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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 0-23063
FIRST SECURITYFED FINANCIAL, INC.
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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 (I.R.S. Employer
Incorporation or Organization) Identification Number)
936 North Western Avenue, Chicago, Illinois 60622
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(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code: (773) 772-4500
________________________
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES X NO .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X ]
As of February 7, 2000, the Registrant had approximately 5,428,640 shares
of Common Stock issued and outstanding.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closng price of such stock as of
February 7, 2000 was $52.1 million. (The exclusion from such amount of the
market value of the shares owned by any person shall not be deemed an admission
by the Registrant that such person is an affiliate of the Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
PART II of Form 10-K - Annual Report to Stockholders for the fiscal year ended
December 31, 1999.
PART III of Form 10-K - Proxy Statementfor 1999 Annual Meeting of Stockholders.
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FORWARD-LOOKING STATEMENTS
First SecurityFed Financial, Inc. ("First SecurityFed" or the "Company"),
and its wholly-owned subsidiary, First Security Federal Savings Bank ("First
Security" or the "Bank"), may from time to time make written or oral
"forward-looking statements," including statements contained in its filings with
the Securities and Exchange Commission. These forward-looking statements may be
included in this Annual Report on Form 10-KSB and the exhibits attached to it,
in First SecurityFed's reports to shareholders and in other communications,
which are made in good faith by us pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements about our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
that are subject to significant risks and uncertainties, and are subject to
change based on various factors, some of which are beyond our control. The words
"may", "could", "should", "would", "believe", "anticipate", "estimate",
"expect", "intend", "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause our
financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in the forward-looking
statements:
o the strength of the United States economy in general and the strength
of the local economies in which we conduct operations;
o the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve
Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of our new products and
services and the perceived overall value of these products and
services by users, including the features, pricing and quality
compared to competitors' products and services;
o the willingness of users to substitute our products and services for
products and services of our competitors;
o our success in gaining regulatory approval of our products and
services, when required;
o the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
o the impact of technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o our success at managing the risks involved in the foregoing.
The list of important factors stated above is not exclusive. We do not
undertake to update any forward-looking statement, whether written or oral, that
may be made from time to time by or on behalf of First SecurityFed or First
Security.
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PART I
Item 1. Business
General
First SecurityFed, is a Delaware corporation that was formed in 1997 by
First Security Federal Savings Bank for the purpose of becoming a savings and
loan holding company. The Company owns all of the outstanding capital stock of
First Security. Unless the context otherwise requires, all references herein to
the Company include the Company and the Bank on a consolidated basis.
As a community-oriented financial institution, First Security seeks to
serve the financial needs of communities in its ethnically diverse market area.
The Bank achieved a significant penetration in its market area by engaging in
substantial community service activities and targeting marketing initiatives
focused on groups within its market area.
First Security's business involves attracting deposits from the general
public and using such deposits, together with other funds, to originate
primarily one- to four-family residential mortgage loans and, to a lesser
extent, multi-family and commercial real estate, consumer and other loans in its
market area. The Bank also invests in mortgage-backed and other securities and
other permissible investments.
The Bank offers a variety of accounts having a range of interest rates and
terms. The Bank's deposits include passbook and NOW accounts, money market
accounts and certificate accounts with terms of three months to five years. The
Bank solicits deposits only in its primary market area and does not accept
brokered deposits.
Market Area
The Bank's main office is located in Chicago, Illinois and its branch
offices are located in Chicago, Illinois, Philadelphia, Pennsylvania and Rolling
Meadows, Illinois.
The Bank's Western Avenue office is located on the near northwest side of
Chicago in the "Ukrainian Village" community, a middle-income community where
the Bank has focused its operations since 1964. This community is located
approximately two and one half miles to the northwest of downtown Chicago and
approximately three miles west of Lake Michigan. The majority of the community's
many businesses are small and local companies. Residences within the community
consist primarily of two- to four-family flats and single family homes although
there are also mid-size apartment buildings. Real estate values within this
community have risen sharply over the last ten years as "gentrification" has
begun to occur as a result of the community's proximity to downtown Chicago.
The Bank's Milwaukee Avenue office was opened in 1993 and is located in the
"Norwood Park" neighborhood of Chicago. This community is a stable middle income
area which also has many residents of Eastern European descent. Residences
within the community consist primarily of single family homes as well as two and
three flats and small apartment buildings. This area is located approximately
eight miles northwest of downtown Chicago.
The Bank's Philadelphia branch was acquired in 1994 through a purchase from
the Resolution Trust Corporation. The branch is located in a moderate income
neighborhood of Philadelphia known as "Rhawnhurst." The community is home to
many persons of Eastern European heritage, including new
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immigrants. Residences within the community consist primarily of single family
row houses and, to a lesser extent, small apartment buildings.
The Bank's suburban Chicago branch was opened in 1977 and is located in
Rolling Meadows, Illinois, an upper middle class community located to the
northwest of Chicago, near the western border of Palatine, Illinois. Over the
last 20 years, Rolling Meadows has experienced significant population and
commercial growth. However, as a result of competition, the branch's deposit and
loan growth has been modest.
Lending Activities
General. The principal lending activity of the Bank is originating for its
portfolio fixed and, to a much lesser extent, adjustable rate ("ARM") mortgage
loans secured by one- to four-family residences located primarily in the Bank's
market area. First Security also originates home equity, multi-family and
commercial real estate, consumer and other loans in its market area. At December
31, 1999, the Bank's loans receivable, net totaled $241.2 million. See "-
Originations of Loans." Recently, the Bank added a construction lending program
to its array of lending products.
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The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and in percentages as of the dates indicated.
<TABLE>
December 31,
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1999 1998 1997 1996 1995
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to four-family........ $200,201 80.58% $182,452 82.23% $154,819 81.66% $134,971 81.14% $117,379 79.83%
Construction . . . . . . . 3,800 1.53 ---- --- --- --- --- --- --- ---
Multi-family.............. 13,389 5.39 11,313 5.10 10,999 5.80 9,374 5.63 7,926 5.39
Commercial................ 15,304 6.16 11,535 5.20 9,308 4.91 7,647 4.60 7,865 5.35
Mixed use(1).............. 9,084 3.65 9,898 4.46 7,927 4.18 8,004 4.81 7,262 4.94
------- ----- -------- ------ ------- ------ ------ ----- ------- -----
Total real estate loans.. 241,778 97.31 215,198 96.99 183,053 96.55 159,996 96.18 140,432 95.51
Consumer loans:
Share loans............. 1,164 .47 1,091 0.49 1,421 0.75 1,174 0.71 1,570 1.07
Automobile.............. 3 .01 16 0.01 47 0.01 74 0.04 110 0.07
Home equity............. 5,103 2.05 5,158 2.32 4,602 2.43 3,431 2.06 3,684 2.51
Home improvement........ 0 .00 11 0.01 7 0.01 12 0.01 29 0.02
Other................... 410 .16 404 0.18 387 0.21 395 0.24 445 0.30
--------- ---- -------- ------- ------- ----- -------- ------- ------- ------
Total consumer loans... 6,680 2.69 6,680 3.01 6,464 3.41 5,086 3.06 5,838 3.97
Loans secured by leases. 0 0 --- --- 81 0.04 1,272 0.76 759 0.52
-------- -------- -------- ------- -------- ------ -------- -------- ------- ------
Total loans........... 248,458 100.00 % 221,878 100.00% 189,598 100.00% 166,354 100.00% 147,029 100.00%
======== ====== ====== ====== ======
Less:
Construction Loans in Process 3,467 --- --- --- ----
Deferred fees and discounts.. 1,508 1,498 1,511 1,486 1,578
Allowance for losses......... 2,315 2,069 1,828 1,520 885
-------- --------- -------- -------- --------
Total loans receivable, net. $241,168 $218,311 $186,259 $163,348 $144,566
========= ========= ======== ========= =========
</TABLE>
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(1) Mixed use refers to real estate on which the borrower both resides and
conducts a business.
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The following table shows the composition of the Bank's loan portfolio by
fixed- and adjustable-rate at the dates indicated.
<TABLE>
December 31,
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1999 1998 1997 1996 1995
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
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(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family............$193,552 77.90% $175,246 78.98% $143,882 75.89% $118,308 71.12% $101,015 68.70%
Multi-family................... 13,389 5.39 11,313 5.10 10,999 5.80 9,169 5.51 7,719 5.25
Commercial..................... 12,668 5.10 8,625 3.89 7,649 4.04 6,545 3.94 7,370 5.01
Mixed use(1)................... 9,084 3.65 9,444 4.26 7,446 3.93 7,424 4.46 6,666 4.53
-------- -------- --------- ------- ------- ------- --------- ------ --------- -------
Total real estate loans........ 228,693 92.04 204,628 92.23 169,976 89.66 141,446 85.03 122,770 83.49
Consumer........................ 1,577 0.64 1,522 0.69 1,862 0.98 1,655 1.00 2,154 1.46
Loans secured by leases......... --- --- --- --- 81 0.04 1,272 0.76 759 0.52
--------- --------- --------- ------- ---------------- --------- ------ ---------- -------
Total fixed-rate loans........ 230,270 92.68 206,150 92.92 171,919 90.68 144,373 86.79 125,683 85.47
Adjustable-Rate Loans
Real estate:
One-to-four-family............ 6,649 2.68 7,206 3.25 10,937 5.77 16,663 10.02 16,364 11.13
Multi-family.................. --- --- --- --- --- --- 205 0.12 207 0.14
Commercial.................... 2,636 1.06 2,910 1.31 1,659 0.87 1,102 0.66 495 0.34
Mixed use..................... --- --- 454 0.20 481 0.25 580 0.35 596 0.41
Construction 3,800 1.53 --- --- --- --- --- --- --- ---
Consumer....................... 5,103 2.05 5,158 2.32 4,602 2.43 3,431 2.06 3,684 2.51
--------- -------- --------- ------- -------- ------- ------- ------ -------- -------
Total adjustable-rate loans... 18,188 7.32 15,728 7.08 17,679 9.32 21,981 13.21 21,346 14.53
---------- -------- --------------- ------- ------- -------- ------ -------- ------
Total loans................... 248,458 100.00% 221,878 100.00% 189,598 100.00% 166,354 100.00% 147,02 100.00%
======== ====== ====== ====== ======
Less:
Construction Loans in Process 3,467 --- --- --- ---
Deferred fees and discounts.... 1,508 1,498 1,511 1,486 1,578
Allowance for losses........... 2,315 2,069 1,828 1,520 885
---------- ------- --------- ---------- ---------
Total loans receivable, net... $241,168 $218,311 $186,259 $163,348 $144,566
========== ======== ======== ======== ========
</TABLE>
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The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at December 31, 1999. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
final payment is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
Real Estate
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Multi-family,
Construction and
Commercial Real
One-to four family Estate Consumer Total
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Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
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(Dollars in Thousands)
Due During
Years Ending
December 31,
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
2000................. $ 1,439 7.53 $ 8,258 9.17%$ 1,005 9.23% $ 10,702 8.96%
2001 to 2002........... 1,795 7.74 2,144 9.26 743 8.67 4,682 8.58
2003 and 2004.......... 20,523 7.79 17,212 8.94 4,932 8.28 42,667 8.31
2005 to 2009........... 17,394 7.52 3,311 9.47 0 0 20,705 7.83
2010 to 2019........... 78,877 7.98 8,657 8.83 0 0 87,534 8.06
2020 and following..... 80,173 7.73 1,995 8.34 0 0 82,168 7.74
-------- ----------- ------- ----------
Total...............$200,201 7.82 $ 41,577 8.99 $ 6,680 8.47 $248,458 8.03
========= ========= ======== =========
</TABLE>
The total amount of loans due after December 31, 2000 which have
predetermined interest rates is $ 219.6 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $ 18.2
million.
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Under federal law, the aggregate amount of loans that the Bank is permitted
to make to any one borrower is generally limited to 15% of unimpaired capital
and surplus (25% if the security for such loan has a "readily ascertainable"
value or 30% for certain residential development loans). At December 31, 1999,
based on the above, the Bank's regulatory loans-to-one borrower limit was
approximately $10.5 million. On the same date, the Bank had no borrowers with
outstanding balances in excess of this amount. As of December 31, 1999, the
largest dollar amount outstanding or committed to be lent to one borrower or,
group of related borrowers, related to one residential loan and several
multi-family dwelling loans totaling $1.8 million secured by the borrower's
residence and several multi-family dwellings located in Chicago, Illinois. At
December 31, 1999, these loans were performing in accordance with their terms.
As of the same date, there were eight other lending relationships with carrying
values in excess of $1.0 million.
All of the Bank's lending is subject to its written underwriting standards
and to loan origination procedures. Decisions on loan applications are made on
the basis of detailed applications and property valuations (consistent with the
Bank's appraisal policy). The loan applications are designed primarily to
determine the borrower's ability to repay and the more significant items on the
application are verified through use of credit reports, financial statements,
tax returns or confirmations. All mortgage loans currently originated by First
Security are approved by the loan committee, currently comprised of Directors
Babyk, Dobrowolsky and Gawryk and Vice President Korb, and ratified by the full
Board of Directors.
The Bank requires title insurance or other evidence of title on its
mortgage loans, as well as fire and extended coverage casualty insurance in
amounts at least equal to the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. The Bank also
requires flood insurance to protect the property securing its interest when the
property is located in a flood plain.
One- to Four-Family Residential Real Estate Lending. The cornerstone of the
Bank's lending program is the origination of loans secured by mortgages on
owner-occupied one- to four-family residences. Historically, the Bank focused
its residential lending activities on fixed rate loans with terms up to 30
years. In the 1980s, in order to reduce the average term to repricing of its
assets, the Bank began to offer 15 year and 10 year fixed rate loans as well as
ARMs (although, as a result of customer preference, the Bank's ARM loan volume
has been limited). Substantially all of the Bank's one- to four-family
residential mortgage originations are secured by properties located in its
market area. All mortgage loans currently originated by the Bank are retained
and serviced by it.
The Bank currently offers fixed-rate mortgage loans with maturities from 10
to 30 years. The Bank also offers fixed rate balloon products with a 30 year
amortization schedule which are due in three or five years and which, under
certain circumstances, may be extended for an additional term of up to three or
five years, as applicable. As of December 31, 1999, the Bank had $17.3 million
of fixed rate loans with original terms of 10 years or less (most of which were
three or five year balloon loans), $67.2 million of fixed rate loans with
original terms of 10-15 years and $109.1 million of fixed rate loans with
original terms of more than 15 years. See "- Originations of Loans."
The Bank also originates fixed rate home equity loans with terms of up to
ten years. These loans are written so that the total balance does not exceed the
lesser of $35,000 or 75% of the appraised value of the security property when
combined with the balance of the first mortgage lien. At December 31, 1999, the
Bank had $1.8 million of home equity loans, all of which are classified in the
tabular data as one- to four-family residential loans.
The Bank also offers ARMs which carry interest rates which adjust at a
margin (generally 250 basis points) over the yield on the One Year and the Three
Year Average Monthly U.S. Treasury Constant Maturity Indexes ("CMT"). Such loans
may carry terms to maturity of up to 30 years. The ARM loans
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currently offered by the Bank provide for a cap on annual interest rate changes
of 200 basis points and a lifetime cap generally of 600 basis points over the
initial rate. Initial interest rates offered on the Bank's ARMs may be
approximately 100-150 basis points below the fully indexed rate, although
borrowers are qualified at the fully indexed rate. As a result, the risk of
default on these loans may increase as interest rates increase. At December 31,
1999, one- to four-family ARMs totaled $6.6 million or 2.68% of the Bank's total
loan portfolio.
First Security will generally lend up to 90% of the lesser of the sales
price or appraised value of the security property on owner occupied one- to
four-family loans; provided, however, that private mortgage insurance is
obtained in an amount sufficient to reduce the Bank's exposure to not more than
80% of the sales price or appraised value, as applicable. The loan-to-value
ratio on non-owner occupied, one- to four-family loans is generally 80% of the
lesser of the sales price or appraised value of the security property. Non-owner
occupied one- to four-family loans may pose a greater risk to the Bank than
traditional owner occupied one- to four-family loans. In underwriting one- to
four-family residential real estate loans, the Bank currently evaluates the
borrower's ability to make principal, interest and escrow payments, the
borrower's credit history, the value of the property that will secure the loan
and debt to income ratios.
Residential loans do not currently include prepayment penalties, are
non-assumable and do not produce negative amortization. The Bank's underwriting
practices do not comply in every way with those required by most purchasers in
the secondary market. For instance, the Bank, on occasion, will lend to
borrowers that have income/debt service ratios below that required by many
secondary market purchasers. In that event, the Bank will require that the
borrower have other attributes which justify approving a loan, such as a
favorable repayment record with the Bank on previous lending relationships,
favorable cash flow, a low loan to value ratio or other assets which can be used
as additional collateral. The Bank has found that non-compliance with secondary
market standards at the time of origination does not in and of itself cause
credit problems since the Bank has engaged in this type of lending for many
years and its overall delinquency experience on these loans has been
satisfactory to date. In addition, these loans, once seasoned, generally are
saleable on the secondary market. Furthermore, the Bank has found that these
policies and procedures help the Bank maintain and improve its customer
relations, which is critical in the communities the Bank serves.
While the Bank seeks to originate most of its one- to four-family
residential loans in amounts which are less than or equal to the applicable
Federal Home Loan Mortgage Corporation maximum, the Bank does make one- to
four-family residential loans in amounts in excess of such maximum. The Bank's
delinquency experience on such loans has been similar to its experience on its
other residential loans.
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.
Multi-family and Commercial Real Estate Lending. In order to increase the
yield of its loan portfolio and to complement residential lending opportunities,
the Bank originates permanent multi-family and commercial real estate loans
secured by properties in its primary market area. At December 31, 1999, the Bank
had multi-family loans totaling $13.4 million, or 5.39% of the Bank's total loan
portfolio, and $15.3 million in commercial real estate loans, representing 6.16%
of the total loan portfolio.
The Bank's multi-family loan portfolio consists primarily of loans secured
by sixteen or fewer units. The Bank's commercial real estate loans are primarily
secured by retail stores, small office buildings, store/apartment complexes,
taverns and store front offices.
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The Bank's multi-family real estate loans generally carry a maximum term of
5 years and have fixed rates, although most of these loans are five year
balloons with a 25 year or more amortization schedule. These loans are generally
made in amounts of up to 75% of the lesser of the appraised value or the
purchase price of the property. Most of the Bank's commercial real estate loans
are five year balloon loans with fixed rates of interest. Also included in the
Bank's commercial real estate loans are $2.6 million of lines of credit secured
by commercial real estate with floating interest rates tied to the prime rate of
interest. Commercial real estate loans are generally made in amounts up to 75%
of the lesser of the appraised value or the purchase price of the property.
Appraisals on properties securing multi-family and commercial real estate
loans in excess of $200,000 are performed by an independent appraiser designated
by the Bank at the time the loan is made. All appraisals on multi-family and
commercial real estate loans are reviewed by the Bank's loan committee. In
addition, the Bank's underwriting procedures require verification of the
borrower's credit history, income and financial statements, banking
relationships, references and income projections for the property. The Bank
obtains personal guarantees on these loans.
At December 31, 1999, the Bank's largest commercial real estate or
multi-family loan outstanding totaled $1,250,000 and was secured by a
residential 16-unit apartment building located in Chicago, Illinois. The loan
was performing in accordance with its terms as of that date.
Multi-family and commercial real estate loans may present a higher level of
risk than loans secured by one- to four-family residences. This greater risk is
due to several factors, including the concentration of principal in a limited
number of loans and borrowers, the effects of general economic conditions on
income producing properties and the increased difficulty of evaluating and
monitoring these types of loans.
Construction Lending. The Bank originates construction loans to finance
development of residential properties. Loans are primarily fixed rate with a
maturity of one year or less.
The Bank requires independent appraisals with loan to value not in excess
of 80%. Disbursements are made in increments as construction progresses, and
inspections warrant. Land loans do not exceed 60% of the appraised value or
actual cost.
As of December 31,1999 the Bank had committed $3.8 million to borrowers for
construction loans. As of this same date, $330,000 of the committed funds had
been disbursed.
Consumer Lending. Management believes that offering consumer loan products
helps to expand the Bank's customer base and to create stronger ties to its
existing customer base. In addition, because consumer loans generally have
shorter terms to maturity and carry higher rates of interest than do residential
mortgage loans, they can be valuable asset/liability management tools. The Bank
originates a variety of different types of consumer loans, including home equity
lines of credit, and deposit account loans for household and personal purposes.
Due to the tax advantages to the borrower of home equity lines of credit, the
Bank has focused its recent consumer lending activities on home equity lending.
At December 31, 1999 consumer loans totaled $6.7 million or 2.69% of total loans
outstanding.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. Other than the home
equity lines of credit, the Bank's consumer loans are made at fixed interest
rates, with terms of up to five years.
The Bank's home equity lines of credit are written so that the total
commitment amount, when combined with the balance of the first mortgage lien,
may not exceed 75% of the appraised value of the
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property. These loans are written with fixed terms of up to five years and carry
interest rates that float with the prime rate of interest. At December 31, 1999,
the Bank's home equity lines of credit totaled $5.1 million outstanding, or
2.05% of the Bank's total loan portfolio.
The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's payment history on other debts and ability to
meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. Consumer loans may entail greater credit
risk than do residential mortgage loans, particularly in the case of consumer
loans which are unsecured. In addition, consumer loan collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans.
Originations of Loans
Real estate loans are originated by First Security's staff through walk-ins
and referrals from existing customers or real estate agents.
The Bank's ability to originate loans is dependent upon customer demand for
loans in its market and to a lesser extent, customer service and marketing
efforts. Demand is affected by both the local economy and the interest rate
environment. As a result of the strong real estate market in the Bank's primary
market areas and its emphasis on customer service and community outreach, the
Bank has experienced significant loan growth in recent years. See "-- Market
Area." However, as a result of consumer demand, most recent originations have
carried fixed rather than adjustable rates. Under current policy, all loans
originated by First Security are retained in the Bank's portfolio. See "-- One-
to Four- Family Residential Lending" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Asset/Liability Management"
in the Annual Report attached as Exhibit 13 hereto.
In order to supplement loan originations, the Bank has acquired a
substantial amount of mortgage-backed and other securities which are held,
depending on the investment intent, in the "held-to-maturity" or
"available-for-sale" portfolios. See "Investment Activities - Mortgage-Backed
and Related Securities" and Note 2 of the Notes to Consolidated Financial
Statements in the Annual Report attached as Exhibit 13 hereto. In addition,
depending on market conditions, the Bank may also consider the purchase of
residential loans from other lenders, although it has not done so since 1994.
As a reflection of the Bank's emphasis on customer service, the Bank has
not sold loans in the past but may do so in the future to manage interest rate
risk. Servicing of such loans would be retained by the Bank.
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The following table shows the loan origination, purchase and repayment
activities of the Bank for the periods indicated.
<TABLE>
Year Ended December 31,
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1999 1998 1997
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(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family.............. $2,543 $ 1,791 $ 1,082
Fixed rate:
Real estate - one- to four-family.............. 62,460 68,797 46,207
- multi-family............... 5,953 5,076 6,066
- commercial................. 6,096 5,289 1,234
Non-real estate - consumer..................... 2,451 3,772 3,477
-------- ------- -------
Total fixed-rate......................... 76,960 82,934 56,984
-------- ------- -------
Total loans originated................... 79,503 84,725 58,066
Principal repayments.............................. ( 56,390) (52,445) (34,822)
Increase (decrease) in other items, net........... (256) (228) (333)
----------- --------- --------
Net increase.............................. $ 22,857 $32,052 $22,911
======== ======= =======
</TABLE>
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a required payment on
a loan, the Bank attempts to cure the delinquency by contacting the borrower.
Generally, Bank personnel work with the delinquent borrower on a case by case
basis to solve the delinquency. Generally, a late notice is sent on all
delinquent loans followed by a phone call after the thirtieth day of
delinquency. Additional written and verbal contacts may be made with the
borrower between 30 and 60 days after the due date. If the loan is contractually
delinquent for 90 days, the Bank may institute appropriate action to foreclose
on the property. Generally, after 120 days, foreclosure procedures are
initiated. If foreclosed, the property is sold at public sale and may be
purchased by the Bank.
Real estate acquired by First Security as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired by foreclosure or deed in lieu of foreclosure, it is
recorded at the lower of cost or fair value less estimated selling costs. After
acquisition, all costs incurred in maintaining the property are expensed. Costs
relating to the development and improvement of the property, however, are
capitalized.
12
<PAGE>
The following table sets forth the Bank's loan delinquencies by type, by
amount and by percentage of type at December 31, 1999.
<TABLE>
Loans Delinquent For: Total Loans Delinquent
-----------------------------------------------------------------------------------
60-89 Days 90 Days and Over 60-Days-or-More-
------------------------------------------------------------------------------------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family........ 10 $ 787 .39% 9 $ 934 .47% 19 $1,721 .86%
Multi-family............... --- --- --- 1 25 .19 1 25 .19
Commercial................. 3 282 1.84 2 360 2.35 5 642 4.19
Consumer..................... 4 3 .05 7 8 .12 11 11 .16
------ ------- -------- ------ ------ --------
Total........................ 17 $ 1,072 .43% 19 $ 1,327 .53 % 36 $2,399 .96%
======= ======== ======== ======== ======= =========
</TABLE>
13
<PAGE>
Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: Substandard,
Doubtful and Loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the Bank will sustain some
loss if the deficiencies are not corrected. Doubtful assets have the weaknesses
of Substandard assets, with the additional characteristics that the weaknesses
make collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified Loss is considered uncollectible and of such little value that
continuance as an asset on the balance sheet of the institution is not
warranted. Assets classified as Substandard or Doubtful require the institution
to establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as a loss, the institution charges off such amount against
the loan loss allowance. If an institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the District
Director of the OTS.
On the basis of management's review of its assets, at December 31, 1999,
the Bank had classified a total of $1.3 million of its loan and other assets as
follows:
<TABLE>
At
December 31,
1999
------------------------
(In Thousands)
<S> <C>
Substandard........................................... $1,327
Doubtful assets....................................... ---
Loss assets........................................... ---
--------
Total........................................... 1,327
--------
General loss allowance................................ $ 2,315
=======
Specific loss allowance............................... $ ---
=======
Charge-offs, net...................................... $ ---
=======
</TABLE>
First Security's classified assets consist of the non-performing loans
referred to below.
14
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. Accrued
interest on loans delinquent 90 days or more is reversed out of income and
credited to an interest reserve account which offsets the amount of capitalized
interest in loans receivable. See Note 3 of the Notes to Consolidated
Financial Statements in the Annual Report attached as Exhibit 13 hereto.
Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
December 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family....................... $ --- $ 9 $ 9 $ 9 $ 9
Commercial real estate.................... --- --- --- --- ---
--------- -------- -------- -------- --------
Total................................ --- 9 9 9 9
Accruing loans delinquent 90 days or more:
One- to four-family....................... 934 459 614 1,111 971
Multi-family.............................. 25 224 --- 180 367
Commercial real estate.................... 360 313 566 882 749
Consumer.................................. 8 7 194 226 189
---------- --------- ------ ------- -------
Total................................ 1,327 1,003 1,374 2,399 2,276
Foreclosed assets:
One- to four-family....................... 66 --- --- 40 ---
Commercial real estate.................... --- --- --- --- 499
--------- --------- ------- ------- ------
Total................................ 66 --- --- 40 499
Non-performing leases...................... --- --- 81 1,272 ---
---------- --------- ------- ------ ---------
Total non-performing assets............... $1,393 $1,012 $1,464 $3,720 $2,784
======= ====== ====== ====== ======
Total as a percentage of total assets..... .37% 0.30% 0.46% 1.44% 1.11%
======== ==== ==== ==== ====
</TABLE>
For the years ended December 31, 1998 and December 31, 1999, gross interest
income (less additions to the interest reserve) which would have been recorded
had the non-accruing loans (and accruing loans delinquent 90 days or more) been
current in accordance with their original terms amounted to $116,000 and $
96,000, respectively. No interest income was recognized on non-accruing loans
for the years ended December 31, 1999 and December 31, 1998, respectively.
Other Loans of Concern. In addition to the non-performing assets set forth
in the table above, as of December 31, 1999, there were no other loans with
respect to which known information about the possible credit problems of the
borrowers or the cash flows of the security properties have caused management to
have concerns as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories.
Management considers the Bank's non-performing and "of concern" assets in
establishing its allowance for loan losses.
15
<PAGE>
The following table sets forth an analysis of the Bank's allowance for loan
losses.
<TABLE>
Year Ended December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............................ $2,069 $1,828 $1,520 $ 885 $ 792
Charge-offs:
One- to four-family..................................... --- --- --- --- ---
Multi-family............................................ --- --- --- --- ---
Commercial real estate.................................. --- --- --- 68 28
Construction or development............................. --- --- --- --- ---
Consumer................................................ --- 5 2 3 15
Leases.................................................. --- --- 432 --- ---
---------- -------- ------ ------- ---------
--- 5 434 71 43
Recoveries:
One- to four-family..................................... --- --- --- --- ---
Multi-family............................................ --- --- --- --- ---
Commercial real estate.................................. --- --- --- --- ---
Construction or development............................. --- --- --- --- ---
Consumer................................................ --- --- 4 --- ---
Leases.................................................. --- --- --- --- ---
---------- --------- ------- ------- ---------
--- --- 4 --- ---
Net (charge-offs) recoveries.............................. --- (5) (430) (71) (43)
Additions charged to operations........................... 246 246 738 706 136
---------- ------- ------- ------- -------
Balance at end of period............................... $ 2,315 $2,069 $1,828 $1,520 $ 885
======== ====== ====== ====== =======
Ratio of net charge-offs (recoveries) during the
period to average loans outstanding during the
period.................................................. ---% ---% 0.25% 0.05% (0.03)%
====== ===== ==== ==== ====
Ratio of net charge-offs (recoveries) during
the period to average non-performing assets............. ---% 0.38% 21.12% 2.15% (1.88)%
======== ==== ===== ==== =====
</TABLE>
<PAGE>
The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
December 31,
---------------------------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Amount Loan in Each Amount Loan in Each Amount Loan in Each
of Loan Amounts Category of Loan Amounts Category of Loan Amounts Category
Loss by of Total Loss by of Total Loss by of Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.. $ 823 $200,201 80.58% $736 $182,452 82.23% $ 572 $154,819 81.66%
Multi-family......... 80 13,389 5.39 83 11,313 5.10 67 10,999 5.80
Multi-family.........
estate............ 607 24,388 9.81 483 21,433 9.66 448 17,235 9.09
Construction or
development....... 33 333 1.53 --- --- --- --- --- ---
Consumer............. 107 6,680 2.69 112 6,680 3.01 80 6,464 3.41
Loans secured by
leases............ --- --- --- --- --- --- 40 81 0.04
----
Unallocated.......... 665 --- --- 655 --- --- 621 --- ---
-------------------- --------- ----------------------------- ------------------------------ ------------
Total........ $2,315 $244,991 100.00% $2,069 $221,878 100.00% $1,828 $189,598 100.00%
======= ======== ======= ====== ======== ====== ====== ======= ======
</TABLE>
<TABLE>
---------------------------------------------------------------------------------------------------------------
1996 1995
--------------------------------------------------------------------------------------------------------------
Percent Percent
of Loans of Loans
Amount Loan in Each Amount Loan in Each
of Loan Amounts Category of Loan Amounts Category
Loss by of Total Loss by of Total
Allowance Category Loans Allowance Category Loans
<S> <C> <C> <C> <C> <C> <C>
One- to four-family.. $ 335 $134,971 81.14% $ 310 $117,379 79.83%
Multi-family......... 56 9,374 5.63 56 7,926 5.39
Commercial real...
estate............ 245 15,651 9.41 199 15,127 10.29
Construction or
development....... --- --- --- --- --- ---
Consumer........... 68 5,086 3.06 70 5,838 3.97
Loans secured by .
leases............ 318 1,272 0.76 76 759 0.52
Unallocated.......... 478 --- --- 174 --- ---
---- ----- ---- ---- ---- ----
Total........ $1,520 $166,354 100.00% $885 $147,029 100.00%
</TABLE>
<PAGE>
The allowance for loan losses is established through a provision for loan
losses charged to earnings based on management's evaluation of the risk inherent
in its entire loan portfolio. Such evaluation, which includes a review of all
loans of which full collectibility may not be reasonably assured, considers the
market value of the underlying collateral, growth and composition of the loan
portfolio, delinquency trends, adverse situations that may affect the borrower's
ability to repay, prevailing economic conditions and other factors that warrant
recognition in providing for an adequate allowance for loan losses. In
determining the general reserves under these policies, historical charge-offs
and recoveries, changes in the mix and levels of the various types of loans,
collateral values the current loan portfolio and current economic conditions are
considered.
While management believes that it uses the best information available to
determine the allowance for loan losses, unforeseen economic and market
conditions could result in adjustments to the allowance for loan losses, and net
earnings could be significantly affected, if circumstances differ substantially
from the assumptions used in making the final determination.
Securities Activities
General. Generally, the investment policy of the Company is to invest funds
among categories of investments based upon the its asset/liability management
policies, investment quality, loan and deposit volume, liquidity needs and
performance objectives. In accordance with the Company's asset/liability
management policy, the Company has recently focused a significant part of its
investment activities on instruments with terms to repricing or maturity of five
years or less and municipal securities which are exempt from federal taxes.
The Bank must maintain minimum levels of investments and other assets that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Bank has
maintained liquid assets at levels above the minimum requirements imposed by the
OTS regulations and above levels believed adequate to meet the requirements of
normal operations, including potential deposit outflows. At December 31, 1999,
the Bank's liquidity ratio for regulatory purposes was 9.19%. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Asset/Liability Management" and "- Liquidity and Capital Resources" in the
Annual Report attached as Exhibit 13 hereto.
The Company's securities are classified into two categories:
held-to-maturity and available-for-sale. Securities that the Company has the
positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost. All other securities not
classified as held-to-maturity are classified as available-for-sale. At December
31, 1999, the Company had $20.6 million of securities classified as
available-for-sale. Available-for-sale securities are reported at fair value
with unrealized gains and losses included, on an after-tax basis, in a separate
component of shareholders' equity.
Mortgage-Backed and Related Securities. In order to supplement its lending
activities and achieve its asset/liability management goals, the Company invests
in mortgage-backed and related securities. As of December 31, 1999, all of the
mortgage-backed and related securities owned by the Company are issued, insured
or guaranteed either directly or indirectly by a federal agency or are rated
"AAA" by a nationally recognized credit rating agency. However, it should be
noted that, while a (direct or indirect) federal guarantee or a high credit
rating may indicate a high degree of protection against default, they do not
indicate that the securities will be protected from declines in value based on
changes in interest rates or prepayment speeds.
17
<PAGE>
Consistent with its asset/liability management strategy, at December 31,
1999, $ 9.4 million, or 55.4% of the Company's mortgage-backed and related
securities were available-for-sale. In addition, on the same date, $ 9.1 million
or 53.4% of the Company's mortgage-backed and related securities carried
adjustable rates. Finally, as discussed further below, at December 31, 1999, the
Company had $ 1.2 million of collateralized mortgage obligations ("CMOs") with
anticipated average lives of five years or less. For additional information
regarding the Company's mortgage-backed securities portfolio, see Note 2 of
the Notes to Consolidated Financial Statements in the Annual Report attached as
Exhibit 13 hereto.
The Company's CMOs and are securities derived by reallocating the cash
flows from mortgage-backed securities or pools of mortgage loans in order to
create multiple classes, or tranches, of securities with coupon rates and
average lives that differ from the underlying collateral as a whole. The terms
to maturity of any particular tranche is dependent upon the prepayment speed of
the underlying collateral as well as the structure of the particular CMO.
Although a significant proportion of the Company's CMOs are interests in
tranches which have been structured (through the use of cash flow priority and
"support" tranches) to give somewhat more predictable cash flows, the cash flow
and hence the value of CMOs is subject to change.
The Company invests in CMOs as an alternative to mortgage loans and
conventional mortgage-backed securities as part of its asset/liability
management strategy. Management believes that, depending on market conditions,
CMOs may represent attractive investment alternatives relative to other
investments due to the wide variety of maturity and repayment options available.
In particular, the Company has from time to time concluded that short and
intermediate duration CMOs (five year or less average life) often represent a
better combination of rate and duration than adjustable rate mortgage-backed
securities.
To assess price volatility, the Federal Financial Institutions Examination
Council ("FFIEC") adopted a policy in 1992 which requires an annual "stress"
test of mortgage derivative securities. This policy, which has been adopted by
the OTS, requires the Company to annually test its CMOs, and other
mortgage-related securities to determine whether they are high-risk or
nonhigh-risk securities. Mortgage derivative products with an average life or
price volatility in excess of a benchmark 30-year, mortgage-backed, pass-through
security are considered high-risk mortgage securities. Under the policy, savings
institutions may generally only invest in low-risk mortgage securities in order
to reduce interest rate risk. In addition, all high-risk mortgage securities
acquired after February 9, 1992 which are classified as high risk at the time of
purchase must be carried in the institution's trading account or as assets
available-for-sale. At December 31, 1999, the most recent quarterly test date,
none of the Company's mortgage-backed securities were classified as "high-risk."
18
<PAGE>
The following table sets forth the composition of the Company's
mortgage-backed securities at the dates indicated.
<TABLE>
December 31,
-------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
-------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities held-to- maturity:
GNMA.............................................. $ 3,530 20.77% $ 4,975 20.73% $ 7,781 22.05%
FNMA.............................................. 1,043 6.14 1,474 6.14 2,531 7.17
FHLMC............................................. 1,846 10.87 2,955 12.31 4,558 12.92
CMOs.............................................. 1,158 6.82 2,183 9.10 3,681 10.44
-------- ------ -------- -------- ------- -------
7,577 44.60 11,587 48.28 18,551 52.58
Mortgage-backed securities available-for- sale:
GNMA.............................................. 1,371 8.07 1,983 8.26 2,982 8.45
FNMA.............................................. 3,489 20.54 4,309 17.96 5,605 15.89
FHLMC............................................. 4,550 26.79 5,907 24.62 7,601 21.54
CMOs.............................................. --- --- 211 0.88 545 1.54
--------- -------- --------- ------- ------- --------
9,410 55.40 12,410 51.72 16,733 47.42
------- -------- ------- ------- ------ -------
Total mortgage-backed securities............... $ 16,987 100.00% $ 23,997 100.00% $ 35,284 100.00%
========= ======= ======= ====== ======= ======
</TABLE>
19
<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at December 31, 1999.
<TABLE>
Due in December 31, 1999
------------------------------------------------------------------------------------------
6 Months 6 Months 1 to 3 to 5 5 to 10 10 to 20 Over 20 Amortized Carrying
or Less to 1 Year 3 Years Years Years Years Years Cost Value
-----------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation....$ --- $ --- $ 98 $ 378 $ 716 $2,682 $ 2,713 $ 6,587 $6,396
Federal National Mortgage Association.... --- --- --- 358 191 1,975 2,153 4,677 4,532
Government National Mortgage Association. --- --- --- --- 275 1,107 3,531 4,913 4,901
CMOs ..................................... --- --- --- --- 307 85 766 1,158 1,158
------ ----- ----- ----- ------ -------- ------- ------ ------
---
Total.............................. $ --- $ --- $ 98 $ 736 $1,489 $5,849 $ 9,163 $17,335 $ 16,987
======= ====== ====== ====== ======== ======== ======== ======== ========
</TABLE>
20
<PAGE>
As of December 31, 1999, the Company did not have any mortgage-backed
securities in excess of 10% of retained earnings except for FNMA, FHLMC and GNMA
issues, amounting to $4.5 million, $6.4 million and $4.9 million, respectively.
The market values of a portion of the Company's mortgage-backed securities
held-to-maturity have been from time to time lower than their carrying values.
However, for financial reporting purposes, such declines in value are considered
to be temporary in nature since they have been due to changes in interest rates
rather than credit concerns. See Note 2 of the Notes to Consolidated Financial
Statements in the Annual Report attached as Exhibit 13 hereto.
The following table shows mortgage-backed securities purchase, sale and
repayment activities of the Company for the periods indicated.
<TABLE>
Year Ended December 31,
------------------------------------------
1999 1998 1997
------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Purchases:
Adjustable-rate...................... $ --- $ --- $ ---
Fixed-rate........................... --- --- ---
CMOs................................. --- --- ---
-------- --------- --------
Total purchases................. --- --- ---
Principal repayments..................... (6,680) (11,094) (8,475)
Discount/premium net change.............. ( 260) (116) (184)
Fair value net change.................... ( 70) (77) 107
--------- ----------- --------
Net increase (decrease)......... $ (7,010) $(11,287) $(8,552)
========= ======== =======
</TABLE>
The Company's holdings of mortgage-backed securities are approximately 3%
of the Company's total assets. Since pass-through mortgage-backed securities
generally carry a yield approximately 50 to 100 basis points below that of the
corresponding type of residential loan (due to the implied federal agency
guarantee fee and the retention of a servicing spread by the loan servicer), and
the Company's CMOs also carry lower yields (due to the implied federal agency
guarantee and because such securities tend to have shorter actual durations than
30 year loans), in the event that the proportion of the Company's assets
consisting of mortgage-backed and related securities increases, the Company's
asset yields could be somewhat adversely affected. The Company will evaluate
mortgage-backed and related securities purchases in the future based on its
asset/liability objectives, market conditions and alternative investment
opportunities.
Other Securities. In order to complement its lending and mortgage-backed
securities activities, and to increase its holdings of short and intermediate
term assets, the Company invests in liquid investments and in high-quality
investments, such as U.S. Treasury and agency obligations. At December 31, 1999
and December 31, 1998, the Company's securities portfolio totaled $96.5 million
and $60.6 million, respectively. At December 31, 1999, the Company did not own
any other securities of a single issuer which exceeded 10% of the Company's
retained earnings, other than federal agency obligations. See Note 2 of the
Notes to Consolidated Financial Statements in the Annual Report attached as
Exhibit 13 hereto for additional information regarding the Company's other
securities portfolio.
21
<PAGE>
The following table sets forth the composition of the Company's other
securities and other earning assets at the dates indicated.
<TABLE>
December 31,
-----------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
-----------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities held-to-maturity:
Federal agency obligations....................$ 69,763 72.26% $41,504 68.47% $33,562 61.92%
Municipal bonds............................... 15,568 16.13 5,176 8.54 4,909 9.06
------ ----- -------- ------ ------- -------
85,331 88.39 46,680 77.01 38,471 70.98
Securities available-for sale:
US government securities...................... 335 .35 2,577 4.25 8,014 14.79
Mutual funds.................................. 2,998 3.11 3,164 5.22 3,155 5.82
Municipal bonds............................... 7,370 7.62 7,679 12.67 3,966 7.32
Corporate notes............................... 230 .24 242 0.40 250 0.46
Other equity.................................. 279 .29 271 0.45 343 0.63
--------- ------- --------- ------ ------- -------
11,212 11.61 13,933 22.99 15,728 29.02
-------- -------- ------ ------ ------ ------
Total securities......................... $96,543 100.00% $60,613 100.00% $54,199 100.00%
======== ====== ======= ====== ======= ======
Other earning assets:
Interest-earning deposits with banks.......... $ 1,571 38.45% $ 8,205 41.60% $ 5,750 22.28%
FHLB stock.................................... 2,315 56.66 2,131 10.80 1,852 7.18
Federal funds sold............................ 200 4.89 9,189 46.59 18,000 69.76
Time deposit in other financial institutions.. ---- --- 200 1.01 200 0.78
--------- -------- ------- ------- -------- -------
Total................................... $ 4,086 100.00% $19,725 100.00% $25,802 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
22
<PAGE>
The composition and maturities of the other securities portfolio, excluding
FHLB stock, are indicated in the following table.
<TABLE>
December 31, 1999
---------------------------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 years Total Securities
---------------------------------------------------------------------------------------------------
Amortized Amortized Amortized Amortized Amortized Fair
Cost Cost Cost Cost Cost Value
---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
US government securities....... $ --- $ --- $ --- $ 259 $ 259 $ 335
Federal agency obligations..... 200 16,375 50,689 2,499 69,763 67,348
Municipal bonds................ 200 1,323 2,644 19,207 23,374 22,358
Corporate notes................ --- 250 --- --- 250 230
---------- -------- ---------- --------- --------- --------
Total securities............... $ 400 $17,948 $ 53,333 $ 21,965 $93,646(1) $ 90,271
======== ======= ======== ======== ======= ========
Weighted average yield......... 4.79% 6.20% 6.50% 5.26% 6.14%
======== ======= ========= ======= =======
</TABLE>
- ----------------
(1) Includes $ 84.5 million of callable securities.
See Note 2 of Notes to the Consolidated Financial Statements in the
Annual Report attached as Exhibit 13 hereto for a discussion of the Company's
securities portfolio.
Sources of Funds
General. The Bank's primary sources of funds are deposits, payments
(including prepayments) of loan principal, interest earned on loans and
securities, repayments of securities, borrowings and funds provided from
operations.
Deposits. First Security offers deposit accounts having a wide range of
interest rates and terms. The Bank's deposits consist of passbook, NOW, money
market and various certificate accounts. The Bank relies primarily on
competitive pricing and customer service to attract and retain these deposits.
The Bank's customers may access their accounts through any of the Bank's five
offices and five automated teller machines ("ATMs"). In addition, the Bank's
customers may access their accounts through several nationwide ATM networks. The
Bank only solicits deposits in its market area and does not currently use
brokers to obtain deposits.
The Bank manages the pricing of its deposits in keeping with its
asset/liability management, profitability and growth objectives. The variety of
deposit accounts offered by the Bank has allowed it to be competitive in
obtaining funds and to respond with flexibility to changes in consumer demand.
However, as some customers have become more interest rate conscious, the Bank
has become more susceptible to short-term fluctuations in its certificate of
deposit flows.
Management believes that the "core" portion of the Bank's regular savings,
NOW and money market accounts, which amounted to $97.1 million or 40.8% of total
deposits at December 31, 1999, can have a lower cost and be more resistant to
interest rate changes (and competing non-depository financial products) than
certificate accounts. The Bank utilizes customer service, community outreach and
marketing initiatives in an effort to build and maintain the volume of such
deposits. However, there can be no assurance as to whether the Bank will be able
to maintain or increase its core deposits in the future.
23
<PAGE>
The table below sets forth the Bank's deposit flows for the periods
indicated.
<TABLE>
Year Ended December 31,
-----------------------------------------
1999 1998 1997
-----------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Opening balance...................... $ 220,495 $210,100 $ 219,505
Deposits............................. 403,756 373,966 457,063
Withdrawals.......................... (395,294) (372,758) (475,811)
Interest credited.................... 9,166 9,187 9,343
---------- ----------- --------
Ending balance....................... $ 238,123 $220,495 $210,100
========= ========= ========
Net increase (decrease).............. $17,628 $ 10,395 $(9,405)
======= ========= =======
Percent increase (decrease).......... 7.99 4.95% (4.28)%
========= ===== =====
</TABLE>
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by the Bank as of the dates indicated.
<TABLE>
December 31,
------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------------------------------------------------------------------------
(Dollars in Thousands)
<S>
Transactions and Savings <C> <C> <C> <C> <C> <C>
Deposits
Passbook Accounts 3.00%............... $ 75,180 31.6% $ 74,963 34.0% $ 68,572 32.6%
NOW Accounts 2.23%.................... 18,281 7.7 16,976 7.7 15,705 7.5
Money Market Accounts 3.06%........... 3,651 1.5 4,524 2.0 4,574 2.2
----------- ------ ---------- ------- ------- ------
Total Non-Certificates............... 97,112 40.8 96,463 43.7 88,851 42.3
Certificates:
0.00 - 3.99%......................... --- --- 226 0.1 --- ---
4.00 - 5.99%.......................... 124,269 52.2 111,820 50.7 108,902 51.8
6.00 - 7.99%........................ 16,693 7.0 11,892 5.4 12,347 5.9
8.00 - 9.00%........................ 49 --- 94 0.1 --- ---
--------- ------- --------- ------- ----------- -------
Total Certificates.................. 141,011 59.2 124,032 56.3 121,249 57.7
---------- ------ ------- ------ -------- ------
Total Deposits...................... $ 238,123 100.0% $220,495 100.0% $210,100 100.0%
========= ====== ======== ===== ======== =====
</TABLE>
24
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1999.
<TABLE>
Less Than 1 to 2 2 to 3 3 to 4 4 to 5
1 Year Years Years Years Years Total
---------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
3.00 - 3.99%.......... $ --- $ --- $ --- $ --- $ --- $ ---
4.00 - 4.99%.......... 61,862 3,614 82 100 598 66,256
5.00 - 5.99%.......... 51,445 2,781 1,899 1,584 304 58,013
6.00 - 6.99%.......... 8,127 1,533 1,665 178 3,246 14,749
7.00 - 7.99%.......... 1,245 3 696 --- --- 1,944
8.00 - 8.99%......... --- --- --- --- 49 49
------------------------------------------------------------------- -------------
$ 122,679 $ 7,931 $ 4,342 $ 1,862 $ 4,197 $ 141,011
========== ========== ========= ========== ========== =========
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of December 31,
1999.
<TABLE>
Maturity
----------------------------------------------------------------------
Over Over Over
3 Months 3 to 6 6 to 12 12
or Less Months Months Months Total
----------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than
$100,000.................................... $ 29,318 $ 22,864 $ 31,691 $ 13,172 $ 97,045
Certificates of deposit $100,000
or more.................................... 10,505 10,928 17,373 5,160 43,966
--------- -------- -------- -------- --------
Total certificates of deposit.......... $ 39,823 $ 33,792 $ 49,064 $ 18,332 $ 141,011
========= ========= ======== ======== =========
</TABLE>
For additional information regarding the composition of the Bank's
deposits, see Note 7 of the Notes to the Consolidated Financial Statements in
the Annual Report attached as Exhibit 13 hereto.
Borrowings. First Security's other available sources of funds include
advances from the FHLB of Chicago and other borrowings. The Bank's FHLB advances
to date have primarily consisted of subsidized borrowings to fund special
housing programs. As a member of the FHLB of Chicago, the Bank is required to
own capital stock in the FHLB of Chicago and is authorized to apply for advances
from the FHLB of Chicago. Each FHLB credit program has its own interest rate,
which may be fixed or variable, and range of maturities. The FHLB of Chicago may
prescribe the acceptable uses for these advances, as well as limitations on the
size of the advances and repayment provisions. See Note 8 of the Notes to
Consolidated Financial Statements in the Annual Report attached as Exhibit 13
hereto.
25
<PAGE>
The following table sets forth the maximum month-end balance and average
balance of FHLB advances for the periods indicated.
<TABLE>
Year Ended December 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Maximum Balance:
FHLB Advances............................. $ 46,300 $29,000 $12,000 $3,000 $4,000
Average Balance:
FHLB Advances............................. $ 34,607 $21,667 $ 9,548 $3,000 $3,333
Weighted average interest rate of
FHLB advances............................. 5.41% 5.10% 5.72% 5.17% 5.25%
</TABLE>
Subsidiary Activities
As a federally chartered savings bank, First Security is permitted by OTS
regulations to invest up to 2% of its assets in the stock of, or loans to,
service corporation subsidiaries, and may invest an additional 1% of its assets
in service corporations where such additional funds are used for inner-city or
community development purposes. In addition to investments in service
corporations, federal institutions are permitted to invest an unlimited amount
in operating subsidiaries engaged solely in activities which a federal savings
association may engage in directly.
At December 31, 1999, First Security had one wholly owned service
corporation, Western Security Service Corporation ("Western" or the
"Subsidiary"). Western, an Illinois corporation, was incorporated November 1977
for the purpose of offering customers and members of the general public credit,
life, mortgage and disability insurance. First Security's investment in Western
was $26,933 as of December 31, 1999. Western recognized net income (loss) of $
(1,869) during the year ended December 31, 1999 and ($9,500) during the year
ended December 31, 1998.
Competition
First Security faces strong competition both in originating real estate
loans and in attracting deposits. Competition in originating loans comes
primarily from credit unions, mortgage bankers, commercial banks and other
savings institutions, which also make loans secured by real estate located in
the Bank's market area. First Security competes for loans principally on the
basis of the interest rates and loan fees it charges, the types of loans it
originates, community outreach and the quality of services it provides to
borrowers.
Competition for those deposits is principally from credit unions,
commercial banks, mutual funds, securities firms and other savings institutions
located in the same communities. The ability of the Bank to attract and retain
deposits depends on its ability to provide an investment opportunity that
satisfies the requirements of investors as to rate of return, liquidity, risk,
convenient locations and other factors. The Bank competes for these deposits by
offering competitive rates, convenient business hours, community outreach and a
customer oriented staff.
26
<PAGE>
General
First Security is a federally chartered savings bank, the deposits of which
are federally insured and backed by the full faith and credit of the United
States Government. Accordingly, First Security is subject to broad federal
regulation and oversight extending to all its operations. First Security is a
member of the Federal Home Loan Bank ("FHLB") of Chicago and is subject to
certain limited regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). As the savings and loan holding company of
First Security, the Company also is subject to federal regulation and oversight.
The purpose of the regulation of the Company and other holding companies is to
protect subsidiary savings associations. First Security is a member of the
Savings Association Insurance Fund ("SAIF") and the deposits of First Security
are insured by the Federal Deposit Insurance Corporation ("FDIC"). As a result,
the FDIC has certain regulatory and examination authority over First Security.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The Office of Thrift Supervision ("OTS") has extensive authority over the
operations of savings associations. As part of this authority, First Security is
required to file periodic reports with the OTS and is subject to periodic
examinations by the OTS and the FDIC. The last regular OTS and FDIC examinations
of First Security were as of December 31,1999 and April 23 1990, respectively.
Under agency scheduling guidelines, it is likely that another examination will
be initiated in the near future. When these examinations are conducted by the
OTS and the FDIC, the examiners may require First Security to provide for higher
general or specific loan loss reserves. All savings associations are subject to
a semi-annual assessment, based upon the savings association's total assets, to
fund the operations of the OTS.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including First Security and the
Company. This enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of First
Security is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. First Security is in compliance with the noted
restrictions.
First Security's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At December 31, 1999, First Security's lending
limit under this restriction was $10.5 million. First Security is in compliance
with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings
27
<PAGE>
standards, internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits. Any institution which fails to comply
with these standards must submit a compliance plan.
Insurance of Accounts and Regulation by the FDIC
First Security is a member of the Savings Association Insurance Fund
("SAIF"), which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings associations, after giving the OTS
an opportunity to take such action, and may terminate the deposit insurance if
it determines that the institution has engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF-insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. The assessment was reduced to
2.12 basis points as of January 1, 2000, when BIF insured institutions began to
fully participate in the assessment. These assessments, which may be revised
based upon the level of BIF and SAIF deposits will continue until the bonds
mature in the year 2017.
Regulatory Capital Requirements
Federally insured savings associations, such as First Security are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards which require the Bank to maintain minimum amounts and ratios
of total and Tier I capital to risk-weighted assets and of Tier I capital to
qualifying total assets (leverage ratio). These capital requirements must be
generally as stringent as the comparable capital requirements for national
banks. The OTS is also authorized to impose capital requirements in excess of
these standards on individual associations on a case-by-case basis.
28
<PAGE>
The capital regulations require a leverage ratio of 4% of adjusted total
assets (as defined by regulation). Tier I capital, used to calculate the
leverage ratio, generally includes common stockholders' equity and retained
income and certain noncumulative perpetual First Security stock and related
income. In addition, all intangible assets, other than a limited amount of
purchased mortgage servicing rights, must be deducted from Tier I capital for
calculating compliance with the requirement. At December 31,1999, First Security
had $190,000 of intangible assets recorded as assets on its financial
statements, as a result of its acquisition of assets and assumption of
liabilities from the Resolution Trust Corporation in 1994.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital.
At December 31,1999, First Security had Tier I capital of $69.1 million or
19.1% of adjusted total assets, which is approximately $54.6 million above the
minimum requirement of 4% of adjusted total assets in effect on the date.
The capital standards also require Tier I capital equal to at least 4% of
risk-weighted assets.
At December 31,1999, First Security had Tier I capital equal to $69.1
million or 39.4% of risk- weighted assets, which is $62.1 million above the
minimum Tier I risk-based capital ratio of 4% in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1999, First Security
had $ 2.3 million of general loss reserves of which $ 2.2 million qualifies as
supplementary capital, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. First Security had no
such exclusions from capital and assets at December 31, 1999.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or FHLMC.
29
<PAGE>
OTS regulations also require that a savings association with more than
normal interest rate risk exposure deduct from its total capital, for purposes
of determining compliance with such requirements, an amount equal to 50% of its
interest-rate risk exposure multiplied by the present value of its assets. This
exposure is a measure of the potential decline in the net portfolio value of a
savings association, greater than 2% of the present value of its assets, based
upon a hypothetical 200 basis point increase or decrease in interest rates
(whichever results in a greater decline). Net portfolio value is the present
value of expected cash flows from assets, liabilities and off-balance sheet
contracts. The rule will not become effective until the OTS evaluates the
process by which savings associations may appeal an interest rate risk deduction
determination. It is uncertain as to when this evaluation may be completed. Any
savings association with less than $300 million in assets and a total risk-based
capital ratio in excess of 12% is exempt from this requirement unless the OTS
determines otherwise. At the present time, the proposal is not expected to have
a material impact on the Bank.
On December 31, 1999, First Security had total risk-based capital of
approximately $ 71.3 million (including $ 69.1 million in core capital and $ 2.2
in qualifying supplementary capital) and risk-weighted assets of $ 175.6
million; or total capital of 40.6% of risk-weighted assets. This amount was $
57.3 million above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Association may have substantial adverse effects on its operations and
profitability.
30
<PAGE>
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations with
respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
A savings association may make a capital distribution without the approval
of the OTS provided the savings association notifies the OTS 30 days before the
declaration of a capital distribution and the savings association meets the
following requirements: (i) the savings association has a regulatory rating in
one of the two top examination categories, (ii) the savings association is not
of supervisory concern, and will remain adequately - or well - capitalized, as
defined by the OTS prompt corrective action regulations, following the proposed
distribution, and (iii) the distribution does not exceed the savings
associations net income for the calendar year -to-date plus retained net income
for the previous two calendar years (less any dividends previously paid). If the
savings association does not meet the above stated requirements, it must obtain
the prior approval of the OTS before declaring any proposed distributions.
31
<PAGE>
Penalties may be imposed upon associations for violations the liquid asset
ratio requirement. At December 31, 1999, First Security was in compliance with
the requirement, with an overall liquid asset ratio of 9.19%.
Qualified Thrift Lender Test
All savings associations, including First Security, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings association may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At December 31, 1999, First Security met the test and has
always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of First
Security, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by First
Security. An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years, First Security may be required to devote additional funds for
investment and lending in its local community. First Security was examined for
CRA compliance in March 1999 and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association or its subsidiaries
and its affiliates are required to be on terms as favorable to the association
as transactions with non-affiliates. In addition, certain of these
32
<PAGE>
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of First Security include the Company and
any company which is under common control with First Security. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. The OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non- savings association subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than First Security or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If First Security fails the QTL test, the Company must obtain the approval
of the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See "-
Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control of
any other SAIF- insured association. Such acquisitions are generally prohibited
if they result in a multiple savings and loan holding company controlling
savings associations in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of the Company is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to
the information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
First SecurityFed Financial, Inc. stock held by persons who are affiliates
(generally officers, directors and principal stockholders) of the Company may
not be resold without registration or unless sold in accordance with certain
resale restrictions. If the Company meets specified current public information
33
<PAGE>
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At December
31, 1999, First Security was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be imposed
by the OTS. See "-Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
First Security is a member of the FHLB of Chicago, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, First Security is required to purchase and maintain stock in
the FHLB of Chicago. At December 31, 1999, First Security had $ 2.3 million in
FHLB stock, which was in compliance with this requirement. In past years, First
Security has received substantial dividends on its FHLB stock. Over the past
five calendar years such dividends have averaged 6.69% and were 6.69% for
calendar year 1999. As a result of its holdings, the Bank could borrow up to $46
million from the FHLB.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of First Security's FHLB stock may result in a corresponding
reduction in First Security's capital.
For the year ended December 31, 1999, dividends paid by the FHLB of Chicago
to First Security totaled $ 145,500, which constitutes a $ 15,500 increase from
the amount of dividends received in calendar year 1998.
34
<PAGE>
Federal and State Taxation
Savings associations such as First Security that meet certain conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), were
previously permitted to establish reserves for bad debts and to make annual
additions thereto which may, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction is computed under the experience
method. Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
In addition to the regular income tax, corporations, including savings
associations such as First Security, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income.
A portion of the Bank's reserves for losses on loans may not, without
adverse tax consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1999, First Security's excess for tax purposes
totaled approximately $ 2.0 million.
First Security files its federal, state and local income tax returns on a
calendar year basis using the accrual method of accounting.
First Security has not been audited by the IRS with respect to consolidated
federal income tax returns in the past five years. With respect to years
examined by the IRS, either all deficiencies have been satisfied or sufficient
reserves have been established to satisfy asserted deficiencies. In the opinion
of management, any examination of still open returns (including returns of
subsidiary and predecessors of, or entities merged into, First Security) would
not result in a deficiency which could have a material adverse effect on the
financial condition of First Security and its consolidated subsidiary.
Illinois Taxation. For Illinois income tax purposes, the Bank is taxed at
an effective rate equal to 7.18% of Illinois taxable income. For these purposes,
"Illinois Taxable Income" generally means federal taxable income, subject to
certain adjustments (including the addition of interest income on state and
municipal obligations and the exclusion of interest income on United States
Treasury obligations).
Delaware Taxation. As a Delaware holding company, the Company is exempted
from Delaware corporate income tax but is required to file an annual report with
and pay an annual fee to the State of Delaware. The Company is also subject to
an annual franchise tax imposed by the State of Delaware.
Employees
At December 31, 1999, the Company, including its subsidiaries, had a total
of 95 employees, including 25 part-time employees. The Bank's employees are not
represented by any collective bargaining group. Management considers its
employee relations to be good.
35
<PAGE>
Executive Officers of the Corporation Who Are Not Directors
The business experience of each executive officer who is not also a
director is set forth below.
Harry Kucewicz. Mr. Kucewicz, age 43, is currently serving as the Treasurer
and Chief Operating and Financial Officer of both the Corporation and Bank. He
began working at the Bank in 1978 as the Controller. He was elected Treasurer
and Chief Financial Officer in 1990 and Chief Operating Officer in August 1994.
Mary H. Korb. Ms. Korb, age 52, is currently Vice President of the
Corporation and Vice President - Lending of the Bank. Ms. Korb supervises all
aspects of the Bank's lending operations, including lending compliance. Ms. Korb
has been with the Bank since 1970, and has served in her present capacity since
March 1991.
Irene S. Subota. Ms. Subota, age 53, currently serves as Vice President of
the Corporation and as Vice President - Savings of the Bank. Ms. Subota is in
charge of all aspects of the Bank's savings function, including compliance. Ms.
Subota has been employed by the Bank since 1973, and has served in her current
position since 1992.
Adrian Hawryliw. Mr. Hawryliw, age 63, has served as Philadelphia Branch
Manager of the Bank since 1994 when the Philadelphia, Pennsylvania branch was
acquired from the Resolution Trust Corporation, and is currently a Vice
President of the Bank and of the Corporation. Mr. Hawryliw is responsible for
supervising operations of the Philadelphia, Pennsylvania branch, including
business development, retail deposits, real estate lending, accounting and
marketing. He has over 34 years of banking experience in the Philadelphia area,
holding various positions including Chief Financial Officer and Vice
President/Investments for other area institutions.
36
<PAGE>
Item 2. Properties
The following table sets forth information concerning the main office and
each branch office of the Bank at December 31, 1999. At December 31, 1999, the
Bank's premises had an aggregate net book value of approximately $2.7 million.
<TABLE>
Year
Acquired/ Owned or Net Book Value at
Location Established Leased December 31, 1999 Deposits
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Main Office:
936 North Western Avenue 1964 Owned $ 910 $152,102
Chicago, Illinois 60622-4695
Branch Offices:
2166 Plum Grove Road 1977 Leased(1) --- 10,893
Rolling Meadows, Illinois 60008
820 N. Western Avenue 1983 Owned 217 1,873
Chicago, Illinois 60622
5670 N. Milwaukee Avenue 1993 Owned 1,077 14,809
Chicago, Illinois 60646
7918 Bustleton Avenue 1994 Owned 515 58,446
Philadelphia, Pennsylvania 19152
</TABLE>
(1) The lease expires in July 2000.
The Bank believes that its current facilities are adequate to meet the
present and foreseeable future needs of the Bank and the Company. However, in
the future, the Bank may consider the addition of one or more new branches
within the Chicago or Philadelphia areas.
The Bank's depositor and borrower customer files are maintained by an
independent data processing company. The net book value of the data processing
and computer equipment utilized by the Bank at December 31, 1999 was
approximately $454,000.
Item 3. Legal Proceedings
From time to time, First Security is involved as plaintiff or defendant
in various legal proceedings arising in the normal course of its business. While
the ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on the Company's and the Bank's
financial position or results of operations.
37
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Page 17 of the attached 1999 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Selected Financial Data
Pages 3 and 4 of the attached 1999 Annual Report to Stockholders is herein
incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Pages 15 through 16 of the attached 1999 Annual Report to Stockholders is
herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 17 through 48 of the attached 1999 Annual Report to Stockholders is
herein incorporated by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months prior
to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Information concerning Directors of the Corporation is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in May, 2000, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Executive Officers
Information regarding the business experience of the executive officers of
the Corporation and the Bank who are not also directors contained in Part I of
this Form 10-K is incorporated herein by reference.
38
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
Company's Common Stock (or any other equity securities, of which there is none),
to file with the SEC initial reports of ownership and reports of changes in
ownership of the Company's Common Stock. Officers, directors and greater than
10% shareholders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file. Mary H. Korb inadvertently
failed to file a Form 4 to report one transaction on September 1, 1998 and
reported the transaction on a Form 4 dated March 10, 2000.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 1999, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in May, 2000, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in May, 2000, a copy
of which will be filed not later than 120 days after the close of the fiscal
year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in May, 2000 a copy of which will be
filed not later than 120 days after the close of the fiscal year.
39
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements:
The following financial statements are included in this Form 10-K:
1. Five-Year Summary of Selected Consolidated Financial Data.
2. Report of Independent Auditors
3. Consolidated Balance Sheets at December 31, 1999 and 1998.
4. Consolidated Statements of Income for the fiscal years ended
December 31, 1999, 1998 and 1997.
5. Consolidated Statements of Shareholders' Equity for the fiscal
years ended December 31, 1999, 1998 and 1997.
6. Consolidated Statements of Cash Flows for the fiscal years
ended December 31, 1999, 1998 and 1997.
7. Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(a)(3) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
There were no current reports on Form 8-K filed by the Corporation during
the quarter ended December 31, 1999.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
/s/ Julian E. Kulas /s/ Steve Babyk
- -------------------------------------- ----------------------------------
Julian E. Kulas Steve Babyk
President, Chief Executive Officer and Director
Director(Principal Executive Officer)
Date: March 30, 2000 Date: March 30, 2000
------------------------------- -----------------------------
/s/ Lila Maria Bodnar /s/ Myron Dobrowolsky
- -------------------------------------- ----------------------------------
Lila Maria Bodnar Myron Dobrowolsky
Recording Secretary and Director Director
Date: March 30, 2000 Date: March 30, 2000
------------------------------- -----------------------------
/s/ Terry Gawryk /s/ George Kawka
- --------------------------------------- -----------------------------------
Terry Gawryk George Kawka
Secretary and Director Director
Date: March 30, 2000 Date: March 30, 2000
------------------------------- -----------------------------
/s/ Paul Nadzikewycz /s/ Jaroslav H. Sydorenko
- --------------------------------------- -----------------------------------
Paul Nadzikewycz Jaroslav H. Sydorenko
Chairman of the Board Director
Date: March 30, 2000 Date: March 30, 2000
------------------------------- -----------------------------
/s/ Chrysta Wereszczak /s/ Harry Kucewicz
- --------------------------------------- -----------------------------------
Chrysta Wereszczak Harry Kucewicz
Director Principal Financial and Accounting
Officer
Date: March 30, 2000 Date: March 30, 2000
------------------------------- -----------------------------
41
<PAGE>
EXHIBIT INDEX
<TABLE>
Reference to
Prior Filing
Regulation or Exhibit
S-K Number
Exhibit Attached
Number Document Hereto
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, liquidation or succession None
3(a) Certificate of Incorporation *
3(b) By-Laws **
4 Instruments defining the right of security holders, including debentures *
9 Voting Trust Agreement None
10 Executive Compensation Plans and Arrangements
(a) Employment Agreement between Julian E. Kulas and the Bank. *
(b) Change-In-Control Severance Agreement between Harry I. *
Kucewicz and the Bank
(c) Change-In-Control Severance Agreement between Mary H. *
Korb and the Bank
(d) Change-In-Control Severance Agreement between Irene S. Subota *
and the Bank
(e) Change-In-Control Severance Agreement between Adrian *
Hawryliw
and the Bank
(f) 1998 Stock Option and Incentive Plan ***
(g) 1998 Recognition and Retention Plan ***
11 Statement re: computation of per share earnings None
12 Statement re: computation of ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountants None
18 Letter re: change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote of security holders None
23 Consent of Independent Auditor Not Required
24 Power of Attorney Not Required
27 Financial Data Schedule 27
99 Additional Exhibits None
</TABLE>
- ---------------
* Filed as an Exhibit to the Company's Form S-1 Registration
Statement filed on July 21, 1997 (File No. 333-31739) pursuant to Section
5 of the Securities Act of 1933. All of such previously filed documents
are hereby incorporated herein by reference in accordance with Item
601 of Regulation S-K.
<PAGE>
** Filed as an Exhibit to the Company's Form 10-Q Quarterly Report filed
on November 15,1999 (File No. 000-23063) pursuant to Section 12 of the
Securities Exchange Act of 1934. All of such previously filed documents
are hereby incorporated by reference in accordance with Item 601 of
Regulation S-K.
*** Filed as an Exhibit to the Company's Definitive Proxy Statement on
Schedule 14A on March 24, 1998 (File No. 0-23063). All of such
previously filed documents are hereby incorporated herein by reference
in accordance with Item 601 of Regulation S-K.
- -------------------------------------------------------------------------------
1999 ANNUAL REPORT
- -------------------------------------------------------------------------------
[LOGO]
FIRST SECURITYFED FINANCIAL, INC.
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
President's Message............................................... .......... 1
Selected Consolidated Financial Information.................................. 3
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 5
Consolidated Financial Statements.............................................20
Stockholder Information.......................................................48
Corporate Information.........................................................49
2
<PAGE>
- --------------------------------------------------------------------------------
FROM YOUR PRESIDENT
- --------------------------------------------------------------------------------
To Our Stockholders, Depositors and Friends,
The century date change came and went, and the banking industry's
preparations made January 1, 2000 a non-event, at least as far as the dreaded
"Y2K Bug" was concerned. Our Company has also committed extensive time and
resources to the readiness effort of Y2K which helped make the rollover period a
smooth one. Now, it is my pleasure to present to you the Annual Report of First
SecurityFed Financial, Inc and its subsidiary 1st Security Federal Savings Bank
for the period ended December 31, 1999.
As you review the financial pages of this report you will find that First
SecurityFed Financial, Inc. had another banner year. Our total assets as of
December 31, 1999 increased to $372.3 million as compared to $338.1 million at
December 31, 1998, an increase of $34.2 million or 10.12%. Consolidated net
income for 1999 was a record $5.7 million or $1.14 per share, as compared to
$5.3 million or $0.93 per share in 1998. This 22.6% increase in earnings per
share was primarily attributable to higher net interest income, asset growth and
relatively low non-interest expense. The Company's return on equity increased to
6.82% in 1999, a substantial increase from 5.97% in 1998. I am also pleased to
report that for the second consecutive year the Company was able to maintain its
efficiency ratio at 40%.
The Loan Department had another strong year, originating $79.5 million in
new loans and increasing loans receivables by $22.9 million. The level of
non-performing assets as a percentage of total assets increased slightly from
0.30% in 1998 to 0.37% in 1999. The construction loan program that we initiated
towards the latter part of 1998 has been well received in our gentrifying
communities and we are originating an increasing number of such loans.
In 1999, publicly-traded community financial institutions experienced
further downward pressure on their stock prices and our stock was no exception.
However, we believe that, in the long run our continued growth, positive
earnings, increased return on equity and other sound fundamentals should
ultimately translate into solid investment performance. We continue to review
our opportunities to enhance shareholder value, including an aggressive stock
buy-back program. The Company has repurchased over 20% of its outstanding stock
at substantially below book value since the conversion in October 1997. We are
currently engaged in our 5th repurchase program and intend to purchase another
5% of our outstanding stock. In March 2000 the Company declared a quarterly
dividend of $0.12 per share. We will continue to evaluate future stock
repurchases and dividends based on their effects on shareholder value including
return on equity and book value per share.
Community financial institutions continue to face new challenges.
Competition in the financial market place continues to intensify. We need to
pursue new lines of business and find new ways to reach customers. With Y2K
behind us, we can now focus on other strategic technology issues, in particular,
pursuing new customers via the Internet. The Company remains committed to
1
<PAGE>
serving the increasing needs of our customers and our communities. Personal and
efficient service has always been and shall always remain its primary mission.
Our continued personal involvement in various community activities and the
charitable donations made by The Heritage Foundation of First Security Federal
Savings Bank to numerous charitable and civic organizations result in a
priceless asset, and a special bond with loyalty of our communities.
1999 was a very successful year for First SecurityFed Financial, Inc, a
year in which we increased returns to the Company while building shareholder
value. I want to thank our employees, Directors, and Officers for achieving that
goal. Above all I want to thank you, our shareholders and our customers, for
your support and encouragement.
Sincerely,
Julian E. Kulas
President and Chief Executive Officer
2
<PAGE>
SELECTED FINANCIAL INFORMATION
Set forth below are selected financial and other data of First SecurityFed
Financial, Inc. and, prior to October 30, 1997, for First Security Federal
Savings Bank. The financial data is derived in part from and should be read in
conjunction with the Consolidated Financial Statements and Notes of the Company
presented elsewhere in this Annual Report.
<TABLE>
At December 31,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ----------------------------------
Total assets....................................$372,292 $ 338,050 $315,849 $258,115 $251,922
Cash and cash equivalents....................... 6,257 24,830 30,090 7,300 19,173
Loans receivable, net(1)........................ 241,168 218,311 186,259 163,348 144,566
Mortgage-backed securities:
Held-to-maturity.............................. 7,577 11,587 18,551 24,109 25,120
Available-for-sale............................ 9,410 12,410 16,733 19,727 20,044
Investment securities:
Held-to-maturity.............................. 85,331 46,680 38,471 25,779 20,566
Available-for-sale............................ 11,212 13,933 15,728 8,997 13,743
Deposits........................................ 238,123 220,495 210,100 219,505 209,387
Total borrowings................................ 46,300 29,000 10,000 4,000 10,000
Shareholders equity............................. 83,156 84,587 91,872 29,261 29,038
</TABLE>
(1) The allowance for loan losses at December 31, 1999, 1998, 1997, 1996, and
1995, was $2,315,000, $2,069,000, $1,828,000, $1,520,000, and $885,000,
respectively.
<TABLE>
Year Ended December 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income..............................$25,285 $24,059 $20,674 $19,006 $17,650
Total interest expense............................. 11,037 10,296 10,129 9,494 8,727
------- --------- ------- -------- -------
Net interest income.............................. 14,248 13,763 10,545 9,512 8,923
Provision for loan losses.......................... 246 246 738 706 136
-------- --------- -------- --------- --------
Net interest income after provision for loan
losses........................................... 14,002 13,517 9,807 8,806 8,787
Fees and service charges........................... 368 416 371 362 378
Gain (loss) on sales of mortgage-backed
securities and investment securities............. 12 40 (32) 55 24
Other non-interest income.......................... 430 356 253 328 454
------- --------- ------- --------- --------
Total non-interest income.......................... 810 812 592 745 856
Total non-interest expense......................... 6,102 5,887 7,557(1) 8,693(2) 4,690
-------- --------- ------ -------- ------
Income (loss) before taxes and cumulative effect... 8,710 8,442 2,842 858 4,953
Income tax provision .............................. 3,028 3,098 1,017 406 1,760
-------- --------- -------- --------- -------
Net income........................................ $5,682 $5,344 $1,825 $ 452 $3,193
======== ======= ====== ======== ======
</TABLE>
(1) Includes $2.5 million accrual for stock contribution to the Foundation.
(2) Includes $1.3 million SAIF special assessment and $2.5 million cash
contribution to the Foundation.
3
<PAGE>
<TABLE>
Year Ended December 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
- -----------------------------------------
Performance Ratios:
Return on assets (ratio of net income to
average total assets)........................ 1.56% 1.62% 6.4% .18% 1.34%
Return on equity (ratio of net income to
average equity).............................. 6.82 5.97 4.66 1.50 11.64
Dividend payout ratio . . . . . . . . . . . . 35.08 7.62 --- --- ---
Interest rate spread information:
Average during period......................... 3.31 3.19 3.34 3.51 3.61
Net interest margin(1)........................ 4.36 4.37 3.97 3.98 4.00
Ratio of operating expense to average total
assets....................................... 1.68 1.79 2.66 3.45 1.97
Efficiency Ratio(2)........................... .40 .40 .68 .85 .48
Ratio of average interest-earning assets to
average interest-bearing liabilities........ 132.19 135.90 116.50 111.81 109.93
Quality Ratios:
Non-performing assets to total assets at end
of period.................................... .37 .30 .46 1.44 1.11
Allowance for loan losses to non-performing 24
loans at end of period....................... 166.19 203.24 124.86 41.30 38.73
Allowance for loan losses to gross loans
receivable at end of period.................. .96 .93 .96 .91 .60
Capital Ratios:(3)
Equity to total assets at end of period....... 22.34 25.03 29.10 11.42 11.52
Average equity to average assets.............. 22.90 27.18 13.81 11.97 11.55
(1) Net interest income divided by average interest-earning assets.
(2 The efficiency ratio represents non-interest expense divided by the
sum of net interest income and non-interest income.
(3) Ratio is exclusive of unrealized gain (loss) on securities
available-for-sale.
</TABLE>
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
First SecurityFed Financial, Inc. (the "Company") became the holding
company for First Security Federal Savings Bank (the "Bank") upon the completion
of the conversion of the Bank from a federally chartered mutual savings bank to
a federally chartered stock savings bank (the "Conversion") on October 30, 1997.
Concurrent with the Conversion, the Company sold 6,408,000 shares of its common
stock in a subscription offering at a price of $10 per share, resulting in net
proceeds (after giving effect to an adjustment to capital resulting from the
establishment of a leveraged employee stock ownership plan) of $57.8 million.
The financial condition and operating results of the Company are primarily
dependent upon the financial condition and operating results of the Bank. The
Company's primary business activity to date has been limited to its ownership of
the Bank and a portfolio of investment securities.
The Bank is a financial intermediary engaged primarily in attracting
deposits from the general public and using such deposits to originate
one-to-four family residential mortgages and, to a significantly lesser extent,
multi-family, consumer and other loans primarily in its market area. The Bank
also uses these deposits to acquire mortgage backed and other investment
securities. The Bank's revenues are derived principally from interest earned on
loans and mortgage-backed and other investment securities. The operations of the
Bank are influenced significantly by general economic conditions and by policies
of financial institution regulatory agencies, including the OTS and FDIC. The
Bank's cost of funds is influenced by interest rates on competing investments
and general market interest rates. Lending activities are affected by the demand
for financing of real estate and other types of loans, which in turn is affected
by the interest rates at which such financings may be offered.
The Bank's net interest income is dependent primarily upon the difference
or spread between the average yield earned on loans receivable and securities ,
and the average rate paid on deposits, as well as the relative amounts of such
assets and liabilities. The Bank, like other thrift institutions, is subject to
interest rate risk to the degree that its interest-bearing liabilities mature or
reprice at different times, or on a different basis, than its interest-earning
assets.
Business Strategy
The Bank seeks to obtain a competitive advantage in its deposit gathering
and lending operations by maintaining a high level of community involvement and
by offering a high level of personal service.
In its deposit gathering operations, the Bank uses community outreach and
customer service in an attempt to build and maintain passbook and other
non-certificate accounts. These accounts generally carry lower costs than
certificate accounts and are believed to represent primarily "core"
5
<PAGE>
deposits that are less vulnerable to interest rate changes (and competition from
other financial products) than certificate accounts.
In its lending operations, the Bank seeks to obtain high quality
residential and, to a lesser extent, other loans by maintaining a high level of
local visibility, offering a high level of customer service and limiting its
secondary market activities. The Bank's one- to four-family residential loan
balances have increased significantly in recent years as a result of these
efforts. At the same time, asset quality has remained high.
Primarily as a result of its cost of funds and it loan yields, the Bank has
been profitable since 1964. The Board has sought to enhance the Bank's
profitability by controlling expenses and maintaining a relatively steady level
of loan and deposit growth.
Comparison of Financial Condition at December 31, 1999 and December 31, 1998
Total assets at December 31, 1999 were $372.3 million compared to $338.1
million at December 31, 1998, an increase of $34.2 million or 10.12%. The
increase in total assets was due primarily to an increase in loans receivable of
$22.9 million and an increase in securities of $28.9 million. These increases in
assets were partially offset by a decrease of $18.5 million in cash and cash
equivalents. Funding for the increase in assets was provided by increases in
Federal Home Loan Bank Advances and Deposits.
Total liabilities at December 31, 1999 were $289.1 million compared to
$253.5 million at December 31, 1998, an increase of $35.6 million or 14.04%. The
increase in liabilities was due primarily to increases of $17.6 million in
deposits and $17.3 million in Federal Home Loan Bank advances along with a
$400,000 increase in advance payments by borrowers for taxes and insurance.
Total equity at December 31, 1999 was $83.2 million compared to $84.6
million at December 31, 1998 a decrease of $1.4 million. The decrease was
primarily due to the Company's repurchase of outstanding common stock of $5.7
million and $2.0 million of dividends paid. The decrease was primarily offset by
net income of $5.7 million.
Comparison of Operating Results for the Years Ended December 31, 1999 and
December 31, 1998
General. Net income for the year ended December 31, 1999 was $5.7 million
compared to net income of $5.3 million for the year ended December 31, 1998, an
increase of $400,000. The increase was primarily due to an increase of $485,000
in net interest income and a $70,000 decrease in the income tax provision. This
increase in income were partially offset by a $215,000 increase in noninterest
expense.
Interest Income. Interest income for the year ended December 31, 1999 was
$25.3 million compared to $24.1 million for the year ended December 31, 1998 an
increase of $1.2 million or 4.98%. The increase was primarily due to an increase
in the average balance of interest earning
6
<PAGE>
assets from $315.3 million for the year ended December 31, 1998 to $338.6
million for the year ended December 31, 1999 due to the continuing investment of
cash and a strong demand for loans due to the favorable interest rate
environment. The average balance of loans increased $21.2 million to $228.8 for
the year ended December 31, 1999 from $207.6 million for the year ended December
31, 1998. In addition, the average balance of municipal and government agency
securities increased by $16.0 million, but were partially offset by a $8.3
million decrease in mortgage backed securities. The average yield on interest
earning assets remained fairly constant at 7.63% for the year ended December 31,
1998 and 7.62% for the year ended December 31, 1999.
Interest Expense. Interest expense for the year ended December 31, 1999 was
$11.0 million compared to $10.3 million for the year ended December 31, 1998, an
increase of $741,000 or 7.20%. This increase was primarily due to an increase in
the average balance of interest-bearing liabilities of $24.1 million from $232.0
million for the year ended December 31, 1998 to $256.1 million for the year
ended December 31, 1999. This was partially offset by a decrease in the average
cost of funds from 4.44% for the year ended December 31, 1998 to 4.31% for the
year ended December 31, 1999.
Net interest Income. Net interest income of $14.2 million for the year
ended December 31, 1999 represented an increase of $485,000 from the $13.8
million reported for the year ended December 31, 1998. The ratio of interest
earning assets to interest bearing liabilities remained fairly consistent,
however the spread increased to 3.31% for 1999 from 3.19% for 1998.
Provision for Loan Losses. The provision for loan losses for the year ended
December 31, 1999 was $246,000 and remained consistent with the year ended
December 31, 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.
Non-Interest Income. Non-interest income for the year ended December 31,
1999 was $810,000 compared to $812,000 for the year ended December 31, 1998 and
remained fairly consistent.
Non-Interest Expense. Non-interest expense was $6.1 million for the year
ended December 31, 1999 compared to $5.9 million for the year ended December 31,
1998, an increase of $215,000 or 3.65%. The increase was primarily due to a
$334,000 increase in compensation and benfits expense and a $71,000 increase in
other expenses.
7
<PAGE>
Compensation expense increased due to the RRP expense allocation for a full
year as compared to eight months in 1998. Other expenses increased primarily due
to a higher franchise tax for the state of Delaware. The increases were
partially offset by a decrease in data processing expense of $139,000 due to the
computer conversion which was completed in August 1998, and a $37,000 decrease
in occupancy and equipment due to a $26,000 refund for property taxes and a
decrease in the provision for property taxes due to reassessments.
Income Taxes. The provision for income taxes was $3.0 million for the year
ended December 31, 1999 compared to $3.1 million for the year ended December 31,
1998.
Comparison of Operating Results for the Years Ended December 31, 1998 and
December 31, 1997
General. Net income for the year ended December 31, 1998 was $5.3 million
compared to net income of $1.8 million for the year ended December 31, 1997, an
increase of $3.5 million. The increase was primarily due to increases of $3.3
million in net interest income and $220,000 in noninterest income along with
decreases of $492,000 in the provision for loan losses and $1.7 million in
noninterest expense. These were partially offset by a $2.1 million increase in
the provision for income taxes.
Interest Income. Interest income for the year ended December 31, 1998 was
$24.1 million compared to $20.7 million for the year ended December 31, 1997, an
increase of $3.4 million or 16.43%. The increase was primarily due to an
increase in the average balance of interest earning assets from $265.9 million
for the year ended December 31, 1997 to $315.3 million for the year ended
December 31, 1998 due to the continuing investment of proceeds from the initial
stock offering in October 1997 and strong demand for loans due to the prevailing
favorable interest rate environment. The average balance of loans increased
$34.8 million to $207.6 for the year ended December 31, 1998 from $172.8 million
for the year ended December 31, 1997. In addition, the average balances of
municipal and government agency securities increased by $33.9 million, but were
partially offset by a $17.7 million decrease in mortgage backed securities and
mutual funds. These increases in average balances were also offset by a decrease
in the average yield on interest earning assets of 15 basis points from 7.78%
for the year ended December 31, 1997 to 7.63% for the year ended December 31,
1998 primarily as a result of a decrease in loan interest rates due to
competitive market conditions and an overall decline in interest rates in the
local economy.
Interest Expense. Interest expense for the year ended December 31, 1998 was
$10.3 million compared to $10.1 million for the year ended December 31, 1997, an
increase of $167,000 or 1.65%. The increase was primarily due to an increase in
the average balance of interest-bearing liabilities of $3.8 million from $228.2
million for the year ended December 31, 1997 to $232.0 million for the year
ended December 31, 1998. The average cost of funds remained steady at 4.44% for
both years.
Net Interest Income. Net interest income of $13.8 million for the year
ended December 31, 1998 represented an increase of $3.3 million from the $10.5
million reported for the year ended December 31, 1997. The increase in net
interest income was primarily due to an increase in the ratio
8
<PAGE>
of interest earning assets to interest bearing liabilities from 116.5% for the
year ended December 31, 1997 to 135.90% for the year ended December 31, 1998 due
primarily to the investment of the proceeds from the initial stock offering in
October 1997 and strong demand for loans due to the prevailing favorable
interest rate environment. As a result, the net interest margin increased by 40
basis points to 4.37% for the year ended December 31, 1998 from 3.97% for the
year ended December 31, 1997.
Provision for Loan Losses. The provision for loan losses for the year ended
December 31, 1998 was $246,000 compared to $738,000 for the year ended December
31, 1997. A majority of the provision for loan losses in 1997 was related to
various loans to the Bennett Funding Group, Inc. which were secured by equipment
leases which were paid in full during the year. However, the Bank experienced
significant loan growth during 1998 and 1997, which resulted in the continuing
provision of the allowance for loan losses. Gross loans increased $32.3 million
or 17.03% from 1997. The allowance for loan losses represented 0.93% and 0.96%
of gross loans receivable at December 31, 1998 and 1997, respectively.
The amount of the provision and allowance for estimated losses on loans is
influenced by current economic conditions, actual loss experience, industry
trends and other factors, including real estate values, in the Bank's market
area. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for estimated
losses on loans. Such agencies may require the Bank to provide additions to the
allowance based upon judgements which differ from those of management. Although
management uses the best information available and maintains the Bank's
allowance for losses at a level it believes adequate to provide for losses,
future adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Bank's control.
Non-Interest Income. Non-interest income for the year ended December 31,
1998 was $812,000 compared to $592,000 for the year ended December 31, 1997, an
increase of $220,000 or 37.16%. The increase was the result of a $45,000
increase in deposit service charges due to the implementation of ATM surcharges
along with a $99,000 increase in other income largely related to fees on loans
which were repaid prior to their contractual maturity. There was also a $72,000
net increase in the gain on sales and redemptions of securities.
Non-Interest Expense. Non-interest expense was $5.9 million for the year
ended December 31, 1998 compared to $7.6 million for the year ended December 31,
1997, a decrease of $1.7 million or 22.37%. The decrease was due primarily to a
$2.5 million decrease in charitable and foundation contributions partially
offset by increases of $619,000 in compensation and benefits expense and
$184,000 in data processing expense. The decrease in charitable contributions
expense was due to a $2.5 million expense in 1997 related to a commitment to
make contributions to the Heritage Foundation of First Security Federal Savings
Bank. Compensation and benefits expense increased due to the implementation of
the ESOP plan in October 1997 and the RRP plan in May 1998 and the resultant
expense due to the allocation of shares to participants. Data processing expense
increased due to increases in the numbers of deposit and loan accounts and
expenses associated with the Bank's computer conversion which was completed in
August 1998.
9
<PAGE>
Income Taxes. The provision for income taxes was $3.1 million for the year
ended December 31, 1998 compared to $1.0 million for the year ended December 31,
1997. The increase was due to an increase of $5.6 million in pre-tax income.
10
<PAGE>
The following table presents, for the periods indicated, the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. A tax equivalent of 34% was used to compute
the yield on municipal securities. No other tax equivalent adjustments were
made. All average balances for 1999 are daily average balances. All other years
are monthly average balances. Non-accruing loans have been included in the table
as loans carrying a zero yield.
<TABLE>
Year Ended December 31,
-------------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)............ $ 228,768 $ 18,642 8.15% $ 207,629 $17,141 8.26% $172,810 $14,669 8.49%
Mortgage-backed securities &
CMOs(1).................... 20,498 1,295 6.32 28,795 1,942 6.74 44,780 3,157 7.05
Mutual funds(1)................ 3,172 179 5.64 3,172 188 5.93 4,897 278 5.68
Agencies/Other(1).............. 58,876 3,745 6.36 50,686 3,389 6.69 22,071 1,333 6.04
Municipal securities(1)........ 18,684 1,477 7.91 10,889 812 7.46 5,565 442 7.94
Federal funds sold............. 2,666 123 4.61 7,337 395 5.38 11,179 646 5.78
Deposits with other institutions 3,744 181 4.83 4,803 338 7.04 2,761 176 6.37
FHLB stock..................... 2,176 145 6.66 1,985 130 6.55 1,797 123 6.84
--------- -------- --------- ------- --------- ---------
Total interest-earning assets 338,584 25,787 7.62 315,296 24,335 7.72 265,860 20,674 7.83
Non-interest earning assets..... 25,128 13,962 17,810
--------- -------- ---------
Total assets................ $363,712 $329,258 $283,670
========= ======== ========
Interest-Bearing Liabilities:
Money market................... $ 4,180 119 2.85 $ 4,962 139 2.80 $ 5,169 159 3.08
NOW............................ 11,928 234 1.96 11,045 245 2.22 10,176 217 2.13
Passbook savings............... 76,259 2,350 3.08 71,494 2,163 3.03 76,391 2,281 2.99
Certificates of Deposit........ 129,163 6,463 5.00 122,835 6,644 5.41 126,917 6,972 5.49
Advances....................... 34,607 1,871 5.41 21,667 1,105 5.10 9,548 500 5.24
--------- ------- --------- -------- --------- -------
Total interest-bearing liabilities 256,137 11,037 4.31 232,003 10,296 4.44 228,201 10,129 4.44
------- --------- --------
Non-interest bearing liabilities 24,277 7,754 16,299
--------- ----------- - ---------
Total liabilities 280,414 239,757 244,500
Equity.......................... 83,298 89,501 39,170
-------- ----------- ----------
Total liabilities and equity. $363,712 $ 329,258 $283,670
======== ========= ========
Net interest-earning spread..... $ 14,750 3.31% $13,763 3.19% $10,545 3.34%
======== ===== ======= ===== ======= ----
Margin.......................... 4.36% 4.37% 3.97%
===== ====== ----
Assets to liabilities........... 132.19% 135.90% 116.50%
======= ====== ======
</TABLE>
(1) Calculated based on amortized cost.
11
<PAGE>
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and that due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
Year Ended December 31,
------------------------------------------------------------------------------------
1998 vs. 1999 1997 vs. 1998 1996 vs. 1997
------------------------------------------------------------------------------------
Increase Increase Increase
(Decrease) Total (Decrease) Total (Decrease) Total
Due to Increase Due to Increase Due to Increase
------------------------------------------------------------------------------------
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable..............................$1,725 $(224) $ 1,501 $2,884 $(412) $2,472 $1,755 $(154) $1,601
Mortgage-backed securities & CMO's............ (531) (116) (647) (1,083) (132) (1,215) (230) (286) (516)
Mutual funds.................................. - (9) (9) (102) 12 (90) (50) (10) (60)
Agencies and other............................ 527 (171) 356 1,899 157 2,056 (38) 45 7
Municipal securities.......................... 614 51 665 263 (19) 244 42 (27) 15
Federal funds sold............................ (222) (50) (272) (209) (42) (251) 542 (14) 528
Deposits with other institutions.............. (65) (92) (157) 142 20 162 53 28 81
FHLB stock.................................... 13 2 15 12 (5) 7 10 2 12
-------- ------- ------- ------- ------- ------- ------- ------ -------
Total interest-earning assets............. 2,061 (609) 1,452 3,806 (421) 3,385 2,084 (416) 1,668
Interest-bearing liabilities:
Money market.................................. (22) 2 (20) (6) (14) (20) (4) (4) (8)
NOW........................................... 19 30) (11) 19 9 28 8 7 15
Passbook Savings.............................. 146 41 187 (148) 30 (118) 180 (19) 161
Certificates of deposit....................... 332 (513) (181) (222) (106) (328) 116 29 145
Advances...................................... 696 70 766 618 (13) 605 326 (4) 322
------ ----- ----- ----- ------ ------ ------- ------ --------
Total interest bearing liabilities...........1,171 (430) 741 261 (94) 167 626 9 635
----- ------ ----- ------ ------- ------- ------ --------
Net interest/spread.......................... $890 $(179) $711 $ 3,545 (327) $3,218 $1,458 $(425) $1,033
==== ====== ==== ======== ====== ======= ====== ===== =======
</TABLE>
12
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
In an attempt to manage its exposure to changes in interest rates,
management monitors the Company's interest rate risk. The Board of
Directorsreviews at least quarterly the Company's interest rate risk position
and profitability. The Board of Directors also reviews the Company's portfolio,
formulates investment strategies and oversees the timing and implementation of
transactions to assure attainment of the Company's objectives in the most
effective manner. In addition, the Board reviews on a quarterly basis the
Company's asset/liability position, including simulations of the effect on the
Company's capital of various interest rate scenarios.
In managing its asset/liability mix, the Company, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, often places more emphasis on managing short term net
interest margin than on better matching the interest rate sensitivity of its
assets and liabilities in an effort to enhance net interest income. Management
believes that the increased net interest income resulting from a mismatch in the
maturity of its asset and liability portfolios can, during periods of declining
or stable interest rates, provide high enough returns to justify the increased
exposure to sudden and unexpected increases in interest rates.
The Board has taken a number of steps to manage the Company's vulnerability
to changes in interest rates. First, the Company has long used community
outreach, customer service and marketing efforts to increase the Company's
passbook and other non-certificate accounts. At December 31, 1999, $97.1 million
or 40.8% of the Company's deposits consisted of passbook, NOW and money market
accounts. The Company believes that these accounts represent "core" deposits
which are generally somewhat less interest rate sensitive than other types of
deposit accounts. Second, while the Company continues to originate 30 year fixed
rate residential loans for portfolio as a result of consumer demand, an
increasing proportion of the Company's residential loans have terms of 15 years
or less or carry adjustable interest rates. Third, the Company has focused a
significant portion of its investment activities on securities with adjustable
interest rates or terms of five years or less. At December 31, 1999, $10.3
million or 60.6% 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 $19.7 million or
20.4% of the Company's other securities had adjustable interest rates or terms
to maturity of five years or less. Finally, the Company has recently begun to
increase its originations of construction, multi-family, and commercial real
estate loans. These loans generally have shorter terms to maturity than
one-to-four family residential loans.
Management utilizes the net portfolio value ("NPV") analysis to quantify
interest rate risk. In essence, this approach calculates the difference between
the present value of liabilities, expected cash flows from assets and cash flows
from off balance sheet contracts. Presented below, as of December 31, 1999, 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.
13
<PAGE>
<TABLE>
Assumed Change $ Change in % Change
in Interest Rates $ Amount NPV in NPV
- --------------------- ----------------- ------------------ -------------
(Basis Points) (Dollars in Thousands)
<S> <C> <C> <C> <C>
+300 $48,492 $(26,478) (35)%
+200 57,325 (17,645) (24)
+100 66,365 ( 8,605) (11)
--- 74,970 --- ---
-100 82,036 7,066 9
-200 88,452 13,482 18
-300 94,645 19,675 26
</TABLE>
Certain assumptions utilized in assessing the interest rate risk of thrift
institutions were employed in preparing the preceding table. These assumptions
relate to interest rates, loan prepayment rates, deposit decay rates, and the
market values of certain assets under the various interest rate scenarios. It
was also assumed that delinquency rates will not change as a result of changes
in interest rates although there can be no assurance that this will be the case.
Even if interest rates change in the designated amounts, there can be no
assurance that the Company's assets and liabilities would perform as set forth
above. In addition, a change in U.S. Treasury rates in the designated amounts
accompanied by a change in the shape of the Treasury yield curve would cause
significantly different changes to the NPV than indicated above.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits and proceeds from
principal and interest payments on loans and mortgage-backed securities. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition. First Security
generally manages the pricing of its deposits to be competitive and to increase
core deposit relationships.
Liquidity management is both a daily and long-term responsibility of
management. First Security adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-earning deposits and investment
securities, and (iv) the objectives of its asset/liability management program.
Excess liquid assets are invested generally in interest-earning overnight
deposits and short- and intermediate-term U.S. Government and agency obligations
and mortgage-backed securities of short duration. If First Security requires
funds beyond its ability to generate them internally, it has additional
borrowing capacity with the FHLB of Chicago.
Federal regulations require First Security to maintain minimum levels of
liquid assets. The required percentage has varied from time to time based upon
economic conditions and savings flows and is currently 4% of net withdrawable
savings deposits and borrowings payable on demand or in 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
14
<PAGE>
historically maintained its liquidity ratio for regulatory purposes at levels in
excess of those required. At December 31, 1999, First Security's liquidity ratio
for regulatory purposes was 9.19%.
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 $6.5 million, $7.4
million and $2.8 million for the years ended December 31, 1999, 1998, and 1997,
respectively. Net cash used in investing activities consisted primarily of
disbursements for loan originations and the purchase of investments and
mortgage-backed securities, offset by principal collections on loans, proceeds
from maturation and sales of securities and paydowns on mortgage-backed
securities. Net cash from financing activities consisted primarily from
increases in net deposits and advances from FHLB of Chicago partially offset by
purchases of Treasury Stock in 1999 and 1998.
The Company's most liquid assets are cash and short-term investments. The
levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At December 31, 1999,
cash and short-term investments totaled $6.3 million. The Company has other
sources of liquidity if a need for additional funds arises, including securities
maturing within one year and the repayment of loans. The Company may also
utilize the sale of securities available-for-sale and FHLB advances as a source
of funds.
At December 31, 1999 the Company had outstanding commitments to originate
loans of $3.3 million, $344,000 of which had adjustable interest rates with the
remaining commitments having fixed interest rates. These loans are to be secured
by properties located in its market area. The Company anticipates that it will
have sufficient funds available to meet its current loan commitments. Loan
commitments have, in recent periods, been funded through liquidity or through
FHLB advances. Certificates of deposit which are scheduled to mature in one year
or less from December 31, 1999 totaled $122.7 million. Management believes,
based on past experience, that a significant portion of such deposits will
remain with the Company. Based on the foregoing, in addition to the Company's
high level of core deposits and capital, the Company considers its liquidity and
capital resources sufficient to meet its outstanding short-term and long-term
needs.
First Security is subject to various regulatory capital requirements
imposed by the OTS. At December 31, 1999, First Security was in compliance with
all applicable capital requirements on a fully phased-in basis. See Note 10 of
the Notes to Consolidated Financial Statements.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary impact of inflation on the
operations of the Company is reflected in increased operating costs. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates, generally, have
a more significant impact on a financial institution's performance than does
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
15
<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 beginning January 1,2001 with early adoption encouraged
for any fiscal quarter beginning July 1, 1998 or later, with no retroactive
application. Management adopted SFAS 133 effective January 1, 2000 and the
adoption did not have a significant impact on the Company's financial
statements.
Year 2000
The Company successfully completed its Year 2000 changeover without any
problems or disruptions to operations. While management believes that it is
unlikely, there can be no assurance that problems not yet apparent to the
Company or its vendors will not arise as the year progresses. Management will
continue to monitor all business processes and relationships with third parties
to ensure that all processes continue to function properly. Total expenditures
on the Year 2000 project through December 31, 1999 were $583,000 which is
consistent with the amount that management estimated for the project.
Safe Harbor Statement
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies, and expectations of the Company, are
generally identifiable by use of the words "believe", "expect", "intend",
"anticipate", "estimate", "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Company and the subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions, the
legislative/regulatory situation, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
First SecurityFed Financial, Inc.
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of First
SecurityFed Financial, Inc. and its wholly-owned subsidiary as of December 31,
1999 and 1998, and the related consolidated statements of income, comprehensive
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First SecurityFed
Financial, Inc. and its wholly-owned subsidiary at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 4, 2000
17.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(Dollars in thousands, except share data)
<TABLE>
<S> <C> <C>
1999 1998
---- ----
ASSETS
Cash and due from banks $ 6,057 $ 15,641
Federal funds sold 200 9,189
------------ --------------
Total cash and cash equivalents 6,257 24,830
Time deposits in other financial institutions --- 200
Securities available-for-sale 20,622 26,343
Securities held-to-maturity (fair value: $89,850 in 1999
and $58,809 in 1998) 92,908 58,267
Loans receivable, net of allowance for loan losses 241,168 218,311
Federal Home Loan Bank stock, at cost 2,315 2,131
Premises and equipment, net 3,672 3,967
Accrued interest receivable 2,976 2,475
Intangible assets 190 236
Other assets 2,184 1,290
------------ ------------
Total assets $ 372,292 $ 338,050
============ ============
LIABILITIES
Deposits
Non-interest-bearing $ 6,089 $ 6,379
Interest-bearing 232,034 214,116
------------ ------------
238,123 220,495
Advance payments by borrowers for taxes and insurance 2,811 2,432
Advances from Federal Home Loan Bank 46,300 29,000
Accrued interest payable and other liabilities 1,902 1,536
------------ ------------
Total liabilities 289,136 253,463
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value per share, 500,000 shares
authorized, no shares issued and outstanding --- ---
Common stock, $0.01 par value per share, 8,000,000 shares
authorized, 6,408,000 shares issued 64 64
Additional paid-in capital 64,324 64,952
Unearned ESOP shares (4,239) (4,582)
Unearned stock awards (3,075) (3,810)
Treasury stock, at cost (979,360 shares in 1999 and
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financialstatements.
<PAGE>
<TABLE>
FIRST SECURITYFED FINANCIAL, INC.
<S> <C> <C>
553,488 shares in 1998) (13,227) (8,234)
Retained earnings, substantially restricted 39,914 36,225
Accumulated other comprehensive income (605) (28)
----------- ------------
Total shareholders' equity 83,156 84,587
- ----------- ------------
Total liabilities and shareholders' equity $ 372,292 $ 338,050
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
FIRST SECURITYFED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998, and 1997
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Interest and dividend income
Loans $ 18,642 $ 17,141 $ 14,669
Securities
Taxable 2,939 3,577 1,561
Tax-exempt 975 536 302
Mortgage-backed securities 2,279 1,942 3,198
Federal funds sold and other interest earning assets 450 863 944
---------- ---------- -------------
25,285 24,059 20,674
Interest expense
NOW and money market 353 384 376
Passbook savings 2,350 2,163 2,281
Certificates of deposit 6,463 6,644 6,972
Federal Home Loan Bank advances 1,871 1,105 500
---------- ---------- ----------
11,037 10,296 10,129
---------- ---------- ----------
Net interest income 14,248 13,763 10,545
Provision for loan losses 246 246 738
---------- ---------- ----------
Net interest income after provision for loan losses 14,002 13,517 9,807
Noninterest income
Deposit service charges 368 416 371
Insurance commissions 53 45 47
Net gain (loss) on sales and calls of securities 12 40 (32)
Other income 377 311 206
---------- ---------- ----------
810 812 592
Noninterest expense
Compensation and benefits 3,622 3,288 2,669
Occupancy and equipment 695 732 679
Data processing 342 481 297
Federal insurance premiums 204 212 183
Charitable and foundation contributions 3 9 2,557
Other expense 1,236 1,165 1,172
---------- ---------- ----------
6,102 5,887 7,557
---------- ---------- ----------
Income before income taxes 8,710 8,442 2,842
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
FIRST SECURITYFED FINANCIAL, INC.
<S> <C> <C> <C>
Income tax expense 3,028 3,098 1,017
---------- ---------- ----------
Net income $ 5,682 $ 5,344 $ 1,825
========== ========== ==========
Earnings (loss) per share
Basic and diluted $ 1.14 $ .93 $ (.11)
========== ========== =======
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4.
<PAGE>
<TABLE>
FIRST SECURITYFED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1999, 1998, and 1997
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Net income $ 5,682 $ 5,344 $ 1,825
Other comprehensive income
Unrealized holding gains and losses on securities
available-for-sale (933) 62 234
Less reclassification adjustments for gains and losses
recognized in income 12 40 (32)
---------- ----------- ------------
Net unrealized gain and losses (945) 22 266
Tax effect 368 (8) (104)
------------ ------------ ------------
(577) 14 162
------------ ------------ -----------
Comprehensive income $ 5,105 $ 5,358 $ 1,987
============== ============ ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
FIRST SECURITYFED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998, and 1997
(Dollars in thousands, except per share data)
Accumulated
Other Total
Additional Unearned Unearned Compre- Share-
Common Paid-in ESOP Stock Treasury Retained hensive holders'
Stock Capital SharesAwards StockEarnings IncomeEquity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1997 $ --- $ --- $ --- $ --- $ --- $29,465 $ (204) $29,261
Issuance of common stock,
net of conversion costs of
$1,130 and contribution of
stock to foundation 64 65,385 (5,126) --- --- --- --- 60,323
ESOP shares earned --- 110 191 --- --- --- --- 301
Net income --- --- --- --- --- 1,825 --- 1,825
Change in fair value of
securities, net of income
taxes and reclassification
effects --- --- --- --- --- --- 162 162
--------- -------- -------- -------- -------- -------- -------- --------
Balance at
December 31, 1997 64 65,495 (4,935) --- --- 31,290 (42) 91,872
Net income --- --- --- --- --- 5,344 --- 5,344
Stock awards allocated --- --- --- (4,277) 4,277 --- --- ---
ESOP shares earned --- 167 353 --- --- --- --- 520
Stock awards earned --- --- --- 467 --- --- --- 467
Issuance of stock to
Foundation, net of related
tax benefit --- (710) --- --- 775 --- --- 65
Purchase of treasury stock --- --- --- --- (13,286) --- --- (13,286)
Dividends ($.07 per share) --- --- --- --- --- (409) --- (409)
Change in fair value of
securities, net of income
taxes and reclassification
effects --- --- --- --- --- --- 14 14
--------- -------- -------- -------- -------- -------- -------- --------
Balance at
December 31, 1998 64 64,952 (4,582) (3,810) (8,234) 36,225 (28) 84,587
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
<TABLE>
FIRST SECURITYFED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998, and 1997
(Dollars in thousands, except per share data)
Accumulated
OtherTotal
Additional Unearned Unearned Compre- Share-
Common Paid-in ESOP Stock Treasury Retained hensive holders'
StockCapital SharesAward StockEarning IncomeEquity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income $ --- $ --- $ --- $ --- $ --- $ 5,682 $ --- $5,682
ESOP shares earned --- 60 343 --- --- --- --- 403
Stock awards earned --- --- --- 735 --- --- --- 735
Issuance of stock to
Foundation, net of related
tax benefit --- (688) --- --- 712 --- --- 24
Purchase of treasury stock --- --- --- --- (5,705) --- --- (5,705)
Dividends ($.38 per share) --- --- --- --- --- (1,993) --- (1,993)
Change in fair value of
securities, net of income
taxes and reclassification
effects --- --- --- --- --- --- (577) (577)
--------- -------- ------- -------- ------- -------- -------- --------
Balance at
December 31, 1999 $ 64 $64,324 $(4,239) $(3,075) $(13,227) $39,914 $ (605) $83,156
========= ======== ======== ======== ======== ======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
FIRST SECURITYFED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998, and 1997
(Dollars in thousands)
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Cash flows from operating activities
Net income $ 5,682 $ 5,344 $ 1,825
Adjustments to reconcile net income to net cash from
operating activities
Depreciation and amortization of intangibles 381 377 336
Net amortization of securities 190 168 173
Net (gain) loss on sales and calls of securities (12) (40) 32
Provision for loan losses 246 246 738
Net (gain) loss on real estate owned --- (3) 3
Deferred loan origination fees 11 (7) 26
Provision for deferred income taxes 26 (119) (888)
ESOP compensation expense 403 520 301
Stock award compensation expense 735 467 ---
Accrued charitable contribution of Company stock --- --- 2,500
Net change in
Accrued interest receivable (501) (404) (307)
Other assets (463) 571 (175)
Accrued interest payable and other liabilities (214) 235 (1,754)
--------- ---------- ----------
Net cash provided by operating activities 6,484 7,355 2,810
Cash flows from investing activities
Purchase of securities available-for-sale (1,062) (8,800) (10,184)
Purchase of securities held-to-maturity (50,311) (23,402) (24,684)
Proceeds from sales of securities available-for-sale 4,373 6,745 2,587
Proceeds from calls and maturities of securities 10,278 19,130 9,200
Net loan originations (23,180) (32,291) (23,914)
Principal payments on mortgage-backed and related securities 6,680 11,094 12,272
Change in time deposits in other financial institutions 200 --- ---
Purchase of Federal Home Loan Bank stock (184) (279) (179)
Property and equipment expenditures (40) (597) (44)
Real estate owned expenditures --- --- (35)
Proceeds from sale of real estate owned --- 53 261
--------- ---------- ----------
Net cash used in investing activities (53,246) (28,347) (34,720)
Cash flows from financing activities
Net change in deposits 17,628 10,395 (9,405)
Net change in advance payments by borrowers for taxes
and insurance 379 32 282
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
<TABLE>
FIRST SECURITYFED FINANCIAL, INC.
<S> <C> <C> <C>
Change in advances from Federal Home Loan Bank 17,300 19,000 6,000
Dividends paid (1,413) (409) ---
Purchase of treasury stock (5,705) (13,286) ---
Net proceeds from stock issuance --- --- 57,823
---------- ---------- ----------
Net cash provided by financing activities 28,189 15,732 54,700
---------- ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
<TABLE>
FIRST SECURITYFED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998, and 1997
(Dollars in thousands)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net change in cash and cash equivalents $ (18,573) $ (5,260) $ 22,790
Cash and cash equivalents at beginning of year 24,830 30,090 7,300
---------- ---------- ----------
Cash and cash equivalents at end of year $ 6,257 $ 24,830 $ 30,090
========== ========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 11,027 $ 10,292 $ 10,146
Income taxes 3,054 3,083 1,667
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Nature of Business: The consolidated financial
statements include the accounts of First SecurityFed Financial, Inc. (the
Company) and its wholly-owned subsidiary, First Security Federal Savings Bank
(the Bank), and the Bank's wholly-owned subsidiary, Western Security Service
Corporation. Significant intercompany accounts and transactions have been
eliminated. The only business of the Company is the ownership of the Bank. The
Bank's revenues primarily arise from interest income from real estate loans and
securities, with operations conducted through its main office and three branches
in Cook County, Illinois, and one branch in Philadelphia, Pennsylvania.
Use of Estimates: In preparing financial statements, management must make
estimates and assumptions. These estimates and assumptions affect the amounts
reported for assets, liabilities, income, and expenses, as well as affecting the
disclosures provided. Actual results could differ from the current estimates.
The collectibility of loans, fair values of financial instruments, and status of
contingencies are particularly subject to change.
Securities: Securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold those securities to maturity.
Accordingly, they are stated at cost, adjusted for amortization of premiums and
accretion of discounts. All other securities are classified as
available-for-sale since the Company may decide to sell those securities in
response to changes in market interest rates, liquidity needs, changes in yields
or alternative investments, and for other reasons. These securities are carried
at market value with unrealized gains and losses charged or credited, net of
income taxes, to a valuation allowance included as a separate component of
shareholders' equity. Realized gains and losses on disposition are based on the
net proceeds and the adjusted carrying amounts of the securities sold, using the
specific identification method.
Real Estate Owned: Real estate owned represents property obtained through
foreclosure or in settlement of debt obligations and is carried at the lower of
cost (fair value at date of foreclosure) or fair value less estimated selling
expenses. Valuation allowances are recognized when the fair value less selling
expenses is less than the cost of the asset. Changes in the valuation allowance
are charged or credited to income.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is maintained. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of loss
and the amount of loss on any loan is necessarily subjective. Accordingly, the
valuation allowance is maintained at levels considered adequate to cover losses
that are currently anticipated based on delinquencies, property appraisals, past
loss experience, general economic conditions, information about specific
borrower situations including their financial position, and other factors and
estimates which are subject to change over time. While management may
periodically allocate portions of the allowance for specific problem loan
situations, including impaired loans discussed below, the whole allowance is
available for any charge-offs that occur. Loans are charged off in whole or in
part when
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
management's estimate of the undiscounted cash flows from the loan are less than
the recorded investment in the loan, although collection efforts continue and
future recoveries may occur.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans considered to be impaired are reduced to the present value of expected
future cash flows or to the fair value of collateral, by allocating a portion of
the allowance for loan losses to such loans. If these allocations cause the
allowance for loan losses to require increase, such increase is reported as a
provision for loan losses.
Smaller balance homogenous loans are defined as residential first mortgage loans
secured by one-to-four- family residences, residential construction loans,
consumer loans, and share loans and are evaluated collectively for impairment.
Commercial real estate loans are evaluated individually for impairment. In
general, loans classified as doubtful or loss are considered impaired while
loans classified as substandard are individually evaluated for impairment.
Depending on the relative size of the credit relationship, late or insufficient
payments of 30 to 90 days will cause management to reevaluate the credit under
its normal loan evaluation procedures. While the factors to identify a credit
for consideration for impairment or nonaccrual status are similar, the
measurement considerations differ. A loan is impaired when management believes
it is probable they will be unable to collect all amounts due according to the
contractual terms of the loan agreement. A loan is placed on nonaccrual when
payments are more than 90 days past due unless the loan is adequately
collateralized and in the process of collection.
Recognition of Income on Loans: Interest on loans is accrued over the term of
the loans based upon the principal balance outstanding. Where serious doubt
exists as to the collectibility of a loan, the accrual of interest is
discontinued. The carrying values of impaired loans are periodically adjusted to
reflect cash payments, revised estimates of future cash flows, and increases in
the present value of expected cash flows due to the passage of time. Cash
payments representing interest income are reported as such. Other cash payments
are reported as reductions in carrying value, while increases or decreases due
to changes in estimates of future payments and due to the passage of time are
reported as adjustments to the allowance for loan losses. If these adjustments
cause the allowance for loan losses to require adjustment, such adjustment is
reported as an adjustment to the provision for loan losses.
Loan fees, net of direct loan origination costs, are deferred and amortized over
the contractual life of the loan as a yield adjustment.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the respective premises and equipment,
which are primarily thirty to fifty years for premises and five to ten years for
furniture, fixtures, and equipment. Maintenance and repairs are charged to
expense as incurred and improvements which extend the useful lives of assets are
capitalized.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill and Core Deposit Intangible: Goodwill and the core deposit intangibles,
included in other assets, result from the application of purchase accounting
principles to the acquisition of assets and assumption of liabilities from the
Resolution Trust Corporation. Goodwill represents the excess of acquisition cost
over the fair value of net assets of the branches and is amortized over 25 years
using the straight-line method. The premium paid to acquire core deposits is
being amortized over ten years on an accelerated method. Net intangible assets
at December 31, 1999 and 1998 aggregated $190,000 and $236,000, respectively.
Income Taxes: The provision for income taxes is based on an asset and liability
approach which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities. Income tax expense
is the total of the current year income tax due or refundable and the change in
deferred tax assets and liabilities.
Employee Stock Ownership Plan: The cost of shares issued to the ESOP but not yet
allocated to participants is presented in the consolidated balance sheet as a
reduction of shareholders' equity. Compensation expense is recorded based on the
market price of the shares as they are committed to be released for allocation
to participant accounts. The difference between the market price and the costs
of shares committed to be released is recorded as an adjustment to paid-in
capital.
Shares are considered outstanding for earnings per share calculations as they
are committed to be released; unallocated shares are not considered outstanding.
Statement of Cash Flows: Cash and cash equivalents include cash on hand, amounts
due from banks, and daily federal funds sold. The Company reports net cash flows
for customer loan transactions, deposit transactions, and time deposits in other
financial institutions.
Earnings Per Share: Basic earnings per share is computed by dividing net income
available to common shareholders by the weighted average number of shares
outstanding during the period. Diluted earnings per share is computed using the
weighted number of shares determined for the basic computation plus the number
of shares of common stock that would be issued assuming all contingently
issuable shares having a dilutive effect on earnings per share were outstanding
for the period.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available-for-sale, net of tax, which are also recognized
as separate components of equity.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
<TABLE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 2 - SECURITIES
The Company's securities at year-end are as follows:
.......................1999......................
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasury $ 259 $ 76 $ - $ 335
Municipal 7,806 - (436) 7,370
Corporate 250 - (20) 230
Mutual funds 3,172 - (174) 2,998
Other equity securities 369 - (90) 279
---------- ---------- ---------- ----------
11,856 76 (720) 11,212
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 4,741 2 (193) 4,550
Government National Mortgage Association 1,383 6 (18) 1,371
Federal National Mortgage Association 3,634 - (145) 3,489
---------- ---------- ---------- ----------
9,758 8 (356) 9,410
---------- ---------- ---------- ----------
$ 21,614 $ 84 $ (1,076) $ 20,622
========== ========== ========== ==========
.......................1999......................
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities held-to-maturity
U.S. government agencies $ 69,763 $ 69 $ (2,484) $ 67,348
Municipal 15,568 69 (649) 14,988
---------- ---------- ---------- ----------
85,331 138 (3,133) 82,336
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 1,846 16 (68) 1,794
Government National Mortgage Association 3,530 61 (20) 3,571
Federal National Mortgage Association 1,043 5 (19) 1,029
Collateralized mortgage obligations 1,158 - (38) 1,120
---------- ---------- ---------- ----------
7,577 82 (145) 7,514
---------- ---------- ---------- ----------
$ 92,908 $ 220 $ (3,278) $ 89,850
========== ========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
<TABLE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 2 - SECURITIES (Continued)
.......................1998......................
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. government and agencies $ 2,407 $ 170 $ - $ 2,577
Municipal 7,504 175 - 7,679
Corporate 250 - (8) 242
Mutual funds 3,172 22 (30) 3,164
Other equity securities 369 - (98) 271
---------- ---------- ---------- ----------
13,702 367 (136) 13,933
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 6,144 - (237) 5,907
Government National Mortgage Association 1,962 33 (12) 1,983
Federal National Mortgage Association 4,371 2 (64) 4,309
Collateralized mortgage obligations 211 - - 211
---------- ---------- ---------- ----------
12,688 35 (313) 12,410
---------- ---------- ---------- ----------
$ 26,390 $ 402 $ (449) $ 26,343
========== ========== ========== ==========
.......................1998......................
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities held-to-maturity
U.S. government agencies $ 41,504 $ 246 $ (14) $ 41,736
Municipal 5,176 276 - 5,452
---------- ---------- ---------- ----------
46,680 522 (14) 47,188
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 2,955 35 (146) 2,844
Government National Mortgage Association 4,975 159 (9) 5,125
Federal National Mortgage Association 1,474 14 (7) 1,481
Collateralized mortgage obligations 2,183 2 (14) 2,171
---------- ---------- ---------- ----------
11,587 210 (176) 11,621
---------- ---------- ---------- ----------
$ 58,267 $ 732 $ (190) $ 58,809
========== ========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 2 - SECURITIES (Continued)
Sales of securities are summarized as follows:
1999 1998 1997
------------ ------------ ------------
Proceeds $ 4,373 $ 6,745 $ 2,587
Gross realized gains 23 40 31
Gross realized losses 11 - 63
The carrying values and fair values of debt securities as of December 31, 1999,
by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
------------ ------------
Securities available-for-sale
Due after one year through five years $ 250 $ 230
Due after ten years 8,065 7,705
------------ ------------
8,315 7,935
Mutual funds 3,172 2,998
Other equity securities 369 279
Mortgage-backed securities
and collateralized
mortgage obligations 9,758 9,410
------------ ------------
13,299 12,687
------------ ------------
$ 21,614 $ 20,622
============ ============
Securities held-to-maturity
Due in one year or less $ 400 $ 399
Due after one year through five years 17,698 17,349
Due after five years through ten years 53,333 51,289
Due after ten years 13,900 13,298
------------ ------------
85,331 82,336
Mortgage-backed securities and collateralized
mortgage obligations 7,577 7,514
------------ ------------
(Continued)
18.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
$ 92,908 $ 89,850
============ ============
(Continued)
19.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 2 - SECURITIES (Continued)
Securities in the amount of $15,596,000 and $250,000 were pledged to secure
government deposits at December 31, 1999 and 1998.
NOTE 3 - LOANS RECEIVABLE
Loans receivable consisted of the following:
1999 1998
--------------- ----------------
First mortgage loans,
including loans purchased
Secured by one-to-four
-family residences $ 200,201 $ 182,452
Secured by multifamily
residences 13,389 11,313
Secured by commercial
real estate 24,388 21,433
Construction loans 3,800 -
--------------- ----------------
241,778 215,198
Home equity loans 5,103 5,158
Net deferred loan origination fees (1,500) (1,489)
Construction loans in process (3,467) -
--------------- ----------------
Total mortgage loans 241,914 218,867
Consumer and other loans
Automobile 3 16
Share loans 1,164 1,091
Other 410 415
--------------- ----------------
1,577 1,522
Unearned discounts (8) (9)
--------------- ----------------
Total consumer and other loans 1,569 1,513
Allowance for loan losses (2,315) (2,069)
--------------- ----------------
$ 241,168 $ 218,311
=============== ================
There were no nonaccrual loans at December 31, 1999. The principal balance of
loans on nonaccrual status at December 31, 1998 approximated $9,000. The Company
maintains an allowance for uncollected interest
(Continued)
20.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
for mortgage loans with payments past due. The allowance was approximately
$99,000 and $116,000 at December 31, 1999 and 1998, respectively.
(Continued)
21.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
1999 1998 1997
----------- ----------- -----------
Balance, beginning of year $ 2,069 $ 1,828 $ 1,520
Provision for loan losses 246 246 738
Recoveries - - 4
Charge-offs - (5) (434)
----------- ----------- -----------
Balance, end of year $ 2,315 $ 2,069 $ 1,828
=========== =========== ===========
The average balance of impaired loans was $18,000 for the year ended December
31, 1998. No interest income was recognized on these loans. There were no
impaired loans at December 31, 1999 and 1997 or during 1999 and 1997.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
1999 1998
----------- -----------
Land $ 545 $ 545
Buildings and improvements 3,624 3,621
Furniture and equipment 2,577 2,544
Real estate acquired for future expansion
377 377
----------- -----------
Total cost 7,123 7,087
Less accumulated depreciation (3,451) (3,120)
----------- -----------
$ 3,672 $ 3,967
=========== ===========
NOTE 6 - DEPOSITS
Certificate of deposit accounts with balances of $100,000 or more totaled
approximately $43,966,000 and $30,174,000 at December 31, 1999 and 1998,
respectively.
At December 31, 1999, the scheduled maturities of certificates of deposit are as
follows:
2000 $ 122,679
2001 7,931
2002 4,342
2003 1,862
(Continued)
22.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
2004 4,197
--------------
$ 141,011
==============
(Continued)
23.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Chicago are summarized as follows:
1999 1998
------------------------- ----------------------------
Weighted Weighted
FHLB Advances Due Average Rate Amount Average Rate Amount
------------------------- ----------------------------
2000 6.04% $ 7,000 5.78% $ 2,000
2001 5.45 2,000 5.27
3,000
2002 5.71 4,000 5.62
5,000
2003 - - 5.18 3,000
2004 5.55 13,000 - -
2008 5.09 16,000 4.98 16,000
2009 5.00 2,000 - -
Open line 4.74 2,300 - -
---------- ----------
5.41% $ 46,300 5.20% $ 29,000
====== ========== ===== ==========
The Company maintains a collateral pledge agreement covering advances whereby
the Company has agreed to at all times keep on hand, free of all other pledges,
liens, and encumbrances, whole first mortgage loans on improved residential
property not more than 90 days delinquent, aggregating no less than 167% of the
outstanding advances from the Federal Home Loan Bank of Chicago.
NOTE 8 - INCOME TAXES
An analysis of the provision for income taxes is as follows:
1999 1998 1997
----------- ----------- -----------
Current
Federal $ 2,502 $ 2,680 $ 1,585
State 500 537 320
Deferred 26 (119) (888)
----------- ----------- -----------
$ 3,028 $ 3,098 $ 1,017
=========== =========== ===========
(Continued)
24.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 8 - INCOME TAXES (Continued)
The net deferred tax asset included in the accompanying consolidated balance
sheets consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------ --------------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 515 $ 324
Amortization of intangible assets 54 56
Contribution carryforward 1,087 1,376
Unrealized loss on securities available-for-sale 387 19
Other 256 145
------------ --------------
2,299 1,920
Deferred tax liabilities
Depreciation (85) (75)
FHLB stock dividend (65) (65)
Loan fees (359) (332)
------------ --------------
(509) (472)
Valuation allowance on deferred tax assets (180) (180)
------------ --------------
Total net deferred tax asset $ 1,610 $ 1,268
============ ==============
</TABLE>
The valuation allowance at December 31, 1999 and 1998 reflects management's
estimate of temporary deductible differences that may not be realized.
The difference between the provision for income taxes shown on the consolidated
statements of income and amounts computed by applying the statutory federal
income tax rate to income before taxes follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------
1999 1998 1997
------------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Income taxes computed at
statutory rate of 34% $ 2,961 34.0% $ 2,870 34.0% $ 966 34.0%
Tax-exempt income (307) (3.5) (168) (2.0) (90) (3.2)
State income taxes, net of
federal income tax benefit 378 4.3 344 4.1 140 4.9
Other (4) - 52 .6 1 .1
--------- ------- --------- ------ -------- ------
$ 3,028 34.8% $ 3,098 36.7% $ 1,017 35.8%
========= ======= ========= ====== ======== ======
</TABLE>
The Company has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts which differs
from the provision charged to income in the financial statements. Retained
earnings at December 31, 1999 include approximately $2,023,000 for which no
deferred federal income tax liability has been recorded.
(Continued)
25.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet financing needs of its customers. These
financial instruments include commitments to fund loans and previously approved
unused lines of credit. The Company's exposure to credit loss in the event of
nonperformance by the parties to these financial instruments is represented by
the contractual amount of the instruments. The Company uses the same credit
policy for commitments as it uses for on-balance-sheet items. The contract
amount of these financial instruments is summarized as follows:
1999 1998
---------- ---------
Commitments to extend credit $ 3,252 $ 3,009
Unused lines of credit 7,541 5,803
At December 31, 1999, commitments to extend credit consist of $2,908,000 of
fixed-rate loan commitments with rates ranging from 6.75% to 9.00%. These
commitments are due to expire within 60 days of issuance. Since many commitments
expire without being used, the amounts above do not necessarily represent future
cash commitments. Collateral may be obtained upon exercise of a commitment. The
amount of collateral is determined by management and may include commercial and
residential real estate and other business and consumer assets.
The Company's principal loan customers are located in Chicago, Illinois and
Philadelphia, Pennsylvania. Most loans are secured by specific collateral,
including residential and commercial real estate.
NOTE 10 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier I capital (as defined) to average
assets (as
(Continued)
26.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
defined). Management believes, as of December 31, 1999, that the Bank meets all
capital adequacy requirements to which it is subject.
(Continued)
27.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 10 - REGULATORY MATTERS (Continued)
As of December 31, 1999, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- -------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total capital (to risk-weighted
assets) $ 71,337 40.6% $ 14,049 8.0% $ 17,561 10.0%
Tier I capital (to risk-weighted
assets) 69,142 39.4 7,024 4.0 10,537 6.0
Tier I (core) capital (to adjusted
total assets) 69,142 19.1 14,488 4.0 18,110 5.0
As of December 31, 1998:
Total capital (to risk-weighted
assets) $ 68,666 43.1% $ 12,743 8.0% $ 15,929 10.0%
Tier I capital (to risk-weighted
assets) 66,675 41.9 10,372 4.0 9,557 6.0
Tier I (core) capital (to adjusted
total assets) 66,675 20.4 13,050 4.0 16,813 5.0
</TABLE>
NOTE 11 - EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of the earnings (loss) per
common share computation for the years ended December 31, 1999, 1998, and 1997
is presented below.
1999 1998 1997
------ ------ -------
Earnings per common share
Net income $5,682 $5,344 $ 1,825
Less: net income of Bank prior to conversion - - (2,518)
------ ------ -------
Net income (loss) attributable to common shareholders $5,682 $5,344 $ (693)
====== ====== =======
(Continued)
28.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
Weighted average common shares outstanding 4,834 5,548 5,895
Add: shares committed to be issued to charitable foundation 150 200 250
------ ------ ------
Total weighted average common shares outstanding 4,984 5,748 6,145
====== ====== ======
Basic earnings (loss) per share $1.14 $ .93 $(.11)
===== ===== =====
NOTE 11 - EARNINGS PER COMMON SHARE (Continued)
The Company's outstanding stock options and stock awards were not considered in
the computations of diluted earnings per share because the effects of assumed
exercise would have been antidilutive. In future years, outstanding stock
options may be exercised which would increase the weighted average common shares
outstanding and, thereby, dilute earnings per share. In addition, if the average
common stock price were to exceed the exercise price of outstanding options in a
future year, the assumed exercise of the options and/or the assumed issuance of
the stock awards would have a dilutive effect on earnings per share for that
future year. However, previously reported earnings per share and diluted
earnings per share are not restated to reflect change in the status of changes
in the relationship between exercise prices and average stock prices.
NOTE 12 - RELATED PARTY TRANSACTIONS
The Company has lending transactions with directors, executive officers, and
their associates. Activity in these accounts is summarized as follows for the
year ended December 31, 1999.
Balance at beginning of year $ 181
Loans disbursed 5,811
Principal repayments 3,684
Balance at end of year $ 2,308
NOTE 13 - STOCK-BASED COMPENSATION PLANS
As part of the conversion transaction described in Note 15, the Company
established an employee stock ownership plan (ESOP) for the benefit of
substantially all employees. The ESOP borrowed $5,126,400 from the Company and
used those funds to acquire 512,640 shares of the Company's stock at $10 per
share.
Shares issued to the ESOP are allocated to ESOP participants based on principal
and interest repayments
(Continued)
29.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
made by the ESOP on the loan from the Company. The loan is secured by shares
purchased with the loan proceeds and will be repaid by the ESOP with funds from
the Company's discretionary contributions to the ESOP and earnings on ESOP
assets. Principal payments are scheduled to occur over a twenty-year period.
However, in the event the Company's contributions exceed the minimum debt
service requirements, additional principal payments will be made.
During 1999, 1998, and 1997, 34,294, 35,334, and 19,154 shares of stock with an
average fair value of $11.75, $14.72, and $15.74 per share were committed to be
released, resulting in ESOP compensation expense of $402,909, $520,122, and
$301,484 respectively. Shares held by the ESOP at December 31 are as follows:
(Continued)
30.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 13 - STOCK-BASED COMPENSATION PLANS (Continued)
1999 1998
---------- -----------
(Thousands)
Allocated shares 89 54
Unallocated shares 424 459
Total ESOP shares 513 513
========== ===========
Fair value of unallocated shares $ 4,662 $ 5,956
========== ===========
During 1998, the Company adopted a stock option plan under the terms of which
shares of the Company's common stock were reserved for issuance. The options
became exercisable on a cumulative basis in equal installments over a five-year
period from the date of grant. The options expire 10 years from the date of
grant.
A summary of the status of the Company's stock option plan and changes during
the years are presented below:
Weighted- Weighted-
Average Average
1999 Exercise 1998 Exercise
Shares Price Shares Price
----- ---------- -------- ----------
(Thousands)
Outstanding at beginning of year 519 $ 16.68 - $ -
Granted - - 519 16.68
----- ---------- -------- ----------
Outstanding at end of year 519 $ 16.68 519 $ 16.68
===== ========== ======== ==========
Options exercisable at end of year 104 -
Weighted-average fair value of
options granted during year $ - $ 6.48
All of the outstanding options at December 31, 1999 relate to options granted in
May 1998 at an exercise price of $16.68 and have a remaining life of 8.3 years
before expiration. These options are not fully vested. The exercise price equals
the market value on the date the options were granted.
The Company applies APB Opinion 25 and related Interpretations in accounting for
its stock option plan. Accordingly, no compensation cost has been recognized at
the date of grant. Had compensation cost been
(Continued)
31.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
determined based on the fair value at the grant dates for awards under the plan
in 1999 and 1998 consistent with the method of SFAS No. 123, "Accounting for
Stock Based Compensation," the Company's net income and earnings per share would
have been reduced to the pro forma amounts in the table below. For purposes of
pro forma disclosure, the estimated fair value of the options is amortized to
expense over the options' vesting period.
(Continued)
32.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 13 - STOCK-BASED COMPENSATION PLANS (Continued)
1999 1998
----------- -----------
Net income as reported $ 5,682 $ 5,344
Pro forma net income 5,009 4,896
Earnings per share as reported, basic and diluted 1.14 .93
Pro forma earnings per share, basic and diluted 1.01 .85
In connection with the conversion to stock ownership, the Company adopted a
Management Recognition and Retention Plan (MRP). In 1998, the Company
contributed $4.3 million allowing the MRP to acquire 256,320 shares of common
stock of the Company, at an average cost of $16.69 per share, to be awarded to
directors and key employees. The Company awarded 216,166 shares during 1998.
These shares vest over a five-year period. The unamortized cost of shares not
yet earned (vested) is reported as a reduction of shareholders' equity. MRP
compensation expense totaled $735,000 and $467,000 for the years ended December
31, 1999 and 1998, respectively.
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The approximate carrying amount and estimated fair value of financial
instruments as of December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- ------------------------
Approximate Estimated Approximate Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 6,257 $ 6,257 $ 24,830 $ 24,830
Time deposits in other financial institutions - - 200 200
Securities available-for-sale 20,622 20,622 26,343 26,343
Securities held-to-maturity 92,908 89,850 58,267 58,809
Loans, net of allowance for loan losses 241,168 238,121 218,311 221,849
Accrued interest receivable 2,976 2,976 2,475 2,475
Financial liabilities
NOW and money market accounts (21,932) (21,932) (21,497) (21,497)
Savings (75,180) (75,180) (74,966) (74,966)
Time deposits (141,011) (141,573) (124,032) (125,326)
Advance payments by borrowers for taxes
and insurance (2,811) (2,811) (2,432) (2,432)
</TABLE>
(Continued)
33.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
Advances from Federal Home Loan Bank (46,300) (43,123) (29,000) (27,989)
Accrued interest payable (530) (530) (520) (520)
(Continued)
34.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
For purposes of the above, the following assumptions were used:
Cash and Cash Equivalents: The fair value for cash and cash equivalents is based
on their carrying value due to the short-term nature of these assets.
Securities: The fair value of securities is based on the quoted market value for
the individual security or its equivalent.
Loans: The fair value for loans has been determined by calculating the present
value of future cash flows based on the current rate the Company would charge
for similar loans with similar maturities at December 31, 1999 and 1998, applied
for an estimated time period until the loan is assumed to be repriced or repaid.
Deposit Liabilities: The fair value for time deposits has been determined by
calculating the present value of future cash flows based on estimates of rates
the Company would pay on such deposits at December 31, 1999 and 1998, applied
for the time period until maturity. The estimated fair value of NOW, money
market, and savings accounts is assumed to approximate carrying value as
management establishes rates on these deposits at a level that approximates the
local market area.
Advances from Federal Home Loan Bank: The fair value for the Federal Home Loan
Bank advances was determined by calculating the present value of future cash
flows using the current rate for an advance with a similar length to maturity.
Accrued Interest: The fair value of accrued interest receivable and payable is
assumed to equal the carrying value.
Off-Balance-Sheet Instruments: Off-balance-sheet items consist principally of
unfunded loan commitments. The fair value of these commitments is not material.
Other assets and liabilities of the Company not defined as financial
instruments, such as property and equipment, are not included in the above
disclosures. Also not included are nonfinancial instruments typically not
recognized in financial statements such as the value of core deposits, loan
servicing rights, customer goodwill, and similar items.
While the above estimates are based on judgments of the most appropriate
factors, there is no assurance that if the Company disposed of these items on
December 31, 1999 and 1998, the fair value would have been
(Continued)
35.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
achieved, because the market value may differ depending on the circumstances.
The fair values at December 31, 1999 and 1998 should not necessarily be
considered to apply at subsequent dates.
(Continued)
36.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 15 - ADOPTION OF PLAN OF CONVERSION
On June 23, 1997, the Board of Directors of the Company adopted a Plan of
Conversion to convert from a federal mutual savings bank to a federal stock
savings bank with the concurrent formation of a holding company. The conversion
was accomplished through the amendment of the Bank's charter and the sale of the
holding company's common stock in an amount equal to the consolidated pro forma
market value of the holding company and the Bank after giving effect to the
conversion. A subscription offering of the shares of common stock was offered
initially to the Bank's eligible deposit account holders, then to other members
of the Bank. Any shares of the holding company's common stock not sold in the
subscription offering were offered for sale to the general public, giving
preference to the Bank's market area. On October 31, 1997, the Company sold
6,408,000 shares at $10 per share and received proceeds of $57,823,000 net of
conversion expenses and ESOP shares.
At the time of conversion, the Bank established a liquidation account in an
amount equal to its total net worth as of the latest balance sheet appearing in
the prospectus. The balance as of that date was $31,840,000. The liquidation
account will be maintained for the benefit of eligible depositors who continue
to maintain their accounts at the Bank after the conversion. The liquidation
account will be reduced annually to the extent that eligible depositors have
reduced their qualifying deposits. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account. In the event of a
complete liquidation, each eligible depositor will be entitled to receive a
distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts then held. The liquidation
account balance is not available for payment of dividends.
The Company may not declare or pay cash dividends on or repurchase any of its
shares of capital stock if the effect thereof would cause its net worth to be
reduced below applicable regulatory requirements or the amount of the
liquidation accounts of such a declaration and payment would otherwise violate
regulatory requirements.
As part of the conversion, the Bank's depositors approved a stock contribution
of 250,000 shares to The Heritage Foundation of First Security Federal Savings
Bank, Inc. (the Foundation). The contribution was accrued at the time of
conversion for $2.5 million based on the $10 per share initial offering price
and resulted in $2.5 million of expense ($1.5 million, net of tax) to the
Company. Additional paid-in capital was increased by $2.5 million as a result of
the unconditional commitment to contribute the stock to the Foundation. The
Company contributed 50,000 shares to the Foundation in both December 1999 and
1998.
(Continued)
37.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed balance sheet, statement of income, and
statement of cash flows for First SecurityFed Financial, Inc. The Company was
formed on October 31, 1997. Accordingly, the statements of income and cash flows
for 1997 reflect the period October 31, 1997 through December 31, 1997.
CONDENSED BALANCE SHEETS
December 31, 1999 and 1998
1999 1998
----------- -----------
ASSETS
Cash and cash equivalents $ 353 $ 1,164
Securities available-for-sale 7,879 10,387
ESOP loan 4,357 4,614
Investment in bank subsidiary 70,058
67,438
Accrued interest receivable and other assets 1,127
-----------
1,235
-----------
$ 83,774
===========
$ 84,838
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 618 $ 251
Shareholders' equity 83,156 84,587
----------- -----------
$ 83,774 $ 84,838
=========== ===========
(Continued)
38.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 1999 and 1998 and
for the period October 31, 1997 to December 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
----------- ----------- -----------
Income
Dividend income $3,500 $ - $ -
Securities 505 869 33
ESOP loan 31 232 559
Gain on sale of securities 19 40 -
Other income 1 - -
Total income 4,337 1,234 92
Other expenses
Charitable contributions - - 2,500
Other operating expenses 184 198 -
----------- ----------- -----------
184 198 2,500
Income (loss) before income taxes and equity in
undistributed earnings of bank subsidiary 4,153 1,036 (2,408)
Income tax expense (benefit) 125 270 (939)
----------- ----------- -----------
Income (loss) before equity in undistributed 4,028 766 (1,469)
earnings of bank subsidiary
Equity in undistributed earnings of bank subsidiary 1,654 4,578 776
----------- ----------- -----------
Net income (loss) $ 5,682 $ 5,344 $ (693)
=========== =========== ===========
</TABLE>
(Continued)
39.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999 and 1998 and
for the period October 31, 1997 to December 31, 1997
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
---------- -------- ---------
Operating activities
Net income (loss) $ 5,682 $ 5,344 $ (693)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Equity in undistributed earnings of bank subsidiary (1,654) (4,578) (776)
Accrued charitable contribution of Company stock - - 2,500
Net accretion (3) (6) -
Gain on sales of securities (19) (40) -
Change in
Other assets 388 (150) (1,337)
Other liabilities (213) (5,240) 595
------- -------- ---------
Net cash provided by (used in)
operating activities 4,181 (4,670) 289
Investing activities
Purchase of bank subsidiary stock - - (28,912)
Purchase of securities available-for-sale (1,062) (8,759) (10,169)
Proceeds from sales of securities 2,931 6,745 -
Proceeds from calls of maturitites - 2,000 -
Payment received on loan to ESOP 257 256 256
------- -------- ---------
Net cash provided by (used in) investing activities 2,126 187 (38,825)
Financing activities
Net proceeds from sale of common stock - - 57,823
Dividends paid (1,413) (409) -
Purchase of treasury stock (5,705) (13,286) -
------- -------- ---------
Net cash provided by (used in) financing activities (7,118) (13,695) 57,823
------- -------- ---------
Net change in cash and cash equivalents (811) (18,123) 19,287
</TABLE>
(Continued)
40.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
Cash and cash equivalents at beginning of period 1,164 19,287 -
-------- -------- --------
Cash and cash equivalents at end of period $ 353 $ 1,164 $ 19,287
======== ======== ========
(Continued)
41.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
NOTE 17 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Three Months Ended
---------------------------------------------------
March 31 June 30 September 30 December 31
----------- ---------- ----------- ------------
1999
Interest income $ 6,007 $ 6,040 $ 6,361 $ 6,877
Interest expense 2,599 2,616 2,811 3,011
----------- ---------- ----------- -----------
Net interest income 3,408 3,424 3,550 3,866
Provision for loan losses 62 62 61 61
Noninterest income 152 189 223 246
Noninterest expense 1,501 1,478 1,471 1,652
----------- ---------- ----------- -----------
Income before income taxes 1,997 2,073 2,241 2,399
Income tax expense 735 759 795 739
----------- ---------- ----------- -----------
Net income $ 1,262 $ 1,314 $ 1,446 $ 1,660
=========== ========== =========== ===========
Earnings per common share $ .25 $ .27 $ .30 $ .32
=========== ========== =========== ===========
Three Months Ended
---------------------------------------------------
March 31 June 30 September 30 December 31
----------- ---------- ----------- ------------
1998
Interest income $ 6,024 $ 5,998 $ 6,207 $ 6,154
Interest expense 2,513 2,598 2,635 2,711
----------- ---------- ----------- -----------
Net interest income 3,511 3,400 3,572 3,443
Provision for loan losses 62 61 62 61
Noninterest income 159 143 182 165
Noninterest expense 1,240 1,332 1,634 1,657
----------- ---------- ----------- -----------
Income before income taxes 2,368 2,150 2,058 1,890
Income tax expense 915 781 616 810
----------- ---------- ----------- -----------
42.
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except per share data)
Net income $ 1,453 $ 1,369 $ 1,442 $ 1,080
======= ======= ======== ========
Earnings per common share $ .24 $ .22 $ .26 $ .21
======= ======= ======== ========
43.
<PAGE>
<PAGE>
FIRST SECURITYFED FINANCIAL, INC.
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 7:00 p.m., local time on
May 10, 2000 at the Suma Hall located at 2457 W. Chicago Ave, Chicago, Illinois
60622.
STOCK LISTING
First SecurityFed Financial, Inc. common stock is traded on the Nasdaq
Stock Market under the symbol "FSFF."
PRICE RANGE OF COMMON STOCK
As of February 15, 2000 there were approximately 922 shareholders of record
and 5,335,476 outstanding shares of common stock.
The following table sets forth the high and low bid prices and dividends
paid per share of common stock since the stock began trading on October 31,
1997. The stock price information was provided by the NASD, Inc.
<TABLE>
Quarter Dividend
Ended High Low Declared
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
September 30,1998 16.88 10.50 ---
December 31, 1998 14.94 11.00 .07(cent)
March 31, 1998 15.75 14.63 ---
June 30, 1998 17.50 15.00 ---
March 31, 1999 13.00 11.57 .08(cent)
June 30, 1999 12.57 11.13 .09(cent)
September 30, 1999 12.88 10.94 .10(cent)
December 31, 1999 11.94 10.57 .11(cent)
</TABLE>
TRANSFER AGENT SHAREHOLDERS AND GENERAL
INQUIRIES
Registrar and Transfer Co.
10 Commerce Drive Peter Ilnyckyj
Cranford, NJ 07016 First SecurityFed Financial, Inc.
936 North Western Avenue
Chicago, Illinois 60622-4695
(773) 772-4500
SPECIAL COUNSEL INDEPENDENT AUDITORS
Silver, Freedman & Taff, L.L.P. Crowe, Chizek and Company LLP
1100 New York Avenue, NW One Mid America Plaza
7th Floor P.O. Box 3697
Washington, DC 20005 Oak Brook, Illinois 60522-3697
<PAGE>
ANNUAL AND OTHER REPORTS
A copy of First SecurityFed Financial, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1999, as filed with the Securities and Exchange
Commission, may be obtained without charge by contacting Peter Ilnyckyj, First
SecurityFed Financial, Inc., 936 North Western Avenue, Chicago, Illinois
60622-4695
FIRST SECURITYFED FINANCIAL, INC.
CORPORATE INFORMATION
COMPANY AND BANK ADDRESS
936 North Western Avenue Telephone: (773) 772-4500
Chicago, Illinois 60622-4695 Fax: (773) 772-1043
DIRECTORS OF THE BOARD
Steve Babyk Julian Kulas
Director of Fleet Leasing President and Cheif Executvie Officer
Union Tank Car Company First Security Federal Savings Bank
Lila Maria Bodnar Paul Nadzikewycz
Accountant, MBA Self-Employed Real Estate Investor
Myron Dobrowolsky Jaroslav H. Sydorenko
Construction Project Manager Credit Manager
Dames and Moore Kanematsu USA
Terry Gawryk Chrysta Wereszczak
Attorney Co-owner, B&B Formnica
George Kawka
Senior Architectural/Engineering
Project Manager
PAL Telecom Group
EXECUTIVE OFFICERS
Julian Kulas Harry I. Kucewicz
President and Chief Executive Officer Treasurer and Chief Financial Officer
Mary H. Korb Irene S. Subota
Vice President-Lending Vice President - Savings
Adrian Hawryliw
Vice President - Philadelphia
Branch Manager
49
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Jurisdiction of
Percent Incorporation
of or
Parent Subsidiary Ownership Organization
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First SecurityFed Financial, Inc. First Security Federal 100% Federal
Savings Bank
First Security Federal Savings Western Security Corporation 100% Illinois
Bank
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
annual report on Form 10-K for the fiscal year ended December 31, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,057
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,622
<INVESTMENTS-CARRYING> 92,908
<INVESTMENTS-MARKET> 89,850
<LOANS> 241,168
<ALLOWANCE> 2,315
<TOTAL-ASSETS> 372,292
<DEPOSITS> 238,123
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,713
<LONG-TERM> 46,300
64
0
<COMMON> 0
<OTHER-SE> 83,092
<TOTAL-LIABILITIES-AND-EQUITY> 372,292
<INTEREST-LOAN> 18,642
<INTEREST-INVEST> 6,193
<INTEREST-OTHER> 450
<INTEREST-TOTAL> 25,285
<INTEREST-DEPOSIT> 9,166
<INTEREST-EXPENSE> 11,037
<INTEREST-INCOME-NET> 14,248
<LOAN-LOSSES> 246
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 6,102
<INCOME-PRETAX> 8,710
<INCOME-PRE-EXTRAORDINARY> 8,710
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,682
<EPS-BASIC> 1.14
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 4.36
<LOANS-NON> 0
<LOANS-PAST> 1,236
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,069
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,315
<ALLOWANCE-DOMESTIC> 2,315
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 665
</TABLE>
