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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, 1997
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.
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-4177515
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
936 North Western Avenue, Chicago, Illinois 60622
(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
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(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 (Section 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 December 31, 1997, the Registrant had 6,408,000 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 average of the bid and asked price
of such stock as of December 31, 1997 was $88.5 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, 1997.
PART III of Form 10-K - Proxy Statement for the Annual Meeting of
Stockholders for the fiscal year ended December 31, 1997.
PART I
Item 1. Business
General
First SecurityFed Financial, Inc. ("First SecurityFed" or the "Company"),
is a Delaware corporation that was formed in 1997 by First Security Federal
Savings Bank ("First Security" or the "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 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 the home to
many persons of Eastern European heritage, including new 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 multi-family and commercial real
estate, consumer and other loans in its market area. At December 31, 1997, the
Bank's loans receivable, net totaled $186.3 million. See "- Originations of
Loans."
2
The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and in percentages as of the dates indicated.
December 31,
--------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ----------------------------
Amount Percent Amount Percent Amount Percent
------------- ------------ ------------- ------------- ------------- --------------
Real Estate Loans:
One- to four-family.............. $154,819 81.66% $134,971 81.14% $117,379 79.83%
Multi-family..................... 10,999 5.80 9,374 5.63 7,926 5.39
Commercial....................... 9,308 4.91 7,647 4.60 7,865 5.35
Mixed use(1)..................... 7,927 4.18 8,004 4.81 7,262 4.94
Construction or development...... -- -- -- -- -- --
-------- ------ -------- ------- -------- ------
Total real estate loans........ 183,053 96.55 159,996 96.18 140,432 95.51
Consumer loans:
Share loans...................... 1,421 0.75 1,174 0.71 1,570 1.07
Automobile....................... 47 0.01 74 0.04 110 0.07
Home equity...................... 4,602 2.43 3,431 2.06 3,684 2.51
Home improvement................. 7 0.01 12 0.01 29 0.02
Other............................ 387 0.21 395 0.24 445 0.30
-------- ------ -------- ------- -------- ------
Total consumer loans.......... 6,464 3.41 5,086 3.06 5,838 3.97
Loans secured by leases.......... 81 0.04 1,272 0.76 759 0.52
-------- ------ -------- ------- -------- ------
Total loans.................... 189,598 100.00% 166,354 100.00% 147,029 100.00%
====== ====== ======
Less:
Loans in process................. -- -- --
Deferred fees and discounts...... 1,511 1,486 1,578
Allowance for losses............. 1,828 1,520 885
-------- -------- --------
Total loans receivable, net.... $186,259 $163,348 $144,566
======== ======== ========
----------------------------------------------------------
1994 1993
------------------------------ --------------------------
Amount Percent Amount Percent
-------------- --------------- -------------- -----------
Real Estate Loans:
One- to four-family.............. $110,280 79.53% $ 84,401 77.89%
Multi-family..................... 7,731 5.58 7,632 7.04
Commercial....................... 6,911 4.98 4,973 4.59
Mixed use(1)..................... 7,433 5.36 5,847 5.40
Construction or development...... -- -- 185 0.17
-------- ------ -------- ------
Total real estate loans........ 132,355 95.45 103,038 95.09
Consumer loans:
Share loans...................... 1,328 0.96 1,525 1.41
Automobile....................... 141 0.10 150 0.14
Home equity...................... 3,870 2.79 3,105 2.87
Home improvement................. 69 0.05 78 0.07
Other............................ 452 0.33 459 0.42
-------- ------ -------- ------
Total consumer loans.......... 5,860 4.23 5,317 4.91
Loans secured by leases.......... 448 0.32 -- --
-------- ------ -------- ------
Total loans.................... 138,663 100.00% 108,355 100.00%
====== ======
Less:
Loans in process................. -- 6
Deferred fees and discounts...... 1,664 1,795
Allowance for losses............. 792 608
-------- --------
Total loans receivable, net.... $136,207 $105,946
======== ========
- -----------
(1) Mixed use refers to real estate on which the borrower both resides and conducts a business.
3
The following table shows the composition of the Bank's loan portfolio by
fixed- and adjustable-rate at the dates indicated.
December 31,
----------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ------------------------------
Amount Percent Amount Percent Amount Percent
------------- ------------- ------------- ------------- -------------- ---------------
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family................ $143,882 75.89% $118,308 71.12% $101,015 68.70%
Multi-family...................... 10,999 5.80 9,169 5.51 7,719 5.25
Commercial........................ 7,649 4.04 6,545 3.94 7,370 5.01
Mixed use......................... 7,446 3.93 7,424 4.46 6,666 4.53
Construction or development....... -- -- -- -- -- --
-------- ------ -------- ------ -------- ------
Total real estate loans........... 169,976 89.66 141,446 85.03 122,770 83.49
Consumer............................ 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............ 171,919 90.68 144,373 86.79 125,683 85.47
Adjustable-Rate Loans
Real estate:
One-to-four-family................ 10,937 5.77 16,663 10.02 16,364 11.13
Multi-family...................... -- -- 205 0.12 207 0.14
Commercial........................ 1,659 0.87 1,102 0.66 495 0.34
Mixed use......................... 481 0.25 580 0.35 596 0.41
Consumer............................ 4,602 2.43 3,431 2.06 3,684 2.51
-------- ------ -------- ------
Total adjustable-rate loans....... 17,679 9.32 21,981 13.21 21,346 14.53
-------- ------ -------- ------ --------- ------
Total loans....................... 189,598 100.00% 166,354 100.00% 147,029 100.00%
====== ====== ======
Less:
Loans in process.................... -- -- --
Deferred fees and discounts......... 1,511 1,486 1,578
Allowance for losses................ 1,828 1,520 885
-------- -------- --------
Total loans receivable, net....... $186,259 $163,348 $144,566
======== ======== ========
--------------------------------------------------------
1994 1993
--------------------------- ---------------------------
Amount Percent Amount Percent
------------ -------------- --------------- -----------
Fixed-Rate Loans:
Real estate:
One- to four-family............... 93,139 67.17% $ 76,852 70.93%
Multi-family...................... 7,522 5.43 7,421 6.85
Commercial........................ 6,628 4.78 4,973 4.59
Mixed use......................... 6,790 4.90 5,483 5.06
Construction or development....... -- -- 185 0.17
-------- ------ -------- ------
Total real estate loans........... 114,079 82.28 94,914 87.60
Consumer............................ 1,990 1.44 2,212 2.04
Loans secured by leases............. 448 0.32 -- --
-------- ------ -------- ------
Total fixed-rate loans............ 116,517 84.04 97,126 89.64
Adjustable-Rate Loans
Real estate:
One-to-four-family................ 17,141 12.36 7,549 6.96
Multi-family...................... 209 0.15 211 0.19
Commercial........................ 283 0.20 -- --
Mixed use......................... 643 0.46 364 0.34
Consumer............................ 3,870 2.79 3,105 2.87
Total adjustable-rate loans....... 22,146 15.96 11,229 10.36
-------- ------ -------- ------
Total loans....................... 138,663 100.00% 108,355 100.00%
====== ======
Less:
Loans in process.................... -- 6
Deferred fees and discounts......... 1,664 1,795
Allowance for losses................ 792 608
-------- --------
Total loans receivable, net....... $136,207 $105,946
======== ========
4
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at December 31, 1997. 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.
Real Estate
-------------------------------------------------
Multi-family and
Commercial Real
One- to four-family Estate Consumer and Leases Total
----------------------- ------------------------- ----------------------- -------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
---------- ---------- ---------- ------------ ---------- ---------- ---------- ------------
(Dollars in Thousands)
Due During
Years Ending
December 31,
- -----------------------
1998................... $ 807 8.81% $ 2,324 9.85% $ 534 10.24% $ 3,665 9.68%
1999................... 1,237 7.93 4,392 9.52 274 6.34 5,903 9.04
2000 to 2002........... 19,963 7.82 12,204 9.16 5,531 8.63 37,698 8.37
2003 to 2007........... 16,253 8.10 2,173 9.74 135 6.71 18,561 8.28
2008 to 2022........... 47,701 7.97 4,432 9.03 71 7.15 52,204 8.06
2023 and following..... 68,858 7.86 2,709 8.19 -- -- 71,567 7.87
-------- ------- ------- --------
Total............... $154,819 7.92 $28,234 9.20% $ 6,545 8.61% $189,598 8.13%
======== ======= ======= ========
The total amount of loans due after December 31, 1997 which have
predetermined interest rates is $168.2 million while the total amount of loans
due after such date which have floating or adjustable rates is $17.7 million.
5
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, 1997,
based on the above, the Bank's regulatory loans-to-one borrower limit was
approximately $9.3 million. On the same date, the Bank had no borrowers with
outstanding balances in excess of this amount. As of December 31, 1997, the
largest dollar amount outstanding or committed to be lent to one borrower or,
group of related borrowers, related to one residential loan and one commercial
real estate loan totaling $1.1 million secured by the borrower's residence (in a
suburb of Chicago) and one commercial property (a restaurant) located in
Chicago, Illinois. At December 31, 1997, these loans were performing in
accordance with their terms. As of the same date, there were no 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 five or seven years and which, under
certain circumstances, may be extended for an additional term of up to five or
seven years, as applicable. As of December 31, 1997, the Bank had $23.2 million
of fixed rate loans with original terms of 10 years or less (most of which were
five or seven year balloon loans), $49.7 million of fixed rate loans with
original terms of 10-15 years and $71.0 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, 1997, the
Bank had $953,000 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 Average
Monthly U.S. Treasury Constant Maturity Index ("CMT"). Such loans may carry
terms to maturity of up to 30 years. The ARM loans 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, 1997, one- to four-family ARMs
totaled $10.9 million or 5.8% of the Bank's total loan portfolio. ARM volume
declined significantly during 1997 as a result of refinance activity in a
decreasing interest rate environment.
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
6
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 (currently $227,150), 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 from time to time originates permanent multi-family and commercial real
estate loans secured by properties in its primary market area. At December 31,
1997, the Bank had multi-family loans totaling $11.0 million, or 5.8% of the
Bank's total loan portfolio, and $17.2 million in commercial real estate loans,
representing 9.1% of the total loan portfolio.
The Bank's multi-family loan portfolio consists primarily of loans secured
by nine 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.
The Bank's multi-family real estate loans generally carry a maximum term of
15 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 $1.8 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, 1997, the Bank's largest commercial real estate or
multi-family loan outstanding totaled $722,000 and was secured by a six-unit
office building located in Chicago, Illinois. The loan was performing in
accordance with its terms as of that date.
7
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.
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, automobile 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, 1997 consumer loans totaled $6.5 million or 3.4%
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 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, 1997, the Bank's home equity
lines of credit totaled $4.6 million outstanding, or 2.4% 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 or are secured by rapidly depreciable assets, such as
automobiles. In such cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation.
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.
8
As a reflection of the Bank's emphasis on customer service, the Bank has
not sold loans in the past and does not intend to do so in the future.
The following table shows the loan origination, purchase and repayment
activities of the Bank for the periods indicated.
Year Ended December 31,
--------------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one- to four-family........ $ 1,082 $ 3,067 $ 1,682
------- ------- -------
Total adjustable-rate.............. 1,082 3,067 1,682
------- ------- -------
Fixed rate:
Real estate - one- to four-family........ 46,207 34,696 20,024
- multi-family .............. 6,066 4,329 1,921
- commercial ................ 1,234 682 1,215
Non-real estate - consumer............... 3,477 2,039 1,824
Loan secured by leases................. -- 500 750
------- ------- -------
Total fixed-rate................... 56,984 42,246 25,734
------- ------- -------
Total loans originated............. 58,066 45,313 27,416
------- ------- -------
Principal repayments........................ (34,822) (25,988) (19,050)
------- ------- -------
Increase (decrease) in other
items, net.............................. (333) (543) (7)
------- ------- -------
Net increase........................ $22,911 $18,782 $ 8,359
======= ======= =======
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.
9
The following table sets forth the Bank's loan delinquencies by type, by
amount and by percentage of type at December 31, 1997.
Loans Delinquent For:
---------------------------------------------------------------------------------
60-89 Days 90 Days and Over
--------------------------------------- ----------------------------------------
Percent Percent
of Loan of Loan
Number Amount Category Number Amount Category
----------- ----------- ------------- ----------- ---------- ---------------
(Dollars in Thousands)
Real Estate:
One- to four-family........ 9 $469 .30% 11 $ 614 .40%
Multi-family............... -- -- -- -- -- --
Commercial................. -- -- -- 4 566 3.28
Consumer..................... 6 10 .15 6 7 .11
--- ---- --- ------
Total........................ 15 $479 .25% 21 $1,187 .63%
=== ==== === ======
Total Loans Delinquent
60-Days-or-More
------------------------------------
Percent
of Loan
Number Amount Category
------------------------------------
Real Estate:
One- to four-family........ 20 $1,083 .70%
Multi-family............... -- -- --
Commercial................. 4 566 3.28
Consumer..................... 12 17 .26
--- ------
Total........................ 36 $1,666 .88%
=== ======
10
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, 1997,
the Bank had classified a total of $1.5 million of its loan and other assets as
follows:
At
December 31,
1997
--------------------
(In Thousands)
Substandard........................................... $1,463
Doubtful assets....................................... 1
Loss assets........................................... --
------
Total........................................... $1,464
======
General loss allowance................................ $1,828
======
Specific loss allowance............................... $ --
======
Charge-offs, net...................................... $ 434
======
First Security's classified assets consist of the non-performing loans
referred to below.
11
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.
December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
---------- ------------ ----------- ----------- ---------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family....................... $ 9 $ 9 $ 9 $ 41 $ --
Commercial real estate.................... -- -- -- 254 --
------ ------ ------ ------ ------
Total................................ 9 9 9 295 --
Accruing loans delinquent 90 days or more:
One- to four-family....................... 614 1,111 971 500 985
Multi-family.............................. --- 180 367 330 16
Commercial real estate.................... 566 882 749 257 887
Consumer.................................. 194 226 189 43 11
------ ------ ------ ------ ------
Total................................ 1,374 2,399 2,276 1,130 1,899
Foreclosed assets:
One- to four-family....................... -- 40 -- -- --
Commercial real estate.................... -- -- 499 207 96
------ ------ ------ ------ ------
Total................................ -- 40 499 207 96
Non-performing leases(1).................... 81 1,272 -- -- --
------ ------ ------ ------ ------
Total non-performing assets................. $1,464 $3,720 $2,784 $1,632 $1,995
====== ====== ====== ====== ======
Total as a percentage of total assets....... 0.46% 1.44% 1.11% 0.72% 1.05%
==== ===== ===== ==== =====
- -------------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Comparison of Operating Results for the years
ended December 31, 1997 and December 31, 1996 -- Provision for Loan Losses"
in the Annual Report attached as Exhibit 13 hereto for a discussion of the
Bank's Bennett Funding leases.
For the years ended December 31, 1996 and December 31, 1997, 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 $93,000 and $45,000,
respectively. No interest income was recognized on non-accruing loans for the
years ended December 31, 1997 and December 31, 1996, respectively.
Other Loans of Concern. In addition to the non-performing assets set forth
in the table above, as of December 31, 1997, 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.
12
The following table sets forth an analysis of the Bank's allowance for loan
losses.
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
---------- ----------- ----------- ----------- ----------
(Dollars in Thousands)
Balance at beginning of period....... $1,520 $ 885 $ 792 $ 608 $360
Charge-offs:
One- to four-family................ -- -- -- -- --
Multi-family....................... -- -- -- -- --
Commercial real estate............. -- 68 28 -- --
Construction or development........ -- -- -- -- --
Consumer........................... 2 3 15 -- 1
Leases............................. 432 -- -- -- --
------ ------ ------ ------ ------
434 71 43 -- 1
Recoveries:
One- to four-family................ -- -- -- -- --
Multi-family....................... -- -- -- -- --
Commercial real estate............. -- -- -- -- --
Construction or development........ -- -- -- -- --
Consumer........................... 4 -- -- 2 --
Leases............................. -- -- -- -- --
------ ------ ------ ------ ------
4 -- -- 2 --
Net (charge-offs) recoveries......... (430) (71) (43) 2 (1)
Additions charged to operations...... 738 706 136 182 249
------ ------ ------ ------ ------
Balance at end of period............. $1,828 $1,520 $ 885 $ 792 $ 608
====== ====== ====== ====== ======
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 .............. 21.12% 2.15% (1.88)% (0.10)% 0.04%
==== ==== ==== ==== ====
13
The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:
December 31,
---------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------- ------------------------------------ ------------------------------------
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
----------- ------------ ---------- ------------ ----------- ----------- ----------- ----------- ------------
(Dollars in Thousands)
One- to four-family $ 572 $154,819 81.66% $ 355 $134,971 81.14% $310 $117,379 79.83%
Multi-family....... 67 10,999 5.80 56 9,374 5.63 56 7,926 5.39
Commercial real
estate.......... 448 17,235 9.09 245 15,651 9.41 199 15,127 10.29
Construction or
development..... -- -- -- -- -- -- -- -- --
Consumer........... 80 6,464 3.41 68 5,086 3.06 70 5,838 3.97
Loans secured by
leases.......... 40 81 0.04 318 1,272 0.76 76 759 0.52
Unallocated........ 621 -- -- 478 -- -- 174 -- --
------ -------- ------ ------ -------- ------ ---- -------- ------
Total....... $1,828 $189,598 100.00% $1,520 $166,354 100.00% $885 $147,029 100.00%
====== ======== ====== ====== ======== ====== ==== ======== ======
- -------------------------------------------------------------------------
1994 1993
- ------------------------------------- ----------------------------------
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
------------ ------------ ----------- ----------- ----------- ----------
One- to four-family $284 $110,280 79.53% $225 $ 84,401 77.89%
Multi-family...... 52 7,731 5.58 45 7,632 7.04
Commercial real
estate.......... 233 14,344 10.34 206 10,820 9.99
Construction or
development..... -- -- -- 15 185 0.17
Consumer........... 71 5,860 4.23 66 5,317 4.91
Loans secured by
leases.......... 55 448 0.32 -- -- --
Unallocated........ 97 -- -- 51 -- --
---- -------- ------ ---- -------- ------
Total....... $792 $138,663 100.00% $608 $108,355 100.00%
==== ======== ====== ==== ======== ======
14
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 and projected 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, net
realizable values, the current and prospective 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.
Investment 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.
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, 1997,
the Bank's liquidity ratio for regulatory purposes was 18.6%. 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.
Prior to December 31, 1993, the Bank recorded its marketable equity
securities at the lower of cost or current market value and its remaining
investment securities at amortized cost. Unrealized declines in the market value
of marketable equity securities were reflected in the equity section of the
financial statements. Effective January 1, 1994, the Bank adopted SFAS 115. As
required by SFAS 115, securities are classified into three categories: trading,
held-to-maturity and available-for-sale. Securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and are reported at fair value with unrealized gains and
losses included in trading account activities in the statement of operations.
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 trading or held-to-maturity are classified as
available-for-sale. At December 31, 1997, the Company had no securities which
were classified as trading and $32.5 million of mortgage-backed and investment
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 retained earnings.
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, 1997, 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.
Consistent with its asset/liability management strategy, at December 31,
1997, $16.7 million, or 47.4% of the Company's mortgage-backed and related
securities were available-for-sale. In addition, on the same date, $13.6 million
or 38.6% of the Company's mortgage-backed and related securities carried
adjustable rates. Finally, as discussed further below, at December 31, 1997, the
Company had $1.4 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.
15
The Company's CMOs and real estate mortgage investment conduits ("REMICs")
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 or REMIC. Although a significant
proportion of the Company's CMOs and REMICs 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 and REMICs is subject to change.
The Company invests in CMOs and REMICs 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 and REMICs 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 and REMICs (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, 1997, the most recent quarterly test date,
none of the Company's mortgage-backed securities were classified as "high-risk."
16
The following table sets forth the composition of the Company's
mortgage-backed securities at the dates indicated.
December 31,
----------------------------------------------------------------
1997 1996
------------------------------ ------------------------------
Carrying % of Carrying % of
Value Total Value Total
-------------- -------------- --------------- -------------
(Dollars in Thousands)
Mortgage-backed securities held-to-maturity:
GNMA.............................................. $ 7,781 22.05% $ 9,226 21.05%
FNMA.............................................. 2,531 7.17 3,294 7.51
FHLMC............................................. 4,558 12.92 6,280 14.33
CMOs/REMICs....................................... 3,681 10.44 5,309 12.11
------- ------ ------- ------
18,551 52.58 24,109 55.00
Mortgage-backed securities available-for-sale:
GNMA.............................................. 2,982 8.45 3,425 7.81
FNMA.............................................. 5,605 15.89 6,572 14.99
FHLMC............................................. 7,601 21.54 8,985 20.50
CMOs/REMICs....................................... 545 1.54 745 1.70
------- ------ ------- ------
16,733 47.42 19,727 45.00
------- ------ ------- ------
Total mortgage-backed securities............... $35,284 100.00% $43,836 100.00%
======= ====== ======= ======
December 31,
---------------------------------
1995
---------------------------------
Carrying % of
Value Total
--------------- ----------------
Mortgage-backed securities held-to-maturity:
GNMA.............................................. $ 5,142 11.39%
FNMA.............................................. 4,526 10.02
FHLMC............................................. 9,806 21.71
CMOs/REMICs....................................... 5,646 12.50
-------- ------
25,120 55.62
Mortgage-backed securities available-for-sale:
GNMA.............................................. 2,924 6.47
FNMA.............................................. 6,383 14.14
FHLMC............................................. 9,992 22.12
CMOs/REMICs....................................... 745 1.65
-------- ------
20,044 44.38
-------- ------
Total mortgage-backed securities............... $45,164 100.00%
======= ======
17
The following table sets forth the contractual maturities of the Company's
mortgage-backed securities at December 31, 1997.
Due in
----------------------------------------------------------------------
6 Months 6 Months 1 to 3 to 5 5 to 10
or Less to 1 Year 3 Years Years Years
------------ -------------- ------------- ------------ --------------
(In Thousands)
Federal Home Loan Mortgage Corporation............ $196 $ -- $ -- $374 $1,547
Federal National Mortgage Association............. 71 -- 237 -- 1,188
Government National Mortgage Association.......... -- -- -- -- 456
CMOs and REMICs .................................. -- -- 654 -- 1,127
---- ------ ---- ---- -----
Total........................................ $267 $ -- $891 $374 $4,318
==== ====== ==== ==== ======
December 31, 1997
------------------------
10 to 20 Over 20 Amortized Carrying
Years Years Cost Value
------------- ------------ ------------- ----------
Federal Home Loan Mortgage Corporation............ $2,520 $ 7,679 $12,316 $12,159
Federal National Mortgage Association............. 2,378 4,358 8,232 8,136
Government National Mortgage Association.......... 1,941 8,313 10,710 10,763
CMOs and REMICs .................................. 651 1,794 4,226 4,226
------ ------- ------- ------
Total........................................ $7,490 $22,144 $35,484 $35,284
====== ======= ======= =======
18
As of December 31, 1997, 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 $8.1 million, $12.1 million and $10.8 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.
Year Ended December 31,
-------------------------------------------
1997 1996 1995
----------- ------------- -----------
(In Thousands)
Purchases:
Adjustable-rate............... $ -- $2,396 $ 8,197
Fixed-rate.................... -- 4,583 1,498
CMOs.......................... -- 510 --
------- ------- -------
Total purchases.......... 7,489 9,695
Principal repayments.............. (8,475) (8,639) (6,999)
Discount/premium net change....... (184) 16 (39)
Fair value net change............. 107 (194) (114)
------- ------- -------
Net increase (decrease).. $(8,552) $(1,328) $ 2,543
======= =-===== --=====
The Company's holdings of mortgage-backed securities are a significant
portion 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 and REMICs 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, 1997
and December 31, 1996, the Company's securities portfolio totaled $54.2 million
and $34.8 million, respectively. At December 31, 1997, 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.
19
The following table sets forth the composition of the Company's other
securities and other earning assets at the dates indicated.
December 31,
-----------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- -------------------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
------------- ------------- -------------- ------------ --------------- ---------------
(Dollars in Thousands)
Securities held-to-maturity:
Federal agency obligations.............. $33,562 61.92% $20,320 58.43% $15,445 45.02%
Municipal bonds......................... 4,909 9.06 5,208 14.98 4,768 13.90
Corporate notes......................... -- -- 251 0.72 353 1.02
------- ------ ------- ------ ------- ------
38,471 70.98 25,779 74.13 20,566 59.94
Securities available-for sale:
US government securities................ 8,014 14.79 3,350 9.63 7,936 23.13
Mutual funds............................ 3,155 5.82 5,645 16.23 5,737 16.72
Municipal bonds......................... 3,966 7.32 -- -- -- --
Corporate notes......................... 250 0.46 -- -- -- --
Other equity............................ 343 0.63 2 0.01 70 0.21
------- ------ ------- ------ ------- ------
15,728 29.02 8,997 25.87 13,743 40.06
------- ------ ------- ------ ------- ------
Total securities................... $54,199 100.00% $34,776 100.00% $34,309 100.00%
======= ====== ======= ====== ======= ======
Other earning assets:
Interest-earning deposits with banks.... $ 5,750 22.28% $ 2,713 44.58% $ 9,490 71.12%
FHLB stock.............................. 1,852 7.18 1,673 27.49 1,553 11.64
Federal funds sold...................... 18,000 69.76 1,500 24.65 2,100 15.74
Time deposit in other financial
institutions........................... 200 0.78 200 3.28 200 1.50
------- ------ ------- ------ ------- ------
Total............................. $25,802 100.00% $ 6,086 100.00% $13,343 100.00%
======= ====== ======= ====== ======= ======
20
The composition and maturities of the other securities portfolio, excluding
FHLB stock, are indicated in the following table.
December 31, 1997
-----------------------------------------------------------------------------------------------
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)
US government securities............ $1,995 $ -- $ -- $ 259 $ 2,254 $ 2,362
Federal agency obligations.......... -- 9,450 27,753 2,007 39,210 39,309
Municipal bonds..................... 100 1,348 2,152 5,213 8,813 9,071
Corporate notes..................... -- -- 250 -- 250 250
------ ------- ------- ------ ------- -------
Total securities.................... $2,095 $10,798 $30,155 $7,479 $50,527(1) $50,992
====== ======= ======= ====== ======= =======
Weighted average yield.............. 5.86% 6.24% 6.66% 6.04% 6.45%
==== ==== ==== ==== ====
- ----------------
(1) Includes $37.8 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 $88.9 million or 42.3% of total
deposits at December 31, 1997, 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.
21
The table below sets forth the Bank's deposit flows for the periods
indicated.
Year Ended December 31,
-------------------------------------------------
1997 1996 1995
--------------- ----------------- ---------------
(Dollars In Thousands)
Opening balance............... $ 219,505 $ 209,387 $ 195,875
Deposits...................... 457,063 347,280 348,404
Withdrawals................... (475,811) (346,192) (343,039)
Interest credited............. 9,343 9,030 8,147
--------- --------- ----------
Ending balance................ $ 210,100 $ 219,505 $ 209,387
========= ========= ==========
Net increase (decrease)....... $ (9,405) $ 10,118 $ 13,512
========= ========= ==========
Percent increase (decrease)... (4.28)% 4.83% 6.90%
===== ==== ====
22
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.
December 31,
-------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- --------------------------- ----------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------------------------- --------------------------- ----------------------------
(Dollars in Thousands)
Transactions and Savings Deposits
Passbook Accounts 3.00%....................... $ 68,572 32.6% $ 71,167 32.4% $ 69,631 33.3%
NOW Accounts 2.23%............................ 15,705 7.5 14,509 6.6 13,262 6.3
Money Market Accounts 3.06%................... 4,574 2.2 5,107 2.3 5,612 2.7
------- ----- -------- ----- -------- -----
Total Non-Certificates........................ 88,851 42.3 90,783 41.3 88,505 42.3
Certificates:
0.00 - 3.99%.................................. -- -- 119 0.1 310 0.1
4.00 - 5.99%.................................. 108,902 51.8 116,397 53.0 87,775 41.9
6.00 - 7.99%................................ 12,347 5.9 12,094 5.5 32,629 15.6
8.00 - 9.00%................................ -- -- 112 0.1 168 0.1
-------- ----- -------- ----- -------- ------
Total Certificates.......................... 121,249 57.7 128,722 58.7 120,882 57.7
-------- ----- -------- ----- -------- -----
Total Deposits.............................. $210,100 100.0% $219,505 100.0% $209,387 100.0%
======== ===== ======== ===== ======== =====
23
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1997.
Less Than 1 to 2 2 to 3 3 to 4 4 to 5 Greater
1 Year Years Years Years Years than 5 Years Total
------------- ------------ ------------ ------------ ------------ ---------------- ----------
(Dollars in Thousands)
4.00 - 4.99%.......... $ 7,173 $ -- $ 5 $ -- $ -- $ -- $ 7,178
5.00 - 5.99%.......... 88,685 9,759 865 1,336 1,079 -- 101,724
6.00 - 6.99%.......... 229 652 6,729 1,705 2,391 -- 11,706
7.00 - 7.99%.......... 19 49 522 2 --- 49 641
------- ------- ------ ------ ------ ------ --------
$96,106 $10,460 $8,121 $3,043 $3,470 $ 49 $121,249
======= ======= ====== ====== ====== ====== ========
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,
1997.
Maturity
----------------------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------------- ------------- --------------- --------------- ---------------
(In Thousands)
Certificates of deposit less than
$100,000................................... $31,064 $24,646 $21,728 $16,798 $ 94,236
Certificates of deposit $100,000
or more.................................... 7,193 7,157 4,318 8,345 27,013
------- ------- ------- ------- --------
Total certificates of deposit.......... $38,257 $31,803 $26,046 $25,143 $121,249
======= ======= ======= ======= ========
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.
24
The following table sets forth the maximum month-end balance and average
balance of FHLB advances for the periods indicated.
Year Ended December 31,
------------------------------------------------------------------------------
1997 1996 1996 1995 1994
-------------- --------------- -------------- --------------- ----------------
(Dollars In Thousands)
Maximum Balance:
FHLB Advances........................... $12,000 $3,000 $4,000 $10,000 $3,000
Average Balance:
FHLB Advances........................... $ 9,548 $3,000 $3,333 $3,769 $2,846
Weighted average interest rate of
FHLB advances........................... 5.72% 5.17% 5.25% 5.25% 6.30%
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, 1997, 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 $38,000 as of December 31, 1997. Western recognized net income (loss) of
($15,000) during the year ended December 31, 1997 and $3,000 during the year
ended December 31, 1996.
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.
25
REGULATION
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 September 30, 1997 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, 1997, First Security's lending
limit under this restriction was $9.3 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, 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. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. The OTS and the other federal banking
agencies have also proposed additional guidelines on asset quality and earnings
standards.
26
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.
For the first six months of 1995, the assessment schedule for Bank
Insurance Fund ("BIF") members and SAIF members ranged from .23% to .31% of
deposits. As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits.
As a result of the BIF reaching its statutory reserve ratio the FDIC revised the
premium schedule for BIF insured institutions to provide a range of .04% to .31%
of deposits. The revisions became effective in the third quarter of 1995. In
addition, the BIF rates were further revised, effective January 1996, to provide
a range of 0% to .27%. The SAIF rates, however, were not adjusted. At the time
the FDIC revised the BIF premium schedule, it noted that, absent legislative
action (as discussed below), the SAIF would not attain its designated reserve
ratio until the year 2002. As a result, SAIF insured members would continue to
be generally subject to higher deposit insurance premiums than BIF insured
institutions until, all things being equal, the SAIF attains its required
reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate was
established at .657% of deposits and the assessment was paid in November 1996.
Based on First Security's level of SAIF deposits at March 31, 1995, First
Security's assessment was approximately $1.3 million on a pre-tax basis. This
special assessment significantly increased noninterest expense and adversely
affected the Bank's results of operations for the year ended December 31, 1996.
Prior to the enactment of the legislation, a portion of the SAIF assessment
imposed on savings associations was used to repay obligations issued by a
federally chartered corporation to provide financing ("FICO") for resolving the
thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made
27
on BIF-assessable deposits for this purpose, effective January 1, 1997, that
assessment is limited to 20% of the rate imposed on SAIF assessable deposits
until the earlier of December 31, 1999 or when no savings association continues
to exist, thereby imposing a greater burden on SAIF member institutions such as
First Security. Thereafter, however, assessments on BIF-member institutions will
be made on the same basis as SAIF-member institutions. The rates established by
the FDIC to implement this requirement for all FDIC-insured institutions are a
6.5 basis points assessment on SAIF deposits and 1.5 basis points on BIF
deposits until BIF insured institutions participate fully in the assessment.
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, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. 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.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital 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 tangible capital for calculating
compliance with the requirement. At December 31, 1997, First Security had
$343,000 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. See Note 6 of the Notes to Consolidated
Financial Statements in the Annual Report attached as Exhibit 13 hereto.
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, 1997, First Security had tangible capital of $61.4 million,
or 19.8% of adjusted total assets, which is approximately $56.8 million above
the minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio.
At December 31, 1997, First Security had core capital equal to $61.4
million, or 19.8% of adjusted total assets, which is $52.1 million above the
minimum leverage ratio requirement of 3% as 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, 1997, First Security
had $1.8 million of general loss reserves of which $1.8 million qualifies as
supplementary capital, which was less than 1.25% of risk-weighted assets.
28
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, 1997.
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.
OTS regulations also require every savings association with more than
normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, 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 provides for a two quarter lag between
calculating interest rate risk and recognizing any deduction from capital. 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 capital ratio in
excess of 12% is exempt from this requirement unless the OTS determines
otherwise.
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.
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
29
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.
Generally, savings associations, such as First Security, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. First Security
may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
associations that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain OTS
approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association that is a
subsidiary of a holding company may make a capital distribution with notice to
the OTS provided that it has a CAMEL 1 or 2 rating, is not of supervisory
concern, and would remain adequately capitalized (as defined in the OTS prompt
corrective action regulations) following the proposed distribution. Savings
associations that would remain adequately capitalized following the proposed
distribution but do not meet the other noted requirements must notify the OTS 30
days prior to declaring a capital distribution. The OTS stated it will generally
regard as permissible that amount of capital distributions that do not exceed
50% of the institution's excess regulatory capital plus net income to date
during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity
All savings associations, including First Security, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what First Security
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
in the Annual Report attached as Exhibit 13 hereto. This liquid asset ratio
requirement may vary from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings associations. At the
present time, the minimum liquid asset ratio is 4%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily balance
of net withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon associations for violations of either liquid asset ratio
requirement. At December 31, 1997, First Security was in compliance with both
requirements, with an overall liquid asset ratio of 18.57% and a short-term
liquid assets ratio of 9.27%
Accounting
An OTS policy statement applicable to all savings associations clarifies
and re-emphasizes that the investment activities of a savings association must
be in compliance with approved and documented investment policies and
strategies, and must be accounted for in accordance with GAAP. Under the policy
statement, management must support
30
its classification of and accounting for loans and securities (i.e., whether
held-to-maturity, available-for-sale or trading) with appropriate documentation.
First Security is in compliance with these amended rules.
The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
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. Such assets
primarily consist of residential housing related loans and investments. At
December 31, 1997, First Security met the test with 83.6% of its portfolio
assets in qualified thrift investments 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 April 1996 and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association and its affiliates
are required to be on terms as favorable to the association as transactions with
non-affiliates. In addition, certain of these 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
31
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.
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 will be 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
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, 1997, 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."
32
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. The aggregate amount of advances cannot exceed 20 times the amount of
FHLB stock held by the institutions.
As a member, First Security is required to purchase and maintain stock in
the FHLB of Chicago. At December 31, 1997, First Security had $1.9 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 6.54% and were 6.8% for
calendar year 1997. As a result of its holdings, the Bank could borrow up to
$37.0 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, 1997, dividends paid by the FHLB of Chicago
to First Security totaled $123,000, which constitute a $12,000 increase from the
amount of dividends received in calendar year 1996.
Federal and State Taxation
In August 1996, legislation was enacted that repeals the reserve method of
accounting used by many thrifts to calculate their bad debt reserve for federal
income tax purposes. As a result, small thrifts such as the Bank must recapture
that portion of the reserve that exceeds the balance of its reserves as of the
close of its 1987 tax year. The legislation also requires thrifts to account for
bad debts for federal income tax purposes on the same basis as commercial banks
for tax years beginning after December 31, 1995. The recapture will occur over a
six-year period, the commencement of which will be delayed until the first
taxable year beginning after December 31, 1997, provided the institution meets
certain residential lending requirements. The management of the Company does not
believe that the legislation will have a material impact on the Company or the
Bank.
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.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions
33
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, 1997, 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.
Impact of New Accounting Standards
In June 1996, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 125 ("SFAS No. 125"), "Accounting for
Transfers and Extinguishments of Liabilities." SFAS No. 125 provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 125 requires a consistent application
of a financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, and
derecognizes liabilities when extinguished. SFAS No. 125 also supersedes SFAS
No. 122 and requires that servicing assets and liabilities be subsequently
measured by amortization in proportion to and over the period of estimated net
servicing income or loss and requires assessment for asset impairment or
increases obligations based on their fair values. SFAS No. 125 applies to
transfers and extinguishments occurring after December 31, 1996 and early or
retroactive application is not permitted. Because the volume and variety of
certain transactions will make it difficult for some entities to comply, some
provisions have been delayed by SFAS No. 127. The adoption of SFAS No. 125 did
not have a material impact on the financial condition or operations of the
Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130") "Reporting Comprehensive Income". This statement
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Income tax effects must also
be shown. This statement is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 130 is not expected to have a material impact
on the results of operations or financial condition of the Company.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", was issued in 1997 by the
Financial Accounting Standards Board. This Statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Statement 131 is effective for periods beginning after
December 31, 1997.
34
Management does not believe that the provisions of this Statement are applicable
to the Company, since substantially all of the Company's operations are banking
services.
Year 2000
The Company has conducted a review of its computer systems to review the
systems that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. For example, programs that have time sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company presently
believes that, with modifications to existing software and by converting to new
software, the Year 2000 problem will not pose significant operational problems
for the Company's computer systems as so modified and converted. However, if
such modifications and conversions are not completed timely, the Year 2000
problem may have a material impact on the operations of the Company.
Employees
At December 31, 1997, the Corporation, including its subsidiaries, had a
total of 86 employees, including 20 part-time employees. The Bank's employees
are not represented by any collective bargaining group. Management considers its
employee relations to be good.
Item 2. Properties
The following table sets forth information concerning the main office and
each branch office of the Bank at December 31, 1997. At December 31, 1997, the
Bank's premises had an aggregate net book value of approximately $ 3.7 million.
Year
Acquired/ Owned or Net Book Value at
Location Established Leased December 31, 1997 Deposits
- -------------------------------------- ------------------ ------------ --------------------- ------------
(In Thousands)
Main Office:
936 North Western Avenue 1964 Owned $1,265 $135,785
Chicago, Illinois 60622-4695
Branch Offices:
2166 Plum Grove Road 1977 Leased(1) 2 10,082
Rolling Meadows, Illinois 60008
820 N. Western Avenue 1983 Owned 248 2,293
Chicago, Illinois 60622
5670 N. Milwaukee Avenue 1993 Owned 1,169 11,224
Chicago, Illinois 60646
7918 Bustleton Avenue 1994 Owned 628 50,716
Philadelphia, Pennsylvania 19152
- ---------------
(1) The lease expires in July 2000.
35
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, 1997 was
approximately $110,000.
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.
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,
1997.
36
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Page 45 of the attached 1997 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Selected Financial Data
Pages 2 and 3 of the attached 1997 Annual Report to Stockholders is herein
incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Pages 5 through 17 of the attached 1997 Annual Report to Stockholders is
herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 18 through 44 of the attached 1997 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 1998, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Executive Officers of the Corporation who are not Directors
The following table sets forth certain information regarding the executive
officers of the Corporation and the Bank who are not also directors.
Name Positions Held with Bank and Corporation
- ---- ----------------------------------------
Adrian Hawryliw Vice President - Philadelphia Branch Manager
Mary H. Korb Vice President - Lending
Harry I. Kucewicz Treasurer and Chief Financial Officer
Irene S. Subota Vice President - Savings
- --------------------
(1) At December 31, 1997.
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.
The business experience of each executive officer who is not also a
director is set forth below.
Harry Kucewicz. Mr. Kucewicz, age 41, is currently serving as the Treasurer
and Chief Operating and Financial Officer of the 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 50, is currently Vice President - Lending of
the Bank. In such capacity, 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 51, currently serves as Vice President -
Savings of the Bank. In such capacity, 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 61, 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. 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.
37
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 1998, 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 1998, 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 1998, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
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. Independent Auditors' Report.
3. Consolidated Statements of Financial Condition at December 31,
1997 and 1996.
4. Consolidated Statements of Income for the fiscal years ended
December 31, 1997, 1996 and 1995.
5. Consolidated Statements of Shareholders' Equity for the fiscal
years ended December 31, 1997, 1996 and 1995.
6. Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 1997, 1996 and 1995.
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, 1997.
38
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 Director
and Director
(Principal Executive Officer)
Date: March 31, 1998 Date: March 31, 1998
---------------------------- ----------------------------
/s/ Lila Maria Bodnar /s/ Myron Dobrowoolsky
- ---------------------------------- ----------------------------------
Lila Maria Bodnar Myron Dobrowolsky
Recording Secretary and Director Director
Date: March 31, 1998 Date: March 31, 1998
---------------------------- ----------------------------
/s/ Terry Gawryk /s/ George Kawka
- ---------------------------------- ----------------------------------
Terry Gawryk George Kawka
Secretary and Director Director
Date: March 31, 1998 Date: March 31, 1998
---------------------------- ----------------------------
/s/ Paul Nadzikewycz /s/ Jaroslav H. Sydorenko
- ---------------------------------- ----------------------------------
Paul Nadzikewycz Jaroslav H. Sydorenko
Chairman of the Board Director
Date: March 31, 1998 Date: March 31, 1998
---------------------------- ----------------------------
/s/ Chrysta Wereszczak /s/ Harry Kucewicz
- ---------------------------------- ----------------------------------
Chrysta Wereszczak Harry Kucewicz
Director Principal Financial and Accounting
Officer
Date: March 31, 1998 Date: March 31, 1998
---------------------------- ----------------------------------
39
EXHIBIT INDEX
Reference to
Prior Filing
or Exhibit
Number
Attached
Number Document Hereto
- ------ --------------------------------------------------- ------------
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession
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 Material contracts: None
11 Statement re: computation of per share earnings None
12 Statement re: computation of ratios Not required
13 Annual Report to Security Holders
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 None
vote of security holders
23 Consent of Independent Auditor Not Required
24 Power of Attorney Not Required
27 Financial Data Schedule 27
99 Additional Exhibits None
- ---------------