UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

 

FORM 10-Q

 

(Mark One)

 

ý		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the period ended:      March 31, 2004
o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                to

 

Commission file number      00-23063

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

 

Indicate the number of shares outstanding of each the issuer’s classes of common stock, as of the latest practicable date:

 

 

 

FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS

 

INDEX

 

Part I. Financial Information
	Item 1.	Financial Statements
	Condensed Consolidated Statements of Financial Condition  as of March  31, 2004 and December 31, 2003
	Condensed Consolidated Statements of Income for the three months ended March 31, 2004 and  2003
	Statements of Comprehensive Income for the three months ended  March 31, 2004 and  2003
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2004
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003
	Notes to the Condensed Consolidated Financial Statements as of March 31, 2004
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk
	Item 4.	Controls and Procedures
Part II. Other Information
	Item 1.	Legal Proceedings
	Item 2.	Changes in Securities, Use of Proceeds and Issuers Purchases of Equity Securities
	Item 3.	Defaults Upon Senior Securities
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 5.	Other Information
	Item 6.	Exhibits and Reports on Form 8-K

 

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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except share and per share data)

(Unaudited)

 

		March 31, 2004			December 31, 2003
ASSETS
Cash and due from banks		$	12,464		$	7,652
Interest-bearing deposit accounts in other financial institutions		3,080			3,909
Federal funds sold		20,800			2,300
Total cash and cash equivalents		36,344			13,861
Securities available-for-sale		92,701			105,672
Securities held-to-maturity (fair value of $43,541 in 2004 and $45,238 in 2003)		40,809			42,618
Loans receivable, net		302,354			303,977
Federal Home Loan Bank stock, at cost		20,466			20,139
Premises and equipment, net		4,440			4,518
Accrued interest receivable		3,249			3,164
Other assets		160			462
Total assets		$	500,523		$	494,411
LIABILITIES
Deposits
Non-interest-bearing		$	12,772		$	12,803
Interest-bearing		301,301			297,039
		314,073			309,842
Advance payments by borrowers for taxes and insurance		1,575			2,662
Advances from Federal Home Loan Bank		93,529			93,644
Accrued interest payable and other liabilities		3,590			2,379
Total liabilities		412,767			408,527
SHAREHOLDERS’ EQUITY
Preferred stock, $0.01 par value per share, 500,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $0.01 par value per share, 8,000,000 shares authorized, 6,408,000 shares issued		64			64
Additional paid-in capital		64,990			64,813
Unearned ESOP shares		(2,894		)	(2,967		)
Unearned stock awards		(731		)	(739		)
Treasury stock, at cost; (2,368,937 shares in 2004 and 2003)		(35,752		)	(35,752		)
Retained earnings		60,886			59,645
Accumulated other comprehensive income		1,193			820
Total shareholders’ equity		87,756			85,884
Total liabilities and shareholders’ equity		$	500,523		$	494,411

 

See accompanying notes to condensed consolidated financial statements

 

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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except share and per share data)

(Unaudited)

 

		Three months ended March 31,
		2004			2003
Interest income
Loans		$	5,426		$	5,769
Securities		1,176			944
Mortgage-backed securities		433			490
Other interest-earning assets and federal funds sold		360			429
Total interest income		7,395			7,632
Interest expense
Deposits		1,358			1,706
Federal Home Loan Bank advances		1,162			1,140
Total interest expense		2,520			2,846
Net interest income		4,875			4,786
Provision for loan losses		33			21
Net interest income after provision for loan losses		4,842			4,765
Noninterest income
Deposit service charges		121			123
Other income		72			144
Total noninterest income		193			267
Noninterest expense
Compensation and benefits		1,077			1,183
Occupancy and equipment		198			190
Data processing		143			130
Professional fees		258			117
Other operating expenses		259			313
Total noninterest expense		1,935			1,933
Income before income taxes		3,100			3,099
Income tax expense		1,171			1,145
Net income		$	1,929		$	1,954
Earnings per share
Basic		$	.52		$	.55
Diluted		$	.49		$	.53

 

See accompanying notes to condensed consolidated financial statements

 

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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS

STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands, except share and per share data)

(Unaudited)

 

		Three months ended March 31,
		2004			2003
Net income		$	1,929		$	1,954
Other comprehensive income, net of tax:
Change in unrealized holding gains (losses) on securities available-for-sale		373			4
Comprehensive income		$	2,302		$	1,958

 

See accompanying notes to condensed consolidated financial statements

 

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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS

 

CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in thousands, except share and per share data)

(Unaudited)

 

																				Accumulated			Total
					Additional			Unearned			Unearned									Other Com-			Share-
		Common			Paid-in			ESOP			Stock			Treasury			Retained			prehensive			holders’
		Stock			Capital			Shares			Awards			Stock			Earnings			Income			Equity
Balance at December 31, 2003		$	64		$	64,813		$	(2,967	)	$	(739	)	$	(35,752	)	$	59,645		$	820		$	85,884
ESOP shares earned		—			177			73			—			—			—			—			250
Stock awards earned		—			—			—			8			—			—			—			8
Net income		—			—			—			—			—			1,929			—			1,929
Dividends declared ($.17 per share)		—			—			—			—			—			(688		)	—			(688		)
Change in fair value of securities, net of income taxes and reclassification effects		—			—			—			—			—			—			373			373
Balance at March 31, 2004		$	64		$	64,990		$	(2,894	)	$	(731	)	$	(35,752	)	$	60,886		$	1,193		$	87,756

 

See accompanying notes to condensed consolidated financial statements

 

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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, except share and per share data)

(Unaudited)

 

		Three months ended March 31,
		2004			2003
Cash flows from operating activities
Net income		$	1,929		$	1,954
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization		97			84
Amortization of discounts and premiums on securities		196			132
Provision for loan losses		33			21
ESOP compensation expense		250			197
Stock award compensation expense		8			187
Federal Home Loan Bank stock dividend		(327		)	(410		)
Change in
Deferred loan origination fees		50			50
Accrued interest receivable and other assets		217			(198		)
Other liabilities and deferred income taxes		921			(199		)
Net cash from operating activities		3,374			1,818
Cash flows from investing activities
Purchase of securities available-for-sale		—			(21,706		)
Proceeds from repayment of securities		3,988			3,048
Proceeds from calls and maturities of securities		11,215			9,092
Net change in loans		1,580			1,636
Capital expenditures, net		(15		)	(341		)
Purchase of Federal Home Loan Stock		—			(4,000		)
Net cash from investing activities		16,768			(12,271		)
Cash flows from financing activities
Net increase in deposits		4,231			5,785
Net change in advances from Federal Home Loan Bank		(115		)	(115		)
Net change  in advances from borrowers for insurance and taxes		(1,087		)	(1,149		)
Dividends paid		(688		)	(505		)
Net cash from financing activities		2,341			4,016
Net change in cash and cash equivalents		22,483			(6,437		)
Cash and cash equivalents at beginning of period		13,861			27,817
Cash and cash equivalents at end of period		$	36,344		$	21,380

 

See accompanying notes to condensed consolidated financial statements

 

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FIRST SECURITYFED FINANCIAL, INC.
CHICAGO, ILLINOIS
NOTES TO CONDENSED  CONSOLIDATED  FINANCIAL STATEMENTS

 

NOTE  1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Financial Statement Presentation

First SecurityFed Financial, Inc. (the Company) is a Delaware corporation organized in July 1997 by First Security Federal Savings Bank (the Bank) in connection with the conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information.   These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ.  The allowance for loan losses is particularly subject to change.

 

In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial condition of First SecurityFed Financial, Inc. as of March 31, 2004 and the results of its operations for the three month periods ended March 31, 2004 and 2003 and cash flows for the three months ended March 31, 2004 and 2003.  The annualized results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results expected for the full year ending December 31, 2004. The unaudited interim consolidated financial statements presented herein should be read in conjunction with the annual consolidated financial statements of the Company as of and for the year ended December 31, 2003 included in its Annual Report on Form 10-K.

 

The December 31, 2003 balance sheet presented herein has been derived from the audited financial statements included in the Company’s 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

NOTE  2 – MERGER OF COMPANY

 

On January 12, 2004, MB Financial, Inc. (“MB Financial”) and the Company announced their agreement to merge, pursuant to the Agreement and Plan of Merger, dated as of January 9, 2004 (“the Agreement”), between MB Financial and the Company. Pursuant to the Agreement, the Company will be merged with and into MB Financial, with MB Financial as the surviving corporation.  Subject to the allocation provisions of the Agreement, the Company’s shareholders will have the right to elect to receive for each share of the Company’s common stock held, either $35.25 in cash or a number of shares of MB Financial common stock equal to the quotient obtained by dividing $35.25 by the average closing price of MB Financial common stock over

 

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the ten-trading day period ending on the second trading day prior to the effective date of the transaction.  The transaction is subject to restructuring as an all-cash transaction at $35.25 per share if the aggregate value of the MB Financial common stock to be issued is less than 40% of the value of the aggregate transaction consideration and MB Financial elects not to increase the number of shares issuable in the transaction.  Subject to any such increase by MB Financial and/or any increase for the Company’s stock options exercised prior to the effective date, the total number of shares of common stock to be issued by MB Financial in the cash and stock transaction has been fixed at 1,996,849.

 

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NOTE  3 – EARNINGS PER COMMON SHARE

 

A reconciliation of the numerator and denominator of the earnings per common share computation for the three month periods ended March 31, 2004 and 2003 is presented below:

 

		Three Months Ended March 31,
		2004			2003
		(In thousands, except per share data)
Basic Earnings per common share
Net income attributable to common shareholders		$	1,929		$	1,954
Total weighted average common shares outstanding		3,745			3,572
Basic earnings per share		$	.52		$	.55
		2004			2003
Earnings per share assuming dilution
Net income attributable to common shareholders		$	1,929		$	1,954
Weighted average common shares outstanding		3,745			3,572
Dilutive effect  of assumed exercises:
Stock awards		1			3
Stock options		164			141
Weighted average common and dilutive potential common shares outstanding		3,910			3,716
Diluted earnings per share		$	.49		$	.53

 

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NOTE  4 - CAPITAL REQUIREMENTS

 

Pursuant to federal regulations, savings institutions must meet two separate capital requirements.  The following is a summary of the Bank’s regulatory capital at March 31, 2004.

 

 

NOTE  5 – STOCK COMPENSATION

 

Employee compensation expense under stock options is reported using the intrinsic value method.  No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant.  The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.

 

		2004			2003
Net income as reported		$	1,929		$	1,954
Deduct:  Stock-based compensation expense Determined under fair value based method		15			107
Pro forma net income		1,914			1,847
Basic earnings per share as reported		.52			.55
Pro forma basic earnings per share		.51			.52
Diluted earnings per share as reported		.49			.53
Pro forma diluted earning per share		.49			.50

 

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Item  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Merger of Company

 

On January 12, 2004, the Company jointly announced with MB Financial, Inc (Nasdaq: MBFI), parent of MB Financial Bank, that we agreed to merge.  MB Financial, Inc will be the surviving corporation in the transaction valued at $139.2 million, which will be paid through a combination of MB Financial, Inc. common stock and cash.  Completion of the transaction is expected in the second quarter of 2004, pending shareholder, regulatory and other necessary approvals.

 

Comparison of Financial Condition at March 31, 2004 and December 31, 2003

 

Total assets at March 31, 2004 were $500.5 million compared to $494.4 million at December 31, 2003, an increase of $6.1 million. The increase in total assets was due primarily to an increase of $22.5 million in cash and cash equivalents partially offset by decreases of $14.8 million in securities and $1.6 million in loans receivable.

 

Net loans receivable decreased by $1.6 million from $304.0 million at December 31, 2003 to $302.4 million at March 31, 2004. The decrease was primarily due to $7.7 million in paydowns on construction loans, $18.3 million in paydowns and payoffs on mortgage loans, and net decreases of $684,000 in share loans and $1.2 million in line of credit loans partially offset by disbursements of $11.0 million to fund construction loans as well as the disbursement of $15.3 million to fund mortgage loans.

 

Securities decreased by $14.8 million from $148.3 million at December 31, 2003 to $133.5 million at March 31, 2004. The decrease was primarily due to paydowns of $4.0 million on mortgage-backed securities and calls and maturities of $11.2 million in agency and municipal securities partially offset by a $373,000 increase in unrealized holding gains on securities available-for-sale.

 

Cash and cash equivalents increased by $22.4 million from $13.9 million at December 31, 2003 to $36.3 million at March 31, 2004.  The increase in cash and cash equivalents was primarily attributable to paydowns on mortgage backed securities, an increase in deposits and calls of agency securities.  A majority of the calls of agency securities occurred in the latter half of March 2004.  The funds were subsequently redeployed into agency and municipal securities in April 2004.

 

Non-performing assets at March 31, 2004 totaled $4.2 million or 0.84% of assets compared to $2.7 million or 0.56% of assets at December 31, 2003.  The loan loss allowance as of March 31, 2004 was $3.1 million or 1.00% of gross loans, compared with $3.0 million at December 31, 2003, or 0.98% of gross loans.

 

Total liabilities at March 31, 2004 were $412.8 million compared to $408.5 million at December 31, 2003, an increase of $4.3 million. The increase in liabilities was due primarily to increases of

 

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$4.3 million in deposits and $1.2 million in accrued interest payable and other liabilities,  partially offset by decreases of $1.1 million in advance payments by borrowers for taxes and insurance and $115,000 in Federal Home Loan Bank advances.

 

Deposits increased due to increased marketing efforts, competitive rates paid by the Bank on its deposit products, and a seventeen month certificate of deposit special offered by the Bank during the first quarter of 2004.

 

Advance payments by borrowers for taxes and insurance decreased due to the payment of the first installment of real estate taxes during the quarter.

 

Advances from Federal Home Loan Bank decreased due to principal repayments of approximately $38,000 per month on an amortizing advance.

 

Accrued interest payable and other liabilities increased by $1.2 million due to the exercise of stock options in December 2003 resulting in a lower tax liability at December 31, 2003 in combination with the accrual for taxes payable made during the quarter ended March 31, 2004.  The taxes were paid to the various taxing authorities in April 2004.

 

 Shareholders’ equity at March 31, 2004 was $87.8 million compared to $85.9 million at December 31, 2003, an increase of $1.9 million. The increase in equity was due primarily to net income of $1.9 million, the vesting of ESOP shares and a $373,000 increase in accumulated other comprehensive income due to an increase in the fair value of securities available-for-sale partially offset by the declaration of a $688,000 cash dividend on common stock.  The dividend was paid to shareholders in April 2004.

 

Comparison of Operating Results for the Three Months Ended March 31, 2004 and  2003

 

General

 

Net income for the three months ended March 31, 2004 was $1,929,000 compared to net income of $1,954,000 for the three months ended March 31, 2003, a decrease of  $25,000. The decrease in net income was due to a decrease in noninterest income partially offset by an increase in net interest income.  Basic earnings per share for the three months ended March 31, 2004 decreased to $0.52 as compared to basic earnings per share of $0.55 for the three months ended March 31, 2003.  Diluted earnings per share for the three months ended March 31, 2004 decreased to $0.49 as compared to diluted earnings per share of $0.53 for the three months ended March 31, 2003.  The decrease in basic and diluted earnings per share was primarily attributable to an increase in the weighted average shares outstanding due to vesting of ESOP shares.  Also contributing to the decrease in basic and diluted earnings per share was a decrease in net income.

 

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Interest Income

 

Interest income for the three months ended March 31, 2004 was $7.4 million compared to $7.6 million for the three months ended March 31, 2003, a decrease of $200,000.  Interest income on loans decreased by $343,000 due to a decrease in the average rate earned on loans receivable from 7.67% for the three months ended March 31,2003 to 7.16% for the three months ended March 31, 2004.  Interest income on securities increased by $232,000 due to an increase in the average outstanding balances of the Company’s securities portfolio.  Interest income on mortgage-backed securities decreased by $57,000 due to the prevailing lower interest rate environment, which caused an increase in principal prepayments on these securities.  Interest income on other interest earning assets and federal funds sold decreased by $69,000 due to a decrease in the yield earned on federal funds sold and a special stock dividend paid by the Federal Home Loan Bank in 2003.

 

Interest Expense

 

Interest expense for the three months ended March 31, 2004 was $2.5 million compared to $2.8 million for the three months ended March 31, 2003, a decrease of $300,000.  The decrease in interest expense was due primarily to a decrease in the average interest rate paid on interest-bearing liabilities.

 

Interest expense on deposits decreased by $348,000 due primarily to maturities of customer’s certificates of deposit and the reinvestment of those funds into certificates paying lower rates of interest.  Further contributing to the decrease in interest expense were decreases in the average interest rates paid on money market accounts, NOW accounts and passbook savings accounts.   Interest expense on Federal Home Loan Bank advances increased by $22,000 due to increases in the balances of Federal Home Loan Bank advances.  Even though the balances of both deposits and Federal Home Loan Bank advances increased, the impact on interest expense was moderated by the low interest rate environment.

 

Provision for Loan Losses

 

The provision for loan losses for the three months ended March 31, 2004 was $33,000 compared to $21,000 for the three months ended March 31, 2003, an increase of $12,000.

 

On a quarterly basis, management of the Bank meets to review the adequacy of the allowance for loan losses. Management classifies loans in compliance with regulatory classifications. Classified loans are individually reviewed to arrive at specific reserves for those loans. Once the specific portion of the allowance is calculated, management calculates a historical portion for each loan category based on loan loss history, peer data, current economic conditions and trends in the portfolio, including delinquencies and impairments and real estate values in the Bank’s market area as well as changes in the composition of the loan portfolio. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for losses on loans.  Such agencies may require the Bank to provide additions to the allowance based upon judgments that differ from those of management.  Additions were made in 2004 to the loan loss provision due to increases in nonperforming assets and in the outstanding balances of construction loans.  The outstanding balance of

 

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construction loans increased by $3.3 million.  Since these types of loans expose the Bank to a higher degree of risk, additional loan loss provisions were made.  Although management believes the allowance for loan losses reflected probable incurred losses on existing loans at March 31, 2004, there can be no assurance that such losses will not exceed estimated amounts.

 

Noninterest Income

 

Noninterest income for the three months ended March 31, 2004 was $193,000 compared to $267,000 for the three months ended March 31, 2003, a decrease of $74,000.  The decrease in noninterest income was due primarily to a $72,000 decrease in other income from $144,000 for the three months ended March 31, 2003 to $72,000 for the three months ended March 31, 2004. The decrease was due to a reduction in the number of payoffs of construction loans prior to maturity resulting in lower fee income.  Also contributing to the decrease in other income was a reduction in rental income on two properties owned by the Bank due to the vacating of the properties by the tenants.

 

Noninterest Expense

 

Noninterest expense for the three months ended March 31, 2004 was $1,935,000 compared to noninterest expense of $1,933,000 for the three months ended March 31, 2003, an increase of $2,000.  Compensation and benefits expense decreased by $106,000 primarily due to a $180,000 reduction in stock award expense partially offset by an increase in ESOP expense resulting from an increase in the Company’s stock price and due to normal annual salary adjustments for existing Bank personnel.  Professional fees increased by $141,000 due to the additional expense incurred in connection with the Company’s pending merger with MB Financial.    Other expense decreased by $54,000 primarily due to decreases in advertising, office supply and promotional expense all of which were higher in 2003 due to the opening of the Bank’s relocated northwest suburban branch.  Data processing expense increased by $13,000 due to normal annual adjustments in the Company’s data processing contract with an outside service bureau and increases in the number of accounts maintained by the service bureau.

 

Income Taxes

 

Income tax expense was $1,171,000 for the three months ended March 31, 2004 compared to $1,145,000 for the three months ended March 31, 2003, an increase of $26,000.  The effective tax rate on income for the three months ended March 31, 2004 was 37.77% compared to an effective tax rate of 36.95% for the three months ended March 31, 2003.

 

Liquidity and Capital Resources

 

The Company’s primary sources of funds are deposits, and proceeds from principal and interest payments on loans and mortgage-backed securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. First Security generally manages the pricing of its deposits to be competitive and to increase core deposit relationships.

 

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Liquidity management is both a daily and long-term responsibility of management. First Security adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on liquid and other assets, (iv) management’s analysis of current economic conditions, and (v) the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits and short- and intermediate-term U.S. government and agency obligations and mortgage-backed securities of short duration. If First Security requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB of Chicago.  Additional borrowings with the FHLB may require additional collateral to be pledged to the FHLB.

 

The Company’s cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities and financing activities.  Cash flows provided by operating activities were $3.4 million and $1.8 million for the three months ended March 31, 2004 and March 31, 2003 respectively. Net cash from investing activities consisted primarily of disbursements for loan originations and the purchase of municipal agency and mortgage-backed securities, the purchase of FHLB stock, offset by principal collections on loans, proceeds from calls, maturities and sales of securities and paydowns on mortgage-backed securities. Net cash from financing activities consisted primarily of increases in net deposits, offset by the payment of dividends.

 

The Company’s most liquid assets are cash and short-term investments. The levels of these assets are dependent on the Company’s operating, financing, lending and investing activities during any given period. At March 31, 2004, cash and short-term investments totaled $36.3 million. The Company has other sources of liquidity if a need for additional funds arises, including securities maturing within one year and the repayment of loans. The Company may also utilize the sale of securities available-for-sale and FHLB advances as a source of funds.

 

Critical Accounting Policies

 

Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs, net of recoveries.  Management estimates the allowance balance required using past loss experience, economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors.  Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.  Loan losses are charged off against the allowance when management believes that the uncollectibility of a loan balance is confirmed.

 

A loan is impaired when full payment under the loan term is not expected.  Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, residential construction, and consumer loans and an individual basis for other loans.  If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

 

Management recognizes a certain level of imprecision exists in the manner in which the allowance for loan losses is calculated, owing to intangible factors which cannot be quantified for inclusion in a formula.

 

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Commitments

 

At March 31, 2004, the Company had outstanding commitments to originate loans of $3.5 million, of which $3.2 million had fixed interest rates. As of the same date, the Company had construction loans in process of $18.8 million, all of which had floating interest rates based on the prime rate and $17.7 million in unused lines of credit for home equity loans.  Finally, as of March 31, 2004, the Company had $21.7 million in commitments to fund construction loans where a commitment was extended to a potential borrower but was not yet accepted by the borrower.  These loans are to be secured by properties located in its market area. The Company anticipates that it will have sufficient funds available to meet its current loan commitments. Loan commitments have, in recent periods, been funded through liquidity or through FHLB advances.

 

Certificates of deposit which are scheduled to mature in one year or less from March 31, 2004 totaled $116.9 million. Management believes, based on past experience, that a significant portion of such deposits will remain with the Company. Based on the foregoing, the Company considers its liquid resources sufficient to meet its outstanding short-term and long-term needs.

 

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The following tables disclose contractual obligations and commercial commitments of the Company as of March 31, 2004:

 

		Total			Less Than 1 Year			1-3 Years			4-5 Years			After 5 Years
		(In Thousands)
FHLB Advances		$	93,529		$	16,000		$	37,680		$	28,849		$	11,000
Total contractual obligations		$	93,529		$	16,000		$	37,680		$	28,849		$	11,000

 

		Total Amounts Committed			Less Than 1 Year			1 - 3 Years			4 - 5 Years			After 5 Years
		(In Thousands)
Lines of Credit		$	17,736		$	950		$	5,024		$	11,762		—
Mortgage Loans		3,494			3,494			—			—			—
Construction Loans		18,797			18,797			—			—			—
Letters of Credit		140			140			—			—			—
Commitments to fund construction loans		21,701			21,701			—			—			—
Total commercial commitments		61,868			45,082			5,024			11,762			—

 

The Company is subject to various regulatory capital requirements imposed by the Office of Thrift Supervision.  At March 31, 2004, the Company was in compliance with all applicable capital requirements. See Note 4 of the Notes to the Condensed Consolidated Financial Statements.

 

Impact of Inflation and Changing Prices

The condensed consolidated financial statements and related data presented herein have been prepared in accordance with  accounting principles generally accepted in the United States of America, which require the measurement of financial position and results of operations in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. Therefore, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. In the current interest rate environment, the liquidity and maturity structure and quality of the Company’s assets and liabilities are critical to the maintenance of acceptable performance levels.

 

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Safe Harbor Statement

 

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation  Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions.  Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are generally identifiable by use of the words “believe, expect, intend, anticipate, estimate, project” or similar expressions.  The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors that could have a material adverse effect on the operations and future prospects of the Company and the subsidiaries include, but are not limited to, changes in: interest rates; general economic conditions; the legislative/regulatory situation; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; the quality or composition of the loan or investment portfolios; demand for loan products; prevailing real estate values; the possibility that some of the Company’s senior officers may retire in the near term; demographic changes; deposit flows; competition; demand for financial services in the Company’s market area and accounting principles, policies and guidelines.  These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements.  Further information concerning the Company and its business, including additional factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission.

 

New Accounting Pronouncements

 

Recently-Issued Accounting Standards – In March 2004, the SEC issued Staff Accounting Bulletin (SAB) No. 105 “Application of Accounting Principles to Loan Commitments”.  This SAB related to Financial Accounting Standards Board (FASB) Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities” for valuing loan commitments, considered to be derivatives, on mortgage loans that will be sold. This SAB is effective for commitments entered into after April 1, 2004.  The adoption did not have a material impact on the financial position or results of operations.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

In an attempt to manage its exposure to changes in interest rates, management monitors the Company’s interest rate risk. The Board of Directors reviews at least quarterly the Company’s interest rate risk position and profitability. The Board of Directors also reviews the Company’s portfolio, formulates investment strategies and oversees the timing and implementation of transactions to assure attainment of the Company’s objectives in the most effective manner. In addition, the Board reviews on a quarterly basis the Company’s asset/liability position, including simulations of the effect of various interest rate scenarios on the Company’s capital and earnings.

 

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In managing its asset/liability mix, the Company, depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, often places more emphasis on managing short term net interest margin than on more closely matching the interest rate sensitivity of its assets and liabilities in an effort to enhance net interest income. Management believes that the increased net interest income resulting from a mismatch in the maturity of its asset and liability portfolios can, during periods of declining or stable interest rates, provide high enough returns to justify the increased exposure to sudden and unexpected increases in interest rates.

 

The Board has taken a number of steps to manage the Company’s vulnerability to changes in interest rates. First, the Company has long used community outreach, customer service and marketing efforts to increase the Company’s passbook and other  non-certificate accounts. At March 31, 2004, $139.4 million or 44.37% of the Company’s deposits consisted of passbook, NOW and money market accounts. The Company believes that these accounts represent “core” deposits, which are generally somewhat less interest rate sensitive than other types of deposit accounts.  Second, while the Company continues to originate 30 year fixed rate residential loans for portfolio as a result of consumer demand, an increasing proportion of the Company’s residential loans have terms of 15 years or less or carry adjustable interest rates.  Third, the Company continues to use FHLB advances, to extend the term to repricing of its liabilities. At March 31, 2004, the Company had $ 37.85 million of fixed rate advances with a remaining term to maturity of three years or more. The average term to maturity or call of the Company’s fixed rate advances was 1.9 years at March 31, 2004.  Finally, the Company has recently increased its holdings of construction, multi-family and commercial real estate loans. These loans generally have shorter terms to maturity than one-to-four family residential loans.

 

Management utilizes the net portfolio value (“NPV”) analysis to quantify interest rate risk. In essence, this approach calculates the difference between the present value of liabilities, expected cash flows from assets and cash flows from off balance sheet contracts.  The analysis estimates how the Bank’s net portfolio value responds to changes in interest rates. The current interest rate scenarios used in the NPV analysis assume an instantaneous and sustained parallel shift in the Treasury yield curve of plus and minus 100, 200, and 300 basis points in 100 basis point increments.  On December 31, 2003, the yield on the three-month Treasury bill was below 2.00%. As a result, the net portfolio value analysis was unable to produce results for the minus 200 and minus 300 basis point scenario for the quarter ended December 31, 2003.

 

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Presented below, as of December 31, 2003 (most recent available information), is an analysis of the Bank’s estimated interest rate risk as measured by changes in NPV for instantaneous and sustained parallel shifts in interest rates as indicated.

 

Assumed Change						$ Change in			% Change in
In Interest Rates			$ Amount			NPV			NP V
(Basis Points)			(Dollars in Thousands)
+ 300			$	67,378		$	(23,531	)	(26%	)
+ 200			77,680			(13,229		)	(15	)
+ 100			86,536			(4,373		)	(5	)
—			90,909			—			—
- 100			91,326			417			0

 

Certain assumptions utilized in assessing the interest rate risk of thrift institutions were employed in preparing the preceding table. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under the various interest rate scenarios. It was also assumed that delinquency rates will not change as a result of changes in interest rates although  there can be no assurance that this will be the case. Even if interest rates change in the designated amounts, there can be no assurance that the Company’s assets and liabilities would perform as set forth above. In addition, a change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause significantly different changes to the NPV than indicated above.

 

ITEM 4. CONTROLS AND PROCEDURES

 

The Company has adopted interim disclosure controls and procedures designed to facilitate the Company’s financial reporting.  The interim disclosure controls currently consist of communications among the Chief Executive Officer, the Chief Financial Officer and each department head to identify any transactions, events, trends, risks or contingencies which may be material to the Company’s operations.  The Company’s disclosure controls also contain certain elements of its internal controls adopted in connection with applicable accounting and regulatory guidelines.  Finally, the Chief Executive Officer, the Chief Financial Officer, the Audit Committee and the Company’s independent auditors also meet on a quarterly basis and discuss the Company’s material accounting policies.  The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of these interim disclosure controls as of the end of the period covered by this report and found them to be adequate.

 

The Company maintains internal control over financial reporting.  There have not been any significant changes in such internal control over the financial reporting in the last quarter that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part II        Other Information

 

Item 1.		Legal Proceedings
		None
Item 2.		Changes in Securities, Use of Proceeds and Issuers Purchases of Equity Securities
		None.  In addition, there were no stock repurchases during the quarter.
Item 3.		Defaults Upon Senior Securities
		None
Item 4.		Submission of Matters to a Vote of Security Holders
		None
Item 5.		Other Information
		None
Item 6.		Exhibits and Reports on Form 8-K.
a.		Exhibits – See insert A next page
		3(a)	Certificate of Incorporation		*
		3(b)	By-Laws		**
		4	Instruments defining the right of security  holders, including debentures		*
		31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002		31.1
		31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002		31.2
		32.1	Statements pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		32.1

 

*         Filed as an Exhibit to the Company’s Form S-1 Registration Statement filed on July 21, 1997 (File No. 333-31739) pursuant to Section 5 of the Securities Act of 1933.  All of such previously filed documents are hereby incorporated hereing by reference in accordance with Item 601 of Regulation S-K.

 

**               Filed as an Exhibit to the Company’s Form 10-Q Quarterly report filed on November 15,1999 (File No. 000-23063) pursuant to Section 12 of the Securities Exchange Act of 1934.  All of such previously filed documents are hereby incorporated by reference in accordance with Item 601 of Regulation S-K.

 

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b.		Reports on Form 8-K.  The Company filed three reports on Form 8-K during the quarter for which this report is filed.  The reports on Form 8-K were as follows:
		i) On January 12, 2004, the Company reported its agreement to merge with MB Financial Inc., the parent company of MB Financial Bank.  The agreement was dated January 9, 2004.
		ii) On February 17, 2004, the Company’s report to the Commission contained our press release dated February 17, 2004, which contained our net income and earnings information for the year ended Decemver 31, 2003.
		iii) On March 19, 2004, the Company reported that our Annual Meeting of Stockholders was scheduled for May 19, 2004.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

	FIRST SECURITYFED FINANCIAL, INC.
	(Registrant)
	By: /s/Julian E. Kulas
	Julian E. Kulas
	Principal Executive Officer
	May 15, 2004
	By: /s/Harry Kucewicz
	Harry Kucewicz
	Chief Financial and Accounting Officer
	May 15, 2004

 

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EXHIBIT INDEX

 

Regulation S-K Exhibit Number		Document		Reference To Prior Filing or Exhibit Number Attached Hereto
31		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002		31.1
31		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002		31.2
32		Statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		32.1

 

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