<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 000 - 24157
-----------
SECURITY FINANCIAL CORP.
--------------------------------------
(Name of small business issuer in its charter)
Delaware 34-1579662
- ------------------------------------ ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1 South Main Street, Niles, Ohio 44446-0228
- ------------------------------------------------ ----------------------
(Address of principal executive offices) (Zip Code)
Issuers's telephone number, including area code (330) 544-7400
---------------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------
(Title of Class)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenue for its most recent fiscal year $13,036,000
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based upon the closing market price as of March 15, 2000 was $23.9
million
As of March 15, 2000, there were 361,776 shares of no par value common stock
issued and outstanding.
Transitional small business disclosure format (check one) Yes No X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
December 31, 1999. (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders for
the Fiscal Year ended December 31, 1999. (Part III)
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INDEX
<TABLE>
<S> <C> <C>
PART I
Item 1. Business.......................................................................... 3
Selected Financial Data........................................................... 8
Item 2. Properties........................................................................ 20
Item 3. Legal Proceedings................................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders............................... 21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............. 21
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation........................................................ 21
Item 7. Financial Statements ............................................................. 21
Report of Independent Auditors
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................ 21
PART III
Item 9. Directors and Executive Officers of the Registrant................................ 21
Item 10. Executive Compensation............................................................ 22
Item 11. Security Ownership of Certain Beneficial Owners and Management.................... 22
Item 12. Certain Relationships and Related Transactions.................................... 22
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................. 22
Signatures.................................................................................. 23
</TABLE>
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PART I
ITEM 1. 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.
Forward Looking Statements
- --------------------------
Security Financial Corporation may from time to time make written or oral
"forward-looking statements," including statements contained in the Company's
filings with the Securities and Exchange Commission (including this Annual
Report on Form 10-KSB and the exhibits thereto), in its reports to stockholders
and in other communications by the Company, which are made in good faith by the
Company pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users; including the features, pricing and quality compared to
competitors' products and services; the willingness of the users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services laws and
regulations (including laws concerning taxes, banking, securities, and
insurance); technological changes, acquisitions; changes in consumer spending
and savings habits; and the success of the Company at managing the risks
involved in the foregoing.
The Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
General
- -------
The Company was incorporated under the laws of the State of Delaware on November
23, 1987, at the direction of management of Security Dollar Bank ("the Bank"),
for the purpose of becoming a bank holding company by acquiring all of the
outstanding shares of 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 44446-0228.
The Company, through its affiliate, conducts the business of a commercial
banking organization. At December 31, 1999, the Company and its subsidiary had
consolidated total assets of approximately $172.7 million, consolidated total
deposits of approximately $145.4 million and consolidated total equity of
approximately $14.3 million.
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The Company, through its banking affiliate, offers a broad range of banking
services to the commercial, industrial and consumer markets 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 the Federal Reserve Bank and its
deposits are insured by the Federal Deposit Insurance Corporation to the extent
permitted by law.
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. Over the past 10 years less dependence on the steel
industry has occurred with a resulting increase in service related businesses.
The area's 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. The next 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 affecting
the market in general and in the case of secured loans inadequate collateral.
Consumer and credit card loans comprise the third 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.
Employees
- ---------
As of December 31, 1999, the Bank had 80 full-time and 24 part-time employees.
The Bank provides a number of benefits for its full-time employees, including
health and life insurance, retirement plan, workers' compensation, social
security, paid vacations, and numerous bank services.
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.
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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 is
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.
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").
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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) 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 Bank, including their ability to pay dividends.
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.
Subsequent to December 31, 1999, the Company entered into a formal regulatory
agreement with its primary regulators, The Federal Reserve and The Ohio Division
of Financial Institutions which, among other things, requires regulatory
approval for any payment of dividends by the Bank to the Company.
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.
In November of 1999, the Gramm-Leach-Bliley, or Financial Services Modernization
Act, was enacted, amending the Bank Holding Company Act of 1956 and modernizing
the laws governing the financial services industry. This Act contains a variety
of provisions of benefit to the banking industry, including language which
greatly expands the powers of banks and bank holding companies by authorizing a
bank holding company to affiliate with any financial company and cross-sell an
affiliate's products, thus
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allowing such a company to offer its customers any financial product or service.
The Act expands the number of permissible activities to include a wide variety
of financial activities; any activity in the future not already included in the
list that the Federal Reserve and the Treasury Department consider financial in
nature or incidental to financial activities; and any activity that the Federal
Reserve determines is complementary to a financial activity and which does not
pose a substantial safety and soundness risk. In addition, the Act fully closes
the unitary thrift loophole which permits commercial companies to own and
operate thrifts, reforms the Federal Home Loan Bank System to significantly
increase community banks' access to loan funding and protects banks from
discriminatory state insurance regulation. The Act also includes new provisions
in the privacy area, restricting the ability of financial institutions to share
nonpublic personal information with third parties. The specific effects of the
enactment of the Financial Services Modernization Act on the banking industry in
general and on Security Financial Corp. and Security Dollar Bank in particular
have yet to be determined due to the fact that the Financial Services
Modernization Act was only recently adopted.
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. Because the Bank is "well-capitalized," it currently pays less than the
maximum 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.
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 these proposals may be adopted in
the future, and if adopted, what their effect would be on the Company.
Selected Financial Information
- ------------------------------
The following table sets forth certain information concerning the consolidated
financial position of the Company at the dates indicated:
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Selected Consolidated Financial Data
- ------------------------------------
The following table sets forth certain selected consolidated financial
information of the Corporation.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of income:
Total interest income $ 12,120 $ 12,657 $ 12,848 $ 11,269 $ 8,995
Total interest expense 6,079 6,492 6,328 5,457 4,243
------------ ------------- ------------ ------------ ------------
Net interest income 6,041 6,165 6,520 5,812 4,752
Provision for loan losses 970 2,267 1,250 668 198
------------ ------------- ------------ ------------ ------------
Net interest income after
provision for loan losses 5,071 3,898 5,270 5,144 4,554
Securities gains, net 7 51 25 26 22
Other noninterest income 909 834 916 801 728
Other noninterest expenses 5,201 4,730 4,284 4,186 3,832
Federal income tax expense
(benefit) 151 (100) 609 543 422
------------ ------------- ------------ ------------ ------------
Net income $ 635 $ 153 $ 1,318 $ 1,242 $ 1,050
============ ============= ============ ============ ============
Per share of common stock: (1)
Net income $ 1.77 $ .43 $ 3.89 $ 4.22 $ 3.65
Dividends 1.24 1.20 1.09 .94 .84
Book value 39.64 41.25 41.40 36.37 33.42
Average common shares
outstanding 359,212 355,009 330,354 285,730 279,356
Year-end balances:
Loans, net $ 107,468 $ 108,952 $ 110,751 $ 113,310 $ 81,988
Securities 40,544 44,360 41,639 26,691 18,737
Total assets 172,667 172,074 167,258 152,899 127,064
Cash and cash equivalents 17,359 10,733 8,906 6,868 6,189
Deposits 145,366 148,917 145,352 129,670 109,571
Borrowings 12,406 7,649 6,524 11,754 7,246
Stockholders' equity 14,341 14,744 14,633 10,799 9,789
KEY OPERATING RATIOS:
Return on average assets (net income
divided by average total assets) 0.37% .09% .81% .86% .90%
Return on average equity (net income
divided by average equity) 4.38 1.04 9.83 12.14 12.51
Dividend payout ratio (dividends
declared per share divided by net
income per share) 70.06 279.07 27.98 22.35 23.26
Equity to assets ratio (average equity
divided by average total assets) 8.34 8.72 8.26 7.12 7.19
Allowance for loan losses to
nonperforming loans 109.80 133.97 64.51 85.75 236.45
</TABLE>
(1) All share and per share data has been restated for the effect of common
stock dividends and splits.
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Securities
- ----------
The securities portfolio decreased by $3.8 million or 8.6% in 1999. Most of the
decrease occurred in mortgage-backed securities and obligations of states and
political subdivisions, which decreased by $3.5 million and $720,000,
respectively.
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.
<TABLE>
<CAPTION>
_______________________________1 9 9 9______________________________
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
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
--------------- -------------- ------------- ----------------
Total investment securities $ 41,520,620 $ 293,366 $ (1,270,254) $ 40,543,732
=============== ============== ============= ================
</TABLE>
<TABLE>
<CAPTION>
_______________________________1 9 9 8______________________________
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
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 investment securities 42,505,890 459,654 (226,445) 42,739,099
Equity securities 1,468,638 158,793 (6,716) 1,620,715
--------------- -------------- ------------- ----------------
Total investment securities $ 43,974,528 $ 618,447 $ (233,161) $ 44,359,814
=============== ============== ============= ================
</TABLE>
The Company's investment securities portfolio at December 31, 1999 did not
contain securities of any issuers with an aggregate book value in excess of 10%
of the Company's equity, excluding those issued by the United States Government
or its agencies.
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Bank's investment
securities portfolio at December 31, 1999.
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<TABLE>
<CAPTION>
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------
One One to Five to More than
Year and Less Five Years Ten Years Ten Years Total Securities
- ------------------------------------------------------------------------------------------------------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
agency securities $ 2,343 5.87% $ 2,568 6.16% $ $ 2,112 7.21% $ 7,023 6.37%
Obligations of
states and political
subdivisions 251 4.70 1,815 5.54 6,442 5.37 8,508 5.39
Corporate obligations 188 6.50 188 6.50
Mortgage-backed
securities 16 10.54 1,756 9.32 2,023 9.12 19,340 7.28 23,135 7.75
Equity securities 1,690 N/A - - - - - - 1,690 N/A
------- ------- ------- ------- -------
Total $ 4,300 5.78% $ 6,139 6.82% $ 8,653 6.03% $21,452 7.27% $40,544 6.96%
======= ======= ======= ======= =======
</TABLE>
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Loan Portfolio
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Historically, loans have been originated by the Company to customers in
northeast Ohio. Loans have been originated primarily through direct loans to the
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 85% 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 85% 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 $1.6 million in 1999,
or 1.48%, compared to a $1.7 million or 1.49% decrease during 1998. The product
mix in the loan portfolio shows commercial loans comprising 5.55%, real estate
mortgage loans (residential and commercial) 77.28% and installment loans to
individuals 17.17% at December 31, 1999 compared with 9.26%, 65.68% and 25.06%,
respectively at December 31, 1998.
Real estate mortgage loans increased to $84.3 million at December 31, 1999, an
increase of $11.6 million over 1998. This growth centered principally in the
commercial real estate market which increased $7.8 million due to the economic
health within the Company's market area. The real estate portfolio consists of
$51.2 million of 1-4 family residential properties and $32.6 million and
$567,000 in commercial real estate and construction properties, respectively.
The Company originated both fixed rate and adjustable rate mortgages during
1999. 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, 1999 decreased $4.2 million to $6.1 million
compared to $10.3 million at December 31, 1998. Commercial loans, which are
comprised primarily of variable rate loans, are granted to customers within the
immediate trade area of the Company. The mix is diverse, covering a wide range
of borrowers and business types. The Company 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 $27.8 million on December 31,
1998 to $18.7 million on December 31, 1999 which represents a 32.49% decrease.
Although management continues to target the automobile dealer network to
originate indirect installment loans, the Company has experienced significant
loan losses in relation to this portfolio. In an effort to remedy this
situation, management has been stringently enforcing existing underwriting
guidelines which has led to a reduction in the number of indirect installment
loans originated.
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<TABLE>
<CAPTION>
At December 31,
---------------
1999 1998
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of loan Real estate loans:
Construction $ 567 0.52% $ 454 .41%
One to four family 51,192 46.92 47,501 42.89
Commercial 32,562 29.84 24,791 22.38
Commercial 6,060 5.55 10,255 9.26
Consumer loans 18,737 17.17 27,754 25.06
----------- -----------
Total loans 109,118 100.00% 110,755 100.00%
Less:
Allowance for loan losses (1,650) (1,803)
----------- -----------
Total loans, net $ 107,468 $ 108,952
=========== ===========
</TABLE>
Loan maturities and rate sensitivity of the loan portfolio, exclusive of real
estate mortgage loans, and consumer installment loans, at December 31, 1999, are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
Within One One to
Year Five Years Total
<S> <C> <C> <C>
Construction $ 567 $ - $ 567
Commercial, financial, and agricultural 3,640 2,420 6,060
----------- ----------- -----------
Total $ 4,207 $ 2,420 $ 6,627
=========== ========== ===========
Loans at fixed interest rates $ 1,071 $ 1,323 $ 2,394
Loans at variable interest rates 3,136 1,097 4,233
----------- ----------- -----------
Total $ 4,207 $ 2,420 $ 6,627
=========== ========== ===========
</TABLE>
Allowance for Loan Losses
- -------------------------
The provision for 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.
12
<PAGE> 13
Provisions charged to operations decreased from $2.27 million in 1998 to
$970,000 in 1999. The provision charged to operations was decreased as a result
of the lower levels of charge-offs in 1999 compared to 1998. Net loans charged
off during 1999 amounted to $1.12 million and were primarily made up of consumer
indirect automobile loans. During 1997, the Company 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 Company initiated an indirect lending portfolio in 1995, which grew to $24.0
million by the end of 1996 and has subsequently declined to $10.0 million at
December 31, 1999. 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. As the Company 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. A former officer of the Bank granted loans that were outside
the policy guidelines implemented. The significant provisions for loan losses
recorded in 1999 and 1998 have primarily been attributed to the indirect
automobile loans.
The allowance for loan losses as a percent of total loans decreased to 1.51% at
December 31, 1999 from 1.63% at December 31, 1998, while total loans declined by
$1.7 million from $110.8 million at December 31, 1998 to $109.1 million at
December 31, 1999. The allowance for loan losses as a percent of nonperforming
loans has decreased from 133.97% at December 31, 1998 to 109.80% at December 31,
1999. This decrease is the result of the reduction in the allowance for loan
losses.
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 risk
characteristics of the loan portfolio. Management believes the allowance for
loan losses at December 31, 1999 of $1.6 million 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, 1999.
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:
13
<PAGE> 14
The distribution of the Company's allowance for loan losses at the dates
indicated are summarized as follows:
<TABLE>
<CAPTION>
At December 31,
---------------
1999 1998
---- ----
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 $ 307 5.55% $ 344 9.26%
Mortgage:
Commercial 204 29.84 187 22.38
One to four family 110 46.92 98 42.89
Construction - 0.52 - .41
Consumer 914 17.17 1,174 25.06
Unallocated 115 - - -
----------- ------- ----------- ---------
Total $ 1,650 100.00% $ 1,803 100.00%
=========== ====== =========== ======
</TABLE>
14
<PAGE> 15
The following table sets forth the amounts and categories of the Company's
non-performing assets at the dates indicated.
Loans accounted for on a non-accrual basis:
<TABLE>
<CAPTION>
At December 31,
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Mortgage loans
One to four family $ - $ 191
Commercial 667 478
Consumer 299 239
Commercial 75 392
----------- -----------
Total non-accrual loans 1,041 1,300
Accruing loans greater than 90 day past due:
Mortgage loans:
One to four family 156 138
Commercial - -
Consumer 28 274
Commercial -
----------- -----------
Total accruing loans greater than 90 day past due 184 412
----------- -----------
Total non-performing loans 1,225 1,712
Other non-performing assets 22 283
----------- -----------
Total non-performing assets $ 1,247 $ 1,995
=========== ===========
Total non-performing loans to total loans 1.12% 1.55%
========== ===========
Total non-performing loans to total assets .71% 0.99%
========== ===========
Total non-performing assets to total assets .72% 1.16%
========== ===========
</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 $124,000 for the
year ended December 31, 1999 and $70,000 was collected and included in the
Company's interest income from non-accrual loans for the year ended December 31,
1999.
The policy for placing loans on nonaccrual is to cease accruing interest on
loans when management believes that the collection of interest is doubtful,
generally when loans are past due as to principal or interest 90 days or more.
When loans are charged-off, any accrued interest recorded in the current fiscal
year is charged against interest income. The remaining balance is treated as a
loan charge-off.
At December 31, 1999, there were $ 3.3 million of loans not otherwise identified
above which were included on management's watch list. Management's watch list
includes both loans which management has some doubt as to the borrowers' ability
to comply with the present repayment terms and loans which management is
actively monitoring due to changes in the borrowers' financial condition.
Included in watch list loans were $834,000 of indirect loans which were past due
more than 30 days. The potential problem loans and their potential loss exposure
have been considered in management's analysis of the adequacy of the allowance
for loan losses.
15
<PAGE> 16
The following table sets forth information with respect to the Bank's allowance
for loan loses at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Total loans outstanding $ 109,118 $ 110,754
Average loans outstanding 108,133 109,132
Allowance balance (at beginning of period) $ 1,803 $ 1,678
Provision: 970 2,267
Charge-offs:
Residential (42) (39)
Consumer (917) (1,899)
Commercial (368) (316)
Recoveries:
Residential - -
Consumer 201 109
Commercial 3 3
-------------- --------------
Allowance balance (at end of period) $ 1,650 $ 1,803
============== ==============
Allowance for loan losses as a percent
of total loans outstanding 1.51% 1.63%
Net loans charged off as a percent
of average loans outstanding 1.04% 1.96%
</TABLE>
As of December 31, 1999, there were no concentrations of loans greater than 10%
of total loans which are not otherwise disclosed as a category of loans in the
table previously presented.
As of December 31, 1999, there are no other interest earning assets that would
be required to be disclosed if such assets were loans.
16
<PAGE> 17
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 went from $148.9 million
in 1998 to $145.4 million in 1999, which equates to a decrease of 2.38%. The
company continued to experience growth in its tiered money market product which
was introduced in 1998 and which attracted local deposits from a variety of
competitors, and coupled with the maturing of certificates of deposits, resulted
in an increase of $6.9 million in money market accounts during 1999.
The following table represents the average deposits and average rate paid for
the years ended:
<TABLE>
<CAPTION>
At December 31,
1999 1998
---- ----
Average Rate Average Rate
Amount Paid Amount Paid
------ ---- ------ ----
(Dollars in thousands)
Deposits:
<S> <C> <C> <C> <C>
Noninterest-bearing demand $ 19,438 N/A $ 18,680 N/A
Interest-bearing demand 8,930 2.44% 8,051 2.42%
Money market 14,799 4.16% 5,705 3.56%
Savings 26,699 2.93% 27,294 2.94%
Time 76,425 5.28% 85,949 5.79%
----------- -----------
Total deposits $ 146,291 $ 145,679
=========== ===========
</TABLE>
The following table indicates the amount of the Company's time deposits of
$100,000 or more by time remaining until maturity as of December 31, 1999.
<TABLE>
<CAPTION>
Maturity Period Time Deposits
(In thousands)
<S> <C>
Within three months $ 1,897
More than three through six months 3,340
More than six through twelve months 3,795
Over twelve months 3,082
---------
Total $ 12,114
=========
</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.
17
<PAGE> 18
Total interest income, which remained relatively stable, was $12.1 million for
1999 as compared to $12.7 million for 1998. This decrease resulted from declines
in interest income on loans of $513,000 and securities of $143,000 partially
offset by an increase in interest income on federal funds sold of $119,000. This
fluctuation in interest income is due to a decrease in the average balance of
loans of $1.0 million combined with a 39 basis point decline in loan yields (100
basis points equal 1.0%).
Total interest expense amounted to $6.1 million for 1999, representing a 6.4%
decrease from $6.5 million for 1998. The decrease in interest expense is
primarily due to a decrease in the average balance of deposits of $146,000
combined with a decrease in the cost of funds for deposits of 49 basis points.
The table below sets forth information regarding changes in interest income and
interest expense for the periods indicated. For each category of
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) and (ii) changes in rate (changes in rate multiplied by
old volume).
<TABLE>
<CAPTION>
Year Ended December 31
1999 vs 1998
Increase (Decrease) Due to (1)
Volume Rate Net
------ ---- ---
<S> <C> <C> <C>
Interest earned on
Loans $ (90) $ (423) $ (513)
Taxable investment securities 54 (192) (138)
Tax-exempt investment securities 80 (85) (5)
Federal funds sold 142 (23) 119
-------------- -------------- ---------------
186 (723) (537)
-------------- -------------- ---------------
Interest paid on:
Demand deposits 21 2 23
Money market accounts 373 40 413
Savings deposits (17) (2) (19)
Time deposits (524) (412) (936)
Short-term borrowings 8 (23) (15)
Long-term borrowings 121 - 121
-------------- -------------- ---------------
(18) (395) (413)
-------------- -------------- ---------------
Total $ 204 $ (328) $ (124)
============== ============== ===============
</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.
18
<PAGE> 19
The following table sets forth a summary of average balances of assets,
liabilities and stockholder's equity, as well as average yield and cost
information. Average balances are derived from daily balances.
<TABLE>
<CAPTION>
December 31
1999 (2) 1998 (2)
----------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Loans (1) $ 108,133 $ 9,342 8.64% $ 109,132 $ 9,855 9.03%
Taxable investment securities 35,883 2,010 5.60% 34,987 2,148 6.14%
Tax-exempt investment
securities 9,133 417 6.92% 8,060 422 7.93%
Federal funds sold 7,082 351 4.96% 4,253 232 5.45%
----------- --------- ----------- -----------
Total interest-earning assets 160,231 12,120 7.56% 156,432 12,657 8.23%
Noninterest-earning assets 13,529 11,972
----------- -----------
$ 173,760 $ 168,404
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Interest-bearing liabilities:
Demand deposits $ 8,930 218 2.44% $ 8,051 195 2.42%
Money market accounts 14,799 616 4.16% 5,705 203 3.56%
Savings deposits 26,699 783 2.93% 27,294 802 2.94%
Time deposits 76,425 4,038 5.28% 85,949 4,974 5.79%
Short-term borrowings 8,084 303 3.75% 7,874 318 4.04%
Long-term borrowings 2,595 121 4.66% - - -
----------- --------- ----- ---------------- ----------- -----
Total interest-bearing
Liabilities 137,532 6,079 4.42% 134,873 6,492 4.81%
--------- -----------
Noninterest-bearing
liabilities 21,729 18,848
Stockholder's equity 14,499 14,683
----------- -----------
$ 173,760 $ 168,404
=========== ===========
Net interest income $ 6,041 $ 6,165
========= ===========
Net yield on interest-earning
assets (3) 3.77% 4.08%
Interest rate spread (4) 3.14% 3.42%
Ratio of average interest-earning
assets to average interest-
bearing liabilities 116.50% 115.99%
</TABLE>
(1) Average balances include nonaccrual 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.
19
<PAGE> 20
The following table set forth information concerning borrowings during the
periods indicated.
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Ending $ 9,405,994 $ 7,649,027
Maximum month-end balance during the year 9,653,054 10,509,123
Average balance during the year 8,084,747 7,874,000
Average year end interest rate 3.49% 3.47%
Average interest rate during the year 3.75% 4.04%
</TABLE>
ITEM 2. DESCRIPTION OF PROPERTY.
- -------------------------------
(a) PROPERTY. The Bank owns and operates its main office at 1 South Main Street
in Niles, Ohio. The Bank also operates four branches. The following is a
breakdown of the branch offices owned:
Branches Owned:
- ---------------
Girard Office Youngstown Road Office
121 North State St. 2910 Youngstown Road
Girard, OH 44420 Warren, OH 44484
422 Office Mineral Ridge Office
5845 Youngstown-Warren Rd. 3826 Main Street
Niles, OH 44446 Mineral Ridge, OH 44440
(b) INVESTMENT POLICIES. See "Note 1 - Summary of Significant Accounting
Policies" in the Annual Report to Stockholders incorporated by reference
herein for a description of the Bank's investment policy. The Bank's
investments are primarily acquired to produce income, and to a lesser
extent, possible capital gain.
(c) DESCRIPTION OF REAL ESTATE AND OPERATING DATA.
Not Applicable.
20
<PAGE> 21
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- -----------------------------------------------------------------
The information contained under the section captioned "Stock Market Information"
of the Company's Annual Report to Stockholders for the fiscal year ended
December 31, 1999 (the "Annual Report") is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
- --------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion and
Analysis" in the Annual Report is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS.
- ------------------------------
The Registrant's financial statements listed under Item 13 are incorporated
herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT'S ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ---------------------
The information contained in the section captioned "Selection of Auditors" in
the Company's 2000 definitive proxy statement for the Company's 2000 Annual
Meeting of Stockholders (the "Proxy Statement") is incorporated herein by
reference.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS. COMPLIANCE
- --------------------------------------------------------------------------------
WITH SECTION 16(A) OF THE EXCHANGE ACT.
- ---------------------------------------
The information contained under the sections captioned "Compliance with Section
16(a) of the Securities Exchange Act of 1934" and "Proposal for the Election of
Directors and Information with Respect to Directors and Officers - Information
with Respect to Nominees," "Information with Respect to Directors not Standing
for Reelection" and "Security Ownership of Management" in the Proxy Statement is
incorporated herein by reference.
21
<PAGE> 22
ITEM 10. EXECUTIVE COMPENSATION.
- ---------------------------------
The information contained in the section captioned "Proposal for the
Election of Directors and Information with Respect to Directors and Officers -
Committees and Compensation of the Board of Directors" and "Executive
Compensation and Other Information" in the Proxy Statement is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference in
the section captioned "Voting Securities and Principal Holders Thereof" in
the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to
the chart in the section captioned "Proposal for the Election of Directors
and Information with Respect to Directors and Officers -Information with
Respect to Nominees" and "Security Ownership of Management" in the Proxy
Statement.
(c) Management of the Registrant knows of no arrangement, including any pledge
by any person of securities of the Registrant, the operation of which may
at a subsequent date result in a change in control of the Registrant.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
The information required by this item is incorporated herein by reference to the
section captioned "Executive Compensation and Other Information - Certain
Relationships and Related Transactions" in the Proxy Statement.
ITEM 13. EXHIBITS, LIST, AND REPORTS ON FORM 8-K.
- --------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as part
of this report.
The following consolidated financial statements of the Company and its
subsidiaries are filed as part of this document under Item 7,
incorporated by reference:
- Report of Independent Auditors
- Consolidated Balance Sheets as of December 31, 1999 and 1998
- Consolidated Statements of Income for the years ended December 31,
1999 and 1998
- Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999 and 1998
- Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998
- Notes to Consolidated Financial Statements
22
<PAGE> 23
2. Schedules omitted as they are not applicable.
(b) Reports on Form 8-K filed during the last quarter of 1999 No reports were
filed on Form 8-K during the last quarter of 1999.
(c). The following exhibits are included in this Report or incorporated herein
by reference:
Exhibit
Number
3.1.1 Certificate of Incorporation of Security Financial Corp. (1)
3.1.2 Bylaws of Security Financial Corp. (1)
10.1 Written Agreement (4)
11 Statement Re: Computation of Per Share Earnings (2)
13.0 1999 Annual Report to Stockholders
16.1 Letter on Change of Certifying Accountants (3)
21.0 Subsidiaries of the Registrant (See "Item 1-Description of Business")
23.0 Consent of Crowe, Chizek and Company LLP
23.1 Consent of S.R Snodgrass, A.C.
27 Financial Data Schedule (electronic filing only)
(1) Incorporated by reference into this document from Exhibits filed with the
Registration Statement on Form 10-SB, and any amendments thereto,
Registration No. 033-18566
(2) Statement regarding Computation of Per Share Earnings included in Note 1 to
Consolidated Financial Statements, 1999 Annual Report to Stockholders'
under the caption "Earnings Per Common Share"
(3) Incorporated by reference to the Form 8-K filed with the SEC on March 2,
1999.
(4) Incorporated by reference to the Form 8-K filed with the SEC on March 22,
2000
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: March 30, 2000 By:
-------------------------------
Glenn E. Griffiths,
President & CEO
Date: March 30, 2000 By: /s/ Stephen K. Miller
-------------------------------
Stephen K. Miller,
Treasurer
Date: March 30, 2000 By: /s/ Gary A. Clayman
-------------------------------
Gary A. Clayman,
Director
23
<PAGE> 24
Date: March 30, 2000 By: /s/ Robert I. Griffith, Jr.
------------------------------
Robert I. Griffith, Jr.,
Director
Date: March 30, 2000 By: /s/ Robert J. McClurkin
------------------------------
Robert J. McClurkin,
Director
Date: March 30, 2000 By:
------------------------------
Douglas J. Neuman,
Director
Date: March 30, 2000 By: /s/ Peter P. Rossi, Jr.
-------------------------------
Peter P. Rossi, Jr.,
Director
Date: March 30, 2000 By: /s/ Christopher J. Shaker
------------------------------
Christopher J. Shaker,
Director
24
<PAGE> 1
Exhibit 13
HIGHLIGHTS OF 1999 and 1998
Security Financial Corp. and Subsidiary
- --------------------------------------------------------------------------------
Percent
FOR THE YEAR 1999 1998 Change
---- ---- ------
Net Income $ 635,202 $ 152,808 315.69%
Return on Average Assets 0.37% 0.09% 311.11%
Return on Equity 4.38% 1.04% 321.15%
YEAR END
Assets $172,667,293 $172,073,780 0.34%
Securities 40,543,732 44,359,814 -8.60%
Net Loans 107,467,850 108,952,155 -1.36%
Deposits 145,365,974 148,916,886 -2.38%
Stockholders' Equity 14,340,628 14,744,280 -2.74%
Shares Outstanding 361,780 357,387 1.23%
Book Value 39.64 41.25 -3.90%
- --------------------------------------------------------------------------------
"This financial information has not been reviewed or confirmed for
accuracy or relevance by the Federal Reserve System."
Table of Contents
Highlights of 1999...................................... 1
Report to Stockholders.................................. 2
Directors and Officers.................................. 3
Description of Business................................. 4
Selected Financial Data................................. 5-6
Management's Discussion................................. 7-13
Accountant's Report..................................... 14
Consolidated Balance Sheet.............................. 15
Consolidated Statement of Income........................ 16
Consolidated Statement of Changes
in Stockholders' Equity............................... 17
Consolidated Statement of Cash Flows.................... 18
Notes to Consolidated Financial Statements.............. 19-39
. Office Locations........................................ 40
Form 10-K SB
A copy of Security Financial Corp.'s Annual Report filed with the Securities
and Exchange Commission will be available on March 31, 2000 upon written
request to: Lynn M. Bowers, Corporate Secretary, Security Financial Corp.,
1 South Main Street, Niles, Ohio 44446
MEMBER FEDERAL DEPOSIT INSURANCE CORPORATION/FEDERAL RESERVE SYSTEM
- 1 -
<PAGE> 2
REPORT TO STOCKHOLDERS
Security Financial Corp. and Subsidiary
[LOGO]
SECURITY FINANCIAL CORP.
1 South Main Street P.O. Box 228
Niles, Ohio 44446-0228 Phone (330) 544-7400
TO OUR STOCKHOLDERS:
Before we comment on results for 1999, all of us with the Security Financial
family wish Glenn Griffiths a speedy recovery from his recent surgery. As many
of you are aware, Glenn successfully completed his scheduled surgery in March
and is presently on medical leave. Please keep Glenn and his family in your
thoughts and prayers.
The Board of Directors has retained Jim Bess as Interim President and CEO. Jim
is a highly experienced bank executive and started with the Company shortly
before Glenn began his medical leave. Officers and staff have responded well to
the transition and the Board is confident Jim will provide outstanding
leadership for the Company. If you have not already met Jim, please take a
moment at the Annual Meeting to introduce yourself and welcome Jim to Security
Financial.
1999 was a challenging year for the Company and for the banking industry as a
whole. Much of the year was devoted to Y2K preparedness activities. The tireless
efforts of our officers and staff resulted in all systems working perfectly at
the onset of the new millennium. Most of the difficulties associated with our
indirect loan portfolio were successfully resolved and overall loan quality is
at the healthiest levels in several years. The Board of Directors recently
entered into a written agreement with its state and federal regulatory agencies
to address several conditions noted in the last regulatory exam completed during
the fourth quarter. The agreement seeks to strengthen several areas of
administration and management of the bank. The Board of Directors and management
are committed to improving all areas of bank administration.
Net income in 1999 improved to $635,202, a significant improvement from $152,808
in 1998, but well below our goals for the year. Ongoing legal expenses in our
litigation regarding the indirect auto loan losses continued to be a drag on
earnings. Improved credit quality did allow us to reduce our provision for loan
losses by approximately 57% in 1999. We expect to be able to reduce the
provision again in the year 2000. We are pleased to have been able to once again
increase our cash dividend in 1999.
On behalf of the Board of Directors, we want to thank you for your support and
assure you that the Board is striving for the best interests of all
shareholders. We look forward to seeing you at the Annual Meeting.
FOR THE BOARD OF DIRECTORS
/s/Christopher J. Shaker
CHRISTOPHER J. SHAKER
CHAIRMAN
-2-
<PAGE> 3
--------------------------------------------------------------
DIRECTORS AND OFFICERS
Security Financial Corp. and Subsidiary
--------------------------------------------------------------
BOARD OF DIRECTORS OF SECURITY FINANCIAL CORP.
AND THE SECURITY DOLLAR BANK
GARY A. CLAYMAN ROBERT I. GRIFFITH, JR.
GLENN E. GRIFFITHS ROBERT J. MCCLURKIN
DOUGLAS J. NEUMAN
CHRISTOPHER J. SHAKER - CHAIRMAN
PETER P. ROSSI, JR. - VICE CHAIRMAN
OFFICERS OF SECURITY FINANCIAL CORP.
GLENN E. GRIFFITHS STEPHEN K. MILLER LYNN M. BOWERS
President/CEO Treasurer Secretary
OFFICERS OF SECURITY DOLLAR BANK
<TABLE>
<S> <C> <C> <C>
GLENN E. GRIFFITHS STEPHEN K. MILLER FREMONT J. CAMERINO PHILLIP M. SUAREZ
President/CEO CFO & Treasurer Senior Vice President Senior Vice President
Head of Lending
KEVIN T. LAMAR ROBERT E. TRUE LYNN M. BOWERS THOMAS G. HATHHORN
Vice President Vice President Secretary Vice President
Senior Loan Officer Business Development Commercial Lending
RICHARD G. FERRARO PAUL D. RHODES RICHARD R. LYTLE ROSE ANN LUBERT
Vice President Vice President Asst. Vice President Assistant Vice President
& Loan Officer Collection Dept. Manager 422 Office Branch Coordinator
R. KEITH PRICE JAMES G. SWIFT ARMETA E. CORDELL
Assistant Vice President Assistant Vice President Assistant Secretary
Human Resources & Controller
</TABLE>
===============================================================================
- 3 -
<PAGE> 4
SECURITY FINANCIAL CORP.
Security Financial Corp. (the "Corporation") is a one-bank holding company
formed under the Bank Holding Company Act of 1956, as amended, operating under
regulations of the Board of Governors of the Federal Reserve System. Its
principal subsidiary is The Security Dollar Bank of Niles. Presently the
Corporation and its subsidiary operate in one industry, domestic banking.
The Corporation conducts no business activities except for investments in
securities permitted under the Bank Holding Company Act. The Board of Directors
of the Corporation and the Bank are identical. The officers of the Corporation
are Glenn E. Griffiths, President/CEO; Stephen K. Miller, Treasurer; and Lynn M.
Bowers, Secretary. Bank holding companies are permitted under Regulation Y of
the Board of Governors of the Federal Reserve System to engage in other
activities considered closely related to banking such as leasing and mortgage
banking. The Corporation has no other subsidiaries engaged in such activities at
this time.
THE SECURITY DOLLAR BANK
The Bank is a full service state-chartered bank engaged in commercial and retail
banking with the exception of trust services. The Bank's banking services
include checking accounts, savings accounts, time deposit accounts, commercial,
mortgage, installment and home equity loans, night depository, automatic 24-hour
teller machines, safe deposit boxes, money orders, travelers checks, government
bond sales, utility bill payments, IRA accounts, MasterCard and Visa Credit
Cards and other services normally offered by banks.
The Bank's main office is located at 1 South Main Street, Niles, Ohio. Business
is conducted at a total of five (5) offices located in Trumbull County. As a
state banking association and member of the Federal Reserve System, the Bank is
subject to supervision and regulation by the Ohio Division of Banks and the
Federal Reserve Bank of Cleveland. Deposits are insured by the Federal Deposit
Insurance Corporation (FDIC) to the extent provided by law.
As of December 31, 1999, the Corporation and its subsidiary had 104 full and
part-time employees, and considers its relations with its employees to be
satisfactory.
<PAGE> 5
Selected Financial Information
The following table sets forth certain information concerning the consolidated
financial position of the Company at the dates indicated:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousand, except shares and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income:
Interest income $ 12,120 $ 12,657 $ 12,848 $ 11,269 $ 8,995
Interest expense 6,079 6,492 6,328 5,457 4,243
----------- ----------- ----------- ----------- -----------
Net interest income 6,041 6,165 6,520 5,812 4,752
Provision for loan losses 970 2,267 1,250 668 198
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 5,071 3,898 5,270 5,144 4,554
Securities gains, net 7 51 25 26 22
Other noninterest income 909 834 916 801 728
Other noninterest expense 5,201 4,730 4,284 4,186 3,832
Federal income tax expense (benefit) 151 (100) 609 543 422
----------- ----------- ----------- ----------- -----------
Net income $ 635 $ 153 $ 1,318 $ 1,242 $ 1,050
=========== =========== =========== =========== ===========
Per share of common stock (1):
Net income $ 1.77 $ 0.43 $ 3.89 $ 4.22 $ 3.65
Dividends 1.24 1.20 1.09 0.94 0.84
Book value 39.64 41.25 41.40 36.37 33.42
Average common shares outstanding 359,212 355,009 330,354 285,730 279,356
Year-end balances:
Loans receivable, net $ 107,468 $ 108,952 $ 110,751 $ 113,310 $ 81,988
Securities available for sale 40,544 44,360 41,639 26,691 18,737
Total assets 172,667 172,074 167,258 152,899 127,064
Cash and cash equivalents 17,359 10,733 8,906 6,868 6,189
Deposits 145,366 148,917 145,352 129,670 109,571
Borrowings 12,406 7,649 6,524 11,754 7,246
Stockholder's equity 14,341 14,744 14,633 10,779 9,789
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands, except shares and per share data)
<S> <C> <C> <C> <C> <C>
Key Operating Ratios:
Return on average assets (net income
divided by average total assets) 0.37% 0.09% 0.81% 0.86% 0.90%
Return on average equity (net income
divided by average equity) 4.38 1.04 9.83 12.14 12.51
Dividend payout ratio (dividends
declared per share divided by net
income per share) 70.06 279.07 27.98 22.35 23.26
Equity to assets ratio (average equity
divided by average total assets) 8.34 8.72 8.26 7.12 7.19
Allowance for loan losses to
nonperforming loans 109.80 133.97 64.51 85.75 236.45
</TABLE>
(1) All share and per share data has been restated for the effect of common
stock dividends and splits.
STOCK MARKET INFORMATION
There is no established public trading market for the Company's common stock and
the shares of the Company are not listed on any exchange. Sale price information
is based on information reported to the Company by individual buyers and sellers
of the Company stock. The following table summarizes the high and low prices and
dividend information for 1999 and 1998, adjusted for a three percent stock
dividend on December 14, 1999. Cash dividends are paid on a quarterly basis.
Cash
Dividends
Quarter Ended High Low Paid
- ------------- ---- --- ---------
1999 March 31 $ 70.06 $ 69.57 $ 0.31
June 30 70.25 69.83 0.31
September 30 70.54 70.25 0.31
December 31 73.12 70.39 0.31
1998 March 31 66.59 63.26 0.30
June 30 66.76 66.59 0.30
September 30 69.24 66.76 0.30
December 31 69.57 69.24 0.30
At December 31, 1999 the Company had approximately 603 stockholders of record.
The Bank is subject to legal limitations on the amount of dividends 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. Restrictions on the amount of dividends
allowable by the Bank could, as a practical matter, restrict the Company's
ability to pay dividends to shareholders.
<PAGE> 7
The following is management's discussion and analysis of the financial condition
and results of the operations of Security Financial Corp.. It is intended to
explain certain financial information regarding the Company and should be read
in conjunction with the consolidated Financial Statements, related Notes, and
the Five Year Summary of Selected Data included in this report.
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,"
"estimate" or "projected" and similar expressions as they relate to Security
Financial Corp. or its management are intended to identify such forward looking
statements. Security Financial Corp.'s actual results, performance or
achievements may materially differ from those expressed or implied in the
forward looking statements. 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.
FINANCIAL CONDITION
Total assets amounted to $172,667,000 at December 31, 1999, an increase of
$593,000 or less than 1% from $172,074,000 at December 31, 1998. Short-term
liquid investments consisting of cash and due from banks, federal funds sold,
and interest-bearing deposits in other banks, increased in the aggregate by
$6,427,000 or 57.7% as management increased liquidity in preparation for Year
2000 and the uncertainty related to the potential increased demand for currency
by the Company's customers.
Investment securities decreased $3,816,000, or 8.6%, to $40,544,000 at December
31, 1999 from $44,360,000 at December 31, 1998. This decrease was due to
maturities, calls and paydowns during the year. Funds from these events were
used to help fund the growth in commercial real estate loans and to increase
short-term liquid investments.
Net loan receivables decreased $1,484,000 or 1.4% from $108,952,000 at December
31, 1998 to $107,468,000 at December 31, 1999. During 1999, there was a strong
demand for commercial real estate loans, which generated approximately
$7,769,000 in loan growth; however, more than offsetting this increase was a
decline in the installment loan portfolio and more specifically in the indirect
automobile loan portfolio. As discussed below, the Company has experienced
significant loan losses in relation to this portfolio and management has been
stringently enforcing existing underwriting guidelines, which has resulted in a
reduction in loan originations. Indirect automobile loans have a three to five
year average life and the repayment of these loans has outpaced the new loan
originations during the current period.
Deposits decreased by $3,551,000, or 2.4%, to $145,366,000 at December 31, 1999
from $148,917,000 at December 31, 1998. This decrease represents increases in
money market deposit accounts of $6,858,000 which were more than offset by a
decline in certificates of deposit of $7,973,000. The Company has developed a
new tiered money market product and experienced a continuation of a change in
the deposit portfolio mix, with funds moving from certificates of deposit to
money market deposits.
<PAGE> 8
Short-term borrowings increased $1,757,000, or 23.0%, from $7,649,000 at
December 31, 1998 to $9,406,000 at December 31, 1999. The increase is a result
of an increase in repurchase agreements. Management believes such accounts are a
stable source of funds as they represent substitutes for core deposits for
larger commercial and governmental agency customers. The Company also obtained
$3,000,000 of advances from the FHLB during 1999. Management views these funds
as an alternative to time deposit funds and was able to extend the maturity of
the liabilities more than would have been possible with retail deposits.
Equity capital decreased by $404,000 for the year ended December 31, 1999 due to
the increase in the unrealized loss on securities available for sale of $899,000
and dividends paid of $446,000. These events were partially offset by an
increase in equity from net income of $635,000 and the purchase of common shares
through the dividend reinvestment plan totaling $281,000. Through December 31,
1999, the Company paid dividends of $1.24 per share, while maintaining capital
ratios in excess of regulatory guidelines. The Board of Directors will determine
future dividend policies in light of the earnings and financial condition of the
Company including applicable governmental regulations and policies.
RESULTS OF OPERATIONS
Comparison of results from operations from December 31, 1999 to December 31,
1998:
Net income increased by $482,000 to $635,000 or $1.77 per share. Net income
increased mainly as a result of the decline in the provision for loan losses of
$1,297,000 or 57.2%, which was offset by a decline in net interest income of
$124,000 and an increase in operating expenses of $471,000.
NET INTEREST INCOME
Net interest income decreased $124,000, or 2.0%, to $6,041,000 for the year
ended December 31, 1999 compared to $6,165,000 for 1998. Interest income and
expense decreased by $537,000 and $413,000, respectively.
The decrease in interest income resulted primarily from a decrease in earnings
on loans of $513,000 or 5.2%, and a decrease in interest income on investments
of $143,000. The decrease in interest income was partially offset by an increase
in income on federal funds sold amounting to $119,000. The decrease in interest
income on loans was due to a decrease in the average principal balances for
loans of $1.0 million coupled with a decline in the yields on loans of 39 basis
points. The decline in interest income on securities was also due to a decline
in the yield on securities which was slightly offset by an increase in the
average balance of securities during the year. The increase in interest income
from federal funds sold was due to the increase in the average balance
outstanding of $2.8 million which was partially offset by a decline in yield of
49 basis points.
Interest expense on deposits decreased by $519,000. This decrease results from a
slight decrease of $146,000 in the average balance for the period and a decrease
in the cost of funds for deposits of 40 basis points. The decrease in interest
expense on deposits was partially offset by the increase in the interest expense
from the $3 million of FHLB advances obtained during 1999.
The following table sets forth information regarding changes in interest income
and interest expense in 1999 compared to 1998. For each category of
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.
<PAGE> 9
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 vs 1998
---- -- ----
INCREASE (DECREASE) DUE TO
--------------------------
VOLUME RATE NET
------ ---- ---
<S> <C> <C> <C>
Interest earned on:
Loans $ (90) $ (423) $ (513)
Taxable investment securities 54 (192) (138)
Tax-exempt investment securities 80 (85) (5)
Federal funds sold 142 (23) 119
-------------- -------------- ---------------
Total 186 (723) (537)
-------------- -------------- ---------------
Interest paid on:
Demand deposits 21 2 23
Money market accounts 373 40 413
Savings deposits (17) (2) (19)
Time deposits (524) (412) (936)
Short-term borrowings 8 (23) (15)
Long-term borrowings 121 - 121
-------------- -------------- ---------------
Total (18) (395) (413)
-------------- -------------- ---------------
GRAND TOTAL $ 204 $ (328) $ (124)
============== ============== ===============
</TABLE>
PROVISION FOR LOAN LOSSES
During 1999 and 1998 the Company's earnings have been adversely affected by
significant provisions for loan losses. In 1995 the Company initiated an
indirect automobile loan program within its immediate market area. This program
experienced significant growth in 1996 and continued through May 1997. During
this period, management and the Board of Directors initiated and modified
certain policies and procedures to protect asset quality in this higher risk
loan category. A former officer of the Bank granted loans that were outside the
policy guidelines implemented. The significant provisions for loan losses
recorded in 1999 and 1998 have primarily been attributed to the indirect
automobile loans.
Management has monitored and implemented additional control procedures to
protect asset quality. Management has determined that substantially all
automobile repossessions have occurred in loans that were granted on terms and
conditions that were outside of the policy limits established. These losses were
provided for from current earnings of the Company, which reduced the earnings
for 1999 and 1998. The former officer of the Bank was dismissed in 1997 and the
Company has initiated a claim with its blanket bond insurance carrier asserting
wrongful conduct on part of the Bank Officer in making these loans. The Board of
Directors intends to continue to pursue the bond claim to recover losses
realized and to recover any future chargeoffs that may occur in association with
the loans granted outside the limitations established by the Board of Directors.
Management's evaluation of the allowance for loan losses 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 provision for loan losses decreased by $1.3 million for the year
ended December 31, 1999 compared to the same period ended 1998 primarily due to
the $1.0 million decline in net loan charge-offs in 1999 compared to 1998.
<PAGE> 10
OTHER INCOME
Noninterest income, which is comprised principally of service charges on deposit
accounts and brokerage income, increased $31,000 or 3.5%. Service charges on
deposit accounts increased $30,000, a result of the bank restructuring service
charges. In addition, brokerage income increased $52,000 or 54.8% in 1999 from
1998.
OTHER EXPENSES
Noninterest expense increased by $471,000, or 10.0%, from $4,730,000 for the
year ended December 31, 1998 compared to $5,201,000 for the year ended December
31, 1999. Salaries and employee benefits increased $95,000 or 3.6% as a result
of normal pay increases during the year. Occupancy and equipment expense
increased $101,000 or 14.5% due primarily to the impact of the new operations
center which opened in November, 1998 as well as additional costs related to the
computer systems. Other expenses increased $281,000 or 19.5%. The largest single
increase was from professional fees which increased $119,000 primarily due to
litigation involving problem loan situations.
PROVISION FOR INCOME TAXES
Income tax expense increased $251,000 to $151,000 for the year ended December
31, 1999 compared to a benefit of $100,000 for the year ended December 31, 1998
due to the increase in pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Company's ability to efficiently meet normal cash
flow requirements of both borrowers and depositors. To maintain proper
liquidity, the Company uses asset liability management policies along with its
investment policies to assure it can meet its financial obligations to
depositors, credit customers and shareholders. Liquidity is needed to meet
depositors' withdrawal demands, extend credit to meet borrowers' needs, provide
funds for normal operating expenses and cash dividends, and fund other capital
expenditures.
Liquidity management is influenced by cash generated by operating activities,
investing activities and financing activities. The most important source of
funds is the deposits which are primarily core deposits (deposits from customers
with other relationships). Short-term debt from the Federal Home Loan Bank
supplements the Company's availability of funds.
At December 31, 1999, the Company and its Bank subsidiary exceeded all of its
regulatory capital requirements. The Company had total risk-based capital of
$15.9 million, or 15.1% which is above the $8.4 million, or 8% required; Tier I
risk-based capital of $14.5 million, or 13.7% which is above the $4.2 million or
4% required for capital adequacy purposes; and a leverage capital of $14.5
million, or 8.5% which is above the $6.8 million or 4% required for capital
adequacy purposes.
Subsequent to year end, the Company entered into a formal regulatory agreement
with its primary regulators, The Federal Reserve and The Ohio Division of
Financial Institutions which, among other things, requires regulatory approval
for any payment of dividends. In addition, subsequent to December 31, 1999, the
Board of Directors voted to suspend the Dividend Reinvestment Plan. During 1999,
approximately $281,000 or 63% of the $446,000 paid in cash dividends was used to
purchase shares of common stock as part of the dividend reinvestment plan.
<PAGE> 11
INTEREST RATE 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. Asset/liability management includes GAP
measurement that determines, over various time periods, interest-earning assets
and interest-bearing liabilities which are due to reprice at current market
rates. A financial institution will have a negative interest rate sensitivity
GAP for a given period of time if the amount of its interest-bearing liabilities
maturing or repricing within that period is greater than the total of the
interest-earning assets maturing or repricing within the same period. When
interest rates increase, financial institutions with a negative interest rate
sensitivity GAP will be more likely to experience increases in the cost of their
liabilities faster than the corresponding yields generated by their earning
assets. Following the same concept, as interest rates decrease, the cost of
funds of financial institutions with a negative interest-rate sensitivity GAP
usually will decrease more rapidly than the yields on the earning assets. As a
general rule, the same changes in interest rate will usually have the opposite
effect on financial institution structured with a positive interest-rate
sensitivity GAP.
Interest rate sensitivity varies with various types of interest-earning assets
and interest-bearing liabilities. 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) money market accounts, and short-term borrowings.
Savings deposits and NOW accounts are considered core deposits and are not
short-term interest sensitive.
At December 31, 1999, the company was in a negative GAP position in the one year
time horizon and is therefore more likely to be negatively impacted by interest
rate increases in the near term.
YEAR 2000 COMPLIANCE
Management devoted significant time and attention during 1999 to the task of
ensuring the Company was "Year 2000" compliant prior to December 31, 1999. At
the present time, the Company has not experienced and management does not
anticipate any negative effects from "Year 2000" issues.
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. The costs for those services is
not currently known.
<PAGE> 12
IMPACT OF INFLATION
Consolidated financial data included herein has been prepared in accordance with
generally accepted accounting principles (GAAP). Presently, GAAP requires the
Company to measure financial position and operating results in terms of
historical dollars, except for securities available for sale which are carried
at fair value. Changes in the relative value of money due to inflation or
recession are generally not considered.
In management's opinion, changes in interest rates affect the financial
condition of the Company to a far greater degree than changes in the inflation
rate. While interest rates are greatly influenced by changes in the inflation
rate, they do not move concurrently. Rather, interest rate volatility is based
on changes in the expected rate of inflation, as well as changes in monetary and
fiscal policy. A financial institution's ability to be relatively unaffected by
changes in interest rates is a good indicator of its capability to perform in a
volatile economic environment. In an effort to protect itself from the effects
of interest rate volatility, the Company reviews its interest rate risk position
frequently, monitoring its exposure and taking necessary steps to minimize any
detrimental effects on the Company's profitability.
<PAGE> 13
AVERAGE BALANCE SHEET AND INTEREST RATE ANALYSIS
The following table sets 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>
1999 1998
------------------------------------------------------------------------------------
Average Yield/ Average Yield
BALANCE INTEREST RATE (2) BALANCE INTEREST RATE (2)
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Loans (1) $ 108,133 $ 9,342 8.64% $ 109,132 $ 9,855 9.03%
Taxable investment securities 35,883 2,010 5.60% 34,987 2,148 6.14%
Tax-exempt investment
securities 9,133 417 6.92% 8,060 422 7.93%
Federal funds sold 7,082 351 4.96% 4,253 232 5.45%
----------- --------- ---- ----------- ----------- -----
Total interest-earning assets 160,231 12,120 7.56% 156,432 12,657 8.23%
Noninterest-earning assets 13,529 11,972
----------- -----------
$ 173,760 $ 168,404
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits $ 8,930 218 2.44% $ 8,051 195 2.42%
Money market accounts 14,799 616 4.16% 5,705 203 3.56%
Savings deposits 26,699 783 2.93% 27,294 802 2.94%
Time deposits 76,425 4,038 5.28% 85,949 4,974 5.79%
Short-term borrowings 8,084 303 3.75% 7,874 318 4.04%
Long-term borrowings 2,595 121 4.66% - - -
----------- --------- ----- ---------------- ----------- -----
Total interest-bearing
liabilities 137,532 6,079 4.42% 134,873 6,492 4.81%
--------- -----------
Noninterest-bearing
liabilities 21,729 18,848
Stockholders' equity 14,499 14,683
----------- -----------
$ 173,760 $ 168,404
=========== ===========
Net interest income $ 6,041 $ 6,165
========= ===========
Net yield on interest-earning
assets (3) 3.77% 4.08%
Interest rate spread (4) 3.14% 3.42%
Ratio of average interest-earning
assets to average interest-
bearing liabilities 116.50% 115.99%
</TABLE>
(1) Average balances include nonaccrual 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.
<PAGE> 14
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Security Financial Corp.
Niles, Ohio
We have audited the accompanying consolidated balance sheet of Security
Financial Corp. as of December 31, 1999 and the related statements of income,
changes in stockholders' equity and cash flows for the year 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 audit. The 1998 financial statements were audited by other auditors whose
report dated January 22, 1999 expressed an unqualified opinion on those
statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Security Financial Corp. as of
December 31, 1999, and the results of its operations and cash flows for the year
then ended in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Cleveland, Ohio
February 10, 2000, except for Notes 14 and
18, as to which the date is March 17, 2000
<PAGE> 15
SECURITY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,110,768 $ 8,056,009
Federal funds sold 8,950,000 1,781,000
Short-term interest bearing deposits 298,000 896,000
----------------- -----------------
Cash and cash equivalents 17,358,768 10,733,009
Long-term interest bearing deposits 199,000 398,000
Investment securities available for sale 40,543,732 44,359,814
Loans 109,117,665 110,754,928
Less allowance for loan losses 1,649,815 1,802,773
----------------- -----------------
Net loans 107,467,850 108,952,155
Premises and equipment, net 4,899,155 4,967,839
Accrued interest and other assets 2,198,788 2,662,963
----------------- -----------------
Total assets $ 172,667,293 $ 172,073,780
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand $ 18,319,669 $ 21,178,516
Interest bearing demand 9,894,059 7,980,918
Money market 17,052,311 10,194,276
Savings 25,085,927 26,576,390
Time 75,014,008 82,986,786
----------------- -----------------
Total deposits 145,365,974 148,916,886
Short-term borrowings 9,405,994 7,649,027
FHLB advances 3,000,000 -
Accrued interest payable and other liabilities 554,697 763,587
----------------- -----------------
Total liabilities 158,326,665 157,329,500
----------------- -----------------
Commitments and contingencies
Common stock, without par value, 1,500,000 shares
authorized; 361,780 and 346,978 shares issued 7,860,674 6,794,102
Retained earnings 7,124,702 7,695,892
Accumulated other comprehensive income (644,748) 254,286
----------------- -----------------
Total stockholders' equity 14,340,628 14,744,280
----------------- -----------------
Total liabilities and stockholders' equity $ 172,667,293 $ 172,073,780
================= =================
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE> 16
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
INTEREST INCOME
<S> <C> <C>
Interest and fees on loans $ 9,342,188 $ 9,855,641
Securities:
Taxable 1,958,712 2,115,073
Tax exempt 416,635 421,742
Interest-bearing deposits in other banks 51,322 32,701
Federal funds sold 350,856 231,838
--------------- ---------------
Total interest income 12,119,713 12,656,995
--------------- ---------------
INTEREST EXPENSE
Deposits 5,654,758 6,173,623
Short-term borrowings 302,662 318,388
FHLB advances 121,350 -
--------------- ---------------
Total interest expense 6,078,770 6,492,011
--------------- ---------------
Net interest income 6,040,943 6,164,984
Provision for loan losses 970,000 2,267,000
--------------- ---------------
Net interest income after provision for loan losses 5,070,943 3,897,984
--------------- ---------------
OTHER INCOME
Service charges on deposit accounts 626,088 595,678
Investment securities gains, net 7,468 51,167
Gain on sales of mortgage loans, net 11,683 46,428
Brokerage income 147,732 95,438
Other income 122,981 95,941
--------------- ---------------
Total other income 915,952 884,652
--------------- ---------------
OTHER EXPENSES
Salaries and employee benefits 2,684,919 2,590,383
Occupancy and equipment 796,557 695,417
Other expenses 1,719,129 1,443,912
--------------- ---------------
Total other expense 5,200,605 4,729,712
--------------- ---------------
Income before income taxes 786,290 52,924
Income tax expense (benefit) 151,088 (99,884)
--------------- ---------------
Net Income $ 635,202 $ 152,808
=============== ===============
Weighted average shares outstanding:
Basic 359,212 355,009
Diluted 359,541 355,399
Earnings Per Share:
Basic $ 1.77 $ 0.43
Diluted 1.77 0.43
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE> 17
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON CAPITAL RETAINED COMPREHENSIVE
STOCK SURPLUS EARNINGS INCOME TOTAL
----- ------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ 832,910 $ 4,977,246 $ 8,695,696 $127,031 $ 14,632,883
Reclassification for change to
no par common stock 4,977,246 (4,977,246) -
Net income 152,808 152,808
Other comprehensive income 127,255 127,255
---------------
Total comprehensive income 280,063
Cash dividends ($1.20 per share) (428,265) (428,265)
Dividend reinvestment and stock
purchase plan 262,156 262,156
Three percent stock dividend
including cash paid for
fractional shares 721,790 (724,347) (2,557)
------------- ------------- ------------- ---------- ---------------
Balance, December 31, 1998 6,794,102 - 7,695,892 254,286 14,744,280
Net income 635,202 635,202
Other comprehensive income (loss) (899,034) (899,034)
-----------
Total comprehensive
income (loss) (263,832)
Cash dividends ($1.24 per share) (446,452) (446,452)
Stock options exercised (424 shares) 26,784 26,784
Issue of 52 common shares 3,583 3,583
Dividend reinvestment and stock
purchase plan 280,815 280,815
Three percent stock dividend
including cash paid for
fractional shares 755,390 (759,940) (4,550)
------------- ------------- ------------- ---------- ---------------
Balance, December 31, 1999 $ 7,860,674 $ - $ 7,124,702 $(644,748) $ 14,340,628
============= ============= ============= ========== ===============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE> 18
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 635,202 $ 152,808
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 346,534 385,186
Net amortization of security premiums 259,348 472,245
Investment securities gains, net (7,468) (51,167)
Provision for loan losses 970,000 2,267,000
Deferred federal income taxes 6,824 51,854
Mortgage loans originated for sale (315,850) (2,402,039)
Proceeds from sales of mortgage loans 181,850 2,448,467
Gain on sales of mortgage loans, net (11,683) (46,428)
Decrease (increase) in accrued interest receivable 114,601 (27,329)
Increase (decrease) in accrued interest payable (6,055) (45,849)
Other, net 302,258 23,797
--------------- ----------------
Net cash from operating activities 2,475,561 3,228,545
--------------- ----------------
INVESTMENT ACTIVITIES
Decrease (increase) in interest-bearing
time deposits maturing in more than 90 days 199,000 (398,000)
Investment securities available for sale:
Proceeds from sales 6,487,590 4,365,457
Proceeds from maturities and principal repayments 9,076,280 12,165,746
Purchases (13,376,777) (19,480,782)
Net decrease (increase) in loans 636,622 (1,379,969)
Purchase of premises and equipment (205,850) (1,447,700)
Proceeds from sale of repossessed assets 270,684 253,212
--------------- ----------------
Net cash from investing activities 3,087,549 (5,922,036)
--------------- ----------------
FINANCING ACTIVITIES
Net (decrease) increase in deposits (3,550,912) 3,564,425
Net increase in short-term borrowings 1,756,964 1,124,341
FHLB advances 3,000,000 -
Dividends paid on common stock (451,002) (430,822)
Proceeds from stock options 26,784 -
Proceeds from dividend reinvestment
and stock purchase plan 280,815 262,156
--------------- ----------------
Net cash from financing activities 1,062,649 4,520,100
--------------- ----------------
Increase in cash and cash equivalents 6,625,759 1,826,609
Cash and cash equivalents at beginning of year 10,733,009 8,906,400
--------------- ----------------
Cash and cash equivalents at end of year $ 17,358,768 10,733,009
=============== ================
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE> 19
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION:
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.
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, fair values of financial
instruments, and status of contingencies are particularly subject to change.
CASH FLOW INFORMATION: For purposes of reporting cash flows, cash and cash
equivalents include cash and due from banks, federal funds sold, and
interest-bearing deposits in other banks with a maturity less than 90 days.
Cash payments for interest in 1999 and 1998 were $6,071,102 and $6,537,860,
respectively. Cash received from a refund of prior income taxes paid was
$100,431 in 1999. Cash payments for income taxes paid were $140,000 for 1998.
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)
<PAGE> 20
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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 of the allowance is
allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan's existing 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 as impaired. Factors considered by management in
determining impairment include payment status and collateral value.
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.
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 21
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INTANGIBLES: Purchased intangibles, primarily goodwill and core deposit value,
are recorded at cost and amortized over the estimated life. Goodwill is being
amortized over 15 years and the core deposit is being amortized over 8 years.
Intangible amortization of $72,000 was recorded in both 1999 and 1998.
LONG-TERM ASSETS: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
discounted amounts.
REPURCHASE AGREEMENTS: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
PROFIT SHARING PLAN: Profit sharing expense is the amount of the contribution
determined by a formula which is based on the achievement of certain operating
levels and performance ratios.
STOCK COMPENSATION: Employee compensation expense under stock option plans is
reported if options are granted below market price at grant date. Pro forma
disclosures of net income and earnings per share are shown using the fair value
method of SFAS No. 123 to measure expense for the options, using an option
pricing model to estimate fair value.
INCOME TAXES: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
FINANCIAL INSTRUMENTS: Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and standby letters of credit,
issued to meet customer financing needs. The face amount for these items
represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
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.
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.
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 22
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
NEW ACCOUNTING PRONOUNCEMENTS: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect but the effect will depend on derivative holdings when
this standard applies.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
BUSINESS SEGMENTS: While the Company's chief decision-makers monitor the revenue
streams of the various Company products and services, operations are managed and
financial performance is evaluated on a company-wide basis. Accordingly, all of
the Company's banking operations are considered by management to be aggregated
in one reportable operating segment.
RECLASSIFICATIONS: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 23
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The amortized cost and estimated market values of securities available for sale
are as follows:
<TABLE>
<CAPTION>
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
--------------- ---------------- --------------- ----------------
Total $ 41,520,620 $ 293,366 $ (1,270,254) $ 40,543,732
=============== ================ =============== ================
1998
-------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------
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
--------------- ---------------- --------------- ----------------
Total $ 43,974,528 $ 618,447 $ (233,161) $ 44,359,814
=============== ================ =============== ================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 24
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (continued)
The amortized cost and estimated market values of debt securities at December
31, 1999, by contractual maturity, are shown below. The Company's
mortgage-backed securities have contractual maturities ranging from one to
thirty 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.
Estimated
Amortized Fair
Cost Value
Due in one year or less $ 2,650,028 $ 2,594,109
Due after one year through five years 4,552,324 4,383,045
Due after five years through ten years 7,159,690 6,629,728
Due after ten years 2,095,612 2,112,048
Mortgage-backed securities 23,618,028 23,135,216
--------------- ----------------
Total $ 40,075,682 $ 38,854,146
=============== ================
The following is a summary of proceeds received, gross gains, and gross losses
realized on the sale of securities:
1999 1998
---- ----
Proceeds from sales $ 6,487,590 $ 4,365,457
Gross gains 29,280 51,167
Gross losses 21,812 -
Securities with carrying values of $21,433,459 and $22,615,602 at December 31,
1999 and 1998, respectively, were pledged to secure public deposits, securities
sold under agreements to repurchase, and other purposes as required by law.
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 25
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Real estate mortgages:
Residential $ 51,759,229 $ 47,954,511
Commercial 32,560,547 24,791,286
Commercial, financial, and agricultural 6,060,456 10,255,062
Consumer loans 16,619,461 25,177,883
Other 2,117,972 2,576,186
--------------- ----------------
$ 109,117,665 $ 110,754,928
=============== ================
Activity in the allowance for loan losses for the year was as follows:
1999 1998
---- ----
Balance, January 1 $ 1,802,773 $ 1,677,651
Add:
Provisions charged to operations 970,000 2,267,000
Recoveries 204,383 112,173
Less loans charged off 1,327,341 2,254,051
--------------- ----------------
Balance, December 31 $ 1,649,815 $ 1,802,773
=============== ================
Impaired loans were as follows.
1999 1998
---- ----
Year-end loans with no allocated allowance
for loan losses $ 115,773 $ 422,387
Year-end loans with allocated allowance
for loan losses 234,124 524,124
--------------- ----------------
Total $ 349,897 $ 946,511
=============== ================
Amount of the allowance for loan losses allocated $ 80,000 $ 238,000
Average of impaired loans during the year $ 724,018 $ 1,113,000
Interest income recognized during impairment $ 5,929 $ 10,894
Cash-basis interest income recognized 5,929 10,894
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 26
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (continued)
Nonperforming loans were as follows.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Loans past due over 90 days still on accrual $ 184,000 $ 412,000
Nonaccrual loans 1,041,569 933,675
</TABLE>
Nonperforming loans includes substantially all impaired loans and smaller
balance homogeneous loans, such as residential mortgage and consumer loans, that
are collectively evaluated for impairment.
NOTE 4 - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 576,173 $ 576,173
Buildings 4,845,116 4,883,483
Furniture, fixtures, and equipment 3,565,448 3,321,227
--------------- --------------
8,986,737 8,780,883
Less: Accumulated depreciation 4,087,582 3,813,044
--------------- --------------
Total $ 4,899,155 $ 4,967,839
=============== ==============
</TABLE>
Depreciation charged to operations was $274,534 in 1999 and $313,186 in 1998.
NOTE 5 - DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000 or
more. Such deposits aggregated $12,114,475 and $13,487,912 at December 31, 1999
and 1998, respectively.
Scheduled maturities of time deposits for the next five years were as follows.
2000 $ 53,134,221
2001 15,870,453
2002 3,734,306
2003 1,264,834
2004 651,784
Thereafter 358,410
---------------
$ 75,014,008
===============
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 27
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 6 - SHORT TERM BORROWINGS
Short-term borrowings consist of securities sold under agreements to repurchase
and federal funds purchased. The outstanding balances and related information
for short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Short-term borrowings:
Ending balance $ 9,405,994 $ 7,649,027
Maximum month-end balance during the year 9,653,054 10,509,123
Average balance during the year 8,084,000 7,874,000
Average year end interest rate 3.49% 3.47%
Average interest rate during the year 3.75% 4.05%
</TABLE>
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
$16,820,000 and $16,825,000 as of December 31, 1999 and 1998, respectively, as
collateral for the repurchase agreements.
At December 31, 1999 and 1998, the Company maintained unsecured lines of credit
with various financial institutions which totaled $15,000,000, respectively. All
lines were unused at December 31, 1999 and 1998, and are available to support
general corporate purposes. There are no fees to maintain these lines and no
interest was paid.
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
At December 31, 1999, advances from the Federal Home Loan Bank were as follows.
Maturities January 2009 through March 2009, at rates
from 4.5% to 4.86%, averaging 4.65%. $ 3,000,000
=============
Currently, only interest payments are due on the FHLB advances. The advances are
convertible fixed rate advances and convert within 2 years from date of issue at
which point the Bank has the option to pay off the balances without penalty or
convert the advances. The advances were collateralized by $4,500,000 of first
mortgage loans under a blanket lien arrangement at year-end 1999. At December
31, 1999, the Bank had a borrowing capacity of approximately $18.9 million with
the FHLB. There were no such borrowings at December 31, 1998.
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 28
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 8 - PROFIT SHARING
The Company maintains a trusteed, Section 401(k) profit sharing plan with
contributions matching those by eligible employees to a maximum of 140 percent
of employee contributions annually, to a maximum of 5 percent 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 $105,824 in 1999 and $96,990 in 1998.
NOTE 9 - OTHER EXPENSE
The following is an analysis of other expense:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Stationery, printing, and supplies $ 148,933 $ 158,648
Professional fees 410,450 290,953
Data processing 126,031 125,958
Franchise tax 200,245 197,526
Postage and courier 161,072 151,098
Other 672,398 519,729
--------------- ----------------
Total $ 1,719,129 $ 1,443,912
=============== ================
</TABLE>
NOTE 10 - INCOME TAXES
The federal income tax expense (benefit) consist of:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current $ 144,264 $ (151,738)
Deferred 6,824 51,854
--------------- ----------------
Tax expense (benefit) $ 151,088 $ (99,884)
=============== ================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 29
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 10 - INCOME TAXES (continued)
The components of the net deferred tax assets and liabilities are as follows:
1999 1998
---- ----
Deferred tax assets:
Allowance for loan loses $ 205,116 $ 301,745
Intangible amortization 28,171 21,566
Deferred compensation 8,417 11,895
Net unrealized loss on securities 332,142 -
Other 28,261 -
------------ ------------
Total 602,107 335,206
------------ ------------
Deferred tax liabilities:
Premises and equipment 56,421 53,021
Investment securities discount accretion 37,239 55,796
Loan origination fees, net 245,754 310,638
Net unrealized gain on securities - 130,997
FHLB stock dividends 86,771 65,147
------------ ------------
Total 426,185 615,599
------------ ------------
Net deferred tax asset (liability) $ 175,922 $ (280,393)
============ ============
The following is a reconciliation between income tax expense and the amounts of
income taxes which would have been provided at statutory rates:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provision at statutory rate $ 267,339 34.0% $ 17,995 34.0%
Effect of tax-exempt income (147,859) (18.8) (152,058) (287.3)
Nondeductible interest expense 22,946 2.9 18,484 34.9
Other, net 8,662 1.1 15,695 29.7
--------------- --- --------------- ----
Tax expense (benefit) and
effective rates $ 151,088 19.2% $ (99,884) (188.7)%
=============== ==== =============== =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 30
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 11- 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 withdraw from the plan at
any time. Stockholders purchased 3,982 shares in 1999 and 3,854 shares in 1998
through the plan. Subsequent to December 31, 1999, the Board of Directors
authorized the suspension of the dividend reinvestment plan.
NOTE 12- STOCK OPTIONS
Options to buy stock may be granted to directors, officers and employees under
the Employee Stock Option Plan, which provides for the issuance of up to 21,218
options. The exercise price shall be, at a minimum, the market price on the date
of grant. The maximum option term is ten years, and qualified options vest over
five years and nonqualified options vest over three years.
A summary of the activity in the plan is as follows.
<TABLE>
<CAPTION>
1999 1998
------- -------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year 8,487 $ 62.27 -
Granted - 8,487 $ 62.27
Exercised (424) 63.12 -
Forfeited (848) 64.82 -
-------------- --------- --------------- --------
Outstanding at end of year 7,215 $ 61.84 8,487 $ 62.27
============== ========= =============== ========
Options exercisable at
year-end 1,272
Weighted-average fair
value of options granted
during year - $ 7.42
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 31
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 12- STOCK OPTIONS (continued)
Options outstanding at year-end 1999 were as follows.
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------- -----------
Weighted Average Weighted
Remaining Average
Contractual Exercise
Number Life Number Price
------ ---- ------ -----
<S> <C> <C> <C> <C>
Nonqualified 6,154 8.0 1,060 $ 61.42
Qualified 1,061 8.5 212 64.82
----------- ----------- ----------- ---------
Outstanding at year end 7,215 8.1 1,272 $ 61.84
=========== =========== =========== ========
</TABLE>
Had compensation cost for stock options been measured using FASB Statement No.
123, net income and earnings per share would have been the pro forma amounts
indicated below. The pro forma effect may increase in the future if more options
are granted.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net income as reported $ 635,202 $ 152,808
Pro forma net income 623,403 141,009
Basic earnings per share as reported $ 1.77 $ 0.43
Pro forma basic earnings per share 1.74 0.40
Diluted earnings per share as reported 1.77 0.43
Pro forma diluted earnings per share 1.74 0.40
</TABLE>
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
<TABLE>
<CAPTION>
QUALIFIED NON-QUALIFIED
--------- -------------
<S> <C> <C>
Risk-free interest rate 5.51% 5.70%
Expected option life 6 years 3 years
Expected stock price volatility 4.51% 4.51%
Dividend yield 2.00% 2.00%
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 32
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various outstanding commitments and
contingent liabilities 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:
1999 1998
---- ----
Commitments to extend credit $ 10,843,000 $ 17,098,019
Standby letters of credit and
financial guarantees 827,000 837,102
--------------- ----------------
Total $ 11,670,000 $ 17,935,121
=============== ================
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 instruments on the balance sheet. Generally,
collateral is not required to support these financial instruments. The terms are
typically for a one-year period with an annual renewal option subject to prior
approval by management.
The district Federal Reserve Bank requires the Bank to maintain certain average
reserve balances. As of December 31, 1999 and 1998, the Bank had required
reserves of $813,000 and $716,000 respectively, comprised of vault cash and a
depository amount held with the Federal Reserve Bank. These assets do not earn
interest.
The Company and Bank are involved in various legal actions from normal business
activities. Management believes the liability, if any, arising from such
litigation will not have a material adverse effect on the Company's financial
position.
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 33
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 14 - 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 the Company'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 1 capital (as defined in the regulations) to risk-weighted assets (as
defined) and Tier 1 capital to average assets (as defined). Management believes
as of December 31, 1999 that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1999 and 1998, the Company and Bank were considered well
capitalized under the regulatory framework for prompt corrective action. There
have been no conditions or events that management believes have changed the
Company's or the Bank's category.
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 34
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 14 - REGULATORY CAPITAL REQUIREMENTS (continued)
The following table reflects the capital ratios and minimum requirements as of
December 31, 1999 and 1998.
<TABLE>
<CAPTION>
TO BE "WELL CAPITALIZED"
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31,
1999 (in thousands)
Total Capital (to Risk
Weighted Assets)
Consolidated $ 15,908 15.10% $ 8,429 8.0% $ 10,536 10.0%
Bank $ 15,060 14.34% $ 8,400 8.0% $ 10,500 10.0%
Tier I Capital (to Risk
Weighted Assets)
Consolidated $ 14,477 13.74% $ 4,214 4.0% $ 6,322 6.0%
Bank $ 13,743 13.09% $ 4,200 4.0% $ 6,300 6.0%
Tier I Capital
(to Average Assets)
Consolidated $ 14,477 8.47% $ 6,838 4.0% $ 8,547 5.0%
Bank $ 13,743 7.91% $ 6,953 4.0% $ 8,691 5.0%
As of December 31, 1998 (in thousands):
Total Capital (to Risk
Weighted Assets)
Consolidated $ 15,253 14.25% $ 8,566 8.0% $ 10,708 10.0%
Bank $ 14,476 13.60% $ 8,517 8.0% $ 10,646 10.0%
Tier I Capital (to Risk
Weighted Assets)
Consolidated $ 13,909 12.99% $ 4,282 4.0% $ 6,423 6.0%
Bank $ 13,139 12.34% $ 4,258 4.0% $ 6,388 6.0%
Tier I Capital
(to Average Assets)
Consolidated $ 13,909 8.12% $ 6,856 4.0% $ 8,570 5.0%
Bank $ 13,139 7.69% $ 6,833 4.0% $ 8,541 5.0%
</TABLE>
<PAGE> 35
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 14 - REGULATORY CAPITAL REQUIREMENTS (continued)
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 ten percent of the Bank's capital.
The Bank is subject to legal limitations on the amount of dividends it can pay
as a state-chartered member of the Federal Reserve Bank System. In accordance
with the regulatory agreement described in Note 18, the Bank may not declare or
pay and dividends without prior written approval by the Federal Reserve Bank of
Cleveland and the Ohio Division of Financial Institutions.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 17,358,768 $ 17,359,000 $ 10,733,009 $ 10,733,000
Long-term interest bearing deposits 199,000 199,000 398,000 398,000
Securities available for sale 40,543,732 40,544,000 44,359,814 44,360,000
Net loans 107,467,850 107,271,000 108,952,155 109,797,000
Accrued interest receivable 954,720 955,000 1,069,321 1,069,000
Financial liabilities:
Deposits (145,365,974) (145,295,000) (148,916,886) (149,031,000)
Short-term borrowings (9,405,994) (9,406,000) (7,649,027) (7,649,000)
FHLB advances (3,000,000) (2,991,000) - -
Accrued interest payable (286,795) (287,000) (292,850) (293,000)
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 36
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS: For those short-term instruments, the carrying amount
is a reasonable estimate of fair value.
LONG-TERM INTEREST BEARING DEPOSITS: The carrying amount is a reasonable
estimate of fair value.
SECURITIES: For securities, fair values are based on quoted market prices or
dealer quotes. The estimated fair value of Federal Home Loan Bank and Federal
Reserve Bank stock is considered to approximate cost since it may be redeemed at
par under certain circumstances.
LOANS: The fair value of loans is estimated by discounting future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES: The fair value of demand deposits and savings accounts is
the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated by discounting future cash
flows using the rates currently offered for deposits of similar remaining
maturities.
SHORT TERM BORROWINGS: The fair value of short term borrowings is the amount
payable at the reporting date.
FEDERAL HOME LOAN BANK ADVANCES: The fair value of Federal Home Loan Bank
advances is estimated by discounting future cash flows using the rates currently
offered for similar borrowings of similar remaining maturities.
ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE: For these assets and
liabilities, the carrying amount is a reasonable estimate of fair value.
OFF BALANCE SHEET COMMITMENTS: The fair value of off balance sheet commitments
to extend credit is not material.
While these estimates of fair value are based on management's judgment of the
most appropriate factors as of the balance sheet date, there is no assurance
that the estimated fair values would have been realized if the assets were
disposed of or the liabilities settled at that date, since market values may
differ depending on various circumstances. The estimated fair values would also
not apply to subsequent dates. In addition, other assets and liabilities that
are not financial instruments, such as premises and equipment, are not included
in the above disclosures. Also, non-financial instruments typically not
recognized on the balance sheet may have value but are not included in the above
disclosures. These include, among other items, the estimated earning power of
core deposits, the trained workforce, customer goodwill, and similar items.
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 37
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY
Following are condensed parent-only financial statements for Security Financial
Corp.
Condensed Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Assets
Cash on deposit in subsidiary bank $ 407,150 $ 347,711
Interest-bearing deposit in other banks 100,000 100,000
Investment in subsidiary bank 13,445,586 13,874,166
Securities available for sale 465,936 463,365
Other assets - 10,744
--------------- ----------------
Total assets $ 14,418,672 $ 14,795,986
=============== ================
Liabilities $ 78,044 $ 51,706
Stockholders' Equity 14,340,628 14,744,280
--------------- ----------------
Total liabilities and stockholders' equity $ 14,418,672 $ 14,795,986
=============== ================
Condensed Statements of Income
For the years ended December 31, 1999 and 1998
Income
Dividends from subsidiary bank $ 125,000 $ 125,000
Dividend income 18,755 13,754
--------------- ----------------
Total income 143,755 138,754
Expense
Operating expense 63,579 62,205
--------------- ----------------
Income before equity in undistributed
earnings of subsidiary 80,176 76,549
Income tax expense (benefit) (23,476)
Equity in undistributed
earnings of subsidiary 531,550 76,259
--------------- ----------------
Net income $ 635,202 $ 152,808
=============== ================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 38
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY (continued)
Condensed Statements of Cash Flows
For the years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Operating activities
Net income $ 635,202 $ 152,808
Adjustments to reconcile net
income to net cash provided by
operating activities:
Equity in undistributed
earnings of subsidiary (531,550) (76,259)
Change in other assets and liabilities 9,189 -
--------------- ----------------
Net cash from operating activities 112,841 76,549
Investing activities
Return of capital on equity
investment 90,001 -
Purchase of investment securities
available for sale - (177,259)
--------------- ----------------
Net cash from investing activities 90,001 (177,259)
Financing activities
Proceeds from dividend
reinvestment and stock
purchase plan 280,815 262,156
Proceeds from stock options 26,784 -
Dividends paid on common stock (451,002) (430,822)
--------------- ----------------
Net cash from financing activities (143,403) (168,666)
Increase (decrease) in cash 59,439 (269,376)
Cash at beginning of year 347,711 617,087
--------------- ----------------
Cash at end of year $ 407,150 $ 347,711
=============== ================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 39
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 17 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Unrealized holding gains (losses) on
available-for-sale securities $ (1,354,705) $ 243,978
Less reclassification adjustments for gains
recognized in income 7,468 51,167
-------------- ---------------
Net unrealized gains and losses (1,362,173) 192,811
Tax effect 463,139 65,556
-------------- ---------------
Other comprehensive income (loss) $ (899,034) $ 127,255
============== ===============
</TABLE>
NOTE 18 - SUBSEQUENT EVENT - 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.
- --------------------------------------------------------------------------------
<PAGE> 40
SECURITY FINANCIAL CORP.
Niles, Ohio
ANNUAL REPORT
December 31, 1999 and 1998
<PAGE> 1
Exhibit 23.0
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 filed on or about
November 15, 1999 of Security Financial Corp, of our report dated February 10,
2000, except for Notes 14 and 18, as to which the date is March 17, 2000,
related to the consolidated balance sheet of Security Financial Corp, as of
December 31, 1999 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the year ended December 31, 1999, which
report is incorporated by reference in this Form 10-KSB.
/s/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Cleveland, Ohio
March 29, 2000
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 filed on or about
November 15, 1999 of Security Financial Corp, of our report dated January 22,
1999, related to the consolidated balance sheet of Security Financial Corp. as
of December 31, 1998 and the related consolidated statements of income, changes
in stockholders' equity and cash flows for the year ended December 31, 1998,
which report is incorporated by reference in this Form 10-KSB.
/s/S.R. Snodgrass, A.C.
S.R. Snodgrass, A.C.
Wexford, PA
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000825392
<NAME> SECURITY FINANCIAL CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,111
<INT-BEARING-DEPOSITS> 497
<FED-FUNDS-SOLD> 8,950
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 40,544
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 109,118
<ALLOWANCE> 1,650
<TOTAL-ASSETS> 172,667
<DEPOSITS> 145,366
<SHORT-TERM> 9,406
<LIABILITIES-OTHER> 555
<LONG-TERM> 3,000
0
0
<COMMON> 7,861
<OTHER-SE> 6,480
<TOTAL-LIABILITIES-AND-EQUITY> 172,667
<INTEREST-LOAN> 9,342
<INTEREST-INVEST> 2,375
<INTEREST-OTHER> 402
<INTEREST-TOTAL> 12,120
<INTEREST-DEPOSIT> 5,655
<INTEREST-EXPENSE> 6,079
<INTEREST-INCOME-NET> 6,041
<LOAN-LOSSES> 970
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 5,201
<INCOME-PRETAX> 786
<INCOME-PRE-EXTRAORDINARY> 786
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 635
<EPS-BASIC> 1.77
<EPS-DILUTED> 1.77
<YIELD-ACTUAL> 3.77
<LOANS-NON> 1,042
<LOANS-PAST> 184
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,300
<ALLOWANCE-OPEN> 1,803
<CHARGE-OFFS> 1,327
<RECOVERIES> 204
<ALLOWANCE-CLOSE> 1,650
<ALLOWANCE-DOMESTIC> 1,650
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 115
</TABLE>
