<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended December 31, 1997
OR
[ ] 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 0-23063
FIRST SECURITYFED FINANCIAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-4177515
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
936 North Western Avenue, Chicago, Illinois 60622
(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code: (773) 772-4500
-------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of December 31, 1997, the Registrant had 6,408,000 shares of Common
Stock issued and outstanding.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the average of the bid and asked price
of such stock as of December 31, 1997 was $88.5 million. (The exclusion from
such amount of the market value of the shares owned by any person shall not be
deemed an admission by the Registrant that such person is an affiliate of the
Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
PART II of Form 10-K - Annual Report to Stockholders for the fiscal year
ended December 31, 1997.
PART III of Form 10-K - Proxy Statement for the Annual Meeting of
Stockholders for the fiscal year ended December 31, 1997.
<PAGE>
PART I
Item 1. Business
General
First SecurityFed Financial, Inc. ("First SecurityFed" or the "Company"),
is a Delaware corporation that was formed in 1997 by First Security Federal
Savings Bank ("First Security" or the "Bank") for the purpose of becoming a
savings and loan holding company. The Company owns all of the outstanding
capital stock of First Security. Unless the context otherwise requires, all
references herein to the Company include the Company and the Bank on a
consolidated basis.
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.
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 three months to five years. The
Bank solicits deposits only in its primary market area and does not accept
brokered deposits.
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 December 31, 1997, the
Bank's loans receivable, net totaled $186.3 million. See "- Originations of
Loans."
2
<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,
--------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ----------------------------
Amount Percent Amount Percent Amount Percent
------------- ------------ ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family.............. $154,819 81.66% $134,971 81.14% $117,379 79.83%
Multi-family..................... 10,999 5.80 9,374 5.63 7,926 5.39
Commercial....................... 9,308 4.91 7,647 4.60 7,865 5.35
Mixed use(1)..................... 7,927 4.18 8,004 4.81 7,262 4.94
Construction or development...... -- -- -- -- -- --
-------- ------ -------- ------- -------- ------
Total real estate loans........ 183,053 96.55 159,996 96.18 140,432 95.51
Consumer loans:
Share loans...................... 1,421 0.75 1,174 0.71 1,570 1.07
Automobile....................... 47 0.01 74 0.04 110 0.07
Home equity...................... 4,602 2.43 3,431 2.06 3,684 2.51
Home improvement................. 7 0.01 12 0.01 29 0.02
Other............................ 387 0.21 395 0.24 445 0.30
-------- ------ -------- ------- -------- ------
Total consumer loans.......... 6,464 3.41 5,086 3.06 5,838 3.97
Loans secured by leases.......... 81 0.04 1,272 0.76 759 0.52
-------- ------ -------- ------- -------- ------
Total loans.................... 189,598 100.00% 166,354 100.00% 147,029 100.00%
====== ====== ======
Less:
Loans in process................. -- -- --
Deferred fees and discounts...... 1,511 1,486 1,578
Allowance for losses............. 1,828 1,520 885
-------- -------- --------
Total loans receivable, net.... $186,259 $163,348 $144,566
======== ======== ========
<CAPTION>
----------------------------------------------------------
1994 1993
------------------------------ --------------------------
Amount Percent Amount Percent
-------------- --------------- -------------- -----------
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family.............. $110,280 79.53% $ 84,401 77.89%
Multi-family..................... 7,731 5.58 7,632 7.04
Commercial....................... 6,911 4.98 4,973 4.59
Mixed use(1)..................... 7,433 5.36 5,847 5.40
Construction or development...... -- -- 185 0.17
-------- ------ -------- ------
Total real estate loans........ 132,355 95.45 103,038 95.09
Consumer loans:
Share loans...................... 1,328 0.96 1,525 1.41
Automobile....................... 141 0.10 150 0.14
Home equity...................... 3,870 2.79 3,105 2.87
Home improvement................. 69 0.05 78 0.07
Other............................ 452 0.33 459 0.42
-------- ------ -------- ------
Total consumer loans.......... 5,860 4.23 5,317 4.91
Loans secured by leases.......... 448 0.32 -- --
-------- ------ -------- ------
Total loans.................... 138,663 100.00% 108,355 100.00%
====== ======
Less:
Loans in process................. -- 6
Deferred fees and discounts...... 1,664 1,795
Allowance for losses............. 792 608
-------- --------
Total loans receivable, net.... $136,207 $105,946
======== ========
- -----------
(1) Mixed use refers to real estate on which the borrower both resides and conducts a business.
</TABLE>
3
<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,
----------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ------------------------------
Amount Percent Amount Percent Amount Percent
------------- ------------- ------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family................ $143,882 75.89% $118,308 71.12% $101,015 68.70%
Multi-family...................... 10,999 5.80 9,169 5.51 7,719 5.25
Commercial........................ 7,649 4.04 6,545 3.94 7,370 5.01
Mixed use......................... 7,446 3.93 7,424 4.46 6,666 4.53
Construction or development....... -- -- -- -- -- --
-------- ------ -------- ------ -------- ------
Total real estate loans........... 169,976 89.66 141,446 85.03 122,770 83.49
Consumer............................ 1,862 0.98 1,655 1.00 2,154 1.46
Loans secured by leases............. 81 0.04 1,272 0.76 759 0.52
-------- ------ -------- ------ -------- ------
Total fixed-rate loans............ 171,919 90.68 144,373 86.79 125,683 85.47
Adjustable-Rate Loans
Real estate:
One-to-four-family................ 10,937 5.77 16,663 10.02 16,364 11.13
Multi-family...................... -- -- 205 0.12 207 0.14
Commercial........................ 1,659 0.87 1,102 0.66 495 0.34
Mixed use......................... 481 0.25 580 0.35 596 0.41
Consumer............................ 4,602 2.43 3,431 2.06 3,684 2.51
-------- ------ -------- ------
Total adjustable-rate loans....... 17,679 9.32 21,981 13.21 21,346 14.53
-------- ------ -------- ------ --------- ------
Total loans....................... 189,598 100.00% 166,354 100.00% 147,029 100.00%
====== ====== ======
Less:
Loans in process.................... -- -- --
Deferred fees and discounts......... 1,511 1,486 1,578
Allowance for losses................ 1,828 1,520 885
-------- -------- --------
Total loans receivable, net....... $186,259 $163,348 $144,566
======== ======== ========
<CAPTION>
--------------------------------------------------------
1994 1993
--------------------------- ---------------------------
Amount Percent Amount Percent
------------ -------------- --------------- -----------
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family............... 93,139 67.17% $ 76,852 70.93%
Multi-family...................... 7,522 5.43 7,421 6.85
Commercial........................ 6,628 4.78 4,973 4.59
Mixed use......................... 6,790 4.90 5,483 5.06
Construction or development....... -- -- 185 0.17
-------- ------ -------- ------
Total real estate loans........... 114,079 82.28 94,914 87.60
Consumer............................ 1,990 1.44 2,212 2.04
Loans secured by leases............. 448 0.32 -- --
-------- ------ -------- ------
Total fixed-rate loans............ 116,517 84.04 97,126 89.64
Adjustable-Rate Loans
Real estate:
One-to-four-family................ 17,141 12.36 7,549 6.96
Multi-family...................... 209 0.15 211 0.19
Commercial........................ 283 0.20 -- --
Mixed use......................... 643 0.46 364 0.34
Consumer............................ 3,870 2.79 3,105 2.87
Total adjustable-rate loans....... 22,146 15.96 11,229 10.36
-------- ------ -------- ------
Total loans....................... 138,663 100.00% 108,355 100.00%
====== ======
Less:
Loans in process.................... -- 6
Deferred fees and discounts......... 1,664 1,795
Allowance for losses................ 792 608
-------- --------
Total loans receivable, net....... $136,207 $105,946
======== ========
</TABLE>
4
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at December 31, 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
December 31,
- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998................... $ 807 8.81% $ 2,324 9.85% $ 534 10.24% $ 3,665 9.68%
1999................... 1,237 7.93 4,392 9.52 274 6.34 5,903 9.04
2000 to 2002........... 19,963 7.82 12,204 9.16 5,531 8.63 37,698 8.37
2003 to 2007........... 16,253 8.10 2,173 9.74 135 6.71 18,561 8.28
2008 to 2022........... 47,701 7.97 4,432 9.03 71 7.15 52,204 8.06
2023 and following..... 68,858 7.86 2,709 8.19 -- -- 71,567 7.87
-------- ------- ------- --------
Total............... $154,819 7.92 $28,234 9.20% $ 6,545 8.61% $189,598 8.13%
======== ======= ======= ========
</TABLE>
The total amount of loans due after December 31, 1997 which have
predetermined interest rates is $168.2 million while the total amount of loans
due after such date which have floating or adjustable rates is $17.7 million.
5
<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 December 31, 1997,
based on the above, the Bank's regulatory loans-to-one borrower limit was
approximately $9.3 million. On the same date, the Bank had no borrowers with
outstanding balances in excess of this amount. As of December 31, 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 one commercial
real estate loan totaling $1.1 million secured by the borrower's residence (in a
suburb of Chicago) and one commercial property (a restaurant) located in
Chicago, Illinois. At December 31, 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 December 31, 1997, the Bank had $23.2 million
of fixed rate loans with original terms of 10 years or less (most of which were
five or seven year balloon loans), $49.7 million of fixed rate loans with
original terms of 10-15 years and $71.0 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 December 31, 1997, the
Bank had $953,000 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 December 31, 1997, one- to four-family ARMs
totaled $10.9 million or 5.8% of the Bank's total loan portfolio. ARM volume
declined significantly during 1997 as a result of refinance activity in a
decreasing interest rate environment.
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 non-owner occupied, one- to four-family loans is generally 80% of the
lesser
6
<PAGE>
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
Federal Home Loan Mortgage Corporation maximum (currently $227,150), 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 December 31,
1997, the Bank had multi-family loans totaling $11.0 million, or 5.8% of the
Bank's total loan portfolio, and $17.2 million in commercial real estate loans,
representing 9.1% 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 with a 25 year or more amortization schedule. These loans are generally
made in amounts of up to 75% 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 $1.8 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 $200,000 are performed by an independent appraiser designated
by the Bank at the time the loan is made. All appraisals on 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 December 31, 1997, the Bank's largest commercial real estate or
multi-family loan outstanding totaled $722,000 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.
7
<PAGE>
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.
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 December 31, 1997 consumer loans totaled $6.5 million or 3.4%
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 December 31, 1997, the Bank's home equity
lines of credit totaled $4.6 million outstanding, or 2.4% 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 walk-ins
and 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
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." However, as a result of consumer demand, most recent originations have
carried fixed rather than adjustable rates. 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 the Annual Report attached as Exhibit 13 hereto.
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 the Annual Report attached as Exhibit 13 hereto. 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.
8
<PAGE>
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>
Year Ended December 31,
--------------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family........ $ 1,082 $ 3,067 $ 1,682
------- ------- -------
Total adjustable-rate.............. 1,082 3,067 1,682
------- ------- -------
Fixed rate:
Real estate - one- to four-family........ 46,207 34,696 20,024
- multi-family .............. 6,066 4,329 1,921
- commercial ................ 1,234 682 1,215
Non-real estate - consumer............... 3,477 2,039 1,824
Loan secured by leases................. -- 500 750
------- ------- -------
Total fixed-rate................... 56,984 42,246 25,734
------- ------- -------
Total loans originated............. 58,066 45,313 27,416
------- ------- -------
Principal repayments........................ (34,822) (25,988) (19,050)
------- ------- -------
Increase (decrease) in other
items, net.............................. (333) (543) (7)
------- ------- -------
Net increase........................ $22,911 $18,782 $ 8,359
======= ======= =======
</TABLE>
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.
9
<PAGE>
The following table sets forth the Bank's loan delinquencies by type, by
amount and by percentage of type at December 31, 1997.
<TABLE>
<CAPTION>
Loans Delinquent For:
---------------------------------------------------------------------------------
60-89 Days 90 Days and Over
--------------------------------------- ----------------------------------------
Percent Percent
of Loan of Loan
Number Amount Category Number Amount Category
----------- ----------- ------------- ----------- ---------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family........ 9 $469 .30% 11 $ 614 .40%
Multi-family............... -- -- -- -- -- --
Commercial................. -- -- -- 4 566 3.28
Consumer..................... 6 10 .15 6 7 .11
--- ---- --- ------
Total........................ 15 $479 .25% 21 $1,187 .63%
=== ==== === ======
<CAPTION>
Total Loans Delinquent
60-Days-or-More
------------------------------------
Percent
of Loan
Number Amount Category
------------------------------------
<S> <C> <C> <C>
Real Estate:
One- to four-family........ 20 $1,083 .70%
Multi-family............... -- -- --
Commercial................. 4 566 3.28
Consumer..................... 12 17 .26
--- ------
Total........................ 36 $1,666 .88%
=== ======
</TABLE>
10
<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 December 31, 1997,
the Bank had classified a total of $1.5 million of its loan and other assets as
follows:
At
December 31,
1997
--------------------
(In Thousands)
Substandard........................................... $1,463
Doubtful assets....................................... 1
Loss assets........................................... --
------
Total........................................... $1,464
======
General loss allowance................................ $1,828
======
Specific loss allowance............................... $ --
======
Charge-offs, net...................................... $ 434
======
First Security's classified assets consist of the non-performing loans
referred to below.
11
<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 3 of the Notes to Consolidated Financial
Statements in the Annual Report attached as Exhibit 13 hereto. Foreclosed assets
include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
---------- ------------ ----------- ----------- ---------
(Dollars in Thousands)
<S> <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....................... 614 1,111 971 500 985
Multi-family.............................. --- 180 367 330 16
Commercial real estate.................... 566 882 749 257 887
Consumer.................................. 194 226 189 43 11
------ ------ ------ ------ ------
Total................................ 1,374 2,399 2,276 1,130 1,899
Foreclosed assets:
One- to four-family....................... -- 40 -- -- --
Commercial real estate.................... -- -- 499 207 96
------ ------ ------ ------ ------
Total................................ -- 40 499 207 96
Non-performing leases(1).................... 81 1,272 -- -- --
------ ------ ------ ------ ------
Total non-performing assets................. $1,464 $3,720 $2,784 $1,632 $1,995
====== ====== ====== ====== ======
Total as a percentage of total assets....... 0.46% 1.44% 1.11% 0.72% 1.05%
==== ===== ===== ==== =====
</TABLE>
- -------------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Comparison of Operating Results for the years
ended December 31, 1997 and December 31, 1996 -- Provision for Loan Losses"
in the Annual Report attached as Exhibit 13 hereto for a discussion of the
Bank's Bennett Funding leases.
For the years ended December 31, 1996 and December 31, 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 $45,000,
respectively. No interest income was recognized on non-accruing loans for the
years ended December 31, 1997 and December 31, 1996, respectively.
Other Loans of Concern. In addition to the non-performing assets set forth
in the table above, as of December 31, 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.
12
<PAGE>
The following table sets forth an analysis of the Bank's allowance for loan
losses.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
---------- ----------- ----------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....... $1,520 $ 885 $ 792 $ 608 $360
Charge-offs:
One- to four-family................ -- -- -- -- --
Multi-family....................... -- -- -- -- --
Commercial real estate............. -- 68 28 -- --
Construction or development........ -- -- -- -- --
Consumer........................... 2 3 15 -- 1
Leases............................. 432 -- -- -- --
------ ------ ------ ------ ------
434 71 43 -- 1
Recoveries:
One- to four-family................ -- -- -- -- --
Multi-family....................... -- -- -- -- --
Commercial real estate............. -- -- -- -- --
Construction or development........ -- -- -- -- --
Consumer........................... 4 -- -- 2 --
Leases............................. -- -- -- -- --
------ ------ ------ ------ ------
4 -- -- 2 --
Net (charge-offs) recoveries......... (430) (71) (43) 2 (1)
Additions charged to operations...... 738 706 136 182 249
------ ------ ------ ------ ------
Balance at end of period............. $1,828 $1,520 $ 885 $ 792 $ 608
====== ====== ====== ====== ======
Ratio of net charge-offs
(recoveries) during the period
to average loans outstanding
during the period .................. 0.25% 0.05% (0.03)% --% --%
==== ==== ==== ==== ====
Ratio of net charge-offs
(recoveries) during the
period to average
non-performing assets .............. 21.12% 2.15% (1.88)% (0.10)% 0.04%
==== ==== ==== ==== ====
</TABLE>
13
<PAGE>
The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------- ------------------------------------ ------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Amount Loan in Each Amount Loan in Each Amount Loan in Each
of Loan Amounts Category of Loan Amounts Category of Loan Amounts Category
Loss by of Total Loss by of Total Loss by of Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
----------- ------------ ---------- ------------ ----------- ----------- ----------- ----------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family $ 572 $154,819 81.66% $ 355 $134,971 81.14% $310 $117,379 79.83%
Multi-family....... 67 10,999 5.80 56 9,374 5.63 56 7,926 5.39
Commercial real
estate.......... 448 17,235 9.09 245 15,651 9.41 199 15,127 10.29
Construction or
development..... -- -- -- -- -- -- -- -- --
Consumer........... 80 6,464 3.41 68 5,086 3.06 70 5,838 3.97
Loans secured by
leases.......... 40 81 0.04 318 1,272 0.76 76 759 0.52
Unallocated........ 621 -- -- 478 -- -- 174 -- --
------ -------- ------ ------ -------- ------ ---- -------- ------
Total....... $1,828 $189,598 100.00% $1,520 $166,354 100.00% $885 $147,029 100.00%
====== ======== ====== ====== ======== ====== ==== ======== ======
<CAPTION>
- -------------------------------------------------------------------------
1994 1993
- ------------------------------------- ----------------------------------
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
------------ ------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
One- to four-family $284 $110,280 79.53% $225 $ 84,401 77.89%
Multi-family...... 52 7,731 5.58 45 7,632 7.04
Commercial real
estate.......... 233 14,344 10.34 206 10,820 9.99
Construction or
development..... -- -- -- 15 185 0.17
Consumer........... 71 5,860 4.23 66 5,317 4.91
Loans secured by
leases.......... 55 448 0.32 -- -- --
Unallocated........ 97 -- -- 51 -- --
---- -------- ------ ---- -------- ------
Total....... $792 $138,663 100.00% $608 $108,355 100.00%
==== ======== ====== ==== ======== ======
</TABLE>
14
<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 the Company is to invest funds
among categories of investments based upon the its asset/liability management
policies, investment quality, loan and deposit volume, liquidity needs and
performance objectives. In accordance with the Company's asset/liability
management policy, the Company has recently focused a significant part of its
investment activities on instruments with terms to repricing or maturity of five
years or less.
The Bank 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, the Bank has
maintained liquid assets at levels above the minimum requirements imposed by the
OTS regulations and above levels believed adequate to meet the requirements of
normal operations, including potential deposit outflows. At December 31, 1997,
the Bank's liquidity ratio for regulatory purposes was 18.6%. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Asset/Liability Management" and "- Liquidity and Capital Resources" in the
Annual Report attached as Exhibit 13 hereto.
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, the Bank 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 the Company 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 December 31, 1997, the Company had no securities which
were classified as trading and $32.5 million of mortgage-backed and investment
securities classified as available-for-sale. Available-for-sale securities are
reported at fair value with unrealized gains and losses included, on an
after-tax basis, 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 Company invests
in mortgage-backed and related securities. As of December 31, 1997, all of the
mortgage-backed and related securities owned by the Company 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 December 31,
1997, $16.7 million, or 47.4% of the Company's mortgage-backed and related
securities were available-for-sale. In addition, on the same date, $13.6 million
or 38.6% of the Company's mortgage-backed and related securities carried
adjustable rates. Finally, as discussed further below, at December 31, 1997, the
Company had $1.4 million of collateralized mortgage obligations ("CMOs") with
anticipated average lives of five years or less. For additional information
regarding the Company's mortgage-backed securities portfolio, see Note 2 of the
Notes to Consolidated Financial Statements in the Annual Report attached as
Exhibit 13 hereto.
15
<PAGE>
The Company'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 Company'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 Company 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 Company 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 Company 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 trading account or as assets
available-for-sale. At December 31, 1997, the most recent quarterly test date,
none of the Company's mortgage-backed securities were classified as "high-risk."
16
<PAGE>
The following table sets forth the composition of the Company's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1997 1996
------------------------------ ------------------------------
Carrying % of Carrying % of
Value Total Value Total
-------------- -------------- --------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities held-to-maturity:
GNMA.............................................. $ 7,781 22.05% $ 9,226 21.05%
FNMA.............................................. 2,531 7.17 3,294 7.51
FHLMC............................................. 4,558 12.92 6,280 14.33
CMOs/REMICs....................................... 3,681 10.44 5,309 12.11
------- ------ ------- ------
18,551 52.58 24,109 55.00
Mortgage-backed securities available-for-sale:
GNMA.............................................. 2,982 8.45 3,425 7.81
FNMA.............................................. 5,605 15.89 6,572 14.99
FHLMC............................................. 7,601 21.54 8,985 20.50
CMOs/REMICs....................................... 545 1.54 745 1.70
------- ------ ------- ------
16,733 47.42 19,727 45.00
------- ------ ------- ------
Total mortgage-backed securities............... $35,284 100.00% $43,836 100.00%
======= ====== ======= ======
<CAPTION>
December 31,
---------------------------------
1995
---------------------------------
Carrying % of
Value Total
--------------- ----------------
<S> <C> <C>
Mortgage-backed securities held-to-maturity:
GNMA.............................................. $ 5,142 11.39%
FNMA.............................................. 4,526 10.02
FHLMC............................................. 9,806 21.71
CMOs/REMICs....................................... 5,646 12.50
-------- ------
25,120 55.62
Mortgage-backed securities available-for-sale:
GNMA.............................................. 2,924 6.47
FNMA.............................................. 6,383 14.14
FHLMC............................................. 9,992 22.12
CMOs/REMICs....................................... 745 1.65
-------- ------
20,044 44.38
-------- ------
Total mortgage-backed securities............... $45,164 100.00%
======= ======
</TABLE>
17
<PAGE>
The following table sets forth the contractual maturities of the Company's
mortgage-backed securities at December 31, 1997.
<TABLE>
<CAPTION>
Due in
----------------------------------------------------------------------
6 Months 6 Months 1 to 3 to 5 5 to 10
or Less to 1 Year 3 Years Years Years
------------ -------------- ------------- ------------ --------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation............ $196 $ -- $ -- $374 $1,547
Federal National Mortgage Association............. 71 -- 237 -- 1,188
Government National Mortgage Association.......... -- -- -- -- 456
CMOs and REMICs .................................. -- -- 654 -- 1,127
---- ------ ---- ---- -----
Total........................................ $267 $ -- $891 $374 $4,318
==== ====== ==== ==== ======
<CAPTION>
December 31, 1997
------------------------
10 to 20 Over 20 Amortized Carrying
Years Years Cost Value
------------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation............ $2,520 $ 7,679 $12,316 $12,159
Federal National Mortgage Association............. 2,378 4,358 8,232 8,136
Government National Mortgage Association.......... 1,941 8,313 10,710 10,763
CMOs and REMICs .................................. 651 1,794 4,226 4,226
------ ------- ------- ------
Total........................................ $7,490 $22,144 $35,484 $35,284
====== ======= ======= =======
</TABLE>
18
<PAGE>
As of December 31, 1997, the Company did not have any mortgage-backed
securities in excess of 10% of retained earnings except for FNMA, FHLMC and GNMA
issues, amounting to $8.1 million, $12.1 million and $10.8 million,
respectively.
The market values of a portion of the Company'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 Consolidated Financial
Statements in the Annual Report attached as Exhibit 13 hereto.
The following table shows mortgage-backed securities purchase, sale and
repayment activities of the Company for the periods indicated.
Year Ended December 31,
-------------------------------------------
1997 1996 1995
----------- ------------- -----------
(In Thousands)
Purchases:
Adjustable-rate............... $ -- $2,396 $ 8,197
Fixed-rate.................... -- 4,583 1,498
CMOs.......................... -- 510 --
------- ------- -------
Total purchases.......... 7,489 9,695
Principal repayments.............. (8,475) (8,639) (6,999)
Discount/premium net change....... (184) 16 (39)
Fair value net change............. 107 (194) (114)
------- ------- -------
Net increase (decrease).. $(8,552) $(1,328) $ 2,543
======= =-===== --=====
The Company's holdings of mortgage-backed securities are a significant
portion of the Company'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 Company'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 Company's assets consisting of mortgage-backed and related securities
increases, the Company's asset yields could be somewhat adversely affected. The
Company 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. In order to complement its lending and mortgage-backed
securities activities, and to increase its holdings of short and intermediate
term assets, the Company invests in liquid investments and in high-quality
investments, such as U.S. Treasury and agency obligations. At December 31, 1997
and December 31, 1996, the Company's securities portfolio totaled $54.2 million
and $34.8 million, respectively. At December 31, 1997, the Company did not own
any other securities of a single issuer which exceeded 10% of the Company's
retained earnings, other than federal agency obligations. See Note 2 of the
Notes to Consolidated Financial Statements in the Annual Report attached as
Exhibit 13 hereto for additional information regarding the Company's other
securities portfolio.
19
<PAGE>
The following table sets forth the composition of the Company's other
securities and other earning assets at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- -------------------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
------------- ------------- -------------- ------------ --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities held-to-maturity:
Federal agency obligations.............. $33,562 61.92% $20,320 58.43% $15,445 45.02%
Municipal bonds......................... 4,909 9.06 5,208 14.98 4,768 13.90
Corporate notes......................... -- -- 251 0.72 353 1.02
------- ------ ------- ------ ------- ------
38,471 70.98 25,779 74.13 20,566 59.94
Securities available-for sale:
US government securities................ 8,014 14.79 3,350 9.63 7,936 23.13
Mutual funds............................ 3,155 5.82 5,645 16.23 5,737 16.72
Municipal bonds......................... 3,966 7.32 -- -- -- --
Corporate notes......................... 250 0.46 -- -- -- --
Other equity............................ 343 0.63 2 0.01 70 0.21
------- ------ ------- ------ ------- ------
15,728 29.02 8,997 25.87 13,743 40.06
------- ------ ------- ------ ------- ------
Total securities................... $54,199 100.00% $34,776 100.00% $34,309 100.00%
======= ====== ======= ====== ======= ======
Other earning assets:
Interest-earning deposits with banks.... $ 5,750 22.28% $ 2,713 44.58% $ 9,490 71.12%
FHLB stock.............................. 1,852 7.18 1,673 27.49 1,553 11.64
Federal funds sold...................... 18,000 69.76 1,500 24.65 2,100 15.74
Time deposit in other financial
institutions........................... 200 0.78 200 3.28 200 1.50
------- ------ ------- ------ ------- ------
Total............................. $25,802 100.00% $ 6,086 100.00% $13,343 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
20
<PAGE>
The composition and maturities of the other securities portfolio, excluding
FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
December 31, 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............ $1,995 $ -- $ -- $ 259 $ 2,254 $ 2,362
Federal agency obligations.......... -- 9,450 27,753 2,007 39,210 39,309
Municipal bonds..................... 100 1,348 2,152 5,213 8,813 9,071
Corporate notes..................... -- -- 250 -- 250 250
------ ------- ------- ------ ------- -------
Total securities.................... $2,095 $10,798 $30,155 $7,479 $50,527(1) $50,992
====== ======= ======= ====== ======= =======
Weighted average yield.............. 5.86% 6.24% 6.66% 6.04% 6.45%
==== ==== ==== ==== ====
</TABLE>
- ----------------
(1) Includes $37.8 million of callable securities.
See Note 2 of Notes to the Consolidated Financial Statements in the Annual
Report attached as Exhibit 13 hereto for a discussion of the Company'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 $88.9 million or 42.3% of total
deposits at December 31, 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.
21
<PAGE>
The table below sets forth the Bank's deposit flows for the periods
indicated.
Year Ended December 31,
-------------------------------------------------
1997 1996 1995
--------------- ----------------- ---------------
(Dollars In Thousands)
Opening balance............... $ 219,505 $ 209,387 $ 195,875
Deposits...................... 457,063 347,280 348,404
Withdrawals................... (475,811) (346,192) (343,039)
Interest credited............. 9,343 9,030 8,147
--------- --------- ----------
Ending balance................ $ 210,100 $ 219,505 $ 209,387
========= ========= ==========
Net increase (decrease)....... $ (9,405) $ 10,118 $ 13,512
========= ========= ==========
Percent increase (decrease)... (4.28)% 4.83% 6.90%
===== ==== ====
22
<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>
December 31,
-------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- --------------------------- ----------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------------------------- --------------------------- ----------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits
Passbook Accounts 3.00%....................... $ 68,572 32.6% $ 71,167 32.4% $ 69,631 33.3%
NOW Accounts 2.23%............................ 15,705 7.5 14,509 6.6 13,262 6.3
Money Market Accounts 3.06%................... 4,574 2.2 5,107 2.3 5,612 2.7
------- ----- -------- ----- -------- -----
Total Non-Certificates........................ 88,851 42.3 90,783 41.3 88,505 42.3
Certificates:
0.00 - 3.99%.................................. -- -- 119 0.1 310 0.1
4.00 - 5.99%.................................. 108,902 51.8 116,397 53.0 87,775 41.9
6.00 - 7.99%................................ 12,347 5.9 12,094 5.5 32,629 15.6
8.00 - 9.00%................................ -- -- 112 0.1 168 0.1
-------- ----- -------- ----- -------- ------
Total Certificates.......................... 121,249 57.7 128,722 58.7 120,882 57.7
-------- ----- -------- ----- -------- -----
Total Deposits.............................. $210,100 100.0% $219,505 100.0% $209,387 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
23
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 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%.......... $ 7,173 $ -- $ 5 $ -- $ -- $ -- $ 7,178
5.00 - 5.99%.......... 88,685 9,759 865 1,336 1,079 -- 101,724
6.00 - 6.99%.......... 229 652 6,729 1,705 2,391 -- 11,706
7.00 - 7.99%.......... 19 49 522 2 --- 49 641
------- ------- ------ ------ ------ ------ --------
$96,106 $10,460 $8,121 $3,043 $3,470 $ 49 $121,249
======= ======= ====== ====== ====== ====== ========
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of December 31,
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................................... $31,064 $24,646 $21,728 $16,798 $ 94,236
Certificates of deposit $100,000
or more.................................... 7,193 7,157 4,318 8,345 27,013
------- ------- ------- ------- --------
Total certificates of deposit.......... $38,257 $31,803 $26,046 $25,143 $121,249
======= ======= ======= ======= ========
</TABLE>
For additional information regarding the composition of the Bank's
deposits, see Note 7 of the Notes to the Consolidated Financial Statements in
the Annual Report attached as Exhibit 13 hereto.
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
Consolidated Financial Statements in the Annual Report attached as Exhibit 13
hereto.
24
<PAGE>
The following table sets forth the maximum month-end balance and average
balance of FHLB advances for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1997 1996 1996 1995 1994
-------------- --------------- -------------- --------------- ----------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Maximum Balance:
FHLB Advances........................... $12,000 $3,000 $4,000 $10,000 $3,000
Average Balance:
FHLB Advances........................... $ 9,548 $3,000 $3,333 $3,769 $2,846
Weighted average interest rate of
FHLB advances........................... 5.72% 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 December 31, 1997, First Security had one wholly owned service
corporation, Western Security Service 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 $38,000 as of December 31, 1997. Western recognized net income (loss) of
($15,000) during the year ended December 31, 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.
25
<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 Federal Home Loan Bank ("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 Company also is subject to federal regulation and oversight.
The purpose of the regulation of the 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 Federal Deposit Insurance Corporation ("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 Office of Thrift Supervision ("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 September 30, 1997 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
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.
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 December 31, 1997, First Security's lending
limit under this restriction was $9.3 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.
26
<PAGE>
Insurance of Accounts and Regulation by the FDIC
First Security is a member of the Savings Association Insurance Fund
("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.
For the first six months of 1995, the assessment schedule for Bank
Insurance Fund ("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
27
<PAGE>
on BIF-assessable deposits for this purpose, effective January 1, 1997, that
assessment is 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.
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 December 31, 1997, First Security had
$343,000 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 in the Annual Report attached as Exhibit 13 hereto.
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.
At December 31, 1997, First Security had tangible capital of $61.4 million,
or 19.8% of adjusted total assets, which is approximately $56.8 million above
the minimum requirement of 1.5% of adjusted total assets in effect on that date.
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 December 31, 1997, First Security had core capital equal to $61.4
million, or 19.8% of adjusted total assets, which is $52.1 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
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
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 December 31, 1997, First Security
had $1.8 million of general loss reserves of which $1.8 million qualifies as
supplementary capital, which was less than 1.25% of risk-weighted assets.
28
<PAGE>
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 December 31, 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.
OTS regulations also require 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.
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.
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
29
<PAGE>
transactions charged to the capital account. OTS regulations also prohibit a
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.
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"
in the Annual Report attached as Exhibit 13 hereto. 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 4%.
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 December 31, 1997, First Security was in compliance with both
requirements, with an overall liquid asset ratio of 18.57% and a short-term
liquid assets ratio of 9.27%
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
30
<PAGE>
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
December 31, 1997, First Security met the test with 83.6% 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."
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 Company and
31
<PAGE>
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 Company will be a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the 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 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.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the 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 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 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 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 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 Company is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to
the information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
First SecurityFed Financial, Inc. stock held by persons who are affiliates
(generally officers, directors and principal stockholders) of the Company may
not be resold without registration or unless sold in accordance with certain
resale restrictions. If the Company meets specified current public information
requirements, each affiliate of the 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 December
31, 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."
32
<PAGE>
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require 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 December 31, 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 6.54% and were 6.8% for
calendar year 1997. As a result of its holdings, the Bank could borrow up to
$37.0 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, 1997, dividends paid by the FHLB of Chicago
to First Security totaled $123,000, which constitute a $12,000 increase from the
amount of dividends received in calendar year 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 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
33
<PAGE>
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, 1997, 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 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 Company is also subject to
an annual franchise tax imposed by the State of Delaware.
Impact of New Accounting Standards
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. 127. The adoption of SFAS No. 125 did
not have a material impact on the financial condition or operations of the
Company.
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 the Company.
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.
34
<PAGE>
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.
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 timely, the Year 2000
problem may have a material impact on the operations of the Company.
Employees
At December 31, 1997, the Corporation, including its subsidiaries, had a
total of 86 employees, including 20 part-time employees. The Bank's employees
are not represented by any collective bargaining group. Management considers its
employee relations to be good.
Item 2. Properties
The following table sets forth information concerning the main office and
each branch office of the Bank at December 31, 1997. At December 31, 1997, the
Bank's premises had an aggregate net book value of approximately $ 3.7 million.
<TABLE>
<CAPTION>
Year
Acquired/ Owned or Net Book Value at
Location Established Leased December 31, 1997 Deposits
- -------------------------------------- ------------------ ------------ --------------------- ------------
(In Thousands)
<S> <C> <C> <C> <C>
Main Office:
936 North Western Avenue 1964 Owned $1,265 $135,785
Chicago, Illinois 60622-4695
Branch Offices:
2166 Plum Grove Road 1977 Leased(1) 2 10,082
Rolling Meadows, Illinois 60008
820 N. Western Avenue 1983 Owned 248 2,293
Chicago, Illinois 60622
5670 N. Milwaukee Avenue 1993 Owned 1,169 11,224
Chicago, Illinois 60646
7918 Bustleton Avenue 1994 Owned 628 50,716
Philadelphia, Pennsylvania 19152
- ---------------
(1) The lease expires in July 2000.
</TABLE>
35
<PAGE>
The Bank believes that its current facilities are adequate to meet the
present and foreseeable future needs of the Bank and the 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 December 31, 1997 was
approximately $110,000.
Item 3. 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 Company's and the Bank's
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1997.
36
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Page 45 of the attached 1997 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Selected Financial Data
Pages 2 and 3 of the attached 1997 Annual Report to Stockholders is herein
incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Pages 5 through 17 of the attached 1997 Annual Report to Stockholders is
herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 18 through 44 of the attached 1997 Annual Report to Stockholders is
herein incorporated by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months prior
to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Information concerning Directors of the Corporation is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in May 1998, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Executive Officers of the Corporation who are not Directors
The following table sets forth certain information regarding the executive
officers of the Corporation and the Bank who are not also directors.
Name Positions Held with Bank and Corporation
- ---- ----------------------------------------
Adrian Hawryliw Vice President - Philadelphia Branch Manager
Mary H. Korb Vice President - Lending
Harry I. Kucewicz Treasurer and Chief Financial Officer
Irene S. Subota Vice President - Savings
- --------------------
(1) At December 31, 1997.
Information regarding the business experience of the executive officers of
the Corporation and the Bank who are not also directors contained in Part I of
this Form 10-K is incorporated herein by reference.
The business experience of each executive officer who is not also a
director is set forth below.
Harry Kucewicz. Mr. Kucewicz, age 41, 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 50, 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.
37
<PAGE>
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in May 1998, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in May 1998, a copy
of which will be filed not later than 120 days after the close of the fiscal
year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in May 1998, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements:
The following financial statements are included in this Form 10-K:
1. Five-Year Summary of Selected Consolidated Financial Data.
2. Independent Auditors' Report.
3. Consolidated Statements of Financial Condition at December 31,
1997 and 1996.
4. Consolidated Statements of Income for the fiscal years ended
December 31, 1997, 1996 and 1995.
5. Consolidated Statements of Shareholders' Equity for the fiscal
years ended December 31, 1997, 1996 and 1995.
6. Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 1997, 1996 and 1995.
7. Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(a)(3) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
There were no current reports on Form 8-K filed by the Corporation during
the quarter ended December 31, 1997.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
/s/ Julian E. Kulas /s/ Steve Babyk
- ---------------------------------- ----------------------------------
Julian E. Kulas Steve Babyk
President, Chief Executive Officer Director
and Director
(Principal Executive Officer)
Date: March 31, 1998 Date: March 31, 1998
---------------------------- ----------------------------
/s/ Lila Maria Bodnar /s/ Myron Dobrowoolsky
- ---------------------------------- ----------------------------------
Lila Maria Bodnar Myron Dobrowolsky
Recording Secretary and Director Director
Date: March 31, 1998 Date: March 31, 1998
---------------------------- ----------------------------
/s/ Terry Gawryk /s/ George Kawka
- ---------------------------------- ----------------------------------
Terry Gawryk George Kawka
Secretary and Director Director
Date: March 31, 1998 Date: March 31, 1998
---------------------------- ----------------------------
/s/ Paul Nadzikewycz /s/ Jaroslav H. Sydorenko
- ---------------------------------- ----------------------------------
Paul Nadzikewycz Jaroslav H. Sydorenko
Chairman of the Board Director
Date: March 31, 1998 Date: March 31, 1998
---------------------------- ----------------------------
/s/ Chrysta Wereszczak /s/ Harry Kucewicz
- ---------------------------------- ----------------------------------
Chrysta Wereszczak Harry Kucewicz
Director Principal Financial and Accounting
Officer
Date: March 31, 1998 Date: March 31, 1998
---------------------------- ----------------------------------
39
<PAGE>
EXHIBIT INDEX
Reference to
Prior Filing
or Exhibit
Number
Attached
Number Document Hereto
- ------ --------------------------------------------------- ------------
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession
3(a) Certificate of Incorporation
3(b) By-Laws
4 Instruments defining the right of security
holders, including debentures
9 Voting Trust Agreement None
10 Material contracts: None
11 Statement re: computation of per share earnings None
12 Statement re: computation of ratios Not required
13 Annual Report to Security Holders
16 Letter re: change in certifying accountants None
18 Letter re: change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to None
vote of security holders
23 Consent of Independent Auditor Not Required
24 Power of Attorney Not Required
27 Financial Data Schedule 27
99 Additional Exhibits None
- ---------------
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
President's Message.................................................. 1
Selected Consolidated Financial Information.......................... 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 4
Consolidated Financial Statements....................................17
Stockholder Information..............................................44
Corporate Information................................................45
<PAGE>
- --------------------------------------------------------------------------------
FROM YOUR PRESIDENT
- --------------------------------------------------------------------------------
To Our Stockholders, Depositors and Friends,
On behalf of the Directors, Officers and Employees of First
SecurityFed Financial, Inc., I am pleased to bring you this annual report, our
first as a public company. On October 30, 1997, we completed the conversion of
1st Security Federal Savings Bank and sold 6,408,000 shares of stock of our
holding company at $10.00 per share. Our aim has been to successfully
undertake the process by which this institution can "survive and flourish" in
a rapidly evolving financial services industry. The conversion helps position
us to move into the next millennium as a strong and vibrant institution
serving the needs of our community.
Our most valued assets are our loyal customers in the communities
that we serve. In appreciation of that loyalty, we have established, in 1996,
The Heritage Foundation of First Security Federal Savings Bank. The Foundation
was established as a means of supporting the needs of the local communities
while simultaneously increasing the visibility and reputation of the Bank. The
Foundation was initially funded through several cash contributions in 1996
aggregating $2.5 million and in addition the holding company has committed to
contribute 250,000 shares valued at $2.5 million during the last quarter of
1997. We believe that the contributions will be fully tax-deductible for both
federal and state income tax purposes. I am convinced that the contribution to
the Foundation is one of the best investments that this institution has ever
made.
We all recognize that the conversion brings us a new constituency,
our stockholders, to add to our existing constituencies represented by our
employees, our customers and our surrounding communities. Your management team
will work to harmonize the interests of all these constituencies through the
continuation of our operating strategy, which is to remain a carefully run,
limited risk, independent community-based profitable institution. The
additional capital received from the conversion gives us the opportunity to
explore gradual diversification, both through prudent expansion of our
customer base and the offering of new products and broader loan programs. We
are also exploring a number of possibilities for expansion of our franchise
and the related leveraging of the new capital. It should be noted that we have
already significantly increased the volume of loan production during the last
quarter of 1997.
The Directors, management and employees of First SecurityFed
Financial, Inc. are looking forward to our first full year as a stock company
and the opportunity to serve our community as a locally owned financial
institution. We are committed to meeting the challenges of the financial
service industry while maintaining our tradition of first class service to our
customers. Thank you for your trust and support as we move forward to a new
and exciting era in the history of our Bank.
Sincerely,
Julian E. Kulas
President and Chief Executive Officer
1
<PAGE>
SELECTED FINANCIAL INFORMATION
Set forth below are selected financial and other data of First
SecurityFed Financial, Inc. and, prior to October 30, 1997, for First Security
Federal Savings Bank. The financial data is derived in part from and should be
read in conjunction with the Consolidated Financial Statements and Notes of
the Company presented elsewhere in this Annual Report.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets....................................... $315,849 $258,115 $251,922 $227,922 $189,846
Cash and cash equivalents.......................... 30,090 7,300 19,173 6,800 11,365
Loans receivable, net(1)........................... 186,259 163,348 144,566 136,207 105,946
Mortgage-backed securities(2):
Held-to-maturity................................. 18,551 24,109 25,120 42,621 45,445
Available-for-sale............................... 16,733 19,727 20,044 --- ---
Investment securities:(2)
Held-to-maturity................................. 38,471 25,779 20,566 17,926 20,804
Available-for-sale............................... 15,728 8,997 13,743 15,662 ---
Deposits........................................... 210,100 219,505 209,387 195,875 161,715
Total borrowings................................... 10,000 4,000 10,000 3,000 1,000
Retained earnings - substantially restricted....... 91,872 29,261 29,038 25,555 22,395
</TABLE>
____________________
(1) The allowance for loan losses at December 31, 1997, 1996, 1995, 1994, and
1993, was $1,828,000, $1,520,000, $885,000, $792,000, and $608,000,
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,
investment securities and mortgage-backed securities held for sale were
carried at the lower of amortized cost or market value, as adjusted for
amortization of premiums and accretion of discounts over the remaining
terms of the securities from the dates of purchase.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income.............................. $20,674 $19,006 $17,650 $15,710 $13,995
Total interest expense............................. 10,129 9,494 8,727 6,584 6,068
------- ------- ------- ------- -------
Net interest income.............................. 10,545 9,512 8,923 9,126 7,927
Provision for loan losses.......................... 738 706 136 182 249
------- ------- ------- ------- -------
Net interest income after provision for loan
losses........................................... 9,807 8,806 8,787 8,944 7,678
Fees and service charges........................... 371 362 378 326 281
Gain (loss) on sales of mortgage-backed
securities and investment securities............. (32) 55 24 5 32
Other non-interest income.......................... 253 328 454 246 286
------- ------- ------- ------- -------
Total non-interest income.......................... 592 745 856 577 599
Total non-interest expense......................... 7,557(1) 8,693(2) 4,690 4,271 3,457
------- ------- ------- ------- -------
Income (loss) before taxes and cumulative effect... 2,842 858 4,953 5,250 4,820
Income tax provision .............................. 1,017 406 1,760 1,825 1,644
------- ------- ------- ------- -------
Net income......................................... $ 1,825 $ 452 $ 3,193 $ 3,425 $ 3,176
======= ======= ======= ======= =======
</TABLE>
_____________________
(1) Includes $2.5 million accrual for stock contribution to the Foundation.
(2) Includes $1.3 million SAIF special assessment and $2.5 million cash
contribution to the Foundation.
2
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------ --------
Selected Financial Ratios and Other Data:
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net income to
average total assets)........................ .64% .18% 1.34% 1.62% 1.74
Return on equity (ratio of net income to
average equity).............................. 4.66 1.50 11.64 14.23 15.21
Interest rate spread information:
Average during period......................... 3.34 3.51 3.61 4.28 4.22
Net interest margin(1)........................ 3.97 3.98 4.00 4.60 4.56
Ratio of operating expense to average total
assets....................................... 2.66 3.45 1.97 2.03 1.89
Efficiency Ratio(2)............................ .68 .85 .48 .44 .41
Ratio of average interest-earning assets to
average interest-bearing liabilities........ 116.50 111.81 109.93 109.51 109.55
Quality Ratios:
Non-performing assets to total assets at end
of period.................................... .46 1.44 1.11 .72 1.05
Allowance for loan losses to non-performing
loans at end of period........................ 124.86 41.30 38.73 55.58 32.02
Allowance for loan losses to gross loans
receivable at end of period................... .96 .91 .60 .57 .56
Capital Ratios:(3)
Equity to total assets at end of period......... 29.10 11.42 11.52 11.33 11.80
Average equity to average assets................ 13.81 11.97 11.55 11.42 11.42
</TABLE>
__________________
(1) Net interest income divided by average interest-earning assets.
(2) The efficiency ratio represents non-interest expense divided by the sum of
net interest income and non-interest income.
(3) Ratio is exclusive of unrealized gain (loss) on securities available-for-
sale.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
First SecurityFed Financial, Inc. (the "Company") became the holding
company for First Security Federal Savings Bank (the "Bank") upon the
completion of the conversion of the Bank from a federally chartered mutual
savings bank to a federally chartered stock savings bank (the "Conversion") on
October 30, 1997. Concurrent with the Conversion, the Company sold 6,408,000
shares of its common stock in a subscription offering at a price of $10 per
share, resulting in net proceeds (after giving effect to an adjustment to
capital resulting from the establishment of a leveraged employee stock
ownership plan) of $57.8 million. The financial condition and operation
results of the Company are primarily dependent upon the financial condition
and operating results of the Bank. The Company's primary business activity to
date has been limited to its ownership of the Bank.
The Bank is a financial intermediary engaged primarily in attracting
deposits from the general public and using such deposits to acquire
mortgage-backed and other securities and to originate one-to-four family
residential mortgage and, to a significantly lesser extent, multi-family,
consumer and other loans primarily in its market area. The Bank's revenues are
derived principally from interest earned on mortgage-backed and other
securities and loans. 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 securities and loans
receivable, net 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 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.
4
<PAGE>
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 it 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.
Comparison of Financial Condition at December 31, 1997 and December 31, 1996
Total assets at December 31, 1997 were $315.8 million compared to
$258.1 million at December 31, 1996, an increase of $57.7 million or 22.36%.
The increase in total assets was due primarily to increases in loans
receivable and securities (including overnight Fed Funds) funded by an
increase in Federal Home Loan Bank (FHLB) advances and proceeds from the
institutions mutual-to-stock conversion.
Total liabilities at December 31, 1997 were $224.0 million compared
to $228.9 million at December 31, 1996, a decrease of $4.9 million, or 2.14%.
The decrease in liabilities was due to a decrease in deposits of $9.4 million
and a decrease in other liabilities of $1.7 million partially offset by
increases in Federal Home Loan Bank ("FHLB") advances of $6.0 million and
advance payments by borrowers for taxes and insurance of $300,000. The primary
reason for the decrease in deposits was the use of depositor funds to purchase
stock in the initial public offering of the Company.
Total equity at December 31, 1997 was $91.9 million compared to $29.3
million at December 31, 1996. This increase of $62.6 million was primarily due
to net proceeds of $57.8 million from the sale of common stock in the Bank's
conversion from a mutual to a stock institution. Also contributing to the
increase in equity was $1.8 million in net income for the period and a
decrease of $162,000 in unrealized losses on securities available-for-sale.
Comparison of Operating Results for the Years Ended December 31, 1997
and December 31, 1996
General. Net income for the year ended December 31, 1997 was $1.8
million compared to net income of $452,000 for the year ended December 31,
1996, an increase of $1.4 million. The increase was primarily due to an
increase in net interest income of $1.0 million and a decrease in non-interest
expense of $1.0 million. This was partially offset by a $600,000 increase in
the provision for income taxes. The decrease in non-interest expense was
primarily a result of the special SAIF assessment paid in 1996.
Interest Income. Interest income for the year ended December 31, 1997
was $20.7 million compared to $19.0 million for the year ended December
31,1996, an increase of $1.7 million or 8.95%. The increase was primarily due
to an increase in the average balance of interest-earning assets from $238.8
million for the year ended December 31, 1996 to $265.9 million for the year
ended December 31, 1997 as a result of the investment of proceeds from the
initial stock offering
5
<PAGE>
in October 1997. The average balance of loans increased $20.7 million to
$172.8 million for the year ended December 31, 1997 from $152.1 million for
the prior year. In addition, the average balance of federal funds sold
increased to $11.1 million for the year ended December 31, 1997 from $1.8
million for the year ended December 31, 1996. These increases in average
balances were partially offset by a decrease in the average yield on
interest-earning assets of 18 basis points from 7.96% for the year ended
December 31, 1996 to 7.78% for the year ended December 31, 1997 primarily as a
result of a decrease in loan interest rates due to competitive market
conditions and an overall decline in interest rates in the local economy.
Interest Expense. Interest expense for the year ended December 31,
1997 was $10.1 million compared to $9.5 million for the year ended December
31, 1996, an increase of $635,000, or 6.7%. The increase was primarily due to
an increase in the average balance of interest-bearing liabilities of $14.6
million from $213.6 million for the year ended December 31, 1996 to $228.2
million for the year ended December 31, 1997. The average cost of funds
remained steady at 4.44% for both years.
Net Interest Income. Net interest income of $10.5 million for the
year ended December 31, 1997 represented an increase of $1.0 million from the
$9.5 million reported for the year ended December 31, 1996. The increase in
net interest income was primarily due to an increase in the ratio of
interest-earning assets to interest-bearing liabilities from 111.8% for the
year ended December 31, 1996 to 116.5% for the year ended December 31, 1997
primarily as a result of the investment of the proceeds from the initial stock
offering in October 1997. The net interest margin remained relatively steady
at 3.97% for the year ended December 31, 1997.
Provision for Loan Losses. The provision for loan losses for the year
ended December 31, 1997 was $738,000 compared to $706,000 for the year ended
December 31, 1996. A majority of the provision for loan losses in both years
was related to various loans to the Bennett Funding Group, Inc. which were
secured by equipment leases. Bennett Funding filed bankruptcy during 1996. In
February 1997, the Bank received a settlement offer from the bankruptcy
trustee. As a result of the proposed settlement, a portion of the outstanding
loans were charged off and a balance of $839,000 remained on the books of the
Bank. Subsequent to April 30,1997, the Bank received $713,481 from the trustee
as part of the settlement. Several more payments were received in 1997 and at
December 31, 1997, the outstanding balance on the Bennett Funding loans was
$81,000. Furthermore, the Bank experienced significant loan growth during 1997
and 1996, which resulted in increases in the allowance for loan losses. Gross
loans increased $23.2 million or 13.97% from 1996. The allowance for loan
losses represented .96% and .91% of gross loans receivable at December 31,
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, 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,
6
<PAGE>
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 year ended December
31, 1997 was $592,000 compared to $745,000 for the year ended December 31,
1996, a decrease of $153,000, or 20.5%. The decrease was the result of a net
loss on sales and calls of securities of $32,000 as compared with a net gain
of $55,000 in 1996 combined with a net loss on the sale of real estate owned
of $3,000 as compared with a net gain of $50,000 in 1996.
Non-interest Expense. Non-interest expense was $7.6 million for the
year ended December 31, 1997 compared to $8.7 million for the year ended
December 31, 1996, a decrease of $1.1 million, or 12.6%. The decrease was due
to a $1.3 million one-time special assessment on SAIF insured deposits which
was paid in 1996 as well as a reduction in Federal deposit insurance premiums
of $370,000. These reductions were partially offset by increases in
compensation expense of $258,000 and in other expense of $241,000. The
increase in compensation expense was primarily due to the allocation of ESOP
shares to plan participants. In 1997, as in 1996, there was a $2.5 million
expense related to contributions to the Heritage Foundation of First Security
Federal Savings Bank.
Income Taxes. The provision for income taxes was $1.0 million for the
year ended December 31, 1997 compared to $406,000 for the year ended December
31, 1996. The increase was due primarily to an increase in pre-tax income of
$2.0 million.
A valuation allowance of $180,000 was established in 1996 to reduce
the deferred tax asset 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
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 year ended
December 31, 1997, there was no related impact to income from continuing
operations.
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,
7
<PAGE>
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.
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.
8
<PAGE>
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 Heritage Foundation
of First Security Federal Savings Bank. 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.
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.
9
<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. All average balances are monthly average balances.
Non-accruing loans have been included in the table as loans carrying a zero
yield.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
------------------------------------------ --------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------------------------------------------ --------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(2)............ $172,810 $14,669 8.49% $152,147 $13,068 8.59%
Mortgage-backed securities(2).. 39,569 2,864 7.24 41,735 3,260 7.81
Mutual funds(2)................ 4,897 278 5.68 5,776 338 5.85
Agencies/Other(2).............. 22,071 1,333 6.04 22,714 1,326 5.83
CMOs(2)........................ 5,211 293 5.62 6,313 413 6.54
Municipal securities(2)........ 5,565 292 5.25 4,794 277 5.78
Federal funds sold............. 11,179 646 5.78 1,829 118 6.45
Time deposits.................. 200 11 5.50 200 11 5.50
Deposits with other institutions 2,561 165 6.44 1,665 84 5.05
FHLB stock..................... 1,797 123 6.84 1,645 111 6.75
-------- ------- --------
Total interest-earning assets 265,860 20,674 7.78 238,818 19,006 7.96
Non-interest earning assets.... 17,810 13,445
-------- --------
Total assets................ $283,670 $252,263
======== ========
Interest-Bearing Liabilities:
Money market................... $ 5,169 159 3.08 $ 5,301 167 3.15
NOW............................ 10,176 217 2.13 9,810 202 2.06
Passbook savings............... 76,391 2,281 2.99 70,356 2,120 3.01
Certificates of Deposit........ 126,917 6,972 5.49 124,797 6,827 5.47
Advances....................... 9,548 500 5.24 3,333 178 5.34
-------- ------- -------- -------
Total interest-bearing
liabilities 228,201 10,129 4.44 213,597 9,494 4.44
------- -------
Non-interest bearing liabilities 16,299 8,471
-------- --------
Total liabilities 244,500 222,068
Equity.......................... 39,170 30,195
-------- --------
Total liabilities and equity. $283,670 $252,263
======== ========
Net interest-earning spread..... $10,545 3.34% $ 9,512 3.52%
======= ---- ======= ====
Margin.......................... 3.97% 3.98%
---- ====
Assets to liabilities........... 116.50% 111.81%
======= ========
</TABLE>
<PAGE>
- -TABLE RESTUBBED BELOW-
Year Ended December 31,
1995
--------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
--------------------------------------
Interest-Earning Assets:
Loans receivable(2)............ $139,860 $12,080 8.64%
Mortgage-backed securities(2).. 36,034 2,455 6.81
Mutual funds(2)................ 5,776 358 6.20
Agencies/Other(2).............. 22,189 1,586 7.15
CMOs(2)........................ 6,903 412 5.97
Municipal securities(2)........ 5,199 327 6.29
Federal funds sold............. 3,338 225 6.74
Time deposits.................. 200 9 4.50
Deposits with other institutions 1,942 100 5.15
FHLB stock..................... 1,482 98 6.61
-------- -------
Total interest-earning assets 222,923 17,650 7.92
Non-interest earning assets.... 14,702
--------
Total assets................ $237,625
========
Interest-Bearing Liabilities:
Money market................... $ 6,234 193 3.10
NOW............................ 9,241 184 1.99
Passbook savings............... 70,585 2,113 2.99
Certificates of Deposit........ 112,963 6,044 5.35
Advances....................... 3,769 193 5.12
-------- -------
Total interest-bearing
liabilities 202,792 8,727 4.30
-------
Non-interest bearing liabilities 7,392
--------
Total liabilities 210,184
Equity.......................... 27,441
--------
Total liabilities and equity. $237,625
========
Net interest-earning spread..... $ 8,923 3.62%
======= ======
Margin.......................... 4.00%
======
Assets to liabilities........... 109.93%
========
_________________
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
(2) Calculated based on amortized cost.
10
<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>
Year Ended December 31,
1996 vs. 1997 1995 vs. 1996 1994 vs. 1995
-------------------------------------------------------------------------------------------
Increase Increase Increase
(Decrease) Total (Decrease) Total (Decrease) Total
Due to Increase Due to Increase Due to 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....................... $1,755 $(154) $1,601 $1,056 $ (68) $988 $1,565 $(603) $962
Mortgage-backed securities............. (164) (232) (396) 418 387 805 10 317 327
Mutual funds........................... (50) (10) (60) --- (20) (20) --- 32 32
Agencies and other..................... (38) 45 7 37 (297) (260) 551 27 578
CMOs................................... (66) (54) (120) (37) 38 1 (59) 64 5
Municipal securities................... 42 (27) 15 (24) (26) (50) (19) (32) (51)
Federal funds sold..................... 542 (14) 528 (98) (9) (107) (51) 94 43
Time deposits.......................... --- --- --- --- 2 2 --- 1 1
Deposits with other institutions....... 53 28 81 (14) (2) (16) 54 (33) 21
FHLB stock............................. 10 2 12 11 2 13 13 9 22
--------- -------- -------- ------- ----- ----- ------- ------- -------
Total interest-earning assets.... 2,084 (416) 1,668 1,349 7 1,356 2,064 (124) $1,940
Interest-bearing liabilities:
Money market........................... (4) (4) (8) (29) 3 (26) (16) (5) (21)
NOW.................................... 8 7 15 12 6 18 28 --- 28
Passbook Savings....................... 180 (19) 161 (7) 14 7 70 (4) 66
Certificates of deposit................ 116 29 145 645 138 783 807 1,250 2,057
Advances............................... 326 (4) 322 (23) 8 (15) 51 (38) 13
-------- -------- -------- ------- ------ ------ ------- ------ -------
Total interest-earning assets........ $ 626 $ 9 $ 635 $ 598 $169 $767 $ 940 $1,203 $2,143
------- ------- ------- ------ ---- ---- ------ ------ ------
Net interest/spread..................... $1,458 $(425) $1,033 $ 751 $(162) $589 $1,124 (1,327) $ (203)
====== ===== ====== ====== ===== ==== ====== ====== ======
</TABLE>
11
<PAGE>
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 December 31, 1997,
$88.9 million or 42.3% 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
December 31, 1997, $15.0 million or 42.2% 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 $17.1 million or 31.7% 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
December 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.
12
<PAGE>
Assumed Change $ Change in % Change in
in Interest Rates $ Amount NPV NPV
- --------------------- ------------ ----------- ----------
(Basis Points) (Dollars in Thousands)
+400 $47,002 $(23,370) (33)%
+300 53,042 (17,330) (25)
+200 59,209 (11,163) (16)
+100 65,222 (5,150) (7)
--- 70,372 --- ---
-100 74,138 3,766 5
-200 77,084 6,712 10
-300 80,542 10,170 14
-400 85,014 14,642 21
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.
Liquidity and Capital Resources
The Company'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.
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.
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 4% 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
13
<PAGE>
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 December 31, 1997, First
Security's liquidity ratio for regulatory purposes was 18.57%.
The Company'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
$2.8 million, $2.1 million and $4.1 million for the years ended December 31,
1997, December 31, 1996, and 1995, 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 the net proceeds from the issuance of stock in 1997 and
activity in deposit and escrow accounts and advances from FHLB of Chicago.
The Company's most liquid assets are cash and short-term investments.
The levels of these assets are dependent on the Company's operating,
financing, lending and investing activities during any given period. At
December 31, 1997, cash and short-term investments totaled $30.1 million. The
Company has other sources of liquidity if a need for additional funds arises,
including securities maturing within one year and the repayment of loans. The
Company may also utilize the sale of securities available-for-sale and FHLB
advances as a source of funds.
At December 31, 1997, the Company had outstanding commitments to
originate loans of $1.6 million, all of which had fixed interest rates. These
loans are to be secured by properties located in its market area. The Company
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 December 31, 1997 totaled $96.1
million. Management believes, based on past experience, that a significant
portion of such deposits will remain with the Company. Based on the foregoing,
in addition to the Company's high level of core deposits and capital, the
Company considers its liquidity and capital resources sufficient to meet its
outstanding short-term and long-term needs.
First Security is subject to various regulatory capital requirements
imposed by the OTS. At December 31, 1997, First Security was in compliance
with all applicable capital requirements on a fully phased-in basis. See Note
11 of the Notes to 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 Company 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.
14
<PAGE>
Impact of New Accounting Standards
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 Company.
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 the Company.
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.
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
15
<PAGE>
converted. However, if such modifications and conversions are not completed
timely, the Year 2000 problem may have a material impact on the operations of
the Company.
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 Company 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 purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies, and expectations of the Company, are
generally identifiable by use of the words "believe", "expect", "intend",
"anticipate", "estimate", "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies
is inherently uncertain. Factors which could have a material adverse effect on
the operations and future prospects of the Company and the subsidiaries
include, but are not limited to, changes in: interest rates, general economic
conditions, the legislative/regulatory situation, 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 Company'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
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
16
<PAGE>
[LOGO]
REPORT OF INDEPENDENT AUDITORS
Board of Directors
First SecurityFed Financial, Inc.
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of First
SecurityFed Financial, Inc. and its wholly-owned subsidiary as of December 31,
1997 and 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company'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 First
SecurityFed Financial, Inc. and its wholly-owned subsidiary at December 31,
1997 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 6, 1998
17
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 12,090 $ 5,800
Federal funds sold 18,000 1,500
------------ ------------
Total cash and cash equivalents 30,090 7,300
Time deposits in other financial institutions 200 200
Securities available-for-sale 32,461 28,724
Securities held-to-maturity (fair value of $57,498 in 1997
and $49,881 in 1996) 57,022 49,888
Loans receivable, net of allowance for loan losses 186,259 163,348
Federal Home Loan Bank stock, at cost 1,852 1,673
Premises and equipment, net 3,692 3,923
Accrued interest receivable 2,071 1,764
Intangible assets 291 352
Real estate owned 50 40
Other assets 1,861 903
------------ ------------
Total assets $ 315,849 $ 258,115
============ ============
LIABILITIES
Deposits $ 210,100 $ 219,505
Advance payments by borrowers for taxes and insurance 2,400 2,118
Advances from Federal Home Loan Bank 10,000 4,000
Accrued interest payable and other liabilities 1,477 3,231
------------ ------------
Total liabilities 223,977 228,854
SHAREHOLDERS' 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 -
Additional paid-in capital 65,495 -
Unearned ESOP shares (4,935) -
Retained earnings, substantially restricted 31,290 29,465
Net unrealized loss on securities available-for-sale,
net of income taxes (42) (204)
------------ ------------
Total shareholders' equity 91,872 29,261
------------ ------------
Total liabilities and shareholders' equity $ 315,849 $ 258,115
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996, and 1995
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income
Loans $ 14,669 $ 13,068 $ 12,080
Securities
Taxable 1,561 1,664 1,944
Tax-exempt 302 277 327
Mortgage-backed securities 3,198 3,673 2,867
Federal funds sold and other interest earning assets 944 324 432
---------- ---------- ----------
20,674 19,006 17,650
Interest expense
NOW and money market 376 369 377
Passbook savings 2,281 2,120 2,113
Certificates of deposit 6,972 6,827 6,044
Federal Home Loan Bank advances and other borrowings 500 178 193
---------- ---------- ----------
10,129 9,494 8,727
---------- ---------- ----------
Net interest income 10,545 9,512 8,923
Provision for loan losses 738 706 136
---------- ---------- ----------
Net interest income after provision for loan losses 9,807 8,806 8,787
Noninterest income
Deposit service charges 371 362 378
Insurance commissions 47 54 58
Net gain (loss) on sales and calls of securities (32) 55 24
Net gain (loss) on sale of real estate owned (3) 50 147
Other income 209 224 249
---------- ---------- ----------
592 745 856
Noninterest expense
Compensation and benefits 2,669 2,411 2,370
Occupancy and equipment 679 678 630
Data processing 297 269 260
SAIF assessment - 1,293 -
Federal insurance premiums 183 553 521
Charitable and foundation contributions 2,557 2,558 67
Other expense 1,172 931 842
---------- ---------- ----------
7,557 8,693 4,690
---------- ---------- ----------
Income before income taxes 2,842 858 4,953
Income tax provision 1,017 406 1,760
---------- ---------- ----------
Net income $ 1,825 $ 452 $ 3,193
========== ========== ==========
Loss per share
Basic $ (.11)
==========
Diluted $ (.11)
===========
</TABLE>
19
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996, and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Unrealized
Gain (Loss) Total
Additional Unearned on Securities Share-
Common Paid-in ESOP Retained Available- holders'
Stock Capital Shares Earnings for-Sale Equity
------ ---------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ - $ - $ - $ 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
Issuance of common stock,
net of conversion costs of
$1,130 and contribution of
stock to foundation 64 65,385 (5,126) - 60,323
ESOP shares earned - 110 191 - - 301
Net income - - - 1,825 - 1,825
Change in valuation allowance
for securities available-for-sale,
net of income taxes of $104 - - - - 162 162
--------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 $ 64 $ 65,495 $ (4,935) $ 31,290 $ (42) $ 91,872
========= ========== ========== ========== ========== ==========
</TABLE>
20
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
(Continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended
December 31, 1997, 1996, and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,825 $ 452 $ 3,193
Adjustments to reconcile net income to net cash from
operating activities
Depreciation and amortization of intangibles 336 358 329
Net amortization (accretion) of securities 173 (90) 138
Net (gain) loss on sales and calls of securities 32 (55) (24)
Provision for loan losses 738 706 136
Net (gain) loss on real estate owned 3 (50) (147)
Deferred loan origination fees 26 (80) (75)
Federal Home Loan Bank stock dividend - - (20)
Provision for deferred income taxes (888) (937) 135
ESOP compensation expense 301 - -
Accrued charitable contribution of Company stock 2,500 - -
Net change in
Accrued interest receivable (307) (148) 119
Other assets (175) (141) 182
Accrued interest payable and other liabilities (1,754) 2,125 27
---------- ---------- ----------
Net cash provided by operating activities 2,810 2,140 3,993
Cash flows from investing activities
Purchase of securities available-for-sale (10,184) (2,989) -
Purchase of securities held-to-maturity (24,684) (20,129) (30,451)
Proceeds from sales of securities available-for-sale 2,587 - 1,504
Proceeds from calls and maturities of securities 9,200 15,814 20,112
Net loan originations (23,914) (19,548) (8,696)
Principal payments on mortgage-backed and related securities 12,272 7,965 5,916
Purchase of Federal Home Loan Bank stock (179) (120) (215)
Property and equipment expenditures (44) (189) (119)
Real estate owned expenditures (35) (5) (44)
Proceeds from sale of real estate owned 261 614 147
---------- ---------- ----------
Net cash used in investing activities (34,720) (18,587) (11,846)
Cash flows from financing activities
Net change in deposits (9,405) 10,137 13,568
Net change in advance payments by borrowers for taxes
and insurance 282 437 (342)
Change in advances from Federal Home Loan Bank 6,000 (6,000) 7,000
Net proceeds from stock issuance 57,823 - -
---------- ---------- ----------
Net cash provided by financing activities 54,700 4,574 20,226
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended
December 31, 1997, 1996, and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net change in cash and cash equivalents $ 22,790 $ (11,873) $ 12,373
Cash and cash equivalents at beginning of year 7,300 19,173 6,800
---------- ---------- ----------
Cash and cash equivalents at end of year $ 30,090 $ 7,300 $ 19,173
========== ========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 10,146 $ 9,498 $ 8,510
Income taxes 1,667 1,497 1,620
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 239 140 276
</TABLE>
22
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Nature of Business: The consolidated financial
statements include the accounts of First SecurityFed Financial, Inc. (the
Company) and its wholly-owned subsidiary, First Security Federal Savings Bank
(the Bank), and the Bank's wholly-owned subsidiary, Western Security Service
Corporation. Significant intercompany accounts and transactions have been
eliminated. The only business of the Company is the ownership of the Bank. The
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 Company 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 Company 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, 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.
23
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Smaller balance homogenous loans are defined as residential first mortgage
loans secured by one-to-four-family residences, residential construction
loans, consumer 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.
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. 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.
24
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill and Core Deposit Intangible: Goodwill and the core deposit
intangibles, included in other assets, result from the application of purchase
accounting principles to the acquisition of assets and assumption of
liabilities from the Resolution Trust Corporation. Goodwill represents the
excess of acquisition cost over the fair value of net assets of the branches
and is amortized over 25 years using the straight-line method. The premium
paid to acquire core deposits is being amortized over ten years on an
accelerated method.
Income Taxes: The provision for income taxes is based on an asset and
liability approach which 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.
Employee Stock Ownership Plan: The cost of shares issued to the ESOP but not
yet allocated to participants are presented in the consolidated balance sheet
as a reduction of shareholders' equity. Compensation expense is recorded based
on the market price of the shares as they are committed to be released for
allocation to participant accounts. The difference between the market price
and the costs of shares committed to be released is recorded as an adjustment
to paid-in capital.
Shares are considered outstanding for earnings per share calculations as they
are committed to be released; unallocated shares are not considered
outstanding.
Statement of Cash Flows: Cash and cash equivalents include cash on hand,
amounts due from banks, and daily federal funds sold. The Company reports net
cash flows for customer loan transactions, deposit transactions, and time
deposits in other financial institutions.
Earnings Per Share: Earnings per common share is computed under the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
which was adopted by the Company in 1997. The amount reported as earnings per
common share for the year ended December 31, 1997 reflects the earnings since
October 31, 1997 available to common shareholders divided by the weighted
average number of common shares outstanding since October 31, 1997.
Reclassifications: Certain prior year items have been reclassified to conform
to the current year's presentation.
Future Accounting Changes: New accounting standards have been issued which
will require future reporting of comprehensive income (net income plus changes
in holding gains and losses on securities available-for-sale) and may require
redetermination of industry segment financial information. Management does not
anticipate these statements will have an impact on the operations of the
Company.
25
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The Company's securities are as follows:
<TABLE>
<CAPTION>
-----------------------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 $ 7,902 $ 116 $ (4) $ 8,014
Municipals 3,904 62 - 3,966
Corporates 250 - - 250
Mutual funds 3,172 26 (43) 3,155
Other equity investments 369 - (26) 343
---------- ---------- ---------- ----------
15,597 204 (73) 15,728
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 7,758 17 (174) 7,601
Government National Mortgage Association 2,929 66 (13) 2,982
Federal National Mortgage Association 5,701 13 (109) 5,605
Collateralized mortgage obligations 545 - - 545
---------- ---------- ---------- ----------
16,933 96 (296) 16,733
---------- ---------- ---------- ----------
$ 32,530 $ 300 $ (369) $ 32,461
========== ========== ========== ==========
-----------------------1997----------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- -------
Securities held-to-maturity
U.S. government agencies $ 33,562 $ 120 $ (25) $ 33,657
States and political subdivisions 4,909 197 (1) 5,105
---------- ---------- ---------- ----------
38,471 317 (26) 38,762
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 4,558 61 (109) 4,510
Government National Mortgage Association 7,781 255 (15) 8,021
Federal National Mortgage Association 2,531 14 (26) 2,519
Collateralized mortgage obligations 3,681 26 (21) 3,686
---------- ---------- ---------- ----------
18,551 356 (171) 18,736
---------- ---------- ---------- ----------
$ 57,022 $ 673 $ (197) $ 57,498
========== ========== ========== ==========
</TABLE>
26
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
-----------------------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
========== ========== ========== ==========
-----------------------1996----------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
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>
27
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Sales of securities are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Proceeds $ 2,587 $ - $ 1,504
Gross realized gains 31 - 4
Gross realized losses 63 - -
</TABLE>
Call premiums on debt securities of $55,376 and $19,625 were recognized by
the Company during 1996 and 1995, respectively.
The carrying values and fair values of debt securities as of December 31,
1997, 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>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Securities available-for-sale
Due in one year or less $ 1,995 $ 1,997
Due after five years through ten years 5,897 5,901
Due after ten years 4,164 4,332
------------ ------------
12,056 12,230
Mutual funds 3,172 3,155
Other equity investments 369 343
Mortgage-backed securities and collateralized
mortgage obligations 16,933 16,733
------------ ------------
20,474 20,231
------------ ------------
$ 32,530 $ 32,461
============ ============
Securities held-to-maturity
Due in one year or less $ 100 $ 102
Due after one year through five years 10,798 10,829
Due after five years through ten years 24,258 24,455
Due after ten years 3,315 3,376
------------ ------------
38,471 38,762
Mortgage-backed securities and collateralized
mortgage obligations 18,551 18,736
------------ ------------
$ 57,022 $ 57,498
============ ============
</TABLE>
28
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
One security in the amount of $250,000 was pledged to secure government
deposits at December 31, 1997 and 1996.
NOTE 3 - LOANS RECEIVABLE
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
First mortgage loans, including loans purchased
Secured by one-to-four-family residences $ 154,819 $ 134,971
Secured by multifamily residences 10,999 9,374
Secured by commercial real estate 17,235 15,651
------------ ------------
183,053 159,996
Home equity loans 4,602 3,431
Less
Net deferred loan origination fees (1,496) (1,470)
------------ ------------
Total mortgage loans 186,159 161,957
Consumer and other loans
Automobile 47 74
Share loans 1,421 1,174
Improvement 7 12
Loans secured by leases 81 1,272
Other 387 395
------------ ------------
1,943 2,927
Less unearned discounts (15) (16)
------------ ------------
Total consumer and other loans 1,928 2,911
Less allowance for loan losses (1,828) (1,520)
------------ ------------
$ 186,259 $ 163,348
============ ============
</TABLE>
The principal balance of loans on nonaccrual status at December 31, 1997 and
1996 approximated $9,000. The Company maintains an allowance for uncollected
interest for mortgage loans with payments past due. The allowance was
approximately $45,000 and $93,000 at December 31, 1997 and 1996, respectively.
29
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 1,520 $ 885 $ 792
Provision for loan losses 738 706 136
Recoveries 4 - -
Charge-offs (434) (71) (43)
----------- ----------- -----------
Balance, end of year $ 1,828 $ 1,520 $ 885
=========== =========== ===========
Information regarding impaired loans is as follows:
1997 1996
---- ----
Average investment in impaired loans $ 565 $ 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
1997 1996
---- ----
Balance of impaired loans $ 81 $ 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 $ 81 $ 1,272
=========== ===========
Portion of allowance for loan losses allocated to the
impaired loan balance $ 8 $ 318
=========== ===========
</TABLE>
30
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 545 $ 545
Buildings and improvements 3,615 3,620
Furniture and equipment 1,946 1,894
Real estate acquired for future expansion 377 377
----------- -----------
Total cost 6,483 6,436
Less accumulated depreciation (2,791) (2,513)
----------- -----------
$ 3,692 $ 3,923
=========== ===========
</TABLE>
NOTE 6 - INTANGIBLE ASSETS
Intangible assets, which arose from the Company's acquisition of assets and
assumption of liabilities from the Resolution Trust Corporation consisted of
the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Excess of purchase price over net assets acquired $ 156 $ 156
Core deposit intangible 377 377
----------- -----------
Total 533 533
Less accumulated amortization (242) (181)
----------- -----------
Intangible assets, net $ 291 $ 352
=========== ===========
</TABLE>
NOTE 7 - DEPOSITS
Certificate of deposit accounts with balances of $100,000 or more totaled
approximately $27,013,000 and $39,940,000 at December 31, 1997 and 1996,
respectively. Deposits greater than $100,000 are not insured.
31
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS (Continued)
At December 31, 1997, the scheduled maturities of certificates of deposit are
as follows:
1998 $ 96,106
1999 10,460
2000 8,121
2001 3,043
2002 and thereafter 3,519
-------------
$ 121,249
=============
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Chicago are summarized as follows:
<TABLE>
<CAPTION>
---------Principal Balance------
Contractual Frequency
Maturity Interest of Rate
Date Rate Adjustment 1997 1996
---- ---- ---------- ---- ----
<S> <C> <C> <C> <C>
February 11, 1997 4.80 Fixed $ - $ 2,000
March 18, 1997 5.51 Fixed - 1,000
February 11, 1998 5.88 Fixed 2,000 -
March 20, 1998 5.91 Fixed 1,000 1,000
February 21, 2000 6.08 Fixed 1,000 -
February 21, 2000 5.48 Fixed 1,000 -
June 18, 2002 5.71 Fixed 4,000 -
August 8, 2002 5.26 Fixed 1,000 -
---------- -----------
$ 10,000 $ 4,000
========== ===========
</TABLE>
The Company maintains a collateral pledge agreement covering secured advances
whereby the Company 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.
32
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES
An analysis of the provision for income taxes is as follows:
1997 1996 1995
---- ---- ----
Current
Federal $ 1,585 $ 1,132 $ 1,377
State 320 211 248
Deferred (888) (1,117) 135
Valuation allowance - 180 -
----------- ----------- -----------
$ 1,017 $ 406 $ 1,760
=========== =========== ===========
The net deferred tax asset included in the accompanying consolidated balance
sheets consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets
Bad debts $ 135 $ 42
Amortization of intangible assets 46 36
Contribution carryforward 1,641 851
Unrealized loss on securities available-for-sale 26 130
----------- -----------
1,848 1,059
Deferred tax liabilities
Depreciation (87) (102)
FHLB stock dividend (65) (65)
Loan fees (333) (340)
Other (27) -
----------- -----------
(512) (507)
Valuation allowance on deferred tax assets (180) (180)
----------- -----------
Total deferred tax asset $ 1,156 $ 372
=========== ===========
</TABLE>
The valuation allowance at December 31, 1997 and 1996 reflects management'
estimate of temporary deductible differences that may not be realized.
33
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
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>
--------------------For the Years Ended December 31,-------------------
---------1997------- ---------1996------- ---------1995--------
<S> <C> <C> <C> <C> <C> <C>
Provision for federal income
taxes computed at statutory
rate of 34% $ 966 34.0% $ 292 34.0% $ 1,684 34.0%
Tax-exempt income (90) (3.2) (85) (9.9) (102) (2.1)
State income taxes, net of
federal income tax benefit 140 4.9 37 4.3 197 4.0
Other 1 .1 (18) (2.1) (19) (.4)
Valuation allowance - - 180 21.0 - -
--------- ------ --------- ------ -------- ------
$ 1,017 35.8% $ 406 47.3% $ 1,760 35.5%
========= ======= ========= ====== ======== ======
</TABLE>
The Company 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 December 31, 1997 include approximately $2,023,000 for
which no deferred federal income tax liability has been recorded.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company 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 Company'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 Company 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:
1997 1996
---- ----
Commitments to extend credit $ 1,610 $ 1,802
Unused lines of credit 4,887 4,186
At December 31, 1997, commitments to extend credit consist of fixed rate loan
commitments with rates ranging from 6.88% to 9.25%. These commitments are due
to expire within 60 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.
34
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
The Company'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 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. The remaining contribution of $2,250,000 was funded in 1997. Refer to
Note 16 for discussion of the stock contribution committed during 1997.
NOTE 11 - REGULATORY MATTERS
The 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
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The 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 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 December 31, 1997,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the 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 Bank's category.
35
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY MATTERS (Continued)
The 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
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital (to risk-weighted
assets) $ 63,149 42.8% $ 11,811 8.0% $ 14,763 10.0%
Tier I capital (to risk-weighted
assets) 61,368 41.6 5,905 4.0 8,858 6.0
Tier I (core) capital (to adjusted
total assets) 61,368 19.8 9,288 3.0 N/A N/A
Tangible capital (to adjusted total
assets) 61,368 19.8 4,644 1.5 N/A N/A
Tier I capital (to average assets) 61,368 21.6 11,347 4.0 14,183 5.0
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 (core) capital (to adjusted
total assets) 28,437 11.1 7,721 3.0 N/A N/A
Tangible capital (to adjusted total
assets) 28,437 11.1 3,860 1.5 N/A N/A
Tier I capital (to average assets) 28,437 11.2 10,193 4.0 12,742 5.0
</TABLE>
NOTE 12 - EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of the earnings (loss) per
common share computation for the year ended December 31, 1997 is presented
below.
<TABLE>
<CAPTION>
<S> <C>
Earnings per common share
Net income $ 1,825
Less: net income of Bank prior to conversion (2,518)
------------
Net loss attributable to common shareholders $ (693)
============
Weighted average common shares outstanding 5,895
Add: shares committed to be issued to charitable foundation 250
------------
Total weighted average common shares outstanding 6,145
============
Basic loss per share $ (.11)
============
</TABLE>
36
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company has lending transactions with directors, executive officers, and
their associates. Loans to these individuals totaled approximately $32,453 and
$50,511 at December 31, 1997 and December 31, 1996, respectively.
NOTE 14 - STOCK-BASED COMPENSATION PLANS
As part of the conversion transaction, the Company established an employee
stock ownership plan (ESOP) for the benefit of substantially all employees.
The ESOP borrowed $5,126,400 from the Company and used those funds to acquire
512,640 shares of the Company's stock at $10 per share.
Shares issued to the ESOP are allocated to ESOP participants based on
principal and interest repayments made by the ESOP on the loan from the
Company. The loan is secured by shares purchased with the loan proceeds and
will be repaid by the ESOP with funds from the Company's discretionary
contributions to the ESOP and earnings on ESOP assets. Principal payments are
scheduled to occur over a twenty-year period. However, in the event the
Company's contributions exceed the minimum debt service requirements,
additional principal payments will be made.
NOTE 14 - STOCK-BASED COMPENSATION PLANS (Continued)
During 1997, 19,154 shares of stock with a fair value of $15.74 per share were
committed to be released, resulting in ESOP compensation expense of $301,484.
Shares held by the ESOP at December 31, 1997 are as follows:
Allocated shares 19
Unallocated shares 494
------------
Total ESOP shares 513
============
Fair value of unallocated shares $ 7,780
============
37
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The approximate carrying amount and estimated fair value of financial
instruments as of December 31 are as follows:
<TABLE>
<CAPTION>
--------------1997---------- -------------1996-----------
Approximate Estimated Approximate Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 30,090 $ 30,090 $ 7,300 $ 7,300
Time deposits in other financial institutions 200 200 200 200
Securities available-for-sale 32,461 32,461 28,724 28,724
Securities held-to-maturity 57,022 57,498 49,888 49,881
Loans, net of allowance for loan losses 186,259 191,323 163,348 165,738
Accrued interest receivable 2,071 2,071 1,764 1,764
Financial liabilities
NOW accounts (20,279) (20,279) (19,616) (19,616)
Savings (68,572) (68,572) (71,167) (71,167)
Time deposits (121,249) (121,795) (128,722) (128,805)
Advance payments by borrowers for taxes
and insurance (2,400) (2,400) (2,118) (2,118)
Advances from Federal Home Loan Bank (10,000) (9,853) (4,000) (3,995)
Accrued interest payable (516) (516) (533) (533)
</TABLE>
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 Company would charge
for similar loans with similar maturities at December 31, 1997, and 1996,
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 Company would pay on such deposits at December 31, 1997 and 1996, 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.
38
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
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 Company 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 Company disposed of these items on
December 31, 1997 and 1996, the fair value would have been achieved, because
the market value may differ depending on the circumstances. The fair values at
December 31, 1997 and 1996 should not necessarily be considered to apply at
subsequent dates.
NOTE 16 - ADOPTION OF PLAN OF CONVERSION
On June 23, 1997, the Board of Directors of the Company 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. The
conversion was accomplished through the amendment of the 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 Bank after
giving effect to the conversion. A subscription offering of the shares of
common stock was offered initially to the Bank's eligible deposit account
holders, then to other members of the Bank. Any shares of the holding
company's common stock not sold in the subscription offering were offered for
sale to the general public, giving preference to the Bank's market area. On
October 31, 1997, the Company sold 6,408,000 shares at $10 per share and
received proceeds of $57,823,000 net of conversion expenses and ESOP shares.
At the time of conversion, the Bank established a liquidation account in an
amount equal to its total net worth as of the latest balance sheet appearing
in the final prospectus. The balance as of that date was $31,840,000. The
liquidation account will be maintained for the benefit of eligible depositors
who continue to maintain their accounts at the 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.
39
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 16 - ADOPTION OF PLAN OF CONVERSION (Continued)
The Company 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.
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.
NOTE 17 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed balance sheet, statement of income, and
statement of cash flows for First SecurityFed Financial, Inc. The Company was
formed on October 31, 1997. Accordingly, the statements of income and cash
flows reflect the period October 31, 1997 through December 31, 1997.
CONDENSED BALANCE SHEET
December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash and cash equivalents $ 19,287
Securities available-for-sale 10,211
ESOP loan 4,870
Investment in bank subsidiary 61,905
Accrued interest receivable and other assets 1,320
-----------
$ 97,593
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 5,721
Shareholders' equity
Common stock 64
Additional paid-in capital 65,495
Unearned ESOP shares (4,935)
Retained earnings 31,290
Unrealized depreciation on securities available-for-sale (42)
-----------
91,872
-----------
$ 97,593
===========
</TABLE>
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 17 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENT OF INCOME
For the period October 31, 1997 to December 31, 1997
Income
Securities $ 33
ESOP loan 59
-----------
Total income 92
Other expenses
Charitable contributions 2,500
Loss before income taxes and equity in undistributed
earnings of bank subsidiary (2,408)
Income taxes (benefit) (939)
Loss before equity in undistributed earnings of bank subsidiary (1,469)
Equity in undistributed earnings of bank subsidiary 776
-----------
Net loss $ (693)
40
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 17 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENT OF CASH FLOWS
For the period October 31, 1997 to December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Operating activities
Net loss $ (693)
Adjustments to reconcile net loss to net cash provided by
operating activities
Equity in undistributed earnings of bank subsidiary (776)
Accrued charitable contribution of Company stock 2,500
Change in
Other assets (1,337)
Other liabilities 595
-----------
Net cash provided by operating activities 289
Investing activities
Purchase of bank subsidiary stock (28,912)
Purchase of securities available-for-sale (10,169)
-----------
Net cash used in investing activities (39,081)
Financing activities
Net proceeds from sale of common stock 57,823
Payment received on loan to ESOP 256
-----------
Net cash provided by financing activities 58,079
-----------
Net change in cash and cash equivalents 19,287
Cash and cash equivalents at beginning of period -
-----------
Cash and cash equivalents at end of period $ 19,287
===========
</TABLE>
41
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
------------------------Three Months Ended---------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997
Interest income $ 4,858 $ 4,850 $ 5,018 $ 5,948
Interest expense 2,404 2,485 2,585 2,655
----------- ----------- ----------- -----------
Net interest income 2,454 2,365 2,433 3,293
Provision for loan losses 61 554 62 61
Other income 149 146 180 117
Other expense 1,118 1,363 1,150 3,926
----------- ----------- ----------- -----------
Income (loss) before income taxes 1,424 594 1,401 (577)
Income tax expense (benefit) 564 186 540 (273)
----------- ----------- ----------- -----------
Net income (loss) $ 860 $ 408 $ 861 $ (304)
=========== =========== =========== ===========
Earnings (loss) per common share* N/A N/A N/A (.11)
1996
Interest income $ 4,583 $ 4,816 $ 4,748 $ 4,859
Interest expense 2,389 2,332 2,350 2,423
----------- ----------- ----------- -----------
Net interest income 2,194 2,484 2,398 2,436
Provision for loan losses 31 52 62 561
Other income 151 143 170 281
Other expense 1,150 1,226 2,418 3,899
----------- ----------- ----------- -----------
Income (loss) before income taxes 1,164 1,349 88 (1,743)
Income tax expense (benefit) 446 500 (21) (519)
----------- ----------- ----------- -----------
Net income (loss) $ 718 $ 849 $ 109 $ (1,224)
=========== =========== =========== ===========
Earnings (loss) per common share N/A N/A N/A N/A
* Since date of conversion (October 31, 1997).
</TABLE>
42
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 7:00 p.m., local
time on May 6, 1997 at the Ukranian Sports Club located at the Suma Hall
located at 2457 W. Chicago Avenue, Chicago, Illinois 60622.
STOCK LISTING
First SecurityFed Financial, Inc. common stock is traded on the Nasdaq
Stock Market under the symbol "FSFF."
PRICE RANGE OF COMMON STOCK
The Company's common stock began trading on the Nasdaq Stock Market on October
31, 1997. The high and low sales prices for 1997 were $16.63 and $14.88
respectively. No dividends were paid on the common stock during 1997. At March
16, 1998, there were 6,408,000 shares of First SecurityFed Financial, Inc.
common stock issued and outstanding (including unallocated ESOP shares) and
there were 1,225 holders of record.
TRANSFER AGENT SHAREHOLDERS AND GENERAL
INQUIRIES
Registrar and Transfer Co.
10 Commerce Drive Orest Olchowyj
Cranford, NJ 07016 First SecurityFed Financial, Inc.
936 North Western Avenue
Chicago, Illinois 60622-4695
(773) 772-4500
SPECIAL COUNSEL INDEPENDENT AUDITORS
Silver, Freedman & Taff, L.L.P. Crowe, Chizek and Company LLP
1100 New York Avenue, NW One Mid America Plaza
7th Floor P.O. Box 3697
Washington, DC 20005 Oak Brook, Illinois 60522-3697
44
<PAGE>
ANNUAL AND OTHER REPORTS
A copy of First SecurityFed Financial, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1997, as filed with the Securities and
Exchange Commission, may be obtained without charge by contacting Orest
Olchowyj, First SecurityFed Financial, Inc., 936 North Western Avenue,
Chicago, Illinois 60622-4695
FIRST SECURITYFED FINANCIAL, INC.
CORPORATE INFORMATION
COMPANY AND BANK ADDRESS
936 North Western Avenue Telephone: (773) 772-4500
Chicago, Illinois 60622-4695 Fax: (773) 772-1043
DIRECTORS OF THE BOARD
Steve Babyk
Director of Fleet Leasing
Union Tank Car Company
Lila Maria Bodnar
Accountant, MBA
Myron Dobrowolsky
Construction Project Manager
Dames and Moore
Terry Gawryk
Attorney
George Kawka
Senior Architectural/Engineering
Project Manager
PAL Telecom Group
EXECUTIVE OFFICERS
Julian Kulas
President and Chief Executive Officer
Mary H. Korb
Vice President-Lending
Adrian Hawryliw
Vice President - Philadelphia
Branch Manager
Julian Kulas
President and Chief Executive Officer
First Security Federal Savings Bank
Paul Nadzikewycz
President and Chief Executive Officer,
Oakley Assoc. Ltd.
Janoslav H. Sydonenko
Credit Manager
Kanematsu USA
Chrysta Wereszczak
Co-owner, B&B Formica
Harry I. Kucewicz
Treasurer and Chief Financial Officer
Irene S. Subota
Vice President - Savings
45
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percent Jurisdiction of
of Incorporation
Parent Subsidiary Ownership or Organization
- ------------------------- ---------------------------- ------------- ------------------
<S> <C> <C> <C>
First SecurityFed Financial, Inc. First Security Federal 100% Federal
Savings Bank
First Security Federal Western Security 100% Illinois
Savings Bank Corporation
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the annual
report on Form 10-K for the fiscal year ended December 31, 1997 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,090
<INT-BEARING-DEPOSITS> 200
<FED-FUNDS-SOLD> 18,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,461
<INVESTMENTS-CARRYING> 57,022
<INVESTMENTS-MARKET> 57,498
<LOANS> 186,259
<ALLOWANCE> 1,828
<TOTAL-ASSETS> 315,849
<DEPOSITS> 210,100
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 3,877
<LONG-TERM> 7,000
0
0
<COMMON> 64
<OTHER-SE> 91,808
<TOTAL-LIABILITIES-AND-EQUITY> 315,849
<INTEREST-LOAN> 14,669
<INTEREST-INVEST> 5,061
<INTEREST-OTHER> 944
<INTEREST-TOTAL> 20,674
<INTEREST-DEPOSIT> 9,629
<INTEREST-EXPENSE> 10,129
<INTEREST-INCOME-NET> 10,545
<LOAN-LOSSES> 738
<SECURITIES-GAINS> (32)
<EXPENSE-OTHER> 7,557
<INCOME-PRETAX> 2,842
<INCOME-PRE-EXTRAORDINARY> 2,842
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,825
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
<YIELD-ACTUAL> 3.97
<LOANS-NON> 9
<LOANS-PAST> 1,374
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,520
<CHARGE-OFFS> 434
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 1,828
<ALLOWANCE-DOMESTIC> 1,828
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 621
</TABLE>
