicated. At June 30, 2001, there were no loans other than those included in the table below with regard to which management had information about possible credit problems of the borrower that caused management to seriously doubt the ability of the borrower to comply with present loan repayment terms.

A loan is placed on non-accrual status when it becomes 90 days or more delinquent and when the collection of principal and/or interest becomes doubtful. At June 30, 2001, the Bank had no non-accrual loans. At June 30, 2000, the Bank had one single family residential loan with an outstanding principal balance of $113,000 that was non-accruing. At June 30, 1999, the Bank had one single family residential loan with an outstanding principal balance of $70,000 that was non-accruing. For the years ended June 30, 2001 and 2000 and 1999 the amount of interest income that would have been recorded on non-accrual loans had 9 such loans been accruing interest in accordance with their terms was $0, $4,000, and $4,000 respectively. Interest earned on loans 90 days or more delinquent and still accruing interest amounted to $11,000, $9,000, and $11,000 for the fiscal years ended June 30, 2001, 2000 and 1999, respectively. The Bank's non-performing assets at June 30, 2001, consisted of a single one- to four- family residential loan with an outstanding principal balance of $112,000. The Bank's non-performing assets at June 30, 2000, consisted of two one- to four-family residential loans with an aggregate outstanding principal balance of $249,000, and a single one- to four- family FRE property with a carrying balance of $78,000. The Bank's non-performing assets at June 30, 1999 consisted of two one-to four-family residential loans, with an aggregate outstanding principal balance of $186,000 and one multi-family residential loan with an outstanding principal balance of $7,000. The properties underlying the non-performing loans and the FRE are located in the Chicago metropolitan area. CLASSIFIED ASSETS. OTS regulations require that each saving association classify its assets on a regular basis and establish prudent valuation allowances based on such classifications. In addition, in connection with examinations of savings associations, OTS examiners have authority to identify problem assets and, if appropriate, require them to be classified. OTS regulations provide for three adverse classifications for problem assets: Substandard, Doubtful and Loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the savings association will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of Substandard assets, with the additional characteristics that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high probability of loss. An asset classified Loss is considered uncollectible and of such little value that its continuance as an asset of the institution is not warranted. The regulations have also created a Special Mention category, consisting of assets which do not currently expose a savings association to a sufficient degree of risk to warrant classifications, but do possess credit deficiencies or potential weaknesses deserving management's close attention. Assets classified as Substandard or Doubtful require the savings association to establish prudent valuation allowances. If an asset or portion thereof is classified as Loss, the association must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified Loss or charge off such amount. If an association does not agree with an examiner's classification of an asset, it may appeal this determination to the District Director of the OTS. On the basis of management's review of its loans at June 30, 2001, the Bank had no potential problem loans which met the criteria for classification as "Special Mention", "Substandard", or "Doubtful." ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses (the "ALL") is established through a provision for loan losses based on management's evaluation of the risks inherent in the Bank's loan portfolio and the general economy. The allowance for loan losses is maintained at an amount management considers adequate to cover loan losses which are deemed probable and estimable. The allowance is based upon a number of factors, including asset classifications, economic trends, industry experience and trends, industry and geographic concentrations, estimated collateral values, management's assessment of the credit risk inherent in the portfolio, historical loan loss experience and the Bank's underwriting policies. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions and the Bank's actual experience differ substantially from the conditions and experience 10 used in the assumptions upon which the initial determinations are based. The OTS, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyzes all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management establishes acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. On July 2, 2001, the Federal Financial Institutions Examination Council (FFEIC), on behalf of the OTS and the other federal banking agencies issued a policy statement on the allowance for loan and lease losses methodologies and documentation for banks and savings institutions. This policy statement clarifies that the banking agencies guidance relating to methodologies and supporting documentation for calculation of the ALL. The board of directors is responsible for ensuring that controls are in place to determine the appropriate level of the ALL. While the Bank believes that it has established an adequate allowance for loan losses, there can be no assurance that regulators, in reviewing the Bank's loan portfolio as part of a future regulatory examination, will not request the Bank to materially increase its allowance for loan losses, thereby negatively affecting the Bank's financial condition and earnings at that time. Moreover, no assurance can be made that future additions to the allowance will not be necessary based on changes in economic and real estate market conditions, further information obtained regarding known problem loans, identification of additional problem loans and other factors, both within and outside of management's control. The directors of the Bank and the Company review, on a quarterly basis, the provision for loan losses and the allowance for loan losses and the assumptions utilized by management as to their reasonableness and adequacy. Specific valuation reserves are provided for individual loans which are contractually past due (including loans classified Substandard or Doubtful) when ultimate collection is considered questionable by management after reviewing the current status of such loans and considering the net realizable value of the security for the loan. 11 The following table analyzes activity in the Bank's allowance for loan losses during the periods indicated.

-------------------------- (1) Total loans represent loans, net plus the allowance for loan losses. The following tables set forth the breakdown of the allowance for loan losses by loan category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category. 12

INVESTMENT ACTIVITIES GENERAL. The investment policy of the Bank, which is approved by the Board of Directors, is based upon its asset/liability management goals and is designed primarily to provide and maintain adequate liquidity, maintain a balance of high quality, diversified investments, minimize risks to the Bank and complement the Bank's lending activities. The investment policy is implemented by the Chief Financial Officer and the President. The policy designates the Chief Financial Officer as the investment manager authorized to oversee the daily operations of the investment portfolio. Under OTS regulations, the Bank is required to maintain sufficient liquidity to ensure its safe and sound operation. At June 30, 2001, the Bank's liquidity ratio was 23.63%. The Bank's liquidity ratio is high due to the amount of mortgage-backed-securities held in the Bank's investment portfolio with a stated maturity of less than five years. The levels of the Bank's short-term liquid assets are dependent on the Bank's operating, financing and investing activities during any given period. See "Liquidity and Capital Resources" in Management's Discussion and Analysis of Financial Condition and Results of Operations, in the 2001 Annual Report to Stockholders. As required by Statement of Financial Accounting Standards ("SFAS") 115, securities are classified into three categories: trading, held-to-maturity and available-for-sale. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities 13 and are reported at fair value with unrealized gains and losses included in trading account activities in the statement of earnings. At June 30, 2001, the Bank had no securities which were classified as trading. Securities that the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. All other securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are reported at fair value with unrealized gains and losses included, on an after tax basis, as a separate component of accumulated other comprehensive income in stockholders' equity. At June 30, 2001, $20.8 million of securities were classified as available-for-sale. At June 30, 2001, held-to-maturity securities totaled $11.1 million and had a fair value of $11.1 million. MORTGAGE-BACKED SECURITIES. The Bank invests in mortgage-backed securities and uses such investments to complement its mortgage lending activities and supplement such activities at times of low mortgage loan demand. At June 30, 2001, all securities in the Bank's mortgage-backed securities portfolio were directly insured or guaranteed by Fannie Mae or the Federal Home Loan Mortgage Corporation ("Freddie Mac"), thereby providing the certificate holder a guarantee of timely payments of interest and scheduled principal payments, whether or not they are collected. The Bank's mortgage-backed securities portfolio had a weighted average yield of 6.89% at June 30, 2001. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees or credit enhancements that reduce credit risk. However, mortgage-backed securities are more liquid than individual mortgage loans and may be used to collateralize borrowings of the Bank. In general, mortgage-backed securities issued or guaranteed by the Government National Mortgage Association ("Ginnie Mae"), Fannie Mae and Freddie Mac and certain AAA rated mortgage-backed pass through securities are weighted at no more than 20% for risk based regulatory capital purposes, compared to the 50% risk weighting assigned to most non-securitized residential mortgage loans. While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed, and value, of such securities. INVESTMENT SECURITIES. Federal savings associations have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federal savings associations may also invest their assets in commercial paper, investment grade corporate debt securities and mutual funds whose assets conform to the investments that a federal savings association is otherwise authorized to make directly. The Bank, from time to time, has used investment securities to supplement loan volume and to provide short- and intermediate-term assets for asset/liability management purposes. From time to time, the Bank has invested in high quality investment securities with various terms to maturity. At June 30, 2001, the Company had $9.4 million in investment securities, at fair value. 14 The following table sets forth activity in the Company's mortgage-backed and investment securities portfolio for the periods indicated.

The following table sets forth certain information regarding the amortized cost and fair value of the Company's mortgage-backed and investment securities at the dates indicated.

The table below sets forth certain information regarding the amortized cost, fair value, weighted average yields and stated maturity of the Company's mortgage-backed and investment securities portfolio at June 30, 2001. No effect has been given to prepayments or amortization of securities. There were no mortgage-backed securities (exclusive of obligations of the U.S. Government and any federal agencies) 15 issued by any one entity with a total carrying value in excess of 10% of stockholders' equity at June 30, 2001.

REAL ESTATE INVESTMENT. At June 30, 2001, the Company had no investment in real estate held for sale and development. The investment in real estate held for sale and development originally consisted of 158 single family detached home sites and a 15-acre commercial parcel in a Planned Unit Development named the Trails of Olympia Fields. At June 30, 1999, the Bank had nearly liquidated this investment through sales, and only one five-acre commercial parcel with a book value of $262,000 remained unsold. This parcel was sold in July 1999 at an auction without reservation. The sale price, net of all selling cost, was approximately $154,000, resulting in a loss of approximately $108,000. A loss accrual was recorded by the Company in the quarter ended June 30, 1999 for this amount. Through the sale of this property, the Company expects to benefit in future years from a reduction of operating expenses related to the property of approximately $40,000 annually and from the ability to invest the proceeds of the sale in income-earning assets. In connection with the development of the Trails of Olympia Fields the Bank initiated action against certain parties involved in the development. A final settlement was reached resolving its 16 remaining claims against the named defendants in the fourth quarter of fiscal year 2001. The Bank has received approximately $707,000 in total settlement awards in these cases, of which approximately $523,000 was received in the fourth quarter this year. The Bank's co-plaintiffs in the case also received approximately $500,000 in settlement of their claims against the defendants. The professional services expenses (legal expenses) paid during the fiscal year relating to the suit offset the settlement award, and therefore there was minimal impact on net income for the fiscal year ended June 30, 2001. SOURCES OF FUNDS GENERAL. Savings deposits are the primary source of the Bank's funds for use in lending and for other general business purposes. In addition to savings deposits, the Bank derives funds from loan and security repayments and prepayments, from advances from the FHLB of Chicago, from other borrowings, net revenues from operations and to a lesser extent from loan sales. Loan and mortgage-backed securities amortizations are a relatively stable source of funds, while savings inflows and outflows and loan and mortgage-backed securities prepayments are significantly influenced by general interest rates and money market conditions. Borrowings, primarily from the FHLB of Chicago, may be used on a short term basis to compensate for reductions in normal sources of funds at less than projected levels. They may also be used on a longer term basis to support expanded activities. SAVINGS DEPOSITS. The Bank offers several types of savings programs to attract short term and long term savings deposits, including passbook, various NOW accounts, money market deposit accounts and a variety of fixed-rate, money market certificates. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. The Bank's savings deposits are obtained predominantly from the areas near its office locations. The Bank relies primarily on customer service and long-standing relationships with customers to attract and retain these savings deposits; however, market interest rates and rates offered by competing financial institutions significantly affect the Bank's ability to attract and retain savings deposits. Certificate accounts in excess of $100,000 are not actively solicited by the Bank nor does the Bank use brokers to obtain savings deposits. At June 30, 2001, the Bank had approximately $128.2 million outstanding in savings deposits. The ability to pay competitive rates on insured savings deposits has allowed the Bank to be more aggressive in obtaining funds and has given it more flexibility to minimize net deposit outflows. However, competitive interest rates have also resulted in a more volatile cost of funds. 17 The following table sets forth the distribution of the Bank's deposit accounts at the dates indicated and the weighted average interest rates on each category of savings deposits presented.

The following table presents the savings deposit activity of the Bank for the periods indicated.

At June 30, 2001, the Bank had $13.0 million in certificate accounts with a balance of $100,000 or greater maturing as follows: WEIGHTED AMOUNT AVERAGE RATE -------- ------------ (Dollars in thousands) Maturity Period --------------- Within three months $ 7,856 5.81% After three but within six months 1,820 4.63 After six but within 12 months 1,754 4.92 After 12 months 1,543 5.59 -------- ---- Total $ 12,973 5.49% ======== 18 The following table sets forth the amount of certificates of deposit outstanding at the dates indicated and the remaining period to maturity of the certificates of deposit outstanding at June 30, 2001.

BORROWINGS. Although savings deposits are the primary source of funds for the Bank's lending and investment activities and for its general business purposes, the Bank has in the past relied upon advances from the FHLB of Chicago and, to a lesser extent, reverse repurchase agreements, to supplement its supply of funds and to meet deposit withdrawal requirements. The Bank may obtain advances from the FHLB of Chicago on the security of the capital stock of the FHLB of Chicago it owns and certain of its home mortgage loans and/or mortgage-backed and investment securities provided certain standards related to creditworthiness have been met. Such advances are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities, and the FHLB of Chicago prescribes acceptable uses to which the advances pursuant to each program may be used as well as limitations on the size of such advances. Depending on the program, such limitations are based either on a fixed percentage of assets or the Bank's creditworthiness. The FHLB is required to review its credit limitations and standards at least once every six months. FHLB advances have from time to time been used to meet the Bank's liquidity needs. At June 30, 2001, the Bank had $61.0 million in FHLB of Chicago borrowings. Certain advances are callable by the FHLB as follows: $13,000,000 in advances due in 2008 are callable quarterly beginning June, 2001; $8,000,000 in advances due in 2005 are callable quarterly beginning May 2002; and $12,000,000 in advances due in 2008 have a one time call date of June 19, 2003. The Company also has the capability to borrow additional funds upon complying with the FHLB of Chicago's collateral requirements. The Bank at times sells securities under agreements to repurchase, which transactions are treated as financings, and the obligation to repurchase the securities sold is reflected as a liability in the statements of financial condition. The dollar amount of securities underlying the agreements remains in the asset account and are held in safekeeping. There were no securities sold under agreements to repurchase outstanding at or during fiscal years 2001, 2000, and 1999. 19 The following table sets forth certain information regarding borrowings at the dates and for the periods indicated:

PERSONNEL At June 30, 2001, the Bank employed 43 full time and 18 part time employees. At June 30, 2001, 47% of the Bank's full time employees had been with the Bank for more than ten years. The employees are not represented by a collective bargaining unit, and the Bank considers its relationship with its employees to be good. The Bank seeks to compensate its personnel at a level competitive with its savings institution peers in order to retain highly qualified employees. IMPACT OF NEW ACCOUNTING STANDARDS In July 2001, the Financing Accounting Standards Board's (the "FASB") issued SFAS No. 141, "Business Combinations" (SFAS No. 141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. SFAS No. 142 is effective January 1, 2002 for calendar year companies; however, any acquired goodwill or intangible assets recorded in transactions closed subsequent to June 30, 2001 will be subject immediately to the nonamortization and amortization provisions of SFAS No. 142. The Company anticipates that the adoption of SFAS No. 141 and No. 142 will not have a material impact on the Company's results of operations or financial condition. FEDERAL AND STATE TAXATION FEDERAL TAXATION GENERAL. The following is a discussion of material federal income tax matters and does not purport to be a comprehensive description of the federal income tax rules applicable to the Bank or the Company. The Bank has not been audited by the IRS during the last five years. For federal income tax purposes, the Company and the Bank file consolidated income tax returns. The Company and the Bank report their income on a fiscal year basis using the accrual method of accounting and are subject to 20 federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's tax reserve for bad debts, discussed below. TAX BAD DEBT RESERVES. The Bank, as a "small bank" (one with assets having an adjusted tax basis of $500 million or less) is permitted to maintain a reserve for bad debts with respect to its qualifying loans, which, in general, are loans secured by certain interests in real property, and to make, within specified formula limits, annual additions to the reserve which are deductible for purposes of computing the Bank's taxable income. Pursuant to the 1996 Tax Act, the Bank is now required to recapture (take into income) over a multi-year period a portion of the balance of its bad debt reserve as of July 31, 1996 equal to $500,000, which will require the Bank to report an additional tax liability of $194,000. This liability has already been provided for and will not have an adverse impact on the Bank's financial condition or results of operations. DISTRIBUTIONS. To the extent that the Bank makes "non-dividend distributions" to the Company, such distributions will be considered to have been made from the Bank's "base year reserve," i.e., its reserves as of July 31, 1988 and then from the Bank's supplemental reserve for losses on loans, to the extent thereof, and an amount based on the amount distributed (but not in excess of the amount of such reserves) will be included in the Bank's income. The balance of the Bank's tax bad debt reserve as of July 31, 1988 was $3,685,478. The balance of the Bank's supplemental reserve for losses was $2,463,159. Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of the Bank's current or accumulated earnings and profits will not be so included in the Bank's income. The amount of additional taxable income created from a non-dividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if the Bank makes a non-dividend distribution to the Company, approximately one and one-half times the amount of such distribution (but not in excess of the amount of such reserves) would be includable in income for federal income tax purposes, assuming a 34% federal corporate income tax rate. The Bank does not intend to make non-dividend distributions to the Company. CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax ("AMT") on alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating loss carryovers. AMTI is also adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. The Bank does not expect to be subject to the AMT. ELIMINATION OF DIVIDENDS; DIVIDENDS RECEIVED DEDUCTION. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. A 70% dividends received deduction generally applies with respect to dividends received from domestic corporations that are not members of such affiliated group, except that an 80% dividends received deduction applies if the Company and the Bank own more than 20% of the stock of a corporation paying a dividend. 21 STATE AND LOCAL TAXATION The Bank may file a combined Illinois income tax return with the Company. For Illinois income tax purposes, the Bank is taxed at an effective rate equal to 7.18% of Illinois Taxable Income. For these purposes, "Illinois Taxable Income" generally means federal taxable income, subject to certain adjustments (including the addition of interest income on state and municipal obligations and the exclusion of interest income on United States Treasury obligations). The exclusion of income on United States Treasury obligations has the effect of reducing the Illinois Taxable Income of the Bank. As of June 30, 2001, the Bank has approximately $4.6 million of Illinois' net loss deduction carry forward that can be utilized to reduce Illinois taxable income in the future. As an Illinois holding company, the Company pays an annual franchise tax to the State of Illinois. The Company files a combined Illinois income tax return with the Bank. The Company is taxed at an effective rate equal to 7.18% of Illinois taxable income as defined above. REGULATION GENERAL The Bank is subject to extensive regulation, examination, and supervision by the OTS, as its chartering agency, and the FDIC, as its deposit insurer. The Bank's deposit accounts are insured up to applicable limits by the SAIF administered by the FDIC, and the Bank is a member of the FHLB of Chicago. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, and it must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The OTS and the FDIC conduct periodic examinations to assess the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings association can engage and is intended primarily for the protection of the insurance fund and depositors. The Company, as a savings association holding company, is also required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS. The OTS and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company, the Bank and the operations of both. On November 12, 1999, President Clinton signed into law landmark financial services legislation, titled the Gramm-Leach-Bliley Act ("GLB Act"). The GLB Act repeals depression-era laws restricting affiliations among banks, securities firms, insurance companies and other financial services providers. The impact of the GLB Act on the Company and the Bank, where relevant, is discussed throughout the regulation section below. 22 The following discussion is intended to be a summary of the material statutes and regulations applicable to savings associations and their holding companies, and it does not purport to be a comprehensive description of all such statutes and regulations. REGULATION OF FEDERAL SAVINGS ASSOCIATIONS. BUSINESS ACTIVITIES. The Bank derives its lending and investment powers from the Home Owners' Loan Act, as amended (the "HOLA"), and the regulations of the OTS thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. These investment powers are subject to various limitations, including (a) a prohibition against the acquisition of any corporate debt security that is not rated in one of the four highest rating categories; (b) a limit of 400% of an association's capital on the aggregate amount of loans secured by non-residential real estate property; (c) a limit of 20% of an association's assets on the aggregate amount of commercial loans; (d) a limit of 35% of an association's assets on the aggregate amount of consumer loans and acquisitions of certain debt securities; (e) a limit of 5% of assets on nonconforming loans (loans in excess of the specific limitations of the HOLA); and (f) a limit of the greater of 5% of assets or an association's capital on certain construction loans made for the purpose of financing what is or is expected to become residential property. LOANS TO ONE BORROWER. Under the HOLA, savings associations are generally subject to the same limits on loans to one borrower as are imposed on national banks. Generally, under these limits, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the association's unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily marketable collateral. At June 30, 2001, the Bank's regulatory limit on loans to one borrower was $3.3 million. At June 30, 2001, the Bank's largest aggregate amount of loans to one borrower was $500,000, and the second largest borrower had an aggregate balance of $495,000. The Bank is in compliance with all applicable limitations on loans to one borrower. QTL TEST. The HOLA requires a savings association to meet a qualified thrift lender, or "QTL" test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" in at least nine months of the most recent 12-month period. "Portfolio assets" means, in general, an association's total assets less the sum of (a) specified liquid assets up to 20% of total assets, (b) certain intangibles, including goodwill and credit card and purchased mortgage servicing rights, and (c) the value of property used to conduct the association's business. "Qualified thrift investments" includes various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, consumer loans, small business loans, education loans, and credit card loans. At June 30, 2001, the Bank maintained 99% of its portfolio assets in qualified thrift investments. The Bank had also met the QTL test in each of the prior 12 months and was, therefore, a qualified thrift lender. A savings association may also satisfy the QTL test by qualifying as a "domestic building and loan association" as defined in 23 the Internal Revenue Code of 1986. A savings association that fails the QTL test must either operate under certain restrictions on its activities or convert to a bank charter. CAPITAL REQUIREMENTS. The OTS regulations require savings associations to meet three minimum capital standards: a tangible capital ratio requirement of 1.5% of total assets as adjusted under the OTS regulations, a leverage ratio requirement of 3% of core capital to such adjusted total assets and a risk-based capital ratio requirement of 8% of total risk-based capital to total risk-weighted assets. In determining compliance with the risk-based capital requirement, a savings association must compute its risk-weighted assets by multiplying its assets and certain off balance sheet items by risk weights, which range from 0% for cash and obligations issued by the United States Government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulation based on the risks OTS believes are inherent in the type of asset. Tangible capital is defined, generally, as common stockholders' equity (including retained earnings), certain noncumulative perpetual preferred stock and related earnings and minority interests in equity accounts of fully consolidated subsidiaries, less intangibles (other than certain purchased mortgage servicing rights) and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital is defined similarly to tangible capital, but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital currently includes cumulative and other perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses. The allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets, and the amount of supplementary capital that may be included as total capital cannot exceed the amount of core capital. At June 30, 2001, the Bank met each of its capital requirements. The table below presents the Bank's regulatory capital as compared to the OTS regulatory capital requirements at June 30, 2001.

A reconciliation between the Bank's regulatory capital and stockholder's equity at June 30, 2001 is presented below. 24

LIMITATION ON CAPITAL DISTRIBUTIONS. Under OTS capital distribution regulations, certain savings associations are permitted to pay capital distributions during a calendar year that do not exceed the association's net income for that year plus its retained net income for the prior two years, without notice to, or the approval of, the OTS. However, a savings association subsidiary of a savings and loan holding company, such as the Bank, is required to file a notice unless the specific capital distribution requires an application. In addition, the OTS can prohibit a proposed capital distribution, otherwise permissible under the regulation, if the OTS has determined that the association is in need of more than normal supervision or if it determines that a proposed distribution by an association would constitute an unsafe or unsound practice. Furthermore, under the OTS prompt corrective action regulations, the Bank would be prohibited from making any capital distribution if, after the distribution, the Bank failed to meet its minimum capital requirements, as described below. See "Prompt Corrective Regulatory Action." LIQUIDITY. The Bank's primary sources of funds are savings deposits, principal and interest payments on loans and mortgage-backed securities, and borrowings from the Federal Home Loan Bank ("FHLB"). While maturities and scheduled amortization of loans and mortgage-backed securities provide an indication of the timing of the receipt of funds, changes in interest rates, economic conditions and competition strongly influence mortgage prepayment rates and savings deposit flows, reducing the predictability of the timing of sources of funds. Congress eliminated the statutory liquidity requirement, which required federal savings associations to maintain a minimum amount of liquid assets of between four and ten percent, as determined by the Director of the Office of Thrift Supervision ("OTS"), the Bank's primary federal regulator. The OTS recently conformed its implementing regulations to reflect this statutory change. Under the revised regulations, the Bank is required to maintain sufficient liquidity to ensure its safe and sound operation. At June 30, 2001, the Bank's liquidity ratio was 23.63%. The Bank's liquidity ratio is high due to the amount of mortgage-backed-securities held in the Bank's investment portfolio with a stated maturity of less than five years. The levels of the Bank's short-term liquid assets are dependent on the Bank's operating, financing and investing activities during any given period. ASSESSMENTS. Savings associations are required by OTS regulation to pay assessments to the OTS to fund the operations of the OTS. The general assessment, paid on a semiannual basis, is computed by totaling three components: the size of the association on which the basic assessment is based; the association's supervisory condition, which would result in an additional assessment based on a percentage of the basic assessment for any savings institution with a composite rating of 3, 4 or 5 in its 25 most recent safety and soundness examination; and the complexity of the association's operations, which would result in an additional assessment based on a percentage of the basic assessment for any savings association that managed over $1.0 billion in trust assets, serviced for others loans aggregating more than $1.0 billion, or had certain off-balance sheet assets aggregating more than $1.0 billion. BRANCHING. Subject to certain limitations, the HOLA and the OTS regulations permit federally chartered savings associations to establish branches in any state of the United States. The authority to establish such branches is available (a) in states that expressly authorize branches of savings associations located in another state or (b) to an association that either satisfies the "QTL" test for a qualified thrift lender or qualifies as a "domestic building and loan association" under the Internal Revenue Code of 1986, which imposes qualification requirements similar to those for a "qualified thrift lender" under the HOLA. See "QTL Test." The authority for a federal savings association to establish an interstate branch network would facilitate a geographic diversification of the association's activities. This authority under the HOLA and the OTS regulations preempts any state law purporting to regulate branching by federal savings associations. COMMUNITY REINVESTMENT. Under the Community Reinvestment Act (the "CRA"), as implemented by OTS regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings association, to assess the association's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating in its most recent examination. The CRA regulations establish an assessment system that bases an association's rating on its actual performance in meeting community needs. In particular, the assessment system focuses on three tests: (a) a lending test, to evaluate the institution's record of making loans in its assessment areas; (b) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and (c) a service test, to evaluate the institution's delivery of services through its branches, ATMs and other offices. TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in transactions with its "affiliates" is limited by the OTS regulations and by Sections 23A and 23B of the Federal Reserve Act (the "FRA"). The OTS regulations also prohibit a savings association (a) from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies under Section 4(c) of the BHC Act and (b) from purchasing the securities of any affiliate other than a subsidiary. Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the savings association and also limits the aggregate amount of transactions with all affiliates to 20% of the savings association's capital and surplus. Extensions of credit to affiliates are required to be secured by collateral in an amount and of a type described in Section 23A, and the 26 purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the association as those prevailing at the time for comparable transactions with nonaffiliated companies. In the absence of comparable transactions, such transactions may only occur under terms and circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies. The Bank's authority to extend credit to its directors, executive officers, and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the FRB thereunder. Among other things, these provisions require that extensions of credit to insiders (a) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the association's capital. In addition, extensions of credit in excess of certain limits must be approved by the association's board of directors. ENFORCEMENT. Under the Federal Deposit Insurance Act (the "FDI Act"), the OTS has primary enforcement responsibility over savings associations and has the authority to bring enforcement action against all "institution affiliated parties," including any controlling stockholder or any stockholder, attorney, appraiser or accountant who knowingly or recklessly participates in any violation of applicable law or regulation or breach of fiduciary duty or certain other wrongful actions that causes or is likely to cause more than a minimal loss or other significant adverse effect on an insured savings association. This enforcement authority includes among other things, the ability to assess civil monetary penalties, to issue cease and desist orders and to remove directors and officers. In addition, regulators have substantial discretion to take enforcement action against an institution that fails to comply with its regulatory requirements, particularly with respect to its capital requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to receivership, conservatorship or the termination of deposit insurance. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS that enforcement action be taken with respect to a particular savings association. If action is not taken by the Director of the OTS, the FDIC has authority to take such action under certain circumstances. STANDARDS FOR SAFETY AND SOUNDNESS. Pursuant to the FDI Act, as amended by FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994 (the "Community Development Act"), the OTS and the federal bank regulatory agencies have adopted, a set of guidelines prescribing safety and soundness standards pursuant to FDICIA, as amended. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings standards, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice. In addition, the OTS adopted regulations that authorize, but do not require, the OTS to order an institution that has been given 27 notice by the OTS that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the "prompt corrective action" provisions of FDICIA. If an institution fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties. REAL ESTATE LENDING STANDARDS. The OTS and the other federal banking agencies adopted regulations to prescribe standards for extensions of credit that (a) are secured by real estate or (b) are made for the purpose of financing the construction of improvements on real estate. The OTS regulations require each savings association to establish and maintain written internal real estate lending standards that are consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its real estate lending activities. The standards also must be consistent with accompanying OTS guidelines, which include loan-to-value ratios for the different types of real estate loans. Associations are also permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as such exceptions are reviewed and justified appropriately. The guidelines also list a number of lending situations in which exceptions to the loan-to-value standards are justified. PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective action regulations, the OTS is required to take certain, and is authorized to take other, supervisory actions against undercapitalized savings associations. For this purpose, a savings association would be placed in one of the following five categories based on the association's capital: o Well capitalized; o Adequately capitalized; o Under capitalized; o Significantly undercapitalized; and o Critically undercapitalized. The elements of an association's capital for purposes of the prompt corrective action regulations are defined generally as they are under the regulations for minimum capital requirements. At June 30, 2001, the Bank met the criteria for being considered "well-capitalized". When appropriate, the OTS can require corrective action by a savings association holding company under the "prompt corrective action" provisions of FDICIA. INSURANCE OF DEPOSIT ACCOUNTS. The Bank is a member of the SAIF, and the Bank pays its deposit insurance assessments to the SAIF. The FDIC also maintains another insurance fund, the BIF, which primarily insures the deposits of banks and state chartered savings banks. Pursuant to FDICIA, the FDIC established a risk based assessment system for determining the deposit insurance assessments to be paid by insured depositary institutions. Under the assessment system, the FDIC assigns an institution to one of three capital categories based on the institution's 28 financial information as of the quarter ending three months before the beginning of the assessment period. The three capital categories consist of (a) well-capitalized, (b) adequately capitalized or (c) undercapitalized. The FDIC also assigns an institution to one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under the regulation, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. Assessment rates currently range from 0.0% of deposits for an institution in the highest category (i.e., well capitalized and financially sound, with no more than a few minor weaknesses) to 0.27% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concern). The FDIC is authorized to raise the assessment rates as necessary to maintain the required reserve ratio of 1.25%. As a result of the Deposit Insurance Funds Act of 1996 (the "1996 Act"), both the BIF and the SAIF currently satisfy the reserve ratio requirement. The 1996 Act also provides that the FDIC cannot assess regular insurance assessments for an insurance fund unless required to maintain or to achieve the designated reserve ratio of 1.25%, except on those of its member institutions that are not classified as "well capitalized" or that have been found to have "moderately severe" or "unsatisfactory" financial, operational or compliance weaknesses. The Bank has not been so classified by the FDIC or the OTS. In addition, the 1996 Act expanded the assessment base for the payments on the bonds (the "FICO bonds") issued in the late 1980s by the Financing Corporation to recapitalize the now defunct Federal Savings and Loan Insurance Corporation to include the deposits of both BIF- and SAIF-insured institutions beginning January 1, 1997. Both BIF and SAIF-insured deposits are assessed the same FICO rates. Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of Chicago, which is one of the regional Federal Home Loan Banks composing the Federal Home Loan Bank System. Each Federal Home Loan Bank provides a central credit facility primarily for its member institutions. The Bank, as a member of the FHLB of Chicago, is required to acquire and hold shares of capital stock in the FHLB of Chicago in an amount equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans, home-purchase contracts and similar obligations, but not less than $500. The Bank was in compliance with this requirement with an investment in the capital stock of the FHLB of Chicago at June 30, 2001, of $3.7 million. Any advances from a Federal Home Loan Bank must be secured by specified types of collateral, and all long term advances may be obtained only for the purpose of providing funds for residential housing finance. 29 The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the Federal Home Loan Banks can pay as dividends to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. The Bank earned dividends on the FHLB of Chicago capital stock in amounts equal to $259,000, $198,000, and $190,000, respectively, during the fiscal year ended June 30, 2001, 2000, and 1999. If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, the Bank's net interest income would be affected. Under the GLB Act, membership in the Federal Home Loan Bank System is now voluntary for all federally-chartered savings associations, such as the Bank. The GLB Act also replaces the existing redeemable stock structure of the Federal Home Loan Bank System with a capital structure that requires each Federal Home Loan Bank to meet a leverage limit and a risk-based permanent capital requirement. Two classes of stock are authorized: Class A (redeemable on 6-months notice) and Class B (redeemable on 5-years notice). The board of directors of each Federal Home Loan Bank must submit for FHFB approval a capital plan that the FHFB determines is best-suited for the Federal Home Loan Bank and its members. FEDERAL RESERVE SYSTEM. The Bank is subject to provisions of the FRA and the FRB's regulations pursuant to which depositary institutions may be required to maintain non-interest-earning reserves against their deposit accounts and certain other liabilities. Currently, reserves must be maintained against transaction accounts (primarily NOW and regular checking accounts). The FRB regulations generally require that reserves be maintained in the amount of 3% of the aggregate of transaction accounts up to $42.8 million. The amount of aggregate transaction accounts in excess of $42.8 million are currently subject to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 12%. The FRB regulations currently exempt $5.5 million of otherwise reservable balances from the reserve requirements, which exemption is adjusted by the FRB at the end of each year. The Bank is in compliance with the foregoing reserve requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest bearing account at a Federal Reserve Bank, or a passthrough account as defined by the FRB, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OTS. Federal Home Loan Bank System members are also authorized to borrow from the Federal Reserve "discount window," but FRB regulations require such institutions to exhaust all Federal Home Loan Bank sources before borrowing from a Federal Reserve Bank. PRIVACY REGULATIONS. Under new OTS regulations adopted pursuant to the GLB Act, the Bank is required to adopt procedures to protect customers' "nonpublic personal information." The new regulations generally require that the Bank disclose its privacy policy, including identifying with whom it shares a customer's "nonpublic personal information," to customers at the time of establishing the customer relationship and annually thereafter. In addition, the Bank is required to provide its customers with the ability to "opt-out" of having it share their personal information with unaffiliated third parties and not to disclose account numbers or access codes to nonaffiliated third parties for marketing purposes. The Bank currently has a privacy protection policy in place, which has been reviewed for compliance with the regulations. 30 REGULATION OF SAVINGS ASSOCIATION HOLDING COMPANIES The Company is a non-diversified unitary savings bank holding company within the meaning of the HOLA, as amended. As such, the Company is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries, if any. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness, or stability of a subsidiary savings institution. The HOLA prohibits a savings association holding company, directly or indirectly, or through one or more subsidiaries, from acquiring another savings association or holding company thereof, without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings association, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating an application by a holding company to acquire a savings association, the OTS must consider the financial and managerial resources and future prospects of the company and savings association involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. Laws governing savings and loan holding companies historically have classified such entities based upon the number of thrift institutions which they control. The Company is classified as a unitary savings and loan holding company because it only controls one thrift, the Bank. Under the GLB Act, any company which becomes a unitary savings and loan holding company pursuant to a charter application filed with the OTS after May 4, 1999 is prohibited from engaging in non-financial activities or affiliating with non-financial companies. All unitary savings and loan holding companies in existence prior to May 4, 1999, such as the Company, are "grandfathered" under the GLB Act and may continue to operate as a unitary savings and loan holding company without any limitations in the types of business activities in which it can engage at the holding company level, provided the Bank continues to satisfy the QTL Test. In addition, for grandfathered savings and loan holding companies, such as the Company, the GLB Act also prohibits the sale of such entities to nonfinancial companies. This prohibition is intended to restrict the transfer of grandfathered rights to other entities and, thereby, prevent evasion of the limitation on the creation of new unitary savings and loan holding companies. To the extent that the GLB Act permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Company currently offers and that can aggressively compete in the markets that the Company currently serves. FEDERAL SECURITIES LAW The Company's Common Stock is registered with the SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. 31 ITEM 2. PROPERTIES The Bank conducts its business through its corporate office and two branch locations, as set forth in the following table.

------------------------------- (1) Land leased, building owned by the Bank. (2) The Bank has two five-year renewal options. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of its operations, the Bank is a party to routine litigation involving claims incidental to the savings bank business. Management believes that no current litigation poses a substantial likelihood of potential loss or exposure, which would have a material adverse effect on the financial position of the Bank. PART II ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this Item is incorporated herein by reference to the inside back cover of the Company's 2001 Annual Report to Stockholders under the caption "Stockholder Information," which section is included in Exhibit 13.1 to this Report. 32 ITEM 6. SELECTED FINANCIAL DATA FINANCIAL HIGHLIGHTS (Dollars in thousands except per share data)

--------------------------------------------------------------- (1) Fairfield Savings Bank, F.S.B. only. (2) Quotes for 1997 include the period from December 19, 1996 to June 30, 1997. 33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is incorporated herein by reference to pages 5 through 20 of the Company's 2001 Annual Report to Stockholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," which section is included in Exhibit 13.1 to this Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this Item is incorporated herein by reference to pages 7 through 9 of the Company's 2001 Annual Report to Stockholders under the caption "Quantitative and Qualitative Disclosures About Market Risk," which section is included in Exhibit 13.1 to this Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated herein by reference to pages 21 through 52 of the Company's 2001 Annual Report to Stockholders under the captions "Independent Auditors' Report," "Consolidated Financial Statements" and "Notes to Consolidated Financial Statements," which sections are included in Exhibit 13.1 to this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following information included on pages 6 through 10 and 20 of the Company's Proxy Statement for the 2001 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by reference: "Election of Directors," "Nominees for Election as Director," "Continuing Directors," "Executive Officers," and "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 11. EXECUTIVE COMPENSATION The following information included on pages 10 through 19 of the Proxy Statement is incorporated herein by reference: "Management Salary Compensation Committee Report on Executive Compensation," "Compensation Committee Interlocks and Insider Participation," "Performance Graph," "Directors' Compensation," "Executive Compensation," "Employment Agreements," and "Benefits." 34 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following information included on pages 4 through 6 of the Proxy Statement is incorporated herein by reference: "Security Ownership of Certain Beneficial Owners and Management-Principal Shareholders of the Company," and "Security Ownership of Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following information included on page 19 of the Proxy Statement is incorporated herein by reference: "Compensation of Directors and Executive Officers - Transactions with Certain Related Persons." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Listed below are all financial statements and exhibits filed as part of this report: a. Financial Statements, Schedules and Exhibits (1) The consolidated balance sheets of Big Foot Financial Corp. and subsidiary as of June 30, 2001 and 2000, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the years ended June 30, 2001, 2000 and 1999 together with the related notes and the independent auditors' report of KPMG LLP, independent certified public accountants. (2) Schedules omitted as they are not applicable. (3) See Exhibit Index on following page. b. Reports on Form 8-K - None. 35

36 21.1 Subsidiaries of the Registrant.(1) 23.1 Consent of KPMG LLP (1) Incorporated herein by reference to Registration Statement No. 333-12083 on Form S-1 of Big Foot Financial Corp. filed with the Securities and Exchange Commission on September 16, 1996, as amended. (2) Incorporated herein by reference to the Registrant's Form 10-K for the transition period from August 1, 1996 to June 30, 1997, filed with the Securities and Exchange Commission on September 29, 1997. (3) Incorporated herein by reference to the Schedule 14A filed with the Securities and Exchange Commission on May 22, 1997. (4) Incorporated herein by reference to the Schedule 14A filed with the Securities and Exchange Commission on November 14, 1997. (5) Incorporated herein by reference to the Registrant's Form 10-K for the year ended June 30, 1999, filed with the Securities and Exchange Commission on September 28, 1999. (6) Incorporated herein by reference to the Registrant's Form 10-Q for the quarter ended March 31, 2001, filed with the Securities and Exchange Commission on May 8, 2001.

37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on September 18, 2001. Big Foot Financial Corp. By: /s/ Timothy L. McCue ------------------------ Timothy L. McCue President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

BIG FOOT FINANCIAL CORP 10-K