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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1996 Commission File No. 0-19510
FINANCIAL SECURITY CORP.
Delaware 36-3781658
-------- ----------
(State of other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification Number)
1209 N. MILWAUKEE AVENUE, CHICAGO, 60622
- ---------------------------------- -----
ILLINOIS
--------
(address of principal executive office) (Zip Code)
Registrant's telephone number,
including area code (312) 227-7020
--------------
Indicate by check mark whether the registrant has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and has been subject to such filing requirements
for the past 90 days.
YES X NO
----- -----
Number of shares Common Stock outstanding at the close of business on
---------------------------------------------------------------------
July 31, 1996: 1,550,846 $.01 PAR VALUE OF COMMON STOCK
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FINANCIAL SECURITY CORP.
AND SUBSIDIARY
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
Item 1. Consolidated Statements of Financial Condition 3
as of June 30, 1996 (Unaudited) and December
31, 1995.
Consolidated Statements of Earnings for the Three 4
Months ended June 30, 1996 and 1995 (Unaudited)
Consolidated Statements of Cash Flows for the 5-6
Three Months ended June 30, 1996 and 1995
(Unaudited)
Notes to the Unaudited Consolidated Financial 7-9
Statements
Item 2. Management Discussion and Analysis of Financial 10-16
Condition and Results of Operation
PART II. OTHER INFORMATION 17
Signatures 18
2
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<TABLE>
<CAPTION>
ITEM 1. FINANCIAL INFORMATION
FINANCIAL SECURITY CORP.
------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
June 30, 1996 December 31, 1995
------------- -----------------
(Unaudited)
-----------
ASSETS:
- -------
<S> <C> <C>
Cash and Cash Due from Banks $ 1,153,826 $ 1,143,375
Interest Earning Deposits 14,001,678 6,267,332
Federal Funds Sold -0- 745,696
-------------- --------------
Total Cash and Cash Equivalents 15,155,504 8,156,403
Securities Held to Maturity 984,373 1,341,470
Securities Available-for-Sale 43,498,985 54,134,691
Loans Receivable - Net of allowance
for loan losses of $2,106,618 at June
30, 1996 and $2,284,662 at December
31, 1995. 178,803,238 190,495,513
Loans Held for Sale - (Net) 1,515,475 3,483,448
Foreclosed Real Estate - (Net) 1,142,904 1,321,009
Limited Partnership Investment in
Purchased Mortgage Servicing Rights 8,961,257 8,615,863
Accrued Interest Receivable 2,049,317 2,370,350
Federal Home Loan Bank Stock 2,075,000 2,187,500
Premises and Equipment 3,016,002 3,151,491
Real Estate Held for Development 416,400 466,400
Prepaid Expenses and Other Assets 833,968 1,333,061
----------- -----------
TOTAL ASSETS $ 258,452,423 $ 277,057,199
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
LIABILITIES:
- ------------
Deposits $ 185,679,440 $ 193,845,087
Borrowed Funds 28,200,000 39,344,703
Advance Payment by Borrowers for
Taxes and Insurance 1,178,207 1,152,685
Accrued Interest Payable and Other
Liabilities 3,553,293 3,946,861
----------- -----------
TOTAL LIABILITIES 218,610,940 238,289,336
----------- -----------
STOCKHOLDER'S EQUITY:
Preferred Stock, $.01 Par Value.
Authorized 1,000,000 shares;
None Issued or Outstanding
-0- -0-
Common Stock, $.01 Par Value.
Authorized 3,000,000; Issued
1,769,928; Outstanding 1,550,846 17,969 17,419
Additional Paid in Capital 17,004,653 16,386,274
Treasury Stock (246,082 shares at
June 30, 1996 and December 31, 1995.) (3,826,060) (3,826,060)
Retained Earnings (Substantially
Restricted) 27,964,521 26,987,884
Employee Stock Ownership Plan Loan (550,000) (644,703)
Recognition and Retention Plan
Stock Awards (257,787) (326,400)
Unrealized Gain or (Loss) on Securities
Available for Sale (Net of Income Taxes) (511,813) 173,449
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 39,841,483 38,767,863
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 258,452,423 $ 277,057,199
============= =============
</TABLE>
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<TABLE>
<CAPTION>
FINANCIAL SECURITY CORP.
------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
(UNAUDITED)
-----------
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
- ----------------
Loans $ 3,870,354 $ 4,609,404 $ 7,881,870 $ 8,803,369
Deposits & Federal Funds Sold 118,728 35,621 157,174 116,472
Dividends on FHLB Stock 34,919 34,709 70,013 67,216
Investment Securities 680,568 663,884 1,438,499 1,097,160
Mortgage-backed Securities 210,459 270,195 447,616 525,469
------- ------- ------- -------
Total Interest Income: 4,915,028 5,613,813 9,995,172 10,609,686
--------- --------- --------- ----------
INTEREST EXPENSE:
- -----------------
Deposit: 2,298,628 2,645,945 4,641,212 4,997,908
Borrowed Funds 534,158 601,515 1,174,427 1,187,453
------- ------- --------- ---------
Total Interest Expense 2,832,786 3,247,460 5,815,639 6,185,361
--------- --------- --------- ---------
Net Interest Income Before
Provision for Loan Losses 2,082,242 2,366,353 4,179,533 4,424,325
Provision for Loan Losses -0- -0- 75,000 100,000
---------- ---------- ---------- ----------
Net Interest Income After
Provision for Loan Losses 2,082,242 2,366,353 4,104,533 4,324,325
Non Interest Income:
Gain (Loss) on Sale Of:
Loans Available for Sale (1,525) 2,500 59,680 2,500
Investment Securities -0- 5,810 -0- 30,810
Foreclosed Real Estate 89,245 34,711 213,866 88,811
Insurance Commissions 8,398 14,513 25,009 34,968
PMSR's 148,316 146,053 376,394 331,038
Other 61,744 166,966 119,797 199,513
------ ------- ------- -------
Total Non Interest Income 306,178 370,553 794,746 687,640
------- ------- ------- -------
Non Interest Expense:
Compensation and Benefits 859,847 849,764 1,691,626 1,607,163
Office Occupancy and
Equipment 211,604 252,783 434,893 410,170
Federal Deposit Insurance
Premiums 112,514 109,978 227,489 219,956
Data Processing 77,791 100,477 163,880 187,993
Legal Fees 3,910 28,732 11,108 59,692
Provision on Losses for
Investments 136,408 194,954 274,000 322,341
Provision for Loss on Real
Estate Held for Development -0- -0- 50,000 -0-
Loss from Foreclosed Real
Estate Operations Net 44,033 152,376 154,112 249,702
Advertising and Promotion 16,703 92,344 43,957 166,958
Other 459,990 175,465 646,576 450,379
------- ------- ------- -------
Total Non Interest Expense 1,922,800 1,956,873 3,697,641 3,674,354
--------- --------- --------- ---------
Income Before Income Taxes 465,620 780,033 1,201,638 1,337,611
Income Tax Expense 37,000 292,000 225,000 346,000
----------- ----------- ---------- -----------
Net Income $ 428,620 $ 448,033 $ 976,638 $ 991,611
=========== =========== ========== ===========
Net Earnings Per Share:
Primary $ 0.27 $ 0.31 $0.61 $ 0.63
====== ====== ===== ======
Fully Diluted $ 0.27 $ 0.31 $0.61 $ 0.63
====== ====== ===== ======
</TABLE>
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<TABLE>
<CAPTION>
FINANCIAL SECURITY CORP.
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
-----------
For the Six Months Ended For the Six Months Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 976,638 $ 991,611
Adjustments to reconcile net
income to Net Cash provided by
(Used In) Operating Activities:
Depreciation 143,907 176,874
Deferred Income Taxes (50,000) ( 223,133)
Amortization of Premiums,
discounts and deferred loan fees (163,974) ( 273,814)
Additions to Deferred Income and
Unearned Discounts -0- 244,190
Amortization of ESOP and RRP 163,316 143,727
Provisions for Losses:
Loans Receivable 75,000 100,000
Real Estate Held for Development 50,000 -0-
Investments 274,000 322,341
Loss (Gain) on Sale of:
Securities Available for Sale -0- ( 30,810)
Foreclosed Real Estate (210,578) ( 20,434)
Loans 59,680 ( 2,500)
Equity Investment - PMSR's (376,394) ( 331,020)
Proceeds from:
Sale of Loans Held for Sale 1,614,024 1,701,000
Sale of Securities Available for Sale -0- -0-
Increase (Decrease) in accrued interest
receivable, prepaid expenses and
other assets 496,463 822,110
Increase in accrued interest payable
and other liabilities 443,568 1,237,654
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NET CASH PROVIDED BY OPERATING
ACTIVITIES 3,495,650 12,838,796
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net Change in Loans Receivable
and Held For Sale 11,882,731 (635,453)
Mortgage Backed Securities 1,734,000 819,000
Proceeds from Sale of Investment
Securities Available for Sale -0- 7,981,000
Proceeds from Maturities of
Investment Securities 19,367,067 -0-
Proceeds from Sales of Foreclosed
Real Estate 581,470 2,375,749
Purchase of:
Investment in Limited Partnership
in PMSR's -0- (691,000)
Loans Receivable -0- ( 1,514,000)
Mortgage Backed Securities -0- ( 43,000)
Investment Securities (11,500,000) ( 25,310,722)
Premises and Equipment (8,418) ( 43,266)
Federal Home Loan Bank Stock
(Purchase) Redemption 112,500 ( 37,500)
------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 22,169,350 ( 25,080,192)
---------- -------------
(CONTINUED)
</TABLE>
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<TABLE>
<CAPTION>
FINANCIAL SECURITY CORP.
------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(UNAUDITED)
-----------
(CONTINUED) For the Six Months Ended For the Six Months Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in:
Deposits (8,165,647) 21,220,062
Payment of Dividend on Common
Stock -0- ( 1,569,128)
Purchase of Treasury Stock -0- ( 1,391,031)
Proceeds from Exercise of Stock
Options 618,929 27,500
Proceeds from Borrowed Funds 12,900,000 12,450,000
Repayment of Borrowed Funds (24,044,703) ( 17,742,982)
Net Increase (Decrease) in Advance
Payments by Borrowers for Taxes
and Insurance 25,522 ( 2,188,757)
------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (18,665,899) 10,805,664
------------ ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 6,999,101 ( 1,435,732)
Cash and Cash Equivalents at
Beginning of Period 8,156,403 6,036,418
---------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 15,155,504 $ 4,600,686
------------ ===========
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the quarter for:
Interest $ 2,937,939 $ 2,937,901
----------- -----------
Income Taxes -0- $ 159,000
----------- -----------
Non-Cash Activities:
Transfer of Loans to Foreclosed
Real Estate $ 192,787 $ 777,140
----------- -----------
</TABLE>
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1)
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles (GAAP) for
interim financial information and with the instructions to form 10-QSB and
Article 10 of regulation S-X. Accordingly, they do not include all of the
information and notes required by GAAP for complete financial statements. In the
opinion of management, all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation have been included.
The preparation of financial statements in conformity with generally
accepted accounting principles and with general practices within the thrift
industry requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. The actual results could
differ from these estimates. Areas involving the use of management's estimates
and assumptions, and which are more susceptible to change in the near term,
include the allowance for loan losses, the realization of deferred tax assets,
fair value of certain securities, including FHA Title I securities and
collateralized mortgage obligations, the determination and carrying value of
impaired loans, the carrying value of loans held for sale, the carrying value of
other real estate, the fair value of mortgage servicing rights as they relate to
the limited partnership, and the determination of other-than-temporary
reductions in the fair value of securities.
The results of operations and other data for the six months ended June 30,
1996 are not necessarily indicitive of results that may be expected for the
entire fiscal year ending December 31, 1996.
The unaudited consolidated financial statements include the accounts of
Financial Security Corp. (the "Company") and its wholly owned subsidiary,
Security Federal Savings and Loan Association of Chicago (the "Association"),
and subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
(2) Other Events. On April 22, 1996, the Company entered into an Agreement
and Plan of Merger (the "Agreement") with Pinnacle Banc Group, Inc. ("Pinnacle")
pursuant to which Pinnacle will acquire the Company with the Company merging
into Pinnacle (the "Merger"). The Company's wholly-owned subsidiary, Security
Federal Savings and Loan Association of Chicago will be held as a separate
subsidiary of Pinnacle.
Under the terms of the Agreement, holders of the Company's common stock
will receive $28.50, in cash, Pinnacle common stock or a combination thereof for
each share, subject to adjustment.
7
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The Company has retained Hovde Financial Inc., an investment banking firm
as its financial advisor for a fee of approximately $470,000, which is
contingent upon consumation of the merger. Of this fee $122,000 has been paid
and included in expense for the second quarter of 1996 and $348,000 will be due
and payable on the date of the closing.
The Agreement is subject to approval by the shareholders of the Company
and Pinnacle and the approval of the appropriate regulatory authorities.
(3)
Earnings per share of common stock for the six months ended June 30, 1996
have been determined by dividing net income by 1,590,207 primary shares and
1,593,802 fully diluted shares respectively; the weighted average number of
shares of common stock and common stock equivalents outstanding. Stock options
are regarded as common stock equivalents and are therefore considered in the
earnings per share calculations. Common stock equivalents are computed using the
treasury stock method. (See Exhibit 11.0).
(4) Recapitalization of SAIF and Other Legislative Initiatives
Legislative initiatives regarding the recapitalization of the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC"), deposit insurance premiums, FICO bond interest payments, the merger of
SAIF and Bank Insurance Fund ("BIF"), financial industry regulatory structure,
and revision of thrift and bank charters are still pending before Congress.
Legislation regarding bad debt recapture has been passed by Congress and sent to
the President for signature. Management cannot predict the ultimate impact any
final legislation or regulatory actions may have on the operations of the
Company. Without passage of legislation addressing the FDIC insurance premium
disparity, the Association, like other thrifts, will continue to pay deposit
insurance premiums significantly higher than banks. As long as such premium
differential continues, it may have adverse consequences on the Company's
earnings and the Company may be placed at a substantial competitive disadvantage
to commercial banking organizations insured by the BIF.
(5) SFAS No. 122
On January 1, 1996, the Company adopted a Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights ("MSRs")
(an amendment to Statement 65)." SFAS 122 provides for the capitalization of
MSRs when mortgage loans are either originated or purchased and the underlying
loan is sold or securitized with the MSR retained. The statement applies to
servicing rights resulting
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<PAGE> 9
from mortgage loans only and is effective for fiscal years starting after
December 15, 1995. The Association is currently not originating mortgage loans
for sale and therefore the adoption of SFAS 122 did not have a material impact
on the Company.
(6) SFAS No. 123
During 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" which provides new accounting guidelines over the
treatment of employee stock options. The Statement gives entities a choice of
either adopting a new fair value method of accounting for employee stock options
and expensing any related compensation costs in the income statement, or
continuing to apply Accounting Principles Board Opinion No. 25 and provide
proforma disclosure of the effect of the fair value method within the financial
statements. The Statement is effective for financial statements beginning after
December 15, 1995. The Company currently intends to adopt the disclosure method
of the Statement.
(7)
In June of 1996 the Financial Accounting Standards Board released Statement
of Financial Accounting Standard No. 125 (SFAS 125) "Accounting for Transfers
and Extinguishments of Liabilities." SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS 125 applies to transfers and extinguishments after December
31, 1996 and early or retroactive application is not permitted.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's results of operations are primarily dependent upon its net
interest income which is the difference between interest on its interest-earning
assets, such as loans, mortgage-backed securities and investment securities, and
interest paid on its interest-bearing liabilities, such as deposits and
borrowings. Net interest income is directly affected by the relative amounts of
interest-earning assets and interest-bearing liabilities and the interest rates
earned or paid on such amounts. The Company's results of operations are also
affected by the provision for loan losses and the level of non-interest income
and expenses. Non-interest income includes transactional fees, loan servicing
fees, fees on purchased mortgage servicing rights, real estate operations and
fees and commissions from the sales of insurance products through its operating
subsidiary. Non-interest expenses primarily consist of salaries and employee
benefits, occupancy expenses, federal deposit insurance premiums and other
operating expenses.
The operating results of the Company are also significantly affected by
general economic and competitive conditions, the monetary and fiscal policies of
federal agencies and the policies of agencies that regulate financial
institutions. The cost of funds is influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
influenced by the demand for real estate loans and other types of loans, which
is in turn affected by the interest rates at which such loans are made. General
economic conditions affect the loan demand and the availability of funds for
lending activities.
During the first six months of 1996, the Company's yield on interest
earning assets decreased from 8.16% to 7.86% and the cost of funds decreased
from 5.38% for fiscal 1995 to 5.10% due to a reduction in deposit rates from
5.10% to 4.91% and borrowing costs from 6.87% to 6.15% which resulted in a net
interest margin of 3.32% as compared to 3.30% at year end 1995.
LIQUIDITY & CAPITAL RESOURCES
- -----------------------------
The Company's primary sources of funds are deposits and proceeds from
principal and interest payments on loans. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by interest rate cycles, economic
conditions and competition.
Liquidity management for the Company is both a daily and long-term
function of management's strategy. The Company's subsidiary thrift association
is required to maintain minimum levels of qualifying liquid assets which are
defined by OTS regulations. This requirement, which may be varied at the
direction of the OTS
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depending upon economic conditions and deposit flows, is based upon percentage
of deposits and short-term borrowings. The required ratio is currently 5.0%. At
June 30, 1996, the Association's liquidity ratio was 8.7%.
The Company continues to maintain adequate liquidity with approximately
$15.2 million held in cash and cash equivalents and $44.5 million in investments
and loans classified as available-for-sale. If necessary, the Association has
additional secured borrowing ability with the Federal Home Loan Bank of Chicago.
The Association will continue to use advances from the Federal Home Loan
Bank-Chicago if they prove to be a less costly source of funds or can be
invested at a positive rate of return.
Management's interest rate sensitivity strategy is designed to provide a
relatively stable stream of net interest income in moderately varying interest
rate environments. Having relatively high levels of cash, cash equivalents, and
short to intermediate term securities helps achieve this objective.
The Company's cash flows are comprised of three classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Cash flows from operating activities,
consisting primarily of interest and dividends received; less interest paid on
deposits, were $3.8 million for the six months ended June 30, 1996. Net cash
provided by investing activities was $21.8 million for the six months ended June
30, 1996. Disbursements for loan originations, and the purchase of investments
available for sale totaled $16.7 million, these were offset by principal
collected on loans, mortgage-backed securities, and maturity of securities
totaling $38.3 million. Net cash used in financing activities amounted to $18.6
million for the six months ended June 30, 1996.
At June 30, 1996, the Company had outstanding commitments of $927,000, all
of which were fixed rate loans, with rates ranging from 7.25% to 10.25%. In
addition, the Company had $1.1 million in unused lines of credit under its home
equity loan program. The weighted average rate on those lines is 9.46%. The
Company anticipates that it will have sufficient funds available to meet its
current commitments. Certificates of deposit scheduled to mature in one year or
less from June 30, 1996, totaled $93.0 million. Management believes that a
significant portion of such deposits will remain with the Company and that their
maturity and repricing will not have a material adverse impact.
The current FHLB-Chicago advances mature on a tiered basis over the next
four years. Management intends to monitor these advances during their terms and
repay or renegotiate such advances as required.
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CHANGES IN FINANCIAL CONDITION
- ------------------------------
TOTAL ASSETS as of June 30, 1996 amounted to $258.5 million as compared to
$277.1 million at December 31, 1995, a decrease of $18.6 million or 6.7%. Total
loans as of June 30, 1996, including loans held for sale, amounted to $180.3
million as compared to $194.0 million at December 31, 1995, a decrease of $13.7
million or 7.1%. The decrease in loans resulted from a lack of loan demand and
the sales of $1.6 million from loans available-for-sale. During the six months
ended June 30, 1996 the Company originated $5.0 million in loans as compared to
$10.8 million in the comparable period in 1995, while loan repayments increased
from $10.1 million in 1995 to $13.1 million in 1996. Total securities amounted
to $44.5 million as of June 30, 1996 as compared to $55.5 million in 1995, a
decrease of $11.0 million or 19.8%.
TOTAL DEPOSITS at June 30, 1996 amounted to $185.7 million as compared to
$193.8 million at December 31, 1995 a decrease of $8.1 million or 4.2%. The
decrease in deposits is due mainly to a decrease in certificates of deposit at
the Niles office from $16.6 million to $12.0 million. Advances from the Federal
Home Loan Bank decreased $10.5 million from $38.7 at December 31, 1995 to $28.2
million at June 30, 1996 while the weighted average rate increased from 6.66% at
December 31, 1995 to 6.74% at June 30, 1996.
STOCKHOLDERS EQUITY at June 30, 1996 amounted to $39.8 million as compared
to $38.8 million as of December 31, 1995, an increase of $973,000. This increase
was due to net income of $977,000, proceeds from the exercise of employee stock
options of $619,000 and contributions from employment benefit plans of $163,000
which was partially offset by a net decrease in market value of the
available-for-sale portfolio of $685,000. As of June 30, 1996 the book value per
outstanding share of common stock was $25.69 as compared to $25.92 at December
31, 1995. The primary reasons for this decrease were the exercise of shareholder
options and the fluctuation in the market value of the available-for-sale
portfolio.
The Office of Thrift Supervision ("OTS") has established three capital
standards for thrifts:
Tangible capital ratio equal to 1.5% of adjusted total assets
Core capital ratio equal to 3.0% of adjusted total assets
Risk-based ratio equal to 8.0% of risk weighted assets
The Company's subsidiary significantly exceeds each of the regulatory capital
requirements at June 30, 1996. The following table represents the Associations
capital ratios:
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<TABLE>
<CAPTION>
Tangible Leverage Risk-Based
(Dollars in Thousands) Capital (Core) Capital Capital
--------------- ----------------- ----------------
<S> <C> <C> <C>
Required Capital Ratio 1.50% 3.00% 8.00%
Actual Capital Ratio 11.77% 11.77% 21.62%
Actual Capital $ 29,812 $ 29,812 $ 31,186
Required Capital $ 3,801 $7,602 $ 11,537
Excess Capital $ 26,011 $ 22,210 $ 19,649
</TABLE>
The Office of Thrift Supervision (OTS) issued final regulations which set
forth the methodology for calculating an interest rate-risk component that is
being incorporated in the OTS regulatory capital rules. Under the new
regulations, only savings institutions with "above normal" interest rate-risk
exposure are required to maintain additional capital. The OTS has deferred
implementation of this regulation. As of June 30, 1996 the Association was not
subject to any interest rate-risk component.
NON-PERFORMING ASSETS at June 30, 1996 amounted to $6.9 million or 2.5% of
total assets as compared to $5.5 million or 2.0% at December 31, 1995. Total
non-performing loans and leases amounted to $5.2 million or 2.8% of total loans
as compared to 2.1% as of December 31, 1995. The primary reason for the increase
in non-performing loans and assets are the commercial office equipment leases
purchased from Bennett Family Group, Inc., totaling $1.6 million. On March 28,
1996, the U.S. Attorney's office in New York City charged Patrick Bennett and
Bennett Funding Group, a Syracuse N.Y. company ("Bennett") with securities fraud
and perjuring in connection with Bennett's offering of up to $80 million in
short-and-medium-term notes. In addition, the Securities and Exchange Commission
("SEC") filed suit against Mr. Bennett and his related companies. On April 1,
1996, Bennett filed for Chapter 11 bankruptcy protection and ceased payments to
investors. It is uncertain what effect, if any, the Bennett litigation will have
on the Company. Therefore the Company has classified the leases as
non-performing and placed them on non-accrual status. Lease payments are
currently being received by the bankruptcy trustee. It is anticipated that the
Company may experience a temporary loss of interest on the leases until they can
be transferred from the trustee. During the first quarter of 1996, the Company
provided a loss reserve of 75,000, however, there can be no assurance that
additional losses will not be incurred due to the pending litigation against
Bennett.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
INTEREST INCOME for the three months ended June 30, 1996 decreased
----------------
$700,000 or 12.5% to $4.9 million as of June 30, 1996 from $5.6 million as of
June 30, 1995. The decrease in interest income is due primarily to a decline in
loan and investment security balances outstanding.
INTEREST EXPENSE for the three months ended June 30, 1996 amounted to $2.8
----------------
million as compared to $3.2 million for the comparable period in 1995, a
decrease of $400,000 or 12.5%. This decrease was due primarily to decline in
deposit balances during the quarter of $3.1 million, borrowed funds of $13.3
million and a decrease in the average cost of funds from 5.5% for 1995 to 5.10%
in 1996.
NET INTEREST INCOME for the three months ended June 30, 1996 decreased
--------------------
$300,000 from $2.4 million for 1995 to $2.1 million for 1996. This decrease was
primarily due to a decrease in average balances outstanding, while the net
interest margin increased .02% during the quarter ended June 30, 1996 from 3.30%
at March 31, 1996.
PROVISION FOR LOAN LOSSES were not recorded for the quarters ended June
--------------------------
30, 1996 and 1995. Management continues to monitor the allowance in relation to
the performance of the Company's loan and lease portfolio, the economy and
changes in real estate values. See discussion regarding non-performing assets in
"Changes in Financial Condition" section.
NON-INTEREST INCOME for the three months ended June 30, 1996 amounted to
--------------------
$306,000 as compared to $371,000 for the comparable period in 1995, a decrease
of $65,000. This decrease was primarily attributable to non-recurring interest
on prior years income tax refunds recorded in 1995 of $107,000, which was
partially offset by increased gains on sale of foreclosed real estate of
$55,000.
NON-INTEREST EXPENSE for the three months ended June 30, 1996 amounted to
---------------------
$1.9 million as compared to $2.0 million for the comparable period in 1995 a
decrease of $100,000. The decrease was primarily attributable to decreases of
expense of foreclosed real estate operations of $108,000, provision for losses
on investments of $59,000, data processing expense of $23,000, occupancy expense
of $41,000 and accounting and audit fees of $43,000 which were offset by legal
fees of $152,000 and financial advisory fees of $122,000 associated with the
Merger. Upon completion of the Merger approximately $350,000 in additional
financial advisory fees will be due and payable.
INCOME TAX EXPENSE for the three months ended June 30, 1996 amounted to
------------------
$37,000 as compared to $292,000 for the comparable period in 1995, a decrease of
$255,000. This decrease was due primarily to low housing credits of $75,000
recorded in the second quarter of 1996. If the low income housing credit were
not recorded the tax expense would have been $112,000.
14
<PAGE> 15
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
INTEREST INCOME for the six months ended June 30, 1996 amounted to $10.0
----------------
million as compared to $10.6 million for the comparable period in 1995, a
decrease of $600,000 or 5.7%. This decrease was due primarily to decreased loan
and investment balances outstanding during the first half of 1996 and a decrease
in the average yield of .30%.
INTEREST EXPENSE for the six months ended June 30, 1996 amounted to $5.8
-----------------
million as compared to $6.2 million for the comparable period in 1995, a
decrease of $400,000 or 6.5%. This decrease was due primarily to decreased
balances on deposits and borrowed funds and by a decrease in the cost of funds
of .28% as short term rates on deposits remained low and higher cost borrowings
were paid off during the first half of 1996.
NET INTEREST INCOME before provision for loan losses for the six months
--------------------
ended June 30, 1996 amounted to $4.2 million as compared to $4.4 million for the
comparable period in 1995, a decrease of $200,000 or 4.5%. This decrease was due
primarily to a decrease in average interest earning assets of $9.9 million
during the first half of 1996 while the net interest margin increased .02%.
PROVISION FOR LOAN LOSSES during the first six months of 1996 amounted to
--------------------------
$75,000 as compared to $100,000 for the comparable period in 1995. Total
non-performing loans and leases as of June 30, 1996 amounted to $5.2 million as
compared to $6.1 million as of June 30, 1995. Management continues to monitor
the allowance in relation to the performance of the Company's loan and lease
portfolio, the economy and changes in real estate values. See discussion
regarding non-performing assets in "Changes in Financial Condition" section.
NON-INTEREST INCOME for the first six months of 1996 amounted to $795,000
--------------------
as compared to $688,000 for the comparable period in 1995, an increase of
$107,000 or 15.6%. This increase was primarily attributable to increased gains
on sale of loans and foreclosed real estate totaling $182,000 and increased
earnings on PMSR's of $45,000 which were offset by decreases in gains on sale of
securities of $30,800 and non-recurring interest on prior year's income tax
refunds recorded in 1995 of $107,000.
NON-INTEREST EXPENSE for the first six months of 1996 increased $24,000
---------------------
from $3,674,000 to $3,698,000. The increases were primarily attributable to
increases in compensation and benefits of $85,000, occupancy expense of $25,000,
provision for loss on real estate held for development of $50,000 and Merger
expenses of $274,000 which were partially offset by decreases in data processing
costs of $24,000, audit fees of $48,000, legal fees of $49,000, provision for
loss on investments of $48,000, loss from foreclosed real estate operations of
$96,000 and advertising and promotion of $123,000.
15
<PAGE> 16
INCOME TAX EXPENSE for the six months ended June 30, 1996 amounted to
-------------------
$225,000 as compared to $346,000 for the comparable period in 1995, a decrease
of $121,000. This decrease was primarily due to decreased taxable income of
$136,000 and the low income housing tax credit of $75,000. If these had not been
recorded, tax expense would approximate $300,000.
16
<PAGE> 17
FINANCIAL SECURITY CORP.
AND SUBSIDIARY
PART II: OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings.
The Company and the Association are not engaged in any legal
proceedings of a material nature at the present time.
Item 2. Changes in securities. (Not applicable.)
Item 3. Defaults upon senior securities. (Not applicable.)
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other information. None.
Item 6. Exhibits and Reports on Form 8-K.
1. The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of Financial Security Corp.*
3.2 Bylaws of Financial Security Corp.*
4.0 Stock Certificate of Financial Security Corp.*
11.0 Statement re. Computation of Earnings Per Share.
(filed herewith)
27.0 Financial Data Schedule (filed herewith)
2. Reports on Form 8-K
A Form 8-K was filed on April 23, 1996 announcing the Agreement
and Plan of Reorganization dated April 22, 1996 between
Pinnacle Banc Group, Inc. and Financial Security Corp.
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, filed on August 8, 1991 and any
amendments thereto, Registration No. 33-42492.
17
<PAGE> 18
FINANCIAL SECURITY CORP.
AND
SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINANCIAL SECURITY CORP.
Date: August 7, 1996 By: /s/ Daniel K. Augustine
-------------- -------------------------------------
Daniel K. Augustine
President, Chief Executive Officer
Date: August 7, 1996 By: /s/ William C. Preissner
-------------- -------------------------------------
William C. Preissner
Vice President, Chief Financial Officer
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER 11.0
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
Quarter Ended Six Months Ended
June 30, 1996 June 30, 1996
------------------- -------------------
<S> <C> <C>
Net income $ 428,620 $ 976,638
Weighted average shares outstanding 1,524,245 1,524,245
Common stock equivalents due to dilutive
effect on stock options 62,733 65,962
------ ------
Total weighted average common shares
and equivalents outstanding 1,586,978 1,590,207
========= =========
Primary earnings per share $ 0.27 $ 0.61
====== ======
Additional dilutive shares using the end of
the period market value versus the
average market value when applying the
treasury stock method 800 3,595
--- -----
Total weighted average common shares
and equivalents outstanding for fully
diluted computation 1,587,778 1,593,802
========= =========
Fully diluted earnings per share $0.27 $0.61
===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This legend contains summary information extracted from the Form 10-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000878730
<NAME> FINANCIAL SECURITY CORP.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 1,153,826
<INT-BEARING-DEPOSITS> 14,001,678
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,498,985
<INVESTMENTS-CARRYING> 984,373
<INVESTMENTS-MARKET> 984,373
<LOANS> 180,318,713
<ALLOWANCE> 2,106,618
<TOTAL-ASSETS> 258,452,423
<DEPOSITS> 185,679,440
<SHORT-TERM> 28,200,000
<LIABILITIES-OTHER> 4,731,500
<LONG-TERM> 0
0
0
<COMMON> 17,969
<OTHER-SE> 39,823,514
<TOTAL-LIABILITIES-AND-EQUITY> 258,452,423
<INTEREST-LOAN> 7,881,870
<INTEREST-INVEST> 1,956,128
<INTEREST-OTHER> 157,174
<INTEREST-TOTAL> 9,995,172
<INTEREST-DEPOSIT> 4,641,212
<INTEREST-EXPENSE> 5,815,639
<INTEREST-INCOME-NET> 4,179,533
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,697,641
<INCOME-PRETAX> 1,201,638
<INCOME-PRE-EXTRAORDINARY> 1,201,638
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 976,638
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
<YIELD-ACTUAL> 7.86
<LOANS-NON> 5,200,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0<F1>
<LOANS-PROBLEM> 0<F1>
<ALLOWANCE-OPEN> 0<F1>
<CHARGE-OFFS> 0<F1>
<RECOVERIES> 0<F1>
<ALLOWANCE-CLOSE> 2,106,618
<ALLOWANCE-DOMESTIC> 2,106,618
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> This information is not contained in Form 10-QSB.
</FN>
</TABLE>
