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, 1999
[ ] 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 $23.0 million as of September 21,
1999.
As of September 21, 1999, 2,231,449 shares of the Registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's 1999 Annual Report to Stockholders are incorporated
by reference in Part II.
Portions of the Registrant's Proxy Statement for its 1999 Annual Meeting of
Stockholders are incorporated by reference in Part III.
<PAGE>
BIG FOOT FINANCIAL CORP.
REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
JUNE 30, 1999
TABLE OF CONTENTS
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ITEM PART I PAGE
- --------------------------------------------------------------------------------
1 BUSINESS 3
2 PROPERTIES 33
3 LEGAL PROCEEDINGS 34
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PART II
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4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 34
5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 34
6 SELECTED FINANCIAL DATA 35
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 36
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 36
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 36
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 36
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PART III
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10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 36
11 EXECUTIVE COMPENSATION 36
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER AND MANAGEMENT 37
13 CERTAIN RELATIONSHIPS AND RELATED TRANSCTIONS 37
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PART IV
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14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 37
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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."
- --------------------------------------------------------------------------------
<PAGE>
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, 1999, the Company had total assets of $215.5 million, of
which $138.5 million was comprised of loans receivable and $54.0 million was
comprised of mortgage-backed securities. At such date, total savings deposits
were $123.9 million, borrowings were $52.0 million and stockholders' equity was
$34.7 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 years ending June 30, 1999 and 1998.
The Bank was originally founded in 1901 as an Illinois state chartered
mutual savings and loan association. On July 1, 1991, the Bank converted to a
federally chartered mutual savings bank. The Bank is subject to extensive
regulation, supervision and examination by the Office of Thrift Supervision (the
"OTS"), its primary regulator, and the Federal Deposit Insurance Corporation
(the "FDIC"), which insures its deposits. The Bank's savings deposits are
insured up to the maximum allowable amount by the Savings Association Insurance
Fund (the "SAIF") of the FDIC.
The Bank'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,
3
<PAGE>
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 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.
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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, 1999, the Bank had gross loans receivable outstanding of
$139.1 million, of which $136.9 million, or 98.5% of gross loans, were one- to
four-family residential mortgage loans. The remainder consisted of $0.6 million
of multifamily mortgage loans, or 0.4% of gross loans; $0.6 million of
commercial real estate mortgage loans, or 0.4% of gross loans; $58,000 of land,
construction and development loans, or 0.1% of gross loans; $0.6 million of home
equity loans, or 0.4% of gross loans; and $316,000 of other loans, or 0.2% of
gross loans.
The loans that the Bank may originate are subject to federal and state
laws and regulations. Interest rates charged by the Bank on loans are affected
by the demand for such loans, the supply of money available for lending purposes
and the rates offered by competitors. These factors are in turn affected by,
among other things, economic conditions, monetary policies of the federal
government, including the Board of Governors of the Federal Reserve System (the
"FRB"), and legislative tax policies.
All of the Bank's lending is subject to its written, nondiscriminatory
underwriting standards and to loan origination procedures prescribed by the
Bank's Board of Directors the majority of which 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.
5
<PAGE>
Under applicable federal law, the aggregate amount of loans that the
Bank is permitted to make to any one borrower is generally limited to 15% of
unimpaired capital and surplus (25% if the security for such loan has a "readily
ascertainable" value or 30% for certain residential development loans). At June
30, 1999, based on the above, the Bank's regulatory loans to one borrower limit
was approximately $4.0 million. On the same date, the Bank had no borrowers with
outstanding balances in excess of this amount. At June 30, 1999, the two largest
dollar amounts outstanding to one borrower or group of related borrowers were
approximately $414,000 and $395,000. Both of these loans are secured by one- to
four-family properties located in the Bank's market area and, at June 30, 1999,
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.
<TABLE>
<CAPTION>
AT JUNE 30 AT JULY 31,
------------------------------------------------------------ ---------------------------------------
1999 1998 1997 1996 1995
-------------------- ------------------ ----------------- ----------------- -------------------
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 $136,924 98.5% $113,441 97.8% $91,133 96.7% $76,325 95.6% $68,080 94.9%
Multifamily (1) 610 0.4 741 0.6 942 1.0 979 1.2 1,035 1.4
Commercial real estate 593 0.4 833 0.7 384 0.4 411 0.5 441 0.6
Land, construction/development 58 0.1 118 0.1 403 0.4 404 0.5 166 0.2
Home equity 597 0.4 822 0.7 1,258 1.3 1,421 1.8 1,691 2.4
-------- ----- -------- ----- ------- ----- ------- ----- ------- -----
Total mortgage loans $138,782 99.8% $115,955 99.9% $94,120 99.8% $79,540 99.6% $71,413 99.5%
-------- ----- -------- ----- ------- ----- ------- ----- ------- -----
Other loans
Home improvement - - - - - - - - 15 -
Commercial credit lines - - - - - - 150 0.2 131 0.2
Loans on savings deposits 316 0.2 144 0.1 181 0.2 192 0.2 212 0.3
-------- ----- -------- ----- ------- ----- ------- ----- ------- -----
Total other loans 316 0.2 144 0.1 181 0.2 342 0.4 358 0.5
-------- ----- -------- ----- ------- ----- ------- ----- ------- -----
Loans receivable, gross $139,098 100.0% $116,099 100.0% $94,301 100.0% $79,882 100.0% $71,771 100.0%
-------- ===== -------- ===== ------- ===== ------- ===== ------- =====
Less:
Loans in process $ - $ - $ - $ - $ 111
Deferred loan fees 281 327 377 438 510
Allowance for loan losses 300 300 300 300 166
-------- -------- ------- ------- -------
Loans receivable, net $138,517 $115,472 $93,624 $79,144 $70,984
======== ======== ======= ======= =======
</TABLE>
(1) Multifamily includes participation in Community Investment Corporation
("CIC") of $333,000 at June 30, 1999, $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, 1999, over 98.0% of the Bank's $138.8
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, 1999, approximately 96.5% 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 $4.2 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
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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, 1999, the Bank had an aggregate
balance of $597,000 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 pay-out procedures for these
loans in recognition of the higher degree of risk involved in making such loans.
See "Delinquencies and Non-Performing Assets."
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
ELEVEN MONTHS
FOR THE YEAR ENDED JUNE 30, ENDED JUNE 30,
----------------------------- ---------------
1999 1998 1997
---------- ------------- ------------
(In thousands)
<S> <C> <C> <C>
LOAN (GROSS):
At beginning of period $ 116,099 $ 94,301 $ 79,882
---------- ---------- ---------
MORTGAGE LOANS ORIGINATED:
One-to four-family 43,587 38,612 23,088
Multifamily 98 34 -
Commercial real estate - 550 -
---------- ---------- ---------
Total mortgage loans originated 43,685 39,196 23,088
OTHER LOANS ORIGINATED:
Other loans 449 249 192
---------- ---------- ---------
Total loans originated 44,134 39,445 23,280
---------- ---------- ---------
Additional draws - open-end home equity loans 279 428 346
Principal repayments (21,414) (17,838) (9,207)
Loans sold - (237) -
---------- ---------- ---------
LOAN BALANCES AT END OF PERIOD $ 139,098 $ 116,099 $ 94,301
========== ========== =========
</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 years ended June 30, 1999 and 1998 and the eleven
months ended June 30, 1997, the Bank earned an aggregate of such fees totaling
$20,000, $24,000 and $23,000, respectively.
LOAN MATURITY. The following table shows the contractual maturity of
the Bank's loan portfolio at June 30, 1999. 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
ONE-TO CONSTRUCTION WEIGHTED
DUE DURING 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>
2000 $ 4 $ 7 $ - $ - $ - $ 55 $ 66 8.68%
2001 246 17 39 58 31 51 442 8.29
2002 391 36 - - 219 210 856 7.84
2003 and 2004 1,309 53 77 - 223 - 1,662 7.89
2005 to 2010 12,569 - 41 - 124 - 12,734 7.11
2011 to 2015 32,260 306 22 - - - 32,588 6.74
2016 to 2020 4,159 176 414 - - - 4,749 7.61
2021 and following 85,986 15 - - - - 86,001 6.95
-------- ----- ----- ----- ----- ----- -------- -----
Total loans due, gross $136,924 $ 610 $ 593 $ 58 $ 597 $ 316 $139,098 6.95%
======== ===== ===== ===== ===== ===== ======== =====
</TABLE>
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<PAGE>
The following table sets forth at June 30, 1999, the dollar amount of
loans due after June 30, 2000, and whether such loans have fixed interest rates
or adjustable interest rates.
DUE AFTER JUNE 30, 2000
-----------------------------------------
FIXED ADJUSTABLE TOTAL
------------ -------------- ---------
(In thousands)
Mortgage loans:
One- to four-family $ 132,769 $ 4,151 $ 136,920
Multifamily 603 - 603
Commercial real estate 492 101 593
Land, construction and development - 58 58
Home equity - 597 597
--------- ------- ---------
Total mortgage loans $ 133,864 $ 4,907 $ 138,771
Other loans 261 - 261
--------- ------- ---------
Total loans $ 134,125 $ 4,907 $ 139,032
========= ======= =========
DELINQUENCIES AND NON-PERFORMING ASSETS
DELINQUENCY PROCEDURES. When a borrower fails to make a required
payment on a loan, the Bank attempts to cause the deficiency to be cured by
contacting the borrower. Contacts are made after a payment is more than 15 days
past due, and a late charge is assessed at that time. In most cases,
deficiencies are cured promptly. If the deficiency exceeds 90 days and is not
cured through the Bank's normal collection procedures, the Bank may institute
measures to remedy the default, including commencing a foreclosure action or
accepting from the mortgagor a voluntary deed of the secured property in lieu of
foreclosure. If a foreclosure action is instituted and the loan is not
reinstated, paid in full or refinanced, the property is sold at a judicial sale.
If the Bank acquires the property at judicial sale or accepts a voluntary deed
of the secured property in lieu of foreclosure, the acquired property is then
listed in the Bank's Real Estate Owned ("REO") account until it is sold. At June
30, 1999, 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, 1999, 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.
9
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<TABLE>
<CAPTION>
AT JUNE 30, AT JULY 31,
----------------------------- -------------------
NON-PERFORMING LOANS: 1999 1998 1997 1996 1995
- ------------------------------------------- -------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $ 186 $ 342 $ 199 $ 69 $ 193
Multifamily 7 - - - -
Commercial real estate - - - - -
Land, construction and development - - - - -
Home equity - - - 49 -
Other loans - - - - -
------ ------ ----- ----- ------
Total non-performing loans 193 342 199 118 193
------ ------ ----- ----- ------
Real estate owned - - - - 168
------ ------ ----- ----- ------
Total non-performing assets $ 193 $ 342 $ 199 $ 118 $ 361
====== ====== ===== ===== ======
Total non-performing loans to total loans 0.14 % 0.29 % 0.21 % 0.15 % 0.27 %
Total non-performing assets to total assets 0.09 0.16 0.09 0.06 0.18
</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, 1999, the Bank had one single family residential loan with
an outstanding principal balance of $70,000 that was non-accruing. At June 30,
1998 the Bank had no non-accrual loans. The Bank had one single family
residential loan with an outstanding balance of $199,000 at June 30, 1997 that
was non-accruing. For the years ended June 30, 1999 and 1998 and for the eleven
months ended June 30, 1997 the amount of interest income that would have been
recorded on non-accrual loans was $4,000, $0 and $10,000, respectively. Interest
earned on loans 90 days or more delinquent and still accruing interest amounted
to $11,000, $25,000, and $36,000 for the fiscal years ended June 30, 1999 and
1998 and for the eleven months ended June 30, 1997, respectively.
The Bank's non-performing assets at June 30, 1999, consisted of two
one- to four-family residential loan with an aggregate outstanding principal
balance of $186,000 and one multi-family residential loan with an aggregate
outstanding principal balance of $7,000. 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.
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
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<PAGE>
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high probability of loss. An
asset classified Loss is considered uncollectible and of such little value that
its continuance as an asset of the institution is not warranted. The regulations
have also created a Special Mention category, consisting of assets which do not
currently expose a savings association to a sufficient degree of risk to warrant
classifications, but do possess credit deficiencies or potential weaknesses
deserving management's close attention. Assets classified as Substandard or
Doubtful require the savings association to establish prudent valuation
allowances. If an asset or portion thereof is classified as Loss, the
association must either establish specific allowances for loan losses in the
amount of 100% of the portion of the asset classified Loss or charge off such
amount. If an association does not agree with an examiner's classification of an
asset, it may appeal this determination to the District Director of the OTS. On
the basis of management's review of its loans at June 30, 1999, the Bank had one
loan which met the criteria for classification as "Substandard" and no potential
problem loans which met the criteria for classification as "Special Mention" or
"Doubtful".
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
12
<PAGE>
the allowance for loan losses and the assumptions utilized by management as to
their reasonableness and adequacy. Specific valuation reserves are provided for
individual loans which are contractually past due (including loans classified
Substandard or Doubtful) when ultimate collection is considered questionable by
management after reviewing the current status of such loans and considering the
net realizable value of the security for the loan.
The following table analyzes activity in the Bank's allowance for loan
losses during the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR
THE ELEVEN
MONTHS
AT OR FOR THE ENDED AT OR FOR THE
YEAR ENDED JUNE 30, JUNE 30, YEAR ENDED JULY 31,
ALLOWANCE FOR LOAN LOSSES 1999 1998 1997 1996 1995
- ------------------------- ---------- ---------- --------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 300 $ 300 $ 300 $ 166 $ 166
Provision for loan losses - - - 138 -
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 $ 300 $ 166
======= ====== ====== ===== ======
Allowance for loan losses to total loans
at the end of the period (1) 0.22% 0.26% 0.32% 0.38% 0.23%
Allowance for loan losses to total
non-performing loans at end of period 155.44 87.72 150.75 254.24 86.01
Allowance for loan losses to total
non-performing assets at end of period 155.44 87.72 150.75 254.24 45.98
Net charge-offs to average loans outstanding - - - 0.01 -
- --------------------------
(1) Total loans represent loans, net plus the allowance for loan losses.
</TABLE>
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,
----------------------------------------------------------------------------------
1999 1998
----------------------------------------- ---------------------------------------
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
ALLOWANCE PERCENT OF CATEGORY TO ALLOWANCE PERCENT OF CATEGORY TO
AMOUNT ALLOWNACE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS
---------- ---------- ------------- ---------- ---------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $ 237 79.1% 98.5% $ 125 41.7% 97.8%
Multifamily 3 1.0 0.4 4 1.3 0.6
Commercial real estate 6 2.0 0.4 8 2.7 0.7
Land, construction and development 1 0.3 0.1 1 0.3 0.1
Home equity 1 0.3 0.4 2 0.7 0.7
Other loans - - 0.2 - - 0.1
Unallocated 52 17.3 - 160 53.3 -
----- ----- ----- ----- ----- -----
Total $ 300 100.0% 100.0% $ 300 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, AT JULY 31,
---------------------------------------- ----------------------------------------
1997 1996
---------------------------------------- ----------------------------------------
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
ALLOWANCE PERCENT OF CATEGORY TO ALLOWANCE PERCENT OF CATEGORY TO
AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS
---------- ----------- -------------- ---------- ----------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $ 105 35.0% 96.7% $ 85 28.3% 95.6 %
Multifamily 5 1.7 1.0 5 1.7 1.2
Commercial real estate 4 1.3 0.4 4 1.3 0.5
Land, construction and
Development 2 0.7 0.4 2 0.7 0.5
Home equity 3 1.0 1.3 4 1.3 1.8
Other loans - - 0.2 - - 0.4
Unallocated 181 60.3 - 200 66.7 -
Total $ 300 100.0% 100.0% $ 300 100.0% 100.0 %
===== ===== ===== ===== ===== =====
</TABLE>
AT JULY 31,
-----------------------------------------
1995
-----------------------------------------
PERCENT OF
LOANS IN EACH
ALLOWANCE PERCENT OF CATEGORY TO
AMOUNT ALLOWANCE GROSS LOANS
------------ ----------- --------------
(Dollars in thousands)
Mortgage loans:
One- to four-family $ 79 47.6 % 94.9%
Multifamily 6 3.6 1.4
Commercial real estate 4. 2.4 0.6
Land, construction and
Development 2 1.2 0.2
Home equity 5 3.0 2.4
Other loans - - 0.5
Unallocated 70 42.2 -
Total $ 166 100.0 % 100.0%
===== ===== =====
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 these levels are believed adequate to meet the requirements
of normal operations, including potential deposit outflows. At June 30, 1999,
the Bank's liquidity ratio for regulatory purposes was 50.1%. See "Liquidity and
Capital Resources" in Management's Discussion and Analysis of Financial
Condition and Results of Operations, in the 1999 Annual Report to Stockholders.
As required by Statement of Financial Accounting Standards ("SFAS")
115, securities are classified into three categories: trading, held-to-maturity
and available-for-sale. Securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
13
<PAGE>
securities and are reported at fair value with unrealized gains and losses
included in trading account activities in the statement of earnings. At June 30,
1999, the Bank had no securities which were classified as trading. Securities
that the Bank has the positive intent and ability to hold to maturity are
classified as held-to-maturity and reported at amortized cost. All other
securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are reported at fair value
with unrealized gains and losses included, on an after tax basis, as a separate
component of accumulated other comprehensive income in stockholders' equity. At
June 30, 1999, $28.8 million of mortgage-backed securities and other investments
were classified as available-for-sale. At June 30, 1999, mortgage-backed
securities held-to-maturity totaled $28.6 million and had a fair value of $28.1
million.
MORTGAGE-BACKED SECURITIES. The Bank invests in mortgage-backed
securities and uses such investments to complement its mortgage lending
activities and supplement such activities at times of low mortgage loan demand.
At June 30, 1999, 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, 1999.
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,
1999, the Company had $3.3 million invested in preferred
14
<PAGE>
stocks and mutual funds. These equity investments are held in the Company's
available-for-sale portfolio, and are carried at fair value, as shown in the
table below. Certain of these equity investments currently have unrealized
holding losses. The short term value fluctuations are monitored by management
for other than temporary impairment. Also management views these investments
with a longer time horizon for return on the Company's investment.
The following table sets forth activity in the Company's
mortgage-backed securities and investment portfolio for the periods indicated.
<TABLE>
<CAPTION>
FOR THE ELEVEN
MONTHS ENDED
FOR THE YEAR ENDED JUNE 30, JUNE 30,
1999 1998 1997
----------- --------------- ---------------
(In thousands)
<S> <C> <C> <C>
Held-to-maturity:
Amortized cost at beginning of period $ 46,729 $ 47,376 $ 44,133
Purchases/sales, net - 10,192 10,207
Principal repayments (17,863) (10,602) (6,753)
Premium and discount amortization, net (299) (237) (211)
---------- --------- ---------
Amortized cost at end of period $ 28,567 $ 46,729 $ 47,376
---------- --------- ---------
Available-for-sale
Amortized cost at beginning of period $ 35,550 $ 61,376 $ 59,898
Purchases/sales, net 11,188 (7,440) 10,172
Principal repayments (17,165) (18,331) (8,680)
Premium and discount amortization, net (78) (55) (14)
---------- --------- ---------
Amortized cost at end of period $ 29,495 $ 35,550 $ 61,376
---------- --------- ---------
Total mortgage-backed securities and
investment portfolio $ 58,062 $ 82,279 $ 108,752
========== ========= =========
</TABLE>
The following table sets forth certain information regarding the
amortized cost and fair value of the Company's mortgage-backed securities and
investments at the dates indicated.
15
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ------------------------
AMORTIZED AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
----------- ---------- ---------- ---------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
HELD-TO-MATURITY:
FNMA $ 28,567 $ 28,055 $ 44,284 $ 44,087 $ 44,136 $ 43,283
FHLMC - - 2,445 2,473 3,240 3,252
-------- -------- -------- -------- --------- --------
Total held-to-maturity $ 28,567 $ 28,055 $ 46,729 $ 46,560 $ 47,376 $ 46,535
-------- -------- -------- -------- --------- --------
AVAILABLE-FOR-SALE:
FNMA $ $ 23,344 $ 22,974 $ 22,576 $ 22,693 $ 41,173 $ 41,152
FHLMC 2,480 2,473 10,369 10,342 19,187 19,067
Mutual funds and preferred stock 3,671 3,320 2,605 2,569 1,016 1,087
-------- -------- -------- -------- --------- --------
Total available-for-sale $ 29,495 $ 28,767 $ 35,550 $ 35,604 $ 61,376 $ 61,306
-------- -------- -------- -------- --------- --------
Total mortgage-backed securities
and investment portfolio $ 58,062 $ 56,822 $ 82,279 $ 82,164 $ 108,752 $107,841
======== ======== ======== ======== ========= ========
</TABLE>
The table below sets forth certain information regarding the amortized
cost, fair value, weighted average yields and stated maturity of the Company's
mortgage-backed securities and investment portfolio at June 30, 1999. 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, 1999.
(See table on following page)
16
<PAGE>
AT JUNE 30, 1999
--------------------------------------
WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE COUPON
---------- -------- ----------
(Dollars in thousands)
HELD-TO-MATURITY:
No stated maturity date $ - $ - - %
Due within 1 year 2,890 2,827 6.43
Due after 1 year but within 5 years 15,046 14,654 6.39
Due after 5 years but within 10 years 136 134 7.00
Due after 10 years 10,495 10,440 7.14
-------- -------- -----
Total held-to-maturity $ 28,567 $ 28,055 6.68 %
-------- -------- -----
AVAILABLE-FOR-SALE:
No stated maturity date $ 2,171 $ 1,845 7.95 %
Due within 1 year 51 51 7.00
Due after 1 year but within 5 years 8,465 8,302 6.80
Due after 5 years but within 10 years 8,127 8,039 6.52
Due after 10 years 10,681 10,530 6.85
-------- -------- -----
Total available-for-sale $ 29,495 $ 28,767 6.83 %
-------- -------- -----
TOTAL:
No stated maturity date $ 2,171 $ 1,845 7.95 %
Due within 1 year 2,941 2,878 6.44
Due after 1 year but within 5 years 23,511 22,956 6.54
Due after 5 years but within 10 years 8,263 8,173 6.53
Due after 10 years 21,176 20,970 7.00
-------- -------- -----
Total mortgage-backed securities
and investment portfolio $ 58,062 $ 56,822 6.75 %
======== ======== =====
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. At June 30, 1999, the Bank had nearly liquidated this investment
through sales and only one five-acre commercial parcel with a book value of
$262,000 remained unsold. This parcel was sold in July 1999 at an auction
without reservation. The sale price, net of all selling cost was approximately
$154,000, resulting in a loss of approximately $108,000. A loss accrual was
recorded by the Company in the quarter ended June 30, 1999 for this amount.
Through the sale of this property, the Company expects to benefit in future
years from a reduction of operating expenses related to the property of
approximately $40,000 annually and from the ability to invest the proceeds of
the sale in income-earning assets.
The Bank is currently the plaintiff in litigation brought against the
Village of Olympia Fields, 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.
17
<PAGE>
SOURCES OF FUNDS
GENERAL. Savings deposits are the primary source of the Bank's funds
for use in lending and for other general business purposes. In addition to
savings deposits, the Bank derives funds from loan and security repayments and
prepayments, from advances from the FHLB of Chicago, from other borrowings, net
revenues from operations and to a lesser extent from loan sales. Loan and
mortgage-backed securities amortizations are a relatively stable source of
funds, while savings inflows and outflows and loan and mortgage-backed
securities prepayments are significantly influenced by general interest rates
and money market conditions. Borrowings, primarily from the FHLB of Chicago, may
be used on a short term basis to compensate for reductions in normal sources of
funds at less than projected levels. They may also be used on a longer term
basis to support expanded activities.
SAVINGS DEPOSITS. The Bank offers several types of savings programs to
attract short term and long term savings deposits, including passbook, various
NOW accounts, money market deposit accounts and a variety of fixed-rate, money
market certificates. Deposit account terms vary according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. The Bank's savings deposits are obtained
predominantly from the areas near its office locations. The Bank relies
primarily on customer service and long-standing relationships with customers to
attract and retain these savings deposits; however, market interest rates and
rates offered by competing financial institutions significantly affect the
Bank's ability to attract and retain savings deposits. Certificate accounts in
excess of $100,000 are not actively solicited by the Bank nor does the Bank use
brokers to obtain savings deposits. At June 30, 1999, the Bank had approximately
$123.9 million outstanding in savings deposits.
The ability to pay competitive rates on insured savings deposits has
allowed the Bank to be more aggressive in obtaining funds and has given it more
flexibility to minimize net deposit outflows. However, competitive interest
rates have also resulted in a more volatile cost of funds.
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,
----------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- --------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED PERCENT WEIGHTED
OF TOTAL AVERAGE OF TOTAL AVERAGE OF TOTAL AVERAGE
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
------- -------- -------- -------- -------- -------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing NOW accounts $ 5,949 4.8% -% $5,847 4.7 % -% $4,582 3.7 % -%
Interest-bearing NOW accounts 10,020 8.1 2.01 7,668 6.2 2.01 7,178 5.9 2.02
Money market demand accounts 10,865 8.8 2.82 11,797 9.5 3.31 12,281 10.0 3.12
Passbook accounts 39,358 31.7 2.50 38,838 31.4 2.50 39,607 32.2 2.50
Certificates of deposit 57,725 46.6 4.86 59,685 48.2 5.37 59,333 48.2 5.34
------- ----- ----- -------- ----- ---- -------- ----- -----
Total $123,917 100.0% 3.47% $123,835 100.0 % 3.81% $122,981 100.0% 3.81%
======== ===== ===== ======== ===== ==== ======== ===== =====
</TABLE>
The following table presents the savings deposit activity of the Bank
for the periods indicated.
18
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, FOR THE ELEVEN
--------------------------- MONTHS ENDED
1999 1998 JUNE 30, 1997
---------- ---------- -------------
(In thousands)
<S> <C> <C> <C>
Deposits $ 300,897 $ 263,421 $ 266,195
Withdrawals (305,172) (267,098) (284,167)
--------- --------- ---------
Deposits in excess of (less than) withdrawals (4,275) (3,677) (17,972)
Interest credited 4,357 4,531 3,776
--------- --------- ---------
Total increase (decrease) in savings deposits $ 82 $ 854 $ (14,196)
========= ========= =========
</TABLE>
At June 30, 1999, the Bank had $7.0 million in certificate accounts
with a balance of $100,000 or greater maturing as follows:
WEIGHTED
AMOUNT AVERAGE RATE
------ ------------
(Dollars in thousands)
MATURITY PERIOD
---------------
Within three months $ 2,462 4.47 %
After three but within six months 1,186 4.85
After six but within 12 months 2,665 5.01
After 12 months 666 4.98
-------- ------
Total $ 6,979 4.79 %
======== ======
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, 1999.
<TABLE>
<CAPTION>
PERIOD TO MATURITY AT JUNE 30, 1999
-----------------------------------
ONE TO MORE THAN TOTAL AT JUNE 30,
LESS THAN THREE THREE TO -----------------
INTEREST RATE RANGE ONE YEAR YEARS FIVE YEARS 1999 1998 1997
- ------------------- --------- -------- ---------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
4.00% and below $ 145 $ - $ - $ 145 $ 265 $ 257
4.01% to 5.00% 26,103 4,826 1,069 31,998 9,868 2,014
5.01% to 6.00% 19,037 6,380 152 25,569 48,559 54,622
6.01% to 7.00% 13 - - 13 993 2,440
-------- -------- -------- -------- -------- --------
Total $ 45,298 $ 11,206 $ 1,221 $ 57,725 $ 59,685 $ 59,333
======== ======== ======== ======== ======== ========
</TABLE>
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
19
<PAGE>
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, 1999, the Bank had $52.0 million in FHLB of Chicago
borrowings. Certain advances are callable by the FHLB as follows: $9,000,000 in
advances due in 2002 are callable quarterly beginning August 1998; $13,000,000
in advances due in 2008 are callable quarterly beginning June, 2001; $12,000,000
in advances due in 2008 have a one time call date of June 19, 2003. The Company
also has the capability to borrow additional funds upon complying with the FHLB
of Chicago's collateral requirements.
The Bank at times sells securities under agreements to repurchase,
which transactions are treated as financings, and the obligation to repurchase
the securities sold is reflected as a liability in the statements of financial
condition. The dollar amount of securities underlying the agreements remains in
the asset account and are held in safekeeping. There were no securities sold
under agreements to repurchase outstanding at or during the fiscal years 1999,
1998, and 1997.
The following table sets forth certain information regarding borrowings
at the dates and for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR
THE YEAR ENDED THE ELEVEN
JUNE 30, MONTHS ENDED
----------------- JUNE 30,
1999 1998 1997
-------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB of Chicago advances:
Maximum amount outstanding at any month-end during the period $ 52,000 $ 53,000 $ 49,600
Average daily balance outstanding 52,070 48,530 43,849
Balance outstanding at end of period 52,000 53,000 49,600
Weighted average daily interest rate during the period 5.67% 6.61% 6.22%
Weighted average interest rate at end of period 5.59 5.59% 6.41%
</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.
20
<PAGE>
PERSONNEL
At June 30, 1999, the Bank employed 50 full time and 15 part time
employees. At June 30, 1999, 45% 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.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The following is a discussion of material federal income tax
matters and does not purport to be a comprehensive description of the federal
income tax rules applicable to the Bank or the Company. The Bank has not been
audited by the IRS during the last five years. For federal income tax purposes,
the Company and the Bank file consolidated income tax returns. The Company and
the Bank report their income on a fiscal year basis using the accrual method of
accounting and are subject to federal income taxation in the same manner as
other corporations with some exceptions, including particularly the Bank's tax
reserve for bad debts, discussed below.
TAX BAD DEBT RESERVES. The Bank, as a "small bank" (one with
assets having an adjusted tax basis of $500 million or less) is permitted to
maintain a reserve for bad debts with respect to its loans, which, in general,
are loans secured by certain interests in real property, and to make, within
specified formula limits, annual additions to the reserve which are deductible
for purposes of computing the Bank's taxable income. Pursuant to the 1996 Tax
Act, the Bank is now required to recapture (take into income) over a multi-year
period a portion of the balance of its bad debt reserve as of July 31, 1996
equal to $500,000, which will require the Bank to report an additional tax
liability of $194,000. As of June 30, 1998, this liability had already been
provided for and will not have an adverse impact on the Bank's financial
condition or results of operations.
DISTRIBUTIONS. To the extent that the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's "base year reserve," i.e., its reserves as of July 31,
1988 and then from the Bank's supplemental reserve for losses on loans, to the
extent thereof, and an amount based on the amount distributed (but not in excess
of the amount of such reserves) will be included in the Bank's income. The
balance of the Bank's tax bad debt reserve as of July 31, 1988 was $3,685,478.
The balance of the Bank's supplemental reserve for losses was $2,463,159.
Non-dividend distributions include distributions in excess of the Bank's current
and accumulated earnings and profits, as calculated for federal income tax
purposes, distributions in redemption of stock, and distributions in partial or
complete liquidation. Dividends paid out of the Bank's current or accumulated
earnings and profits will not be so included in the Bank's income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the
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distribution. Thus, if the Bank makes a non-dividend distribution to the
Company, approximately one and one-half times the amount of such distribution
(but not in excess of the amount of such reserves) would be includable in income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate.
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.
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,
1999, the Bank has approximately $5.7 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 files 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
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financial condition, and it must obtain regulatory approvals prior to
entering into certain transactions, such as mergers with, or acquisitions of,
other depository institutions. The OTS and the FDIC conduct periodic
examinations to assess the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which a savings association can engage and is
intended primarily for the protection of the insurance fund and depositors. The
Company, as a savings association holding company, is also required to file
certain reports with, and otherwise comply with, the rules and regulations of
the OTS 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; (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,
1999, the Bank's regulatory limit on loans to one borrower was $4.0 million. At
June 30, 1999, the Bank's largest
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aggregate amount of loans to one borrower was $414,000, and the second largest
borrower had an aggregate balance of $395,000. 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,
1999, the Bank maintained 99% of its portfolio assets in qualified thrift
investments. The Bank had also met the QTL test in each of the prior 12 months
and was, therefore, a qualified thrift lender. A savings association may also
satisfy the QTL test by qualifying as a "domestic building and loan association"
as defined in 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. 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
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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 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. A savings association's interest rate
risk is measured by the decline in the net portfolio value of its assets (i.e.,
the 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 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, 1999, 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, 1999.
<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......... $ 26,798 12.78% $ 3,145 1.50% $ 23,653 11.28%
Core capital............. 26,798 12.78 6,290 3.00 20,508 9.78
Risk-based capital....... 27,098 30.49 7,110 8.00 19,988 22.49
</TABLE>
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A reconciliation between the Bank's regulatory capital and GAAP capital
at June 30, 1999 is presented below.
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
------- ------- -------
(In thousands)
GAAP capital............................... $ 26,577 $ 26,577 $ 26,577
Unrealized loss on mortgage-back securities
available-for-sale, net of tax........... 221 221 221
Allowance for loan losses.................. - - 300
-------- ------- -------
Regulatory capital......................... $ 26,798 $ 26,798 $ 27,098
======== ======== ========
LIMITATION ON CAPITAL DISTRIBUTIONS. Effective April 1, 1999, the OTS
amended its capital distribution regulations to reduce regulatory burdens on
savings associations. Under the amendments adopted by the OTS, certain savings
associations will be permitted to pay capital distributions during a calendar
year that do not exceed the association's net income for that year plus its
retained net income for the prior two years, without notice to, or the approval
of, the OTS. However, a savings association subsidiary of a savings and loan
holding company, such as the Bank, 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 below. See "--Prompt
Corrective Regulatory Action".
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%. OTS regulations also require each
savings association to maintain an average daily balance of short-term liquid
assets at a specified percentage of the total of its net withdrawable deposit
accounts and borrowings payable in one year or less. Monetary penalties may be
imposed for failure to meet these liquidity requirements. The Bank's average
liquidity ratio for the month ended June 30, 1999, was 49.8%, 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. The OTS has adopted
amendments to its
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regulations, effective January 1, 1999, that are intended to assess savings
associations on a more equitable basis. The new regulations will 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 an additional
assessment based on a percentage of the basic assessment for any savings
institution with a composite rating of 3, 4 or 5 in its most recent safety and
soundness examination; and the complexity of the association's operations, which
would result in an additional assessment based on a percentage of the basic
assessment for any savings association that managed over $1.0 billion in trust
assets, serviced for others loans aggregating more than $1.0 billion, or had
certain off-balance sheet assets aggregating more than $1.0 billion. In order to
avoid a disproportionate impact on the smaller savings institutions, which are
those whose total assets never exceeded $100.0 million, the new regulations
provide that the portion of the assessment based on asset size will be the
lesser of the assessment under the amended regulations or the regulations before
the amendment. Management believes that any change in its rate of OTS
assessments under the amended regulations will not be material.
BRANCHING. Subject to certain limitations, the HOLA and the OTS
regulations permit federally chartered savings associations to establish
branches in any state of the United States. The authority to establish such
branches is available (a) in states that expressly authorize branches of savings
associations located in another state or (b) to an association that either
satisfies the "QTL" test for a qualified thrift lender or qualifies as a
"domestic building and loan association" under the Internal Revenue Code of
1986, which imposes qualification requirements similar to those for a "qualified
thrift lender" under the HOLA. See "QTL Test". The authority for a federal
savings association to establish an interstate branch network would facilitate a
geographic diversification of the association's activities. This authority under
the HOLA and the OTS regulations preempts any state law purporting to regulate
branching by federal savings associations.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act (the
"CRA"), as implemented by OTS regulations, a savings association has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with its examination of a savings
association, to assess the association's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such association. The CRA also requires all institutions to make
public disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA
rating in its most recent examination.
The CRA regulations establish an assessment system that bases an
associations rating on its actual performance in meeting community needs. In
particular, the assessment system focuses on three tests: (a) a lending test, to
evaluate the institution's record of making loans in its assessment areas; (b)
an investment test, to evaluate the institution's record of investing in
community development projects, affordable housing, and programs benefiting low
or moderate income individuals and businesses; and (c) a service test, to
evaluate the institution's delivery of services through its branches, ATMs and
other offices.
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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. 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.
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
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<PAGE>
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 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%,
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<PAGE>
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. At June 30, 1999, the Bank met the
criteria for being considered "well-capitalized".
When appropriate, the OTS can require corrective action by a savings
association holding company under the "prompt corrective action" provisions of
FDICIA.
INSURANCE OF DEPOSIT ACCOUNTS. The Bank is a member of the SAIF, and
the Bank pays its deposit insurance assessments to the SAIF. The FDIC also
maintains another insurance fund, the BIF, which primarily insures the deposits
of banks and state chartered savings banks.
Pursuant to FDICIA, the FDIC established a risk based assessment system
for determining the deposit insurance assessments to be paid by insured
depositary institutions. Under the assessment system, the FDIC assigns an
institution to one of three capital categories based on the institution's
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.
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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. The annual rate of assessments for the payments on the FICO bonds for
the first, second, third and fourth quarters of fiscal 1999 were 0.0622%,
0.0610%, 0.0582% and 0.0610%, respectively.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Chicago, which is one of the regional Federal Home Loan Banks composing the
Federal Home Loan Bank System. Each Federal Home Loan Bank provides a central
credit facility primarily for its member institutions. The Bank, as a member of
the FHLB of Chicago, is required to acquire and hold shares of capital stock in
the FHLB of Chicago in an amount equal to 1% of the aggregate principal amount
of its unpaid residential mortgage loans, home-purchase contracts and similar
obligations, but not less than $500. The Bank was in compliance with this
requirement with an investment in the capital stock of the FHLB of Chicago at
June 30, 1999, of $2.6 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 $190,000, $171,000, and $138,000 respectively
during the fiscal year ended June 30, 1999, 1998 and the eleven months ended
June 30, 1997. 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
31
<PAGE>
maintained against transaction accounts (primarily NOW and regular checking
accounts). The FRB regulations generally require that reserves be maintained in
the amount of 3% of the aggregate of transaction accounts up to $46.5 million.
The amount of aggregate transaction accounts in excess of $46.5 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 $4.9 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.
32
<PAGE>
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 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.
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.
ITEM 2. PROPERTIES
The Bank conducts its business through its corporate office and two
branch locations, as set forth in the following table.
NET BOOK
DATE LEASE VALUE AT
LEASED OR LEASED OR EXPIRATION JUNE 30,
OWNED ACQUIRED DATE 1999
--------- --------- ---------- ---------
(In thousands)
Main Office:
Old McHenry Road
Long Grove, Illinois 60047 Owned 1980 ----- $3,561
Branches:
1601 North Milwaukee Avenue
Chicago, Illinois 60647 Owned 1941 ----- 341
8301 West Lawrence
Norridge Illinois 60656 (1) 1976 4/2006(2) 19
_______________________________
(1) Land leased, building owned by the Bank.
(2) The Bank has two five-year renewal options.
33
<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 poses a substantial likelihood of
potential loss or exposure, which would have a material adverse effect on the
financial position of the Bank.
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by
reference to the inside back cover of the Company's 1999 Annual Report to
Shareholders under the caption "Stockholder Information" which section is
included in Exhibit 13.1 to this Report.
34
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
At or for the
At or for the year eleven months At or for the year
Ended June 30, Ended June 30, Ended July 31,
--------------------- -------------- ----------------------
1999 1998 1997 1996(1) 1995(1)
-------- -------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $215,493 $220,604 $ 214,896 $194,624 $ 200,251
Loans receivable (net) 138,517 115,472 93,624 79,144 70,984
Allowance for loan losses 300 300 300 300 166
Mortgage-backed securities 54,014 79,764 107,595 102,411 111,283
Savings deposits 123,917 123,835 122,981 137,177 148,350
Borrowed funds 52,000 53,000 49,600 39,900 32,300
Stockholders' equity 34,722 38,094 36,977 13,579 14,423
SELECTED OPERATING DATA:
Net interest income before provision for loan losses 6,370 6,442 5,346 4,704 5,341
Net income 818 1,180 220 226 982
Net income excluding special SAIF assessment, net
of tax 818 1,180 837 226 982
SELECTED FINANCIAL RATIOS:
Bank Capital ratios:
Tangible 12.78% 12.30% 12.13% 7.35% 7.05%
Core 12.78 12.30 12.13 7.35 7.05
Risk-based 30.49 31.76 34.03 21.59 21.28
Return on average assets 0.38 0.55 0.11 0.11 0.51
Return on average assets excluding special SAIF
assessment, net of tax 0.38 0.55 0.41 0.11 0.51
Return on average stockholders' equity 2.26 3.12 0.82 1.58 6.98
Return on average stockholders' equity excluding
special SAIF assessment, net of tax 2.26 3.12 3.13 1.58 6.98
Consolidated equity to assets at end of period 16.11 17.27 17.21 6.98 7.20
Noninterest expense to average assets 2.47 2.47 2.59 2.36 2.45
Noninterest expense to average assets excluding
special SAIF assessment 2.47 2.47 2.13 2.36 2.45
Non-performing assets as a percent of total assets 0.09 0.16 0.09 0.06 0.18
Allowance for loan losses as a percent of total loans 0.22 0.26 0.32 0.38 0.23
Allowance for loan losses as a percent of
non-performing loans 155.44 87.72 150.75 254.24 86.01
PER SHARE DATA:
Basic earnings per share $ 0.37 $ 0.50 $ 0.27 N/A N/A
Diluted earnings per share 0.37 0.49 0.27 N/A N/A
Book value per share 15.29 15.16 14.72 N/A N/A
STOCK QUOTE:
High(2) $ 18.500 $ 23.938 $ 16.125 N/A N/A
Low(2) 12.125 16.000 12.313 N/A N/A
At June 30 15.000 18.000 16.125 N/A N/A
</TABLE>
______________________________________________________
(1) Fairfield Savings Bank, F.S.B. only.
(2) Quotes for 1997 include the period from December 19, 1996 to June 30, 1997.
35
<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 1999 Annual Report to
Stockholders under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations", which section is included in
Exhibit 13.1 to this Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is incorporated herein by
reference to pages 7 through 9 of the Company's 1999 Annual Report to
Stockholders under the caption "Quantitative and Qualitative Disclosures About
Market Risk," which section is included in Exhibit 13.1 to this Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by
reference to pages 25 through 58 of the Company's 1999 Annual Report to
Stockholders 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 7, 8 and 19 of the
Company's Proxy Statement for the 1999 Annual Meeting of Stockholders (the
"Proxy Statement") is incorporated herein by reference: "Election of Director,"
"Nominee for Election as Director," "Continuing Directors," "Executive
Officers," and "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The following information included on pages 10 through 19, of the Proxy
Statement is incorporated herein by reference: "Management Salary Compensation
Committee Report on Executive Compensation," "Compensation Committee Interlocks
and Insider Participation," "Performance Graph," "Directors' Compensation,"
"Executive Compensation," "Employment Agreements," and "Benefits."
36
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information included on pages 4 through 6, of the Proxy
Statement is incorporated herein by reference: "Security Ownership of Certain
Beneficial Owners and Management-Principal Shareholders of the Company," and
"Security Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information included on page 19 of the Proxy Statement is
incorporated herein by reference: "Compensation of Directors and Executive
Officers - Transactions with Certain Related Persons."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Listed below are all financial statements and exhibits filed as part of this
report:
a. Financial Statements, Schedules, and Exhibits
(1) The consolidated balance sheets of Big Foot Financial Corp.
and subsidiary as of June 30, 1999 and 1998, and the related
consolidated statements of earnings, stockholders' equity, and
cash flows for the years ended June 30, 1999 and 1998 and the
eleven-month period ended June 30, 1997 together with the
related notes and the independent auditors' report of KPMG
LLP, independent certified public accountants.
(2) Schedules omitted as they are not applicable.
(3) See Exhibit Index on following page.
b. Reports on Form 8-K - None.
37
<PAGE>
EXHIBIT NO. DESCRIPTION
3.1 Articles 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(a) Big Foot Financial Corp. 1997 Recognition and Retention Plan****
10.12(b) Amendment No. 1 to the Big Foot Financial Corp.1997 Recognition
and Retention Plan
13.1 Portions of Big Foot Financial Corp. 1999 Annual Report to
Stockholders.
38
<PAGE>
21.1 Subsidiaries of the Registrant*
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule (Submitted only with filing in
electronic format).
99.1 Proxy Statement for 1999 Annual Meeting of Stockholders of Big
Foot Financial Corp. (previously filed with the Securities and
Exchange Commission on September 20, 1999.
* 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 14, 1997.
39
<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 21, 1999.
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 September 21, 1999
George M. Briody (Principal Executive Officer)
/s/ F. Gregory Opelka
-------------------------------- Executive Vice President, September 21, 1999
F. Gregory Opelka Director
/s/ Timothy L. Mccue
-------------------------------- Senior Vice President, September 21, 1999
Timothy L. McCue Chief Financial Officer
/s/ Michael J. Cahill
-------------------------------- Vice President, Controller September 21, 1999
Michael J. Cahill
/s/ Stephen E. Nelson
-------------------------------- Director September 21, 1999
Stephen E. Nelson
/s/ Eugene W. Pilawski
-------------------------------- Director September 21, 1999
Eugene W. Pilawski
/s/ Joseph J. Nimrod
-------------------------------- Director September 21, 1999
Joseph J. Nimrod
/s/ Walter E. Powers, M.D.
-------------------------------- Director September 21, 1999
Walter E. Powers, M.D.
</TABLE>
40
BIG FOOT FINANCIAL CORP.
1997 STOCK OPTION PLAN
-----------------------------------
AMENDMENT NO. 1
DOCUMENT: NY02/ 1235380
DRAFT DATE: 2/23/99
BOARD OF DIRECTORS
APPROVAL DATE: 2/23/99
-----------------------------------
AMENDMENT
---------
1. Article III - Effective as of February 23, 1999, Section 3.1 of the
Plan shall be amended to read in its entirety as follows:
SECTION 3.1 AVAILABLE SHARES.
----------------
Subject to section 8.3, the maximum aggregate number of Shares
with respect to which Options may be granted at any time shall be equal
to the excess of:
(a) 251,275 Shares until February 23, 1999 and 258,143 Shares
on and after February 23, 1999; less
(b) the sum of:
(i) the number of Shares with respect to which
previously granted Options may then or may in the future be
exercised; plus
(ii) the number of Shares with respect to which
previously granted Options have been exercised.
A maximum aggregate of 201,020 Shares may be granted to Eligible
Employees, and Options with respect to a maximum aggregate of 50,255
Shares until February 23, 1999 and 57,123 Shares on and after February
23, 1999 may be granted to Eligible Directors. For purposes of this
section 3.1, an Option shall not be considered as having been exercised
to the extent that such Option terminates by reason other than the
purchase of related Shares; PROVIDED, HOWEVER, that for purposes of
meeting the requirements of section 162(m) of the Code, no Eligible
Employee who is a covered employee under section 162(m) of the Code
shall receive a grant of Options in excess of the amount specified
under this section 3.1, computed as if any Option which is cancelled
reduced the maximum number of Shares.
2. Article V - Effective as of February 23, 1999, Section 5.1 of the Plan
shall be amended by adding a new section 5.1(b), to read in its entirety as
follows, and by renumbering subsequent subsections and conforming all
cross-references accordingly:
(b) On February 23, 1999, each Eligible Director who had not
been granted an Option on the Effective Date shall be granted an Option
to purchase 6,868 Shares.
3. Article V - Effective as of February 23, 1999, Section 5.3 of the Plan
shall be amended to read in its entirety as follows:
Page 1 of 3
<PAGE>
SECTION 5.3 OPTION PERIOD.
-------------
(a) Subject to sections 5.3(b) and 5.3(c), the Option Period
during which an Option granted to an Eligible Director under section
5.1 may be exercised shall commence on the date the Option is granted
and shall expire on the earlier of:
(i) removal for cause in accordance with the
Employer's bylaws; or
(ii) the last day of the ten-year period commencing
on the date on which the Option was granted;
(b) For each Eligible Director who was granted an Option on
the Effective Date, during the Option Period, the maximum number of
Shares as to which an outstanding Option may be exercised shall be as
follows:
(i) prior to the first anniversary of the date on
which the Plan is approved by shareholders pursuant to section
9.8, the Option shall not be exercisable;
(ii) on and after the first anniversary, but prior to
the second anniversary, of the date on which the Plan is
approved by shareholders pursuant to section 9.8, the Option
may be exercised as to a maximum of twenty percent (20%) of
the Shares subject to the Option;
(iii) on and after the second anniversary, but prior
to the third anniversary, of the date on which the Plan is
approved by shareholders pursuant to section 9.8, the Option
may be exercised as to a maximum of forty percent (40%) of the
Shares subject to the Option, when granted, less any number of
optioned Shares purchased prior to such second anniversary;
(iv) on and after the third anniversary, but prior to
the fourth anniversary, of the date on which the Plan is
approved by shareholders pursuant to section 9.8, the Option
may be exercised as to a maximum of sixty percent (60%) of the
Shares subject to the Option, when granted, less any number of
optioned Shares purchased prior to such third anniversary;
(v) on and after the fourth anniversary, but prior to
the fifth anniversary, of the date on which the Plan is
approved by shareholders pursuant to section 9.8, the Option
may be exercised as to a maximum of eighty percent (80%) of
the Shares subject to the Option, when granted, less any
number of optioned Shares purchased prior to such fourth
anniversary; and
(vi) on and after the fifth anniversary of the date
on which the Plan is approved by shareholders pursuant to
section 9.8 and for the remainder of the Option Period, the
Option may be exercised as to the entire number of optioned
Shares not theretofore purchased;
Page 2 of 3
<PAGE>
(c) For each Eligible Director who was granted an Option on
February 23, 1999, during the Option Period, the maximum number of
Shares as to which an outstanding Option may be exercised shall be as
follows:
(i) on and after the second anniversary, but prior to
the third anniversary, of the date on which the Plan is
approved by shareholders pursuant to section 9.8, the Option
may be exercised as to a maximum of 838 Shares;
(ii) on and after the third anniversary, but prior to
the fourth anniversary, of the date on which the Plan is
approved by shareholders pursuant to section 9.8, the Option
may be exercised as to a maximum of 2,848 Shares, less any
number of optioned Shares purchased prior to such third
anniversary;
(iii) on and after the fourth anniversary, but prior
to the fifth anniversary, of the date on which the Plan is
approved by shareholders pursuant to section 9.8, the Option
may be exercised as to a maximum of 4,858 Shares, less any
number of optioned Shares purchased prior to such fourth
anniversary; and
(iv) on and after the fifth anniversary of the date
on which the Plan is approved by shareholders pursuant to
section 9.8 and for the remainder of the Option Period, the
Option may be exercised as to the entire number of optioned
Shares not theretofore purchased;
PROVIDED, HOWEVER, that such Option(s) shall become fully exercisable,
and all optioned Shares not previously purchased shall become available
for purchase, on the date of the Option holder's death or Disability
and remain exercisable for the balance of the original ten year term.
Page 3 of 3
BIG FOOT FINANCIAL CORP.
1997 RECOGNITION AND RETENTION PLAN
-----------------------------------
AMENDMENT NO. 1
DOCUMENT: NY02/ 1235383
DRAFT DATE: 2/23/99
BOARD OF DIRECTORS
APPROVAL DATE: 2/23/99
-----------------------------------
AMENDMENT
---------
1. Article III - Effective as of February 23, 1999, Section 3.1 of the
Plan shall be amended to read in its entirety as follows:
SECTION 3.1 SHARES AVAILABLE UNDER PLAN.
---------------------------
The maximum number of Shares available for Awards under the
Plan shall be 100,510 until February 23, 1999 and 103,659 after
February 23, 1999. Such Shares may be authorized but unissued Shares or
treasury Shares purchased from Big Foot Financial Corp. or they may be
outstanding Shares purchased from other holders.
2. Article V - Effective as of February 23, 1999, Section 5.3 of the Plan
shall be amended to read in its entirety as follows:
SECTION 5.3 INVESTMENTS.
-----------
The Trustee shall invest the Trust Fund in Shares and in such
other investments as may be permitted under the Trust Agreement, including
savings accounts, time or other interest bearing deposits in, or other interest
bearing obligations of, Fairfield Savings Bank, F.S.B., in such proportions as
shall be determined by the Committee; PROVIDED, HOWEVER, that in no event shall
the Trust Fund be used to purchase more than 100,510 Shares until February 23,
1999 and 103,659 after February 23, 1999. Notwithstanding the immediately
preceding sentence, the Trustee may temporarily invest the Trust Fund in
short-term obligations of, or guaranteed by, the U.S. Government or an agency
thereof, or the Trustee may retain the Trust Fund uninvested or may sell assets
of the Trust Fund to provide amounts required for purposes of the Plan.
3. Article VI - Effective as of February 23, 1999, Section 6.1 of the Plan
shall be amended to read in its entirety as follows:
SECTION 6.1 TO ELIGIBLE DIRECTORS.
On the Effective Date, each Person who is then an Eligible
Director shall be granted an Award of 4,020 Shares. On February 23,
1999, each Eligible Director who was not granted an Award on the
Effective Date shall be granted an award of 3,149 Shares.
Page 1 of 2
<PAGE>
4. Article VII - Effective as of February 23, 1999, Section 7.1 of the
Plan shall be amended to read in its entirety as follows:
SECTION 7.1 VESTING OF SHARES GRANTED TO ELIGIBLE
DIRECTORS.
-------------------------------------
(a) The Shares subject to each Award granted to Eligible
Directors under the Plan on the Effective Date shall become vested as
follows: (i) 10% of such Shares shall become vested on June 30, 1998;
(ii) 20% of such Shares shall become vested June 30, 1999; (iii) 20% of
such Shares shall become vested on June 30, 2000; (iv) 20% of such
Shares shall become vested June 30, 2001; (v) 20% of such Shares shall
become vested on June 30, 2002; and (vi) 10% of such Shares shall
become vested on January 1, 2003; PROVIDED, HOWEVER, that the Eligible
Director has remained in Service during the period beginning on the
Effective Date and ending on the applicable Vesting date; AND PROVIDED,
FURTHER, an Award shall become 100% vested upon the Award holder's
death, Disability or retirement while in Service and after attaining
age 65 or on the effective date of any Change in Control.
(b) The Shares subject to each Award granted to Eligible
Directors under the Plan on February 23, 1999 shall become vested as
follows: (i) 335 Shares shall become vested June 30, 1999; (ii) 804
Shares shall become vested on June 30, 2000; (iii) 804 Shares shall
become vested on June 30, 2001 (iv) 804 Shares shall become vested on
June 30, 2002; and (v) 402 Shares shall become vested on January 1,
2003; PROVIDED, HOWEVER, that the Eligible Director has remained in
Service during the period beginning on the date the Award was granted
and ending on the applicable Vesting date; AND PROVIDED, FURTHER, an
Award shall become 100% vested upon the Award holder's death,
Disability or retirement while in Service and after attaining age 65 or
on the effective date of any Change in Control.
Page 2 of 2
1999 ANNUAL REPORT
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS 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 all of the capital stock of the
Bank was acquired by the Company. The Company issued and sold 2,512,750 shares
of its common stock, $.01 par value, 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 $22.0 million.
The Company's principal business is its investment in the Bank, which
is a community-oriented financial institution providing a variety of financial
services to the communities which it serves. The Bank's principal business
consists of gathering savings deposits from the general public within its market
area and investing those funds primarily in mortgage loans secured by one- to
four-family owner occupied properties, mortgage-backed securities and
obligations of the U.S. Government. To a lesser extent, the Bank makes
multifamily residential loans, commercial real estate loans, land, construction
and development loans, consumer loans and commercial lines of credit. The Bank's
revenues are derived principally from interest on mortgage loans and interest
and dividends on investments, mortgage-backed securities and, to a much lesser
extent, short-term investments. The Bank also derives income from fees and
service charges. The Bank's primary sources of funds are savings deposits and,
to a lesser extent, advances from the Federal Home Loan Bank of Chicago (the
"FHLB"). The Bank does not have any subsidiaries.
On November 6, 1998, the Office of Thrift Supervision (the "OTS")
provided its non-objection to the Company's second stock repurchase program to
repurchase up to 119,356 shares of its common stock ("Second Repurchase
Program"), upon completion of its existing repurchase program ("First Repurchase
Program"). The first repurchase program and second repurchase program authorize
the Company to repurchase a total of up to 244,993 shares, or 9.75%, of its
2,512,750 total outstanding common shares. As of June 30, 1999, the Company had
repurchased 241,801 shares of its common stock at a cost of $3.3 million at an
average price of $13.48 per share. On May 10, 1999, the OTS provided its
non-objection to the Company's third stock repurchase program to repurchase up
to 113,388 shares. The repurchases will be made from time to time at the
discretion of management.
On December 4, 1997, the OTS provided its non-objection to the
Company's notification that it would repurchase up to an additional 4% of its
shares of common stock, or 100,510 shares, for the Company's 1997 Recognition
and Retention Plan ("RRP"). On February 23, 1999, the Company amended the RRP in
connection with the authorization and granting of a restricted stock award of
3,149 shares to a new director. The Company, as of June 30, 1999, had
repurchased 106,929 common shares for the RRP.
5
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1999 ANNUAL REPORT
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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.
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, 1999, one- to four-family residential mortgage loans totaled $136.9
million or 98.5% of gross loans, of which $132.8 million or approximately 95.5%
of gross loans, are at fixed rates of interest. Approximately 1.5% of gross
loans consisted of multifamily mortgage loans, land, construction and
development loans, home equity and other loans. For the 1999 fiscal year, the
Bank originated $44.1 million of loans. The Bank also invests in mortgage-backed
securities. The Bank's holdings of mortgage-backed securities totaled $54.0
million at June 30, 1999, representing 25% 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 0.14% to 0.29% for
the last five fiscal year ends and was 0.14% at June 30, 1999. The ratio of
non-performing assets to total assets ranged from 0.06% to 0.18% for the last
five fiscal year ends and was 0.09% at June 30, 1999. The Bank's ratio of
allowance for loan losses to non-performing loans ranged from 86.01% to 254.24%
for the last five fiscal year-ends and was 155.44% at June 30, 1999.
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 $66.2
million or 53.4% of total savings deposits and had a weighted average effective
rate of 2.25% at June 30, 1999. For the past three years, these accounts have
consistently accounted for more than 51% of total savings deposits and had a
weighted average effective rate of not more than 2.36% throughout this period.
At June 30, 1999, money market demand accounts totaled $10.9 million or 8.8% of
total savings deposits and had a weighted average effective rate of 2.82%. 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, 1999,
the Bank's cost of savings deposits was 3.47% and its cost of funds (including
FHLB borrowings) was 4.10%, or 0.38 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
6
<PAGE>
1999 ANNUAL REPORT
================================================================================
more resistant to increases in interest rates and (iii) purchases
mortgage-backed securities primarily with maturities of five to fifteen years.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal objectives of the Bank's interest rate risk ("IRR")
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, 1999,
the Company had $54.0 million in mortgage-backed securities, approximately $34.7
million of which mature within ten years. The Bank's available-for-sale
securities portfolio is marked-to-market monthly and is carried 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, 1999, the
Bank had $39.4 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,
1999, the Bank had $48.3 million or over 34.8% 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.
7
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1999 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 300 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). The OTS model is based on only the
Bank's balance sheet, because virtually all of the Company's interest rate risk
exposure lies at the Bank level. Management believes the table below also
accurately reflects an analysis of the Company's IRR.
Presented below, as of June 30, 1999, 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 300 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. This calculation is
substituted for the OTS calculations and then a new set of ratios is computed.
The
8
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1999 ANNUAL REPORT
================================================================================
Bank's asset and liability structure results in a decrease in NPV in a rising
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>
NPV AS % OF ECONOMIC
CHANGE IN INTEREST NET PORTFOLIO VALUE VALUE OF ASSETS
RATE IN BASIS POINTS ------------------- ----------------------
(RATE SHOCKS) AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
------------- ------ -------- -------- --------- ------
($ in thousands)
<S> <C> <C> <C> <C> <C>
300 $26,563 $(8,416) (24.0)% 13.28 % (299)
200 30,730 (4,249) (12.0) 14.90 (137)
100 33,252 (1,727) (5.0) 15.76 (51)
Static (1) 34,979 - - 16.26 -
(100) 34,655 (324) (1.0) 15.95 (31)
(200) 31,356 (3,623) (10.0) 14.47 (179)
(300) 28,850 (6,129) (18.0) 13.29 (297)
</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 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 $4.2 million or 12.0%. The level of
interest rate risk in the NPV table set forth above at June 30, 1999 is within
the Bank's current guidelines for acceptable interest rate risk.
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.
9
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1999 ANNUAL REPORT
================================================================================
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.
10
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1999 ANNUAL REPORT
================================================================================
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
AT JUNE 30, 1999 JUNE 30, 1999
--------------------- -----------------------------------
WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE RATE (1) BALANCE INTEREST YIELD/COST
------- -------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Mortgage-backed securities $ 54,015 6.68% $ 66,241 $ 3,871 5.84%
Loans receivable (2) 138,817 6.95 125,523 9,056 7.21
Investment securities (3) 3,320 7.69 3,246 272 8.38
Interest-earnings deposits 7,501 5.91 10,274 516 5.02
Stock in FHLB-Chicago 2,600 6.50 2,908 190 6.53
--------- ---- --------- -------- ----
Total interest-earning assets 206,253 6.85% 208,192 13,905 6.68%
--------- ---- --------- -------- ----
Allowance for loan losses (300) (300)
Noninterest-earning assets 9,540 9,645
--------- ---------
Total assets $ 215,493 $ 217,537
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
NOW accounts $ 10,020 2.01% $ 8,322 $ 167 2.01%
Money market demand accounts 10,865 2.82 11,587 341 2.94
Passbook/statement savings accounts 39,358 2.50 38,764 969 2.50
Certificates of deposit 57,725 4.86 59,413 3,106 5.23
Borrowed money 52,000 5.59 52,077 2,952 5.67
--------- ---- --------- -------- ----
Total interest-bearing liabilities $ 169,968 4.24% $ 170,163 $ 7,535 4.43%
========= ==== ========= ======== ====
Noninterest-bearing NOW accounts 5,949 5,837
Other noninterest-bearing liabilities 4,854 5,424
--------- ---------
Total liabilities $ 180,771 $ 181,424
--------- ---------
Stockholders' Equity 34,722 36,113
--------- ---------
Total liabilities and stockholders'
equity $ 215,493 $ 217,537
========= =========
Net interest income $ 6,370
========
Average interest rate spread (4) 2.61% 2.25%
==== ====
Net interest margin (5) 3.06%
====
Net interest earning assets $ 36,285 $ 38,029
========= =========
Ratio of interest-earning assets to
Interest-bearing liabilities 121.35% 122.35%
========= =========
</TABLE>
(NOTES ON FOLLOWING PAGE)
11
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1999 ANNUAL REPORT
================================================================================
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE ELEVEN MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
-------------------------------- -------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST (6)
------- -------- ---- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Mortgage-backed securities $ 91,196 $ 5,582 6.12% $ 105,347 $ 6,048 6.26%
Loans receivable (2) 102,733 7,839 7.63 83,707 5,954 7.76
Investment securities (3) 1,786 170 9.52 430 17 4.31
Interest-earnings deposits 7,264 412 5.67 4,131 310 8.19
Stock in FHLB-Chicago 2,565 171 6.67% 2,215 138 6.80%
--------- -------- ---- --------- -------- ----
Total interest-earning assets $ 205,544 $ 14,174 6.90% $ 195,830 $ 12,467 6.94%
--------- -------- ---- --------- -------- ----
Allowance for loan losses (300) (300)
Noninterest-earning assets 9,123 9,108
--------- ---------
Total assets $ 214,367 $ 204,638
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
NOW accounts $ 7,158 $ 145 2.03% $ 7,080 $ 132 2.03%
Money market demand accounts 11,957 382 3.19 12,840 366 3.11
Passbook/statement savings accounts 39,046 977 2.50 40,257 923 2.50
Certificates of deposit 59,931 3,287 5.48 64,184 3,158 5.37
Borrowed funds 48,469 2,941 6.07 44,000 2,542 6.30
--------- -------- ---- --------- -------- ----
Total interest-bearing liabilities $ 166,561 $ 7,732 4.64% $ 168,361 $ 7,121 4.61%
---------- -------- ---- --------- -------- ----
Noninterest-bearing NOW accounts 4,962 4,470
Other noninterest-bearing liabilities 5,003 5,092
---------- ---------
Total liabilities $ 176,526 $ 177,923
---------- ---------
Stockholders' Equity 37,841 26,715
---------- ---------
Total liabilities and stockholders'
equity $ 214,367 $ 204,638
========== =========
Net interest income $ 6,442 $ 5,346
======== ========
Average interest rate spread (4) 2.26% 2.33%
==== ====
Net interest margin (5) 3.13% 2.98%
==== ====
Net interest earning assets $ 38,983 $ 27,469
========== =========
Ratio of interest-earning assets to
interest-bearing liabilities 123.40% 116.32%
========== =========
</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.
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
12
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1999 ANNUAL REPORT
================================================================================
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 YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
COMPARED TO COMPARED TO
YEAR ENDED ELEVEN MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO DUE TO
----------------------------- ------------------------------
VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- ---
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Mortgage-backed securities $(1,466) $ (245) $ (1,711) $ (400) $ (66) $ (466)
Loans receivable 1,618 (401) 1,217 2,035 (150) 1,885
Investment securities (1) 119 (17) 102 111 42 153
Interest-earning deposits 143 (39) 104 171 (69) 102
Stock in FHLB of Chicago 23 (4) 19 38 (5) 33
------- -------- --------- -------- --------- ----------
Total $ 437 $ (706) $ (269) $ 1,955 $ (248) $ 1,707
======= ======== ========= ======== ========= ==========
INTEREST-BEARING LIABILITIES
NOW accounts $ 23 $ (1) $ 22 $ (2) $ 15 $ 13
Money market demand accounts (12) (29) (41) 33 (17) 16
Passbook/statement savings accounts (8) - (8) 54 - 54
Certificates of deposit (28) (153) (181) 203 (74) 129
Borrowed money 96 (85) 11 622 (223) 399
------- -------- --------- -------- --------- ----------
Total $ 71 $ (268) $ (197) $ 910 $ (299) $ 611
======= ======== ========= ======== ========= ==========
Net change in net interest income $ 366 $ (438) $ (72) $ 1,045 $ 51 $ 1,096
======= ======== ========= ======== ========= ==========
</TABLE>
- -----------------------------------
(1) Includes investment in mutual funds and preferred stock.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1999 AND JUNE 30, 1998
Total assets decreased $5.1 million from $220.6 million at June 30,
1998 to $215.5 million at June 30, 1999. The components of the Company's asset
base also changed from June 30, 1998 to June 30, 1999. Mortgage-backed
securities ("MBS") (including both held-to-maturity and available-for-sale
portfolios) decreased $25.7 million from $79.7 million at June 30, 1998 to $54.0
million at June 30, 1999. This decrease is primarily due to $35.0 million in
principal repayments which was partially offset by the purchase of $10.1 million
of MBS during the twelve month period. An increase of $23.0 million in loans
receivable from $115.5 million at June 30, 1998 to $138.5 million at June 30,
1999, was the result of loan originations of $44.4
13
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1999 ANNUAL REPORT
================================================================================
million which exceeded the $21.4 million of loan repayments. Interest earning
deposits decreased $2.3 million from $9.8 million at June 30, 1998 to $7.5
million at June 30, 1999.
Investments in mutual funds and preferred stock are recorded on the
balance sheet at fair value and were $3.3 million and $2.6 million at June 30,
1999 and 1998, respectively. The net unrealized gain or loss in this portfolio
is included as a component of accumulated other comprehensive income (loss). See
Note 2, to the Consolidated Financial Statements, for further information.
The Company, in July 1999, sold its remaining parcel of real estate
held for development in Olympia Fields by means of an auction. The cost basis of
the property at June 30, 1999, was $262,259; the sale price, net of selling
costs, was approximately $154,000 resulting in a loss of approximately $108,000.
A loss accrual was recorded by the Company in the quarter ended June 30, 1999
for this amount. Through the sale of this property, the Company expects to
benefit in future years from a reduction of operating expenses related to the
property of approximately $40,000 annually and from the ability to invest the
proceeds of the sale in income-earning assets.
The allowance for loan losses at June 30, 1999 and 1998 was $300,000.
Management believes that the allowance for loan losses is 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. The ratio of the allowance for loan losses to total loans was 0.22%
and 0.26% at June 30, 1999 and 1998, respectively. At June 30, 1999 and 1998,
the ratio of the allowance for loan losses to non-performing loans was 155.44%
and 87.72%, respectively. The Bank had three non-performing loans totaling
approximately $193,000 at June 30, 1999 and three non-performing loans totaling
approximately $342,000 at June 30, 1998. There were no loan chargeoffs during
the fiscal years June 30, 1999 and 1998.
Savings deposits increased $82,000 from June 30, 1998 to June 30, 1999;
during this time, borrowed funds decreased by $1.0 million. The savings
categories of money market demand accounts, and certificates of deposit
decreased $2.9 million, while passbook accounts increased $0.5 million, and NOW
accounts increased $2.4 million. The increase in NOW accounts was partially
caused by the increases in Government Entity deposits, whose balances fluctuate
during the year.
Stockholders' equity at June 30, 1999 was $34.7 million or $3.4 million
less than at June 30, 1998. This decline is due to the purchase of 69,269 shares
of the Company's common stock for the Recognition and Retention Plan and the
repurchase of 241,801 treasury shares by the Company, at a cost of $3.3 million,
pursuant to the Company's First and Second Repurchase Programs. Accumulated
other comprehensive income (loss) was $(480,354) and $36,377 at June 30, 1999
and 1998 respectively, representing the decline in the market value of the
securities held in the available-for-sale portfolio.
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COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED JUNE 30, 1999 AND 1998
GENERAL. For the year ended June 30, 1999, net income was $818,000 or
$0.37 basic and diluted earnings per share, compared to $1.2 million or $0.50
basic and $0.49 diluted earnings per share for the year ended June 30, 1998.
INTEREST INCOME. Interest income was $13.9 million for the year ended
June 30, 1999, compared to $14.2 million for the year ended June 30, 1998. The
average balance of interest earning assets increased $2.6 million from $205.5
million for the year ended June 30, 1998 to $208.1 million for the year ended
June 30, 1999. Generally, yields earned on new mortgage loan originations were
lower than rates earned on loan repayments, as a result the average yield on the
Bank's interest-earning assets decreased 22 basis points from 6.90% for the year
ended June 30, 1998 to 6.68% for the year ended June 30, 1999.
INTEREST EXPENSE. Interest expense decreased $0.2 million and was $7.5
million for the year ended June 30, 1999. This decrease was due primarily to a
lower cost of funds. The average rate paid on interest-bearing liabilities
decreased 21 basis points from 4.64% for the year ended June 30, 1998 to 4.43%
for the year ended June 30, 1999. The average balance of interest-bearing
liabilities increased $3.6 million to $170.2 million for the year ended June 30,
1999 from $166.6 million for the year ended June 30, 1998.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest
income before provision for loan losses decreased $72,000 and was $6.4 million
for the year ended June 30, 1999. The average interest rate spread was 2.25% for
the year ended June 30, 1999 and 2.26% in 1998. Net interest margin declined
seven basis points and was 3.06% for the year ended June 30, 1999.
PROVISION FOR LOAN LOSSES. There was no provision for loan losses for
the years ended June 30, 1999 and 1998.
NONINTEREST INCOME. Noninterest income was $284,000 for the year ended
June 30, 1999 compared to $724,000 for the year ended June 30, 1998. The primary
reason for the decrease was due to a $470,000 gain that was realized from a sale
in 1998 of $10.7 million of securities classified as available-for-sale.
NONINTEREST EXPENSE. Noninterest expense increased $91,000 for the year
ended June 30, 1999 as compared to the year ended June 30, 1998.
Compensation and benefits totaled $2.9 million for both years ended
June 30, 1999 and 1998; however, there were changes in some of the components.
Employee Stock Ownership Plan ("ESOP") expense declined $110,000 for the year
ended June 30, 1999. The cost of the ESOP is partially related to the Company's
average common stock price; therefore the lower average common stock price of
the Company during the fiscal year ended June 30, 1999 decreased the expense for
shares released to the ESOP compared to the prior year. Also, pension expense
decreased from the prior year due to a change in estimated pension liability.
These decreases were offset by an increase in expense of the Recognition and
Retention Plan ("RRP")
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1999 ANNUAL REPORT
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of $252,000, and increases in salaries and other employee benefits. The RRP,
which was implemented in January 1998, had six months of expense in 1998
compared to twelve months of expense in 1999.
Office occupancy expense was $1,090,000 for the year ended June 30,
1999, compared to $1,043,000 for the same period in 1998. This was primarily due
to increased furniture and fixture depreciation expense, resulting from the
purchase of new ATMs and in-house data processing equipment.
The loss on the sale of Olympia Fields property was provided for by the
Company in the quarter ended June 30, 1999, through the establishment of a loss
accrual of $108,000. Through the sale of this property, the Company expects to
benefit in future years from a reduction of operating expenses related to the
property of approximately $40,000 annually and from the ability to invest the
proceeds of the sale in income-earning assets.
Professional services expense decreased $22,000 to $319,000 for the
year ended June 30, 1999. This decrease was primarily due to a reduction in
legal fees associated with an ongoing litigation regarding a real estate
development known as The Trails of Olympia Fields.
Other noninterest expense was $787,000 for the year ended June 30, 1999
compared to $833,000 for the year ended June 30, 1998. This decrease was
primarily due to a one time $40,000 State of Illinois franchise payment in 1998
and a reduction of advertising expense in 1999. This decrease was partially
offset by an increase of $31,000 in 1999 relating to the Year 2000 issue.
INCOME TAX EXPENSE. Income tax expense decreased $240,000 from $712,000
for the year ended June 30, 1998 to $472,000 for the year ended June 30, 1999.
This decrease was primarily due to a decrease of $602,000 in pre-tax income and
a decrease in the effective tax rate. The effective tax rate was 36.6% and 37.6%
for the years ended June 30, 1999 and 1998, respectively.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND JUNE 30, 1997
The financial data presented for the 1997 fiscal year represents the
activity of the Bank for the period prior to the Conversion on December 19,
1996, 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
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1999 ANNUAL REPORT
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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 1997.
The allowance for loan losses at June 30, 1998 and 1997 was $300,000.
At June 30, 1998 and 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 accumulated other
comprehensive income.
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").
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 four 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
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1999 ANNUAL REPORT
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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 three 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, 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 three 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 were no expense allocations 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. 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.
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1999 ANNUAL REPORT
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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 1998 fiscal 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 ESOP,
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. 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.
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.
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.
The Bank's primary sources of funds are savings deposits, principal and
interest payments on loans and mortgage-backed securities, and borrowings from
the FHLB. While maturities and scheduled amortization of loans and
mortgage-backed securities provide an indication of the timing of the receipt of
funds, changes in interest rates, economic conditions and competition strongly
influence mortgage prepayment rates and savings deposit flows, reducing the
predictability of the timing of sources of funds. Cash flow from operating
activities amounted to $1.6 million, $1.6 million and $2.1 million for the 1999,
1998 and 1997 fiscal years, respectively.
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The Bank is required by the OTS 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%. At June 30, 1999, 1998 and 1997 the
Bank's liquidity ratio was 50.1%, 60.8% and 42.9%, respectively. 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 Bank's
liquidity ratio is high due to the amount of mortgage-backed securities in the
portfolio. The levels of the Bank's short-term liquid assets are dependent on
the Bank's operating, financing and investing activities during any given
period.
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 years ended June 30, 1999 and 1998 and the eleven
months ended June 30, 1997 the Bank's disbursements for loan originations
totaled $44.1, $39.4 and $23.3 million respectively. These activities were
funded primarily by principal repayments on loans and securities. During the
1999 fiscal year, there was $1.0 million net cash provided by investing
activities. 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 for the fiscal year ended June 30, 1997.
For the 1999 fiscal year, the Company purchased $4.4 million of Company
common stock for the RRP and treasury stock; also the Bank had an $82,000 net
increase in deposits (including the effect of interest credited). 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 the disintermediation 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 used in financing activities amounted to $5.2 million
for the year ended June 30, 1999. Net cash flows provided by financing
activities amounted to $3.7 million and $17.3 million for the 1998 fiscal year
and the eleven months ended June 30, 1997 respectively.
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1999 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, 1999, 1998 and 1997, cash and cash equivalents totaled $10.6, $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. The Bank had $52.0 and
$53.0 million, outstanding in FHLB advances at June 30, 1999 and 1998
respectively. 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, 1999, the Bank had outstanding mortgage loan origination
commitments of $2.8 million and unused lines of consumer credit of $394,000. 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 one year or less from June 30, 1999 totaled $45.3
million. Based upon the Bank's most recent pricing strategy, management believes
that a significant portion of such deposits will remain with the Bank.
At June 30, 1999, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $26.8 million, or 12.78% of total
adjusted assets, which is above the required level of $3.1 million or 1.5%; core
capital of $26.8 million, or 12.78% of total adjusted assets, which is above the
required level of $6.3 million or 3.0%; and total risk-based capital of $27.1
million, or 30.49% of risk-weighted assets, which is above the required level of
$7.1 million, or 8.0% of risk-weighted assets.
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
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
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1999 ANNUAL REPORT
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are required to carry all derivative instruments in the balance sheet 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 stockholders' 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. In June
1999, the FASB issued Statement 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the effective date of Statement No. 133." This
statement defers the adoption of Statement 133 to fiscal quarters of fiscal
years beginning after June 15, 2000. The Company has not yet determined the
impact Statement 133 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 could 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 which 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 results. As a result, many calculations which
rely on the date field information, such as interest, payments or due dates and
other operating functions, may 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.
The OTS, the Company's primary federal bank regulatory agency, along
with the other federal bank regulatory agencies, has published substantive
guidance on the Year 2000 Program and has included Year 2000 compliance as a
substantive area of examination for both regularly
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1999 ANNUAL REPORT
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scheduled and special bank examinations. These publications, in addition to
providing guidance as to examination criteria, have outlined requirements for
creation and implementation of a compliance plan and target dates for testing
and implementation of corrective action, as discussed below. As a result of the
oversight by and authority vested in the federal bank regulatory agencies, a
financial institution that does not become Year 2000 compliant could become
subject to administrative remedies similar to those imposed on financial
institutions otherwise found not to be operating in a safe and sound manner,
including remedies available under prompt corrective action regulations.
In order to address the Year 2000 issue and to minimize its potential
adverse impact, management has implemented 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 Bank and its operations. 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
was completed in September 1998; (4) Validation Phase - test and verify system
changes and coordinate with outside parties. This phase was completed during the
quarter ended June 30, 1999; and (5) Implementation Phase - components certified
as Year 2000 compliant and moved to production. The phase was completed during
the quarter ended June 30, 1999.
Third party vendors provide the majority of software used by the
Company. The Company has provided notice to its vendors concerning the Year 2000
situation. The Company's software vendors have provided upgraded or replacement
software which is stated to be Year 2000 compliant. This has enabled the Company
to devote substantial time to the testing of the upgraded systems prior to the
arrival of the millennium. The Company also 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 was completed in October,
1998. The critical application software and hardware for the Company's in-house
computer system has been tested both by the respective service providers and
internally, and has been stated by the respective vendors to be Year 2000
compliant. The Company presently believes that due to the modifications to
existing software and conversions to new software, the Year 2000 concerns, as it
relates to systems and other operations utilized by the Company, will be
negotiated without causing a material adverse impact on the operations of the
Company. However, even with these modifications and conversions the Year 2000
Problem could have an adverse impact on the operations of the Company. Thus, the
Company has also developed, and the Board of Directors has approved, a
Remediation Contingency Plan to mitigate risks associated with the failure to
successfully complete renovation, validation or implementation of any
applications. After an application is implemented, the Company is allowed to
drop the application from the Remediation
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1999 ANNUAL REPORT
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Contingency Plan. A second contingency plan, the Business Resumption Contingency
Plan, is to mitigate the risks associated with the failure of applications at
critical dates. The Business Resumption Contingency Plan has been developed and
the Board of Directors has approved such plan. The Company will continue to
closely monitor the progress of its Year 2000 compliance plan.
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.
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'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. Both direct and indirect costs of addressing the Year 2000 Problem
will be charged to earnings as incurred. Total direct costs incurred to date are
approximately $31,000. The Company currently estimates that the direct costs
should not exceed $50,000 and does not believe that such costs will have a
material effect on the results of operations.
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.
There has been limited litigation filed against corporations regarding
the Year 2000 Problem and such corporations' compliance efforts, and the law in
this area will likely continue to develop well into the new millennium. Should
the Company experience a Year 2000 failure, exposure of the Company could be
significant and material, unless there is legislative action to limit such
liability. Legislation has been introduced in several jurisdictions regarding
the Year 2000 Problem. However, no assurance can be given that legislation will
be enacted in jurisdictions where the Company does business that will have the
effect of limiting any potential liability.
24
<PAGE>
1999 ANNUAL REPORT
================================================================================
[Letterhead of KPMG LLP]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Big Foot Financial Corp.
Long Grove, Illinois:
We have audited the accompanying consolidated balance sheets of Big Foot
Financial Corp. and subsidiary (the Company) as of June 30, 1999 and 1998,
and the related consolidated statements of earnings, stockholders' equity,
and cash flows for the years ended June 30, 1999 and 1998, and the
eleven-month period ended June 30, 1997. 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, 1999 and 1998, and the
results of their operations and their cash flows for the years ended June
30, 1999 and 1998, and the eleven-month period ended June 30, 1997, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
August 2, 1999
25
<PAGE>
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
<TABLE>
<CAPTION>
Consolidated Balance Sheets
June 30, 1999 and 1998
- --------------------------------------------------------------------------------------------------------
ASSETS 1999 1998
------------- -------------
<S> <C> <C>
Cash and due from banks $ 3,126,148 3,345,248
Interest-earning deposits 7,501,314 9,800,686
Mortgage-backed securities held-to-maturity, at amortized
cost (fair value of $28,055,319 at June 30, 1999
and $46,560,298 at June 30, 1998) (note 2) 28,567,158 46,729,303
Mortgage-backed securities available-for-sale, at fair value (note 2) 25,447,366 33,035,203
Investment in mutual funds and preferred stock, at fair value (note 2) 3,320,333 2,569,126
Loans receivable, net (note 3) 138,516,590 115,472,207
Accrued interest receivable (note 4) 979,010 968,659
Investment in real estate held for sale and development, net (note 14) 154,259 262,259
Stock in Federal Home Loan Bank of Chicago, at cost 2,600,000 3,400,000
Office properties and equipment, net (note 5) 4,820,183 4,667,235
Prepaid expenses and other assets 460,421 354,359
------------- -------------
Total assets $ 215,492,782 220,604,285
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits (note 6):
Interest-bearing $ 117,968,013 117,987,506
Noninterest-bearing 5,948,780 5,847,332
------------- -------------
Total savings deposits 123,916,793 123,834,838
Borrowed money (note 7) 52,000,000 53,000,000
Advance payments by borrowers for taxes and insurance 1,866,489 1,773,720
Accrued interest payable and other liabilities 2,987,290 3,901,663
------------- -------------
Total liabilities 180,770,572 182,510,221
------------- -------------
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 25,128 25,128
Treasury stock, at cost (241,801 shares at June 30, 1999) (3,259,062) --
Additional paid-in capital 24,463,104 24,224,171
Retained earnings - substantially restricted 16,866,409 16,048,531
Common stock acquired by Employee Stock Option Plan (1,507,650) (1,708,670)
Common stock acquired by Recognition and Retention Plan (1,385,365) (531,473)
Accumulated other comprehensive income (loss) (480,354) 36,377
------------- -------------
Total stockholders' equity 34,722,210 38,094,064
------------- -------------
Total liabilities and stockholders' equity $ 215,492,782 220,604,285
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
<TABLE>
<CAPTION>
Consolidated Statements of Earnings
Years ended June 30, 1999 and 1998 and eleven months ended June 30, 1997
- --------------------------------------------------------------------------------------------------------
ELEVEN
MONTHS
YEARS ENDED ENDED
JUNE 30, JUNE 30,
------------------------ -----------
1999 1998 1997
------------ ---------- -----------
<S> <C> <C> <C>
Interest income:
Mortgage-backed securities held-to-maturity $ 2,114,813 2,518,316 2,447,395
Mortgage-backed securities available-for-sale 1,756,151 3,064,001 3,600,566
Investment in mutual funds and preferred stock 271,703 170,208 16,737
Loans receivable 9,055,558 7,838,745 5,954,201
Interest-earning deposits 516,309 412,083 309,755
Federal Home Loan Bank of Chicago stock 190,236 170,806 138,067
------------ ---------- -----------
Total interest income 13,904,770 14,174,159 12,466,721
------------ ---------- -----------
Interest expense:
Savings deposits (note 6) 4,582,783 4,791,429 4,578,779
Borrowed money 2,951,948 2,941,217 2,541,792
------------ ---------- -----------
Total interest expense 7,534,731 7,732,646 7,120,571
------------ ---------- -----------
Net interest income before provision for loan losses 6,370,039 6,441,513 5,346,150
Provision for loan losses (note 3) -- -- --
------------ ---------- -----------
Net interest income after provision for loan losses 6,370,039 6,441,513 5,346,150
------------ ---------- -----------
Noninterest income:
Gain on sale of securities available-for-sale -- 469,752 314
Service fees 255,244 220,095 188,400
Litigation settlements (note 14) -- -- 21,145
Other 28,918 34,097 71,750
------------ ---------- -----------
Total noninterest income 284,162 723,944 281,609
------------ ---------- -----------
Noninterest expense:
Compensation and benefits 2,936,718 2,934,805 2,277,996
Office occupancy 1,089,704 1,043,396 894,735
Federal deposit insurance premiums 75,076 78,173 1,097,211
Real estate held for sale and development 48,910 43,355 56,826
Provision for loss, investment in real estate held for
sale and development 108,000 -- --
Professional services 319,005 340,498 260,731
Other 787,057 833,250 708,185
------------ ---------- -----------
Total noninterest expense 5,364,470 5,273,477 5,295,684
------------ ---------- -----------
Income before income taxes 1,289,731 1,891,980 332,075
Income tax expense (note 8) 471,853 711,913 112,400
------------ ---------- -----------
Net income $ 817,878 1,180,067 219,675
============ ========== ===========
Earnings per share:
Basic $ 0.37 0.50 0.27
Diluted 0.37 0.49 0.27
============ ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1999 and 1998 and eleven months ended June 30, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON COMMON ACCUMULATED
ADDITIONAL STOCK STOCK OTHER
PREFERRED COMMON TREASURY PAID-IN RETAINED ACQUIRED ACQUIRED COMPREHENSIVE
STOCK STOCK STOCK CAPITAL EARNINGS BY ESOP BY RRP INCOME (LOSS) TOTAL
----- ----- ----- ------- -------- ------- ------ ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1996 $ -- -- -- -- 14,648,789 -- -- (1,069,302) 13,579,487
Comprehensive income:
Net income -- -- -- -- 219,675 -- -- -- 219,675
Other comprehensive income,
net of tax:
Unrealized holding gains
on investment securities
arising during period -- -- -- -- -- -- -- 1,023,826 1,023,826
Less reclassification
adjustment for gains
included in net income -- -- -- -- -- -- -- (207) (207)
-----------
Total comprehensive income 1,243,294
Net proceeds from
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
release of ESOP shares -- -- -- 61,562 -- -- -- -- 61,562
--------- ------- ----------- ----------- ----------- ----------- ----------- ------------ -----------
Balance at June 30, 1997 -- 25,128 -- 24,038,934 14,868,464 (1,909,690) -- (45,683) 36,977,153
Comprehensive income:
Net income -- -- -- -- 1,180,067 -- -- -- 1,180,067
Other comprehensive income,
net of tax:
Unrealized holding gains
on investment securities
arising during period -- -- -- -- -- -- -- 392,092 392,092
Less reclassification
adjustment for gains
included in net income -- -- -- -- -- -- -- (310,032) (310,032)
-----------
Total comprehensive income 1,262,127
Purchase of RRP shares -- -- -- (6,737) -- -- (724,955) -- (731,692)
Amortization of awards of
RRP shares -- -- -- -- -- -- 193,482 -- 193,482
Cost of ESOP shares
released -- -- -- -- -- 201,020 -- -- 201,020
Market adjustment for
release of ESOP shares -- -- -- 191,974 -- -- -- -- 191,974
--------- ------- ----------- ----------- ----------- ----------- ----------- ------------ -----------
Balance at June 30, 1998 -- 25,128 -- 24,224,171 16,048,531 (1,708,670) (531,473) 36,377 38,094,064
Comprehensive income:
Net income -- -- -- -- 817,878 -- -- -- 817,878
Other comprehensive income,
net of tax:
Unrealized holding loss
on investment securities
arising during period -- -- -- -- -- -- -- (516,731) (516,731)
----------
Total comprehensive income 301,147
Purchase of Treasury stock -- -- (3,259,062) -- -- -- -- -- (3,259,062)
Purchase of RRP shares -- -- -- 195,100 -- -- (1,299,258) -- (1,104,158)
Amortization of award of
RRP shares -- -- -- (38,210) -- -- 445,366 -- 407,156
Cost of ESOP shares
released -- -- -- -- -- 201,020 -- -- 201,020
Market adjustment for
release of ESOP shares -- -- -- 82,043 -- -- -- -- 82,043
--------- ------- ----------- ----------- ----------- ----------- ----------- ------------ -----------
Balance at June 30, 1999 $ -- 25,128 (3,259,062) 24,463,104 16,866,409 (1,507,650) (1,385,365) (480,354) 34,722,210
========= ======= =========== =========== =========== =========== =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 1999 and 1998 and eleven months ended June 30, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
ELEVEN
MONTHS
YEAR ENDED ENDED
JUNE 30, JUNE 30,
1999 1998 1997
----------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 817,878 1,180,067 219,675
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 450,888 407,469 351,159
Deferred income tax benefit (77,066) (29,391) (18,660)
Market adjustment for committed ESOP shares 82,043 191,974 61,562
Cost of ESOP shares released 201,020 201,020 100,510
Amortization of award of RRP shares 445,366 193,482 --
Gain on sale of securities available-for-sale -- (469,752) (314)
Net amortization of deferred loan fees (45,791) (50,420) (61,027)
Net amortization of discounts and premiums 377,194 (32,114) 225,263
Provision for investment in real estate held for sale and development 108,000 -- --
(Increase) decrease in accrued interest receivable (10,351) 81,919 (87,069)
(Increase) decrease in prepaid expenses and other assets (106,062) (186,593) 221,125
Increase (decrease) in accrued interest payable and other liabilities (610,236) 160,547 1,052,358
----------- ---------- ----------
Net cash provided by operating activities 1,632,883 1,648,208 2,064,582
----------- ---------- ----------
Cash flows from investing activities:
Net increase in loans receivable (22,998,592) (21,797,951) (14,419,237)
Purchases of mortgage-backed securities held-to-maturity -- (9,995,700) (10,207,310)
Purchases of mortgage-backed securities available-for-sale (10,121,376) -- (10,174,580)
Purchases of investment in mutual funds and preferred stock (1,066,249) (2,672,247) (1,016,437)
Principal repayments on mortgage-backed securities held-to-maturity 17,863,208 10,603,911 6,752,845
Principal repayments on mortgage-backed securities available-for-sale 17,163,985 18,331,120 8,680,594
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 --
Purchase of stock in Federal Home Loan Bank of Chicago -- (1,350,000) (435,000)
Proceeds from redemption of stock in Federal Home Loan Bank of Chicago 800,000 430,000 --
Purchase of office properties and equipment, net (603,835) (338,040) (286,816)
----------- ---------- ----------
Net cash provided by (used in) investing activities 1,037,141 3,919,383 (20,087,339)
----------- ---------- ----------
Cash flows from financing activities:
Net increase (decrease) in savings deposits 81,955 854,021 (14,195,953)
Net increase (decrease) in borrowed money (1,000,000) 3,400,000 9,700,000
Increase (decrease) in advance payments by borrowers for taxes and insurance 92,769 163,882 (190,378)
Net proceeds of common stock issued -- -- 21,992,300
Purchase of treasury stock (3,259,062) -- --
Purchase of RRP shares (1,104,158) (731,692) --
----------- ---------- ----------
Net cash provided by (used in) financing activities (5,188,496) 3,686,211 17,305,969
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (2,518,472) 9,253,802 (716,788)
Cash and cash equivalents at beginning of period 13,145,934 3,892,132 4,608,920
----------- ---------- ----------
Cash and cash equivalents at end of period $10,627,462 13,145,934 3,892,132
=========== ========== ==========
Supplemental disclosures of cash flow information -
cash paid during the period for:
Interest $ 7,568,520 7,746,111 6,591,151
Income taxes 550,000 866,000 71,000
=========== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
(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 sheets. 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 1999, 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.
30 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
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 consolidated financial statements and accompanying notes.
Actual results could differ from these estimates.
SEGMENT REPORTING
In June 1997, the Financing Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 131
(Statement 131), "Disclosures about Segments of an Enterprise and
Related Information." Statement 131 establishes standards for the
way public business enterprises report information about products,
services, geographic areas, and major customers of operating
segments in annual and interim financial reports issued to
shareholders. Operating segments are components of an enterprise
that engage in business activities that generate revenue and incur
expense and for which separate financial information is available
and evaluated regularly by management in deciding how to allocate
resources and in assessing performance. As the Company operates as
a single business segment, management has determined the
disclosure requirements under this statement do not apply to the
Company.
NEW ACCOUNTING STANDARDS
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 balance sheet 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 stockholders'
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.
In June 1999, the FASB issued Statement 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
effective date of Statement No. 133." This statement defers the
adoption of Statement 133 to fiscal quarters of fiscal years
beginning after June 15, 2000. The Company has not yet determined
the impact Statement 133 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 of the available-for-sale
portfolio is reflected as a separate component of accumulated
other comprehensive income, 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.
31 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
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. The difference
between amortized cost and fair value is reflected as a separate
component of accumulated other comprehensive income, net of
related tax effects. If a decrease in the market value of a
security is expected to be other than temporary, then the security
is written down to its fair value through a charge to income.
Gains and losses on the sale of these investments are determined
using the specific identification method.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances less
deferred loan fees and the allowance for loan losses. The Company
defers 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 for loan
losses, 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.
32 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
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.
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.
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 sheets at cost as a reduction of
stockholders' equity.
STOCK OPTION PLAN
As allowed under FASB Statement 123, "Accounting for Stock-Based
Compensation," the Company measures stock-based compensation cost
in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". The Company has
included in Note 11 the impact of the fair value of employee
stock-based compensation plans on net income and earnings per
share on a pro forma basis for awards granted since January 1,
1996, pursuant to Statement 123.
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 income available to common stockholders by
the weighted average number of common shares adjusted for the
dilutive effect of outstanding stock options.
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.
33 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
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, ENDED JUNE 30,
---------------------------------- ----------------------
1999 1998 1997
---------------- ---------------- ----------------------
<S> <C> <C> <C>
Basic:
Net income $ 817,878 1,180,067 638,078
Weighted average common
shares outstanding 2,233,284 2,341,883 2,231,781
---------------- ---------------- ----------------------
Basic earnings per share $ .37 .50 .27
================ ================ ======================
Diluted:
Net income $ 817,878 1,180,067 638,078
Weighted average common
shares outstanding 2,233,284 2,341,883 2,231,781
Effect of dilutive stock options
outstanding 422 55,820 7,791
---------------- ---------------- ----------------------
Diluted weighted average
common shares outstanding 2,233,706 2,397,703 2,329,572
---------------- ---------------- ----------------------
Diluted earnings per
share $ .37 .49 .27
================ ================ ======================
</TABLE>
COMPREHENSIVE INCOME
In June 1997, FASB Statement 130, "Reporting Comprehensive
Income," was issued. Pursuant to this statement, the consolidated
statements of stockholders' equity now include a new measure
called "comprehensive income," which includes net income as well
as certain items that are reported within a separate component of
stockholders' equity that bypass net income. Currently, the
Company's only component of other comprehensive income is the
unrealized gains (losses) on securities available-for-sale.
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to
the 1999 financial statement presentation.
34 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
(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 and preferred stock are
summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DESCRIPTION COST GAINS LOSSES VALUE
--------------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Held-to-maturity -
Federal National Mortgage
Association $ 28,567,158 33,511 (545,350) 28,055,319
=============== =============== =============== ===============
Available-for-sale:
Federal National Mortgage
Association $ 23,343,908 46,461 (415,935) 22,974,434
Federal Home Loan Mortgage
Corporation 2,479,842 15,759 (22,669) 2,472,932
--------------- --------------- --------------- ---------------
Total mortgage-backed
securities
available-for-sale 25,823,750 62,220 (438,604) 25,447,366
--------------- --------------- --------------- ---------------
Investment in mutual funds 870,930 -- (198,373) 672,557
Investment in preferred stock 2,800,000 -- (152,224) 2,647,776
--------------- --------------- --------------- ---------------
Total investment in mutual
funds and preferred stock 3,670,930 -- (350,597) 3,320,333
--------------- --------------- --------------- ---------------
Total securities
available-for-sale $ 29,494,680 62,220 (789,201) 28,767,699
=============== =============== =============== ===============
</TABLE>
35 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
<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 securities
available-for-sale $ 35,549,298 244,744 (189,713) 35,604,329
=============== =============== =============== ===============
</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
available-for-sale during the year ended June 30, 1999.
Mortgage-backed securities with an amortized cost of approximately
$1,100,000 and $2,631,000 have been pledged to secure certain savings
deposits of local municipal agencies as of June 30, 1999 and 1998,
respectively. Mortgage-backed securities with an amortized cost of
approximately $2,985,000 and $4,565,000 have been pledged to secure
Federal Home Loan Bank of Chicago (FHLB) advances as of June 30, 1999
and 1998, respectively.
36 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
(3) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Real estate loans:
One- to four-family residential $ 136,923,697 113,441,132
Multifamily 609,625 741,169
Commercial 592,572 833,386
Land, construction, and development loans 58,155 117,972
Home equity 597,177 821,300
---------------- -----------------
Total real estate loans 138,781,226 115,954,959
Consumer loans 316,166 143,841
---------------- -----------------
Gross loans receivable 139,097,392 116,098,800
Less:
Deferred loan fees (280,802) (326,593)
Allowance for loan losses (300,000) (300,000)
---------------- -----------------
$ 138,516,590 115,472,207
================ =================
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN
JUNE 30, MONTHS
---------------------------------- ENDED
1999 1998 JUNE 30, 1997
-------------- ----------------- -------------
<S> <C> <C> <C>
Balance at beginning of period $ 300,000 300,000 300,000
Provision for loan losses -- -- --
Charge-offs -- -- --
-------------- ----------------- -----------------
Balance at end of period $ 300,000 300,000 300,000
============== ================= =================
</TABLE>
37 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
Loans receivable delinquent three months or more at June 30, are as
follows:
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF GROSS
OF LOANS
YEAR LOANS AMOUNT RECEIVABLE
---- ---------------- --------------------- --------------------
<S> <C> <C> <C>
1999 3 $ 192,615 .14%
1998 3 342,317 .29
1997 1 199,112 .21
================ ===================== ====================
</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
$4,000, $-0-, and $10,000 for the years ended June 30, 1999 and 1998 and
the eleven months ended June 30, 1997, respectively.
No loans were identified as impaired by the Savings Bank at June 30,
1999, 1998, or 1997. Additionally, no loans were considered impaired
during the years ended June 30, 1999 and 1998 or the eleven months ended
June 30, 1997.
The Company serviced loans for others with principal balances
approximating $701,000, $1,170,000, and $1,757,000 at June 30, 1999,
1998, and 1997, 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 years ended June 30, 1999
and 1998, and the eleven months ended June 30, 1997.
Real estate first mortgage loans aggregating approximately $4,264,000,
$6,045,000, and $6,682,000 at June 30, 1999, 1998, and 1997,
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:
JUNE 30,
-----------------------------
1999 1998
------------- --------------
Mortgage-backed securities $ 299,022 438,452
Other investments 56,621 43,265
Loans receivable 623,367 486,942
------------- --------------
$ 979,010 968,659
============= ==============
38 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
(5) OFFICE PROPERTIES AND EQUIPMENT, NET
A summary of office properties and equipment at cost, less accumulated
depreciation and amortization, is as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Land $ 930,845 930,845
Buildings 6,280,745 6,114,643
Furniture, fixtures, and equipment 5,184,056 4,758,544
----------------- -----------------
12,395,646 11,804,032
Less accumulated depreciation and amortization 7,575,463 7,136,797
----------------- -----------------
$ 4,820,183 4,667,235
================= =================
</TABLE>
Depreciation and amortization expense was $450,888, $407,469, and
$351,159 for the years ended June 30, 1999 and 1998 and the eleven
months ended June 30, 1997, respectively.
(6) SAVINGS DEPOSITS
Savings deposits are summarized as follows:
<TABLE>
<CAPTION>
STATED OR
WEIGHTED AVERAGE JUNE 30,
INTEREST RATE --------------------------------------------------------
JUNE 30, 1999 1998
------------------------ ---------------------------- ------------------------------
1999 1998 AMOUNT PERCENT AMOUNT PERCENT
----------- ------------ --------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
NOW accounts --% -- $ 5,948,780 4.8% $ 5,847,332 4.7%
NOW accounts 2.01 2.01 10,020,046 8.1 7,667,774 6.2
Money market
demand accounts 2.82 3.31 10,864,901 8.8 11,797,048 9.5
Passbook accounts 2.50 2.50 39,357,636 31.7 38,837,530 31.4
----------- ------------ --------------- ------------ -------------- --------------
2.25 2.36 66,191,363 53.4 64,149,684 51.8
Certificate accounts 4.86 5.37 57,725,430 46.6 59,685,154 48.2
----------- ------------ --------------- ------------ -------------- --------------
3.47% 3.81 $ 123,916,793 100.0% $ 123,834,838 100.0%
=========== ============ =============== ============ ============== ==============
</TABLE>
39 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------------------
1999 1998
---------------------------- -------------------------------
AMOUNT PERCENT AMOUNT PERCENT
--------------- ------------ --------------- --------------
<S> <C> <C> <C> <C>
Contractual maturity of certificate accounts:
Under 12 months $ 14,171,928 24.6% $ 12,962,502 21.7%
12 to 36 months 39,814,853 69.0 42,343,204 71.0
Over 36 months 3,738,649 6.4 4,379,448 7.3
--------------- ------------ --------------- --------------
$ 57,725,430 100.0% $ 59,685,154 100.0%
=============== ============ =============== ==============
</TABLE>
The aggregate amount of certificate accounts with a balance of $100,000
or greater was approximately $6,979,000 and $6,419,000 at June 30, 1999
and 1998, respectively.
Interest expense on savings deposits is summarized as follows for the
periods indicated:
<TABLE>
<CAPTION>
ELEVEN
YEAR ENDED MONTHS
JUNE 30, ENDED
-------------------------------- -----------------
1999 1998 JUNE 30, 1997
--------------- --------------- -----------------
<S> <C> <C> <C>
NOW accounts $ 167,258 144,808 132,568
Money market demand accounts 339,728 381,935 365,685
Passbook accounts 969,329 976,986 922,897
Certificate accounts 3,106,468 3,287,700 3,157,629
--------------- --------------- -----------------
$ 4,582,783 4,791,429 4,578,779
=============== =============== =================
</TABLE>
40 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
(7) BORROWED MONEY
Borrowed money is summarized as follows :
<TABLE>
<CAPTION>
AMOUNT
INTEREST RATE AT OUTSTANDING AT
JUNE 30, JUNE 30,
-------------------- --------------------
DUE DATE 1999 1998 1999 1998
-------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Advances from the FHLB:
07/26/1998 --% 5.63 $ -- 1,000,000
07/19/1999 6.64 6.64 1,000,000 1,000,000
02/21/2000 6.08 6.08 7,000,000 7,000,000
08/08/2002 5.40 5.40 9,000,000 9,000,000
10/30/2000 6.02 6.02 10,000,000 10,000,000
06/19/2008 5.44 5.44 7,000,000 7,000,000
06/19/2008 5.19 5.19 8,000,000 8,000,000
06/19/2008 5.44 5.44 5,000,000 5,000,000
06/19/2008 5.19 5.19 5,000,000 5,000,000
-------------- ------------- -------------- --------------
$ 52,000,000 53,000,000
============== ==============
Weighted average
interest rate 5.59% 5.59%
============== =============
</TABLE>
Certain advances are callable by the FHLB as follows: $9,000,000 in
advances due in 2002 are callable quarterly beginning August 1998;
$13,000,000 in advances due in 2008 are callable quarterly beginning
June, 2001; $12,000,000 in advances due in 2008 have a one time call
date of June 19, 2003. The Company also has available an open line of
credit with the FHLB which has a floating rate of interest. There were
no borrowings under the line of credit at June 30, 1999 or 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 FHLB. At June 30, 1999 and 1998, all stock in the FHLB and
mortgage-backed securities with an amortized cost of approximately
$2,985,000 and $4,565,000 were pledged to secure FHLB advances as of
June 30, 1999 and 1998, respectively.
41 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
(8) INCOME TAXES
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
ELEVEN
YEAR ENDED MONTHS
JUNE 30, ENDED
---------------------------------- -----------------
1999 1998 JUNE 30, 1997
-------------- ----------------- -----------------
<S> <C> <C> <C>
Current:
Federal $ 548,919 741,304 110,746
State -- -- 20,314
-------------- ----------------- -----------------
548,919 741,304 131,060
-------------- ----------------- -----------------
Deferred:
Federal (77,066) (29,391) (18,660)
State -- -- --
-------------- ----------------- -----------------
(77,066) (29,391) (18,660)
-------------- ----------------- -----------------
Total income tax expense $ 471,853 711,913 112,400
============== ================= =================
</TABLE>
The reasons for the difference between the effective income tax rate and
the corporate Federal income tax rate of 34% are as follows:
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN
JUNE 30, MONTHS
----------------------- ENDED
1999 1998 JUNE 30, 1997
---- ---- -------------
<S> <C> <C> <C>
Federal income tax rate of 34% 34.0% 34.0 34.0
Other 2.6 3.6 (0.2)
-------------- ----------------- -----------------
Effective income tax rate 36.6% 37.6 33.8
============== ================= =================
</TABLE>
42 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 102,000 116,216
Deferred loss on sales of real estate 98,938 120,251
Capitalized interest 15,831 18,037
State net operating loss carryforwards 270,302 448,025
Unrealized loss on securities available-for-sale 246,627 --
Depreciation 10,258 --
----------------- -----------------
743,956 702,529
Less valuation allowance 270,302 410,245
----------------- -----------------
Total deferred tax assets, net of valuation allowance 473,654 292,284
----------------- -----------------
Deferred tax liabilities:
Unrealized gain on securities available-for-sale -- 18,654
Depreciation -- 24,238
Excess of tax bad debt reserve over base year amount 141,414 193,348
Federal Home Loan Bank stock dividends not
currently taxable 95,136 108,396
Deferred loan fees 161,498 208,065
Other 4,323 10,647
----------------- -----------------
Total gross deferred tax liabilities 402,371 563,348
----------------- -----------------
Net deferred tax asset (liability) $ 71,283 (271,064)
================= =================
</TABLE>
The Company has Illinois net operating loss carryforwards in the amount
of $5,704,000 at June 30, 1999, which expire in varying amounts through
July 31, 2015.
The valuation allowance for deferred tax assets was $270,302 and
$410,245 as of June 30, 1999 and 1998, respectively, resulting in a
decrease of $139,943 for the year ended June 30, 1999. 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 primarily due to
the utilization of state net operating loss carryforwards in the current
year.
Retained earnings at June 30, 1999 and 1998 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.
43 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
(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 years ended June 30, 1999 and 1998, and the eleven
months ended June 30, 1997, 20,102, 20,102 and 10,051 shares were
allocated, respectively. ESOP expense recognized for the years
ended June 30, 1999 and 1998 and the eleven months ended June 30,
1997 was $283,063, $392,994, and $162,072, respectively.
RECOGNITION AND RETENTION PLAN (RRP)
On December 22, 1997, the Company adopted an RRP and 4%, or
100,510 shares, of the common stock issued in the Company's
initial public offering were granted to eligible directors and
certain key officers of the Company. Shares vest as follows: 10%
on June 30, 1998; 20% on June 30, 1999, 2000, 2001, and 2002; and
10% on January 1, 2003. Compensation expense relating to the above
shares 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.
In February 1999, an additional 3,149 RRP shares were granted, of
which 335 shares were vested at June 30, 1999. In addition, 804
shares will vest at June 30, 2000, 2001, and 2002, respectively,
and 402 shares will vest at June 30, 2003. Compensation expense
relating to the additional RRP shares totaled $40,347, the fair
value of the shares on the date of grant, and is being recognized
as the shares vest.
During the years ended June 30, 1999 and 1998, 23,248 and 10,051
RRP shares vested, respectively, and for the years ended June 30,
1999 and 1998, the Company recorded RRP compensation expense of
$445,366 and $193,482, respectively.
During the years ended June 30, 1999 and 1998, 69,269 and 37,660
shares of the Company's common stock were purchased by the RRP in
the open market at weighted average prices of $15.94 and $19.43
per share, respectively. 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.
44 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
In February 1998, FASB Statement 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits," was issued, and is
effective for fiscal years beginning after December 31, 1997. The
statement revised the required disclosures for pensions and other post
retirement plans but does not change the measurement or recognition of
such plans. The following tables set forth the plan's funded status and
net periodic benefit cost for the years ended June 30, as per the
disclosure requirements of Statement 132:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Change in benefit obligation:
Projected benefit obligation at beginning of year $ 885,468 740,070
Projected benefit obligation actuarial loss 83,612 51,571
Service cost 62,369 44,829
Interest cost 77,204 52,172
Benefits paid (7,323) (3,174)
Change in discount rate as of June 30, 1999 99,598 --
---------------- ----------------
Projected benefit obligation at end of year $ 1,200,928 885,468
================ ================
Change in plan assets:
Fair value of plan assets at beginning of year $ 1,133,347 872,809
Actual return on plan assets 20,150 187,899
Employer contribution 34,209 75,813
Benefits paid (7,323) (3,174)
---------------- ----------------
Fair value of plan assets at end of year $ 1,180,383 1,133,347
================ ================
Accrued pension cost:
Funded status $ (20,545) 247,879
Unrecognized net actuarial loss/(gain) 141,881 (114,057)
Unrecognized prior service cost -- --
Unrecognized net asset (62,356) (79,441)
---------------- ----------------
Accrued pension cost $ 58,980 54,381
================ ================
Weighted-average assumptions as of April 30:
Discount rate 6.75% 7.50%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase Varies by age Varies by age
================ ================
</TABLE>
45 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------- --------------------
1999 1998 1997
------------------ ---------------- --------------------
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 62,369 44,829 42,000
Interest cost 77,204 52,172 44,996
Expected return on plan assets (92,878) (60,971) (17,695)
Amortization of unrecognized
transition cost (17,085) (14,238) 115,046
------------------ ---------------- --------------------
Net periodic benefit cost $ 29,610 21,792 25,347
================== ================ ====================
</TABLE>
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 years ended June
30, 1999 and 1998 and the eleven months ended June 30, 1997, the Company
made contributions of $17,850, $16,803, and $13,995, 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 for the eleven months ended June 30, 1997. There was no
contribution or expense for the years ended June 30, 1999 or 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, 1999, 1998, or 1997, 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. Stock options initially granted under the Plan vest at a
rate of 20% per year beginning on the first anniversary date of the
grant. During the year ended June 30, 1999, an additional 6,868 shares
were granted and 838 vested. Remaining shares vest as follows: 2,010
shares at June 24, 2000, 2001, and 2002, respectively. The exercise
price of shares granted is equal to the fair value of the common stock
at the date of grant. The option term cannot exceed ten years from the
date of grant.
46 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
The per share weighted average fair value of stock options granted
during 1999 and 1997 was $7.59 and $3.40, respectively, on the date of
grant using the Black Scholes option pricing model. The following
weighted average assumptions were used for grants issued in 1999 and
1997, respectively: an expected dividend yield of 0.0% and 2.6%,
expected volatility of 23.96% and 6.98%, risk-free interest rate of
5.39% and 6.63%, and an expected life of 8.2 and 8.8 years. There were
no stock options granted during the year ended June 30, 1998.
Under FASB Statement 123, the Company is required to disclose pro forma
net income and earnings per share 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 and earnings per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, ELEVEN MONTHS
---------------------------------------- ENDED JUNE 30,
1999 1998 1997
------------------- -------------------- ---------------------
<S> <C> <C> <C>
Net income:
As reported $ 817,878 1,180,067 219,675
Pro forma 700,011 1,067,295 218,132
Earnings per share:
Basic:
As reported .37 .50 .27
Pro forma .31 .46 .27
Diluted:
As reported .37 .49 .27
Pro forma .31 .45 .27
=================== ==================== =====================
</TABLE>
47 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
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>
YEAR ENDED YEAR ENDED ELEVEN MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997
------------------------------- ------------------------------ -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------------------------ ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period 251,275 $ 15.63 251,275 $ 15.63 -- $ --
Granted 6,868 12.81 -- -- 251,275 15.63
Exercised -- -- -- -- -- --
--------------- --------------- ------------- ---------------- ---------- --------------
Outstanding at end of
period 258,143 15.55 251,275 15.63 251,275 15.63
--------------- --------------- ------------- ---------------- ---------- --------------
Exercisable at year end 107,373 15.55 50,255 15.63 -- --
--------------- --------------- ------------- ---------------- ---------- --------------
Weighted average grant
date fair value of
options granted during
the period $ 5.62 $ -- $ 3.40
=============== ============== ==============
</TABLE>
(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.
48 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
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 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, 1999 and
1998, 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 the most recent 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, 1999
and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------------------------------------------------------------
TO BE WELL-
FOR CAPITAL CAPITALIZED
ADEQUACY UNDER PROMPT
ACTUAL PURPOSES CORRECTIVE ACTION
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital (to risk-
weighted assets):
Consolidated $ 35,502 38.11% N/A N/A N/A N/A
Fairfield Savings Bank, FSB 27,098 30.49 $ 7,110 8.00% $ 8,888 10.00%
============ =========== ============ =========== =========== ============
Tier 1 capital (to risk-weighted
assets):
Consolidated 35,202 37.78 N/A N/A N/A N/A
Fairfield Savings Bank, FSB 26,798 30.15 N/A N/A 5,333 6.00
============ =========== ============ =========== =========== ============
Tier 1 capital (to adjusted total
assets):
Consolidated 35,202 16.28 N/A N/A N/A N/A
Fairfield Savings Bank, FSB 26,798 12.78 6,290 3.00 10,483 5.00
============ =========== ============ =========== =========== ============
Tangible capital (to adjusted
total assets):
Consolidated 35,202 16.28 N/A N/A N/A N/A
Fairfield Savings Bank, FSB 26,798 12.78 3,145 1.50 N/A N/A
============ =========== ============ =========== =========== ============
</TABLE>
49 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------------------------------------------------
TO BE WELL-
FOR CAPITAL CAPITALIZED
ADEQUACY UNDER PROMPT
ACTUAL PURPOSES CORRECTIVE ACTION
------------------ ------------------ ------------------
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>
(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, 1999 were approximately $2,577,000 and $236,000, respectively, at
rates ranging between 6.325% and 9.750%. Commitments to fund available
home equity lines of credit of approximately $394,000 at June 30, 1999
represent amounts which the Company has committed to fund if requested
by the borrower within the normal commitment period. The Company
evaluates each customer's creditworthiness prior to extension of credit,
as it does for loans recorded on the consolidated balance sheet.
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.
50 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
(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.
In July 1999, the Company sold its remaining parcel of real estate held
for sale and development in Olympia Fields by means of an auction. The
cost basis of the property at June 30, 1999, was $262,259; the sale
price, net of selling costs, was approximately $154,000 resulting in a
loss of approximately $108,000. A loss accrual was recorded by the
Company in the quarter ended June 30, 1999 for this amount.
(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.
51 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
(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,
---------------------------------------------------------------------
1999 1998
--------------------------------- ----------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 3,126,148 3,126,148 3,345,248 3,345,248
Interest-bearing deposits 7,501,314 7,501,314 9,800,686 9,800,686
Mortgage-backed securities 54,014,524 53,502,685 79,764,506 79,595,501
Investment in mutual funds
and preferred stock 3,320,333 3,320,333 2,569,126 2,569,126
Loans receivable, net 138,516,590 135,168,878 115,472,207 115,947,700
Accrued interest receivable 979,010 979,010 968,659 968,659
Federal Home Loan Bank
of Chicago stock 2,600,000 2,600,000 3,400,000 3,400,000
----------------- ----------------- ----------------- -----------------
Total financial assets $ 210,057,919 206,198,368 215,320,432 215,626,920
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial liabilities:
Nonmaturing savings
deposits $ 66,191,363 66,191,363 64,149,684 64,149,684
Savings deposits with
stated maturities 57,725,430 57,830,527 59,685,154 59,724,794
Borrowed money 52,000,000 51,168,795 53,000,000 53,109,319
Accrued interest payable 856,283 856,283 890,072 890,072
----------------- ----------------- ----------------- -----------------
Total financial liabilities $ 176,773,076 176,046,968 177,724,910 177,873,869
================= ================= ================= =================
</TABLE>
52 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
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.
LOANS RECEIVABLE, NET
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.
53 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
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.
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 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.
54 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
(17) OTHER COMPREHENSIVE INCOME
The components of other comprehensive income as well as the related tax
(expense) benefit are summarized below:
<TABLE>
<CAPTION>
BEFORE INCOME AFTER
TAX TAX TAX
---------------- --------------- -----------------
<S> <C> <C> <C>
Year ended June 30, 1999:
Unrealized holding losses on investment
securities $ (782,012) 265,281 (516,731)
Reclassification adjustments for losses
included in net income -- -- --
---------------- --------------- -----------------
$ (782,012) 265,281 (516,731)
================ =============== =================
Year ended June 30, 1998:
Unrealized holding gains on investment
securities $ 594,079 (201,987) 392,092
Reclassification adjustments for gains
included in net income (469,752) 159,720 (310,032)
---------------- --------------- -----------------
$ 124,327 (42,267) 82,060
================ =============== =================
Eleven months ended June 30, 1997:
Unrealized holding gains on investment
securities $ 1,551,173 (527,347) 1,023,826
Reclassification adjustments for gains
included in net income (314) 107 (207)
---------------- --------------- -----------------
$ 1,550,859 (527,240) 1,023,619
================ =============== =================
</TABLE>
55 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
(18) CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION
The following condensed statements of financial condition as of June 30,
1999 and 1998 and statements of earnings and cash flows for the years
ended June 30, 1999 and 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 1999 1998
----------------- -----------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 598,737 2,257,262
Mortgage-backed securities available-for-sale 2,559,480 5,236,247
Investment in mutual funds and preferred stock 3,320,333 2,569,126
Equity investment in the Savings Bank 26,577,302 25,967,935
Receivable from the Savings Bank -- 193,482
ESOP loan receivable from the Savings Bank 1,507,650 1,708,670
Accrued interest receivable 30,133 35,473
Investment in real estate held for sale and development 154,259 262,259
Other assets 39,960 --
----------------- -----------------
Total assets $ 34,787,854 38,230,454
================= =================
Liabilities - other liabilities $ 65,644 136,390
----------------- -----------------
Stockholders' equity:
Common stock 25,128 25,128
Treasury stock, at cost (3,259,062) --
Additional paid-in capital 24,463,104 25,224,171
Retained earnings 16,866,409 16,048,531
Common stock acquired by ESOP (1,507,650) (1,708,670)
Common stock acquired by RRP (1,385,365) (531,473)
Accumulated other comprehensive income (loss) (480,354) 36,377
----------------- -----------------
Total stockholders' equity 34,722,210 38,094,064
----------------- -----------------
Total liabilities and stockholders' equity $ 34,787,854 38,230,454
================= =================
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 19,
YEARS ENDED JUNE 30, 1996 TO JUNE 30,
-------------------- ----------------
STATEMENTS OF EARNINGS 1999 1998 1997
------------- -------------- ------------------
<S> <C> <C> <C>
Equity in undistributed earnings of the Savings Bank $ 627,217 660,478 32,364
Interest income 680,079 872,547 429,754
Interest expense -- -- (5,804)
Noninterest income -- 240,649 313
Noninterest expense (377,378) (331,794) (140,352)
------------- -------------- ------------------
Income before income taxes 929,918 1,441,880 316,275
Income tax expense 112,040 261,813 96,600
------------- -------------- ------------------
Net income $ 817,878 1,180,067 219,675
============= ============== ==================
</TABLE>
56 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 19,
YEARS ENDED JUNE 30, 1996 TO JUNE 30,
---------------------------- ------------------
STATEMENTS OF CASH FLOWS 1999 1998 1997
------------------------ ------------- -------------- ------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 817,878 1,180,067 219,675
Equity in undistributed earnings of the Savings Bank (910,280) (1,053,470) (194,436)
Market adjustment for committed ESOP shares 82,043 191,974 61,562
Cost of ESOP shares released 201,020 201,020 100,510
Amortization of award of RRP shares 445,366 193,482 --
Amortization of premiums 24,708 24,708 10,295
Provision for loss on real estate held for sale and
development 108,000 -- --
Gain on sale of investment securities available-for-sale -- (240,649) --
Decrease (increase) in other assets 153,522 (229,859) (262,259)
Decrease (increase) in accrued interest receivable 5,340 102,939 (138,412)
Increase (decrease) in other liabilities 1,325 (17,616) 213,011
------------- -------------- ------------------
Net cash provided by operating activities 928,922 352,596 9,946
------------- -------------- ------------------
Investing activities:
Net decrease in ESOP loan receivable $ 201,020 301,530 --
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 2,641,002 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 (1,066,249) (2,672,247) (1,016,437)
------------- -------------- ------------------
Net cash provided by investing activities 1,775,773 2,338,699 (21,704,587)
------------- -------------- ------------------
Financing activities:
Purchase of treasury stock (3,259,062) -- --
Purchase of RRP stock (1,104,158) (731,692) 21,992,300
------------- -------------- ------------------
Net cash used in financing activities (4,363,220) (731,692) 21,992,300
------------- -------------- ------------------
Net increase (decrease) in cash and cash equivalents (1,658,525) 1,959,603 297,659
Cash and cash equivalents at beginning of period 2,257,262 297,659 --
------------- -------------- ------------------
Cash and cash equivalents at end of period $ 598,737 2,257,262 297,659
============= ============== ==================
</TABLE>
57 (Continued)
<PAGE>
1999 ANNUAL REPORT
================================================================================
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
(19) 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 years ended June 30, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
----------------------------------- -----------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR.
---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 3,562 3,554 3,408 3,381 3,568 3,687 3,447 3,472
Interest expense 1,950 1,928 1,835 1,822 1,967 2,006 1,898 1,861
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income before
provision for loan losses 1,612 1,626 1,537 1,559 1,601 1,681 1,549 1,611
Provision for loan losses -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses 1,612 1,626 1,573 1,559 1,601 1,681 1,549 1,611
Noninterest income 69 73 68 74 68 297 57 302
Noninterest expense 1,285 1,465 1,293 1,321 1,314 1,325 1,330 1,303
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes 396 234 348 312 355 653 276 610
Income tax expense 145 93 126 108 123 200 98 293
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 251 141 222 204 232 453 178 317
======== ======== ======== ======== ======== ======== ======== ========
EPS:
Basic $ .11 .0 .10 .10 .10 .20 .08 .14
Diluted .11 .0 .10 .10 .10 .19 .07 .13
======== ======== ======== ======== ======== ======== ======== ========
Cash dividends declared per share
$ -- -- -- -- -- -- -- --
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
1999 ANNUAL REPORT
================================================================================
STOCKHOLDER INFORMATION
CORPORATE OFFICE
MAILING ADDRESS:
1190 RFD
Long Grove, IL 60047
Located At:
Route 83 and Old McHenry Road
Long Grove, IL 60047
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on October 19, 1999 at 2:00
p.m. at the Holiday Inn Mundelein, located at 510 East Route 83, Mundelein,
Illinois 60060.
ANNUAL REPORT ON FORM 10-K
A copy of Big Foot Financial Corp.'s Annual Report on Form 10-K as filed with
the Securities and Exchange Commission may be obtained without charge upon
written request to Timothy L. McCue, Big Foot Financial Corp., 1190 RFD, Long
Grove, Illinois 60047, or by calling (847) 634-2100 or via the internet at:
www.edgar-online.com.
LOCAL COUNSEL
Vedder Price, Kaufman & Kammholz
222 North LaSalle Street
Chicago, Illinois 60601
SPECIAL COUNSEL
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
1700 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
REGISTRAR/TRANSFER AGENT (1)
Harris Trust and Savings Bank
311 West Monroe
P.O. Box A3504
Chicago, Illinois 60690
(312) 360-5354
(1) Communications regarding change of address, transfer of stock, and lost
certificates should be sent directly to the Harris Trust.
ACCOUNTANTS
KPMG LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
STOCK LISTING
Big Foot Financial Corporation's common stock is traded over the counter and is
listed on the Nasdaq National Market System of the Nasdaq Stock Market under the
symbol "BFFC." At June 30, 1999, there were 2,270,949 shares of Big Foot
Financial Corp. common stock issued and outstanding and there were approximately
408 holders of record. The price range of the common stock for the past two
fiscal years was as follows:
QUARTER ENDED HIGH LOW DIVIDENDS
September 30, 1997 17.875 16.000 N/A
December 31, 1997 21.500 17.750 N/A
March 31, 1998 23.938 20.125 N/A
June 30, 1998 21.875 17.313 N/A
September 30, 1998 18.500 12.750 N/A
December 31, 1998 15.000 13.250 N/A
March 31, 1999 14.250 12.313 N/A
June 30, 1999 15.313 12.125 N/A
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 declared its first cash dividend of $.05 per share payable on
September 15, 1999, to stockholders of record on August 31, 1999. The Board of
Directors considers 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.
MARKET MAKERS (PARTIAL LIST)
ABN AMRO
Friedman Billings Ramsey & Company
Robert W. Baird & Company, Inc.
Capital Resources, Inc.
Herzog, Heine, Geduld, Inc.
[Letterhead of KPMG LLP]
The Board of Directors
Big Foot Financial Corp.:
We consent to the incorporation by reference in the registration statement (No.
333-57981) on Form S-8 of Big Foot Financial Corp. of our report dated August 2,
1999, relating to the consolidated balance sheets of Big Foot Financial Corp.
and subsidiary as of June 30, 1999 and 1998, and the related consolidated
statement of earnings, stockholders' equity and cash flows for the years ended
June 30, 1999 and 1998, and the eleven-month period ended June 30, 1997, which
report is incorporated by reference in the June 30, 1999 annual report on Form
10-K of Big Foot Financial Corp.
/s/ KPMG LLP
Chicago, Illinois
September 24, 1999
<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>
<CIK> 0001022807
<NAME> Big Foot Financial Corp.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 3,126,148
<INT-BEARING-DEPOSITS> 7,501,314
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,767,699
<INVESTMENTS-CARRYING> 28,567,158
<INVESTMENTS-MARKET> 28,055,319
<LOANS> 138,516,590
<ALLOWANCE> 300,000
<TOTAL-ASSETS> 215,492,782
<DEPOSITS> 123,916,793
<SHORT-TERM> 8,000,000
<LIABILITIES-OTHER> 4,853,779
<LONG-TERM> 44,000,000
0
0
<COMMON> 25,128
<OTHER-SE> 34,697,082
<TOTAL-LIABILITIES-AND-EQUITY> 215,492,782
<INTEREST-LOAN> 9,055,558
<INTEREST-INVEST> 4,849,212
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 13,904,770
<INTEREST-DEPOSIT> 4,582,783
<INTEREST-EXPENSE> 7,534,731
<INTEREST-INCOME-NET> 6,370,039
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,364,470
<INCOME-PRETAX> 1,289,731
<INCOME-PRE-EXTRAORDINARY> 1,289,731
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 817,878
<EPS-BASIC> 0.37
<EPS-DILUTED> 0.37
<YIELD-ACTUAL> 6.85
<LOANS-NON> 192,615
<LOANS-PAST> 0
<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>
