<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
Security Financial Corp.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in its charter)
Delaware 34-1579662
- -------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1 South Main St., Niles, OH 44446-0228
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, (330) 544-7400
--------------------------------------------
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None None
- ---------------------------------------- ------------------------------------
- ---------------------------------------- ------------------------------------
Securities to be registered under Section 12(g) of the Act:
Common Stock
------------------------------------------------------
(Title of class)
Section 12(g)
------------------------------------------------------
(Title of class)
<PAGE> 2
INFORMATION REQUIRED IN REGISTRATION STATEMENT
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The purpose of the Security Financial Corp. (the "Company") is to
engage in any lawful act or activity for which corporations may be
organized under the General Company Law of Delaware.
General
The Company was incorporated under the laws of the State of Delaware
on November 23, 1987, at the direction of management of the Bank, for the
purpose of becoming a bank holding company by acquiring all of the outstanding
shares of Security Dollar Bank (the "Bank"). In March, 1988, the Company
became the sole shareholder of the Bank. The Bank carries on business under the
name "Security Dollar Bank." The principal office of the Company is located at
1 South Main Street, Niles, Ohio 4446-0228.
Security Dollar Bank was established under the banking laws of the
State of Ohio in November in 1904.
The Bank is headquartered in Niles, Ohio, which is located in the
northeast portion of Ohio, in the County of Trumbull. Trumbull County has a
population of approximately 227,000. The population in Trumbull County
decreased during the period 1990-1995 by .47%. This compares to a growth in
population during the same period for the State of Ohio of 1.7%. As of
December 31, 1997, median household income for Trumbull County was 93% of the
State of Ohio median household income. Historically the steel industry
accounted for a large segment of the economic activity in Trumbull County.
Over the past 10 years less dependance on the steel industry has occurred with
a resulting increase in service related businesses. The areas largest single
employer is General Motors which operates an assembly facility within Trumbull
County.
The Bank provides customary retail and commercial banking services to
its customers, including checking and savings accounts, time deposits, NOW
accounts, safe deposit facilities, real estate mortgage loans and installment
loans. The Bank also makes secured and unsecured commercial loans.
The largest category of loans comprising the Bank's Loan Portfolio is
Residential Real Estate Loans. These loans are primarily single family
residential real estate loans secured by a first mortgage on the dwelling. The
risks associated with these loans are primarily the risk of default in
repayment and inadequate collateral. Consumer and credit card loans comprise
the next largest area of the Bank's loan portfolio. These loans include
consumer installment including automobile loans as well as personal loans and
credit card loans. The risks inherent in these loans include the risk of
default in principal, repayment and in the case of secured loans the risk of
inadequate collateral. The third largest loan segment of the Bank's Loan
Portfolio is the Commercial category. The loans comprising this category
represent loans to business interests, located primarily within the Bank's
defined market areas, with no significant industry concentration. Commercial
Loans include both secured and unsecured loans. The risks associated with
these loans are principally the risk in default of the payment of principal
resulting from economic problems of the commercial customer, economic downturn
effecting the market in general and in the case of secured loans inadequate
collateral.
The Bank is insured by the Federal Deposit Insurance Corporation, and
is regulated by the Ohio Division of Banks and the Board of Governors of the
Federal Reserve System.
Employees
As of March 31, 1998, the Bank had 77 full-time and 17 part-time
employees. The Bank provides a number of benefits for its full-time employees,
including health and life insurance, pension, workers' compensation, social
security, paid vacations, and numerous bank services.
The Company, through its affiliate, Security Dollar Bank, (the "Bank")
conducts the business of a commercial banking organization. At March 31, 1998,
the Company and its subsidiaries had consolidated total assets of approximately
$168 million, consolidated total deposits of approximately $145 million and
consolidated total equity of approximately $15 million.
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The Company, through its banking affiliate, offers a broad range of
banking services to the commercial, industrial and consumer market segments
which it serves. Services include commercial, real estate and personal loans;
checking, savings and time deposits and other customer services such as safe
deposit facilities. the Company does not have any foreign operations, assets or
investments.
The Bank is a state banking corporation. The Bank is regulated by the
Ohio Division of Financial Institutions ("ODFI") and its deposits are insured by
the Federal Deposit Insurance Corporation to the extent permitted by law and,
as a subsidiary of the Company, is regulated by the Federal Reserve Board.
Competition
The commercial banking business in the market areas served by the Bank
is very competitive. the Company and the Bank are in competition with commercial
banks located in their own service areas. Some competitors of the Company and
the Bank are substantially larger than the Bank. In addition to local bank
competition, the Bank competes with larger commercial banks located in
metropolitan areas, savings banks, savings and loan associations, credit unions,
finance companies and other financial institutions for loans and deposits.
Certain Regulatory Considerations
The following is a summary of certain statutes and regulations
affecting the Company and its subsidiaries. This summary is qualified in its
entirety by such statutes and regulations.
The Company
The Company is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended, ("BHC Act") and as such is subject to
regulation by the Federal Reserve Board. A bank holding company is required to
file with the Federal Reserve Board quarterly reports and other information
regarding its business operations and those of its subsidiaries. A bank holding
company and its subsidiary banks are also subject to examination by the Federal
Reserve Board.
The BHC Act requires every bank holding company to obtain the prior
approval of the Federal Reserve Board before acquiring substantially all the
assets of any bank or bank holding company or ownership or control of any voting
shares of any bank or bank holding company, if, after such acquisition, it would
own or control, directly or indirectly, more than five percent (5%) of the
voting shares of such bank or bank holding company.
In approving acquisitions by bank holding companies of companies
engaged in banking-related activities, the Federal Reserve Board considers
whether the performance of any such activity by a subsidiary of the holding
company reasonably can be expected to produce benefits to the public, such as
greater convenience, increased competition, or gains in efficiency, which
outweigh possible adverse effects, such as over concentration of resources,
decrease of competition, conflicts of interest, or unsound banking practices.
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Bank holding companies are restricted in, and subject to, limitations
regarding transactions with subsidiaries and other affiliates.
In addition, bank holding companies and their subsidiaries are
prohibited from engaging in certain "tie in" arrangements in connection with any
extensions of credit, leases, sales of property, or furnishing of services.
The Company's Subsidiary
The Company operates a single bank, namely, Security Dollar Bank. As an
Ohio state chartered commercial bank the Bank is supervised and regulated by the
ODFI, and subject to laws and regulations applicable to Ohio banks.
Capital
The Federal Reserve Board, ODFI, and FDIC require banks and holding
companies to maintain minimum capital ratios.
The Federal Reserve Board adopted final "risk-adjusted" capital
guidelines for bank holding companies. The guidelines became fully implemented
as of December 31, 1992. The ODFI and FDIC have adopted substantially similar
risk-based capital guidelines. These ratios involve a mathematical process of
assigning various risk weights to different classes of assets, then evaluating
the sum of the risk-weighted balance sheet structure against the Company's
capital base. The rules set the minimum guidelines for the ratio of capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) at 8%. At least half of the total capital is to be
composed of common equity, retained earnings, and a limited amount of perpetual
preferred stock less certain goodwill items ("Tier 1 Capital"). The remainder
may consist of a limited amount of subordinated debt, other preferred stock, or
a limited amount of loan loss reserves.
In addition, the federal banking regulatory agencies have adopted
leverage capital guidelines for banks and bank holding companies. Under these
guidelines, banks and bank holding companies must maintain a minimum ratio of
three percent (3%) Tier 1 Capital (as defined for purposes of the year-end 1992
risk-based capital guidelines) to total assets. The Federal Reserve Board has
indicated, however, that banking organizations that are experiencing or
anticipating significant growth, are expected to maintain capital ratios well in
excess of the minimum levels.
Regulatory authorities may increase such minimum requirements for all
banks and bank holding companies or for specified banks or bank holding
companies. Increases in the minimum required ratios could adversely affect the
Company and the Banks, including their ability to pay dividends.
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Additional Regulation
The Bank is also subject to federal regulation as to such matters as
required reserves, limitation as to the nature and amount of its loans and
investments, regulatory approval of any merger or consolidation, issuance or
retirement of their own securities, limitations upon the payment of dividends
and other aspects of banking operations. In addition, the activities and
operations of the Bank are subject to a number of additional detailed, complex
and sometimes overlapping laws and regulations. These include state usury and
consumer credit laws, state laws relating to fiduciaries, the Federal
Truth-in-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act
and Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act, the
Community Reinvestment Act, anti-redlining legislation and antitrust laws.
Dividend Regulation
The ability of the Company to obtain funds for the payment of dividends
and for other cash requirements is largely dependent on the amount of dividends
which may be declared by the Bank. Generally, the Bank may not declare a
dividend, without the approval of the ODFI, if the total of dividends declared
in a calendar year exceeds the total of its net profits for that year combined
with its retained profits of the preceding two years.
Government Policies and Legislation
The policies of regulatory authorities, including the ODFI, Federal
Reserve Board, FDIC and the Depository Institutions Deregulation Committee, have
had a significant effect on the operating results of commercial banks in the
past and are expected to do so in the future. An important function of the
Federal Reserve System is to regulate aggregate national credit and money supply
through such means as open market dealings in securities, establishment of the
discount rate on member bank borrowings, and changes in reserve requirements
against member bank deposits. Policies of these agencies may be influenced by
many factors, including inflation, unemployment, short-term and long-term
changes in the international trade balance and fiscal policies of the United
States government.
The United States Congress has periodically considered and adopted
legislation which has resulted in further deregulation of both banks and other
financial institutions, including mutual funds, securities brokerage firms and
investment banking firms. No assurance can be given as to whether any additional
legislation will be adopted or as to the effect such legislation would have on
the business of the Company or the Bank.
In addition to the relaxation and elimination of certain geographic
restrictions on banks and bank holding companies, a number of regulatory and
legislative initiatives have the potential for eliminating many of the product
line barriers presently separating the services offered by commercial banks from
those offered by nonbanking institutions. For example, Congress recently has
considered legislation which would expand the scope of permissible business
activities for bank holding companies (and in some cases banks) to include
securities underwriting, insurance services and various real estate related
activities.
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Deposit Insurance
The Federal Deposit Insurance Company Improvement Act of 1991
("FDICIA") was enacted in 1991. Among other things, FDICIA, requires federal
bank regulatory authorities to take "prompt corrective action" with respect to
banks that do not meet minimum capital requirements. For these purposes, FDICIA
establishes five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized.
As an FDIC-insured institution, the Bank is required to pay deposit
insurance premium assessments to the FDIC. The amount each institution pays for
FDIC deposit insurance coverage is determined in accordance with a risk-based
assessment system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation. Institutions classified as
well-capitalized (as defined by the FDIC) and considered healthy pay the lowest
premium while institutions that are less than adequately capitalized (as defined
by the FDIC) and considered substantial supervisory concerns pay the highest
premium. Beginning in 1996, such deposit insurance runs from a cost of zero
percent to 0.27% of deposits. Because the Bank is "well-capitalized," it
currently pays the minimum deposit insurance premiums.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or written agreement
with, the FDIC. The FDIC may also suspend deposit insurance temporarily during
the hearing process for a permanent termination of insurance if the institution
has no tangible capital. Management of the Company is not aware of any activity
or condition that could result in termination of the deposit insurance of the
Bank.
Recent Legislation
On September 29, 1994, the Reigle/Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") was signed into law. The
Interstate Act effectively permits nationwide banking. The Interstate Act
provides that one year after enactment, adequately capitalized and adequately
managed bank holding companies may acquire banks in any state, even in those
jurisdictions that currently bar acquisitions by out-of-state institutions,
subject to deposit concentration limits. The deposit concentration limits
provide that regulatory approval by the Federal Reserve Board may not be granted
for a proposed interstate acquisition if after the acquisition, the acquirer on
a consolidated basis would control more than 10% of the total deposits
nationwide or would control more than 30% of deposits in the state where the
acquiring institution is located. The deposit concentration state limit does not
apply for initial acquisitions in a state and in every case, may be waived by
the state regulatory authority. Interstate acquisitions are subject to
compliance with the Community Reinvestment Act ("CRA"). States are permitted to
impose age requirements not to exceed five years on target banks for interstate
acquisitions. States are not allowed to opt-out of interstate banking.
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Branching between states may be accomplished either by merging separate
banks located in different states into one legal entity, or by establishing de
novo branches in another state. Consolidation of banks was not permitted until
June 1, 1997, provided that the state had not passed legislation "opting-out" of
interstate branching. If a state opted-out prior to June 1, 1997, then banks
located in that state may not participate in interstate branching. A state could
have opted-in to interstate branching by bank consolidation or by de novo
branching by passing appropriate legislation earlier than June 1, 1997.
Interstate branching is also subject to a 30% statewide deposit concentration
limit on a consolidated basis, and a 10% nationwide deposit concentration limit.
The laws of the host state regarding community reinvestment, fair lending,
consumer protection (including usury limits) and establishment of branches shall
apply to the interstate branches. The State of Ohio opted-in to the legislation
in May of 1997.
De novo branching by an out-of-state bank is not permitted unless the
host state expressly permits de novo branching by banks from out-of-state. The
establishment of an initial de novo branch in a state is subject to the same
conditions as apply to initial acquisition of a bank in the host state other
than the deposit concentration limits.
The FDIC, together with the Federal Reserve, the ODFI and the Office of
Thrift Supervision (the "OTS"), have established rules implementing requirement
that the federal banking agencies establish operational and managerial standards
to promote the safety and soundness of federally insured depository
institutions. The guidelines establish standards for internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits. In general, the guidelines prescribe the goals to be achieved in each
area, and each institution is responsible for establishing its own procedures to
achieve those goals. If an institution fails to comply with any of the standards
set forth in the guidelines, the institution's primary federal regulator may
require the institution to submit to a plan for achieving and maintaining
compliance. Failure to submit an acceptable plan, or failure to comply with a
plan that has been accepted by the appropriate regulator, would constitute
grounds for further enforcement action.
The Federal Reserve, the ODFI and the OTS have adopted new regulations
under the Community Reinvestment Act ("CRA"). Under the new regulations, an
institution's performance in meeting the credit needs of its entire community,
including low and moderate income areas, as required by the CRA, is generally
evaluated under three tests: the "lending test," which considers the extent to
which the institution makes loans in the low and moderate income areas of its
market; the "service test," which considers the extent to which the institution
makes branches accessible to low and moderate income areas of its market and
provides other services that promote credit availability; and the "investment
test," which considers the extent to which the institution invests in community
and economic development activities. The Bank had a satisfactory CRA rating as
of its latest examination.
Proposed Legislation
In addition to the above, there have been proposed a number of
legislative and regulatory proposals designed to strengthen the federal deposit
insurance system and to improve the overall financial stability of the U.S.
banking system. It is impossible to predict whether or in what form
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<PAGE> 8
these proposals may be adopted in the future, and if adopted, what their effect
would be on the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Selected Financial Information
The following table sets forth certain information concerning the consolidated
financial position of the Company at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands, except shares and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income:
Interest income $ 12,848 $ 11,269 $ 8,995 $ 7,380 $ 7,223
Interest expense 6,328 5,457 4,243 2,949 2,966
Net interest income 6,520 5,812 4,752 4,431 4,257
Provision for loan losses 1,250 668 198 290 612
Net interest income after provision
for loan losses 5,270 5,144 4,554 4,141 3,645
Investment securities gains, net 25 26 22 21 -
Other noninterest income 916 801 728 707 637
Other noninterest expense 4,284 4,186 3,832 3,421 3,098
Federal income tax expense 609 543 422 427 321
Cumulative effect of accounting - - - - 87
change (2)
--------------------------------------------------------------------------------
Net Income $ 1,318 $ 1,241 $ 1,049 $ 1,020 $ 951
================================================================================
Per share of common stock (1):
Net income $ 4.11 $ 4.48 $3.87 $3.93 $3.81
Dividends 1.15 1.00 0.90 0.68 0.55
Book value 43.92 38.58 35.45 31.52 29.16
Average common shares outstanding 320,732 277,408 271,219 259,597 249,692
Year-end balances:
Loans receivable, net $110,751 $113,310 $ 81,988 $ 66,370 $ 64,483
Investment securities available for 41,639 26,691 18,737 17,782 20,666
sale
Total assets 167,258 152,899 127,064 107,880 98,181
Cash and cash equivalents 8,906 6,868 6,189 7,298 10,056
Deposits 145,352 129,670 109,571 94,188 87,520
Borrowings 6,524 11,754 7,246 4,974 2,784
Stockholder's equity 14,633 10,779 9,789 8,388 7,425
</TABLE>
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<TABLE>
<CAPTION>
KEY OPERATING RATIOS:
<S> <C> <C> <C> <C> <C>
Return on average assets (net income
divided by average total assets) 0.81 0.86 0.90 1.00 1.01
Return on average equity (net income
divided by average equity) 9.83 12.14 12.51 13.73 14.67
Dividend Payout Ratio (dividends
declared per
share divided by net income per share) 27.98 22.35 23.26 17.30 14.44
Equity to assets ratio (average equity
divided by average total assets) 8.26 7.12 7.19 7.28 6.88
Allowance for loan losses to
Nonperforming Loans 64.51 85.75 236.45 167.18 539.54
----- ----- ------ ------ ------
</TABLE>
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(1) All share and per share data has been restated for the effect of common
stock dividends and splits.
(2) Cumulative effect adjustment is the result of adopting Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Investments Securities
The investment portfolio, increased by $14.9 million or 56.0% in 1997. Most of
the increase occurred in mortgage-backed securities, which grew by $11.4 million
in 1997. The increase is primarily attributable to excess funds resulting from
deposit growth outpacing the current year loan demand. The deposits and other
liabilities that are not used to fund loans are placed in investments which
possess less risk and, therefore, lower yield. The impact on net interest income
is discussed later in the Net Interest Income section.
In general investment in securities is limited to those funds the bank feels it
has in excess of funds used to satisfy loan demand and operating considerations.
The following table shows the amortized cost and estimated market value of
investment securities by type of obligation at the dates indicated.
The amortized cost, unrealized gains and losses and estimated fair values are as
follows at December 31:
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and Government
agency securities $13,456,631 $30,215 ($16,167) $13,470,679
Obligations of states and political
subdivisions 6,087,660 91,342 (12,734) 6,166,268
Mortgage-backed securities 20,770,857 132,780 (147,395) 20,756,242
Corporate securities - - - -
-------------------------------------------------------------------------
Total debt securities 40,315,148 254,337 (176,296) 40,393,189
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Equity securities 1,130,882 114,431 - 1,245,313
-------------------------------------------------------------------------
Total investment securities $41,446,030 $368,768 ($176,296) $41,638,502
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and Government
agency securities $13,823,796 $36,492 ($117,466) $13,742,822
Obligations of states and political
subdivisions 2,509,420 35,601 (23,019) 2,522,002
Mortgage-backed securities 9,325,478 100,572 (49,519) 9,376,531
Corporate securities - - - -
-------------------------------------------------------------------------
Total debt securities 25,658,694 172,665 (190,004) 25,641,355
Equity securities 1,002,182 47,736 - 1,049,918
-------------------------------------------------------------------------
Total investment securities $26,660,876 $220,401 ($190,004) $26,691,273
=========================================================================
</TABLE>
Loans
Historically, loans have been originated by the Company to customers in East
Central Ohio. Loans have been originated primarily through direct loans to our
existing customer base, with new customers generated by referrals from real
estate brokers, building contractors, attorneys, accountants and existing
customers. The Company also generates indirect loans through new and used car
dealers in the primary lending area.
All lending is governed by a lending policy which is developed and maintained by
management and approved by the Board of Directors. The Company's lending policy
regarding real estate loans is that generally the maximum mortgage granted on
owner-occupied residential property is 80% of the appraised value or purchase
price (whichever is lower) when secured by the first mortgage on the property.
Home equity lines of credit or second mortgage loans are generally originated
subject to maximum mortgage liens against the property of 80% of the current
appraised value. The maximum term for mortgage loans is 30 years for one- to
four-family residential property and 15 years for commercial and vacation
property.
As shown in the following table, total loans declined by $2.5 million in 1997,
or 1.76%, a decrease from the strong 38% increase during 1996. The product mix
in the Loan Portfolio shows Commercial Loans comprising 11.92%, Real Estate
Mortgage Loans (Residential and Commercial)56.26% and Installment Loans to
Individuals 31.82% at December 31, 1997 compared with 11.04%,57.43% and 31.53%,
respectively December 31, 1996.
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Real estate mortgage loans decreased to $63.3 million at December 31, 1997 a
decrease of 4.23% under 1996. This portfolio consists of $46.1 million 0f 1-4
family residential properties and $17.2 million in construction and commercial
real estate properties, all made within the Bank's primary market area. The
Company originated both fixed rate and adjustable rate mortgages during 1997.
Fixed rate loans that are maintained in the portfolio are limited to
fifteen-year terms while adjustable rate products are offered with maturities up
to thirty years.
Commercial Loans at December 31, 1997 increased from year-end 1996 with
outstanding balances of $13.4 million. This portfolio is comprised of primarily
Variable rate loans. The Bank's commercial loans are granted to customers within
the immediate trade area of the Bank. The mix is diverse, covering a wide range
of borrowers and business types. The Bank monitors and controls concentrations
within a particular industry or segment of the economy. These loans are made for
purposes such as equipment purchases, capital and leasehold improvements, the
purchase of inventory, general working capital purposes and small business lines
of credit.
Installment Loans to Individuals decreased from $36.3 million on December 31,
1996 to $35.8 million on December 31, 1997 which represents a 1.33% decrease.
Management continues to target the automobile dealer network to originate
indirect Installment Loans. Dealer paper was originated using strict
underwriting guidelines with an emphasis on quality.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------
1997 1996
------------------------------------ -------------------------------------
Amount Percent Amount Percent
---------------- ---------------- ---------------- ----------------
Type of Loan (Dollars in Thousands)
- ------------
<S> <C> <C> <C> <C>
Real Estate Loans:
Construction $ 623 0.55% $ 1,188 1.03%
One to four family 46,064 40.97 47,476 41.29
Commercial 16,565 14.74 17,384 15.11
Commercial 13,398 11.92 12,689 11.04
Consumer loans 35,779 31.82 36,251 31.53
---------------- ---------------- ---------------- ----------------
Total loans 112,429 100.00% 114,988 100.00%
================ ================
Less:
Allowance for possible loan (1,678) (1,679)
losses
---------------- ----------------
Total loans, net $ 110,751 $ 113,309
================ ================
</TABLE>
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Allowance for Loan Losses
The provisions for possible loan losses charged to operating expense is based on
management's judgment after taking into consideration all factors connected with
the collectability of the existing loan portfolio. Management evaluates the loan
portfolio in light of economic conditions, changes in the nature and volume of
the loan portfolio, industry standards and other relevant factors. Specific
factors are considered by management in determining the amounts charged to
operating expenses include previous credit loss experience, the status of past
due interest and principal payments, the quality of financial information
supplied by loan customers and the general condition of the industries in the
community to which loans have been made.
Provisions charged to operations increased from $668 thousand in 1996 to $1.26
million in 1997. The provision charged to operations was increased as a result
of higher levels of charge-offs. Total loans charged off during 1997 amounted
to $1.3 million and were primarily made up of consumer indirect automobile and
credit card loans. During the second quarter of 1997, the Bank began to
experience higher levels of nonperforming consumer loans than anticipated.
Management took immediate measures to implement more stringent underwriting
guidelines associated with these loans.
The Bank initiated an indirect lending portfolio in 1995, which grew to $24.0
million by the end of 1996 and has remained at relatively the same levels
through 1997. As a result of this level of growth coupled with the knowledge
that indirect loans inherently possess a higher degree of risk of loss than
most other loans, management began to increase the provision for loan losses in
the later part on 1996 and continuing in 1997. As the Bank began to experience
higher levels of nonperforming indirect loans, management determined that such
loans contained common characteristics and implemented underwriting guidelines
to address those specific issues.
The allowance for loan losses as a percent of total loans remained relatively
constant at 1.49% at December 31, 1997 and 1.46% at December 31, 1996, while
total loans declined by $2.6 million from $115.0 million at December 31, 1996
to $112.4 million at December 31, 1997. The allowance for loan losses as a
percent of nonperforming loans has declined from 85.75% at December 31, 1996 to
64.51% at December 31, 1997. This decline is primarily the result of increased
levels of nonperforming indirect loans as discussed above.
Management uses the aforementioned review and analysis to determine the
adequacy of the allowance for loan losses on a quarterly basis. The provision
for loan losses represents an amount that is intended to be sufficient to
maintain the allowance for loan losses at a level necessary to meet present and
potential risk characteristics of the loan portfolio. Management believes the
allowance for loan losses at December 31, 1997 of $1,678,000 is adequate to
cover losses inherent in the portfolio. However, there can be no assurances
that additional losses will not be sustained in future periods, which could be
substantial in relation to the size of the allowance for loan losses at
December 31, 1997.
The allowance for possible loan losses has been allocated according to the
amount deemed to be reasonably necessary to provide for the possibility of
losses being incurred within the following categories of loans as of the dates
indicated:
The distribution of the Bank's allowance for loan losses at the dates indicated
are summarized as follows:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------
1997 1996
------------------------------------- ------------------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
---------------- ---------------- ---------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial $ 312 11.92% $ 287 11.04%
Mortgage:
Commercial 555 14.74 587 15.11
One to Four Family 75 40.97 100 41.29
Construction - 0.55 - 1.03
Consumer 736 31.82 706 31.53
Unallocated - - - -
---------------- --------------- ---------------- ---------------
Total $ 1,678 100.00% $ 1,679 100.00%
================ =============== ================ ===============
</TABLE>
12
<PAGE> 13
The following table sets forth the amounts and categories of the Bank's non -
performing assets at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------
1997 1996
----------------- ----------------
(Dollars in Thousands)
<S> <C> <C>
Loans accounted for on a non - accrual basis:
Mortgage loans:
One to four family $ 163 $ 119
Commercial 619 627
Consumer 890 431
Commercial 619 465
----------------- ----------------
Total non-accrual loans 2,290 1,642
----------------- ----------------
Accruing loans greater than 90 day past due:
Mortgage loans:
One to four family - -
Commercial - -
Consumer 311 233
Commercial - 83
----------------- ----------------
Total accruing loans greater than 90 day past due 311 317
----------------- ----------------
Total non - performing loans 2,601 1,958
Real estate acquired in settlement of loans 39 39
Other non-performing assets - -
----------------- ----------------
Total non-performing assets $ 2,640 $ 1,997
================= ================
Total non-performing loans to total loans 2.31% 1.70%
================= ================
Total non-performing loans to total assets 1.56% 1.28%
================= ================
Total non-performing assets to total assets 1.58% 1.31%
================= ================
</TABLE>
Interest income that would have been recorded on loans accounted for on a
non-accrual basis under the original terms of such loans was $247,124 for the
year ended December 31, 1997 and $168,489 was collected and included in the
Bank's interest income from non-accrual loans for the year ended December 31,
1997.
13
<PAGE> 14
The following table sets forth information with respect to the Bank's allowance
for loan losses at the dates indicated:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1997 1996
---------------- ----------------
(Dollars in Thousands)
<S> <C> <C>
Total loans outstanding $ 112,429 $ 114,988
================ ================
Average loans outstanding $ 116,122 $ 100,487
================ ================
Allowance balance (at beginning of period) $ 1,679 $ 1,239
Provision: 1,250 668
Charge-offs:
Residential (12) (35)
Consumer (1,257) (364)
Commercial (70) (47)
Recoveries:
Residential - 42
Consumer 84 51
Commercial 4 125
---------------- ----------------
Allowance balance (at end of period) $ 1,678 $ 1,679
================ ================
Allowance for loan losses as a percent
of total loans outstanding 1.49% 1.46%
Net loans charged off as a percent
of average loans outstanding (1.33)% (0.44)%
</TABLE>
Deposits
Deposits represent the Company's principal source of funds. The deposit base
consists of demand deposits, savings and money market accounts and other time
deposits. During the year, the Company's total deposits grew from $124.7 million
in 1996 to $140.5 million in 1997, which equates to an increase of 12.68%. Most
of this growth occurred in time deposits, which increased from $67.8 million in
1996 to $83.0 million in 1997. Part of this increase was due to a program of
attracting certificates of deposit from outside of our market area, occurring in
the first
14
<PAGE> 15
quarter of the year which generated approximately $8 million in new time deposit
money to the Company.
The following table represents the average deposits and average rate paid for
the years ended:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1997 1996
----------------------------------- -----------------------------------
Average Rate Average Rate
Category Amount Paid Amount Paid
---------------------------------------------------------------------------
(Dollars in Thousands)
Deposits:
<S> <C> <C> <C> <C>
Noninterest-bearing demand $ 18,132 N/A $ 17,155 N/A
Interest-bearing demand 7,938 2.42% 7,736 2.39%
Money market 3,749 2.83% 4,137 2.80%
Savings 27,912 2.95% 26,512 2.93%
Time 83,017 5.87% 67,784 5.81%
---------------- ----------------
Total deposits $ 140,748 $ 123,324
================ ================
</TABLE>
The following table indicates the amount of the Bank's time deposits of $100,000
or more by time remaining until maturity as of December 31, 1997.
<TABLE>
<CAPTION>
Maturity Period Time Deposits
--------------- -------------
(In thousands)
<S> <C>
Within three months $ 5,311
More than three through six months 3,178
More than six through nine months 3,223
Over nine months 4,012
===================
Total $ 15,724
===================
</TABLE>
Net Interest Income
The most significant source of revenue is net interest income, the amount by
which interest earned on interest-bearing assets exceeds interest expense on
interest-bearing liabilities. Factors which influence net interest income are
changes in volume of interest-bearing assets and liabilities as well as changes
in the associated interest rates.
The Company finances its earning assets with a combination of interest-bearing
and interest-free funds. The interest-bearing funds are composed of deposits,
short-term borrowings and long-term debt. Interest paid for the use of these
funds is the second factor in the net interest income equation. Interest-free
funds, such as demand deposits and stockholders equity, require no interest
expense and, therefore, contribute significantly to net interest income.
15
<PAGE> 16
Total interest income was $12.8 million for 1997 as compared to $11.3 million
and $8.9 million for 1996 and 1995, respectively. The 14.01% increase in
interest income is attributed to a 16.70% increase in interest and fees on loans
while interest on investment securities declined by 4.9%. The increase in
interest and fees on loans was primarily the result of the $15.6 million
increased in average in loans during the year. The decline in interest on
investment securities is the combined result of declines in volume of $905,000
and a 17 basis point decline in yield (100 basis points equal 1.0%).
Total interest expense amounted to $6.3 million for 1997, representing a 15.96%
increase from 1996 while interest expense of $5.5 million for 1996 represents a
28.61% increase from 1995. The increase in interest expense is primarily due to
an increase of $15.2 million in the average balance outstanding of certificates
of deposit and an overall 14 basis point increase in the average rate paid on
interest-bearing liabilities.
The table below sets forth information regarding changes in our interest income
and interest expense for the periods indicated. For each category of our
interest - earning assets and interest - bearing liabilities, information is
provided on changes attributable to (i) changes in volume (changes in volume
multiplied by old rate), (ii) changes in rate (changes in rate multiplied by old
volume), and (iii) the change in interest due to both volume and rate, which has
been allocated to volume and rate changes in proportion to the relationship of
the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------
1997 vs 1996
Increase (Decrease) Due to (1)
---------------------------------------------------------
Volume Rate Net
---------------------------------------------------------
<S> <C> <C> <C>
Interest earned on:
Loans 1,600 (78) 1,522
Taxable investment securities 158 (25) (99)
Tax-exempt investment securities 35 (40) (5)
Federal funds sold 188 (27) 161
---------------------------------------------------------
Total 1,981 (402) 1,579
=================================================
Interest paid on:
Demand deposits 5 2 7
Money market accounts (12) 2 (10)
Savings deposits 36 10 46
Time deposits 652 277 929
Short - term borrowings 0 1 1
Long - term borrowings 0 (102) (102)
---------------------------------------------------------
Total 681 190 871
=================================================
Grand Total 708
===
</TABLE>
(1) The change in interest due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
16
<PAGE> 17
Other Income
Other income is primarily made up of service charges on deposit accounts,
investment securities gains and gains on the sale of mortgage loans. Other
income increased $115 thousand or 13.86% from 1996 which increased $73 thousand
or 10.03% from 1995. The primary contributing factor to this increase was an
increase in service charges and fees related to deposit accounts. Management
believes its fees on deposit accounts are comparative to those fees charged by
the Company's competition. Management continues to explore new products and
services that could increase other income in future years.
Other Expenses
Total other expenses are primarily made up of compensation and employee
benefits, occupancy expenses, professional fees, data processing costs and other
expenses. Total other expenses for 1997 increased 2.34% over 1996 as compared to
an increase of 9.24% from 1996 over 1995. There was no one category of other
expenses which experienced a significant increase during 1997. These expenses
are subject to increases each year due primarily to asset growth, increased
volume of the operations of the bank and inflation. Management has adopted a
strategy to operate efficiently while maintaining the highest level of customer
service possible. Management will continue to closely monitor and keep the
increases in other expenses to a minimum in the future.
Liquidity
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.
Provision for Income Taxes
The provision for income taxes for 1997 increased by $65,685 to $609,119,
compared to the $121,000 increase in 1996, due to increased taxable earnings.
Stockholders' Equity
Stockholders' equity is evaluated in relation to total assets and the risk
associated with those assets. The greater the capital resources, he more likely
a Company is to meet its cash
17
<PAGE> 18
obligations and absorb unforeseen losses. For these reasons capital adequacy has
been, and will continue to be, of paramount importance.
Stockholders' equity has grown by 35.76% in 1997, 10.11% in 1996, and 16.69% in
1995 to the current level of $14.632 million. Adjustments made to equity for
unrealized holding gains and losses on available-for-sale securities resulted in
an increase of $106,969 in 1997 compared to a decrease of $119,209 in 1996.
Total equity was approximately 8.75% of total assets at December 31, 1997, as
compared to 7.05% at December 31, 1996.
The dividend rate is determined by the Board of Directors after considering the
Company's capital requirements, current and projected net income, and other
factors. In 1997 and 1996, 28.54% and 22.35% of net income was paid out in
dividends, respectively.
There are currently three federal regulatory measures of capital adequacy. The
Company's ratios substantially exceed all federal regulatory standards.
Year 2000
As a financial institution the Company is subject to the potential risks
to the financial services industry and the Company's business specifically, of
the "Y2K" issue. The Y2K issue is the acronym and terminology currently
utilized to describe a wide variety of application specific potential
technological problems inherent in computer software which is designed to read
only a 2 digit annual date position. Many software packages currently employed
by the financial services industry as well as by industries which provide
products and services which may effect the financial services industry, either
directly or indirectly through suppliers, customers, and other persons, are not
able to identify the advent of the year 2000 as "00". Therefore, there is wide
spread concern over the risks posed to the financial services industry which is
both highly automated and dependent upon information processing technology.
Concerns include but are not limited to possible erroneous checking account
transactions, interest calculations or payment schedules. Similarly Y2K issues
extend to possible problems with ATM systems or credit and debit cards. The
potential problems do not end at financial systems. Any machine or device
controlled by a computer is susceptible to the Y2K problem. The financial
impact to the industry as a whole to address Y2K could be substantial. The
Securities and Exchange Commission as well as all banking regulatory agencies
have alerted companys under their respective jurisdictions to consider and
address the risks posited by Y2K and to disclose where appropriate the specific
impact of Y2K on the Company.
The Company has developed a written Y2K Compliance Program which has been
adopted by the Company's Board of Directors. The Company and its subsidiary
bank have been subject to examination by the Federal Reserve Bank of Cleveland
regarding Y2K and has not been made aware of any material deficiency as a
result of such examination. The Company continues to monitor its relationships
with suppliers of computer hardware and software for verification of compliance
with Y2K. In addition the Company has undertaken a review of all major
customer relationships to determine that such customers own Y2K computer issues
are being addressed. There can be no assurance that the Company will not
experience adverse financial consequences as a result of Y2K, however
management, under the direction of the Board of Directors will continue to
monitor Y2K to minimize the risks associated with it wherever identified.
Interest Rate and Market Risk Management
The objective of interest rate sensitivity management is to maintain an
appropriate balance between the stable growth of income and the risks associated
with maximizing income through interest sensitivity imbalances and the market
value risk of assets and liabilities.
Because of the nature of it's operations, the Company is not subject to foreign
currency exchange or commodity price risk and, since the Company has no trading
portfolio, it is not subject to trading risk. Currently the Company has equity
securities that represent only 2.73% of its investment portfolio and, therefore,
equity risk is not significant.
The primary components of interest-sensitive assets include adjustable-rate
loans and investments, loan repayments, investment maturities and money market
investments. The primary components of interest-sensitive liabilities include
maturing certificates of deposit, IRA certificates of deposit (individuals over
59 1/2 have the option of changing their interest rate annually) and short-term
borrowings. Savings deposits, NOW accounts and money market investor accounts
are considered core deposits and are not short-term interest sensitive.
Loan maturities and rate sensitivity of the loan portfolio, exclusive of real
estate mortgage loans, and consumer installment loans, at December 31, 1997, are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
Within One One to After Five
Year Five Years Years Total
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Construction $ 623 $ - $ - $ 623
Commercial, financial, and agricultural 8,147 5,159 92 13,398
---------------- ---------------- ---------------- ----------------
Total $ 8,770 $ 5,159 $ 92 $ 14,021
================ ================ ================ ================
Loans at fixed interest rates $ 2,262 $ 1,743 $ 92 $ 4,097
Loans at variable interest rates 6,508 3,416 - 9,924
---------------- ---------------- ---------------- ----------------
Total $ 8,770 $ 5,159 $ 92 $ 14,021
================ ================ ================ ================
</TABLE>
18
<PAGE> 19
The following tables set forth a summary of average balances of assets and
liabilities as well as average yield and cost information. Average balances are
derived from daily balances.
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------------------------------
1997 (2) 1996 (2)
-------------------------------------------- --------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------------------------------
(In thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1) $ 116,122 $ 10,636 9.17% $ 100,487 $ 9,114 9.25%
Taxable investment securities 26,917 1,823 6.77% 28,002 1,922 6.86%
Tax-exempt investment securities 3,679 194 7.99% 3,499 199 8.62%
Federal funds sold 3,493 195 5.58% 503 34 6.76%
----------------------------- -----------------------------
Total interest-earning assets 150,211 12,848 8.62% 132,491 11,269 8.58%
Noninterest-earning assets
Cash and due from banks 7,628 6,223
Premises and equipment 3,746 3,623
Other assets 2,415 2,519
Less allowance for loan losses 1,688 1,339
--------------- ---------------
$ 162,312 $ 143,517
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits $ 7,938 $ 192 2.42% $ 7,736 $ 185 2.39%
Money market accounts 3,749 106 2.83% 4,137 116 2.80%
Savings deposits 27,912 824 2.95% 26,512 778 2.93%
Time deposits 83,017 4,871 5.87% 67,784 3,942 5.82%
Short - term borrowings 5,231 228 4.36% 5,151 227 4.41%
Long - term borrowings 1,813 107 5.90% 3,830 209 5.46%
------------------------------ -----------------------------
Total interest-bearing liabilities 129,660 6,328 4.88% 115,150 5,457 4.74%
Noninterest-bearing liabilities:
Demand deposits 18,132 17,155
Other 1,115 987
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Shareholders' equity 13,405 10,225
---------------- ---------------
$ 162,312 $ 143,517
================ ===============
------------- -------------
Net interest income $ 6,520 $ 5,812
============= =============
Net yield on interest-earning 4.41% 4.46%
assets (3)
Interest rate spread(4) 3.74% 3.84%
Ratio of average interest-earning
assets to average interest-
bearing liabilities 115.85% 115.06%
</TABLE>
- -----------------
(1) Average balances include non-accrual loans.
(2) Tax equivalent adjustments have been made to yields on loans and securities
that are exempt from federal income tax.
(3) Net yield on interest - earning assets represents net interest income as a
percentage of average interest-earning assets.
(4) Interest rate spread represents the difference between the average yield on
interest - earning assets and the cost of interest - bearing liabilities.
<TABLE>
<CAPTION>
1997 1996
-------------------------------------
FEDERAL FUNDS PURCHASED
<S> <C> <C>
Ending Balance $ -- $ 3,075,000
Maximum month end balance 84,000 3,075,000
Average balance 162,943 733,333
Ave year end rate N/A 7.23%
Ave int rate during year 5.86% 5.61%
REPURCHASE AGREEMENTS
Ending Balance $ 6,523,560 $ 3,279,431
Maximum month end balance 7,158,445 5,918,346
Average balance 5,068,331 4,416,735
Ave year end rate 4.29% 5.89%
Ave int rate during year 4.24% 4.21%
</TABLE>
20
<PAGE> 21
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Savings Bank's investment
securities portfolio at June 30, 1997.
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
One year or less One to Five Years Five to Ten Years More than Ten Years
------------------- ------------------ ----------------- -------------------
------------------- ------------------ ----------------- -------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
Obligations of state and $ 100 4.29% $ 324 5.49% $ 847 5.35% $ 4,817 5.36%
political subdivisions
U. S. government and agency 2,450 5.96 7,607 6.18 1,750 8.74 1,650 6.57
securities
Securities available for sale 312 4.95 -- -- -- -- -- --
Mortgage-backed securities - - 1,164 9.68 1,433 9.45 18,174 7.92
Interest - bearing deposits in
other
financial institutions 13 6.40 6 5.60 -- -- -- --
FHLB Stock (1) 820 6.86 -- -- -- -- -- --
-------------------- -------------------- ------------------- --------------------
Total $ 3,695 6.03%% $ 9,101 6.61%% $ 4,030 8.28%% $ 24,641 7.33%%
==================== ==================== =================== ====================
</TABLE>
- ----------------------------------
(1) Recorded at cost.
<TABLE>
<CAPTION>
Total Investment Securities
---------------------------
Carrying Market
Value Yield Value
----- ----- --------
Investment securities:
<S> <C> <C> <C>
Obligations of state and $ 6,088 5.35% $ 6,166
political subdivisions
U. S. government and agency 13,457 6.52 13,471
securities
Securities available for sale 312 4.95 425
Mortgage-backed securities 20,771 8.13 20,756
Interest - bearing deposits in
other
financial institutions 18 6.13 300
FHLB Stock (1) 820 6.86 820
---------------------- --------
Total $ 41,466 7.15%% $ 41,938
====================== ========
</TABLE>
21
<PAGE> 22
ITEM 3. DESCRIPTION OF PROPERTY.
Property
The Bank owns and operates its main office at 1 South Main Street in
Niles, Ohio. The Bank also operates six branches. The following is a breakdown
of the branch offices owned:
Branches Owned:
Downtown Niles Drive-In Girard Office
Corner of Church & State Sts. 121 North State St.
Niles, OH 44446 Girard, OH 44420
422 Office
5845 Youngstown-Warren Rd.
Niles, OH 44446
Youngstown Road Office Mineral Ridge Office
2910 Youngstown Road 3826 Main Street
Warren, OH 44484 Mineral Ridge, OH 44440
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
<TABLE>
<CAPTION>
Shares of Company Common
Stock Owned Beneficially as Percentage of Beneficial
of Feb. 28, 1998 Ownership as of Feb. 28,
Name & Age --------------------------- 1998
---------- ------------------------
<S> <C> <C>
Gary A. Clayman* 5,560.83(1) 1.67%
(age 43)
Robert I. Griffith, Jr. 1,082.99(2) .33%
(age 48)
Glenn E. Griffiths* 988.09 .30%
(age 58)
Robert J. McClurkin* 2,093.12(3) .63%
(age 33)
Douglas J. Neuman 833.76 .25%
(age 45)
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
Shares of Company
Common Stock Percentage of
Owned Beneficially as Beneficial Ownership
Name & Age of Feb. 28, 1998 as of Feb. 28, 1998
---------- --------------------- --------------------
<S> <C> <C>
Peter P. Rossi, Jr. 8,431.35(4) 2.53%
(age 57)
Christopher J. Shaker 6,083.55(5) 1.83%
(age 39)
Mr. Donald L. Stacy 408.50(6) .12%
(age 44)
Mr. Fremont Camerino 670.47(7) .20%
(age 61)
Phillip Suarez 0 N/A
(age 49)
</TABLE>
* Indicates a nominee to Class I of the Company's Board standing
for election at the Annual Meeting in 1998.
(1) 893.67 shares owned directly; 3,262.96 shares held jointly
with Sherri Clayman, 1441 shares are held as custodian for the
benefit of children, and 400 shares are held in an IRA account.
(2) 981.57 shares owned directly, 101.42 in the name of The Griffith
Agency.
(3) 214.86 shares owned directly; 1,099.99 shares held jointly
with Karen McClurkin; 239.74 jointly with Kathryn McClurkin;
349.93 jointly with Grace McClurkin, 188.60 jointly with Thomas
McClurkin.
(4) 1,909.18 shares owned directly; 4,573.23 shares
held jointly with Mary Rossi; 1,948.94 shares held in name of
Peter Rossi & Son Memorial Chapel Co.
All officers and directors as a group owned 26,152.66 shares,
representing 7.80% of the outstanding common shares as of February 28,
1998.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATION AND DIRECTOR
NAME & AGE BUSINESS EXPERIENCE SINCE
---------- ------------------- --------
<S> <C> <C>
Gary A. Clayman* Niles Iron & Metal Co. 1995
(age 43) (Mr. Clayman is an owner
and Vice President of Niles
Iron and Metal Co. a metal
fabrication company.)
Robert I. Griffith, Jr. President, Griffith 1992
(age 48) Insurance Agency
(Mr. Griffith is the
controlling shareholder and
President of Griffith
Insurance Agency, a property
and casualty insurance agency.)
Glenn E. Griffiths* President Security 1988
(age 58) Financial Corp. &
Security Dollar Bank
Robert J. McClurkin* McClurkin Funeral 1995
(age 33) Home
(Mr. McClurkin is the
controlling shareholder and
President of McClurkin
Funeral Home, a local
mortuary.)
Douglas J. Neuman Attorney 1980
(age 45) (Mr. Neuman is an attorney
engaged in private law
practice in Niles, Ohio)
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
PRINCIPAL
NAME & AGE OCCUPATION DIRECTOR SINCE
---------- ---------- --------------
<S> <C> <C>
Peter P. Rossi, Jr. President, Rossi & Son 1990
(age 57) Memorial Chapel
(Mr. Rossi is President
and the controlling
shareholder of Rossi &
Son Memorial Chapel,
a local mortuary.)
Christopher J. Shaker Attorney (Mr. Shaker 1987
(age 39) is an attorney engaged in
private law practice in
Niles, Ohio.)
Mr. Donald L. Stacy Senior Vice President &
(age 44) Treasurer of
Security Dollar Bank
Mr. Fremont Camerino Senior Vice President N/A
(age 61) of Security Dollar
Bank N/A
Phillip Suarez Senior Vice President of
(age 49) Security Dollar
Bank N/A
</TABLE>
- - indicates an executive officer who is not a director.
Each of the above named directors of the Company was elected as a director at
the 1998 Annual Meeting of Shareholders to serve a one year term until the
Annual Meeting of Shareholders in 1999. No director of the Company serves as a
director of any other reporting public company.
There are no family relationships among any persons named above.
ITEM 6. EXECUTIVE AND DIRECTOR COMPENSATION.
The following remuneration table sets forth all direct remuneration
paid by the Bank in 1997 to the Company's President and Chief Executive Officer.
No other Officers' total compensation exceeded $100,000 for the year ended 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Name and ------------------- Option # All Other
Principal Position Year Salary(1) Bonus(2) Awards(shares) Compensation(3)
- ------------------ ---- --------- -------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Mr. Glenn E. Griffiths 1997 96,572 11,475 0 0
President and Chief 1996 93,395 9,933 0 0
Executive Officer 1995 84,960 11,784 0 0
</TABLE>
Mr. Griffiths serves at the pleasure of the Board of Directors of the Company
and does not have any employment contract.
Under the terms of the Company's 1997 Stock Option Plan, each non-employee
director received options on 1,000 shares of the Company's common stock on
January 1, 1998. Thereafter, new non-employee directors who have not previously
been granted options under the terms of the 1997 Stock Option Plan will receive
options for 1,000 shares on the first day of the year following their election
to serve as a director.
Directors receive $400 per director meeting attended and $300 for each
executive committee meeting attended. During 1997 there were 12 regular
meetings.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Some of the directors, officers and principal shareholders of the
Company and/or the Bank and the companies with which they are associated were
customers of and have had banking transactions with the Bank in the ordinary
course of the Bank's business in the past and up to the present time. All loans
and commitments for loans included in such transactions were made on
substantially the same terms including interest rates and collateral as were
prevailing at the time for comparable transactions with other persons. In the
opinion of the Board of Directors of the Bank, these loans and commitments for
loans do not involve more than a normal risk of collectability or present other
unfavorable features.
The Company and/or the Bank have had, and expect to have in the future,
banking transactions in the ordinary course of its business with directors,
officers, principal shareholders and their associates, on substantially the same
terms, including interest rates and collateral on loans, as those prevailing at
the same time for comparable transactions with others. Such transactions will
not involve more than the normal risk of collectability or present other
unfavorable features.
24
<PAGE> 25
ITEM 8. DESCRIPTION OF SECURITIES.
The Company has 1,500,000 of shares authorized no par value common
stock of which 333,164 shares were issued and outstanding as of April 30, 1998.
The holders of the Shares have no preemptive right to acquire other or
additional Shares which may, from time to time, be authorized and issued by the
Company.
Each Share of Common Stock of the Company entitles the holder thereof
to (1) vote on all matters. Shareholders of the Company do not have cumulative
voting rights in the election of directors.
The Certificate of Incorporation of the Company contains provisions
providing for indemnification of the Company's Directors and Officers and the
purchase of insurance in connection with such indemnification.
The Certificate of Incorporation also contain certain provisions to
protect the interest of the Company and its shareholders from any hostile
takeover attempts. A vote of 75 percent of the outstanding Shares, in the
aggregate, are required to authorize the merger, consolidation or other business
combination with another entity or the disposition of all or substantially all
of the assets of the Company or the Bank to a person who owns five percent or
more of the shares of the Company unless in each such case the matter has been
approved and recommended by vote of the directors. These provisions and
limitations will make it more difficult for companies or persons to acquire
control of the Company without the support of the Board of Directors of the
Company. However, these provisions also could deter offers for Shares in the
Company which might be viewed by certain Investors not to be in their best
interest.
25
<PAGE> 26
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
The Company was incorporated on November 23, 1987. Currently, the
Company's shares are not listed on any exchange. The only trades of which the
Company has knowledge are presented in the table below. All per share figures
are adjusted for stock splits and stock dividends. (Average trading price per
Share is based upon information provided to the Company's Management from
individuals involved in their personal stock transactions.)
<TABLE>
<CAPTION>
($)
Dates Number of Shares Average Price Per Share
----- ---------------- -----------------------
<S> <C> <C>
First Quarter - 1997 47,848 54
Second Quarter - 1997 35,903 59
Third Quarter - 1997 13,633 60
Fourth Quarter - 1997 9,370 62
First Quarter-1996 11,002 36
Second Quarter-1996 3,956 40
Third Quarter-1996 7,912 41
Fourth Quarter - 1996 5,336 54
First Quarter-1995 9981 30
Second Quarter-1995 18,438 32
Third Quarter-1995 9,884 30
Fourth Quarter-1995 19,797 30
First Quarter-1994 3,588 24
Second Quarter-1994 484 24
Third Quarter-1994 7,321 24
Fourth Quarter-1994 4,802 24
First Quarter-1993 10,274 21
Second Quarter-1993 1,936 21
Third Quarter-1993 24,220 21
Fourth Quarter-1993 3,514 21
</TABLE>
The above-stated trading prices may not be indicative of the true value
of the Company's stock.
Since the date of its incorporation, the Company has paid dividends as
presented below. The amount and timing of future dividends will be determined by
the Company's Board of Directors, and will depend substantially upon the
earnings and financial condition of its subsidiary, the Bank.
26
<PAGE> 27
<TABLE>
<CAPTION>
($) ($)
Year Per Share(1) Total Annual Dividend
---- ------------ ---------------------
<S> <C> <C> <C>
1991 0.50 121,402
1992 0.53 128,750
1993 0.55 137,495
1994 0.68 175,792
1995 0.90 244,575
1996 1.00 277,447
1997 1.15 376,307
</TABLE>
(1) The above figures are adjusted to reflect all stock splits and
dividends.
ITEM 2. LEGAL PROCEEDINGS.
There is no pending litigation which, in the opinion of management,
will adversely impact the financial condition of the Company or the Bank. There
is litigation threatened by a bank customer which has not been initiated as of
the preparation of this offering circular. In the event that the threatened
litigation is initiated, management and its counsel do not believe that any loss
other than those associated with the collection process shall be incurred.
Consequently, it is the opinion of management that the threatened litigation
shall not have a material adverse impact upon the financial condition of the
Company and the Bank.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
There have been no disagreements with the independent accountants on
matters of accounting principles or financial statement disclosure required to
be reported under this item. There has been no change in accountants.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
Sale of 50,000 shares pursuant to an intrastate offering exemption
under Rule 147. The offering commenced on January 2, 1997 and was completed on
April 30, 1997. The shares were registered under applicable Ohio securities laws
pursuant to ORC 1707.09. Community Banc Investments, Inc., an Ohio broker/dealer
assisted in the sale of such shares on a "best efforts" basis.
Sale of 17,002 shares pursuant to the Company's Dividend Reinvestment
Plan and pursuant to the limited offering exemption of Rule 504 of Regulation D.
The Company registered the shares under applicable Ohio securities laws pursuant
to ORC 1707.06(A)(1). The offering commenced June 20, 1996 and the offering
expires June 20, 1998 pursuant to the
27
<PAGE> 28
Registration under Ohio Securities laws and the Ohio Division of Securities
Certificate of Acknowledgement issued June 20, 1996.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article V, Section 5.1 of the Bylaws of the Company provides for the
authority of the Company to indemnify any director, officer, employee or agent
who was or is a party or is threatened to be made a party to any civil,
criminal, administrative or investigative action, suit or proceeding by reason
of the fact that the person was a director, officer, employee or agent of the
Company or any of its subsidiaries. The Company may indemnify any such director,
officer, employee or agent for any expense incurred by that person only if such
person acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interest of the Company or had no reasonable cause to
believe his conduct was unlawful in a criminal action.
Additionally, the Company may purchase insurance at its expense for the
purpose of protecting itself and its directors, officers, employees and agents
against any expense, liabilities or loss, whether or not the Company would have
the power to indemnify such person against such expense, liability or loss under
the Delaware General Company Laws.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
28
<PAGE> 29
PART F/S - FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Security Financial Corp.
We have audited the accompanying consolidated balance sheet of Security
Financial Corp. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Security Financial Corp. and subsidiary as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/S/ S. R. SNODGRASS, A.C.
Wexford, PA
February 6, 1998
29
<PAGE> 30
SECURITY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 7,416,457 $ 6,568,483
Federal funds sold 1,090,000 -
Interest-bearing deposits in other banks 400,000 505,000
Investment securities available for sale 41,638,502 26,691,273
Loans 112,428,694 114,988,281
Less allowance for loan losses 1,677,651 1,678,528
------------ ------------
Net loans 110,751,043 113,309,753
Premises and equipment 3,833,325 3,787,930
Accrued interest and other assets 2,128,857 2,036,805
------------ ------------
TOTAL ASSETS $167,258,184 $152,899,244
============ ============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 18,047,213 $ 19,048,452
Interest-bearing demand 7,873,059 6,829,893
Money market 4,017,442 4,190,028
Savings 27,119,276 28,210,321
Time 88,295,471 71,391,004
------------ ------------
Total deposits 145,352,461 129,669,698
Short-term borrowings 6,523,560 6,354,431
Other borrowings - 5,400,000
Accrued interest and other liabilities 749,280 696,292
------------ ------------
TOTAL LIABILITIES 152,625,301 142,120,421
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $2.50 stated value; 750,000 shares authorized;
333,164 and 279,422 shares issued 832,910 698,556
Capital surplus 4,977,246 2,306,650
Retained earnings 8,695,696 7,753,555
Net unrealized gain on securities 127,031 20,062
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 14,632,883 10,778,823
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $167,258,184 $152,899,244
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
30
<PAGE> 31
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
----------- -----------
INTEREST INCOME
<S> <C> <C>
Interest and fees on loans $10,636,250 $ 9,114,086
Interest bearing deposits in other banks 19,924 45,992
Federal funds sold 195,028 34,011
Investment securities:
Taxable 1,802,521 1,876,236
Exempt from federal income tax 194,081 198,852
----------- -----------
Total interest income 12,847,804 11,269,177
----------- -----------
INTEREST EXPENSE
Deposits 5,991,240 5,020,522
Short-term borrowings 230,862 227,046
Other borrowings 106,253 209,285
----------- -----------
Total interest expense 6,328,355 5,456,853
----------- -----------
NET INTEREST INCOME 6,519,449 5,812,324
PROVISION FOR LOAN LOSSES 1,250,000 668,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,269,449 5,144,324
----------- -----------
OTHER INCOME
Service charges and fees 846,634 650,463
Investment securities gains, net 25,250 25,602
Gain on sales of mortgage loans, net 62,356 30,149
Other income 7,481 120,843
----------- -----------
Total other income 941,721 827,057
----------- -----------
OTHER EXPENSE
Salaries and employee benefits 2,286,155 2,218,165
Occupancy expense 426,434 283,068
Other expense 1,571,014 1,685,260
----------- -----------
Total other expense 4,283,603 4,186,493
----------- -----------
Income before income taxes 1,927,567 1,784,888
Applicable income taxes 609,119 543,434
----------- -----------
NET INCOME $ 1,318,448 $ 1,241,454
=========== ===========
EARNINGS PER SHARE $ 4.11 $ 4.48
AVERAGE SHARES OUTSTANDING 320,732 277,408
</TABLE>
See accompanying notes to the consolidated financial statements.
31
<PAGE> 32
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Common Capital Retained Gain (Loss)
Stock Surplus Earnings on Securities Total
------------ --------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 690,359 $ 2,169,561 $ 6,789,548 $ 139,271 $ 9,788,739
Net income 1,241,454 1,241,454
Cash dividends ($ 1.00 per share) (277,447) (277,447)
Dividend reinvestment and stock
purchase plan 8,197 137,089 145,286
Net unrealized loss on securities (119,209) (119,209)
------------ --------------- --------------- --------------- ---------------
Balance, December 31, 1996 698,556 2,306,650 7,753,555 20,062 10,778,823
Net income 1,318,448 1,318,448
Cash dividends ($ 1.15 per share) (376,307) (376,307)
Proceeds from the sale of stock 125,000 2,456,682 2,581,682
Dividend reinvestment and stock
purchase plan 9,354 213,914 223,268
Net unrealized gain on securities 106,969 106,969
------------ --------------- --------------- --------------- ---------------
Balance, December 31, 1997 $ 832,910 $ 4,977,246 $ 8,695,696 $ 127,031 $ 14,632,883
============ =============== =============== =============== ===============
</TABLE>
See accompanying notes to the consolidated financial statements.
32
<PAGE> 33
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
------------ ------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,318,448 $ 1,241,454
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 831,903 704,409
Investment securities gains, net (25,250) (25,602)
Provision for loan losses 1,250,000 668,000
Deferred federal income taxes 38,367 202,569
Mortgage loans originated for sale (3,299,045) (1,239,194)
Proceeds from sales of mortgage loans 3,361,401 2,245,384
Gain on sales of mortgage loans, net (62,356) (30,149)
Increase in accrued interest receivable (117,057) (87,001)
Increase in accrued interest payable 74,518 28,350
Other, net (91,180) 402,718
------------ ------------
Net cash provided by operating activities 3,279,749 4,110,938
------------ ------------
INVESTING ACTIVITIES
Decrease in interest-bearing time deposits in other banks 205,000 95,000
Investment securities available for sale:
Proceeds from sales 6,724,900 7,202,992
Proceeds from maturities and principal repayments 3,053,702 8,243,792
Purchases (24,750,170) (8,687,203)
Net decrease (increase) in loans 1,009,384 (33,195,566)
Purchase of premises and equipment (366,309) (695,454)
Proceeds received from branch acquisition - 8,571,843
Proceeds from sale of other real estate owned - 447,637
------------ ------------
Net cash used for investing activities (14,123,493) (18,016,959)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 15,682,763 10,508,392
Increase in short-term borrowings 170,255 2,008,915
Proceeds from other borrowings - 5,400,000
Repayment of other borrowings (5,400,000) (2,900,000)
Dividends paid on common stock (376,307) (277,447)
Proceeds from sale of common stock 2,581,682 -
Proceeds from dividend reinvestment and stock purchase plan 223,268 145,286
------------ ------------
Net cash provided by financing activities 12,881,661 14,885,146
------------ ------------
Increase in cash and cash equivalents 2,037,917 979,125
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,868,483 5,889,358
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,906,400 $ 6,868,483
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
33
<PAGE> 34
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Security Financial Corp. (the
"Company") and its wholly-owned subsidiary, Security Dollar Bank (the "Bank")
conform with generally accepted accounting principles and with general practice
within the banking industry.
A summary of the significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The Company is a Delaware corporation organized to become the holding company of
the Bank. The Bank is a state-chartered commercial bank located in Ohio. The
Company and its subsidiary derive substantially all their income from banking
and bank-related services which include interest earnings on commercial,
commercial mortgage, residential real estate, and consumer loan financing, as
well as a variety of deposit services to its customers through six locations.
The Company is supervised by the Board of Governors of the Federal Reserve
System, while the Bank is subject to regulation and supervision by the Board of
Governors of the Federal Reserve System and the Ohio Division of Banks.
The consolidated financial statements of the Company include its wholly-owned
subsidiary, the Bank. Significant inter-company items have been eliminated in
consolidation.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
INVESTMENT SECURITIES
Investment securities are classified, at the time of purchase, based on
management's intention and ability, as securities held to maturity or securities
available for sale. Debt securities acquired with the intent and ability to hold
to maturity are stated at cost adjusted for amortization of premium and
accretion of discount which are computed using the interest method and
recognized as adjustments of interest income. Certain other debt and equity
securities have been classified as available for sale, to serve principally as a
source of liquidity. Unrealized holding gains and losses for available for sale
securities are reported as a separate component of stockholders' equity, net of
tax, until realized. Realized securities gains and losses are computed using the
specific identification method. Interest and dividends on investment securities
are recognized as income when earned.
Common stock of the Federal Home Loan Bank, Federal Reserve Bank, and
Independent State Bank of Ohio represent ownership in institutions which are
wholly-owned by other financial institutions. These securities are accounted for
at cost and are classified with equity securities available for sale.
34
<PAGE> 35
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS
Loans are reported at their principal amount net of unearned income. Interest
from installment loans is recognized in income by both the sum-of-the-digits
method which results in approximate level rates of return over the terms of the
loans and, on the accrual method, which is calculated based on the current
outstanding loan balances, depending on the date of organization. Interest on
real estate mortgages and commercial loans is recognized as income when earned
on the accrual method.
The accrual of interest is generally discontinued when the contractual payment
of principal and interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan is currently performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a
loan is placed on nonaccrual status unpaid interest is charged against income.
Interest received on nonaccrual loans is either applied to principal or
reported as interest income, according to management's judgment as to the
collectibility of principal.
Loan origination fees and certain direct loan origination costs are being
deferred and the net amount amortized as an adjustment of the related loan
yield. The Company is amortizing these amounts over the contractual lives of the
related loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential losses in its loan portfolio. The allowance
method is used in providing for loan losses. Accordingly, all loan losses are
charged to the allowance, and all recoveries are credited to it. The allowance
for loan losses is established through a provision for loan losses which is
charged to operations. The provision is based on management's evaluation of the
adequacy of the allowance for loan losses which encompasses the overall risk
characteristics of the various portfolio segments, past experience with losses,
the impact of economic conditions on borrowers, and other relevant factors. The
estimates used in determining the adequacy of the allowance for loan losses
including the amounts and timing of future cash flows expected on impaired
loans, are particularly susceptible to significant changes in the near term.
A loan is considered impaired when it is probable that the borrower will not
repay the loan according to the original contractual terms of the loan
agreement. Management has determined that first mortgage loans on on-to-four
family properties and all consumer loans represent large groups of
smaller-balance homogeneous loans that are to be collectively evaluated.
Management considers an insignificant delay, which is defined as less than 90
days by the Company, will not cause a loan to be classified as impaired. A loan
is not impaired during a period of delay in payment if the Company expects to
collect all amounts due including interest accrued at the contractual interest
rate for the period of delay. Management determines the significance of payment
delays on a case by case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of
the delay, the borrower's prior payment record, and the amount of shortfall in
relation to principal and interest owned. All loans identified as impaired are
evaluated independently by management. The Company estimates credit losses on
impaired loans based on the present value of expected cash flows or the
fair value of the underlying collateral if the loan repayment is expected to
come from the sale or operation of such collateral. Impaired loans, or portions
thereof, are charged-off when it is determined that a realized loss has
occurred. Until such time, an allowance for loan losses is maintained for
estimated losses. Cash receipts on impaired loans are applied first to accrued
interest receivable, unless otherwise required by the loan terms, except when
an impaired loan is also a nonaccrual loan, in which case the portion of the
receipts related to interest is recognized as income.
35
<PAGE> 36
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated useful
lives of the assets. Expenditures for maintenance and repairs are charged
against income as incurred. Costs of major additions and improvements are
capitalized.
INTANGIBLE ASSET
The intangible asset is comprised solely of a core deposit acquisition premium.
This core deposit acquisition premium, which was developed by a specific core
deposit life study, is amortized using the straight-line method over the period
to be benefited eight to ten years. Annual assessments of the carrying values
and remaining amortization periods of intangible assets are made to determine
possible carrying value impairment, and appropriate adjustments, as deemed
necessary. This asset is a component of other assets on the balance sheet.
PENSION AND PROFIT SHARING PLANS
Pension and employee benefits include contributions, determined actuarially, to
a retirement plan covering eligible employees of the Bank. Contributions to the
profit sharing plan are made based on the achievement of certain operating
levels and performance ratios.
INCOME TAXES
The Company and its subsidiary file a consolidated federal income tax return.
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. Deferred income tax expenses or benefits are based
on the changes in the deferred tax asset or liability from period to period.
EARNINGS PER SHARE
Earnings per share computations are based upon the weighted number of shares
outstanding for each of the reported periods.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards Statement No. 128, "Earnings Per
Share" ("EPS"). The Statement establishes new standards for computing and
presenting EPS and requires dual presentation of "basic" and "diluted" EPS on
the face of the income statement. The Company currently maintains a simple
capital structure, therefore there are no dilutive effects on earnings per
share.
CASH FLOW INFORMATION
For purposes of reporting cash flows, cash, and cash equivalents include cash
and due from banks, interest-bearing deposits, and federal funds sold in other
banks with a maturity less than ninety days.
Cash payments for interest in 1997 and 1996 were $6,253,837 and $5,428,503,
respectively. Cash payments for income taxes for 1997 and 1996 were $482,000 and
$115,000, respectively.
36
<PAGE> 37
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During 1996, management made the determination that it no longer had the
positive intent to hold certain debt securities to maturity. As a result, the
Company transferred the remaining held to maturity portfolio with an amortized
cost of $16,874,000 and estimated market value of $16,945,000 to the available
for sale classification.
PENDING ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The Statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings based on a
control-oriented financial-components approach. Under this approach, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and liabilities it has incurred, derecognizes financial
assets when control has been surrendered and derecognizes liabilities when
extinguished. The provision of Statement No. 125 are effective for transactions
occurring after December 31, 1996, except those provisions relating to
repurchase agreements, securities lending, and other similar transactions and
pledged collateral, which have been delayed until after December 31, 1997 by
Statement No. 127, "Deferral of the Effective Date of Certain Provisions of
Statement No. 125, an amendment of Statement No. 125." The adoption of the
provisions of Statement No. 127 is not expected to have a material impact on
financial position or results of operations.
In July 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." The Statement establishes standards for reporting and presentation of
comprehensive income and its components (revenue, expenses, gains, and losses)
in a full set of general purpose financial statements. It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
presented with the same prominence as other financial statements. The provisions
of the statement are effective for all fiscal years beginning after December 15,
1997. The adoption of this statement is not expected to have a material impact
on financial position or results of operations.
In June 1997, the FASB issued Statement No. 131 "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards
for the way public companies report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The statement
defines an operating segment as a component of an enterprise that generates
revenues and incurs expense, whose operating results are reviewed by the chief
operating decision maker in the determination of resource allocation and
performance, and for which discrete financial information is available. This
Statement is effective for fiscal years beginning after December 31, 1997,
however, it does not require disclosure in interim reporting in the year of
initial application.
INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market values of investment securities
available for sale are as follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------ ---------------- ----------------- -------------------
<S> <C> <C> <C> <C>
U.S. Treasury and Government
agency securities $ 13,456,631 $ 30,215 $ (16,167) $ 13,470,679
Obligations of states and political
subdivisions 6,087,660 91,342 (12,734) 6,166,268
Mortgage-backed securities 20,770,857 132,780 (147,395) 20,756,242
----------------- ---------------- ----------------- -------------------
Total debt securities 40,315,148 254,337 (176,296) 40,393,189
Equity securities 1,130,882 114,431 - 1,245,313
----------------- ---------------- ----------------- -------------------
Total $ 41,446,030 $ 368,768 $ (176,296) $ 41,638,502
================= ================ ================= ===================
</TABLE>
37
<PAGE> 38
INVESTMENT SECURITIES AVAILABLE FOR SALE (CONTINUED)
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------ ----------------- ---------------- ------------------
<S> <C> <C> <C> <C>
U.S. Treasury and Government
agency securities $ 13,823,796 $ 36,492 $ (117,466) $ 13,742,822
Obligations of states and political
subdivisions 2,509,420 35,601 (23,019) 2,522,002
Mortgage-backed securities 9,325,478 100,572 (49,519) 9,376,531
------------------ ----------------- ---------------- ------------------
Total debt securities 25,658,694 172,665 (190,004) 25,641,355
Equity securities 1,002,182 47,736 - 1,049,918
------------------ ----------------- ----------------- ------------------
Total $ 26,660,876 $ 220,401 $ (190,004) $ 26,691,273
================== ================= ================= ==================
</TABLE>
Investment securities with carrying values of $20,532,070 and $18,721,853 at
December 31, 1997 and 1996, respectively, were pledged to secure public
deposits, repurchase agreements and other purposes as required by law.
The amortized cost and estimated market values of debt securities at December
31, 1997, by contractual maturity, are shown below. The Company's
mortgage-backed securities have contractual maturities ranging from one to
twenty-eight years. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less $ 2,250,090 $ 2,248,359
Due after one year through five years 8,167,155 8,172,274
Due after five years through ten years 4,898,710 4,897,714
Due after ten years 24,999,193 25,074,842
----------- -----------
Total $40,315,148 $40,393,189
=========== ===========
</TABLE>
Proceeds from the sales of investment securities available for sale during 1997
and 1996 were $6,724,900 and $7,202,992. Gross gains and gross losses were
realized on those sales as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Gross gains $30,754 $88,276
Gross losses 5,504 62,674
</TABLE>
38
<PAGE> 39
LOANS
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Real estate mortgages:
Residential $ 46,686,796 $ 48,664,249
Commercial 16,564,644 17,383,815
Commercial, financial, and 13,398,099 12,689,109
agricultural
Consumer loans 32,810,884 33,149,199
Other 2,968,271 3,101,909
------------ ------------
112,428,694 114,988,281
Less allowance for loan losses 1,677,651 1,678,528
------------ ------------
Net loans $110,751,043 $113,309,753
============ ============
</TABLE>
At December 31, 1997 and 1996 the recorded investment in loans considered to be
impaired was $1,452,316 and $781,042 respectively, all of which were on
non-accrual status at year end. The related allowance for loan losses allocated
to impaired loans was $514,142 and $382,687 at December 31, 1997 and 1996. The
average recorded investment in impaired loans during the year was approximately
$995,189 in 1997 and $783,502 in 1996. The Company recognized interest income on
impaired loans of $1,612 and $24,079 for the year ended December 31, 1997 and
1996.
The Company's primary business activity is with customers located within its
local trade area. Commercial, residential, and consumer loans are granted.
Although the Company has a diversified loan portfolio at December 31, 1997 and
1996, loans outstanding to individuals and businesses are dependent upon the
local economic conditions in its immediate trade area.
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Balance, January 1 $1,678,528 $1,239,188
Add:
Provisions charged to operations 1,250,000 668,000
Recoveries 85,744 218,018
Less loans charged off 1,336,621 446,678
---------- ----------
Balance, December 31 $1,677,651 $1,678,528
========== ==========
</TABLE>
39
<PAGE> 40
PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land $ 246,173 $ 246,173
Buildings 4,006,187 3,798,735
Furniture, fixtures, and equipment 3,119,571 2,960,714
---------- ----------
7,371,931 7,005,622
Less accumulated depreciation 3,538,606 3,217,692
---------- ----------
Total $3,833,325 $3,787,930
========== ==========
</TABLE>
Depreciation charged to operations was $320,914 in 1997 and $292,532 in 1996.
DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000 or
more. Such deposits aggregated $15,723,898 and $19,809,918 at December 31, 1997
and 1996, respectively.
Maturities of time deposits of $100,000 or more are as follows:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Three months or less $ 5,311,165
Three to twelve months 6,400,411
Over one year 4,012,322
-----------
$15,723,898
===========
</TABLE>
SHORT-TERM BORROWINGS
The outstanding balances and related information for short-term borrowings is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
Federal Funds Purchased:
<S> <C> <C>
Ending Balance $ - $3,075,000
Maximum month-end balance during the year 84,000 3,075,000
Average balance during the year 162,943 733,333
Average year-end interest rate - 7.23%
Average interest rate during the year 5.86% 5.61%
Securities Sold Under Agreements to Repurchase:
Ending Balance $6,523,560 $3,279,431
Maximum month-end balance during the year 7,158,445 5,918,346
Average balance during the year 5,068,331 4,416,735
Average year-end interest rate 4.29% 5.89%
Average interest rate during the year 4.24% 4.21%
</TABLE>
40
<PAGE> 41
Average amounts outstanding during the year represent daily averages. Average
interest rates represent interest expense divided by the related average
balances. The Company has pledged investment securities with carrying values of
$11,574,348 and $6,247,357 as of December 31, 1997 and 1996, as collateral for
the repurchase agreements.
OTHER BORROWINGS
Other borrowings consist of separate loans from the Federal Home Loan Bank of
Cincinnati. As of December 31, 1996, FHLB advances totaled $5,400,000 with
original maturities ranging from 45 to 325 days at an average rate of 5.46%. All
of these advances were repaid during 1997.
All advances were collateralized by the Bank's investment in Federal Home Loan
Bank stock and a blanket collateral pledge agreement with the Federal Home Loan
Bank under which the Bank has pledged certain qualifying assets equal to 150% of
the unpaid amount of the outstanding balances. Based upon the Bank's investment
in Federal Home Loan Bank stock, the Bank has $16,396,000 available to borrow
from the FHLB.
OTHER EXPENSE
The following is an analysis of other expense:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Stationery, printing, and supplies $ 151,082 $ 149,824
Professional fees 150,027 104,013
Data processing 117,933 149,284
Other 1,151,972 965,018
---------- ----------
Total $1,571,014 $1,368,139
========== ==========
</TABLE>
INCOME TAXES
The provision for federal income taxes consist of:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Currently payable $570,752 $340,865
Deferred tax 38,367 202,569
-------- --------
Total provision $609,119 $543,434
======== ========
</TABLE>
The components of the net deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses $ 396,753 $ 370,847
Deferred compensation 15,373 18,851
Other 14,960 8,354
---------------- ----------------
Total 427,086 398,052
---------------- ----------------
</TABLE>
41
<PAGE> 42
INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
Deferred tax liabilities:
<S> <C> <C>
Premises and equipment 44,625 39,644
Investment securities discount accretion 51,179 20,629
Loan origination fees, net 384,179 371,417
Net unrealized gain on securities 65,441 10,335
Other 44,645 25,537
--------- ---------
Total 590,069 467,562
--------- ---------
Net deferred tax liability $(162,983) $ (69,510)
========= =========
</TABLE>
The following is a reconciliation between the income tax expense and the amounts
of income taxes which would have been provided at statutory rates:
<TABLE>
<CAPTION>
1997 1996
----------------------------------- ---------------------------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
----------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Provision at statutory rate $ 655,373 34.0% $ 606,862 34.0
Effect of tax exempt income (73,463) (3.8) (76,777) (4.3)
Non-deductible interest expense 9,482 0.5 9,091 0.5
Other, net 17,727 0.9 4,258 0.2
----------------- --------------- ---------------- --------------
Tax expense and effective rates $ 609,119 31.6% $ 543,434 30.4
================= =============== ================ ==============
</TABLE>
EMPLOYEE BENEFITS
The Company maintains a trusteed Section 401(k) plan with contributions matching
those by eligible employees to a maximum of 140% of employee contributions
annually, to a maximum of 5% of annual salary. The Company may also provide for
a discretionary profit sharing contribution. All employees at least 20 1/2 years
of age who have completed one year of service are eligible to participate in the
plan. The Company's contribution to this plan was $85,566 in 1997 and $76,243 in
1996.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company maintains a dividend reinvestment plan. Participation is available
to all common stockholders who are residents of the state of Ohio. The Plan
provides each participant with a simple and convenient method of purchasing
additional common shares without payment of any brokerage commission or other
service fees.
A participant in the Plan may elect to reinvest dividends on all or part of
their shares to acquire additional common stock. In addition, the Plan provides
for the optional purchase of shares of the Company's common stock up to a
maximum of $4,000 per year. A participant may
42
<PAGE> 43
withdraw from the Plan at any time. Stockholders purchased 3,742 shares in 1997
and 3,279 shares in 1996 through the Plan.
COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
In the normal course of business, there are various outstanding commitments and
contingent liabilities which are not reflected in the accompanying consolidated
financial statements. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. These
commitments were comprised of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Commitments to extend credit $11,792,000 $11,500,000
Standby letters of credit and financial guarantees 830,000 810,000
----------- -----------
Total $12,622,000 $12,310,000
=========== ===========
</TABLE>
The instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated balance sheet.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. Generally, collateral
is not required to support financial instruments with credit risk. The terms are
typically for a one year period with an annual renewal option subject to prior
approval by management.
Unused Lines of Credit
At December 31, 1997 and 1996, the Company maintained unsecured lines of credit
with various financial institutions which totaled $3,125,000 and $3,075,000,
respectively. All lines were unused at December 31, 1997 and 1996 and are
available to support general corporate purposes. There are no fees to maintain
these lines, and no interest was paid.
Contingent Liabilities
The Company is involved in various legal actions from normal business
activities. Management believes that the liability, if any, arising from such
litigation will not have a material adverse effect on the Company's financial
position.
REGULATORY MATTERS
Federal law prevents Security Financial Corp. from borrowing from the Bank
unless the loans are secured by specific collateral. Further, such secured loans
are limited in amount to 10% of the Bank's common stock and capital surplus.
43
<PAGE> 44
The Bank is subject to legal limitations on the amount of dividends that it can
pay as a state chartered member of the Federal Reserve Bank System. Prior
approval of the Federal Reserve Board is required if the total of all dividends
declared by the Bank in any calendar year exceeds net profits, as defined for
the year, combined with its retained net profits for the two preceding calendar
years less any required transfers to surplus. Using this formula, the amount
available for payment of dividends by the Bank to the Company in 1998, without
approval of the Federal Reserve Board, will be limited to $2,478,729 plus 1998
net profits retained up to the date of the dividend declaration.
The district Federal Reserve Bank requires the Bank to maintain certain average
reserve balances. As of December 31, 1997 and 1996, the Bank had required
reserves of $715,000 and $651,000, respectively, comprised of vault cash and a
depository amount held with the Federal Reserve Bank.
REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal regulatory agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by the regulators that, if undertaken, could have a direct
material effect on an entity's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the entities' assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's and the Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weighting, and
other factors.
Quantitative measures established by the regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Total
and Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined) and of Tier I capital to average assets (as defined). Management
believes as of December 31, 1997 and 1996, that the Company and the Bank meet
all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the appropriate
primary regulator has categorized the Company and Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, an entity must maintain minimum Total Risk-based, Tier I
Risk-based, and Tier I Leverage ratios at least 100 to 200 basis points above
those ratios set forth in the table. There have been no conditions or events
since that notification that management believes have changed the Company's or
the Bank's category. The capital position of the Company does not materially
differ from the Bank's, therefore, the following table sets forth the Company's
capital position and minimum requirements as of December 31:
44
<PAGE> 45
<TABLE>
<CAPTION>
1997 1996
------------------------------- --------------------------------
Amount Ratio Amount Ratio
---------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets)
Actual $ 15,245,699 13.72% $ 11,398,514 10.47%
For Capital Adequacy 8,888,669 8.00% 8,706,553 8.00%
To Be Well Capitalized 11,110,837 10.00% 10,883,191 10.00%
Tier 1 Capital
(to Risk-Weighted Assets)
Actual $ 13,853,279 12.47% $ 10,034,188 9.22%
For Capital Adequacy 4,444,335 4.00% 4,353,276 4.00%
To Be Well Capitalized 6,666,502 6.00% 6,529,915 6.00%
Tier 1 Capital
(to Average Assets)
Actual $ 13,853,279 8.52% $ 10,034,188 6.18%
For Capital Adequacy 6,500,588 4.00% 6,497,708 4.00%
To Be Well Capitalized 8,125,735 5.00% 8,122,135 5.00%
</TABLE>
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------- ---------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks, interest-
bearing deposits with other banks,
and federal funds sold $ 8,906,457 $ 8,906,457 $ 7,073,483 $ 7,073,483
Investment securities 41,638,502 41,638,502 26,691,273 26,691,273
Net loans 110,751,043 115,808,789 113,309,753 110,959,771
Accrued interest receivable 1,041,992 1,041,992 924,935 924,935
----------------- ------------------ ----------------- ------------------
Total $ 162,337,994 $ 167,395,740 $ 147,999,444 $ 145,649,462
================= ================== ================= ==================
Financial liabilities:
Deposits $ 145,352,461 $ 146,340,299 $ 129,669,698 $ 129,887,589
Short-term borrowings 6,523,560 6,523,560 6,354,431 6,354,431
Other borrowings - - 5,400,000 5,400,000
Accrued interest payable 338,699 338,699 264,181 264,181
----------------- ------------------ ----------------- ------------------
Total $ 152,214,720 $ 153,202,558 $ 141,688,310 $ 141,906,201
================= ================== ================= ==================
</TABLE>
45
<PAGE> 46
Financial instruments are defined as cash, evidence of an ownership interest in
an entity, or a contract which creates an obligation or right to receive or
deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties other than in a
forced liquidation sale. If a quoted market price is available for a financial
instrument, the estimated fair value would be calculated based upon the market
price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial
instruments should be based upon management's judgment regarding current
economic conditions, interest rate risk, expected cash flows, future estimated
losses, and other factors as determined through various option pricing formulas
or simulation modeling. As many of these assumptions result from judgments made
by management based upon estimates which are inherently uncertain, the resulting
estimated fair values may not be indicative of the amount realizable in the sale
of a particular financial instrument. In addition, changes in the assumptions on
which the estimated fair values are based may have a significant impact on the
resulting estimated fair values.
As certain assets and liabilities such as lease receivables, deferred tax
assets, and premises and equipment are not considered financial instruments, the
estimated fair value of financial instruments would not represent the full value
of the Company.
The Company employed simulation modeling in determining the estimated fair value
of financial instruments for which quoted market prices were not available,
based upon the following assumptions:
CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSIT WITH OTHER BANKS, FEDERAL
FUNDS SOLD, ACCRUED INTEREST RECEIVABLE, SHORT-TERM BORROWINGS, OTHER
BORROWINGS, AND ACCRUED INTEREST PAYABLE
The fair value is equal to the current carrying value.
INVESTMENT SECURITIES
The fair value of investment securities available for sale is equal to the
available quoted market price. If no quoted market price is available, fair
value is estimated using the quoted market price for similar securities.
LOANS AND DEPOSITS
The fair value is estimated by discounting the future cash flows using a
simulation model which estimates future cash flows and employs discount rates
that consider reinvestment opportunities, operating expenses, non-interest
income, credit quality, and prepayment risk. Demand, savings, and money market
deposit accounts are valued at the amount payable on demand as of year end. Fair
value for time deposits are estimated using a discounted cash flow calculation
that applies
46
<PAGE> 47
contractual cost currently being offered in the existing portfolio to current
market rates being offered for deposits and notes of similar remaining
maturities.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
These financial instruments are generally not subject to sale, and estimated
fair values are not readily available. The carrying value, represented by the
net deferred fee arising from the unrecognized commitment or letter of credit,
and the fair value, determined by discounting the remaining contractual fee over
the term of the commitment using fees currently charged to enter into similar
agreements with similar credit risk, are not considered material for disclosure.
The contractual amounts of unfunded commitments and letters of credit are
presented in the Commitments and Contingent Liabilities note.
PARENT COMPANY
Following are condensed parent only financial statements for Security Financial
Corp.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash on deposit in subsidiary bank $ 617,087 $ 173,725
Interest-bearing deposit in other banks 100,000 -
Investment in subsidiary bank 13,695,496 10,428,816
Investment securities available for sale 248,462 181,768
Other assets 10,744 10,744
----------- -----------
TOTAL ASSETS $14,671,789 $10,795,053
=========== ===========
LIABILITIES $ 38,906 $ 16,230
STOCKHOLDERS' EQUITY 14,632,883 10,778,823
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,671,789 $10,795,053
=========== ===========
</TABLE>
47
<PAGE> 48
PARENT COMPANY (CONTINUED)
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
---------- ----------
INCOME
<S> <C> <C>
Dividends from subsidiary bank $ 125,000 $ 100,000
Dividend income 7,481 4,973
---------- ----------
Total income 132,481 104,973
EXPENSES
Operating expense 17,762 19,716
---------- ----------
Income before income tax benefits 114,719 85,257
Income taxes - 6,197
---------- ----------
Income (loss) before equity in undistributed
earnings of subsidiary 114,719 91,454
Equity in undistributed earnings of subsidiary 1,203,729 1,150,000
---------- ----------
NET INCOME $1,318,448 $1,241,454
========== ==========
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
----------- -----------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,318,448 $ 1,241,454
Adjustments to reconcile net income to
net cash provided by operating activities:
Undistributed income of subsidiary (1,203,729) (1,150,000)
- 68,803
Other
----------- -----------
Net cash provided by operating activities 114,719 160,257
----------- -----------
INVESTING ACTIVITY
Increase in interest-bearing deposits in other banks (100,000) (10,284)
Investment in subsidiary (2,000,000) -
----------- -----------
Net cash used for investing activities (2,100,000) (10,284)
----------- -----------
FINANCING ACTIVITIES
Proceeds from sale of common stock 2,581,682 -
Proceeds from dividend reinvestment and stock purchase plan 223,268 145,286
Dividends paid on common stock (376,307) (277,447)
----------- -----------
Net cash provided by (used for) financing activities 2,428,643 (132,161)
----------- -----------
Increase in cash 443,362 17,812
CASH AT BEGINNING OF YEAR 173,725 155,913
----------- -----------
CASH AT END OF YEAR $ 617,087 $ 173,725
=========== ===========
</TABLE>
48
<PAGE> 49
PART III
ITEM 1. INDEX TO EXHIBITS.
2. Plan of acquisition, reorganization, arrangement, liquidation,
or succession
3. Charter and by-laws.
4. Instruments defining the rights of security holders.
9. Voting trust agreement
10. Material contracts
11. Statement re computation of per share earnings
16. Letter re change in certifying accountant
21. Subsidiaries of the registrant
24. Power of Attorney
27. Financial Data Schedule
99. Additional Exhibits
ITEM 2. DESCRIPTION OF EXHIBITS.
Exhibit Number Description
(2) Not Applicable
(3).(i) Certificate of Incorporation
(3).(ii) Bylaws
(4) None
(9) None
(10) Security Financial Corp. 1997 Stock Option Plan
(11) Not Applicable
(16) None
(21) Subsidiaries of the Registrant
(24) Not Applicable
(27) Financial Data Schedule
(99) Not Applicable
49
<PAGE> 50
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
SECURITY FINANCIAL CORP.
Date: August 28, 1998
By: /s/ Donald L. Stacy
---------------------------------------
Donald L. Stacy, Treasurer
50
<PAGE> 51
INDEX TO EXHIBITS
Exhibit Number Description
(2) Not Applicable
*(3).(i) Certificate of Incorporation
*(3).(ii) Bylaws
(4) None
(9) None
*(10) Security Financial Corp. 1997 Stock Option Plan
(11) Not Applicable
(16) None
*(21) Subsidiaries of the Registrant
(24) Not Applicable
*(27) Financial Data Schedule
(99) Not Applicable
* Previously filed with Form 10-SB.
