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, 1998
[ ] 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 $38.2 million as of June 30,
1998.
As of September 4, 1998, 2,493,100 shares of the Registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's 1998 Annual Report to Stockholders are incorporated
by reference in Part II.
Portions of the Registrant's Proxy Statement for its 1998 Annual Meeting of
Stockholders are incorporated by reference in Part III.
<PAGE>
BIG FOOT FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
JUNE 30, 1998
TABLE OF CONTENTS
ITEM PART I PAGE
1 BUSINESS ..................................................... 3
2 PROPERTIES ................................................... 32
3 LEGAL PROCEEDINGS ............................................ 32
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......... 33
PART II
5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ....................................... 33
6 SELECTED FINANCIAL DATA ...................................... 34
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ....................... 35
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK ...................................................... 35
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .................. 35
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .......................... 35
PART III
10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ........... 35
11 EXECUTIVE COMPENSATION ....................................... 35
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER AND
MANAGEMENT ................................................ 36
13 CERTAIN RELATIONSHIPS AND RELATED TRANSCTIONS ................ 36
PART IV
14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.................................................. 36
2
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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
Bank completed its conversion (the "Conversion") from a federally chartered
mutual savings bank to a federally chartered stock savings bank, and the Company
acquired all of the capital stock of the Bank. 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
"Offering") to eligible members of the Bank and to the Company's Employee Stock
Ownership Plan ("ESOP"). 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, 1998, the Company had total assets of $220.6 million,
which included $115.5 million of loans receivable and $79.8 million of
mortgage-backed securities. At such date, total savings deposits were $123.8
million, borrowings were $53.0 million and stockholders' equity was $38.1
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 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 the Conversion, 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 twelve month periods ended June 30, 1998 and
July 31, 1996.
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'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.
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;
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<PAGE>
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 becoming 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 mature. The Norridge market has
modest prospects for growth; however, it provides the Bank with a stable source
of deposits. 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. Particularly intense competition
exists for savings deposits and the origination of all of the loan products
emphasized by the Bank.
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 real estate owned.
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, 1998, the Bank had gross loans receivable outstanding of
$116.1 million, of which $113.4 million, or 97.8% of gross loans, were one- to
four-family residential mortgage loans. The remainder consisted of $0.7 million
of multifamily mortgage loans, or 0.6% of gross loans; $0.8 million of
commercial real estate mortgage loans, or 0.7% of gross loans; $118,000 of land,
construction and development loans, or 0.1% of gross loans; $0.8 million of home
equity loans, or 0.7% of gross loans; and $144,000 of other loans, or 0.1% of
gross loans.
4
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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 conform to the Federal National
Mortgage Association ("FNMA") 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 the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"), 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, 1998, based on
the above, the Bank's regulatory loans to one-borrower limit was approximately
$3.9 million. On the same date, the Bank had no borrowers with outstanding
balances in excess of this amount. At June 30, 1998, the two largest dollar
amounts outstanding to one borrower or group of related borrowers were
approximately $449,000 and $359,000. Both of these loans are secured by one- to
four-family properties located in the Bank's market area and, at June 30, 1998,
were performing in accordance with their terms.
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.
5
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<TABLE>
<CAPTION>
At June 30, At July 31,
--------------------------------------- --------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------- ------------------ ----------------- -------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------------------ --------- ----------------------------- ------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family $113,441 97.8% $ 91,133 96.7% $ 76,325 95.6% $68,080 94.9% $ 66,318 94.6%
Multifamily (1) 741 0.6 942 1.0 979 1.2 1,035 1.4 1,335 1.9
Commercial real
estate 833 0.7 384 0.4 411 0.5 441 0.6 475 0.7
Land,construction/
development 118 0.1 403 0.4 404 0.5 166 0.2 146 0.2
Home equity 822 0.7 1,258 1.3 1,421 1.8 1,691 2.4 1,679 2.4
-------- ------ -------- ------ -------- ------ ------- ------ -------- ------
Total mortgage
loans $115,955 99.9% $94,120 99.8% $ 79,540 99.6% $71,413 99.5% $ 69,953 99.8%
======== ====== ======= ====== ======== ====== ======= ====== ======== ======
Other loans
Home improvement - - - - - - 15 - 15 -
Commercial credit
lines - - - - 150 0.2 131 0.2 - -
Loans on savings
deposits 144 0.1 181 0.2 192 0.2 212 0.3 135 0.2
-------- ------ -------- ------ -------- ------ ------- ------ -------- ------
Total other loans 144 0.1 181 0.2 342 0.4 358 0.5 150 0.2
-------- ------ -------- ------ -------- ------ ------- ------ -------- ------
Loans receivable,
gross $116,099 100.0% $94,301 100.0% $ 79,882 100.0% $71,771 100.0% $ 70,103 100.0%
======== ====== ======= ====== ======== ====== ======= ====== ======== ======
Less:
Loans in process - - - 111 892
Deferred loan fees 327 377 438 510 573
Allowance for loan 300 300 300 166 166
losses
Capitalized - - - - 46
interest reserve
-------- ------- ------- ------- -------
Loans receivable, net $115,472 $93,624 $ 79,144 $70,984 $68,426
======== ======= ======== ======= =======
</TABLE>
__________________________
(1) Multifamily includes participations in Community Investment Corporation
("CIC") of $389,000 at June 30, 1998, $413,000 at June 30, 1997, $381,000 at
July 31, 1996, and $321,000 at July 31, 1995. 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, 1998, over 97% of the Bank's $116.1
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 FNMA delivery rate with
adjustments relating to local competition and the availability of funds. At June
30, 1998, approximately 94% of the Bank's mortgage portfolio was comprised of
fixed-rate loans. The balance of the mortgage loan portfolio is comprised of
adjustable rate loans, including approximately $5.6 million of one- to
four-family residential mortgages, the majority of which are tied to the
National Cost of Funds Index 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 with 15
year terms. The Bank also makes home equity loans. At June 30, 1998, the Bank
had an aggregate balance of $822,000 in 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 payout procedures for these loans
in recognition of the higher degree of risk involved in making such loans. The
Bank's loss experience in construction lending on single family and multifamily
residences has been extremely favorable. See "-Delinquencies and Non-Performing
Assets."
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In addition to financing custom construction of homes, the Bank
finances detached residential subdivision and condominium land acquisition and
development projects. For these loans, the Bank requires feasibility studies and
economic analyses which address a property's proposed gross sale or rental
income, market absorption rate, occupancy estimates and marketing and operating
expenses in order to ascertain the discounted net sales or capitalized rental
value projections. As a general guideline, actual or projected net cash flows
from these types of lending activities should equal or exceed 120% of the debt
service (excluding condominium properties). A builder or developer's experience
in constructing and marketing properties is also evaluated by the Bank. Each
borrower must demonstrate that it has the financial capacity to fund a project's
debt service.
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.
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<TABLE>
<CAPTION>
For the
For the year eleven months For the year
ended June 30, ended June 30, ended July 31,
1998 1997 1996
-------------- -------------- -------------
(In thousands)
<S> <C> <C> <C>
LOAN (GROSS):
At beginning of period $ 94,301 $ 79,882 $ 71,771
------------ -------- --------
MORTGAGE LOANS ORIGINATED:
One-to four-family 38,612 23,088 19,617
Multifamily 34 - 86
Commercial real estate 550 - -
Land, construction and development - - 38
------------ -------- --------
Total mortgage loans originated 39,196 23,088 19,741
OTHER LOANS ORIGINATED:
Other loans 249 192 202
------------ -------- --------
Total loans originated 39,445 23,280 19,943
------------ -------- --------
Additional draws - open-end home equity loans 428 346 549
Principal repayments (17,838) (9,207) (12,377)
Loans sold (237) - -
Loans transferred to real estate owned - - -
Charge-off-CIC participation - - (4)
============ ======== ========
LOAN BALANCES AT END OF PERIOD $ 116,099 $ 94,301 $ 79,882
============ ======== ========
</TABLE>
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 1998 fiscal year and the fiscal years ended June 30,
1997 and July 31, 1996, the Bank earned an aggregate of such fees totaling
$24,000, $23,000 and $29,000, respectively.
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LOAN MATURITY. The following table shows the contractual maturity of
the Bank's loan portfolio at June 30, 1998. 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.
<TABLE>
<CAPTION>
Mortgage loans Total loans
--------------- -----------
Land,
Due during One- to construction Weighted
periods four- Multi- Commercial and Home Other average
Ending June 30, Family family Real Estate development equity loans Amount rate
- --------------- ---------- ---------- ----------- ----------- --------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 $ 168 $ 5 $ - $ - $ 15 $ 25 $ 213 8.00%
2000 92 10 - - 1 36 139 8.08
2001 411 34 85 118 90 77 815 8.59
2002 and 2003 1,711 77 103 - 388 6 2,285 8.36
2004 to 2009 13,811 42 45 - 328 - 14,226 7.31
2010 to 2014 24,252 227 151 - - - 24,630 7.07
2015 to 2019 5,159 327 449 - - - 5,935 8.22
2020 and
following 67,837 19 - - - - 67,856 7.36
--------- ------ -------- ------- ------- ------ --------- ------
Total loans
due, gross $113,441 $ 741 $ 833 $ 118 $822 $ 144 $116,099 7.36%
========= ====== ======== ======= ======= ====== ======== =======
</TABLE>
The following table sets forth at June 30, 1998, the dollar amount of
loans due after June 30, 1999, and whether such loans have fixed interest rates
or adjustable interest rates.
Due after June 30, 1999
Fixed Adjustable Total
------------ ------------ ----------
Mortgage loans: (In thousands)
One- to four-family $ 107,613 $ 5,642 $ 113,255
Multifamily 754 - 754
Commercial real estate 552 281 833
Land, construction and development - 118 118
Home equity 807 807
-
------------ ---------- ------------
Total mortgage loans $ 108,919 $ 6,848 $ 115,767
------------ ---------- ------------
Other loans 119 - 119
============ ========== ============
Total loans $ 109,038 $ 6,848 $ 115,886
============ ========== ============
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
9
<PAGE>
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 Real Estate
Owned ("REO") account until it is sold. At June 30, 1998, the Bank had no REO.
The Bank is permitted to finance sales from its REO 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. Currently, the Bank has 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 REO) at the dates indicated. At June 30, 1998, 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.
<TABLE>
<CAPTION>
At June 30, At July 31,
--------------- ----------------------------
Non-performing loans: 1998 1997 1996 1995 1994
- --------------------------------------------- ------- ------- -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $ 342 $ 199 $ 69 $ 193 $ 511
Multifamily - - - - -
Commercial real estate - - - - -
Land, construction and development - - - - -
Home equity - - 49 - -
Other loans - - - - -
------- ------- --------- --------- ---------
Total non-performing loans 342 199 118 193 511
------- ------- --------- --------- ---------
Real estate owned - - - 168 -
------- ------- --------- --------- ---------
Total non-performing assets $ 342 $ 199 $ 118 $ 361 $ 511
======= ======= ========= ========= =========
Total non-performing loans to total loans 0.30% 0.21% 0.15% 0.27% 0.74%
Total non-performing assets to total assets 0.16% 0.09% 0.06% 0.18% 0.26%
</TABLE>
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, 1998, the Bank had no single family residential loans that
were non accruing. The Bank had one single family residential loan with an
outstanding balance of $199,000 at June 30, 1997 that was non-accruing. At July
31, 1996, the Bank had no non-accruing loans. For the year ended June 30, 1998,
the eleven months ended June 30, 1997 and the year ended July 31, 1996, the
amount of interest income that would have been recorded on non-accrual loans had
such loans performed in accordance with their terms was $0, $10,000, and $0,
respectively. Interest earned on loans 90 days or more delinquent and still
accruing interest amounted to $25,000, $36,000, and $67,000 for the fiscal year
ended June 30, 1998, the eleven months ended June 30, 1997 and the fiscal year
ended July 31, 1996, respectively.
The Bank's non-performing assets at June 30, 1998 consisted of three,
one- to four-family residential loans, with an aggregate outstanding principal
balance of $342,000. The Bank's non-performing assets at June 30, 1997,
consisted of one, one-to four-family residential loan, with an aggregate
outstanding principal balance of $199,000. The properties underlying the
non-performing loans are located in the Chicago metropolitan area.
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<PAGE>
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 classification, but do
possess credit deficiencies or potential weaknesses deserving management's close
attention. Assets classified as Substandard or Doubtful require the Bank 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, 1998, the Bank had no loans, which would have been classified by
management as "Substandard" or "Doubtful" and no potential problem loans, which
would have been classified by management as "Special Mention."
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses 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. The allowance for loan losses is maintained at an
amount considered adequate to provide for potential losses. 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 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.
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 have reviewed
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
11
<PAGE>
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.
The following table analyzes activity in the Bank's allowance for loan
losses during the periods indicated.
<TABLE>
<CAPTION>
At or for
At or the eleven
for the months
year ended ended
June 30, June 30, At or for the year ended July 31,
----------- ----------- ---------------------------------
Allowance for Loan Losses 1998 1997 1996 1995 1994
- ------------------------------------------- ------------ ----------- --------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 300 $ 300 $ 166 $ 166 $ 184
Provision (credit) for loan losses - - 138 - (18)
Charge-offs:
Mortgage loans:
One-to four-family - - - - -
Multifamily - - (4) - -
Commercial real estate - - - - -
Land, construction and development - - - - -
Home equity - - - - -
Other loans - - - - -
--------- ----------- --------- ----------- ------------
Total charge-offs - - (4) - -
--------- ----------- --------- ----------- ------------
Recoveries - - - - -
--------- ----------- --------- ---------- -------------
Balance at end of year $ 300 $ 300 $ 300 $ 166 $ 166
========= =========== ========= =========== ============
Allowance for loan losses to total loans
at the end of the period (1) 0.26% 0.32% 0.38% 0.23% 0.24%
Allowance for loan losses to total
non-performing loans at end of period 87.72 150.75 254.24 86.01 32.49
Allowance for loan losses to total
non-performing assets at end of period 87.72 150.75 254.24 45.98 32.49
Net charge-offs to average loans
outstanding - - 0.01 - -
</TABLE>
_____________________________________
(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
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------------------------------------------------
1998 1997
-------------------------------------- -------------------------------------
Percent of Percent of
Loans in Each Percent Loans in Each
Allowance Percent of Category to Allowance of Category to
Amount Allowance Gross Loans Amount Allowance Gross Loans
----------- ---------- ------------- --------- ----------- -------------
Mortgage loans: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to four-family $ 125 41.7% 97.8% $105 35.0% 96.7%
Multifamily 4 1.3 0.6 5 1.7 1.0
Commercial real estate 8 2.7 0.7 4 1.3 0.4
Land, construction and
development 1 0.3 0.1 2 0.7 0.4
Home equity 2 0.7 0.7 3 1.0 1.3
Other loans - - 0.1 - - 0.2
Unallocated 160 53.3 - 181 60.3 -
----------- ---------- ------------- --------- ----------- -------------
Total allowance for loan losses $ 300 100.0% 100.0% $300 100.0% 100.0%
=========== ========== ============= ========= =========== =============
</TABLE>
<TABLE>
<CAPTION>
AT JULY 31,
---------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- --------------------------------- ----------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
Allowance Percent of to Gross Allowance Percent of to Gross Allowance Percent of to Gross
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Mortgage loans: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-family $ 85 28.3% 95.6% $79 47.6% 94.9% $ 83 50.0% 94.6%
Multifamily 5 1.7 1.2 6 3.6 1.4 6 3.6 1.9
Commercial real estate 4 1.3 0.5 4 2.4 0.6 5 3.0 0.7
Land construction and
development 2 0.7 0.5 2 1.2 0.2 1 0.6 0.2
Home equity 4 1.3 1.8 5 3.0 2.4 4 2.4 2.4
Other loans - - 0.4 - - 0.5 - - 0.2
Unallocated 200 66.7 - 70 42.2 - 67 40.4 -
-------- -------- --------- -------- --------- ---------- --------- -------- ---------
Total allowance for loan
losses $ 300 100.0% 100.0% $166 100.0% 100.0% $ 166 100.0% 100.0%
======== ======== ========= ======== ========= ========== ========== ======== =========
</TABLE>
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. Historically, the Bank has
maintained liquid assets at levels above the minimum requirements imposed by the
OTS regulations and above levels believed adequate to meet the requirements of
normal operations, including potential deposit outflows. At June 30, 1998, the
Bank's liquidity ratio for regulatory purposes was 60.8%.
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
and are reported at fair value with unrealized gains and losses included in
trading account activities in the statement of
13
<PAGE>
earnings. At June 30, 1998, 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 retained earnings. At June 30, 1998, $35.6 million of
mortgage-backed securities and other investments were classified as
available-for-sale. At June 30, 1998, mortgage-backed securities
held-to-maturity totaled $46.7 million and had a fair value of $46.6 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, 1998, all securities in the Bank's mortgage-backed
securities portfolio were directly insured or guaranteed by FNMA or the Federal
Home Loan Mortgage Corporation ("FHLMC"), 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 6.68% at June 30, 1998.
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. In addition, 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 ("GNMA"), FNMA and
FHLMC 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,
1998, the Company had $2.6 million investment in preferred stocks and mutual
funds. These investments are managed in the Company's available-for-sale
portfolio.
The following table sets forth activity in the Bank's mortgage-backed
securities and investment portfolio for the periods indicated.
14
<PAGE>
<TABLE>
<CAPTION>
For the year For the eleven For the year
ended months ended ended
June 30, June 30, July 31,
1998 1997 1996
-------------- ---------------- ---------------
(In thousands)
Held-to-maturity:
<S> <C> <C> <C>
Amortized cost at beginning of period $ 47,376 $ 44,133 $111,283
Purchases/sales, net 10,192 10,207 -
Transfer (to) from available-for-sale - - (56,447)
Principal repayments (10,602) (6,753) (10,484)
Premium and discount amortization, net (237) (211) (219)
--------------- ----------------- ---------------
Amortized cost at end of period $ 46,729 $47,376 $ 44,133
--------------- ----------------- ---------------
Available-for-sale:
Amortized cost at beginning of period $ 61,376 $59,898 $ -
Purchases/sales, net (7,440) 10,172 10,081
Transfer (to) from held-to-maturity - - 56,447
Principal repayments (18,331) (8,680) (6,622)
Premium and discount amortization, net (55) (14) (8)
--------------- ----------------- ---------------
Amortized cost at end of period $ 35,550 $ 61,376 $ 59,898
--------------- ----------------- ---------------
Total mortgage-backed securities and
investment portfolio $ 82,279 $108,752 $104,031
=============== ================= ===============
</TABLE>
The following table sets forth certain information regarding the
amortized cost and fair value of the Bank's mortgage-backed securities and
investments at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At July 31,
---------------------------------------------------- -------------------------
1998 1997 1996
-------------------------- ------------------------ -------------------------
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
----------- -------------- ----------- ------------ ----------- ------------
(In thousands)
Held-to-Maturity:
<S> <C> <C> <C> <C> <C> <C>
FNMA $ 44,284 $ 44,087 $ 44,136 $ 43,283 $ 39,135 $ 37,195
FHLMC 2,445 2,473 3,240 3,252 4,998 4,960
----------- -------------- ----------- ------------ ----------- ------------
Total held-to-maturity $ 46,729 $ 46,560 $ 47,376 $ 46,535 $ 44,133 $ 42,155
----------- -------------- ----------- ------------ ----------- ------------
Available-for-sale:
FNMA $ 22,576 $ 22,693 $ 41,173 $ 41,152 $ 37,454 $ 36,596
FHLMC 10,369 10,342 19,187 19,067 22,444 21,682
Mutual funds and preferred
stock 2,605 2,569 1,016 1,087 - -
----------- -------------- ----------- ------------ ----------- ------------
Total available-for-sale $ 35,550 $ 35,604 $ 61,376 $ 61,306 $ 59,898 $ 58,278
----------- -------------- ----------- ------------ ----------- ------------
Total mortgage-backed
securities and investment
portfolio $ 82,279 $ 82,164 $108,752 $107,841 $104,031 $100,433
=========== ============== =========== ============ =========== ============
</TABLE>
The table below sets forth certain information regarding the amortized
cost, fair value, weighted average yields and stated maturity of the Bank's
mortgage-backed securities and investment portfolio at June 30, 1998. No effect
has been given to prepayments or amortization of loans. There were no
mortgage-backed securities (exclusive of obligations of the U.S. Government and
any federal agencies) issued by any one entity with a total carrying value in
excess of 10% of stockholders' equity at June 30, 1998.
15
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1998
-------------------------------------------------------------
Weighted
Amortized Fair Average
Cost Value Coupon
----------------- --------------------- ---------------------
Held-to-Maturity: (Dollars in
thousands)
<S> <C> <C> <C>
No stated maturity date: $ - $ - - %
Due within 1 year 2,631 2,657 6.50
Due after 1 year but within 5 years 26,884 26,563 6.34
Due after 5 years but within 10 years 2,496 2,515 7.49
Due after 10 years 14,718 14,825 7.16
----------------- --------------------- ---------------------
Total held-to-maturity $ 46,729 $ 46,560 6.67%
----------------- --------------------- ---------------------
Available-for-sale:
No stated maturity date $ 2,105 $ 2,059 8.68%
Due within 1 year 6,365 6,297 5.50
Due after 1 year but within 5 years 15,193 15,130 6.88
Due after 5 years but within 10 years 4,780 4,910 7.34
Due after 10 years 7,107 7,208 7.04
----------------- --------------------- ---------------------
Total available-for-sale $ 35,550 $ 35,604 6.83%
----------------- --------------------- ---------------------
Total:
No stated maturity date $ 2,105 $ 2,059 8.68%
Due within 1 year 8,996 8,954 5.79
Due after 1 year but within 5 years 42,077 41,693 6.54
Due after 5 years but within 10 years 7,276 7,425 7.39
Due after 10 years 21,825 22,033 7.12
----------------- --------------------- ---------------------
Total mortgage-backed securities
and investment portfolio $ 82,279 $ 82,164 6.74%
================= ===================== =====================
</TABLE>
REAL ESTATE INVESTMENT. 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. However, the Bank has nearly liquidated this investment
through sales. At June 30, 1998, only one five-acre commercial parcel with a
book value of $262,000 remained unsold. The Company acquired this parcel from
the Bank in the second quarter of fiscal 1997.
The Bank is currently the plaintiff in litigation brought against the
Village of Olympia Field, its trustees, The Home Owners Association of the
Trails of Olympia Fields and individual members of its Home Owners Association
for actions by these defendants that impeded the orderly development of the
Trails of Olympia Fields.
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.
16
<PAGE>
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, 1998, the Bank had approximately
$123.8 million outstanding in savings deposits.
The authority 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.
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. Management does not believe that the use
of year end balances instead of average monthly balances would result in any
material difference in the information presented.
<TABLE>
<CAPTION>
At June 30, At July 31,
-------------------------------------------------------------- -----------------------------
1998 1997 1996
------------------------------- ------------------------------ -----------------------------
Percent of Weighted Percent of Weighted Percent of Weighted
Total Average Total Average Total Average
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
--------- ---------- --------- --------- -------- -------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing NOW
accounts $ 5,847 4.7% - % $ 4,582 3.7% - % $ 4,165 3.0% - %
Interest-bearing NOW accounts 7,668 6.2 2.01 7,178 5.9 2.02 7,310 5.3 2.02
Money market demand accounts 11,797 9.5 3.31 12,281 10.0 3.12 13,035 9.5 3.12
Passbook accounts 38,838 31.4 2.50 39,607 32.2 2.50 41,324 30.2 2.50
Certificates of deposit 59,685 48.2 5.37 59,333 48.2 5.34 71,343 52.0 5.48
--------- -------- --------- --------- -------- -------- --------- --------- -------
Total $123,835 100.0% 3.81% $122,981 100.0% 3.81% $137,177 100.0% 4.01%
========= ======== ========= ========= ======== ======== ========= ========= =======
</TABLE>
17
<PAGE>
The following table presents the savings deposit activity of the Bank
for the periods indicated.
<TABLE>
<CAPTION>
For the year For the eleven For the year
ended months ended ended
June 30, June 30, July 31,
1998 1997 1996
-------------- ---------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Deposits $ 263,421 $ 266,195 $ 266,028
Withdrawals (267,098) (284,167) (282,429)
-------------- ----------------- ----------------
Deposits in excess of (less than) withdrawals ( 3,677) (17,972) (16,401)
Interest credited 4,531 3,776 5,228
-------------- ----------------- ----------------
Total increase (decrease) in savings deposits $ 854 $ (14,196) $( 11,173)
============== ================= ================
</TABLE>
At June 30, 1998, the Bank had $6.4 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 $ 1,183 4.92%
After three but within six months 1,481 5.47
After six but within 12 months 1,497 5.33
After 12 months 2,258 5.56
-------------- ---------------
Total $ 6,419 5.37%
============== ===============
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, 1998.
<TABLE>
<CAPTION>
Period to Maturity at June 30, 1998 Total at
----------------------------------------- ----------------------------------------
One to More than
Less than Three Years Three to June 30, June 30, July 31,
Interest Rate Range One Year Five Years 1998 1997 1996
- ---------------------- ------------- ------------- ------------- ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
4.00% and below $ 265 $ - $ - $ 265 $ 257 $ 968
4.01% to 5.00% 9,868 - - 9,868 2,014 18,226
5.01% to 6.00% 28,690 18,703 1,166 48,559 54,622 34,515
6.01% to 7.00% 981 12 - 993 2,440 17,634
7.01% and above - - - - - -
============= ============= ============= ============ ============ ============
Total $ 39,804 $ 18,715 $ 1,166 $ 59,685 $ 59,333 $ 71,343
============= ============= ============= ============ ============ ============
</TABLE>
18
<PAGE>
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, 1998, the Bank had $53.0 million in FHLB of Chicago
borrowings and the capability to borrow additional funds upon complying with the
FHLB of Chicago's collateral requirements.
The Bank has in the past sold 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 the end of or
during the fiscal years 1998, 1997, and 1996. The Bank may utilize this type of
financing in the future.
The following table sets forth certain information regarding
borrowings at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At or for
For the year the eleven For the year
ended months ended ended
June 30, June 30, July 31,
1998 1997 1996
-------------- ------------- --------------
(Dollars in thousands)
FHLB of Chicago advances:
<S> <C> <C> <C>
Maximum amount outstanding at any month-end during the period $ 53,000 $ 49,600 $ 43,000
Average daily balance outstanding 48,530 43,849 37,800
Balance outstanding at end of period 53,000 49,600 39,900
Weighted average daily interest rate during the period 6.61% 6.22% 6.68%
Weighted average interest rate at end of period 5.59% 6.41% 6.75%
</TABLE>
SUBSIDIARY ACTIVITIES
As a federally chartered savings bank, the Bank is permitted to invest
an amount equal to 2% of its assets in service corporation subsidiaries with an
additional investment of 1% of assets where such investment serves primarily
community, inner city and community development. In addition to investments in
service corporations, federal institutions are permitted to invest an unlimited
amount in operating subsidiaries engaged solely in activities which a federal
savings bank may engage in directly. The Bank currently does not have any
subsidiary operations.
19
<PAGE>
PERSONNEL
At June 30, 1998, the Bank employed 47 full time and 16 part time
employees. At June 30, 1998, 50% 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.
YEAR 2000
The disclosure required for the Year 2000 Problem is incorporated
herein by reference to pages 22 through 24 of the Company's 1998 Annual Report
to Shareholders under the caption "Year 2000" which section is included in
Exhibit 13.1 to this Report.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The following is intended only as 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 will 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 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 "qualifying loans," which, primarily
consist of 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
Small Business Job Protection Act of 1996, the Bank is now recapturing (taking
into income) over a multi-year period a portion of the balance of its bad debt
reserve as of July 31, 1996.
DISTRIBUTIONS. To the extent that the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to result
in distributions from the Bank's "base year reserve," i.e., its reserve as of
July 31, 1988, to the extent thereof and then from the Bank's supplemental
reserve for losses on loans, to the extent thereof, and an amount based on the
amount distributed will be included in the Bank's taxable 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
20
<PAGE>
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.
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.
Thus, the Bank's AMTI is increased by an amount equal to 75% of the amount by
which the Bank's adjusted current earnings exceeds its AMTI (determined without
regard to this adjustment and prior to reduction for net operating losses). The
Bank does not expect to be subject to the AMT. Although the corporate
environmental tax of 0.12% of the excess of AMTI (with certain modifications)
over $2.0 million has expired, under current Administration proposals, such tax
will be retroactively reinstated for taxable years beginning after December 31,
1997 and before January 2009.
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.
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 7.3% 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,
1998, the Bank has approximately $9.5 million of Illinois' net loss deduction
carry forward that can be utilized to reduce Illinois taxable income.
As an Illinois holding company, the Company will pay an annual
franchise tax to the State of Illinois.
The Company will file a combined Illinois income tax return with the
Bank. The Company will be taxed at an effective rate equal to 7.3% 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 publicly-held savings association holding company, is also
required to file certain reports with, and otherwise comply with, the rules and
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regulations of the OTS and of the Securities and Exchange Commission (the "SEC")
under the federal securities laws.
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.
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; with the amount of
commercial loans in excess of 10% of assets being limited to small business
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. Such collateral is defined to include certain debt and equity
securities and bullion but generally does not include real estate. At June 30,
1998, the Bank's regulatory limit on loans to one borrower was $3.9 million. At
June 30, 1998, the Bank's largest aggregate amount of loans to one borrower was
$449,000, and the second largest borrower had an aggregate balance of $359,000.
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,
1998, the Bank maintained 99% of its portfolio assets in
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<PAGE>
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 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. The
initial restrictions include prohibitions against (a) engaging in any new
activity not permissible for a national bank, (b) paying dividends not
permissible under national bank regulations, (c) obtaining new advances from any
Federal Home Loan Bank and (d) establishing any new branch office in a location
not permissible for a national bank in the association's home state. In
addition, within one year of the date that a savings association ceases to meet
the QTL test, any company controlling the association would have to register
under, and become subject to the requirements of, the Bank Holding Company Act
of 1956, as amended (the "BHC Act"). If the savings association does not
requalify under the QTL test within the three-year period after it failed the
QTL test, it would be required to terminate any activity and to dispose of any
investment not permissible for a national bank and would have to repay as
promptly as possible any outstanding advances from a Federal Home Loan Bank. A
savings association that has failed the QTL test may requalify under the QTL
test and be free of such limitations, but it may do so only once.
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. The FDIC and the federal banking regulators have proposed
amendments to their minimum capital regulations to provide that the minimum
leverage capital ratio for a depository institution that has been assigned the
highest composite rating of 1 under the Uniform Financial Institutions Rating
System will be 3% and that the minimum leverage capital ratio for any other
depository institution will be 4%, unless a higher leverage capital ratio is
warranted by the particular circumstances or risk profile of the depository
institution. 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.
The OTS and the other federal banking regulators adopted, effective
October 1, 1998, an amendment to their risk-based capital guidelines that
permits insured depository institutions to include in supplementary capital up
to 45% of the pretax net unrealized holding gains on certain available-for-sale
equity securities, as such gains are computed under the guidelines. The OTS has
promulgated a regulation that requires a savings association with "above normal"
interest rate risk, when determining compliance with its risk-based capital
requirements, to hold additional capital to account for its "above normal"
interest rate risk. Pending resolution of related regulatory issues, the OTS has
deferred enforcement of this regulation. A savings association's interest rate
risk is measured by the decline in the net portfolio value of its assets (i.e.,
the
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<PAGE>
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off balance sheet contracts) resulting from a hypothetical 2%
increase or decrease in market rates of interest, divided by the estimated
economic value of the association's assets, as calculated in accordance with
guidelines set forth by the OTS. At the times when the 3 month Treasury bond
equivalent yield falls below 4%, an association may compute its interest rate
risk on the basis of a decrease equal to one-half of that Treasury rate rather
than on the basis of 2%. A savings association whose measured interest rate risk
exposure exceeds 2% would be considered to have "above normal" risk. The
interest rate risk component is an amount equal to one-half of the difference
between the association's measured interest rate risk and 2%, multiplied by the
estimated economic value of the association's assets. That dollar amount is
deducted from an association's total capital in calculating compliance with its
risk based capital requirement. Any required deduction for interest rate risk
becomes effective on the last day of the third quarter following the reporting
date of the association's financial data on which the interest rate risk was
computed. An institution with assets of less than $300 million and risk-based
capital ratios in excess of 12% is not subject to the interest rate risk
component, unless the OTS determines otherwise. The rule also provides that the
Director of the OTS may waive or defer an institution's interest rate risk
component on a case-by-case basis. The OTS has indefinitely deferred the
implementation of the interest rate risk component in the computation of an
institution's risk-based capital requirements. The OTS continues to monitor the
interest rate risk of individual institutions and retains the right to impose
additional capital requirements on individual institutions.
At June 30, 1998, 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, 1998.
<TABLE>
<CAPTION>
Bank Capital
Bank Requirements Bank Excess
------------------------- ----------------------------------------------------
Amount Percent Amount Percent Amount Percent
------------ ------------ ------------ ------------ ----------- --------------
(Dollars In thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital....... $ 25,888 12.30% $3,158 1.50% $22,730 10.80%
Core capital........... 25,888 12.30 6,316 3.00 19,572 9.30
Risk-based capital..... 26,188 31.76 6,597 8.00 19,591 23.76
</TABLE>
A reconciliation between the Bank's regulatory capital and GAAP
capital at June 30, 1998 is presented below.
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
GAAP capital...................................... $ 25,968 $ 25,968 $ 25,968
Unrealized loss on mortgage-backed securities
available-for-sale, net of tax.................. (80) (80) (80)
Allowance for loan losses......................... - - 300
--------- ------------- ------------
Regulatory capital................................ $ 25,888 $ 25,888 $ 26,188
--------- ------------- ------------
</TABLE>
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<PAGE>
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations currently impose
limitations upon capital distributions by savings associations, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash out merger and other distributions
charged against capital. At least 30-days written notice must be given to the
OTS of a proposed capital distribution by a savings association, and capital
distributions in excess of specified earnings or by certain institutions are
subject to approval by the OTS. An association that has capital in excess of all
fully phased-in regulatory capital requirements before and after a proposed
capital distribution and that is not otherwise restricted in making capital
distributions, may, after prior notice but without the approval of the OTS, make
capital distributions during a calendar year equal to the greater of (a) 100% of
its net earnings to date during the calendar year plus the amount that would
reduce by its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year, or (b)
75% of its net earnings for the previous four quarters. Any additional capital
distributions would require prior OTS approval. The OTS has proposed amendments
of its capital distribution regulations to reduce regulatory burdens on savings
associations. If adopted as proposed, certain savings associations will be
permitted to pay capital distributions within the amounts described above for
Tier 1 institutions 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, will continue to have 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 above.
LIQUIDITY. The Bank is required to maintain an average daily balance
of liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of certain
mutual funds and certain corporate debt securities and commercial paper) equal
to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the savings flows of
member institutions, and is currently 4%. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The Bank's average liquidity ratio
for the month ended June 30, 1998, was 59.8%, which exceeded the applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
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 upon the savings
association's total assets, including consolidated subsidiaries, as reported in
the association's latest quarterly Thrift Financial Report. During July, 1998,
the Bank paid the semiannual assessment of $29,225. The OTS has proposed
amendments to its regulations that are intended to assess savings associations
on a more equitable basis. The proposed regulations would base the assessment
for an individual savings association on three components: the size of the
association, on which the basic assessment would be based; the association's
supervisory condition, which would result in percentage increases for any
savings institution with a composite rating of 3, 4, or 5 in its most recent
safety and soundness examination; and the complexity of the association's
operations, which would result in percentage increases for a savings association
that managed over $1 billion in trust assets, serviced for others loans
aggregating more than $1 billion, or had certain off-balance sheet assets
aggregating more than $1 billion. In order to avoid a disproportionate impact on
the smaller savings institutions, the OTS is proposing to permit the portion of
the assessment based on assets size either under the current regulations or
under the amended regulations.
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<PAGE>
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.
In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
in meeting community needs. In particular, the system will focus 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. The amended CRA regulations also clarify how an
institution's CRA performance would be considered in the application process.
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"). In general, an
affiliate of the Bank is any company that controls the Bank or any other company
that is controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are insured depository institutions.
Currently, a subsidiary of a bank that is not also a depository institution is
not treated as an affiliate of the bank for purposes of Sections 23A and 23B,
but the FRB has proposed treating any subsidiary of a bank that is engaged in
activities not permissible for bank holding companies under the BHCA as an
affiliate for purposes of Sections 23A and 23B. The OTS regulations 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 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.
26
<PAGE>
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.
Civil penalties cover a wide range of violations and actions and range from
$5,000 for each day during which violations of law, regulations, orders, and
certain written agreements and conditions continue, up to $1 million per day for
such violations if the person obtained a substantial pecuniary gain as a result
of such violation or knowingly or recklessly caused a substantial loss to the
institution. Criminal penalties for certain financial institution crimes include
fines of up to $1 million and imprisonment for up to 30 years. 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 and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director or principal
stockholder. In addition, the OTS adopted regulations that authorize, but do not
require, the OTS to order an institution that has been given 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
27
<PAGE>
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 five
categories based on the association's capital. Generally, a savings association
is treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10.0%, its ratio of core capital to risk weighted assets is
at least 6.0%, its ratio of core capital to total assets is at least 5.0%, and
it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings association will be treated as "adequately capitalized"
if its ratio of total capital to risk-weighted assets is at least 8.0%, its
ratio of core capital to risk weighted assets is at least 4.0%, and its ratio of
core capital to total assets is at least 4.0% (3.0% if the association receives
the highest rating on the CAMELS financial institutions rating system). A
savings association that has a total risk based capital of less than 8.0% or a
leverage ratio or a Tier 1 capital ratio that is less than 4.0% (3.0% leverage
ratio if the association receives the highest rating on the CAMELS financial
institutions rating system) is considered to be "undercapitalized." A savings
association that has a total risk based capital of less than 6.0% or a Tier 1
risk based capital ratio or a leverage ratio of less than 3.0% is considered to
be "significantly undercapitalized." A savings association that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "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.
The severity of the action authorized or required to be taken under
the prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
association would be undercapitalized. An undercapitalized association is
required to file a capital restoration plan within 45 days of the date the
association receives notice that it is within any of the three undercapitalized
categories. The OTS is required to monitor closely the condition of an
undercapitalized association and to restrict the asset growth, acquisitions,
branching, and new lines of business of such an association. Significantly
undercapitalized associations are subject to restrictions on compensation of
senior executive officers; such an association may not, without OTS consent, pay
any bonus or provide compensation to any senior executive officer at a rate
exceeding the officer's average rate of compensation (excluding bonuses, stock
options and profit-sharing) during the 12 months preceding the month when the
association became undercapitalized. A significantly undercapitalized
association may also be subject, among other things, to forced changes in the
composition of its board of directors or senior management, additional
restrictions on transactions with affiliates, restrictions on acceptance of
deposits from correspondent associations, further restrictions on asset growth,
restrictions on rates paid on deposits, forced termination or reduction of
activities deemed risky, and any further operational restrictions deemed
necessary by the OTS.
If one or more grounds exist for appointing a conservator or receiver
for an association, the OTS may require the association to issue additional debt
or stock, sell assets, be acquired by a depository association holding company
or combine with another depository association. The OTS and the FDIC have a
broad range of grounds under which they may appoint a receiver or conservator
for an insured depositary association. Under FDICIA, the OTS is required to
appoint a receiver (or with the concurrence of the FDIC, a conservator) for a
critically undercapitalized association within 90 days after the association
becomes critically
28
<PAGE>
undercapitalized or, with the concurrence of the FDIC, to take such other action
that would better achieve the purposes of the prompt corrective action
provisions. Such alternative action can be renewed for successive 90-day
periods. However, if the association continues to be critically undercapitalized
on average during the quarter that begins 270 days after it first became
critically undercapitalized, a receiver must be appointed, unless the OTS makes
certain findings with which the FDIC concurs and the Director of the OTS and the
Chairman of the FDIC certify that the association is viable. In addition, an
association that is critically undercapitalized is subject to more severe
restrictions on its activities, and is prohibited, without prior approval of the
FDIC from, among other things, entering into certain material transactions or
paying interest on new or renewed liabilities at a rate that would significantly
increase the association's weighted average cost of funds.
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
financial information as of the reporting period ending seven months before 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 authorized the FDIC to impose a special
one-time assessment on all institutions with SAIF-assessable deposits in the
amount necessary to recapitalize the SAIF-assessable deposits as of March 31,
1995. For the Bank, the special assessment was $936,000. The impact on
operations, net of related tax effects, reduced reported earnings by $617,000
for the eleven months ended June 30, 1997.
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. Until December 31, 1999, or such earlier
date on which the last savings association ceases to exist, the rate of
assessment for BIF-assessable deposits will be one-fifth of the rate imposed on
SAIF-assessable deposits. For the semi-annual period beginning on July 1, 1997,
the rates of assessment for the
29
<PAGE>
FICO bonds are 0.0126% for BIF-assessable deposits and 0.0630% for
SAIF-assessable deposits. For the semi-annual period beginning July 1, 1998, the
rates of assessment for the FICO bonds is 0.0122% for BIF-assessable deposits
and 0.0610% for SAIF-assessable deposits.
The 1996 Act also provides for the merger of the BIF and SAIF on
January 1, 1999, with such merger being conditioned upon the prior elimination
of the thrift charter. The Secretary of the Treasury is required to conduct a
study of relevant factors with respect to the development of a common charter
for all insured depository institutions and abolition of separate charters for
banks and thrifts and to report the Secretary's conclusions and findings to the
Congress. The Secretary of the Treasury has recommended that the separate
charter for thrifts be eliminated only if other legislation is adopted that
permits bank holding companies to engage in certain non-financial activities.
Absent legislation permitting such non-financial activity, the Secretary of the
Treasury recommended retention of the thrift charter. The Secretary of the
Treasury also recommended the merger of the BIF and the SAIF irrespective of
whether the thrift charter is eliminated. However, the current version of bank
modernization legislation, The Financial Services Act of 1998, H.R. 10, which
was passed by the U.S. House of Representatives in May 1998 and was being
considered by the U.S. Senate over the summer of 1998, does not require thrift
institutions to convert to bank charter. H.R. 10 also requires the FDIC's Board
of Governors to report to Congress on various issues regarding the deposit
insurance funds, including such questions as the plans being developed for the
merger of the funds, an estimate of the cost of such merger to be borne by SAIF
members, and any recommendations for legislative action to provide for an
efficient merger of the funds.
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 at least equal to the greater of 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year or 1/20 of its advances (borrowings)
from the FHLB of Chicago. The Bank was in compliance with this requirement with
an investment in the capital stock of the FHLB of Chicago at June 30, 1998, of
$3.4 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.
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 $171,000, $138,000, and $148,000 respectively
during the fiscal year ended June 30, 1998, the eleven months ended June 30,
1997, and the fiscal year ended July 31, 1996. If dividends were reduced, or
interest on future Federal Home Loan Bank advances increased, the Bank's net
interest income would likely also be reduced.
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
30
<PAGE>
reserves be maintained in the amount of 3% of the aggregate of transaction
accounts up to $47.8 million. The amount of aggregate transaction accounts in
excess of $47.8 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 $4.7 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.
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.
As a unitary savings bank holding company, the Company generally is
not restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to satisfy the QTL test.
Upon any non-supervisory acquisition by the Company of another savings
association or savings bank that meets the QTL test and is deemed to be a
savings association by the OTS and that will be held as a separate subsidiary,
the Company would become a multiple savings association holding company and
would be subject to limitations on the types of business activities in which it
could engage. The HOLA limits the activities of a multiple savings association
holding company and its noninsured association subsidiaries primarily to
activities permissible for bank holding companies under Section 4(c)(8) of the
BHC Act, subject to the prior approval of the OTS, and to other activities
authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings association holding company controlling savings
associations in more than one state, subject to two exceptions: an acquisition
of a savings association in another state (a) in a supervisory transaction or
(b) pursuant to authority under the laws of the state of the association to be
acquired that specifically permit such acquisitions. The conditions imposed upon
interstate acquisitions by those states that have enacted authorizing
legislation vary. Some states impose conditions of reciprocity, which have the
effect of requiring that the laws of both the state in which the acquiring
holding company is located (as determined by the location of its subsidiary
savings association) and the state in which the association to be acquired is
located, have each enacted legislation allowing its savings associations to be
acquired by out-of-state holding companies on the
31
<PAGE>
condition that the laws of the other state authorize such transactions on terms
no more restrictive than those imposed on the acquiror by the state of the
target association. Some of these states also impose regional limitations, which
restrict such acquisitions to states within a defined geographic region. Other
states allow full nationwide banking without any condition of reciprocity. Some
states do not authorize interstate acquisitions of savings associations.
Transactions between the Bank and the Company and its other
subsidiaries are subject to various conditions and limitations. The Bank is
required to give 30-days written notice to the OTS prior to any declaration of
the payment of any dividends or other capital distributions to the Company.
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.
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; depositor and borrower preferences; and
the factors described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000" in Item 7 of the Form 10-K.
ITEM 2. PROPERTIES
The Bank conducts its business through its corporate office and two
branch locations, as set forth in the following table.
<TABLE>
<CAPTION>
Lease Net Book
Leased or Date Leased Expiration Value at
Owned or Acquired Date June 30, 1998
------------- -------------- -------------- --------------
(In thousands)
Main Office:
Old McHenry Road
<S> <C> <C> <C> <C>
Long Grove, Illinois 60047.... Owned 1980 ----- $3,543
Branches:
1601 North Milwaukee Avenue
Chicago, Illinois 60647....... Owned 1941 ----- 409
8301 West Lawrence
Norridge Illinois 60656....... (1) 1976 4/2006(2) 23
</TABLE>
____________________
(1) Land leased, building owned by the Bank.
(2) The Bank has two five-year renewal options.
32
<PAGE>
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, threatened or pending, to which
the Bank or its assets is or may become a party 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
Big Foot Financial Corp. common stock is traded over the counter and
is listed on the National Market System of the Nasdaq Stock Market under the
symbol "BFFC." At June 30, 1998, there were 2,512,750 shares of Big Foot
Financial Corp. common stock issued and outstanding and there were approximately
485 holders of record. The price range of the common stock from the date the
common stock began trading on December 20, 1996 was as follows:
THREE MONTHS ENDED HIGH LOW
------------------ ---- ---
December 31, 1996* $13.000 $12.313
March 31, 1997 14.750 12.688
June 30, 1997 16.125 13.875
September 30, 1997 17.875 16.000
December 31, 1997 21.500 17.750
March 31, 1998 23.938 20.125
June 30, 1998 21.875 17.313
__________________________________
*Period began December 20, 1996
The stock price information set forth in the table above was provided
by the National Association of Securities Dealers, Inc. High, low, and closing
prices and daily trading volume are reported in most major newspapers.
The Company has not paid a cash dividend since its incorporation. The
Board of Directors may consider the payment of cash dividends, dependent on the
results of operations and financial condition of the Company, tax
considerations, industry standards, economic conditions, regulatory
restrictions, general business practices, and other factors. The Company's
ability to pay dividends is dependent on the dividend payments it receives from
its subsidiary, Fairfield Savings Bank, F.S.B. which are subject to regulations
and the Bank's continued compliance with all regulatory capital requirements.
See Note 15 of the Notes to the Consolidated Financial Statements for
information regarding limitations of the Bank's ability to pay dividends to the
Company.
33
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
At or for At or for the
the eleven months
year ended ended
June 30, June 30, At or for the year ended July 31,
1998 1997 1996(1) 1995(1) 1994(1)
------------ ---------------- ---------------------------------------
Selected Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets $220,604 $ 214,896 $194,624 $200,251 $195,207
Loans receivable (net) 115,472 93,624 79,144 70,984 68,426
Allowance for loan losses 300 300 300 166 166
Mortgage-backed securities 79,764 107,595 102,411 111,283 111,987
Savings deposits 123,835 122,981 137,177 148,350 141,830
Borrowed funds 53,000 49,600 39,900 32,300 34,300
Stockholders' equity 38,094 36,977 13,579 14,423 13,441
Selected Operating Data:
Net interest income before provision for
loan losses 6,442 5,346 4,704 5,341 6,129
Net income 1,180 220 226 982 2,110
Net income excluding special SAIF
assessment, net of tax 1,180 837 226 982 2,110
Selected Financial Ratios:
Bank Capital ratios:
Tangible 12.30% 12.13% 7.35% 7.05% 6.50%
Core 12.30 12.13 7.35 7.05 6.50
Risk-based 31.76 34.03 21.59 21.28 19.63
Return on average assets 0.55 0.11 0.11 0.51 1.09
Return on average assets excluding
special SAIF assessment, net of tax 0.55 0.41 0.11 0.51 1.09
Return on average stockholders' equity 3.12 0.82 1.58 6.98 16.93
Return on average stockholders' equity
excluding special SAIF assessment,
net of tax 3.12 3.13 1.58 6.98 16.93
Consolidated equity to assets at end of
period 17.27 17.21 6.98 7.20 6.89
Noninterest expense to average assets 2.47 2.59 2.36 2.45 2.63
Noninterest expense to average assets
excluding special SAIF assessment 2.47 2.13 2.36 2.45 2.63
Non-performing assets as a percent of
total assets 0.16 0.09 0.06 0.18 0.26
Allowance for loan losses as a percent
of total loans 0.26 0.32 0.38 0.23 0.24
Allowance for loan losses as a percent
of non-performing loans 87.72 150.75 254.24 86.01 32.49
Per Share Data:
Basic earnings per share $ 0.50 $ 0.27 N/A N/A N/A
Diluted earnings per share 0.49 0.27 N/A N/A N/A
Book value 15.16 14.72 N/A N/A N/A
Stock Quotes:
High(2) $ 23.938 $ 16.125 N/A N/A N/A
Low(2) 16.000 12.313 N/A N/A N/A
At June 30 18.000 16.125 N/A N/A N/A
</TABLE>
__________________________________________________
(1) Fairfield Savings Bank, F.S.B. only.
(2) Quotes for 1997 include the period from December 20, 1996 to June 30, 1997.
34
<PAGE>
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 24 of the Company's 1998 Annual Report to
Shareholders 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 10 of the Company's 1998 Annual Report to
Shareholders 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 25 through 54 of the Company's 1998 Annual Report to
Shareholders under the captions "Independent Auditor's 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 8, and page 18
of the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders
(the "Proxy Statement") is incorporated herein by reference: "Election of
Directors," "Information as to Nominees and Continuing 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 9 through 18, 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."
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."
35
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information included on page 18 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, 1998 and June 30, 1997 and the related
consolidated statements of earnings, stockholders' equity, and cash
flows for the year ended June 30, 1998, the eleven month period ended
June 30, 1997 and the year ended July 31, 1996 together with the
related notes and the independent auditors' report of KPMG Peat
Marwick LLP, independent certified public accountants.
(2) Schedules omitted as they are not applicable.
(3) Exhibits
36
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Article of Incorporation of Big Foot Financial Corp.*
3.2 Bylaws of Big Foot Financial Corp.*
4.3 Specimen of Stock Certificate of Big Foot Financial Corp.*
10.1(a) Employee Stock Ownership Plan of Big Foot Financial Corp.*
10.1(b) ESOP Trust Agreement dated as of December 19, 1996.**
10.2 Loan Agreement by and between Big Foot Financial Corp.
Employee Stock Ownership Plan Trust and Big Foot Financial
Corp. Made and Entered Into as of December 19, 1996, as
amended.**
10.3 Employment Agreement between Big Foot Financial Corp. and
George M. Briody.**
10.4 Form of Employment Agreement between Big Foot Financial
Corp. and Executive Officers.**
10.5 Employment Agreement between Fairfield Savings Bank, F.S.B.
and George M. Briody.**
10.6 Form of Employment Agreement between Fairfield Savings Bank,
F.S.B. and Executive Officers.**
10.7 Form of Employee Retention Agreement between Big Foot
Financial Corp., Fairfield Savings Bank, F.S.B. and certain
employees.**
10.8 Lease Agreement of Fairfield Savings Bank, F.S.B. for
Norridge Branch Office, dated April 29, 1976.*
10.9 Amended and Restated Severance Pay Plan of Fairfield Savings
Bank, F.S.B., Adopted on September 17, 1996, Effective on
December 19, 1996.**
10.10(a) Fairfield Savings Bank Profit Sharing and Savings Plan (as
amended and restated effective August 1, 1989).*
10.10(b) Amendments No.1 (dated September 21, 1993), No. 2 (dated
July 19, 1994) and No. 3 (dated November 18, 1996) to the
Fairfield Savings Bank Profit Sharing and Savings Plan.**
10.11(a) Big Foot Financial Corp. 1997 Stock Option Plan***
10.11(b) Amendment No. 1 to the Big Foot Financial Corp. 1997 Stock
Option Plan****
10.12 Big Foot Financial Corp. 1997 Recognition and Retention
Plan*****
13.1 Portions of Big Foot Financial Corp. 1998 Annual Report to
shareholders.
37
<PAGE>
21.1 Subsidiaries of the Registrant*
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule (Submitted only with filing in
electronic format).
99.1 Proxy statement for 1998 Annual Meeting of Stockholders of
Big Foot Financial Corp. (previously filed with the
Securities and Exchange Commission on September 10, 1998.
* 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.
** 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.
*** Incorporated herein by reference to the Schedule 14A filed with the
Securities and Exchange Commission on May 22, 1997.
*****Incorporated herein by reference to the Schedule 14A filed with the
Securities and Exchange Commission on November 17, 1997.
b. Reports on Form 8-K - None
38
<PAGE>
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 23, 1998.
Big Foot Financial Corp.
By: /s/ George M. Briody
--------------------
George M. Briody
President
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.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
/s/ George M. Briody President, Director
- ----------------------------- (Principal Executive Officer) September 23, 1998
George M. Briody
/s/ F. Gregory Opelka Executive Vice President, Director September 23, 1998
- -----------------------------
F. Gregory Opelka
/s/ Timothy L. McCue Vice President, Chief Financial Officer September 23, 1998
- -----------------------------
Timothy L. McCue
/s/ Michael J. Cahill Vice President, Controller September 23, 1998
- -----------------------------
Michael J. Cahill
/s/ Maurice F. Leahy Director September 23, 1998
- -----------------------------
Maurice F. Leahy
/s/ Eugene W. Pilawski Director September 23, 1998
- -----------------------------
Eugene W. Pilawski
/s/ Joseph J. Nimrod Director September 23, 1998
- -----------------------------
Joseph J. Nimrod
/s/ Walter E. Powers, M.D. Director September 23, 1998
- -----------------------------
Walter E. Powers, M.D.
/s/ William B. O'Connell Director September 23, 1998
- -----------------------------
William B. O'Connell
39
</TABLE>
1998 ANNUAL REPORT
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
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 Bank completed its
conversion (the "Conversion") from a federally chartered mutual savings bank to
a federally chartered stock savings bank, and the Company acquired all of the
capital stock of the Bank. The Company issued and sold 2,512,750 shares of its
common stock, $.01 par value per share, at a price of $10.00 per share in a
subscription offering (the "Offering") to eligible members of the Bank and to
the Company's Employee Stock Ownership Plan ("ESOP"). Net proceeds from the
Offering amounted to approximately $22.0 million. At June 30, 1998, there were
2,512,750 shares outstanding. The Company's sole business activity consists of
the ownership of the Bank. The Company also invests in long and short-term
investment grade marketable securities and other liquid investments. The
financial data presented in this Annual Report represents the activity of Bank
for the period prior to the Conversion and the consolidated activity of Big Foot
Financial Corp. and subsidiary thereafter.
The business of the Bank is that of a financial intermediary engaged
primarily in attracting savings deposits from the general public and using such
deposits to originate one- to four-family residential mortgage loans and, to a
lesser extent, multifamily residential loans, commercial real estate loans,
land, construction and development loans and consumer loans primarily in its
market area. The Bank maintains an investment portfolio consisting primarily of
mortgage-backed securities. The operations of the Bank are influenced
significantly by general economic conditions and by policies of financial
institution regulatory agencies, including the Office of Thrift Supervision (the
"OTS") and the Federal Deposit Insurance Corporation (the "FDIC"). Interest
rates on competing investments and general market interest rates influence the
Bank's cost of funds. Lending activities are affected by the demand for
financing of real estate and other types of loans, which in turn is affected by
the interest rates at which such financings may be offered.
The Bank's earnings are primarily dependent on its net interest income,
which is determined by the difference (the "spread") between the yields earned
on its interest earning assets, such as loans and investments, and the rates
paid on its interest bearing liabilities, primarily savings deposits and
borrowings. Results of operations are also dependent upon the level of the
Bank's noninterest income, including gain on sale of securities, fee income and
service charges, and by noninterest expenses, principally its general and
administrative expenses.
Management Strategy
Home Lending and Asset Quality. The Bank's strategy has been to maintain
its focus as a traditional consumer oriented financial intermediary serving the
markets in which its offices are located.
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1998 ANNUAL REPORT
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The Bank has emphasized, and intends to continue to emphasize, the
origination of one- to four-family residential mortgage loans in its lending
area, which is defined generally as Cook, Du Page and Lake Counties in Illinois.
At June 30, 1998, one- to four-family family residential mortgage loans totaled
$113.4 million or over 97% of gross loans, of which $107.8 million or
approximately 92.8% of gross loans, are at fixed rates of interest.
Approximately 2.0% of gross loans consisted of multifamily mortgage loans, land,
construction and development loans, home equity and other loans. For the 1998
fiscal year, the Bank originated $39.4 million of loans. The Bank also invests
in mortgage-backed securities. The Bank's holdings of mortgage-backed securities
totaled $74.5 million at June 30, 1998, representing over 35% of total assets.
The Bank pays particular attention to both the value estimates applied to
the collateral securing loans as well as to the creditworthiness of its
prospective borrowers and employs rigorous underwriting standards to minimize
risk of loss. As a result of this strategy, historically the Bank has had
minimal loss experience in its lending operations. The Bank's ratio of
non-performing loans to total loans at year-end ranged from 0.15% to 0.74% for
the last five fiscal year ends and was 0.30% at June 30, 1998. Non-performing
assets to total assets ratio ranged from 0.06% to 0.26% for the last five fiscal
year ends and was 0.16% at June 30, 1998. The Bank's ratio of allowance for loan
losses to non-performing loans ranged from 32.49% to 254.24% for the last five
fiscal year ends and was 87.72% at June 30, 1998.
Savings Deposits and Borrowed Money. The Bank's savings deposits are
derived principally from its primary market area. The Bank's strategy has been
to maintain a high level of stable savings deposits by providing quality service
to its customers without significantly increasing its cost of funds. The Bank's
low-cost deposit base, consisting of passbook accounts, noninterest bearing
demand accounts, NOW accounts and money market demand accounts, totaled $64.2
million or 51.8% of total savings deposits and had a weighted average effective
rate of 2.36% at June 30, 1998. For the past three years, these accounts have
consistently accounted for more than 48.0% of total savings deposits and had a
weighted average effective rate of not more than 2.41% throughout this period.
At June 30, 1998, money market demand accounts totaled $11.8 million or 9.5% of
total savings deposits and had a weighted average effective rate of 3.31%. The
Bank has consistently maintained an overall cost of funds lower than the
National Median Cost of Funds Rate as determined by the OTS. At June 30, 1998,
the Bank's cost of savings deposits was 3.81% and its cost of funds (including
FHLB borrowings) was 4.34%, or 53 basis points below the National Median Cost of
Funds Rate. The Bank has not and does not intend to use brokered deposits as a
source of funds.
Management of Interest Rate Risk. The Bank's business strategy also seeks
to reduce the Bank's vulnerability to increases in interest rates. Pursuant to
this strategy, the Bank, (i) emphasizes the origination of mortgage loans with
terms of 15-years, instead of 30-year terms, (ii) seeks to attract and maintain
passbook accounts, which are considered by management to be more resistant to
increases in interest rates and (iii) purchases mortgage-backed securities
primarily with maturities of five to fifteen years.
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1998 ANNUAL REPORT
================================================================================
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal objectives of the Bank's interest rate risk management
activities are to: (i) evaluate the interest rate risk included in certain
balance sheet accounts; (ii) determine the level of risk appropriate given the
Bank's business focus, operating environment, capital and liquidity requirements
and performance objectives; and (iii) manage this risk consistent with Board
approved guidelines. Through such management, the Bank seeks to reduce
vulnerability to changes in interest rates and to manage the ratio of interest
rate sensitive assets to interest rate sensitive liabilities within specified
maturities or repricing dates. The Bank monitors its interest rate risk as such
risk relates to its operating strategies. The change in levels of interest rates
is an uncertainty that could have an impact on the earnings of the Bank. The
Bank's Chief Financial Officer is charged with the responsibility of developing
and implementing an interest rate risk management and reporting system. This
system measures the Bank's exposure to interest rate risk and provides reports
quarterly to management and the Board of Directors to ensure compliance with the
limits of the policy.
To the extent consistent with its interest rate spread objectives and
market conditions, the Bank attempts to manage its interest rate risk and has
taken several steps in this regard. First, a majority of the Bank's
mortgage-backed and investment securities acquisitions since 1993 have been
securities having a balloon maturity of five or seven years. At June 30, 1998,
the Company had $79.8 million in mortgage-backed securities, approximately $58.3
million of which mature in ten years or less. The Bank's portfolio of securities
available-for-sale is marked-to-market monthly and is carried on the books of
the Bank at fair value. Any sale of such securities may result in a gain or loss
to the Bank to the extent the market value at the time of sale exceeds or is
less than the amortized cost.
Second, a significant portion of the Bank's deposits are passbook
accounts, which are considered by management to be somewhat more resistant to
interest rate changes than most other types of accounts. At June 30, 1998, the
Bank had $38.8 million in passbook accounts. Finally, although the Bank makes
minimal adjustable rate loans due to competitive factors, the Bank's fixed rate
lending program emphasizes loans with terms of 15 years or less. At June 30,
1998, the Bank had $42.3 million or over 36.0% of total loans with remaining
terms of 16 years or less.
Despite the efforts taken by the Bank to seek to reduce its level of
interest rate risk, and the Bank's intent to continue to seek to reduce its
exposure to interest rate risk, the Bank has remained vulnerable to increases in
interest rates. There can be no assurance that the Bank will not experience
changes in net income and net interest income during periods of increasing or
decreasing interest rates.
Net Portfolio Value ("NPV") analysis provides a quantification of
interest rate risk. In essence, this approach calculates the present value of
expected cash flows from existing assets less the present value of expected cash
flows from existing liabilities plus the present value of net expected cash
inflows from existing off-balance sheet contracts.
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1998 ANNUAL REPORT
================================================================================
The OTS provides all institutions that file a schedule entitled the
Consolidated Maturity & Rate schedule ("CMR") as a part of their quarterly
Thrift Financial Report with an interest rate sensitivity report of NPV. The OTS
simulation model uses a discounted cash flow analysis and an option-based
pricing approach to measuring the interest rate sensitivity of NPV. The OTS
model estimates the economic value of each type of asset, liability, and
off-balance sheet contract under the assumption that the Treasury yield curve
shifts instantaneous and parallel up and down 100 to 400 basis points in 100
basis point increments. The OTS allows thrifts under $500 million in total
assets to use the results of their interest rate sensitivity model, which is
based on information provided by the institution, to estimate the sensitivity of
NPV.
The OTS model utilizes an option-based pricing approach to estimate the
sensitivity of mortgage loans. The most significant embedded option in these
types of assets is the prepayment option of the borrowers. The OTS model uses
various price indications and prepayment assumptions to estimate sensitivity of
mortgage loans.
In the OTS model the value of deposit accounts appears on the asset and
liability side of the NPV analysis. In estimating the value of certificates of
deposit accounts, the liability portion of the CD is represented by the implied
value when comparing the difference between the CD face rate and available
wholesale CD rates. On the asset side of the NPV calculation, the value of the
"customer relationship" due to the rollover of retail CD deposits represents an
intangible asset in the NPV calculation.
Other deposit accounts such as NOW accounts, money market demand
accounts, passbook accounts, and non-interest-bearing accounts also are included
on the asset and liability side of the NPV calculation in the OTS model. These
accounts are valued at 100% of the respective account balances on the liability
side. On the asset side of the analysis, the value of the "customer
relationship" of the various types of deposit accounts is reflected as a deposit
intangible.
The NPV sensitivity of borrowed funds is estimated by the OTS model based
on a discounted cash flow approach. The cash flows are assumed to consist of
monthly or semi-annual interest payments with principal paid at maturity
(dependent upon the type of borrowing). These cash flows are discounted based
upon London Interbank Offered Rates ("LIBOR"). The OTS model is based on only
the Bank's balance sheet.
Under OTS regulations, an institution's "normal" level of interest rate
risk in the event of an immediate and sustained 200 basis point change in
interest rates is a decrease in the institution's NPV in an amount not exceeding
2% of the present value of its assets. As of June 30, 1998, the Bank's change in
present value of its assets in a sustained 200 basis point change in interest
rate is projected to be approximately 2.25%. Most thrift institutions with
greater than "normal" interest rate exposure must take a deduction from their
total capital available to meet their risk based capital requirement. The amount
of that deduction is one-half of the difference between (a) the institution's
actual calculated exposure to the 200 basis point interest rate increase or
decrease (whichever results in the greater pro forma decrease in NPV) and (b)
its "normal" level of exposure which is 2% of the present value of its assets.
However, savings institutions with less than $300 million in assets and
risk-based capital ratios in excess of 12%,
4
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1998 ANNUAL REPORT
================================================================================
are exempt from this requirement unless the OTS determines otherwise. At
present, the Bank meets both conditions to be exempt from this additional
capital requirement. The OTS has indefinitely deferred the implementation of the
interest rate risk component in the computation of an institution's risk-based
capital requirements. The OTS continues to monitor the interest rate risk of
individual institutions and retains the right to impose additional capital
requirements on individual institutions.
Presented below, as of June 30, 1998, is an analysis of the Bank's
estimated interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts in interest rates, up and down 400 basis points in 100
point increments. The NPV is prepared for the Bank by the OTS as of the end of
each calendar quarter. The regulatory focus of Asset and Liability Management
allows institutions to perform an in-house estimate of risk as the basis for
measuring risk-based capital. The Bank has demonstrated through its past pricing
action that passbook accounts function as relatively fixed rate deposits, and as
such, the passbook accounts are not rate sensitive deposits. Based upon the
Bank's historical experience of its passbook accounts, the Bank calculates the
Core Deposit Intangible value for those accounts. The Bank also changed the NPV
value for Borrowed funds as calculated by the OTS. A majority of the outstanding
FHLB advances have a callable feature which was not considered by the OTS in
their analysis. These calculations are substituted for the OTS calculations and
then a new set of ratios is computed. The Bank's asset and liability structure
results in a decrease in NPV in a rising interest rate scenario and an increase
in NPV in a declining interest rate scenario. During periods of rising interest
rates, the value of monetary assets declines more rapidly than the value of
monetary liabilities rises. Conversely, during periods of falling interest
rates, the value of monetary assets rises more rapidly than the value of
monetary liabilities declines. However, the amount of change in value of
specific assets and liabilities due to changes in interest rates is not the same
in a rising interest rate environment as in a falling interest rate environment
(i.e., the amount of value increase under a specific rate decline may not equal
the amount of value decrease under an identical upward interest rate movement).
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE NPV AS % OF ECONOMIC
CHANGE IN INTEREST ------------------- VALUE OF ASSETS
RATES IN BASIS $ % --------------------
POINTS (RATE SHOCKS) AMOUNT CHANGE CHANGE NPV RATIO % CHANGE
-------------------- ------ ------ ------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
400 25,428 (10,489) -29% 12.51% (378) bp
300 28,440 (7,477) -21% 13.69% (260) bp
200 32,486 (3,431) -10% 15.22% (107) bp
100 34,814 (1,103) - 3% 16.01% ( 28) bp
Static (1) 35,917 16.29% 0 bp
(100) 35,108 (809) 2% 15.81% ( 48) bp
(200) 30,955 (4,962) -14% 14.02% (228) bp
(300) 25,510 (10,407) -29% 11.65% (464) bp
(400) 19,342 (16,575) -46% 8.93% (736) bp
</TABLE>
-------------------------------------
(1) Based on the economic value of the Bank's assets assuming no change
in interest rates.
As noted above, the market value of the Bank's net assets would be
anticipated to decline significantly in the event of certain designated
increases in interest rates. For instance, in the event of a 200 basis point
increase in interest rates, NPV is anticipated to fall by $3.4 million or 10%.
In addition, a decrease in interest rates is anticipated to cause an decrease in
NPV. The
5
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1998 ANNUAL REPORT
================================================================================
level of interest rate risk in the NPV table set forth above at June 30, 1998 is
within the Bank's current guidelines for acceptable interest rate risk.
Certain assumptions utilized by the OTS in assessing the interest rate
risk of thrift institutions were employed in preparing the previous table. These
assumptions related to interest rates, loan prepayment rates and the market
value of certain assets under the various interest rate scenarios. However, the
Bank uses its internal assumptions for passbook decay rate based on the Bank's
historical experience. The Bank also changed the NPV value for Borrowed funds as
calculated by the OTS. A majority of the outstanding FHLB advances have a
callable feature which was not considered by the OTS in their analysis. It was
also assumed that delinquency rates did not change as a result of changes in
interest rates although there can be no assurance that this will be the case. In
the event that interest rates do not change in the designated amounts, there can
be no assurance that the Bank's assets and liabilities would perform as set
forth above. In addition, a change in Treasury rates in the designated amounts
accompanied by a change in the shape of the Treasury yield curve would cause
changes to the NPV significantly different than indicated above.
Certain shortcomings are inherent in the methods of analysis presented in
the computation of NPV. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates while interest rates on other types of assets may lag behind
changes in market rates. Additionally, certain assets, such as adjustable rate
loans, have features that restrict changes in interest rates both in the near
term and over the life of the asset. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in the table. Finally, the ability of borrowers
to make scheduled payments on their adjustable rate loans may decrease in the
event of an interest rate increase. As a result, the actual effect of changing
interest rates may differ from that presented in the foregoing table.
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
The following tables set forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets and
liabilities, respectively, for the periods presented. The eleven month results
for 1997 fiscal year have been annualized to calculate the Average Yield/Cost.
Average balances are derived from month end balances. Management does not
believe that the use of month end balances instead of daily balances has caused
any material difference in the information presented. The yields and costs
include fees, which are considered adjustments to yields.
6
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1998 ANNUAL REPORT
================================================================================
<TABLE>
<CAPTION>
For the year ended
At June 30, 1998 June 30, 1998
------------------------- ---------------------------------------
Weighted
Average Average Average
Balance Rate (1) Balance Interest Yield/Cost
------------ ------------ -------------------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Asset:
Interest-earning assets:
Mortgage-backed securities $ 79,764 6.68% $ 91,196 $ 5,582 6.12%
Loans receivable (2) 115,772 7.36 102,733 7,839 7.63
Investment securities (3) 2,569 8.68 1,786 170 9.52
Interest-earning deposits 9,801 5.91 7,264 412 5.67
Stock in FHLB-Chicago 3,400 6.63 2,565 171 6.67
------------ ------------ ------------- ------------ ------------
Total interest-earning assets $ 211,306 7.04% $ 205,544 $ 14,174 6.90%
------------ ------------ ------------- ------------ ------------
Allowance for loan losses (300) (300)
Noninterest-earning assets 9,598 9,123
============ =============
Total assets $ 220,604 $ 214,367
============ =============
Liabilities & Equity:
Interest-bearing liabilities:
NOW accounts $ 7,668 2.01% $ 7,158 $ 145 2.03%
Money market demand accounts 11,797 3.31 11,957 382 3.19
Passbook/statement savings accounts 38,838 2.50 39,046 977 2.50
Certificates of deposit 59,685 5.37 59,931 3,287 5.48
Borrowed money 53,000 5.59 48,469 2,941 6.07
------------ ------------ -------------------------- ------------
Total interest-bearing liabilities $ 170,988 4.49% $ 166,561 $ 7,732 4.64%
------------ ------------ -------------------------- ------------
Noninterest-bearing NOW accounts 5,847 4,962
Other noninterest-bearing liabilities 5,675 5,003
------------ -------------
Total liabilities $ 182,510 $ 176,526
------------ -------------
Equity 38,094 37,841
============ =============
Total liabilities and equity $ 220,604 $ 214,367
============ =============
Net interest income $ 6,442
=============
Interest rate spread (4) 2.55% 2.26%
============ ============
Net interest earning assets $ 40,318 $ 38,983
============ =============
Net interest margin (5) 3.13%
============
Ratio of interest-earning assets to
interest-bearing liabilities 123.58% 123.40%
============ =============
</TABLE>
(NOTES ON FOLLOWING PAGE)
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1998 ANNUAL REPORT
================================================================================
<TABLE>
<CAPTION>
FOR THE ELEVEN MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED JULY 31,
-------------------------------------- ------------------------------------------
1997 1996
--------------------------------------- -----------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST(6) BALANCE INTEREST COST
------- -------- ------- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Asset:
Interest-earning assets:
Mortgage-backed securities $ 105,347 $ 6,048 6.26% $ 110,734 $ 6,844 6.18%
Loans receivable (2) 83,707 5,954 7.76 75,264 6,027 8.01
Investment securities (3) 430 17 4.31 - - -
Interest-earning deposits 4,131 310 8.19 2,601 136 5.23
Stock in FHLB-Chicago 2,215 138 6.80 2,157 147 6.82
------------ ------------ ------------ ------------ ------------- --------------
Total interest-earning assets $ 195,830 $ 12,467 6.94% $ 190,756 $ 13,154 6.90%
------------ ------------ ------------ ------------ ------------- --------------
Allowance for loan losses (300) (187)
Noninterest-earning assets 9,108 9,064
------------ ------------
Total assets $ 204,638 $ 199,633
============ ============
Liabilities & Equity:
Interest-bearing liabilities:
NOW accounts $ 7,080 $ 132 2.03% $ 7,263 $ 146 2.01%
Money market demand accounts 12,840 366 3.11 14,031 437 3.11
Passbook/statement savings accounts 40,257 923 2.50 42,094 1,054 2.50
Certificates of deposit 64,184 3,158 5.37 75,064 4,287 5.71
Borrowed money 44,000 2,542 6.30 37,800 2,526 6.68
------------ ------------ ------------ ------------ ------------- --------------
Total interest-bearing $168,361 $ 7,121 4.61% $ 176,252 8,450 4.79%
liabilities ------------ ------------ ------------ ------------ ------------- --------------
Noninterest-bearing NOW accounts 4,470 4,115
Other noninterest-bearing 5,092 4,942
liabilities ------------ ------------
Total liabilities $ 177,923 $ 185,309
------------ ------------
Equity 26,715 14,324
------------ ------------
Total liabilities and equity $204,638 $ 199,633
============ ============
Net interest income $ 5,346 $ 4,704
============ =============
Interest rate spread (4) 2.33% 2.11%
============ ==============
Net interest earning assets $ 27,469 $ 14,504
============ ============
Net interest margin (5) 2.98% 2.47%
============ ==============
Ratio of interest-earning assets
to Interest-bearing liabilities 116.32% 108.23%
============ ============
</TABLE>
- ---------------------------------
(1) The weighted average rate represents the coupon associated with each
asset and liability, weighted by the principal balance associated with
each asset and liability.
(2) In computing the average balance of loans receivable, non-accrual loans
have been included.
(3) Includes investment in mutual funds and preferred stock.
(4) Average interest rate spread represents the difference between the
average rate earned on interest-earning assets and the average rate paid
on interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(6) Eleven month results have been annualized to calculate the Average
Yield/Cost.
8
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1998 ANNUAL REPORT
================================================================================
Rate/Volume Analysis
Net interest income can also be analyzed in terms of the impact changing
interest rates have on interest-earning assets and interest-bearing liabilities,
and the change in the volume or amount of these assets and liabilities. In
general, increases in the volume or amount of interest-bearing liabilities, as
well as increases in the interest rates paid on interest-bearing liabilities,
and decreases in the volume or amount of interest-earning assets, as well as
decreases in the yields earned on interest-earning assets, have the effect of
reducing the Bank's net interest income. Conversely, increases in the volume or
amount of the Bank's interest-earning assets, as well as increases in the yields
earned on interest-earning assets, and decreases in the volume or amount of
interest-bearing liabilities, as well as decreases in the rates paid on
interest-bearing liabilities, have the effect of increasing the Bank's net
interest income. The following table sets forth certain information regarding
changes in interest income and interest expense for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (changes in
volume multiplied by old rate) and changes in rates (changes in rates multiplied
by old volume). Changes attributable to the combined impact of rate volume have
been allocated proportionately to the changes due to volume and the changes due
to rate.
<TABLE>
<CAPTION>
Year ended Eleven months ended
June 30, 1998 June 30, 1997
compared to compared to
eleven months ended year ended
June 30, 1997 July 31, 1996
--------------------------------------- --------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
--------------------------------------- --------------------------------------
Volume Rate Net Volume Rate Net
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Mortgage-backed securities $ (400) $ (66) $ (466) $ (1,086) $ 290 $ (796)
Loans receivable 2,035 (150) 1,885 (101) 28 (73)
Investment securities (1) 75 22 97 17 - 17
Interest-earning deposits 171 (69) 102 89 85 174
Stock in FHLB of Chicago 38 (5) 33 (9) - (9)
============= ============ ============ ============ ============ ============
Total $ 1,919 (268) $ 1,651 $ (1,090) $ 403 $ (687)
============= ============ ============ ============ ============ ============
Interest-bearing liabilities
NOW accounts $ (2) $ 15 $ 13 $ (19) $ 5 $ (14)
Money market demand accounts 33 (17) 16 (71) - (71)
Passbook/statement savings
accounts 54 - 54 (131) - (131)
Certificates of deposit 203 (74) 129 (800) (329) (1,129)
Borrowed money 622 (223) 399 25 (9) 16
------------- ------------ ------------ ------------ ------------ ------------
Total $ 910 $ (299) $ 611 $ (996) $ (333) $ (1,329)
------------- ------------ ------------ ------------ ------------ ------------
Net change in net interest income $ 1,009 $ 31 $ 1,040 $ (94) $ 736 $ 642
============= ============ ============ ============ ============ ============
- -----------------------------------
(1) Includes investment in mutual funds
and preferred stock.
</TABLE>
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1998 ANNUAL REPORT
================================================================================
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 TO JUNE 30, 1997
The financial data presented in this Annual Report represents the activity
of the Bank for the period prior to the Conversion and the consolidated activity
of Big Foot Financial Corp. and subsidiary thereafter.
Total assets increased $5.7 million to $220.6 million at June 30, 1998,
from $214.9 million at June 30, 1997. The asset growth was funded through
increased borrowings and the net growth in deposits. Asset growth was
concentrated in loans, which increased $21.8 million to $115.5 million at June
30, 1998, from $93.6 million at June 30, 1997. Loan originations totaled $39.4
million for the year ended June 30, 1998, compared to $23.3 million for the
eleven months ended June 30, 1997, representing an increase of $16.1 million.
The increase was due primarily to an increase in the origination of one- to
four-family residential mortgage loans reflecting increased loan demand
experienced by the Bank. Total mortgage-backed securities ("MBS") decreased
$27.8 million to $79.8 million at June 30, 1998, compared to $107.6 million at
June 30, 1997. This decrease is primarily due to the sale of $9.3 million of MBS
and principal repayments and amortizations received during the year and a gain
in the market value adjustment for the available-for-sale portfolio during the
year. There was no Real Estate Owned ("REO") at June 30, 1998 and June 30, 1997.
The allowance for loan losses at June 30, 1998 and June 30, 1997 was
$300,000. At June 30, 1998 and June 30, 1997 the ratio of the allowance for loan
losses to non-performing loans was 87.72% and 150.75%, respectively.
Non-performing loans increased $143,000 to a balance of $342,000 at June 30,
1998, causing this ratio to decline. The Bank's non-performing assets at June
30, 1998, consisted of three, one- to four-family residential loans.
Savings deposits increased $854,000 to $123.8 million at June 30, 1998
from $123.0 million at June 30, 1997. Total NOW accounts increased $1.7 million
from $11.8 million at June 30, 1997 to $13.5 million at June 30, 1998.
Certificates of deposits also increased $352,000 from the June 30, 1997 balance
of $59.3 million. Offsetting these increases were declines of $769,000 and
$484,000 for passbook and money market demand accounts, respectively, during the
fiscal year ended June 30, 1998.
Stockholders' equity was $38.1 million at June 30, 1998 and $37.0 million
at June 30, 1997. The increase was primarily due to net income of $1.2 million
in 1998 which was partially offset by a $150,000 net decrease relating to
transactions of the ESOP and RRP and the change in the unrealized market value
adjustment for available-for-sale securities.
COMPARISON OF OPERATING RESULTS FOR THE TWELVE MONTH FISCAL YEAR ENDED JUNE 30,
1998 AND THE ELEVEN MONTH FISCAL YEAR ENDED JUNE 30, 1997
General. During fiscal year 1997, the Bank changed its fiscal year to
coincide with the calendar quarters. The Company's and the Bank's fiscal year
ends on June 30. Therefore, the Consolidated Statement of Earnings data are for
a twelve month period for the 1998 fiscal year ("1998 fiscal year") and the
eleven months ended June 30, 1997 ("1997 fiscal year").
10
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1998 ANNUAL REPORT
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All rates and yields for the 1997 fiscal year have been annualized to
provide for a more meaningful comparison.
Net income for the 1998 fiscal year was $1.2 million compared to $220,000
for the 1997 fiscal year. The $1.0 million increase was primarily attributable
to a $1.1 million increase in the net interest income before provision for loan
losses, and a $470,000 gain on sale of security investments available-for-sale
which was partially offset by a $600,000 increase in income tax expense.
Interest Income. Interest income totaled $14.2 million for the fiscal year
ended June 30, 1998 compared to $12.5 million for the eleven months ended June
30, 1997. This change reflects an increase of $9.7 million in total average
interest-earning assets in the 1998 fiscal year compared to the 1997 fiscal
year, while the average yield on such assets decreased 4 basis points from 6.94%
to 6.90% over the same period. Interest income on loans receivable increased
$1.9 million to $7.8 million for the 1998 fiscal year. Higher loan demand
increased the Bank's average balance of loans by $19.0 million. Generally,
yields earned on new mortgage loan originations were lower than rates earned on
loan repayments, which caused a 13 basis point decrease in the average yield on
loans to 7.63% from 7.76%. Interest income on mortgage-backed securities
decreased $466,000 to $5.6 million for the 1998 fiscal year from $6.0 million
for the 1997 fiscal year. The decrease is due primarily to a $14.1 million
decrease in the average balance of mortgage-backed securities to $91.2 million
from $105.3 million and a 14 basis point decrease in the average yield to 6.12%
from 6.26%. The average balance of mortgage-backed securities decreased in 1998
due to loan amortization, repayments and sales of securities. Interest income on
interest-earning deposits increased $102,000 to $412,000 for the 1998 fiscal
year, due to a $3.1 million increase in average balance and a 252 basis point
decrease in average yield from 8.19% to 5.67%. These funds are generally
deposited in overnight money, which earns interest at the Federal Reserve Bank's
Federal Funds rate.
Interest Expense. Interest expense increased $611,000 to $7.7 million for
the fiscal year ended June 30, 1998, compared to $7.1 million for the eleven
months ended June 30, 1997. This increase reflects an increase in the average
rate paid on average interest-bearing liabilities of 3 basis points during the
1998 fiscal year from 4.61% to 4.64% which was offset by a decrease in the
average interest-bearing liabilities of $1.8 million over the same period. The
decrease in average interest-bearing liabilities is primarily attributable to a
decrease in the average balance of certificates of deposit of $4.3 million for
the 1998 fiscal year from $64.2 million for the 1997 fiscal year. The average
cost of certificates of deposit increased 11 basis points from 5.37% to 5.48%.
The net effect was an increase of four basis points in the average rate paid on
savings deposits. Interest expense on borrowed money increased $399,000 as the
average balance of borrowings increased $4.5 million to $48.5 million for the
fiscal year ended June 30, 1998 from $44.0 million for the eleven months ended
June 30, 1997, and the average cost of such borrowings decreased to 6.07% from
6.30%.
Net Interest Income. Net interest income before provision for loan losses
increased $1.1 million to $6.4 million for the fiscal year ended June 30, 1998,
from $5.3 million for the eleven months ended June 30, 1997. Total interest
income increased $1.7 million to $14.2 million for the fiscal year ended June
30, 1998 from $12.5 million for the eleven months ended June 30,
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1997 due to an increase of $9.7 million, from $195.8 million to $205.5 million,
in the average balance of interest-earning assets. Total interest expense
increased $611,000 to $7.7 million for the fiscal year ended June 30, 1998 from
$7.1 million for the eleven months ended June 30, 1997. This increase was the
result of an increase in the average cost of funds of 3 basis points from 4.61%
to 4.64% which was offset by a decrease in the average balance of
interest-bearing liabilities of $1.8 million, from $168.4 million to $166.6
million.
Provision for Loan Losses. There was no expense allocated to the provision
for loan losses for the fiscal years ended 1998 and 1997. At June 30, 1998, the
ratios of the allowance for loan losses to non-performing loans and to total
loans were 87.72% and 0.26%, respectively, which were well below the Bank's peer
group average. Management believes that the provision for loan losses and the
allowance for loan losses are reasonable and adequate to cover any known losses
and any losses reasonably expected in the loan portfolio. While management
estimates loan losses using the best available information, no assurance can be
made that future additions to the allowance will not be necessary.
Noninterest Income. Noninterest income for the fiscal year ended June 30,
1998 increased $443,000 to $724,000 from $281,000 for the eleven months ended
June 30, 1997. Securities held in the available-for-sale portfolio totaling
$10.7 million were sold during the year. These securities are intended to
generate income for the Company either by interest income or gain on sale or
both, which is considered a normal part of the Company's operation. Gain on sale
of securities was $470,000 and $0 for fiscal years 1998 and 1997 respectively.
Noninterest income was also affected by an increase in service fees of $32,000
for the 1998 fiscal year compared to the 1997 fiscal year.
Noninterest Expense. Noninterest expense remained constant at $5.3 million
for the fiscal year ended June 30, 1998 and for the eleven months ended June 30,
1997. However, this is a comparison of twelve months expense to eleven months in
1997. The Bank's ratio of noninterest expenses to average assets increased to
2.47% in the 1998 fiscal year from 2.13% (annualized) in the 1997 fiscal year
(excluding special SAIF assessment). Compensation related expenses increased
$657,000. Compensation expense increased due primarily to the Employee Stock
Ownership Plan ("ESOP"), Recognition and Retention Plan ("RRP"), and other
employee benefits. The cost of these newly implemented benefit plans are
reflected for portions of fiscal years 1998 and 1997. Occupancy expenses
increased $149,000 or 16.7% during the fiscal year ended June 30, 1998, due
primarily to an increase in utility and depreciation expenses. Professional
services expenses increased $79,000 or 30.3% during the fiscal year ended June
30, 1998 as a result of increased legal fees incurred in connection with claims
against a municipality and certain parties involved in the development of the
Trails of Olympia Fields, a real estate investment of the Company. Professional
service expense increased due to the additional costs incurred in connection
with operation of the Company as a public entity for the entire 1998 fiscal year
as opposed to only a part of the 1997 fiscal year. These increases were offset
by a reduction of over $1.0 million premium paid for federal deposit insurance
premiums. The Bank paid to the FDIC a one-time special assessment of $936,000 in
fiscal year 1997.
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1998 ANNUAL REPORT
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Income Tax Expense. Income tax expense increased $600,000 to $712,000 for
the fiscal year ended June 30, 1998 from $112,000 for the eleven months ended
June 30, 1997. This increase was primarily due to the increase of $1.6 million
in pre-tax income.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1997 AND JULY 31, 1996
Total assets increased $20.3 million to $214.9 million at June 30, 1997,
from $194.6 million at July 31, 1996. The asset growth was funded through
increased borrowings and the net proceeds of the Conversion. Asset growth was
concentrated in loans, which increased $14.5 million to $93.6 million at June
30, 1997, from $79.1 million at July 31, 1996. Loan originations totaled $23.3
million for the eleven months ended June 30, 1997, compared to $19.9 million for
the year ended July 31, 1996, representing an increase of $3.4 million. The
increase was due primarily to an increase in the origination of one- to
four-family residential mortgage loans reflecting increased loan demand
experienced by the Bank. Total mortgage-backed securities increased $5.2 million
to $107.6 million at June 30, 1997, compared to $102.4 million at July 31, 1996.
This increase is primarily due to the purchases of MBS in an amount that
exceeded principal repayments and amortizations received during the year as well
as the reduction of the loss in the market value adjustment for the
available-for-sale portfolio during the year. There was no Real Estate Owned
("REO") at June 30, 1997 and July 31, 1996.
The allowance for loan losses at June 30, 1997 and July 31, 1996 was
$300,000. At June 30, 1997 and July 31, 1996, the ratio of the allowance for
loan losses to non-performing loans was 150.8% and 254.2%, respectively.
Non-performing loans increased to a balance of $199,000 at June 30, 1997,
causing this ratio to decline. This increase was due to one single-family loan.
Savings deposits decreased $14.2 million to $123.0 million at June 30,
1997 from $137.2 million at July 31, 1996, due primarily to a non-renewal in
certificates of deposit with original maturities of 19 months. The Bank had
attracted these funds by offering above-market rates of interest in prior fiscal
years. Upon maturity, the Bank sought to retain these funds by offering market
rates of interest, and, while a portion of such funds were retained, the Bank
experienced an overall decrease in such funds. All 19-month certificates of
deposit have matured and have either been retained by the Bank or withdrawn. In
addition, the reduction in savings deposits was also attributable to the
withdrawal of $5.1 million to purchase stock in the Conversion.
Stockholders' equity was $37.0 million at June 30, 1997 and $13.6 million
at July 31, 1996. The increase was due to the infusion of the $22.0 million in
net proceeds from the initial public offering completed December 19, 1996, a
decrease in the net unrealized loss on the available-for-sale portfolio of $1.0
million, and an increase of $220,000 in retained earnings.
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1998 ANNUAL REPORT
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COMPARISON OF OPERATING RESULTS FOR THE ELEVEN MONTHS ENDED JUNE 30, 1997 AND
THE TWELVE MONTH FISCAL YEAR ENDED JULY 31, 1996
General. Net income for the eleven months ended June 30, 1997 was $220,000
compared to $226,000 for the fiscal year ended July 31, 1996. To address and
resolve the SAIF/BIF assessment disparity, the Deposit Insurance Funds Act of
1996 (the "1996 Act") became law on September 30, 1996. The 1996 Act authorized
the FDIC to impose a special assessment on all institutions with SAIF-insured
deposits in an amount necessary to recapitalize the SAIF. The Bank incurred an
expense for the special SAIF assessment of $936,000. The impact (after tax)
reduced net earnings by $617,000 for the fiscal year ended June 30, 1997.
Net income for the fiscal year of 1997, excluding the non-recurring SAIF
assessment, would have been $837,000. The increase in net income was due to both
an increase in net interest income after provision for loan losses of $780,000,
as well as reductions in noninterest expense (excluding the SAIF assessment) of
$348,000 for the 1997 fiscal year, as compared to the 1996 fiscal year.
Interest Income. Interest income totaled $12.5 million for the eleven
months ended June 30, 1997, compared to $13.2 million for the fiscal year ended
July 31, 1996. This change reflects both a $5.1 million increase in total
average interest-earning assets and an increase of 4 basis points in the average
yield on such assets for the 1997 fiscal year over the 1996 fiscal year.
Interest income on loans receivable was $6.0 million for the 1997 fiscal year,
reflecting a $8.4 million increase in the average balance of loans and the
effect of a 25 basis point decrease in the average yield to 7.76%. Interest
income on all mortgage-backed securities decreased $796,000 to $6.0 million for
the 1997 fiscal year from $6.8 million for the 1996 fiscal year. The decrease is
due primarily to a $5.4 million decrease in the average balance to $105.3
million, resulting from amortizations and prepayments exceeding purchases of
such securities during 1997. This was partially offset by an 8 basis point
increase in the average yield to 6.26%.
Interest Expense. Interest expense was $7.1 million for the eleven months
ended June 30, 1997, compared to $8.4 million for the fiscal year ended July 31,
1996. This change reflects both a decrease in average interest-bearing savings
deposits of $14.1 million during the 1997 fiscal year and a decrease of 20 basis
points in the average rate paid for deposits. Certificates of Deposit that
matured during the 1997 fiscal year were generally renewed at a lower interest
rate. Similarly, although average balances on borrowings increased for the year,
new advances were obtained at a rate lower than those on maturing advances
causing a 38 basis point decrease in the average rate paid on borrowings.
Net Interest Income. Net interest income before provision for loan losses
for the 1997 fiscal year was $5.3 million, as compared to $4.7 million for the
1996 fiscal year. The average yield on interest-earning assets increased from
6.90% for the 1996 fiscal year to 6.94% for the 1997 fiscal year, and the Bank's
average rate paid on interest-bearing liabilities decreased from 4.79% for the
1996 fiscal year to 4.61% for the 1997 fiscal year. These changes in yields
earned and
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1998 ANNUAL REPORT
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rates paid resulted in the average interest rate spread increasing by 22 basis
points to 2.33% and the net interest margin increasing by 51 basis points to
2.98% for the 1997 fiscal year, as compared to 2.11% and 2.47%, respectively,
for the 1996 fiscal year.
Provision for Loan Losses. The provision for loan losses was $0 and
$138,000 for the 1997 fiscal year and the 1996 fiscal year, respectively. At
June 30, 1997, the allowance for loan losses as a percentage of non-performing
loans and total loans, was 150.75% and 0.32%, respectively, as compared to
254.2% and 0.38%, respectively, at July 31, 1996. The percentage of
non-performing loans to total loans increased to 0.21% at June 30, 1997, from
0.15% at July 31, 1996. Management believes that the provision for loan losses
and the allowance for loan losses are reasonable and adequate to cover any known
losses and any losses reasonably expected in the loan portfolio. While
management estimates loan losses using the best available information, no
assurance can be made that future additions to the allowance will not be
necessary.
Noninterest Income. Noninterest income for the eleven months ended June
30, 1997 was $282,000 compared to $485,000 for the fiscal year ended July 31,
1996. This change was primarily due to non-recurring settlements of litigation
of $184,000 in fiscal 1996 as compared to $21,000 in 1997, and a $24,000
decrease in service charges and servicing fees in fiscal 1997.
Noninterest Expense. Noninterest expense was $5.3 million for 1997 fiscal
year compared to $4.7 million for the fiscal year ended July 31, 1996. The
Bank's ratio of noninterest expense to average assets was 2.59% in the 1997
fiscal year (2.13% excluding the special SAIF assessment) compared to 2.36% in
the 1996 fiscal year. Compensation and benefits expense totaled $2.3 million for
the of 1997 fiscal year compared to $2.2 million for the 1996 fiscal year.
Compensation expenses increased due to increased staffing levels, general salary
increases, and increases in benefit expenses associated with the new ESOP. The
Bank was assessed and paid to the FDIC a one-time special SAIF assessment of
$936,000. After this special assessment in September 1996, regular deposit
insurance premiums were reduced in subsequent periods so that the net increase
in deposit insurance premiums for 1997 was $760,000. Professional services
expenses decreased $98,000, from $359,000 for the 1996 fiscal year to $261,000
for the 1997 fiscal year. Professional services expense reduction reflects lower
legal fees relating to litigation and regulatory matters. Other noninterest
expense increased $95,000 to $708,000 for the 1997 fiscal year compared to
$613,000 for the 1996 fiscal year. Other expenses increased primarily due to a
fraud loss of $50,000 suffered by the Bank. The majority of the remaining
increases in other expenses were due to insurance premium increases and loan
origination expenses.
Income Tax Expense. Income tax expense decreased $5,000 to $112,000 for
1997 fiscal year from $117,000 for the fiscal year ended July 31, 1996. This
decrease was primarily due to a decrease of $11,000 in pretax income.
LIQUIDITY AND CAPITAL RESOURCES
The term "liquidity" as used by a savings bank refers to the ability of
the institution to produce sufficient cash to meet withdrawals, fund loan
commitments and pay operating expenses. Cash needed to fund these requirements
is generated by savings deposits, loan repayments, securities sales, FHLB
advances, and other sources of income.
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1998 ANNUAL REPORT
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The Bank's primary sources of funds are savings deposits, principal and
interest payments on loans and securities and borrowings from the FHLB of
Chicago. While maturities and scheduled amortization of loans and 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. Cash flows from operating activities amounted to
$1.6 million, $2.1 million, and $165,000, for the 1998, 1997 and 1996 fiscal
years, respectively.
The Bank is required to maintain an average daily balance of liquid assets
as a percentage of net withdrawable deposit accounts plus short term borrowings
as defined by the regulations of the OTS. The minimum required liquidity ratio
is currently 4.0%. At June 30, 1998 and 1997, and July 31, 1996, the Bank's
liquidity ratios were 60.8%, 42.9%, and 42.4%, respectively. The levels of the
Bank's short term assets are dependent on the Bank's operating, financing and
investing activities during any given period. Management believes it will have
adequate resources to fund all commitments on a short term and long term basis
in accordance with its business strategy.
The primary investing activities of the Bank are the origination of
mortgage and other loans and the purchase and sale of mortgage-backed and other
securities. During the fiscal year ended June 30, 1998, the eleven months ended
June 30, 1997, and the fiscal year ended July 31, 1996, the Bank's disbursements
for loan originations totaled $39.4, $23.3 million, and $19.9 million,
respectively. These activities were funded primarily by principal repayments on
loans and securities, and FHLB advances. Due to high levels of repayments and
amortizations of loans and MBS, and the sale of securities during the 1998
fiscal year, there was $3.9 million net cash provided from investing activities.
Net cash flows used in investing activities amounted to $20.1 million and
$510,000 for the fiscal years ended June 30, 1997, and July 31, 1996,
respectively.
For the 1998 fiscal year, the Bank experienced net increases in deposits
(including the effect of interest credited) of $854,000 and for fiscal year
1997, a decrease of $14.2 million. The decrease in deposits in 1997 was due
primarily to a decrease in certificates of deposit that matured in the fiscal
year. The Bank attracted these funds by offering above-market rates of interest
in prior fiscal years. Upon maturity, the Bank sought to retain these funds by
offering market rates of interest, and while a portion of such funds were
retained, the Bank experienced a decrease in such funds. In addition, management
believes that the reduction in deposits resulted, in part, from
disintermediation the flow of funds away from savings institutions into direct
investments, such as corporate securities, mutual funds and other investment
vehicles, which direct investments, because of the absence of federal deposit
insurance premiums and reserve requirements, among other reasons, may pay higher
rates of return than savings institutions. In the fiscal year 1997, there was an
inflow of $22.0 million from the net proceeds from the sale of the Company's
stock in the Conversion
Net cash flows provided by financing activities amounted to $3.7 million
and $17.3 million for the 1998 and 1997 fiscal years, respectively. Net cash
flows used in financing activities amounted to $4.1 million for the year ended
July 31, 1996.
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1998 ANNUAL REPORT
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The Bank's most liquid assets are cash and cash equivalents, which consist
of short-term highly liquid investments with original maturities of less than
three months that are readily convertible to known amounts of cash and
interest-earning deposits. The level of these assets is dependent on the Bank's
operating, financing and investing activities during any given period. At June
30, 1998 and 1997, cash and cash equivalents totaled $13.1 and $3.9 million,
respectively.
The Bank has other sources of liquidity if a need for additional funds
arises, including the ability to obtain FHLB advances. At June 30, 1998, the
Bank had $53.0 million outstanding in FHLB advances. The Bank utilizes
borrowings primarily to offset outflows in deposits at times when the Bank does
not believe that it can replace such funds with lower costing deposit products.
In addition, the Bank has used borrowed funds to fund the purchase of
mortgage-backed securities at times when the spread between the rate paid on the
borrowed funds and the yield earned on such securities was favorable.
At June 30, 1998, the Bank had outstanding mortgage loan origination
commitments of $3.5 million and unused lines of consumer credit of $495,000. The
Bank anticipates that it will have sufficient funds available to meet its
current origination and other lending commitments.
Certificates of deposit scheduled to mature in less than one year from
June 30, 1998 totaled $39.8 million. Based upon the Bank's most recent
experience and pricing strategy, management believes that a significant portion
of such deposits will remain with the Bank.
At June 30, 1998, the Bank exceeded all of its regulatory capital
requirements with tangible capital of $25.9 million, or 12.30% of total adjusted
assets, which is above the required level of $3.2 million or 1.5%; core capital
of $25.9 million, or 12.30% of total adjusted assets, which is above the
required level of $6.3 million or 3.0%; and total risk based capital of $26.2
million, or 31.76% of risk-weighted assets, which is above the required level of
$6.6 million, or 8%.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's consolidated Financial Statements and Notes thereto
presented herein have been prepared in accordance with GAAP, which generally
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Bank's operations. Unlike industrial companies,
nearly all of the assets and liabilities of the Bank are monetary in nature. As
a result, interest rates have a greater impact on the Bank's performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.
IMPACT OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board's ("FASB") Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("Statement
130"), establishes standards for reporting and the presentation of comprehensive
income and its components in a full set of general-purpose financial statements.
Statement 130 is effective for both interim and annual
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1998 ANNUAL REPORT
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periods beginning after December 15, 1997, with initial application of the
Statement as of the beginning of an enterprise's fiscal year, and is not
expected to have a material impact on the Company.
Statement 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way public business enterprises are
to report information about operating segments in annual financial statements,
and requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. Statement 131 is
effective for financial periods beginning after December 15, 1997 and is not
expected to have a material impact on the Company.
Statement 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits," standardizes the disclosure requirements of Statements
87 and 106, and recommends a parallel format for presenting information about
pensions and other postretirement benefits. This statement does not change
measurement or recognition provisions provided in Statements 87, 88, and 106.
Statement 132 is effective for fiscal years beginning after December 15, 1997,
and is not expected to have a material impact on the Company.
In June 1998, the FASB issued Statement 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement 133 standardizes the accounting
for derivative instruments, including certain derivative instruments imbedded in
other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value. The
accounting for the changes in fair value of a derivative instrument depends on
whether it has been designated and qualifies as part of the hedging relationship
and, if so, on the reason for holding it. The gain or loss due to changes in
fair value is recognized in earnings or as other comprehensive income in the
statement of shareholders' equity, depending on the type of instrument and
whether or not it is considered a hedge. Statement 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. The Company
has not yet determined the impact this new statement may have on its future
financial condition or its results of operations.
YEAR 2000
The "Year 2000 Problem" centers on the inability of computer systems to
recognize the Year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Company and its operations may be
significantly affected by the Year 2000 Problem due to the nature of financial
information. Software, hardware, and equipment both within and outside the
Company's direct control and with whom the Company electronically or
operationally interfaces (e.g. third party vendors providing data processing,
information system management, maintenance of computer systems, and credit
bureau information) are likely to be affected. Furthermore, if computer systems
are not adequately changed to identify the Year 2000, many computer applications
could fail or create erroneous
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1998 ANNUAL REPORT
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results. As a result, many calculations which rely on the date field
information, such as interest, payment or due dates and other operating
functions, will generate results which could be significantly misstated, and the
Company could experience a temporary inability to process transactions, send
invoices or engage in similar normal business activities.
In addition, noninformation technology systems, such as telephones,
copiers and elevators may also contain embedded technology which controls its
operation and which may be affected by the Year 2000 Problem. When the Year 2000
arrives, systems, including some of those with embedded chips, may not work
properly because of the way they store date information. They may not be able to
deal with the date 01/01/00, and may not be able to deal with operational
`cycles' such as `do x every 100 days'. Thus, even noninformation technology
systems may affect the normal operations of the Company upon the arrival of the
Year 2000.
Under certain circumstances, failure to adequately address the Year 2000
Problem could adversely affect the viability of the Company's suppliers and
creditors and the creditworthiness of its borrowers. Thus, if not adequately
addressed, the Year 2000 Problem could result in a significant adverse impact on
the Company's products, services and competitive condition.
In order to address the Year 2000 issue and to minimize its potential
adverse impact, management has begun a process to identify areas that will be
affected by the Year 2000 Problem, assess its potential impact on the operations
of the Bank, monitor the progress of third party software vendors in addressing
the matter, test changes provided by these vendors, and develop contingency
plans for any critical systems which are not effectively reprogrammed. A
committee of senior officers and employees of the Company has been formed to
evaluate the effects that the upcoming Year 2000 could have on the computer
programs utilized by the Bank. The Company's plan is divided into five phases:
(1) Awareness Phase - define the problem, obtain executive level support,
develop an overall strategy. This phase was completed in September 1997; (2)
Assessment Phase identify all systems and criticality. This phase was completed
in December 1997; (3) Renovation Phase - program enhancements, hardware and
software upgrades, system replacements, and vendor certifications. This phase is
in process with a scheduled completion date of September 30, 1998; (4)
Validation Phase - test and verify system changes and coordinate with outside
parties. This phase is in process with a scheduled completion date of December
31, 1998; and (5) Implementation Phase - components certified as Year 2000
compliant and moved to production. This phase is in process with a scheduled
completion date of December 31, 1998.
Third party vendors provide the majority of software used by the Company.
All of the Company's vendors are aware of the Year 2000 situation, and most have
assured the Company that they are currently working to have their software
compliant by December 31, 1998, and testing for the critical applications is
underway. This will enable the Company to devote substantial time to the testing
of the upgraded systems prior to the arrival of the millennium. The Company
utilizes the service of a third party vendor to provide the software which is
used to process and maintain most customer-related accounts. This vendor has
provided the Company with a software version which has been stated to be Year
2000 compliant. Testing by the Company to verify compliance for its applications
and usage is scheduled to be completed by December 31, 1998. The Company
presently believes that with modifications to existing software and conversions
to new software, the Year 2000 Problem will be mitigated without
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1998 ANNUAL REPORT
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causing a material adverse impact on the operations of the Company. However, if
such modifications and conversions are not made, or are not completed timely,
the Year 2000 Problem could have an adverse impact on the operations of the
Company.
The Company's total Year 2000 project cost and estimates to complete
include the estimated costs and time associated with the impact of a third
party's Year 2000 Problem, and are based on presently available information.
However, there can be no guarantee that the systems of the other companies on
which the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company. The
Company believes it has no exposure to contingencies related to the Year 2000
Problem for the products it has sold.
In addition, monitoring and managing the Year 2000 project will result in
additional direct and indirect costs to the Company and the Bank. Direct costs
include potential charges by third party software vendors for product
enhancements, costs involved in testing software products for Year 2000
compliance, and any resulting costs for developing and implementing contingency
plans for critical software products which are not enhanced. Indirect costs will
principally consist of the time devoted by existing employees in monitoring
software vendor progress, testing enhanced software products and implementing
any necessary contingency plans. The Company currently estimates that the
aggregate direct and indirect costs will be between $25,000 and $50,000 and does
not believe that such costs will have a material effect on the results of
operations. Both direct and indirect costs of addressing the Year 2000 Problem
will be charged to earnings as incurred. Such costs have not been material to
date.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties. The
critical application software and hardware for the Company's in-house computer
system has been tested by the respective service providers and has been stated
to be Year 2000 compliant. The Company has not developed a redemption
contingency plan which would be implemented in the unlikely event that it is not
Year 2000 compliant. A business resumption contingency plan has been developed
for the Company. The Company will continue to closely monitor the progress of
its Year 2000 compliance plan and will determine by December 31, 1998 if the
need for a redemption contingency plan exists.
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
Big Foot Financial Corp.
and Subsidiary
Long Grove, Illinois:
We have audited the accompanying consolidated balance sheets of Big Foot
Financial Corp. and subsidiary (the Company) as of June 30, 1998 and 1997,
and the related consolidated statements of earnings, stockholders' equity,
and cash flows for the year ended June 30, 1998, the eleven-month period
ended June 30, 1997, and the year ended July 31, 1996. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Big
Foot Financial Corp. and subsidiary as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for the year ended June
30, 1998, the eleven-month period ended June 30, 1997, and the year ended
July 31, 1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
July 24, 1998
21
<PAGE>
1998 ANNUAL REPORT
<TABLE>
<CAPTION>
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1998 and 1997
ASSETS 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $3,345,248 2,191,000
Interest-earning deposits 9,800,686 1,701,132
Mortgage-backed securities held-to-maturity, at amortized cost (note 2) 46,729,303 47,376,322
Mortgage-backed securities available-for-sale, at fair value (note 2) 33,035,203 60,219,205
Investment in mutual funds and preferred stock, at fair value (note 2) 2,569,126 1,087,287
Loans receivable, net (note 3) 115,472,207 93,623,836
Accrued interest receivable (note 4) 968,659 1,050,578
Investment in real estate held for sale and development 262,259 262,259
Stock in Federal Home Loan Bank of Chicago, at cost 3,400,000 2,480,000
Office properties and equipment, net (note 5) 4,667,235 4,736,664
Prepaid expenses and other assets 354,359 167,766
------------ -----------
Total assets $220,604,285 214,896,049
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits (note 6):
Interest-bearing 117,987,506 118,399,008
Noninterest-bearing 5,847,332 4,581,809
------------ ------------
Total savings deposits 123,834,838 122,980,817
Borrowed money (note 7) 53,000,000 49,600,000
Advance payments by borrowers for taxes and insurance 1,773,720 1,609,838
Accrued interest payable and other liabilities 3,901,663 3,728,241
------------ ------------
Total liabilities 182,510,221 177,918,896
------------ ------------
Stockholders' equity (note 12):
Preferred stock, $.01 par value, 2,000,000 shares
authorized; none issued or outstanding - -
Common stock, $.01 par value, 8,000,000 shares
authorized; 2,512,750 issued and outstanding 25,128 25,128
Additional paid-in capital 24,224,171 24,038,934
Retained earnings - substantially restricted 16,048,531 14,868,464
Common stock acquired by Employee Stock Option Plan (1,708,670) (1,909,690)
Common stock acquired by Recognition and Retention Plan (531,473) -
Unrealized gain (loss) on securities available-for-sale,
net of tax 36,377 (45,683)
------------ -----------
Total stockholders' equity 38,094,064 36,977,153
------------ -----------
Total liabilities and stockholders' equity $220,604,285 214,896,049
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
1998 ANNUAL REPORT
<TABLE>
<CAPTION>
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Earnings
Year ended June 30, 1998, eleven months ended June 30, 1997 and year ended July
31, 1996
ELEVEN MONTHS ENDED
JUNE 30,
--------------------------------------
YEAR ENDED YEAR ENDED
JUNE 30, 1998 1997 1996 JULY 31, 1996
------------------- ------------------- ------------------- -------------------
(Unaudited)
Interest income:
<S> <C> <C> <C> <C>
Mortgage-backed securities held-to- maturity $2,518,316 2,447,395 2,546,127 2,755,626
Mortgage-backed securities available-for-sale 3,064,001 3,600,566 3,769,364 4,088,066
Investment in mutual funds and preferred stock 170,208 16,737 - -
Loans receivable 7,838,745 5,954,201 5,508,051 6,026,328
Interest-earning deposits 412,083 309,755 124,738 136,222
Federal Home Loan Bank of Chicago stock 170,806 138,067 136.225 147,302
---------- ---------- ---------- ----------
Total interest income 14,174,159 12,466,721 12,084,505 13,153,544
========== ========== ========== ==========
Interest expense:
Savings deposits (note 6) 4,791,429 4,578,779 5,453,299 5,924,074
Borrowed money 2,941,217 2,541,792 2,301,905 2,525,598
---------- ---------- ---------- ----------
Total interest expense 7,732,646 7,120,571 7,755,204 8,449,672
========== ========== ========== ==========
Net interest income before provision for loan losses 6,441,513 5,346,150 4,329,301 4,703,872
Provision for loan losses (note 3) - - 137,558 137,558
---------- --------- ---------- ----------
Net interest income after provision for loan losses 6,441,513 5,346,150 4,191,743 4,566,314
========== ========= ========== ==========
Noninterest income:
Gain on sale of securities available-for-sale 469,752 314 - -
Gain on sale of real estate owned - - 35,448 35,448
Service fees 220,095 188,400 194,025 212,109
Litigation settlements (note 14) - 21,145 184,415 184,415
Other 34,097 71,750 50,576 53,000
---------- --------- ---------- ----------
Total noninterest income 723,944 281,609 464,464 484,972
========== ========= ========== ==========
Noninterest expense:
Compensation and benefits 2,934,805 2,277,996 2,066,092 2,226,288
Office occupancy 1,043,396 894,735 940,801 1,032,676
Federal deposit insurance premiums 78,173 1,097,211 309,538 337,220
Real estate held for development 43,355 56,826 132,439 139,847
Professional services 340,498 260,731 346,172 359,217
Other 833,250 708,185 574,569 613,042
---------- --------- ---------- ----------
Total noninterest expense 5,273,477 5,295,684 4,369,611 4,708,290
========== ========= ========== ==========
Income before income taxes 1,891,980 332,075 286,596 342,996
Total tax expense (note 8) 711,913 112,400 98,300 117,000
---------- --------- ---------- ----------
Net income $1,180,067 219,675 188,296 225,996
========== ========= ---------- ==========
Earnings per share:
Basic $ 0.50 0.27 N/A N/A
Diluted 0.49 0.27 N/A N/A
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
1998 ANNUAL REPORT
<TABLE>
<CAPTION>
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Year ended June 30, 1998, eleven months ended June 30, 1997 and year ended July
31, 1996
UNREALIZED
GAIN (LOSS)
COMMON ON SECURITIES
ADDITIONAL COMMON STOCK STOCK AVAILABLE FOR
PREFERRED COMMON PAID-IN RETAINING ACQUIRED ACQUIRED SALE,
STOCK STOCK CAPITAL EARNINGS BY ESOP BY-RRP NET OF TAX TOTAL
------------- --------- ------------ ------------ ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1995 $ - - - 14,422,793 - - - 14,422,793
Net income for the year
ended July 31, 1996 - - - 225,996 - - - 225,996
Change in unrealized loss
on securities available-for-sale - - - - - - (1,069,302) (1,069,302)
-------- ------- ---------- ----------- ----------- -------- ----------- ---------
Balance at July 31, 1996 - - - 14,648,789 - - (1,069,302) 13,579,487
======== ======= ========== =========== =========== ======== ============ ==========
Net income for the eleven
months ended June 30, 1997 - - - 219,675 - - - 219,675
Net proceeds of common
stock issued - 25,128 23,977,372 - (2,010,200) - - 21,992,300
Cost of ESOP shares released - - - - 100,510 - - 100,510
Market adjustment for
committed ESOP shares - - 61,562 - - - - 61,562
Change in unrealized loss on
securities available-for-sale,
net - - - - - - 1,023,619 1,025,619
-------- ------- ---------- ----------- ----------- -------- ------------ ----------
Balance at June 30, 1997 - 25,128 24,038,934 14,868,464 (1,909,690) - (45,683) 36,977,153
======== ======= ========== =========== =========== ======== ============ ==========
Net income for the year
ended June 30, 1998 - - - 1,180,067 - - - 1,180,067
Recognition and Retention
Plan
(RRP) shares purchased - - (6,737) - - (724,955) - (731,692)
Amortization of award of
RRP shares - - - - - 193,482 - 193,482
Cost of ESOP shares released - - - - 201,020 - - 201,020
Market adjustment for
committed ESOP shares - - 191,974 - - - - 191,974
Change in unrealized gain on
securities available-for-sale,
net - - - - - - 82,060 82,060
-------- ------- ---------- ----------- ----------- -------- ------------ ---------
Balance at June 30, 1998 $ - 25,128 24,224,171 16,048,531 (1,708,670) (531,473) 36,377 38,094,064
======== ======= ========== =========== =========== ======== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
1998 ANNUAL REPORT
<TABLE>
<CAPTION>
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flow
Year ended June 30, 1998, eleven months ended June 30, 1997 and year ended July 31, 1996
===================================================================================================================================
Eleven months ended
Year ended June 30, Year ended
June 30, 1998 1997 1996 July 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,180,067 219,675 188,296 225,996
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 407,469 351,159 376,815 404,019
Deferred income tax benefit (29,391) (18,660) (65,595) (65,595)
Market adjustment for committed ESOP shares 191,974 61,562 - -
Cost of ESOP shares released 201,020 100,510 - -
Amortization of award of RRP shares 193,482 - - -
Gain on sale of securities available-for-sale (469,752) (314) - -
Gain on sale of real estate owned - (35,448) (35,448)
Net amortization of deferred loan fees (50,420) (61,027) (1,626) (1,705)
Net amortization of discounts and premiums (32,114) 225,263 201,356 228,490
Provision for loan losses - - 137,558 137,558
(Increase) decrease in prepaid expenses and other
assets (186,593) 221,125 (89,469) (80,134)
(Increase) decrease in accrued interest receivable 81,919 (87,069) (35,921) (20,697)
Increase (decrease) in accrued interest payable and
other liabilities 160,547 1,052,358 113,612 (627,759)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,648,208 2,064,582 789,578 164,725
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Net increase in loans receivable (21,797,951) (14,419,37) (7,816,151) (8,296,671)
Purchases of mortgage-backed securities
held-to-maturity (9,995,700) (10,207,310) - -
Purchases of mortgage-backed securities
held-to-maturity - (10,174,580) (7,816,151) (8,296,671)
Purchases of investment in mutual funds and preferred
stock (2,672,247) (1,016,437) (10,081,249) (10,081,249)
Principal repayments on mortgage-backed securities
held-to-maturity 10,603,911 6,752,845 9,597,079 10,482,665
Principal repayments on mortgage-backed securities
available-for-sale 18,331,120 8,680,594 6,283,355 7,174,307
Proceeds from sale of mortgage-backed securities
available-for-sale 9,383,638 1,018,602 - -
Proceeds from sale of investments in mutual funds and
preferred stock 1,324,652 - - -
Proceeds from sale of real estate owned - - 203,250 203,250
Purchase of stock in Federal Home Loan Bank of Chicago (1,350,000) (435,000) (100,000) (100,000)
Proceeds from sale of stock in Federal Home Loan Bank
of Chicago 430,000 - 319,300 319,300
Purchase of office properties and equipment, net (388,040) (286,816) (211,844) (211,844)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 3,869,383 (20,087,339) (1,806,260) (510,242)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase (decrease) in savings deposits 854,021 (14,195,953) (10,656,214) (11,173,208)
Net increase in borrowed money 3,400,000 9,700,000 8,600,000 7,600,000
Increase (decrease) in advance payments by borrowers 163,882 (190,378) (771,674) (516,799)
for taxes and insurance
Net proceeds of common stock issued - 21,992,300 - -
Purchase of RRP stock (731,692) - - -
Net cash provided by (used in) financing activities 3,686,211 17,305,969 (2,827,888) (4,090,007)
Net increase (decrease) in cash and cash equivalents 9,203,802 (716,788) (3,844,570) (4,435,524)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 3,892,132 4,608,920 9,044,444 9,044,444
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $13,095,934 3,982,132 5,199,874 4,608,920
Supplemental disclosures of cash flow
Cash paid during the period for
Interest $ 7,746,111 6,591,151 7,061,099 8,391,152
Income taxes 866,000 71,000 90,000 133,000
Noncash investing activities
Transfer of securities to available for sale - - 56,446,621 56,446,621
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
Consolidated Statements of Cash Flows
Year ended June 30, 1998, eleven months ended June 30, 1997 and year ended July
31, 1996
25
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998 and 1997 and July 31, 1996
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Big Foot Financial Corp. and subsidiary (the Company) prepares its
financial statements on the basis of generally accepted accounting
principles. The following is a description of the more significant of
those policies which the Company follows in preparing and presenting its
financial statements.
REORGANIZATION TO A STOCK CORPORATION
On May 21, 1996, the Board of Directors of Fairfield Savings Bank,
F.S.B. (Savings Bank) adopted a plan of conversion (which was amended on
September 17, 1996), pursuant to which the Savings Bank converted from a
federally chartered mutual savings bank to a federally chartered stock
savings bank, with the concurrent formation of the Company. On December
19, 1996, the Company sold 2,512,750 shares of common stock at $10.00
per share in a subscription offering. Total net proceeds, after
reflecting conversion expenses of approximately $1,125,000 and including
the sale of common stock to the ESOP, were approximately $22,000,000,
and are reflected as common stock and additional paid-in capital on the
accompanying consolidated balance sheet. The Company utilized
$12,001,250 of the net proceeds to acquire all of the issued and
outstanding capital stock of the Savings Bank.
As part of the conversion, the Savings Bank established a liquidation
account as of the eligibility date for the benefit of eligible
depositors who continue to maintain deposits in the Savings Bank
following the conversion. The balance in this account decreases each
year in which deposit balances of eligible account holders decline. In
the unlikely event of a complete liquidation of the Savings Bank, each
eligible depositor who has continued to maintain deposits in the Savings
Bank following the conversion will be entitled to receive a liquidation
distribution from the liquidation account, based on such depositor's
proportionate share of the then-total remaining qualifying deposits,
prior to any distribution to Big Foot Financial Corp. as the sole
stockholder of the Savings Bank. Dividends cannot be paid from retained
earnings allocated to the liquidation account.
Prior to the stock conversion, the Company had not issued any stock, had
no assets or liabilities, and had not engaged in any business activities
other than those of an organizational nature. Accordingly, operating
activities prior to December 19, 1996 reflect the operations of the
Savings Bank only.
In fiscal year 1997, the Savings Bank changed its fiscal year end from
July 31 to June 30. The Company's and the Savings Bank's fiscal years
1998 and 1997 ended on June 30.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Big Foot
Financial Corp. and its wholly owned subsidiary, Fairfield Savings Bank,
F.S.B. All significant intercompany balances have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from these
estimates.
(Continued)
26
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income,"
(Statement 130) establishes standards for reporting and the presentation
of comprehensive income and its components in a full set of
general-purpose financial statements. Statement 130 is effective for
both interim and annual periods beginning after December 15, 1997, with
initial application of the Statement as of the beginning of an
enterprise's fiscal year, and its adoption is not expected to have a
material impact on the Company.
Statement 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way public business
enterprises are to report information about operating segments in annual
financial statements, and requires those enterprises to report selected
information about operating segments in interim financial reports issued
to shareholders. Statement 131 is effective for financial periods
beginning after December 15, 1997. The Company will adopt the statement
effective July 1, 1998, and its adoption is not expected to have a
material impact on the Company.
Statement 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits" standardizes the disclosure requirements of
Statements 87 and 106, and recommends a parallel format for presenting
information about pensions and other postretirement benefits. This
statement does not change measurement or recognition provisions provided
in Statements 87, 88, and 106. Statement 132 is effective for fiscal
years beginning after December 15, 1997. The Company will adopt the
statement effective July 1, 1998, and its adoption is not expected to
have a material impact on the Company.
In June 1998, the FASB issued Statement 133, "Accounting for Derivative
Instruments and Hedging Activities". Statement 133 standardizes the
accounting for derivative instruments, including certain derivative
instruments imbedded in other contracts. Under the standard, entities
are required to carry all derivative instruments in the statement of
financial position at fair value. The accounting for the changes in fair
value of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and, if so,
on the reason for holding it. The gain or loss due to changes in fair
value is recognized in earnings or as other comprehensive income in the
statement of shareholders' equity, depending on the type of instrument
and whether or not it is considered a hedge. Statement No. 133 is
effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999. The Company has not yet determined the impact this new
statement may have on its future financial condition or its results of
operations.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities which the Company has the positive intent and
ability to hold to maturity are carried at amortized cost. All other
mortgage-backed securities are designated as available-for-sale, and are
carried at fair value. The difference between amortized cost and fair
value is reflected as a separate component of stockholders' equity, net
of related tax effects. Unearned premiums and discounts are amortized
over the estimated life of the security using the interest method. Gains
and losses on the sale of mortgage-backed securities are determined
using the specific identification method.
INVESTMENT IN MUTUAL FUNDS AND PREFERRED STOCK
Investment in mutual funds and preferred stock is designated as
available-for-sale and is carried at fair value. Gains and losses on the
sale of these investments are determined using the specific
identification method.
(Continued)
27
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances less deferred
loan fees and the allowance for loan losses. The Company defers all loan
origination fees and certain direct costs associated with loan
originations. Net deferred fees are amortized as yield adjustments over
the contractual life of the related loans using the interest method.
It is the policy of the Company to provide valuation allowances for
estimated losses on loans when any significant and permanent decline in
value is identified. Periodic reviews are made to identify potential
problems. In addition to specific allowances, the Company maintains a
general allowance for loan losses. Additions to the allowance for loan
losses are charged to operations. Also, various regulatory agencies, as
an integral part of their examination process, periodically review the
Company's allowance for loan losses. Such agencies may require the
Company to recognize additions to the allowance based on their judgments
using information available to them at the time of their examination. In
the opinion of management, the allowance, when taken as a whole, is
adequate to absorb foreseeable losses.
The accrual of interest income is suspended and previously accrued
interest income is reversed when a loan is contractually delinquent for
90 days or more and where collection of interest is doubtful. Accrual is
resumed when the loan becomes less than 90 days contractually delinquent
and collection of interest is probable.
Impaired loans are measured at the present value of expected future cash
flows discounted at the loan's effective interest rate, or, at the
loan's observable market price or the fair value of the collateral if
the loan is collateral dependent. Impaired loans exclude homogeneous
loans that are collectively evaluated for impairment, including one- to
four-family residential real estate loans and consumer loans.
DEPRECIATION AND AMORTIZATION
Depreciation of office properties and equipment and amortization of
leasehold improvements are recorded using the straight-line method over
the estimated useful lives of the related assets. Estimated useful lives
range between 3 and 40 years.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
Compensation expense under the ESOP is equal to the fair value of common
shares released or committed to be released annually to participants in
the ESOP. Common stock purchased by the ESOP and not committed to be
released to participants is included in the consolidated balance sheet
at cost as a reduction of stockholders' equity.
EARNINGS PER SHARE
In February 1997, the FASB issued Statement 128, "Earnings per Share,"
which replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Basic earnings per
share is calculated by dividing income available to common stockholders
by the weighted average number of common shares outstanding. Diluted
earnings per share is calculated by dividing net income by the weighted
average number of shares adjusted for the dilutive effect of outstanding
stock options.
(Continued)
28
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company adopted Statement 128 at December 31, 1997. All earnings per
share amounts for prior years have been restated under the provisions of
SFAS 128. Earnings per share information for the year ended July 31,
1996 cannot be computed because the Company did not issue common stock
until December 19, 1996. Net income for earnings per share calculations
for the eleven months ended June 30, 1997 consists of net income from
December 19, 1996 (the initial public offering date) through June 30,
1997. ESOP shares are only considered outstanding for earnings per share
calculations when they are committed to be released.
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year ended Eleven months
June 30, 1998 ended June 30, 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic:
Net income $ 1,180,067 638,078
Weighted average common
shares outstanding 2,341,883 2,231,781
- ---------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .50 .27
- ---------------------------------------------------------------------------------------------------------------------------
Diluted:
Net income 1,180,067 638,078
Weighted average common
shares outstanding 2,341,883 2,231,781
Effect of dilutive stock options outstanding 55,820 7,791
- ---------------------------------------------------------------------------------------------------------------------------
Diluted weighted average common
shares outstanding $ 2,397,703 2,329,572
- ---------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .49 .27
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, as well as operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly
liquid debt instruments with an original maturity of three months or
less to be cash equivalents. Cash and cash equivalents also include cash
on hand and due from banks.
(Continued)
29
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
RECLASSIFICATIONS
Certain 1997 amounts have been reclassified to conform to the 1998
financial statement presentation.
(2) MORTGAGE-BACKED SECURITIES AND INVESTMENT IN MUTUAL FUNDS AND PREFERRED
STOCK
The amortized cost and estimated fair value of mortgage-backed
securities and investment in mutual funds are summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
June 30, 1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity:
Federal National Mortgage Association $ 44,283,725 132,252 (328,669) 44,087,308
Federal Home Loan Mortgage
Corporation 2,445,578 27,412 - 2,472,990
- ---------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities
held-to-maturity $ 46,729,303 159,664 (328,669) 46,560,298
- ---------------------------------------------------------------------------------------------------------------------------
Available-for-sale:
Federal National Mortgage Association 22,575,671 183,567 (66,027) 22,693,211
Federal Home Loan Mortgage
Corporation 10,368,946 45,921 (72,875) 10,341,992
- ---------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities
available-for-sale 32,944,617 229,488 (138,902) 33,035,203
- ---------------------------------------------------------------------------------------------------------------------------
Investment in mutual funds 804,681 - (28,311) 776,370
Investment in preferred stock 1,800,000 15,256 (22,500) 1,792,756
- ---------------------------------------------------------------------------------------------------------------------------
Total investment in mutual funds
and preferred stock 2,604,681 15,256 (50,811) 2,569,126
- ---------------------------------------------------------------------------------------------------------------------------
Total available-for-sale $ 35,549,298 244,744 (189,713) 35,604,329
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
30
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity:
Federal National Mortgage Association $ 44,135,833 - (853,215) 43,282,618
Federal Home Loan Mortgage
Corporation 3,240,489 11,284 - 3,251,773
- ---------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities
held-to-maturity $ 47,376,322 11,284 (853,215) 46,534,391
- ---------------------------------------------------------------------------------------------------------------------------
Available-for-sale:
Federal National Mortgage Association 41,172,451 132,442 (152,677) 41,152,216
Federal Home Loan Mortgage
Corporation 19,186,900 13,356 (133,267) 19,066,989
- ---------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities
available-for-sale 60,359,351 145,798 (285,944) 60,219,205
Investment in mutual funds 1,016,437 70,850 - 1,087,287
- ---------------------------------------------------------------------------------------------------------------------------
Total available-for-sale $ 61,375,788 216,648 (285,944) 61,306,492
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from the sale of securities available-for-sale for the year
ended June 30, 1998 and the eleven months ended June 30, 1997 were
$10,708,290 and $1,018,602, respectively, with gross gains of $469,752
and $314, respectively. There were no sales of securities during the
year ended July 31, 1996.
In 1995, the Financial Accounting Standards Board (FASB) issued a
special report allowing the transfer of securities from the
held-to-maturity to the available-for-sale classification during the
period from November 15, 1995 to December 31, 1995, with no recognition
of any related unrealized gain or loss in current earnings. On December
31, 1995, mortgage-backed securities held-to-maturity with an amortized
cost of approximately $56,447,000 were transferred to the
available-for-sale classification. The gross unrealized gain related to
the transferred securities was approximately $609,000.
Mortgage-backed securities with an amortized cost of approximately
$2,631,000 and $315,000 have been pledged to secure certain savings
deposits of local municipal agencies as of June 30, 1998 and 1997,
respectively. Mortgage-backed securities with an amortized cost of
approximately $4,565,000 have been pledged to secure FHLB advances as of
June 30, 1998.
(Continued)
31
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(3) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
June 30,
--------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate loans:
One- to four-family residential $ 113,441,132 91,132,990
Multifamily 741,169 941,902
Commercial 833,386 383,724
Land, construction, and development loans 117,972 403,165
Home equity 821,300 1,258,587
- ---------------------------------------------------------------------------------------------------------------------------
Total real estate loans 115,954,959 94,120,368
Consumer loans 143,841 180,481
- ---------------------------------------------------------------------------------------------------------------------------
Gross loans receivable 116,098,800 94,300,849
Less:
Deferred loan fees (326,593) (377,013)
Allowance for loan losses (300,000) (300,000)
- ---------------------------------------------------------------------------------------------------------------------------
$ 115,472,207 93,623,836
- ---------------------------------------------------------------------------------------------------------------------------
Activity in the allowance for loan losses is summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------------
Eleven months
Year ended ended Year ended
June 30, 1998 June 30, 1997 July 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 300,000 300,000 166,000
Provision for loan losses - - 137,558
Charge-offs - - (3,558)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 300,000 300,000 300,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
32
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Loans receivable delinquent three months or more are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Number Percentage
of of gross
loans Amount loans receivable
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 30, 1998 3 $ 342,317 .29 %
June 30, 1997 1 199,112 .21
July 31, 1996 2 118,303 .15
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company discontinues recognizing interest on loans 90 days and
greater delinquent where collection of interest is doubtful. The
reduction in interest income associated with loans 90 days and greater
delinquent where collection of interest is doubtful was approximately
$-0-, $10,000, and $-0- for the year ended June 30, 1998, the eleven
months ended June 30, 1997, and the year ended July 31, 1996,
respectively.
No loans were identified as impaired by the Savings Bank at June 30,
1998 or 1997 or July 31, 1996. Additionally, no loans were considered
impaired during the year ended June 30, 1998, the eleven months ended
June 30, 1997 or the year ended July 31, 1996.
The Company serviced loans for others with principal balances
approximating $1,170,000, $1,757,000, and $2,021,000 at June 30, 1998
and 1997 and July 31, 1996, respectively. As part of the loan sale
agreements to the Federal National Mortgage Association, the Company is
required to repurchase loans which become contractually delinquent. The
Company was not required to repurchase loans during the year ended June
30, 1998, the eleven months ended June 30, 1997, or the year ended July
31, 1996.
Real estate first mortgage loans, aggregating approximately $6,045,000,
$6,682,000, and $4,538,000 at June 30, 1998 and 1997, and July 31, 1996,
respectively, had interest rates which adjust based on the movement of
various economic indices.
(4) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
June 30,
--------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage-backed securities $ 438,452 590,596
Loans receivable 486,942 420,405
Other investments 43,265 39,577
- ---------------------------------------------------------------------------------------------------------------------------
$ 968,659 1,050,578
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
33
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(5) OFFICE PROPERTIES AND EQUIPMENT
A summary of office properties and equipment at cost, less accumulated
depreciation and amortization, is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
June 30,
--------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 930,845 906,359
Buildings 6,114,643 6,114,643
Furniture, fixtures, and equipment 4,758,544 4,477,164
- ---------------------------------------------------------------------------------------------------------------------------
11,804,032 11,498,166
Less accumulated depreciation and amortization 7,136,797 6,761,502
- ---------------------------------------------------------------------------------------------------------------------------
$ 4,667,235 4,736,664
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization expense was $407,469, $351,159, and
$404,019 for the year ended June 30, 1998, the eleven months ended June
30, 1997, and the year ended July 31, 1996, respectively.
(6) SAVINGS DEPOSITS
Savings deposits are summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Stated or weighted
average interest rate June 30,
June 30, 1998 1997
---------------------- -------------------- -----------------------
1998 1997 Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
NOW accounts - % - $ 5,847,332 4.7% $ 4,581,809 3.7%
NOW accounts 2.01 2.02 7,667,774 6.2 7,177,873 5.9
Money market demand
accounts 3.31 3.12 11,797,048 9.5 12,280,816 10.0
Passbook accounts 2.50 2.50 38,837,530 31.4 39,607,313 32.2
- ---------------------------------------------------------------------------------------------------------------------------
64,149,684 51.8 63,647,811 51.8
Certificate accounts 5.37 5.34 59,685,154 48.2 59,333,006 48.2
- ---------------------------------------------------------------------------------------------------------------------------
3.81% 3.81 $ 123,834,838 100.0% $ 122,980,817 100.0%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
34
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------
1998 1997
-------------------- -----------------------
Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Contractual maturity of certificate accounts:
Under 12 months $ 12,962,502 21.7% $ 45,140,069 76.1%
12 to 36 months 42,343,204 71.0 13,264,789 22.3
Over 36 months 4,379,448 7.3 928,148 1.6
- ---------------------------------------------------------------------------------------------------------------------------
$ 59,685,154 100.0% $ 59,333,006 100.0%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The aggregate amount of certificate accounts with a balance of $100,000
or greater was approximately $6,419,000 and $5,505,000 at June 30, 1998
and 1997, respectively.
Interest expense on savings deposits is summarized as follows for the
periods indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Eleven months
Year ended ended Year ended
June 30, 1998 June 30, 1997 July 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW accounts $ 144,808 132,568 146,390
Money market demand accounts 381,935 365,685 437,098
Passbook accounts 976,986 922,897 1,054,003
Certificate accounts 3,287,700 3,157,629 4,286,583
- ---------------------------------------------------------------------------------------------------------------------------
$ 4,791,429 4,578,779 5,924,074
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
35
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(7) BORROWED MONEY
Borrowed money is summarized as follows :
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Amount
Interest rate at outstanding at
June 30, June 30,
------------------ ----------------------
Due date 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Advances from the Federal
Home Loan Bank
of Chicago: - -% 6.74% $ - 16,900,000
07/26/97 - 5.38 - 1,000,000
02/20/98 - 7.30 - 7,700,000
06/26/98 - 5.85 - 15,000,000
07/26/98 5.63 5.63 1,000,000 1,000,000
07/19/99 6.64 6.64 1,000,000 1,000,000
02/21/00 6.08 6.08 7,000,000 7,000,000
08/08/02 5.40 - 9,000,000 -
10/30/00 6.02 - 10,000,000 -
06/19/08 5.44 - 7,000,000 -
06/19/08 5.19 - 8,000,000 -
06/19/08 5.44 - 5,000,000 -
06/19/08 5.19 - 5,000,000 -
- ---------------------------------------------------------------------------------------------------------------------------
$ 53,000,000 49,600,000
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 5.59% 6.41%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The $16,900,000 advance at June 30, 1997 represents borrowings on an
open line of credit which had a floating rate of interest, and for which
there is no stated due date. There were no such borrowings at June 30,
1998.
The Company has a collateral pledge agreement whereby the Company has
agreed to keep on hand at all times, free of all other pledges, liens,
and encumbrances, residential first mortgages with unpaid principal
balances aggregating no less than 167% of the outstanding advances from
the Federal Home Loan Bank of Chicago. At June 30, 1998 and 1997, all
stock in the Federal Home Loan Bank of Chicago was also pledged as
collateral for these advances. Mortgage-backed securities with an
amortized cost of approximately $4,565,000 have also been pledged to
secure FHLB advances as of June 30, 1998.
(Continued)
36
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(8) INCOME TAXES
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Eleven months
Year ended ended Year ended
June 30, 1998 June 30, 1997 July 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 741,304 110,746 182,595
State - 20,314 -
- ---------------------------------------------------------------------------------------------------------------------------
741,304 131,060 182,595
- ---------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (29,391) (18,660) (65,595)
State - - -
- ---------------------------------------------------------------------------------------------------------------------------
(29,391) (18,660) (65,595)
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 711,913 112,400 117,000
- ---------------------------------------------------------------------------------------------------------------------------
The reasons for the difference between the effective income tax rate and
the corporate Federal income tax rate of 34% are as follows:
- ---------------------------------------------------------------------------------------------------------------------------
Eleven months
Year ended ended Year ended
June 30, 1998 June 30, 1997 July 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Federal income tax rate of 34% 34.0% 34.0 34.0
Other 3.6 (0.2) 0.1
- ---------------------------------------------------------------------------------------------------------------------------
Effective income tax rate 37.6% 33.8 34.1
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
37
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
June 30,
---------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 116,216 123,540
Deferred loss on sales of real estate 120,251 135,826
Capitalized interest 18,037 19,174
State net operating loss carryforwards 448,025 796,466
Unrealized loss on securities available-for-sale - 23,613
Other - 6,814
- ---------------------------------------------------------------------------------------------------------------------------
702,529 1,105,433
Less valuation allowance 410,245 748,027
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets, net of valuation allowance 292,284 357,406
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on securities available-for-sale 18,654 -
Depreciation 24,238 13,411
Excess of tax bad debt reserve over base year amount 193,348 218,686
Federal Home Loan Bank stock dividends not currently taxable 108,396 115,227
Deferred loan fees 208,065 263,706
Other 10,647 5,769
- ---------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 563,348 616,799
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ (271,064) (259,393)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has Illinois net operating loss carryforwards in the amount
of $9,500,000, which will expire in varying amounts beginning July 31,
1998 through July 31, 2011.
The valuation allowance for deferred tax assets was $410,245 and
$748,027 as of June 30, 1998 and 1997, respectively, resulting in an
decrease of $337,782 for the year ended June 30, 1998. The valuation
allowance relates to state net operating loss carryforwards and certain
deductible temporary differences which may not generate future state tax
benefits. The reduction in the valuation allowance is due to the
utilization of state net operating loss carry forwards in the current
year.
Retained earnings at June 30, 1998 and 1997 include $6,149,000 for which
no provision for Federal income tax has been made. These amounts
represent allocations of income to bad debt deductions for tax purposes
only. Reduction of amounts so allocated for purposes other than tax bad
debt losses will create income for tax purposes only, which will be
subject to the then current Federal and state corporate income tax
rates.
(Continued)
38
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) OFFICER, DIRECTOR, AND EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
In conjunction with the Savings Bank's conversion, the Company formed an
ESOP. The ESOP covers substantially all employees that are age 21 or
over and with at least 1,000 hours of service. The ESOP borrowed
$2,010,200 from the Company and purchased 201,020 common shares issued
in the conversion. The Savings Bank intends to make discretionary
contributions to the ESOP sufficient to service the requirements of the
loan over a period of ten years. During the year ended June 30, 1998 and
the eleven months ended June 30, 1997, 20,102 and 10,051 shares were
allocated, respectively. ESOP expense recognized for the year ended June
30, 1998 and the eleven months ended June 30, 1997 was $392,994 and
$162,072, respectively.
RECOGNITION AND RETENTION PLAN (RRP)
On December 22, 1997, the Company adopted an RRP which may grant up to
4%, or 100,510 shares, of the common stock issued in the Company's
initial public offering to eligible directors and certain key officers
of the Company. All shares available under the RRP were granted on
December 22, 1997. Shares vest as follows: 10% on June 30, 1998; 20% on
June 30, 1999, 2000, 2001 and 2002, respectively; and 10% on January 1,
2003. Compensation expense relating to the shares granted under the RRP
totaled $1,934,818, the fair value of the shares on the date of grant,
and is being recognized as the participants vest in those shares. At
June 30, 1998, 10,051 shares have vested and for the year ended June 30,
1998 the Company recorded compensation expense of $193,482.
During 1998, 37,660 shares of the Company's common stock were purchased
by the RRP in the open market at a weighted average price of $19.43 per
share. The aggregate purchase price of all unvested shares acquired by
the RRP is reflected as a reduction of stockholders' equity as deferred
compensation.
PENSION PLAN
The Savings Bank has a qualified noncontributory pension plan covering
employees over 21 years of age, working more than 1,000 hours per year.
The Savings Bank's policy is to fund pension costs accrued.
The following table sets forth the plan's funded status at June 30, 1998
and June 30, 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
June 30,
--------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligations, including vested benefits of $736,288
at June 30, 1998 and $566,749 at June 30, 1997 $ 738,326 610,087
- ---------------------------------------------------------------------------------------------------------------------------
Plan assets at fair value 1,133,347 872,809
Less projected benefit obligation for services rendered to date 885,468 740,070
- ---------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 247,879 132,739
Unrecognized net transition asset at August 1, 1991 being recognized over 11.65 years (79,441) (93,679)
Unrecognized net gain (114,057) (38,700)
- ---------------------------------------------------------------------------------------------------------------------------
Accrued pension obligation $ 54,381 360
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
39
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Net pension expense includes the following for the periods indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Eleven months
Year ended ended Year ended
June 30, 1998 June 30, 1997 July 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 44,829 42,000 48,802
Interest cost on projected benefit obligation 52,172 44,996 41,757
Actuarial return on plan assets (187,899) (176,695) (54,552)
Net amortization and deferral 112,690 115,046 1,294
- ---------------------------------------------------------------------------------------------------------------------------
Net periodic pension expense $ 21,792 25,347 37,301
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The rate of increase in future compensation levels used is determined by
the age of the participants. The discount rate used in determining the
actuarial present value of the projected benefit obligation was 7.50% at
June 30, 1998 and 1997 and July 31, 1996. The expected long-term rate of
return was 8.0% at June 30, 1998 and 1997 and July 31, 1996.
The Company also has a contributory profit-sharing and savings plan
covering substantially all full-time employees. The Company makes
matching contributions to the plan equal to a percentage of each
participant's contribution for the plan year. For the year ended June
30, 1998, the eleven months ended June 30, 1997 and the year ended July
31, 1996, the Company made contributions of $16,803, $13,995 and
$13,934, respectively. Prior to the formation of the ESOP, the Company
also made profit-sharing contributions to the plan equal to a percentage
of each participant's compensation for the plan year. Profit-sharing
expense was approximately $50,000, and $110,000 for the eleven months
ended June 30, 1997, and the year ended July 31, 1996, respectively.
There was no contribution or expense for the year ended June 30, 1998.
(10) MANAGEMENT BONUS PROGRAM
The Savings Bank has an annual Management Bonus Program for Senior
Management Officers. The individual amounts to be awarded under the
annual bonus program are based on the Savings Bank attaining a minimum
return on average assets for that year. No accrual was made for the
annual bonus at June 30, 1998 or 1997, or July 31, 1996, as the minimum
benchmarks established were not achieved.
(11) STOCK OPTION PLAN
On June 24, 1997, the Company adopted a stock option plan (the Plan)
pursuant to which the Company's Board of Directors may grant stock
options to directors, officers, and employees of the Company and the
Savings Bank. The number of common shares authorized under the Plan is
251,275, equal to 10% of the total number of shares issued in the
initial stock offering and stock options granted will vest at a rate of
20% per year beginning on the first anniversary date of the grant. The
exercise price is equal to the fair value of the common stock at the
date of grant. The option term cannot exceed ten years from the
commencement date of the Plan of June 24, 1997.
As of June 30, 1997, the Company adopted the disclosure provisions of
FASB Statement 123, "Accounting for Stock-Based Compensation." The per
share weighted-average fair value of stock options granted during 1997
was $3.40 on the date of grant using the Black Scholes option pricing
model with the following weighted-average assumptions: an expected
dividend yield of 2.6%, expected volatility of 6.98%, risk-free interest
rate of 6.63%, and an expected life of 8.8 years. There were no stock
options granted during the year ended June 30, 1998.
(Continued)
40
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Under Statement 123, the Company is required to disclose pro forma net
income and earnings per share for 1998 as if compensation expense
relative to the fair value of options granted had been included in
earnings. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under Statement 123, the
Company's net income would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Eleven months
Year ended ended
June 30, 1998 June 30, 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $ 1,180,067 219,675
Pro forma 1,009,203 218,132
Earnings per share:
Basic:
As reported .50 .27
Pro forma .43 .27
Diluted:
As reported .49 .27
Pro forma .43 .27
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
A summary of the status of the Company's stock option transactions under
the Plan for the periods ended June 30, is presented below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Eleven months
Year ended ended
June 30, 1998 June 30, 1997
--------------------- ----------------------
Weighted- Weighted-
average average
exercise exercise
Options Shares price Shares price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 251,275 $ 15.63 - $ -
Granted - - 251,275 15.63
Exercised - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 251,275 15.63 251,275 15.63
- ---------------------------------------------------------------------------------------------------------------------------
Exercisable at year end 50,255 15.63 - -
- ---------------------------------------------------------------------------------------------------------------------------
Weighted-average grant date fair value of
options granted during the period $ - $ 3.40
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
41
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(12) REGULATORY MATTERS
The Savings Bank is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Thrift
Supervision (OTS). Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect
on the Company's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Savings
Bank must meet specific capital guidelines that involve quantitative
measures of the entity's assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The
Savings Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Savings Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined
in the regulations) to risk-weighted assets, and of Tier 1 capital to
adjusted total assets and of tangible capital to adjusted total assets.
As of June 30, 1998 and 1997, the most recent notification from the OTS
categorized the Savings Bank as well-capitalized under the regulatory
framework. There are no conditions or events since that notification
that management believes would affect the Savings Bank's category.
The following table summarizes the Company's and the Savings Bank's
actual capital and the Savings Bank's required capital at June 30, 1998
and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
To be well-
For capital capitalized
adequacy under prompt
Actual Purposes Corrective Action
------ -------- -----------------
June 30, 1998 Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital (to risk-weighted assets):
Consolidated $ 38,358 44.21% N/A N/A N/A N/A
Fairfield Savings Bank, FSB 26,188 31.76 $ 6,597 8.00% $ 8,246 10.00%
- ---------------------------------------------------------------------------------------------------------------------------
Tier 1 capital (to risk-weighted assets):
Consolidated 38,058 43.87 N/A N/A N/A N/A
Fairfield Savings Bank, FSB 25,888 31.39 N/A N/A 4,498 6.00
- ---------------------------------------------------------------------------------------------------------------------------
Tier 1 capital (to adjusted total assets):
Consolidated 38,058 17.26 N/A N/A N/A N/A
Fairfield Savings Bank, FSB 25,888 12.30 6,316 3.00 10,532 5.00
- ---------------------------------------------------------------------------------------------------------------------------
Tangible capital (to adjusted total assets):
Consolidated 38,058 17.26 N/A N/A N/A N/A
Fairfield Savings Bank, FSB 25,888 12.30 3,158 1.50 N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
42
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
To be well-
For capital capitalized
adequacy under prompt
Actual Purposes corrective action
------ -------- -----------------
June 30, 1997 Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital (to risk-weighted assets):
Consolidated $ 37,323 48.43% N/A N/A N/A N/A
Fairfield Savings Bank, FSB 25,134 34.03 $ 5,908 8.00% $ 7,385 10.00%
- ---------------------------------------------------------------------------------------------------------------------------
Tier 1 capital (to risk-weighted assets):
Consolidated 37,023 48.03 N/A N/A N/A N/A
Fairfield Savings Bank, FSB 24,834 33.63 N/A N/A 4,431 6.00
- ---------------------------------------------------------------------------------------------------------------------------
Tier 1 capital (to adjusted total assets):
Consolidated 37,023 17.21 N/A N/A N/A N/A
Fairfield Savings Bank, FSB 24,834 12.13 5,900 3.00 9,983 5.00
- ---------------------------------------------------------------------------------------------------------------------------
Tangible capital (to adjusted total assets):
Consolidated 37,023 17.21 N/A N/A N/A N/A
Fairfield Savings Bank, FSB 24,834 12.13 3,070 1.50 N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(13) CREDIT CONCENTRATION AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of its business. These instruments are
commitments to originate loans and involve credit and interest rate risk
in excess of the amount recognized in the consolidated balance sheets.
Commitments to originate fixed and variable rate mortgage loans at June
30, 1998 were $3,541,750 and $-0-, respectively, at rates ranging
between 6.750% and 7.125%. Commitments to fund available home equity
lines of credit of approximately $495,000 at June 30, 1998 represent
amounts which the Company has committed to fund if requested by the
borrower within the normal commitment period. Because the
creditworthiness of each customer is reviewed prior to extension of
credit, the Company adequately controls its credit risk on these
commitments as it does for loans recorded on the consolidated balance
sheets.
The majority of the Company's loans are secured by residential real
estate in the Chicago metropolitan area. Management believes the Company
has a diversified loan portfolio and the concentration of lending
activities in these local communities does not result in an acute
dependency upon economic conditions of the lending region.
(Continued)
43
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(14) COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings incidental to the
normal course of business. Although the outcome of such litigation
cannot be predicted with any certainty, management is of the opinion,
based on the advice of legal counsel, that final disposition of any
litigation should not have a material effect on the consolidated
financial statements of the Company.
In connection with the development of the Trails of Olympia Fields (a
planned unit development of homesites and commercial land developed by
the Savings Bank and its subsidiary in prior years), the Company
initiated action against a municipality and certain parties involved in
the development. During the year ended June 30, 1996, the Bank received
$184,415 from the settlement of certain of these claims. The Bank
recognized $21,145 in prejudgment interest income during the eleven
months ended June 30, 1997.
(15) DIVIDEND RESTRICTIONS
The OTS imposes limitations upon all capital distributions by savings
institutions, including cash dividends. An institution that exceeds all
fully phased-in capital requirements before and after a proposed capital
distribution (Tier 1 Association) and has not been advised by the OTS
that it is in need of more than normal supervision could, after prior
notice but without the approval of the OTS, make capital distributions
during a calendar year up to the higher of (i) 100% of its net income to
date during the calendar year, plus the amount that would reduce by 1/2
its surplus capital ratio (the excess capital over its fully phased-in
capital requirements) at the beginning of the calendar year; or (ii) 75%
of its net income over the most recent four-quarter period. Any
additional capital distributions would require prior regulatory
approval.
(Continued)
44
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(16) FAIR VALUES OF FINANCIAL INSTRUMENTS
FASB Statement 107, "Disclosure about Fair Value of Financial
Instruments," requires the disclosure of estimated fair values of all
asset, liability, and off-balance sheet financial instruments. Statement
107 defines fair value as the amount at which the instrument could be
exchanged in a current transaction between willing parties. Fair value
estimates, methods, and assumptions are set forth below for the
Company's financial instruments:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
JUNE 30,
--------------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 3,345,248 3,345,248 2,191,000 2,191,000
Interest-earning deposits 9,800,686 9,800,686 1,701,132 1,701,132
Mortgage-backed securities 79,764,506 79,595,501 107,595,527 106,753,596
Investment in mutual funds and
preferred stock 2,569,126 2,569,126 1,087,287 1,087,287
Loans receivable, net 115,472,207 115,947,700 93,623,836 93,441,235
Accrued interest receivable 968,659 968,659 1,050,578 1,050,578
Federal Home Loan Bank
of Chicago stock 3,400,000 3,400,000 2,480,000 2,480,000
- ---------------------------------------------------------------------------------------------------------------------------
Total financial assets $ 215,320,432 215,626,920 209,729,360 208,704,828
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial liabilities:
Nonmaturing savings deposits $ 64,149,684 64,149,684 63,647,811 63,647,811
Savings deposits with
stated maturities 59,685,154 59,724,794 59,333,006 59,333,006
Borrowed money 53,000,000 53,109,319 49,600,000 49,600,000
Accrued interest payable 890,072 890,072 900,019 900,019
- ---------------------------------------------------------------------------------------------------------------------------
Total financial liabilities $ 177,724,910 177,873,869 173,480,836 173,480,836
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
CASH AND DUE FROM BANKS AND INTEREST-EARNING DEPOSITS
The carrying value of cash and due from banks and interest-earning
deposits approximates fair value due to the short period of time between
origination of the instruments and their expected realization.
MORTGAGE-BACKED SECURITIES AND INVESTMENT IN
MUTUAL FUNDS AND PREFERRED STOCK
The fair value of mortgage-backed securities and investment in mutual
funds and preferred stock is estimated based on quoted market prices.
(Continued)
45
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
LOANS RECEIVABLE
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type and then further segmented
into fixed and variable rate interest terms and by performing and
nonperforming categories. The fair value of performing fixed rate loans
is calculated by discounting contractual cash flows adjusted for
prepayment estimates, using discount rates based on new loan rates
adjusted to reflect differences in servicing and credit costs. For
variable rate loans, the carrying amount is a reasonable estimate of
fair value as these loans reprice frequently or have a relatively short
term to maturity and there has been little or no change in credit
quality since origination. Fair value for nonperforming loans is
calculated by discounting estimated future cash flows using a rate
commensurate with the risk associated with the cash flows.
ACCRUED INTEREST RECEIVABLE
The carrying amount of accrued interest receivable approximates its fair
value due to the relatively short period of time between accrual and
expected realization.
FEDERAL HOME LOAN BANK OF CHICAGO STOCK
The fair value of this stock is based on its redemption value.
SAVINGS DEPOSITS
Under Statement 107, the fair value of deposits with no stated maturity,
such as noninterest-bearing demand deposits, NOW accounts, money market
accounts, and passbook accounts, is equal to the amount payable on
demand as of the date of estimate. The fair value of certificates of
deposit is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates offered for deposits of
similar remaining maturities. If the estimated fair value is less than
the amount payable on demand, the fair value disclosed is the amount
payable. The fair value estimates do not include the benefit that
results from the low-cost funding provided by the deposit liabilities
compared to the cost of borrowing funds in the market.
BORROWED MONEY
The fair value of FHLB advances is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
offered for FHLB advances of similar remaining maturities. If the
estimated fair value is less than the amount payable on demand, the fair
value disclosed is the amount payable.
ACCRUED INTEREST PAYABLE
The carrying amount of accrued interest payable approximates its fair
value due to the relatively short period of time between accrual and
expected realization.
LIMITATIONS
The fair value estimates are made at a specific point in time based on
relevant market information and information about the financial
instrument. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are subjective in
nature and involve uncertainties and matters of significant judgment,
and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
In addition, the fair value estimates are based on existing on- and
off-balance sheet financial instruments without attempting to estimate
the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. Significant
assets and liabilities that are not considered financial assets or
liabilities include the mortgage origination operation, deferred taxes,
and
(Continued)
46
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
property, plant, and equipment. In addition, the tax ramifications
related to the realization of unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered
in any of the estimates.
(17) CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION
The following condensed statements of financial condition as of June 30,
1998 and statements of earnings and cash flows for the year ended June
30, 1998 and for the period from December 19, 1996 (date of commencement
of operations) to June 30, 1997 for Big Foot Financial Corp. should be
read in conjunction with the consolidated financial statements and the
notes thereto.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
JUNE 30,
--------
STATEMENTS OF FINANCIAL CONDITION 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 2,257,262 297,659
Mortgage-backed securities available-for-sale 5,236,247 8,683,233
Investment in mutual funds 2,569,126 1,087,287
Equity investment in the Savings Bank 25,967,935 24,737,420
Accounts receivable from the Savings Bank 193,482 100,510
ESOP loan receivable from the Savings Bank 1,708,670 1,909,690
Accrued interest receivable 35,473 138,412
Investment in real estate held for sale and development 262,259 262,259
- ---------------------------------------------------------------------------------------------------------------------------
$ 38,230,454 37,216,470
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities -
other liabilities 136,390 239,317
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock 25,128 25,128
Additional paid-in capital 24,224,171 24,038,934
Retained earnings 16,048,531 14,868,464
Common stock acquired by ESOP (1,708,670) (1,909,690)
Common stock acquired by RRP (531,473) -
Unrealized gain (loss) on securities
available-for-sale, net of tax 36,377 (45,683)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 38,094,064 36,977,153
- ---------------------------------------------------------------------------------------------------------------------------
$ 38,230,454 37,216,470
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
47
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
December 19,
Year ended 1996 to
STATEMENTS OF EARNINGS June 30, 1998 June 30, 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Equity in undistributed earnings of the Savings Bank $ 660,478 32,364
Interest income 872,547 429,754
Interest expense - (5,804)
Noninterest income 240,649 313
Noninterest expense (331,794) (140,352)
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,441,880 316,275
Income tax expense 261,813 96,600
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 1,180,067 219,675
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
48
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
December 19,
Year ended 1996 to
STATEMENTS OF CASH FLOWS June 30, 1998 June 30, 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net income $ 1,180,067 219,675
Equity in undistributed earnings of the Savings Bank (660,476) (32,364)
Provision (benefit) for deferred income taxes (36,377) -
Amortization of premiums 24,708 10,295
Gain on sale of investment securities available-for-sale (240,649) -
Increase in other assets - (262,259)
Decrease (increase) in accrued interest receivable 102,939 (138,412)
Increase (decrease) in other liabilities (17,616) 213,011
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 352,596 9,946
- ---------------------------------------------------------------------------------------------------------------------------
Investing activities:
Net decrease in loans receivable 301,530 -
Purchase of capital stock of the Savings Bank - (9,991,050)
Origination of ESOP loan receivable - (2,010,200)
Purchase of mortgage-backed securities available for sale - (10,174,580)
Principal repayments on mortgage-backed securities available-for-sale 3,384,764 469,078
Proceeds from sales of mortgage-backed securities available-for-sale - 1,018,602
Sale of investment in mutual funds and preferred stock 1,324,652 -
Purchase of investment in mutual funds and preferred stock (2,672,247) (1,016,437)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities 2,338,699 (21,704,587)
- ---------------------------------------------------------------------------------------------------------------------------
Financing activities:
Purchase of RRP stock (731,692) -
Net proceeds of common stock issued - 21,992,300
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (731,692) 21,992,300
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,959,603 297,659
Cash and cash equivalents at beginning of period 297,659 -
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,257,262 297,659
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
49
<PAGE>
1998 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(18) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth certain unaudited income and expense and
per share data on a quarterly basis for the periods indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1998 ELEVEN MONTHS ENDED JUNE 30, 1997
------------------------ ---------------------------------
1st qtr. 2nd qtr. 3rd qtr 4th qtr. 1st qtr. 2nd qtr. 3rd qtr. 2 mos.
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 3,568 3,687 3,447 3,472 3,192 3,425 3,488 2,362
Interest expense 1,967 2,006 1,898 1,861 2,009 1,984 1,844 1,284
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income
before provision
for loan losses 1,601 1,681 1,549 1,611 1,183 1,441 1,644 1,078
Provision for loan losses - - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 1,601 1,681 1,549 1,611 1,183 1,441 1,644 1,078
Noninterest income 68 297 57 302 110 59 74 38
Noninterest
expense (1) 1,314 1,325 1,330 1,303 2,087 1,157 1,157 894
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before
income tax expense
(benefit) 355 653 276 610 (794) 343 561 222
Income tax expense
(benefit) 123 200 98 293 (270) 117 190 75
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 232 453 178 317 (524) 226 371 147
- ---------------------------------------------------------------------------------------------------------------------------
EPS: (2)
Basic $ .10 .20 .08 .14 N/A .05 .16 .06
Diluted .10 .19 .07 .13 N/A .05 .16 .06
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends
declared per share $ - - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) First quarter noninterest expense for 1997 includes a one-time
special assessment charge resulting from legislation passed on
September 30, 1996, regarding the Savings Association Insurance
Fund. To cover the special assessment called for by the
legislation, the Company recorded a pre-tax charge of $936,000.
(2) Earnings per share information the first quarter of fiscal 1997
cannot be computed because the Company did not issue stock until
December 19, 1996. The 1997 and 1998 earnings per share amounts
have been computed in accordance with Statement of Financial
Accounting Standards 128, "Earnings per Share."
50
[Letterhead of KPMG Peat Marwick LLP]
The Board of Directors:
Big Foot Financial Corp.
We consent to incorporation by reference in the registration statement (No.
333-57981) on Form S-8 of Big Foot Financial Corp. of our report dated July 24,
1998, relating to the consolidated balance sheets of Big Foot Financial Corp.
and subsidiary as of June 30, 1998 and 1997, and the related consolidated
statements of earnings, stockholders' equity and cash flows for the year ended
June 30, 1998, the eleven-month period ended June 30, 1997, and the year ended
July 31, 1996, which report is incorporated by reference in the June 30, 1998
annual report on Form 10-K of Big Foot Financial Corp.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
September 24, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and the statements of income of Big Foot Financial
Corp. and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUN-30-1997
<PERIOD-END> JUN-30-1998
<CASH> 3,345,248
<INT-BEARING-DEPOSITS> 9,800,686
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35,604,329
<INVESTMENTS-CARRYING> 46,729,303
<INVESTMENTS-MARKET> 46,560,298
<LOANS> 115,772,207
<ALLOWANCE> 300,000
<TOTAL-ASSETS> 220,604,285
<DEPOSITS> 123,834,838
<SHORT-TERM> 1,000,000
<LIABILITIES-OTHER> 3,901,663
<LONG-TERM> 52,000,000
0
0
<COMMON> 25,128
<OTHER-SE> 38,068,936
<TOTAL-LIABILITIES-AND-EQUITY> 220,604,285
<INTEREST-LOAN> 7,838,745
<INTEREST-INVEST> 6,335,414
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14,174,159
<INTEREST-DEPOSIT> 4,791,429
<INTEREST-EXPENSE> 7,732,646
<INTEREST-INCOME-NET> 6,441,513
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 469,752
<EXPENSE-OTHER> 5,273,477
<INCOME-PRETAX> 1,891,980
<INCOME-PRE-EXTRAORDINARY> 1,891,980
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,180,067
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.49
<YIELD-ACTUAL> 7.04
<LOANS-NON> 0
<LOANS-PAST> 342,317
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 300,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 300,000
<ALLOWANCE-DOMESTIC> 300,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
