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, 1998
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 (ss. 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. [ ]
As of December 31, 1998, the Registrant had 5,854,512 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, 1998 was $66.5 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, 1998.
PART III of Form 10-K - Proxy Statement for 1998 Annual Meeting of
Stockholders.
1
<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 midsize 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 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 home equity, multi-family and
commercial real estate, consumer and other loans in its market area. At December
31, 1998, the Bank's loans receivable, net totaled $218.3 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,
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------ ----------------- ------------------ -------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- --------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family........ $182,452 82.23% $154,819 81.66% $134,971 81.14% $117,379 79.83 %$110,280 79.53%
Multi-family............... 11,313 5.10 10,999 5.80 9,374 5.63 7,926 5.39 7,731 5.58
Commercial................. 11,535 5.20 9,308 4.91 7,647 4.60 7,865 5.35 6,911 4.98
Mixed use(1)............... 9,898 4.46 7,927 4.18 8,004 4.81 7,262 4.94 7,433 5.36
------- ----- ------- ------ ------- ----- --------- ------ ------- ------
Total real estate loans.. 215,198 96.99 183,053 96.55 159,996 96.18 140,432 95.51 132,355 95.45
Consumer loans:
Share loans................ 1,091 .49 1,421 0.75 1,174 0.71 1,570 1.07 1,328 0.96
Automobile................. 16 .01 47 0.01 74 0.04 110 0.07 141 0.10
Home equity................ 5,158 2.32 4,602 2.43 3,431 2.06 3,684 2.51 3,870 2.79
Home improvement........... 11 .01 7 0.01 12 0.01 29 0.02 69 0.05
Other...................... 404 .18 387 0.21 395 0.24 445 0.30 452 0.33
------- ----- ------- ------ ------- ----- --------- ------ ------- ------
Total consumer loans.... 6,680 3.01 6,464 3.41 5,086 3.06 5,838 3.97 5,860 4.23
Loans secured by leases.... --- --- 81 0.04 1,272 0.76 759 0.52 448 0.32
------- ------ ------- ------ ------- ----- --------- ------ ------- ------
Total loans.............. 221,878 100.00% 189,598 100.00% 166,354 100.00% 147,029 100.00% 138,663 100.00%
====== ====== ====== ======
Less:
Deferred fees and discounts 1,498 1,511 1,486 1,578 1,664
Allowance for losses....... 2,069 1,828 1,520 885 792
------- ------- ------- --------- -------
Total loans receivable, net $218,311 $186,259 $163,348 $144,566 $136,207
======== ======== ======== ========
</TABLE>
- -----------
(1) Mixed use refers to real estate on which the borrower both resides and
conducts a business.
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,
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------ ----------------- ------------------ -------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- --------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family... $175,246 78.9 $143,882 75.89 $118,308 71.12 $101,015 68.70 $ 93,139 67.17%
Multi-family.......... 11,313 5.10 10,999 5.80 9,169 5.51 7,719 5.25 7,522 5.43
Commercial............ 8,625 3.89 7,649 4.04 6,545 3.94 7,370 5.01 6,628 4.78
Mixed use(1).......... 9,444 4.26 7,446 3.93 7,424 4.46 6,666 4.53 6,790 4.90
--------- ------ -------- ------ -------- ------ -------- ----- ------- ------
Total real estate loans 204,628 92.23 169,976 89.66 141,446 85.03 122,770 83.49 114,079 82.28
Consumer................ 1,522 .69 1,862 0.98 1,655 1.00 2,154 1.46 1,990 1.44
Loans secured by leases. --- --- 81 0.04 1,272 0.76 759 0.52 448 0.32
-------- ------ ------- ------ ------- ------- -------- ----- -------- ------
Total fixed-rate loans 206,150 92.92 171,919 90.68 144,373 86.79 125,683 85.47 116,517 84.04
Adjustable-Rate Loans
Real estate:
One-to-four-family.... 7,206 3.25 10,937 5.77 16,663 10.02 16,364 11.13 17,141 12.36
Multi-family.......... --- --- --- --- 205 0.12 207 0.14 209 0.15
Commercial............ 2,910 1.31 1,659 0.87 1,102 0.66 495 0.34 283 0.20
Mixed use............. 454 .20 481 0.25 580 0.35 596 0.41 643 0.46
Consumer................ 5,158 2.32 4,602 2.43 3,431 2.06 3,684 2.51 3,870 2.79
------- ------ ------- ------- ------ ------ -------- ------- ------- ------
Total adjustable-rate loans 15,728 7.08 17,679 9.32 21,981 13.21 21,346 14.53 22,146 15.96
------- ------ ------- ------- ------ ------ ------- ----- ------- ------
Total loans........... $221,878 100.00% 189,598 100.00% 166,354 100.00% 138,663 100.00% 138,663 100.00%
====== ====== ====== ====== ======
Less:
Deferred fees and discounts 1,498 1,511 1,486 1,578 1,664
Allowance for losses.... 2,069 1,828 1,520 885 792
------- -------- --------- ------- ------
Total loans receivable,
net................. $218,311 $186,259 $163,348 $144,566 $136,207
======== ======== ======== ======== ========
</TABLE>
4
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at December 31, 1998. 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due During
Years Ending
December 31,
- -------------------
1999................... $ 1,603 7.49% $4,007 8.98% $1,168 9.21% $ 6,778 8.67%
2000................... 1,174 7.81 1,885 9.25 652 8.54 3,711 8.67
2001 to 2003........... 19,713 7.74 16,955 8.88 4,786 8.30 41,454 8.27
2004 to 2008........... 17,303 7.59 1,582 9.51 29 4.50 18,914 7.75
2009 to 2023........... 70,185 7.93 7,359 8.77 45 7.41 77,589 8.01
2024 and following..... 72,474 7.66 958 8.11 --- --- 73,432 7.67
-------- ---- ------- ---- ------- ---- -------- ----
Total............... $182,452 7.77% $32,746 8.90% $6,680 8.46% $221,878 7.96%
======== ======= ======= ========
</TABLE>
The total amount of loans due after December 31, 1998 which have
predetermined interest rates is $206.2 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $15.7
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, 1998,
based on the above, the Bank's regulatory loans-to-one borrower limit was
approximately $10.0 million. On the same date, the Bank had no borrowers with
outstanding balances in excess of this amount. As of December 31, 1998, the
largest dollar amount outstanding or committed to be lent to one borrower or,
group of related borrowers, related to one residential loan and several
multi-family dwelling loans totaling $1.4 million secured by the borrower's
residence and several multi-family dwellings located in Chicago, Illinois. At
December 31, 1998, these loans were performing in accordance with their terms.
As of the same date, there were five 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, 1998, the Bank had $25.7 million
of fixed rate loans with original terms of 10 years or less (most of which were
five or seven year balloon loans), $56.5 million of fixed rate loans with
original terms of 10-15 years and $93.0 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, 1998, the
Bank had $1.0 million 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, 1998, one- to four-family ARMs
totaled $7.2 million or 3.25% of the Bank's total loan portfolio. ARM volume
increased during 1998 as a result of an increase in first-time home buyers.
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
6
<PAGE>
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 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, 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 originates permanent multi-family and commercial real estate loans
secured by properties in its primary market area. At December 31, 1998, the Bank
had multi-family loans totaling $11.3 million, or 5.1% of the Bank's total loan
portfolio, and $21.4 million in commercial real estate loans, representing 9.7%
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 $2.8 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, 1998, the Bank's largest commercial real estate or
multi-family loan outstanding totaled $814,000 and was secured by a mixed use
building containing a veterinary hospital on the ground floor and apartments on
the second floor 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, 1998 consumer loans totaled $6.7 million or 3.0%
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, 1998, the Bank's home equity
lines of credit totaled $5.2 million outstanding, or 2.3% 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,
-------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family........ $ 1,791 $ 1,082 $ 3,067
------- ------- -------
Total adjustable-rate.............. 1,791 1,082 3,067
------- ------- -------
Fixed rate:
Real estate - one- to four-family........ 68,797 46,207 34,696
- multi-family......... 5,076 6,066 4,329
- commercial........... 5,289 1,234 682
Non-real estate - consumer............... 3,772 3,477 2,039
Loan secured by leases................. --- --- 500
------- ------- -------
Total fixed-rate................... 82,934 56,984 42,246
------- ------- -------
Total loans originated............. 84,725 58,066 45,313
------- ------- -------
Principal repayments........................ (52,445) (34,822) (25,988)
------- ------- -------
Increase (decrease) in other
items, net.............................. (228) (333) (543)
------- ------- -------
Net increase........................ $32,052 $22,911 $18,782
======= ======= =======
</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, 1998.
<TABLE>
<CAPTION>
Loans Delinquent For:
----------------------------------------------------------------
Total Loans Delinquent
60-89 Days 90 Days and Over 60-Days-or-More
---------------------------- ----------------------------- ----------------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
---------- -------- ---------- ------- -------- ---------- --------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family........ 4 $64 .04% 12 $468 .26% 16 $ 532 .29%
Multi-family............... 1 78 .69 3 224 1.98 4 302 2.67
Commercial and mixed use... 3 467 4.05 3 313 1.46 6 780 3.64
Consumer..................... 4 5 .07 6 7 .10 10 12 .18
-- --- ---- -- ----- ---- -- ----- ----
Total........................ 12 $614 .28% 24 $1,012 .46% 36 $1,626 .73%
== ==== ==== == ====== ==== == ====== ====
</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, 1998,
the Bank had classified a total of $1.0 million of its loan and other assets as
follows:
<TABLE>
<CAPTION>
At
December 31,
1998
--------------------
(In Thousands)
<S> <C>
Substandard........................................... $1,007
Doubtful assets....................................... 5
Loss assets........................................... ---
Total........................................... $1,012
General loss allowance................................ $2,069
Specific loss allowance............................... $ ---
Charge-offs, net...................................... $ 5
</TABLE>
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,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ---------------- ------------ ------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family....................... $ 9 $ 9 $ 9 $ 9 $ 41
Commercial real estate.................... --- --- --- --- 254
------ ------- ------ ------ ------
Total................................ 9 9 9 9 295
Accruing loans delinquent 90 days or more:
One- to four-family....................... 459 614 1,111 971 500
Multi-family.............................. 224 --- 180 367 330
Commercial real estate.................... 313 566 882 749 257
Consumer.................................. 7 194 226 189 43
------ ------- ------ ------ ------
Total................................ 1,003 1,374 2,399 2,276 1,130
Foreclosed assets:
One- to four-family....................... --- --- 40 --- ---
Commercial real estate.................... --- --- --- 499 207
------ ------- ------ ------ ------
Total................................ --- --- 40 499 207
Non-performing leases(1).................... --- 81 1,272 --- ---
------ ------- ------ ------ ------
Total non-performing assets................. $1,012 $1,464 $3,720 $2,784 $1,632
====== ====== ====== ====== ======
Total as a percentage of total assets....... 0.30% 0.46% 1.44% 1.11% 0.72%
==== ==== ==== ==== ====
</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, 1997 and December 31, 1998, 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 $45,000 and
$116,000, respectively. No interest income was recognized on non-accruing loans
for the years ended December 31, 1998 and December 31, 1997, respectively.
Other Loans of Concern. In addition to the non-performing assets set forth
in the table above, as of December 31, 1998, 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,
--------------------------------------------------------
1998 1997 1996 1995 1994
----------- -------- ----------- -------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.... $1,828 $1,520 $ 885 $792 $608
Charge-offs:
One- to four-family............. --- --- --- --- ---
Multi-family.................... --- --- --- --- ---
Commercial real estate.......... --- --- 68 28 ---
Construction or development..... --- --- --- --- ---
Consumer........................ 5 2 3 15 ---
Leases.......................... --- 432 --- --- ---
------ ------ ------ ---- ----
5 434 71 43 ---
Recoveries:
One- to four-family............. --- --- --- --- ---
Multi-family.................... --- --- --- --- ---
Commercial real estate.......... --- --- --- --- ---
Construction or development..... --- --- --- --- ---
Consumer........................ --- 4 --- --- 2
Leases.......................... --- --- --- --- ---
------ ------ ------ ---- ----
--- 4 --- --- 2
Net (charge-offs) recoveries...... (5) (430) (71) (43) 2
Additions charged to operations... 246 738 706 136 182
------ ------ ------ ---- ----
Balance at end of period.......... $2,069 $1,828 $1,520 $885 $792
====== ====== ====== ==== ====
Ratio of net charge-offs
(recoveries) during the period
to average loans outstanding
during the end of period....... ---% 0.25% 0.05% (0.03)% ---%
=== ==== ==== ==== ====
Ratio of net charge-offs
(recoveries) during the period
to average non-performing assets. 38%s 21.12% 2.15% (1.88)% (0.10)%
=== ===== ==== ==== =====
</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,
--------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
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 . $ 736 $182,452 82.23% $ 572 $154,819 81.66% $ 355 $134,971 81.14%
Multi-family ........ 83 11,313 5.10 67 10,999 5.80 56 9,374 5.63
Commercial real
estate ........... 483 21,433 9.66 448 17,235 9.09 245 15,651 9.41
Construction or
development ...... -- -- -- -- -- -- -- -- --
Consumer ............ 112 6,680 3.01 80 6,464 3.41 68 5,086 3.06
Loans secured by
leases ........... -- -- -- 40 81 0.04 318 1,272 0.76
Unallocated ......... 655 -- -- 621 -- -- 478 -- --
Total ........ $ 2,069 $221,878 100.00% $ 1,828 $189,598 100.00% $ 1,520 $166,354 100.00%
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1995 1994
-----------------------------------------------------------------
Percent Percent
of Loans of Loans
Amount Loan in Each Amount Loan in Each
of Loan Amounts Category of Loan Amounts Category
Loss by of Total Loss by of Total
Allowance Category Loans Allowance Category Loans
-----------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family . $ 310 $117,379 79.83% $ 284 $110,280 79.53%
Multi-family ........ 56 7,926 5.39 52 7,731 5.58
Commercial real
estate ........... 199 15,127 10.29 233 14,344 10.34
Construction or
development ...... -- -- -- -- -- --
Consumer ............ 70 5,838 3.97 71 5,860 4.23
Loans secured by
leases ........... 76 759 0.52 55 448 0.32
Unallocated ......... 174 -- -- 97 -- --
Total ........ $ 885 $147,029 100.00% $ 792 $138,663 100.00%
</TABLE>
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, 1998,
the Bank's short-term liquidity ratio for regulatory purposes was 41.38%. 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.
The Company's 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, 1998, the Company had no securities which
were classified as trading and $26.3 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, 1998, 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, 1998, $12.4 million, or 51.7% of the Company's mortgage-backed and related
securities were available-for-sale. In addition, on the same date, $11.8 million
or 49.2% of the Company's mortgage-backed and related securities carried
adjustable rates. Finally, as discussed further below, at December 31, 1998, the
Company had $2.4 million of collateralized mortgage obligations ("CMOs") and
real estate mortgage investment conduits ("REMICs") 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 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, REMICs 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, 1998, 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,
----------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- --------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
--------- ------ -------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities held-to- maturity:
GNMA.............................................. $ 4,975 20.73% $ 7,781 22.05% $ 9,226 21.05%
FNMA.............................................. 1,474 6.14 2,531 7.17 3,294 7.51
FHLMC............................................. 2,955 12.31 4,558 12.92 6,280 14.33
CMOs/REMICs....................................... 2,183 9.10 3,681 10.44 5,309 12.11
11,587 48.28 18,551 52.58 24,109 55.00
Mortgage-backed securities available-for- sale:
GNMA.............................................. 1,983 8.26 2,982 8.45 3,425 7.81
FNMA.............................................. 4,309 17.96 5,605 15.89 6,572 14.99
FHLMC............................................. 5,907 24.62 7,601 21.54 8,985 20.50
CMOs/REMICs....................................... 211 .88 545 1.54 745 1.70
12,410 51.72 16,733 47.42 19,727 45.00
Total mortgage-backed securities............... $23,997 100.00% $35,284 100.00% $43,836 100.00%
</TABLE>
17
<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at December 31, 1998.
<TABLE>
<CAPTION>
December 31,
Due in 1998
------------------------------------------------------------------ ------------------
6 Months 6 Months 1 to 3 to 5 5 to 10 10 to 20 Over 20 Amortized Carrying
or Less to 1 Year 3 Years Years Years Years Years Cost Value
-------- --------- ------- ------ ------- -------- ------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation ... $ -- $ -- $ 221 $ 572 $ 1,125 $ 2,374 $ 4,807 $ 9,099 $ 8,751
Federal National Mortgage Association .... -- 146 -- 551 282 2,115 2,751 5,845 5,790
Government National Mortgage Association . -- -- -- -- 353 1,507 5,077 6,937 7,108
CMOs and REMICs .......................... 322 -- -- -- 692 551 829 2,394 2,382
------- ------- ------- ------- ------- ------- ------- ------- -------
Total ............................... $ 322 $ 146 $ 221 $ 1,123 $ 2,452 $ 6,547 $13,464 $24,275 $24,031
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
18
<PAGE>
As of December 31, 1998, 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 $5.8 million, $8.9 million and $7.0 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,
---------------------------------------
1998 1997 1996
---------------------------------------
(In Thousands)
Purchases:
Adjustable-rate .................. $ -- $ -- $ 2,396
Fixed-rate ....................... -- -- 4,583
CMOs ............................. -- -- 510
Total purchases ............. -- -- 7,489
-------- -------- --------
Principal repayments ................. (11,096) (8,475) (8,639)
Discount/premium net change .......... (114) (184) 16
Fair value net change ................ (77) 107 (194)
-------- -------- --------
Net increase (decrease) ..... $(11,287) $ (8,552) $ (1,328)
======== ======== ========
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, 1998
and December 31, 1997, the Company's securities portfolio totaled $60.6 million
and $54.2 million, respectively. At December 31, 1998, 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,
-----------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------
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 ................ $41,504 68.47% $33,562 61.92% $20,320 58.43%
Municipal bonds ........................... 5,176 8.54 4,909 9.06 5,208 14.98
Corporate notes ........................... -- -- -- -- 251 0.72
------- ------ ------- ------ ------- ------
46,680 77.01 38,471 70.98 25,779 74.13
Securities available-for sale:
US government securities .................. 2,577 4.25 8,014 14.79 3,350 9.63
Mutual funds .............................. 3,164 5.22 3,155 5.82 5,645 16.23
Municipal bonds ........................... 7,679 12.67 3,966 7.32 -- --
Corporate notes ........................... 242 .40 250 0.46 -- --
Other equity .............................. 271 .45 343 0.63 2 0.01
------- ------ ------- ------ ------- ------
13,933 22.99 15,728 29.02 8,997 25.87
------- ------ ------- ------ ------- ------
Total securities ..................... $60,613 100.00% $54,199 100.00% $34,776 100.00%
======= ====== ======= ====== ======= ======
Other earning assets:
Interest-earning deposits with banks ...... $ 8,205 41.60% $ 5,750 22.28% $ 2,713 44.58%
FHLB stock ................................ 2,131 10.80 1,852 7.18 1,673 27.49
Federal funds sold ........................ 9,189 46.59 18,000 69.76 1,500 24.65
Time deposit in other financial
institutions ............................. 200 1.01 200 0.78 200 3.28
------- ------ ------- ------ ------- ------
Total ............................... $19,725 100.00% $25,802 100.00% $ 6,086 100.00%
======= ====== ======= ====== ======= ======
</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, 1998
-----------------------------------------------------------------------------------
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 ................. $ -- $ -- $ -- $ 258 $ 258 $ 382
Federal agency obligations ............... -- 19,579 24,074 -- 43,653 43,931
Municipal bonds .......................... 526 1,769 1,380 9,005 12,680 13,131
Corporate notes .......................... -- -- 250 -- 250 242
------- ------- ------- ------- --------- -------
Total securities ......................... $ 526 $21,348 $25,704 $ 9,263 $56,841(1) $57,686
======= ======= ======= ======= ========= =======
Weighted average yield ................... 5.42% 6.25% 6.07% 5.29% 6.01%
==== ==== ==== ==== ====
</TABLE>
- -------------------------
(1) Includes $54.6 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 $96.5 million or 43.7%
of total deposits at December 31, 1998, 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,
-----------------------------------------
1998 1997 1996
-----------------------------------------
(Dollars In Thousands)
Opening balance ................. $ 210,100 $ 219,505 $ 209,387
Deposits ........................ 373,966 457,063 347,280
Withdrawals ..................... (372,758) (475,811) (346,192)
Interest credited ............... 9,187 9,343 9,030
--------- --------- ---------
Ending balance .................. $ 220,495 $ 210,100 $ 219,505
========= ========= =========
Net increase (decrease) ......... $ 10,395 $ (9,405) $ 10,118
========= ========= =========
Percent increase (decrease) ..... 4.95% (4.28)% 4.83%
==== ===== ====
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,
----------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ----------------------
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% .................. $ 74,963 34.0% $ 68,572 32.6% $ 71,167 32.4%
NOW Accounts 2.23% ....................... 16,976 7.7 15,705 7.5 14,509 6.6
Money Market Accounts 3.06% .............. 4,524 2.0 4,574 2.2 5,107 2.3
-------- ----- -------- ----- -------- -----
Total Non-Certificates ................... 96,463 43.7 88,851 42.3 90,783 41.3
Certificates:
0.00 - 3.99% ............................. 226 0.1 -- -- 119 0.1
4.00 - 5.99% ............................. 111,820 50.7 108,902 51.8 116,397 53.0
6.00 - 7.99% ............................. 11,892 5.4 12,347 5.9 12,094 5.5
8.00 - 9.00% ............................. 94 0.1 -- -- 112 0.1
-------- ----- -------- ----- -------- -----
Total Certificates ....................... 124,032 56.3 121,249 57.7 128,722 58.7
-------- ----- -------- ----- -------- -----
Total Deposits ........................... $220,495 100.0% $210,100 100.0% $219,505 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
22
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1998.
<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>
3.00 - 3.99% .............. $ 226 $ -- $ -- $ -- $ -- $ -- $ 226
4.00 - 4.99% .............. 31,657 1,002 54 2 57 -- 32,772
5.00 - 5.99% .............. 67,955 6,549 1,725 1,080 1,739 -- 79,048
6.00 - 6.99% .............. 577 5,563 1,653 1,504 80 -- 9,377
7.00 - 7.99% .............. -- 1,648 3 864 -- -- 2,515
8.00 - 8.99% .............. 45 -- -- -- -- 49 94
-------- -------- -------- -------- -------- -------- --------
$100,460 $ 14,762 $ 3,435 $ 3,450 $ 1,876 $ 49 $124,032
======== ======== ======== ======== ======== ======== ========
</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,
1998.
<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 .......................................... $ 32,589 $ 23,795 $ 22,162 $ 15,011 $ 93,557
Certificates of deposit $100,000
or more ........................................... 8,097 8,279 5,538 8,561 30,475
Total certificates of deposit ................. $ 40,686 $ 32,074 $ 27,700 $ 23,572 $124,032
</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.
23
<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,
----------------------------------------------------
1998 1997 1996 1996 1995
----------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Maximum Balance:
FHLB Advances ................. $29,000 $12,000 $ 3,000 $ 4,000 $10,000
Average Balance:
FHLB Advances ................. $21,667 $ 9,548 $ 3,000 $ 3,333 $ 3,769
Weighted average interest rate of
FHLB advances ................. 5.10% 5.72% 5.17% 5.25% 5.25%
</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, 1998, 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 $28,802 as of December 31, 1998. Western recognized net income loss of
$9,500 during the year ended December 31, 1998 and $15,000 during the year ended
December 31, 1997.
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.
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
24
<PAGE>
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, 1998 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, 1998, First Security's lending
limit under this restriction was $10.0 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, asset quality, earnings standards, 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.
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
25
<PAGE>
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.
Effective January 1, 1997, the premium schedule for BIF and SAIF
insured institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve thrift failures in the
1980s, equal to approximately 6.48 basis points for each $100 in domestic
deposits, while BIF-insured institutions pay an assessment equal to
approximately 1.52 basis points for each $100 in domestic deposits. The
assessment is expected to be reduced to 2.43 basis points no later than January
1, 2000, when BIF insured institutions fully participate in the assessment.
These assessments, which may be revised based upon the level of BIF and SAIF
deposits will continue until the bonds mature in the year 2017.
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, 1998, First Security had
$236,000 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, 1998, First Security had tangible capital of $66.7
million, or 20.4% of adjusted total assets, which is approximately $61.8 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, 1998, First Security had core capital equal to $66.7
million, or 20.4% of adjusted total assets, which is $53.7 million above the
minimum leverage ratio requirement of 4% as in effect on that date.
26
<PAGE>
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, 1998, First Security
had $2.1 million of general loss reserves of which $2.0 million qualifies as
supplementary capital, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. First Security had no
such exclusions from capital and assets at December 31, 1998.
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 that savings associations 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 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 risk-based capital ratio in excess of 12% is exempt from this requirement
unless the OTS determines otherwise. At the present time, the proposal is not
expected to have a material impact on the Bank.
On December 31, 1998, First Security had total risk-based capital of
approximately $68.7 million (including $66.7 million in core capital and $2.0 in
qualifying supplementary capital) and risk-weighted assets of $159.3 million; or
total capital of 43.1% of risk-weighted assets. This amount was $56.0 million
above the 8% requirement in effect on that date.
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
27
<PAGE>
exceptions, within 90 days after it becomes critically undercapitalized. Any
undercapitalized association is also subject to the general enforcement
authority of the OTS and the FDIC, including the appointment of a conservator or
a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Association may have substantial adverse effects on its operations and
profitability.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
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 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 average daily balance of its liquidity base during the preceding calendar
quarter or a percentage of the amount of its liquidity base at the end of the
preceding quarter. 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%.
28
<PAGE>
Penalties may be imposed upon associations for violations the liquid
asset ratio requirement. At December 31, 1998, First Security was in compliance
with the requirement, with an overall liquid asset ratio of 41.38%.
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. As an alternative, the savings association may maintain 60% of its assets
in those assets specified in Section 7701(a)(19) of the Internal Revenue Code.
Under either test, such assets primarily consist of residential housing related
loans and investments. At December 31, 1998, First Security met the test 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 or its
subsidiaries 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
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. The OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
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
29
<PAGE>
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 is 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, 1998, First Security was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be imposed
by the OTS. See "-Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
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
30
<PAGE>
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.
As a member, First Security is required to purchase and maintain stock
in the FHLB of Chicago. At December 31, 1998, First Security had $2.1 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 6.6% for
calendar year 1998. As a result of its holdings, the Bank could borrow up to
$42 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, 1998, dividends paid by the FHLB of Chicago
to First Security totaled $130,000, which constitutes a $7,000 increase from the
amount of dividends received in calendar year 1997.
FEDERAL AND STATE TAXATION
Savings associations such as First Federal that meet certain conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), are
permitted to establish reserves for bad debts and to make annual additions
thereto which may, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes. The amount of the bad
debt reserve deduction is computed under the experience method. Under the
experience method, the bad debt reserve deduction is an amount determined under
a formula based generally upon the bad debts actually sustained by the savings
association over a period of years.
In August 1996, legislation was enacted that repealed the percentage of
taxable income method used by many thrifts, including the Bank, to calculate
their bad debt reserve for federal income tax purposes. As a result, the Bank
must recapture that portion of the reserve that exceeds the amount that could
have been taken under the experience method for tax years beginning after
December 31, 1987. 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. At December 31, 1998, the Bank had approximately $1.2
million in bad debt reserves subject to recapture for federal income tax
purposes. The deferred tax liability related to the recapture has been
previously established so there will be no effect on future net income.
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.
A portion of the Bank's reserves for losses on loans may not, without
adverse tax consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1998, 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
31
<PAGE>
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. 122. The adoption of SFAS
No. 125 did not have a material impact on the financial condition or operations
of the Company.
In February 1997, the FASB issued SFAS No. 128 "Earnings per Share."
This Statement modifies the standards for computing earnings per share and
replaces the presentation of primary earnings per share (EPS) with a
presentation of basic EPS. The Statement is effective for financial statements
issued after December 15, 1997. The Company has adopted SFAS 128 in its December
31, 1998 consolidated financial statements and its adoption did not have a
material impact on the results of operations or financial condition 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 did not 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.
EMPLOYEES
At December 31, 1998, the Company, including its subsidiaries, had a
total of 93 employees, including 25 part-time employees. The Bank's employees
are not represented by any collective bargaining group. Management considers its
employee relations to be good.
32
<PAGE>
EXECUTIVE OFFICERS OF THE CORPORATION WHO ARE NOT DIRECTORS
The business experience of each executive officer who is not also a
director is set forth below.
Harry Kucewicz. Mr. Kucewicz, age 42, is currently serving as the Treasurer
and Chief Operating and Financial Officer of both the Corporation and 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 51, is currently Vice President of the
Corporation and Vice President - Lending of the Bank. 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 52, currently serves as Vice President of
the Corporation and as Vice President - Savings of the Bank. 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 62, 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 and of the Corporation. 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.
ITEM 2. PROPERTIES
The following table sets forth information concerning the main office and
each branch office of the Bank at December 31, 1998. At December 31, 1998, the
Bank's premises had an aggregate net book value of approximately $2.9 million.
<TABLE>
<CAPTION>
Year
Acquired/ Owned or Net Book Value at
Location Established Leased December 31, 1998 Deposits
- ---------------------------------- ----------- -------- ----------------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
MAIN OFFICE:
936 North Western Avenue 1964 Owned $ 963 $138,799
Chicago, Illinois 60622-4695
BRANCH OFFICES:
2166 Plum Grove Road 1977 Leased(1) 1 11,024
Rolling Meadows, Illinois 60008
820 N. Western Avenue 1983 Owned 235 2,012
Chicago, Illinois 60622
5670 N. Milwaukee Avenue 1993 Owned 1,124 13,487
Chicago, Illinois 60646
7918 Bustleton Avenue 1994 Owned 539 55,173
Philadelphia, Pennsylvania 19152
</TABLE>
- ---------------------
(1) The lease expires in July 2000.
33
<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, 1998 was
approximately $555,000.
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,
1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 49 of the attached 1998 Annual Report to Stockholders is herein
incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Pages 3 and 4 of the attached 1998 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 19 of the attached 1998 Annual Report to Stockholders
is herein incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 20 through 48 of the attached 1998 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 1999, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
34
<PAGE>
EXECUTIVE OFFICERS
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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
the Company's Common Stock (or any other equity securities, of which there is
none), to file with the SEC initial reports of ownership and reports of changes
in ownership of the Company's Common Stock. Officers, directors and greater than
10% shareholders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 1998, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with except that Myron
Dobrowolsky inadvertently failed to file a Form 4 to report one transaction. Mr.
Dobrowolsky reported the transaction on a Form 5 dated February 12, 1999.
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 1999, 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 1999, 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 1999, 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,
1998 and 1997.
4. Consolidated Statements of Income for the fiscal years ended
December 31, 1998, 1997 and 1996.
5. Consolidated Statements of Shareholders' Equity for the fiscal
years ended December 31, 1998, 1997 and 1996.
6. Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 1998, 1997 and 1996.
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, 1998.
35
<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, 1999 Date: March 31, 1999
-------------------------------- ------------------------------
/s/ Lila Maria Bodnar /s/ Myron Dobrowoolsky
- ------------------------------------- -----------------------------------
Lila Maria Bodnar Myron Dobrowolsky
Recording Secretary and Director Director
Date: March 31, 1999 Date: March 31, 1999
-------------------------------- ------------------------------
/s/ Terry Gawryk /s/ George Kawka
- ------------------------------------- -----------------------------------
Terry Gawryk George Kawka
Secretary and Director Director
Date: March 31, 1999 Date: March 31, 1999
-------------------------------- ------------------------------
/s/ Paul Nadzikewycz /s/ Jaroslav H. Sydorenko
- ------------------------------------- -----------------------------------
Paul Nadzikewycz Jaroslav H. Sydorenko
Chairman of the Board Director
Date: March 31, 1999 Date: March 31, 1999
-------------------------------- ------------------------------
/s/ Chrysta Wereszczak /s/ Harry Kucewicz
- ------------------------------------- -----------------------------------
Chrysta Wereszczak Harry Kucewicz
Director Principal Financial and Accounting
Officer
Date: March 31, 1999 Date: March 31, 1999
-------------------------------- ------------------------------
36
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Reference to
Prior Filing
Regulation or Exhibit
S-K Number
Exhibit Attached
Number Document Hereto
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, liquidation or None
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 Executive Compensation Plans and Arrangements
(a) Employment Agreement between Julian E. Kulas and the *
Bank.
(b) Change-In-Control Severance Agreement between Harry I. *
Kucewicz and the Bank
(c) Change-In-Control Severance Agreement between Mary H. *
Korb and the Bank
(d) Change-In-Control Severance Agreement between Irene S. *
Subota and the Bank
(e) Change-In-Control Severance Agreement between Adrian *
Hawryliw and the Bank
(f) 1998 Stock Option and Incentive Plan **
(g) 1998 Recognition and Retention Plan **
11 Statement re: computation of per share earnings None
12 Statement re: computation of ratios Not required
13 Annual Report to Security Holders 13
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 vote of security None
holders
23 Consent of Independent Auditor Not Required
24 Power of Attorney Not Required
27 Financial Data Schedule 27
99 Additional Exhibits None
</TABLE>
- ---------------
* Filed as an Exhibit to the Company's Form S-1 Registration Statement
filed on July21, 1997 (File No. 333- 31739) pursuant to Section 5 of
the Securities Act of 1933. All of such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-K.
** Filed as an Exhibit to the Company's Definitive Proxy Statement on
Schedule 14A on March 24, 1998 (File No. 0-23063). All of such
previously filed documents are hereby incorporated herein by reference
in accordance with Item 601 of Regulation S-K.
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
President's Message............................................... 1
Selected Consolidated Financial Information....................... 3
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 5
Consolidated Financial Statements................................. 20
Stockholder Information........................................... 49
Corporate Information............................................. 50
<PAGE>
- ------------------------------------------------------------------------------
FROM YOUR PRESIDENT
- ------------------------------------------------------------------------------
To Our Stockholders, Depositors and Friends,
I am pleased to bring you this annual report of First SecurityFed
Financial, Inc. for the year ending 1998. Inasmuch as we completed the
conversion of 1st Security Federal Savings Bank on October 30,1997 this report
covers our first full year as a stock company. As you read our financial
statements you will find that we had a very successful year of operation. Our
assets at December 31,1998 were $338.1 million compared to $315.8 million at
December 31,1997, an increase of $22.3 million or 7.1%. The increase in total
assets was due primarily to an increase in loans receivable. Net income for the
year was $5.3 million compared to net income of $1.8 million for the year ended
December 31,1997. The return on average assets was 1.62% and the return on
average shareholders equity was 5.97%. Earnings per share for 1998 were $0.93.
The Company efficiency ratio, a measure of operating efficiency was an
outstanding 41% for 1998. During the year the Company's net loans receivable
increased $32.0 million from $186.3 million to $218.3 million.
The Company's performance in 1998 is significant not only in view of profit
but in an emerging strategic plan that will help us achieve future growth and
enhance the value of your stock investment. To increase our assets the Company
commenced a construction loan program and lending on commercial properties.
Subject to applicable regulatory restrictions, we are aggressively pursuing
stock repurchases and currently are engaged in the third buy-back program.
Recent declines in thrift stock prices present us with an opportunity to
purchase our stock significantly below book value which in the long run will
benefit all shareholders. The Company will continue to pay cash dividends and
continue to grow its balance sheet to leverage the capital. We are continually
exploring de novo branch initiatives as well as evaluating in market acquisition
opportunities.
The keynote of our success over the years has been our ability to provide
the personal service our customers and our communities expect. We look forward
to meeting these challenges in 1999 and beyond. I am pleased to report that
during 1998 The Heritage Foundation of First Security Federal Savings Bank made
grants to charitable and civic organizations in excess of $150,000. I expect
these grants to increase in 1999 and future years.
1st Security remains committed to community banking. To alleviate the
community's concern about the Year 2000 computer problems, we have invested over
$550,000 this year in new equipment, software, and training to make certain that
our communities will continue to receive quality and timely service. This
upgrade will also improve our competitive position in the future financial
services environment of year 2000 and beyond.
1
<PAGE>
As shareholders in the Company, management, and the board are keenly aware
of the importance of enhancing shareholders value. The successful pursuit of
strategies that I have outlined, should help us succeed in reaching that goal.
On behalf of the employees, officers, and directors I thank you for your
investment in First SecurityFed Financial, Inc. and pledge our untiring efforts
to enhance the value of your investment.
Sincerely,
/s/: Julian E. Kulas
Julian E. Kulas
PRESIDENT AND CHIEF EXECUTIVE OFFICER
2
<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,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In Thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets..................... $ 338,050 $315,849 $258,115 $251,922 $227,922
Cash and cash equivalents........ 24,830 30,090 7,300 19,173 6,800
Loans receivable, net(1)......... 218,311 186,259 163,348 144,566 136,207
Mortgage-backed securities:
Held-to-maturity............... 11,587 18,551 24,109 25,120 42,621
Available-for-sale............. 12,410 16,733 19,727 20,044 ---
Investment securities:
Held-to-maturity............... 46,680 38,471 25,779 20,566 17,926
Available-for-sale............. 13,933 15,728 8,997 13,743 15,662
Deposits......................... 220,495 210,100 219,505 209,387 195,875
Total borrowings................. 29,000 10,000 4,000 10,000 3,000
Retained earnings-Substantially rest 84,587 91,872 29,261 29,038 25,555
(1) The allowance for loan losses at December 31, 1998, 1997, 1996, 1995 and 1994, was $2,069,000, $1,828,000,
$1,520,000, $885,000 and $792,000, respectively.
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In Thousands)
SELECTED OPERATIONS DATA:
Total interest income.............. $24,059 $20,674 $19,006 $17,650 $15,710
Total interest expense............. 10,296 10,129 9,494 8,727 6,584
--------- ------- --------- -------- --------
Net interest income.............. 13,763 10,545 9,512 8,923 9,126
Provision for loan losses.......... 246 738 706 136 182
--------- ------- --------- --------- --------
Net interest income after provision
for loan losses................... 13,517 9,807 8,806 8,787 8,944
Fees and service charges........... 154 371 362 378 326
Gain (loss) on sales of mortgage-backed
securities and investment securities 40 (32) 55 24 5
Other non-interest income.......... 618 253 328 454 246
-------- ------- --------- --------- --------
Total non-interest income.......... 812 592 745 856 577
Total non-interest expense......... 5,887 7,557(1) 8,693(2) 4,690 4,271
--------- ------ -------- --------- --------
Income (loss) before taxes and
cumulative effect................ 8,442 2,842 858 4,953 5,250
Income tax provision .............. 3,098 1,017 406 1,760 1,825
--------- -------- --------- --------- -------
Net income......................... $5,344 $1,825 $ 452 $3,193 $3,425
======= ====== ======== ====== ======
(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.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Return on assets (ratio of net income to
average total assets)................................... 1.62% .64% .18% 1.34% 1.62%
Return on equity (ratio of net income to
average equity)......................................... 5.97 4.66 1.50 11.64 14.23
Interest rate spread information:
Average during period................................... 3.19 3.34 3.51 3.61 4.28
Net interest margin(1).................................. 4.37 3.97 3.98 4.00 4.60
Ratio of operating expense to average total
assets.................................................. 1.79 2.66 3.45 1.97 2.03
Efficiency Ratio(2)...................................... .40 .68 .85 .48 .44
Ratio of average interest-earning assets to
average interest-bearing liabilities.................... 135.90 116.50 111.81 109.93 109.51
Quality Ratios:
Non-performing assets to total assets at end
of period............................................... .30 .46 1.44 1.11 .72
Allowance for loan losses to non-performing
loans at end of period.................................. 203.24 124.86 41.30 38.73 55.58
Allowance for loan losses to gross loans
receivable at end of period............................. .93 .96 .91 .60 .57
Capital Ratios:(3)
Equity to total assets at end of period................. 25.03 29.10 11.42 11.52 11.33
Average equity to average assets........................ 27.18 13.81 11.97 11.55 11.42
(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.
</TABLE>
4
<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 operating 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 and a portfolio of investment securities.
The Bank is a financial intermediary engaged primarily in attracting
deposits from the general public and using such deposits to originate
one-to-four family residential mortgage and, to a significantly lesser extent,
multi-family, consumer and other loans primarily in its market area. And to
acquire mortgage-backed and other securities. The Bank's revenues are derived
principally from interest earned on loans and mortgage-backed and other
securities. The operations of the Bank are influenced significantly by general
economic conditions and by policies of financial institution regulatory
agencies, including the OTS and FDIC. The Bank's cost of funds is influenced by
interest rates on competing investments and general market interest rates.
Lending activities are affected by the demand for financing of real estate and
other types of loans, which in turn is affected by the interest rates at which
such financings may be offered.
The Bank's net interest income is dependent primarily upon the difference
or spread between the average yield earned on loans receivable and securities ,
and the average rate paid on deposits, as well as the relative amounts of such
assets and liabilities. The Bank, like other thrift institutions, is subject to
interest rate risk to the degree that its interest-bearing liabilities mature or
reprice at different times, or on a different basis, than its interest-earning
assets.
BUSINESS STRATEGY
The Bank seeks to obtain a competitive advantage in its deposit gathering
and lending operations by maintaining a high level of community involvement and
by offering a high level of personal service.
In its deposit gathering operations, the Bank uses community outreach and
customer service in an attempt to build and maintain 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.
5
<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 31,1998 AND DECEMBER 31,1997
Total assets at December 31,1998 were $338.1 million compared to $315.8
million at December 31, 1997, an increase of $22.3 million or 7.06%. The
increase in total assets was due primarily to an increase in loans receivable of
$32.0 million partially offset by decreases in securities of $4.9 million and
cash and cash equivalents of $5.3 million. Additional funding for the increase
in assets was provided by increases in deposits and Federal Home Loan Bank
(FHLB) Advances.
Total liabilities at December 31,1998 were $253.5 million compared to
$224.0 million at December 31, 1997, an increase of $29.5 million or 13.17%. The
increase in liabilities was due primarily to increases in deposits of $10.4
million and Federal Home Loan Bank (FHLB) advances of $19.0 million.
Total equity at December 31, 1998 was $84.6 million compared to $91.9
million at December 31, 1997, a decrease of $7.3 million. The decrease was due
primarily to the Company's repurchase of outstanding common stock of $13.3
million of which $4.3 million was used to fund the Recognition and Retention
Plan and $775,000 was used to fund the contribution to the Heritage Foundation.
The decrease was partially offset by net income of $5.3 million for the period.
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 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.
6
<PAGE>
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 31,1998 AND
DECEMBER 31,1997
GENERAL. Net income for the year ended December 31,1998 was $5.3 million
compared to net income of $1.8 million for the year ended December 31,1997, an
increase of $3.5 million. The increase was primarily due to increases of $3.3
million in net interest income and $220,000 in noninterest income along with
decreases of $492,000 in the provision for loan losses and $1.7 million in
noninterest expense. These were partially offset by a $2.1 million increase in
the provision for income taxes.
INTEREST INCOME. Interest income for the year ended December 31,1998 was
$24.1 million compared to $20.7 million for the year ended December 31,1997, an
increase of $3.4 million or 16.43%. The increase was primarily due to an
increase in the average balance of interest earning assets from $265.9 million
for the year ended December 31,1997 to $315.3 million for the year ended
December 31,1998 due to the continuing investment of proceeds from the initial
stock offering in October 1997 and strong demand for loans due to the prevailing
favorable interest rate environment. The average balance of loans increased
$34.8 million to $207.6 for the year ended December 31,1998 from $172.8 million
for the year ended December 31,1997. In addition, the average balances of
municipal and government agency securities increased by $33.9 million, but were
partially offset by a $17.7 million decrease in mortgage backed securities and
mutual funds. These increases in average balances were also offset by a decrease
in the average yield on interest earning assets of 15 basis points from 7.78%
for the year ended December 31,1997 to 7.63% for the year ended December 31,1998
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 31,1998 was
$10.3 million compared to $10.1 million for the year ended December 31,1997, an
increase of $167,000 or 1.65%. The increase was primarily due to an increase in
the average balance of interest-bearing liabilities of $3.8 million from $228.2
million for the year ended December 31,1997 to $232.0 million for the year ended
December 31,1998. The average cost of funds remained steady at 4.44% for both
years.
NET INTEREST INCOME. Net interest income of $13.8 million for the year
ended December 31,1998 represented an increase of $3.3 million from the $10.5
million reported for the year ended December 31,1997. The increase in net
interest income was primarily due to an increase in the ratio of interest
earning assets to interest bearing liabilities from 116.5% for the year ended
December 31,1997 to 135.90% for the year ended December 31,1998 due primarily to
the investment of the
7
<PAGE>
proceeds from the initial stock offering in October 1997 and strong demand for
loans due to the prevailing favorable interest rate environment. As a result,
the net interest margin increased by 40 basis points to 4.37% for the year ended
December 31,1998 from 3.97% for the year ended December 31,1997.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the year
ended December 31,1998 was $246,000 compared to $738,000 for the year ended
December 31,1997. A majority of the provision for loan losses in 1997 was
related to various loans to the Bennett Funding Group, Inc. which were secured
by equipment leases which were paid in full during the year. However, the Bank
experienced significant loan growth during 1998 and 1997, which resulted in the
continuing provision of the allowance for loan losses. Gross loans increased
$32.3 million or 17.03% from 1997. The allowance for loan losses represented
0.93% and 0.96% of gross loans receivable at December 31,1998 and 1997,
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 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.
NON-INTEREST INCOME. Non-interest income for the year ended December
31,1998 was $812,000 compared to $592,000 for the year ended December 31,1997,
an increase of $220,000 or 37.16%. The increase was the result of a $45,000
increase in deposit service charges due to the implementation of ATM surcharges
along with a $99,000 increase in other income largely related to fees on loans
which were repaid prior to their contractual maturity. There was also a $72,000
net increase in the gain on sales and redemptions of securities.
NON-INTEREST EXPENSE. Non-interest expense was $5.9 million for the year
ended December 31,1998 compared to $7.6 million for the year ended December
31,1997, a decrease of $1.7 million or 22.37%. The decrease was due primarily to
a $2.5 million decrease in charitable and foundation contributions partially
offset by increases of $619,000 in compensation and benefits expense and
$184,000 in data processing expense. The decrease in charitable contributions
expense was due to a $2.5 million expense in 1997 related to a commitment to
make contributions to the Heritage Foundation of First Security Federal Savings
Bank. Compensation and benefits expense increased due to the implementation of
the ESOP plan in October 1997 and the RRP plan in May 1998 and the resultant
expense due to the allocation of shares to participants. Data processing expense
increased 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 1998.
8
<PAGE>
INCOME TAXES. The provision for income taxes was $3.1 million for the year
ended December 31,1998 compared to $1.0 million for the year ended December
31,1997. The increase was due to an increase of $5.6 million in pre-tax income.
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
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
9
<PAGE>
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,
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
10
<PAGE>
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.
11
<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,
--------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
--------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1).. $ 207,629 $17,141 8.26% $172,810 $14,669 8.49% $152,147 $13,068 8.59%
Mortgage-backed securiteis
& CMOs(1)............... 28,795 1,942 6.74 44,780 3,157 7.05 48,048 3,673 7.64
Mutual funds(1)...... 3,172 188 5.93 4,897 278 5.68 5,776 338 5.85
Agencies/Other(1).... 50,686 3,389 6.69 22,071 1,333 6.04 22,714 1,326 5.83
Municipal securities(1) 10,889 536 4.92 5,565 292 5.25 4,794 277 5.78
Federal funds sold... 7,337 395 5.38 11,179 646 5.78 1,829 118 6.45
Deposits with other instit 4,803 338 7.04 2,761 176 6.37 1,865 95 5.09
FHLB stock........... 1,985 130 6.55 1,797 123 6.84 1,645 111 6.75
--------- --------- -------- --------- --------- -------
Total interest-earnings assets 315,296 24,059 7.63 265,860 20,674 7.78 238,818 19,006 7.96
Non-interest earning asset 13,962 17,810 13,445
------ --------- ---------
Total assets...... $329,258 $283,670 $252,263
======== ======== ========
Interest-Bearing Liabilities:
Money market......... $4,962 139 2.80 5,169 159 3.08 5,301 167 3.15
NOW.................. 11,045 245 2.22 10,176 217 2.13 9,810 202 2.06
Passbook savings..... 71,494 2,163 3.03 76,391 2,281 2.99 70,356 2,120 3.01
Certificates of Deposit 122,835 6,644 5.4 126,917 6,972 5.49 124,797 6,827 5.47
Advances............. 21,667 1,105 5.10 9,548 500 5.24 3,333 178 5.34
----------- -------- -------- ------- ------- -------
Total interest-bearing
liabilities 232,003 10,296 4.44 228,201 10,129 4.44 213,597 9,494 4.44
Non-interest bearing liabilities 7,754 --------- 16,299 ------ 8,471 ------
------- ---------- ---------
Total liabilities 239,757 244,500 222,068
Equity................ 89,501 39,170 30,195
----------- ---------- ---------
Total liabilities and equity $ 329,258 $283,670 $252,263
= ======= ======== ========
Net interest-earning spread $13,763 3.19% $10,545 3.34% $ 9,512 3.52%
======= ===== ======= ---- ======= ======
Margin................ 4.37% 3.97% 3.98%
====== ---- ======
Assets to liabilities. 135.90% 116.50% 111.81%
====== ====== =======
</TABLE>
(1) Calculated based on amortized cost.
12
<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,
------------------------------------------------------------------------------
1997 vs. 1998 1996 vs. 1997 1995 vs. 1996
-----------------------------------------------------------------------------------------------
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)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Loans receivable................... $2,884 $(412) $2,472 $1,755 $(154) $1,601 $1,056 $ (68) $988
Mortgage-backed securities & CMO's. (1,083) (132) (1,215) (230) (286) (516) 381 425 806
Mutual funds....................... (102) 12 (90) (50) (10) (60) --- (20) (20)
Agencies and other................. 1,899 157 2,056 (38) 45 7 37 (297) (260)
Municipal securities............... 263 (19) 244 42 (27) 15 (24) (26) (50)
Federal funds sold................. (209) (42) (251) 542 (14) 528 (98) (9) (107)
Deposits with other institutions... 142 20 162 53 28 81 (14) --- (14)
FHLB stock......................... 12 (5) 7 10 2 12 11 2 13
----------------------------------------- -------- ------- ----- -----
Total interest-earning assets 3,806 (421) $ 3,385 2,084 (416) 1,668 1,349 7 1,356
Interest-bearing liabilities:
Money market....................... (6) (14) (20) (4) (4) (8) (29) 3 (26)
NOW................................ 19 9 28 8 7 15 12 6 18
Passbook Savings................... (148) 30 (118) 180 (19) 161 (7) 14 7
Certificates of deposit............ (222) (106) (328) 116 29 145 645 138 783
Advances........................... 618 (13) 605 326 (4) 322 (23) 8 (15)
----------------------------------------- -------- ------- ------ -------
Total interest bearing liabilities 261 (94) 167 626 9 635 598 169 767
------- -------- ------- ------- ------- ------- ------ ---- ----
Net interest/spread................. $ 3,545 $ (327) $3,218 $1,458 $(425) $1,033 $ 751 $(162) $589
========= ======= ====== ====== ===== ====== ====== ===== ====
</TABLE>
13
<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, 1998, $96.5 million
or 43.7% 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. Third, 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, 1998, $53.87
million or 12.9% of the Company's mortgage-backed securities had adjustable
interest rates or terms to maturity (or anticipated average lives in the case of
collateralized mortgage obligations) of five years or less and $15.8 million or
25.98% of the Company's other securities had adjustable interest rates or terms
to maturity of five years or less. Finally, the Company has recently begun to
increase its originations of construction, multi-family, and commercial real
estate loans. These loans generally have shorter terms to maturity than
one-to-four family residential loans.
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, 1998, is
an analysis of the Bank's estimated interest rate risk as measured by changes in
NPV for instantaneous and sustained parallel shifts in interest rates, up and
down 400 basis points in 100 point increments.
14
<PAGE>
<TABLE>
<CAPTION>
Assumed Change $ Change in % Change in
IN INTEREST RATES $ AMOUNT NPV NPV
----------------- ----------- ------------- -------------
(Basis Points) (Dollars in Thousands)
<S> <C> <C> <C> <C>
+400 $53,123 $(25,513) (32)%
+300 60,000 (18,637) (24)
+200 66,956 (11,681) (15)
+100 73,428 (5,208) ( 7)
--- 78,636 ~ ~
-100 82,819 4,182 5
-200 86,665 8,029 10
-300 91,290 12,654 16
-400 95,859 17,223 22
</TABLE>
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
15
<PAGE>
one year or less during the preceding calendar month. Liquid assets for purposes
of this ratio include cash, certain time deposits, U.S. Government, government
agency and corporate securities and other obligations generally having remaining
maturities of less than five years. First Security has historically maintained
its liquidity ratio for regulatory purposes at levels in excess of those
required. At December 31, 1998, First Security's liquidity ratio for regulatory
purposes was 41.38%.
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 $7.4 million, $2.8
million and $2.1 million for the years ended December 31, 1998, 1997, and 1996,
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 from
increases in net deposits and advances from FHLB of Chicago partially offset by
purchases of Treasury Stock in 1998.
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, 1998,
cash and short-term investments totaled $24.8 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, 1998, the Company had outstanding commitments to originate
loans of $3.0 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, 1998 totaled $100.5 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, 1998, 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
16
<PAGE>
performance than does inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In 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.
17
<PAGE>
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 prior 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. Furthermore, the Bank performed its own
independent testing of the systems on November 22,1998 and all systems
functioned properly utilizing a date in the year 2000. Further testing utilizing
other dates in the year 2000 will be performed 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 compliant, the Bank will continue to work
with the 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.
As of December 31,1998, the Bank has incurred $560,000 in expense
related to its hardware and software conversion. Furthermore, it anticipates
incurring an additional $25,000 in expense to achieve full Year 2000 compliance.
18
<PAGE>
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 Litigation 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.
19
<PAGE>
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,
1998 and 1997, and the related consolidated statements of income, comprehensive
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998. 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, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 5, 1999
<PAGE>
<TABLE>
<CAPTION>
FIRST SECURITYFED FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(Dollars in thousands, except share data)
- ------------------------------------------------------------------------------------
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 15,641 $ 12,090
Federal funds sold 9,189 18,000
--------- ---------
Total cash and cash equivalents 24,830 30,090
Time deposits in other financial institutions 200 200
Securities available-for-sale 26,343 32,461
Securities held-to-maturity (fair value:
$58,809 in 1998 and $57,498 in 1997) 58,267 57,022
Loans receivable, net of allowance for loan losses 218,311 186,259
Federal Home Loan Bank stock, at cost 2,131 1,852
Premises and equipment, net 3,967 3,692
Accrued interest receivable 2,475 2,071
Intangible assets 236 291
Real estate owned -- 50
Other assets 1,290 1,861
--------- ---------
Total assets $ 338,050 $ 315,849
========= =========
LIABILITIES
Deposits $ 220,495 $ 210,100
Advance payments by borrowers for taxes and insurance 2,432 2,400
Advances from Federal Home Loan Bank 29,000 10,000
Accrued interest payable and other liabilities 1,536 1,477
--------- ---------
Total liabilities 253,463 223,977
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 64
Additional paid-in capital 64,952 65,495
Unearned ESOP shares (4,582) (4,935)
Unearned stock awards (3,810) --
Treasury stock, at cost (553,488 shares) (8,234) --
Retained earnings, substantially restricted 36,225 31,290
Accumulated other comprehensive income (28) (42)
--------- ---------
Total shareholders' equity 84,587 91,872
--------- ---------
Total liabilities and shareholders' equity $ 338,050 $ 315,849
========= =========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
FIRST SECURITYFED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands, except per share data)
- -----------------------------------------------------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest and dividend income
Loans $ 17,141 $ 14,669 $ 13,068
Securities
Taxable 3,577 1,561 1,664
Tax-exempt 536 302 277
Mortgage-backed securities 1,942 3,198 3,673
Federal funds sold and other interest earning assets 863 944 324
-------- -------- --------
24,059 20,674 19,006
Interest expense
NOW and money market 384 376 369
Passbook savings 2,163 2,281 2,120
Certificates of deposit 6,644 6,972 6,827
Federal Home Loan Bank advances and other borrowings 1,105 500 178
-------- -------- --------
10,296 10,129 9,494
-------- -------- --------
NET INTEREST INCOME 13,763 10,545 9,512
Provision for loan losses 246 738 706
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 13,517 9,807 8,806
Noninterest income
Deposit service charges 416 371 362
Insurance commissions 45 47 54
Net gain (loss) on sales and calls of securities 40 (32) 55
Net gain (loss) on sale of real estate owned 3 (3) 50
Other income 308 209 224
-------- -------- --------
812 592 745
Noninterest expense
Compensation and benefits 3,288 2,669 2,411
Occupancy and equipment 732 679 678
Data processing 481 297 269
SAIF assessment -- -- 1,293
Federal insurance premiums 212 183 553
Charitable and foundation contributions 9 2,557 2,558
Other expense 1,165 1,172 931
-------- -------- --------
5,887 7,557 8,693
-------- -------- --------
INCOME BEFORE INCOME TAXES 8,442 2,842 858
Income tax provision 3,098 1,017 406
-------- -------- --------
NET INCOME $ 5,344 $ 1,825 $ 452
======== ======== ========
Earnings (loss) per share
Basic and diluted $ .93 $ (.11)
======== ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
22
<PAGE>
<TABLE>
<CAPTION>
FIRST SECURITYFED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net income $ 5,344 $ 1,825 $ 452
Other comprehensive income
Unrealized holding gains and losses on securities
available-for-sale 62 234 (320)
Less reclassification adjustments for gains and losses
recognized in income 40 (32) 55
------- ------- -------
Net unrealized gain and losses 22 266 (375)
Tax effect 8 104 (146)
------- ------- -------
14 162 (229)
------- ------- -------
Comprehensive income $ 5,358 $ 1,987 $ 223
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
FIRST SECURITYFED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated
Other Total
Additional Unearned Unearned Compre- Share-
Common Paid-in ESOP Stock Treasury Retained hensive holders'
Stock Capital Shares Awards Stock Earnings Income Equity
--------- ---------- --------- --------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ -- $ -- $ -- $ -- $ -- $ 29,013 $ 25 $ 29,038
Net income -- -- -- -- -- 452 -- 452
Change in fair value of
securities, net of income
taxes and reclassification
effects -- -- -- -- -- -- (229) (229)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at
December 31, 1996 -- -- -- -- -- 29,465 (204) 29,261
Issuance of common stock,
net of conversion costs of
$1,130 and contribution of
stock to foundation 64 65,385 (5,126) -- -- -- 60,323
ESOP shares earned -- 110 191 -- -- 301
Net income -- -- -- -- -- 1,825 -- 1,825
Change in fair value of
securities, net of income
taxes and reclassification
effects -- -- -- -- -- -- 162 162
-------- -------- -------- -------- -------- -------- -------- --------
Balance at
December 31, 1997 64 65,495 (4,935) -- -- 31,290 (42) 91,872
Net income -- -- -- -- -- 5,344 -- 5,344
Stock awards allocated -- -- -- (4,277) 4,277 -- -- --
ESOP shares earned -- 167 353 -- -- -- -- 520
Stock awards earned -- -- -- 467 -- -- -- 467
Issuance of stock to
Foundation, net of related
tax benefit -- (710) -- -- 775 -- -- 65
Purchase of treasury stock -- -- -- -- (13,286) -- -- (13,286)
Dividends paid
($.07 per share) -- -- -- -- -- (409) -- (409)
Change in fair value of
securities, net of income
taxes and reclassification
effects -- -- -- -- -- -- 14 14
-------- -------- -------- -------- -------- -------- -------- --------
Balance at
December 31, 1998 $ 64 $ 64,952 $ (4,582) $ (3,810) $ (8,234) $ 36,225 $ (28) $ 84,587
======== ======== ======== ======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
FIRST SECURITYFED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,344 $ 1,825 $ 452
Adjustments to reconcile net income to net cash from
operating activities
Depreciation and amortization of intangibles 377 336 358
Net amortization (accretion) of securities 168 173 (90)
Net (gain) loss on sales and calls of securities (40) 32 (55)
Provision for loan losses 246 738 706
Net (gain) loss on real estate owned (3) 3 (50)
Deferred loan origination fees (7) 26 (80)
Provision for deferred income taxes (119) (888) (937)
ESOP compensation expense 520 301 --
Stock award compensation expense 467 -- --
Accrued charitable contribution of Company stock -- 2,500 --
Net change in
Accrued interest receivable (404) (307) (148)
Other assets 571 (175) (141)
Accrued interest payable and other liabilities 235 (1,754) 2,125
-------- -------- --------
Net cash provided by operating activities 7,355 2,810 2,140
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale (8,800) (10,184) (2,989)
Purchase of securities held-to-maturity (23,402) (24,684) (20,129)
Proceeds from sales of securities available-for-sale 6,745 2,587 --
Proceeds from calls and maturities of securities 19,130 9,200 15,814
Net loan originations (32,291) (23,914) (19,548)
Principal payments on mortgage-backed and related securities 11,094 12,272 7,965
Purchase of Federal Home Loan Bank stock (279) (179) (120)
Property and equipment expenditures (597) (44) (189)
Real estate owned expenditures -- (35) (5)
Proceeds from sale of real estate owned 53 261 614
-------- -------- --------
Net cash used in investing activities (28,347) (34,720) (18,587)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 10,395 (9,405) 10,137
Net change in advance payments by borrowers for taxes
and insurance 32 282 437
Change in advances from Federal Home Loan Bank 19,000 6,000 (6,000)
Dividends paid (409) -- --
Purchase of treasury stock (13,286) -- --
Net proceeds from stock issuance -- 57,823 --
-------- -------- --------
Net cash provided by financing activities 15,732 54,700 4,574
-------- -------- --------
- ----------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
25
<PAGE>
<TABLE>
<CAPTION>
FIRST SECURITYFED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net change in cash and cash equivalents $ (5,260) $ 22,790 $(11,873)
Cash and cash equivalents at beginning of year 30,090 7,300 19,173
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 24,830 $ 30,090 $ 7,300
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 10,292 $ 10,146 $ 9,498
Income taxes 3,083 1,667 1,497
- ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(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.
- --------------------------------------------------------------------------------
27
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(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.
- --------------------------------------------------------------------------------
28
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(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.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available-for-sale, net of tax, which are also recognized
as separate components of equity. The accounting standard that requires
reporting comprehensive income first applies for 1998, with prior information
restated to be comparable.
- --------------------------------------------------------------------------------
(Continued)
29
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The Company's securities are as follows:
<TABLE>
<CAPTION>
--------------------------1998-------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. government and agencies $ 2,407 $ 170 $ -- $ 2,577
Municipals 7,504 175 -- 7,679
Corporates 250 -- (8) 242
Mutual funds 3,172 22 (30) 3,164
Other equity investments 369 -- (98) 271
-------- -------- -------- --------
13,702 367 (136) 13,933
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 6,144 -- (237) 5,907
Government National Mortgage Association 1,962 33 (12) 1,983
Federal National Mortgage Association 4,371 2 (64) 4,309
Collateralized mortgage obligations 211 -- -- 211
-------- -------- -------- --------
12,688 35 (313) 12,410
-------- -------- -------- --------
$ 26,390 $ 402 $ (449) $ 26,343
======== ======== ======== ========
--------------------------1998-------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Securities held-to-maturity
U.S. government agencies $ 41,504 $ 246 $ (14) $ 41,736
Municipals 5,176 276 5,452
-------- -------- -------- --------
46,680 522 (14) 47,188
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 2,955 35 (146) 2,844
Government National Mortgage Association 4,975 159 (9) 5,125
Federal National Mortgage Association 1,474 14 (7) 1,481
Collateralized mortgage obligations 2,183 2 (14) 2,171
-------- -------- -------- --------
11,587 210 (176) 11,621
-------- -------- -------- --------
$ 58,267 $ 732 $ (190) $ 58,809
======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
30
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<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
Municipals 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>
- --------------------------------------------------------------------------------
(Continued)
31
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Sales of securities are summarized as follows:
1998 1997
------ ------
Proceeds $6,745 $2,587
Gross realized gains 40 31
Gross realized losses -- 63
Call premiums on debt securities of $55,376 were recognized by the Company
during 1996.
The carrying values and fair values of debt securities as of December 31, 1998,
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.
Amortized Fair
Cost Value
---- -----
Securities available-for-sale
Due after five years through ten years $ 2,398 $ 2,437
Due after ten years 7,763 8,061
------- -------
10,161 10,498
Mutual funds 3,172 3,164
Other equity investments 369 271
Mortgage-backed securities and collateralized
mortgage obligations 12,688 12,410
------- -------
16,229 15,845
------- -------
$26,390 $26,343
======= =======
Securities held-to-maturity
Due in one year or less $ 526 $ 535
Due after one year through five years 15,229 15,297
Due after five years through ten years 28,921 29,260
Due after ten years 2,004 2,096
------- -------
46,680 47,188
Mortgage-backed securities and collateralized
mortgage obligations 11,587 11,621
------- -------
$58,267 $58,809
======= =======
- --------------------------------------------------------------------------------
(Continued)
32
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Securities in the amount of $250,000 were pledged to secure government deposits
at December 31, 1998 and 1997.
NOTE 3 - LOANS RECEIVABLE
Loans receivable consisted of the following:
1998 1997
--------- ---------
First mortgage loans, including loans purchased
Secured by one-to-four-family residences $ 182,452 $ 154,819
Secured by multifamily residences 11,313 10,999
Secured by commercial real estate 21,433 17,235
--------- ---------
215,198 183,053
Home equity loans 5,158 4,602
Less net deferred loan origination fees (1,489) (1,496)
--------- ---------
Total mortgage loans 218,867 186,159
Consumer and other loans
Automobile 16 47
Share loans 1,091 1,421
Improvement 11 7
Loans secured by leases -- 81
Other 404 387
--------- ---------
1,522 1,943
Less unearned discounts (9) (15)
--------- ---------
Total consumer and other loans 1,513 1,928
Less allowance for loan losses (2,069) (1,828)
--------- ---------
$ 218,311 $ 186,259
========= =========
The principal balance of loans on nonaccrual status at December 31, 1998 and
1997 approximated $9,000. The Company maintains an allowance for uncollected
interest for mortgage loans with payments past due. The allowance was
approximately $116,000 and $45,000 at December 31, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
(Continued)
33
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(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:
1998 1997 1996
------- ------- -------
Balance, beginning of year $ 1,828 $ 1,520 $ 885
Provision for loan losses 246 738 706
Recoveries -- 4 --
Charge-offs (5) (434) (71)
------- ------- -------
Balance, end of year $ 2,069 $ 1,828 $ 1,520
======= ======= =======
The average balance of impaired loans was $18,000 and $565,000 for the years
ended December 31, 1998 and 1997, respectively. No interest income was
recognized on these loans. There were no impaired loans at December 31, 1998. At
December 31, 1997, the balance of impaired loans was $81,000 for which $8,000 of
the allowance for loan losses was allocated.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
1998 1997
------- -------
Land$ 545 $ 545
Buildings and improvements 3,621 3,615
Furniture and equipment 2,544 1,946
Real estate acquired for future expansion 377 377
------- -------
Total cost 7,087 6,483
Less accumulated depreciation (3,120) (2,791)
------- -------
$ 3,967 $ 3,692
======= =======
NOTE 6 - INTANGIBLE ASSETS
Intangible assets, which arose from the Company's acquisition of its
Philadelphia location consisted of the following:
1998 1997
----- -----
Excess of purchase price over net assets acquired $ 156 $ 156
Core deposit intangible 377 377
----- -----
Total 533 533
Less accumulated amortization (297) (242)
----- -----
Intangible assets, net $ 236 $ 291
===== =====
- --------------------------------------------------------------------------------
(Continued)
34
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
Certificate of deposit accounts with balances of $100,000 or more totaled
approximately $30,475,000 and $27,013,000 at December 31, 1998 and 1997,
respectively.
At December 31, 1998, the scheduled maturities of certificates of deposit are as
follows:
1999 $100,460
2000 14,762
2001 3,435
2002 3,450
2003 and thereafter 1,925
--------
$124,032
========
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 1998 1997
---- ---- ---------- ---- ----
<S> <C> <C> <C> <C>
February 11, 1998 5.88% Fixed $ -- $ 2,000
March 20, 1998 5.91 Fixed -- 1,000
February 21, 2000 6.08 Fixed 1,000 1,000
February 21, 2000 5.48 Fixed 1,000 1,000
September 3, 2001 4.90 Fixed 1,000 --
September 3, 2001 5.45 Fixed 2,000 --
June 18, 2002 5.71 Fixed 4,000 4,000
August 8, 2002 5.26 Fixed 1,000 1,000
April 6, 2003 5.15 Fixed 2,000 --
July 24, 2003 5.24 Floating 1,000 --
January 16, 2008 4.95 Fixed 5,000 --
February 17, 2008 5.05 Fixed 2,000 --
May 29, 2008 5.01 Fixed 1,000 --
June 19, 2008 5.17 Fixed 4,000 --
July 24, 2008 5.24 Floating 2,000 --
October 6, 2008 4.35 Fixed 1,000 --
October 6, 2008 4.30 Fixed 1,000 --
------- -------
$29,000 $10,000
======= =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
35
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK (Continued)
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.
NOTE 9 - INCOME TAXES
An analysis of the provision for income taxes is as follows:
1998 1997 1996
------- ------- -------
Current
Federal $ 2,680 $ 1,585 $ 1,132
State 537 320 211
Deferred (119) (888) (1,117)
Valuation allowance -- -- 180
------- ------- -------
$ 3,098 $ 1,017 $ 406
======= ======= =======
The net deferred tax asset included in the accompanying consolidated balance
sheets consist of the following:
1998 1997
------- -------
Deferred tax assets
Bad debts $ 324 $ 135
Amortization of intangible assets 56 46
Contribution carryforward 1,376 1,641
Other 145 --
Unrealized loss on securities available-for-sale 19 26
------- -------
1,920 1,848
Deferred tax liabilities
Depreciation (75) (87)
FHLB stock dividend (65) (65)
Loan fees (332) (333)
Other -- (27)
------- -------
(472) (512)
Valuation allowance on deferred tax assets (180) (180)
------- -------
Total deferred tax asset $ 1,268 $ 1,156
======= =======
The valuation allowance at December 31, 1998 and 1997 reflects management's
estimate of temporary deductible differences that may not be realized.
- --------------------------------------------------------------------------------
(Continued)
36
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(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,-----------------
--------1998------- --------1997-------- ---------1996-------
<S> <C> <C> <C> <C> <C> <C>
Provision for federal income
taxes computed at statutory
rate of 34% $ 2,870 34.0% $ 966 34.0% $ 292 34.0%
Tax-exempt income (168) (2.0) (90) (3.2) (85) (9.9)
State income taxes, net of
federal income tax benefit 344 4.1 140 4.9 37 4.3
Other 52 .6 1 .1 (18) (2.1)
Valuation allowance -- -- -- -- 180 21.0
------- ---- ------- ---- ------- ----
$ 3,098 36.7% $ 1,017 35.8% $ 406 47.3%
======= ==== ======= ==== ======= ====
</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, 1998 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:
1998 1997
------ ------
Commitments to extend credit $3,009 $1,610
Unused lines of credit 5,803 4,887
At December 31, 1998, commitments to extend credit consist of fixed rate loan
commitments with rates ranging from 6.50% to 8.75%. 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.
- --------------------------------------------------------------------------------
(Continued)
37
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(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, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, 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.
- --------------------------------------------------------------------------------
(Continued)
38
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(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, 1998:
Total capital (to risk-weighted
assets) $68,666 43.1% $12,743 8.0% $15,929 10.0%
Tier I capital (to risk-weighted
assets) 66,675 41.9 10,372 4.0 9,557 6.0
Tier I (core) capital (to adjusted
total assets) 66,675 20.4 13,050 4.0 16,813 5.0
Tier I (tangible) capital (to tangible
assets) 66,675 20.4 4,894 1.5 N/A N/A
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 12,384 4.0 15,480 5.0
Tier I (tangible) capital (to tangible
assets) 61,368 21.6 4,644 1.5 N/A N/A
</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, 1998 and 1997 is
presented below.
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Earnings per common share
Net income $ 5,344 $ 1,825
Less: net income of Bank prior to conversion -- (2,518)
------- -------
Net income (loss) attributable to common shareholders $ 5,344 $ (693)
======= =======
Weighted average common shares outstanding 5,548 5,895
Add: shares committed to be issued to charitable foundation 200 250
------- -------
Total weighted average common shares outstanding 5,748 6,145
======= =======
Basic earnings (loss) per share $ .93 $ (.11)
======= =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
39
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 12 - EARNINGS PER COMMON SHARE (Continued)
The Company's outstanding stock options and stock awards were not considered in
the computations of diluted earnings per share because the effects of assumed
exercise would have been antidilutive. In future years, outstanding stock
options may be exercised which would increase the weighted average common shares
outstanding and, thereby, dilute earnings per share. In addition, if the average
common stock price were to exceed the exercise price of outstanding options in a
future year, the assumed exercise of the options and/or the assumed issuance of
the stock awards would have a dilutive effect on earnings per share for that
future year. However, previously reported earnings per share and diluted
earnings per share are not restated to reflect change in the status of changes
in the relationship between exercise prices and average stock prices.
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company has lending transactions with directors, executive officers, and
their associates. Loans to these individuals totaled approximately $181,000 and
$32,000 at December 31, 1998 and December 31, 1997, 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.
During 1998 and 1997, 35,334 and 19,154 shares of stock with an average fair
value of $14.72 and $15.74 per share were committed to be released, resulting in
ESOP compensation expense of $520,122 and $301,484, respectively.
Shares held by the ESOP at December 31 are as follows:
1998 1997
---- ----
Allocated shares 54 19
Unallocated shares 459 494
------ ------
Total ESOP shares 513 513
====== ======
Fair value of unallocated shares $5,956 $7,780
====== ======
- --------------------------------------------------------------------------------
(Continued)
40
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 14 - STOCK-BASED COMPENSATION PLANS (Continued)
During 1998, the Company adopted a stock option plan under the terms of which
shares of the Company's common stock were reserved for issuance. The options
became exercisable on a cumulative basis in equal installments over a 5-year
period from the date of grant. The options expire 10 years from the date of
grant.
A summary of the status of the Company's stock option plan and changes during
the year are presented below:
Weighted-
Average
1998 Exercise
Shares Price
------ -----
(Thousands)
Outstanding at beginning of year $ -- $ --
Granted 519 16.68
----- ------
Outstanding at end of year $ 519 $16.68
===== ======
Options exercisable at end of year --
Weighted-average fair value of options granted during year $6.48
All of the outstanding options at December 31, 1998 relate to options granted in
May 1998 at an exercise price of $16.68 and have a remaining life of 9.3 years
before expiration. These options are not fully vested. The exercise price equals
the market value on the date the options were granted.
The Company applies APB Opinion 25 and related Interpretations in accounting for
its stock option plan. Accordingly, no compensation cost has been recognized at
the date of grant. Had compensation cost been determined based on the fair value
at the grant dates for awards under the plan in 1998 consistent with the method
of SFAS No. 123, "Accounting for Stock Based Compensation," the Company's net
income and earnings per share would have been reduced to the pro forma amounts
in the table below. For purposes of pro forma disclosure, the estimated fair
value of the options is amortized to expense over the options' vesting period.
1998
----
Net income as reported $ 5,344
Pro forma net income 5,087
Earnings per share as reported, basic and diluted .93
Pro forma earnings per share, basic and diluted .89
- --------------------------------------------------------------------------------
(Continued)
41
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 14 - STOCK-BASED COMPENSATION PLANS (Continued)
In connection with the conversion to stock ownership, the Company adopted a
Management Recognition and Retention Plan (MRP). In 1998, the Company
contributed $4.3 million allowing the MRP to acquire 256,320 shares of common
stock of the Company, at an average cost of $16.69 per share, to be awarded to
directors and key employees. The Company awarded 216,166 shares during 1998.
These shares vest over a five-year period. The unamortized cost of shares not
yet earned (vested) is reported as a reduction of stockholders' equity. MRP
compensation expense totaled $467,000 for the year ended December 31, 1998.
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>
--------------1998---------- -----------1997-----------
Approximate Estimated Approximate Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 24,830 $ 24,830 $ 30,090 $ 30,090
Time deposits in other financial institutions 200 200 200 200
Securities available-for-sale 26,343 26,343 32,461 32,461
Securities held-to-maturity 58,267 58,809 57,022 57,498
Loans, net of allowance for loan losses 218,311 221,849 186,259 191,323
Accrued interest receivable 2,475 2,475 2,071 2,071
Financial liabilities
NOW and MM accounts (21,497) (21,497) (20,279) (20,279)
Savings (74,966) (74,966) (68,572) (68,572)
Time deposits (124,032) (125,326) (121,249) (121,795)
Advance payments by borrowers for taxes
and insurance (2,432) (2,432) (2,400) (2,400)
Advances from Federal Home Loan Bank (29,000) (27,989) (10,000) (9,853)
Accrued interest payable (520) (520) (516) (516)
</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.
- --------------------------------------------------------------------------------
(Continued)
42
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
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, 1998, and 1997,
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, 1998 and 1997, applied
for the time period until maturity. The estimated fair value of NOW, Money
Market, and savings accounts is assumed to approximate carrying value as
management establishes rates on these deposits at a level that approximates the
local market area.
ADVANCES FROM FEDERAL HOME LOAN BANK: The fair value for the Federal Home Loan
Bank advances was determined by calculating the present value of future cash
flows using the current rate for an advance with a similar length to maturity.
ACCRUED INTEREST: The fair value of accrued interest receivable and payable is
assumed to equal the carrying value.
OFF-BALANCE-SHEET INSTRUMENTS: Off-balance-sheet items consist principally of
unfunded loan commitments. The fair value of these commitments is not material.
Other assets and liabilities of the 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, 1998 and 1997, the fair value would have been achieved, because the
market value may differ depending on the circumstances. The fair values at
December 31, 1998 and 1997 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
- --------------------------------------------------------------------------------
(Continued)
43
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 16 - ADOPTION OF PLAN OF CONVERSION (Continued)
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.
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. In
December 1998, the Company contributed 50,000 shares 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.
- --------------------------------------------------------------------------------
(Continued)
44
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 17 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,164 $ 19,287
Securities available-for-sale 10,387 10,211
ESOP loan 4,614 4,870
Investment in bank subsidiary 67,438 61,905
Accrued interest receivable and other assets 1,235 1,320
-------- --------
$ 84,838 $ 97,593
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 251 $ 5,721
Shareholders' equity
Common stock 64 64
Additional paid-in capital 64,952 65,495
Unearned ESOP shares (4,582) (4,935)
Unearned MRP shares (3,810) --
Treasury stock, at cost (8,234) --
Retained earnings 36,225 31,290
Unrealized depreciation on securities available-for-sale (28) (42)
-------- --------
84,587 91,872
$ 84,838 $ 97,593
======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
45
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 17 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
For the year ended December 31, 1998 and
for the period October 31, 1997 to December 31, 1997
1998 1997
------- -------
<S> <C> <C>
Income
Securities $ 869 $ 33
ESOP loan 325 59
Gain on sale of securities 40 --
------- -------
Total income 1,234 92
Other expenses
Charitable contributions -- 2,500
Other operating expenses 198 --
------- -------
198 2,500
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
EARNINGS OF BANK SUBSIDIARY 1,036 (2,408)
Income taxes (benefit) 270 (939)
------- -------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED 766 (1,469)
EARNINGS OF BANK SUBSIDIARY
Equity in undistributed earnings of bank subsidiary 4,578 776
------- -------
NET INCOME (LOSS) $ 5,344 $ (693)
======= =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
46
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(Table amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 17 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
For the year ended December 31, 1998 and
for the period October 31, 1997 to December 31, 1997
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 5,344 $ (693)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Equity in undistributed earnings of bank subsidiary (4,578) (776)
Accrued charitable contribution of Company stock -- 2,500
Net accretion (6) --
Gain on sales of securities (40) --
Change in
Other assets (150) (1,337)
Other liabilities (5,185) 595
-------- --------
Net cash provided by (used in) operating activities (4,615) 289
INVESTING ACTIVITIES
Purchase of bank subsidiary stock -- (28,912)
Purchase of securities available-for-sale (8,759) (10,169)
Proceeds from sales of securities 6,745 --
Proceeds from calls of maturitites 2,000 --
-------- --------
Net cash used in investing activities (69) (39,081)
FINANCING ACTIVITIES
Net proceeds from sale of common stock -- 57,823
Payment received on loan to ESOP 256 256
Dividends paid (409) --
Purchase of treasury stock (13,286) --
-------- --------
Net cash provided by (used in) financing activities (13,439) 58,079
-------- --------
Net change in cash and cash equivalents (18,123) 19,287
Cash and cash equivalents at beginning of period 19,287 --
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,164 $ 19,287
======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
47
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(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
-------- ------- ------------ -----------
1998
- ----
<S> <C> <C> <C> <C>
Interest income $6,024 $5,998 $6,207 $6,154
Interest expense 2,513 2,598 2,635 2,711
------ ------ ------ ------
NET INTEREST INCOME 3,511 3,400 3,572 3,443
Provision for loan losses 62 61 62 61
Other income 159 143 182 165
Other expense 1,240 1,332 1,634 1,657
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 2,368 2,150 2,058 1,890
Income tax expense 915 781 616 810
------ ------ ------ ------
NET INCOME $1,453 $1,369 $1,442 $1,080
====== ====== ====== ======
Earnings per common share $ .24 $ .22 $ .26 $ .21
====== ====== ====== ======
------------------------Three Months Ended-----------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
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)
</TABLE>
* Since date of conversion (October 31, 1997).
48
<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 12, 1999 at the Suma Hall located at 2457 W. Chicago Ave, 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
As of February 15, 1999 there were approximately 1,056 shareholders of
record and 5,776,208 outstanding shares of common stock.
The following table sets forth the high and low bid prices and dividends
paid per share of common stock since the stock began trading on October 31,
1997. The stock price information was provided by the NASD, Inc.
Quarter Dividend
Ended High Low Declared
- --------------------------------------------------------------------------------
December 31, 1997 16.6250 15.0000 -
March 31, 1998 15.7500 14.6250 -
June 30, 1998 17.5000 15.0000 -
September 30, 1998 16.8750 10.5000 -
December 31, 1998 14.9375 11.0000 .07(cent)
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
49
<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, 1998, 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
50
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
Percent Jurisdiction of
of Incorporation
Parent Subsidiary Ownership or Organization
- --------------------------------- ------------------------------ ----------- ---------------
<S> <C> <C> <C>
First SecurityFed Financial, Inc. First Security Federal Savings 100% Federal
Bank
First Security Federal Savings Western Security Corporation 100% Illinois
Bank
</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, 1998 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,641
<INT-BEARING-DEPOSITS> 200
<FED-FUNDS-SOLD> 9,189
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,343
<INVESTMENTS-CARRYING> 58,267
<INVESTMENTS-MARKET> 58,809
<LOANS> 218,311
<ALLOWANCE> 2,069
<TOTAL-ASSETS> 338,050
<DEPOSITS> 220,495
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,968
<LONG-TERM> 29,000
64
0
<COMMON> 0
<OTHER-SE> 84,523
<TOTAL-LIABILITIES-AND-EQUITY> 338,050
<INTEREST-LOAN> 17,141
<INTEREST-INVEST> 6,055
<INTEREST-OTHER> 863
<INTEREST-TOTAL> 24,059
<INTEREST-DEPOSIT> 9,191
<INTEREST-EXPENSE> 10,296
<INTEREST-INCOME-NET> 13,763
<LOAN-LOSSES> 246
<SECURITIES-GAINS> 40
<EXPENSE-OTHER> 5,887
<INCOME-PRETAX> 8,442
<INCOME-PRE-EXTRAORDINARY> 8,442
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,344
<EPS-PRIMARY> .93
<EPS-DILUTED> .93
<YIELD-ACTUAL> 4.37
<LOANS-NON> 9
<LOANS-PAST> 1,003
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,828
<CHARGE-OFFS> 5
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,069
<ALLOWANCE-DOMESTIC> 2,069
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 655
</TABLE>
