UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

 

First SecurityFed Financial, Inc.

(Exact Name of Registrant as Specified In Its Charter)

 

 

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, 2003 and December 31, 2002
	Condensed Consolidated Statements of Income for the three months ended March 31, 2003 and 2002
	Statements of Comprehensive Income for the three months ended March 31, 2003 and 2002
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2003
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002
	Notes to the Condensed Consolidated Financial Statements as of March 31, 2003
	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 and Use of Proceeds
	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

 

2

 

FIRST SECURITYFED FINANCIAL, INC.

CHICAGO, ILLINOIS

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

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

(Unaudited)

 

		March 31, 2003			December 31, 2002
ASSETS
Cash and due from banks		$	9,114		$	16,557
Interest-bearing deposit accounts in other financial institutions		4,212			5,631
Federal funds sold		8,054			5,629
Total cash and cash equivalents		21,380			27,817
Securities available-for-sale		58,204			42,628
Securities held-to-maturity (fair value of $65,936 in 2003 and $72,362 in 2002)		62,990			69,126
Loans receivable, net		299,935			301,642
Federal Home Loan Bank stock, at cost		19,198			14,788
Premises and equipment, net		4,606			4,349
Accrued interest receivable		3,339			3,319
Other assets		810			632
Total assets		$	470,462		$	464,301
LIABILITIES
Deposits
Non-interest-bearing		$	10,342		$	9,601
Interest-bearing		286,055			281,011
		296,397			290,612
Advance payments by borrowers for taxes and insurance		1,683			2,832
Advances from Federal Home Loan Bank		91,990			92,105
Accrued interest payable and other liabilities		2,623			2,820
Total liabilities		392,693			388,369
SHAREHOLDERS’ EQUITY
Preferred stock, $0.01 par value per share, 500,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $0.01 par value per share, 8,000,000 shares authorized, 6,408,000 shares issued		64			64
Additional paid-in capital		63,390			63,269
Unearned ESOP shares		(3,193		)	(3,269		)
Unearned stock awards		(820		)	(1,007		)
Treasury stock, at cost; (2,455,246 shares in 2003 and 2002)		(37,750		)	(37,750		)
Retained earnings		55,345			53,896
Accumulated other comprehensive income		733			729
Total shareholders’ equity		77,769			75,932
Total liabilities and shareholders’ equity		$	470,462		$	464,301

 

See accompanying notes to condensed consolidated financial statements

 

3

 

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,
		2003			2002
Interest income
Loans		$	5,769		$	5,832
Securities		944			1,170
Mortgage-backed securities		490			469
Other interest-earning assets and federal funds sold		429			161
Total interest income		7,632			7,632
Interest expense
Deposits		1,706			2,114
Federal Home Loan Bank advances		1,140			1,098
Total interest expense		2,846			3,212
Net interest income		4,786			4,420
Provision for loan losses		21			30
Net interest income after provision for loan losses		4,765			4,390
Noninterest income
Deposit service charges		123			104
Net gain on sale of securities		—			2
Other income		144			94
Total noninterest income		267			200
Noninterest expense
Compensation and benefits		1,183			1,053
Occupancy and equipment		190			164
Data processing		130			109
Professional fees		117			58
Other operating expenses		313			266
Total noninterest expense		1,933			1,650
Income before income taxes		3,099			2,940
Income tax expense		1,145			1,033
Net income		$	1,954		$	1,907
Earnings per share
Basic		$	.55		$	.52
Diluted		$	.53		$	.51

 

See accompanying notes to condensed consolidated financial statements

 

4

 

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,
		2003			2002
Net income		$	1,954		$	1,907
Other comprehensive income, net of tax:
Change in unrealized holding gains (losses) on securities available-for-sale		4			(11		)
Reclassification adjustments for gains recognized in income		—			(2		)
Comprehensive income		$	1,958		$	1,894

 

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)

 

		Common Stock			Additional Paid-in Capital			Unearned ESOP Shares			Unearned Stock Awards			Treasury Stock			Retained Earnings			Accumulated Other Com- prehensive Income			Total Share- holders' Equity
Balance at December 31, 2002		$	64		$	63,269		$	(3,269	)	$	(1,007	)	$	(37,750	)	$	53,896		$	729		$	75,932
ESOP shares earned		—			121			76			—			—			—			—			197
Stock awards earned		—			—			—			187			—			—			—			187
Net income		—			—			—			—			—			1,954			—			1,954
Dividends declared ($.13 per share)		—			—			—			—			—			(505		)	—			(505		)
Change in fair value of securities, net of income taxes and reclassification effects		—			—			—			—			—			—			4			4
Balance at March 31, 2003		$	64		$	63,390		$	(3,193	)	$	(820	)	$	(37,750	)	$	55,345		$	733		$	77,769

 

See accompanying notes to condensed consolidated financial statements

 

6

 

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,
		2003			2002
Cash flows from operating activities
Net income		$	1,954		$	1,907
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization		84			77
Amortization of discounts and premiums on securities		132			59
Net gain on sale of securities		—			(2		)
Provision for loan losses		21			30
ESOP compensation expense		197			154
Stock award compensation expense		187			180
Federal Home Loan Bank stock dividend		(410		)	(145		)
Change in
Deferred loan origination fees		50			110
Accrued interest receivable and other assets		(198		)	(723		)
Other liabilities and deferred income taxes		(199		)	8
Net cash from operating activities		1,818			1,655
Cash flows from investing activities
Purchase of securities available-for-sale		(21,706		)	(1,015		)
Purchase of securities held-to-maturity		—			(3,525		)
Proceeds from repayment of securities		3,048			2,203
Proceeds from sales of securities available-for-sale		—			1,842
Proceeds from calls and maturities of securities		9,092			4,530
Net change in loans		1,636			(7,484		)
Capital expenditures, net		(341		)	(766		)
Purchase of Federal Home Loan Stock		(4,000		)	—
Net cash from investing activities		(12,271		)	(4,215		)
Cash flows from financing activities
Net increase in deposits		5,785			1,278
Net change in advances from Federal Home Loan Bank		(115		)	2,350
Net change in advances from borrowers for insurance and taxes		(1,149		)	(1,148		)
Dividends paid		(505		)	(523		)
Purchase of treasury stock		—			(21		)
Net cash from financing activities		4,016			1,936
Net change in cash and cash equivalents		(6,437		)	(624		)
Cash and cash equivalents at beginning of period		27,817			9,421
Cash and cash equivalents at end of period		$	21,380		$	8,797

 

See accompanying notes to condensed consolidated financial statements

 

7

 

FIRST SECURITYFED FINANCIAL, INC.

CHICAGO, ILLINOIS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share data)

 

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, 2003 and the results of its operations for the three month periods ended March 31, 2003 and 2002 and cash flows for the three months ended March 31, 2003 and 2002.  The annualized results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results expected for the full year ending December 31, 2003. 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, 2002 included in its Annual Report on Form 10-K.

 

The December 31, 2002 balance sheet presented herein has been derived from the audited financial statements included in the Company’s 2002 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.

 

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NOTE  2 – 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, 2003 and 2002 is presented below:

 

		Three Months Ended March 31,
(In thousands, except per share data)		2003			2002
Basic Earnings per common share
Net income attributable to common shareholders		$	1,954		$	1,907
Total weighted average common shares outstanding		3,572			3,681
Basic earnings per share		$	.55		$	.52

 

		2003			2002
Earnings per share assuming dilution
Net income attributable to common shareholders		$	1,954		$	1,907
Weighted average common shares outstanding		3,572			3,681
Dilutive effect of assumed exercises:
Stock awards		3			6
Incentive stock options		141			72
Weighted average common and dilutive potential common shares outstanding		3,716			3,759
Diluted earnings per share		$	.53		$	.51

 

9

 

NOTE  3 - CAPITAL REQUIREMENTS

 

The following is a summary of the Bank's regulatory capital at March 31, 2003.

 

		Core Capital			Risk based Capital
		(In thousands)
Regulatory capital		$	62,236		$	65,180
Minimum capital requirement to be considered adequately capitalized		18,552			20,896
Excess regulatory capital over minimum requirement		$	43,684		$	44,284

 

NOTE  4 – 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.

 

		2003			2002
Net income as reported		$	1,954		$	1,907
Deduct:  Stock-based compensation expense
Determined under fair value based method		107			107
Pro forma net income		1,847			1,800
Basic earnings per share as reported		.55			.52
Pro forma basic earnings per share		.52			.49
Diluted earnings per share as reported		.53			.51
Pro forma diluted earning per share		.50			.48

 

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

 

Comparison of Financial Condition at March 31, 2003 and December 31, 2002

 

Total assets at March 31, 2003 were $470.5 million compared to $464.3 million at December 31, 2002, an increase of $6.2 million. The increase in total assets was due primarily to increases of $9.4 million in securities, $4.4 million in Federal Home Loan Bank (FHLB) stock and $257,000 in premises and equipment partially offset by decreases of $6.4 million in cash and cash equivalents and $1.7 million in loans receivable.

 

Net loans receivable decreased by $1.7 million from $301.6 million at December 31, 2002 to $299.9 million at March 31, 2003. The decrease was primarily due to $1.7 million in paydowns on construction loans and $29.7 million in paydowns and payoffs on mortgage loans partially offset by disbursements of $4.9 million to fund construction loans as well as the disbursement of $20.7 million to fund mortgage loans and a net increase in line of credit loans of $3.9 million.

 

Cash and cash equivalents decreased by $6.4 million due to the redeployment of these funds into agency, municipal and mortgage-backed securities.

 

Securities increased by $9.4 million from $111.8 million at December 31, 2002 to $121.2 million at March 31, 2003. The increase was primarily due to the purchase of $12.4 million in mortgage-backed securities, $8.9 million in agency securities and $355,000 in municipal securities partially offset by paydowns of $3.0 million on mortgage-backed securities and calls and maturities of $9.1 million in agency securities.

 

Federal Home Loan Bank stock increased by $4.4 million primarily due to stock purchases by the Bank.  Also contributing to this increase in stock were stock dividends received from the Federal Home Loan Bank.  Additional Federal Home Loan Bank stock was purchased primarily because the stock issued by the Federal Home Loan Bank pays a competitive quarterly dividend.

 

Premises and equipment increased by $257,000 primarily due to the completion of the remodeling of a building in Palatine, Illinois for the Bank’s relocated northwest suburban Chicago branch.  Also contributing to this increase were purchases of furniture, fixtures and signage for the new branch.  The remodeled office is located in very close proximity to the Bank’s former northwest suburban Chicago branch, but is a much larger, freestanding facility.

 

Total liabilities at March 31, 2003 were $392.7 million compared to $388.4 million at December 31, 2002, an increase of $4.3 million. The increase in liabilities was due primarily to an increase of $5.8 million in deposits, partially offset by decreases of $1.1 million in advance payments by borrowers for taxes and insurance, $115,000 in advances from Federal Home Loan Bank and $197,000 in accrued interest payable and other liabilities.

 

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Deposits increased due to the less volatile and less risky nature of deposit accounts in comparison to other types of consumer investment vehicles, the competitive rates paid by the Bank on its deposit products and increased marketing efforts by the Bank.

 

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.

 

Shareholders’ equity at March 31, 2003 was $77.8 million compared to $75.9 million at December 31, 2002, an increase of $1.9 million. The increase in equity was due primarily to net income of $2.0 million and vesting of ESOP shares and stock awards partially offset by a declaration of a $505,000 cash dividend on common stock.  The dividend was paid to shareholders in April 2003.

 

Comparison of Operating Results for the Three Months Ended March 31, 2003 and  2002

 

General

 

Net income for the three months ended March 31, 2003 was $2.0 million compared to net income of $1.9 million for the three months ended March 31, 2002, an increase of  $47,000. The increase in net income was primarily attributable to an increase in net interest income and noninterest income partially offset by increases in noninterest expense.  Basic earnings per share for the three months ended March 31, 2003 increased to $0.55 as compared to basic earnings per share of $0.52 for the three months ended March 31, 2002, an increase of 5.77%.  Diluted earnings per share for the three months ended March 31, 2003 increased to $0.53 as compared to diluted earnings per share of $0.51 for the three months ended March 31, 2002, an increase of 3.92%.  The increase in basic and diluted earnings per share was attributable to higher net income and a decrease in the average shares outstanding due to the Company’s repurchase of its common stock.  The company has additional shares remaining in its current stock repurchase plan; however, because the market price of the stock is well in excess of its book value, the Company is not currently repurchasing any of the stock as it would be dilutive to book value.

 

Interest Income

 

Interest income for the three months ended March 31, 2003 was $7.6 million, which was consistent with the three month period ended March 31, 2002.  Interest income on loans decreased by $63,000 due to a decrease in the average rate earned on loans receivable.  Interest income on securities decreased by $226,000 due primarily to calls and maturities of securities during the past year being replaced by lower interest earning securities as interest rates declined.  Also contributing to the decrease in interest income on securities was a decrease in the average outstanding balances of the Company’s securities portfolio resulting from calls of these securities by the issuing agency.  Interest income on mortgage-backed securities increased by $21,000 due to increases in the average outstanding balances of mortgage-backed securities.  Interest income on other interest earning assets and federal funds sold increased by $268,000 due to a special stock dividend paid by the Federal Home Loan Bank.

 

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Interest Expense

 

Interest expense for the three months ended March 31, 2003 was $2.8 million compared to $3.2 million for the three months ended March 31, 2002, a decrease of $400,000.  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 $408,000 due primarily to maturities of customer’s certificates of deposit and the reinvestment of those funds into certificates paying lower rates of interest.  Interest expense on Federal Home Loan Bank advances increased by $42,000 due to increases in the average outstanding 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 resulting in a lower cost of funds for the Bank.

 

Provision for Loan Losses

 

The provision for loan losses for the three months ended March 31, 2003 was $21,000 compared to $30,000 for the three months ended March 31, 2002, a decrease of $9,000.  Non-performing assets at March 31, 2003 totaled $2.4 million or 0.50% of assets.  The Company charged-off $7,000 on an equity loan and $7,000 in credit card receivables in the three month period ended March 31, 2003.  The loan loss allowance as of March 31, 2003 was $2.94 million or 0.97% of gross loans, compared with $2.94 million at December 31, 2002 or 0.96% of gross loans.

 

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.  Although management believes the allowance for loan losses reflected probable incurred losses on existing loans at March 31, 2003, there can be no assurance that such losses will not exceed estimated amounts.

 

Noninterest Income

 

Noninterest income for the three months ended March 31, 2003 was $267,000 compared to $200,000 for the three months ended March 31, 2002, an increase of $67,000.  The increase in noninterest income is partially due to growth in the balances of deposit accounts resulting in an increased deposit fee assessment base thereby increasing income from deposit service charges.  Also contributing to the increase in other income were increases in release fees charged on mortgage loans that were paid off.  The number of mortgages being paid off increased

 

13

 

significantly due to an acceleration of refinance activity due to the lower interest rate environment.

 

Noninterest Expense

 

Noninterest expense for the three months ended March 31, 2003 was $1.9 million compared to noninterest expense of $1.7 million for the three months ended March 31, 2002, an increase of $283,000.  Compensation and benefits expense increased by $130,000 partially due to 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.  Occupancy and equipment expense increased by $26,000 due to higher natural gas prices, increased utility prices for the Bank’s larger northwest suburban branch and additional depreciation expense primarily for the remodeled branch and its furniture and fixtures.  Data processing expense increased by $21,000 due both to normal annual adjustments in the Company’s data processing contract with an outside service bureau and increases in the number of loan and deposit accounts maintained by the service bureau.  Professional fees increased by $59,000 primarily due to $23,000 in additional fees paid to the Company’s independent auditors and $36,000 in additional fees paid to the Company’s legal counsel.  The additional fees were assessed for the substantial increase in the workload of these outside parties for compliance with new regulatory guidelines.  Other operating expense increased by $47,000 due to increases in advertising, office supply, and ATM expense incurred primarily in connection with the opening of the relocated northwest suburban branch.

 

Income Taxes

 

Income tax expense was $1.1 million for the three months ended March 31, 2003 compared to $1.0 million for the three months ended March 31, 2002, an increase of $112,000. The increase in the provision for income taxes was primarily due to an increase in pretax earnings.  The effective tax rate on income for the three months ended March 31, 2003 was 36.95% compared to an effective tax rate of 35.14% for the three months ended March 31, 2002.

 

Liquidity and Capital Resources

 

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

 

Liquidity management is both a daily and long-term responsibility of management. First Security adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits and short- and intermediate-term U.S. government and agency obligations and mortgage-backed securities of

 

14

 

short duration. If First Security requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB of Chicago.

 

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 $1.8 million and $1.7 million for the three months ended March 31, 2003 and March 31, 2002 respectively. Net cash from investing activities consisted primarily of disbursements for loan originations and the purchase of securities and mortgage-backed securities, and capital expenditures, 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, and advances from FHLB of Chicago partially offset by the payment of dividends and the purchase of treasury stock.

 

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, 2003, cash and short-term investments totaled $21.4 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.

 

Commitments

 

At March 31, 2003, the Company had outstanding commitments to originate loans of $5.9 million, of which $5.2 million had fixed interest rates. As of the same date, the Company had construction loans in process of $11.1 million, all of which had floating interest rates based on the prime rate and $16.7 million in unused lines of credit for home equity loans.  Finally, as of March 31, 2003, the Company had $21.9 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, 2003 totaled $126.3 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.

 

15

 

The following tables disclose contractual obligations and commercial commitments of the Company as of March 31, 2003:

 

		Total			Less Than 1 Year		1-3 Years			4 – 5 Years			After 5 Years
FHLB Advances		$	91,990		—		$	33,300		$	39,690		$	19,000
Total contractual obligations		$	91,990		—		$	33,300		$	39,690		$	19,000

 

		Total Amounts Committed			Less Than 1 Year			1 – 3 Years			4 – 5 Years			After 5 Years
Lines of Credit		$	16,683		$	535		$	4,722		$	11,426		—
Commitments to Originate Mortgage Loans		5,908			5,908			—			—			—
Construction Loans in process		11,055			11,055			—			—			—
Letters of Credit		230			230			—			—			—
Total commercial commitments		33,876			17,728			4,722			11,426			—
Unexercised Commitment to Extend Credit		21,892			21,892			—			—			—
Total Unexercised Commitments to Extend Credit		$	21,892		$	21,892		—			—			—

 

The Company is subject to various regulatory capital requirements imposed by the Office of Thrift Supervision.  At March 31, 2003, the Company was in compliance with all applicable capital requirements. See Note 3 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 words such as “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project” or similar expressions.  The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse affect 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, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, prevailing real estate values, 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.

 

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

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

 

The Board has taken a number of steps to manage the Company’s vulnerability to changes in interest rates. First, the Company has long used community outreach, customer service and marketing efforts to increase the Company’s passbook and other non-certificate accounts. At March 31, 2003,  $132.3 million or 44.63% of the Company’s deposits consisted of passbook, NOW and money market accounts. The Company believes that these accounts represent “core” deposits, which are generally somewhat less interest rate sensitive than other types of deposit accounts.  Second, while the Company continues to originate 30 year fixed rate residential loans for portfolio as a result of consumer demand, an increasing proportion of the Company’s residential loans have terms of 15 years or less or carry adjustable interest rates. Third, the Company has recently used FHLB advances, to extend the term to repricing of its liabilities. At March 31, 2003, the Company had $ 73.99 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 2.5 years at March 31, 2003.  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, 2002, 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, 2002.

 

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Presented below, as of December 31, 2002 (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 up 300 basis points and down 100 basis points, in 100 point increments. The information presented below is not necessarily representative of the Bank's estimated interest rate risk at March 31, 2003.

 

Assumed Change In Interest Rates			$ Amount			$ Change in NPV			% Change in NP V
(Basis Points)			(Dollars in Thousands)
+ 300			$	66,597		$	(15,159	)	(19	)%
+ 200			73,833			(7,923		)	(10	)
+ 100			79,531			(2,225		)	(3	)
—			81,756			—			—
- 100			82,521			765			1
- 200			—			—			—
- 300			—			—			—

 

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 Bank’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

 

Management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation, which was completed within 90 days of the filing of this Form 10-Q, of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion and no changes are required at this time.  There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.  There have been no significant deficiencies or material weaknesses in  internal controls requiring corrective action, and no corrective actions have been taken.

 

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PART II.                        OTHER INFORMATION

 

ITEM 1.                             LEGAL PROCEEDINGS

 

None

 

ITEM 2.                             CHANGES IN SECURITIES AND USE OF PROCEEDS

 

None

 

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 –
3(a)	Certificate of Incorporation		*
3(b)	By-Laws		**
4	Instruments defining the rights of security holders, including debentures		*
99	Additional Exhibits
	(a)	Statements pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	99.1

 

*                              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 herein 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.

 

b.                         Reports on Form 8-K.  No reports on Form 8-K were filed by the registrant during the quarter ended March 31, 2003.

 

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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, 2003
	By: /s/ Harry Kucewicz
	Harry Kucewicz
	Chief Financial and Accounting Officer
	May 15, 2003

 

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CERTIFICATIONS

 

I, Julian E. Kulas, certify that:

 

1.  I have reviewed this quarterly report on Form 10-Q of First SecurityFed Financial, Inc.;

 

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.  The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)  evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

 

c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.  The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

 

a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

 

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

 

6.  The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: May 15, 2003

 

 

	/s/ Julian E. Kulas
	Julian E. Kulas,
	Principal Executive Officer

 

22

 

CERTIFICATIONS

 

I, Harry Kucewicz, certify that:

 

1.  I have reviewed this quarterly report on Form 10-Q of First SecurityFed Financial, Inc.;

 

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.  The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)  evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

 

c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.  The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

 

a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

 

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

 

6.  The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: May 15, 2003

 

 

	/s/ Harry Kucewicz
	Harry Kucewicz,
	Principal Financial Officer

 

23

 

EXHIBIT INDEX

 

Regulation S-K Exhibit Number		Document		Reference to Prior Filing or Exhibit Number Attached Hereto
99		Additional Exhibits
		Statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		99.1

 

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