UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended: JUNE 30,1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from --------------------- to --------------------
Commission file number 00-23063
FIRST SECURITYFED FINANCIAL , INC.
(Exact Name of Registrant as Specified In Its Charter)
DELAWARE 36-4177515
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
CHICAGO, ILLINOIS 60622
(Address of Principal Executive Offices) (Zip Code)
773/772-4500
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
Indicate the number of shares outstanding of each the issuer's classes of common
stock, as of the latest practicable date:
CLASS OUTSTANDING AT JULY 31,1999
Common Stock, par value $0.01 5,528,840 shares
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition as of
June 30, 1999 and December 31,1998................................. 3
Condensed Consolidated Statements of Income for the three months
and six months ended June 30,1999 and 1998......................... 4
Statement of Comprehensive Income for the three months and
six months ended June 30,1999 and 1998 .......................... 5
Condensed Consolidated Statements of Changes in Stockholders
Equity for the year ended December 31,1998 and the six months
ended June 30,1999.................................................. 6
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998................................ 8
Notes to the Condensed Consolidated Financial Statements as of
June 30, 1999...................................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 19
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders............. 21
Item 6. Exhibits and Reports on Form 8-K............................... 21
<PAGE>
<TABLE>
<CAPTION>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share and per share data)
(Unaudited)
- ---------------------------------------------------------------------------------
June 30, December 31,
1999 1998
----------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,582 $ 15,641
Federal funds sold 151 9,189
----------- ----------
Total cash and cash equivalents 6,733 24,830
Time deposits in other financial
institutions 200 200
Securities available-for-sale 21,926 26,343
Securities held-to-maturity (fair value of
$81,778 in 1999 and $58,809 in 1998) 83,289 58,267
Loans, net of allowance for loan losses 227,301 218,311
Federal Home Loan Bank stock 2,194 2,131
Premises and equipment, net 3,814 3,967
Accrued interest receivable 2,621 2,475
Intangible assets 210 236
Other assets 1,643 1,290
----------- ----------
Total assets $ 349,931 $ 338,050
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 225,903 $ 220,495
Advances from borrowers for taxes and
insurance 2,722 2,432
Advances from Federal Home Loan Bank 37,500 29,000
Accrued interest payable and other liabilities 1,490 1,536
----------- ----------
Total liabilities 267,615 253,463
Stockholders' Equity
Preferred stock, $0.01 par value per share,
500,000 shares authorized, no shares issued
and outstanding - -
Common stock, $0.01 par value per share, 8,000,000
shares authorized, 6,408,000 shares issued 64 64
Additional paid-in capital 64,989 64,952
Unearned ESOP shares (4,410) (4,582)
Unearned MRP shares (3,460) (3,810)
Retained earnings, substantially restricted 37,799 36,225
Net unrealized loss on available-for-sale
securities, net of income taxes (421) (28)
Treasury stock, at cost; (879,160 shares at
6/30/99 and 553,488 shares at 12/31/98) (12,245) (8,234)
----------- ----------
Total stockholders' equity 82,316 84,587
----------- ----------
Total liabilities and stockholders' equity $ 349,931 $ 338,050
=========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share and per share data)
(Unaudited)
- ---------------------------------------------------------------------------------
Six months ended Three months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Loans $ 8,935 $ 8,262 $ 4,495 $ 4,195
Securities 1,695 1,967 862 980
Mortgage-backed securities 1,107 1,527 577 721
Other interest-earning assets 310 266 106 102
--------- -------- --------- ---------
Total interest income 12,047 12,022 6,040 5,998
Interest expense
Deposits 4,440 4,698 2,225 2,374
FHLB advances 775 413 391 224
--------- -------- --------- ---------
Total interest expense 5,215 5,111 2,616 2,598
NET INTEREST INCOME 6,832 6,911 3,424 3,400
Provision for loan losses 124 123 62 61
--------- -------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,708 6,788 3,362 3,339
Noninterest income
Net Gain on sale of securities 19 0 0 0
Other income 322 302 189 143
--------- -------- --------- ---------
Total noninterest income 341 302 189 143
Noninterest expense
Compensation and benefits 1,777 1,340 861 677
Occupancy and equipment
expense 331 357 181 177
Data Processing 182 189 94 97
Federal deposit insurance
premiums 102 106 50 54
Professional fees 72 81 58 53
Other operating expenses 515 499 234 274
--------- -------- --------- ---------
Total noninterest expense 2,979 2,572 1,478 1,332
--------- -------- --------- ---------
INCOME BEFORE INCOME TAX
PROVISION 4,070 4,518 2,073 2,150
Provision for income taxes 1,494 1,696 759 781
--------- -------- --------- ---------
NET INCOME $ 2,576 $ 2,822 $ 1,314 $ 1,369
========= ======== ========= =========
Earnings per share
Basic $ .52 $ .46 $ .27 $ .22
========= ======== ========= =========
Diluted $ .52 $ .46 $ .27 $ .22
========= ======== ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands, except share and per share data)
(Unaudited)
- ---------------------------------------------------------------------------------
Six Months Ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
----- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 2,576 $ 2,822 $1,314 $1,369
Other comprehensive income,
net of tax:
Change in unrealized gains
on securities (393) 30 (343) (15)
------- ------- ------ ------
Comprehensive Income $ 2,183 $ 2,852 $ 971 $1,354
======= ======= ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except share and per share data)
(Unaudited)
- ---------------------------------------------------------------------------------
Unrealized
Gain (Loss) Total
Additional Unearned Unearned on Securities Stock-
Common Paid-in ESOP MRP Retained Available- Treasury holders'
Stock Capital Shares Shares Earnings For-Sale Stock Equity
------ ---------- -------- ------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 64 $ 65,495 $ (4,935) - $31,290 $ (42) - $91,872
ESOP shares earned - 167 353 - - - - 520
MRP shares earned - - - 467 - - - 467
Issuance of stock to Foundation,
Net of related tax benefit - (710) - - - - 775 65
Net income - - - - 5,344 - - 5,344
Treasury stock - - - - - - (13,286) (13,286)
Dividends Paid ($.07 per share) - - - - (409) - - (409)
MRP shares allocated - - - (4,277) - - 4,277 -
Change in valuation allowance
For securities available-for-sale
Net of income taxes - - - - - 14 - 14
------- ------- ------- ------- ------- ------- ------ --------
Balance at December 31, 1998 64 64,952 (4,582) (3,810) 36,225 (28) (8,234) 84,587
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except share and per share data)
(Unaudited)
- CONTINUED -
- ---------------------------------------------------------------------------------
Unrealized
Gain (Loss) Total
Additional Unearned Unearned on Securities Stock-
Common Paid-in ESOP MRP Retained Available- Treasury holders'
Stock Capital Shares Shares Earnings For-Sale Stock Equity
------ --------- -------- ------- -------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ESOP shares earned - $ 37 $ 172 - - - - $ 209
MRP shares earned - - - 350 - - - 350
Net income - - - - 2,576 - - 2,576
Treasury stock - - - - - - (4,011) (4,011)
Dividends Declared
($.17 per share) - - - - (1,002) - - (1,002)
Change in valuation
allowance for securities
available-for-sale
net of income taxes - - - - - (393) - (393)
------ ------- ------- ------- ------- -------- -------- -------
Balance at June 30,1999 $ 64 $64,989 $(4,410) $(3,460) $37,799 $ (421) $(12,245) $82,316
====== ======= ======= ======= ======= ====== ======== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share and per share data)
(Unaudited)
- ---------------------------------------------------------------------------------
Six months ended
June 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,576 $ 2,822
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 192 194
Amortization of discounts and premiums
on securities 81 81
Net Gain on sales and calls of securities (19) -
Provision for loan losses 124 123
ESOP compensation expense 209 276
Stock Award Compensation Expense 350 117
Change in
Deferred loan origination fees 19 47
Accrued interest receivable and
other assets (499) (16)
Other liabilities and deferred
income taxes (46) (530)
--------- ---------
Net cash provided by operating
activities 2,987 3,114
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale (1,062) (7,505)
Purchase of securities held-to-maturity (36,840) (15,383)
Proceeds from repayment of securities 4,243 4,626
Proceeds from sales of securities
available-for-sale 2,968 -
Proceeds from calls and maturities
of securities 9,100 10,030
Net change in loans (9,131) (20,606)
Capital expenditures, net (12) (17)
Purchase of Federal Home Loan Bank Stock (63) (149)
--------- ---------
Net cash used in investing activities (30,797) (29,004)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 5,408 6,359
Net borrowings from FHLB 8,500 11,000
Net change in advances from
borrowers for insurance and taxes 290 212
Dividends Paid (474) -
Purchase of Treasury Stock (4,011) (5,092)
--------- ---------
Net cash provided by (used in)
financing activities 9,713 12,479
--------- ---------
Decrease in cash and cash equivalents (18,097) (13,411)
Cash and cash equivalents at beginning
of period 24,830 30,090
--------- ---------
Cash and cash equivalents at end of period $ 6,733 $ 16,679
========= =========
</TABLE>
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
First SecurityFed Financial, Inc. (the Company) is a Delaware corporation
organized in July 1997 by First Security Federal Savings Bank (the Bank) in
connection with the conversion of the Bank from a federally chartered mutual
savings bank to a federally chartered stock savings bank.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements.
In the opinion of management, the unaudited consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial condition of First SecurityFed
Financial, Inc. as of June 30,1999 and December 31,1998, the results of its
operations for the three and six month periods ended June 30,1999 and 1998 and
cash flows for the six months ended June 30,1999 and 1998.
NOTE 2 - CONVERSION
On October 30, 1997, First Security Federal Savings Bank ("Bank") converted from
a federally chartered mutual savings bank to a federally chartered stock savings
bank. The Bank issued all of its common stock to First SecurityFed Financial,
Inc. ("Company") and at the same time the Company issued 6,408,000 shares of
common stock at $10.00 per share to the ESOP, certain depositors of the Bank,
and certain members of the general public, all pursuant to a plan of conversion
("Conversion").
As part of the conversion, the Bank's depositors approved a stock contribution
of 250,000 shares to The Heritage Foundation of First Security Federal Savings
Bank, Inc. (the "Foundation"). The contribution was accrued at the time of
conversion for $2.5 million based on the $10 per share initial offering price
and resulted in $2.5 million of expense ($1.5 million, net of tax) to the
Company. Additional paid-in capital was increased by $2.5 million as a result of
the unconditional commitment to contribute the stock to the Foundation.
The ESOP purchased 512,640 shares of common stock representing 8% of the total
issued shares. The ESOP borrowed $5,126,400 from the Company to purchase the
stock using the stock as collateral for the loan. The loan is to be repaid
principally from the Bank's contributions to the ESOP over a period of up to 20
years.
<PAGE>
NOTE 3 - EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of the earnings per common
share computation for the three and six month periods ended June 30,1999 is
presented below:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30,1999 June 30,1999
------------------- ----------------
<S> <C> <C>
Earnings per common share
Net Income $ 1,314 $ 2,576
--------------- --------------------
Net income attributable
to common shareholders $ 1,314 $ 2,576
=============== ====================
Weighted average common
shares outstanding 4,618 4,709
Add: shares committed
to be issued to
charitable foundation 200 200
--------------- --------------------
Total weighted average
common shares outstanding 4,818 4,909
--------------- --------------------
Basic earnings per share $ .27 $ .52
=============== ====================
</TABLE>
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 the
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
<PAGE>
NOTE 4 - CAPITAL REQUIREMENTS
Pursuant to federal regulations, savings institutions must meet two separate
capital requirements. The following is a summary of the Bank's regulatory
capital at June 30,1999:
Core Risk based
Capital Capital
------- ----------
(In thousands)
Regulatory capital $69,376 $71,474
Minimum capital requirement 13,695 13,429
------- -------
Excess regulatory capital over
minimum requirement $55,681 $58,045
======= =======
NOTE 5 - COMPREHENSIVE INCOME
Under a new accounting standard, comprehensive income is now reported for all
periods. Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized gains and
losses on securities available-for-sale.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
COMPARISON OF FINANCIAL CONDITION AT JUNE 30,1999 AND DECEMBER 31, 1998
Total assets increased $11.8 million to $349.9 million at June 30,1999 from
$338.1 million at December 31,1998. The increase in total assets consisted
primarily of increases of $20.6 million in securities, $9.0 million in loans
receivable and $300,000 in other assets which were offset by a decrease of $18.1
million in cash and cash equivalents.
Net loans receivable increased by $9.0 million from $218.3 million at December
31,1998 to $227.3 million at June 30,1999 as a result of increased marketing
efforts and strong market demand due to the prevailing favorable interest rate
environment.
Cash and cash equivalents decreased by $18.1 million from $24.8 million at
December 31,1998 to $6.7 million at June 30,1999. The decrease was the result of
the redeployment of funds into higher yielding loans and securities and the
repurchase of the company's stock.
Securities available-for-sale decreased by $4.4 million from $26.3 million at
December 31,1998 to $21.9 million at June 30,1999. During the same six month
period, securities held-to-maturity increased by $25.0 million from $58.3
million at December 31,1998 to $83.3 million at June 30,1999. This net increase
of $20.6 million in securities was the result of the continued investment of
funds into higher yielding government securities.
Total liabilities at June 30,1999 were $267.6 million compared to $253.5 million
at December 31,1998, an increase of $14.1 million. Deposits increased by $5.4
million, advances from the Federal Home Loan Bank increased by $8.5 million and
advances from borrowers for taxes and insurance increased by $300,000. The net
increase in liabilities helped in funding loan growth, increasing the securities
portfolio, and repurchasing common stock.
Equity at June 30,1999 was $82.3 million compared to $84.6 million at December
31,1998, a decrease of $2.3 million. The decrease was due primarily to the
company's repurchase of outstanding common stock of $4.0 million partially
offset by net income of $2.6 million. Equity at June 30,1999 was also impacted
by dividends on the company's common stock. A cash dividend of $474,000 was paid
in April 1999 and a cash dividend of $528,000 was declared in June 1999. The
$528,000 dividend was paid to stockholders in July 1999.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30,1999 AND JUNE
30,1998
GENERAL
Net earnings for the six months ended June 30,1999 were $2,576,000, a decrease
of $246,000 from net earnings of $2,822,000 for the six months ended June
30,1998. The decrease in net earnings was primarily due to a decrease of $79,000
in net interest income and a $407,000 increase in noninterest expense partially
offset by a decrease of $202,000 in the provision for income taxes and an
increase in noninterest income of $39,000.
INTEREST INCOME
Interest income for the six months ended June 30,1999 was $12.0 million and
remained fairly consistent with the six months ended June 30,1998. Interest
income increased on loans receivable by $673,000 and on other interest-earning
assets by $44,000 due to increases in the average balances of loans receivable
and interest earning assets. The decrease of $272,000 in interest from
securities is primarily due to the sale of securities to fund the company's
purchase of Treasury stock, and lower interest rates due to market conditions.
The decrease of $420,000 in mortgage-backed securities is due to repayments of
mortgage-backed securities.
INTEREST EXPENSE
Interest expense for the six months ended June 30,1999 was $5.2 million compared
to $5.1 million for the six months ended June 30,1998, an increase of $100,000.
The increase of $362,000 in interest on Federal Home Loan Bank Advances is
primarily the result of increased borrowings from the Federal Home Loan Bank
used to fund loan growth, and partially offset by a decrease of $258,000 in
interest expense on deposits due to lower interest rates.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the six months ended June 30,1999 was $124,000
and remained constant with the six months ended June 30,1998.
The amount of the provision and allowance for estimated losses on loans is
influenced by current economic conditions, actual loss experience, industry
trends and other factors, including real estate values, in the Bank's market
area . In addition, various regulatory agencies, as an integral part of their
examination process , periodically review the Bank's allowance for estimated
losses on loans. Such agencies may require the Bank to provide additions to the
allowance based upon judgements which differ from those of management. Although
management uses the best information available and maintains the Bank's
allowance for losses at a level it believes adequate to provide for losses,
future adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Bank's control.
NONINTEREST INCOME
Noninterest income for the six months ended June 30,1999 was $341,000 compared
to $302,000 for the six months ended June 30,1998. The increase was attributed
to the increased use of our ATM's by other institutions' customers.
NONINTEREST EXPENSE
Noninterest expense was $3.0 million for the six months ended June 30,1999
compared to $2.6 million for the six months ended June 30,1998 an increase of
$400,000. Compensation and benefits expense increased by $437,000 due to the
implementation of the RRP plan which was approved in May 1998. Professional fees
decreased by $9,000 due to the Company assuming an increased role in the
preparation of various reports required by regulatory agencies. Occupancy and
equipment expense decreased by $26,000 due to a refund for property taxes. Other
operating expense increased by $16,000 due to an increase of $30,000 in State of
Delaware Franchise Tax and $6,500 in ATM expense partially offset by a decrease
in appraisal expense of $18,000 attributable, in part, to the hiring of an
internal appraiser.
<PAGE>
INCOME TAXES
Income taxes were $1.5 million for the six months ended June 30,1999 compared to
$1.7 million for the six months ended June 30,1998, a decrease of $200,000. The
decrease in the provision for income taxes was due to a decrease of $448,000 in
pre-tax earnings.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30,1999 AND
JUNE 30,1998
GENERAL
Net earnings for the three months ended June 30,1999 were $1,314,000 a decrease
of $55,000 from net earnings of $1,369,000 for the three months ended June
30,1998. The decrease is primarily attributed to an increase in compensation
expense due to the implementation of the RRP plan approved in May 1998 by the
stockholders. However, income per share increased during the period as a result
of the company's purchase of Treasury stock.
INTEREST INCOME
Interest income for the three months ended June 30,1999 was $6.0 million and
remained fairly consistent with the three months ended June 30,1998. The
increase of $300,000 in interest income on loans was due to an increase in loans
receivable, which was partially offset by a $118,000 decrease in securities
income due to the sale of securities to fund the company's purchase of Treasury
stock. Mortgage-backed securities interest income decreased by $144,000 due to
repayments of the principal balance.
INTEREST EXPENSE
Interest expense for the three months ended June 30,1999 was $2.6 million which
was consistent with the three month period ended June 30,1998. Interest expense
on deposits decreased $149,000 due to lower interest rates, which was offset by
a $167,000 increase in the interest paid on Federal Home Loan Bank advances due
to increased borrowings to fund loan growth.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended June 30,1999 was
$62,000 and remained consistent with the three months ended June 30,1998.
<PAGE>
The amount of the provision and allowance for estimated losses on loans is
influenced by current economic conditions, actual loss experience, industry
trends and other factors, including real estate values, in the Bank's market
area . In addition, various regulatory agencies, as an integral part of their
examination process , periodically review the Bank's allowance for estimated
losses on loans. Such agencies may require the Bank to provide additions to the
allowance based upon judgements which differ from those of management. Although
management uses the best information available and maintains the Bank's
allowance for losses at a level it believes adequate to provide for losses,
future adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Bank's control.
NONINTEREST INCOME
Noninterest income for the three months ended June 30,1999 was $189,000 compared
to $143,000 for the three months ended June 30,1998. The increase of $46,000 was
attributed to increased use of our ATM's by other institutions' customers.
NONINTEREST EXPENSE
Noninterest expense was $1,478,000 for the three months ended June 30,1999
compared to $1,332,000 for the three months ended June 30,1998, an increase of
$146,000.
Compensation and benefits expense increased by $184,000 due to the
implementation of the RRP plan. Professional fees increased by $5,000 primarily
due to increased fees paid for the preparation of various reports relating to
the Company's retirement benefit plans.
Other operating expense decreased by $40,000 primarily due to a decrease in
appraisal expense of $26,000 due to the hiring of an internal appraiser.
Goodwill amortization and foreclosure expense decreased by $8,000 and $6,500
respectively.
INCOME TAXES
Income taxes were $759,000 for the three months ended June 30,1999 compared to
$781,000 for the three months ended June 30,1998 a decrease of $22,000.
The decrease in the provision for income taxes was due to a decrease of $77,000
in pre-tax earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary resource 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.
<PAGE>
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 objective of its asset/liability management program. Excess liquid
assets are invested generally in interest-earning overnight deposits and
short-and intermediate-term U.S. government and agency obligations and
mortgage-backed securities of short duration. If First Security requires funds
beyond its ability to generate them internally, it has additional borrowing
capacity with the FHLB of Chicago.
Federal Regulations require First Security to maintain minimum levels of liquid
assets. The required percentage has varied from time to time based upon economic
conditions and savings flows and is currently 4% of net withdrawable savings
deposits and borrowings payable on demand or in one year or less during the
preceding calendar month. Liquid assets for purposes of this ratio include cash,
certain time deposits, U. S. Government, government agency and corporate
securities and other 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 June 30,1999,
First Security's liquidity ratio for regulatory purposes was 39.14%.
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 $3.0 million and $3.1 million
for the six months ended June 30,1999 and June 30,1998 respectively, and $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 of increases
in net deposits and advances from FHLB of Chicago partially offset by purchases
of Treasury Stock in 1999.
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 June 30,1999, cash and
short-term investments totaled $6.7 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 June 30,1999, the Company had outstanding commitments to originate loans of
$4.6 million, $4.1 million of which had fixed interest rates, and $500,000 of
which had adjustable 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
June 30,1999 totaled $110.3 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 June 30,1999, First Security was in compliance with all applicable
capital requirements on a fully phased-in basis. See Note 4 of the Notes to
Consolidated Financial Statements.
<PAGE>
IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS 133 does not allow hedging of a security which is
classified as held-to-maturity, accordingly, upon adoption of SFAS 133,
companies may reclassify any security from held-to-maturity to
available-for-sale if they wish to be able to hedge the security in the future.
SFAS 133 is effective for the fiscal years beginning after June 15,1999 with
early adoption encouraged for any fiscal quarter beginning July 1,1998 or later,
with no retroactive application. Management does not expect the adoption of SFAS
133 to have a significant impact on the Company's financial statements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and results of operations in terms
of historical dollars, without considering changes in the relative purchasing
power of money over time due to inflation. Unlike most industrial companies,
virtually all of the assets and liabilities of the Company are monetary in
nature. Therefore, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. In the current interest rate
environment, the liquidity and maturity structure and quality of the Company's
assets and liabilities are critical to the maintenance of acceptable performance
levels.
SAFE HARBOR STATEMENT
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Bank intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities 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 Bank, are
generally identifiable by use of the words "believe", "expect", "intend",
"anticipate", "estimate", "project" or similar expressions. The Bank's ability
<PAGE>
to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Bank and the subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Bank's market area and accounting principles, policies and guidelines. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Bank's financial results, is included
in the Bank's filings with the Securities and Exchange Commission.
YEAR 2000
The Bank's lending and deposit activities are almost entirely dependent upon
computer systems which process and record transactions, although the Bank can
effectively operate with manual systems for brief periods when its electronic
systems malfunction or cannot be accessed. Currently, the Bank utilizes the
services of a nationally recognized data processing service bureau which
specializes in data processing for financial institutions.
The Bank has conducted a review of its computer systems to review the systems
that could be affected by the Year 2000 issue and has developed a plan of action
to resolve the issue. In 1997, the Bank began a process of identifying any Year
2000 related problems that may be experienced by its computer-dependent systems.
During this process of identifying and assessing any potential Year 2000 related
problems, the Bank decided to convert from its current data processing service
bureau to the aforementioned nationally-recognized data processing service
bureau. As part of this conversion, the Bank also decided to purchase all new
computer hardware to replace the existing outdated teller terminals. The
installation of the new hardware and the conversion to the new service bureau
took place successfully in August 1998.
The Bank has received confirmation from both the computer hardware supplier and
the data processing service bureau that both systems (hardware and software) are
Year 2000 compliant. However, the Bank performed it's own independent testing of
the systems in November 1998 and in April 1999. Various system applications were
tested and both tests were completed successfully utilizing dates in the year
2000.
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 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.
<PAGE>
As of June 30,1999, the Bank has incurred $570,000 in capital expenditures
related to its hardware and software conversion. Furthermore, it anticipates
incurring an additional $15,000 in capital expense to achieve full Year 2000
compliance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In an attempt to manage its exposure to changes in interest rates, management
monitors the Company's interest rate risk. The Board of Directors reviews at
least quarterly the Company's interest rate risk position and profitability. The
Board of Directors also reviews the Company's portfolio, formulates investment
strategies and oversees the timing and implementation of transactions to assure
attainment of the Company's objectives in the most effective manner. In
addition, the Board reviews on a quarterly basis the Company's asset/liability
position, including simulations of the effect on the Company's capital of
various interest rate scenarios.
In managing its asset/liability mix, the Company, depending on the relationship
between long- and short-term interest rates, market conditions and consumer
preference, often places more emphasis on managing short term net interest
margin than on better matching the interest rate sensitivity of its assets and
liabilities in an effort to enhance net interest income. Management believes
that the increased net interest income resulting from a mismatch in the maturity
of its asset and liability portfolios can, during periods of declining or stable
interest rates, provide high enough returns to justify the increased exposure to
sudden and unexpected increases in interest rates.
The Board has taken a number of steps to manage the Company's vulnerability to
changes in interest rates. First, the Company has long used community outreach,
customer service and marketing efforts to increase the Company's passbook and
other non-certificate accounts. At June 30,1999, $98.4 million or 43.6% of the
Company's deposits consisted of passbook, NOW and money market accounts. The
Company believes that these accounts represent "core" deposits which are
generally somewhat less interest rate sensitive than other types of deposit
accounts. Second, while the Company continues to originate 30 year fixed rate
residential loans for portfolio as a result of consumer demand, an increasing
proportion of the Company's residential loans have terms of 15 years or less or
carry adjustable interest rates. Finally, the Company has focused a significant
portion of its investment activities on securities with adjustable interest
rates or terms of five years or less. At June 30,1999, $11.5 million or 58.2% of
the Company's mortgage-backed securities had adjustable interest rates or terms
to maturity (or anticipated average lives in the case of collateralized mortgage
obligations) of five years or less and $18.0 million or 21.1% of the Company's
other securities had adjustable interest rates or terms to maturity of five
years or less.
<PAGE>
Management utilizes the net portfolio value ("NPV") analysis to quantify
interest rate risk. In essence, this approach calculates the difference between
the present value of liabilities, expected cash flows from assets and cash flows
from off balance sheet contracts. Presented below, as of March 31,1999, the
latest date for which information is available, is an analysis of the Bank's
estimated interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts in interest rates, up and down 300 basis points in 100
point increments. Even though the information presented reflects the Bank's
interest rate risk position at the close of the prior quarter, management
believes that it is helpful in assessing the Bank's current interest rate risk
position.
Assumed Change $ Change in % Change in
In Interest Rates $ Amount NPV NPV
- ----------------- ------------ ----------- -----------
(Basis Points) (Dollars in Thousands)
+ 300 $60,319 $(19,720) (25)%
+ 200 67,560 (12,389) (15)
+ 100 74,497 (5,542) (7)
---- 80,039 ---- ----
- 100 85,172 5,133 6
- 200 89,930 9,890 12
- 300 95,264 15,225 19
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.
<PAGE>
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the Company's stockholders, held on May 12,1999, the
stockholders considered the following proposals:
I. The election of three directors of the Company
II. The ratification of the appointment of Crowe, Chizek and Company, LLP
as auditors for the fiscal year ending December 31,1999.
The following directors were re-elected:
FOR WITHHELD TOTAL
--------- -------- ---------
Terry Gawryk 3,604,562 62,100 3,666,662
Jaroslav Sydorenko 3,612,787 53,875 3,666,662
Chrystya Wereszczak 3,614,037 52,625 3,666,662
The vote on proposal II was as follows:
FOR AGAINST ABSTAIN NON-VOTE
--------- ------- ------- --------
Proposal II 3,627,107 31,170 8,385
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits - Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K - none
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST SECURITYFED FINANCIAL, INC
(Registrant)
BY: /s/JULIAN E. KULAS
-------------------------------
Julian E. Kulas
Principal Executive Officer
August 13,1999
BY: /s/HARRY KUCEWICZ
-------------------------------
Harry Kucewicz
Chief Financial and Accounting
Officer
August 13,1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q for the quarter ended June 30,1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,582
<INT-BEARING-DEPOSITS> 200
<FED-FUNDS-SOLD> 151
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,926
<INVESTMENTS-CARRYING> 83,289
<INVESTMENTS-MARKET> 81,778
<LOANS> 227,301
<ALLOWANCE> 2,190
<TOTAL-ASSETS> 349,931
<DEPOSITS> 225,903
<SHORT-TERM> 10,500
<LIABILITIES-OTHER> 4,212
<LONG-TERM> 27,000
0
0
<COMMON> 64
<OTHER-SE> 82,252
<TOTAL-LIABILITIES-AND-EQUITY> 349,931
<INTEREST-LOAN> 8,935
<INTEREST-INVEST> 2,802
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<INTEREST-TOTAL> 12,047
<INTEREST-DEPOSIT> 4,440
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<INTEREST-INCOME-NET> 6,832
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<EXPENSE-OTHER> 2,979
<INCOME-PRETAX> 4,070
<INCOME-PRE-EXTRAORDINARY> 4,070
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,576
<EPS-BASIC> 0.52
<EPS-DILUTED> 0.52
<YIELD-ACTUAL> 4.17
<LOANS-NON> 9
<LOANS-PAST> 806
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,066
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<ALLOWANCE-CLOSE> 2,190
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</TABLE>
