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: June 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 June 30,2000
----------------------------- ---------------------------
Common Stock, par value $0.01 5,060,220 shares
<PAGE>
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition as of
June 30, 2000 and December 31,1999....................................... 3
Condensed Consolidated Statements of Income for the six months
and three months ended June 30,2000 and 1999............................ 4
Statements of Comprehensive Income for the six months and three months
ended June 30,2000 and 1999 ........................................... 5
Condensed Consolidated Statements of Changes in Shareholders' Equity for the
six months ended June 30,2000............................................ 6
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999...................................... 7
Notes to the Condensed Consolidated Financial Statements as of
June 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...... 17
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders............. 19
Item 6. Exhibits and Reports on Form 8-K.................................. 19
2
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars n thousands, except share and per share data)
(Unaudited)
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<TABLE>
June 30, December 31,
2000 1999
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,934 $ 6,057
Federal funds sold - 200
---------------- ---------------
Total cash and cash equivalents 4,934 6,257
Securities available-for-sale 35,628 20,622
Securities held-to-maturity (fair value of
$75,342 - 2000 and $89,850 - 1999) 78,665 92,908
Loans, net of allowance for loan losses 261,165 241,168
Federal Home Loan Bank stock 2,958 2,315
Premises and equipment, net 3,613 3,672
Accrued interest receivable 3,111 2,976
Intangible assets 170 190
Other assets 2,363 2,184
---------------- ---------------
Total assets $ 392,607 $ 372,292
================ ===============
LIABILITIES
Deposits
Non-interest bearing $ 6,841 $ 6,089
Interest-bearing 240,590 232,034
---------------- ---------------
247,431 238,123
Advance payments by borrowers for taxes and
insurance 3,116 2,811
Advances from Federal Home Loan Bank 58,150 46,300
Accrued interest payable and other liabilities 2,056 1,902
---------------- ---------------
Total liabilities 310,753 289,136
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 63,028 64,324
Unearned ESOP shares (4,072) (4,239)
Unearned stock awards (2,714) (3,075)
Treasury stock, at cost; (1,178,565 shares - 2000
and 979,360 shares - 1999 ) (15,222) (13,227)
Retained earnings, substantially restricted 41,552 39,914
Accumulated other comprehensive income (782) (605)
---------------- - --------------
Total shareholders' equity 81,854 83,156
---------------- --------------
Total liabilities and shareholders' equity $ 392,607 $ 372,292
================ ===============
</TABLE>
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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>
Six months ended Three months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Loans $ 10,208 $ 8,935 $ 5,224 $ 4,495
Securities 2,456 1,695 1,253 862
Mortgage-backed securities 1,098 1,107 545 577
Other interest-earning assets 133 310 70 106
------------- ------------ ------------- --------------
Total interest income 13,895 12,047 7,092 6,040
Interest expense
Deposits 5,153 4,440 2,634 2,225
FHLB advances 1,496 775 807 391
------------- ------------ ------------- --------------
Total interest expense 6,649 5,215 3,441 2,616
------------- ------------ ------------- --------------
Net interest income 7,246 6,832 3,651 3,424
Provision for loan losses 123 124 62 62
------------- ------------ ------------- --------------
Net interest income after
provision for loan losses 7,123 6,708 3,589 3,362
Noninterest income
Net gain/(loss) on sale of securities (29) 19 (16) -
Gain on sale of real estate owned 41 - 41 -
Other income 314 322 159 189
------------- ------------ ------------- --------------
Total noninterest income 326 341 184 189
Noninterest expense
Compensation and benefits 1,845 1,777 927 861
Occupancy and equipment expense 340 331 167 181
Data processing expense 156 182 75 94
Federal deposit insurance premiums 63 102 32 50
Professional fees 78 72 53 58
Other operating expenses 509 515 261 234
------------- ------------ ------------- --------------
Total noninterest expense 2,991 2,979 1,515 1,478
------------- ------------ ------------- --------------
Income before income tax provision 4,458 4,070 2,258 2,073
Provision for income taxes 1,545 1,494 772 759
------------- ------------ ------------- --------------
Net income $ 2,913 $ 2,576 $ 1,486 $ 1,314
============= ============ ============= ==============
Earnings per share
Basic $ .60 $ .52 $ .31 $ .27
============== ============ ============= ==============
Diluted $ .60 $ .52 $ .31 $ .27
=============== ============ ============= ==============
</TABLE>
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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>
Six Months Ended Three Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 2,913 $ 2,576 $ 1,486 $ 1,314
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 (61) (381) 47 (343)
Reclassification adjustment for (gains) losses
recognized in income 18 (12) 10 ---
------- ------- ------- --------
Comprehensive Income $ 2,736 $ 2,183 $ 1,543 $ 971
======= ======= ======= ========
</TABLE>
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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> q <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 -- 21 167 -- -- -- -- 188
Stock awards earned -- -- -- 361 -- -- -- 361
Issuance of stock to Foundation,
net of related tax benefit -- (1,317) -- -- 1,411 -- -- 94
Net income -- -- -- -- -- 2,913 -- 2,913
Purchase of treasury stock -- -- -- -- (3,406) -- -- (3,406)
Dividends ($.25 per share) -- -- -- -- -- (1,275) -- (1,275)
Change in fair value of securities,
net of income taxes and
reclassification effects -- -- -- -- -- -- (177) (177)
-------- -------- ------- -------- -------- ------- ------ --------
Balance at June 30, 2000 $ 64 $ 63,028 $ (4,072) $ (2,714) $(15,222) $ 41,552 $ (782) $ 81,854
======== ======== ======== ======== ======== ======== ====== ========
</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>
Six months ended
June 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,913 $ 2,576
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 161 192
Amortization of discounts and premiums
on securities 76 81
Net (gain)/loss on sales and calls of securities 29 (19)
Provision for loan losses 123 124
ESOP compensation expense 188 209
Stock award compensation expense 361 350
Federal Home Loan Bank stock dividend (51) -
Change in
Deferred loan origination fees 253 19
Accrued interest receivable and other assets 207 (499)
Other liabilities and deferred income taxes 173 (46)
------------- -------------
Net cash provided by operating activities 4,433 2,987
Cash flows from investing activities
Purchase of securities available-for-sale (1,301) (1,062)
Purchase of securities held-to-maturity (2,896) (36,840)
Proceeds from repayment of securities 1,886 4,243
Proceeds from sales of securities available-for-sale 310 2,968
Proceeds from calls nd maturities of securities 435 9,100
Net change in loans (20,373) (9,131)
Capital expenditures, net (82) (12)
Purchase of Federal Home Loan Bank stock (592) (63)
------------- -------------
Net cash used in investing activities (22,613) (30,797)
Cash flows from financing activities
Net increase in deposits 9,308 5,408
Net borrowings from FHLB 11,850 8,500
Net change in advances from
borrowers for insurance and taxes 305 290
Dividends paid (1,200) (474)
Purchase of treasury stock (3,406) (4,011)
-------------- -------------
Net cash provided by financing activities 16,857 9,713
------------- -------------
Net change in cash and cash equivalents (1,323) (18,097)
Cash and cash equivalents at beginning of period 6,257 24,830
------------- -------------
Cash and cash equivalents at end of period $ 4,934 $ 6,733
============= =============
</TABLE>
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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 June 30,2000 and December 31,1999, and the
results of its operations for the three and six month periods ended June 30,2000
and 1999 and cash flows for the six months ended June 30,2000 and 1999. The
annualized results of operations for the six months ended June 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.
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8
<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 six and three month periods ended June 30,2000 and
1999 is presented below:
<TABLE>
Six Months Ended Three Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings per common share
Net Income $2,913 $2,576 $1,486 $1,314
------ ------ ------ ------
Net income attributable to
common shareholders $2,913 $2,576 $1,486 $1,314
====== ====== ====== ======
Weighted average common
shares outstanding 4,772 4,709 4,720 4,618
Add: Shares committed to be issued
to charitable foundation 50 200 50 200
------ ------ ------ ------
Total weighted average common
shares outstanding 4,822 4,909 4,770 4,818
====== ====== ====== ======
Basic earnings per share $ .60 $ .52 $ .31 $ .27
====== ====== ====== ======
</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
<PAGE>
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 June 30,2000:
<TABLE>
Core Risk based
Capital Capital
------- ----------
(In thousands)
<S> <C> <C>
Regulatory capital $ 68,543 $ 70,876
Minimum capital requirement 15,337 15,001
-------- --------
Excess regulatory capital over
minimum requirement $ 53,206 $ 55,875
======== ========
</TABLE>
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10
<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 30,2000 and December 31, 1999
Total assets increased $20.3 million to $392.6 million at June 30,2000 from
$372.3 million at December 31,1999. The increase in total assets consisted
primarily of increases of $763,000 in securities, $20.0 million in loans
receivable and $643,000 in Federal Home Loan Bank Stock partially offset by a
decrease of $1.3 million in cash and cash equivalents.
Net loans receivable increased by $20.0 million from $241.2 million at December
31,1999 to $261.2 million at June 30,2000. This increase was due to the
disbursement of $2.0 million to fund construction loans and the continuing
market demands for 1 - 4 family loans due to current economic conditions and the
prevailing favorable interest rate environment.
Securities available-for-sale increased by $15.0 million from $20.6 million at
December 31,1999 to $35.6 million at June 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,
partially offset by paydowns on mortgage-backed securities.
Securities held-to-maturity decreased by $14.2 million from $92.9 million at
December 31,1999 to $78.7 million at June 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.
Total liabilities at June 30,2000 were $310.8 million compared to $289.1 million
at December 31,1999, an increase of $21.7 million. Deposits increased by $9.3
million and Federal Home Loan Bank advances increased by $11.9 million. The
weighted average term to maturity of the Company's Federal Home Loan Bank
advances at June 30,2000 was 3.6 years, with a weighted average term to call of
7 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 increased by $300,000 and accrued interest payable and other
liabilities increased by $154,000.
Shareholders' equity at June 30,2000 was $81.9 million compared to $83.2 million
at December 31,1999, a decrease of $1.3 million. The decrease in equity was due
primarily to the Company's repurchase of outstanding common stock of $3.4
million partially offset by net income of $2.9 million. Equity on June 30,2000
was also impacted by dividends on the Company's common stock. A cash dividend of
$621,000 was paid in April 2000 and a cash dividend of $666,000 was declared in
June 2000. The $666,000 dividend was paid to stockholders in July 2000.
Comparison of Operating Results for the Six Months Ended June 30,2000 and June
30,1999
General
Net earnings for the six months ended June 30,2000 were $2,913,000, an increase
of $337,000 from net earnings of $2,576,000 for the six months ended June
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. Earnings per share also increased during the period as a result of
the increase in net earnings and the Company's repurchases of its common stock.
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11
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Interest Income
Interest income for the six months ended June 30,2000 was $13.9 million, an
increase of $1.9 million from interest income of $12.0 million for the six
months ended June 30,1999. Interest income on loans increased by $1,273,000 due
to increases in the volume of loans receivable and the average weighted yields
earned on the loans. Interest income on securities increased by $761,000 due to
increases in the outstanding balances of the Company's investment securities
portfolio and the average weighted yields earned on the securities. Interest
income on other interest-earning assets decreased by $177,000 due to decreases
in the outstanding balances of funds invested in overnight federal funds and
interest bearing accounts with the Federal Home Loan Bank.
Interest Expense
Interest expense for the six months ended June 30,2000 was $6.6 million compared
to $5.2 million for the six months ended June 30,1999, an increase of $1.4
million. Interest expense on deposits increased by $713,000 due to increases in
outstanding deposit balances and the rates paid on those balances. Interest
expense on Federal Home Loan Bank advances increased by $721,000 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 six months ended June 30,2000 was $123,000
and remained fairly consistent with the $124,000 provision for loan losses for
the six months ended June 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.
Noninterest Income
Noninterest income for the six months ended June 30,2000 was $326,000 compared
to $341,000 for the six months ended June 30,1999. The $15,000 decrease in
non-interest income was due primarily to a $48,000 decrease in the net gain on
the sale of securities which was partially offset by a $41,000 gain on the sale
of real estate owned.
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12
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Noninterest Expense
Noninterest expense for the six months ended June 30,2000 was $3.0 million and
remained fairly consistent with the six months ended June 30,1999. Compensation
and benefits expense increased by $68,000 partially due to the hiring of
additional bank personnel as a result of continuing growth by the Bank.
Occupancy and equipment expense increased by $9,000 due to a $30,000 refund for
property taxes being included in the totals for the six months ended June
30,1999. The increase in property tax expense was partially offset by decreases
in depreciation expense for the Bank's office buildings. Federal deposit
insurance premiums decreased by $39,000 due to the reduced FDIC assessment which
was effective as of January1,2000. Data processing expense decreased by $26,000
primarily due to non-recurring costs associated with Y2K testing and revisions
which occurred in 1999.
Income Taxes
Income taxes were $1,545,000 for the six months ended June 30,2000 compared to
$1,494,000 for the six months ended June 30,1999, an increase of $51,000. The
increase in the provision for income taxes was due to an increase of $388,000 in
pretax earnings.
Comparison of Operating Results for the Three Months Ended June 30,2000 and June
30,1999
General
Net earnings for the three months ended June 30,2000 were $1,486,000, an
increase of $172,000 from net earnings of $1,314,000 for the three months ended
June 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. 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 June 30,2000 was $7.1 million
compared to $6.0 million for the three months ended June 30,1999, an increase of
$1.1 million. Interest income on loans increased by $729,000 due to increases in
the volume of loans receivable and the average weighted yields earned on the
loans. Interest income on securities increased by $391,000 due to increases in
the outstanding balances of the Company's investment securities portfolio and
the average weighted yields earned on the securities. Interest income on other
interest-earning assets decreased by $36,000 due to decreases in the outstanding
balances of funds invested in overnight federal funds and interest bearing
accounts with the Federal Home Loan Bank.
Interest Expense
Interest expense for the three months ended June 30,2000 was $3.4 million
compared to $2.6 million for the three months ended June 30,1999, an increase of
$825,000. Interest expense on deposits increased by $409,000 due to increases in
outstanding deposit balances and the rates paid on those balances. Interest
expense on Federal Home Loan Bank advances increased by $416,000 due to
increases in the balances of Federal Home loan Bank advances which were used to
fund loan growth.
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13
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Provision for Loan Losses
The provision for loan losses for the three months ended June 30,2000 and 1999
was $62,000.
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 June 30,2000 was $184,000 compared
to $189,000 for the three months ended June 30,1999. The $5,000 decrease in
non-interest income was due to a $16,000 net loss on the sale of securities
which was offset by a $41,000 gain on the sale of real estate owned.
Miscellaneous income decreased by $11,000 due to the settlement of the Bennett
Funding lease payments in 1999. Safety deposit and ATM fee income decreased by
$19,000 due to a decrease in usage.
Noninterest Expense
Noninterest expense for the three months ended June 30,2000 was $1.5 million and
remained fairly consistent with the three months ended June 30,1999.
Compensation and benefits expense increased by $66,000 partially due to the
hiring of additional bank personnel as a result of the continuing growth of the
Bank. Occupancy and equipment expenses decreased by $14,000 due to a decrease in
depreciation expense for the Bank's office buildings. Federal deposit insurance
premiums decreased by $18,000 due to the reduced FDIC assessment which was
effective as of January 1,2000.
Data processing decreased by $19,000 primarily due to non-recurring costs
associated with Y2K testing in 1999. Other operating expense increased by
$27,000 primarily due to increased service charges by our correspondent banks.
Income Taxes
Income taxes were $772,000 for the three months ended June 30,2000 compared to
$759,000 for the three months ended June 30,1999. The increase in the provision
for income taxes was due to an increase in pretax earnings.
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14
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
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 June 30,2000,
First Security's liquidity ratio for regulatory purposes was 10.67%.
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 $4.4 million and $3.0 million
for the six months ended June 30,2000 and June 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 June 30,2000, cash and
short-term investments totaled $4.9 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 30,2000, the Company had outstanding commitments to originate loans of
$3.1 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.
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15
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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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 30,2000 totaled $123.6 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 30,2000, 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.
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16
<PAGE>
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 June 30,2000, $99.4 million or 40.19% 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. In addition, the Company recently 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 June 30,2000, $7.8 million or 52.7% of the Company's
mortgage-backed securities had adjustable interest rates or terms to maturity
(or anticipated average lives in the case of collateralized mortgage
obligations) of five years or less and $20.8 million or 20.9% 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 March 31,2000, 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 $52,352 $(27,367) (34)%
+ 200 61,201 (18,518) (23)
+ 100 70,481 (9,238) (12)
---- 79,719 ---- ----
- 100 87,629 7,910 10
- 200 92,627 12,908 16
- 300 98,509 18,790 24
</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
--------------------------------------------------------------------------------
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 10,2000, 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 31,2000.
The following directors were re-elected:
<TABLE>
For Withheld Total
<S> <C> <C> <C>
Myron Dobrowolsky 3,921,401 114,935 4,036,336
Julian E. Kulas 3,941,681 94,655 4,036,336
Paul Nadzikewycz 3,923,601 112,735 4,036,336
</TABLE>
The vote on proposal II was as follows:
<TABLE>
For Against Abstain Non-Vote
<S> <C> <C> <C> <C>
Proposal II 3,949,593 80,823 5,920
</TABLE>
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
August 11,2000
By: /s/Harry Kucewicz
-----------------------------------
Harry Kucewicz
Chief Financial and Accounting Officer
August 11,2000
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