UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended: September 30, 2000
[ ] 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
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First SecurityFed Financial , Inc.
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(Exact Name of Registrant as Specified In Its Charter)
Delaware 36-4177515
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
Chicago, Illinois 60622
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(Address of Principal Executive Offices) (Zip Code)
773/772-4500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each the issuer's classes of common
stock, as of the latest practicable date:
Class Outstanding at October 31, 2000
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Common Stock, par value $0.01 5,029,135 shares
1
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
<TABLE>
INDEX
Part I. Financial Information
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition as of
September 30, 2000 and December 31,1999........................................................ 3
Condensed Consolidated Statements of Income for the nine months and three months
ended September 30, 2000 and 1999............................................................ 4
Statements of Comprehensive Income for the nine months and three months
ended September 30, 2000 and 1999 ........................................................... 5
Condensed Consolidated Statements of Changes in Shareholders' Equity for the
nine months ended September 30, 2000.......................................................... 6
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999...................................................... 7
Notes to the Condensed Consolidated Financial Statements as of
September 30, 2000............................................................................ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.............................................................. 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................ 18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K........................................................ 20
</TABLE>
2
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONSENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share and per share data)
(unaudited)
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<TABLE>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,334 $ 6,057
Federal funds sold 76 200
---------------- ---------------
Total cash and cash equivalents 2,410 6,257
Securities available-for-sale 31,807 20,622
Securities held-to-maturity (fair value of
$76,216 - 2000 and $89,850 - 1999) 78,606 92,908
Loans, net of allowance for loan losses 270,035 241,168
Federal Home Loan Bank stock 3,090 2,315
Premises and equipment, net 3,583 3,672
Accrued interest receivable 3,196 2,976
Intangible assets 161 190
Other assets 1,851 2,184
---------------- ---------------
Total assets $ 394,739 $ 372,292
================ ===============
LIABILITIES
Deposits
Non-interest bearing $ 7,864 $ 6,089
Interest-bearing 241,464 232,034
---------------- ---------------
249,328 238,123
Advance payments by borrowers for taxes and
insurance 1,673 2,811
Advances from Federal Home Loan Bank 60,650 46,300
Accrued interest payable and other liabilities 1,971 1,902
---------------- ---------------
Total liabilities 313,622 289,136
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 62,512 64,324
Unearned ESOP shares (3,989) (4,239)
Unearned stock awards (2,534) (3,075)
Treasury stock, at cost; (1,313,865 shares - 2000
and 979,360 shares - 1999 ) (16,901) (13,227)
Retained earnings, substantially restricted 42,407 39,914
Accumulated other comprehensive income (442) (605)
----------------- ----------------
Total shareholders' equity 81,117 83,156
---------------- ---------------
Total liabilities and shareholders' equity $ 394,739 $ 372,292
================ ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share and per share data)
(Unaudited)
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<TABLE>
Nine months ended Three months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Loans $ 15,702 $ 13,636 $ 5,494 $ 4,701
Securities 3,723 2,710 1,267 1,015
Mortgage-backed securities 1,635 1,700 537 593
Other interest-earning assets 210 362 77 52
------------- ------------ ------------- --------------
Total interest income 21,270 18,408 7,375 6,361
Interest expense
Deposits 7,982 6,739 2,829 2,299
FHLB advances 2,411 1,287 915 512
------------- ------------ ------------- --------------
Total interest expense 10,393 8,026 3,744 2,811
------------- ------------ ------------- --------------
Net interest income 10,877 10,382 3,631 3,550
Provision for loan losses 185 185 61 61
------------- ------------ ------------- --------------
Net interest income after
provision for loan losses 10,692 10,197 3,570 3,489
Noninterest income
Net gain/(loss) on sale of securities (43) 19 (15) -
Gain on sale of real estate owned 41 - - -
Other income 471 545 158 223
------------- ------------ ------------- --------------
Total noninterest income 469 564 143 223
Noninterest expense
Compensation and benefits 2,804 2,677 960 900
Occupancy and equipment expense 511 514 171 183
Data processing expense 227 266 71 84
Federal deposit insurance premiums 96 152 33 50
Professional fees 100 105 22 33
Other operating expenses 770 736 261 221
------------- ------------ ------------- --------------
Total noninterest expense 4,508 4,450 1,518 1,471
------------- ------------ ------------- --------------
Income before income tax provision 6,653 6,311 2,195 2,241
Provision for income taxes 2,254 2,289 709 795
------------- ------------ ------------- --------------
Net income $ 4,399 $ 4,022 $ 1,486 $ 1,446
============= ============ ============= ==============
Earnings per share
Basic $ .93 $ .82 $ .32 $ .30
============= ============ ============= ==============
Diluted $ .93 $ .82 $ .32 $ .30
============= ============ ============= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands, except share and per share data)
(Unaudited)
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<TABLE>
Nine Months Ended Three Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $4,399 $4,022 $1,486 $1,446
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on
securities resulting from the reclassification
of securities from held-to- maturity to
available-for-sale (134) - - -
Change in unrealized holding gains (losses)
on securities available-for-sale 271 (518) 331 (136)
Reclassification adjustment for (gains) losses
recognized in income 26 (11) 9 -
------ ------ ------ ------
Other comprehensive income 163 (529) 340 (136)
------ ------ ------ ------
Comprehensive Income $4,562 $3,493 $1,826 $1,310
====== ====== ====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands, except share and per share data)
(Unaudited)
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<TABLE>
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 December 31, 1999 $64 $64,324 $(4,239) $(3,075) $(13,227) $39,914 $(605) $83,156
ESOP shares earned - 51 250 - - - - 301
Stock awards earned - - - 541 - - - 541
Issuance of stock to Foundation,
net of related tax benefit - (1,863) - - 2,054 - - 191
Net income - - - - - 4,399 - 4,399
Purchase of treasury stock - - - - (5,728) - - (5,728)
Dividends ($.38 per share) - - - - - (1,906) - (1,906)
Change in fair value of securities,
net of income taxes and
reclassification effects - - - - - - 163 163
--- ------- ------- ------- -------- ------- ----- -------
Balance at September 30, 2000 $64 $62,512 $(3,989) $(2,534) $ (16,901) $42,407 $(442) $81,117
=== ======= ======= ======= ========= ======= ===== =======
</TABLE>
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See accompanying notes to condensed consolidated financial statements
6
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share and per share data)
(Unaudited)
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<TABLE>
Nine months ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,399 $ 4,022
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 239 289
Amortization of discounts and premiums
on securities 114 114
Net (gain)/loss on sales and calls of securities 43 (19)
Provision for loan losses 185 185
ESOP compensation expense 301 307
Stock award compensation expense 541 555
Federal Home Loan Bank stock dividend (109) -
Change in
Deferred loan origination fees 336 21
Accrued interest receivable and other assets (104) (1,339)
Other liabilities and deferred income taxes 196 796
------------- -------------
Net cash provided by operating activities 6,141 4,931
Cash flows from investing activities
Purchase of securities available-for-sale (1,551) (1,062)
Purchase of securities held-to-maturity (3,333) (45,627)
Proceeds from repayment of securities 3,201 5,705
Proceeds from sales of securities available-for-sale 2,479 2,968
Proceeds from calls and maturities of securities 2,480 9,900
Net change in loans (29,313) (18,013)
Capital expenditures, net (121) (25)
Purchase of Federal Home Loan Bank stock (666) (63)
------------- -------------
Net cash used in investing activities (26,824) (46,217)
Cash flows from financing activities
Net increase in deposits 11,205 12,253
Net borrowings from FHLB 14,350 13,300
Net change in advances from
borrowers for insurance and taxes (1,138) 1,672
Dividends paid (1,853) (1,002)
Purchase of treasury stock (5,728) (4,011)
-------------- -------------
Net cash provided by financing activities 16,836 22,212
------------- -------------
Net change in cash and cash equivalents (3,847) (19,074)
Cash and cash equivalents at beginning of period 6,257 24,830
------------- -------------
Cash and cash equivalents at end of period $ 2,410 $ 5,756
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
7
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
First SecurityFed Financial, Inc. (the Company) is a Delaware corporation
organized in July 1997 by First Security Federal Savings Bank (the Bank) in
connection with the conversion of the Bank from a federally chartered mutual
savings bank to a federally chartered stock savings bank.
The accompanying unaudited condensed 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 condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial condition of First
SecurityFed Financial, Inc. as of September 30, 2000 and December 31, 1999, and
the results of its operations for the three and nine month periods ended
September 30, 2000 and 1999 and cash flows for the nine months ended September
30, 2000 and 1999. The annualized results of operations for the nine months
ended September 30, 2000 are not necessarily indicative of the results expected
in the full year ending December 31, 2000.
NOTE 2 - SECURITIES
Effective January 1, 2000, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. As permitted by SFAS No.133, the Company
reclassified some of its securities held-to-maturity to securities
available-for-sale. The securities which were reclassified had an amortized cost
of $15,605,733 and a fair value of $15,386,299 at January 1, 2000.
8
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<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3 - EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of the earnings per common
share computation for the nine and three month periods ended September 30, 2000
and 1999 is presented below:
<TABLE>
Nine Months Ended Three Months Ended
September 30 September 30,
2000 1999 2000 1999
---- ---- ---- -----
<S> <C> <C> <C> <C>
Earnings per common share
Net income attributable to
common shareholders $ 4,399 $ 4,022 $ 1,486 $ 1,446
========= ========= ========= =========
Weighted average common
shares outstanding 4,754 4,676 4,620 4,593
Add: Shares committed to be issued
to charitable foundation - 200 - 200
--------- --------- --------- ---------
Total weighted average common
shares outstanding 4,754 4,876 4,620 4,793
========= ========= ========= =========
Basic earnings per share $ .93 $ .82 $ .32 $ .30
========= ========= ========= =========
</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
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9
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 4 - CAPITAL REQUIREMENTS
Pursuant to federal regulations, savings institutions must meet two separate
capital requirements. The following is a summary of the Bank's regulatory
capital at September 30, 2000:
<TABLE>
Core Risk based
Capital Capital
------- ---------
(In thousands)
<S> <C> <C>
Regulatory capital $ 67,052 $ 69,452
Minimum capital requirement 15,440 15,362
---------- ---------
Excess regulatory capital over
minimum requirement $ 51,612 $ 54,090
========== ==========
</TABLE>
10
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Comparison of Financial Condition at September 30, 2000 and December 31, 1999
Total assets increased $22.4 million to $394.7 million at September 30, 2000
from $372.3 million at December 31,1999. The increase in total assets consisted
primarily of increases of $28.8 million in loans receivable and $775,000 in
Federal Home Loan Bank Stock partially offset by decreases of $3.1 million in
securities and $3.9 million in cash and cash equivalents.
Net loans receivable increased by $28.8 million from $241.2 million at December
31,1999 to $270.0 million at September 30, 2000. The increase was due to the
disbursement of $7.5 million to fund construction loans and the continuing
market demand for 1-4 family mortgage loans resulting in disbursement of $29.7
million for 1 to 4 family loans due to current economic conditions and the
prevailing interest rate environment. The disbursements to fund new mortgage
loans were partially offset by monthly paydowns of outstanding mortgage loan
balances.
Securities available-for-sale increased by $11.2 million from $20.6 million at
December 31,1999 to $31.8 million at September 30, 2000. The increase was
primarily due to the reclassification of $15.6 million of securities from
held-to-maturity to available-for-sale, in connection with the adoption of SFAS
No.133. This increase was partially offset by paydowns on mortgage-backed
securities and the sale of $2.5 million of securities.
Securities held-to-maturity decreased by $14.3 million from $92.9 million at
December 31,1999 to $78.6 million at September 30, 2000. The decrease was
primarily due to the reclassification of $15.6 million in securities from
held-to-maturity to available-for-sale, in connection with the adoption of SFAS
No.133, partially offset by purchases of federal agency and tax exempt municipal
securities.
Cash and cash equivalents decreased by $3.9 million due to the Company's
continued repurchase of outstanding common stock and to fund the continuing
demand for loans.
Total liabilities at September 30, 2000 were $313.6 million compared to $289.1
million at December 31,1999, an increase of $24.5 million. Deposits increased by
$11.2 million and Federal Home Loan Bank advances increased by $14.4 million.
The weighted average term to maturity of the Company's Federal Home Loan Bank
advances at September 30, 2000 was 3.3 years, with a weighted average term to
call of 5 months. Borrowings were increased in order to fund the continuing
demand for loans. During this same period, advance payments by borrowers for
taxes and insurance decreased by $1.1 million due to the payment of real estate
taxes.
Shareholders' equity at September 30, 2000 was $81.1 million compared to $83.2
million at December 31,1999, a decrease of $2.1 million. The decrease in equity
was due primarily to the Company's repurchase of outstanding common stock of
$5.7 million partially offset by net income of $4.4 million. Equity at September
30, 2000 was also impacted by dividends on the Company's common stock. Three
cash dividends totaling $1.9 million were declared during the nine month period
ending September 30, 2000. The dividends were paid to stockholders in April,
July and October 2000.
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11
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Comparison of Operating Results for the Nine Months Ended September 30, 2000 and
September 30,1999
General
Net earnings for the nine months ended September 30, 2000 were $4.4 million, an
increase of $377,000 from net earnings of $4.0 million for the nine months ended
September 30,1999. The increase in net earnings is primarily attributable to an
increase in net interest income due to increases in the average balances of
assets and liabilities. The increase in net interest income was partially offset
by a decrease in noninterest income. Earnings per share also increased during
the period as a result of the increase in net earnings and the Company's
repurchase of its common stock.
Interest Income
Interest income for the nine months ended September 30, 2000 was $21.3 million,
an increase of $2.9 million from interest income of $18.4 million for the nine
months ended September 30,1999. Interest income on loans increased by $2.1
million due to increases in the volume of loans receivable and the weighted
average yields earned on the loans. Interest income on securities increased by
$1.0 million due to increases in the average outstanding balances of the
Company's investment securities portfolio and the weighted average yields earned
on the securities. Interest income on other interest-earning assets decreased by
$152,000 due to decreases in the outstanding balances of funds invested in
overnight federal funds and interest bearing accounts with the Federal Home Loan
Banks.
Interest Expense
Interest expense for the nine months ended September 30, 2000 was $10.4 million
compared to $8.0 million for the nine months ended September 30,1999, an
increase of $2.4 million. Interest expense on deposits increased by $1.3 million
due to increases in outstanding deposit balances and the rates paid on those
balances. Interest expense on Federal Home Loan Bank advances increased by $1.1
million due to increases in the balances of Federal Home Loan Bank advances
which were used to fund loan growth.
Provision For Loan Losses
The provision for loan losses for the nine months ended September 30, 2000 was
$185,000 and remained consistent with the $185,000 provision for loan losses for
the nine months ended September 30,1999.
The amount of the provision and allowance for estimated losses on loans is
influenced by current economic conditions, actual loss experience, industry
trends and other factors, including real estate values, in the Bank's market
area . In addition, various regulatory agencies, as an integral part of their
examination process , periodically review the Bank's allowance for estimated
losses on loans. Such agencies may require the Bank to provide additions to the
allowance based upon judgements which differ from those of management. Although
management uses the best information available and maintains the Bank's
allowance for losses at a level it believes adequate to provide for losses,
future adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Bank's control.
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12
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Noninterest Income
Noninterest income for the nine months ended September 30, 2000 was $469,000
compared to $564,000 for the nine months ended September 30,1999. The $95,000
decrease in non-interest income was due primarily to a $62,000 decrease in net
gain on the sale of securities and a $33,000 decrease in other income due to
decreases in safety deposit and ATM fee income.
Noninterest Expense
Noninterest expense for the nine months ended September 30, 2000 was $4.5
million and remained fairly consistent with the nine months ended September
30,1999. Compensation and benefits expense increased by $127,000 partially due
to the hiring of additional bank personnel as a result of the continuing growth
of the bank and due to standard annual salary adjustments for existing bank
personnel. Data processing expense decreased by $39,000 primarily due to
non-recurring costs associated with Y2K testing and revisions which occurred in
1999. Federal deposit insurance premiums decreased by $56,000 due to the reduced
FDIC assessment which was effective as of January 1,2000.
Income Taxes
Income taxes were $2.3 million for the nine months ended September 30, 2000 and
remained fairy consistent with the income tax provision for the nine months
ended September 30,1999.
Comparison of Operating Results for the Three Months Ended September 30, 2000
and September 30,1999
General
Net earnings for the three months ended September 30, 2000 were $1.5 million, an
increase of $40,000 from net earnings of $1.4 million for the three months ended
September 30,1999. The increase in net earnings is primarily attributable to an
increase in net interest income due to increases in the average balances of
assets and liabilities . The increase in net interest income along with a
decrease in the provision for income taxes was partially offset by a decrease in
noninterest income. Income per share also increased during the period as a
result of the increase in net earnings and the Company's repurchase of its
common stock.
Interest Income
Interest income for the three months ended September 30, 2000 was $7.4 million
compared to $6.4 million for the three months ended September 30,1999, an
increase of $1.0 million. Interest income on loans increased by $793,000 due to
increases in the volume of loans receivable and weighted average yields earned
on the loans. Interest income on securities increased $252,000 due to increases
in the average outstanding balances of the Company's investment securities
portfolio and the weighted average yields earned on the securities.
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13
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Interest Expense
Interest expense for the three months ended September 30, 2000 was $3.7 million
compared to $2.8 million for the three months ended September 30,1999, an
increase of $933,000. Interest expense on deposits increased by $530,000 due to
increases in outstanding deposit balances and the rates paid on those balances.
Interest expense on Federal Home Loan Bank advances increased by $403,000 due to
increases in the balances of Federal Home Loan Bank advances which were used to
fund loan growth.
Provision for Loan Losses
The provision for loan losses for the three months ended September 30, 2000 and
1999 was $61,000.
The amount of the provision and allowance for estimated losses on loans is
influenced by current economic conditions, actual loss experience, industry
trends and other factors, including real estate values, in the Bank's market
area . In addition, various regulatory agencies, as an integral part of their
examination process , periodically review the Bank's allowance for estimated
losses on loans. Such agencies may require the Bank to provide additions to the
allowance based upon judgements which differ from those of management. Although
management uses the best information available and maintains the Bank's
allowance for losses at a level it believes adequate to provide for losses,
future adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Bank's control.
Noninterest Income
Noninterest income for the three months ended September 30, 2000 was $143,000
compared to $223,000 for the three months ended September 30,1999. The $80,000
decrease in non-interest income was due to a $15,000 net loss in the sale of
securities and a $65,000 decrease in other income. The decrease in other income
is due to decreases in safety deposit and ATM fee income due to decreases in
usage.
Noninterest Expense
Noninterest expense for the three months ended September 30, 2000 was $1.5
million and remained fairly consistent with the three months ended September
30,1999. Compensation and benefits expense increased by $60,000 partially due to
the hiring of additional bank personnel as a result of the continuing growth of
the bank and due to standard annual salary adjustments for existing bank
personnel. Data processing expense decreased by $13,000 primarily due to
non-recurring costs associated with Y2K testing and revisions which occurred in
1999. Federal deposit insurance premiums decreased by $17,000 due to the reduced
FDIC assessment which was effective as of January 1,2000. Other operating
expense increased by $40,000 primarily due to increased service charges by our
correspondent banks.
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14
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Income Taxes
Income taxes were $709,000 for the three months ended September 30, 2000
compared to $795,000 for the three months ended September 30,1999. The decrease
in the provision for income taxes was due to a decrease in pretax 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.
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 September 30,
2000, First Security's liquidity ratio for regulatory purposes was 10.87%.
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 $6.1 million and $4.9 million
for the nine months ended September 30, 2000 and September 30,1999. Net cash
from investing activities consisted primarily of disbursements for loan
originations and the purchase of securities 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 Federal Home
Loan Bank advances partially offset by purchases of treasury stock and the
payment of dividends in 2000 and 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 September 30, 2000, cash and
short-term investments totaled $2.4 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.
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15
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
At September 30, 2000, the Company had outstanding commitments to originate
loans of $5.5 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 September 30, 2000 totaled $122.0 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 September 30, 2000, First Security was in compliance with all
applicable capital requirements. See Note 4 of the Notes to Condensed
Consolidated 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
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.
16
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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In an attempt to manage its exposure to changes in interest rates, management
monitors the Company's interest rate risk. The Board of Directors reviews at
least quarterly the Company's interest rate risk position and profitability. The
Board of Directors also reviews the Company's portfolio, formulates investment
strategies and oversees the timing and implementation of transactions to assure
attainment of the Company's objectives in the most effective manner. In
addition, the Board reviews on a quarterly basis the Company's asset/liability
position, including simulations of the effect on the Company's capital of
various interest rate scenarios.
In managing its asset/liability mix, the Company, depending on the relationship
between long- and short-term interest rates, market conditions and consumer
preference, often places more emphasis on managing short term net interest
margin than on better matching the interest rate sensitivity of its assets and
liabilities in an effort to enhance net interest income. Management believes
that the increased net interest income resulting from a mismatch in the maturity
of its asset and liability portfolios can, during periods of declining or stable
interest rates, provide high enough returns to justify the increased exposure to
sudden and unexpected increases in interest rates.
The Board has taken a number of steps to manage the Company's vulnerability to
changes in interest rates. First, the Company has long used community outreach,
customer service and marketing efforts to increase the Company's passbook and
other non-certificate accounts. At September 30, 2000, $101.0 million or 40.51%
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,
are 5 year balloon loans, or carry adjustable interest rates. In addition, the
Company has instituted a construction lending program with the rates charged on
construction loans based on the prime rate. Since the rates may be adjusted
monthly the Company believes that construction loans are a beneficial tool in
its interest rate risk management program. Finally, the Company has focused a
significant portion of its investment activities on securities with adjustable
interest rates or terms of five years or less. At September 30, 2000, $7.6
million or 54.68% 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 $19.9 million or
20.6% of the Company's other securities had adjustable interest rates or terms
to maturity of five years or less.
Management utilizes the net portfolio value ("NPV") analysis to quantify
interest rate risk. In essence, this approach calculates the difference between
the present value of liabilities, expected cash flows from assets and cash flows
from off balance sheet contracts. Presented below, as of June 30, 2000, 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.
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17
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
--------------------------------------------------------------------------------
<TABLE>
Assumed Change $ Change in % Change in
In Interest Rates $ Amount NPV NPV
----------------- ------- ----------- -------------
(Basis Points) (Dollars in Thousands)
<S> <C> <C> <C>
+ 300 $52,118 $(26,908) (34)%
+ 200 60,845 (18,181) (23)
+ 100 69,998 (9,028) (11)
---- 79,026 ---- ----
- 100 86,543 7,517 10
- 200 91,249 12,223 15
- 300 97,274 18,248 23
</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.
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18
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
--------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits - Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K - none
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19
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
--------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST SECURITYFED FINANCIAL, INC
(Registrant)
By: /s/Julian E. Kulas
-----------------------------------
Julian E. Kulas
Principal Executive Officer
November 14, 2000
By: /s/Harry Kucewicz
-----------------------------------
Harry Kucewicz
Chief Financial and Accounting Officer
November 14, 2000
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20
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