<PAGE>
1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
------------- -------------
Commission file Number: 0-24157
SECURITY FINANCIAL CORP.
(Exact Name of small business issuer as specified in its charter)
DELAWARE 34-1579662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One South Main Street
Niles, Ohio 44446-0228
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (330) 544-7400
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirement for the past 90 days. YES X NO
---
<PAGE>
2
Security Financial Corp.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
Part I Financial Information Page
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet, (unaudited)
as of June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income (unaudited) for
three and six months ended June 30, 1998 and 1997 4
Consolidated Statements of Changes in
Stockholders' Equity (unaudited) for the
six months ended June 30, 1998 5
Consolidated Statement of Cash Flows (unaudited)
for the six months ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II Other Information 13
Signatures 14
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3
SECURITY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET (Unaudited)
June 30, December 31,
1998 1997
ASSETS ------------- -------------
Cash and due from banks $ 7,078,811 $ 7,416,457
Federal funds sold 2,518,000 1,090,000
Interest-bearing deposits in other banks 200,000 400,000
Investment securities available for sale 43,611,641 41,638,502
Loans 108,940,298 112,428,694
Less allowance for loan losses 1,528,207 1,677,651
------------- -------------
Net loans 107,412,091 110,751,043
Premises and equipment 4,444,858 3,833,325
Accrued interest and other assets 2,494,893 2,128,857
------------- -------------
TOTAL ASSETS $ 167,760,294 $ 167,258,184
============= ==============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 18,550,174 $ 18,047,213
Interest-bearing demand 7,652,576 7,873,059
Money market 5,006,467 4,017,442
Savings 27,429,543 27,119,276
Time 85,837,460 88,295,471
------------- -------------
Total deposits 144,476,220 145,352,461
Short-term borrowings 7,648,287 6,523,560
Accrued interest and other liabilities 737,115 749,280
------------- -------------
TOTAL LIABILITIES 152,861,622 152,625,301
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 1,500,000 shares authorized;
333,164 shares issued 832,910 832,910
Capital surplus 5,107,565 4,977,246
Retained earnings 8,915,881 8,695,696
Net unrealized gain on securities 42,316 127,031
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 14,898,672 14,632,883
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 167,760,294 $ 167,258,184
============= ==============
See accompanying notes to the unaudited consolidated financial statements.
<PAGE>
4
<TABLE>
<CAPTION>
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
INTEREST INCOME ------------- ------------- ------------- -------------
Interest and fees on loans $ 2,448,364 $ 2,700,970 $ 4,943,858 $ 5,323,552
Interest-bearing deposits in other banks 3,917 5,473 8,454 12,337
Federal funds sold 51,442 44,903 89,184 51,635
Investment securities:
Taxable 535,604 420,548 1,084,883 818,897
Exempt from federal income tax 98,299 40,705 182,031 77,040
------------- ------------- ------------- -------------
Total interest income 3,137,626 3,212,599 6,308,410 6,283,461
------------- ------------- ------------- -------------
INTEREST EXPENSE
Deposits 1,536,901 1,483,038 3,089,252 2,869,887
Short-term borrowings 66,765 39,111 131,566 98,364
Other borrowings - 32,489 - 82,347
------------- ------------- ------------- -------------
Total interest expense 1,603,666 1,554,638 3,220,818 3,050,598
------------- ------------- ------------- -------------
NET INTEREST INCOME 1,533,960 1,657,961 3,087,592 3,232,863
PROVISION FOR LOAN LOSSES 300,000 300,000 637,000 600,000
------------- ------------- ------------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,233,960 1,357,961 2,450,592 2,632,863
------------- ------------- ------------- -------------
OTHER INCOME
Service charges and fees 140,337 157,676 277,941 297,331
Investment securities gains, net 20,913 3,420 31,682 3,420
Other income 62,421 117,128 122,099 187,516
------------- ------------- ------------- -------------
Total other income 223,671 278,224 431,722 488,267
------------- ------------- ------------- -------------
OTHER EXPENSE
Salaries and employee benefits 596,217 543,461 1,224,232 1,152,258
Occupancy expense 169,975 150,595 337,815 308,624
Other expense 416,394 424,395 728,250 734,535
------------- ------------- ------------- -------------
Total other expense 1,182,586 1,118,451 2,290,297 2,195,417
------------- ------------- ------------- -------------
Income before income taxes 275,045 517,734 592,017 925,713
Applicable income taxes 78,527 159,264 158,304 285,613
------------- ------------- ------------- -------------
NET INCOME $ 196,518 $ 358,470 $ 433,713 $ 640,100
============= ============== ============== ==============
EARNINGS PER SHARE $ 0.59 $ 1.14 $ 1.30 $ 2.16
AVERAGE SHARES OUTSTANDING 334,112 313,624 333,588 296,666
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
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5
<TABLE>
<CAPTION>
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
Net
Unrealized
Common Capital Retained Gain (Loss) Comprehensive
Stock Surplus Earnings on Securities Total Income
<S> <C> <C> <C> <C> <C>
Balance, December $ 832,910 $ 4,977,246 $ 8,695,696 $ 127,031 $ 14,632,883
Net income 433,713 433,713 $ 433,713
Cash dividends (213,528) (213,528)
Dividend reinvestment plan 130,319 130,319
Net unrealized loss on securities (84,715) (84,715) (84,715)
------------- ------------- ------------- ------------- ------------- -------------
Balance, June 30, $ 832,910 $ 5,107,565 $ 8,915,881 $ 42,316 $ 14,898,672 $ 348,998
============= ============== ============== ============== ============== ==============
Components of comprehensive income:
Change in net unrealized gain on investment
securities held for sale $ (63,805)
Realized gains included in net income net
of tax (20,910)
--------------
Total $ (84,715)
==============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
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6
<TABLE>
<CAPTION>
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Six Months Ended June 30,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES ------------- ------------
Net income $ 433,713 $ 640,100
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 543,412 363,479
Provision for loan losses 637,000 600,000
Mortgage loans originated for sale (1,256,600) (1,032,075)
Proceeds from sales of mortgage loans 1,284,979 1,054,342
Investment securities gains, net (31,682) (3,420)
Increase in accrued interest receivable (1,791) (28,733)
Increase (decrease) in accrued interest payable (19,924) 297,950
Other, net (165,395) (508,290)
------------ ------------
Net cash provided by operating activities 1,423,712 1,383,353
------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sales 932,259 2,180,688
Proceeds from maturities and principal repayments 5,625,943 2,139,900
Purchases (8,833,827) (7,432,127)
Net decrease (increase) in loans 2,318,395 (3,213,254)
Purchase of premises and equipment (779,533) (74,007)
Proceeds from sale of other real estate owned 39,254 -
------------ ------------
Net cash used for investing activities (697,509) (6,398,800)
------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits (876,241) 12,890,149
Increase (decrease) in short-term borrowings 1,123,601 (2,140,148)
Repayment of other borrowings - (4,400,000)
Cash dividends (213,528) (88,059)
Proceeds from dividend reinvestment plan 130,319 50,536
Proceeds from sale of common stock - 2,599,293
------------ ------------
Net cash provided by financing activities 164,151 8,911,771
------------ ------------
Increase in cash and cash equivalents 890,354 3,896,324
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,906,457 7,073,483
============ ============
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,796,811 $ 10,969,807
============ ============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
<PAGE>
7
Security Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and, therefore,
do not necessarily include all information which would be included in audited
financial statements. The information furnished reflects all normal recurring
adjustments which are, in the opinion of management, necessary for fair
statement of the results of the period. The results of operations for the
interim periods are not necessarily indicative of the results to be expected
for the full year.
NOTE 2 - STOCK OPTION PLAN
On December 30, 1997, the Board of Directors adopted a Stock Option Plan for
the directors, officers, and employees which was approved by stockholders at
the annual meeting held on April 21, 1998. An aggregate of 33,000 shares of
authorized but unissued common stock of the Company were reserved for future
issuance under the plan. The stock options typically have expiration terms of
ten years subject to certain extensions and early terminations. The per
share exercise price of a stock option shall be, at a minimum, equal to the
fair value of a share of common stock on the date the option is granted.
NOTE 3 - EARNINGS PER SHARE
There are no convertible securities which would affect the net income
required to be used in calculating basic and diluted earnings per share, as
such, net income as presented on the consolidated statement of income is used
for computation purposes.
The average shares outstanding for both basic and diluted earnings per share
are 333,164 at June 30, 1998 and 279,422 at June 30,1997.
NOTE 4 - COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." In adopting statement
No. 130, the Company is required to present comprehensive income and its
components in a full set of general purpose financial statements. The Company
has elected to report the effects of statement No. 130 as part of the
statement of changes in stockholders' equity.
<PAGE>
8
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION
& RESULTS OF OPERATIONS
Financial Condition
Total assets increased by $502,000 or 0.3% from December 31, 1997 to June 30,
1998. Gross loans decreased $3,488,000 or 3.1% during the first six months
of 1998. Decreases occurred in the real estate and installment portfolios
which combined to decrease $3,639,000 during the first six months of 1998.
The Bank experienced significant rate competition in the commercial real
estate lending area from larger institutions and strategically decided not to
negatively impact net interest margin by offering comparable rates. The
decrease in the installment portfolio was due to the continued slowdown in
funding the indirect portfolio.
Total securities increased by 1.9 million or 4.7% to $43,612,000 at June 30,
1998 from $41,639,000 at December 31, 1997. The increase was primarily the
result of low loan demand during the six months. Mortgage-backed securities
are typically being used to supplement the loan portfolio in periods of
inadequate demand. Principal repayments from mortgage-backed securities are
being used to fund loans and to meet operating expenses.
Total deposits decreased $876,241 or 0.60%, during the first six months of
1998. Time certificates of deposits decreased $2,458,011 for the period
ended June 30,1998.
Stockholders' equity increased $216,000 for the six month period ended
June 30, 1998, due to net income of $434,000 which was offset by cash
dividends paid of $214,000 and a decreased net unrealized gains on securities
of $85,000.
Results of Operations
Net income for the period ending June 30, 1998 stood at $434,000 compared to
$640,000 during the same period in 1997. Discussed below are the major
factors which have influenced these operating results. Net interest income,
the primary source of earnings, is the amount by which interest and fees on
loans and investments exceed the interest cost of deposits and other borrowings
obtained to fund them. Net interest income is affected by the volume and
composition of earning assets and interest-bearing liabilities as well as the
level of non-interest-bearing demand deposits and stockholders' equity. Also
impacting net interest income is the susceptibility of interest-earning
assets and interest-bearing liabilities to changes in the general market level
of interest rates. Management attempts to manage the repricing of assets and
liabilities so as to achieve a stable level of net interest income and reduce
the effect of significant changes in the market level of interest rates.
This is accomplished through the pricing and promotion of various loan and
deposit products as well as the active management of the Bank's portfolio of
investment securities available for sale.
Interest income for the first half 1998 amounted to $6,308,000 as compared to
$6,283,000 during the same period 1997, a increase of $25,000. During the
same time period, interest expense increased $170,000 from $3,051,000 in 1997
to$3,221,000 in 1998. The increase in interest income is the result of an
increase in the yield of the investment portfolio over the 12 month period.
The increase in the interest expense for the period is mainly due to a change
in the deposit structure in the first half of 1997 from short-term borrowing
to large certificates of deposits.
The provision for possible loan losses for the six months ending June 30,
1998 was $637,000, compared to $600,000 for the six months ended June 30,
1997. The increase in the provision, related primarily to an increase in net
loan charge-offs for the six months ended June 30, 1998 compared to the same
period in 1997, as well as management's overall evaluation of the adequacy of
the level of the allowance, in relation to non-performing loans and total
loans. The adequacy of the allowance for possible loan losses is evaluated
by management on a quarterly basis. This review includes an assessment of
problem loans and potential unknown losses based on current economic
conditions, the regulatory environment and historical experience. The
provision for possible loan losses represents charges to operations necessary
to maintain the allowance at a level which management believes will be
adequate to absorb possible losses. Management believes that the allowance
for possible loan losses is adequate. While management evaluates the
allowance for possible loan losses based upon available information, future
additions to the allowance may be necessary. Additionally, regulatory agencies
review the Company's allowance for possible loan losses as part of their
examination process. Such agencies may require the Company to recognize
additions to the allowance based on judgments which may be different from
those of management.
Non-interest expense increased $95,000 or 4.32% to $2,290,000 for 1998 from
$2,195,000 for 1997. The increase was the result of operating a larger
organization. Compensation and benefits increased $71,974 or 6.24%.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Company's ability to efficiently meet normal
cash flow requirements of both borrowers and depositors. To maintain proper
liquidity, the Company uses asset liability management policies along with
its investment policies to assure it can meet its financial obligations to
depositors, credit customers and shareholders. Liquidity is needed to meet
depositors' withdrawal demands, extend credit to meet borrowers' needs,
provide funds for normal operating expenses and cash dividends, and fund
other capital expenditures.
Liquidity management is influenced by cash generated by operating activities,
investing activities and financing activities. The most important source of
funds is the deposits which are primarily core deposits (deposits from
customers with other relationships). Short-term debt from the Federal Home
Loan Bank supplements the Company's availability of funds.
<PAGE>
9
Impact of Inflation and Changing Prices
The financial statements and related data have been prepared in accordance
with generally accepted accounting principles which require the measurement
of financial position and operating results in terms of historical dollars,
without consideration for changes in the relative purchasing power of money
over time caused by inflation.
Unlike industrial companies, nearly all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance than
general levels of inflation. Interest rates do not necessarily move in the
same direction of in the same magnitude as the price of goods and services,
since such goods and services are affected by inflation. In the current
interest rate environment, liquidity and the maturity structure of the Bank's
assets and liabilities are critical to the maintenance of acceptable
performance levels.
Year 2000 Compliance
Management has developed a year 2000 compliance program to prepare the Bank's
computer systems and applications for the year 2000. The Bank has completed
the planning and assessment phases of the plan and has begun the testing
phase. Critical applications are scheduled to be tested by December 31, 1998
and all applications are scheduled to be completed by March 31, 1999. The Bank
expects to incur internal staff costs as well as consulting and other expenses
related to testing and enhancements to prepare the systems for the year 2000.
Although these costs cannot be fully determined at this time, they are not
considered to be internal. A significant portion of these costs are not
likely to be incremental costs to the Bank, but rather will represent the
redeployment of existing resources.
<PAGE>
10
Risk Elements
Non performing Assets
The following schedule presents information concerning nonperforming assets
including nonaccrual loans, loans 90 days or more past due, and other real
estate owned at June 30, 1998 and December 31, 1997. A loan is classified as
nonaccrual when, in the opinion of management, there are serious doubts about
collectibility of interest and principal. At the time the accrual of interest
is discontinued, future income is recognized only when cash is received.
June 31, December 31,
1998 1997
-------- --------
(Dollars in Thousands)
Loans on nonaccrual basis $ 2,378 $ 2,291
Loans past due 90 days or more 302 494
------ ------
Total non-performing loans 2,680 2,785
------ ------
Real estate owned 214 39
------ ------
Total non-performing assets 2,894 2,824
====== ======
Total non-performing loans to
total loans 2.46 % 2.48 %
====== ======
Total non-performing loans to
total assets 1.60 % 1.67 %
====== ======
Total non-performing assets to
total assets 1.73 % 1.69 %
====== ======
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11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in the rights of the Company's security holders
None
Item 3. Defaults by the Company on its senior securities
None
Item 4. Results of votes of security holders
The following represents the results of matters submitted to a vote of the
shareholders at the annual meeting held on April 21, 1998:
Election of Directors:
The following directors were elected with terms to expire April, 2000:
For Withhold Authority
Gary A. Clayman 253,753 2,934
Glenn E. Griffiths 253,469 3,218
Robert J. McClurkin 253,266 3,421
Adapt the Security Financial Corp. 1997 stock option plan.
For 206,691
Against 38,195
To amend Certificate of Incorporation to increase authorized shares from
750,000 to 1,500,000 and to eliminate par value.
For 240,287
Against 6,859
S.R. Snodgrass was elected as the Company's Independent Auditors for the year
ending December 31, 1998 by the following vote:
For 245,662
Against 102
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Security Financial Corp.
(Registrant)
Date: August 14, 199 By: /s/ Glenn Griffiths
-----------------------
Glenn Griffiths,
President & CEO
Date: August 14, 1998 By: /s/ Donald Stacy
-----------------------
Donald Stacy,
Vice President &
Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,078,811
<INT-BEARING-DEPOSITS> 200,000
<FED-FUNDS-SOLD> 2,518,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,611,641
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 108,940,298
<ALLOWANCE> 1,528,207
<TOTAL-ASSETS> 167,760,294
<DEPOSITS> 144,476,220
<SHORT-TERM> 7,648,287
<LIABILITIES-OTHER> 737,115
<LONG-TERM> 0
0
0
<COMMON> 832,910
<OTHER-SE> 14,065,762
<TOTAL-LIABILITIES-AND-EQUITY> 167,760,294
<INTEREST-LOAN> 4,943,858
<INTEREST-INVEST> 1,266,914
<INTEREST-OTHER> 97,638
<INTEREST-TOTAL> 6,308,410
<INTEREST-DEPOSIT> 3,089,252
<INTEREST-EXPENSE> 3,220,818
<INTEREST-INCOME-NET> 3,087,592
<LOAN-LOSSES> 637,000
<SECURITIES-GAINS> 31,682
<EXPENSE-OTHER> 2,290,297
<INCOME-PRETAX> 592,017
<INCOME-PRE-EXTRAORDINARY> 592,017
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 433,713
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.30
<YIELD-ACTUAL> 3.97
<LOANS-NON> 2,378,000
<LOANS-PAST> 302,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,677,651
<CHARGE-OFFS> 44,000
<RECOVERIES> 830,443
<ALLOWANCE-CLOSE> 1,528,207
<ALLOWANCE-DOMESTIC> 1,528,207
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
