<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 1999
Commission File Number 0-24157
-------
SECURITY FINANCIAL CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 34-1579662
- -------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One South Main Street, Niles, Ohio 44446-0228
---------------------------------------------
(Address of principal executive offices)
(330) 544-7400
--------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the issuer was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date.
Class: Outstanding at October 31, 1999
Common stock, no par value 350,337 common shares
- --------------------------------------------------------------------------------
1.
<PAGE> 2
SECURITY FINANCIAL CORP.
FORM 10-QSB
Quarter ended September 30, 1999
Part I - Financial Information
<TABLE>
<CAPTION>
Page
----
ITEM 1 - FINANCIAL STATEMENTS (unaudited)
<S> <C>
Consolidated Balance Sheet, (unaudited) as of September 30, 1999 and
December 31, 1998 ................................................................ 3
Consolidated Statements of Income (unaudited) for the three and nine months
Ended September 30, 1999 and 1998................................................ 4
Condensed Consolidated Statements of Changes in Stockholders' Equity (unaudited)
For the nine months ended September 30, 1999...................................... 6
Condensed Consolidated statement of Cash Flows (unaudited) for the nine
Months ended September 30, 1999 and 1998.......................................... 7
Notes to Consolidated Financial Statements ....................................... 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................... 13
Part II - Other Information
OTHER INFORMATION....................................................................... 19
SIGNATURES ............................................................................. 20
</TABLE>
- --------------------------------------------------------------------------------
2.
<PAGE> 3
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
SECURITY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,228,343 $ 8,056,009
Federal funds sold 4,681,000 1,781,000
Interest-bearing deposits in other banks 696,000 1,294,000
----------------- -----------------
Cash and cash equivalents 12,605,343 11,131,009
Securities available for sale 43,309,618 44,359,814
Loans 108,602,563 110,754,928
Less allowance for loan losses 1,823,452 1,802,773
----------------- -----------------
Net loans 106,779,111 108,952,155
Premises and equipment 4,956,925 4,967,839
Accrued interest receivable and other assets 2,451,150 2,662,963
----------------- -----------------
Total assets $ 170,102,147 $ 172,073,780
================= =================
LIABILITIES
Deposits:
Noninterest-bearing demand $ 17,297,922 $ 21,178,516
Interest-bearing demand 9,099,660 7,980,918
Money market 16,327,831 10,194,276
Savings 26,158,489 26,576,390
Time 75,788,059 82,986,786
----------------- -----------------
Total deposits 144,671,961 148,916,886
Short-term borrowings 7,478,727 7,649,027
FHLB Advances 3,000,000
Accrued interest and other liabilities 563,201 763,587
----------------- -----------------
Total liabilities 155,713,889 157,329,500
STOCKHOLDERS' EQUITY
Common stock, no par value
1,500,000 shares authorized;
349,381 and 346,978 shares issued 6,894,627 6,794,102
Retained earnings 7,991,964 7,695,892
Accumulated other comprehensive income (498,333) 254,286
----------------- -----------------
Total stockholders' equity 14,388,258 14,744,280
----------------- -----------------
Total liabilities and stockholders' equity $ 170,102,147 $ 172,073,780
================= =================
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3.
<PAGE> 4
<TABLE>
<CAPTION>
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30,
------------ -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 2,350,033 $ 2,467,132 $ 7,046,965 $ 7,410,990
Interest bearing deposits
in other banks 11,662 5,839 43,159 14,293
Federal funds sold 81,094 77,039 211,196 166,223
Investment securities:
Taxable 486,789 524,058 1,494,056 1,608,941
Exempt from federal
income tax 107,272 116,325 332,971 298,356
--------------- -------------- -------------- ---------------
Total interest income 3,036,850 3,190,393 9,128,347 9,498,803
INTEREST EXPENSE
Deposits 1,409,852 1,548,785 4,213,953 4,638,037
Short-term borrowings 76,866 96,277 204,174 227,843
FHLB borrowings 35,162 86,188
--------------- -------------- -------------- ---------------
Total interest expense 1,521,880 1,645,062 4,504,315 4,865,880
NET INTEREST INCOME 1,514,970 1,545,331 4,624,032 4,632,923
Provision for loan losses 300,000 1,390,000 820,000 2,027,000
--------------- -------------- -------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,214,970 155,331 3,804,032 2,605,923
NON-INTEREST INCOME
Service charges and fees 205,214 151,900 581,958 429,841
Investment securities gains, net 7,269 31,682
Gain on sale of loans, net 10,404
Other income 8,434 31,219 27,492 153,318
--------------- -------------- -------------- ---------------
Total non-interest income 213,648 183,119 627,123 614,841
NON-INTEREST EXPENSE
Salaries and employee benefits 600,957 683,815 1,938,132 1,908,047
Occupancy expense 166,015 204,012 526,396 541,827
Other expense 494,194 433,644 1,474,207 1,161,894
--------------- -------------- -------------- ---------------
Total non-interest expense 1,261,166 1,321,471 3,938,735 3,611,768
</TABLE>
- -----------------------------------------------------------------------------
(Continued)
4.
<PAGE> 5
<TABLE>
<CAPTION>
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME BEFORE INCOME TAX $ 167,452 $(983,021) $ 492,420 $(391,004)
Income tax expense (benefit) 3,153 (365,740) 43,432 (207,436)
--------- --------- --------- ---------
NET INCOME $ 170,605 $(617,281) $ 448,988 $(183,568)
========= ========= ========= =========
Basic and diluted earnings per share $ .49 $ (1.84) $ 1.29 $ (.55)
Weighted average shares outstanding 349,217 335,306 348,154 330,920
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5.
<PAGE> 6
<TABLE>
<CAPTION>
SECURITY FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
Accumulated other
Common Retained Comprehensive
Stock Earnings Income Total
----- -------- ------ -----
<S> <C> <C> <C> <C>
Balance, January 1, 1999 $ 6,794,102 $ 7,695,892 $ 254,286 $ 14,744,280
Dividend reinvestment
and stock options exercised 100,525 100,525
Cash dividends (152,916) (152,916)
Comprehensive income:
Net income 448,988 448,988
Net unrealized loss on
securities (752,619) (752,619)
--------------
Total comprehensive
income (303,631)
------------- ------------- ------------ --------------
Balance, September 30, 1999 $ 6,894,627 $ 7,991,964 $ (498,333) $ 14,388,258
============= ============= ============ ==============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6.
<PAGE> 7
<TABLE>
<CAPTION>
SECURITY FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash from operating activities $ 1,864,030 $ 2,292,405
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 5,979,590 932,259
Proceeds from maturities and principal repayments 5,948,649 9,031,241
Purchases (12,280,777) (11,788,974)
Net decrease in loans 1,593,044 2,952,591
Purchase of premises and equipment (162,586) (1,139,159)
Proceeds from sale of other real estate owned 39,254
--------------- ----------------
Net cash from investing activities 1,077,920 27,212
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (4,244,925) (481,229)
Increase (decrease) in short-term borrowings (170,300) 1,911,661
Increase in FHLB advances 3,000,000
Cash dividends (152,916) (213,528)
Proceeds from dividend reinvestment plan
And stock options exercised 100,525 130,319
--------------- ----------------
Net cash from financing activities (1,467,616) 1,347,223
Net increase in cash and cash equivalents 1,474,334 3,666,840
Cash and cash equivalents at beginning of period 11,131,009 8,906,457
--------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,605,343 $ 12,573,297
=============== ================
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
7.
<PAGE> 8
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
- ----------------------------------------------
Security Financial Corp. (the "Company") is a Delaware corporation organized as
the holding company of the Security Dollar Bank (the "Bank"). The consolidated
financial statements of the Company include its wholly-owned subsidiary, the
Bank. Significant intercompany items have been eliminated in consolidation.
Investment Securities
- ---------------------
The Company has classified debt and equity securities 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.
Premiums and discounts are recognized in interest income using a method which
approximates the interest method over the period to maturity.
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.
- --------------------------------------------------------------------------------
(Continued)
8.
<PAGE> 9
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
Allowance for Loan Losses
- -------------------------
The allowance for loan losses represents the amount which management estimates
is adequate to provide for probable 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 charged to
operations. The provision for loan losses is based on management's periodic
evaluation of individual loans, economic factors, past loan loss experience,
changes in the composition and volume of the portfolio, 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 changes in the near term.
Impaired loans are commercial and commercial real estate loans for which it is
probable the Company will not be able to collect all amounts due according to
the contractual terms of the loan agreement. The Company individually evaluates
such loans for impairment and does not aggregate loans by major risk
classifications. The definition of "impaired loans" is not the same as the
definition of "nonaccrual loans," although the two categories overlap. The
Company may choose to place a loan on nonaccrual status due to payment
delinquency or uncertain collectibility, while not classifying the loan as
impaired if the loan is not a commercial or commercial real estate loan. Factors
considered by management in determining impairment include payment status and
collateral value. The amount of impairment for these types of impaired loans is
determined by the difference between the present value of the expected cash
flows related to the loan, using the original interest rate, and its recorded
value, or as a practical expedient in the case of collateralized loans, the
difference between the fair value of the collateral and the recorded amount of
the loans. When foreclosure is probable, impairment is measured based on the
fair value of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are large
groups of smaller balance homogeneous loans and are measured for impairment
collectively. Loans that experience insignificant payment delays, which are
defined as 90 days or less, generally are not classified as impaired. Management
determines the significance of payment delays on a case-by-case basis taking
into consideration all 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 the principal and interest owed.
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 10
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
Comprehensive Income
- --------------------
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." In adopting Statement No.
130, the Company is required to present comprehensive income and its components
in a full set of general purpose financial statements for all periods presented.
The Company has elected to report the effects of Statement No. 130 as part of
the Statement of Changes in Stockholders' Equity.
Earnings per share
- ------------------
There are no convertible securities which would affect the net income required
to be used in calculating basic and diluted earnings per share, as such, net
income as presented on the consolidated statement of income is used for
computation purposes.
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE> 11
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The amortized cost and estimated market values of securities available for sale
are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1999
----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and
Government agency
securities $ 6,176,663 $ 625 $ (112,256) $ 6,065,032
Obligations of states and
political subdivisions 9,213,334 7,601 (498,789) 8,722,146
Corporate obligations 194,922 (2,609) 192,313
Mortgage-backed securities 26,946,006 366,872 (735,813) 26,577,065
---------------- ---------------- ---------------- ----------------
Total debt securities 42,530,925 375,098 (1,349,467) 41,556,556
---------------- ---------------- ---------------- ----------------
Equity securities 1,533,738 219,324 1,753,062
---------------- ---------------- ---------------- ----------------
$ 44,064,663 $ 594,422 $ (1,349,467) $ 43,309,618
================ ================ ================ ================
<CAPTION>
December 31, 1998
----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and
Government agency
securities $ 6,824,464 $ 15,258 $ (3,187) $ 6,836,535
Obligations of states and
political subdivisions 9,182,033 105,136 (59,101) 9,228,068
Mortgage-backed securities 26,499,393 339,260 (164,157) 26,674,496
---------------- ---------------- ---------------- ----------------
Total debt securities 42,505,890 459,654 (226,445) 42,739,099
---------------- ---------------- ---------------- ----------------
Equity securities 1,468,638 158,793 (6,716) 1,620,715
---------------- ---------------- ---------------- ----------------
$ 43,974,528 $ 618,447 $ (233,161) $ 44,359,814
================ ================ ================ ================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE> 12
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Real estate mortgages:
Residential $ 49,035,479 $ 47,954,511
Commercial 28,650,148 24,791,286
Commercial, financial, and agricultural 10,056,544 10,255,062
Consumer loans 18,595,383 25,177,883
Other 2,265,009 2,576,186
--------------- ----------------
108,602,563 110,754,928
Less allowance for loan losses 1,823,452 1,802,773
--------------- ----------------
$ 106,779,111 $ 108,952,155
=============== ================
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $ 1,802,773 $ 1,677,651
Provision charged to income 820,000 2,027,000
Net charge-offs (799,321) (1,187,556)
--------------- ----------------
Balance at end of period $ 1,823,452 $ 2,517,095
=============== ================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
12.
<PAGE> 13
SECURITY FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
Financial Condition
- -------------------
Total assets decreased by approximately $2.0 million or 1.15% from December 31,
1998 to September 30, 1999, primarily as a result of the decrease in the loan
portfolio. Gross loans decreased by approximately $2.2 million or 1.94% during
the first nine months of 1999. The consumer portfolio decreased approximately
$6.6 million during the first nine months of 1999 which more than offset the
$4.9 million increase in the residential and commercial real estate portfolios.
A large part of the consumer portfolio decrease was due to a reduction in the
level of indirect loans originated and due to the higher charges-off's of
indirect loans in 1998 and 1999 which were primarily a result of a former
employee who made loans outside of bank policy.
Total deposits decreased by approximately $4.2 million or 2.85%, during the
first nine months of 1999. Decreases occurred in the noninterest-bearing and the
time deposit portfolios during the first six months of 1999, and were partially
offset by an increase in money market accounts.
Stockholders' equity decreased by approximately $356,000 for the nine month
period ended September 30, 1999, due to cash dividends of approximately $153,000
and an increase in net unrealized losses on securities of approximately
$753,000. These decrease to stockholders equity was partially offset by net
income of approximately $449,000 and an increase in common stock of
approximately $101,000 from the dividend reinvestment plan and the exercise of
stock options.
Results of Operations
- ---------------------
Net income for the nine-month period ending September 30, 1999 amounted to
$448,988 compared to $(183,568) during the same period in 1998. Net income for
the three-month period ending September 30, 1999 also increased approximately
$788,000. Discussed below are the major factors which have influenced these
operating results. Net interest income, the primary source of earnings, is the
amount by which interest and fees on loans and investments exceed the interest
cost of deposits and other borrowings obtained to fund them. Net interest income
is affected by the volume and composition of earning assets and interest-bearing
liabilities as well as the level of non-interest-bearing demand deposits and
stockholders' equity. Also impacting net interest income is the susceptibility
of interest-earning assets and interest-bearing liabilities to changes in the
general market level of interest rates. Management attempts to manage the
repricing of assets and liabilities so as to achieve a stable level of net
interest income and reduce the effect of significant changes in the market level
of interest rates. This is accomplished through the pricing and promotion of
various loan and deposit products as well as the active management of the Bank's
portfolio of investment securities available for sale.
- --------------------------------------------------------------------------------
13.
<PAGE> 14
SECURITY FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
- --------------------------------------------------------------------------------
Interest income for the first nine months of 1999 totaled approximately
$9,128,000 as compared to $9,499,000 during the same period 1998, a decrease of
$371,000. During the same time period, interest expense decreased $362,000 from
$4,866,000 in 1998 to $4,504,000 in 1999. The decrease in interest income is
primarily the result of the decrease in the average balance of the loan
portfolio from the same period in 1998 and a decline in the yield on loans. The
decrease in the interest expense for the period was due to a decline in the cost
of funds due to a decline in rates for time deposits and due to the shift in
deposit mix from higher cost time deposits to comparably lower costing money
market deposit accounts.
Provision for Loan Losses
- -------------------------
The provision for loan losses for the nine months ended September 30, 1999 was
$820,000, compared to $2,027,000 for the nine months ended September 30, 1998.
The decrease in the provision, related primarily to an decrease in net loan
charge-offs for the nine months ended September 30, 1999 compared to the same
period in 1998, as well as management's overall evaluation of the adequacy of
the level of the allowance, in relation to non-performing loans and total loans.
The adequacy of the allowance for possible loan losses is evaluated by
management on a quarterly basis. This review includes an assessment of problem
loans and probable unknown losses based on current economic conditions, the
regulatory environment and historical experience. The provision for loan losses
represents charges to operations necessary to maintain the allowance at a level
which management believes will be adequate to absorb losses. Management believes
that the allowance for possible loan losses is adequate. While management
evaluates the allowance for loan losses based upon available information, future
additions to the allowance may be necessary. Additionally, regulatory agencies
review the Company's allowance for loan losses as part of their examination
process. Such agencies may require the Company to recognize additions to the
allowance based on judgments which may be different from those of management.
Non-interest income, which is comprised principally of service charges on
deposit accounts, increased 1.95%, or $12,000 from $615,000 for the nine months
ended September 30, 1998 to $627,000 for the nine months ended September 30,
1999.
Non-interest expense increased $327,000 or 9.05% to $3,939,000 for the nine
months ended September 30, 1999 from $3,612,000 for the nine months ended
September 30, 1998. Salaries and employee benefits increased $30,000 or 1.58%
during this time due to increases in wages, insurance and more employees using
the tuition reimbursement plan. Of the $312,000 increase in other expesnes,
$59,000 was related to the sale of repossessed assets at a loss. Legal expenses
also increased $31,000 during the nine months ended September 30, 1999 when
compared to the same period in 1998. Both the loss from the sale of repossessed
assets and the increase in legal expenses are a direct effect of the problems
the bank had experienced with their indirect loan portfolio during 1998. The
loan portfolio was tainted by a former officer of the Bank who made loans
outside the policies of the bank. The Company has filed civil litigation against
the individual and others who were believed to be involved with these
transactions. The remaining amount of the increase in non-interest expense is
due to
- --------------------------------------------------------------------------------
14.
<PAGE> 15
SECURITY FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
- --------------------------------------------------------------------------------
the general increase in other general operating expenses including increases in
advertising, insurance, ATMs, and data processing expense.
YEAR 2000 COMPLIANCE
During 1998, the Company adopted a Year 2000 Compliance Plan (the "Plan") and
established a Year 2000 Compliance Committee (the "Committee"). The objectives
of the Plan and the Committee are to prepare the Company for the millennium. As
recommended by the Federal Financial Institutions Examination Council, the Plan
encompasses the following phases:
Awareness, Assessment, Renovation, Validation, and Implementation. These phases
will enable the Company to identify risks, develop an action plan, perform
adequate testing, and complete certification that its processing systems will be
Year 2000 ready. Execution of the Plan is currently on target. The Company is
currently in Phase 4, Validation (which includes testing of incremental changes
to hardware and software, testing connections with third-party vendors, and
establishing controls to ensure timely completion of all hardware and software
prior to final implementation). Prioritization of the most critical applications
has been addressed, along with contract and service agreements.
The primary operating software for the Company is obtained and maintained by an
external provider of software (the "External Provider"). The Company has
maintained ongoing contact with this vendor so that modification of the software
is a top priority and has been completed. The Company has contacted all other
material vendors and suppliers regarding their Year 2000 readiness. Each of
these third parties has delivered written assurance to the Company that they
expect to be Year 2000 compliant prior to the Year 2000. The Company has
contacted material customers and non-information technology suppliers (i.e.,
utility systems, telephone systems, and security systems) regarding their Year
2000 state of readiness. The implementation phase was targeted for completion by
September 30, 1999 and management met the target. Management also completed its'
Year 2000 risk analysis of significant borrowers during the second quarter. The
Company has and will incur internal staffing costs as well as consulting and
other expenses related to testing and enhancements to prepare the systems for
the Year 2000. The Company does not anticipate that the related costs will be
material in any single year. The Company has and will also incur expense in an
effort to inform and educate its' customer base as to the Company's Year 2000
readiness. In total, the Company estimates that its cost for compliance will
amount to approximately $160,000 over the two-year period from 1998 to 1999. A
significant portion of these costs are not likely to be incremental costs to the
Company but rather the redeployment of existing resources. As of September 30,
1999, the Company estimates that approximately $130,000 of these costs have been
incurred.
No assurance can be given that the Year 2000 Compliance Plan will be completed
successfully by the Year 2000, in which event the Company could incur
significant costs. If the External Provider is unable to resolve the potential
problem in time, the Company would likely experience significant data processing
delays, mistakes, or failures. These delays, mistakes, or failures could have a
significant adverse impact on the financial statements of the Company.
- --------------------------------------------------------------------------------
15.
<PAGE> 16
SECURITY FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
- --------------------------------------------------------------------------------
Successful and timely completion of the Year 2000 project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain including the progress and results of the
Company's External Provider, testing plans, and all vendors, suppliers, and
customer readiness.
RISK ELEMENTS
Nonperforming Assets
The following schedule presents information concerning nonperforming assets
including nonaccrual loans, loans 90 days or more past due, and other real
estate owned at September 30, 1999 and December 31, 1998. A loan is classified
as nonaccural when, in the opinion of management, there are serious doubts about
collectibility of interest and principal. At the time the accrual of interest is
discontinued, future income is recognized only when cash is received.
<TABLE>
<CAPTION>
September 30, December 31
1999 1998
---- ----
(Dollars in Thousand)
<S> <C> <C>
Loans on nonaccrual basis $ 1,381 $ 1,300
Loan past 90 days or more and still accruing 163 412
----------- -----------
Total non-performing loans 1,544 1,712
Other non-performing assets 47 283
----------- -----------
Total non-performing assets $ 1,591 $ 1,995
=========== ===========
Total non-performing loans to
total loans 1.42% 1.55%
Total non-performing loans to
total assets .91% .99%
Total non-performing assets to
total assets .94% 1.16%
</TABLE>
- --------------------------------------------------------------------------------
16.
<PAGE> 17
SECURITY FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
- --------------------------------------------------------------------------------
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 borrowings from the Federal Home Loan Bank
supplements the Company's availability of funds.
CAPITAL RESOURCES
Under regulations issued by federal banking agencies, banks and bank holding
companies are required to maintain certain minimum capital ratios known as the
risk-based capital ratio and the leverage ratio. At September 30, 1999, the
Company's Tier 1 Capital (to average assets), Tier 1 Capital (to risk-weighted
assets) and total risk-based capital ratios were 8.08%, 13.11% and 14.36%,
respectively, compared to 8.12%, 12.99% and 14.25% at December 31, 1998,
respectively. The Company has exceeded all required regulatory capital ratios
for each period presented and is considered "well capitalized" under all federal
banking agency regulations.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars, without
consideration for changes in the relative purchasing power of money over time
caused by inflation.
Unlike industrial companies, nearly all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services, since
such goods and services are affected by inflation. In the current interest rate
environment, liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
- --------------------------------------------------------------------------------
17.
<PAGE> 18
SECURITY FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
- -------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts are
forward looking statements that are subject to certain risks and uncertainties.
When used herein, the terms "anticipates," "plans," "expects," "believes," and
similar expressions as they relate to the Company or its management are intended
to identify such forward looking statements. The Company's actual results,
performance or achievements may materially differ from those expressed or
implied in the forward looking statement. Risks and uncertainties that could
cause or contribute to such material differences include, but are not limited
to, general economic conditions, interest rate environment, competitive
conditions in the financial services industry, changes in law, governmental
policies and regulations, and rapidly changing technology affecting financial
services.
- --------------------------------------------------------------------------------
18.
<PAGE> 19
SECURITY FINANCIAL CORP.
FORM 10-QSB
Quarter ended September 30, 1999
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1 - 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 by a bank customer for $3.5 million dollars which was filed on March
31, 1999. It is the opinion of management and its counsel that the threatened
litigation will cause no loss to the bank or have a material adverse impact upon
the financial condition of the Company and the Bank.
Item 2 - Changes in rights of the Company's Security holders.
None.
Item 3 - Defaults by the Company on its senior securities.
None.
Item 4 - Results of votes of security holders.
None
Item 5 - Other information.
None.
Item 6 - Reports on Form 8-K
None
- --------------------------------------------------------------------------------
19.
<PAGE> 20
SECURITY FINANCIAL CORP.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SECURITY FINANCIAL CORP.
------------------------
(Registrant)
Date: November 12, 1999 /s/Glenn Griffiths
--------------------------- -------------------------------------
Glenn Griffiths
President and Chief Executive Officer
Date: November 12, 1999 /s/Stephen Miller
--------------------------- -------------------------------------
Stephen Miller
Treasurer
- --------------------------------------------------------------------------------
20.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the quarterly
report on Form 10-QSB and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,228,343
<INT-BEARING-DEPOSITS> 696,000
<FED-FUNDS-SOLD> 4,681,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,309,618
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 108,602,563
<ALLOWANCE> 1,823,452
<TOTAL-ASSETS> 170,102,147
<DEPOSITS> 144,671,961
<SHORT-TERM> 7,478,727
<LIABILITIES-OTHER> 563,201
<LONG-TERM> 3,000,000
0
0
<COMMON> 6,894,627
<OTHER-SE> 7,493,631
<TOTAL-LIABILITIES-AND-EQUITY> 170,102,147
<INTEREST-LOAN> 7,046,965
<INTEREST-INVEST> 1,827,027
<INTEREST-OTHER> 254,355
<INTEREST-TOTAL> 9,128,347
<INTEREST-DEPOSIT> 4,213,953
<INTEREST-EXPENSE> 4,504,315
<INTEREST-INCOME-NET> 3,804,032
<LOAN-LOSSES> 820,000
<SECURITIES-GAINS> 7,269
<EXPENSE-OTHER> 3,938,735
<INCOME-PRETAX> 492,420
<INCOME-PRE-EXTRAORDINARY> 492,420
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 448,988
<EPS-BASIC> 1.29
<EPS-DILUTED> 1.29
<YIELD-ACTUAL> 3.94
<LOANS-NON> 1,381,000
<LOANS-PAST> 163,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,802,773
<CHARGE-OFFS> 929,000
<RECOVERIES> 129,679
<ALLOWANCE-CLOSE> 1,823,452
<ALLOWANCE-DOMESTIC> 1,823,452
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
