<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-24157
-------
SECURITY FINANCIAL CORP.
------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 34-1579662
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One South Main Street, Niles, Ohio 44446-0228
----------------------------------------------
(Address of principal executive offices)
(330) 544-7400
--------------
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class: Outstanding at July 31, 2000
Common stock, no par value 361,776 common shares
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
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SECURITY FINANCIAL CORP.
FORM 10-QSB
Quarter ended June 30, 2000
Part I - Financial Information
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1 - Financial Statements
Consolidated Balance Sheets, as of June 30, 2000 and
December 31, 1999 .............................................................................. 3
Consolidated Statements of Income for the three and six months
Ended June 30, 2000 and 1999.................................................................... 4
Consolidated Statements of Comprehensive Income for the three and six
Months ended June 30, 2000 and 1999............................................................. 6
Consolidated Statement of Changes in Stockholders' Equity
For the six months ended June 30, 2000.......................................................... 7
Condensed Consolidated Statements of Cash Flows for the six
Months ended June 30, 2000 and 1999............................................................. 8
Notes to Consolidated Financial Statements ..................................................... 9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................................... 15
Part II -
Other Information..................................................................................... 20
Signatures ........................................................................................... 22
</TABLE>
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2
<PAGE> 3
PART I. FINANCIAL INFORMATION
SECURITY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,420,270 $ 8,110,768
Federal funds sold 9,347,000 8,950,000
Short-term interest-bearing deposits 199,000 298,000
------------- -------------
Cash and cash equivalents 16,966,270 17,358,768
Long-term interest-bearing deposits 299,000 199,000
Securities available for sale 39,474,647 40,543,732
Loans 103,933,256 109,117,665
Less allowance for loan losses 1,792,862 1,649,815
------------- -------------
Net loans 102,140,394 107,467,850
Premises and equipment, net 4,806,696 4,899,155
Accrued interest and other assets 2,121,565 2,198,788
------------- -------------
Total assets $ 165,808,572 $ 172,667,293
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non interest-bearing demand $ 19,388,271 $ 18,319,669
Interest-bearing demand 10,792,028 9,894,059
Money market 17,816,846 17,052,311
Savings 24,629,417 25,085,927
Time 67,667,096 75,014,008
------------- -------------
Total deposits 140,293,658 145,365,974
Short-term borrowings 9,865,528 9,405,994
FHLB advances 1,000,000 3,000,000
Accrued interest payable and other liabilities 351,926 554,697
------------- -------------
Total liabilities 151,511,112 158,326,665
Commitments and Contingencies
Common stock, no par value
1,500,000 shares authorized;
361,776 and 361,780 shares issued 7,860,674 7,860,674
Retained earnings 7,110,648 7,124,702
Accumulated other comprehensive income (loss) (673,862) (644,748)
------------- -------------
Total stockholders' equity 14,297,460 14,340,628
------------- -------------
Total liabilities and stockholders' equity $ 165,808,572 $ 172,667,293
============= =============
</TABLE>
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See accompanying notes to consolidated financial statements.
3
<PAGE> 4
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 2,250,669 $ 2,336,487 $ 4,581,361 $ 4,696,932
Securities:
Taxable 516,410 483,085 1,027,022 968,536
Tax exempt 98,632 133,933 208,945 264,430
Interest-bearing deposits
in other banks 5,850 14,568 11,988 31,497
Federal funds sold 153,921 91,188 289,315 130,102
----------- ----------- ----------- -----------
Total interest income 3,025,482 3,059,261 6,118,631 6,091,497
INTEREST EXPENSE
Deposits 1,376,833 1,389,284 2,804,409 2,804,101
Short-term borrowings 126,678 68,389 231,751 127,308
FHLB borrowings 11,219 34,779 34,200 51,026
----------- ----------- ----------- -----------
Total interest expense 1,514,730 1,492,452 3,070,360 2,982,435
----------- ----------- ----------- -----------
NET INTEREST INCOME 1,510,752 1,566,809 3,048,271 3,109,062
Provision for loan losses 150,000 220,000 300,000 520,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,360,752 1,346,809 2,748,271 2,589,062
OTHER INCOME
Service charges on deposit accounts 139,218 174,016 277,345 318,726
Investment securities gains
(losses), net (25,781) 157 (25,781) 7,269
Gain on sale of loans, net 1,184 7,984 2,872 10,404
Other income 55,295 38,021 119,243 77,076
----------- ----------- ----------- -----------
Total other income 169,916 220,178 373,679 413,475
OTHER EXPENSE
Salaries and employee benefits 760,276 682,259 1,483,360 1,337,175
Occupancy and equipment 150,279 175,322 318,384 360,381
Other expense 614,596 480,115 1,226,660 980,013
----------- ----------- ----------- -----------
Total other expense 1,525,151 1,337,696 3,028,404 2,677,569
</TABLE>
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(Continued)
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SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------- --------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INCOME BEFORE INCOME TAX $ 5,517 $ 229,291 $ 93,546 $ 324,968
Income tax expense (benefit) (22,666) 51,650 (8,167) 46,585
--------- --------- --------- ---------
NET INCOME $ 28,183 $ 177,641 $ 101,713 $ 278,383
========= ========= ========= =========
Basic and diluted earnings per share $ .08 $ .50 $ .28 $ .78
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET INCOME $ 28,183 $ 177,641 $ 101,713 $ 278,383
Other comprehensive income, net of tax
Unrealized gain (loss) on securities
available for sale arising during
the period (42) (394,890) (46,129) (618,447)
Less: Reclassified adjustment for
accumulated gains (losses)
included in net income (17,015) 104 (17,015) 4,798
--------- --------- --------- ---------
Unrealized gains (losses) on
securities, net of tax 16,973 (394,786) (29,114) (613,649)
--------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ 45,156 $(217,145) $ 72,599 $(335,266)
========= ========= ========= =========
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
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SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income Total
----- -------- ------ -----
<S> <C> <C> <C> <C>
Balance, January 1, 2000 $ 7,860,674 $ 7,124,702 $ (644,748) $ 14,340,628
Cash dividends ($.32 per share) (115,767) (115,767)
Comprehensive income:
Net income 101,713 101,713
Net unrealized loss on
securities available for
sale, net of tax (29,114) (29,114)
--------------
Total comprehensive
income 72,599
------------- ------------- ------------ --------------
Balance, June 30, 2000 $ 7,860,674 $ 7,110,648 $ (673,862) $ 14,297,460
============= ============= ============ ==============
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
SECURITY FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash from operating activities $ 307,887 $ 1,315,686
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in long-term interest-bearing deposits (100,000) --
Securities available for sale:
Proceeds from sales 1,200,000 5,105,590
Proceeds from maturities and principal repayments 2,481,777 3,536,625
Purchases (2,485,000) (11,975,777)
Net decrease in loans 5,027,456 3,800,853
Purchase of premises and equipment (96,069) (115,991)
------------ ------------
Net cash from investing activities 6,028,164 351,300
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (5,072,316) (2,986,228)
Increase in short-term borrowings 459,534 128,493
Increase in FHLB advances -- 3,000,000
Repayment of FHLB advances (2,000,000) --
Cash dividends paid on common stock (115,767) (111,115)
Proceeds from dividend reinvestment plan -- 86,522
------------ ------------
Net cash from financing activities (6,728,549) 117,672
------------ ------------
Net increase (decrease) in cash and cash equivalents (392,498) 1,784,658
Cash and cash equivalents at beginning of period 17,358,768 11,131,009
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,966,270 $ 12,915,667
============ ============
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The consolidated financial statements include Security Financial Corp.
("Company") and its wholly-owned subsidiary, Security Dollar Bank ("Bank").
Significant intercompany transactions and balances are eliminated in
consolidation.
These interim financial statements reflect all adjustments of a normal recurring
nature which, in the opinion of management, are necessary to present fairly the
consolidated financial position of Security Financial Corp. at June 30, 2000,
and its results of operations and cash flows for the periods presented. The
accompanying consolidated financial statements do not purport to contain all the
necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances and are not
necessarily indicative of the results to be expected for the full year. The
Annual Report for Security Financial Corp. for the year ended December 31, 1999,
contains consolidated financial statements and related notes which should be
read in conjunction with the accompanying consolidated financial statements.
The Company is a Delaware corporation organized as holding company of the Bank.
The Bank is a state-chartered commercial bank located in Northeast Ohio. The
Company and its subsidiary derive substantially all their income from banking
and bank-related services which include interest earnings on commercial and
consumer loan financing as well as interest on securities and a variety of
deposit services to its customers through five locations. The Company and the
Bank are supervised by the Federal Reserve Board, while the Bank is also subject
to regulation and supervision by the Ohio Division of Financial Institutions.
USE OF ESTIMATES
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and future results could
differ. The allowance for loan losses and status of contingencies are
particularly subject to change.
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.
Interest income includes amortization of purchase premiums or discounts.
Common stock of the Federal Home Loan Bank, Federal Reserve Bank, and
Independent State Bank of Ohio are accounted for at cost and are classified with
equity securities available for sale.
--------------------------------------------------------------------------------
(Continued)
9
<PAGE> 10
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOANS
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are reported at the principal balance
outstanding, net of deferred loan fees and costs and an allowance for loan
losses. Loans held for sale are reported at the lower of cost or market, on an
aggregate basis.
Interest on loans is recognized as income when earned on the accrual method. The
Company's general policy has been to stop accruing interest on loans when it is
determined that reasonable doubt exists as to the collectibility of additional
interest. Interest payments received on nonaccrual loans is recorded as income
or applied against principal according to management's judgment as to the
collectibility of the related loans. 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 is a valuation allowance for probable incurred
credit losses, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
using past loan loss experience, the nature and volume of the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
A loan is considered impaired when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage and consumer loans, and on an individual
loan basis for other loans. If a loan is impaired, a portion for the allowance
is allocated so that the loan is reported, net, at the present value of
estimated future cash flows using the loan's exiting rate or at the fair value
of collateral if repayment is expected solely from the collateral. 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 impaired. Factors considered by
management in determining impairment include payment status and collateral
value.
EARNINGS PER COMMON SHARE
Basic earnings per common share is net income divided by the weighted average
number of common shares outstanding during the period. Diluted earnings per
common share includes the dilutive effect of additional potential common shares
issuable under stock options. Earnings and dividends per share have been
restated for all stock dividends. The basic weighted average shares were 361,776
and 358,041 and diluted weighted average shares were 362,598 and 358,401 for
June 30, 2000 and 1999.
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(Continued)
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<PAGE> 11
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
COMPREHENSIVE INCOME
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securities
available for sale which are also recognized as separate components of equity.
LOSS CONTINGENCIES
Loss contingencies, including claims and legal actions arising in the ordinary
course of business, are recorded as liabilities when the likelihood of loss is
probable and an amount or range of loss can be reasonably estimated. Management
does not believe there now are such matters that will have a material effect on
the financial statements.
DIVIDEND RESTRICTION
Banking regulations require maintaining certain capital levels and may limit the
dividends paid by the bank to the holding company or by the holding company to
shareholders.
INCOME TAXES
Income tax expense (benefit) is based on the effective tax rate expected to be
applicable for the entire year. The Corporation follows the liability method of
accounting for income taxes. The liability method provides that deferred tax
assets and liabilities are recorded at enacted tax rates based on the difference
between the tax basis of assets and liabilities and their carrying amounts for
financial reporting purposes, referred to as "temporary differences." A
valuation allowance, if needed, reduces deferred tax assets to the amount
expected to be realized.
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(Continued)
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<PAGE> 12
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The amortized cost and estimated market values of securities available for sale
are summarized as follows:
<TABLE>
<CAPTION>
June 30, 2000
------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and
Government agency
securities $ 9,403,485 $ 17,576 $ (203,985) $ 9,217,076
Obligations of states and
political subdivisions 8,075,181 10,826 (397,201) 7,688,806
Corporate obligations 195,490 - (16,677) 178,813
Mortgage-backed securities 21,443,564 34,440 (599,222) 20,878,782
---------------- ---------------- ---------------- ----------------
Total debt securities 39,117,720 62,842 (1,217,085) 37,963,477
Equity securities 1,377,929 140,003 (6,762) 1,511,170
---------------- ---------------- ---------------- ----------------
$ 40,495,649 $ 202,845 $ (1,223,847) $ 39,474,647
================ ================ ================ ================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and
Government agency
securities $ 7,145,502 $ 16,952 $ (139,750) $ 7,022,704
Obligations of states and
political subdivisions 9,117,043 4,590 (613,220) 8,508,413
Corporate obligations 195,109 - (7,296) 187,813
Mortgage-backed securities 23,618,028 27,176 (509,988) 23,135,216
---------------- ---------------- ---------------- ----------------
Total debt securities 40,075,682 48,718 (1,270,254) 38,854,146
Equity securities 1,444,938 244,648 - 1,689,586
---------------- ---------------- ---------------- ----------------
$ 41,520,620 $ 293,366 $ (1,270,254) $ 40,543,732
================ ================ ================ ================
</TABLE>
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(Continued)
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<PAGE> 13
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Real estate mortgages:
Residential $ 50,564,919 $ 51,759,229
Commercial 32,029,967 32,560,547
Commercial, financial, and agricultural 6,192,278 6,060,456
Consumer loans 13,267,646 16,619,461
Other 1,878,446 2,117,972
--------------- ----------------
103,933,256 109,117,665
Less allowance for loan losses 1,792,862 1,649,815
--------------- ----------------
$ 102,140,394 $ 107,467,850
=============== ================
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
---- ----
<S> <C> <C>
Balance at beginning of period $ 1,649,815 $ 1,802,773
Provision charged to income 300,000 520,000
Charge-offs (304,000) (511,624)
Recoveries charge-offs 147,047 51,602
--------------- ----------------
Balance at end of period $ 1,792,862 $ 1,862,751
=============== ================
</TABLE>
NOTE 4 - REGULATORY AGREEMENT
On March 17, 2000, the Board of Directors approved and entered into a written
regulatory agreement between Security Dollar Bank and the Federal Reserve Bank
of Cleveland and the Ohio Division of Financial Institutions. The agreement was
executed in accordance with current banking regulations and will remain
enforceable until terminated or suspended by the Bank's regulators. The
agreement restricts the payment of dividends by the Bank without the prior
approval of its primary regulators. In addition, the agreement requires specific
actions by the Bank's management and the Board of Directors which are intended
to improve and strengthen the Bank's operations, oversight, risk management and
internal control.
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(Continued)
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<PAGE> 14
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 5 - MERGER
On May 26, 2000, the Company and Farmers National Banc Corp. (Farmers) entered
into an agreement to merge. The transaction is structured as a tax-free exchange
of stock and is expected to be accounted for using the pooling-of-interests
method of accounting. The ratio at which Company shares will be exchanged for
the shares of Farmers will be calculated by dividing $90 by an average of the
price of farmers' shares just prior to the closing of the transaction, provided
that the ratio shall not be less than 7.20, nor greater than 9.742, shares for
each Company share subject to certain conditions and adjustments. Should the
Farmers "Closing Price" (as defined by the average closing price per share
reported in a mutually agreeable source for the most recent 30 days on which
actual trades of shares occur, ending on the second day immediately preceding
the closing date) be less than $7.50, the Company may propose to terminate the
agreement. The shares to be issued to the Company shareholders will be
registered with the Securities and Exchange Commission. The merger is expected
to be consummated in the fourth calendar quarter of 2000 and is subject to
approvals by various regulatory authorities and by the shareholders of the
Company and Farmers.
--------------------------------------------------------------------------------
(Continued)
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<PAGE> 15
SECURITY FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
FINANCIAL CONDITION
Total assets decreased by approximately $6.9 million or 3.97% from December 31,
1999 to June 30, 2000, primarily as a result of the decrease in the loan
portfolio. Gross loans decreased by approximately $5.2 million or 4.81% during
the first six months of 2000. Decreases occurred in the residential real estate
and consumer portfolios which combined to decrease approximately $4.5 million
during the first six months of 2000. A large part of the consumer portfolio
decrease was due to management's plan to change the mix of the loan portfolio
and de-emphasize indirect lending.
Total securities available for sale decreased by approximately $1.1 million or
2.64% to $39.5 million at June 30, 2000 from $40.5 million at December 31, 1999.
Total deposits decreased by approximately $5.1 million or 3.49%, during the
first six months of 2000. Decreases occurred in the savings and time deposit
portfolios during the first six months of 2000, and were partially offset by an
increase in money market, non-interest and interest bearing deposit accounts.
During the first half of 2000, Management restructured the interest rates
offered on its time deposits in order to extend the duration of its liabilities,
thus reducing the Bank's level of interest rate risk. Interest rates are
generally set to be competitive in the local market for the desired maturity
ranges, without leading the market. While this decision has resulted in a
decrease in the overall level of time deposits, Management considers this course
of action to be in the Bank's best interests in terms of interest rate risk,
future earnings potential and liquidity.
During the first quarter of 1999, the Bank borrowed a total of $3 million in
three separate transactions from the Federal Home Loan Bank of Cincinnati
("FHLB"). Each of these $1 million borrowings carried a low fixed rate for an
initial time period, after which the interest rate would become variable. Two of
these borrowings converted to variable rates during the first quarter of 2000,
and Management elected to repay these borrowings at that time. The remaining $1
million will convert to a variable rate in the first quarter of 2001. Management
will continue to utilize FHLB borrowings when they represent the best available
funding source.
Stockholders' equity decreased by approximately $43,000 for the six month period
ended June 30, 2000, due to net income of approximately $102,000 which was
offset by net unrealized losses on securities increasing by approximately
$29,000 and payment of cash dividends of approximately $116,000.
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15
<PAGE> 16
SECURITY FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net income for the six-month period ending June 30, 2000 amounted to $102,000,
compared to $278,000 during the same period in 1999. Net income for the
three-month period ending June 30, 2000 amounted to $28,000, compared to
$178,000 during the same period in 1999. Discussed below are the major factors
which have influenced these operating results. Net interest income, the primary
source of earnings, is the amount by which interest and fees on loans and
investments exceed the interest cost of deposits and other borrowings obtained
to fund them. Net interest income is affected by the volume and composition of
earning assets and interest-bearing liabilities as well as the level of
non-interest-bearing demand deposits and stockholders' equity. Also impacting
net interest income is the susceptibility of interest-earning assets and
interest-bearing liabilities to changes in the general market level of interest
rates. Management attempts to manage the repricing of assets and liabilities so
as to achieve a stable level of net interest income and reduce the effect of
significant changes in the market level of interest rates. This is accomplished
through the pricing and promotion of various loan and deposit products as well
as the active management of the Bank's portfolio of investment securities
available for sale.
Interest income for the first half of 2000 totaled $6,119,000 compared to
$6,091,000 during the same period in 1999, an increase of $28,000. During the
same time period, interest expense increased $88,000 from $2,982,000 in 1999 to
$3,070,000 in 2000. Interest income for the three months ended June 30, 2000
decreased $34,000 or 1.1% from $3,059,000 during the same period in 1999. During
the same time period, interest expense increased $22,000 to $1,515,000. The
increase in interest income for the first half of 2000 is primarily the result
of the increase in the average balance and rate earned on federal funds compared
to the same period in 1999 which was partially offset by a decline in the yield
on loans from 1999 to 2000. The decrease in interest income for the three months
ended June 30, 2000 is a result of the decrease in the average balance on loans
and tax-exempt securities. The primary increase in interest expense, for both
the six and three month ended, was due to the increase in the average balance
and rate for money market accounts and repurchase agreements. The increase was
partially offset by the decrease in the average balance of time deposits from
the same period in 1999.
The provision for loan losses for the three months ended June 30, 2000 was
$300,000, compared to $520,000 for the six months ended June 30, 1999. The
decrease in the provision, related primarily to a decrease in net loan
charge-offs for the six months ended June 30, 2000 compared to the same period
in 1999, 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
overall level of non-performing loans declined from $1,471,000 at June 30, 1999
to $1,167,000 at June 30, 2000. 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.
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16
<PAGE> 17
SECURITY FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
Non-interest income, which is comprised principally of service charges on
deposit accounts, decreased 9.6% and 22.8%, or $39,000 and $50,000 from $413,000
and $220,000 for the six and three months ended June 30, 1999 to $374,000 and
$170,000 for the six and three months ended June 30, 2000. The majority of the
decrease is due to the net loss realized on the sale of securities when compared
to the same period in 1999 and a reduction in the gain on sale of loans from
1999 to 2000.
Non-interest expense increased $350,000 and $187,000 or 13.1% and 14.0% to
$3,028,000 and $1,525,000 for the six and three months ended June 30, 2000 from
$2,678,000 and $1,338,000 for the six and three months ended June 30, 1999. Of
the increase, $146,000 and $78,000 related to increases in salaries and benefits
expenses the six and three months ended June 30, 2000 when compared to the same
period in 1999. Also, additional expenses were incurred due to the outside
consulting engagements due to the regulatory agreement and proposed merger. The
remaining amount of the increase in non-interest expense is due to the general
increase in other general operating expenses including increases in professional
fees, collection expense and FDIC insurance.
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 June 30, 2000 and December 31, 1999. 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>
June 30, December 31,
2000 1999
---- ----
(Dollars in Thousand)
<S> <C> <C>
Loans on nonaccrual basis $ 951 $ 1,041
Loans past due 90 days or more and still accruing 216 184
----------- -----------
Total non-performing loans 1,167 1,225
Other non-performing assets 16 22
----------- -----------
Total non-performing assets $ 1,183 $ 1,247
=========== ===========
Total non-performing loans to
total loans 1.12% 1.12%
Total non-performing loans to
total assets .70% .71%
Total non-performing assets to
total assets .71% .72%
</TABLE>
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17
<PAGE> 18
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.
REGULATORY ACTION
On March 17, 2000, the Board of Directors entered into a written regulatory
agreement between Security Dollar Bank and the Federal Reserve Bank of Cleveland
and the Ohio Division of Financial Institutions. The agreement remains
enforceable until terminated or suspended by the regulatory agencies and
requires prior regulatory approval before any dividends can be paid by the Bank.
In addition, the agreement requires specific actions be undertaken by management
and the Bank's Board of Directors which are intended to improve and strengthen
the Bank's operations, oversight, risk management and internal control. The
agreement establishes specific time frames for the completion of various action
items and requires written progress reports be furnished to the Bank's
regulators on a quarterly basis detailing the actions taken to secure compliance
with the agreement. Management anticipates that both Company management and the
Board of Directors will devote significant time and attention during 2000 to
complete the detailed requirements of the agreement. In addition, management
anticipates the Company will incur costs for outside consulting engagements
required under specific terms of the agreement.
MERGER
On May 26, 2000, the Company and Farmers National Banc Corp. (Farmers) entered
into an agreement to merge. The transaction is structured as a tax-free exchange
of stock and is expected to be accounted for using the pooling-of-interests
method of accounting. The merger is expected to be consummated in the fourth
quarter of 2000 and is subject to approvals by various regulatory authorities
and by the shareholders of the Company and Farmers. The Company will incur
various costs, such as: Fee to investment banker; attorney fees and other
miscellaneous costs, at the close of the merger. All of these costs have not
been determined at this time.
--------------------------------------------------------------------------------
18
<PAGE> 19
SECURITY FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
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 June 30, 2000, the Company's
Tier 1 Capital (to average assets), Tier 1 Capital (to risk-weighted assets) and
total risk-based capital ratios were 8.62%, 14.45% and 15.77%, respectively,
compared to 8.47%, 13.74% and 15.10% at December 31, 1999, 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.
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.
--------------------------------------------------------------------------------
19
<PAGE> 20
SECURITY FINANCIAL CORP.
FORM 10-QSB
Quarter ended June 30, 2000
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
Item 1 - Legal Proceedings.
The nature of the Company's business results in a certain amount of litigation.
Accordingly, the Company and its subsidiaries are subject to various pending and
threatened lawsuits in which claims for monetary damages are asserted in the
ordinary course of business. While any litigation involves an element of
uncertainty, in the opinion of management, liabilities, if any, arising from
such litigation or threat thereof will not have a material effect on the
Company.
Item 2 - Changes in rights of the Company's Security holders.
None.
Item 3 - Defaults upon senior securities.
None.
Item 4 - Submission of Matters to a Vote of Security Holders.
Security Financial Corp. held its Annual Meeting of Shareholders on April 25,
2000 for the purpose of electing two directors and to transact such other
business as would properly come before the meeting. Results of shareholder
voting on these individuals were as follows:
<TABLE>
<CAPTION>
Christopher J. Shaker Robert I. Griffith, Jr.
--------------------- -----------------------
<S> <C> <C>
For 234,815 235,285
Withheld Authority 4,717 4,242
</TABLE>
Item 5 - Other information.
None.
Item 6 - Exhibits and Reports on Form 8-K
(a.) Exhibit
Number Exhibit
------ -------
11.1 Statement Re Computation of Earnings per common Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares outstanding during the period, as restated for shares
issued in business combinations accounted for as pooling-of-interests, stock
splits and stock dividends. Diluted earnings per share is computed using the
weighted average number of shares determined for the basic computation plus the
number of shares of common stock that would be issued assuming all contingently
issuable shares having a dilutive effect on earnings per share were outstanding
for the period.
Earnings per share data have also been restated for the 3% stock dividend
declared and paid December 31, 1999.
--------------------------------------------------------------------------------
20
<PAGE> 21
SECURITY FINANCIAL CORP.
FORM 10-QSB
Quarter ended June 30, 2000
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
Item 6 - Exhibits and Reports on Form 8-K (Continued)
The weighted average number of common shares outstanding for basic and diluted
earnings per share computations were as follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income $ 101,713 $ 278,383 $ 28,183 $ 177,641
Denominator:
Weighted-average common
shares outstanding (basic) 361,776 358,041 361,776 348,139
Exercise of options 822 360 822 360
Weighted-average common
shares outstanding (diluted) 362,598 358,401 362,598 348,499
Earnings per share:
Basic $ 0.28 $ 0.78 $ 0.08 $ 0.50
Diluted $ 0.28 $ 0.78 $ 0.08 $ 0.50
</TABLE>
27 Financial Data Schedule for the six months ended
June 30, 2000 (1)
(b.) Reports on Form 8-K - on June 5, 2000, the issuer filed a Form 8-K.
The information reported is as follows:
Security Financial Corp. ("Company") executed a definitive Agreement and Plan of
Merger ("Agreement") with Farmers National Banc Corp. ("Farmers") dated May 26,
2000. Under the terms of the Agreement, shareholders of the Company will receive
$90 in consideration, payable in shares of Farmers' Common stock, for each share
of the Company on the Merger of the Company with and into Farmers (the
"Merger").
(1) Filed only in electronic format.
--------------------------------------------------------------------------------
21
<PAGE> 22
SECURITY FINANCIAL CORP.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SECURITY FINANCIAL CORP.
------------------------
(Registrant)
Date: August 10, 2000 /s/C. James Bess
------------------------------ ----------------
C. James Bess
President and Chief Executive Officer
Date: August 10, 2000 /s/Stephen K. Miller
------------------------------ --------------------
Stephen K. Miller
Treasurer
--------------------------------------------------------------------------------
22
