UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended: June 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 00-23063
First SecurityFed Financial, Inc.
(Exact Name of Registrant as Specified In Its Charter)
Delaware 36-4177515
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
Chicago, Illinois 60622
(Address of Principal Executive Offices) (Zip Code)
773/772-4500
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO _____
Indicate the number of shares outstanding of each the issuer's classes of common
stock, as of the latest practicable date:
Class Outstanding at July 31, 1998
Common Stock, par value $0.01 6,253,920 shares
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
INDEX
<TABLE>
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition as of
June 30, 1998 and December 31, 1997................................................ 3
Condensed Consolidated Statements of Income for the three months and
six months ended June 30, 1998 and 1997........................................... 4
Statement of Comprehensive Income for the three months and
six months ended June 30, 1998 and 1997............................................ 5
Condensed Consolidated Statements of Changes in Equity for the
six months ended June 30, 1998 and 1997............................................ 6
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997................................................ 8
Notes to the Condensed Consolidated Financial Statements as of
June 30, 1998...................................................................... 9
Item 2. Management's Discussion and Analysis of the Financial Condition
and Results of Operation................................................. 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................... 17
Item 4. Submission of Matters to a Vote of Security Holders............................ 19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................................... 20
</TABLE>
2
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share and per share data)
(Unaudited)
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<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,327 $ 12,090
Federal funds sold 5,352 18,000
--------- ---------
Total cash and cash equivalents 16,679 30,090
Time deposits in other financial
institutions 200 200
Securities available-for-sale 36,576 32,461
Securities held-to-maturity (fair value of
$61,816 in 1998 and $57,498 in 1997) 61,403 57,022
Loans, net of allowance for loan losses 206,369 186,259
Federal Home Loan Bank stock 2,001 1,852
Premises and equipment, net 3,557 3,692
Accrued interest receivable 2,373 2,071
Intangible assets 261 291
Other assets 1,625 1,911
--------- ---------
Total assets $ 331,044 $ 315,849
========= =========
LIABILITIES AND EQUITY
Liabilities
Deposits $ 216,459 $ 210,100
Advances from borrowers for taxes and
insurance 2,612 2,400
Advances from Federal Home Loan Bank 21,000 10,000
Accrued interest payable and other liabilities 947 1,477
--------- ---------
Total liabilities 241,018 223,977
Stockholders' Equity
Preferred stock, $0.01 par value per share, 500,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $0.01 par value per share, 8,000,000
shares authorized, 6,408,000 shares issued 64 64
Additional paid-in capital 65,596 65,495
Unearned ESOP shares (4,758) (4,935)
Unearned MRP shares (4,161) 0
Retained earnings, substantially restricted 34,112 31,290
Net unrealized loss on available-for-sale
securities, net of income taxes (12) (42)
Treasury stock, at cost (815) 0
--------- ---------
Total equity 90,026 91,872
--------- ---------
Total liabilities and equity $ 331,044 $ 315,849
========= =========
</TABLE>
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3
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share and per share data)
(Unaudited)
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<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income
Loans $ 8,262 $ 6,961 $ 4,195 $ 3,485
Securities 1,967 1,000 980 505
Mortgage-backed securities 1,527 1,696 721 837
Other interest-earning assets 266 51 102 23
------- ------- ------- -------
Total interest income 12,022 9,708 5,998 4,850
Interest expense
Deposits 4,698 4,705 2,374 2,372
FHLB advances 413 184 224 113
------- ------- ------- -------
Total interest expense 5,111 4,889 2,598 2,485
Net interest income 6,911 4,819 3,400 2,365
Provision for loan losses 123 615 61 53
------- ------- ------- -------
Net interest income after
provision for loan losses 6,788 4,204 3,339 2,312
Noninterest income
Other income 302 295 143 145
------- ------- ------- -------
Total noninterest income 302 295 143 145
Noninterest expense
Compensation and benefits 1,340 1,206 677 642
Occupancy and equipment expense 357 335 177 167
Data Processing 189 141 97 70
Federal deposit insurance premiums 106 78 54 53
Professional fees 81 51 53 26
Other operating expenses 499 670 274 405
------- ------- ------- -------
Total noninterest expense 2,572 2,481 1,332 1,363
------- ------- ------- -------
Income before income tax provision 4,518 2,018 2,150 1,094
Provision for income taxes 1,696 750 781 386
------- ------- ------- -------
Net income $ 2,822 $ 1,268 $ 1,369 $ 708
======= ======= ======= =======
Earnings per share
Basic $ .46 $ N/A $ .22 $ N/A
======= ======= ======= =======
Diluted $ .46 $ N/A $ .22 $ N/A
======= ======= ======= =======
</TABLE>
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4
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands, except share and per share data)
(Unaudited)
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<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income $ 2,822 $ 1,268 $ 1,369 $ 708
Other comprehensive income, net of tax:
Change in unrealized gains on securities 30 27 (15) 99
------- ------- ------- -------
Comprehensive Income $ 2,852 $ 1,295 $ 1,354 $ 807
======= ======= ======= =======
</TABLE>
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5
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN EQUITY
(Dollars in thousands, except share and per share data)
(Unaudited)
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<TABLE>
<CAPTION>
Unrealized
Gain (Loss) Total
Additional Unearned Unearned on Securities Share-
Common Paid-in ESOP MRP Retained Available- Treasury holders'
Stock Capital Shares Share Earnings for-Sale Stock Equity
--------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- -- -- -- 29,465 (204) -- 29,261
Net income -- -- -- -- 1,268 -- -- 1,268
Change in valuation
allowance for securities
available-for-sale,
net of income taxes -- -- -- -- -- 26 -- 26
--------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Balance at June 30, 1997 -- -- -- -- 30,733 (178) -- 30,555
========= ========== ========== ========== ========== ========== ========== =========
</TABLE>
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6
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN EQUITY
(Dollars in thousands, except share and per share data)
(Unaudited)
- continued -
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) Total
Additional Unearned Unearned on Securities Share-
Common Paid-in ESOP MRP Retained Available- Treasury holders'
Stock Capital Shares Share Earnings for-Sale Stock Equity
--------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 64 65,495 (4,935) -- 31,290 (42) -- 91,872
Unearned MRP shares -- 4,277 -- (4,277) -- -- -- --
ESOP shares earned -- 101 177 -- -- -- -- 278
MRP shares earned -- -- -- 116 -- -- -- 116
Net income -- -- -- -- 2,822 -- -- 2,822
Treasury stock -- -- -- -- -- -- (5,092) (5,092)
MRP shares allocated -- (4,277) -- -- -- -- 4,277 --
Change in valuation
allowance For securities
available-for-sale
Net of income taxes -- -- -- -- -- 30 -- 30
--------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Balance at June 30, 1998 $ 64 $ 65,596 $ (4,758) $ (4,161) $ 34,112 $ (12) $ (815) $ 90,026
========= ========== ========== ========== ========== ========== ========== =========
</TABLE>
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7
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share and per share data)
(Unaudited)
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<TABLE>
<CAPTION>
Six months ended
June 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,822 $ 1,268
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 194 182
Amortization of discounts and premiums
on securities 81 75
Provision for loan losses 123 615
ESOP compensation expense 276 0
MRP Expense 117 0
Change in
Deferred loan origination fees 47 14
Accrued interest receivable and other assets (16) (1,640)
Other liabilities and deferred income taxes (530) (214)
-------- --------
Net cash provided by operating activities 3,114 300
Cash flows from investing activities
Purchase of securities available-for-sale (7,505) 0
Purchase of securities held-to-maturity (15,532) (4,199)
Proceeds from repayment of securities 4,626 4,112
Proceeds from calls and maturities of securities 10,030 1,500
Net change in loans (20,606) (10,102)
(Capital expenditures, net (17) (28)
Proceeds from sale of real estate owned 0 246
-------- --------
Net cash used in investing activities (29,004) (8,471)
Cash flows from financing activities
Net increase (decrease) in deposits 6,359 429
Net borrowings from FHLB 11,000 3,500
Net decrease in advances from
borrowers for insurance and taxes 212 246
Buyback of outstanding Common Stock (5,092) 0
-------- --------
Net cash provided by (used in) financing activities 12,479 4,175
-------- --------
Decrease in cash and cash equivalents (13,411) (3,996)
Cash and cash equivalents at beginning of period 30,090 7,300
-------- --------
Cash and cash equivalents at end of period $ 16,679 $ 3,304
======== ========
</TABLE>
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8
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
First SecurityFed Financial, Inc. (the Company) is a Delaware corporation
organized in July 1997 by First Security Federal Savings Bank (the Bank) in
connection with the conversion of the Bank from a federally chartered mutual
savings bank to a federally chartered stock savings bank. For purposes of the
Form 10-Q the unaudited financial statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations presented herein are
for the Bank as a predecessor entity to the Company for periods prior to the
mutual to stock conversion on October 30, 1997.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial condition of First SecurityFed
Financial, Inc. as of June 30, 1998 and 1997, and the results of its operations
and cash flows for the three and six month periods then ended.
NOTE 2 - CONVERSION
On October 31, 1997, First Security Federal Savings Bank ("Bank") converted from
a federally chartered mutual savings bank to a federally chartered stock savings
bank. The Bank issued all of its common stock to First SecurityFed Financial,
Inc. ("Company") and at the same time the Company issued 6,408,000 shares of
common stock at $10.00 per share to the ESOP, certain depositors of the Bank,
and certain members of the general public, all pursuant to a plan of conversion
("Conversion").
As part of the conversion, the Bank's depositors approved a stock contribution
of 250,000 shares to The Heritage Foundation of First Security Federal Savings
Bank, Inc. (the "Foundation"). The contribution was accrued at the time of
conversion for $2.5 million based on the $10 per share initial offering price
and resulted in $2.5 million of expense ($1.5 million, net of tax) to the
Company. Additional paid-in capital was increased by $2.5 million as a result of
the unconditional commitment to contribute the stock to the Foundation.
The ESOP purchased 512,640 shares of common stock representing 8% of the total
issued shares. The ESOP borrowed $5,126,400 from the Company to purchase the
stock using the stock as collateral for the loan. The loan is to be repaid
principally from the Bank's contributions to the ESOP over a period of up to 20
years.
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9
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3 - EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of the earnings per common
share computation for the three and six month period ended June 30, 1998 is
presented below:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1998 June 30, 1998
------ ------
<S> <C> <C>
Earnings per common share
Net Income $1,369 $2,822
------ ------
Net income attributable to common shareholders $1,369 $2,822
====== ======
Weighted average common shares outstanding 5,855 5,881
Add: shares committed to be issued to charitable foundation 250 250
------ ------
Total weighted average common shares outstanding 6,105 6,131
====== ------
Basic earnings per share $ .22 $ .46
====== ======
</TABLE>
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10
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - CAPITAL REQUIREMENTS
Pursuant to federal regulations, savings institutions must meet three separate
capital requirements. The following is a summary of the Bank's regulatory
capital at June 30, 1998.
Tangible Core Risk based
Capital Capital Capital
---------- ---------- ----------
(In thousands)
Regulatory capital $ 64,299 $ 64,299 $ 66,213
Minimum capital requirement 6,353 12,705 12,251
---------- ---------- ----------
Excess regulatory capital over
minimum requirement $ 57,946 $ 51,594 $ 53,962
========== ========== ==========
NOTE 5 - COMPREHENSIVE INCOME
Under a new accounting standard, comprehensive income is now reported for all
periods. Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized gains and
losses on securities available-for-sale.
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11
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Comparison of Financial Condition at June 30, 1998 and December 31, 1997
Total assets increased $15.2 million to $331.0 million at June 30, 1998 from
$315.8 million December 31, 1997. The increase was primarily the result of
increases of $20.1 million in loans receivable and $8.5 million in securities
offset by a decrease of $13.4 million in cash and cash equivalents.
Net loans receivable increased by $20.1 million from $186.3 million at December
31, 1997 to $206.4 million at June 30, 1998 as a result of increased marketing
efforts and strong market demand due to the prevailing favorable interest rate
environment.
Cash and cash equivalents decreased by $13.4 million from $30.1 million at
December 31, 1997 to $16.7 million at June 30, 1998. This decrease was the
result of the redeployment of Stock conversion proceeds and other funds into
higher yielding loans as loan demand remained strong.
Securities available-for-sale increased by $4.1 million from $32.5 million at
December 31, 1997 to $36.6 million at June 30, 1998. During the same six month
period, securities held-to-maturity increased by $4.4 million from $57.0 million
at December 31, 1997 to $61.4 million at June 30, 1998. These increases in
securities were the result of the continuing investment of the proceeds of the
institution's mutual-to-stock conversion.
Total liabilities at June 30, 1998 were $241.0 million compared to $224.0
million at December 31, 1997, an increase of $17.0 million. Deposits increased
by $6.4 million and FHLB advances most of which had a term of 60 to 120 months,
increased by $11.0 million. During the same six month period, a decrease of
$530,000 in accrued interest payable and other liabilities was partially offset
by an increase of $200,000 in advances from borrowers for taxes and insurance.
The net increase in liabilities helped in funding loan growth and in increasing
the securities portfolio.
Equity at June 30, 1998 was $90.0 million compared to $91.9 million at December
31, 1997, a decrease of $1.9 million. The decrease was due primarily to the
Company's repurchase of outstanding common stock.
Comparison of Operating Results for the Six Months Ended June 30, 1998 and June
30, 1997
General
Net earnings for the six months ended June 30, 1998 were $2,822,000, an increase
of $1,554,000 from net earnings of $1,268,000 for the six months ended June 30,
1997. The increase was due primarily to an increase of $2,092,000 in net
interest income and a $492,000 decrease in the provision for loan losses
partially offset by increases of $ 91,000 in non-interest expense and $946,000
in the provision for income taxes.
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12
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Interest Income
Interest income for the six months ended June 30, 1998 was $12.0 million
compared to $9.7 million for the six months ended June 30, 1997, an increase of
$2.3 million or 23.7%. The increase in interest income was the result of an
increase in the average balance of interest earning assets due to increases in
the average balances of loans receivable and securities. The increases in the
average balances of loans receivable and securities were primarily the result of
investing funds from the mutual-to-stock conversion.
Interest Expense
Interest expense for the six months ended June 30, 1998 was $5.1 million
compared to $4.9 million for the six months ended June 30, 1997, an increase of
$200,000 or 4.1%. The increase in interest expense was primarily a result of
increased borrowings from the Federal Home Loan Bank used to fund loan growth.
Provision for Loan Losses
The provision for loan losses for the six months ended June 30, 1998 was
$123,0000 compared to $615,000 for the six months ended June 30, 1997, a
decrease of $492,000. The provision for loan losses in 1997 was due to various
loans to the Bennett Funding Group, Inc. (Bennett Funding) which were secured by
equipment leases. Bennett Funding declared bankruptcy in 1996. During 1996, no
additional loan loss provisions were made as management investigated whether the
leases securing the loans on their books were legally secured and also awaited
further rulings from the bankruptcy court. During 1997, after receiving a
settlement offer, the Bank charged off $432,000 of the Bennett Funding loans. In
addition, during 1997, the Bank was considering foreclosure proceedings on
several other loans as to which management was uncertain whether the Bank would
recover the outstanding balance and related expenses. These loans also
contributed to the increased provision for the six months ended June 30, 1997.
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 judgements 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, 1998 was $302,000 compared
to $295,000 for the six months ended June 30, 1997. Service charges on deposits
remained relatively stable during these periods.
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13
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Noninterest Expense
Noninterest expense was $2.6 million for the six months ended June 30, 1998
compared to $2.5 million for the six months ended June 30, 1997, an increase of
$100,000. Compensation and benefits expensed increased by $134,000 due to the
implementation of the ESOP plan in October 1997 and the MRP plan in May 1998.
Data processing expense increased by $48,000 due to increases in the numbers of
deposit and loan accounts and the computer tapes which were produced for the
bank's computer conversion scheduled to be completed in August of this year.
Occupancy and equipment expense increased by $22,000 primarily due to the
depreciation of newly purchased computer equipment. Federal deposit insurance
premiums were $28,000 greater for the six months ended June 30, 1998 compared to
the six months ended June 30, 1997 due to a $27,000 credit in the first quarter
of 1997, resulting from the payment of the special assessment for the
recapitalization of SAIF. Professional fees paid in the six months ended June
30, 1998 were $30,000 greater than in the six month period ended June 30, 1997
primarily due to the increased reporting required of public companies. Other
operating expense for the six months ended June 30, 1998 was $171,000 less than
for the six months ended June 30, 1997 primarily due to decreases in expenses on
real estate owned. The expense for charitable contributions decreased as larger
donations were made by the charitable foundation created in 1996.
Income Taxes
The provision for income taxes was $1,696,000 for the six months ended June 30,
1998 compared to $750,000 for the six months ended June 30, 1997, an increase of
$946,000. The increase in the income tax provision was due to an increase of
$2.5 million in pretax earnings.
Comparison of Operating Results for the Three Months Ended June 30, 1998 and
June 30, 1997
General
Net earnings for the three months ended June 30, 1998 were $1,369,000, an
increase of $661,000 from net earnings of $708,000 for the three months ended
June 30, 1997. The increase was due primarily to an increase of $1,035,000 in
net interest income and a decrease in non-interest expense of $31,000 partially
offset by an increase in the provision for income taxes of $395,000.
Interest Income
Interest income for the three months ended June 30, 1998 was $6.0 million
compared to $4.9 million for the three months ended June 30, 1997, an increase
of $1.1 million or 22.4%. 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 average yield on interest-earning assets increased from
7.77% for the three months ended June 30, 1997 to 7.88% for the three months
ended June 30, 1998. The increases in the average balances of interest-earning
assets were primarily the result of investing funds from the mutual-to-stock
conversion.
Interest Expense
Interest expense for the three months ended June 30, 1998 was $2.6 million
compared to $2.5 million for the three months ended June 30, 1997, an increase
of $100,000 or 4.0%. The increase in interest expense was directly a result of
increased borrowings from the Federal Home Loan Bank used to fund loan growth.
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14
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Provision for Loan Losses
The provision for loan losses for the three months ended June 30, 1998 was
$61,000 compared to $53,000 for the three months ended June 30, 1997, an
increase of $8,000. The provision increased due to the increase in loans
receivable.
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 judgements 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 three months ended June 30, 1998 was $143,000
compared to $145,000 for the three months ended June 30, 1997. Service charges
on deposit and transaction accounts remained relatively stable during these
periods.
Noninterest Expense
Noninterest expense was $1,332,000 for the three months ended June 30, 1998
compared to $1,363,000 for the three months ended June 30, 1997, a decrease of
$31,000. Compensation and benefits expense increased by $35,000 due to the
implementation of the ESOP plan in October 1997 and the MRP plan in May 1998.
Occupancy and equipment expense increased by $10,000 primarily due to the
depreciation of newly purchased computer equipment. Data processing expense
increased by $27,000 primarily as a result of additional reports and computer
tapes produced for the bank's computer conversion scheduled to be completed in
August of this year. Professional fees paid during the three months ended June
30, 1998 were $27,000 greater than in the three month period ended June 30, 1997
primarily due to the increased reporting required of public companies. Other
operating expense for the three months ended June 30, 1998 was $131,000 less
than for the three months ended June 30, 1997 primarily due to decreases in
expenses on real estate owned and decreases in charitable contributions .
Furthermore, printing expense for the three months ended June 30, 1998 was less
than for the three months ended June 30, 1997 due to the institution's
mutual-to-stock conversion which took place in 1997.
Income Taxes
Income taxes were $781,000 for the three months ended June 30, 1998 compared to
$386,000 for the three months ended June 30, 1997, an increase of $395,000. The
increase in the provision for income taxes was due to an increase of $1,056,000
in pretax earnings.
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15
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Impact of New Accounting Standards
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information", was issued in 1997 by the Financial
Accounting Standards Board. This Statement establishes standards for the way
that public business enterprises report information about operating segments in
annual financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. Statement 131 is effective for periods beginning after December 31,
1997. Management does not believe that the provisions of this Statement are
applicable to the Company, since substantially all of the Company's operations
are banking services.
Safe Harbor Statement
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Bank intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposed of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Bank, are
generally identifiable by use of the words "believe", "expect", "intend",
"anticipate", "estimate", "project" or similar expressions. The Bank's ability
to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Bank and the subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative / regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Bank's market area and accounting principles, policies and guidelines. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Bank's financial results, is included
in the Bank's filings with the Securities and Exchange Commission.
Year 2000
The Company has conducted a review of its computer systems to review the systems
that could be affected by the Year 2000 issue and is developing an
implementation plan to resolve the issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. For example, programs that have time sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company presently
believes that, with modifications to existing software and by converting to new
software, the Year 2000 problem will not pose significant operational problems
for the Company's computer systems as so modified and converted. However, if
such modifications and conversions are not completed in a timely manner, the
Year 2000 problem may have a material impact on the operations of the Company.
- --------------------------------------------------------------------------------
16
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
- --------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In an attempt to manage its exposure to changes in interest rates, management
monitors the Company's interest rate risk. The Board of Directors reviews at
least quarterly the Company's interest rate risk position and profitability. The
Board of Directors also reviews the Company's portfolio, formulates investment
strategies and oversees the timing and implementation of transactions to assure
attainment of the Company's objectives in the most effective manner. In
addition, the Board reviews on a quarterly basis the Company's asset/liability
position, including simulations of the effect on the Company's capital of
various interest rate scenarios.
In managing its asset/liability mix, the Company, 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 Company's vulnerability to
changes in interest rates. First, the Company has long used community outreach,
customer service and marketing efforts to increase the Company's passbook and
other non-certificate accounts. At June 30, 1998, $93.8 million or 43.3% of the
Company's deposits consisted of passbook, NOW and money market accounts. The
Company believes that these accounts represent "core" deposits which are
generally somewhat less interest rate sensitive than other types of deposit
accounts. Second, while the Company continues to originate 30 year fixed rate
residential loans for portfolio as a result of consumer demand, an increasing
proportion of the Company's residential loans have terms of 15 years or less or
carry adjustable interest rates. Finally, the Company has focused a significant
portion of its investment activities on securities with adjustable interest
rates or terms of five years or less. At June 30, 1998, $13.5 million or 45.9%
of the Company'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 $17.4 million or 25.4% of the
Company's other securities had adjustable interest rates or terms to maturity of
five years or less.
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. Presented below, as of March 31, 1998, is an
analysis of the Bank's estimated interest rate risk as measured by changes in
NPV for instantaneous and sustained parallel shifts in interest rates, up and
down 400 basis points in 100 point increments.
- --------------------------------------------------------------------------------
17
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
- --------------------------------------------------------------------------------
Assumed Change $ Change in % Change in
In Interest Rates $ Amount NPV NP V
----------------- -------- --- ----
(Basis Points) (Dollars in Thousands)
+ 400 $50,007 $ (26,643) (35)%
+ 300 56,788 (19,862) (26)
+ 200 63,727 (12,922) (17)
+ 100 70,607 (6,043) (8)
-- 76,649 -- --
- 100 81,372 4,723 6
- 200 84,940 8,291 11
- 300 88,856 12,206 16
- 400 93,922 17,272 23
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 Company'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.
- --------------------------------------------------------------------------------
18
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the Company's stockholders, held on May 6, 1998, the
stockholders considered the following proposals:
I. The election of three directors of the Company
II. The approval and adoption of the Company's 1998 Recognition and
Retention Plan
III. The approval and adoption of the Company's 1998 Stock Option and
Incentive Plan
IV. The approval and adoption of the appointment of Crowe, Chizek and
Company, LLP as auditors for the fiscal year ending December 31, 1998.
The following directors were re-elected:
For Withheld Total
--- -------- -----
Steve Babyk 4,893,295 79,852 4,973,147
Lila Maria Bodnar 4,885,788 87,359 4,973,147
George Kawka 4,889,695 83,452 4,973,147
The vote on the election of proposals II, III, and IV were as follows:
For Against Abstain Non-Vote
--- ------- ------- --------
Proposal II 3,555,676 337,652 43,062 1,036,757
Proposal III 3,605,449 297,477 33,464 1,036,757
Proposal IV 4,912,721 26,526 33,900 --
- --------------------------------------------------------------------------------
19
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
- --------------------------------------------------------------------------------
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits - Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K - none
- --------------------------------------------------------------------------------
20
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST SECURITYFED FINANCIAL, INC
(Registrant)
By: /s/Julian E. Kulas
---------------------------------------
Julian E. Kulas
Principal Executive Officer
August 14, 1998
By: /s/Harry Kucewicz
---------------------------------------
Harry Kucewicz
Chief Financial and Accounting Officer
August 14, 1998
- --------------------------------------------------------------------------------
21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from Form
10-Q for the quarter ended June 30, 1998 and is qualified in its entirety
by reference to such financial statements
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,327
<INT-BEARING-DEPOSITS> 200
<FED-FUNDS-SOLD> 5,352
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 36,576
<INVESTMENTS-CARRYING> 61,403
<INVESTMENTS-MARKET> 61,816
<LOANS> 206,369
<ALLOWANCE> 1,951
<TOTAL-ASSETS> 331,044
<DEPOSITS> 216,459
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,559
<LONG-TERM> 21,000
64
0
<COMMON> 0
<OTHER-SE> 89,962
<TOTAL-LIABILITIES-AND-EQUITY> 331,044
<INTEREST-LOAN> 8,262
<INTEREST-INVEST> 3,494
<INTEREST-OTHER> 266
<INTEREST-TOTAL> 12,022
<INTEREST-DEPOSIT> 4,698
<INTEREST-EXPENSE> 5,111
<INTEREST-INCOME-NET> 6,911
<LOAN-LOSSES> 123
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,572
<INCOME-PRETAX> 4,518
<INCOME-PRE-EXTRAORDINARY> 4,518
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,822
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
<YIELD-ACTUAL> 4.48
<LOANS-NON> 9
<LOANS-PAST> 1,132
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,889
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,951
<ALLOWANCE-DOMESTIC> 1,951
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 768
</TABLE>
