UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended: September 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 00-23063
First SecurityFed Financial , Inc.
(Exact Name of Registrant as Specified In Its Charter)
Delaware 36-4177515
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
Chicago, Illinois 60622
(Address of Principal Executive Offices) (Zip Code)
773/772-4500
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
Indicate the number of shares outstanding of each the issuer's classes of common
stock, as of the latest practicable date:
Class Outstanding at October 31,1998
Common Stock, par value $0.01 6,087,600 shares
1
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
INDEX
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition as of
September 30, 1998 and December 31, 1997.......................................................... 3
Condensed Consolidated Statements of Income for the three months and
nine months ended September 30, 1998 and 1997.................................................... 4
Statement of Comprehensive Income for the three months and
nine months ended September 30, 1998 and 1997...................................................... 5
Condensed Consolidated Statements of Changes in Stockholders` Equity for the
nine months ended September 30, 1998 and 1997...................................................... 6
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997........................................................... 8
Notes to the Condensed Consolidated Financial Statements as of
September 30, 1998................................................................................. 9
Item 2. Management's Discussion and Analysis of the Financial Condition
and Results of Operation...................................................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................................................ 21
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share and per share data)
(Unaudited)
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September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 12,886 $ 12,090
Federal funds sold 3,268 18,000
--------- ---------
Total cash and cash equivalents 16,154 30,090
Time deposits in other financial
institutions 200 200
Securities available-for-sale 35,758 32,461
Securities held-to-maturity (fair value of
$58,736 in 1998 and $57,498 in 1997) 58,319 57,022
Loans, net of allowance for loan losses 217,282 186,259
Federal Home Loan Bank stock 2,001 1,852
Premises and equipment, net 3,779 3,692
Accrued interest receivable 2,969 2,071
Intangible assets 246 291
Other assets 1,444 1,911
--------- ---------
Total assets $ 338,152 $ 315,849
========= =========
LIABILITIES AND STOCKHOLDERS` EQUITY
Liabilities
Deposits $ 218,508 $ 210,100
Advances from borrowers for taxes and
insurance 3,886 2,400
Advances from Federal Home Loan Bank 27,000 10,000
Accrued interest payable and other liabilities 1,343 1,477
--------- ---------
Total liabilities 250,737 223,977
Stockholders' Equity
Preferred stock, $0.01 par value per share, 500,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $0.01 par value per share, 8,000,000
shares authorized, 6,408,000 shares issued 64 64
Additional paid-in capital 65,633 65,495
Unearned ESOP shares (4,670) (4,935)
Unearned MRP shares (3,996) 0
Retained earnings, substantially restricted 35,554 31,290
Net unrealized loss on available-for-sale
securities, net of income taxes 1 (42)
Treasury stock, at cost; 320,400 shares (5,171) 0
--------- ---------
Total stockholders' equity 87,415 91,872
--------- ---------
Total liabilities and stockholders' equity $ 338,152 $ 315,849
========= =========
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share and per share data)
(Unaudited)
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Nine months ended Three months ended
September 30, September 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income
Loans $12,669 $10,637 $ 4,407 $ 3,676
Securities 3,080 1,381 1,113 485
Mortgage-backed securities 2,074 2,483 547 787
Other interest-earning assets 406 225 140 70
------- ------- ------- -------
Total interest income 18,229 14,726 6,207 5,018
Interest expense
Deposits 7,029 7,139 2,331 2,433
FHLB advances 717 335 304 152
------- ------- ------- -------
Total interest expense 7,746 7,474 2,635 2,585
Net interest income 10,483 7,252 3,572 2,433
Provision for loan losses 185 677 62 62
------- ------- ------- -------
Net interest income after
provision for loan losses 10,298 6,575 3,510 2,371
Noninterest income
Net gain on sale of securities 0 19 0 19
Other income 484 456 182 161
------- ------- ------- -------
Total noninterest income 484 475 182 180
Noninterest expense
Compensation and benefits 2,227 1,752 887 545
Occupancy and equipment expense 603 510 246 176
Data Processing 310 216 121 75
Federal deposit insurance premiums 159 130 53 52
Professional fees 127 118 46 38
Other operating expenses 780 905 281 264
------- ------- ------- -------
Total noninterest expense 4,206 3,631 1,634 1,150
------- ------- ------- -------
Income before income tax provision 6,576 3,419 2,058 1,401
Provision for income taxes 2,312 1,290 616 540
------- ------- ------- -------
Net income $ 4,264 $ 2,129 $ 1,442 $ 861
======= ======= ======= =======
Earnings per share
Basic $ .72 $ N/A $ .26 $ N/A
======= ======= ======= =======
Diluted $ .72 $ $ N/A .26 $ N/A
======= ======= ======= =======
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands, except share and per share data)
(Unaudited)
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Nine Months Ended Three Months Ended
September 30, September 30,
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income $4,264 $2,129 $1,442 $ 861
Other comprehensive income, net of tax:
Change in unrealized gains on securities 43 61 13 34
------ ------ ------ ------
Comprehensive Income $4,307 $2,190 $1,455 $ 895
====== ====== ====== ======
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except share and per share data)
(Unaudited)
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Unrealized
Gain (Loss) Total
Additional Unearned Unearned on Securities Stock-
Common Paid-in ESOP MRP Retained Available- Treasury holders'
Stock Capital Shares Share Earnings for-Sale Stock Equity
------- ---------- -------- -------- -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- -- -- -- $29,465 $ (204) -- $29,261
Net income -- -- -- -- 2,129 -- -- 2,129
Change in valuation allowance
for securities available-for-sale,
net of income taxes -- -- -- -- -- 61 -- 61
------- ------- ------- ------- ------- ------- ------- -------
Balance at September 30, 1997 -- -- -- -- $31,594 $ (143) -- $31,451
======= ======= ======= ======= ======= ======= ======= =======
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<CAPTION>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except share and per share data)
(Unaudited)
- continued -
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Unrealized
Gain (Loss) Total
Additional Unearned Unearned on Securities Stock-
Common Paid-in ESOP MRP Retained Available- Treasury holders'
Stock Capital Shares Shares Earnings for-Sale Stock Equity
---------- ---------- -------- -------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 64 $ 65,495 $ (4,935) -- $ 31,290 $ (42) -- $ 91,872
Unearned MRP shares -- 4,288 -- (4,288) -- -- -- --
ESOP shares earned -- 138 265 -- -- -- -- 403
MRP shares earned -- -- -- 292 -- -- -- 292
Net income -- -- -- -- 4,264 -- -- 4,264
Treasury stock -- -- -- -- -- -- (9,459) (9,459)
MRP shares allocated -- (4,288) -- -- -- -- 4,288 --
Change in valuation allowance
For securities available-for-sale
Net of income taxes -- -- -- -- -- 43 -- 43
-------- -------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1998 $ 64 $ 65,633 $ (4,670) $ (3,996) $ 35,554 $ 1 $ (5,171) $ 87,415
======== ======== ======== ======== ======== ======== ======== ========
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share and per share data)
(Unaudited)
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Nine months ended
September 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,264 $ 2,129
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 289 268
Amortization of discounts and premiums
on securities 132 111
Provision for loan losses 185 677
ESOP compensation expense 403 0
MRP Expense 292 0
Net gain on sales of securities available-for-sale 0 (19)
Change in
Deferred loan origination fees 40 20
Accrued interest receivable and other assets (431) 62
Other liabilities and deferred income taxes (134) (2,238)
-------- --------
Net cash provided by operating activities 5,040 1,010
Cash flows from investing activities
Purchase of securities available-for-sale (8,105) (15)
Purchase of securities held-to-maturity (16,943) (8,649)
Purchase of Federal Home Loan Bank Stock (149) (179)
Proceeds from sales of securities available-for-sale 0 2,638
Proceeds from repayment of securities 8,220 6,344
Proceeds from calls and maturities of securities 13,030 4,000
Net change in loans (32,151) (16,096)
Capital expenditures, net (313) (38)
Proceeds from sale of real estate owned 0 0
-------- --------
Net cash used in investing activities (36,411) (11,995)
Cash flows from financing activities
Net increase in deposits 8,408 2,250
Net borrowings from FHLB 17,000 8,000
Net decrease in advances from
borrowers for insurance and taxes 1,486 (980)
Buyback of outstanding Common Stock (9,459) 0
-------- --------
Net cash provided by (used in) financing activities 17,435 9,270
-------- --------
Decrease in cash and cash equivalents (13,936) (1,715)
Cash and cash equivalents at beginning of period 30,090 7,300
-------- --------
Cash and cash equivalents at end of period $ 16,154 $ 5,585
======== ========
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
First SecurityFed Financial, Inc. (the Company) is a Delaware corporation
organized in July 1997 by First Security Federal Savings Bank (the Bank) in
connection with the conversion of the Bank from a federally chartered mutual
savings bank to a federally chartered stock savings bank. For purposes of the
Form 10-Q the unaudited financial statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations presented herein are
for the Bank as a predecessor entity to the Company for periods prior to the
mutual to stock conversion on October 31,1997.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial condition of First SecurityFed
Financial, Inc. as of September 30, 1998 and December 31, 1997, and the results
of its operations and cash flows for the three and nine month periods ended
September 30, 1998 and 1997.
NOTE 2 - CONVERSION
On October 31, 1997, First Security Federal Savings Bank ("Bank") converted from
a federally chartered mutual savings bank to a federally chartered stock savings
bank. The Bank issued all of its common stock to First SecurityFed Financial,
Inc. ("Company") and at the same time the Company issued 6,408,000 shares of
common stock at $10.00 per share to the ESOP, certain depositors of the Bank,
and certain members of the general public, all pursuant to a plan of conversion
("Conversion").
As part of the conversion, the Bank's depositors approved a stock contribution
of 250,000 shares to The Heritage Foundation of First Security Federal Savings
Bank, Inc. (the "Foundation"). The contribution was accrued at the time of
conversion for $2.5 million based on the $10 per share initial offering price
and resulted in $2.5 million of expense ($1.5 million, net of tax) to the
Company. Additional paid-in capital was increased by $2.5 million as a result of
the unconditional commitment to contribute the stock to the Foundation.
The ESOP purchased 512,640 shares of common stock representing 8% of the total
issued shares. The ESOP borrowed $5,126,400 from the Company to purchase the
stock using the stock as collateral for the loan. The loan is to be repaid
principally from the Bank's contributions to the ESOP over a period of up to 20
years.
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3 - EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of the earnings per common
share computation for the three and nine month period ended September 30,1998 is
presented below:
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Three months ended Nine months ended
September 30,1998 September 30, 1998
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<S> <C> <C>
Earnings per common share
Net Income $1,442 $4,264
------ ------
Net income attributable to common shareholders $1,442 $4,264
====== ======
Weighted average common shares outstanding 5,261 5,657
Add: shares committed to be issued to charitable foundation 250 250
------ ------
Total weighted average common shares outstanding 5,511 5,907
====== ======
Basic earnings per share $ .26 $ .72
====== ======
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 4 - CAPITAL REQUIREMENTS
Pursuant to federal regulations, savings institutions must meet two separate
capital requirements. The following is a summary of the Bank's regulatory
capital at September 30, 1998.
Core Risk based
Capital Capital
------- -------
(In thousands)
Regulatory capital $65,798 $67,781
Minimum capital requirement 13,006 12,688
------- -------
Excess regulatory capital over
minimum requirement $52,792 $55,093
======= =======
NOTE 5 - COMPREHENSIVE INCOME
Under a new accounting standard, comprehensive income is now reported for all
periods. Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized gains and
losses on securities available-for-sale.
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11
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Comparison of Financial Condition at September 30, 1998 and December 31, 1997
Total assets increased $22.4 million to $338.2 million at September 30, 1998
from $315.8 million at December 31, 1997. The increase consisted primarily of
increases of $31.0 million in loans receivable and a $4.6 million in securities
funded by a decrease of $13.9 million in cash and cash equivalents, increases of
$8.4 million in deposits and $17.0 million in advances from the Federal Home
Loan Bank.
Net loans receivable increased by $31.0 million from $186.3 million at December
31, 1997 to $217.3 million at September 30, 1998 as a result of increased
marketing efforts and strong market demand due to the prevailing favorable
interest rate environment.
Cash and cash equivalents decreased by $13.9 million from $30.1 million at
December 31, 1997 to $16.2 million at September 30, 1998. This decrease was the
result of the redeployment of stock conversion proceeds and other funds into
higher yielding loans and securities, and the repurchase of stock.
Securities available-for-sale increased by $3.3 million from $32.5 million at
December 31, 1997 to $35.8 million at September 30, 1998. During the same nine
month period, securities held-to-maturity increased by $1.3 million from $57.0
million at December 31, 1997 to $58.3 million at September 30, 1998. This $4.6
million increase in securities was the result of the investment of the proceeds
of the institution's mutual-to-stock conversion.
Total liabilities at September 30, 1998 were $250.7 million compared to $224.0
million at December 31, 1997, an increase of $26.7 million. Deposits increased
by $8.4 million and FHLB advances, most of which had terms of 42 to 120 months,
increased by $17.0 million. During the same nine month period, advances from
borrowers for taxes and insurance increased $1.5 million. The net increase in
liabilities helped in funding loan growth, increasing the securities portfolio,
and repurchasing common stock.
Equity at September 30, 1998 was $87.4 million compared to $91.9 million at
December 31, 1997, a decrease of $4.5 million. The decrease was due primarily to
the company's repurchase of outstanding common stock of $9.5 million of which
$4.3 million was used to fund the Recognition and Retention Plan. This was
partially offset by net income of $4.3 million for the period.
Comparison of Operating Results for the Nine Months Ended September 30, 1998 and
September 30, 1997
General
Net earnings for the nine months ended September 30, 1998 were $4,264,000 , an
increase of $2,135,000 from net earnings of $2,129,000 for the nine months ended
September 30, 1997. The
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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increase was due primarily to an increase of $3,231,000 in net interest income
and a $492,000 decrease in the provision for loan losses partially offset by
increases of $639,000 in non-interest expense and $958,000 in the provision for
income taxes
Interest Income
Interest income for the nine months ended September 30, 1998 was $18.2 million
compared to $14.7 million for the nine months ended September 30, 1997, an
increase of $3.5 million or 23.8%. The increase in interest income was the
result of an increase in the average balance of interest earning assets due to
increases in the average balances of loan receivables and securities. The
increases in the average balances of loans receivable and securities were
primarily the result of investing funds from the mutual-to-stock conversion and
funds from Federal Home Loan Bank advances and deposits.
Interest Expense
Interest expense for the nine months ended September 30, 1998 was $7,746,000
compared to $7,474,000 for the nine months ended September 30, 1997, an increase
of $272,000 or 3.6%. The increase in interest expense was due primarily to a
$382,000 increase in interest paid on Federal Home Loan Bank advances which were
used to fund loan growth and was partially offset by a $110,000 decrease in
interest paid on deposits.
Provision for Loan Losses
The provision for loan losses for the nine months ended September 30, 1998 was
$185,000 compared to $677,000 for the nine months ended September 30, 1997, a
decrease of $492,000. The provision for loan losses in 1997 was due to various
loans to the Bennett Funding Group, Inc. (Bennett Funding) which were secured by
equipment leases. Bennett Funding declared bankruptcy in 1996. During 1996, no
additional loan loss provisions were made as management investigated whether the
leases securing the loans on their books were legally secured and also awaited
further rulings from the bankruptcy court. During 1997, after receiving a
settlement offer, the Bank charged off $432,000 of the Bennett Funding loans. In
addition, during 1997, the Bank was considering foreclosure proceedings on
several other loans as to which management was uncertain whether the Bank would
recover the outstanding balance and related expenses. These loans also
contributed to the increased provision for the nine months ended September 30,
1997.
The amount of the provision and allowance for estimated losses on loans is
influenced by current economic conditions, actual loss experience, industry
trends and other factors, including real estate values, in the Bank's market
area . In addition, various regulatory agencies, as an integral part of their
examination process , periodically review the Bank's allowance for estimated
losses on loans. Such agencies may require the Bank to provide additions to the
allowance based upon judgements which differ from those of management. Although
management uses the best information available and maintains the Bank's
allowance for losses at a level it believes adequate to provide for losses,
future adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Bank's control.
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13
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Noninterest Income
Noninterest income for the nine months ended September 30, 1998 was $484,000
compared to $475,000 for the nine months ended September 30, 1997. A $28,000
increase in other income due to increased ATM fees was partially offset by a
$19,000 decrease in the net gain on the sale of securities. However, service
charges on deposit and transaction accounts remained relatively stable during
these periods.
Noninterest Expense
Noninterest expense was $4,206,000 for the nine months ended September 30, 1998
compared to $3,631,000 for the nine months ended September 30, 1997, an increase
of $575,000.
Compensation and benefits expense increased by $475,000 due to the
implementation of the ESOP plan in October 1997 and the RRP plan in May 1998.
Occupancy and equipment expense increased by $93,000 primarily due to the
depreciation of newly purchased computer equipment and other office building
improvements at various locations of the bank. Data processing expense increased
by $94,000 due to increases in the numbers of deposit and loan accounts and
expenses associated with the Bank's computer conversion which was completed in
August of this year. Federal deposit insurance premiums were $29,000 greater for
the nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997 due to a $27,000 credit in the first quarter of 1997,
resulting from the payment of the special assessment for the recapitalization of
SAIF. Professional fees paid in the nine months ended September 30, 1998 were
$9,000 greater than in the nine month period ended September 30, 1997 primarily
due to increased reporting required of public companies. Other operating expense
for the nine month period ended September 30, 1998 was $125,000 less than for
the nine month period ended September 30, 1997 primarily due to decreases in
expenses on real estate owned and advertising. Also, the expense for charitable
contributions decreased as most donations were made by the previously funded
charitable foundation .
Income Taxes
The provision for income taxes was $2,312,000 for the nine months ended
September 30, 1998 compared to $1,290,000 for the nine months ended September
30, 1997, an increase of $1,022,000. The increase in the income tax provision
was due to an increase of $3.2 million in pretax earnings.
Comparison of Operating Results for the Three Months Ended September 30, 1998
and September 30, 1997
General
Net income for the three months ended September 30, 1998 was $1,442,000, an
increase of $581,000 from net income of $861,000 for the three months ended
September 30, 1997. The increase was due primarily to an increase of $1,139,000
in net interest income partially offset by an increase in noninterest expense of
$548,000.
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Interest Income
Interest income for the three months ended September 30, 1998 was $6.2 million
compared to $5.0 million for the three months ended September 30, 1997, an
increase of $1.2 million or 24%. The increase in interest income was the result
of an increase in the average balance of interest earning assets due to
increases in the average balances of loans receivable and securities. The
increases in the average balances of loans receivable and securities were
primarily the result of investing funds from the mutual-to-stock conversion, and
investing funds from FHLB advances and increased deposits.
Interest Expense
Interest expense for the three months ended September 30, 1998 was $2,635,000
compared to $2,585,000 for the three months ended September 30, 1997, an
increase of $50,000. The increase in interest expense was due primarily to a
$152,000 increase in interest paid on Federal Home Loan Bank advances which were
used to fund loan growth and was partially offset by a $102,000 decrease in
interest paid on deposits. The interest paid on deposits decreased due to the
current falling interest rate environment.
Provision for Loan Losses
The provision for loan losses was $62,000 for both the three month period ending
September 30, 1998 and the three month period ending September 30, 1997.
The amount of the provision and allowance for estimated losses on loans is
influenced by current economic conditions, actual loss experience, industry
trends and other factors, including real estate values, in the Bank's market
area. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for estimated
losses on loans. Such agencies may require the Bank to provide additions to the
allowance based upon judgements which differ from those of management. Although
management uses the best information available and maintains the Bank's
allowance for losses at a level it believes adequate to provide for losses,
future adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Bank's control.
Noninterest Income
Noninterest income for the three months ended September 30, 1998 was $182,000
compared to $180,000 for the three months ended September 30, 1997, an increase
of $2,000. A $21,000 increase in other income was due primarily to increased ATM
fee income and was offset by a $19,000 decrease in the net gain on the sale of
securities. Other service charges on deposit and transaction accounts remained
relatively stable during the two periods.
Noninterest Expense
Noninterest expense was $1,634,000 for the three months ended September 30, 1998
compared to $1,150,000 for the three months ended September 30, 1997, an
increase of $484,000. Compensation and benefits expense increased by $342,000
primarily due to the implementation of the ESOP plan in October 1997 and the RRP
plan in May 1998. Occupancy and equipment
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15
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
expense increased by $70,000 due to the depreciation of the newly purchased
computer equipment and other office building improvements at various locations
of the bank.
Data processing expense increased by $46,000 due to increases in the number of
deposit and loan accounts and costs associated with the Bank's computer
conversion which was completed in August of this year. Professional fees paid
during the three months ended September 30, 1998 were $8,000 greater than during
the three months ended September 30, 1997 primarily due to the increased
reporting required of public companies. Other operating expense for the three
month period ended September 30, 1998 was $17,000 more than for the three month
period ended September 30, 1997 due to increased travel and education expenses
related to the training of employees in the use of the new computer system. Also
contributing to the increased expense was the increase in appraisal fees paid to
mortgage appraisers during the recent period of high loan demand.
Income Taxes
The provision for income taxes was $616,000 for the three months ended September
30, 1998 compared to $540,000 for the three months ended September 30, 1997, an
increase of $76,000. The increase in the provision for income taxes was due to
an increase of $657,000 in pretax earnings.
Impact of New Accounting Standards
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information", was issued in 1997 by the Financial
Accounting Standards Board. This Statement establishes standards for the way
that public business enterprises report information about operating segments in
annual financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS 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.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS 133 does not allow hedging of a security which is
classified as held-to-maturity, accordingly, upon adoption of SFAS 133,
companies may reclassify any security from held-to-maturity to
available-for-sale if they wish to be able to hedge the security in the future.
SFAS 133 is effective for the fiscal years beginning after June 15, 1999 with
early adoption encouraged for any fiscal quarter beginning July 1, 1998 or
later, with no retroactive application. Management does not expect the adoption
of SFAS 133 to have a significant impact on the Company's financial statements.
- --------------------------------------------------------------------------------
16
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise", changes the way companies
involved in mortgage banking account for certain securities and other interests
they retain after securitizing mortgage loans that were held for sale. SFAS 134
allows any retained mortgage-backed securities after a securitization of
mortgage loans held for sale to be classified based on holding intent in
accordance with SFAS 115 except in cases where the retained mortgage-backed
security is committed to be sold before or during the securitization process in
which case it must be classified as trading. Previously, all retained
mortgage-backed securities were required to be classified as trading. SFAS 134
will be effective on January 1,1999 and is not expected to have a significant
impact on the Company's financial statements, as the Company currently does not
securitize loans.
Impact Of Inflation and Changing Prices
The consolidated 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 results of operations in terms
of historical dollars, without considering changes in the relative purchasing
power of money over time due to inflation. Unlike most industrial companies,
virtually all of the assets and liabilities of the Company are monetary in
nature. Therefore, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. In the current interest rate
environment, the liquidity and maturity structure and quality of the Company's
assets and liabilities are critical to the maintenance of acceptable performance
levels.
Safe Harbor Statement
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Bank intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposed of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Bank, are
generally identifiable by use of the words "believe", "expect", "intend",
"anticipate", "estimate", "project" or similar expressions. The Bank's ability
to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Bank and the subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative / regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Bank's market area and accounting principles, policies and guidelines. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that
- --------------------------------------------------------------------------------
17
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
could materially affect the Bank's financial results, is included in the Bank's
filings with the Securities and Exchange Commission.
Year 2000
The Bank's lending and deposit activities are almost entirely dependent upon
computer systems which process and record transactions, although the Bank can
effectively operate with manual systems for brief periods when its electronic
systems malfunction or cannot be accessed. Currently, the Bank utilizes the
services of a nationally recognized data processing service bureau which
specializes in data processing for financial institutions.
The Bank has conducted a review of its computer systems to review the systems
that could be affected by the Year 2000 issue and has developed a plan of action
to resolve the issue. In 1997, the Bank began a process of identifying any Year
2000 related problems that may be experienced by its computer-dependent systems.
During this process of identifying and assessing any potential Year 2000 related
problems, the Bank decided to convert from its current data processing service
bureau to the aforementioned nationally-recognized data processing service
bureau. As part of this conversion, the Bank also decided to purchase all new
computer hardware to replace the existing outdated teller terminals. The
installation of the new hardware and the conversion to the new service bureau
took place successfully in August 1998.
The Bank has received confirmation from both the computer hardware supplier and
the data processing service bureau that both systems (hardware and software) are
Year 2000 compliant. However, the Bank will perform it's own independent testing
of the systems in November 1998 and again in the spring of 1999.
The Bank has contacted the companies that supply or service its
computer-dependent systems to obtain confirmation that each system that is
material to the operation of the Bank is either currently Year 2000 compliant or
is expected to be Year 2000 compliant. With respect to systems that cannot
presently be confirmed as Year 2000 complaint, the Bank will continue to work
with appropriate servicer or supplier to ensure all such systems will be
rendered compliant in a timely manner, with minimal expense to the Bank or
disruption of the Bank's operations. All of the identified computer systems
affected by the Year 2000 issue are currently in the renovation, validation or
implementation phase of the process of becoming Year 2000 compliant.
In addition to the possible expense related to its own systems, the Bank could
incur losses if loan payments are delayed due to Year 2000 problems affecting
any of the Bank's significant borrowers or impairing the payroll systems of
large employers in the Bank's primary market area. Because the Bank's loan
portfolio is highly diversified with regard to individual borrowers and types of
businesses and the Bank's primary market area is not significantly dependent on
one employer or industry, the Bank does not expect any significant or prolonged
Year 2000 related difficulties will affect net earnings or cash flow. At this
time, however, the expense that may be incurred by the Bank in connection with
Year 2000 issues cannot be determined.
- --------------------------------------------------------------------------------
18
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
- --------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In an attempt to manage its exposure to changes in interest rates, management
monitors the Company's interest rate risk. The Board of Directors reviews at
least quarterly the Company's interest rate risk position and profitability. The
Board of Directors also reviews the Company's portfolio, formulates investment
strategies and oversees the timing and implementation of transactions to assure
attainment of the Company's objectives in the most effective manner. In
addition, the Board reviews on a quarterly basis the Company's asset/liability
position, including simulations of the effect on the Company's capital of
various interest rate scenarios.
In managing its asset/liability mix, the Company, depending on the relationship
between long- and short-term interest rates, market conditions and consumer
preference, often places more emphasis on managing short term net interest
margin than on better matching the interest rate sensitivity of its assets and
liabilities in an effort to enhance net interest income. Management believes
that the increased net interest income resulting from a mismatch in the maturity
of its asset and liability portfolios can, during periods of declining or stable
interest rates, provide high enough returns to justify the increased exposure to
sudden and unexpected increases in interest rates.
The Board has taken a number of steps to manage the Company's vulnerability to
changes in interest rates. First, the Company has long used community outreach,
customer service and marketing efforts to increase the Company's passbook and
other non-certificate accounts. At September 30, 1998, $94.8 million or 43.4% 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 September 30, 1998, $12.4 million or
46.1% 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 $20.9 million or 31.0% 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 June 30,1998, the
latest date for which information is available, 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. Even though the information presented reflects the Bank's
interest rate risk position at the close of the prior quarter, management
believes that it is helpful in assessing the Bank's current interest rate risk
position.
- --------------------------------------------------------------------------------
19
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
- --------------------------------------------------------------------------------
Assumed Change $ Change in $ Change
In Interest Rates $ Amount NPV NPV
----------------- -------- ----------- --------
(Basis Points) (Dollars in Thousands)
+ 400 $ 52,685 $(24,688) (32)%
+ 300 59,264 (18,109) (23)
+ 200 65,937 (11,435) (15)
+ 100 72,305 (5,068) (7)
-- 77,373 -- --
- 100 81,817 4,445 6
- 200 85,367 7,995 10
- 300 89,673 12,300 16
- 400 94,606 17,233 22
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.
- --------------------------------------------------------------------------------
20
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
- --------------------------------------------------------------------------------
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits - Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K - none
- --------------------------------------------------------------------------------
21
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST SECURITYFED FINANCIAL, INC
(Registrant)
By: /s/Julian E. Kulas
--------------------------------------
Julian E. Kulas
Principal Executive Officer
November 13,1998
By: /s/Harry Kucewicz
--------------------------------------
Harry Kucewicz
Chief Financial and Accounting Officer
November 13, 1998
- --------------------------------------------------------------------------------
22
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 12,886
<INT-BEARING-DEPOSITS> 200
<FED-FUNDS-SOLD> 3,268
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35,758
<INVESTMENTS-CARRYING> 58,319
<INVESTMENTS-MARKET> 58,736
<LOANS> 217,282
<ALLOWANCE> 2,006
<TOTAL-ASSETS> 338,152
<DEPOSITS> 218,508
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,229
<LONG-TERM> 27,000
0
0
<COMMON> 64
<OTHER-SE> 87,351
<TOTAL-LIABILITIES-AND-EQUITY> 338,152
<INTEREST-LOAN> 12,669
<INTEREST-INVEST> 5,154
<INTEREST-OTHER> 406
<INTEREST-TOTAL> 18,229
<INTEREST-DEPOSIT> 7,029
<INTEREST-EXPENSE> 7,746
<INTEREST-INCOME-NET> 10,483
<LOAN-LOSSES> 185
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,206
<INCOME-PRETAX> 6,576
<INCOME-PRE-EXTRAORDINARY> 6,576
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,264
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.72
<YIELD-ACTUAL> 4.51
<LOANS-NON> 9
<LOANS-PAST> 1,951
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,951
<CHARGE-OFFS> 6
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,006
<ALLOWANCE-DOMESTIC> 2,006
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,045
</TABLE>
