As filed with the Securities and Exchange Commission on September 11, 1997
Registration No. 333-31739
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
PRE-EFFECTIVE AMENDMENT NO. TWO
TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FIRST SECURITYFED FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 6035 36-4177515
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number) Identification No.)
or organization)
936 North Western Avenue, Chicago, Illinois 60622-4695 (773) 772-4500
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-------------
Julian E. Kulas
President and Chief Executive Officer
First SecurityFed Financial, Inc.
936 North Western Avenue
Chicago, Illinois 60622-4695
(773) 772-4500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-------------
Please send copies of all communications to:
Kip A. Weissman, P.C.
Martin L. Meyrowitz, P.C.
SILVER, FREEDMAN & TAFF, L.L.P.
(A limited liability partnership including professional corporations)
1100 New York Avenue, N.W.
Seventh Floor, East Tower
Washington, DC 20005
(202) 414-6100
-------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=======================================================================================================
Title of Each Amount Proposed Maximum Proposed Maximum
Class of Securities to be Offering Price Aggregate Offering Amount of
to be Registered Registered(1) Per Share(1) Price(1) Registeration Fee
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 6,408,000 shares $10.00 $64,080,000 $19,418(2)
=======================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $17,258 of which was previously provided with the initial filing.
</TABLE>
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Prospectus
[LOGO]
FIRST SECURITYFED FINANCIAL, INC.
(Proposed Holding Company for First Security Federal Savings Bank)
$10.00 Per Share
5,572,000 Shares of Common Stock
(Anticipated Maximum)
First SecurityFed Financial, Inc. (the "Holding Company") is offering up to
5,572,000 shares of common stock, par value $0.01 per share (the "Common
Stock"), in connection with the conversion of First Security Federal Savings
Bank ("First Security" or the "Bank") from a federally chartered mutual savings
bank to a federally chartered stock savings bank and the issuance of all of
First Security's outstanding stock to the Holding Company (the "Conversion").
Pursuant to the Bank's plan of conversion (the "Plan of Conversion" or the
"Plan"), non-transferable rights to subscribe for the Common Stock
("Subscription Rights") have been given to (i) First Security's depositors with
account balances of $50 or more as of December 31, 1995 ("Eligible Account
Holders"), (ii) tax-qualified employee plans of First Security and the Holding
Company ("Tax-Qualified Employee Plans"), provided, however, that the
Tax-Qualified Employee Plans shall have first priority Subscription Rights to
the extent that the total number of shares of Common Stock sold in the
Conversion exceeds the maximum of the Estimated Valuation Range as defined
below, (iii) First Security's depositors with account balances of $50 or more as
of __________ __, 1997 ("Supplemental Eligible Account Holders"), (iv) certain
of its other members ("Other Members"), and (v) its employees, officers and
directors (the "Subscription Offering.)
(continued on next page)
--------------------
FOR ADDITIONAL INFORMATION ON HOW TO SUBSCRIBE, PLEASE CALL
THE STOCK CENTER AT (___) ___-____.
--------------------
FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED, SEE
"RISK FACTORS" BEGINNING ON PAGE __.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION OR THE FEDERAL DEPOSIT
INSURANCE CORPORATION, NOR HAS SUCH COMMISSION, OFFICE OR CORPORATION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON
STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
SAVINGS DEPOSITS AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
================================================================================
Estimated
Underwriting Fees, Estimated Net
Purchase Commissions and Conversion
Price(1) Other Expenses(2) Proceeds(3)
-------- ----------------- -----------
Per Share(4).................... $10.00 $0.20 $9.80
Minimum Total................... $41,180,000 $898,000 $40,282,000
Midpoint Total.................. $48,450,000 $965,000 $47,485,000
Maximum Total................... $55,720,000 $1,032,000 $54,688,000
Maximum Total, As Adjusted(5)... $64,080,000 $1,109,000 $62,971,000
================================================================================
(1) Determined on the basis of an appraisal prepared by FinPro, Inc. ("FinPro")
dated September 8, 1997, which states that the estimated aggregate pro
forma market value of the Common Stock to be sold in the Conversion ranged
from $41,180,000 to $55,720,000 or between 4,118,000 shares and 5,572,000
shares of Common Stock at $10.00 per share. See "The Conversion - Stock
Pricing and Number of Shares to be Issued."
(2) Consists of the estimated costs to the Bank and the Holding Company arising
from the Conversion, including the payment to Friedman, Billings, Ramsey &
Co., Inc. ("FBR") of estimated sales commissions ranging from $358,000 (at
the minimum) to $492,000 (at the maximum) in connection with the sale of
shares in the Offering. Such fees may be deemed to be underwriting fees.
See "Use of Proceeds" and "Pro Forma Data" for the assumptions used to
arrive at these estimates. The Holding Company has agreed to indemnify FBR
against certain liabilities, including liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"). See "The
Conversion - Marketing Arrangements" for a more detailed description of
underwriting fees, commissions and expenses.
(3) Net Conversion proceeds may vary from the estimated amounts, depending on
the Purchase Price, the number of shares issued and the number of shares
sold subject to commissions. The actual number of shares of Common Stock to
be issued in the Conversion will not be determined until after the close of
the Offering.
(4) Assumes the sale of the midpoint number of shares. If the minimum, maximum
or 15% above the maximum number of shares are sold, estimated expenses per
share would be $0.22, $0.19 or $0.17, respectively, resulting in estimated
net Conversion proceeds per share of $9.78, $9.81 or $9.83, respectively.
(5) As adjusted to give effect to the sale of up to an additional 836,000
shares (15% above the maximum of the Estimated Valuation Range) which may
be offered in the Conversion without the resolicitation of subscribers or
any right of cancellation, to reflect changes in market and financial
conditions following the commencement of the Offering. See "Pro Forma
Data," and "The Conversion - Stock Pricing and Number of Shares to be
Issued."
Friedman, Billings, Ramsey & Co., Inc.
The date of this Prospectus is ________ __, 1997
<PAGE>
(continued from prior page)
Subscription Rights are non-transferrable. Persons found to be selling or
otherwise transferring their right to purchase stock in the Subscription
Offering or purchasing Common Stock on behalf of another person will be subject
to forfeiture of such rights and possible further sanctions and penalties
imposed by the Office of Thrift Supervision (the "OTS"), an agency of the United
States Government. Subject to the prior rights of holders of Subscription Rights
and to market conditions, the Holding Company may also offer the Common Stock
for sale through FBR in a direct community offering (the "Direct Community
Offering") and/or a public offering to selected persons to whom this prospectus
is delivered (the "Public Offering" and when referred to together with the
Subscription Offering and the Direct Community Offering, if any, the
"Offering"). Depending on market conditions and availability of shares, the
shares of Common Stock may be offered for sale in the Public Offering on a
best-efforts basis by a selling group of selected broker-dealers to be managed
by FBR. The Bank and the Holding Company reserve the right, in their absolute
discretion, to accept or reject, in whole or in part, any or all orders in the
Public Offering.
The total number of shares to be issued in the Conversion will be based
upon an appraised valuation of the estimated aggregate pro forma market value of
the Holding Company and the Bank as converted. The purchase price per share
("Purchase Price") has been fixed at $10.00. Based on the current valuation
range of the shares to be sold of $41,180,000 to $55,720,000 (the "Estimated
Valuation Range"), the Holding Company is offering up to 5,572,000 shares.
Depending upon the market and financial conditions at the time of the completion
of the Public Offering, if any, the total number of shares to be issued in the
Conversion may be increased or decreased from the 5,572,000 shares offered
hereby, provided that the product of the total number of shares multiplied by
the price per share remains within, or does not exceed by more than 15% the
maximum of the Estimated Valuation Range. If the aggregate Purchase Price of the
Common Stock sold in the Conversion is below $41,180,000 or above $64,080,000,
or if the Offering is extended beyond ______ ___, 1997, subscribers will be
permitted to modify or cancel their subscriptions and to have their subscription
funds returned promptly with interest. Under such circumstances, if subscribers
take no action, their subscription funds will be promptly returned to them with
interest. In all other circumstances, subscriptions are irrevocable by
subscribers. See "The Conversion - Offering of Holding Company Common Stock."
In addition to the shares of the Common Stock to be issued in the
Conversion, the Holding Company intends, subject to member approval, to
contribute, or sell for a price equal to their aggregate par value ($2,500),
250,000 shares of the Common Stock to the Heritage Foundation of First Security
Federal Savings Bank, Inc. (the "Foundation"), a charitable foundation
previously created by the Bank. The purpose of the Foundation is to provide
charitable benefits to persons and organizations residing within the communities
in which the Bank operates. The proposed contribution to the Foundation is
subject to the approval of the Bank's members at the Special Meeting being held
to consider the Plan of Conversion. For a discussion of the Foundation and its
effects on the Conversion, including what would happen if members do not approve
the proposed contribution to the Foundation, see "Risk Factors -- Contribution
to the Charitable Foundation," "Pro Forma Data," and "The Conversion --
Contribution to the Charitable Foundation."
With the exception of the Tax-Qualified Employee Plans, no Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member may purchase in
their capacity as such in the Subscription Offering more than $250,000 of Common
Stock; no person, together with associates of and persons acting in concert with
such person, may purchase more than $250,000 of Common Stock in the Public
Offering and no person, together with associates of and persons acting in
concert with such person, may purchase more than $750,000 of Common Stock. Under
certain circumstances, the maximum purchase limitations may be increased or
decreased at the sole discretion of the Bank and the Holding Company up to 9.99%
of the total number of shares of Common Stock sold in the Conversion or down to
one percent of shares of Common Stock offered in the Conversion. The minimum
purchase is 25 shares. See "The Conversion - Additional Purchase Restrictions."
The Bank and the Holding Company have engaged FBR as financial advisor and agent
to consult, advise and assist in the distribution of shares of Common Stock, on
a best-efforts basis in the Offering including, if necessary, managing selected
broker-dealers to assist in selling stock in the Public Offering. For such
services, FBR will receive a marketing fee of 1.0% of the total dollar amount of
Common Stock sold in the Conversion, excluding purchases by directors, officers,
employees and their immediate family members, and the employee stock ownership
and benefit plans of the Bank and the Holding Company. If selected dealers are
used, the selected dealers will receive a fee estimated to be up to 4.5% of the
aggregate Purchase Price for all shares of Common Stock sold in the Public
Offering through such selected dealers. Such fees may be deemed to be
underwriting commissions. FBR and the selected dealers may be deemed to be
underwriters. See "The Conversion - Marketing Arrangements" and "The Conversion
- - Offering of Holding Company Common Stock."
The Subscription Offering will expire at 12:00 Noon, Chicago, Illinois
Time, on ___________, 1997 ("Expiration Date"), unless extended by the Board of
Directors up to an additional 45 days with the approval of the OTS, if
necessary, but without additional notice to subscribers. To subscribe for shares
of Common Stock in the Subscription Offering, the Holding Company must receive
(at any office of the Bank) a properly executed stock order and certification
form (together, the "Order Form") along with full payment at $10.00 per share
(or appropriate instructions authorizing a withdrawal from a deposit account at
the Bank) for all shares for which subscription is made by the Expiration Date.
The date by which orders must be received in the Public Offering, if any, will
be set by the Holding Company at the time of such offering provided that, if
such offering is extended beyond ________ 1997, each subscriber will have the
right to modify or rescind their order. Subscriptions paid by check, bank draft
or money order will be placed in a segregated account at the Bank and will earn
interest at the Bank's passbook rate from the date of receipt until completion
or termination of the Conversion. Payments authorized by withdrawal from deposit
accounts at the Bank will continue to earn interest at the contractual rate
until the Conversion is completed or terminated; these funds will be otherwise
unavailable to the depositor until such time. Authorized withdrawals from
certificate accounts for the purchase of Common Stock will be permitted without
the imposition of early withdrawal penalties or loss of interest. Once tendered,
subscription orders cannot be revoked or modified without the consent of the
Bank and the Holding Company. The Holding Company is not obligated to accept
orders submitted on photocopied or facsimile Order Forms. If the Conversion is
not consummated within 45 days after the last day of the Subscription Offering
and the OTS consents to an extension of time to complete the Conversion,
subscribers will be given the right to increase, decrease or rescind their
orders. Such extensions may not go beyond _________, 1999.
The Holding Company has applied to have the Common Stock listed on the
Nasdaq Stock Market under the symbol "____." Prior to this offering there has
not been a public market for the Common Stock, and there can be no assurance
that an active and liquid trading market for the Common Stock will develop or
that resales of the Common Stock can be made at or above the Purchase Price. See
"Market for Common Stock" and "The Conversion - Stock Pricing and Number of
Shares to be Issued."
2
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[MAP TO COME]
3
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the detailed information and financial statements appearing
elsewhere herein.
First SecurityFed Financial, Inc.
The Holding Company, First SecurityFed Financial, Inc., was recently
formed by First Security under the laws of Delaware for the purpose of becoming
a savings and loan holding company which will own all of the outstanding capital
stock that First Security will issue in connection with the Conversion.
Immediately following the Conversion, the only significant assets of the Holding
Company will be the capital stock of First Security, a note evidencing the
Holding Company's loan to the Employee Stock Ownership Plan (the "ESOP") and up
to approximately 50% of the net proceeds from the Offering, less the amount of
the ESOP loan. See "Use of Proceeds." Upon completion of the Conversion, the
Holding Company's business initially will consist only of the business of First
Security. See "First SecurityFed Financial, Inc."
First Security
General. First Security is a federally chartered mutual savings bank
headquartered in Chicago, Illinois. While the Bank was originally chartered in
1928, the modern chapter of the Bank did not begin until 1964 when the prior
board of directors resigned and President Kulas and eleven other community
leaders assumed director positions. At that time, the Bank had less than
$300,000 of assets and did not have federal deposit insurance. By the end of
1966, the assets of the Bank more than tripled and the Bank's board of
directors, by pledging their own deposits to an agency of the federal
government, had secured federal deposit insurance. Since that time, First
Security has grown steadily by focusing on the needs of its customers, many of
whom are persons of Ukrainian, Polish, Eastern European and Latin American
descent, and by remaining extremely active in community affairs within its
principal market areas.
First Security currently serves the financial needs of communities in
its market area through its main office located at 936 North Western Avenue,
Chicago, Illinois 60622-4695 and from branch offices located in Chicago,
Illinois, Philadelphia, Pennsylvania and Rolling Meadows, Illinois. Its deposits
are insured up to applicable limits by the Federal Deposit Insurance Corporation
("FDIC"). At April 30, 1997, First Security had total assets of $260.0 million,
deposits of $219.0 million and equity of $30.0 million (or 11.54% of total
assets).
First Security has been, and intends to continue to remain, an
independent, community oriented, financial institution. First Security's
business involves attracting deposits from the general public and using such
deposits, together with other funds, to originate primarily one- to four-family
residential mortgages and, to a lesser extent, commercial real estate,
multi-family, consumer and other loans primarily in its market area. At April
30, 1997, $137.5 million, or 81.32%, of the Bank's total loan portfolio
consisted of one- to four-family residential mortgage loans. The Bank also
invests in mortgage-backed and other securities and other permissible
investments. See "Business Investment Activities - Securities" and "-
Mortgage-Backed and Related Securities."
4
<PAGE>
Financial and operational highlights of the Bank include the following:
Profitability. First Security historically has been very profitable.
During each of the fiscal years ended December 31, 1992 through December 31,
1995, the Bank reported net income of between $3.0 million and $3.4 million.
During the same periods the Bank's return on average assets ("ROAA") ranged from
1.76% to 1.34%, while its return on average equity ("ROAE") ranged from 17.12%
to 11.64%. For the year ended December 31, 1996, First Security reported net
income of $452,000, which equated to an ROAA of 0.18% and an ROAE of 1.50%. The
decline in profitability for 1996 was primarily attributable to a mandatory $1.3
million one time assessment to recapitalize the Savings Association Insurance
Fund and a $2.5 million contribution to the Foundation. For the year ended
December 31, 1996, net income would have been $2.7 million without the one-time
SAIF assessment and the contribution to the Foundation. ROAA would have been
1.08% and ROAE would have been 8.88%. See "Risk Factors - Stock Contribution to
Charitable Foundation." For the four months ended April 30, 1997, the Bank
recorded net income of $761,000, resulting in an annualized ROAA and ROAE of
0.88% and 7.65%, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Capital Strength. As a result of its historic profitability and
commitment to maintaining a high level of capital, First Security has been able
to maintain a strong equity to assets ratio. For each of the fiscal years ended
from December 31, 1993 through December 31, 1996, the Bank's equity to assets
ratio exceeded 11%. At April 30, 1997, the Bank had total equity of $30.0
million, or 11.54% of total assets, which substantially exceeded all of the
applicable regulatory capital requirements with tangible, core and risk-based
capital ratios of 11.4%, 11.4% and 24.4%, respectively. Assuming on a pro forma
basis that $48.5 million, the midpoint of the Estimated Valuation Range, of
shares were sold in the Conversion and approximately 50% of the net proceeds
were contributed by the Holding Company to the Bank, as of April 30, 1997, the
Bank's capital would have been $46.8 million (16.9% of assets). See "Pro Forma
Regulatory Capital Analysis."
Asset Quality. One of the principal aims of First Security's operating
strategy is to maintain a high level of asset quality. The Board has sought to
achieve this goal by emphasizing the origination of one- to four-family
residential mortgage loans in the Bank's market area and by investing in
government-backed or investment grade mortgage-backed and other securities. The
Bank's ratio of non-performing assets to total assets was 0.87% at April 30,
1997. At that date, First Security had no real estate owned.
Core Deposits. The Bank historically has been successful at attracting and
retaining "core" deposits, which consist primarily of passbook, NOW and money
market accounts. The Bank continues to utilize customer service, marketing
initiatives and community outreach programs in order to maintain and expand its
deposit base. At April 30, 1997, $90.8 million, or 41.4% of the Bank's total
deposits consisted of passbook, NOW and money market accounts. These accounts
generally carry lower interest rates and are believed by the Board to be more
resistant to interest rate changes than certificate accounts.
Niche Strategy. First Security has long been extremely active in
community affairs within its urban market areas which are home to many persons
of Ukrainian, Polish, Eastern European and, more recently, Latin American
descent. Although the Bank historically has focused its operations on the
Chicago market, the Bank purchased in 1994 from the Resolution Trust Corporation
the deposits and many of the loans of Ukrainian Savings and Loan Association, a
5
<PAGE>
Philadelphia, Pennsylvania based thrift located in a community with an ethnic
composition similar to that of the Bank's Chicago urban market areas. As a
result of the Bank's marketing efforts and community involvement, the deposits
of its Philadelphia branch have increased from approximately $22.3 million at
June 24, 1994 to approximately $50.0 million at April 30, 1997.
The Board believes that additional opportunities for future expansion
may exist in other metropolitan areas, including areas with demographics similar
to those of the Bank's Chicago and Philadelphia markets. However, there can be
no assurance that the Bank will be able to identify any such additional
opportunities, or successfully conclude a transaction to take advantage of them.
Strong Community Orientation. The Board of Directors strongly believes
that the Bank's success is closely tied to its focus on the financial and other
needs of its community members, many of whom are of Ukrainian, Polish, Eastern
European or, to a lesser extent, Latin American descent. In an attempt to better
serve its customers, all of the Bank's directors and employees are fluent in at
least one language in addition to English. In addition, the Bank encourages its
employees to be active in the community, and substantially all of the Bank's
employees and its directors and senior officers are active in local charitable
community service organizations. Finally, the Bank itself has been highly active
in community affairs as demonstrated by the formation and funding of a
charitable foundation. See "Stock Contribution to Charitable Foundation."
The Board strongly believes that the Bank can maintain the community
orientation which has been so important to its operations only by remaining
independent. The Board believes that the Bank is well positioned to maintain
independent, community oriented operations into the next century and beyond.
Stock Contribution to Charitable Foundation
As a reflection of the Bank's long-standing commitment to the local
community, in 1996, the Bank established The Heritage Foundation of First
Security Federal Savings Bank, Inc. a private charitable foundation under the
Illinois General Not-For-Profit Corporation Act, (the "Foundation"). The
Foundation was established as a means of supporting the needs of the local
community while simultaneously increasing the visibility and reputation of the
Bank. The Foundation was initially funded by the Bank through several cash
contributions aggregating $2.5 million, all of which were accrued by the Bank
during the fourth quarter of 1996. In addition, under the Plan and subject to
member approval, the Holding Company will contribute to the Foundation 250,000
shares of its Common Stock (the "Stock Contribution"). The Stock Contribution
will be either in the form of a direct contribution or a sale of the shares for
their aggregate par value ($2,500). The Holding Company believes that the Stock
Contribution will be fully tax-deductible for both federal and state income tax
purposes. Finally, the Company may make additional contributions to the
Foundation in the future, although the Company has no current plans regarding
timing or amount of such future contributions, if any. See "Risk Factors --
Risks Associated with the Stock Contribution to a Charitable Foundation."
The Holding Company and the Bank believe that the funding of the
Foundation with Common Stock of the Holding Company is a means of reinforcing
the bond among the Bank and the communities in which the Bank operates, thereby
enabling such communities to share in the potential growth and success of the
Holding Company over the long-term. Although the Stock Contribution will result
in a reduction in the Holding Company's conversion appraisal (but not in its pro
forma capital per share or earnings per share), the Board believes that the
6
<PAGE>
Stock Contribution will enhance the long term value of the Bank by increasing
customer loyalty as well as the size of its customer base. The Board believes
that customer loyalty and community support are critical for the success of
community oriented institutions such as the Bank.
The Board believes that the Stock Contribution will facilitate the
support of charitable activities even during periods when the Holding Company
may not be in a position to support such activities. (Similarly, the Stock
Contribution could enable the Foundation to offset the impact of variations in
contribution levels from the Holding Company by accumulating funds during
periods of relatively large contributions and disbursing such funds during
periods of relatively small contributions.) In addition, the Board believes that
the Stock Contribution will have a highly beneficial public relations impact.
Finally, the Board believes that the Stock Contribution will facilitate the
participation of non-Holding Company personnel in charitable activities. The
Board believes that the Foundation and the making of the Stock Contribution on
the terms described herein represents an opportunity to make a significant
charitable contribution which will benefit the Holding Company and the Bank at a
time when they have adequate capital, are not yet subject to possible earnings
pressure resulting from the Holding Company's status as a public company and
there is a need for charitable funding in the Bank's market area.
The Foundation has been established to qualify as a private foundation
under the Internal Revenue Code of 1986, as amended (the "Code"). As a private
foundation, the Foundation is required to distribute annually in grants or
donations at least 5% of its net investment assets. The Foundation is dedicated
to the promotion of charitable purposes within the communities in which the Bank
operates, including, but not limited to, providing grants or donations to
community groups, cultural activities, youth and elder care and other types of
organizations or projects. While the Foundation is authorized to engage directly
in charitable activities, in order to limit overhead costs, it is currently
anticipated that the Foundation's primary activity will consist of making grants
to other charitable organizations.
The authority for the affairs of the Foundation is vested in the Board
of Trustees of the Foundation which is currently comprised of Chairman
Nadzikewycz, President Kulas and Director Gawryk, each of whom is also currently
a member of the Bank's Board of Directors. In accordance with the OTS rules
regarding conflicts of interests, such persons excused themselves from the Bank
Board's vote on the Stock Contribution. Under the terms of the Foundation's
articles of incorporation, new trustees may be selected only by the Foundation's
Board of Trustees. The Board of Trustees may be expanded following the
Conversion to include additional Bank directors and other community members as
trustees; but it is currently anticipated that at least a majority of the
Foundation's Board of Trustees will consist of persons who are then-current or
former directors of the Bank.
The Foundation's articles of incorporation provide that the earnings of
the Foundation shall not result in any private benefit for its members, trustees
or officers. In addition, it is anticipated that the Foundation will adopt a
conflicts of interest policy to protect against inappropriate benefits for
trustees or officers of the Foundation and any related parties. While these
provisions would not prohibit the payment of reasonable compensation for
services rendered, the members of the Board of Trustees do not currently receive
fees for service on the Board.
The Trustees of the Foundation are responsible for establishing and
carrying out the policies of the Foundation with respect to grants or donations
by the Foundation, consistent with the purposes for which the Foundation was
established. The Trustees of the Foundation are also responsible for directing
the activities of the Foundation, including the management of the shares of
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<PAGE>
Common Stock held by the Foundation; provided, however, that the voting of any
such shares will be subject to applicable OTS policy regarding foundations.
Under the terms of the OTS letter approval of the conversion application, when
matters are presented for a stockholder vote, the shares of Common Stock held by
the Foundation must be voted in the same ratio as all other shares of the Common
Stock. Under such circumstances, the Board and management of the Holding Company
would derive no additional voting control from such shares. However, in the
event that the OTS were to waive this voting restriction, the Foundation's Board
of Trustees would exercise voting control over such shares. Since the
Foundation's Board of Trustees currently consists of three Holding Company
directors, in the event that the OTS were to waive this restriction, the number
of shares over which the Board of Directors of the Holding Company is deemed to
exercise voting control could increase. However, as of the date hereof, the
Company has no intentions to seek such a waiver.
It is currently anticipated that the Foundation will adopt a policy
addressing affiliated transactions between the Foundation and the Holding
Company or the Bank. Any transactions between the Foundation and the Bank will
comply with applicable provisions of Sections 23A and 23B of the Federal Reserve
Act, as amended, as well as with the OTS conflicts of interests regulations.
Additionally, the Holding Company (but not the Bank) may provide office space
and administrative support to the Foundation without charge provided that such
actions comply with the applicable conflicts of interests restrictions.
Under applicable IRS regulations, the Foundation will be authorized to
purchase shares of the Holding Company's Common Stock in the open market,
subject to certain restrictions. However, it is not currently anticipated that
the Foundation will purchase any such shares. The OTS has informed the Holding
Company that any such purchases of Common Stock in the open market by the
Foundation would be considered to be purchases by the Holding Company for the
purpose of the OTS limitations on post-conversion stock repurchases. See "Use of
Proceeds."
If approved by members, the Stock Contribution will be made within
twelve months following the completion of the Conversion. However, as discussed
below, the Holding Company will recognize the expense related to the Stock
Contribution in the quarter in which the Conversion is completed. Once made, the
Stock Contribution will not be recoverable by the Holding Company or the Bank.
The Foundation may receive working capital from any dividends that may be paid
on the Holding Company's Common Stock in the future and, subject to applicable
federal and state laws, from loans collateralized by the Common Stock or from
the proceeds of the sale of any of the Common Stock in the open market from time
to time as may be permitted to provide the Foundation with additional liquidity.
One of the conditions imposed on the Stock Contribution by the Holding Company
is that the amount of Common Stock that may be sold by the Foundation in any one
year shall not exceed 5% of the average market value of the assets held by the
Foundation, except where the Board of Trustees of the Foundation, by
three-fourths vote, determines that the failure to sell an amount of Common
Stock greater than such amount would result in a long-term reduction in the
value of the Foundation's assets and as such would jeopardize the Foundation's
capacity to carry out its charitable purposes. The Stock Contribution is also
subject to certain conditions imposed by the OTS in connection with its approval
of the Conversion. See "The Conversion -- Stock Contribution to the Charitable
Foundation." and "-- Regulatory Conditions Imposed on the Foundation." Assuming
the sale of shares at the maximum of the Estimated Valuation Range, the Company
will have 5,822,000 shares issued and outstanding, of which the Foundation will
own 250,000 shares or 4.3%. Due to the additional issuance of shares
8
<PAGE>
of Common Stock to the Foundation, persons purchasing shares in the Conversion
will have their ownership and voting interests in the Company diluted. See "Pro
Forma Data."
If the Stock Contribution is approved by the Bank's members, the
Holding Company will recognize a $2.5 million expense (offset in part by a
corresponding tax benefit), during the quarter in which the Conversion is
completed, which is expected to be the fourth quarter of fiscal 1997. Such
expense will likely eliminate earnings in the quarter in which it is recognized
and have a material adverse impact on the Holding Company's earnings for fiscal
year 1997. Assuming a contribution valued at $2.5 million, the Holding Company
estimates a net tax-effected expense of $1.5 million. If the Stock Contribution
had been expensed during the four month period ended April 30, 1997, the Bank
would have reported a net loss of $739,000 for the four months ended April 30,
1997 rather than net income of $761,000. For further discussion of the
Foundation and its impact on purchasers of Common Stock in the Conversion, see
"Risk Factors Stock Contribution to a Charitable Foundation" and "Pro Forma
Data."
Because the Stock Contribution will result in dilution, it will reduce
the estimated pro forma market value of the stock to be sold by approximately
$4.6 million at the midpoint of the Estimated Valuation Range. As a result, the
pro forma capital of the Holding Company will be $3.0 million lower at the
midpoint of the Estimated Valuation Range than it would have been without the
Stock Contribution. However, because of the lower number of shares which are
being offered (as a result of the lower appraisal), per share capital and
earnings are expected to be approximately the same. See "Comparison of Valuation
and Pro Forma Information With No Stock Contribution."
As a result of the $4.6 million reduction in the estimated pro forma
market value of the stock to be sold caused by the Stock Contribution, the
amount of shares expected to be purchased by directors and executive officers,
assuming the sale of the midpoint number of shares, increased from 4.0% to 4.3%
of the shares sold. See "The Conversion--Participation by the Board and
Executive Officers." However, it should also be noted that their stock incentive
awards, which are calculated as a percentage of the conversion shares, will be
reduced by the reduction in the estimated pro forma market value of the stock to
be sold caused by the Stock Contribution.
The Stock Contribution is subject to the approval of a majority of the
total outstanding votes of the Bank's members eligible to be cast at the Special
Meeting. The Stock Contribution will be considered as a separate matter from the
vote to approve the Plan of Conversion. If the Bank's members approve the Plan
of Conversion, but not the Stock Contribution, the Bank intends to complete the
Conversion without the Stock Contribution. Failure to approve the Stock
Contribution may materially increase the aggregate pro forma market value of the
Common Stock being offered since the Estimated Valuation Range, as set forth
herein, takes into account the after-tax impact of the Stock Contribution. If
the pro forma market value of the shares of the Common Stock to be sold without
the Stock Contribution is either greater than $64.1 million or less than $41.2
million or if the OTS otherwise requires a resolicitation of subscribers, the
Bank will establish a new Estimated Valuation Range and commence a
resolicitation of subscribers (i.e., subscribers will be permitted to continue
or modify their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded with interest.) Any change in
the Estimated Valuation Range must be approved by the OTS. See "Pro Forma Data,"
"Comparison of Valuation and
9
<PAGE>
Pro Forma Information With No Stock Contribution," and "The Conversion--Stock
Contribution to the Charitable Foundation" and "The Conversion--Stock Pricing."
The Conversion
The Offering is being made in connection with the conversion of First
Security from a federally chartered mutual savings bank to a federally chartered
stock savings bank and the formation of First SecurityFed Financial, Inc. as the
holding company of First Security. The Conversion is subject to certain
conditions, including the prior approval of the Plan by the Bank's members at a
Special Meeting to be held on ______ __, 1997. After the Conversion, the Bank's
current voting members (who include certain deposit account holders and
borrowers) will have no voting rights in First Security and will have no voting
rights in the Holding Company unless they become Holding Company stockholders.
Eligible Account Holders and Supplemental Eligible Account Holders, however,
will have certain liquidation rights in the Bank. See "The Conversion Effects of
Conversion to Stock Form on Depositors and Borrowers of the Bank - Liquidation
Rights."
By converting to the stock form of organization, the Bank will be
structured in the form used by all commercial banks, most major business
corporations and an increasing number of savings institutions. The Conversion
will also increase the equity capital of the Bank. See "The Conversion --
Business Purposes."
The Offering. The shares of Common Stock to be issued in the Conversion
are being offered at a Purchase Price of $10.00 per share in the Subscription
Offering pursuant to nontransferable Subscription Rights in the following order
of priority: (i) Eligible Account Holders (i.e., depositors whose accounts in
the Bank totaled $50.00 or more on December 31, 1995); (ii) Tax-Qualified
Employee Plans; provided, however, that the Tax Qualified Employee Plans shall
have first priority Subscription Rights to the extent that the total number of
shares of Common Stock sold in the Conversion exceeds the maximum of the
Estimated Valuation Range; (iii) Supplemental Eligible Account Holders (i.e.,
depositors whose accounts in the Bank totaled $50.00 or more on ________ __,
____); (iv) Other Members (i.e., depositors as of ________ __, ____ and certain
borrowers of the Bank as of ________ __, ____ and _______ __, ____); and (v)
employees, officers and directors of the Bank. Subscription Rights received in
any of the foregoing categories will be subordinated to the Subscription Rights
received by those in a prior category. Subscription Rights will expire if not
exercised by noon, Chicago, Illinois time, on ______ _, ____, unless extended
(the "Expiration Date").
Subject to the prior rights of holders of Subscription Rights and
market conditions at or near the completion of the Subscription Offering, any
shares of Common Stock not subscribed for in the Subscription Offering may be
offered at the same price in a Public Offering and/or Direct Community Offering
through FBR to selected persons to whom this prospectus is delivered. To order
Common Stock in connection with the Public Offering and/or Direct Community
Offering, if any, an executed Order Form and full payment at $10.00 per share in
the form of a check, bank draft or money order must be received by FBR prior to
the termination of such offerings. The date by which orders must be received in
the Public Offering and/or Direct Community Offering, if any, will be set by the
Holding Company at the time of such offering provided that if the Offering is
extended beyond _____ _, 1997, each subscriber will have the right to modify or
rescind his or her subscription. The Holding Company and the Bank reserve the
absolute right to accept or reject any orders in the Public Offering and Direct
Community Offering, in whole or in part.
10
<PAGE>
If necessary, shares of Common Stock may also be offered in connection
with the Public Offering for sale on a best-efforts basis by selected dealers
managed by FBR. See "The Conversion -- Public Offering and Direct Community
Offering."
The Bank and the Holding Company have engaged FBR to consult with and
advise the Holding Company and the Bank with respect to the Offering, and FBR
has agreed to solicit subscriptions and purchase orders for shares of Common
Stock in the Offering. Neither FBR nor any selected broker-dealers will have any
obligation to purchase shares of Common Stock in the Offering. FBR will receive
for its services a marketing fee of 1.0% of the total dollar amount of Common
Stock sold in the Conversion (excluding purchases by directors, officers,
employees and members of their immediate families, the Foundation and the
employee benefit plans of the Holding Company and the Bank, and shares sold by
selected broker-dealers). To the extent selected broker-dealers are utilized in
connection with the sale of shares in the Public Offering, the selected dealers
will receive a fee of up to 4.5% and FBR will receive a fee of 1.0% of the
aggregate Purchase Price for all shares of Common Stock sold through such
broker-dealers. FBR will also receive reimbursement for certain expenses
incurred in connection with the Offering. The Holding Company has agreed to
indemnify FBR against certain liabilities, including certain liabilities under
the Securities Act of 1933, as amended ("Securities Act"). See "The Conversion -
Marketing Arrangements."
The Bank has established a Stock Center, which will be managed by FBR,
to coordinate the Offering, and answer questions about the Offering received by
telephone. All subscribers will be instructed to mail payment to the Stock
Center or deliver payment directly to one of the Bank's offices. In addition,
representatives of FBR will be available to answer questions at the Bank's
Philadelphia, Pennsylvania office. Payment for shares of Common Stock may be
made by cash (if delivered in person), check or money order or by authorization
of withdrawal from deposit accounts maintained with the Bank. Such funds will
not be available for withdrawal and will not be released until the Conversion is
completed or terminated. See "The Conversion - Method of Payment for
Subscriptions."
Purchase Limitations. The Plan of Conversion places limitations on the
number of shares which may be purchased in the Conversion by various categories
of persons. With the exception of the Tax-Qualified Employee Plans, no Eligible
Account Holder, Supplemental Eligible Account Holder, Other Member or director,
officer or employee may purchase in their capacity as such in the Subscription
Offering more than $250,000 of Common Stock; no person, together with associates
of and persons acting in concert with such person, may purchase more than
$250,000 of Common Stock in the Public Offering; and no person or group of
persons acting in concert (other than the Tax-Qualified Employee Plans) may
purchase more than $750,000 of Common Stock in the Conversion. The minimum
purchase limitation is 25 shares of Common Stock. These purchase limits may be
increased or decreased consistent with the Office of Thrift Supervision ("OTS")
regulations at the sole discretion of the Holding Company and the Bank. See "The
Conversion - Offering of Holding Company Common Stock."
Restrictions on Transfer of Subscription Rights. Prior to the
completion of the Conversion, no person may transfer or enter into any agreement
or understanding to transfer the legal or beneficial ownership of the
subscription rights issued under the Plan or the shares of Common Stock to be
11
<PAGE>
issued upon their exercise. Persons found to be selling or otherwise
transferring their right to purchase stock in the Subscription Offering or
purchasing Common Stock on behalf of another person will be subject to
forfeiture of such rights and possible federal penalties and sanctions. See "The
Conversion -- Restrictions on Transfer of Subscription Rights and Shares."
Stock Pricing and Number of Shares of Common Stock to be Issued in the
Conversion. The Purchase Price of the Common Stock is $10.00 per share and is
the same for all purchasers. The aggregate pro forma market value of the Holding
Company and First Security, as converted, was estimated by FinPro, which is
experienced in appraising converting thrift institutions, to be the Estimated
Valuation Range. The Board of Directors has reviewed the Estimated Valuation
Range as stated in the appraisal and compared it with recent stock trading
prices as well as recent pro forma market value estimates for other financial
institutions. The Board of Directors has also reviewed the appraisal report,
including the assumptions and methodology utilized therein, and determined that
it was not unreasonable.
Depending on market and financial conditions at the time of the
completion of the Offering, the total number of shares of Common Stock to be
issued in the Conversion may be increased or decreased significantly from the
5,572,000 shares offered hereby and the Purchase Price may be decreased.
However, subscribers will be permitted to modify or rescind their subscriptions
if the product of the total number of shares to be sold multiplied by the price
per share is less than $41.2 million or more than $64.1 million. The appraisal
is not intended to be, and must not be interpreted as, a recommendation of any
kind as to the advisability of voting to approve the Conversion or of purchasing
shares of Common Stock. The appraisal considers First Security and the Holding
Company only as going concerns and should not be considered as any indication of
the liquidation value of First Security or the Holding Company. Moreover, the
appraisal is necessarily based on many factors which change from time to time.
There can be no assurance that persons who purchase shares in the Offering will
be able to sell such shares at prices at or above the Purchase Price. See "Pro
Forma Data" and "The Conversion - Stock Pricing and Number of Shares to be
Issued" for a description of the manner in which such valuation was made and the
limitations on its use.
Purchases by Directors and Executive Officers
The directors and executive officers of First Security intend to
purchase, for investment purposes and at the same price as the shares are sold
to other investors in the Conversion, approximately $2.1 million of Common
Stock, or 5.1%, 4.3% or 3.8% of the shares to be sold in the Conversion at the
minimum, midpoint and maximum of the Estimated Valuation Range, respectively. In
addition, an amount of shares equal to an aggregate of 8% of the shares to be
issued in the Conversion, including the shares to be issued pursuant to the
Stock Contribution, is anticipated to be purchased by the ESOP. See "The
Conversion -- Participation by the Board and Executive Officers."
12
<PAGE>
Potential Benefits of Conversion to Directors and Executive Officers
Employee Stock Ownership Plan. The Board of Directors of the Bank has
adopted an ESOP, a tax-qualified employee benefit plan for officers and
employees of the Holding Company and the Bank. All employees of the Bank are
eligible to participate in the ESOP after they attain age 21 and complete one
year of service. The Bank's contribution to the ESOP is allocated among
participants on the basis of their relative compensation. Each participant's
account will be credited with cash and shares of Holding Company Common Stock
based upon compensation earned during the year with respect to which the
contribution is made. The ESOP intends to buy up to 8% of the Common Stock sold
in the Conversion (approximately $3.3 million to $4.5 million of the Common
Stock based on the issuance of the minimum and the maximum of the Estimated
Valuation Range and the $10.00 per share Purchase Price). The ESOP will purchase
the shares with funds borrowed from the Holding Company, and it is anticipated
that the ESOP will repay the loans through periodic tax-deductible contributions
from the Bank over a ten-year period. These contributions will increase the
compensation expense of the Bank. See "Management - Benefit Plans - Employee
Stock Ownership Plan" for a description of this plan.
Stock Option and Incentive Plan and Recognition and Retention Plan. The
Board of Directors of the Holding Company intends to adopt a Stock Option and
Incentive Plan (the "Stock Option Plan") and a Recognition and Retention Plan
("RRP") to become effective upon ratification by stockholders following the
Conversion. Certain of the directors and executive officers of the Holding
Company and the Bank will receive awards under these plans. It is currently
anticipated that an amount of shares equal to 10% and 4% of the shares sold in
the Conversion, including the shares to be issued pursuant to the Stock
Contribution, will be reserved for issuance under the Stock Option Plan and RRP,
respectively. Depending upon market conditions in the future, the Holding
Company may purchase shares in the open market to fund these plans. See
"Management - Benefit Plans" for a description of these plans.
Under the proposed Stock Option Plan, it is presently intended that the
directors and executive officers be granted options to purchase, in addition to
the shares to be issued in the Conversion, an amount of shares equal to 8.4% of
the shares issued in the Conversion, including the shares to be issued pursuant
to the Stock Contribution, (or 345,912 and 468,048 shares, respectively, of
Common Stock based on the minimum and maximum of the Estimated Valuation Range)
at an exercise price equal to the market value per share of the Common Stock on
the date of grant. Such options will be awarded at no cost to the recipients and
pose no financial risk to the recipients until exercised. It is presently
anticipated that Julian Kulas, President and Chief Executive Officer, will
receive an option to purchase an amount of shares equal to 2.5% of the shares
issued in the Conversion (or 102,950 and 139,300 shares, assuming the minimum
and maximum of the Estimated Valuation Range, respectively). See "Management
Benefit Plans - Stock Option and Incentive Plan."
The award and exercise of options pursuant to the Stock Option Plan
will not result in any expense to the Holding Company; however, when the options
are exercised, the interests of existing stockholders will likely be diluted.
13
<PAGE>
It is also intended that directors and executive officers be granted
under the RRP (without any requirement of payment by the grantee) an amount of
shares of restricted stock awards equal to 3.4% of the shares sold in the
Conversion (or 140,012 and 189,448 shares, respectively, based on the minimum
and maximum of the Estimated Valuation Range), which will vest over five years
commencing one year from stockholder ratification and which will have a total
value of $1.4 million and $1.9 million based on the Purchase Price of $10.00 per
share at the minimum and maximum of the Estimated Valuation Range, respectively.
It is presently anticipated that President Kulas will receive a restricted stock
award equal to 1.0% of the shares issued in the Conversion, including the shares
to be issued pursuant to the Stock Contribution, (or 41,180 and 55,720 shares,
assuming the minimum and maximum of the Estimated Valuation Range). The
restricted stock award to President Kulas would have an aggregate value ranging
from $411,800 to $557,200 (at the minimum and maximum of the Estimated Valuation
Range) based upon the original Purchase Price of $10.00 per share. See "Risk
Factors - Takeover Defensive Provisions" and "Management - Benefit Plans -
Recognition and Retention Plan."
Following stockholder ratification of the RRP, the RRP will be funded
either with shares purchased in the open market or with authorized but unissued
shares. Based upon the Purchase Price of $10.00 per share, the amount required
to fund the full number of shares available for grant under the RRP through
open-market purchases would range from approximately $1.6 million (based upon
the sale of shares at the minimum of the Estimated Valuation Range) to
approximately $2.2 million (based upon the sale of shares at the maximum of the
Estimated Valuation Range). In the event that the per share price of the Common
Stock increases above the $10.00 per share Purchase Price following completion
of the Offering, the amount necessary to fund the RRP would also increase. The
expense related to the cost of the RRP will be recognized over the five-year
vesting period of the awards made pursuant to such plan. The use of authorized
but unissued shares to fund the RRP would dilute the interests of stockholders
who purchase Common Stock in the Conversion. See "Management - Benefit Plans -
Recognition and Retention Plan."
The Holding Company intends to submit the RRP and the Stock Option Plan
to stockholders for ratification following completion of the Offering, but in no
event prior to six months following the completion of the Conversion. These
plans will only be effective if ratified by the stockholders. In the event the
Stock Option Plan and the RRP are not ratified by stockholders, management may
consider the adoption of alternate incentive plans, although no such plans are
currently contemplated. While the Bank believes that the RRP and the Stock
Option Plan will provide important incentives for the performance and retention
of management, the Bank has no reason to believe that the failure to obtain
shareholder ratification of such plans would result in the departure of any
members of senior management.
Employment and Severance Agreements. The Bank intends to enter into an
employment agreement with President Kulas. It is anticipated that the agreement
will provide for a salary equal to his current salary, will have an initial term
of three years, subject to annual extension for an additional year following the
Bank's annual performance review and will become effective upon the completion
of the Conversion. Under certain circumstances including a change in control, as
defined in the employment agreement, Mr. Kulas will be entitled to a severance
14
<PAGE>
payment in lieu of salary equal to a multiple of his base amount of
compensation, as defined. See "Management - Executive Compensation."
The Bank also intends to enter into change in control severance
agreements with four other executive officers. Such agreements will have initial
terms of 24 months and become effective upon completion of the Conversion. In
the event a covered officer is terminated following a "change in control" (as
defined in the agreements), such officer will be entitled to a severance payment
of 200% of their then current compensation. See "Management - Executive
Compensation - Employment Agreements and Severance Agreements" for the
definition of "change in control" and a more detailed description of these
agreements.
Use of Proceeds
The net proceeds from the sale of Common Stock in the Conversion
(estimated at $40.3 million, $47.5 million, $54.7 million and $63.0 million
based on sales at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range, respectively) will substantially increase the
capital of First Security. See "Pro Forma Data." The Holding Company will
utilize approximately 50% of the net proceeds from the issuance of the Common
Stock to purchase all of the common stock of First Security to be issued upon
Conversion and will retain approximately 50% of the net proceeds. The proceeds
retained by the Holding Company will be invested initially in short-term
investments similar to those currently in the Bank's portfolio. Such proceeds
will subsequently be invested in mortgage-backed securities and investment
securities and will be available for general corporate purposes, including the
possible repurchase of shares of the Common Stock, as permitted by the OTS. The
Holding Company currently has no specific plan to make any such repurchases of
any of its Common Stock. In addition, the Holding Company intends to provide the
funding for the ESOP loan. Based upon the initial Purchase Price of $10.00 per
share, the dollar amount of the ESOP loan would range from $3.3 million (based
upon the sale of shares at the minimum of the Estimated Valuation Range) to $4.5
million (based upon the sale of shares at the maximum of the Estimated Valuation
Range). It is anticipated that the ESOP will repay the loan through periodic
tax-deductible contributions from the Bank over a ten-year period. The interest
rate to be charged by the Holding Company on the ESOP loan will be based upon
the Internal Revenue Service ("IRS") prescribed applicable federal rate at the
time of origination.
Finally, the Holding Company currently intends to use a portion of the
proceeds to fund a Recognition and Retention Plan ("RRP"), subject to
stockholder ratification. Compensation expense related to the RRP will be
recognized as share awards vest. See "Pro Forma Data." Following stockholder
ratification of the RRP, the RRP may be funded either with shares purchased in
the open market or with authorized but unissued shares. Based upon the Purchase
Price of $10.00 per share, the amount required to fund the RRP through
open-market purchases would range from approximately $1.6 million (based upon
the sale of shares at the minimum of the Estimated Valuation Range) to
approximately $2.2 million (based upon the sale of shares at the maximum of the
Estimated Valuation Range). In the event that the per share price of the Common
Stock increases above the $10.00 per share Purchase Price following completion
of the Offering, the amount necessary to fund the RRP would also increase. The
use of authorized but unissued shares to fund the RRP could dilute the interests
of stockholders who purchase Common Stock in the Conversion. See "Management
Benefit Plans - Recognition and Retention Plan."
15
<PAGE>
The net proceeds received by First Security will become part of First
Security's general funds for use in its business and will be used to support the
Bank's existing operations, subject to applicable regulatory restrictions.
Immediately upon the completion of the Conversion, it is anticipated that the
Bank will invest such proceeds into short-term assets. Subsequently, the Bank
intends to redirect the net proceeds to the origination of residential loans
and, to a lesser extent, multi-family and commercial real estate and consumer
loans, subject to market conditions. In addition, a portion of the proceeds may
be used for the creation of one or more de novo branch offices within the
greater Chicago or Philadelphia areas, although the Bank has no specific plans
regarding any new branch offices at this time. Finally, such proceeds will be
available for the acquisition of deposits or assets or both from other
institutions, although no such acquisitions are contemplated at this time.
See "Use of Proceeds" for additional information on the utilization of
the offering proceeds as well as OTS restrictions on repurchases of the Holding
Company's stock.
Dividends
The Holding Company currently has no plans to pay dividends. However,
the Holding Company's Board of Directors may consider a policy of paying
dividends in the future. The declaration and payment of dividends are subject
to, among other things, the Holding Company's financial condition and results of
operations, First Security's compliance with its regulatory capital
requirements, including the fully phased-in capital requirements, tax
considerations, industry standards, economic conditions, regulatory
restrictions, general business practices and other factors. There can be no
assurance as to whether or when the Holding Company will pay a dividend. See
"Dividends."
Market for Common Stock
The Holding Company has applied to have the Common Stock traded on the
Nasdaq Stock Market under the symbol "____." In order to be traded on the Nasdaq
Stock Market, there must be at least three market makers for the Common Stock.
FBR has indicated its intention to make a market in the Holding Company's Common
Stock following completion of the Conversion, depending upon the volume of
trading activity in the Common Stock and subject to compliance with applicable
laws and other regulatory requirements. Additional market markers have not yet
been secured by the Holding Company. The Holding Company anticipates that it
will be able to secure the additional market makers necessary to enable the
Common Stock to be traded on the Nasdaq Stock Market. A public market having the
desirable characteristics of depth, liquidity and orderliness, however, depends
upon the presence in the marketplace of both willing buyers and sellers of the
Common Stock at any given time, which is not within the control of the Holding
Company, First Security or any market maker. Further, no assurance can be given
that an investor will be able to resell the Common Stock at or above the
Purchase Price after the Conversion. See "Market for Common Stock" and "The
Conversion - Stock Pricing and Number of Shares to be Issued."
16
<PAGE>
Risk Factors
See "Risk Factors" for information regarding certain factors which
should be considered by prospective investors, including interest rate risk
exposure, risks associated with a contribution to a charitable foundation,
competition, takeover defensive provisions contained in the Holding Company's
certificate of incorporation and bylaws, post-conversion overhead expenses,
regulatory oversight, the risk of a delayed offering, the absence of an active
market for the Common Stock and the possible consequences of amendment of the
Plan of Conversion.
17
<PAGE>
SELECTED FINANCIAL INFORMATION
Set forth below are selected financial and other data of the Bank. The
financial data is derived in part from, and should be read in conjunction with
the Consolidated Financial Statements and Notes of the Bank presented elsewhere
in this Prospectus.
In the opinion of management, the unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial condition and
results of operations of First Security as of April 30, 1997 and for the four
month periods ended April 30, 1997 and 1996. Interim results at and for the four
months ended April 30, 1997 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1997.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
At April 30,
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets ............................. $260,002 $258,115 $251,922 $227,922 $189,846 $177,443
Cash and cash equivalents ................ 7,104 7,300 19,173 6,800 11,365 8,667
Loans receivable, net(1) ................. 165,914 163,348 144,566 136,207 105,946 97,968
Mortgage-backed securities(2):
Held-to-maturity ....................... 22,389 24,109 25,120 42,621 45,445 37,911
Available-for-sale ..................... 18,616 19,727 20,044 -- -- --
Securities(2)
Held-to-maturity ....................... 28,259 25,779 20,566 17,926 20,804 27,693
Available-for-sale ..................... 8,919 8,997 13,743 15,662 -- --
Deposits ................................. 218,987 219,505 209,387 195,875 161,715 154,559
Total borrowings ......................... 7,500 4,000 10,000 3,000 1,000 1,000
Total equity ............................. 29,950 29,261 29,038 25,555 22,395 19,214
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Four Months Year Ended
Ended April 30, December 31,
---------------- --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income ..................................... $ 6,495 $ 6,124 $19,006 $17,650 $15,710 $13,995 $14,764
Total interest expense .................................... 3,220 3,163 9,494 8,727 6,584 6,068 7,308
------- ------- ------- ------- ------- ------- -------
Net interest income ..................................... 3,275 2,961 9,512 8,923 9,126 7,927 7,456
Provision for loan losses ................................. 574 42 706 136 182 249 184
------- ------- ------- ------- ------- ------- -------
Net interest income after provision for loan losses ....... 2,701 2,919 8,806 8,787 8,944 7,678 7,272
------- ------- ------- ------- ------- ------- -------
Fees and service charges .................................. 116 121 362 378 326 281 229
Gain on sales of securities ............................... -- -- 55 24 5 32 28
Other non-interest income ................................. 81 73 328 454 246 286 171
------- ------- ------- ------- ------- ------- -------
Total non-interest income ................................. 197 194 745 856 577 599 428
Total non-interest expense ................................ 1,657 1,520 8,693(3) 4,690 4,271 3,457 3,173
------- ------- ------- ------- ------- ------- -------
Income before taxes ....................................... 1,241 1,593 858 4,953 5,250 4,820 4,527
Income tax provision ...................................... 480 603 406 1,760 1,825 1,644 1,496
------- ------- ------- ------- ------- ------- -------
Net income ................................................ $ 761 $ 990 $ 452 $ 3,193 $ 3,425 $ 3,176 $ 3,031
======= ======= ======= ======= ======= ======= =======
- -------------
<FN>
(1) The allowance for loan losses at April 30, 1997, December 31, 1996, 1995,
1994, 1993 and 1992 was $1,666,000, $1,520,000, $885,000, $792,000,
$608,000 and $360,000, respectively.
(2) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
effective as of January 1, 1994. Prior to the adoption of SFAS No. 115,
marketable equity securities were carried at the lower of amortized cost or
market value and the remaining securities were carried at amortized cost ,
as adjusted for amortization of premiums and accretion of discounts over
the remaining terms of the securities from the dates of purchase.
(3) Includes $1.3 million SAIF special assessment and $2.5 million cash
contribution to the Foundation.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Four Months Year Ended
Ended April 30, December 31,
---------------- ------------------------------------------------
1997(1) 1996(1) 1996 1995 1994 1993 1992
------- ------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average
total assets) .......................................... 0.88% 1.19% 0.18%(2) 1.34% 1.62% 1.74% 1.76%
Return on equity (ratio of net income to average equity) 7.65 10.07 1.50 (2) 11.64 14.23 15.21 17.12
Interest rate spread information:
Average during period .............................. 3.45 3.37 3.51 3.61 4.28 4.22 4.16
Net interest margin(3) ............................. 3.96 3.81 3.98 4.00 4.60 4.56 4.54
Ratio of operating expense to average total assets ...... 1.92 1.83 3.45 (2) 1.97 2.03 1.89 1.84
Efficiency Ratio(4) ..................................... 0.48 0.48 0.85 (2) 0.48 0.44 0.41 0.40
Ratio of average interest-earning assets to average
interest-bearing liabilities ....................... 112.96 110.69 111.81 109.93 109.51 109.55 108.56
Quality Ratios:
Non-performing assets to total assets at end of period .. 0.87 1.18 1.44 1.11 0.72 1.05 1.32
Allowance for loan losses to non-performing loans
at end of period ................................... 73.78 33.46 41.30 38.73 55.58 32.02 16.57
Allowance for loan losses to gross loans receivable
at end of period ................................... 0.98 0.52 0.91 0.60 0.57 0.56 0.36
Capital Ratios:
Equity to total assets at end of period(5) .............. 11.63 11.52 11.42 11.52 11.33 11.80 10.83
Average equity to average assets ........................ 11.50 11.84 11.97 11.55 11.42 11.42 10.27
- ------------
(1) Ratios for the four-month periods have been annualized.
(2) Excluding the $1.3 million SAIF special assessment and the $2.5 million
cash contribution to the Foundation, net of tax, the return on assets,
return on equity and ratio of operating expense to average total assets
would have been 1.10%, 9.19% and 1.94%, respectively. The efficiency ratio
would have been 0.48.
(3) Net interest income divided by average interest-earning assets.
(4) The efficiency ratio represents non-interest expense divided by the sum of
net interest income and non-interest income.
(5) Ratio is exclusive of unrealized gain (loss) on securities
available-for-sale.
</TABLE>
20
<PAGE>
RECENT FINANCIAL DATA
The selected financial and other data of the Bank set forth below at
and for the two and six months ended June 30, 1997 were derived from unaudited
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the financial
condition and results of operations for the unaudited periods presented have
been included. The information presented below is qualified in its entirety by
the detailed information and financial statements included elsewhere in this
Prospectus and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and the
audited Financial Statements of the Bank and Notes thereto included elsewhere in
this Prospectus.
At June 30, At April 30,
1997 1997
---- ----
Selected Financial Condition Data: (In Thousands)
- ----------------------------------
Total assets ................ $261,294 $260,002
Cash and cash equivalents ... 3,304 7,104
Loans receivable, net ....... 172,627 165,914
Securities available-for-sale 27,382 27,535
Securities held-to-maturity . 49,651 50,648
Deposits .................... 219,996 218,987
Total Borrowings ............ 7,500 7,500
Total Equity ................ 30,555 29,950
<TABLE>
<CAPTION>
Two Months Ended Six Months Ended
June 30, June 30,
----------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
Selected Operations Data: (In Thousands)
- -------------------------
<S> <C> <C> <C> <C>
Interest income ........................................ $3,213 $3,275 $9,708 $9,399
Interest expense ....................................... 1,669 1,558 4,889 4,721
------ ------ ------ ------
Net interest income before
provision for loan losses ........................... 1,544 1,717 4,819 4,678
Provision for loan losses .............................. 41 41 615 83
------ ------ ------ ------
Net interest income after
provision for loan losses ........................... 1,503 1,676 4,204 4,595
Fees and service charges ............................... 64 62 180 183
Other non-interest income .............................. 34 38 115 111
Non-interest expense ................................... 824 856 2,481 2,376
------ ------ ------ ------
Income before taxes .................................... 777 920 2,018 2,513
Income taxes ........................................... 270 343 750 946
------ ------ ------ ------
Net income ........................................... $ 507 $ 577 $1,268 $1,567
====== ====== ====== ======
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
At or for the At or for the
Two Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
------ ------ ------ -----
Selected Financial Ratios and Other Data:
- -----------------------------------------
<S> <C> <C> <C> <C>
Performance Ratios:
Return on average assets(1) .................................. 1.16 1.38 0.97 1.25
Return on average equity(1) .................................. 10.04 11.43 8.46 10.53
Average equity to average assets ............................. 11.60 12.09 11.53 11.91
Equity to total assets at end of period ...................... 11.69 12.03 11.69 12.03
Average interest rate spread(1) .............................. 3.18 3.89 3.37 3.56
Net interest margin(1)(2) .................................... 3.69 4.34 3.87 4.00
Average interest-earning assets to
average interest-bearing liabilities ........................ 112.78 111.52 112.86 110.83
Non-interest expense to average assets(1) .................... 1.89 2.05 1.91 1.90
Efficiency ratio(3) .......................................... 0.50 0.47 0.49 0.48
Asset Quality Ratios:
- ---------------------
Allowance for loan losses as a percent of
gross loans receivable ..................................... 0.97 0.60 0.97 0.60
Allowance for loan losses as a percent of
non-performing loans ....................................... 87.20 25.33 87.20 25.33
</TABLE>
- ------------
(1) Ratios for the two and six month periods have been annualized.
(2) Net income divided by average interest-earning assets.
(3) The efficiency ratio represents non-interest expense as a percent of net
interest income and non-interest income.
22
<PAGE>
Comparison of Financial Condition at June 30, 1997 and April 30, 1997
Total assets at June 30, 1997 were $261.3 million compared to $260.0
million at April 30, 1997, an increase of $1.3 million, or 0.5%. The increase in
total assets was due primarily to increases in loans receivable due to strong
loan demand, funded by a slight increase in deposits and advance payments by
borrowers for taxes and insurance, as well as a decrease in cash and cash
equivalents.
Total liabilities at June 30, 1997 were $230.7 million compared to
$230.1 million at April 30, 1997, an increase of $645,000, or 0.3%. The increase
is primarily due to a $1.0 million increase in deposits combined with a $774,000
increase in advance payments by borrowers for taxes and insurance, partially
offset by a $450,000 decrease in accrued interest payable as a result of
interest payments at quarter end.
Total equity at June 30, 1997 was $30.6 million compared to $30.0
million at April 30, 1997, an increase of $605,000, or 2.0% as a result of
$507,000 net income for the period combined with a change in unrealized loss on
securities available-for-sale from $276,000 at April 30, 1997 to $177,000 at
June 30, 1997. At June 30, 1997, tangible, core and risk-based capital were
$30.1 million, or 11.4%, $30.1 million, or 11.4% and $31.7 million, or 24.5%,
respectively, which exceeded the requirements of 1.5%, 3.0% and 8.0%,
respectively. In addition, leveraged capital (Tier I capital to risk-weighted
assets) was $30.1 million, or 23.3% which exceeded the requirement of 4.0%.
Comparison of Operating Results for the Two Months Ended June 30, 1997 and June
30, 1996
General. Net income for the two months ended June 30, 1997 was
$507,000, a decrease of $70,000, from net earnings of $577,000 for the two
months ended June 30, 1996. The decrease was primarily due to a decrease of
$173,000 in net interest income as a result of increased cost of funds,
partially offset by a decrease in noninterest expense of $32,000 and a decrease
in income taxes of $73,000.
Interest Income. Interest income for the two months ended June 30, 1997
was $3.2 million compared to $3.3 million for the two months ended June 30,
1996, a decrease of $62,000, or 1.9%. The decrease resulted primarily from a
decrease in the average yield on interest-earning assets from 8.28% for the two
months ended June 30, 1996 to 7.68% for the two months ended June 30, 1997. This
was partially offset by an increase in the average balance of interest-earning
assets from $237.2 million for the two months ended June 30, 1996 to $250.9
million for the two months ended June 30, 1997. The average balance of loans
receivable increased from $149.8 million for the two months ended June 30, 1996
to $170.0 million for the two months ended June 30, 1997. The increase in the
average balance of loans receivable was a result of increased demand in the
Bank's market area. The decrease in the average yield on interest-earning assets
was primarily reflective of the decrease in the average yield on loans from
8.59% for the two months ended June 30, 1996 to 8.17% for the two months ended
June 30, 1997. This decrease was a result of repayments of higher rate loans and
the origination of lower yielding loans due to the current rate environment.
Interest Expense. Interest expense was $1.7 million for the two months
ended June 30, 1997 compared to $1.6 million for the two months ended June 30
1996, an increase of $111,000,
23
<PAGE>
or 7.1%. The increase was a result of the increase in the average balance of
interest-bearing liabilities combined with an increase in the average cost of
funds for the periods. The average balance of interest-bearing liabilities
increased from $212.7 for the two months ended June 30, 1996 to $222.5 million
for the two months ended June 30, 1997. The average cost of funds increased from
4.40% for the two months ended June 30, 1996 to 4.50% for the two months ended
June 30, 1997. The increase in the average cost of funds was a result of the
increases in the average balances being primarily in certificates of deposit and
FHLB advances which are at higher rates than the core deposits. The increase in
certificates of deposit was a result of increased market demand.
Net Interest Income. Net interest income was $1.5 million for the two
months ended June 30, 1997, a decrease of $173,000, or 10.1% from net interest
income of $1.7 million for the two months ended June 30, 1996. The decrease was
primarily a result of a decrease in the net interest margin from 4.34% for the
two months ended June 30, 1996 to 3.69% for the two months ended June 30, 1997.
In addition, the net interest spread decreased from 3.89% for the two months
ended June 30, 1996 to 3.18% for the two months ended June 30, 1997. Both
decreases were a result of an increase in the average cost of interest-bearing
liabilities and a decrease in the average yield of interest-earning assets.
Provision for Loan Losses. The Bank recorded a $41,000 provision for
loan losses for the two months ended June 30, 1997 and June 30, 1996. At June
30, 1997, the allowance for loan losses totaled $1.7 million, or .97% of total
loans and 87.0% of total non-performing loans. The amount of the provision and
allowance for estimated losses on loans is influenced by current economic
conditions, actual loss experience, industry trends and other factors, such as
adverse economic conditions, including real estate values, in the Bank's market
area. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for estimated
losses on loans. Such agencies may require the Bank to provide additions to the
allowance based upon judgments which differ from those of management. Although
management uses the best information available and maintains the Bank's
allowance for losses at a level it believes adequate to provide for losses,
future adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Bank's control.
Noninterest Income. Noninterest income for the two months ended June
30, 1997 was $98,000 compared to $100,000 for the two months ended June 30,
1996, a decrease of $2,000, or 2.0%.
Noninterest Expense. Noninterest expense was $824,000 for the two
months ended June 30, 1997 compared to $856,000 for the two months ended June
30, 1996, a decrease of $32,000, or 3.7%. The decrease was primarily a result of
a decrease in Federal insurance premiums of $56,000 as a result of a decrease in
rates due to the recapitalization of SAIF during 1996, combined with a decrease
in compensation and benefits of $99,000 primarily due to an employer profit
sharing contribution made in April 1997 of $105,000 compared to the contribution
being made in June of the prior year. These decreases were partially offset by
an increase in REO expense of $113,000.
24
<PAGE>
Income Tax Expense. The provision for income taxes totaled $270,000 for
the two months ended June 30, 1997 compared to $343,000 for the two months ended
June 30, 1996. The decrease was primarily due to a decrease in income before
income taxes of $143,000.
Comparison of Operating Results for the Six Months Ended June 30, 1997 and June
30, 1996
General. Net income for the six months ended June 30, 1997 was $1.3
million compared to net income of $1.6 million for the six months ended June 30,
1996, a decrease of $299,000, or 19.1%. The decrease was primarily a result of a
provision for loan losses of $615,000 for the six months ended June 30, 1997
compared to $83,000 for the six months ended June 30, 1996, combined with an
increase of $105,000 in noninterest expense. These increases were partially
offset by an increase of $141,000 in net interest income and a decrease of
$196,000 in income tax expense. The increase in the provision for loan losses
was a result of the Bennett Funding loans secured by leases as further discussed
herein.
Interest Income. Interest income for the six months ended June 30, 1997
was $9.7 million compared to $9.4 million for the six months ended June 30,
1996, an increase of $309,000, or 3.3%. The increase resulted from an increase
in the average balance of interest-earning assets from $233.9 million for the
six months ended June 30, 1996 to $249.1 million for the six months ended June
30, 1997, partially offset by a decrease in the average yield on
interest-earning assets. The average balance of loans receivable increased by
$19.2 million. The average yield on interest-earning assets decreased from 8.04%
for the six months ended June 30, 1996 to 7.80% for the six months ended June
30, 1997. The decrease was primarily a result of decreased yields on the loan
portfolio due to the repayment of older higher yielding loans and the
origination of lower yielding loans as a result of the current rate environment.
Interest Expense. Interest expense for the six months ended June 30,
1997 was $4.9 million compared to $4.7 million for the six months ended June 30,
1996, an increase of $168,000, or 3.6%. The increase in interest expense is
primarily the result of an increase in the average balance of interest-bearing
liabilities from $211.0 million for the six months ended June 30, 1996 to $220.7
million for the six months ended June 30, 1997 as a result of increased
deposits. This increase was partially offset by a decrease in the average cost
of funds from 4.47% for the six months ended June 30, 1996 to 4.43% for the six
months ended June 30, 1997. The decrease was primarily in certificates of
deposit.
Net Interest Income. Net interest income of $4.8 million for the six
months ended June 30, 1997 represented an increase of $141,000 from the $4.7
million reported for the six months ended June 30, 1996. There was a decrease in
the net interest spread from 3.56% for the six months ended June 30, 1996 to
3.37% for the six months ended June 30, 1997. The decrease in the net interest
rate spread was a result of the average yield of interest-earning assets
decreasing at a more rapid rate than the average cost of interest-bearing
liabilities. However, the ratio of average interest-earning assets to average
interest-bearing liabilities increased from 110.83% for the six months ended
June 30, 1996 to 112.86% for the six months ended June 30, 1997, and the net
interest margin decreased slightly from 4.00% to 3.87% for the same period.
25
<PAGE>
Provision for Loan Losses. The Bank's provision for loan losses for the
six months ended June 30, 1997 was $615,000 compared to $83,000 for the six
months ended June 30, 1996. The increase in the provision for loan losses was
primarily related to various loans to The Bennett Funding Group, Inc. (Bennett
Funding) which were secured by leases. Bennett Funding filed bankruptcy during
1996. The Bank had loans receivable from Bennett Funding of $839,000 at June 30,
1997. As of June 30, 1996, management had not determined whether the leases
securing the loans on their books were legally secured, or whether they were
fraudulent. No additional provision was made at that time as management
continued its investigation and awaited rulings from the bankruptcy court. The
Bank received a settlement offer in February 1997. As a result of the proposed
settlement, the Bank charged off $432,000 of the Bennett Funding loans, leaving
$839,000 of loans on the books. As part of the settlement, the Bank was to
receive a cash payment of $529,000. The remaining $310,000 was to be collected
through future payments from the lessees. Subsequent to June 30, 1997, the Bank
received $713,481 from the trustee as part of the settlement. However, at this
time management is unsure as to the full collectibility of the remaining payment
stream. In addition, the Bank has experienced significant loan growth during
1997. Gross loans increased $21.7 million, or 14.08% from 1996. Management
increases the allowance for loan losses for loan growth based on a statistical
percentage developed considering past loss experience and other factors
discussed below. The allowance for loan losses represented .97% and .60% of
gross loans receivable at June 30, 1997 and 1996, respectively. The amount of
the provision and allowance for estimated losses on loans is influenced by
current economic conditions, actual loss experience, industry trends and other
factors, such as adverse economic conditions, including real estate values, in
the Bank's market area. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's allowance for
estimated losses on loans. Such agencies may require the Bank to provide
additions to the allowance based upon judgments which differ from those of
management. Although management uses the best information available and
maintains the Bank's allowance for losses at a level it believes adequate to
provide for losses, future adjustments to the allowance may be necessary due to
economic, operating, regulatory and other conditions that may be beyond the
Bank's control.
Noninterest Income. Noninterest income for the six months ended June
30, 1997 was $295,000 compared to $294,000 for the six months ended June 30,
1996, representing fairly stable service charges and other noninterest income.
Noninterest Expense. Noninterest expense was $2.5 million for the six
months ended June 30, 1997 compared to $2.4 million for the six months ended
June 30, 1996, an increase of $105,000, or 4.4%. The increase was primarily due
to an increase in REO expense of $145,000, combined with an increase in data
processing expense of $13,000, occupancy and equipment expense of $10,000 and
various other items. These items were partially offset by a decrease in FDIC
insurance premiums of $195,000 due to a reduction in rates.
Income Taxes. The provision for income taxes was $750,000 for the six
months ended June 30, 1997 compared to $946,000 for the six months ended June
30, 1996. The decrease was primarily due to a decrease in pretax income of
$495,000.
26
<PAGE>
RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors before deciding whether to
purchase the Common Stock offered in the Offering.
Interest Rate Risk Exposure
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. When interest
rates rise, the Bank's net interest income tends to be adversely impacted since
its liabilities tend to reprice more quickly than its assets. Conversely, in a
declining rate environment the Bank's net interest income is generally
positively impacted since its assets tend to reprice more slowly than its
liabilities. Changes in the level of interest rates also affect the amount of
loans originated by the Bank and, thus, the amount of loan and commitment fees,
as well as the market value of the Bank's interest-earning assets. Moreover,
increases in interest rates also can result in disintermediation, which is the
flow of funds away from savings institutions into direct investments, such as
corporate securities and other investment vehicles, which generally pay higher
rates of return than savings institutions. Finally, a flattening of the "yield
curve" (i.e., a decline in the difference between long and short term interest
rates), could adversely impact net interest income to the extent that the Bank's
assets have a longer average term than its liabilities.
In managing its asset/liability mix, the Bank often, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, places more emphasis on managing net interest margin than
on better matching the interest rate sensitivity of its assets and liabilities
in an effort to enhance net interest income. In particular, because of customer
demand, a large majority of the Bank's residential loans carry fixed interest
rates. As a result, the Bank will continue to be significantly vulnerable to
changes in interest rates and to decreases in the difference between long and
short term interest rates.
The Bank has taken a number of steps to limit its sensitivity to
interest rate changes. Nevertheless, at March 31, 1997, the most recent date for
which data is available, the Bank's net portfolio value would have declined by
29% and 58%, respectively, in the event of instantaneous 200 and 400 basis point
increases in general interest rates. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Asset/Liability Management."
27
<PAGE>
Risks Associated with the Stock Contribution to a Charitable Foundation
The Stock Contribution is subject to the approval of the Bank's members
at the Special Meeting. If approved by members, the Stock Contribution will be
made within 12 months following the completion of the Conversion and will be
expensed when the Conversion is completed, which is expected in the fourth
quarter of 1997.
Negative Impact on Earnings. Assuming receipt of approval of the Bank's
members, the Stock Contribution will have an adverse impact on the Holding
Company's earnings. The Holding Company will recognize an expense in the amount
of the $2.5 million ($1.5 million net of taxes) in the quarter in which the
Conversion is completed, which is expected to be the fourth quarter of fiscal
1997. Such expense will reduce earnings and have a material adverse impact on
the Holding Company's earnings in the fiscal quarter and year recorded. The
Holding Company has been advised by its independent accountants that the Stock
Contribution will be tax deductible, subject to a limitation based on 10% of the
Holding Company's annual taxable income. If the Stock Contribution had been made
at April 30, 1997, the Bank would have reported a net loss of $739,000 for the
prior four month period rather than net income of $761,000.
In the future, the Holding Company may make additional contributions to
the Foundation, although the Holding Company has no current plans regarding the
amount or timing of any such future contributions. The amount of future
contributions, if any, will be determined based upon, among other factors, an
assessment of the Holding Company's then current financial position, operations,
and prospects and on the need for charitable activities in the Bank's market
area. Any such contributions, regardless of form, will result in an increase in
non-interest expense and thus a reduction in net earnings. In addition, any
contributions of authorized but unissued shares would dilute the interests of
outstanding shares. However, the Holding Company currently anticipates that any
contributions of shares by it to the Foundation will be funded through shares
repurchased in the open market. The Holding Company does not intend to make any
contributions to the Foundation which are not deductible for federal income tax
purposes.
Dilution of Stockholder's Interests. The Stock Contribution will
involve the donation of 250,000 shares of the Common Stock, or the sale of such
shares for their aggregate par value ($2,500), to the Foundation. Upon
completion of the Conversion and the Stock Contribution, the Holding Company
will have 5,095,000 shares issued and outstanding at the midpoint of the
Estimated Valuation Range, of which the Foundation will own 250,000 shares, or
4.9%. As a result, persons purchasing shares in the Conversion will have their
share ownership and voting interest in the Holding Company diluted by 4.9%. See
"Pro Forma Data."
Possible Nondeductibility of the Stock Contribution. The Internal Revenue
Service ("IRS") has determined that the Foundation is exempt from federal income
tax under Section 501(a) of the Code as an organization described in Section
501(c)(3) of the Code. As such, the Holding Company will be entitled to a
deduction in the amount of the Stock Contribution, subject to an annual
limitation based on 10% of the Holding Company's annual taxable income. The
Holding Company, however, would be able to carry forward any unused portion of
the deduction for five years following the Stock Contribution for Federal and
Illinois tax purposes. Based on present information, the Holding Company
currently estimates that the Stock Contribution should be fully deductible for
federal tax and Illinois purposes. However, no assurances can be made that the
Holding Company will have sufficient pre-tax income over the five-year period
following the year in which the Stock Contribution is made to utilize fully the
carryover related to the excess contribution.
Potential Change in Valuation and Capital if the Stock Contribution is
Not Made. The Stock Contribution was taken into account by FinPro in determining
the estimated pro forma market value of the Holding Company. The aggregate price
of the shares of Common Stock being offered in the Offering is based upon the
Appraisal. The pro forma aggregate price of the shares being offered for sale in
the Conversion is currently estimated to be between $41.2 million and $55.7
28
<PAGE>
million, with a midpoint of $48.5 million. The pro forma price to book value
ratio and the pro forma price to earnings ratio are 70.13% and 14.49x,
respectively, at the midpoint of the Estimated Valuation Range.
If the Stock Contribution is not part of the Conversion, the Estimated
Valuation Range of the shares being offered is estimated to be between $45.1
million and $61.0 million. This represents an increase of $4.6 million at the
midpoint of the Estimated Valuation Range. In such event the estimated pro forma
stockholders' equity of the Holding Company would be approximately $75.6 million
at the midpoint based on a pro forma price to book ratio of 70.13% and a pro
forma price to earnings ratio of 14.49x. See "Comparison of Valuation and Pro
Forma Information with No Stock Contribution."
The decrease in the amount of Common Stock being offered for sale as a
result of the Stock Contribution will not have a significant effect on the
Holding Company's or the Bank's capital position. The Bank's regulatory capital
is significantly in excess of its regulatory capital requirements and will
further exceed such requirements following the Conversion. The Bank's tangible,
core and risk-based capital ratios at April 30, 1997 were 11.4%, 11.4% and
24.4%, respectively. Assuming the sale of shares at the midpoint of the
Estimated Valuation Range, the Bank's pro forma tangible, core and risk-based
capital ratios at April 30, 1997 would be 17.7%, 17.7% and 38.8%, respectively.
On a consolidated basis, as of April 30, 1997, the Holding Company's pro forma
stockholders' equity would be $72.6 million, assuming the sale of shares at the
midpoint of the Estimated Valuation Range and contribution to the Foundation.
Pro forma stockholders' equity per share at April 30, 1997 and pro forma net
earnings per share for the four months ended April 30, 1997 would be $14.26 and
$0.23, respectively. If the Stock Contribution were not made in the Conversion,
based on the FinPro estimate, the Holding Company's pro forma stockholders'
equity would be approximately $75.6 million at the midpoint of the estimate and
pro forma stockholders' equity per share and pro forma net earnings per share
would be approximately the same with the Stock Contribution as without the Stock
Contribution. See "Comparison of Valuation and Pro Forma Information with No
Stock Contribution."
Potential Anti-Takeover Effect. If the Stock Contribution is approved
by the Bank's members, upon completion of the Conversion, assuming the sale of
the midpoint number of the Conversion shares of the Estimated Valuation Range,
the Foundation would own 4.9% of the Holding Company's outstanding shares. Such
shares will be owned solely by the Foundation; however pursuant to the terms of
the Stock Contribution as mandated by the OTS, the shares of Common Stock of the
Holding Company held by the Foundation must be voted in the same ratio as other
shares of the Holding Company's Common Stock on all proposals considered by the
stockholders of the Holding Company. See "The Conversion -- Stock Contribution
to Charitable Foundation -- Regulatory Conditions Imposed on the Foundation."
The Holding Company and the Foundation will take the necessary steps to provide
such requirement in the Foundation's corporate governance documents. As such,
the Holding Company does not believe the Foundation will have an anti-takeover
effect on the Holding Company. In the event that the OTS were to waive this
voting restriction, the Foundation's Board of Trustees would exercise sole
voting power over such shares and would no longer be subject to the voting
restriction. However, the OTS could impose additional conditions at that time on
the composition of the Board of the Foundation or which otherwise relate to
control of the Common Stock of the Holding Company held by the Foundation. See
"The Conversion -- the Stock Contribution to the Charitable Foundation --
Regulatory Conditions Imposed on the Foundation." If a waiver of the voting
restriction were granted by the OTS and no
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further conditions were imposed on the Foundation at that time, management of
the Holding Company and the Bank could benefit to the extent that the Board of
Trustees of the Foundation determines to vote the shares of Common Stock held by
the Foundation in favor of proposals supported by the Holding Company and the
Bank. Furthermore, when the Foundation's shares are combined with shares
purchased directly by executive officers and directors of the Holding Company,
shares issued pursuant to proposed stock benefit plans, and shares held in the
Bank's ESOP, the aggregate of such shares could exceed 20% of the Holding
Company's outstanding Common Stock, which could enable management to defeat
stockholder proposals requiring 80% approval. Consequently, this potential
voting control might preclude takeover attempts that other stockholders deem to
be in their best interest, and might tend to perpetuate management. Since the
ESOP shares are allocated to eligible employees of the Bank, and any unallocated
shares will be voted by an independent trustee, and because awards under the
proposed stock benefit plans may be granted to employees other than executive
officers and directors, management of the Holding Company does not expect to
have voting control of all shares held or to be allocated by the ESOP or other
stock benefit plans. See, "-- Certain Anti-Takeover Provisions Which May
Discourage Takeover Attempts -- Voting Control of Officers and Directors."
There are no agreements or understandings, written or tacit, with
respect to the exercise of either direct or indirect control over the management
or policies of the Holding Company by the Foundation, including agreements
related to voting, acquisition or disposition of the Holding Company's Common
Stock. Finally, as the Foundation sells its shares of Common Stock over time,
its ownership interest and voting power in the Holding Company is expected to
decrease.
Potential Challenges. The funding of a charitable foundation as part of
a conversion is innovative and has occurred on only a few other occasions. As
such, the Stock Contribution may be subject to potential challenges
notwithstanding that the Boards of Directors of the Holding Company and the Bank
have carefully considered the various factors involved in the establishment of
the Foundation in reaching their determination to make the Stock Contribution as
part of the Conversion. See "The Conversion--the Stock Contribution to the
Charitable Foundation" In conjunction with its approval of the Conversion, the
Bank determined to submit the Stock Contribution to a vote of members so that
members have a right to vote on whether the Stock Contribution should be made.
If an action were instituted seeking to require the Bank to eliminate the Stock
Contribution in connection with the Conversion, no assurances can be made that
the resolution of such action would not result in a delay in the consummation of
the Conversion or that any objecting persons would not be ultimately successful
in obtaining such removal or other equitable relief or monetary damages against
the Holding Company or the Bank. Additionally, if the Holding Company and the
Bank are forced to eliminate the Stock Contribution, the Holding Company may be
required to resolicit subscribers in the Offering.
Approval of Members. The Stock Contribution is subject to the approval
of a majority of the total outstanding votes of the Bank's members eligible to
be cast at the Special Meeting. The Stock Contribution will be considered as a
separate matter from the proposal to approve the Plan of Conversion. If the
Bank's members approve the Plan of Conversion, but not the Stock Contribution,
the Bank intends to complete the Conversion without the Stock Contribution.
Failure to approve the Stock Contribution may materially increase the pro forma
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market value of the Common Stock being offered for sale in the Offering since
the Estimated Valuation Range, as set forth herein, takes into account the
expense related to the Stock Contribution. If the pro forma market value of the
shares of Holding Company stock to be sold without the Stock Contribution is
either greater than $64.1 million or less than $41.2 million or if the OTS
otherwise requires a resolicitation of subscribers, the Bank will establish a
new Estimated Valuation Range and commence a resolicitation of subscribers
(i.e., subscribers will be permitted to continue or modify their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded with interest.) Any change in the Estimated Valuation
Range must be approved by the OTS. "See The Conversion-- Stock Pricing."
Competition
First Security experiences significant competition in its local market
area in both originating real estate and other loans and attracting deposits.
This competition arises from other savings institutions as well as credit
unions, mortgage banks, commercial banks, mutual funds and, national and local
securities firms. Due to their size, many competitors can achieve certain
economies of scale and as a result offer a broader range of products and
services than the Bank. The Bank attempts to mitigate the effect of such factors
by emphasizing customer service and community outreach. Such competition may
limit First Security's growth in the future. See "Business - Competition."
Geographic Concentration of Business Activities
The Bank's lending and deposit gathering activities are focused
primarily on selected communities of the greater Chicago and Philadelphia areas.
In the event that such communities experienced an economic slow down or a
decline in real estate values, the Bank's results of operations could be
materially adversely affected. See "Business -- Market Area."
Takeover Defensive Provisions
Holding Company and Bank Governing Instruments. Certain provisions of
the Holding Company's Certificate of Incorporation and Bylaws assist the Holding
Company in maintaining its status as an independent publicly owned corporation.
However, such provisions may also block stockholders from approving a potential
takeover of the Holding Company which a majority of such stockholders believe to
be in their best interests. These provisions provide for, among other things,
limiting voting rights of beneficial owners of more than 10% of the Common
Stock, staggered terms for directors, noncumulative voting for directors, limits
on the calling of special meetings, a fair price/supermajority vote requirement
for certain business combinations and certain notice requirements. The 10% vote
limitation would not affect the ability of an individual who is not the
beneficial owner of more than 10% of the Common Stock to solicit revocable
proxies in a public solicitation for proxies for a particular meeting of
stockholders and to vote such proxies. In addition, provisions in the Bank's
federal stock Charter that have an anti-takeover effect could also be applicable
to changes in control of the Holding Company as the sole shareholder of the
Bank. The Bank's Charter includes a provision applicable for five years which
prohibits acquisitions and offers to acquire, directly or indirectly, the
beneficial ownership of more than 10% of the Bank's securities. Any person
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violating this restriction may not vote the Bank's securities in excess of 10%.
Any or all of these provisions may discourage potential proxy contests and other
takeover attempts, particularly those which have not been negotiated with the
Board of Directors. In addition, the Holding Company's certificate of
incorporation also authorizes preferred stock with terms to be established by
the Board of Directors which may rank prior to the Common Stock as to dividend
rights, liquidation preferences, or both, may have full or limited voting rights
and may have a dilutive effect on the ownership interests of holders of the
Common Stock. See "Restrictions on Acquisitions of Stock and Related Takeover
Defensive Provisions."
Regulatory and Statutory Provisions. Federal regulations prohibit, for
a period of three years following the completion of the Conversion, any person
from offering to acquire or acquiring the beneficial ownership of more than 10%
of the stock of a converted savings institution or its holding company without
prior OTS approval. Federal law also requires OTS approval prior to the
acquisition of "control" (as defined in OTS regulations) of an insured
institution, including a holding company thereof. See "Restrictions on
Acquisitions of Stock and Related Takeover Defensive Provisions."
Employment Agreement, Severance Agreements and Other Benefit Plans. The
employment agreement, severance agreements, the proposed Stock Option Plan and
the proposed RRP also contain provisions that could have the effect of
discouraging takeover attempts of the Holding Company.
The Bank intends to enter into an employment agreement with President
Kulas and severance agreements with four other executive officers. The
employment agreement provides for an annual base salary in an amount not less
than the employee's current salary and an initial term of three years. The
agreement may be extended for an additional year on each annual anniversary
date, but only if such extensions are approved by the Board of Directors. The
employment agreement also provides for payment of the employee's salary to the
employee for the remainder of the term of the agreement, plus an additional
amount, the sum of which will not exceed a percentage of the employee's base
compensation, in the event there is a "change in control" of the Bank (as
defined in the agreement) where employment terminates involuntarily in
connection with such change in control or within 12 months thereafter.
The Bank also intends to enter into change in control severance
agreements with four other executive officers. Such agreements become effective
upon completion of the Conversion and have initial terms of 24 months. In the
event the officer is terminated following a change in control (as defined in the
agreements), such officer will be entitled to a severance payment equal to 200%
of such employee's annual compensation. Finally, the Bank intends to adopt a
Severance Compensation Plan providing other employees with certain severance
benefits in the event they are terminated within 12 months following a change in
control. For more information regarding these agreements, see "Management -
Executive Compensation."
Possible Dilutive Effects. The issuance of additional shares pursuant
to the proposed Stock Option Plan and RRP will result in a dilution in the
percentage of ownership of the Holding Company of those persons purchasing
Common Stock in the Conversion, assuming that the shares utilized to fund the
proposed Stock Option Plan and RRP awards come from authorized but unissued
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shares. Assuming the exercise of all options available under the Stock Option
Plan and the award of all shares available under the RRP, and assuming the use
of authorized but unissued shares, the interest of stockholders will be diluted
by up to 9.1% and 3.8%, respectively. See "Pro Forma Data," "Management -
Benefit Plans - Stock Option and Incentive Plan," and "- Recognition and
Retention Plan" and "Restrictions on Acquisitions of Stock and Related Takeover
Defensive Provisions." For financial accounting purposes, grants under the
proposed RRP will result in the recording of compensation expense over the
vesting period. See "Pro Forma Data."
Voting Control of Directors and Executive Officers. The directors and
executive officers (13 persons) of the Bank are anticipated to purchase an
aggregate of approximately $2.1 million or approximately 5.1% of the shares
offered in the Conversion at the minimum of the Estimated Valuation Range, or
3.8% of the shares offered in the Conversion at the maximum of the Estimated
Valuation Range, exclusive of shares that may be attributable to directors and
officers through the RRP, the Stock Option Plan and the ESOP, which may give
directors, executive officers and employees the potential to control the voting
of additional Common Stock. In addition, in connection with the Conversion the
Foundation will receive 250,000 shares of Common Stock which, if a waiver of the
voting restriction imposed on such Common Stock is obtained from the OTS, may be
voted as determined by the Trustees of the Foundation who also will be directors
or officers of the Holding Company and the Bank. Management's voting control
could, together with additional stockholder support, defeat stockholder
proposals requiring 80% approval of stockholders. As a result, this voting
control may preclude takeover attempts that certain stockholders deem to be in
their best interest and tend to perpetuate existing management. See
"Restrictions on Acquisition of the Holding Company and the Bank--Restrictions
in the Holding Company's Certificate of Incorporation and Bylaws."
Post Conversion Overhead Expense
After completion of the Conversion, the Holding Company's noninterest
expense is likely to increase as a result of the financial accounting, legal and
tax expenses usually associated with operating as a public company. See
"Regulation - Federal and State Taxation" and "Additional Information." In
addition, it is currently anticipated that the Holding Company will record
additional expense based on the proposed RRP. See "Pro Forma Data" and
"Management - Benefit Plans Recognition and Retention Plan." Finally, the
Holding Company will also record additional expense as a result of the adoption
of the ESOP. See "Management - Benefit Plans - Employee Stock Ownership Plan."
Statement of Position 93-6 "Employers' Accounting for Employee Stock
Ownership Plans" ("SOP 93-6") requires an employer to record compensation
expense in an amount equal to the fair value of shares committed to be released
to employees from an employee stock ownership plan. Assuming shares of Common
Stock appreciate in value over time, SOP 93-6 would increase compensation
expense relating to the ESOP to be established in connection with the
Conversion. It is not possible to determine at this time the extent of such
impact on future net income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Impact of New Accounting
Standards" and "Pro Forma Data."
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In addition, the Company will experience additional expense in the
quarter in which the Conversion is completed as a result of the Stock
Contribution. See "The Conversion--Stock Contribution to the Charitable
Foundation."
Regulatory Oversight
The Bank is subject to extensive regulation, supervision and
examination by the OTS as its chartering authority and primary federal
regulator, and by the FDIC, which insures its deposits up to applicable limits.
The Bank is a member of the Federal Home Loan Bank (the "FHLB") of Chicago and
is subject to certain limited regulation by the Board of Governors of the
Federal Reserve System ("Federal Reserve Board"). As the savings and loan
holding company of the Bank, the Holding Company will be subject to regulation
and oversight by the OTS. See "Regulation." Such regulation and supervision
governs the activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. Regulatory
authorities have been granted extensive discretion in connection with their
supervisory and enforcement activities which are intended to strengthen the
financial condition of the banking industry, including the imposition of
restrictions on the operation of an institution, the classification of assets by
the institution, the adequacy of an institution's capital and allowance for loan
losses and the assessment of fees to protect the insurance funds. See
"Regulation - Federal Regulation of Savings Associations" and "- Regulatory
Capital Requirements." Any change in such regulation and oversight, whether by
the OTS, the Federal Reserve Board, the FDIC or Congress, could have a material
impact on the Holding Company, the Bank and their respective operations.
Risk of Delay in Completion of the Offering
The Subscription Offering will expire at ____, Chicago, Illinois time,
on _____ __, 1997 unless extended by the Bank and the Holding Company. Depending
on the availability of shares and market conditions at or near the completion of
the Subscription Offering, the Holding Company may conduct a Public Offering
through FBR. If the Offering is extended beyond ___ _, 1997, all subscribers
will have the right to modify or rescind their subscriptions and to have their
subscription funds returned with interest. There can be no assurance that the
Offering will not be extended as set forth above.
A material delay in the completion of the sale of all unsubscribed
shares in the Public Offering or otherwise may result in a significant increase
in the costs in completing the Conversion. Significant changes in the Bank's
operations and financial condition, the aggregate market value of the shares to
be issued in the Conversion and general market conditions may occur during such
material delay. In the event the Conversion is not consummated within 24 months
after the date of the Special Meeting, OTS regulations would require the Bank to
charge accrued Conversion costs to then-current period operations. See "The
Conversion - Risk of Delay in Completion of the Offering."
Absence of Active Market for the Common Stock
The Holding Company, as a newly organized company, has never issued
capital stock. Consequently, there is not at this time any market for the Common
Stock. The Holding Company has applied for listing of the Common Stock on the
Nasdaq Stock Market under the symbol "____." FBR has agreed to act as a
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market maker and to assist the Holding Company in securing additional market
makers to make a market in the Common Stock. However, there can be no assurance
that at least three market makers will be obtained, that the Bank will receive
final approval for listing on the Nasdaq Stock Market, that an active and liquid
market for the Common Stock will develop or be maintained or that resales of the
Common Stock can be made at or above the Purchase Price. If additional market
makers are not secured or subsequently stop coverage, the Common Stock may not
be listed on the Nasdaq Stock Market (or if initially listed, may be delisted),
which could reduce the activity and liquidity in the market for the Common
Stock. See "Market for Common Stock."
FIRST SECURITYFED FINANCIAL, INC.
The Holding Company was formed at the direction of First Security in
July 1997 for the purpose of becoming a savings and loan holding company and
owning all of the outstanding stock of the Bank issued in the Conversion. The
Holding Company is incorporated under the laws of the State of Delaware. The
Holding Company is authorized to do business in the State of Illinois, and
generally is authorized to engage in any activity that is permitted by the
Delaware General Corporation Law. The business of the Holding Company initially
will consist only of the business of First Security. The holding company
structure will, however, provide the Holding Company with greater flexibility
than the Bank has to diversify its business activities, through existing or
newly formed subsidiaries, or through acquisitions or mergers of stock financial
institutions, as well as, other companies. Although there are no current
arrangements, understandings or agreements regarding any such activity or
acquisition, the Holding Company will be in a position after the Conversion,
subject to regulatory restrictions, to take advantage of any favorable
acquisition opportunities that may arise.
The assets of the Holding Company will consist initially of the stock
of First Security, a note evidencing the Holding Company's loan to the ESOP and
up to 50% of the net proceeds from the Conversion (less the amount used to fund
the ESOP loan). See "Use of Proceeds." Initially, any activities of the Holding
Company are anticipated to be funded by such retained proceeds and the income
thereon and dividends from First Security, if any. See "Dividends" and
"Regulation Holding Company Regulation." Thereafter, activities of the Holding
Company may also be funded through sales of additional securities, through
borrowings and through income generated by other activities of the Holding
Company. At this time, there are no plans regarding such other activities other
than the intended loan to the ESOP to facilitate its purchase of Common Stock in
the Conversion. See "Management - Benefit Plans - Employee Stock Ownership
Plan."
The executive office of the Holding Company is located at 936 North
Western Avenue, Chicago, Illinois 60622-4695. Its telephone number at that
address is (773) ___-____.
FIRST SECURITY
First Security serves the financial needs of communities in its market
area through its main office located at 936 North Western Avenue, Chicago,
Illinois and its branch offices located in Chicago, Illinois, Philadelphia,
Pennsylvania and Rolling Meadows, Illinois. Its deposits are insured up to
applicable limits by the Federal Deposit Insurance Corporation ("FDIC"). At
April 30, 1997, First Security had total assets of $260.0 million, deposits of
$219.0 million and equity of $30.0 million (or 11.54% of total assets).
First Security has been, and intends to continue to be, an independent,
community oriented, financial institution. First Security's business involves
attracting deposits from the general public and using such deposits, together
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with other funds, to originate one- to four-family residential mortgage loans
and, to a lesser extent, multi-family and commercial real estate, consumer and
other loans primarily in its market area. At April 30, 1997, $137.5 million, or
81.32%, of the Bank's total loan portfolio consisted of residential one- to
four-family mortgage loans. See "Business - Lending Activities." The Bank also
invests in mortgage-backed and other securities and other permissible
investments. See "Business - Investment Activities - Securities" and "-
Mortgage-Backed and Related Securities."
The executive office of the Bank is located at 936 North Western
Avenue, Chicago, Illinois 60662-4695. Its telephone number at that address is
(773) 772-4500.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is completed, it is presently
anticipated that such net proceeds will be between $40.3 million and $54.7
million (or up to $63.0 million in the event of an increase in the aggregate pro
forma market value of the Common Stock of up to 15% above the maximum of the
Estimated Valuation Range). See "Pro Forma Data" and "The Conversion - Stock
Pricing and Number of Shares to be Issued" as to the assumptions used to arrive
at such amounts.
In exchange for all of the common stock of First Security issued in the
Conversion, the Holding Company will contribute approximately 50% of the net
proceeds from the sale of the Holding Company's Common Stock to First Security.
On an interim basis, the proceeds will be invested by the Holding Company and
First Security in short-term investments similar to those currently in the
Bank's portfolio. The specific types and amounts of short-term assets will be
determined based on market conditions at the time of the completion of the
Conversion. In addition, the Holding Company intends to provide the funding for
the ESOP loan. Based upon the initial Purchase Price of $10.00 per share, the
dollar amount of the ESOP loan would range from $3.3 million (based upon the
sale of shares at the minimum of the Estimated Valuation Range) to $4.5 million
(based upon the sale of shares at the maximum of the Estimated Valuation Range).
The interest rate to be charged by the Holding Company on the ESOP loan will be
based upon the IRS prescribed applicable federal rate at the time of
origination. It is anticipated that the ESOP will repay the loan through
periodic tax-deductible contributions from the Bank over a ten-year period.
The net proceeds received by First Security will become part of First
Security's general funds for use in its business and will be used to support the
Bank's existing operations, subject to applicable regulatory restrictions.
Immediately upon the completion of the Conversion, it is anticipated that the
Bank will invest such proceeds into short-term assets. Subsequently, the Bank
will redirect the net proceeds to the origination of loans, subject to market
conditions.
After the completion of the Conversion, the Holding Company will
redirect the net proceeds invested by it in short-term assets into a variety of
mortgage-backed securities and other securities similar to those already held by
the Bank. Also, the Holding Company may use a portion of the proceeds to fund
the RRP, subject to shareholder approval of such plan. Compensation expense
related to the RRP will be recognized as share awards vest. See "Pro Forma
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Data." Following stockholder ratification of the RRP, the RRP will be funded
either with shares purchased in the open market or with authorized but unissued
shares. Based upon the initial Purchase Price of $10.00 per share, the amount
required to fund the RRP through open-market purchases would range from
approximately $1.6 million (based upon the sale of shares at the minimum of the
Estimated Valuation Range) to approximately $2.2 million (based upon the sale of
shares at the maximum of the Estimated Valuation Range). In the event that the
per share price of the Common Stock increases above the $10.00 per share
Purchase Price following completion of the Offering, the amount necessary to
fund the RRP would also increase. The use of authorized but unissued shares to
fund the RRP could dilute the holdings of stockholders who purchase Common Stock
in the Conversion. See "Business Lending Activities" and " - Investment
Activities" and "Management - Benefit Plans - Employee Stock Ownership Plan" and
"- Recognition and Retention Plan."
The proceeds may also be utilized by the Holding Company to repurchase
(at prices which may be above or below the initial offering price) shares of the
Common Stock through an open market repurchase program subject to limitations
contained in OTS regulations, although the Holding Company currently has no
specific plan to repurchase any of its stock. In the future, the Board of
Directors of the Holding Company will make decisions on the repurchase of the
Common Stock based on its view of the appropriateness of the price of the Common
Stock as well as the Holding Company's and the Bank's investment opportunities
and capital needs. Under current OTS regulations, no repurchases may be made
within the first year following Conversion except with OTS approval under
"exceptional circumstances." During the second and third years following
Conversion, OTS regulations permit, subject to certain limitations, the
repurchase of up to five percent of the outstanding shares of stock during each
twelve-month period with a greater amount permitted with OTS approval. In
general, the OTS regulations do not restrict repurchases thereafter, other than
limits on the Bank's ability to pay dividends to the Holding Company to fund the
repurchase. For a description of the restrictions on the Bank's ability to
provide the Holding Company with funds through dividends or other distributions,
see "Dividends" and "The Conversion Restrictions on Repurchase of Stock."
The Bank may use a portion of the proceeds to fund the creation of one
or more new branch offices within the greater Chicago or Philadelphia areas,
although the Bank has no specific plans regarding any new branch offices at the
time. In addition, the Holding Company or First Security might consider
expansion through the acquisition of other financial services providers (or
branches, deposits or assets thereof), although there are no specific plans,
negotiations or written or oral agreements regarding any acquisitions at this
time.
DIVIDENDS
The Holding Company currently has no plans to pay dividends. However,
the Holding Company's Board of Directors may consider a policy of paying
dividends in the future. Dividends, when and if paid, will be subject to
determination and declaration by the Board of Directors at its discretion. They
will take into account the Holding Company's consolidated financial condition,
the Bank's regulatory capital requirements, including the fully phased-in
capital requirements, tax considerations, industry standards, economic
conditions, regulatory restrictions, general business practices and other
factors. The Holding Company may also consider making a one time only special
dividend or distribution (including a tax-free return of capital) provided that
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the Holding Company will take no steps toward making such a distribution for at
least one year following the completion of the Conversion.
It is not presently anticipated that the Holding Company will conduct
significant operations independent of those of First Security for some time
following the Conversion. As such, the Holding Company does not expect to have
any significant source of income other than earnings on the net proceeds from
the Conversion retained by the Holding Company (which proceeds are currently
estimated to range from $20.1 million to $27.3 million based on the minimum and
the maximum of the Estimated Valuation Range, respectively) and dividends from
First Security, if any. Consequently, the ability of the Holding Company to pay
cash dividends to its stockholders will be dependent upon such retained proceeds
and earnings thereon, and upon the ability of First Security to pay dividends to
the Holding Company. See "Description of Capital Stock - Holding Company Capital
Stock - Dividends." First Security, like all savings associations regulated by
the OTS, is subject to certain restrictions on the payment of dividends based on
its net income, its capital in excess of the regulatory capital requirements and
the amount of regulatory capital required for the liquidation account to be
established in connection with the Conversion. See "The Conversion - Effects of
Conversion to Stock Form on Depositors and Borrowers of the Bank - Liquidation
Rights in Proposed Converted Institution" and "Regulation - Regulatory Capital
Requirements" and "- Limitations on Dividends and Other Capital Distributions."
Earnings allocated to First Security's "excess" bad debt reserves and deducted
for federal income tax purposes cannot be used by First Security to pay cash
dividends to the Holding Company without adverse tax consequences. See
"Regulation - Federal and State Taxation."
MARKET FOR COMMON STOCK
First Security, as a mutual thrift institution, and the Holding
Company, as a newly organized company, have never issued capital stock.
Consequently, there is not at this time an existing market for the Common Stock.
The Holding Company has applied for listing of the Common Stock on the Nasdaq
Stock Market under the symbol "____" upon completion of the Conversion. In order
to be quoted on the Nasdaq Stock Market, among other criteria, there must be at
least three market makers for the Common Stock. FBR has agreed, subject to
certain conditions, to act as a market maker for the Holding Company's Common
Stock following the Conversion, and assist in securing additional market makers
to do the same. A public trading market having the desirable characteristics of
depth, liquidity and orderliness depends upon the presence in the marketplace of
both willing buyers and sellers of the Common Stock at any given time.
Accordingly, there can be no assurance that an active and liquid market for the
Common Stock will develop or be maintained or that resales of the Common Stock
can be made at or above the Purchase Price. See "The Conversion - Stock Pricing
and Number of Shares to be Issued."
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PRO FORMA DATA
The following table sets forth the historical net income, equity and
per share data of First Security at and for the four months ended April 30, 1997
and the fiscal year ended December 31, 1996, and after giving effect to the
Conversion, the pro forma net income, capital stock and stockholders' equity and
per share data of the Holding Company at and for the four months ended April 30,
1997 and the fiscal year ended December 31, 1996. The pro forma data has been
computed on the assumptions that (i) the specified number of shares of Common
Stock was sold at the beginning of the specified periods and yielded net
proceeds to the Holding Company as indicated, (ii) 250,000 shares were donated
to the Foundation upon the completion of the Conversion, (iii) 50% of such net
proceeds were retained by the Holding Company and the remainder were used to
purchase all of the stock of First Security, and (iv) such net proceeds, less
the amount of the ESOP and RRP funding, were invested by the Bank and Holding
Company at the beginning of the periods to yield a pre-tax return of 5.90% for
the four months ended April 30, 1997 and for the fiscal year ended December 31,
1996. The after-tax rate of return is 3.54% assuming a combined federal and
state income tax rate of 40%. The assumed return is based upon the market yield
rate of one-year U.S. Government Treasury Securities as of April 30, 1997. The
use of this current rate is viewed to be more relevant in the current interest
rate environment than the use of an arithmetic average of the weighted average
yield earned by the Bank on its interest-earning assets and the weighted average
rate paid on its deposits during such periods. In calculating the underwriting
fees to be paid as part of the Offering, the table assumes that (i) no
commission was paid on $2.1 million of shares sold to directors, officers and
employees, (ii) 8% of the total shares sold in the Conversion were sold to the
ESOP at no commission, and (iii) the remaining shares were sold at a 1.0%
commission. (These assumptions represent management's estimate as to the
distribution of stock orders in the Conversion. However, there can be no
assurance that such estimate will be accurate and that a greater proportion of
shares will not be sold at a higher commission, thus increasing offering
expenses.) Fixed expenses are estimated to be $540,000. Actual Conversion
expenses may be more or less than those estimated because the fees paid to FBR
and other brokers will depend upon the categories of purchasers, the Purchase
Price and market conditions and other factors. The pro forma net income amounts
derived from the assumptions set forth herein should not be considered
indicative of the actual results of operations of the Holding Company that would
have been attained for any period if the Conversion had been actually
consummated at the beginning of such period, and the assumptions regarding
investment yields should not be considered indicative of the actual yields
expected to be achieved during any future period.
The total number of shares to be issued in the Conversion may be
increased or decreased significantly, or the price per share decreased, to
reflect changes in market and financial conditions prior to the close of the
Offering. However, if the aggregate Purchase Price of the Common Stock sold in
the Conversion is below $41,180,000 (the minimum of the Estimated Valuation
Range) or more than $64,080,000 (15% above the maximum of the Estimated
Valuation Range), subscribers will be offered the opportunity to modify or
cancel their subscriptions. See "The Conversion - Stock Pricing and Number of
Shares to be Issued."
39
<PAGE>
The following table assumes that the Stock Contribution is approved as
part of the Conversion and therefore gives effect to the issuance of authorized
but unissued shares of the Holding Company's Common Stock to the Foundation
concurrently with the completion of the Conversion.
<TABLE>
<CAPTION>
At or For the Four Months Ended April 30, 1997
---------------------------------------------------------------
15% Above
Minimum Midpoint Maximum Maximum
4,118,000 4,845,000 5,572,000 6,408,000
Shares Sold at Shares Sold at Shares Sold at Shares Sold at
$10.00 per $10.00 per $10.00 per $10.00 per
Share Share Share Share
----- ----- ----- -----
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds ..................................................... $ 41,180 $ 48,450 $ 55,720 $ 64,080
Plus: Shares issued to Foundation(1) ............................... 2,500 2,500 2,500 2,500
----------- ----------- ----------- -----------
Pro forma market capitalization .................................... $ 43,680 $ 50,950 $ 58,220 $ 66,580
=========== =========== =========== ===========
Gross proceeds ..................................................... $ 41,180 $ 48,450 $ 55,720 $ 64,080
Less offering expenses and commissions ............................. 898 965 1,032 1,109
----------- ----------- ----------- -----------
Estimated net conversion proceeds ................................. 40,282 47,485 54,688 62,971
Less ESOP shares ................................................... (3,294) (3,876) (4,458) (5,126)
Less RRP shares .................................................... (1,647) (1,938) (2,229) (2,563)
----------- ----------- ----------- -----------
Estimated proceeds available for investment(2) .................... $ 35,341 $ 41,671 $ 48,001 $ 55,282
=========== =========== =========== ===========
Net Income:
Historical ....................................................... $ 761 $ 761 $ 761 $ 761
Pro Forma Adjustments:
Net earnings from proceeds(3) ................................... 417 492 566 652
ESOP(4) ......................................................... (66) (78) (89) (103)
RRP(5) .......................................................... (66) (78) (89) (103)
----------- ----------- ----------- -----------
Pro forma net income(6) ....................................... $ 1,046 $ 1,097 $ 1,149 $ 1,207
=========== =========== =========== ===========
Net Income Per Share:
Historical(7) .................................................. $ 0.19 $ 0.17 $ 0.15 $ 0.12
Pro forma Adjustments:
Net earnings from proceeds .................................... 0.10 0.10 0.10 0.11
ESOP(3) ....................................................... (0.02) (0.02) (0.02) (0.02)
RRP(5) ........................................................ (0.02) (0.02) (0.02) (0.02)
----------- ----------- ----------- -----------
Pro forma net income per share(5) ......................... $ 0.25 $ 0.23 $ 0.21 $ 0.19
=========== =========== =========== ===========
Ratio of offering price to pro forma net income per share
(annualized) ............................................... 13.33x 14.49x 15.87x 17.54x
Number of shares Used in calculating EPS(4).................... 4,049,541 4,720,320 5,391,099 6,162,448
Stockholders' Equity (Book Value)(8):
Historical ....................................................... $ 29,950 $ 29,950 $ 29,950 $ 29,950
Pro Forma Adjustments:
Estimated net Conversion proceeds ................................ 40,282 47,485 54,688 62,971
Plus: Tax benefit of Stock Contribution .......................... 1,000 1,000 1,000 1,000
Less: Common stock acquired by:
ESOP(4) ......................................................... (3,294) (3,876) (4,458) (5,126)
RRP(5) .......................................................... (1,647) (1,938) (2,229) (2,563)
----------- ----------- ----------- -----------
Pro forma stockholder's equity(5) ........................... $ 66,291 $ 72,621 $ 78,951 $ 86,232
=========== =========== =========== ===========
Stockholders' Equity (Book Value)(8):
Per Share(7):
Historical ....................................................... $ 6.86 $ 5.88 $ 5.14 $ 4.50
Pro Forma Adjustments:
Estimated net Conversion proceeds ................................ 9.22 9.32 9.39 9.46
Plus: Tax benefit of Stock Contribution .......................... 0.23 0.20 0.17 0.15
Less: Common stock acquired by:
ESOP(4) ......................................................... (0.75) (0.76) (0.77) (0.77)
RRP(5) .......................................................... (0.38) (0.38) (0.38) (0.38)
----------- ----------- ----------- -----------
Pro forma book value per share(6) ........................... $ 15.18 $ 14.26 $ 13.55 $ 12.96
=========== =========== =========== ===========
Pro forma price to book value ...................................... 65.88% 70.13% 73.80% 77.16%
Number of shares (including Foundation shares) ..................... 4,368,000 5,095,000 5,822,000 6,658,000
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1996
-------------------------------------------------------------
15% Above
Minimum Midpoint Maximum Maximum
4,118,000 4.845,000 5,572,000 6,408,000
Shares Sold at Shares Sold at Shares Sold at Shares Sold at
$10.00 per $10.00 per $10.00 per $10.00 per
Share Share Share Share
----- ----- ----- -----
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds ..................................................... $ 41,180 $ 48,450 $ 55,720 $ 64,080
Plus: Shares issued to Foundation(1) ............................... 2,500 2,500 2,500 2,500
----------- ----------- ----------- -----------
Pro forma market capitalization .................................... $ 43,680 $ 50,950 $ 58,220 $ 66,580
=========== =========== =========== ===========
Gross proceeds ..................................................... $ 41,180 $ 48,450 $ 55,720 $ 64,080
Less offering expenses and commissions ............................. 898 965 1,032 1,109
----------- ----------- ----------- -----------
Estimated net conversion proceeds ................................. 40,282 47,485 54,688 62,971
Less ESOP shares ................................................... (3,294) (3,876) (4,458) (5,126)
Less RRP shares .................................................... (1,647) (1,938) (2,229) (2,563)
----------- ----------- ----------- -----------
Estimated proceeds available for investment(2) .................... $ 35,341 $ 41,671 $ 48,001 $ 55,282
=========== =========== =========== ===========
Net Income(9):
Historical ....................................................... $ 452 $ 452 $ 452 $ 452
Pro Forma Adjustments:
Net earnings from proceeds(3) ................................... 1,251 1,475 1,699 1,957
ESOP(4) ......................................................... (198) (233) (267) (308)
RRP(4) .......................................................... (198) (233) (267) (308)
----------- ----------- ----------- -----------
Pro forma net income(6) ....................................... $ 1,307 $ 1,461 $ 1,617 $ 1,793
=========== =========== =========== ===========
Net Income Per Share(9):
Historical(7) .................................................. $ 0.11 $ 0.10 $ 0.08 $ 0.07
Pro forma Adjustments:
Net earnings from proceeds .................................... 0.31 0.31 0.31 0.32
ESOP(3) ....................................................... (0.05) (0.05) (0.05) (0.05)
RRP(5) ........................................................ (0.05) (0.05) (0.05) (0.05)
----------- ----------- ----------- -----------
Pro forma net income per share(5) ......................... $ 0.32 $ 0.31 $ 0.29 $ 0.29
=========== =========== =========== ===========
Ratio of offering price to pro forma net income per share ..... 31.25x 32.26x 34.48x 34.48x
Number of shares used in calculating EPS(4) ............... 4,071,504 4,746,160 5,420,816 6,196,624
Stockholders' Equity (Book Value)(8):
Historical
Pro Forma Adjustments: ............................................. $ 29,261 $ 29,261 $ 29,261 $ 29,261
Estimated net Conversion proceeds ................................ 40,282 47,485 54,688 62,971
Plus: Tax benefit of Stock Contribution .......................... 1,000 1,000 1,000 1,000
Less: Common stock acquired by:
ESOP(4) ......................................................... (3,294) (3,876) (4,458) (5,126)
RRP(5) .......................................................... (1,647) (1,938) (2,229) (2,563)
----------- ----------- ----------- -----------
Pro forma stockholders' equity(5) ........................... $ 65,602 $ 71,932 $ 78,262 $ 85,543
=========== =========== =========== ===========
Stockholders' Equity (Book Value)(8):
Per Share(7):
Historical ....................................................... $ 6.70 $ 5.74 $ 5.03 $ 4.39
Pro Forma Adjustments:
Estimated net Conversion proceeds ................................ 9.22 9.32 9.39 9.46
Plus: Tax benefit of Stock Contribution .......................... 0.23 0.20 0.17 0.15
Less: Common stock acquired by:
ESOP(4) ......................................................... (0.75) (0.76) (0.77) (0.77)
RRP(5) .......................................................... (0.38) (0.38) (0.38) (0.38)
----------- ----------- ----------- -----------
Pro forma book value per share(6) ........................... $ 15.02 $ 14.12 $ 13.44 $ 12.85
=========== =========== =========== ===========
Offering Price Per Share as a Percentage of Pro Forma
Stockholders' Equity Per Share .................................. 66.58% 70.82% 74.40% 77.82%
Number of shares (including Foundation shares) ..................... 4,368,000 5,095,000 5,822,000 6,658,000
</TABLE>
- ----------
(1) Subject to member approval, the Holding Company intends to contribute
250,000 shares to the Foundation within 12 months following the completion
of the Conversion. See "The Conversion--Stock Contribution to the
Charitable Foundation." Since the contributed shares will be donated or
sold for nominal consideration, they will not add to gross proceeds.
41
<PAGE>
However, since such shares are issued and outstanding, they add to the
Holding Company's market capitalization.
The amount of the Stock Contribution will be accrued as an expense in the
fiscal quarter in which the Conversion is completed. The pro forma earnings
data does not reflect such non-recurring accrual.
Both the historical and pro forma per share data assume that the Stock
Contribution is made.
(2) Reflects a reduction to net proceeds for the cost of the ESOP and the RRP
(assuming stockholder ratification is received) which it is assumed will be
funded from the net proceeds retained by the Holding Company.
(3) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Conversion. For purposes of
calculating pro forma net income, proceeds attributable to purchases by the
ESOP and RRP, which purchases are to be funded by the Holding Company and
the Bank, have been deducted from net proceeds.
(4) It is assumed that 8% of the shares of Common Stock sold in the Conversion
will be purchased by the ESOP. The funds used to acquire such shares will
be borrowed by the ESOP from the net proceeds from the Conversion retained
by the Holding Company. The Bank intends to make contributions to the ESOP
in amounts at least equal to the principal and interest requirement of the
debt. The Bank's payment of the ESOP debt is based upon equal installments
of principal and interest over a 10-year period. However, assuming the
Holding Company makes the ESOP loan, interest income earned by the Holding
Company on the ESOP debt will offset the interest paid by the Bank.
Accordingly, the only expense to the Holding Company on a consolidated
basis will be related to the allocation of earned ESOP shares which will be
based on the number of shares committed to be released to participants for
the year at the average market value of the shares during the year
tax-effected at 40%. The amount of ESOP debt is reflected as a reduction of
stockholders' equity. In the event that the ESOP were to receive a loan
from an independent third party, both ESOP expense and earnings on the
proceeds retained by the Holding Company would be expected to increase. For
purposes of calculating earnings per share, unallocated ESOP shares are not
considered to be outstanding. In addition, the ESOP shares committed to be
released at the end of the year are assumed to be outstanding at the
beginning of the year. For the interim period, shares committed to be
released for the year have been allocated on a pro rata basis.
(5) Adjustments to both book value and net earnings have been made to give
effect to the proposed open market purchase (based upon an assumed purchase
price of $10.00 per share) following Conversion by the RRP (assuming
stockholder ratification of such plan is received) of an amount of shares
equal to 4% of the shares of Common Stock sold in the Conversion for the
benefit of certain directors, officers and employees. It is assumed that
the sale of the shares to the RRP occurred at the beginning of the period.
Funds used by the RRP to purchase the shares will be contributed to the RRP
by the Holding Company if the RRP is ratified by stockholders following the
Conversion. Therefore, this funding is assumed to reduce the proceeds
available for reinvestment. For financial accounting purposes, the amount
of the contribution will be recorded as a compensation expense (although
not an actual expenditure of funds) over the period of vesting. These
grants are scheduled to vest in equal annual installments over the five
years following stockholder ratification of the RRP. However, all unvested
grants will be forfeited in the case of recipients who fail to maintain
continuous service with the Holding Company or its subsidiaries. In the
event the RRP is unable to purchase a sufficient number of shares of Common
Stock to fund the RRP, the RRP may issue authorized but unissued shares of
Common Stock from the Holding Company to fund the remaining balance. In the
event the RRP is funded by the issuance of authorized but unissued shares
in an amount equal to 4% of the shares sold in the Conversion, the
interests of existing stockholders would be diluted by approximately 3.8%.
In the event that the RRP is funded through authorized but unissued shares,
for the four months ended April 30, 1997 and year ended December 31, 1996,
pro forma net income per share would be $0.25, $0.23, $0.21 and $0.19 and
$0.32, $0.31, $0.30 and $0.29, respectively, and pro forma stockholders'
equity per share would be $13.73, $12.84, $12.17 and $11.59 and $13.58,
$12.71, $12.06 and $11.49, respectively, in each case at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range.
(6) No effect has been given to the shares to be reserved for issuance under
the proposed Stock Option Plan which is expected to be adopted by the
Holding Company following the Conversion, subject to stockholder approval.
In the event the Stock Option Plan is funded by the issuance of authorized
but unissued shares in an amount equal to 10% of the shares sold in the
Conversion, at $10.00 per share, the interests of existing stockholders
would be diluted as follows: pro forma net income per share for the four
months ended April 30, 1997 and the year ended December 31, 1996 would be
$0.25, $0.22, $0.20 and $0.19 and $0.32, $0.31, $0.30 and $0.30,
respectively, and pro forma stockholders' equity per share would be $13.54,
$12.69, $12.06 and $11.50 and $13.40, $12.57, $11.95 and $11.41,
respectively, in each case at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Valuation Range. In the alternative, the
Holding Company may purchase shares in the open market to fund the Stock
Option Plan following stockholder approval of such plan. To the extent, the
entire 10% of the shares to be reserved for issuance under the Stock Option
Plan funded through open market purchases at the Purchase Price of $10.00
per share, proceeds available for reinvestment would be reduced by
$4,118,000, $4,845,000, $5,572,000 and $6,408,000 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range. See
"Management Benefit Plans - Stock Option and Incentive Plan."
42
<PAGE>
(7) Historical per share amounts have been computed as if the shares of Common
Stock indicated had been outstanding at the beginning of the periods or on
the dates shown, but without any adjustment of historical net income or
historical equity to reflect the investment of the estimated net proceeds
of the sale of shares in the Conversion as described above. All ESOP shares
have been considered outstanding for purposes of computing book value per
share. Pro forma share amounts have been computed by dividing the pro forma
net income or stockholders' equity (book value) by the number of shares
indicated as outstanding under SOP 93-6.
(8) "Book value" represents the difference between the stated amounts of the
Bank's assets (based on historical cost) and liabilities computed in
accordance with generally accepted accounting principles. The amounts shown
do not reflect the effect of the Liquidation Account which will be
established for the benefit of Eligible and Supplemental Eligible Account
Holders in the Conversion, or the federal income tax consequences of the
restoration to income of the Bank's special bad debt reserves for income
tax purposes which would be required in the unlikely event of liquidation.
See "The Conversion - Effects of Conversion to Stock Form on Depositors and
Borrowers of the Bank" and "Regulation - Federal and State Taxation." The
amounts shown for book value do not represent fair market values or
amounts, if any, distributable to stockholders in the unlikely event of
liquidation.
(9) In the event that 1996 net income were calculated without giving effect to
the non-recurring $1.3 million special deposit insurance assessment and the
$2.5 million cash contribution to the Foundation, 1996 pro forma net income
and net income per share would have been as follows assuming an income tax
rate of 40%:
15% Above
Minimum Midpoint Maximum Maximum
------- -------- ------- -------
Net Income:
Historical ............... $ 452 $ 452 $ 452 $ 452
Nonrecurring expenses .... 2,276 2,276 2,276 2,276
------- ------- ------- -------
Adjusted historical .... 2,728 2,728 2,728 2,728
Pro Forma Adjustments:
Net earnings from proceeds 1,251 1,475 1,699 1,957
ESOP ..................... (198) (233) (267) (308)
RRP ...................... (198) (233) (267) (308)
------- ------- ------- -------
Pro form net income .. $ 3,583 $ 3,737 $ 3,893 $ 4,069
======= ======= ======= =======
Net Income Per Share:
Historical ............... $ 0.11 $ 0.10 $ 0.08 $ 0.07
Nonrecurring expenses .... 0.67 0.57 0.50 0.44
------- ------- ------- -------
Adjusted historical .... 0.78 0.67 0.58 0.51
Pro Forma Adjustments:
Net earnings from
proceeds ............... 0.31 0.31 0.31 0.32
ESOP ..................... (0.05) (0.05) (0.05) (0.05)
RRP ...................... (0.05) (0.05) (0.05) (0.05)
------- ------- ------- -------
Pro form net income
per share .......... $ 0.99 $ 0.88 $ 0.79 $ 0.73
======= ======= ======= =======
Ratio of offering price to
pro forma net income
per share ................ 10.10x 11.36x 12.66x 13.70x
43
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO
STOCK CONTRIBUTION
In the event that the Stock Contribution to the Foundation is not made,
FinPro has estimated that the amount of Common Stock offered for sale in the
Conversion would increase by approximately $4.6 million and that the overall
market capitalization would increase by $2.0 million, all at the midpoint of the
Estimated Valuation Range as of April 30, 1997. Under such circumstances, pro
forma shareholder equity of the Holding Company would be approximately $75.6
million, at the midpoint, which is approximately $3.0 million greater than the
pro forma shareholder equity of the Holding Company would be if the Stock
Contribution is made. In preparing this estimate, it has been assumed that the
pro forma price to book value ratio and pro forma price to earnings ratio would
be approximately the same under both the current appraisal and the estimate of
the value of the Holding Company without the Stock Contribution at the midpoint
of the Estimated Valuation Range. Further, assuming the midpoint of the
Estimated Valuation Range, pro forma stockholders' equity per share and pro
forma earnings per share would be substantially the same with the Stock
Contribution as without the Stock Contribution. In this regard, pro forma
stockholders' equity and pro forma net income per share at and for the period
ended April 30, 1997 would be $14.26 and $0.23, respectively, at the midpoint of
the estimate, assuming no Stock Contribution, and $14.26 and $0.23,
respectively, with the Stock Contribution. The pro forma price to book value
ratio and the pro forma price to earnings ratio at and for the period ended
April 30, 1997 are 70.13% and 14.49x, respectively, at the midpoint of the
estimate, assuming no Stock Contribution and are 70.13% and 14.49x,
respectively, with the Stock Contribution. This estimate by FinPro was prepared
at the request of the OTS and is solely for purposes of providing members with
sufficient information with which to make an informed decision on the Stock
Contribution. There is no assurance that in the event the Stock Contribution is
not approved at the Special Meeting of members that the appraisal prepared at
that time would conclude that the pro forma market value of the Holding Company
would be the same as that estimated herein.
If the Stock Contribution is not made, FinPro has estimated that the
maximum, as adjusted, of the Estimated Valuation Range would be $70.1 million.
Nevertheless, if the pro forma market value of the common stock to be sold by
the Holding Company without the Stock Contribution is either greater than $64.1
million or less than $41.2 million or if the OTS otherwise requires a
resolicitation of subscribers, the Bank will establish a new Estimated Valuation
Range and commence a resolicitation of subscribers (i.e., subscribers will be
permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded
witinterest.) Any change in the Estimated Valuation Range must be approved by
the OTS. "See the Conversion--Stock Pricing."
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Valuation Range, assuming the Conversion
was completed at April 30, 1997.
44
<PAGE>
<TABLE>
<CAPTION>
At the Minimum At the Midpoint At the Maximum
------------------------- -------------------------- --------------------------
With No With No With No
Stock Stock Stock Stock Stock Stock
Contribution Contribution Contribution Contribution Contribution Contribution
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Estimated offering amount .................... $ 41,180 $ 45,050 $ 48,450 $ 53,000 $ 55,720 $ 60,950
Pro forma market capitalization .............. 43,680 45,050 50,950 53,000 58,220 60,950
Total assets ................................. 296,343 298,713 302,673 305,635 309,003 312,558
Total liabilities ............................ 230,052 230,052 230,052 230,052 230,052 230,052
Pro forma stockholders' equity ............... 66,291 68,661 72,621 75,583 78,951 82,506
Pro forma consolidated net earnings(1) ....... 1,046 1,074 1,097 1,129 1,149 1,185
Pro forma stockholders' equity per share ..... 15.18 15.24 14.26 14.26 13.55 13.53
Pro forma consolidated net earnings
per share(1) ............................... 0.25 0.25 0.23 0.23 0.21 0.21
Pro Forma Pricing Ratios:
Offering price as a percentage of pro
forma stockholders' equity per share ..... 65.88 65.62 70.13 70.13 73.80 73.91
Offering price to pro forma net
earnings per share(1) .................... 13.33 13.33 14.49 14.49 15.87 15.87
Offering price to assets ................... 14.74 15.08 16.83 17.34 18.86 19.50
Pro Forma Financial Ratios:
Return on assets(2) ....................... 1.06 1.08 1.09 1.11 1.12 1.14
Return on stockholders' equity(2) ......... 4.73 4.69 4.53 4.48 4.37 4.31
Stockholders' equity to assets ............ 22.37 22.99 23.99 24.73 25.55 26.40
</TABLE>
At the Maximum
as adjusted
-----------------------------
With No
Stock Stock
Contribution Contribution
------------ ------------
Estimated offering amount .................. $ 64,080 $ 70,090
Pro forma market capitalization ............. 66,580 70,090
Total assets ................................ 316,284 320,517
Total liabilities ........................... 230,052 230,052
Pro forma stockholders'equity ............... 86,232 90,465
Pro forma consolidated net earnings(1) ...... 1,207 1,251
Pro forma stockholders' equity per share ..... 12.96 12.90
Pro forma consolidated net earnings
per share(1) ............................... 0.19 0.19
Pro Forma Pricing Ratios:
Offering price as a percentage of pro
forma stockholders'equity per share ........ 77.16 77.52
Offering price to pro forma net earnings
per share(1) ............................... 17.54 17.54
Offering price to assets .................... 21.04 21.87
Pro Forma Financial Ratios:
Return on assets(2) ......................... 1.14 1.17
Return on stockholders' equity(2) ........... 4.20 4.15
Stockholders' equity to assets .............. 27.26 28.22
------------
(1) For the four month period ended April 30, 1997.
(2) Ratios for the four month periods have been annualized.
45
<PAGE>
PRO FORMA REGULATORY CAPITAL ANALYSIS
At April 30, 1997, the Bank would have exceeded each of the OTS capital
requirements. Set forth below is a summary of the Bank's compliance with the OTS
capital standards as of April 30, 1997 based on historical capital and also
assuming that the indicated number of shares were sold as of such date using the
assumptions contained under the caption "Pro Forma Data."
<TABLE>
<CAPTION>
Pro Forma at April 30, 1997
---------------------------------------------------
4,118,000 Shares Sold 4,845,000 Shares Sold
Historical at Minimum at Midpoint
---------------------- ------------------------ ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital(1) .......................... $29,950 11.5% $46,797 16.9% $49,817 17.8%
======= ==== ======= ==== ======= ====
Tangible Capital(2):
Capital level(3) ........................ $29,468 11.4% $46,315 16.8% $49,335 17.7%
Requirement ............................. 3,892 1.5 4,145 1.5 4,191 1.5
----- --- ----- --- ----- ---
Excess .................................. $25,576 9.9% $42,170 15.3% $45,144 16.2%
======= === ======= ==== ======= ====
Core Capital(2):
Capital level(3) ........................ $29,468 11.4% $46,315 16.8% $49,335 17.7%
Requirement(4) .......................... 7,784 3.0 8,290 3.0 8,382 3.0
----- --- ----- --- ----- ---
Excess .................................. $21,684 8.4% $38,025 13.8% $40,953 14.7%
------- --- ------- ---- ------- ----
Risk-Based Capital(2):
Capital level(5) ........................ $31,060 24.4% $47,949 36.7% $50,976 38.8%
Requirement(6) .......................... 10,186 8.0 10,456 8.0 10,504 8.0
------ --- ------ --- ------ ---
Excess .................................. $20,874 16.4% $37,493 28.7% $40,472 30.8%
======= ==== ======= ==== ======= ====
</TABLE>
Pro Forma at April 30, 1997
-----------------------------------------
6,408,000 Shares
5,572,000 Shares Sold Sold at 15% above
at Maximum Maximum
--------------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
GAAP Capital(1) .......................... $52,836 18.7% $56,309 19.7%
======= ==== ======= ====
Tangible Capital(2):
Capital level(3) ....................... $52,354 18.5% $55,827 19.5%
Requirement ............................ 4,236 1.5 4,288 1.5
------- ---- ------- ----
Excess ................................. $48,118 17.0% $51,539 18.0%
======= ==== ======= ====
Core Capital(2):
Capital level(3) ....................... $52,354 18.5% $55,827 19.5%
Requirement(4) ......................... 8,472 3.0 8,576 3.0
------- ---- ------- ----
Excess ................................. $43,882 15.5% $47,251 16.5%
======= ==== ======= ====
Risk-Based Capital(2):
Capital level(5) ....................... $54,003 40.9% $57,484 43.4%
Requirement(6) ......................... 10,553 8.0 10,608 8.0
------- ---- ------- ----
Excess ................................. $43,450 32.9% $46,876 35.4%
======= ==== ======= ====
- ----------
(1) Total equity as calculated under generally accepted accounting principles
("GAAP"). Assumes that the Bank receives 50% of the net proceeds, offset in
part, by the aggregate Purchase Price of Common Stock acquired at a price
of $10.00 per share by the ESOP in the Conversion.
<PAGE>
(2) Tangible and core capital figures are determined as a percentage of
adjusted total assets; risk-based capital figures are determined as a
percentage of risk-weighted assets. Unrealized losses on debt securities
available for sale totaling $144,000 and deferred tax assets totaling
$226,000 are excluded from tangible, core and risk-based capital. Goodwill
and intangibles totaling $400,000 are also excluded from tangible and core
capital. Adjusted assets assumed for tangible and core capital are $259.5
million, $276.4 million, $279.4 million, $282.4 million and $285.9 million
at historical, minimum, midpoint, maximum and 15% above maximum.
Risk-weighted assets are assumed to be $127.3 million, $130.7 million,
$131.3 million $131.9 million and $132.6 million at historical, minimum,
midpoint, maximum and 15% above the maximum, respectively. See Note 11 of
the Notes to Consolidated Financial Statements.
(3) In April 1991, the OTS proposed a core capital requirement for savings
associations comparable to the requirement for national banks that became
effective on November 30, 1990. This proposed core capital ratio is 3% of
total adjusted assets for thrifts that receive the highest supervisory
rating for safety and soundness ("CAMEL" rating), with a 4% to 5% core
capital requirement for all other thrifts. See "Regulation - Regulatory
Capital Requirements."
(4) Includes $1.7 million of general valuation allowances, of which $1.6
million qualifies as supplementary capital. See "Regulation - Regulatory
Capital Requirements."
(5) Pro forma amounts and percentages assume net proceeds are invested in
assets that carry a 20% risk-weight, such as short-term interest-bearing
deposits.
46
<PAGE>
CAPITALIZATION
Set forth below is the capitalization, including deposits, of First
Security as of April 30, 1997, and the pro forma capitalization of the Holding
Company at the minimum, the midpoint, the maximum and 15% above the maximum of
the Estimated Valuation Range, after giving effect to the Conversion and based
on other assumptions set forth in the table and under the caption "Pro Forma
Data."
<TABLE>
<CAPTION>
Holding Company - Pro Forma Based
Upon Sale at $10.00 per share
----------------------------------------------------
15% Above
Minimum Midpoint Maximum Maximum
Existing 4,118,000 4,845,000 5,572,000 6,408,000
Capitalization Shares Shares Shares Shares
-------------- ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(1) ............................................. $ 218,987 $ 218,987 $ 218,987 $ 218,987 $ 218,987
========= ========= ========= ========= =========
Stockholders' Equity:
Serial Preferred Stock ($0.01 par value)
authorized - 500,000 shares; none to be
outstanding ........................................... $ -- $ -- $ -- $ -- $ --
Common Stock ($0.01 par value authorized
- 8,000,000 shares; to be outstanding (as
shown)(2) ............................................. -- 41 48 56 64
Additional paid-in capital ............................ -- 40,241 47,437 54,632 62,907
Shares issued to the Foundation ....................... -- 2,500 2,500 2,500 2,500
Retained earnings, substantially
restricted(3) ......................................... 30,226 30,226 30,226 30,226 30,226
Net unrealized loss on securities available for
sale ................................................... (276) (276) (276) (276) (276)
Stock Contribution expense net of tax
benefit ................................................ -- (1,500) (1,500) (1,500) (1,500)
Less:
Common Stock acquired by ESOP(4) ...................... -- (3,294) (3,876) (4,458) (5,126)
Common Stock acquired by RRP(4) ....................... -- (1,647) (1,938) (2,229) (2,563)
--------- --------- --------- --------- ---------
Total Stockholders' Equity(5) ........................... $ 29,950 $ 66,291 $ 72,621 $ 78,951 $ 86,232
========= ========= ========= ========= =========
</TABLE>
- ----------
(1) No effect has been given to withdrawals from deposit accounts for the
purpose of purchasing Common Stock in the Conversion. Any such withdrawals
will reduce pro forma deposits by the amount of such withdrawals.
(2) Does not reflect the shares of Common Stock that may be reserved for
issuance pursuant to the Stock Option Plan.
(3) See "Dividends" and "Regulation - Limitations on Dividends and Other
Capital Distributions" regarding restrictions on future dividend payments
and "The Conversion - Effects of Conversion to Stock Form on Depositors and
Borrowers of the Bank" regarding the liquidation account to be established
upon Conversion.
(4) Assumes that 8% of the shares sold in the Conversion will be purchased by
the ESOP. The funds used to acquire the ESOP shares will be borrowed from
the Holding Company. The Bank intends to make contributions to the ESOP
sufficient to service and ultimately retire the ESOP's debt over a ten-year
period. Also assumes that an amount of shares equal to 4% of the amount of
shares sold in the Conversion will be acquired by the RRP, following
shareholder ratification of such plan after completion of the Conversion.
In the event that the RRP is funded by the issuance of authorized but
unissued shares in an amount equal to 4% of the shares sold in the
Conversion, the interest of existing stockholders would be diluted by
approximately 3.8%. The amount to be borrowed by the ESOP and the Common
Stock acquired by the RRP is reflected as a reduction of stockholders'
equity. See "Management - Benefit Plans - Employee Stock Ownership Plan"
and "- Recognition and Retention Plan."
(5) If the Stock Contribution is approved by the Bank's members, the amount of
initial contribution will be accrued as an expense in the fiscal quarter in
which the conversion is completed. See "The Conversion--Stock Contribution
to the Charitable Foundation.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Bank is a financial intermediary engaged primarily in attracting
deposits from the general public and using such deposits to originate one- to
four-family residential mortgage and, to a lesser extent, multi-family and
commercial real estate, consumer and other loans primarily in its market areas,
and to acquire mortgage-backed and other securities. The Bank's revenues are
derived principally from interest earned on loans and mortgage-backed and other
securities. The operations of the Bank are influenced significantly by general
economic conditions and by policies of financial institution regulatory
agencies, including the OTS and FDIC. The Bank's cost of funds is influenced by
interest rates on competing investments and general market interest rates.
Lending activities are affected by the demand for financing of real estate and
other types of loans, which in turn is affected by the interest rates at which
such financings may be offered.
The Bank's net interest income is dependent primarily upon the
difference or spread between the average yield earned on loans receivable and
securities and the average rate paid on deposits, as well as the relative
amounts of such assets and liabilities. The Bank, like other thrift
institutions, is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different times, or on a
different basis, than its interest-earning assets.
Business Strategy
The Bank seeks to obtain a competitive advantage in its deposit
gathering and lending operations by maintaining a high level of community
involvement and by offering a high level of personal service.
In its deposit gathering operations, the Bank uses community outreach
and customer service in an attempt to build and maintain a large volume of
passbook and other non-certificate accounts. These accounts generally carry
lower costs than certificate accounts and are believed to represent primarily
"core" deposits that are less vulnerable to interest rate changes (and
competition from other financial products) than certificate accounts.
In its lending operations, the Bank seeks to obtain high quality
residential and, to a lesser extent, other loans by maintaining a high level of
local visibility, offering a high level of customer service and limiting its
secondary market activities. The Bank's one- to four-family residential loan
balances have increased significantly in recent years as a result of these
efforts. At the same time, asset quality has remained high.
Primarily as a result of its cost of funds and its loan yields, the
Bank has been profitable since 1964. The Board has sought to enhance the Bank's
profitability by controlling expenses and maintaining a relatively steady level
of loan and deposit growth.
48
<PAGE>
The Board believes that the Bank's future success is directly tied to
its ability to maintain and build a loyal customer base through its community
and other activities.
Comparison of Financial Condition at April 30, 1997 and December 31, 1996
Total assets at April 30, 1997 were $260.0 million compared to $258.1
million at December 31, 1996, an increase of $1.9 million, or 0.7%. The increase
in total assets was due primarily to increases in loans receivable, funded by an
increase in Federal Home Loan Bank ("FHLB") advances.
Total liabilities at April 30, 1997 were $230.1 million compared to
$228.9 million at December 31, 1996, an increase of $1.2 million, or 0.5%. The
increase is primarily due to an increase in FHLB advances of $3.5 million,
partially offset by a decrease in advance payments by borrowers for taxes and
insurance of $532,000 as a result of the payment of the first installment of
taxes in 1997.
Total equity at April 30, 1997 was $30.0 million compared to $29.3
million at December 31, 1996. This increase of $700,000, or 2.4%, was a result
of $761,000 in net income for the period, partially offset by a $72,000 increase
in unrealized losses on securities available-for-sale from December 31, 1996 to
April 30, 1997.
Comparison of Financial Condition at December 31, 1996 and December 31, 1995
Total assets at December 31, 1996 were $258.1 million compared to
$251.9 million at December 31, 1995, an increase of $6.2 million, or 2.5%. The
increase in total assets was primarily a result of an increase in net loans
receivable of $18.8 million (most of which was in one- to four-family
residential real estate loans), partially offset by a decrease in cash and cash
equivalents of $11.9 million. In December 1995, management transferred $20.2
million of securities from the held-to-maturity portfolio to the
available-for-sale portfolio in accordance with Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities."
Total liabilities at December 31, 1996 were $228.9 million compared to
$222.9 million at December 31, 1995, an increase of $6.0 million, or 2.7%. The
increase was primarily a result of an increase in deposits of $10.1 million.
This increase was partially offset by a decrease in FHLB advances of $6.0
million.
Total equity at December 31, 1996 was $29.3 million compared to $29.0
million at December 31, 1995, an increase of $300,000, or 1.0% as a result of
$452,000 of net income for the period offset by a change in the unrealized gain
(loss) on securities available-for-sale from $25,000 in 1995 to ($204,000) in
1996.
49
<PAGE>
Results of Operations
The Bank's results of operations depend primarily upon the level of net
interest income, which is the difference between the interest income earned on
its interest-earning assets such as loans and securities, and the costs of the
Bank's interest-bearing liabilities, primarily deposits and borrowings. Results
of operations are also dependent upon the level of the Bank's noninterest
income, including fee income and service charges, and affected by the level of
its noninterest expenses, including its general and administrative expenses. Net
interest income depends upon the volume of interest-earnings assets and
interest-bearing liabilities and the interest rate earned or paid on them,
respectively.
Comparison of Operating Results for the Four Months Ended April 30, 1997 and
April 30, 1996
General. Net income for the four months ended April 30, 1997 was
$761,000, a decrease of $229,000, from net income of $990,000 for the four
months ended April 30, 1996. The decrease was primarily due to an increase of
$532,000 in the provision for loan losses, partially offset by an increase in
net interest income of $314,000.
Interest Income. Interest income for the four months ended April 30,
1997 was $6.5 million compared to $6.1 million for the four months ended April
30, 1996, an increase of $371,000, or 6.1%. The increase resulted primarily from
an increase in the average balance of interest-earning assets of $14.9 million,
partially offset by a two basis point decrease in the average yield on
interest-earning assets. The average balance of loans receivable increased from
$145.5 million for the four months ended April 30,1996 to $164.1 million for the
four months ended April 30,1997. The increase in the average balance of loans
receivable was a result of increased demand as well as increased marketing
efforts. The decrease in the average yield on interest-earning assets was
primarily reflective of the decrease in the average yield on loans from 8.65%
for the four months ended April 30, 1996 to 8.51% for the four months ended
April 30, 1997. This decrease was a result of maturities of older, higher rate
loans.
Interest Expense. Interest expense was $3.2 million for the four months
ended April 30, 1997 and 1996. The average balance of interest-bearing
liabilities increased by $9.0 million. This was offset, however, by a decrease
in the average cost of funds from 4.50% for the four months ended April 30, 1996
to 4.40% for the four months ended April 30, 1997. The decrease in the average
cost of funds was a result of the maturity of higher rate certificates of
deposit and the replacement with lower rate certificates as a result of a
decreasing rate environment. The average balance of interest-bearing liabilities
increased largely in the area of certificates of deposit as a result of
increased market demand. In addition, FHLB advances increased to support the
continued loan growth.
Net Interest Income. Net interest income was $3.3 million for the four
months ended April 30, 1997, an increase of $314,000, or 10.6% from net interest
income of $3.0 million for the four months ended April 30, 1996. The increase
was primarily a result of an increase in the ratio of interest-earning assets to
interest-bearing liabilities from 110.69% for the four months ended April 30,
1996 to 112.96% for the four months ended April 30, 1997.
50
<PAGE>
Provision for Loan Losses. The Bank recorded a $574,000 provision for
loan losses for the four months ended April 30, 1997 compared to a $42,000
provision for the four months ended April 30, 1996. The increase in the
provision for loan losses was primarily related to various loans to The Bennett
Funding Group, Inc. ("Bennett Funding") which were secured by equipment leases.
Bennett Funding filed bankruptcy during 1996. As of April 30, 1996, management
had not determined whether the leases securing the loans on their books were
legally secured, or whether they were fraudulent. No additional provision was
made at that time as management continued its investigation and awaited rulings
from the bankruptcy court. The Bank received a settlement offer in February
1997. As a result of the proposed settlement, the Bank charged off $432,000 of
the Bennett Funding loans, leaving $839,000 of loans on its books. As part of
the settlement, the Bank was to receive a cash payment of $529,000. The
remaining $310,000 was to be collected through future payments from the lessees.
Subsequent to April 30, 1997, the Bank received $713,481 from the trustee as
part of the settlement. However, at this time management is unsure as to the
full collectibility of the remaining payment stream. In addition, management was
considering foreclosure proceedings on several other loans for which they were
uncertain they would recover the outstanding balance and related expenses. These
loans also contributed to the increase in the provision for the four months
ended April 30, 1997. The Bank also had a significant increase in the overall
size of the loan portfolio, which contributed to the increase in the allowance
for loan losses. Management increases the allowance for loan losses for loan
growth based on a statistical percentage developed considering past loss
experience and other factors described below. At April 30, 1997, the Bank's
allowance for loan losses totaled $1.7 million, or .98% of total loans and 73.8%
of total non-performing loans. Net charge-offs as a percent of average loans,
exclusive of the Bennett Funding charge-off, has ranged from recoveries of .03%
to charge-offs of .05%. Management does not anticipate a significant change in
this trend and management believes the allowance for loan losses is adequate at
April 30, 1997 given the current information available.
The amount of the provision and allowance for estimated losses on loans
is influenced by current economic conditions, actual loss experience, industry
trends and other factors, including real estate values, in the Bank's market
area. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for estimated
losses on loans. Such agencies may require the Bank to provide additions to the
allowance based upon judgments which differ from those of management. Although
management uses the best information available and maintains the Bank's
allowance for losses at a level it belives adequate to provide for losses,
future adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Bank's control.
Non-interest Income. Non-interest income for the four months ended
April 30, 1997 was $197,000 compared to $194,000 for the four months ended April
30, 1996, an increase of $3,000, or 1.5%. The increase was primarily a result of
a $1,000 gain on the sale of real estate owned during the 1997 period compared
to $10,000 in losses on the sale of real estate owned during the 1996 period.
This was partially offset by a decrease in deposit service charges of $5,000.
Non-interest Expense. Non-interest expense was $1.7 million for the
four months ended April 30, 1997 compared to $1.5 million for the four months
ended April 30, 1996, an increase of $137,000, or 9.0%. The increase was
primarily a result of an increase in compensation and benefits of $125,000
primarily due to an employer profit sharing contribution made in April 1997 of
$105,000. The corresponding contribution in 1996 was made subsequent to April
30. Other operating expenses increased $106,000 partially as a result of a
$25,000 loss from a robbery and $34,000 of expenses for real estate owned during
the 1997 period and various other miscellaneous expenses increased slightly.
These items were partially offset by a decrease in federal insurance premiums of
$139,000 as a result of a decrease in rates due to the recapitalization of SAIF
during 1996.
Income Tax Expense. The provision for income taxes totaled $480,000 for
the four months ended April 30, 1997 compared to $603,000 for the four months
ended April 30, 1996. The decrease was primarily due to a decrease in income
before income taxes of $352,000. A valuation allowance of $180,000 was
established in 1996 to reduce the deferred tax assets to the amount that
management believed as more likely than not to be realized. The valuation
allowance related specifically to the deferred tax asset recorded for unrealized
capital losses reflected as a deduction of capital under SFAS No. 115 and to
deferred tax assets recorded for certain future tax deductions that are subject
to various expiration dates. As the amount of the valuation allowance did not
change during the four months ended Apirl 30, 1997, there was no related impact
to income from continuing operations.
51
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1996 and
December 31, 1995
General Net income for the year ended December 31, 1996 was $452,000
compared to net income of $3.2 million for the year ended December 31, 1995, a
decrease of $2.7 million, or 84.4%. The decrease was primarily a result of a
$1.3 million FDIC special assessment on SAIF insured deposits effective
September 30, 1996 and a $2.5 million accrued expense for contributions to the
Foundation in 1996. In addition, non-interest income decreased $111,000,
primarily as a result of a decrease in gain on sale of real estate owned of
$97,000 combined with a decrease of $37,000 in rental income from real estate
owned. This was partially offset by an increase in gain on sale of securities of
$31,000.
Interest Income. Interest income for the year ended December 31, 1996
was $19.0 million compared to $17.7 million for the year ended December 31,
1995, an increase of $1.3 million, or 7.3%. The increase resulted from the
combination of an increase in the average balance of interest-earning assets and
an increase in the average yield. The yield on average interest-earning assets
increased from 7.92% for the year ended December 31, 1995 to 7.96% for the year
ended December 31, 1996. The average yield on mortgage-backed securities
increased from 6.81% for the year ended December 31, 1995 to 7.81% for the year
ended December 31, 1996 due to the upward repricing of adjustable rate
securities. The average balance of interest-earning assets increased in total by
$15.9 million from $222.9 million for the year ended December 31, 1995 to $238.8
million for the year ended December 31, 1996. Although the yield on average
loans receivable decreased from 8.64% for the year ended December 31, 1995 to
8.59% for the year ended December 31, 1996, the average balance of loans
receivable increased by $12.3 million due to increased market demand. In
addition, the average balance of mortgage-backed securities increased by $5.7
million as a result of the investment of funds from the increase in deposits and
the transfer of cash into interest-earning assets which exceeded loan growth
from market demand. Management invested these proceeds in mortgage-backed
securities rather than U.S. Treasury securities in order to obtain a yield more
comparative to loans.
Interest Expense. Interest expense for the year ended December 31, 1996
was $9.5 million compared to $8.7 million for the year ended December 31, 1995,
an increase of $767,000, or 8.8%. The increase in interest expense reflected a
higher interest rate environment, as the average cost of interest-bearing
liabilities increased by 14 basis points from 4.30% for the year ended December
31, 1995 to 4.44% for the year ended December 31, 1996. The average cost of
certificates of deposit increased from 5.35% for the year ended December 31,
1995 to 5.47% for the year ended December 31, 1996. In addition, the average
balance of interest-bearing liabilities increased $10.8 million from $202.8
million for the year ended December 31, 1995 to $213.6 million for the year
ended December 31,1996 as a result of market demand.
Net Interest Income. Net interest income of $9.5 million for the year
ended December 31, 1996 represented an increase of $589,000 from the $8.9
million reported for the year ended December 31, 1995. There was a decrease in
the net interest spread from 3.62% for the year ended December 31, 1995 to 3.52%
for the year ended December 31, 1996. The decrease in the net interest rate
spread was a result of the average cost of interest-bearing deposits increasing
at a more rapid rate than the average yield on interest-earning assets. However,
the ratio of average interest-earning assets to average interest-bearing
liabilities increased from 109.93% for the year ended December 31, 1995 to
111.81% for the year ended December 31, 1996, and the net interest margin
decreased slightly from 4.00% to 3.98% for the same period.
52
<PAGE>
Provision for Loan Losses. The Bank's provision for loan losses for the
year ended December 31, 1996 was $706,000 compared to $136,000 for the year
ended December 31, 1995. The increase in the provision for loan losses was
primarily related to the Bennett Funding loans previously discussed. In
addition, the Bank experienced significant loan growth during 1996 which
resulted in an increase in the allowance for loan losses. Management increases
the allowance for loan losses through a provision charged to expense for loan
growth based on a statistical percentage developed considering past loss
experiences, delinquency trends, general economic conditions and other factors.
Gross loans increased $19.3 million, or 13.14% from 1995. The allowance for loan
losses represented .91% and .60% of gross loans receivable at December 31, 1996
and 1995, respectively.
Non-interest Income. Non-interest income for the year ended December
31, 1996 was $745,000 compared to $856,000 for the year ended December 31, 1995,
a decrease of $111,000, or 13.0%. The decrease was the result of a decrease in
the gain on sale of real estate owned of $97,000 combined with a $37,000
decrease in rental income from real estate owned as a result of the sale of the
property. These decreases were partially offset by an increase in gain on the
sale of securities of $21,000,
Non-interest Expense. Non-interest expense was $8.7 million for the
year ended December 31, 1996 compared to $4.7 million for the year ended
December 31, 1995, an increase of $4.0 million, or 85.1%. The increase was
primarily due to a $1.3 million one-time special assessment on SAIF insured
deposits resulting from federal legislation enacted on September 30, 1996,
combined with the $2.5 million contribution accrual to the Foundation. As a
result of the assessment, and depending upon the Bank's capital level and
supervisory rating, annual deposit insurance premiums were decreased for periods
beginning January 1, 1997 to approximately .065% from the .23% of deposits
previously paid by the Bank. See "Regulation--Insurance Accounts and Regulation
by the FDIC."
Income Taxes. The provision for income taxes was $406,000 for the year
ended December 31, 1996 compared to $1.8 million for the year ended December 31,
1995. The decrease was primarily due to a decrease in pretax income of $4.1
million, which was partially offset by an increase of $180,000 in the valuation
allowance for deferred tax assets. The valuation allowance was established in
1996 to reduce the deferred tax assets to the amount that management believed
was more likely than not to be realized. The valuation allowance related
specifically to the deferred tax asset recorded for unrealized capital losses
reflected as a reduction of capital under SFAS No. 115 and to deferred tax
assets recorded for certain future tax deductions that are subject to various
expiration dates.
Comparison of Operating Results for the Years Ended December 31, 1995 and
December 31, 1994
General. Net income for the year ended December 31, 1995 was $3.2
million compared to $3.4 million for the year ended December 31, 1994, a
decrease of $232,000, or 6.8%. The decrease was primarily a result of a decrease
in net interest income of $203,000 combined with an increase in non-interest
expense of $419,000. This was partially offset by an increase in non-interest
income of $279,000 and a decrease in income taxes of $65,000.
Interest Income. Interest income for the year ended December 31, 1995
was $17.7 million compared to $15.7 million for the year ended December 31,
1994, an increase of $2.0 million, or 12.7%. The increase was primarily a result
of an increase in the average balance of interest earning assets from $198.5
million for the year ended December 31, 1994 to $222.9 million for the year
ended December 31, 1995. This increase was primarily a result of the deployment
of the deposits obtained through the acquisition of the Bank's branch in
Philadelphia in June 1994.
53
<PAGE>
Interest Expense. Interest expense for the year ended December 31, 1995
was $8.7 million compared to $6.6 million for the year ended December 31, 1994,
an increase of $2.1 million, or 31.8%. The increase was the result of an
increase in the average balance of interest-bearing liabilities combined with an
increase in the average cost of funds. The average balance increased by $21.6
million from $181.2 million for the year ended December 31, 1994 to $202.8
million for the year ended December 31, 1995. The increase in the average
balance was primarily a result of the Philadelphia branch acquisition in June
1994. The average cost of funds increased by 67 basis points from 3.63% for the
year ended December 31, 1994 to 4.30% for the year ended December 31, 1995 which
was reflective of a higher interest rate environment.
Net Interest Income. Net interest income for the year ended December
31, 1995 was $8.9 million compared to $9.1 million for the year ended December
31, 1994, a decrease of $203,000, or 2.2%. The decrease in net interest income
was a result of the decrease in the net interest spread from 4.29% for the year
ended December 31, 1994 to 3.62% for the year ended December 31, 1995, as well
as a decrease in the net interest margin from 4.60% to 4.00% for the same
period. These decreases were reflective of the rapid increase in the average
cost of funds while the average yield on earning assets remained stable.
Provision for Loan Losses. The Bank's provision for loan losses for the
year ended December 31, 1995 was $136,000 compared to $182,000 for the year
ended December 31, 1994. The allowance for loan losses represented 0.60% and
0.57% of gross loans receivable at December 31, 1995 and 1994, respectively.
Non-interest Income. Non-interest income for the year ended December
31, 1995 was $856,000 compared to $577,000 for the year ended December 31, 1994,
an increase of $279,000, or 48.4%. The increase was primarily a result of a gain
on the sale of real estate owned of $147,000 in 1995 compared to none in 1994
and the gain on sale of securities of $24,000 in 1995 compared to $5,000 in
1994. In addition, deposit service charges increased $52,000 as a result of
increased deposit balances which were largely the result of the Philadelphia
branch acquisition in June 1994. The Bank also received $48,000 in rental income
on foreclosed real estate in 1995 compared to none in 1994.
Non-interest Expense. Non-interest expense for the year ended December
31, 1995 was $4.7 million compared to $4.3 million for the year ended December
31, 1994, an increase of $419,000, or 9.8%. Several factors contributed to the
increase including an increase in compensation and employee benefits of
$327,000, an increase in Federal insurance premiums of $77,000 and an increase
in other operating expenses of $50,000. These increases were primarily
attributable to the Philadelphia branch acquisition in June 1994.
Income Taxes. The provision for income taxes was $1.8 million for the
years ended December 31, 1995 and 1994 reflecting effective tax rates of 35.5%
and 34.8%, respectively.
54
<PAGE>
The following table presents, for the periods indicated, the total
dollar amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. No tax equivalent adjustments
were made. The table also presents, at April 30, 1997, the weighted average
yields earned on loans, securities and other interest-earning assets, the
weighted average rates paid on savings deposits and the result and interest rate
spread. All average balances are monthly average balances. Non-accruing loans
have been included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Four Months Ended April 30,
At --------------------------------------------------------------------
April 30, 1997(1) 1996(1)
1997 -------------------------------- ---------------------------------
----- Average Interest Average Interest
Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Rate Balance Paid Rate Balance Paid Rate
---- ------- ---- ---- ------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(2) ................. 8.15% $164,115 $ 4,653 8.51% $145,504 $ 4,197 8.65%
Mortgage-backed securities(3) ....... 6.99 36,871 1,025 8.34 38,535 1,032 8.03
Mutual funds(3) ..................... 5.96 5,776 109 5.66 5,776 113 5.87
Agencies/Other(3) ................... 6.97 24,531 388 4.75 24,135 420 5.22
CMOs(3) ............................. 5.70 5,808 106 5.48 6,335 126 5.97
Municipal securities(3) ............. 5.58 5,280 97 5.51 4,868 94 5.79
Federal funds sold .................. 5.63 2,489 46 5.54 3,433 66 5.77
Time deposits ....................... 5.65 200 4 6.00 200 4 6.00
Deposits with other institutions .... 5.48 1,504 34 6.78 2,988 42 4.22
FHLB stock .......................... 6.75 1,709 33 5.79 1,601 30 5.62
------- ------- -------- -------
Total interest-earning assets .... 7.65 248,283 6,495 7.85 233,375 6,124 7.87
Non-interest earning assets.......... 11,141 15,821
------- --------
Total assets...................... $259,424 $249,196
======== ========
Interest-Bearing Liabilities:
Money market ....................... 3.06 $ 5,280 54 3.07 $ 5,523 57 3.10
NOW ................................ 2.23 9,851 69 2.10 9,500 65 2.05
Passbook savings ................... 3.00 71,050 705 2.98 69,524 692 2.99
Certificates of Deposit ............ 5.43 128,209 2,285 5.35 123,288 2,293 5.58
Advances ........................... 5.75 5,400 107 5.94 3,000 56 5.60
------- ------ ------- -----
Total interest-bearing
liabilities .................. 4.42 219,790 3,220 4.40 210,835 3,163 4.50
------ -----
Non-interest bearing liabilities .... 9,794 8,863
------- ------
Total liabilities............... 229,584 219,698
Equity............................... 29,840 29,498
------- -------
Total liabilities and equity...... $259,424 $249,196
======== ========
Net interest-earning spread ......... 3.23% $ 3,275 3.45% $ 2,961 3.37%
====== ==== ====== ====
Margin .............................. 3.96% 3.81%
==== ====
Assets to liabilities ............... 112.96% 110.69%
====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- -------------------------------- ----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(2) ............ $152,147 $ 13,068 8.59% $139,860 $ 12,080 8.64% $122,001 $ 11,118 9.11%
Mortgage-backed securities(3) .. 41,735 3,260 7.81 36,034 2,455 6.81 35,873 2,128 5.93
Mutual funds(3) ................ 5,776 338 5.85 5,776 358 6.20 5,776 326 5.64
Agencies/Other(3) .............. 22,714 1,326 5.83 22,189 1,586 7.15 14,473 1,008 6.96
CMOs(3) ........................ 6,313 413 6.54 6,903 412 5.97 7,976 407 5.10
Municipal securities(3) ........ 4,794 277 5.78 5,199 327 6.29 5,488 378 6.89
Federal funds sold ............. 1,829 118 6.45 3,338 225 6.74 4,385 182 4.15
Time deposits .................. 200 11 5.50 200 9 4.50 200 8 4.00
Deposits with other institutions 1,665 84 5.05 1,942 100 5.15 1,013 79 7.80
FHLB stock ..................... 1,645 111 6.75 1,482 98 6.61 1,278 76 5.95
-------- ------- -------- ------ -------- ------
Total interest-earning assets 238,818 19,006 7.96 222,923 17,650 7.92 198,463 15,710 7.92
Non-interest earning assets .... 13,445 14,702 12,330
-------- -------- --------
Total assets ................ $252,263 $237,625 $210,793
======== ======== ========
Interest-Bearing Liabilities:
Money market ................... $ 5,301 167 3.15 $ 6,234 193 3.10 $ 6,753 214 3.17
NOW ............................ 9,810 202 2.06 9,241 184 1.99 7,849 156 1.99
Passbook savings ............... 70,356 2,120 3.01 70,585 2,113 2.99 68,231 2,047 3.00
Certificates of Deposit ........ 124,797 6,827 5.47 112,963 6,044 5.35 95,557 3,987 4.17
Advances ....................... 3,333 178 5.34 3,769 193 5.12 2,846 180 6.32
-------- ----- -------- ----- ------- -----
Total interest-bearing
liabilities ............... 213,597 9,494 4.44 202,792 8,727 4.30 181,236 6,584 3.63
----- ----- -----
Non-interest bearing liabilities 8,471 7,392 5,480
-------- ------- -------
Total liabilities .......... 222,068 210,184 186,716
Equity .......................... 30,195 27,441 24,077
-------- ------- -------
Total liabilities and equity . $252,263 $237,625 $210,793
======== ======= =======
Net interest-earning spread ..... $ 9,512 3.52% $ 8,923 3.62% $ 9,126 4.29%
====== ==== ===== ==== ===== ====
Margin .......................... 3.98% 4.00% 4.60%
==== ==== ====
Assets to liabilities ........... 111.81% 109.93% 109.51%
======== ======= ======
<FN>
- ---------
(1) Annualized yield/rate.
(2) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
(3) Calculated based on amortized cost.
</FN>
</TABLE>
55
<PAGE>
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the changes
related to outstanding balances and that due to the changes in interest rates.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Four Months Ended
April 30, Year Ended December 31, Year Ended December 31,
1996 vs. 1997 1995 vs. 1996 1994 vs. 1995
---------------------------- --------------------------- ----------------------------
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Total Due to Total Due to Total
----------------- Increase --------------- Increase --------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ........................ $ 529 $ (73) $ 456 $ 1,056 $ (68) $ 988 $ 1,565 $ (603) $ 962
Mortgage-backed securities .............. (45) 38 (7) 418 387 805 10 317 327
Mutual funds ............................ -- (4) (4) -- (20) (20) -- 32 32
Agencies and other ...................... 7 (39) (32) 37 (297) (260) 551 27 578
CMOs .................................... (10) (10) (20) (37) 38 1 (59) 64 5
Municipal securities .................... 8 (5) 3 (24) (26) (50) (19) (32) (51)
Federal funds sold ...................... (18) (2) (20) (98) (9) (107) (51) 94 43
Time deposits ........................... -- -- -- -- 2 2 -- 1 1
Deposits with other
institutions .......................... (27) 19 (8) (14) (2) (16) 54 (33) 21
FHLB stock .............................. 2 1 3 11 2 13 13 9 22
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets .......... 446 (75) 371 1,349 7 1,356 2,064 (124) $ 1,940
Interest-bearing liabilities:
Money market ............................ (2) (1) (3) (29) 3 (26) (16) (5) (21)
NOW ..................................... 2 2 4 12 6 18 28 -- 28
Passbook Savings ........................ 15 (2) 13 (7) 14 7 70 (4) 66
Certificates of deposit ................. 90 (98) (8) 645 138 783 807 1,250 2,057
Advances ................................ 47 4 51 (23) 8 (15) 51 (38) 13
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets ........... $ 152 $ (95) $ 57 $ 598 $ 169 $ 767 $ 940 $ 1,203 $ 2,143
------- ------- ------- ------- ------- ------- ------- ------- -------
Net interest/spread ...................... $ 294 $ 20 $ 314 $ 751 $ (162) $ 589 $ 1,124 $(1,327) $ (203)
</TABLE>
56
<PAGE>
Asset/Liability Management
In an attempt to manage its exposure to changes in interest rates,
management monitors the Bank's interest rate risk. The Board of Directors
reviews at least quarterly the Bank's interest rate risk position and
profitability. The Board of Directors also reviews the Bank's portfolio,
formulates investment strategies and oversees the timing and implementation of
transactions to assure attainment of the Bank's objectives in the most effective
manner. In addition, the Board reviews on a quarterly basis the Bank's
asset/liability position, including simulations of the effect on the Bank's
capital of various interest rate scenarios.
In managing its asset/liability mix, First Security, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, often places more emphasis on managing short term net
interest margin than on better matching the interest rate sensitivity of its
assets and liabilities in an effort to enhance net interest income. Management
believes that the increased net interest income resulting from a mismatch in the
maturity of its asset and liability portfolios can, during periods of declining
or stable interest rates, provide high enough returns to justify the increased
exposure to sudden and unexpected increases in interest rates.
The Board has taken a number of steps to manage the Bank's
vulnerability to changes in interest rates. First, the Bank has long used
community outreach, customer service and marketing efforts to increase the
Bank's passbook and other non-certificate accounts. At April 30, 1997, $90.8
million or 41.4% of the Bank's deposits consisted of passbook, NOW and money
market accounts. The Bank believes that these accounts represent "core" deposits
which are generally somewhat less interest rate sensitive than other types of
deposit accounts. Second, while the Bank continues to originate 30 year fixed
rate residential loans for portfolio as a result of consumer demand, an
increasing proportion of the Bank's residential loans have terms of 15 years or
less or carry adjustable interest rates. Finally, the Bank has focused a
significant portion of its investment activities on securities with adjustable
interest rates or terms of five years or less. At April 30, 1997, $18.9 million
or 46.1% of the Bank's mortgage-backed securities had adjustable interest rates
or terms to maturity (or anticipated average lives in the case of collateralized
mortgage obligations) of five years or less and $11.3 million or 30.4% of the
Bank's other securities had adjustable interest rates or terms to maturity of
five years or less based on their carrying value.
Management utilizes the net portfolio value ("NPV") analysis to
quantify interest rate risk. In essence, this approach calculates the difference
between the present value of liabilities, expected cash flows from assets and
cash flows from off balance sheet contracts. Under OTS regulations, an
institution's "normal" level of interest rate risk in the event of an immediate
and sustained 200 basis point change in interest rates is a decrease in the
institution's NPV in an amount not exceeding 2% of the present value of its
assets. Pursuant to this regulation, thrift institutions with greater than
"normal" interest rate exposure must take a deduction from their total capital
available to meet their risk-based capital requirement. The amount of that
deduction is one-half of the difference between (a) the institution's actual
calculated exposure to the 200 basis point interest rate increase or decrease
57
<PAGE>
(whichever results in the greater pro forma decrease in NPV) and (b) its
"normal" level of exposure which is 2% of the present value of its assets.
Savings institutions, however, with less than $300 million in assets and a total
capital ratio in excess of 12%, will be exempt from this requirement unless the
OTS determines otherwise. The OTS has postponed the implementation of the rule
until further notice. Based upon its asset size and capital level at April 30,
1997, the Bank would qualify for an exemption from this rule; however,
management believes that the Bank would be required to make a deduction from
capital if it were subject to this rule.
Presented below, as of March 31, 1997, is an analysis of the Bank's
estimated interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts in interest rates, up and down 400 basis points in 100
point increments.
Assumed Change $ Change in % Change in
in Interest Rates $ Amount NPV NPV
- ------------------------- ----------------- ----------------- -----------
(Basis Points) (Dollars in Thousands)
+400 $16,073 $(22,210) (58)%
+300 21,571 (16,711) (44)
+200 27,278 (11,005) (29)
+100 33,001 (5,282) (14)
--- 38,282 --- ---
-100 42,378 4,095 11
-200 44,454 6,172 16
-300 47,128 8,845 23
-400 50,448 12,165 32
Certain assumptions utilized in assessing the interest rate risk of
thrift institutions were employed in preparing the preceding table. These
assumptions relate to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates 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 U.S. Treasury rates in the designated
amounts accompanied by a change in the shape of the Treasury yield curve would
cause significantly different changes to the NPV than indicated above.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits and proceeds from
principal and interest payments on loans and mortgage-backed securities. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition. First Security
generally manages the pricing of its deposits to be competitive and to increase
core deposit relationships.
58
<PAGE>
Federal regulations require First Security to maintain minimum levels
of liquid assets. The required percentage has varied from time to time based
upon economic conditions and savings flows and is currently 5% of net
withdrawable savings deposits and borrowings payable on demand or in one year or
less during the preceding calendar month. Liquid assets for purposes of this
ratio include cash, certain time deposits, U.S. Government, government agency
and corporate securities and other obligations generally having remaining
maturities of less than five years. First Security has historically maintained
its liquidity ratio for regulatory purposes at levels in excess of those
required. At April 30, 1997, First Security's liquidity ratio for regulatory
purposes was 8.9%.
The Bank's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. Cash flows provided by operating activities were $382,000 and $1.4
million for the four months ended April 30, 1997 and April 30, 1996
respectively, and $2.1 million, $4.1 million and $3.6 million for the years
ended December 31, 1996, December 31, 1995, and 1994, respectively. Net cash
from investing activities consisted primarily of disbursements for loan
originations and the purchase of investments and mortgage-backed securities,
offset by principal collections on loans, proceeds from maturation and sales of
securities and paydowns on mortgage-backed securities. Net cash from financing
activities consisted primarily of activity in deposit and escrow accounts and
advances from FHLB of Chicago.
The Bank's most liquid assets are cash and short-term investments. The
levels of these assets are dependent on the Bank's operating, financing, lending
and investing activities during any given period. At April 30, 1997, cash and
short-term investments totaled $7.1 million. The Bank has other sources of
liquidity if a need for additional funds arises, including securities maturing
within one year and the repayment of loans. The Bank may also utilize the sale
of securities available-for-sale and Federal Home Loan Bank advances as a source
of funds.
At April 30, 1997, the Bank had outstanding commitments to originate
loans of $3.3 million, of which $2.7 million had fixed interest rates. These
loans are to be secured by properties located in its market area. The Bank
anticipates that it will have sufficient funds available to meet its current
loan commitments. Loan commitments have, in recent periods, been funded through
liquidity or through FHLB advances. Certificates of deposit which are scheduled
to mature in one year or less from April 30, 1997 totaled $102.2 million.
Management believes, based on past experience, that a significant portion of
such deposits will remain with the Bank. Based on the foregoing, in addition to
the Bank's high level of core deposits and capital, the Bank considers its
liquidity and capital resources sufficient to meet its outstanding short-term
and long-term needs.
Liquidity management is both a daily and long-term responsibility of
management. First Security adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-earning deposits and investment
securities, and (iv) the objectives of its asset/liability management program.
Excess liquid assets are invested generally in interest-earning overnight
deposits and short- and intermediate-term U.S. Government and agency obligations
and mortgage-backed securities of short duration. If First Security requires
funds beyond its ability to generate them internally, it has additional
borrowing capacity with the FHLB of Chicago. It is anticipated that immediately
upon completion of the Conversion, the Holding Company's and the Bank's liquid
assets will be increased. See "Use of Proceeds."
59
<PAGE>
First Security is subject to various regulatory capital requirements
imposed by the OTS. At April 30, 1997, First Security was in compliance with all
applicable capital requirements on a fully phased-in basis. See "Regulation -
Regulatory Capital Requirements" and "Pro Forma Regulatory Capital Analysis" and
Note 11 of the Notes to the Consolidated Financial Statements.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary impact of inflation on the
operations of the Bank is reflected in increased operating costs. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates, generally, have
a more significant impact on a financial institution's performance than does
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
Impact of New Accounting Standards
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long Lived
Assets and for Long Lived Assets to be Disposed Of." SFAS No. 121 requires that
long lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or circumstances indicate that the carrying amount of
an asset may not be recoverable. However, SFAS No. 121 does not apply to
financial instruments, core deposit intangibles, mortgage and other servicing
rights or deferred tax assets. The adoption of SFAS No. 121 in 1996 did not have
a material impact on the results of operations or financial condition of the
Bank.
In May 1995, the FASB issued Statement of Financial Accounting
Standards No. 122 ("SFAS No. 122"), "Accounting for Mortgage Servicing Rights."
SFAS No. 122 requires an institution that purchases or originates mortgage loans
and sells or securitizes those loans with servicing rights retained to allocate
the cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values. In
addition, institutions are required to assess impairment of the capitalized
mortgage servicing portfolio based on the fair value of those rights. SFAS No.
122 is effective for fiscal years beginning after December 15, 1995. SFAS No.
122 was superseded by Statement of Financial Accounting Standards No. 125 after
December 31, 1996. The adoption of SFAS No. 122 in 1996 did not have a material
impact on the results of operations or financial condition of the Bank.
In November 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock Based Compensation,"
("SFAS No. 123"). This statement establishes financial accounting standards for
stock-based employee compensation plans. SFAS No. 123 permits the Bank to choose
either a new fair value based method or the current APB Opinion 25 intrinsic
value based method of accounting for its stock-based compensation arrangements.
SFAS No. 123 requires pro forma disclosures of net earnings and earnings per
share computed as if the fair value based method had been applied in financial
statements of
60
<PAGE>
companies that continue to follow current practice in accounting for such
arrangements under Opinion 25. The disclosure provisions of SFAS No. 123 are
effective for fiscal years beginning after December 15, 1995. Any effect that
this statement will have on the Bank will be applicable upon the consummation of
the Conversion.
In June 1996, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"),
"Accounting for Transfers and Extinguishments of Liabilities." SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS No. 125 requires a
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, and derecognizes liabilities when extinguished. SFAS No. 125 also
supersedes SFAS No. 122 and requires that servicing assets and liabilities be
subsequently measured by amortization in proportion to and over the period of
estimated net servicing income or loss and requires assessment for asset
impairment or increases obligations based on their fair values. SFAS No. 125
applies to transfers and extinguishments occurring after December 31, 1996 and
early or retroactive application is not permitted. Because the volume and
variety of certain transactions will make it difficult for some entities to
comply, some provisions have been delayed by SFAS No. 122. The adoption of SFAS
No. 125 did not have a material impact on the financial condition or operations
of the Bank.
In March 1997, the accounting requirements for calculating earnings per
share were revised. Basic earnings per share for 1998 and later will be
calculated solely on average common shares outstanding. Diluted earnings per
share will reflect the potential dilution of stock options and other common
stock equivalents. All prior calculations will be restated to be comparable to
the new methods. The new calculation methods are not expected to significantly
affect future basic earnings per share and diluted earnings per share.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 ("SFAS No. 130") "Reporting Comprehensive Income". This
statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Income tax effects must also
be shown. This statement is effective for fiscal years beginning after December
15, 1997. the adoption of SFAS No. 130 is not expected to have a material impact
on the results of operations or financial condition of First Security.
BUSINESS
General
As a community-oriented financial institution, First Security seeks to
serve the financial needs of communities in its market area. First Security's
business involves attracting deposits from the general public and using such
deposits, together with other funds, to originate primarily one- to four-family
residential mortgage loans and, to a lesser extent, multi-family and commercial
real estate, consumer and other loans in its market area. The Bank also invests
in mortgage-backed and other securities and other permissible investments. See
"Risk Factors."
The Bank offers a variety of accounts having a range of interest rates
and terms. The Bank's deposits include passbook and NOW accounts, money market
accounts and certificate accounts with terms of six months to five years. The
Bank solicits deposits only in its primary market area and does not accept
brokered deposits.
61
<PAGE>
Market Area
The Bank's main office is located in Chicago, Illinois and its branch
offices are located in Chicago, Illinois, Philadelphia, Pennsylvania and Rolling
Meadows, Illinois.
The Bank's Western Avenue office is located on the near northwest side
of Chicago in the "Ukrainian Village" community, a middle-income community where
the Bank has focused its operations since 1964. This community is located
approximately two and one half miles to the northwest of downtown Chicago and
approximately three miles west of Lake Michigan. The majority of the community's
many businesses are small and local companies. Residences within the community
consist primarily of two- to four-family flats and single family homes although
there are also mid-size apartment buildings. Real estate values within this
community have risen sharply over the last ten years as "gentrification" has
begun to occur as a result of the community's proximity to downtown Chicago.
The Bank's Milwaukee Avenue office was opened in 1993 and is located in
the "Norwood Park" neighborhood of Chicago. This community is a stable middle
income area which also has many residents of Eastern European descent.
Residences within the community consist primarily of single family homes as well
as two and three flats and small apartment buildings. This area is located
approximately eight miles northwest of downtown Chicago.
The Bank's Philadelphia branch was acquired in 1994 through a purchase
from the Resolution Trust Corporation. The branch is located in a moderate
income neighborhood of Philadelphia known as "Rhawnhurst." The community is the
home to many persons of Eastern European heritage, including new immigrants.
Residences within the community consist primarily of single family row houses
and, to a lesser extent, small apartment buildings.
The Bank's suburban Chicago branch was opened in 1977 and is located in
Rolling Meadows, Illinois, an upper middle class community located to the
northwest of Chicago, near the western border of Palatine, Illinois. Over the
last 20 years, Rolling Meadows has experienced significant population and
commercial growth. However, as a result of competition, the branch's deposit and
loan growth has been modest.
Lending Activities
General. The principal lending activity of the Bank is originating for
its portfolio fixed and, to a much lesser extent, adjustable rate ("ARM")
mortgage loans secured by one- to four-family residences located primarily in
the Bank's market area. First Security also originates multi-family and
commercial real estate, consumer and other loans in its market area. At April
30, 1997, the Bank's loans receivable, net totaled $165.9 million. See "-
Originations of Loans" and "Use of Proceeds."
62
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and in percentages as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
April 30, ------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- ------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family ......... $137,479 81.32% $134,971 81.14% $117,379 79.83%
Multi-family ................ 9,708 5.74 9,374 5.63 7,926 5.39
Commercial .................. 7,661 4.53 7,647 4.60 7,865 5.35
Mixed use(1) ................ 7,764 4.59 8,004 4.81 7,262 4.94
Construction or
development ............... -- -- -- -- -- --
-------- ----- ------- ----- ------- ------
Total real estate loans ... 162,612 96.18 159,996 96.18 140,432 95.51
Consumer loans:
Share loans ................. 1,182 0.70 1,174 0.71 1,570 1.07
Automobile .................. 72 0.04 74 0.04 110 0.07
Home equity ................. 4,006 2.37 3,431 2.06 3,684 2.51
Home improvement ............ 10 0.01 12 0.01 29 0.02
Other ....................... 351 0.20 395 0.24 445 0.30
-------- ----- ------- ----- ------- -----
Total consumer loans ..... 5,621 3.32 5,086 3.06 5,838 3.97
Loans secured by leases ..... 839 0.50 1,272 0.76 759 0.52
-------- ----- ------- ----- ------- -----
Total loans ............... 169,072 100.00% 166,354 100.00% 147,029 100.00%
====== ====== ======
Less:
Loans in process ............ -- -- --
Deferred fees and
discounts ................. 1,492 1,486 1,578
Allowance for losses ........ 1,666 1,520 885
-------- ------ ------
Total loans receivable, net $165,914 $163,348 $144,566
======== ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1994 1993 1992
----------------------- ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family ......................... $110,280 79.53% $ 84,401 77.89% $ 76,102 75.90%
Multi-family ................................ 7,731 5.58 7,632 7.04 6,799 6.78
Commercial .................................. 6,911 4.98 4.973 4.59 6,843 6.82
Mixed use(1) ................................ 7,433 5.36 5,847 5.40 4,355 4.34
Construction or
development ............................... -- -- 185 0.17 429 0.43
-------- ----------- -------- ----------- -------- ----------
Total real estate loans ................... 132,355 95.45 103,038 95.09 94,528 94.27
Consumer loans:
Share loans ................................. 1,328 0.96 1,525 1.41 1,436 1.43
Automobile .................................. 141 0.10 150 0.14 159 0.16
Home equity ................................. 3,870 2.79 3,105 2.87 3,599 3.59
Home improvement ............................ 69 0.05 78 0.07 161 0.16
Other ....................................... 452 0.33 459 0.42 387 0.39
-------- ----------- -------- ----------- -------- ----------
Total consumer loans ..................... 5,860 4.23 5,317 4.91 5,742 5.73
Loans secured by leases ..................... 448 0.32 -- -- -- --
-------- ----------- -------- ----------- -------- ----------
Total loans ............................... 138,663 100.00% 108,355 100.00% 100,270 100.00%
=========== ======== =======
Less:
Loans in process ............................ -- 6 43
Deferred fees and
discounts ................................. 1,664 1,795 1,899
Allowance for losses ........................ 792 608 360
-------- -------- --------
Total loans receivable, net ............... $136,207 $105,946 $97,968
======== ======== ========
- -----------
<FN>
(1) Mixed use refers to real estate on which the borrower both resides and
conducts a business.
</FN>
</TABLE>
63
<PAGE>
The following table shows the composition of the Bank's loan portfolio
by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
December 31,
April 30, ------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- ------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family ....... $122,397 72.40% $118,308 71.12% $101,015 68.70%
Multi-family .............. 9,504 5.62 9,169 5.51 7,719 5.25
Commercial ................ 6,478 3.83 6,545 3.94 7,370 5.01
Mixed use(1) .............. 7,189 4.25 7,424 4.46 6,666 4.53
Construction or development -- -- -- -- -- --
-------- ------ -------- ------ -------- -----
Total real estate loans ... 145,568 86.10 141,446 85.03 122,770 83.49
Consumer .................... 1,615 0.95 1,655 1.00 2,154 1.46
Loans secured by leases ..... 839 0.50 1,272 0.76 759 0.52
-------- ------ -------- ------ -------- -----
Total fixed-rate loans .... 148,022 87.55 147,804 86.79 125,683 85.47
Adjustable-Rate Loans
Real estate:
One-to-four-family ........ 15,082 8.92 16,663 10.02 16,364 11.13
Multi-family .............. 204 0.12 205 0.12 207 0.14
Commercial ................ 1,183 0.70 1,102 0.66 495 0.34
Mixed use ................. 575 0.34 580 0.35 596 0.41
Consumer .................... 4,006 2.37 3,431 2.06 3,684 2.51
-------- ----- ------- ------ ------- -----
Total adjustable-rate loans 21,050 12.45 21,981 13.21 21,346 14.53
-------- ----- ------- ------ ------- -----
Total loans ............... 169,072 100.00% 166,354 100.00% 147,029 100.00%
====== ====== ======
Less:
Loans in process ............ -- -- --
Deferred fees and discounts . 1,492 1,486 1,578
Allowance for losses ........ 1,666 1,520 885
-------- ------- -------
Total loans receivable, net $165,914 $163,348 $144,566
======== ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1994 1993 1992
----------------------- ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family .................. $ 93,139 67.17% $ 76,852 70.93% $ 67,865 67.68%
Multi-family ......................... 7,522 5.43 7,421 6.85 6,799 6.78
Commercial ........................... 6,628 4.78 4,973 4.59 6,843 6.82
Mixed use(1) ......................... 6,790 4.90 5,483 5.06 3,986 3.98
Construction or development .......... -- -- 185 0.17 429 0.43
-------- ---------- -------- ----------- -------- ---------
Total real estate loans .............. 114,079 82.28 94,914 87.60 85,922 85.69
Consumer ............................... 1,990 1.44 2,212 2.04 2,143 2.14
Loans secured by leases ................ 448 0.32 -- -- -- --
-------- ---------- -------- ----------- -------- ---------
Total fixed-rate loans ............... 116,517 84.04 97,126 89.64 88,065 87.83
Adjustable-Rate Loans
Real estate:
One-to-four-family ................... 17,141 12.36 7,549 6.96 8,237 8.22
Multi-family ......................... 209 0.15 211 0.19 -- --
Commercial ........................... 283 0.20 -- -- -- --
Mixed use ............................ 643 0.46 364 0.34 369 0.36
Consumer ............................... 3,870 2.79 3,105 2.87 3,599 3.59
-------- ---------- -------- ----------- -------- ---------
Total adjustable-rate loans .......... 22,146 15.96 11,229 10.36 12,205 12.17
-------- ---------- -------- ---------- -------- --------
Total loans........................... 138,663 100.00% 108,355 100.00% 100,270 100.00%
========== ========== ========
Less:
Loans in process ....................... -- 6 43
Deferred fees and discounts ............ 1,664 1,795 1,899
Allowance for losses ................... 792 608 360
-------- -------- ------
Total loans receivable, net .......... $136,207 $105,946 $ 97,968
======== ======== ======
</TABLE>
64
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at April 30, 1997. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
final payment is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-----------------------------------------
Multi-family and
Commercial Real
One- to four-family Estate Consumer and Leases Total
-------------------- ------------------- -------------------- ----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
April 30,
------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 ................................ $ 870 9.30% $ 3,109 10.37% $ 1,130 10.65% $ 5,109 10.25%
1999 ................................ 604 7.98 2,030 8.76 771 8.29 3,405 8.52
2000 to 2002 ........................ 13,092 7.99 12,956 9.31 4,430 8.47 30,478 8.62
2003 to 2007 ........................ 17,314 8.23 2,313 9.68 55 6.58 19,682 8.39
2008 to 2022 ........................ 44,259 8.03 4,138 9.21 74 7.15 48,471 8.13
2023 and following .................. 61,340 7.77 587 7.91 -- -- 61,927 7.77
-------- -------- -------- --------
Total ............................ $137,479 7.94 $ 25,133 9.38% $ 6,460 8.80 $169,072 8.19
======== ======== ======== ========
</TABLE>
The total amount of loans due after April 30, 1998 which have
predetermined interest rates is $149.2 million while the total amount of loans
due after such date which have floating or adjustable interest rates is $14.8
million.
65
<PAGE>
Under 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 April
30, 1997, based on the above, the Bank's regulatory loans-to-one borrower limit
was approximately $4.5 million. On the same date, the Bank had no borrowers with
outstanding balances in excess of this amount. As of April 30, 1997, the largest
dollar amount outstanding or committed to be lent to one borrower or, group of
related borrowers, related to one residential loan and two commercial real
estate loans totaling $1.2 million secured by the borrower's residence (in a
suburb of Chicago) and two commercial properties (both restaurants) located in
Chicago, Illinois. At April 30, 1997, these loans were performing in accordance
with their terms. As of the same date, there were no other lending relationships
with carrying values in excess of $1.0 million.
All of the Bank's lending is subject to its written underwriting
standards and to loan origination procedures. Decisions on loan applications are
made on the basis of detailed applications and property valuations (consistent
with the Bank's appraisal policy). The loan applications are designed primarily
to determine the borrower's ability to repay and the more significant items on
the application are verified through use of credit reports, financial
statements, tax returns or confirmations. All mortgage loans currently
originated by First Security are approved by the loan committee, currently
comprised of Directors Babyk, Dobrowolsky and Gawryk and Vice President Korb,
and ratified by the full Board of Directors.
The Bank requires title insurance or other evidence of title on its
mortgage loans, as well as fire and extended coverage casualty insurance in
amounts at least equal to the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. The Bank also
requires flood insurance to protect the property securing its interest when the
property is located in a flood plain.
One- to Four-Family Residential Real Estate Lending. The cornerstone of
the Bank's lending program is the origination of loans secured by mortgages on
owner-occupied one- to four-family residences. Historically, the Bank focused
its residential lending activities on fixed rate loans with terms up to 30
years. In the 1980s, in order to reduce the average term to repricing of its
assets, the Bank began to offer 15 year and 10 year fixed rate loans as well as
ARMs (although, as a result of customer preference, the Bank's ARM loan volume
has been limited). Substantially all of the Bank's one- to four-family
residential mortgage originations are secured by properties located in its
market area. All mortgage loans currently originated by the Bank are retained
and serviced by it.
The Bank currently offers fixed-rate mortgage loans with maturities
from 10 to 30 years. The Bank also offers fixed rate balloon products with a 30
year amortization schedule which are due in five or seven years and which, under
certain circumstances, may be extended for an additional term of up to five or
seven years, as applicable. As of April 30, 1997, the Bank had $22.9 million of
fixed rate loans with original terms of 10 years or less (most of which were
five or seven year balloon loans), $38.9 million of fixed rate loans with
66
<PAGE>
original terms of 10-15 years and $60.6 million of fixed rate loans with
original terms of more than 15 years. See "- Originations of Loans."
The Bank also originates fixed rate home equity loans with terms of up
to ten years. These loans are written so that the total balance does not exceed
the lesser of $35,000 or 75% of the appraised value of the security property
when combined with the balance of the first mortgage lien. At April 30, 1997,
the Bank had $786,000 of home equity loans, all of which are classified in the
tabular data as one- to four-family residential loans.
The Bank also offers ARMs which carry interest rates which adjust at a
margin (generally 250 basis points) over the yield on the One Year Average
Monthly U.S. Treasury Constant Maturity Index ("CMT"). Such loans may carry
terms to maturity of up to 30 years. The ARM loans currently offered by the Bank
provide for a cap on annual interest rate changes of 200 basis points and a
lifetime cap generally of 600 basis points over the initial rate. Initial
interest rates offered on the Bank's ARMs may be approximately 100-150 basis
points below the fully indexed rate, although borrowers are qualified at the
fully indexed rate. As a result, the risk of default on these loans may increase
as interest rates increase. At April 30, 1997, one- to four-family ARMs totaled
$15.1 million or 8.92% of the Bank's total loan portfolio.
First Security will generally lend up to 90% of the lesser of the sales
price or appraised value of the security property on owner occupied one- to
four-family loans; provided, however, that private mortgage insurance is
obtained in an amount sufficient to reduce the Bank's exposure to not more than
80% of the sales price or appraised value, as applicable. The loan-to-value
ratio on nonowner occupied, one- to four-family loans is generally 80% of the
lesser of the sales price or appraised value of the security property. Non-owner
occupied one- to four-family loans may pose a greater risk to the Bank than
traditional owner occupied one- to four-family loans. In underwriting one- to
four-family residential real estate loans, the Bank currently evaluates the
borrower's ability to make principal, interest and escrow payments, the
borrower's credit history, the value of the property that will secure the loan
and debt to income ratios.
Residential loans do not currently include prepayment penalties, are
non-assumable and do not produce negative amortization. The Bank's underwriting
practices do not comply in every way with those required by most purchasers in
the secondary market. For instance, the Bank, on occasion, will lend to
borrowers that have income/debt service ratios below that required by many
secondary market purchasers. In that event, the Bank will require that the
borrower have other attributes which justify approving a loan, such as a
favorable repayment record with the Bank on previous lending relationships,
favorable cash flow, a low loan to value ratio or other assets which can be used
as additional collateral. The Bank has found that non-compliance with secondary
market standards at the time of origination does not in and of itself cause
credit problems since the Bank has engaged in this type of lending for many
years and its overall delinquency experience on these loans has been
satisfactory to date. In addition, these loans, once seasoned, generally are
saleable on the secondary market. Furthermore, the Bank has found that these
policies and procedures help the Bank maintain and improve its customer
relations, which is critical in the communities the Bank serves.
While the Bank seeks to originate most of its one- to four-family
residential loans in amounts which are less than or equal to the applicable
67
<PAGE>
Federal Home Loan Mortgage Corporation maximum (currently $214,600), the Bank
does make one- to four-family residential loans in amounts in excess of such
maximum. The Bank's delinquency experience on such loans has been similar to its
experience on its other residential loans.
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.
Multi-family and Commercial Real Estate Lending. In order to increase
the yield of its loan portfolio and to complement residential lending
opportunities, the Bank from time to time originates permanent multi-family and
commercial real estate loans secured by properties in its primary market area.
At April 30, 1997, the Bank had multi-family loans totaling $9.7 million, or
5.74% of the Bank's total loan portfolio, and $15.4 million in commercial real
estate loans, representing 9.12% of the total loan portfolio.
The Bank's multi-family loan portfolio consists primarily of loans
secured by nine or fewer units. The Bank's commercial real estate loans are
primarily secured by retail stores, small office buildings, store/apartment
complexes, taverns and store front offices.
The Bank's multi-family real estate loans generally carry a maximum
term of 15 years and have fixed rates, although most of these loans are five
year balloons. These loans are generally made in amounts of up to 80% of the
lesser of the appraised value or the purchase price of the property. Most of the
Bank's commercial real estate loans are five year balloon loans with fixed rates
of interest. Also included in the Bank's commercial real estate loans are $1.2
million of lines of credit secured by commercial real estate with floating
interest rates tied to the prime rate of interest. Commercial real estate loans
are generally made in amounts up to 75% of the lesser of the appraised value or
the purchase price of the property.
Appraisals on properties securing multi-family and commercial real
estate loans in excess of $250,000 are performed by an independent appraiser
designated by the Bank at the time the loan is made. All appraisals on and
multi-family and commercial real estate loans are reviewed by the Bank's loan
committee. In addition, the Bank's underwriting procedures require verification
of the borrower's credit history, income and financial statements, banking
relationships, references and income projections for the property. The Bank
obtains personal guarantees on these loans.
At April 30, 1997, the Bank's largest commercial real estate or
multi-family loan outstanding totaled $729,000 and was secured by a six-unit
office building located in Chicago, Illinois. The loan was performing in
accordance with its terms as of that date.
Multi-family and commercial real estate loans may present a higher
level of risk than loans secured by one- to four-family residences. This greater
risk is due to several factors, including the concentration of principal in a
limited number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans.
68
<PAGE>
Consumer Lending. Management believes that offering consumer loan
products helps to expand the Bank's customer base and to create stronger ties to
its existing customer base. In addition, because consumer loans generally have
shorter terms to maturity and carry higher rates of interest than do residential
mortgage loans, they can be valuable asset/liability management tools. The Bank
originates a variety of different types of consumer loans, including home equity
lines of credit, automobile and deposit account loans for household and personal
purposes. Due to the tax advantages to the borrower of home equity lines of
credit, the Bank has focused its recent consumer lending activities on home
equity lending. At April 30, 1997 consumer loans totaled $5.6 million or 3.32%
of total loans outstanding.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. Other than the home
equity lines of credit, the Bank's consumer loans are made at fixed interest
rates, with terms of up to five years.
The Bank's home equity lines of credit are written so that the total
commitment amount, when combined with the balance of the first mortgage lien,
may not exceed 75% of the appraised value of the property. These loans are
written with fixed terms of up to five years and carry interest rates that float
with the prime rate of interest. At April 30, 1997, the Bank's home equity lines
of credit totaled $4.0 million outstanding, or 2.37% of the Bank's total loan
portfolio.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. Consumer loans may entail greater credit
risk than do residential mortgage loans, particularly in the case of consumer
loans which are unsecured or are secured by rapidly depreciable assets, such as
automobiles. In such cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various federal
and state laws, including bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans.
Originations of Loans
Real estate loans are originated by First Security's staff through
referrals from existing customers or real estate agents.
The Bank's ability to originate loans is dependent upon customer demand
for loans in its market and to a lesser extent, customer service and marketing
efforts. Demand is affected by both the local economy and the interest rate
69
<PAGE>
environment. As a result of the strong real estate market in the Bank's primary
market areas and its emphasis on customer service and community outreach, the
Bank has experienced significant loan growth in recent years. See "-- Market
Area." Under current policy, all loans originated by First Security are retained
in the Bank's portfolio. See "-- One- to Four- Family Residential Lending" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management."
In order to supplement loan originations, the Bank has acquired a
substantial amount of mortgage-backed and other securities which are held,
depending on the investment intent, in the "held-to-maturity" or
"available-for-sale" portfolios. See "Investment Activities - Mortgage-Backed
and Related Securities" and Note 2 of the Notes to Consolidated Financial
Statements. In addition, depending on market conditions, the Bank may also
consider the purchase of residential loans from other lenders, although it has
not done so since 1994.
As a reflection of the Bank's emphasis on customer service, the Bank
has not sold loans in the past and does not intend to do so in the future.
The following table shows the loan origination, purchase and repayment
activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Four Months Ended Year Ended
April 30, December 31,
------------------------ --------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family ............... $ 126 $ 368 $ 3,067 $ 1,682 $ 9,521
-------- -------- -------- -------- --------
Total adjustable-rate ..................... 126 368 3,067 1,682 9,521
-------- -------- -------- -------- --------
Fixed rate:
Real estate - one- to four-family ............... 10,727 10,615 34,696 20,024 21,893
- multi-family .................. 1,321 1,525 4,329 1,921 1,664
- commercial ..................... -- 492 682 1,215 5,708
Non-real estate - consumer ...................... 544 1,072 2,039 1,824 1,434
Loan secured by leases ........................ -- 500 500 750 748
-------- -------- -------- -------- --------
Total fixed-rate .......................... 12,592 14,204 42,246 25,734 31,447
-------- -------- -------- -------- --------
Total loans originated .................... 12,718 14,572 45,313 27,416 40,968
-------- -------- -------- -------- --------
Purchases:
Real estate - one- to four-family ............... -- -- -- -- 13,232
-------- -------- -------- -------- --------
Total loans purchased ..................... -- -- -- -- 13,232
-------- -------- -------- -------- --------
Principal repayments ............................... (10,000) (11,074) (25,988) (19,050) (23,892)
-------- -------- -------- -------- --------
Total reductions ........................... (10,000) (11,074) (25,988) (19,050) (23,892)
-------- -------- -------- -------- --------
Increase (decrease) in other
items, net ..................................... (152) 26 (543) (7) (47)
-------- -------- -------- -------- --------
Net increase ............................... $ 2,566 $ 3,524 $ 18,782 $ 8,359 $ 30,261
======== ======== ======== ======== ========
</TABLE>
70
<PAGE>
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, the Bank attempts to cure the delinquency by contacting the
borrower. Generally, Bank personnel work with the delinquent borrower on a case
by case basis to solve the delinquency. Generally, a late notice is sent on all
delinquent loans followed by a phone call after the thirtieth day of
delinquency. Additional written and verbal contacts may be made with the
borrower between 30 and 60 days after the due date. If the loan is contractually
delinquent for 90 days, the Bank may institute appropriate action to foreclose
on the property. Generally, after 120 days, foreclosure procedures are
initiated. If foreclosed, the property is sold at public sale and may be
purchased by the Bank.
Real estate acquired by First Security as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired by foreclosure or deed in lieu of foreclosure, it is
recorded at the lower of cost or fair value less estimated selling costs. After
acquisition, all costs incurred in maintaining the property are expensed. Costs
relating to the development and improvement of the property, however, are
capitalized.
71
<PAGE>
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at April 30, 1997.
<TABLE>
<CAPTION>
Loans Delinquent For:
----------------------------------------------------------------- Total Loans Delinquent
60-89 Days 90 Days and Over 60 Days or More
---------------------------- ------------------------------ -----------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-
family .................. 9 $ 352 .26% 11 $ 545 .40% 20 $ 897 .66%
Multi-family ............. -- -- -- 1 14 .14 1 14 .14
Commercial ............... -- -- -- 6 838 5.43 6 838 5.43
Consumer ................... -- -- -- 12 22 .39 12 22 .39
------ ------ ---- ------ ---- ----
Total ...................... 9 $ 352 .21% 30 $1,419 .84% 39 $1,771 1.05%
====== ====== ==== ====== ==== =====
</TABLE>
72
<PAGE>
Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three 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 Bank will sustain some
loss if the deficiencies are not corrected. Doubtful assets have the weaknesses
of Substandard assets, with the additional characteristics that the weaknesses
make collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified Loss is considered uncollectible and of such little value that
continuance as an asset on the balance sheet of the institution is not
warranted. Assets classified as Substandard or Doubtful require the institution
to establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as a loss, the institution charges off such amount against
the loan loss allowance. If an institution 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 assets, at April 30, 1997,
the Bank had classified a total of $2.3 million of its loan and other assets as
follows:
At
April 30,
1997
----
(In Thousands)
Substandard........................................... $1,027
Doubtful assets....................................... 1,231
Loss assets........................................... ---
---------
Total........................................... 2,258
=======
General loss allowance................................ 1,666
=======
Specific loss allowance............................... ---
=========
Charge-offs, net...................................... 428
========
First Security's classified assets consist of the non-performing loans
referred to below.
73
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. Accrued
interest on loans delinquent 90 days or more is reversed out of income and
credited to an interest reserve account which offsets the amount of capitalized
interest in loans receivable. See Note 1 of the Notes to Consolidated Financial
Statements. Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
December 31,
April 30, -------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family ...................................... $ 9 $ 9 $ 9 $ 41 $ -- $ --
Commercial real estate ................................... -- -- -- 254 -- --
------ ------ ------ ------ ------ ------
Total ............................................... 9 9 9 295 -- --
Accruing loans delinquent 90 days or more:
One- to four-family ...................................... 536 1,111 971 500 985 1,726
Multi-family ............................................. 14 180 367 330 16 62
Commercial real estate ................................... 625 882 749 257 887 203
Consumer ................................................. 235 226 189 43 11 181
------ ------ ------ ------ ------ ------
Total ............................................... 1,410 2,399 2,276 1,130 1,899 2,172
Foreclosed assets:
One- to four-family ...................................... -- 40 -- -- -- --
Commercial real estate ................................... -- -- 499 207 96 170
------
Total ............................................... -- 40 499 207 96 170
Non-performing leases(1) ................................... 839 1,272 -- -- -- --
------ ------ ------ ------ ------ ------
Total non-performing assets ................................ $2,258 $3,720 $2,784 $1,632 $1,995 $2,342
====== ====== ====== ====== ====== ======
Total as a percentage of total assets ...................... 0.87% 1.44% 1.11% 0.72% 1.05% 1.32%
====== ====== ====== ====== ====== ======
- -------------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Comparison of Operating Results for the Four
Months Ended April 30, 1997 and April 30, 1996 -- Provision for Loan
Losses" for a discussion of the Bank's Bennett Funding leases.
</TABLE>
For the year ended December 31, 1996 and for the four months ended
April 30, 1997, gross interest income (less additions to the interest reserve)
which would have been recorded had the non-accruing loans (and accruing loans
delinquent 90 days or more) been current in accordance with their original
terms amounted to $93,000 and $94,000, respectively. The amounts that were
included in interest income on non-accruing loans were $0 and $0 for the year
ended December 31, 1996, and for the four months ended April 30, 1997,
respectively.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of April 30, 1997, there were no other loans with
respect to which known information about the possible credit problems of the
borrowers or the cash flows of the security properties have caused management to
have concerns as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories.
Management considers the Bank's non-performing and "of concern" assets
in establishing its allowance for loan losses.
74
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Four Months
Ended
April 30, Year Ended December 31,
---------------- -------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period .................. $ 1,520 $ 885 $ 885 $ 792 $ 608 $ 360 $ 171
Charge-offs:
One- to four-family ........................... -- -- -- -- -- -- --
Multi-family .................................. -- -- -- -- -- -- --
Commercial real estate ........................ -- 50 68 28 -- -- --
Construction or development ................... -- -- -- -- -- -- --
Consumer ...................................... -- -- 3 15 -- 1 --
Leases ........................................ 432 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
432 50 71 43 -- 1 --
Recoveries:
One- to four-family ........................... -- -- -- -- -- -- --
Multi-family .................................. -- -- -- -- -- -- --
Commercial real estate ........................ -- -- -- -- -- -- --
Construction or development ................... -- -- -- -- -- -- --
Consumer ...................................... 4 -- -- -- 2 -- 5
Leases ........................................ -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
4 -- -- -- 2 -- 5
et (charge-offs) recoveries .................... (428) (50) (71) (43) 2 (1) 5
ditions charged to operations ................. 574 42 706 136 182 249 184
------- ------- ------- ------- ------- ------- -------
Balance at end of period ........................ $ 1,666 $ 877 $ 1,520 $ 885 $ 792 $ 608 $ 360
======= ======= ======= ======= ======= ======= =======
Ratio of net charge-offs
(recoveries) during the period
to average loans outstanding during
the period .................................... 0.26% 0.03% 0.05% (0.03)% ---% ---% ---%
======= ======= ======= ======= ======= ======= =======
Ratio of net charge-offs
(recoveries) during the period to
average non-performing assets .................. 18.95% 1.68% 2.15% (1.88)% (0.10)% 0.04% 0.31%
======= ======= ======= ======= ======= ======= =======
</TABLE>
75
<PAGE>
The distribution of the Bank's allowance for losses on loans
at the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
April 30, 1997 1996
------------------------------------- --------------------------------------
Percent Percent
of Loans of Loans
Amount Loan in Each Amount Loan in Each
of Loan Amounts Category of Loan Amounts Category
Loss by of Total Loss by of Total
Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family ..................... $ 419 $137,479 81.32% $355 $134,971 81.14%
Multi-family ............................ 50 9,708 5.74 56 9,374 5.63
Commercial real estate .................. 311 15,425 9.12 245 15,651 9.41
Construction or
development ............................ -- -- -- -- -- --
Consumer ................................ 69 5,621 3.32 68 5,086 3.06
Loans secured by
leases ................................ 420 839 0.50 318 1,272 0.76
Unallocated ............................. 397 -- -- 478 -- --
-------- -------- ------ -------- -------- -------
Total .............................. $ 1,666 $169,072 100.00% $1,520 $166,354 100.00%
======== ======== ======= ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1995 1994
------------------------------------- --------------------------------------
Percent Percent
of Loans of Loans
Amount Loan in Each Amount Loan in Each
of Loan Amounts Category of Loan Amounts Category
Loss by of Total Loss by of Total
Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family ................. $ 310 $117,379 79.83% $ 284 $110,280 79.53%
Multi-family ........................ 56 7,926 5.39 52 7,731 5.58
Commercial real estate .............. 199 15,127 10.29 233 14,344 10.34
Construction or
development ........................ -- -- -- -- -- --
Consumer ............................ 70 5,838 3.97 71 5,860 4.23
Loans secured by
leases ............................ 76 759 0.52 55 448 0.32
Unallocated ......................... 174 -- -- 97 -- --
-------- -------- ------- -------- -------- ------
Total .......................... $ 885 $147,029 100.00% $ 792 $138,663 100.00%
======== ======== ======= ======== ======== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1993 1992
------------------------------------- --------------------------------------
Percent Percent
of Loans of Loans
Amount Loan in Each Amount Loan in Each
of Loan Amounts Category of Loan Amounts Category
Loss by of Total Loss by of Total
Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family ................ $ 225 $ 84,401 77.89% $165 $ 76,102 75.90%
Multi-family ....................... 45 7,632 7.04 20 6,799 6.78
Commercial real estate ............. 206 10,820 9.99 105 11,198 11.16
Construction or
development ....................... 15 185 0.17 15 429 0.43
Consumer ........................... 66 5,317 4.91 45 5,742 5.73
Loans secured by
leases ........................... -- -- -- -- -- --
Unallocated ........................ 51 -- -- 10 -- --
-------- -------- ------- ----- -------- ------
Total ......................... $ 608 $108,355 100.00% $360 $100,270 100.00%
======== ======== ======= ===== ======== ======
</TABLE>
76
<PAGE>
The allowance for loan losses is established through a provision for
loan losses charged to earnings based on management's evaluation of the risk
inherent in its entire loan portfolio. Such evaluation, which includes a review
of all loans of which full collectibility may not be reasonably assured,
considers the market value of the underlying collateral, growth and composition
of the loan portfolio, delinquency trends, adverse situations that may affect
the borrower's ability to repay, prevailing and projected economic conditions
and other factors that warrant recognition in providing for an adequate
allowance for loan losses. In determining the general reserves under these
policies, historical charge-offs and recoveries, changes in the mix and levels
of the various types of loans, net realizable values, the current and
prospective loan portfolio and current economic conditions are considered.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen economic and market
conditions could result in adjustments to the allowance for loan losses, and net
earnings could be significantly affected, if circumstances differ substantially
from the assumptions used in making the final determination.
Investment Activities
General. Generally, the investment policy of First Security is to
invest funds among categories of investments based upon the Bank's
asset/liability management policies, investment quality, loan and deposit
volume, liquidity needs and performance objectives. In accordance with the
Bank's asset/liability management policy, the Bank has recently focused a
significant part of its investment activities on instruments with terms to
repricing or maturity of five years or less.
First Security must maintain minimum levels of investments and other
assets that qualify as liquid assets under OTS regulations. Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans. Historically, First
Security has maintained liquid assets at levels above the minimum requirements
imposed by the OTS regulations and above levels believed adequate to meet the
requirements of normal operations, including potential deposit outflows. At
April 30, 1997, First Security's liquidity ratio for regulatory purposes was
8.90%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset/Liability Management" and "- Liquidity and Capital
Resources."
Prior to December 31, 1993, the Bank recorded its marketable equity
securities at the lower of cost or current market value and its remaining
investment securities at amortized cost. Unrealized declines in the market value
of marketable equity securities were reflected in the equity section of the
financial statements. Effective January 1, 1994, First Security adopted SFAS
115. As required by SFAS 115, securities are classified into three categories:
trading, held-to-maturity and available-for-sale. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and are reported at fair value with unrealized gains and
losses included in trading account activities in the statement of operations.
Securities that First Security 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 trading or held-to-maturity are classified as
available-for-sale. At April 30, 1997, First Security had no securities which
were classified as trading and $27.5 million of mortgage-backed and investment
securities classified as
77
<PAGE>
available-for-sale. Available-for-sale securities are reported at fair value
with unrealized gains and losses included, on an after-tax basis, in a separate
component of retained earnings.
Mortgage-Backed and Related Securities. In order to supplement its
lending activities and achieve its asset/liability management goals, the Bank
invests in mortgage-backed and related securities. As of April 30, 1997, all of
the mortgage-backed and related securities owned by the Bank are issued, insured
or guaranteed either directly or indirectly by a federal agency or are rated
"AAA" by a nationally recognized credit rating agency. However, it should be
noted that, while a (direct or indirect) federal guarantee or a high credit
rating may indicate a high degree of protection against default, they do not
indicate that the securities will be protected from declines in value based on
changes in interest rates or prepayment speeds.
Consistent with its asset/liability management strategy, at April 30,
1997, $18.6 million, or 45.4% of First Security's mortgage-backed and related
securities were available-for-sale. In addition, on the same date, $17.1 million
or 41.7% of the Bank's mortgage-backed and related securities carried adjustable
rates. Finally, as discussed further below, at April 30, 1997, the Bank had $1.8
million of collateralized mortgage obligations ("CMOs") with anticipated average
lives of five years or less. For additional information regarding the Bank's
mortgage-backed securities portfolio, see Note 2 of the Notes to the
Consolidated Financial Statements.
The Bank's CMOs and real estate mortgage investment conduits ("REMICs")
are securities derived by reallocating the cash flows from mortgage-backed
securities or pools of mortgage loans in order to create multiple classes, or
tranches, of securities with coupon rates and average lives that differ from the
underlying collateral as a whole. The terms to maturity of any particular
tranche is dependent upon the prepayment speed of the underlying collateral as
well as the structure of the particular CMO or REMIC. Although a significant
proportion of the Bank's CMOs and REMICs are interests in tranches which have
been structured (through the use of cash flow priority and "support" tranches)
to give somewhat more predictable cash flows, the cash flow and hence the value
of CMOs and REMICs is subject to change.
The Bank invests in CMOs and REMICs as an alternative to mortgage loans
and conventional mortgage-backed securities as part of its asset/liability
management strategy. Management believes that, depending on market conditions,
CMOs and REMICs may represent attractive investment alternatives relative to
other investments due to the wide variety of maturity and repayment options
available. In particular, the Bank has from time to time concluded that short
and intermediate duration CMOs and REMICs (five year or less average life) often
represent a better combination of rate and duration than adjustable rate
mortgage-backed securities.
To assess price volatility, the Federal Financial Institutions
Examination Council ("FFIEC") adopted a policy in 1992 which requires an annual
"stress" test of mortgage derivative securities. This policy, which has been
adopted by the OTS, requires the Bank to annually test its CMOs and other
mortgage-related securities to determine whether they are high-risk or
nonhigh-risk securities. Mortgage derivative products with an average life or
price volatility in excess of a benchmark 30-year, mortgage-backed, pass-through
security are considered high-risk mortgage securities. Under the policy, savings
institutions may generally only invest in low-risk mortgage securities in order
to reduce interest rate risk. In addition, all high-risk mortgage securities
acquired after February 9, 1992 which are classified as high risk at the time of
purchase must be carried in the institution's
78
<PAGE>
trading account or as assets available-for-sale. At March 31, 1997, the most
recent quarterly test date, none of the Bank's mortgage-backed securities were
classified as "high-risk."
79
<PAGE>
The following table sets forth the composition of the Bank's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
April 30, 1997 1996 1995 1994
------------------ -------------------- ------------------- --------------------
Carrying % of Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total Value Total
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
held-to-maturity:
GNMA ............................. $ 8,896 21.69% $ 9,226 21.05% $ 5,142 11.39% $ 7,380 17.32%
FNMA ............................. 3,016 7.36 3,294 7.51 4,526 10.02 8,508 19.96
FHLMC ............................ 5,655 13.79 6,280 14.33 9,806 21.71 19,234 45.13
CMOs/REMICs ...................... 4,822 11.76 5,309 12.11 5,646 12.50 7,499 17.59
------- ------ ------- ------ ------- ------ ------- ------
22,389 54.60 24,109 55.00 25,120 55.62 42,621 100.00
Mortgage-backed securities
available-for-sale:
GNMA ............................. 3,277 7.99 3,425 7.81 2,924 6.47 -- --
FNMA ............................. 6,197 15.11 6,572 14.99 6,383 14.14 -- --
FHLMC ............................ 8,400 20.49 8,985 20.50 9,992 22.12 -- --
CMOs/REMICs ...................... 742 1.81 745 1.70 745 1.65 -- --
------- ------ ------- ------ ------- ------ ------- ------
18,616 45.40 19,727 45.00 20,044 44.38 -- --
------- ------ ------- ------ ------- ------ ------- ------
Total mortgage-backed
securities .................. $41,005 100.00% $43,836 100.00% $45,164 100.00% $42,621 100.00%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
80
<PAGE>
The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities at April 30, 1997.
<TABLE>
<CAPTION>
April 30,
Due in 1997
---------------------------------------------------------------------- -----------------------------
6 Months 6 Months 1 to 3 to 5 5 to 10 10 to 20 Over 20 Amortized Carrying
or Less to 1 Year 3 Years Years Years Years Years Cost Value
------- --------- ------- ----- ----- ----- ----- ---- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation ..... $ -- $458 $ 1 $ 172 $ 1,785 $ 3,256 $ 8,598 $14,270 $14,055
Federal National
Mortgage Association ..... -- -- 386 -- 1,470 1,179 6,344 9,379 9,213
Government National
Mortgage Association ..... -- -- -- -- 522 718 10,928 12,168 12,173
CMOs and REMICs ............ -- -- 780 -- 1,364 1,244 2,147 5,535 5,564
------ ------- ------- ------- ------- ------- ------- ------- -------
Total ................. $ -- $458 $ 1,167 $ 172 $ 5,141 $ 6,397 $28,017 $41,352 $41,005
====== ======= ======= ======== ======= ======= ======= ======= =======
</TABLE>
81
<PAGE>
As of April 30, 1997, the Bank did not have any mortgage-backed
securities in excess of 10% of retained earnings except for FNMA, FHLMC and GNMA
issues, amounting to $9.2 million, $14.1 million and $12.2 million,
respectively.
The market values of a portion of the Bank's mortgage-backed securities
held-to-maturity have been from time to time lower than their carrying values.
However, for financial reporting purposes, such declines in value are considered
to be temporary in nature since they have been due to changes in interest rates
rather than credit concerns. See Note 2 of the Notes to the Consolidated
Financial Statements.
The following table shows mortgage-backed securities purchase, sale and
repayment activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Four Months Ended Year Ended
April 30, December 31,
------------------------- --------------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Purchases:
Adjustable-rate .............................. $ -- $ 2,396 $ 2,396 $ 8,197 $ 1,460
Fixed-rate ................................... -- -- 4,583 1,498 3,830
CMOs ......................................... -- 510 510 -- 3,446
-------- -------- -------- -------- --------
Total purchases ............................. -- 2,906 7,489 9,695 8,736
Principal repayments ......................... (2,872) (1,169) (8,639) (6,999) (11,211)
Discount/premium net change .................. (2) -- 16 (39) (349)
Fair value net change ........................ (39) (76) (194) (114) --
-------- -------- -------- -------- --------
Net increase (decrease) ..................... $ (2,913) $ 1,661 $ (1,328) $ 2,543 $ (2,824)
======== ======== ======== ======== ========
</TABLE>
The Bank's holdings of mortgage-backed securities are a significant
portion of the Bank's total assets. Since pass-through mortgage-backed
securities generally carry a yield approximately 50 to 100 basis points below
that of the corresponding type of residential loan (due to the implied federal
agency guarantee fee and the retention of a servicing spread by the loan
servicer), and the Bank's CMOs and REMICs also carry lower yields (due to the
implied federal agency guarantee and because such securities tend to have
shorter actual durations than 30 year loans), in the event that the proportion
of the Bank's assets consisting of mortgage-backed and related securities
increases, the Bank's asset yields could be somewhat adversely affected. The
Bank will evaluate mortgage-backed and related securities purchases in the
future based on its asset/liability objectives, market conditions and
alternative investment opportunities.
Other Securities. Federally chartered savings institutions 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, federally chartered savings institutions may also invest
their assets in commercial paper, investment grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally chartered
savings institution is otherwise authorized to make directly.
82
<PAGE>
In order to complement its lending and mortgage-backed securities, and
to increase its holding of short and intermediate term assets, the Bank invests
in liquid investments and in high-quality investments, such as U.S. Treasury and
agency obligations. At April 30, 1997 and December 31, 1996, the Bank's
securities portfolio totaled $37.2 million and $34.8 million, respectively. At
April 30, 1997, the Bank did not own any other securities of a single issuer
which exceeded 10% of the Bank's retained earnings, other than federal agency
obligations. See Note 2 of the Notes to the Consolidated Financial Statements
for additional information regarding the Bank's other securities portfolio.
83
<PAGE>
The following table sets forth the composition of the Bank's other
securities and other earning assets at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
April 30, 1997 1996 1995 1994
--------------- ------------------- ----------------- -----------------------
Carrying % of Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total Value Total
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held-to-maturity:
Federal agency obligations ............ $22,801 61.33% $20,320 58.43% $15,445 45.02% $12,452 37.07%
Municipal bonds ....................... 5,207 14.01 5,208 14.98 4,768 13.90 5,120 15.25
Corporate Notes ....................... 251 0.67 251 0.72 353 1.02 354 1.05
------- --------- ------- --------- ------- ---------- ------- ------
28,259 76.01 25,779 74.13 20,566 59.94 17,926 53.37
Securities available-for sale:
US government securities .............. 3,321 8.93 3,350 9.63 7,936 23.13 10,203 30.38
Mutual Funds .......................... 5,598 15.06 5,645 16.23 5,737 16.72 5,389 16.04
Other Equity .......................... -- -- 2 0.01 70 0.21 70 0.21
------- --------- ------- --------- ------- ---------- ------- ------
8,919 23.99 8,997 25.87 13,743 40.06 15,662 46.63
------- --------- ------- --------- ------- ---------- ------- ------
Total securities ................. $37,178 100.00% $34,776 100.00% $34,309 100.00% $33,588 100.00%
======= ========= ======= ========= ======= ========== ======= ======
Other earning assets:
Interest-earning deposits
with banks ........................... $ 904 18.24% $ 2,713 44.58% $ 9,490 71.12% $ 1,588 38.68%
FHLB stock ............................ 1,852 37.37 1,673 27.49 1,553 11.64 1,318 32.10
Federal funds sold .................... 2,000 40.35 1,500 24.65 2,100 15.74 1,000 24.35
Time deposit in other
financial institutions ............... 200 4.04 200 3.28 200 1.50 200 4.87
------- --------- ------- --------- ------- ---------- ------- ------
Total ........................... $ 4,956 100.00% $6,086 100.00% $13,343 100.00% $4,106 100.00%
======= ========= ======= ========= ======= ========== ======= ======
</TABLE>
84
<PAGE>
The composition and maturities of the other securities portfolio,
excluding FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
April 30, 1997
---------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 years Total Securities
------ ----- ----- -------- ----------------------
Amortized Amortized Amortized Amortized Amortized Fair
Cost Cost Cost Cost Cost Value
---- ---- ---- ---- ---- -----
Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
US government securities ........... $ 999 $ 1,991 $ -- 259 $ 3,249 $ 3,321
Federal agency obligations(1) ...... -- 2,444 15,347 5,010 22,801 22,801(1)
Municipal bonds .................... 100 1,448 2,175 1,484 5,207 5,221
Corporate notes .................... 250 -- -- -- 250 251
------- ------- ------- ------ ------- -------
Total securities ................... $ 1,349 $ 5,883 $17,522 $ 6,753 $31,507 $31,594
======= ======= ======= ======= ======= =======
Weighted average yield ............. 6.89% 6.31% 6.76% 7.20% 6.74%
======= ======= ======= ======= =======
- ----------------
<FN>
(1) $26 million are callable securities.
</FN>
</TABLE>
See Note 2 of the Notes to the Consolidated Financial Statements for a
discussion of the Bank's securities portfolio.
Sources of Funds
General. The Bank's primary sources of funds are deposits, payments
(including prepayments) of loan principal, interest earned on loans and
securities, repayments of securities, borrowings and funds provided from
operations.
Deposits. First Security offers deposit accounts having a wide range of
interest rates and terms. The Bank's deposits consist of passbook, NOW, money
market and various certificate accounts. The Bank relies primarily on
competitive pricing and customer service to attract and retain these deposits.
The Bank's customers may access their accounts through any of the Bank's five
offices and five automated teller machines ("ATMs"). In addition, the Bank's
customers may access their accounts through several nationwide ATM networks. The
Bank only solicits deposits in its market area and does not currently use
brokers to obtain deposits.
The Bank manages the pricing of its deposits in keeping with its
asset/liability management, profitability and growth objectives. The variety of
deposit accounts offered by the Bank has allowed it to be competitive in
obtaining funds and to respond with flexibility to changes in consumer demand.
However, as some customers have become more interest rate conscious, the Bank
has become more susceptible to short-term fluctuations in its certificate of
deposit flows.
Management believes that the "core" portion of the Bank's regular
savings, NOW and money market accounts, which amounted to $90.8 million or 41.4%
of total deposits at April 30, 1997, can have a lower cost and be more resistant
to interest rate changes (and competing non-depository financial products) than
certificate accounts. The Bank utilizes customer service, community outreach and
marketing initiatives in an effort to build and maintain the volume of such
deposits. However, there can be no assurance as to whether the Bank will be able
to maintain or increase its core deposits in the future.
85
<PAGE>
The table below sets forth the Bank's deposit flows for the periods
indicated.
<TABLE>
<CAPTION>
Four Months Ended Year Ended
April 30, December 31,
----------------------------- ----------------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Opening balance...................... $ 219,505 $ 209,387 $ 209,387 $ 195,875 $ 161,715
Deposits............................. 122,486 114,416 347,280 348,404 344,471
Withdrawals.......................... (125,591) (113,652) (346,192) (343,039) (316,340)
Interest credited.................... 2,587 2,602 9,030 8,147 6,029
----------- ---------- ---------- ---------- ----------
Ending balance....................... $ 218,987 $212,753 $219,505 $209,387 $195,875
========= ======== ======== ======== ========
Net increase (decrease).............. $ (518) $ 3,366 $ 10,118 $ 13,512 $ 34,160
=========== ========== ========= ========= =========
Percent increase (decrease).......... (0.24)% 1.61% 4.83% 6.90% 21.12%
===== ==== ==== ==== =====
</TABLE>
86
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank as of the dates
indicated.
<TABLE>
<CAPTION>
April 30, December 31,
------------------------------------ ---------------------------------------------------------
1997 1996 1996 1995 1994
----------------- ---------------- ---------------- ---------------- -----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transactions and
Savings Deposits
Passbook Accounts 3.00% ....... $ 71,203 32.5% $ 69,509 32.7% $ 71,167 32.4% $ 69,631 33.3% $ 73,548 37.5%
NOW Accounts 2.23% ............ 14,505 6.6 13,077 6.1 14,509 6.6 13,262 6.3 11,673 6.0
Money Market Accounts 3.06% ... 5,137 2.3 5,488 2.6 5,107 2.3 5,612 2.7 6,928 3.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total Non-Certificates ........ 90,845 41.4 88,074 41.4 90,783 41.3 88,505 42.3 92,149 47.0
Certificates:
0.00 - 3.99% .................. -- -- 35 -- 119 0.1 310 0.1 20,075 10.2
4.00 - 5.99% .................. 114,663 52.4 106,459 50.0 116,397 53.0 87,775 41.9 76,704 39.2
6.00 - 7.99% .................. 13,365 6.1 18,023 8.5 12,094 5.5 32,629 15.6 6,238 3.2
8.00 - 9.00% .................. 114 0.1 162 0.1 112 0.1 168 0.1 709 0.4
-------- ----- -------- ----- -------- ----- ------ ----- ------ -----
Total Certificates ............ 128,142 58.6 124,679 58.6 128,722 58.7 120,882 57.7 103,726 53.0
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total Deposits ................ $218,987 100.0% $212,753 100.0% $219,505 100.0% $209,387 100.0% $195,875 100.0%
======== ===== ======== ===== ======== ===== ======= ===== ======= =====
- -------
(1) Includes $4.1 million from not for profit organizations.
</TABLE>
87
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of April 30, 1997.
<TABLE>
<CAPTION>
Less Than 1 to 2 2 to 3 3 to 4 4 to 5 Greater
1 Year Years Years Years Years than 5 Years Total
------ ----- ----- ----- ----- ------------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
4.00 - 4.99%.......... $ 8,774 $ 18 $ --- $ --- $ --- $ --- $ 8,792
5.00 - 5.99%.......... 91,255 10,136 1,910 961 1,609 --- 105,871
6.00 - 6.99%.......... 1,888 95 4,433 1,671 2,695 --- 10,782
7.00 - 7.99%.......... 229 --- 1,629 102 623 --- 2,583
8.00 - 8.99%.......... 18 46 --- --- --- 50 114
---------- ---------- --------- --------- --------- ------- -----------
$102,164 $10,295 $7,972 $2,734 $4,927 50 $128,142
======== ======= ====== ====== ====== ======= ========
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of April 30,
1997.
<TABLE>
<CAPTION>
Maturity
----------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------------- -------------- -------------- -------------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than
$100,000................................... $30,123 $26,170 $22,571 $17,639 $ 96,503
Certificates of deposit $100,000
or more.................................... 10,033 7,876 5,391 8,339 31,639
-------- -------- -------- -------- --------
Total certificates of deposit.......... $40,156 $34,046 $27,962 $25,978 $128,142
======= ======= ======= ======= ========
</TABLE>
For additional information regarding the composition of the Bank's
deposits, see Note 7 of the Notes to the Consolidated Financial Statements.
Borrowings. First Security's other available sources of funds include
advances from the FHLB of Chicago and other borrowings. The Bank's FHLB advances
to date have primarily consisted of subsidized borrowings to fund special
housing programs. As a member of the FHLB of Chicago, the Bank is required to
own capital stock in the FHLB of Chicago and is authorized to apply for advances
from the FHLB of Chicago. Each FHLB credit program has its own interest rate,
which may be fixed or variable, and range of maturities. The FHLB of Chicago may
prescribe the acceptable uses for these advances, as well as limitations on the
size of the advances and repayment provisions. See Note 8 of the Notes to the
Consolidated Financial Statements.
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<PAGE>
The following table sets forth the maximum month-end balance and
average balance of FHLB advances for the periods indicated.
<TABLE>
<CAPTION>
Four Months Ended Year Ended
April 30, December 31,
----------------------- ---------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Maximum Balance:
FHLB Advances............................. $7,500 $3,000 $4,000 $10,000 $3,000
Average Balance:
FHLB Advances............................. $5,400 $3,000 $3,333 $3,769 $2,846
Weighted average interest rate of
FHLB advances............................. 5.75% 5.17% 5.25% 5.25% 6.30%
</TABLE>
Subsidiary Activities
As a federally chartered savings bank, First Security is permitted by
OTS regulations to invest up to 2% of its assets in the stock of, or loans to,
service corporation subsidiaries, and may invest an additional 1% of its assets
in service corporations where such additional funds are used for inner-city or
community development purposes. 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
association may engage in directly.
At April 30, 1997, First Security had one wholly owned service
corporation, Western Security Corporation ("Western" or the "Subsidiary").
Western, an Illinois corporation, was incorporated November 1977 for the purpose
of offering customers and members of the general public credit, life, mortgage
and disability insurance. First Security's investment in Western was $47,000 as
of April 30, 1997. Western recognized net income (loss) of $(6,000) during the
four months ended April 30, 1997 and $3,000 during the year ended December 31,
1996.
Competition
First Security faces strong competition both in originating real estate
loans and in attracting deposits. Competition in originating loans comes
primarily from credit unions, mortgage bankers, commercial banks and other
savings institutions, which also make loans secured by real estate located in
the Bank's market area. First Security competes for loans principally on the
basis of the interest rates and loan fees it charges, the types of loans it
originates, community outreach and the quality of services it provides to
borrowers.
Competition for those deposits is principally from credit unions,
commercial banks, mutual funds, securities firms and other savings institutions
located in the same communities. The ability of the Bank to attract and retain
deposits depends on its ability to provide an investment opportunity that
satisfies the requirements of investors as to rate of return, liquidity, risk,
convenient locations and other factors. The Bank competes for these deposits by
offering competitive rates, convenient business hours, community outreach and a
customer oriented staff.
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<PAGE>
Properties
The following table sets forth information concerning the main office
and each branch office of the Bank at April 30, 1997. At April 30, 1997, the
Bank's premises had an aggregate net book value of approximately $3.8 million.
<TABLE>
<CAPTION>
Year Net Book Value
Acquired/ Owned or at
Location Established Leased April 30, 1997 Deposits
-------- ----------- ------ -------------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Main Office:
936 North Western Avenue 1964 Owned $1,340 $143,958
Chicago, Illinois 60622-4695
Branch Offices:
2166 Plum Grove Road 1977 Leased(1) 4 11,444
Rolling Meadows, Illinois 60008
820 N. Western Avenue 1983 Owned 257 2,266
Chicago, Illinois 60622
5670 N. Milwaukee Avenue 1993 Owned 1,197 11,321
Chicago, Illinois 60646
7918 Bustleton Avenue 1994 Owned 663 49,998
Philadelphia, Pennsylvania 19152
</TABLE>
- ---------
(1) The lease expires in July 2000.
The Bank believes that its current facilities are adequate to meet the
present and foreseeable future needs of the Bank and the Holding Company.
However, in the future, the Bank may consider the addition of one or more new
branches within the Chicago or Philadelphia areas.
The Bank's depositor and borrower customer files are maintained by an
independent data processing company. The net book value of the data processing
and computer equipment utilized by the Bank at April 30, 1997 was approximately
$110,700.
Legal Proceedings
From time to time, First Security is involved as plaintiff or defendant
in various legal proceedings arising in the normal course of its business. While
the ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on the Holding Company's and the
Bank's financial position or results of operations.
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<PAGE>
REGULATION
General
First Security is a federally chartered savings bank, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, First Security is subject to broad
federal regulation and oversight extending to all its operations. First Security
is a member of the FHLB of Chicago and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). As the savings and loan holding company of First Security, the Holding
Company also is subject to federal regulation and oversight. The purpose of the
regulation of the Holding Company and other holding companies is to protect
subsidiary savings associations. First Security is a member of the Savings
Association Insurance Fund ("SAIF") and the deposits of First Security are
insured by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over First Security.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, First Security is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS and FDIC examinations of First Security were
as of June 30, 1996 and April 23 1990, respectively. Under agency scheduling
guidelines, it is likely that another examination will be initiated in the near
future. When these examinations are conducted by the OTS and the FDIC, the
examiners may require First Security to provide for higher general or specific
loan loss reserves. All savings associations are subject to a semi-annual
assessment, based upon the savings association's total assets, to fund the
operations of the OTS.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including First Security and the
Holding Company. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of First
Security is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. First Security is in compliance with the noted
restrictions.
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<PAGE>
First Security's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At April 30, 1997, First Security's lending
limit under this restriction was $4.5 million. Assuming the sale of the minimum
number of shares in the Conversion at April 30, 1997, that limit would be
increased to $6.9 million. First Security is in compliance with the
loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. The OTS and the other federal banking
agencies have also proposed additional guidelines on asset quality and earnings
standards. No assurance can be given as to whether or in what form the proposed
regulations will be adopted.
Insurance of Accounts and Regulation by the FDIC
First Security is a member of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings associations, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF-insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
92
<PAGE>
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF insured deposits. As a result of the BIF
reaching its statutory reserve ratio the FDIC revised the premium schedule for
BIF insured institutions to provide a range of .04% to .31% of deposits. The
revisions became effective in the third quarter of 1995. In addition, the BIF
rates were further revised, effective January 1996, to provide a range of 0% to
.27%. The SAIF rates, however, were not adjusted. At the time the FDIC revised
the BIF premium schedule, it noted that, absent legislative action (as discussed
below), the SAIF would not attain its designated reserve ratio until the year
2002. As a result, SAIF insured members would continue to be generally subject
to higher deposit insurance premiums than BIF insured institutions until, all
things being equal, the SAIF attains its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate was
established at .657% of deposits and the assessment was paid in November 1996.
Based on First Security's level of SAIF deposits at March 31, 1995, First
Security's assessment was approximately $1.3 million on a pre-tax basis. This
special assessment significantly increased noninterest expense and adversely
affected the Bank's results of operations for the year ended December 31, 1996.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as First Security. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates established by the FDIC to implement this
requirement for all FDIC-insured institutions are a 6.5 basis points assessment
on SAIF deposits and 1.5 basis points on BIF deposits until BIF insured
institutions participate fully in the assessment.
Regulatory Capital Requirements
Federally insured savings associations, such as First Security, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
93
<PAGE>
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual First Security stock and related income. In addition,
all intangible assets, other than a limited amount of purchased mortgage
servicing rights, must be deducted from tangible capital for calculating
compliance with the requirement. At April 30, 1997, First Security had $400,000
of intangible assets recorded as assets on its financial statements, as a result
of its acquisition of assets and assumption of liabilities from the Resolution
Trust Corporation in 1994. See Note 6 of the Notes to Consolidated Financial
Statements.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital.
Assuming the Bank would have been subject to the OTS capital
requirements, at April 30, 1997, First Security had tangible capital of $29.5
million, or 11.4% of adjusted total assets, which is approximately $25.6 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date. On a pro forma basis, after giving effect to the sale of the minimum,
midpoint and maximum number of shares of Common Stock offered in the Conversion
and investment of 50% of the net proceeds in assets not excluded for tangible
capital purposes, First Security would have had tangible capital equal to 16.8%,
17.7% and 18.5%, respectively, of adjusted total assets at April 30, 1997, which
is $42.2 million, $45.1 million and $48.1 million, respectively, above the
requirement.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio.
At April 30, 1997, First Security had core capital equal to $29.5
million, or 11.4% of adjusted total assets, which is $21.7 million above the
minimum leverage ratio requirement of 3% as in effect on that date. On a pro
forma basis, after giving effect to the sale of the minimum, midpoint and
maximum number of shares of Common Stock offered in the Conversion and
investment of 50% of the net proceeds in assets not excluded from core capital,
First Security would have had core capital equal to 16.8%, 17.7% and 18.5%,
respectively, of adjusted total assets at April 30, 1997, which is $38.0
million, $41.0 million and $43.9 million, respectively, above the requirement.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
94
<PAGE>
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At April 30, 1997, First Security
had $1.7 million of general loss reserves of which $1.6 million qualifies as
supplementary capital, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. First Security had no
such exclusions from capital and assets at April 30, 1997.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule provides for a two quarter
lag between calculating interest rate risk and recognizing any deduction from
capital. The rule will not become effective until the OTS evaluates the process
by which savings associations may appeal an interest rate risk deduction
determination. It is uncertain as to when this evaluation may be completed. Any
savings association with less than $300 million in assets and a total capital
ratio in excess of 12% is exempt from this requirement unless the OTS determines
otherwise. Based upon its capital level and assets size at April 30, 1997, First
Security would qualify for an exemption from the requirement.
On April 30, 1997, First Security had total capital of $31.1 million
(including $29.5 million in core capital and $1.6 million in qualifying
supplementary capital) and risk-weighted assets of $127.5 million; or total
capital of 24.4% of risk-weighted assets. This amount was $20.9 million above
the 8% requirement in effect on that date. On a pro forma basis, after giving
95
<PAGE>
effect to the sale of the minimum, midpoint and maximum number of shares of
Common Stock offered in the Conversion, the infusion to First Security of 50% of
the net Conversion proceeds and the investment of those proceeds to First
Security in 20% risk-weighted government securities, First Security would have
had total capital of 36.7%, 38.8% and 40.9%, respectively, of risk-weighted
assets, which is above the current 8% requirement by $37.5 million, $40.5
million and $43.5 million, respectively.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on First
Security may have a substantial adverse effect on First Security's operations
and profitability and the value of the Common Stock purchased in the Conversion.
Holding Company stockholders do not have preemptive rights, and therefore, if
the Holding Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Holding Company of those persons purchasing
shares in the Conversion.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
96
<PAGE>
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion. See "The
Conversion--Effects of Conversion to Stock Form on Depositors and Borrowers of
the Bank" and "-Restrictions on Repurchase of Stock."
Generally, savings associations, such as First Security, that before
and after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. First Security
may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association that is a
subsidiary of a holding company may make a capital distribution with notice to
the OTS provided that it has a CAMEL 1 or 2 rating, is not of supervisory
concern, and would remain adequately capitalized (as defined in the OTS prompt
corrective action regulations) following the proposed distribution. Savings
associations that would remain adequately capitalized following the proposed
distribution but do not meet the other noted requirements must notify the OTS 30
days prior to declaring a capital distribution. The OTS stated it will generally
regard as permissible that amount of capital distributions that do not exceed
50% of the institution's excess regulatory capital plus net income to date
during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity
All savings associations, including First Security, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what First Security
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 5%.
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In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At April 30, 1997, First Security was in compliance with both
requirements, with an overall liquid asset ratio of 8.90% and a short-term
liquid assets ratio of 5.60%
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held-to-maturity,
available-for-sale or trading) with appropriate documentation. First Security is
in compliance with these amended rules.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test
All savings associations, including First Security, are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. This test requires a savings association to have at least 65%
of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. Such assets primarily consist of residential housing related loans and
investments. At April 30, 1997, First Security met the test with 78.5% of its
portfolio assets in qualified thrift investments and has always met the test
since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
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Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices 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 the examination of First
Security, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by First
Security. An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, First Security may be required to devote additional funds
for investment and lending in its local community. First Security was examined
for CRA compliance in April 1996 and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association and its
affiliates are required to be on terms as favorable to the association as
transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the
association's capital. Affiliates of First Security include the Holding Company
and any company which is under common control with First Security. In addition,
a savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation
The Holding Company will be a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Holding Company is
required to register and file reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS has enforcement authority over
the Holding Company and its non-savings association subsidiaries which also
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings association.
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As a unitary savings and loan holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Holding Company and any of its subsidiaries (other than First Security or
any other SAIF-insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
If First Security fails the QTL test, the Holding Company must obtain
the approval of the OTS prior to continuing after such failure, directly or
through its other subsidiaries, any business activity other than those approved
for multiple savings and loan holding companies or their subsidiaries. In
addition, within one year of such failure the Holding Company must register as,
and will become subject to, the restrictions applicable to bank holding
companies. The activities authorized for a bank holding company are more limited
than are the activities authorized for a unitary or multiple savings and loan
holding company. See "- Qualified Thrift Lender Test."
The Holding Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of the Holding Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Holding
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Holding Company may not
be resold without registration or unless sold in accordance with certain resale
restrictions. If the Holding Company meets specified current public information
requirements, each affiliate of the Holding Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At April 30, 1997, First Security was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "-Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
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associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
First Security is a member of the FHLB of Chicago, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing. The aggregate amount of advances cannot exceed 20 times the amount of
FHLB stock held by the institutions.
As a member, First Security is required to purchase and maintain stock
in the FHLB of Chicago. At April 30, 1997, First Security had $1.9 million in
FHLB stock, which was in compliance with this requirement. In past years, First
Security has received substantial dividends on its FHLB stock. Over the past
five calendar years such dividends have averaged 6.12% and were 6.8% for
calendar year 1996. As a result of its holdings, the Bank could borrow up to
$38.0 million from the FHLB.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of First Security's FHLB stock may result in a corresponding
reduction in First Security's capital.
For the year ended December 31, 1996, dividends paid by the FHLB of
Chicago to First Security totaled $111,000, which constitute a $13,000 increase
from the amount of dividends received in calendar year 1995. The $33,000
dividend received for the four months ended April 30, 1997 reflects an
annualized rate of 5.8%, which is 100 basis points less than the rate for
calendar 1996.
Federal and State Taxation
In August 1996, legislation was enacted that repeals the reserve method
of accounting used by many thrifts to calculate their bad debt reserve for
federal income tax purposes. As a result, small thrifts such as the Bank must
recapture that portion of the reserve that exceeds the balance of its reserves
as of the close of its 1987 tax year. The legislation also requires thrifts to
account for bad debts for federal income tax purposes on the same basis as
commercial banks for tax years beginning after December 31, 1995. The recapture
will occur over a six-year period, the commencement of which will be delayed
until the first taxable year beginning after December 31, 1997, provided the
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institution meets certain residential lending requirements. The management of
the Company does not believe that the legislation will have a material impact on
the Company or the Bank.
In addition to the regular income tax, corporations, including savings
associations such as First Security, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income..
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1996, First Security's excess for tax purposes
totaled approximately $2.0 million.
First Security files its federal, state and local income tax returns on
a calendar year basis using the accrual method of accounting.
First Security has not been audited by the IRS with respect to
consolidated federal income tax returns in the past five years. With respect to
years examined by the IRS, either all deficiencies have been satisfied or
sufficient reserves have been established to satisfy asserted deficiencies. In
the opinion of management, any examination of still open returns (including
returns of subsidiary and predecessors of, or entities merged into, First
Security) would not result in a deficiency which could have a material adverse
effect on the financial condition of First Security and its consolidated
subsidiary.
Illinois Taxation. For Illinois income tax purposes, the Bank is taxed
at an effective rate equal to 7.18% of Illinois taxable income. For these
purposes, "Illinois Taxable Income" generally means federal taxable income,
subject to certain adjustments (including the addition of interest income on
state and municipal obligations and the exclusion of interest income on United
States Treasury obligations).
Delaware Taxation. As a Delaware holding company, the Holding Company
is exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.
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MANAGEMENT
Directors and Executive Officers of the Holding Company and of the Bank
Directors and Executive Officers of the Holding Company. The Board of
Directors of the Holding Company currently consists of nine members. The
directors of the Holding Company are currently comprised of the directors of the
Bank. See "- Board of Directors of the Bank." Directors of the Holding Company
serve three-year staggered terms so that approximately one-third of the
directors will be elected at each annual meeting of stockholders. The terms of
the current directors of the Holding Company are the same as that of the Bank's
board. Upon the completion of the Conversion, the Holding Company intends to pay
directors a fee of $850 per board meeting attended and $100 per committee
meeting attended. For information regarding stock options and restricted stock
proposed to be awarded to directors following stockholder ratification of such
plans, see "- Benefit Plans."
The executive officers of the Holding Company are elected annually and
hold office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The following
table sets forth information regarding executive officers of the Holding
Company. Each executive officer of the Holding Company has held his or her
position since the incorporation of the Holding Company in July 1997.
Name Title
---- -----
Julian Kulas President and Chief Executive Officer
Harry I. Kucewicz Treasurer and Chief Financial Officer
Mary H. Korb Vice-President - Lending
Irene S. Subota Vice-President - Savings
Adrian Hawryliw Vice President - Philadelphia Branch Manager
The Holding Company does not initially intend to pay executive officers
any fees in addition to fees payable to such persons as executive officers of
the Bank. For information regarding compensation of directors and executive
officers of the Bank, see "Management - Director Compensation" and "- Executive
Compensation." For information regarding stock options and restricted stock
proposed to be awarded to directors and executive officers following stockholder
ratification of the Holding Company's stock-based plans, see "- Benefit Plans."
Board of Directors of the Bank. Prior to the Conversion, the direction
and control of the Bank, as a mutual savings institution, was vested in its
Board of Directors. Upon conversion of the Bank to stock form, each of the
directors of the Bank will continue to serve as a director of the converted
Bank. The Board of Directors of the Bank currently consists of nine members. The
directors serve three-year staggered terms so that approximately one-third of
the directors are elected at each annual meeting of members. Because the Holding
Company will own all of the issued and outstanding shares of capital stock of
the Bank after the Conversion, directors of the Holding Company will elect the
directors of the Bank.
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The following table sets forth certain information regarding the
directors of the Bank.
<TABLE>
<CAPTION>
Director Term
Name Position(s) Held With the Bank Age(1) Since Expires
---- ------------------------------ ------ ----- -------
<S> <C> <C> <C> <C>
Steve Babyk Director 50 1993 1998
Lila Maria Bodnar Director and Recording Secretary 38 1995 1998
Myron Dobrowolsky Director 63 1985 2000
Terry Gawryk Director and Secretary 43 1981 1999
Julian Kulas Director, President and Chief Executive Officer 62 1964 2000
George Kawka Director 53 1986 1998
Paul Nadzikewycz Chairman of the Board 58 1973 2000
Jaroslav H. Sydorenko Director 55 1993 1999
Chrysta Wereszczak Director 41 1993 1999
- --------------------
<FN>
(1) At April 30, 1997.
</FN>
</TABLE>
The business experience of each director of the Holding Company for at
least the past five years is set forth below.
Steve Babyk. Mr. Babyk has worked at Union Tank Car Company since 1969
and is currently the Director of Fleet Leasing. Mr. Babyk is primarily
responsible for the care and leasing of over 50,000 railroad cars in the United
States, Canada and Mexico.
Lila Maria Bodnar. Ms. Bodnar was an accountant with the First National
Bank of Chicago from 1981 to 1985 and was a manager in the accounting department
of the Chicago branch of the Bank of Montreal from 1985 to 1991. Ms. Bodnar has
a Masters of Business Administration from Loyola University, Chicago, Illinois.
Myron Dobrowolsky. Mr. Dobrowolsky has been a construction project
manager with the engineering firm of Dames and Moore, Chicago, Illinois since
1991. Previously, Mr. Dobrowolsky was an engineer with the Illinois Highway
Department.
Terry Gawryk. Mr. Gawryk has practiced law in Chicago, Illinois since
1979.
Julian Kulas. Mr. Kulas has served as the President and Chief Executive
Officer of the Bank since 1964. Mr. Kulas has also been engaged in the private
practice of law since 1959. Mr. Kulas is extremely active in community affairs
and holds a variety of positions on not-for-profit organizations. Mr. Kulas has
been a Commissioner on the Chicago Commission on Human Relations since 1981.
George Kawka. Mr. Kawka has been a senior architectural/engineering
project manager with PAL Telecom Group since 1994 and was previously a senior
project manager with AIC Security Systems, all in Chicago, Illinois.
Paul Nadzikewycz. Mr. Nadzikewycz, a licensed podiatrist, has been a
self-employed investor focusing primarily on real estate since 1987. In
addition, since January 1997, Mr. Nadzikewycz has served as President and Chief
Executive Officer of Oakley Assoc. Ltd., a legal software developer.
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Jaroslav H. Sydorenko. Mr. Sydorenko has been a credit manager at
Kanematsu USA, Inc., an import/export trading company located in Chicago,
Illinois since 1985.
Chrysta Wereszczak. Ms. Wereszczak was employed by the Unisys
Corporation from 1982 to 1989 in a variety of positions, including Financial
Manager and Regional Financial Analyst. She is currently involved with B&B
Formica, a manufacturing business she owns with her spouse. Ms. Wereszczak is a
member of the St. Nicholas School Board.
Executive Officers Who Are Not Directors. Each of the executive
officers of the Bank will retain his or her office in the converted Bank.
Officers are elected annually by the Board of Directors of the Bank. The
business experience of the executive officers who are not also directors is set
forth below.
Harry Kucewicz. Mr. Kucewicz, age 40, is currently serving as the
Treasurer and Chief Operating and Financial Officer of the Bank. He began
working at the Bank in 1978 as the Controller. He was elected Treasurer and
Chief Financial Officer in 1990 and Chief Operating Officer in August 1994.
Mary H. Korb. Ms. Korb, age 49, is currently Vice President - Lending
of the Bank. In such capacity, Ms. Korb supervises all aspects of the Bank's
lending operations including lending compliance. Ms. Korb has been with the Bank
since 1970 and has served in her present capacity since March 1991.
Irene S. Subota. Ms. Subota, age 51, currently serves as Vice President
- - Savings of the Bank. In such capacity, Ms. Subota is in charge of all aspects
of the Bank's savings function including compliance. Ms. Subota has been
employed by the Bank since 1973 and has served in her current position since
1992.
Adrian Hawryliw. Mr. Hawryliw, age 61, has served as Philadelphia
Branch Manager of the Bank since 1994 when the Philadelphia, Pennsylvania branch
was acquired from the Resolution Trust Corporation and is currently a Vice
President of the Bank. Mr. Hawryliw is responsible for supervising operations of
the Philadelphia, Pennsylvania branch, including business development, retail
deposits, real estate lending, accounting and marketing. He has over 34 years of
banking experience in the Philadelphia area, holding various positions including
Chief Financial Officer and Vice President/ Investments for other area
institutions.
Indemnification
The Certificate of Incorporation of the Holding Company provides that a
director or officer of the Holding Company shall be indemnified by the Holding
Company to the fullest extent authorized by the General Corporation Law of the
State of Delaware against all expenses, liability and loss reasonably incurred
or suffered by such person in connection with his activities as a director or
officer of the Holding Company or as a director or officer of another company,
if the director or officer held such position at the request of the Holding
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Company. Delaware law requires that such director, officer, employee or agent,
in order to be indemnified, must have acted in good faith and in a manner
reasonably believed to be not opposed to the best interests of the Holding
Company, and, with respect to any criminal action or proceeding, did not have
reasonable cause to believe his or her conduct was unlawful.
The Certificate of Incorporation and Delaware law also provide that the
indemnification provisions of such Certificate and the statute are not exclusive
of any other right which a person seeking indemnification may have or later
acquire under any statute, provision of the Certificate of Incorporation, Bylaws
of the Holding Company, agreement, vote of stockholders or disinterested
directors or otherwise.
These provisions may have the effect of deterring shareholder
derivative actions, since the Holding Company may ultimately be responsible for
expenses for both parties to the action. A similar effect would not be expected
for third-party claims.
In addition, the Certificate of Incorporation and Delaware law also
provide that the Holding Company may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Holding
Company or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the Holding
Company has the power to indemnify such person against such expense, liability
or loss under the Delaware General Corporation Law. The Holding Company may
obtain such insurance.
Meetings and Committees of Board of Directors
The Bank. The Bank's Board of Directors meets on a monthly basis. The
Board of Directors met 13 times during the fiscal year ended December 31, 1996.
During fiscal 1996, no director of the Bank attended fewer than 75% of the
aggregate of the total number of Board meetings and the total number of meetings
held by the committees of the Board of Directors on which he or she served.
The Bank has standing Executive, Audit, Salary Review, Loan and
Investment Committees.
The Executive Committee provides oversight of Board-related matters
in-between regularly scheduled Board Meetings. The Executive Committee is
comprised of Director Gawryk and President Julian Kulas. This committee met
approximately five times during fiscal year 1996.
The Audit Committee is comprised of Directors Bodnar, Sydorenko and
Wereszczak. This Committee oversees and reviews the Bank's financial and
internal control matters. The Audit Committee also reviews the Bank's audited
financial statements with the Bank's outside auditors and the Report of the
Examination with the OTS examiners, either separately or with the full Board.
This committee met four times in 1996.
The Salary Review Committee oversees and reviews the Bank's
compensation policies and sets the compensation levels for Executive Management.
This committee is comprised of Directors Gawryk, Nadzikewycz, Wereszczak and
Babyk and met three times in 1996.
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The Loan Committee is composed of Directors Dobrowolsky, Gawryk, and
Babyk and Vice-President Korb. The Loan Committee reviews loan applications
weekly and sets interest rates for all loan types. The Loan Committee met 24
times in 1996.
The Investment Committee is composed of President Kulas, Vice President
Hawryliw, Treasurer Kucewicz and Director Bodnar. This committee meets at least
once a month to handle the investments for the Bank and the implementation of
the Bank's strategy as it relates to interest rate risk and reinvestment
options. The Investment Committee met eight times in 1996.
The Holding Company. The Board of Directors of the Holding Company has
established standing Executive, Audit, Compensation and Nominating Committees.
Director Compensation
Directors of the Bank are paid a monthly fee of $850 for service on the
Board of Directors. Chairman Paul Nadzikewycz and Recording Secretary Lila Maria
Bodnar each receive an additional fee of $250 per month. Directors receive
additional compensation of $100 for each committee meeting attended.
Executive Compensation
The following table sets forth information concerning the compensation
accrued for services in all capacities to First Security for the fiscal year
ended December 31, 1996 for the Bank's President and Chief Executive Officer. No
other executive officer's aggregate annual compensation (salary plus bonus)
exceeded $100,000 in fiscal 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
------------------------------------- ----------------------------
Other Annual Restricted Stock Options/ All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Award ($)(1) SARs (#)(1) Compensation($)
--------------------------- ---- --------- -------- --------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Julian E. Kulas
President, Chief Executive Officer
and Director 1996 $127,966 $5,419 $7,800 --- --- $22,240(2)
- ----------
</TABLE>
(1) Pursuant to the proposed Stock Option Plan, the Holding Company intends to
grant Mr. Kulas an option to purchase a number of shares equal to 2.5%
(102,950 shares at the minimum and 139,300 shares at the maximum of the
Estimated Valuation Range) of the total number of shares of Common Stock
sold in the Conversion at an exercise price equal to the market value per
share of the Common Stock on the date of grant. See "- Stock Option and
Incentive Plan." In addition, pursuant to the proposed RRP, the Holding
Company intends to grant to Mr. Kulas a number of shares of restricted
stock equal to 1.0% (41,180 shares at the minimum and 55,720 shares at the
maximum of the Estimated Valuation Range) of the total number of shares of
Common Stock sold in the Conversion. See "- Recognition and Retention
Plan."
(2) This amount consists of $22,240 received through the Bank's Profit Sharing
Plan.
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Employment Agreement and Severance Agreements. The Bank intends to
enter into an employment agreement with President Kulas providing for an initial
term of three years and change in control severance agreements with executive
officers Kucewicz, Korb, Subota and Hawryliw providing for an initial term of
two years. The agreements have been filed with the OTS as part of the
application of the Holding Company for approval to become a savings and loan
holding company.
Mr. Kulas' employment agreement will become effective upon completion
of the Conversion and provide for an annual base salary in an amount not less
than his current salary and provide for an annual extension subject to the
performance of an annual formal evaluation by the Board of Directors of the
Bank. The agreement also provides for termination upon the employee's death, for
cause or in certain events specified by OTS regulations. The employment
agreement is terminable by the employee upon 90 days' notice to the Bank.
The employment agreement provides for payment to Mr. Kulas of an amount
equal to 299% of his five-year annual average base compensation, in the event
there is a "change in control" of the Bank where employment involuntarily
terminates in connection with such change in control, as defined, or within
twelve months thereafter. See "Restrictions on Acquisitions of Stock and Related
Takeover Defensive Provisions." If the employment of Mr. Kulas had been
terminated as of April 30, 1997 under circumstances entitling him to severance
pay as described above, he would have been entitled to receive a lump sum cash
payment of approximately $382,600. The agreement also provides for the continued
health coverage for the remainder of the term of his contract should he be
involuntarily terminated in the event of change in control.
The Bank intends to enter into change in control severance agreements
with officers Kucewicz, Korb, Subota and Hawryliw. The agreements become
effective upon completion of the Conversion and provide for an initial term of
24 months. The agreements provide for extensions of one year, on each
anniversary of the effective date of the agreement, subject to a formal
performance evaluation performed by the Bank. The agreements provide for
termination for cause or in certain events specified by OTS regulations.
The agreements provide for a lump sum payment to the employee of 200%
of their annual base compensation and the continued payment for the remaining
term of the contract of life and health insurance coverage maintained by the
Bank in the event there is a "change in control" of the Bank where employment
terminates involuntarily within 12 months of such change in control. This
termination payment is subject to reduction to the extent it is non-deductible
for federal income tax purposes. See "Restrictions on Acquisitions of Stock and
Related Takeover Defensive Provisions."
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Employee Severance Compensation Plan. The Bank's Board of Directors has
established the First Security Employee Severance Compensation Plan which will
provide certain employees with severance pay benefits in the event of a change
in control of the Bank or the Holding Company following Conversion. Management
personnel with individual employment agreements or change in control severance
agreements are not eligible to participate in the Severance Compensation Plan.
The purpose of the Severance Compensation Plan is to recognize the valuable
services and contributions of the Bank's employees and the uncertainties
relating to continuing employment, reduced employee benefits, management changes
and relocations in the event of a change in control. Under the Severance
Compensation Plan, in the event of a change in control, eligible employees who
are terminated or voluntarily terminate employment (for reasons specified under
the Severance Compensation Plan), within one year of a change in control will be
entitled to receive a severance payment. Payments pursuant to the Severance
Compensation Plan are equal to the product of two weeks salary (as defined in
the Severance Compensation Plan) times the number of years of service up to a
maximum of twelve years in the case of officers or seven years in the case of
other employees. In general, the Severance Compensation Plan may be amended or
terminated by the Board of Directors by a majority vote at any time prior to a
change in control but may not be amended or terminated thereafter.
Benefit Plans
General. First Security currently provides insurance benefits to its
employees, including health and life insurance, subject to certain deductibles
and copayments. First Security also maintains a profit sharing plan for the
benefit of its employees.
Profit Sharing Plan. The Bank maintains a tax-exempt profit sharing
plan and trust (the "Profit Sharing Plan"). All employees serving at least 1,000
hours per year are eligible to participate subject to certain vesting and other
qualifying factors. The Bank anticipates that future profit sharing
contributions will be reduced in order to offset, in part, the expense of the
ESOP.
Prior to the completion of the Conversion, the Bank intends to amend
the Profit Sharing Plan in order to give the participants the opportunity to
direct some or all of their vested interests into Holding Company Common Stock.
Employee Stock Ownership Plan. The Boards of Directors of First
Security and the Holding Company have approved the adoption of an ESOP for the
benefit of employees of First Security. The ESOP is also designed to meet the
requirements of an employee stock ownership plan as described at Section
4975(e)(7) of the Code and Section 407(d)(6) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and, as such, the ESOP is empowered
to borrow in order to finance purchases of the Common Stock.
It is anticipated that the ESOP will be funded with a loan from the
Holding Company. The interest rate of the ESOP loan will be equal to the
applicable federal interest rate as determined by the Internal Revenue Service
for the month in which the loan is made, as calculated pursuant to Section
1274(d) of the Code.
GAAP generally requires that any borrowing by the ESOP from an
unaffiliated lender be reflected as a liability in the Holding Company's
Financial Statements, whether or not such borrowing is guaranteed by, or
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constitutes a legally binding contribution commitment of, the Holding Company or
the Bank. The funds used to acquire the ESOP shares will be borrowed from the
Holding Company. Since the Holding Company will finance the ESOP debt, the ESOP
debt will be eliminated through consolidation and no liability will be reflected
on the Holding Company's financial statements. In addition, shares purchased
with borrowed funds will, to the extent of the borrowings, be excluded from
stockholders' equity, representing unearned compensation to employees for future
services not yet performed. Consequently, if the ESOP purchases already-issued
shares in the open market, the Holding Company's consolidated liabilities will
increase to the extent of the ESOP's borrowings, and total and per share
stockholders' equity will be reduced to reflect such borrowings. If the ESOP
purchases newly issued shares from the Holding Company, total stockholders'
equity would neither increase nor decrease, but per share stockholders' equity
and per share net income would decrease because of the increase in the number of
outstanding shares. In either case, as the borrowings used to fund ESOP
purchases are repaid, total stockholders' equity will correspondingly increase.
All employees of the Bank are eligible to participate in the ESOP after
they attain age 21 and complete one year of service. The Bank's contribution to
the ESOP is allocated among participants on the basis of their relative
compensation. Each participant's account will be credited with cash and shares
of Holding Company Common Stock based upon compensation earned during the year
with respect to which the contribution is made. Contributions credited to a
participant's account become fully vested upon such participant's completing
five years of service. Credit will be given for prior years of service for
vesting purposes. ESOP participants are entitled to receive distributions from
their ESOP accounts only upon termination of service. Distributions will be made
in cash and in whole shares of the Holding Company's Common Stock. Fractional
shares will be paid in cash. Participants will not incur a tax liability until a
distribution is made.
Each participating employee is entitled to instruct the trustee of the
ESOP as to how to vote the shares allocated to his or her account. The trustee
will not be affiliated with the Holding Company or First Security Federal
Savings Bank.
The ESOP may be amended by the Board of Directors, except that no
amendment may be made which would reduce the interest of any participant in the
ESOP trust fund or divert any of the assets of the ESOP trust fund for purposes
other than the benefit of participants or their beneficiaries.
Stock Option and Incentive Plan. Among the benefits to the Bank
anticipated from the Conversion is the ability to attract and retain personnel
through the prudent use of stock options and other stock-related incentive
programs. The Board of Directors of the Holding Company intends to adopt the
Stock Option Plan, subject to ratification by stockholders of the Holding
Company at a meeting to be held not earlier than six months after completion of
the Conversion. Under the terms of the proposed Stock Option Plan, stock options
covering shares representing an aggregate of up to 10% of the shares of Common
Stock sold in the Conversion including the Stock Contribution may be granted
to directors, officers and employees of the Holding Company or its subsidiaries
under the Stock Option Plan.
Options granted under the Stock Option Plan may be either options that
qualify under the Code as "incentive stock options" (options that afford
preferable tax treatment to recipients upon compliance with certain restrictions
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and that do not normally result in tax deductions to the employer) or options
that do not so qualify. The exercise price of stock options granted under the
Stock Option Plan is required to be at least equal to the fair market value per
share of the stock on the date of grant. All grants are made in consideration of
past and future services rendered to the Bank, and in an amount deemed necessary
to encourage the continued retention of the officers and directors who are
considered necessary for the continued success of the Bank. In this regard, all
options are intended to vest in five equal annual installments commencing one
year from the date of grant, subject to the continued service of the holder of
such option.
The proposed Stock Option Plan provides for the grant of stock
appreciation rights ("SARs") at any time, whether or not the participant then
holds stock options, granting the right to receive the excess of the market
value of the shares represented by the SARs on the date exercised over the
exercise price. SARs generally will be subject to the same terms and conditions
and exercisable to the same extent as stock options.
Limited SARs may be granted at the time of, and must be related to, the
grant of a stock option or SAR. The exercise of one will reduce to that extent
the number of shares represented by the other. Limited SARs will be exercisable
only for the 45 days following the expiration of the tender or exchange offer,
during which period the related stock option or SAR will be exercisable.
However, no SAR or Limited SAR will be exercisable by a 10% beneficial owner,
director or senior officer within six months of the date of its grant. The
Holding Company has no present intention to grant any SARs or Limited SARs.
The proposed Stock Option Plan will be administered by the Holding
Company's Salary Review Committee which will consist of at least two
disinterested directors. The Salary Review Committee will select the recipients
and terms of awards made pursuant to the Stock Option Plan. OTS regulations
limit the amount of shares that may be awarded pursuant to stock-based plans to
each individual officer, each non-employee director and all non-employee
directors as a group to 25%, 5% and 30%, respectively, of the total shares
reserved for issuance under each such stock-based plan.
The Salary Review Committee, presently consisting of non-employee
Directors Terry Gawryk, Chrysta Wereszczak and Steve Babyk, intends to grant
options in amounts expressed as a percentage of the shares sold in the
Conversion, as follows: President Kulas - 2.5% and to all executive officers as
a group (5 persons) - 5.4%. In addition, under the terms of the Stock Option
Plan, the Chairman of the Board and each non-employee director of the Holding
Company at the time of stockholder ratification of the Stock Option Plan will be
granted an option to purchase shares of Common Stock equal to .5% and .314%,
respectively, of the shares sold in the Conversion, including the Stock
Contribution. The remaining balance of the available awards is unallocated and
reserved for future use. All options will expire 10 years after the date such
option was granted, which, for the option grants listed above, is expected to be
the date of stockholder ratification of the Stock Option Plan. All proposed
option grants to officers are subject to modification by the Salary Review
Committee based upon its performance evaluation of the option recipients at the
time of stockholder ratification of the Stock Option Plan following completion
of the Conversion.
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After stockholder ratification, the Stock Option Plan will be funded
either with shares purchased in the open market or with authorized but unissued
shares of Common Stock. The use of authorized but unissued shares to fund the
Stock Option Plan could dilute the holdings of stockholders who purchased Common
Stock in the Conversion. See "Pro Forma Data." In no event will the Stock Option
Plan acquire an amount of shares, which, in the aggregate, represent more than
10% of the shares sold in the Conversion.
Under SEC regulations, so long as certain criteria are met, an optionee
may be able to exercise the option at the applicable purchase price and
immediately sell the underlying shares at the then-current market price without
incurring short-swing profit liability. This ability to exercise and immediately
resell, which under the SEC regulations applies to stock option plans in
general, allows the optionee to realize the benefit of an increase in the market
price for the stock without the market risk which would be associated with a
required holding period for the stock after payment of the exercise price. All
grants are subject to ratification of the Stock Option Plan by stockholders of
the Holding Company following completion of the Conversion.
Recognition and Retention Plan. The Holding Company intends to
establish the RRP in order to provide employees with a proprietary interest in
the Holding Company in a manner designed to encourage such persons to remain
with the Holding Company and the Bank. The RRP will be subject to ratification
by stockholders at a meeting to be held not earlier than six months after the
completion of the Conversion. The Holding Company will contribute funds to the
RRP to enable it to acquire in the open market or from authorized but unissued
shares (with the decision between open market or authorized but unissued shares
based on the Holding Company's future stock price, alternate investment
opportunities and capital needs), following stockholder ratification of such
plan, an amount of stock equal to 4.0% of the shares of Common Stock sold in
the Conversion, including the shares to be issued to the Foundation.
The Salary Review Committee of the Board of Directors of the Holding
Company will administer the proposed RRP. Under the terms of the proposed RRP,
awards ("Awards") can be granted to key employees in the form of shares of
Common Stock held by the RRP. Awards are non-transferable and non-assignable.
OTS regulations limit the amount of shares that may be awarded pursuant to
stock-based plans to each individual officer, each non-employee director and all
non-employee directors as a group to 25%, 5% and 30%, respectively, of the total
shares reserved for issuance under each such stock-based plan.
Recipients will earn (i.e., become vested in), over a period of time,
the shares of Common Stock covered by the Award. Awards made pursuant to the RRP
will vest in not less than five equal annual installments commencing one year
from the date of grant. Awards will be 100% vested upon termination of
employment due to death or disability. In addition, no awards under the RRP to
directors and executive officers shall vest in any year in which the Bank is not
meeting all of its fully phased-in capital requirements. When shares become
vested and are actually distributed in accordance with the RRP, but in no event
prior to such time, the participants will also receive amounts equal to any
accrued dividends with respect thereto. Earned shares are distributed to
recipients as soon as practicable following the date on which they are earned.
The Salary Review Committee presently intends to grant restricted stock
awards at the Purchase Price, in amounts expressed as a percentage of the shares
sold in the Conversion, including the Stock Contribution, as follows: to
President Kulas - 1.0% and to all
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executive officers as a group (5 persons) - 2.2%. Pursuant to the terms of the
proposed RRP, the Chairman of the Board and each non-employee director of the
Holding Company at the time of stockholder ratification of the RRP will be
awarded an amount of shares equal to .2% and .125%, respectively, of the shares
sold in the Conversion including the Stock Contribution. All proposed RRP awards
to officers of the Bank are subject to modification by the Salary Review
Committee based upon its performance evaluation of the award recipients at the
time of stockholder ratification of the RRP following completion of the
Conversion.
After stockholder ratification, the RRP will be funded either with
shares purchased in the open market or with authorized but unissued shares of
Common Stock issued to the RRP by the Holding Company. The use of authorized but
unissued shares to fund the RRP could dilute the holdings of stockholders who
had purchased Common Stock in the Conversion. In the event the RRP purchases
stock in the open market at prices above the initial Purchase Price, the total
RRP expense may be above that disclosed under the caption "Pro Forma Data." In
no event will the RRP acquire an amount of shares which, in the aggregate,
represent more than 4.0% of the shares sold in the Conversion.
Certain Transactions
The Bank follows a policy of granting loans to the Bank's directors,
officers and employees. The loans to executive officers and directors are made
in the ordinary course of business and on the same terms and conditions as those
of comparable transactions prevailing at the time (except that the underwriting
fee is waived), in accordance with the Bank's underwriting guidelines and do not
involve more than the normal risk of collectibility or present other unfavorable
features. All loans to directors and executive officers cannot exceed 5% of the
Bank's capital and unimpaired surplus, whichever is greater, unless a majority
of the Board of Directors approves the credit in advance and the individual
requesting the credit abstains from voting. Loans to all directors and executive
officers and their associates, including outstanding balances and commitments
totaled $48,000 at April 30, 1997, which was 0.2% of the Bank's retained
earnings at that date. There were no loans to any single director, executive
officer or their affiliates made at preferential rates or terms which in the
aggregate exceeded $60,000 during the three most recent fiscal years.
THE CONVERSION
The Board of Directors of the Bank and the OTS have approved the Plan
of Conversion. OTS approval does not constitute a recommendation or endorsement
of the Plan of Conversion. Certain terms used in the following summary of the
material terms of the Conversion are defined in the Plan of Conversion, a copy
of which may be obtained by contacting First Security.
General
The Board of Directors of the Bank unanimously adopted the Plan,
subject to approval by the OTS and the members of the Bank. Pursuant to the
Plan, the Bank will convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank, with the concurrent formation of a
holding company.
The Conversion will be accomplished through amendment of the Bank's
federal charter to authorize capital stock, at which time the Bank will become a
wholly owned subsidiary of the Holding Company. The Conversion will be accounted
for as a pooling of interests.
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Subscription Rights have been granted to the Eligible Account Holders
as of December 31, 1995, Tax-Qualified Employee Plans of the Bank and Holding
Company, Supplemental Eligible Account Holders as of _______, 1997, Other
Members, and directors, officers, and employees of the Bank. Additionally,
subject to the availability of shares and market conditions at or near the
completion of the Subscription Offering, the Common Stock may be offered for
sale in a Direct Community Offering to selected persons on a best-efforts basis
through FBR. See "- Offering of Holding Company Common Stock." Subscriptions for
shares will be subject to the maximum and minimum purchase limitations set forth
in the Plan of Conversion.
Stock Contribution to the Charitable Foundation
General. As a reflection of the Bank's long-standing commitment to the
local community, the Bank established during 1996 The Heritage Foundation of
First Security Federal Savings Bank, Inc., a private charitable foundation under
the Illinois General Not For Profit Corporation Act (the "Foundation"). The
Foundation was established as a means of supporting the needs of the local
community while simultaneously increasing the visibility and reputation of the
Bank. The Foundation was initially funded by the Bank through a series of cash
contributions aggregating $2.5 million, all of which were accrued by the Bank
during the fourth quarter of 1996. In addition, under the Plan and subject to
member approval, the Holding Company will contribute to the Foundation 250,000
shares of its Common Stock. The Stock Contribution will either be in the form of
a direct contribution or a sale of the shares for their aggregate par value
($2,500).
In the future, the Holding Company may make additional contributions
to the Foundation, although the Holding Company has no current plans regarding
the amount or timing of any such future contributions. The amount of future
contributions, if any, will be determined based upon, among other factors, an
assessment of the Holding Company's then current financial position, operations,
and prospects and on the need for charitable activities in the Bank's market
area. Any such contributions, regardless of form, will result in an increase in
non-interest expense and thus a reduction in net earnings. In addition, any
contributions of authorized but unissued shares would dilute the interests of
outstanding shares. However, the Holding Company currently anticipates that any
contributions of shares by it to the Foundation will be funded through shares
repurchased in the open market. The Holding Company does not intend to make any
contributions to the Foundation which are not deductible for Federal Income Tax
purposes.
The Stock Contribution will be considered as a separate matter from the
proposal to approve the Plan of Conversion. If the Bank's members approve the
Plan of Conversion, but not the Stock Contribution, the Bank intends to complete
the Conversion without the Stock Contribution. Failure to approve the Stock
Contribution may materially affect the pro forma market value of the Common
Stock. If the resulting pro forma market value of the Common Stock to be sold in
the Offering is less than $41.2 million or more than $64.1 million, or if the
OTS otherwise requires a resolicitation, the Bank will establish a new Estimated
Valuation Range and commence a resolicitation of subscribers. In the event of a
resolicitation, unless an affirmative response is received within a specified
period of time, all funds will be promptly returned to investors, as described
elsewhere herein. See "-- Stock Pricing and - Number of Shares to be Issued."
Purpose of the Stock Contribution. The purpose of the Foundation is to
provide funding to support charitable purposes within the communities in which
the Bank operates. The Bank has long emphasized community lending and community
development activities and currently has a satisfactory rating under the
Community Reinvestment Act ("CRA"). The Foundation is a complement to the Bank's
existing community activities, not a replacement for such activities.
The Foundation is a means of supporting the needs of the local
community while simultaneously increasing the visibility and reputation of the
Bank. The Holding Company and the Bank believe that the funding of the
Foundation with Common Stock of the Holding Company is a means of establishing a
common bond between the Bank and the communities in which the Bank operates
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thereby enabling such communities to share in the potential growth and success
of the Holding Company over the long-term. Although the Stock Contribution will
result in a reduction in the Holding Company's conversion appraisal and pro
forma capital (although not in its pro forma capital per share), the Board
believes that the Stock Contribution will enhance the long term value of the
Bank's franchise by increasing customer loyalty as well as the size of its
customer base. The Board believes that customer loyalty and community support
are critical for the success of community oriented institutions such as the
Bank.
The Board believes that the Stock Contribution will enable the
Foundation to support charitable activities during periods when the Holding
Company may not be in a position to support such activities. (Similarly, the
Stock Contribution would enable the Foundation to offset the impact of
variations in contribution levels by accumulating funds during periods of
relatively large contributions from the Holding Company and disbursing such
funds during periods of relatively small contributions.) In addition, the Board
believes that the Stock Contribution will have a highly beneficial public
relations impact. Finally, the Board believes that the Stock Contribution will
facilitate the participation of non-Holding Company personnel in charitable
activities. The Board believes that the Stock Contribution represents an
opportunity to make a significant charitable contribution which will benefit the
Holding Company and the Bank at a time when they have adequate capital, they are
not yet subject to possible earnings pressure resulting from the Holding
Company's status as a public company and there is a need for charitable
donations in the Bank's market area.
Structure of the Foundation. The Foundation is a private foundation
under the Code. As a private foundation, the Foundation will be required to
distribute annually in grants or donations at least 5% of its net investment
assets. The Foundation is dedicated to the promotion of charitable purposes
within the communities in which the Bank operates, including, but not limited
to, providing grants or donations to support cultural activities, not-for-profit
medical facilities, elder and youth care, community groups and other types of
organizations or projects. While the Foundation is authorized to engage directly
in charitable activities, in order to limit overhead costs, the Foundation's
primary activity currently consists of making grants to other charitable
organizations.
The authority for the affairs of the Foundation is vested in the Board
of Trustees of the Foundation which is comprised of Chairman Nadzikewycz,
President Kulas and Director Gawryk. Although all of the Foundation's initial
trustees were selected by the Bank, future Foundation trustees may be nominated
and elected only by its Board of Trustees. As a result, the Board of Trustees is
self-perpetuating. The Board of Trustees may be expanded following the
Conversion to include additional Bank directors and other community members as
trustees; but it is currently anticipated that at least a majority of the
Foundation's Board of Trustees will consist of persons who are then current or
former directors of the Bank.
The Foundation's articles of incorporation provide that the earnings of
the Foundation shall not result in any private benefit for its members, trustees
or officers. In addition, it is anticipated that the Foundation will adopt a
conflicts of interest policy to protect against inappropriate insider benefits.
While these provisions would not prohibit the payment of reasonable compensation
for services rendered, the members of the Board of Trustees do not currently
receive fees for such service. Currently, the Foundation does not have any paid
employees.
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The trustees are responsible for establishing and carrying out the
policies of the Foundation with respect to grants or donations by the
Foundation, consistent with the purposes for which the Foundation was
established. The trustees of the Foundation are also responsible for directing
the activities of the Foundation, and managing its assets.
While the Foundation does not currently intend to purchase any shares
of the Common Stock on the open market, it is authorized to do so. The OTS has
informed the Holding Company that any such purchases by the Foundation would be
deemed to be repurchases by the Holding Company for the purposes of the OTS
restrictions on post-conversion stock repurchases. See "Use of Proceeds."
Under the order of the OTS approving the Bank's conversion application,
all shares of Common Stock held by the Foundation, including those acquired
pursuant to the Stock Contribution, must be voted in the same ratio as all other
shares of the Holding Company's Common Stock on all proposals considered by
stockholders of the Holding Company; provided, however, that the OTS will waive
this voting restriction under certain circumstances if compliance with the
restriction would: (i) cause a violation of the law of the State of Illinois and
the OTS determines that federal law would not preempt the application of the
laws of the State of Illinois to the Foundation; (ii) cause the Foundation to
lose its tax-exempt status or otherwise have a material and adverse tax
consequence on the Foundation; or (iii) cause the Foundation to be subject to an
excise tax under Section 4941 of the Code. In order for the OTS to waive such
voting restriction, the Holding Company's or the Foundation's legal counsel must
render an opinion satisfactory to OTS that compliance with the voting
restriction would have the effect described in clauses (i), (ii) or (iii) above.
Under those circumstances, the OTS will grant a waiver of the voting
restrictions upon submission of such legal opinion(s) by the Holding Company or
the Foundation. In the event that the OTS waives the voting restriction, the
trustees would direct the voting of the Common Stock held by the Foundation.
However, a condition to the OTS approval of the Conversion provides that in the
event such voting restriction is waived or becomes unenforceable, the Director
of the OTS, or his designees, at that time may impose conditions on the
composition of the board of trustees of the Foundation or such other conditions
or restrictions relating to the control of the Common Stock held by the
Foundation, any of which could limit the ability of the board of trustees of the
Foundation to control the voting of the Common Stock held by the Foundation. The
Company has no current intention to seek such a waiver.
There are no agreements or understandings with trustees of the
Foundation regarding the exercise of control directly or indirectly, over the
management or policies of the Holding Company or the Bank, including agreements
related to voting, acquisition or disposition of the Holding Company's stock. As
trustees of a nonprofit corporation, trustees of the Foundation are at all times
bound by their fiduciary duty to advance the Foundation's charitable goals, to
protect the assets of the Foundation and to act in a manner consistent with the
charitable purposes for which the Foundation is established.
It is currently anticipated that the Foundation will adopt a policy
addressing affiliated transactions between the Foundation and the Holding
Company or the Bank. Transactions between the Foundation and the Bank will
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comply with applicable provisions of Sections 23A and 23B of the Federal Reserve
Act, as amended, and the OTS conflicts of interests rules. Additionally, the
Holding Company (but not the Bank) may provide office space and administrative
support to the Foundation without charge provided that such actions comply with
applicable conflicts of interests restrictions.
The Stock Contribution. The Foundation was initially funded with an
aggregate of $2.5 million of contributions from the Bank. These contributions
were accrued during 1996. In addition, under the terms of the Plan, the Holding
Company will contribute, either in the form of a donation or in a sale for their
aggregate par value ($.01 per share), 250,000 shares to the Foundation, subject
to stockholder approval. Such Stock Contribution, once made, will not be
recoverable by the Holding or the Bank. The Holding Company and the Bank
determined to make the Stock Contribution with Common Stock rather than cash
because it desired to form a bond with its community in a manner that would
allow the community to share in the potential growth and success of the Holding
Company and the Bank over the long term. The funding of the Stock Contribution
with stock also provides the Foundation with a potentially larger endowment than
if the Holding Company contributed cash to the Foundation since, as a
shareholder, the Foundation will share in the potential growth and success of
the Holding Company. As such, the Stock Contribution of stock to the Foundation
has the potential to provide a self-sustaining funding mechanism which reduces
the amount of cash that the Holding Company, if it were not making the stock
contribution, would have to contribute to the Foundation in future years in
order to maintain a level amount of charitable grants and donations.
One of the conditions imposed on the gift of Common Stock by the
Holding Company is that the amount of Common Stock that may be sold by the
Foundation in any one year shall not exceed 5% of the average market value of
the assets held by the Foundation, except where the board of directors of the
Foundation, by three-fourths vote, determines that the failure to sell an amount
of common stock greater than such amount would result in a long-term reduction
of the value of the Foundation's assets and as such would jeopardize the
Foundation's capacity to carry out its charitable purposes. While there may be
greater risk associated with a one-stock portfolio in comparison to a
diversified portfolio, the Holding Company believes any such risk is mitigated
by the ability of the Foundation's trustees to sell more than 5% of its stock in
such circumstances. Upon completion of the Conversion and the Stock
Contribution, the Holding Company would have 4,368,000, 5,095,000 and 5,822,000
shares issued and outstanding at the minimum, midpoint and maximum of the
Estimated Valuation Range. Because the Holding Company will have an increased
number of shares outstanding, the voting and ownership interest of shareholders
in the Holding Company's common stock would be diluted by 4.9% at the midpoint,
as compared to their interests in the Holding Company if the Stock Contribution
were not made. For additional discussion of the dilutive effect, see "Comparison
of Valuation and Pro Forma Information With No Stock Contribution" and "Pro
Forma Data."
If the Stock Contribution is approved by the members, the Holding
Company will recognize a $2.5 million expense (offset, in part, by a
corresponding tax deduction), during the quarter in which the Conversion is
completed, which is expected to be the third or fourth quarter of fiscal 1997.
Assuming the contribution of $2.5 million of stock, the Holding Company
estimates a net tax effected expense of $1.5 million. Such expense will likely
eliminate earnings in the quarter recognized and have a material adverse impact
on the Holding Company's earnings for fiscal
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year 1997. If the Stock Contribution had been made at April 30, 1997, the Bank
would have reported a net loss of $739,000 for the four months ended April 30,
1997 rather than net income of $761,000. For further discussion of the
Foundation and its impact on purchasers in the Conversion, see "Risk Factors -
Risks Associated with the Stock Contribution to the Charitable Foundation" and
"Pro Forma Data."
Although the Stock Contribution will be accrued in the third or fourth
quarter of 1997 as described above, such contribution may be paid at any time
during the twelve month period following the completion of the Conversion. The
reason for permitting the Holding Company to pay the Stock Contribution in more
than one tax year is that the five year tax carry forward period commences on
the date of payment rather than the date of accrual and thus that, by paying the
initial contribution over more than one tax year, the Holding Company can
lengthen the period over which the Stock Contribution may be carried forward for
tax purposes. See "--Tax Considerations" below.
Because the funding of the Foundation will result in dilution, it
reduced the estimated value of the stock to be sold in the Conversion by
approximately $4.6 million at the midpoint of the Estimated Valuation Range. As
a result, the pro forma capital of the Holding Company will be $2.0 million
lower at the midpoint of the Estimated Valuation Range than it would have been
without the Foundation. However, because of the lower number of shares which are
being offered (as a result of the lower appraisal), per share capital and
earnings will be essentially identical. See "Comparison of Valuation and Pro
Forma Information with No Stock Contribution."
As a result of the $4.6 million reduction in the amount of shares
offered for sale in the Offering caused by the Stock Contribution, the amount of
shares purchased by directors and executive officers, assuming the sale of the
midpoint number of shares, increased from 4.0% to 4.3% of the shares sold. See
"The Conversion--Participation by the Board and Executive Officers."
Tax Considerations. The Holding Company has been advised by its
independent accountants that the Foundation qualifies as a 501(c)(3) exempt
organization under the Code, and is classified as a private foundation rather
than a public charity. The Holding Company has also received a determination
letter from the IRS to that effect. A private foundation typically receives its
support from one person or one corporation whereas a public charity receives its
support from the public. The Foundation has submitted a request to the IRS to be
recognized as an exempt organization. As long as the IRS approves the
application, the effective date of the Foundation's status as a Section
501(c)(3) organization was the date of its organization.
A legal opinion of the OTS which addresses the establishment of
charitable foundations by savings associations opines that as a general rule
funds contributed to a charitable foundation should not exceed the deductible
limitation set forth in the Code, and if an association's contributions exceed
the deductible limit, such action must be justified by the board of directors.
In addition, under Delaware law, the Holding Company is authorized by statute to
make charitable contributions and case law has recognized the benefits of such
contributions to a Delaware corporation. In this regard, Delaware case law
provides that a charitable gift must merely be within reasonable limits as to
amount and purpose to be valid. Under the Code, the Holding Company may deduct
up to 10% of its taxable income in any one year and any contributions made by
the Holding Company in excess of the deductible amount will be deductible for
federal tax purposes over each of the five succeeding taxable years. The Holding
Company and the Bank believe that the conversion presents a unique opportunity
to make the Stock Contribution given the substantial amount of additional
capital being
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raised in the Conversion. In making such a determination, the Holding Company
and the Bank considered the dilutive impact of the Stock Contribution on the
conversion appraisal. See "Comparison of Valuation and Pro Forma Information
with No Stock Contribution." Based on such considerations, the Holding Company
and Bank believe that the Stock Contribution to the Foundation in excess of the
10% annual limitation is justified given the Bank's capital position and its
earnings, the substantial additional capital being raised in the Conversion and
the potential benefits of the Foundation to the Bank's community. In this
regard, assuming the sale of the Common Stock at the midpoint of the Estimated
Valuation Range, the Holding Company would have pro forma consolidated capital
of $72.6 million and the Bank's pro forma tangible, core and risk-based capital
ratios would be 17.7%, 17.7% and 38.8%, respectively. See "Regulatory Capital
Compliance," "Capitalization," and "Comparison of Valuation and Pro Forma
Information with No Stock Contribution." Thus, the amount of the Stock
Contribution will not adversely impact the financial condition of the Holding
Company and the Bank, and the Holding Company and the Bank therefore believe
that the amount of the charitable contribution is reasonable given the Holding
Company and the Bank's pro forma capital positions. As such, the Holding Company
and the Bank believe that the Stock Contribution does not raise safety and
soundness concerns.
The Holding Company and the Bank have received an opinion of their
independent accountants that the Holding Company's contribution of its own stock
to the Foundation will not constitute an act of self-dealing, and that the
Holding Company will be entitled to a deduction in the amount of the $2.5
million, subject to a limitation based on 10% of the Holding Company's annual
taxable income. The Holding Company, however, would be able to carry forward any
unused portion of the deduction for five years following the year in which the
contribution is made for federal and Illinois tax purposes.
The Holding Company currently estimates that substantially all of the
Stock Contribution should be deductible. However, no assurances can be made that
the Holding Company will have sufficient pre-tax income over the periods
following the year in which the contributions are made to utilize fully the
carryover related to the excess contribution.
Although the Holding Company has received an opinion of its independent
accountants that the Holding Company is entitled to a deduction for the Stock
Contribution, there can be no assurances that the IRS will recognize the
Foundation as a Section 501(c)(3) exempt organization or that the deduction will
be permitted. In such event, the Holding Company's contribution to the
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foundation would be expensed without tax benefit, resulting in a reduction in
earnings in the year in which the IRS makes such a determination. See "Risk
Factors - Risks Associated with the Stock Contribution to the Charitable
Foundation." In cases of willful, flagrant or repeated acts or failures to act
which result in violations of the IRS rules governing private foundations, a
private foundation's status as a private foundation may be involuntarily
terminated by the IRS. In such event, the managers of a private foundation could
be liable for excise taxes based on such violations and the private foundation
could be liable for a termination tax under the Code. The Foundation's
certificate of incorporation provides that it shall have a perpetual existence.
In the event, however, the Foundation were subsequently dissolved as a result of
a loss of its tax exempt status, the Foundation would be required under the Code
and its articles of incorporation to distribute any assets remaining in the
Foundation at that time for one or more exempt purposes within the meaning of
Section 501(c)(3) of the Code, or to distribute such assets to the federal
government, or to a state or local government, for a public purpose.
As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are exempt from federal and state corporate
taxation. However, investment income, such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a private
foundation must include, among other things, an itemized list of all grants made
or approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the Foundation's managers and a concise statement
of the purpose of each grant.
Regulatory Conditions Imposed on the Foundation. The Stock Contribution
is subject to the following conditions imposed by the OTS: (i) the Foundation
will be subject to examination by the OTS, at the Foundation's own expense; (ii)
the Foundation must comply with supervisory directives imposed by the OTS; (iii)
the Foundation will provide annual reports to the OTS describing grants made and
grant recipients; (iv) the Foundation will operate in accordance with written
policies adopted by the board of trustees, including a conflict of interest
policy; (v) the Foundation will not engage in self-dealing and will comply with
all laws necessary to maintain its tax-exempt status; and (vi) any shares of
Common Stock of the Holding Company held by the Foundation must be voted in the
same ratio as all other shares of the Holding Company's Common Stock on all
proposals considered by stockholders of the Holding Company; provided, however,
that the OTS will waive this voting restriction under certain circumstances if
compliance with the voting restriction would: (a) cause a violation of the law
of the State of Illinois and the OTS determines the federal law does not preempt
the application of the laws of the State of Illinois to the Foundation; (b)
cause the Foundation to lose its tax-exempt status or otherwise have a material
and adverse tax consequence on the Foundation; or (c) cause the Foundation to be
subject to an excise tax under Section 4941 of the Code. In order for the OTS to
waive such voting restriction, the Holding Company's or the Foundation's legal
counsel must render an opinion satisfactory to OTS that compliance with the
voting restriction would have the effect described in clauses (a), (b) or (c)
above. There can be no assurances that either a legal or tax opinion addressing
these issues will be rendered, or if rendered, that the OTS will grant an
unconditional waiver of the voting restriction. In this regard, a condition to
the OTS approval of the Conversion provides that in the event such voting
restriction is waived or becomes unenforceable, the Director of the OTS, or his
designees, at that time may impose conditions on the composition of the board of
trustees of the Foundation to control the voting of Common Stock held by the
Foundation. In no event will the voting restriction survive the sale of shares
of the Common Stock held by the Foundation.
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The Stock Contribution is subject to the approval of a majority of the
total outstanding votes of the Bank's members eligible to be cast at the Special
Meeting. The Stock Contribution will be considered as a separate matter from
approval of the Plan of Conversion. If the Bank's members approve the Plan of
Conversion, but not the Stock Contribution, the Bank intends to complete the
Conversion without the Stock Contribution. Failure to approve the Foundation may
materially increase the pro forma market value of the Common Stock being offered
since the Estimated Valuation Range, as set forth herein, takes into account the
after-tax impact of the Stock Contribution. See "Pro Forma Data."
Business Purposes
First Security has several business purposes for the Conversion. The
sale of Holding Company Common Stock will have the immediate result of providing
the Bank with additional equity capital in order to support the expansion of its
existing operations, subject to market conditions. See "Business." The sale of
the Common Stock is the most effective means of increasing the Bank's permanent
capital and does not involve the high interest cost and repayment obligation of
subordinated debt. In addition, investment of that part of the net Conversion
proceeds paid by the Holding Company to the Bank is expected to provide
additional operating income to further increase the Bank's capital on a
continuing basis.
The Board of Directors of the Bank believes that a holding company
structure could facilitate the acquisition of both mutual and stock savings
institutions in the future as well as other companies. If a multiple holding
company structure is utilized in a future acquisition, the acquired savings
institution would be able to operate on a more autonomous basis as a wholly
owned subsidiary of the Holding Company rather than as a division of the Bank.
For example, the acquired savings institution could retain its own directors,
officers and corporate name as well as having representation on the Board of
Directors of the Holding Company. As of the date hereof, there are no plans or
understandings regarding the acquisition of any other institutions.
The Board of Directors of the Bank also believes that a holding company
structure can facilitate the diversification of the Bank's business activities.
While diversification will be maximized if a unitary holding company structure
is utilized because the types of business activities permitted to a unitary
holding company are broader than those of a multiple holding company, either
type of holding company may engage in a broader range of activities than may a
thrift institution directly. Currently, there are no plans that the Holding
Company engage in any material activities apart from holding the shares of the
Bank and investing the remaining net proceeds from the sale of Common Stock in
the Conversion.
The preferred stock and additional common stock of the Holding Company
being authorized in the Conversion will be available for future acquisitions and
for issuance and sale to raise additional equity capital, generally without
stockholder approval or ratification, but subject to market conditions. Although
the Holding Company currently has no plans with respect to future issuances of
equity securities, the more flexible operating structure provided by the Holding
Company and the stock form of ownership is expected to assist the Bank in
competing more aggressively with other financial institutions in its principal
market area.
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The Conversion will structure the Bank in the stock form used in the
United States by all commercial banks, most major business corporations and an
increasing number of savings institutions. The Conversion will permit the Bank's
members to become stockholders of the Holding Company, thereby allowing members
to own stock in the financial organization in which they maintain deposit
accounts or with which they have a borrowing relationship. Such ownership should
encourage stockholders to promote the Bank to potential customers, thereby
further contributing to the Bank's earnings potential.
The Bank is also expected to benefit from its management and employees
owning stock, because stock ownership is viewed as an effective performance
incentive and a means of attracting, retaining and compensating personnel.
Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank
Voting Rights. Deposit account holders will have no voting rights in
the converted Bank or the Holding Company and will therefore not be able to
elect directors of either entity or to control their affairs. These rights are
currently accorded to deposit account holders with regard to the Bank.
Subsequent to Conversion, voting rights will be vested exclusively in the
Holding Company as the sole stockholder of the Bank. Voting rights as to the
Holding Company will be held exclusively by its stockholders. Each purchaser of
Holding Company Common Stock shall be entitled to vote on any matters to be
considered by the Holding Company stockholders. A stockholder will be entitled
to one vote for each share of Common Stock owned, subject to certain limitations
applicable to holders of 10% or more of the shares of the Common Stock. See
"Description of Capital Stock."
Deposit Accounts and Loans. The general terms of the Bank's deposit
accounts, the balances of the individual accounts and the existing FDIC
insurance coverage will not be affected by the Conversion. Furthermore, the
Conversion will not affect the loan accounts, the balances of these accounts, or
the obligations of the borrowers under their individual contractual arrangements
with the Bank.
Tax Effects. The Bank has received an opinion from Silver, Freedman &
Taff, L.L.P. with regard to federal income taxation, and an opinion from Crowe
Chizek & Co. with regard to Illinois taxation, to the effect that the adoption
and implementation of the Plan of Conversion set forth herein will not be
taxable for federal or Illinois tax purposes to the Bank or the Holding Company.
See "- Income Tax Consequences."
Liquidation Rights. The Bank has no plans to liquidate, either before
or subsequent to the completion of the Conversion. However, if there should ever
be a complete liquidation, either before or after Conversion, deposit account
holders would receive the protection of insurance by the FDIC up to applicable
limits. Subject thereto, liquidation rights before and after Conversion would be
as follows:
Liquidation Rights in Present Mutual Institution. In addition to the
protection of FDIC insurance up to applicable limits, in the event of a
complete liquidation of the Bank, each holder of a deposit account in
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the Bank in its present mutual form would receive his or her pro rata
share of any assets of the Bank remaining after payment of claims of
all creditors (including the claims of all depositors in the amount of
the withdrawal value of their accounts). Such holder's pro rata share
of such remaining assets, if any, would be in the same proportion of
such assets as the balance in his or her deposit account was to the
aggregate balance in all deposit accounts in the Bank at the time of
liquidation.
Liquidation Rights in Proposed Converted Institution. After Conversion,
each deposit account holder, in the event of a complete liquidation of
the Bank, would have a claim of the same general priority as the claims
of all other general creditors of the Bank in addition to the
protection of FDIC insurance up to applicable limits. Therefore, except
as described below, the deposit account holder's claim would be solely
in the amount of the balance in his or her deposit account plus accrued
interest. The holder would have no interest in the assets of the Bank
above that amount.
The Plan of Conversion provides that there shall be established, upon
the completion of the Conversion, a special "liquidation account" for
the benefit of Eligible Account Holders (i.e., eligible depositors at
December 31, 1995) and Supplemental Account Holders (eligible
depositors at ________ __, 1997) in an amount equal to the net worth of
the Bank as of the date of its latest consolidated statement of
financial condition contained in the final prospectus relating to the
sale of shares of Holding Company Common Stock in the Conversion. Each
Eligible Account Holder and Supplemental Eligible Account Holder would
have an initial interest in such liquidation account for each deposit
account held in the Bank on the qualifying date. An Eligible Account
Holder and Supplemental Eligible Account Holder's interest as to each
deposit account would be in the same proportion of the total
liquidation account as the balance in his or her account on December
31, 1995 and ________ __, 1997, respectively, was to the aggregate
balance in all deposit accounts of Eligible Account Holders and
Supplemental Eligible Account Holders on such dates. However, if the
amount in the deposit account of an Eligible Account Holder or
Supplemental Eligible Account Holder on any annual closing date of the
Bank is less than the lowest amount in such account on December 31,
1995 or _________ __, 1997 and on any subsequent closing date, then the
account holder's interest in this special liquidation account would be
reduced by an amount proportionate to any such reduction, and the
account holder's interest would cease to exist if such deposit account
were closed.
In addition, the interest in the special liquidation account would
never be increased despite any increase in the balance of the account
holders' related accounts after Conversion, and would only decrease.
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Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders were
satisfied would be distributed to the Holding Company as the sole
stockholder of the Bank.
No merger, consolidation, purchase of bulk assets with assumption of
deposit accounts and other liabilities, or similar transaction, whether
the Bank, as converted, or another SAIF-insured institution is the
surviving institution, is deemed to be a complete liquidation for
purposes of distribution of the liquidation account and, in any such
transaction, the liquidation account would be assumed to the full
extent authorized by regulations of the OTS as then in effect. The OTS
has stated that the consummation of a transaction of the type described
in the preceding sentence in which the surviving entity is not a
SAIF-insured institution would be reviewed on a case-by-case basis to
determine whether the transaction should constitute a "complete
liquidation" requiring distribution of any then remaining balance in
the liquidation account. While the Bank believes that such a
transaction should not constitute a complete liquidation, there can be
no assurance that the OTS will not adopt a contrary position.
Common Stock. For information as to the characteristics of the Common
Stock to be issued under the Plan of Conversion, see "Dividends" and
"Description of Capital Stock." Common Stock issued under the Plan of Conversion
cannot, and will not, be insured by the FDIC or any other governmental agency.
The Bank will continue, immediately after completion of the Conversion,
to provide its services to depositors and borrowers pursuant to its existing
policies and will maintain the existing management and employees of the Bank.
Other than for payment of certain expenses incident to the Conversion, no assets
of the Bank will be distributed in the Conversion. First Security will continue
to be a member of the FHLB System, and its deposit accounts will continue to be
insured by the FDIC. The affairs of First Security will continue to be directed
by the existing Board of Directors and management.
Offering of Holding Company Common Stock
Under the Plan of Conversion, 5,572,000 shares of Holding Company
Common Stock will be offered for sale, subject to certain restrictions described
below, initially through the Offering. Federal conversion regulations require,
with certain exceptions, that all shares offered in a conversion be sold in
order for the conversion to become effective.
The Subscription Offering will expire at noon, Chicago, Illinois time,
on ________, 1997 (the "Subscription Expiration Date") unless extended by the
Bank and the Holding Company. Depending on the availability of shares and market
conditions at or near the completion of the Subscription Offering, the Holding
Company may effect a Public Offering of shares to selected persons through FBR.
To order Common Stock in connection with the Public Offering and Direct
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Community Offering, if any, an executed stock order and account withdrawal
authorization and certification must be received by FBR prior to the termination
of the Public Offering and Direct Community Offering. The date by which orders
must be received in the Public Offering, if any, will be set by the Holding
Company at the time of such offering. OTS regulations require that all shares to
be offered in the Conversion be sold within a period ending not more than 45
days after the Subscription Expiration Date (or such longer period as may be
approved by the OTS) or, despite approval of the Plan of Conversion by members,
the Conversion will not be effected and First Security will remain in mutual
form. This period expires on _____, 1997, unless extended with the approval of
the OTS. In addition, if the Offering is extended beyond _____, 1997, all
subscribers will have the right to modify or rescind their subscriptions and to
have their subscription funds returned promptly with interest. In the event that
the Conversion is not effected, all funds submitted and not previously refunded
pursuant to the Offering will be promptly refunded to subscribers with interest
at the Bank's current passbook rate and all withdrawal authorizations will be
terminated.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities of a thrift institution sold in connection with its conversion must
be based on an appraised aggregate market value of the institution as converted
(i.e., taking into account the expected receipt of proceeds from the sale of the
securities in the conversion), as determined by an independent valuation.
FinPro, which is experienced in the valuation and appraisal of business
entities, including thrift institutions involved in the conversion process, was
retained by the Bank to prepare an appraisal of the estimated pro forma market
value of the Bank and the Holding Company upon Conversion.
FinPro will receive a fee of approximately $23,000 for its appraisal in
addition to its reasonable out-of-pocket expenses incurred in connection with
the appraisal. FinPro has also agreed to assist in the preparation of the Bank's
business plan and to perform certain records management services for the Bank
for such fee. The Bank has agreed to indemnify FinPro under certain
circumstances against liabilities and expenses (including legal fees) arising
out of, related to, or based upon the Conversion.
FinPro has prepared an appraisal of the estimated pro forma market
value of the Bank as converted. The FinPro appraisal concluded that, at April
30, 1997, an appropriate range for the estimated pro forma market value of the
common stock to be sold in the Offering was from a minimum of $41,180,000 to a
maximum of $55,720,000 with a midpoint of $48,450,000. Assuming that the shares
are sold at $10.00 per share in the Conversion, the estimated number of shares
to be issued in the Conversion (not including the Stock Contribution) is
expected to be between 4,118,000 and 5,572,000. The Purchase Price of $10.00 per
share was determined by discussion among the Boards of Directors of the Bank,
the Holding Company and FinPro, taking into account, among other factors, (i)
the requirement under OTS regulations that the Common Stock be offered on a
manner that would achieve the widest distribution of shares and (ii) liquidity
in the Common Stock subsequent to the Conversion.
The appraisal involved a comparative evaluation of the operating and
financial statistics of the Bank with those of other thrift institutions. The
appraisal also took into account such other factors as the market for thrift
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institution stocks generally, prevailing economic conditions, both nationally
and in Illinois, which affect the operations of thrift institutions, the
competitive environment within which the Bank operates and the effect of the
Bank becoming a subsidiary of the Holding Company. No detailed individual
analysis of the separate components of the Holding Company's and the Bank's
assets and liabilities was performed in connection with the evaluation. The Plan
of Conversion requires that all of the shares subscribed for in the Offering be
sold at the same price per share. The Board of Directors reviewed the appraisal,
including the methodology and the appropriateness of the assumptions utilized by
FinPro and determined that in its opinion the appraisal was not unreasonable.
The Estimated Valuation Range may be amended with the approval of the OTS in
connection with changes in the financial condition or operating results of the
Bank or market conditions generally. As described below, an amendment to the
Estimated Valuation Range above $64,080,000 would not be made without a
resolicitation of subscriptions and/or proxies except in limited circumstances.
If, upon completion of the Offering, at least the minimum number of
shares are subscribed for, FinPro, after taking into account factors similar to
those involved in its prior appraisal, will determine its estimate of the pro
forma market value of the Bank and the Holding Company upon Conversion, as of
the close of the Offering.
If, based on the estimate of FinPro, the aggregate pro forma market
value is not within the Estimated Valuation Range, FinPro, upon the consent of
the OTS, will determine a new Estimated Valuation Range ("Amended Valuation
Range"). If the aggregate pro forma market value of the stock to be sold in the
Offering has increased in the Amended Valuation Range to an amount that does not
exceed $64,080,000 (i.e., 15% above the maximum of the Estimated Valuation
Range), then the number of shares to be issued may be increased to accommodate
such increase in value without a resolicitation of subscriptions and/or proxies.
In such event the Bank and the Holding Company do not intend to resolicit
subscriptions and/or proxies unless the Bank and the Holding Company then
determine, after consultation with the OTS, that circumstances otherwise require
such a resolicitation. If, however, the aggregate pro forma market value of the
Common Stock to be sold of the Holding Company, at that time is less than $41.2
million or more than $64.1 million, a resolicitation of subscribers and/or
proxies may be made, the Plan of Conversion may be terminated or such other
actions as the OTS may permit may be taken. In the event that upon completion of
the Offering, the pro forma market value of the Common Stock to be sold is below
$41.2 million or above $64.1 million (15% above the maximum of the Estimated
Valuation Range), the Holding Company intends to file the revised appraisal with
the SEC by post-effective amendment to its Registration Statement on Form S-1.
See "Additional Information." If the Plan of Conversion is terminated, all funds
would be returned promptly with interest at the rate of the Bank's current
passbook rate, and holds on funds authorized for withdrawal from deposit
accounts would be released. If there is a resolicitation of subscriptions,
subscribers will be given the opportunity to cancel or change their
subscriptions and to the extent subscriptions are so canceled or reduced, funds
will be returned with interest at the Bank's current passbook rate and holds on
funds authorized for withdrawal from deposit accounts will be released or
reduced. Stock subscriptions received by the Holding Company and the Bank may
not be withdrawn by the subscriber and, if accepted by the Holding Company and
the Bank, are final. If the Conversion is not completed prior to ______________
(two years after the date of the Special Meeting), the Plan of Conversion will
automatically terminate.
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Any increase in the total number of shares of Common Stock to be
offered in the Conversion will dilute a subscriber's percentage ownership
interest and will reduce the pro forma net income and net worth on a per share
basis. A decrease in the number of shares to be issued in the Conversion will
increase a subscriber's proportionate ownership interest and will increase both
pro forma net income and net worth on a per share basis while decreasing that
amount on an aggregate basis.
No sale of the shares will take place unless, prior thereto, FinPro
confirms to the OTS that, to the best of FinPro's knowledge and judgment,
nothing of a material nature has occurred which would cause FinPro to conclude
that the actual Purchase Price on an aggregate basis is incompatible with its
estimate of the aggregate pro forma market value of the Holding Company and the
Bank as converted at the time of the sale. If, however, the facts do not justify
such a statement, the Offering or other sale may be canceled, a new Estimated
Valuation Range set and new offering held.
In preparing its valuation of the pro forma market value of the Bank
and the Holding Company upon Conversion, FinPro relied upon and assumed the
accuracy and completeness of all financial and statistical information provided
by the Bank and the Holding Company. FinPro also considered information based
upon other publicly available sources which it believes are reliable. However,
FinPro does not guarantee the accuracy and completeness of such information and
did not independently verify the financial statements and other data provided by
the Bank and the Holding Company or independently value the assets or
liabilities of the Bank and the Holding Company. The appraisal is not intended
to be, and must not be interpreted as, a recommendation of any kind as to the
advisability of voting to approve the Conversion or of purchasing shares of
Common Stock. The appraisal considers First Security and the Holding Company
only as going concerns and should not be considered as any indication of the
liquidation value of First Security or the Holding Company. Moreover, the
appraisal is necessarily based on many factors which change from time to time.
There can be no assurance that persons who purchase shares in the Conversion
will be able to sell such shares at prices at or above the Purchase Price.
Subscription Offering
In accordance with OTS regulations, non-transferable Subscription
Rights have been granted under the Plan of Conversion to the following persons
in the following order of priority: (1) Eligible Account Holders (deposit
account holders of the Bank maintaining an aggregate balance of $50 or more as
of December 31, 1995), (2) the Holding Company and the Bank's Tax-Qualified
Employee Plans; provided, however, that the Tax-Qualified Employee Plans shall
have first priority Subscription Rights to the extent that the total number of
shares of Common Stock sold in the Conversion exceeds the maximum of the
Estimated Valuation Range; (3) Supplemental Eligible Accounts Holders (deposit
account holders of the Bank maintaining a balance of $50 or more as of _____ __,
1997), (4) Other Members (depositors of the Bank at the close of business on
________ and Borrowers of the Bank on ________________ and _________, 1997, the
voting record date for the Special Meeting) and (5) officers, directors and
employees of the Bank. All subscriptions received will be subject to the
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availability of Holding Company Common Stock after satisfaction of all
subscriptions of all persons having prior rights in the Subscription Offering,
and to the maximum and minimum purchase limitations set forth in the Plan of
Conversion.
Category No. 1 is reserved for the Bank's Eligible Account Holders.
Subscription Rights to purchase shares under this category will be allocated
among Eligible Account Holders to permit each such depositor to purchase shares
in this Category in an amount equal to the greater of $250,000 of Common Stock,
one-tenth of one percent (.10%) of the total shares offered in the Conversion,
or 15 times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of the qualifying deposits of the
Eligible Account Holder and the denominator is the total amount of the
qualifying deposit of the Eligible Account Holders in the Bank, in each case on
the Eligibility Record Date. To the extent shares are oversubscribed in this
category, shares shall be allocated first to permit each subscribing Eligible
Account Holder to purchase, to the extent possible, 100 shares and thereafter
among each subscribing Eligible Account Holder pro rata in the same proportion
that his Qualifying Deposit bears to the total Qualifying Deposits of all
subscribing Eligible Account Holders whose subscriptions remain unsatisfied.
Category No. 2 provides for the issuance of Subscription Rights to
Tax-Qualified Employee Plans to purchase up to 10% of the total amount of shares
of Common Stock issued in the Subscription Offering on a second priority basis.
However, such plans shall not, in the aggregate, purchase more than 10% of the
Holding Company Common Stock issued. The ESOP intends to purchase a total of 8%
of the Common Stock sold in the Conversion, under this category. Subscription
Rights received pursuant to this category shall be subordinated to all rights
received by Eligible Account Holders to purchase shares pursuant to Category No.
1; provided, however, that notwithstanding any provision of the Plan of
Conversion to the contrary, the Tax-Qualified Employee Plans shall have first
priority Subscription Rights to the extent that the total number of shares of
Common Stock sold in the Conversion exceeds the maximum of the Estimated
Valuation Range.
Category No. 3 is reserved for the Bank's Supplemental Eligible Account
Holders. Subscription Rights to purchase shares under this category will be
allocated among Supplemental Eligible Account Holders to permit each such
depositor to purchase shares in this Category in an amount equal to the greater
of $250,000 of Common Stock, one-tenth of one percent (.10%) of the total shares
of Common Stock offered in the Conversion, or 15 times the product (rounded down
to the next whole number) obtained by multiplying the total number of shares of
Common Stock to be issued by a fraction of which the numerator is the amount of
the qualifying deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of the qualifying deposit of the Supplemental
Eligible Account Holders in the converting Bank in each case on ______ __, 1997
(the "Supplemental Eligibility Record Date"), subject to the overall purchase
limitation after satisfying the subscriptions of Eligible Account Holders and
Tax Qualified Employee Plans. Any non-transferable Subscription Rights received
by an Eligible Account Holder shall reduce, to the extent thereof, the
subscription rights to be distributed to such person as a Supplemental Eligible
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Account Holder. In the event of an oversubscription for shares, the shares
available shall be allocated first to permit each subscribing Supplemental
Eligible Account Holder, to the extent possible, to purchase a number of shares
sufficient to make his total allocation (including the number of shares, if any,
allocated in accordance with Category No. 1) equal to 100 shares, and thereafter
among each subscribing Supplemental Eligible Account Holder pro rata in the same
proportion that his Qualifying Deposit bears to the total Qualifying Deposits of
all subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied.
Category No. 4 provides, to the extent that shares are then available
after satisfying the subscriptions of Eligible Account Holders, Tax-Qualified
Employee Plans and Supplemental Eligible Account Holders, for the issuance of
Subscription Rights to Other Members to purchase in this Category up to the
greater of $250,000 of Common Stock, or one-tenth of one percent (.10%) of the
Common Stock offered in the Conversion. In the event of an oversubscription, the
shares available shall be allocated among the subscribing Other Members pro rata
in the same proportion that his number of votes on the Voting Record Date bears
to the total number of votes on the Voting Record Date of all subscribing Other
Members on such date. Such number of votes shall be determined based on the
Bank's mutual charter and bylaws in effect on the date of approval by members of
this Plan of Conversion.
Category No. 5 provides for the issuance of Subscription Rights to
officers, directors and employees of the Bank, to purchase in this Category up
to $250,000 of the Common Stock to the extent that shares are available after
satisfying the subscriptions of eligible subscribers in preference Categories 1,
2, 3 and 4. The total number of shares which may be purchased under this
Category may not exceed 20% of the number of shares of Holding Company Common
Stock. In the event of an oversubscription, the available shares will be
allocated pro rata among all subscribers in this category based on the number of
shares ordered by each subscriber.
Public Offering and Direct Community Offering
To the extent that shares remain available and subject to market
conditions at or near the completion of the Subscription Offering, the Holding
Company may offer shares pursuant to the Plan to selected persons in a Public
Offering and/or Direct Community Offering on a best-efforts basis through FBR in
such a manner as to promote a wide distribution of the Common Stock. Any orders
received in connection with the Public Offering and Direct Community Offering if
any, will receive a lower priority than orders properly made in the Subscription
Offering by persons properly exercising Subscription Rights. In addition
depending on market conditions, FBR may utilize selected broker-dealers
("Selected Dealers") in connection with the sale of shares in the Public
Offering, if any. Common Stock sold in the Public Offering and Direct Community
Offering will be sold at $10.00 per share and hence will be sold at the same
price as all other shares in the Conversion. The Holding Company and the Bank
have the right to reject orders, in whole or in part, in their sole discretion
in the Public Offering and Direct Community Offering.
No person, together with any associate or group of persons acting in
concert, will be permitted to purchase more than $250,000 of Common Stock in the
Public Offering and Direct Community Offering. To order Common Stock in
connection with the Public Offering or Direct Community Offering, if any, an
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executed stock order and account withdrawal authorization and certification must
be received by FBR prior to the termination of such Offering. The date by which
orders must be received in the Public Offering and Direct Community Offering
will be set by the Holding Company at the time of commencement of such offering;
provided however, if the Offering is extended beyond _______, 1997, each
subscriber will have the opportunity to maintain, modify or rescind his or her
subscription. In such event, all subscription funds will be promptly returned
with interest to each subscriber unless he or she affirmatively indicates
otherwise.
It is estimated that the Selected Dealers will receive a negotiated
commission of up to 4.5% of the Common Stock sold by the Selected Dealers,
payable by the Holding Company, and FBR will also receive a fee of 1.0% of
Common Stock sold by such firms. Such fees in the aggregate will not exceed
5.5%. See "- Marketing Arrangements.
FBR may enter into agreements with Selected Dealers to assist in the
sale of shares in the Public Offering. Selected Dealers may only solicit
indications of interest from their customers to place orders with the Holding
Company as of a certain date ("Order Date") for the purchase of shares of
Conversion Stock with the authorization of FBR. When and if FBR and the Holding
Company believe that enough indications of interest and orders have been
received to consummate the Conversion, FBR will request, as of the Order Date,
Selected Dealers to submit orders to purchase shares for which they have
received indications of interest from their customers. Selected Dealers will
send confirmation of the orders to such customers on the next business day after
the Order Date. Customers who authorize Selected Dealers to debit their
brokerage accounts are required to have the funds for payment in their account
on but not before the closing date of the Conversion. On the closing date,
Selected Dealers will remit funds to the account that the Holding Company
established for each Selected Dealer. Each customer's funds so forwarded to the
Holding Company, along with all other accounts held in the same title, will be
insured up to the applicable legal limit. After payment has been received by the
Holding Company from Selected Dealers, funds will earn interest at the Bank's
passbook rate until the completion of the Offering. In the event the Conversion
is not consummated as described above, funds with interest will be returned
promptly to the Selected Dealers, who, in turn, will promptly credit their
customers' brokerage account.
In the event the Holding Company determines to conduct a Public
Offering and/or Direct Community Offering, persons to whom a prospectus is
delivered may subscribe for shares of Common Stock by submitting a completed
stock order and account withdrawal authorization (provided by FBR) and an
executed certification along with immediately available funds (which may be
obtained by debiting a FBR account) to FBR by not later than the public offering
expiration date (as established by the Holding Company). Promptly upon receipt
of available funds, together with a properly executed stock order and account
withdrawal authorization and certification, FBR will forward such funds to First
Security to be deposited in a subscription escrow account.
If a subscription in the Public Offering and/or Direct Community
Offering is accepted, promptly after the completion of the Conversion, a
certificate for the appropriate amount of shares will be forwarded to FBR as
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nominee for the beneficial owner. In the event that a subscription is not
accepted or the Conversion is not consummated, the Bank will promptly refund
with interest the subscription funds to FBR which will then return the funds to
subscribers' accounts. If the aggregate pro forma market value of the Common
Stock to be sold in the Offering is less than $41.2 million or more than $64.1
million, each subscriber will have the right to modify or rescind his or her
subscription.
The opportunity to subscribe for shares of Common Stock in the Public
Offering and/or Direct Community Offering is subject to the right of the Bank
and the Holding Company, in their sole discretion, to accept or reject any such
orders in whole or in part.
Additional Purchase Restrictions
The Plan also provides for certain additional limitations to be placed
upon the purchase of shares in the Conversion. Specifically, no person (other
than a Tax-Qualified Employee Plan) by himself or herself or with an associate,
and no group of persons acting in concert, may subscribe for or purchase more
than $750,000 of Common Stock. For purposes of this limitation, an associate of
a person does not include a Tax-Qualified Employee Plan or Non-Tax Qualified
Employee Plan in which the person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity. Moreover, for purposes
of this paragraph, shares held by one or more Tax Qualified or Non-Tax Qualified
Employee Plans attributed to a person shall not be aggregated with shares
purchased directly by or otherwise attributable to that person except for that
portion of a plan which is self-directed by a person. See "- Stock Pricing and
Number of Shares to be Issued" regarding potential changes in Subscription
Rights in the event of a decrease in the number of shares to be issued in the
Conversion. Officers and directors and their associates may not purchase, in the
aggregate, more than 30% of the shares to be sold in the Conversion. For
purposes of the Plan, the members of the Board of Directors are not deemed to be
acting in concert solely by reason of their Board membership. For purposes of
this limitation, an associate of an officer or director does not include a
Tax-Qualified Employee Plan. Moreover, any shares attributable to the officers
and directors and their associates, but held by a Tax-Qualified Employee Plan
(other than that portion of a plan which is self-directed) shall not be included
in calculating the number of shares which may be purchased under the limitations
in this paragraph. Shares purchased by employees who are not officers or
directors of the Bank, or their associates, are not subject to this limitation.
The term "associate" is used above to indicate any of the following
relationships with a person: (i) any corporation or organization (other than the
Holding Company or the Bank or a majority-owned subsidiary of the Holding
Company or the Bank) of which a person is an officer or partner or is, directly
or indirectly, the beneficial owner of 10% or more of any class of equity
security; (ii) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or in a similar
fiduciary capacity; and (iii) any relative or spouse of such person or any
relative of such spouse who has the same home as such person or who is a
director or officer of the Holding Company or the Bank or any subsidiary of the
Holding Company or the Bank.
The Boards of Directors of the Holding Company and the Bank, in their
sole discretion, may increase the maximum purchase limitations referred to above
up to 9.99% of the total shares to be offered in the Offering, provided that
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orders for shares exceeding 5.0% of the shares being offered in the Offering
shall not exceed, in the aggregate, 10% of the shares being offered in the
Offering or decrease the maximum purchase limitation to one percent of the
Common Stock offered in the Conversion. Requests to purchase additional shares
of Common Stock under this provision will be allocated by the Boards of
Directors on a pro rata basis giving priority in accordance with the priority
rights set forth above. Depending on market and financial conditions, the Boards
of Directors of the Holding Company and the Bank, with the approval of the OTS
and without further approval of the members, may increase or decrease any of the
above purchase limitations.
To the extent that shares are available, each subscriber must subscribe
for a minimum of 25 shares. In computing the number of shares to be allocated,
all numbers will be rounded down to the next whole number.
Common Stock purchased in the Conversion will be freely transferable
except for shares purchased by executive officers and directors of the Bank or
the Holding Company. See "- Restrictions on Transfer of Subscription Rights and
Shares."
Marketing Arrangements
First Security has retained FBR, a broker-dealer registered with the
Securities and Exchange Commission (the "SEC") and a member of the National
Association of Securities Dealers, Inc. (the "NASD"), to consult with and advise
the Bank and to assist in the distribution of shares in the Offering on a
best-efforts basis. Among the services FBR will perform are (i) training and
educating First Security employees, who will be performing certain ministerial
functions in the Offering, regarding the mechanics and regulatory requirements
of the stock sale process, (ii) keeping records of orders for shares of Common
Stock, (iii) targeting First Security's sales efforts including preparation of
marketing materials, (iv) assisting in the collection of proxies from Members
for use at the Special Meeting, and (v) providing its registered stock
representatives to staff the Stock Center and meeting with and assisting
potential subscribers. For its services, FBR will receive a success fee of 1.0%
of the aggregate Purchase Price of Common Stock sold in the Offering, excluding
Common Stock purchased by directors, officers and employees of the Bank, or
members of their immediate families and purchases by tax-qualified plans. A
management fee of $20,000, is being applied against this fee. If the Offering is
terminated before completion, FBR will be entitled to retain such payments
already accrued or received.
To the extent registered broker-dealers are utilized, the Holding
Company will pay a fee (to be negotiated, but not to exceed 4.5% of the
aggregate Purchase Price of shares of Common Stock sold in the Public Offering
and Direct Community Offering) to such Selected Dealers, including any
sponsoring dealer fees. The Holding Company will also pay FBR a fee of 1.0% of
the aggregate Purchase Price of shares of Common Stock sold in the Offering by
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Selected Dealers, which together with the fee to be paid to Selected Dealers
will result in an aggregate fee not to exceed 5.5% of the Common Stock sold in
the Offering. Fees paid to FBR and to any other broker-dealer may be deemed to
be underwriting fees, and FBR and such other broker-dealers may be deemed to be
underwriters. The Holding Company has agreed to reimburse FBR for its reasonable
out-of-pocket expenses (not to exceed $50,000), and its legal fees and expenses
(not to exceed $37,500) and to indemnify FBR against certain claims or
liabilities, including certain liabilities under the Securities Act.
In the event there is a Public Offering or Direct Community Offering,
procedures may be implemented to permit a purchaser to pay for his or her shares
with funds held by or deposited with FBR or a "Selected Dealer." See "- Public
Offering and Direct Community Offering."
Directors and executive officers of the Holding Company and the Bank
may, to a limited extent, participate in the solicitation of offers to purchase
Common Stock. Sales will be made from a Stock Center located away from the
publicly accessible areas (including teller windows) of the Bank's offices.
Other employees of the Bank may participate in the Offering in administrative
capacities, providing clerical work in effecting a sales transaction or
answering questions of a potential purchaser provided that the content of the
employee's responses is limited to information contained in this Prospectus or
other offering document. Other questions of prospective purchasers will be
directed to executive officers or registered representatives of FBR. Such other
employees have been instructed not to solicit offers to purchase Common Stock or
provide advice regarding the purchase of Common Stock. To the extent permitted
under applicable law, directors and executive officers of the Holding Company
and the Bank may participate in the solicitation of offers to purchase Common
Stock, except in the State of Texas where only a representative of FBR will be
able to offer and sell securities to Texas residents. The Holding Company will
rely on Rule 3a4-1 under the Exchange Act and sales of Common Stock will be
conducted within the requirements of Rule 3a4-1, so as to permit officers,
directors and employees to participate in the sale of Common Stock. No officer,
director or employee of the Holding Company or the Bank will be compensated in
connection with his participation by the payment of commissions or other
remuneration based either directly or indirectly on the transactions in the
Common Stock.
A Stock Center will be established at the Bank's headquarters office,
in an area separated from the Bank's banking operations. In addition,
representatives of FBR will be available to answer questions at a designated
area in the Bank's Philadelphia office which is located away from publicly
accessible areas of that office. No sales activities will be conducted in the
public areas of the Bank's offices, but persons will be able to obtain a
Prospectus and sales information at such places, and employees will inform
prospective purchasers to direct their questions to the Stock Center and will
provide such persons with the telephone number of the Stock Center. Completed
stock orders will be accepted at such places, and will be promptly forwarded to
the Stock Center for processing. No officer, director or employee of the Bank
will be compensated in connection with his participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the Common Stock.
The Bank and the Holding Company will make reasonable efforts to comply
with the securities laws of all states in the United States in which persons
entitled to subscribe for shares, pursuant to the Plan of Conversion, reside.
However, no shares will be offered or sold under the Plan of Conversion to any
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such person who (1) resides in a foreign country or (2) resides in a state of
the United States in which a small number of persons otherwise eligible to
subscribe for shares under the Plan of Conversion reside or as to which the Bank
and the Holding Company determine that compliance with the securities law of
such state would be impracticable for reasons of cost or otherwise, including,
but not limited to, a requirement that the Bank or the Holding Company or any of
their officers, directors or employees register, under the securities laws of
such state, as a broker, dealer, salesmen or agent. No payments will be made in
lieu of the granting of Subscription Rights to any such person.
Method of Payment for Subscriptions
To purchase shares in the Subscription Offering, an executed Order Form
with the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from the Bank's deposit account (which may be given
by completing the appropriate blanks in the order form), must be received by the
Bank by noon, Chicago, Illinois time, on __________, 1997. Order forms which are
not received by such time or are executed defectively or are received without
full payment (or appropriate withdrawal instructions) are not required to be
accepted.
To order Common Stock in connection with the Public Offering and/or
Direct Community Offering, if any, an executed stock order and account
withdrawal authorization must be received by FBR prior to the termination of
such offering. The date by which orders must be received in the Public Offering
and Direct Community Offering will be set by the Holding Company at the time of
commencement of such offerings, if any; provided however, if the Offering is
extended beyond _____, 1997, each subscriber will have the opportunity to
maintain, modify or rescind his or her subscription. In such event, all
subscription funds will be promptly returned with interest to each subscriber
unless he or she affirmatively indicates otherwise. In addition, the Holding
Company and the Bank are not obligated to accept orders submitted on photocopies
or facsimile order forms.
The Holding Company and the Bank have the right to waive or permit the
correction of incomplete or improperly executed forms, but do not represent that
they will do so. Once received, an executed Order Form or stock order and
account withdrawal authorization may not be modified, amended or rescinded
without the consent of the Holding Company and the Bank unless the Conversion
has not been completed by _____, 1997.
Payment for subscriptions in the Subscription Offering, may be made (i)
in cash if delivered in person at the office of the Bank, (ii) by check or money
order or (iii) by authorization of withdrawal from deposit accounts maintained
with the Bank. Interest will be paid on payments made by cash, check, bank draft
or money order, whether or not the Conversion is complete or terminated, at the
Bank's current passbook rate from the date payment is received until the
completion or termination of the Conversion. If payment is made by authorization
of withdrawal from deposit or certificate accounts, the funds authorized to be
withdrawn from such account will continue to accrue interest at the contractual
rates until completion or termination of the Conversion. Such funds will be
unavailable to the depositor until completion or termination of the Conversion.
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If a subscriber authorizes the Bank to withdraw the amount of the
Purchase Price from his certificate account, the Bank will do so as of the
effective date of Conversion. The Bank will waive any applicable penalties for
early withdrawal from certificate accounts at First Security for the purpose of
purchasing Common Stock. If the remaining balance in a certificate account is
reduced below the applicable minimum balance requirement at the time that the
funds actually are transferred under the authorization, the rate paid on the
remaining balance of the certificate will earn interest at the then-current
passbook rate.
A depositor interested in using his or her IRA funds to purchase Common
Stock must do so through a self-directed IRA. Since the Bank does not offer such
accounts, it will allow a depositor to make a trustee-to-trustee transfer of the
IRA funds to a trustee offering a self-directed IRA program with the agreement
that such funds will be used to purchase the Holding Company's Common Stock in
the Offering. There will be no early withdrawal or IRS interest penalties for
such transfers. The new trustee would hold the Common Stock in a self-directed
account in the same manner as the Bank now holds the depositor's IRA funds. An
annual administrative fee may be payable to the new trustee. Depositors
interested in using funds in a Bank IRA to purchase Common Stock should contact
the Stock Center at the Bank as soon as possible so that the necessary forms may
be forwarded for execution and returned prior to the Expiration Date.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but rather, may pay for such shares of Common Stock
subscribed for the Purchase Price upon consummation of the Conversion, provided
that there is in force from the time of its subscription until such time, a loan
commitment to lend to the ESOP, at such time, the aggregate Purchase Price of
the shares for which it subscribed.
For information regarding the submission of orders in connection with
the Public Offering and Direct Community Offering, see "- Public Offering and
Direct Community Offering."
All refunds and any interest due will be paid after completion of the
Conversion. Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the last address of such persons appearing on the
records of the Bank, or to such other address as may be specified in properly
completed order forms, as soon as practicable following consummation of the sale
of all shares of Common Stock. Any certificates returned as undeliverable will
be disposed of in accordance with applicable law.
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 under the Exchange
Act, no prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
Order Form will confirm receipt or delivery in accordance with Rule 15c2-8.
Order Forms will only be distributed with a prospectus. The Bank will accept for
processing only orders submitted on original Order Forms. Photocopies or
facsimile copies of Order Forms will not be accepted. Payment by cash, check,
money order, bank draft or debit authorization to an existing account at the
Bank must accompany the Order Form. No wire transfers will be accepted.
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In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (December 31,
1995), Supplemental Eligibility Record Date (_______ __, 1997) and/or the Voting
Record Date (_____ __, 1997) must list all accounts on the Order Form giving all
names on each account and the account number as of the applicable record date.
In addition to the foregoing, if shares are offered through Selected
Dealers, a purchaser may pay for his shares with funds held by or deposited with
a Selected Dealer. If an Order Form is executed and forwarded to the Selected
Dealer or if the Selected Dealer is authorized to execute the Order Form on
behalf of a purchaser, the Selected Dealer is required to forward the Order Form
and funds to the Bank for deposit in a segregated account on or before noon of
the business day following receipt of the Order Form or execution of the Order
Form by the Selected Dealer. Alternatively, Selected Dealers may solicit
indications of interest from their customers who indicated an interest and seek
their confirmation as to their intent to purchase. Those indicating an intent to
purchase shall forward executed Order Forms to their Selected Dealer or
authorize the Selected Dealer to execute such forms. The Selected Dealer will
acknowledge receipt of the order to its customer in writing on the following
business day and will debit such customer's account on the third business day
after the customer has confirmed his intent to purchase (the "debit date") and
on or before noon of the next business day following the debit date will send
Order Forms and funds to the Bank for deposit in a segregated account. If such
alternative procedure is employed, purchasers' funds are not required to be in
their accounts with Selected Dealers until the debit date.
Restrictions on Transfer of Subscription Rights and Shares
Prior to the completion of the Conversion, the OTS conversion
regulations prohibit any person with subscription rights, including the Eligible
Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account
Holders, Other Members and employees, officers and directors, from transferring
or entering into any agreement or understanding to transfer the legal or
beneficial ownership of the subscription rights issued under the Plan or the
shares of Common Stock to be issued upon their exercise. Such rights may be
executed only by the person to whom they are granted and only for his account.
Each person exercising such subscription rights will be required to certify that
he is purchasing shares solely for his own account and that he has no agreement
or understanding regarding the sale or transfer of such shares. The OTS
regulations also prohibit any person from offering or making an announcement of
an offer or intent to make an offer to purchase such subscription rights or
shares of Common Stock prior to the completion of the Conversion.
The Bank and the Holding Company may pursue any and all legal and
equitable remedies in the event they become aware of the transfer of
subscription rights and will not honor orders known by them to involve the
transfer of such rights.
Except as to directors and executive officers of the Bank and the
Holding Company, the shares of Common Stock sold in the Conversion will be
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freely transferable. Shares purchased by directors, executive officers or their
associates in the Conversion shall be subject to the restrictions that said
shares shall not be sold during the period of one year following the date of
purchase, except in the event of the death of the stockholder. Accordingly,
stock certificates issued by the Holding Company to directors, executive
officers and their associates shall bear a legend giving appropriate notice of
such restriction and, in addition, the Bank and the Holding Company will give
appropriate instructions to the transfer agent for the Common Stock with respect
to the applicable restriction upon transfer of any restricted shares. Any shares
issued at a later date as a stock dividend, stock split or otherwise, to holders
of restricted stock, shall be subject to the same restrictions that may apply to
such restricted stock. Holding Company stock (like the stock of most companies)
is subject to the requirements of the Securities Act. Accordingly, Holding
Company stock may be offered and sold only in compliance with registration
requirements or pursuant to an applicable exemption from registration.
Holding Company stock received in the Conversion by persons who are not
"affiliates" of the Holding Company may be resold without registration. Shares
received by affiliates of the Holding Company (primarily the directors, officers
and principal stockholders of the Holding Company) will be subject to the resale
restrictions of Rule 144 under the Securities Act, which are discussed below.
Rule 144 generally requires that there be publicly available certain
information concerning the Holding Company, and that sales thereunder be made in
routine brokerage transactions or through a market maker. If the conditions of
Rule 144 are satisfied, each affiliate (or group of persons acting in concert
with one or more affiliates) is entitled to sell in the public market, without
registration, in any three-month period, a number of shares which does not
exceed the greater of (i) 1% of the number of outstanding shares of Holding
Company stock, or (ii) if the stock is admitted to trading on a national
securities exchange or reported through the automated quotation system of a
registered securities bank, the average weekly reported volume of trading during
the four weeks preceding the sale.
Participation by the Board and Executive Officers
The directors and executive officers of First Security have indicated
their intention to purchase in the Conversion an aggregate of $2.1 million of
Common Stock, equal to 5.1%, 4.3%, 3.8% or 3.3% of the number of shares to be
issued in the Offering, at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, respectively. The following table sets
forth information regarding Subscription Rights to Common Stock intended to be
exercised by each of the directors of the Bank, including members of their
immediate family and their IRAs, and by all directors and executive officers as
a group. The following table assumes that 4,845,000 shares, the midpoint of the
Estimated Valuation Range, of Common Stock are issued at the Purchase Price of
$10.00 per share and that sufficient shares will be available to satisfy the
subscriptions indicated. The table does not include shares to be purchased
through the ESOP or awarded under the proposed RRP or proposed Stock Option
Plan.
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<TABLE>
<CAPTION>
Number of
Aggregate Shares at Percent of
Purchase $10.00 Shares at
Name Title Price per Share(1) Midpoint
---- ----- ----- ------------ --------
<S> <C> <C> <C> <C>
Julian Kulas Director, President and Chief Executive Officer $500,000 50,000 1.03
Paul Nadzikewycz Chairman of the Board 500,000 50,000 1.03
Steve Babyk Director 150,000 15,000 0.31
Lila Maria Bodnar Director, Recording Secretary 10,000 1,000 0.02
Myron Dobrowolsky Director 50,000 5,000 0.10
Terry Gawryk Director, Secretary 100,000 10,000 0.21
George Kawka Director 200,000 20,000 0.41
Jaroslav H. Sydorenko Director 10,000 1,000 0.02
Chrysta Wereszczak Director 100,000 10,000 0.21
Harry I. Kucewicz Chief Operating Officer, Treasurer 200,000 20,000 0.41
Mary H. Korb Vice President - Lending 100,000 10,000 0.21
Irene S. Subota Vice President - Savings 100,000 10,000 0.21
Adrian Hawryliw Vice President - Philadelphia Manager 100,000 10,000 0.21
----------- -------- -----
Total $2,120,000 212,000 4.38
========== ======= =====
- -----------
(1) Does not include subscriptions by the ESOP, or options which are intended
to be granted under the proposed Stock Option Plan or restricted stock
awards which are intended to be granted under the proposed RRP, subject to
stockholder ratification of such plans.
</TABLE>
Risk of Delay in Completion of the Offering
The completion of the sale of all unsubscribed shares in the Offering
will be dependent, in part, upon the Bank's operating results and market
conditions at the time of the Offering. Under the Plan of Conversion, all shares
offered in the Conversion must be sold within a period ending 24 months from the
date of the Special Meeting. While the Bank and the Holding Company anticipate
completing the sale of shares offered in the Conversion within this period, if
the Board of Directors of the Bank and the Holding Company are of the opinion
that economic conditions generally or the market for publicly traded thrift
institution stocks make undesirable a sale of the Common Stock, then the
Offering may be delayed until such conditions improve. If the Offering is
extended beyond _________, 1997, all subscribers will have the right to modify
or rescind their subscriptions and to have their subscription funds returned
with interest. There can be no assurance that the Offering will not be extended
as set forth above.
A material delay in the completion of the sale of all unsubscribed
shares in the Public Offering or otherwise may result in a significant increase
in the costs of completing the Conversion. Significant changes in the Bank's
operations and financial condition, the aggregate market value of the shares to
be issued in the Conversion and general market conditions may occur during such
material delay. In the event the Conversion is not consummated within 24 months
after the date of the Special Meeting of Members, the Bank would charge accrued
Conversion costs to then current period operations.
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Approval, Interpretation, Amendment and Termination
All interpretations of the Plan of Conversion, as well as the
completeness and validity of order forms and stock order and account withdrawal
authorizations, will be made by the Bank and the Holding Company and will be
final, subject to the authority of the OTS and the requirements of applicable
law. The Plan of Conversion provides that, if deemed necessary or desirable by
the Boards of Directors of the Bank and the Holding Company, the Plan of
Conversion may be substantively amended by the Boards of Directors of the Bank
and the Holding Company, as a result of comments from regulatory authorities or
otherwise, at any time with the concurrence of the OTS and the SEC. In the event
the Plan of Conversion is substantially amended, other than a change in the
maximum purchase limits set forth herein, the Holding Company intends to notify
subscribers of the change and to refund subscription funds with interest unless
subscribers affirmatively elect to increase, decrease or maintain their
subscriptions. The Plan of Conversion will terminate if the sale of all shares
is not completed within 24 months after the date of the Special Meeting of
Members. The Plan of Conversion may be terminated by the Boards of Directors of
the Holding Company and the Bank with the concurrence of the OTS, at any time. A
specific resolution approved by a two-thirds vote of the Boards of Directors of
the Holding Company and the Bank would be required to terminate the Plan of
Conversion prior to the end of such 24-month period.
Restrictions on Repurchase of Stock
For a period of three years following Conversion, the Holding Company
may not repurchase any shares of its capital stock, except in the case of an
offer to repurchase on a pro rata basis made to all holders of capital stock of
the Holding Company. Any such offer shall be subject to the prior approval of
the OTS. Furthermore, the Holding Company may not repurchase any of its stock
(i) if the result thereof would be to reduce the regulatory capital of the Bank
below the amount required for the liquidation account to be established pursuant
to OTS regulations and (ii) except in compliance with the requirements of the
OTS' capital distribution rule.
The above limitations are subject to the OTS conversion rules which
generally provide that the Holding Company may repurchase its capital stock
provided (i) no repurchases occur within one year following the Conversion
(subject to certain exceptions), (ii) repurchases during the second and third
year after conversion are part of an open market stock repurchase program that
does not allow for a repurchase of more than 5% of the Holding Company's
outstanding capital stock during a 12- month period, (iii) the repurchases do
not cause the Bank to become undercapitalized, and (iv) the Holding Company
provides notice to the OTS at lease 10 days prior to the commencement of a
repurchase program and the OTS does not object to such regulations. In addition,
the above limitations do not preclude repurchases of capital stock by the
Holding Company in the event applicable federal regulatory limitations are
subsequently liberalized.
Income Tax Consequences
Consummation of the Conversion is expressly conditioned upon prior
receipt by the Bank of either a ruling from the IRS or an opinion of Silver,
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Freedman & Taff, L.L.P. with respect to federal taxation, and an opinion of
Crowe, Chizek and Company LLP with respect to Illinois taxation, to the effect
that consummation of the Conversion will not be taxable to the converted Bank or
the Holding Company. The full text of the Silver, Freedman & Taff, L.L.P.
opinion, the FinPro Letter (hereinafter defined) and the Crowe, Chizek and
Company LLP opinion, which opinions are summarized herein, were filed with the
SEC as exhibits to the Holding Company's Registration Statement on Form S-1. See
"Additional Information."
An opinion which is summarized below has been received from Silver,
Freedman & Taff, L.L.P. with respect to the proposed Conversion of the Bank to
the stock form. The Silver, Freedman Taff, L.L.P. opinion states that (i) the
Conversion will qualify as a reorganization under Section 368(a)(1)(F) of the
Internal Revenue Code of 1986, as amended, and no gain or loss will be
recognized to the Bank in either its mutual form or its stock form by reason of
the proposed Conversion, (ii) no gain or loss will be recognized to the Bank in
its stock form upon the receipt of money and other property, if any, from the
Holding Company for the stock of the Bank; and no gain or loss will be
recognized to the Holding Company upon the receipt of money for Common Stock of
the Holding Company; (iii) the assets of the Bank in either its mutual or its
stock form will have the same basis before and after the Conversion; (iv) the
holding period of the assets of the Bank in its stock form will include the
period during which the assets were held by the Bank in its mutual form prior to
Conversion; (v) gain, if any, will be realized by the depositors of the Bank
upon the constructive issuance to them of withdrawable deposit accounts of the
Bank in its stock form, nontransferable subscription rights to purchase Holding
Company Common Stock and/or interests in the Liquidation Account (any such gain
will be recognized by such depositors, but only in an amount not in excess of
the fair market value of the subscription rights and Liquidation Account
interests received); (vi) the basis of the account holder's savings accounts in
the Bank after the Conversion will be the same as the basis of his or her
savings accounts in the Bank prior to the Conversion; (vii) the basis of each
account holder's interest in the Liquidation Account is assumed to be zero;
(viii) based on the FinPro Letter, as hereinafter defined, the basis of the
subscription rights will be zero; (ix) the basis of the Holding Company Common
Stock to its stockholders will be the purchase price thereof; (x) a
stockholder's holding period for Holding Company Common Stock acquired through
the exercise of subscription rights shall begin on the date on which the
subscription rights are exercised and the holding period for the Conversion
Stock purchased in the Offering will commence on the date following the date on
which such stock is purchased; (xi) the Bank in its stock form will succeed to
and take into account the earnings and profits or deficit in earnings and
profits, of the Bank, in its mutual form, as of the date of Conversion; (xii)
the Bank, immediately after Conversion, will succeed to and take into account
the bad debt reserve accounts of the Bank, in mutual form, and the bad debt
reserves will have the same character in the hands of the Bank after Conversion
as if no Conversion had occurred; and (xiii) the creation of the Liquidation
Account will have no effect on the Bank's taxable income, deductions or addition
to reserve for bad debts either in its mutual or stock form.
The opinion from Silver, Freedman & Taff, L.L.P. is based, among other
things, on certain assumptions, including the assumptions that the exercise
price of the Subscription Rights to purchase Holding Company Common Stock will
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be approximately equal to the fair market value of that stock at the time of the
completion of the proposed Conversion. With respect to the Subscription Rights,
the Bank will receive a letter from FinPro (the "FinPro Letter") which, based on
certain assumptions, will conclude that the Subscription Rights to be received
by Eligible Account Holders, Supplemental Eligible Account Holders and other
eligible subscribers do not have any economic value at the time of distribution
or at the time the Subscription Rights are exercised, whether or not a Public
Offering takes place.
The Bank has also received an opinion of Silver, Freedman & Taff,
L.L.P. to the effect that, based in part on the FinPro Letter: (i) no taxable
income will be realized by depositors as a result of the exercise of
non-transferable Subscription Rights to purchase shares of Holding Company
Common Stock at fair market value; (ii) no taxable income will be recognized by
borrowers, directors, officers and employees of the Bank on the receipt or
exercise of Subscription Rights to purchase shares of Holding Company Common
Stock at fair market value; and (iii) no taxable income will be realized by the
Bank or Holding Company on the issuance of Subscription Rights to eligible
subscribers to purchase shares of Holding Company Common Stock at fair market
value.
Notwithstanding the FinPro Letter, if the Subscription Rights are
subsequently found to have a fair market value and are deemed a distribution of
property, it is Silver, Freedman & Taff, L.L.P.'s opinion that gain or income
will be recognized by various recipients of the Subscription Rights (in certain
cases, whether or not the rights are exercised) and the Bank and/or the Holding
Company may be taxable on the distribution of the Subscription Rights.
With respect to Illinois taxation, the Bank has received an opinion
from Crowe, Chizek and Company LLP to the effect that the Illinois tax
consequences to the Bank, in its mutual or stock form, the Holding Company,
eligible account holders, parties receiving Subscription Rights, parties
purchasing conversion stock, and other parties participating in the Conversion
will be the same as the federal income tax consequences described above.
Unlike a private letter ruling, the opinions of Silver, Freedman &
Taff, L.L.P. and Crowe, Chizek and Company LLP, as well as the FinPro Letter,
have no binding effect or official status, and no assurance can be given that
the conclusions reached in any of those opinions would be sustained by a court
if contested by the IRS or the Delaware or Illinois tax authorities.
RESTRICTIONS ON ACQUISITIONS OF STOCK AND
RELATED TAKEOVER DEFENSIVE PROVISIONS
Although the Boards of Directors of the Bank and the Holding Company
are not aware of any effort that might be made to obtain control of the Holding
Company after Conversion, the Board of Directors, as discussed below, believe
that it is appropriate to include certain provisions as part of the Holding
Company's certificate of incorporation to protect the interests of the Holding
Company and its stockholders from takeovers which the Board of Directors of the
Holding Company might conclude are not in the best interests of the Bank, the
Holding Company or the Holding Company's stockholders.
The following discussion is a general summary of material provisions of
the Holding Company's certificate of incorporation and bylaws and certain other
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regulatory provisions which may be deemed to have an "anti-takeover" effect. The
following description of certain of these provisions is necessarily general and,
with respect to provisions contained in the Holding Company's certificate of
incorporation and bylaws and the Bank's proposed stock charter and bylaws,
reference should be made in each case to the document in question, each of which
is part of the Bank's Conversion Application filed with the OTS and the Holding
Company's Registration Statement filed with the SEC. See "Additional
Information."
Provisions of the Holding Company's Certificate of Incorporation and Bylaws
Directors. Certain provisions of the Holding Company's certificate of
incorporation and bylaws will impede changes in majority control of the Board of
Directors. The Holding Company's certificate of incorporation provides that the
Board of Directors of the Holding Company will be divided into three classes,
with directors in each class elected for three-year staggered terms except for
the initial directors. Thus, assuming a Board of nine directors, it would take
two annual elections to replace a majority of the Holding Company's Board. The
Holding Company's certificate of incorporation also provides that the size of
the Board of Directors may be increased or decreased only by a majority vote of
the whole Board or by a vote of 80% of the shares eligible to be voted at a duly
constituted meeting of stockholders called for such purpose. The bylaws also
pro- vide that any vacancy occurring in the Board of Directors, including a
vacancy created by an increase in the number of directors, shall be filled for
the remainder of the unexpired term by a majority vote of the directors then in
office. Finally, the bylaws impose certain notice and information requirements
in connection with the nomination by stockholders of candidates for election to
the Board of Directors or the proposal by stockholders of business to be acted
upon at an annual meeting of stockholders.
The certificate of incorporation provides that a director may only be
removed for cause by the affirmative vote of 80% of the shares eligible to vote.
Restrictions on Call of Special Meetings. The certificate of
incorporation of the Holding Company provides that a special meeting of
stockholders may be called only pursuant to a resolution of the Board of
Directors and for only such business as directed by the Board. Stockholders are
not authorized to call a special meeting.
Absence of Cumulative Voting. The Holding Company's certificate of
incorporation does not provide for cumulative voting rights in the election of
directors.
Authorization of Preferred Stock. The certificate of incorporation of
the Holding Company authorizes 500,000 shares of serial preferred stock, $.01
par value. The Holding Company is authorized to issue preferred stock from time
to time in one or more series subject to applicable provisions of law, and the
Board of Directors is authorized to fix the designations, powers, preferences
and relative participating, optional and other special rights of such shares,
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including voting rights (which could be multiple or as a separate class) and
conversion rights. In the event of a proposed merger, tender offer or other
attempt to gain control of the Holding Company that the Board of Directors does
not approve, it might be possible for the Board of Directors to authorize the
issuance of a series of preferred stock with rights and preferences that would
impede the completion of such a transaction. If the Holding Company issued any
preferred stock which disparately reduced the voting rights of the Common Stock
within the meaning of Rule 19c-4 under the Exchange Act, the Common Stock could
be required to be delisted from the Nasdaq System. An effect of the possible
issuance of preferred stock, therefore, may be to deter a future takeover
attempt. The Board of Directors has no present plans or understandings for the
issuance of any preferred stock and does not intend to issue any preferred stock
except on terms which the Board deems to be in the best interests of the Holding
Company and its stockholders.
Limitation on Voting Rights. The certificate of incorporation of the
Holding Company provides that in no event shall any record owner of any
outstanding Common Stock which is beneficially owned, directly or indirectly, by
a person who beneficially owns in excess of 10% of the then outstanding shares
of Common Stock (the "Limit"), be entitled or permitted to any vote in respect
of the shares held in excess of the Limit. This limitation would not inhibit any
person from soliciting (or voting) proxies from other beneficial owners for more
than 10% of the Common Stock or from voting such proxies. Beneficial ownership
is to be determined pursuant to Rule 13d-3 of the General Rules and Regulations
of the Exchange Act, and in any event includes shares beneficially owned by any
affiliate of such person, shares which such person or his affiliates (as defined
in the certificate of incorporation) have the right to acquire upon the exercise
of conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power but shall not include shares
beneficially owned by directors, officers and employees of the Bank or the
Holding Company. This provision will be enforced by the Board of Directors to
limit the voting rights of persons beneficially owning more than 10% of the
stock and thus could be utilized in a proxy contest or other solicitation to
defeat a proposal that is desired by a majority of the stockholders.
Procedures for Certain Business Combinations. The Holding Company's
certificate of incorporation requires that certain business combinations
(including transactions initiated by management) between the Holding Company (or
any majority-owned subsidiary thereof) and a 10% or more stockholder either (i)
be approved by at least 80% of the total number of outstanding voting shares,
voting as a single class, of the Holding Company, (ii) be approved by two-thirds
of the continuing Board of Directors (i.e., persons serving prior to the 10%
stockholder becoming such) or (iii) involve consideration per share generally
equal to that paid by such 10% stockholder when it acquired its block of stock.
It should be noted that, since the Board and management (13 persons)
intend to purchase approximately $2.1 million of the shares offered in the
Conversion and may control the voting of additional shares through the ESOP and
proposed RRP and Stock Option Plan, the Board and management may be able to
block the approval of combinations requiring an 80% vote even where a majority
of the stockholders vote to approve such combinations.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's certificate of incorporation must be approved by the Holding
Company's Board of Directors and also by a majority of the outstanding shares of
the Holding Company's voting stock, provided, however, that approval by at least
80% of the outstanding voting stock is generally required for certain provisions
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(i.e., provisions relating to number, classification, election and removal of
directors; amendment of bylaws; call of special stockholder meetings; offers to
acquire and acquisitions of control; director liability; certain business
combinations; power of indemnification; and amendments to provisions relating to
the foregoing in the certificate of incorporation).
The bylaws may be amended by a majority vote of the Board of Directors
or the affirmative vote of at least 80% of the total votes eligible to be voted
at a duly constituted meeting of stockholders.
Purpose and Takeover Defensive Effects of the Holding Company's
Certificate of Incorporation and Bylaws. The Board of Directors of the Bank
believes that the provisions described above are prudent and will reduce the
Holding Company's vulnerability to takeover attempts and certain other
transactions which have not been negotiated with and approved by its Board of
Directors. These provisions will also assist the Bank in the orderly deployment
of the conversion proceeds into productive assets during the initial period
after the Conversion. The Board of Directors believes these provisions are in
the best interest of the Bank and of the Holding Company and its stockholders.
In the judgment of the Board of Directors, the Holding Company's Board will be
in the best position to determine the true value of the Holding Company and to
negotiate more effectively for what may be in the best interests of its
stockholders. Accordingly, the Board of Directors believes that it is in the
best interests of the Holding Company and its stockholders to encourage
potential acquirors to negotiate directly with the Board of Directors of the
Holding Company and that these provisions will encourage such negotiations and
discourage hostile takeover attempts. It is also the view of the Board of
Directors that these provisions should not discourage persons from proposing a
merger or other transaction at prices reflective of the true value of the
Holding Company and which is in the best interests of all stockholders.
Attempts to take over financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction which is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value for the Holding
Company and its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then
current market prices, such offers are sometimes made for less than all of the
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outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of the benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners becomes less
than the 300 required for Exchange Act registration.
Despite the belief of the Bank and the Holding Company as to the
benefits to stockholders of these provisions of the Holding Company's
certificate of incorporation and bylaws, these provisions may also have the
effect of discouraging a future takeover attempt which would not be approved by
the Holding Company's Board, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have any opportunity to do so. Such provisions will also render the removal
of the Holding Company's Board of Directors and of management more difficult.
The Board will enforce the voting limitation provisions of the charter in proxy
solicitations and accordingly could utilize these provisions to defeat proposals
that are favored by a majority of the stockholders. The Boards of Directors of
the Bank and the Holding Company, however, have concluded that the potential
benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
charter provisions regarding the acquisition of its equity securities that would
be permitted to a Delaware corporation. The Holding Company and the Bank do not
presently intend to propose the adoption of further restrictions on the
acquisition of the Holding Company's equity securities.
Other Restrictions on Acquisitions of Stock
Delaware Anti-Takeover Statute. The Delaware General Corporation Law
(the "DGCL") provides that buyers who acquire more than 15% of the outstanding
stock of a Delaware corporation, such as the Holding Company, are prohibited
from completing a hostile takeover of such corporation for three years. However,
the takeover can be completed if (i) the buyer, while acquiring the 15%
interest, acquires at least 85% of the corporation's outstanding stock (the 85%
requirement excludes shares held by directors who are also officers and certain
shares held under employee stock plans), or (ii) the takeover is approved by the
target corporation's board of directors and two-thirds of the shares of
outstanding stock of the corporation (excluding shares held by the bidder).
However, these provisions of the DGCL do not apply to Delaware
corporations with less than 2,000 stockholders or which do not have voting stock
listed on a national exchange or listed for quotation with a registered national
securities association. No prediction can be made as to whether the Holding
Company will be listed on Nasdaq Stock Market or have 2,000 stockholders. First
Security may exempt itself from the requirements of the statute by adopting an
amendment to its Certificate of Incorporation or Bylaws electing not to be
governed by this provision. At the present time, the Board of Directors does not
intend to propose any such amendment.
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Federal Regulation. A federal regulation prohibits any person prior to
the completion of a conversion from transferring, or entering into any agreement
or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, this regulation prohibits any person, without
the prior approval of the OTS, from acquiring or making an offer to acquire (if
the offer is opposed by the savings association) more than 10% of the stock of
any converted savings institution if such person is, or after consummation of
such acquisition would be, the beneficial owner of more than 10% of such stock.
In the event that any person, directly or indirectly, violates this regulation,
the securities beneficially owned by such person in excess of 10% may not be
counted as shares entitled to vote and may not be voted by any person or counted
as voting shares in connection with any matter submitted to a vote of
stockholders. Like the charter provisions outlined above, these federal
regulations can make a change in control more difficult, even if desired by the
holders of the majority of the shares of the stock. The Board of Directors
reserves the right to ask the OTS or other federal regulators to enforce these
restrictions against persons seeking to obtain control of the Holding Company,
whether in a proxy solicitation or otherwise. The policy of the Board is that
these legal restrictions must be observed in every case, including instances in
which an acquisition of control of the Holding Company is favored by a majority
of the stockholders.
Federal law provides that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition,
federal regulations require that, prior to obtaining control of a savings
association, a person, other than a company, must give 60 days' prior notice to
the OTS and have received no OTS objection to such acquisition of control. Any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Under federal law (as well as the regulations referred to
below) the term "savings association" includes state and federally chartered
SAIF-insured institutions and federally chartered savings banks whose accounts
are insured by the FDIC's BIF and holding companies thereof.
Control, as defined under federal law, in general means ownership,
control of or holding irrevocable proxies representing more than 25% of any
class of voting stock, control in any manner of the election of a majority of a
savings association's directors, or a determination by the OTS that
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the acquiror has the power to direct, or directly or indirectly to exercise a
controlling influence over, the management or policies of the institution.
Acquisition of more than 10% of any class of a savings association's voting
stock, if the acquiror also is subject to any one of eight "control factors,"
constitutes a rebuttable determination of control under the OTS regulations.
Such control factors include the acquiror being one of the two largest
stockholders. The determination of control may be rebutted by submission to the
OTS, prior to the acquisition of stock or the occurrence of any other
circumstances giving rise to such determination, of a statement setting forth
facts and circumstances which would support a finding that no control
relationship will exist and containing certain undertakings. The OTS regulations
provide that persons or companies which acquire beneficial ownership exceeding
10% or more of any class of a savings association's stock must file with the OTS
a certification that the holder is not in control of such institution, is not
subject to a rebuttable determination of control and will take no action which
would result in a determination or rebuttable determination of control without
prior notice to or approval of the OTS, as applicable.
DESCRIPTION OF CAPITAL STOCK
Holding Company Capital Stock
The 8,500,000 shares of capital stock authorized by the Holding Company
certificate of incorporation are divided into two classes, consisting of
8,000,000 shares of Common Stock (par value $.01 per share) and 500,000 shares
of serial preferred stock (par value $.01 per share). The Holding Company
currently expects to issue (not including the Stock Contribution) between
4,118,000 and 5,572,000 shares (subject to increase to 6,408,000) of Common
Stock in the Conversion and no shares of serial preferred stock. The aggregate
par value of the issued shares will constitute the capital account of the
Holding Company on a consolidated basis. Upon payment of the Purchase Price, all
shares issued in the Conversion will be duly authorized, fully paid and
nonassessable. The balance of the purchase price of Common Stock, less expenses
of Conversion, will be reflected as paid-in capital on a consolidated basis. See
"Capitalization."
Each share of the Common Stock will have the same relative rights and
will be identical in all respects with each other share of the Common Stock. The
Common Stock of the Holding Company will represent non-withdrawable capital,
will not be of an insurable type and will not
be insured by the FDIC.
Under Delaware law, the holders of the Common Stock will possess
exclusive voting power in the Holding Company. Each stockholder will be entitled
to one vote for each share held on all matters voted upon by stockholders,
subject to the limitation discussed under "Restrictions on Acquisitions of Stock
and Related Takeover Defensive Provisions - Provisions of the Holding Company's
Certificate of Incorporation and Bylaws - Limitation on Voting Rights." If the
Holding Company issues preferred stock subsequent to the Conversion, holders of
the preferred stock may also possess voting powers.
Liquidation or Dissolution. In the event of any liquidation,
dissolution or winding up of the Bank, the Holding Company, as the sole holder
of the Bank's capital stock would be entitled to receive, after payment or
provision for payment of all debts and liabilities of the Bank (including all
deposit accounts and accrued interest thereon) and after distribution of the
balance in the special liquidation account to Eligible and Supplemental Account
Holders, all assets of the Bank available
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for distribution. In the event of liquidation, dissolution or winding up of the
Holding Company, the holders of its Common Stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all of
the assets of the Holding Company available for distribution. See "The
Conversion - Effects of Conversion to Stock Form on Depositors and Borrowers of
the Bank." If preferred stock is issued subsequent to the Conversion, the
holders thereof may have a priority over the holders of Common Stock in the
event of liquidation or dissolution.
No Preemptive Rights. Holders of the Common Stock will not be entitled
to preemptive rights with respect to any shares which may be issued. The Common
Stock will not be subject to call for redemption, and, upon receipt by the
Holding Company of the full purchase price therefor, each share of the Common
Stock will be fully paid and nonassessable.
Preferred Stock. After Conversion, the Board of Directors of the
Holding Company will be authorized to issue preferred stock in series and to fix
and state the voting powers, designations, preferences and relative,
participating, optional or other special rights of the shares of each such
series and the qualifications, limitations and restrictions thereof. Preferred
stock may rank prior to the Common Stock as to dividend rights, liquidation
preferences, or both, and may have full or limited voting rights. The holders of
preferred stock will be entitled to vote as a separate class or series under
certain circumstances, regardless of any other voting rights which such holders
may have.
Except as discussed above, the Holding Company has no present plans for
the issuance of the additional authorized shares of Common Stock or for the
issuance of any shares of preferred stock. In the future, the authorized but
unissued and unreserved shares of Common Stock will be available for general
corporate purposes, including but not limited to possible issuance as stock
dividends or stock splits, in future mergers or acquisitions, under a cash
dividend reinvestment and stock purchase plan, in a future underwritten or other
public offering, or under a stock based employee plan. The authorized but
unissued shares of preferred stock will similarly be available for issuance in
future mergers or acquisitions, in a future underwritten public offering or
private placement or for other general corporate purposes. Except as described
herein or as otherwise required to approve the transaction in which the
additional authorized shares of common stock or authorized shares of preferred
stock would be issued, no stockholder approval will be required for the issuance
of these shares. Accordingly, the Board of Directors of the Holding Company,
without stockholder approval, can issue preferred stock with voting and
conversion rights which could adversely affect the voting power of the holders
of Common Stock.
Restrictions on Acquisitions of the Holding Company. See "Restrictions
on Acquisitions of Stock and Related Takeover Defensive Provisions" for a
description of certain provisions of the Holding Company's certificate of
incorporation and bylaws which may affect the ability of the Holding Company's
stockholders to participate in certain transactions relating to acquisitions of
control of the Holding Company.
Dividends. The Holding Company's Board of Directors may consider a
policy of paying cash dividends on the Common Stock in the future. No decision
has been made, however, as to the amount or timing of such dividends, if any.
The declaration and payment of dividends are subject to, among other things, the
Holding Company's then current and projected consolidated operating
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results, financial condition, regulatory restrictions, future growth plans and
other factors the Board deems relevant. Therefore, no assurance can be given
that any dividends will be declared.
The ability of the Holding Company to pay cash dividends to its
stockholders will be dependent, in part, upon the ability of the Bank to pay
dividends to the Holding Company. OTS regulations do not permit the Bank to
declare or pay a cash dividend on its stock or repurchase shares of its stock if
the effect thereof would be to cause its regulatory capital to be reduced below
the amount required for the liquidation account or to meet applicable regulatory
capital requirements. See "Regulation - Limitations on Dividends and Other
Capital Distributions" for information regarding OTS regulations governing the
Bank's ability to pay dividends to the Holding Company.
Delaware law generally limits dividends of the Holding Company to an
amount equal to the excess of its net assets over its paid-in capital or, if
there is no such excess, to its net earnings for the current and immediately
preceding fiscal year. In addition, as the Holding Company does not anticipate,
for the immediate future, engaging in activities other than (i) investing in
cash, short-term securities and investment and mortgage-backed securities
similar to those invested in by the Bank and (ii) holding the stock of First
Security, the Holding Company's ability to pay dividends will be limited, in
part, by the Bank's ability to pay dividends, as set forth above.
Earnings appropriated to the Bank's "Excess" bad debt reserves and
deducted for federal income tax purposes cannot be used by the Bank to pay cash
dividends to the Holding Company without adverse tax consequences. See
"Regulation - Federal and State Taxation."
LEGAL AND TAX MATTERS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for First Security by the
firm of Silver, Freedman & Taff, L.L.P. (a limited liability partnership
including professional corporations), 7th Floor, East Tower, 1100 New York
Avenue, NW, Washington, DC 20005. Silver, Freedman & Taff, L.L.P. has consented
to the references herein to its opinions. The Illinois income tax consequences
of the Conversion will be passed upon by Crowe, Chizek and Company LLP. Crowe,
Chizek and Company LLP has consented to references herein to its opinion. FBR
has been represented in the Conversion by Chapman and Cutler, 111 West Monroe
Street, Chicago, Illinois 60603.
EXPERTS
The consolidated financial statements of First Security as of December
31, 1996 and 1995 and for the three year period ended December 31, 1996 included
in this Prospectus have been audited by Crowe, Chizek and Company LLP,
independent auditors, as indicated in their report which is included herein and
has been so included in reliance upon such report, given the authority of that
firm as experts in accounting and auditing.
FinPro has consented to the inclusion herein of the summary of its
letter to the Bank setting forth its opinion as to the estimated pro forma
market value of the Holding Company and the Bank as converted and to the
reference to its opinion that subscription rights received by Eligible Account
149
<PAGE>
Holders, Supplemental Eligible Account Holders and other eligible subscribers do
not have any economic value.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement
under the Securities Act with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the SEC, this Prospectus does not
contain all the information set forth in the Registration Statement. However,
the prospectus does contain a description of the material provisions of the
documents contained therein. Such information can be examined without charge at
the public reference facilities of the SEC located at 450 Fifth Street, NW,
Washington, DC 20549, and copies of such material can be obtained from the SEC
at prescribed rates. In addition, the SEC maintains a Web site. The address of
the SEC's Web site is "http://www.sec.gov." The statements contained herein as
to the contents of any contract or other document filed as an exhibit to the
Registration Statement are, of necessity, brief descriptions thereof which
describe only the material provisions of such documents; each such statement is
qualified by reference to such contract or document.
The Bank has filed an Application for Conversion with the OTS with
respect to the Conversion. Pursuant to the rules and regulations of the OTS,
this Prospectus omits certain information contained in that Application. The
Application may be examined at the principal offices of the OTS, 1700 G Street,
NW, Washington, DC 20552 and at the Chicago District Office of the OTS, Suite
1300, 200 West Madison Street, Chicago, Illinois 60606, without charge.
In connection with the Conversion, the Holding Company will register
the Common Stock with the SEC under Section 12(g) of the Exchange Act, and, upon
such registration, the Holding Company and the holders of its Common Stock will
become subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting and certain other
requirements of the Exchange Act. Under the Plan, the Holding Company has
undertaken that it will not terminate such registration for a period of at least
three years following the Conversion.
A copy of the Certificate of Incorporation and Bylaws of the Holding
Company are available without charge from the Bank.
150
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
Chicago, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
CONTENTS
REPORT OF INDEPENDENT AUDITORS ............................................ F-2
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS .......................................... F-3
CONSOLIDATED STATEMENTS OF INCOME .................................... F-4
CONSOLIDATED STATEMENTS OF EQUITY .................................... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS ................................ F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................... F-8
All schedules are omitted because the required information
is not applicable or is included in the Consolidated
Financial Statements and related notes.
Financial Statements of the Holding Company have
not been provided because First SecurityFed Financial, Inc. has
not conducted any operations to date and
has not been capitalized.
F-1.
<PAGE>
[CROWE CHIZEK LOGO]
REPORT OF INDEPENDENT AUDITORS
Board of Directors
1st Security Federal Savings Bank
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of 1st Security
Federal Savings Bank and Subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, equity, and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Savings Bank's management. Our
responsibility is to express an opinion on these 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 1st Security Federal
Savings Bank and Subsidiary at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Crowe, Chizek and Company LLP
_____________________________
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 8, 1997
F-2.
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
April 30, 1997 (Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
(Unaudited) December 31,
April 30, ----------------------
1997 1996 1995
---- ---- ----
ASSETS
Cash and due from bank ................... $ 5,104 $ 5,800 $ 17,073
Federal funds sold ....................... 2,000 1,500 2,100
--------- --------- ---------
Total cash and cash equivalents ...... 7,104 7,300 19,173
Time deposits in other financial
institutions ............................ 200 200 200
Securities available-for-sale ............ 27,535 28,724 33,787
Securities held-to-maturity (fair
value of $50,007 in 1997, $49,881
in 1996 and $46,115 in 1995) ............ 50,648 49,888 45,686
Loans, net of allowance for loan losses .. 165,914 163,348 144,566
Federal Home Loan Bank stock, at cost .... 1,852 1,673 1,553
Premises and equipment, net .............. 3,845 3,923 4,006
Accrued interest receivable .............. 1,949 1,764 1,616
Intangible assets ........................ 332 352 419
Real estate owned ........................ -- 40 499
Other assets ............................. 623 903 417
--------- --------- ---------
Total assets ......................... $ 260,002 $ 258,115 $ 251,922
========= ========= =========
LIABILITIES
Deposits ................................. $ 218,987 $ 219,505 $ 209,387
Advance payments by borrowers for
taxes and insurance ..................... 1,586 2,118 1,681
Advances from Federal Home Loan Bank ..... 7,500 4,000 10,000
Accrued interest payable and other
liabilities ............................. 1,979 3,231 1,816
--------- --------- ---------
Total liabilities .................... 230,052 228,854 222,884
Commitments and contingencies -- -- --
EQUITY
Retained earnings, substantially
restricted .............................. 30,226 29,465 29,013
Net unrealized gain (loss) on securities
available-for-sale, net of income taxes . (276) (204) 25
--------- --------- ---------
Total equity ......................... 29,950 29,261 29,038
--------- --------- ---------
Total liabilities and equity ...... $ 260,002 $ 258,115 $ 251,922
========= ========= =========
- --------------------------------------------------------------------------------
See accompanying notes to consoldiated financial statements.
F-3.
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995, and 1994
Four months ended April 30, 1997 and 1996 (Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
April 30, December 31,
---------------------- -------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest and dividend income
Loans ............................... $ 4,653 $ 4,197 $ 13,068 $ 12,080 $ 11,118
Securities
Taxable .......................... 497 533 1,664 1,944 1,334
Tax-exempt ....................... 97 94 277 327 378
Mortgage-backed securities .......... 1,131 1,158 3,673 2,867 2,535
Federal funds sold and other
interest earning assets ........... 117 142 324 432 345
-------- -------- -------- -------- --------
6,495 6,124 19,006 17,650 15,710
Interest expense
NOW and money market ................ 123 122 369 377 370
Passbook savings .................... 705 692 2,120 2,113 2,047
Certificates of deposit ............. 2,285 2,293 6,827 6,044 3,987
Federal Home Loan Bank
advances and other borrowings ..... 107 56 178 193 180
-------- -------- -------- -------- --------
3,220 3,163 9,494 8,727 6,584
-------- -------- -------- -------- --------
Net interest income ..................... 3,275 2,961 9,512 8,923 9,126
Provision for loan losses ............... 574 42 706 136 182
------- -------- -------- -------- --------
Net interest income after
provision for loan losses ............. 2,701 2,919 8,806 8,787 8,944
Noninterest income
Deposit service charges ............. 116 121 362 378 326
Insurance commissions ............... 15 18 54 58 58
Net gain on sales and calls of
securities .......... -- -- 55 24 5
Net gain (loss) on sale of real
estate owned ...................... 1 (10) 50 147 --
Other income ........................ 65 65 224 249 188
-------- -------- -------- -------- --------
197 194 745 856 577
Noninterest expense
Compensation and benefits ........... 851 726 2,411 2,370 2,043
Occupancy and equipment ............. 225 209 678 630 610
Data processing ..................... 94 87 269 260 282
SAIF assessment ..................... -- -- 1,293 -- --
Federal insurance premiums .......... 43 182 553 521 444
Charitable and foundation
contributions ..................... 43 21 2,558 67 100
Other expense ....................... 401 295 931 842 792
-------- -------- -------- -------- --------
1,657 1,520 8,693 4,690 4,271
-------- -------- -------- -------- --------
Income before income taxes .............. 1,241 1,593 858 4,953 5,250
Income tax provision .................... 480 603 406 1,760 1,825
-------- -------- -------- -------- --------
Net income .............................. $ 761 $ 990 $452 $ 3,193 $ 3,425
======== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4.
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EQUITY
Years ended December 31, 1996, 1995, and 1994
Four months ended April 30, 1997 (Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Unrealized
Gain (Loss)
on Securities
Retained Available-
Earnings for-Sale Total
-------- -------- -----
Balance at January 1, 1994 .................. $ 22,395 $ -- $ 22,395
Net income .................................. 3,425 -- 3,425
Effect of adopting SFAS No. 115, as of
January 1, 1994, net of income
taxes of $189 ............................. -- 295 295
Change in valuation allowance for
securities available-for-sale, net
of income taxes of $358 ................... -- (560) (560)
-------- -------- --------
Balance at December 31, 1994 ............... 25,820 (265) 25,555
Net income .................................. 3,193 -- 3,193
Reclassification of securities from
held-to-maturity to available-for-sale,
net of income taxes of $44 ................ -- 114 114
Change in valuation allowance for
securities available-for-sale, net of
income taxes of $141 ...................... -- 176 176
-------- -------- --------
Balance at December 31, 1995 ................ 29,013 25 29,038
Net income .................................. 452 -- 452
Change in valuation allowance for
securities available-for-sale, net of
income taxes of $146 ...................... -- (229) (229)
-------- -------- --------
Balance at December 31, 1996 ................ 29,465 (204) 29,261
Net income (unaudited) ...................... 761 -- 761
Change in valuation allowance for
securities available- for-sale,
net of income taxes of $47 (unaudited) .... -- (72) (72)
-------- -------- --------
Balance at April 30, 1997 (unaudited) ....... $ 30,226 $ (276) $ 29,950
======== ======== ========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5.
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995, and 1994
Four months ended April 30, 1997 and 1996 (Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
April 30, December 31,
------------------ --------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income $ 761 $ 990 $ 452 $ 3,193 $ 3,425
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization
of intangibles 121 99 358 329 268
Net amortization (accretion) of
securities 36 -- (90) 138 318
Net gain on sales and calls of
securities -- -- (55) (24) (5)
Provision for loan losses 574 42 706 136 182
Net (gain) loss on real estate owned (1) 10 (50) (79) --
Deferred loan origination fees 2 (12) (80) (75) (118)
Federal Home Loan Bank
stock dividend -- -- -- (20) --
Provision for deferred income taxes 24 -- (937) 135 212
Net change in:
Accrued interest receivable (185) (97) (148) 119 (618)
Accrued interest payable 465 391 (4) 217 52
Other assets 302 180 (141) 182 (215)
Other liabilities (1,717) (240) 2,129 (190) 59
------- ------- -------- -------- --------
Net cash provided by
operating activities 382 1,363 2,140 4,061 3,560
Cash flows from investing activities
Purchase of securities available-for-sale -- (1,985) (2,989) -- (3,973)
Purchase of securities held-to-maturity (3,598) (9,951) (20,129) (30,451) (20,131)
Proceeds from sales of securities
available-for-sale -- -- -- 1,504 --
Proceeds from calls and maturities
of securities 1,000 5,850 15,814 20,112 2,167
Net loan originations (3,151) (3,566) (19,548) (8,696) (16,360)
Principal payments on mortgage-
backed and related securities 2,872 3,519 7,965 5,916 10,436
Purchase of Federal Home Loan
Bank stock (179) (120) (215) (171)
Acquisition of Ukrainian Federal
Savings and Loan Association
branch, net of cash -- -- -- -- 8,308
Net change in federal funds purchased -- -- -- -- (2,000)
Property and equipment expenditures (15) (24) (189) (119) (759)
Real estate owned expenditures -- 53 (5) (44) --
Proceeds from sale of real estate owned 41 75 614 79 --
------- ------- -------- -------- --------
Net cash used in investing activities (3,030) (6,149) (18,587) (11,914) (22,483)
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-6
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995, and 1994
Four months ended April 30, 1997 and 1996 (Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
April 30, December 31,
------------------ --------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities
Net change in deposits $ (516) $ 3,372 $ 10,137 $ 13,568 $ 11,931
Net change in advance payments
by borrowers for taxes and insurance (532) (369) 437 (342) 428
Change in advances from Federal
Home Loan Bank 3,500 (7,000) (6,000) 7,000 2,000
------- -------- -------- -------- --------
Net cash provided by
(used in) financing activities 2,452 (3,997) 4,574 20,226 14,359
------- -------- -------- -------- --------
Net change in cash and cash equivalents (196) (8,783) (11,873) 12,373 (4,564)
Cash and cash equivalents at
beginning of period 7,300 19,173 19,173 6,800 11,364
------- -------- -------- -------- --------
Cash and cash equivalents at
end of period $ 7,104 $ 10,390 $ 7,300 $ 19,173 $ 6,800
======= ======== ======== ======== ========
Supplemental disclosures of
cash flow information
Cash paid during the period for
Interest $ 2,755 $ 2,773 $ 9,498 $ 8,510 $ 6,352
Income taxes 218 451 1,497 1,620 1,658
Schedule of noncash investing
and financing activities
Transfer of securities from
held-to-maturity to available-
for-sale -- -- -- 20,158 --
Real estate acquired in settlement
of loans -- -- 140 276 --
Purchase of branch savings bank
Fair value of assets acquired $ 13,965
Cash received 8,308
--------
Liabilities assumed $ 22,273
========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Nature of Business: The consolidated financial
statements include the accounts of 1st Security Federal Savings Bank (Savings
Bank) and its wholly-owned subsidiary, Western Security Service Corporation.
Significant intercompany accounts and transactions have been eliminated. The
consolidated financial statements for the four-month periods ended April 30,
1997 and 1996 are unaudited, but in the opinion of management, reflect all
necessary adjustments, consisting only of normal recurring items necessary for
fair presentation. The Savings Bank's revenues primarily arise from interest
income from residential real estate loans, with operations conducted through its
main office, three branches in Cook County, and one branch in Philadelphia,
Pennsylvania.
Use of Estimates: In preparing financial statements, management must make
estimates and assumptions. These estimates and assumptions affect the amounts
reported for assets, liabilities, income, and expenses, as well as affecting the
disclosures provided. Actual results could differ from the current estimates.
The collectibility of loans, fair values of financial instruments, and status of
contingencies are particularly subject to change.
Securities: Securities are classified as held-to-maturity when the Savings Bank
has the positive intent and ability to hold those securities to maturity.
Accordingly, they are stated at cost, adjusted for amortization of premiums and
accretion of discounts. All other securities are classified as
available-for-sale since the Savings Bank may decide to sell those securities in
response to changes in market interest rates, liquidity needs, changes in yields
or alternative investments, and for other reasons. These securities are carried
at market value with unrealized gains and losses charged or credited, net of
income taxes, to a valuation allowance included as a separate component of
retained earnings. Realized gains and losses on disposition are based on the net
proceeds and the adjusted carrying amounts of the securities sold, using the
specific identification method.
Real Estate Owned: Real estate owned represents property obtained through
foreclosure or in settlement of debt obligations and is carried at the lower of
cost (fair value at date of foreclosure) or fair value less estimated selling
expenses. Valuation allowances are recognized when the fair value less selling
expenses is less than the cost of the asset. Changes in the valuation allowance
are charged or credited to income.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is maintained. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of loss
and the amount of loss on any loan is necessarily subjective. Accordingly, the
valuation allowance is maintained at levels considered adequate to cover losses
that are currently anticipated based on delinquencies, property appraisals,
- --------------------------------------------------------------------------------
(Continued)
F-8
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
past loss experience, general economic conditions, information about specific
borrower situations including their financial position, and other factors and
estimates which are subject to change over time. While management may
periodically allocate portions of the allowance for specific problem loan
situations, including impaired loans discussed below, the whole allowance is
available for any charge-offs that occur. Loans are charged off in whole or in
part when management's estimate of the undiscounted cash flows from the loan are
less than the recorded investment in the loan, although collection efforts
continue and future recoveries may occur.
Statement of Financial Accounting Standards (SFAS) No. 114, as amended by SFAS
No. 118, was adopted at January 1, 1995. Under these statements, loans
considered to be impaired are reduced to the present value of expected future
cash flows or to the fair value of collateral, by allocating a portion of the
allowance for loan losses to such loans. If these allocations cause the
allowance for loan losses to require increase, such increase is reported as a
provision for loan losses. The adoption of this statement did not have a
material effect on the financial statements.
Smaller balance homogenous loans are defined as residential first mortgage loans
secured by one-to-four family residences, residential construction loans, and
share loans and are evaluated collectively for impairment. Commercial real
estate loans are evaluated individually for impairment. Normal loan evaluation
procedures, as described in the second preceding paragraph, are used to identify
loans which must be evaluated for impairment. In general, loans classified as
doubtful or loss are considered impaired while loans classified as substandard
are individually evaluated for impairment. Depending on the relative size of the
credit relationship, late or insufficient payments of 30 to 90 days will cause
management to reevaluate the credit under its normal loan evaluation procedures.
While the factors which identify a credit for consideration for measurement of
impairment, or nonaccrual, are similar, the measurement considerations differ. A
loan is impaired when management believes it is probable they will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. A loan is placed on nonaccrual when payments are more than 90 days
past due unless the loan is adequately collateralized and in the process of
collection. Although impaired loan and nonaccrual loan balances are measured
differently, impaired loan disclosures under SFAS Nos. 114 and 118 are not
expected to differ significantly from nonaccrual and renegotiated loan
disclosures.
- --------------------------------------------------------------------------------
(Continued)
F-9
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recognition of Income on Loans: Interest on real estate and certain consumer
loans is accrued over the term of the loans based upon the principal balance
outstanding. Where serious doubt exists as to the collectibility of a loan, the
accrual of interest is discontinued. Under SFAS No. 114 as amended by SFAS No.
118, the carrying values of impaired loans are periodically adjusted to reflect
cash payments, revised estimates of future cash flows, and increases in the
present value of expected cash flows due to the passage of time. Cash payments
representing interest income are reported as such. Other cash payments are
reported as reductions in carrying value, while increases or decreases due to
changes in estimates of future payments and due to the passage of time are
reported as adjustments to the allowance for loan losses. If these adjustments
cause the allowance for loan losses to require adjustment, such adjustment is
reported as an adjustment to the provision for loan losses.
Loan fees, net of direct loan origination costs, are deferred and amortized over
the contractual life of the loan as a yield adjustment.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the respective premises and equipment,
which are primarily thirty to fifty years for premises and five to ten years for
furniture, fixtures, and equipment. Maintenance and repairs are charged to
expense as incurred and improvements which extend the useful lives of assets are
capitalized.
Income Taxes: The provision for income taxes is based on an asset and liability
approach in accordance with SFAS No. 109. The asset and liability approach
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities.
Statement of Cash Flows: Cash and cash equivalents include cash on hand, amounts
due from banks, and daily federal funds sold. The Savings Bank reports net cash
flows for customer loan transactions, deposit transactions, and time deposits in
other financial institutions.
Reclassifications: Certain prior period items have been reclassified to conform
to the current period's presentation.
- --------------------------------------------------------------------------------
(Continued)
F-10
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The Bank's securities are as follows:
<TABLE>
<CAPTION>
(Unaudited)
April 30, 1997
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. government and agencies $ 3,249 $ 87 $ (15) $ 3,321
Mutual funds 5,775 -- (177) 5,598
------- ----- -------- -------
9,024 87 (192) 8,919
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 8,615 8 (223) 8,400
Government National Mortgage Association 3,272 27 (22) 3,277
Federal National Mortgage Association 6,363 11 (177) 6,197
Collateralized mortgage obligations 713 29 -- 742
------- ----- -------- -------
18,963 75 (422) 18,616
------- ----- -------- -------
$27,987 $ 162 $ (614) $27,535
======= ===== ======== =======
Securities held-to-maturity
U.S. government agencies $22,801 $ 1 $ (404) $22,398
States and political subdivisions 5,207 87 (73) 5,221
Corporate notes 251 -- -- 251
------- ----- -------- -------
28,259 88 (477) 27,870
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 5,655 59 (158) 5,556
Government National Mortgage Association 8,896 102 (80) 8,918
Federal National Mortgage Association 3,016 17 (85) 2,948
Collateralized mortgage obligations 4,822 -- (107) 4,715
------- ----- -------- -------
22,389 178 (430) 22,137
------- ----- -------- -------
$50,648 $ 266 $ (907) $50,007
======= ===== ======== =======
</TABLE>
At April 30, 1997 (unaudited), collateralized mortgage obligations with a
carrying value of $4.8 million of the total $5.6 million were guaranteed or
insured by governmental agencies (e.g., GNMA, FNMA, FHMC).
- --------------------------------------------------------------------------------
(Continued)
F-11
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. government and agencies $ 3,245 $ 105 $ -- $ 3,350
Mutual funds 5,776 32 (163) 5,645
Other equity investments 2 -- -- 2
------- ----- -------- -------
9,023 137 (163) 8,997
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 9,238 16 (269) 8,985
Government National Mortgage Association 3,399 39 (13) 3,425
Federal National Mortgage Association 6,685 14 (127) 6,572
Collateralized mortgage obligations 713 32 -- 745
------- ----- -------- -------
20,035 101 (409) 19,727
------- ----- -------- -------
$29,058 $ 238 $ (572) $28,724
======= ===== ======== =======
Securities held-to-maturity
U.S. government agencies $20,320 $ 41 $ (81) $20,280
States and political subdivisions 5,208 150 (15) 5,343
Corporate notes 251 -- -- 251
------- ----- -------- -------
25,779 191 (96) 25,874
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 6,280 89 (190) 6,179
Government National Mortgage Association 9,226 142 (43) 9,325
Federal National Mortgage Association 3,294 19 (42) 3,271
Collateralized mortgage obligations 5,309 -- (77) 5,232
------- ----- -------- -------
24,109 250 (352) 24,007
------- ----- -------- -------
$49,888 $ 441 $ (448) $49,881
======= ===== ======== =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-12
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
On December 29, 1995, the Savings Bank reclassified a portion of its
held-to-maturity securities to available-for-sale in accordance with "A Guide to
Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities" in order to improve the Savings Bank's flexibility
in meeting liquidity needs. The amortized cost and unrealized gain on securities
transferred to available-for-sale were $20,157,729 and $113,950, respectively.
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. government and agencies $ 7,743 $ 195 $ (2) $ 7,936
Mutual funds 5,776 42 (81) 5,737
Other equity investments 70 -- -- 70
------- ----- -------- -------
13,589 237 (83) 13,743
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 10,101 17 (126) 9,992
Government National Mortgage Association 2,901 44 (21) 2,924
Federal National Mortgage Association 6,436 18 (71) 6,383
Collateralized mortgage obligations 720 25 -- 745
------- ----- -------- -------
20,158 104 (218) 20,044
------- ----- -------- -------
$33,747 $ 341 $ (301) $33,787
======= ===== ======== =======
Securities held-to-maturity
U.S. government agencies $15,446 $ 93 $ (20) $15,519
States and political subdivisions 4,768 207 (5) 4,970
Corporate notes 352 1 -- 353
------- ----- -------- -------
20,566 301 (25) 20,842
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 9,806 258 (283) 9,781
Government National Mortgage Association 5,142 233 (28) 5,347
Federal National Mortgage Association 4,526 35 (47) 4,514
Collateralized mortgage obligations 5,646 20 (35) 5,631
------- ----- -------- -------
25,120 546 (393) 25,273
------- ----- -------- -------
$45,686 $ 847 $ (418) $46,115
======= ===== ======== =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-13
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
There were no sales of securities during the four months ended April 30, 1997
(unaudited) or during 1996. The Savings Bank recognized a gain of $4,447 on the
sale of one security available for sale during 1995. Call premiums on debt
securities of $55,376 and $19,625 were recognized by the Savings Bank during
1996 and 1995, respectively.
The carrying values and fair values of debt securities, by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
(Unaudited)
April 30, 1997 December 31, 1996
-------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Securities available-for-sale
Due in one year or less $ 999 $ 1,002 $ 997 $ 1,007
Due after one year through five years 1,991 1,977 1,989 1,989
Due after ten years 259 342 259 354
------- ------- ------- -------
3,249 3,321 3,245 3,350
Mutual funds 5,775 5,598 5,776 5,645
Other equity investments -- -- 2 2
Mortgage-backed securities
and collateralized mortgage obligations 18,963 18,616 20,035 19,727
------- ------- ------- -------
24,738 24,214 25,813 25,374
------- ------- ------- -------
$27,987 $27,535 $29,058 $28,724
======= ======= ======= =======
Securities held-to-maturity
Due in one year or less $ 351 $ 353 $ 351 $ 356
Due after one year through five years 5,944 5,784 3,244 3,273
Due after five years through ten years 15,472 15,395 14,289 14,353
Due after ten years 6,492 6,338 7,895 7,892
------- ------- ------- -------
28,259 27,870 25,779 25,874
Mortgage-backed securities and
collateralized mortgage obligations 22,389 22,137 24,109 24,007
------- ------- ------- -------
$50,648 $50,007 $49,888 $49,881
======= ======= ======= =======
</TABLE>
There was one security in the amount of $250,000 pledged to secure government
deposits at December 31, 1996. There were no securities pledged at December 31,
1995.
- --------------------------------------------------------------------------------
(Continued)
F-14
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
(Unaudited) December 31,
April 30, -----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
First mortgage loans, including loans purchased
Secured by one-to-four-family residences $ 137,479 $ 134,971 $ 117,379
Secured by multifamily residences 9,708 9,374 7,926
Secured by commercial real estate 15,425 15,651 15,127
--------- --------- ---------
162,612 159,996 140,432
Home equity loans 4,006 3,431 3,684
Less
Net deferred loan origination fees (1,472) (1,470) (1,550)
--------- --------- ---------
Total mortgage loans 165,146 161,957 142,566
Consumer and other loans
Automobile 72 74 110
Share loans 1,182 1,174 1,570
Improvement 10 12 29
Loans secured by leases 839 1,272 759
Other 351 395 445
--------- --------- ---------
2,454 2,927 2,913
Less unearned discounts (20) (16) (28)
--------- --------- ---------
Total consumer and other loans 2,434 2,911 2,885
Less allowance for loan losses (1,666) (1,520) (885)
--------- --------- ---------
$ 165,914 $ 163,348 $ 144,566
========= ========= =========
</TABLE>
The principal balance of loans on nonaccrual status at April 30, 1997
approximated $9,000 (unaudited). The principal balance of loans on nonaccrual
status at December 31, 1996 and 1995 approximated $9,000 in both years. The
Savings Bank maintains an allowance for uncollected interest for mortgage loans
with payments past due. The allowance was approximately $94,000 (unaudited),
$93,000 and $89,000 at April 30, 1997, and December 31, 1996 and 1995,
respectively.
- --------------------------------------------------------------------------------
(Continued)
F-15
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
(Unaudited)
April 30, December 31,
----------------- -------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
Balance, beginning of period $ 1,520 $ 885 $ 885 $ 792 $608
Provision for loan losses 574 42 706 136 182
Recoveries 4 -- -- -- 2
Charge-offs (432) (50) (71) (43) --
------- ----- ------- ----- ----
Balance, end of period $ 1,666 $ 877 $ 1,520 $ 885 $792
======= ===== ======= ===== ====
Information regarding impaired loans is as follows:
(Unaudited)
For the For the
Four Months Year
Ended Ended
April 30, December 31,
1997 1996
---- ----
Average investment in impaired loans $1,055 $1,087
Interest income recognized on impaired loans
including interest income recognized on cash basis -- 11
Interest income recognized on impaired loans on
cash basis -- 11
April 30, December 31,
1997 1996
---- ----
Balance of impaired loans $ 839 $1,272
Less portion for which no allowance for loan
Losses is allocated -- --
------ ------
Portion of impaired loan balance for which an
allowance for credit losses is allocated $ 839 $1,272
====== ======
Portion of allowance for loan losses allocated
to the impaired loan balance $ 420 $ 318
====== ======
There were no impaired loans at December 31, 1995.
- --------------------------------------------------------------------------------
(Continued)
F-16
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
(Unaudited) December 31,
April 30, --------------------
1997 1996 1995
---- ---- ----
Land $ 545 $ 545 $ 545
Buildings and improvements 3,609 3,620 3,528
Furniture and equipment 1,920 1,894 1,796
Real estate acquired for future expansion 377 377 377
------- ------- -------
Total cost 6,451 6,436 6,246
Less accumulated depreciation (2,606) (2,513) (2,240)
------- ------- -------
$ 3,845 $ 3,923 $ 4,006
======= ======= =======
NOTE 6 - INTANGIBLE ASSETS
Intangible assets, which arose from the Savings Bank's acquisition of assets and
assumption of liabilities from the Resolution Trust Corporation consisted of the
following:
(Unaudited) December 31,
April 30, --------------------
1997 1996 1995
---- ---- ----
Excess of purchase price over net
assets acquired $ 156 $ 156 $ 156
Core deposit intangible assets 377 377 377
----- 533 533
Less accumulated amortization (201) (181) (114)
----- ----- -----
Intangible assets, net $ 332 $ 352 $ 419
===== ===== =====
The excess of purchase price over net assets acquired is being amortized over
fifteen years in relation to the remaining lives of the long-term earning assets
acquired. Amortization charged to expense was $3,467 in the four months ended
April 30, 1997 and 1996 (unaudited). Amortization charged to expense was
$10,400, $10,430, and $5,255 in the years ended December 31, 1996, 1995, and
1994, respectively.
- --------------------------------------------------------------------------------
(Continued)
F-17
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 6 - INTANGIBLE ASSETS (Continued)
The core deposit intangible assets were determined in consideration of the value
of non-interest-bearing demand, NOW, savings, and money market deposit accounts
assumed. The valuation method estimated annual cash flow differentials of the
core deposit interest and handling costs of alternative funds sources, such as
certificates of deposit, and then discounted such cash flow differentials to
their present value. The core deposit intangible asset is being amortized over
ten years on an accelerated method. Amortization charged to expense in the four
months ended April 30, 1997 and 1996 was $17,001 and $18,833, respectively
(unaudited). Amortization charged to expense in the years ended December 31,
1996, 1995, and 1994 was $56,500, $64,000, and $34,000, respectively.
NOTE 7 - DEPOSITS
Certificate of deposit accounts with balances of $100,000 or more totaled
$31,639,423 (unaudited), $39,439,746 and $33,879,449 at April 30, 1997, December
31, 1996 and December 31, 1995, respectively. Deposits greater than $100,000 are
not insured.
At April 30, 1997 (unaudited), the scheduled maturities of certificates of
deposit are as follows:
April 30, 1998 $102,164
April 30, 1999 10,295
April 30, 2000 7,972
April 30, 2001 2,734
April 30, 2002 and thereafter 4,977
--------
$128,142
========
At December 31, 1996, the scheduled maturities of certificates of deposit are as
follows:
December 31, 1997 $105,026
December 31, 1998 11,166
December 31, 1999 3,240
December 31, 2000 5,645
December 31, 2001 and thereafter 3,645
--------
$128,722
========
- --------------------------------------------------------------------------------
(Continued)
F-18
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Chicago were as follows:
Principal Balance
-------------------------------
Contractual Frequency (Unaudited) December 31,
Maturity Interest of Rate April 30, ------------------
Date Rate Adjustment 1997 1996 1995
---- ---- ---------- ---- ---- ----
March 17, 1996 5.72% Fixed $ -- $ -- $ 1,000
February 11, 1997 4.80 Fixed -- 2,000 2,000
March 18, 1997 5.51 Fixed -- 1,000 --
June 17, 1997 5.56 Fixed 2,500 -- --
February 11, 1998 5.88 Fixed 2,000 -- --
March 20, 1998 5.91 Fixed 1,000 1,000 --
February 21, 2000 5.48 Fixed 1,000 -- --
February 21, 2000 6.08 Fixed 1,000 -- --
Open line 5.31 Daily -- -- 7,000
------ ------ -------
$7,500 $4,000 $10,000
====== ====== =======
The Savings Bank maintains a collateral pledge agreement covering secured
advances whereby the Savings Bank has agreed to at all times keep on hand, free
of all other pledges, liens, and encumbrances, whole first mortgage loans on
improved residential property not more than 90 days delinquent, aggregating no
less than 167% of the outstanding secured advances from the Federal Home Loan
Bank of Chicago.
NOTE 9 - INCOME TAXES
An analysis of the provision for income taxes is as follows:
(Unaudited)
For the Four Months Ended For the Years Ended
April 30, December 31,
------------- ------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
Current
Federal $380 $482 $ 1,132 $1,377 $1,372
State 76 121 211 248 241
Deferred 24 -- (1,117) 135 212
Valuation allowance -- -- 180 -- --
---- ---- ------- ------ ------
$480 $603 $ 406 $1,760 $1,825
==== ==== ======= ====== ======
- --------------------------------------------------------------------------------
(Continued)
F-19
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
The net deferred tax asset (liability) included in the accompanying balance
sheets consist of the following:
(Unaudited) December 31,
April 30, ------------------
1997 1996 1995
---- ---- ----
Deferred tax assets
Bad debts $ 72 $ 42 $ --
Amortization of intangible assets 39 36 23
Contribution carryforward 772 851 --
Unrealized loss on securities
available-for-sale 177 130 --
------- ------- -----
1,060 1,059 23
Deferred tax liabilities
Bad debts -- -- (208)
Depreciation (97) (102) (117)
FHLB stock dividend (65) (65) (65)
Loan fees (323) (340) (328)
Unrealized gain on securities
available-for-sale -- -- (16)
------- ------- -----
(485) (507) (734)
Valuation allowance on deferred tax assets (180) (180) --
------- ------- -----
Total deferred tax asset (liability) $ 395 $ 372 $(711)
======= ======= =====
The valuation allowance at April 30, 1997 and December 31, 1996 reflects
management's estimate of temporary deductible differences that may not be
realized.
- --------------------------------------------------------------------------------
(Continued)
F-20
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
The difference between the provision for income taxes shown on the consolidated
statements of income and amounts computed by applying the statutory federal
income tax rate to income before taxes follows:
<TABLE>
<CAPTION>
(Unaudited)
For the Four Months Ended
April 30,
---------------------------------------
1997 1996
---------------- ----------------
<S> <C> <C> <C> <C>
Provision for federal income taxes computed
at statutory rate of 34% $ 422 34.0% $ 542 34.0%
Tax-exempt income (30) (2.4) (30) (1.9)
State income taxes, net of federal income tax benefit 72 5.8 77 4.8
Other 16 1.3 14 1.0
----- ---- ----- ----
$ 480 38.7% $ 603 37.9%
===== ==== ===== ====
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------------------------------------------------
1 9 9 6 1 9 9 5 1 9 9 4
----------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Provision for federal income
taxes computed at statutory
rate of 34% $ 292 34.0% $ 1,684 34.0% $ 1,785 34.0%
Tax-exempt income (85) (9.9) (2.1) (120) (2.3)
State income taxes, net of
federal income tax benefit 37 4.3 197 4.0 204 3.9
Other (18) (2.1) (19) (.4) (44) (.8)
Valuation allowance 180 21.0 -- -- -- --
----- ---- ------- ---- ------- ----
$ 406 47.3% $ 1,760 35.5% $ 1,825 34.8%
===== ==== ======= ==== ======= ====
</TABLE>
The Savings Bank has qualified under provisions of the Internal Revenue Code
which permit it to deduct from taxable income a provision for bad debts which
differs from the provision charged to income on the financial statements.
Retained earnings at April 30, 1997 (unaudited) and December 31, 1996 and 1995
include approximately $2,023,000 for which no deferred federal income tax
liability has been recorded. Tax legislation passed August 1996 now requires all
thrift institutions to deduct a provision for bad debts for tax purposes based
on actual loss experience and recapture the excess bad debt reserve accumulated
in the tax years after 1987. The related amount of deferred tax liability which
must be recaptured is $573,000 and is payable over a six-year period, starting
no later than 1998.
- --------------------------------------------------------------------------------
(Continued)
F-21
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Savings Bank is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet financing needs of its customers. These
financial instruments include commitments to fund loans and previously approved
unused lines of credit. The Savings Bank's exposure to credit loss in the event
of nonperformance by the parties to these financial instruments is represented
by the contractual amount of the instruments. The Savings Bank uses the same
credit policy for commitments as it uses for on-balance-sheet items. The
contract amount of these financial instruments is summarized as follows:
(Unaudited) December 31,
April 30, ------------------
1997 1996 1995
---- ---- ----
Commitments to extend credit $3,322 $1,802 $1,542
Unused lines of credit 4,371 4,186 2,498
At April 30, 1997 (unaudited) and December 31, 1996, commitments to extend
credit consist of $2,673,000 and $1,253,000 of fixed rate and $649,000 and
$549,000 of variable rate loan commitments. The fixed rate loan commitments have
rates ranging from 7.375% to 8.875%. These commitments are due to expire within
90 days of issuance. Since many commitments expire without being used, the
amounts above do not necessarily represent future cash commitments. Collateral
may be obtained upon exercise of a commitment. The amount of collateral is
determined by management and may include commercial and residential real estate
and other business and consumer assets.
The Savings Bank's principal loan customers are located in Chicago, Illinois and
Philadelphia, Pennsylvania. Most loans are secured by specific collateral,
including residential and commercial real estate.
The deposits of savings institutions are presently insured by the Savings
Association Insurance Fund (SAIF), which, along with the Bank Insurance Fund
(BIF), is one of the two insurance funds administered by the Federal Deposit
Insurance Corporation (FDIC). Due to the inadequate capitalization of the SAIF,
a recapitalization plan was signed into law on September 30, 1996 which required
a special assessment of approximately .65% of all SAIF-insured deposit balances
as of March 31, 1995. The Bank's assessment of $1,292,882 is reflected in the
1996 statement of income.
The Savings Bank established The Heritage Foundation of First Security Federal
Savings Bank, Inc. (the Foundation) in December 1996. The Foundation is a
not-for-profit charitable foundation. In 1996, the Board approved a $2,500,000
unconditional contribution to the Foundation, of which $250,000 was paid in
1996. An additional $1,850,000 was funded through April 30, 1997. The remaining
$400,000 (unaudited) is included in other liabilities in the balance sheet at
April 30, 1997.
- --------------------------------------------------------------------------------
(Continued)
F-22
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY MATTERS
The Savings Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. 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 Savings Bank'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 Savings Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Savings Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios (set forth in
the table below) of Total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of April 30, 1997, that the Savings
Bank meets all capital adequacy requirements to which it is subject.
As of April 30, 1997, the most recent notification from the Office of Thrift
Supervision categorized the Savings Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Savings Bank must maintain minimum Total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the following table.
There are no conditions or events since that notification that management
believes have changed the Savings Bank's category.
The Savings Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
To be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------------
(Unaudited) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of April 30, 1997:
Total capital (to
risk-weighted assets) $31,066 24.4% $10,186 8.0% $12,733 10.0%
Tier I Capital (to risk-
weighted assets) 29,468 23.1 5,093 4.0 7,640 6.0
Tier I Capital (to
average assets) 29,468 11.4 10,377 4.0 12,971 5.0
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-23
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY MATTERS (Continued)
<TABLE>
<CAPTION>
To be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------------
(Unaudited) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital (to
risk-weighted assets) $29,954 23.9% $10,045 8.0% $12,556 10.0%
Tier I Capital (to risk-
weighted assets) 28,437 22.6 5,022 4.0 7,534 6.0
Tier I Capital (to
average assets) 28,437 11.2 10,193 4.0 12,742 5.0
</TABLE>
A reconciliation of GAAP capital to regulatory capital is as follows:
April 30, 1997 December 31, 1996
------------------ --------------------
Total Tier I Total Tier I
----- ------ ----- ------
GAAP capital ................... $ 29,950 $ 29,950 $ 29,261 $ 29,261
Goodwill and intangible assets . (400) (400) (429) (429)
Unrealized losses on securities
available-for-sale ............ 144 144 80 80
Disallowed deferred tax assets . (226) (226) (475) (475)
Allowance for loan losses ...... 1,598 -- 1,517 --
-------- -------- -------- --------
$ 31,066 $ 29,468 $ 29,954 $ 28,437
======== ======== ======== ========
NOTE 12 - RELATED PARTY TRANSACTIONS
The Savings Bank has lending transactions with directors, executive officers,
and their associates. Loans to these individuals totaled approximately $48,000
(unaudited), $50,511 and $316,000 at April 30, 1997, December 31, 1996 and
December 31, 1995, respectively.
<PAGE>
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The approximate carrying amount and estimated fair value of financial
instruments are as follows:
<TABLE>
<CAPTION>
(Unaudited) December 31,
April 30, -------------------------------------------------------
1 9 9 7 1 9 9 6 1 9 9 5
------------------------ ------------------------- -------------------------
Approximate Estimated Approximate Estimated Approximate Estimated
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 7,104 $ 7,104 $ 7,300 $ 7,300 $ 19,173 $ 19,173
Time deposits in other
financial institutions 200 200 200 200 200 200
Securities available-for-sale 27,535 27,535 28,724 28,724 33,787 33,787
Securities held-to-maturity 50,648 50,007 49,888 49,881 45,686 46,115
Loans, net of allowance for
loan losses 165,914 169,903 163,348 165,738 144,566 148,670
Accrued interest receivable 1,949 1,949 1,764 1,764 1,616 1,616
Financial liabilities
NOW accounts (19,642) (19,642) (19,616) (19,616) (18,874) (18,874)
Savings (71,203) (71,203) (71,167) (71,167) (69,631) (69,631)
Time deposits (128,142) (128,594) (128,722) (128,805) (120,882) (121,032)
Advance payments by borrowers
for taxes and insurance (1,586) (1,586) (2,118) (2,118) (1,681) (1,681)
Advances from Federal
Home Loan Bank (7,500) (7,489) (4,000) (3,995) (10,000) (9,852)
Accrued interest payable (998) (998) (533) (533) (537) (537)
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-24
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
For purposes of the above, the following assumptions were used:
Cash and Cash Equivalents: The fair value for cash and cash equivalents is based
on their carrying value due to the short-term nature of these assets.
Securities: The fair value of securities is based on the quoted market value for
the individual security or its equivalent.
Loans: The fair value for loans has been determined by calculating the present
value of future cash flows based on the current rate the Savings Bank would
charge for similar loans with similar maturities at April 30, 1997, December 31,
1996 and December 31, 1995, applied for an estimated time period until the loan
is assumed to be repriced or repaid.
Deposit Liabilities: The fair value for time deposits has been determined by
calculating the present value of future cash flows based on estimates of rates
the Savings Bank would pay on such deposits at April 30, 1997, December 31, 1996
and December 31, 1995, applied for the time period until maturity. The estimated
fair value of NOW and savings accounts is assumed to approximate carrying value
as management establishes rates on these deposits at a level that approximates
the local market area.
Advances from Federal Home Loan Bank: The fair value for the Federal Home Loan
Bank advances was determined by calculating the present value of future cash
flows using the current rate for an advance with a similar length to maturity.
Accrued Interest: The fair value of accrued interest receivable and payable is
assumed to equal the carrying value.
Off-Balance-Sheet Instruments: Off-balance-sheet items consist principally of
unfunded loan commitments. The fair value of these commitments is not material.
Other assets and liabilities of the Savings Bank not defined as financial
instruments, such as property and equipment, are not included in the above
disclosures. Also not included are nonfinancial instruments typically not
recognized in financial statements such as the value of core deposits, loan
servicing rights, customer goodwill, and similar items.
While the above estimates are based on judgments of the most appropriate
factors, there is no assurance that if the Savings Bank disposed of these items
on April 30, 1997, December 31, 1996 and December 31, 1995, the fair value would
have been achieved, because the market value may differ depending on the
circumstances. The fair values at April 30, 1997, December 31, 1996 and December
31, 1995 should not necessarily be considered to apply at subsequent dates.
- --------------------------------------------------------------------------------
(Continued)
F-25
<PAGE>
1ST SECURITY FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
April 30, 1997 and 1996 (Unaudited)
(Table amounts in thousands)
- --------------------------------------------------------------------------------
NOTE 14 - ADOPTION OF PLAN OF CONVERSION (UNAUDITED)
On June 23, 1997, the Board of Directors of the Savings Bank, subject to
regulatory approval and approval by the members of the Savings Bank, adopted a
Plan of Conversion to convert from a federal mutual savings bank to a federal
stock savings bank with the concurrent formation of a holding company and the
adoption of a federal thrift charter. The conversion is expected to be
accomplished through the amendment of the Savings Bank's charter and the sale of
the holding company's common stock in an amount equal to the consolidated pro
forma market value of the holding company and the Savings Bank after giving
effect to the conversion. A subscription offering of the shares of common stock
will be offered initially to the Savings Bank's eligible deposit account
holders, then to other members of the Savings Bank. Any shares of the holding
company's common stock not sold in the subscription offering will be offered for
sale to the general public, giving preference to the Savings Bank's market area.
The Board of Directors of the Savings Bank or the holding company intend to
adopt an Employee Stock Ownership Plan and various stock option and incentive
plans, subject to ratification by the stockholders of the holding company after
conversion, if such stockholder approval is required by any regulatory body
having jurisdiction to require such approval. In addition, the Board of
Directors is authorized to enter into employment contracts with key employees.
At the time of conversion, the Savings Bank will establish a liquidation account
in an amount equal to its total net worth as of the latest statement of
financial condition appearing in the final prospectus. The liquidation account
will be maintained for the benefit of eligible depositors who continue to
maintain their accounts at the Savings Bank after the conversion. The
liquidation account will be reduced annually to the extent that eligible
depositors have reduced their qualifying deposits. Subsequent increases will not
restore an eligible account holder's interest in the liquidation account. In the
event of a complete liquidation, each eligible depositor will be entitled to
receive a distribution from the liquidation account in an amount proportionate
to the current adjusted qualifying balances for accounts then held. The
liquidation account balance is not available for payment of dividends.
The Bank may not declare or pay cash dividends on or repurchase any of
its shares of capital stock if the effect thereof would cause its net worth to
be reduced below applicable regulatory requirements or the amount of the
liquidation accounts of such a declaration and payment would otherwise violate
regulatory requirements.
Conversion costs will be deferred and deducted from the proceeds of the shares
sold in the conversion. If the conversion is not completed, all costs will be
charged to expense. At April 30, 1997, no expenses have been deferred.
- --------------------------------------------------------------------------------
F-26
<PAGE>
No person has been authorized to give any information or to make any
representation other than as contained in this Prospectus in connection with the
offering made hereby, and, if given or made, such other information or
representation must not be relied upon as having been authorized by the Holding
Company or the Bank. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
person in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so, or to any person to whom it is unlawful to make such offer or solicitation
in such jurisdiction. Neither the delivery of this Prospectus nor any sale
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Holding Company or the Bank since any of
the dates as of which information is furnished herein or since the date hereof.
--------------
TABLE OF CONTENTS
Page
----
Prospectus Summary........................................
Selected Financial Information............................
Recent Financial Data.....................................
Risk Factors..............................................
First SecurityFed Financial, Inc..........................
First Security ...........................................
Use of Proceeds...........................................
Dividends.................................................
Market for Common Stock...................................
Pro Forma Data............................................
Comparison of Valuation and Pro Forma Information
With No Stock Contribution...............................
Pro Forma Regulatory Capital Analysis.....................
Capitalization............................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................
Business .................................................
Regulation................................................
Management ...............................................
The Conversion............................................
Restrictions on Acquisitions of Stock and Related
Takeover Defensive Provisions..........................
Description of Capital Stock..............................
Legal and Tax Matters.....................................
Experts...................................................
Additional Information....................................
Index to Financial Statements............................. F-1
----------
Until the later of ________, 1997 or 25 days after commencement of the
offering of Common Stock, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
Up to
55,720,000 Shares
FIRST SECURITYFED FINANCIAL, INC.
(Proposed Holding Company
for First Security Federal Savings Bank)
COMMON STOCK
----------
PROSPECTUS
----------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
_______, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Set forth below is an estimate of the amount of fees and expenses (other
than underwriting discounts and commissions) to be incurred in connection with
the issuance of the shares.
SEC registration fees............................................... $ 17,258
NASD fee............................................................ 6,200
Nasdaq registration fee............................................. 32,000
OTS filing fees..................................................... 14,400
Counsel fees and expenses........................................... 135,000
Accounting fees and expenses........................................ 80,000
Appraisal and business plan fees and expenses....................... 25,000
Conversion agent fees and expenses.................................. 17,000
Marketing agent's expenses.......................................... 25,000
Marketing agent's fee............................................... 492,000
Marketing agent's counsel fees and expenses......................... 37,500
Printing, postage and mailing....................................... 120,000
Blue sky fees and expenses.......................................... 5,000
Other expenses...................................................... 25,642
----------
TOTAL.......................................................... $1,032,000
==========
- ---------
(1) Based on maximum of Estimated Valuation Range and assumptions set forth
under "Pro Forma Data" in the Prospectus.
Item 14. Indemnification of Directors and Officers
Article Eleventh of the Holding Company's Certificate of Incorporation
provides for indemnification of directors and officers of the Holding Company
against any and all liabilities, judgments, fines and reasonable settlements,
costs, expenses and attorneys' fees incurred in any actual, threatened or
potential proceeding, except to the extent that such indemnification is limited
by Delaware law and such law cannot be varied by contract or bylaw. Article
Eleventh also provides for the authority to purchase insurance with respect
thereto.
Section 145 of the General Corporation Law of the State of Delaware
authorizes a corporation's Board of Directors to grant indemnity under certain
circumstances to directors and officers, when made, or threatened to be made,
parties to certain proceedings by reason of such
II-1
<PAGE>
status with the corporation, against judgments, fines, settlements and expenses,
including attorneys' fees. In addition, under certain circumstances such persons
may be indemnified against expenses actually and reasonably incurred in defense
of a proceeding by or on behalf of the corporation. Similarly, the corporation,
under certain circumstances, is authorized to indemnify directors and officers
of other corporations or enterprises who are serving as such at the request of
the corporation, when such persons are made, or threatened to be made, parties
to certain proceedings by reason of such status, against judgments, fines,
settlements and expenses, including attorneys' fees; and under certain
circumstances, such persons may be indemnified against expenses actually and
reasonably incurred in connection with the defense or settlement of a proceeding
by or in the right of such other corporation or enterprise. Indemnification is
permitted where such person (i) was acting in good faith; (ii) was acting in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation or other corporation or enterprise, as appropriate; (iii) with
respect to a criminal proceeding, has no reasonable cause to believe his conduct
was unlawful; and (iv) was not adjudged to be liable to the corporation or other
corporation or enterprise (unless the court where the proceeding was brought
determines that such person is fairly and reasonably entitled to indemnity).
Unless ordered by a court, indemnification may be made only following a
determination that such indemnification is permissible because the person being
indemnified has met the requisite standard of conduct. Such determination may be
made (i) by the Board of Directors of the Holding Company by a majority vote of
a quorum consisting of directors not at the time parties to such proceeding; or
(ii) if such a quorum cannot be obtained or the quorum so directs, then by
independent legal counsel in a written opinion; or (iii) by the stockholders.
Section 145 also permits expenses incurred by directors and officers in
defending a proceeding to be paid by the corporation in advance of the final
disposition of such proceedings upon the receipt of an undertaking by the
director or officer to repay such amount if it is ultimately determined that he
is not entitled to be indemnified by the corporation against such expenses.
Item 15. Recent Sales of Unregistered Securities
The Registrant is newly incorporated, solely for the purpose of acting as
the holding company of First Security Federal Savings Bank pursuant to the Plan
of Conversion (filed as Exhibit 2 herein), and no sales of its securities have
occurred to date, other than the sale of one share of the Registrant's stock to
its incorporator for the purpose of qualifying the Registrant to do business in
Illinois.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
1.1 Letter Agreement regarding marketing and consulting services
with Friedman, Billings, Ramsey & Co., Inc.*
1.2 Form of Agency Agreement*
2 Plan of Conversion*
3.1 Certificate of Incorporation of the Holding Company*
3.2 Bylaws of the Holding Company*
3.3 Charter of First Security Federal Savings Bank in stock form*
3.4 Bylaws of First Security Federal Savings Bank in stock form*
4 Form of Stock Certificate of the Holding Company*
5 Opinion of Silver, Freedman & Taff, L.L.P. with respect to legality
of stock*
8.1 Opinion of Silver, Freedman & Taff, L.L.P. with respect to Federal
income tax consequences of the Conversion*
8.2 Opinion of Crowe, Chizek and Company LLP with respect to Illinois
income tax consequences of the Conversion*
8.3 FinPro Letter with respect to estimated pro forma market value and
Subscription Rights*
10.1 Employee Stock Ownership Plan*
10.2 Form of Proposed Stock Option and Incentive Plan*
10.3 Form of Proposed Recognition and Retention Plan*
10.4 Form of Employment Agreement with Julian E. Kulas*
10.5 Form of Change-In-Control Severance Agreement with Harry I. Kucewicz*
10.6 Form of Change-In-Control Severance Agreement with Mary H. Korb*
10.7 Form of Change-In-Control Severance Agreement with Irene S. Subota*
10.8 Form of Change-In-Control Severance Agreement with Adrian Hawryliw*
21 Subsidiaries*
23.1 Consent of Silver, Freedman & Taff, L.L.P.*
23.2 Consent of Crowe, Chizek and Company LLP
23.3 Consent of FinPro*
24 Power of Attorney (set forth on signature page)
99.1 Appraisal*
99.2 Proxy Statement and form of proxy to be furnished to First Security
Federal Savings Bank account holders*
99.3 Stock Order Form and Order Form Instructions*
99.4 Question and Answer Brochure*
99.5 Advertising, Training and Community Informational Meeting Materials*
- ----------
* Previously filed.
II-3
<PAGE>
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and it will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant
II-4
<PAGE>
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Chicago, State of Illinois
on September 11, 1997.
FIRST SECURITYFED FINANCIAL, INC.
By: /s/ Julian E. Kulas
---------------------------------------------------
Julian E. Kulas, President, Chief Executive Officer
and Director
(Duly Authorized Representative)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Julian E. Kulas, his true and lawful
attorney-in-fact and agent, with full power of substitution and re-substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and all other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all said attorney-in-fact and agent or his substitutes
or substitute may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ Julian E. Kulas /s/ Steve Babyk
- -------------------------------------- ----------------------------
Julian E. Kulas Steve Babyk
President, Chief Executive Officer and Director
Director
(Principal Executive Officer)
Date: September 11, 1997 Date: September 11, 1997
/s/ Lila Maria Bodnar /s/ Myron Dobrowolsky
- -------------------------------------- ----------------------------
Lila Maria Bodnar Myron Dobrowolsky
Recording Secretary and Director Director
Date: September 11, 1997 Date: September 11, 1997
II-6
<PAGE>
/s/ Terry Gawryk /s/ George Kawka
- -------------------------------------- ----------------------------
Terry Gawryk George Kawka
Secretary and Director Director
Date: September 11, 1997 Date: September 11, 1997
/s/ Paul Nadzikewycz /s/ Jaroslay H. Sydorenko
- -------------------------------------- ----------------------------
Paul Nadzikewycz Jaroslav H. Sydorenko
Chairman of the Board Director
Date: September 11, 1997 Date: September 11, 1997
/s/ Chrysta Wereszczak
- --------------------------------------
Chrysta Wereszczak
Director
Date: September 11, 1997
II-7
<PAGE>
As filed with the Securities and Exchange Commission on September , 1997
Registration No. 333-31739
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
EXHIBITS TO PRE-EFFECTIVE
AMENDMENT NO. ONE TO THE
FORM S-1
UNDER
THE SECURITIES ACT OF 1933
FIRST SECURITYFED FINANCIAL, INC.
936 North Western Avenue
Chicago, Illinois 60622-4695
================================================================================
<PAGE>
EXHIBIT INDEX
Exhibits:
1.1 Letter Agreement regarding marketing and consulting services with
Friedman, Billings, Ramsey & Co., Inc.*
1.2 Form of Agency Agreement*
2 Plan of Conversion*
3.1 Certificate of Incorporation of the Holding Company*
3.2 Bylaws of the Holding Company*
3.3 Charter of First Security Federal Savings Bank in stock form*
3.4 Bylaws of First Security Federal Savings Bank in stock form*
4 Form of Stock Certificate of the Holding Company*
5 Opinion of Silver, Freedman & Taff, L.L.P. with respect to legality
of stock*
8.1 Opinion of Silver, Freedman & Taff, L.L.P. with respect to Federal
income tax consequences of the Conversion*
8.2 Opinion of Crowe, Chizek and Company LLP with respect to Illinois
income tax consequences of the Conversion*
8.3 FinPro Letter with respect to estimated pro forma market value and
Subscription Rights*
10.1 Employee Stock Ownership Plan*
10.2 Form of Proposed Stock Option and Incentive Plan*
10.3 Form of Proposed Recognition and Retention Plan*
10.4 Form of Employment Agreement with Julian E. Kulas*
10.5 Form of Change-In-Control Severance Agreement with Harry I. Kucewicz*
10.6 Form of Change-In-Control Severance Agreement with Mary H. Korb*
10.7 Form of Change-In-Control Severance Agreement with Irene S. Subota*
10.8 Form of Change-In-Control Severance Agreement with Adrian Hawryliw*
21 Subsidiaries*
23.1 Consent of Silver, Freedman & Taff, L.L.P.*
23.2 Consent of Crowe, Chizek and Company LLP
23.3 Consent of FinPro*
24 Power of Attorney (set forth on signature page)
99.1 Appraisal*
99.2 Proxy Statement and form of proxy to be furnished to First Security
Federal Savings Bank account holders*
99.3 Stock Order Form and Order Form Instructions*
99.4 Question and Answer Brochure*
99.5 Advertising, Training and Community Informational Meeting Materials*
- ----------
* Previously filed.
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
1st Security Federal Savings Bank
We consent to the use in this Registration Statment on Form S-1 filed with the
Securities and Exchange Commission and Amendment No. 2 to Form AC filed with the
Office of Thrift Supervision on September 11, 1997, of our report dated February
8, 1997, on the financial statements of 1st Security Federal Savings Bank. We
also consent to the reference to us under the headings "The Conversion - Income
Tax Consequences" and "-The Contribution" and "-Effects of Conversion to Stock
Form on Depositors and Borrowers of the Bank"; "Experts"; and "Legal and Tax
Matters" in this Registration Statement on Forms S-1 and AC.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Oak Brook, Illinois
September 11, 1997
