<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-24157
-------
SECURITY FINANCIAL CORP.
------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 34-1579662
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One South Main Street, Niles, Ohio 44446-0228
---------------------------------------------
(Address of principal executive offices)
(330) 544-7400
--------------
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class: Outstanding at October 31, 2000
Common stock, no par value 363,508 common shares
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
--------------------------------------------------------------------------------
1.
<PAGE> 2
SECURITY FINANCIAL CORP.
FORM 10-QSB
Quarter ended September 30, 2000
<TABLE>
<CAPTION>
Part I - Financial Information
Page
----
<S> <C>
Item 1 - Financial Statements
Consolidated Balance Sheets, as of September 30, 2000 and
December 31, 1999 .............................................................................. 3
Consolidated Statements of Income for the three and nine months
Ended September 30, 2000 and 1999............................................................... 4
Consolidated Statements of Comprehensive Income for the three and nine
Months ended September 30, 2000 and 1999........................................................ 6
Consolidated Statement of Changes in Stockholders' Equity
For the nine months ended September 30, 2000.................................................... 7
Condensed Consolidated Statements of Cash Flows for the nine
Months ended September 30, 2000 and 1999........................................................ 8
Notes to Consolidated Financial Statements ..................................................... 9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................................... 15
Part II -
Other Information..................................................................................... 21
Signatures ........................................................................................... 23
</TABLE>
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2.
<PAGE> 3
PART I. FINANCIAL INFORMATION
SECURITY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,685,214 $ 8,110,768
Federal funds sold 10,513,000 8,950,000
Short-term interest-bearing deposits 199,000 298,000
------------- -------------
Cash and cash equivalents 17,397,214 17,358,768
Long-term interest-bearing deposits 99,000 199,000
Securities available for sale 37,375,484 40,543,732
Loans 100,764,385 109,117,665
Less allowance for loan losses 2,108,607 1,649,815
------------- -------------
Net loans 98,655,778 107,467,850
Premises and equipment, net 4,709,491 4,899,155
Accrued interest and other assets 1,715,747 2,198,788
------------- -------------
Total assets $ 159,952,714 $ 172,667,293
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non interest-bearing demand $ 18,197,226 $ 18,319,669
Interest-bearing demand 10,166,090 9,894,059
Money market 19,895,810 17,052,311
Savings 24,030,164 25,085,927
Time 63,605,974 75,014,008
------------- -------------
Total deposits 135,895,264 145,365,974
Short-term borrowings 7,871,730 9,405,994
FHLB advances 1,000,000 3,000,000
Accrued interest payable and other liabilities 221,257 554,697
------------- -------------
Total liabilities 144,988,251 158,326,665
Commitments and Contingencies
Common stock, no par value
1,500,000 shares authorized;
363,508 and 361,780 shares issued 7,949,874 7,860,674
Retained earnings 7,411,262 7,124,702
Accumulated other comprehensive income (loss) (396,673) (644,748)
------------- -------------
Total stockholders' equity 14,964,463 14,340,628
------------- -------------
Total liabilities and stockholders' equity $ 159,952,714 $ 172,667,293
============= =============
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3.
<PAGE> 4
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 2,210,357 $ 2,350,033 $ 6,791,718 $ 7,046,965
Securities:
Taxable 497,250 486,789 1,499,552 1,494,056
Tax exempt 95,548 107,272 304,493 332,971
Interest-bearing deposits
in other banks 20,680 11,662 57,388 43,159
Federal funds sold 153,009 81,094 442,324 211,196
----------- ----------- ----------- -----------
Total interest income 2,976,844 3,036,850 9,095,475 9,128,347
INTEREST EXPENSE
Deposits 1,374,343 1,409,852 4,178,752 4,213,953
Short-term borrowings 114,300 76,866 346,051 204,174
FHLB borrowings 11,342 35,162 45,542 86,188
----------- ----------- ----------- -----------
Total interest expense 1,499,985 1,521,880 4,570,345 4,504,315
----------- ----------- ----------- -----------
NET INTEREST INCOME 1,476,859 1,514,970 4,525,130 4,624,032
Provision for loan losses (275,000) 300,000 25,000 820,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,751,859 1,214,970 4,500,130 3,804,032
OTHER INCOME
Service charges on deposit accounts 129,830 143,126 416,882 499,874
Securities gains
(losses), net (8,774) - (34,555) 7,269
Gain on sale of loans, net 703 - 3,575 10,404
Other income 52,794 70,522 162,330 109,576
----------- ----------- ----------- -----------
Total other income 174,553 213,648 548,232 627,123
OTHER EXPENSE
Salaries and employee benefits 651,366 600,957 2,134,726 1,938,132
Occupancy and equipment 160,665 166,015 479,049 526,396
Other expense 541,500 494,194 1,768,160 1,474,207
----------- ----------- ----------- -----------
Total other expense 1,353,531 1,261,166 4,381,935 3,938,735
</TABLE>
--------------------------------------------------------------------------------
(Continued)
4.
<PAGE> 5
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------ -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME BEFORE INCOME TAX $ 572,881 $ 167,452 $ 666,427 $ 492,420
Income tax expense (benefit) 156,500 (3,153) 148,333 43,432
--------------- -------------- -------------- ---------------
NET INCOME $ 416,381 $ 170,605 $ 518,094 $ 448,988
=============== ============== ============== ===============
Basic and diluted earnings per share $1.15 $.49 $1.43 $1.29
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5.
<PAGE> 6
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME $ 416,381 $ 170,605 $ 518,094 $ 448,988
Other comprehensive income, net of tax
Unrealized gain (loss) on securities
available for sale arising during
the period 271,398 (138,970) 225,269 (757,417)
Less: Reclassification adjustment for
accumulated gains (losses)
included in net income (5,791) - (22,806) 4,798
------------- ------------ ------------ ------------
Unrealized gains (losses) on
securities, net of tax 277,189 (138,970) 248,075 (752,619)
------------- ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 693,570 $ 31,635 $ 766,169 $ (303,631)
============= ============ ============ ============
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6.
<PAGE> 7
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income Total
----- -------- ------ -----
<S> <C> <C> <C> <C>
Balance, January 1, 2000 $ 7,860,674 $ 7,124,702 $ (644,748) $ 14,340,628
Cash dividends ($.64 per share) (231,534) (231,534)
Stock options exercised 89,200 89,200
Comprehensive income:
Net income 518,094 518,094
Net unrealized gain on
securities available for
sale, net of tax 248,075 248,075
--------------
Total comprehensive
income 766,169
-------------- -------------- -------------- --------------
Balance, September 30, 2000 $ 7,949,874 $ 7,411,262 $ (396,673) $ 14,964,463
============== ============== ============== ==============
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
7.
<PAGE> 8
SECURITY FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash from operating activities $ 565,770 $ 1,864,030
CASH FLOWS FROM INVESTING ACTIVITIES
Change in long-term interest-bearing deposits 100,000 -
Securities available for sale:
Proceeds from sales 2,450,888 5,979,590
Proceeds from maturities and principal repayments 3,984,488 5,948,649
Purchases (2,603,400) (12,280,777)
Net decrease in loans 8,787,072 1,593,044
Purchase of premises and equipment (99,064) (162,586)
--------------- ----------------
Net cash from investing activities 12,619,984 1,077,920
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (9,470,710) (4,244,925)
Change in short-term borrowings (1,534,264) (170,300)
Increase in FHLB advances - 3,000,000
Repayment of FHLB advances (2,000,000) -
Cash dividends paid on common stock (231,534) (152,916)
Proceeds from stock issuance 89,200 -
Proceeds from dividend reinvestment plan - 100,525
--------------- ----------------
Net cash from financing activities (13,147,308) (1,467,616)
--------------- ----------------
Net increase (decrease) in cash and cash equivalents 38,446 1,474,334
Cash and cash equivalents at beginning of period 17,358,768 11,131,009
--------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,397,214 $ 12,605,343
=============== ================
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
8.
<PAGE> 9
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
----------------------------------------------
The consolidated financial statements include Security Financial Corp.
("Company") and its wholly-owned subsidiary, Security Dollar Bank ("Bank").
Significant intercompany transactions and balances are eliminated in
consolidation.
These interim financial statements reflect all adjustments of a normal recurring
nature which, in the opinion of management, are necessary to present fairly the
consolidated financial position of Security Financial Corp. at September 30,
2000, and its results of operations and cash flows for the periods presented.
The accompanying consolidated financial statements do not purport to contain all
the necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances and are not
necessarily indicative of the results to be expected for the full year. The
Annual Report for Security Financial Corp. for the year ended December 31, 1999,
contains consolidated financial statements and related notes which should be
read in conjunction with the accompanying consolidated financial statements.
The Company is a Delaware corporation organized as holding company of the Bank.
The Bank is a state-chartered commercial bank located in Northeast Ohio. The
Company and its subsidiary derive substantially all their income from banking
and bank-related services which include interest earnings on commercial and
consumer loan financing as well as interest on securities and a variety of
deposit services to its customers through five locations. The Company and the
Bank are supervised by the Federal Reserve Board, while the Bank is also subject
to regulation and supervision by the Ohio Division of Financial Institutions.
Use of Estimates
----------------
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and future results could
differ. The allowance for loan losses and status of contingencies are
particularly subject to change.
Securities
----------
The Company has classified debt and equity securities as available for sale to
serve principally as a source of liquidity. Unrealized holding gains and losses
for available for sale securities are reported as a separate component of
stockholders' equity, net of tax, until realized. Realized securities gains and
losses are computed using the specific identification method. Interest and
dividends on investment securities are recognized as income when earned.
Interest income includes amortization of purchase premiums or discounts.
Common stock of the Federal Home Loan Bank, Federal Reserve Bank, and Great
Lakes Bankers Bank are accounted for at cost and are classified with equity
securities available for sale.
--------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 10
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
-----
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are reported at the principal balance
outstanding, net of deferred loan fees and costs and an allowance for loan
losses. Loans held for sale are reported at the lower of cost or market, on an
aggregate basis.
Interest on loans is recognized as income when earned on the accrual method. The
Company's general policy has been to stop accruing interest on loans when it is
determined that reasonable doubt exists as to the collectibility of additional
interest. Interest payments received on nonaccrual loans is recorded as income
or applied against principal according to management's judgment as to the
collectibility of the related loans. Loan origination fees and certain direct
loan origination costs are being deferred and the net amount amortized as an
adjustment of the related loan yield. The Company is amortizing these amounts
over the contractual lives of the related loans.
Allowance for Loan Losses
-------------------------
The allowance for loan losses is a valuation allowance for probable incurred
credit losses, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
using past loan loss experience, the nature and volume of the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
A loan is considered impaired when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage and consumer loans, and on an individual
loan basis for other loans. If a loan is impaired, a portion for the allowance
is allocated so that the loan is reported, net, at the present value of
estimated future cash flows using the loan's exiting rate or at the fair value
of collateral if repayment is expected solely from the collateral. The
definition of "impaired loans" is not the same as the definition of "nonaccrual
loans," although the two categories overlap. The Company may choose to place a
loan on nonaccrual status due to payment delinquency or uncertain
collectibility, while not classifying the loan impaired. Factors considered by
management in determining impairment include payment status and collateral
value.
Earnings Per Common Share
-------------------------
Basic earnings per common share is net income divided by the weighted average
number of common shares outstanding during the period. Diluted earnings per
common share includes the dilutive effect of additional potential common shares
issuable under stock options. Earnings and dividends per share have been
restated for all stock dividends. The basic weighted average shares were 362,066
and 348,154 and diluted weighted average shares were 362,631 and 348,712 for
September 30, 2000 and 1999.
--------------------------------------------------------------------------------
(Continued)
10.
<PAGE> 11
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive Income
--------------------
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securities
available for sale which are also recognized as separate components of equity.
Loss Contingencies
------------------
Loss contingencies, including claims and legal actions arising in the ordinary
course of business, are recorded as liabilities when the likelihood of loss is
probable and an amount or range of loss can be reasonably estimated. Management
does not believe there now are such matters that will have a material effect on
the financial statements.
Dividend Restriction
--------------------
Banking regulations require maintaining certain capital levels and may limit the
dividends paid by the bank to the holding company or by the holding company to
shareholders.
Income Taxes
------------
Income tax expense (benefit) is based on the effective tax rate expected to be
applicable for the entire year. The Corporation follows the liability method of
accounting for income taxes. The liability method provides that deferred tax
assets and liabilities are recorded at enacted tax rates based on the difference
between the tax basis of assets and liabilities and their carrying amounts for
financial reporting purposes, referred to as "temporary differences." A
valuation allowance, if needed, reduces deferred tax assets to the amount
expected to be realized.
--------------------------------------------------------------------------------
(Continued)
11.
<PAGE> 12
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The amortized cost and estimated market values of securities available for sale
are summarized as follows:
<TABLE>
<CAPTION>
September 30, 2000
----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and
Government agency
securities $ 9,396,102 $ 19,331 $ (126,313) $ 9,289,120
Obligations of states and
political subdivisions 7,163,867 17,393 (301,965) 6,879,295
Corporate obligations 195,689 - (9,425) 186,264
Mortgage-backed securities 19,870,844 34,004 (387,189) 19,517,659
---------------- ---------------- ---------------- ----------------
Total debt securities 36,626,502 70,728 (824,892) 35,872,338
Equity securities 1,349,682 165,430 (11,966) 1,503,146
---------------- ---------------- ---------------- ----------------
$ 37,976,184 $ 236,158 $ (836,858) $ 37,375,484
================ ================ ================ ================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and
Government agency
securities $ 7,145,502 $ 16,952 $ (139,750) $ 7,022,704
Obligations of states and
political subdivisions 9,117,043 4,590 (613,220) 8,508,413
Corporate obligations 195,109 - (7,296) 187,813
Mortgage-backed securities 23,618,028 27,176 (509,988) 23,135,216
---------------- ---------------- ---------------- ----------------
Total debt securities 40,075,682 48,718 (1,270,254) 38,854,146
Equity securities 1,444,938 244,648 - 1,689,586
---------------- ---------------- ---------------- ----------------
$ 41,520,620 $ 293,366 $ (1,270,254) $ 40,543,732
================ ================ ================ ================
</TABLE>
--------------------------------------------------------------------------------
(Continued)
12.
<PAGE> 13
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Real estate mortgages:
Residential $ 49,973,597 $ 51,759,229
Commercial 30,444,433 32,560,547
Commercial, financial, and agricultural 6,869,448 6,060,456
Consumer loans 11,413,408 16,619,461
Other 2,063,499 2,117,972
--------------- ----------------
100,764,385 109,117,665
Less allowance for loan losses 2,108,607 1,649,815
--------------- ----------------
$ 98,655,778 $ 107,467,850
=============== ================
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Balance at beginning of period $ 1,649,815 $ 1,802,773
Provision charged to income 25,000 820,000
Charge-offs (373,549) (929,000)
Recoveries 807,341 129,679
--------------- ----------------
Balance at end of period $ 2,108,607 $ 1,823,452
=============== ================
</TABLE>
NOTE 4 - REGULATORY AGREEMENT
On March 17, 2000, the Board of Directors approved and entered into a written
regulatory agreement between Security Dollar Bank and the Federal Reserve Bank
of Cleveland and the Ohio Division of Financial Institutions. The agreement was
executed in accordance with current banking regulations and will remain
enforceable until terminated or suspended by the Bank's regulators. The
agreement restricts the payment of dividends by the Bank without the prior
approval of its primary regulators. In addition, the agreement requires specific
actions by the Bank's management and the Board of Directors which are intended
to improve and strengthen the Bank's operations, oversight, risk management and
internal control.
--------------------------------------------------------------------------------
(Continued)
13.
<PAGE> 14
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 5 - MERGER
On May 26, 2000, the Company and Farmers National Banc Corp. (Farmers) entered
into an agreement to merge. The transaction is structured as a tax-free exchange
of stock and is expected to be accounted for using the pooling-of-interests
method of accounting. The ratio at which Company shares will be exchanged for
the shares of Farmers will be calculated by dividing $90 by an average of the
price of Farmers' shares just prior to the closing of the transaction, provided
that the ratio shall not be less than 7,344, nor greater than 9,937, shares for
each Company share subject to certain conditions and adjustments. Should the
Farmers "Closing Price" (as defined by the average closing price per share
reported in a mutually agreeable source for the most recent 30 days on which
actual trades of shares occur, ending on the second day immediately preceding
the closing date) be less than $7.50, the Company may propose to terminate the
agreement. The shares to be issued to the Company shareholders will be
registered with the Securities and Exchange Commission. The merger is expected
to be consummated in the fourth calendar quarter of 2000 and is subject to
approvals by various regulatory authorities, which approvals have been received,
and by the shareholders of the Company and Farmers.
NOTE 6 - SUBSEQUENT EVENT
On November 9, 2000, the Company's shareholders approved the agreement and plan
of merger dated May 26, 2000 between Farmers National Banc Corp and the Company.
Of 363,508.123034 shares issued and outstanding, 278,120.070763 or 76.51% voted
to approve the merger, while 5,106.433292 (1.40%) voted against and 2,488.854250
(0.68%) abstained. The shareholders of Farmers National Banc Corp also approved
the agreement and plan of merger on November 9, 2000. It is anticipated that the
merger will become effective prior to December 31, 2000.
--------------------------------------------------------------------------------
14.
<PAGE> 15
SECURITY FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Financial Condition
-------------------
Total assets decreased by approximately $12.7 million or 7.36% from December 31,
1999 to September 30, 2000, primarily as a result of the decrease in the loan
portfolio. Gross loans decreased by approximately $8.4 million or 7.66% during
the first nine months of 2000. Decreases occurred in the residential real estate
and consumer portfolios which combined to decrease approximately $7.0 million
during the first nine months of 2000. A large part of the consumer portfolio
decrease was due to management's plan to change the mix of the loan portfolio
and de-emphasize indirect lending.
Total securities available for sale decreased by approximately $3.2 million or
7.81% to $37.4 million at September 30, 2000 from $40.5 million at December 31,
1999.
Total deposits decreased by approximately $9.5 million or 6.52%, during the
first nine months of 2000. Decreases occurred in the savings and time deposit
portfolios during the first nine months of 2000, and were partially offset by an
increase in money market and interest bearing deposit accounts. During the first
nine months of 2000, Management restructured the interest rates offered on its
time deposits in order to extend the duration of its liabilities, thus reducing
the Bank's level of interest rate risk. Interest rates are generally set to be
competitive in the local market for the desired maturity ranges, without leading
the market. While this decision has resulted in a decrease in the overall level
of time deposits, Management considers this course of action to be in the Bank's
best interests in terms of interest rate risk, future earnings potential and
liquidity.
During the first quarter of 1999, the Bank borrowed a total of $3 million in
three separate transactions from the Federal Home Loan Bank of Cincinnati
("FHLB"). Each of these $1 million borrowings carried a low fixed rate for an
initial time period, after which the interest rate would become variable. Two of
these borrowings converted to variable rates during the first quarter of 2000,
and Management elected to repay these borrowings at that time. The remaining $1
million will convert to a variable rate in the first quarter of 2001. Management
will continue to utilize FHLB borrowings when they represent the best available
funding source.
Stockholders' equity increased by approximately $624,000 for the nine month
period ended September 30, 2000. The increase was due to net income of
approximately $518,000, the decrease of net unrealized losses on securities of
approximately $248,000 and an increase in common stock of $89,000 from the
exercise of stock options. These increases were partially offset by payment of
cash dividends of approximately $232,000.
--------------------------------------------------------------------------------
15.
<PAGE> 16
SECURITY FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
Results of Operations
---------------------
Net income for the nine-month period ending September 30, 2000 amounted to
$518,000, compared to $449,000 during the same period in 1999. Net income for
the three-month period ending September 30, 2000 amounted to $416,000, compared
to $171,000 during the same period in 1999. Discussed below are the major
factors which have influenced these operating results. The decrease in interest
income for the first nine months is primarily due to the decrease in the average
balance on loans compared to the same period in 1999. Net interest income, the
primary source of earnings, is the amount by which interest and fees on loans
and investments exceed the interest cost of deposits and other borrowings
obtained to fund them. Net interest income is affected by the volume and
composition of earning assets and interest-bearing liabilities as well as the
level of non-interest-bearing demand deposits and stockholders' equity. Also
impacting net interest income is the susceptibility of interest-earning assets
and interest-bearing liabilities to changes in the general market level of
interest rates. Management attempts to manage the repricing of assets and
liabilities so as to achieve a stable level of net interest income and reduce
the effect of significant changes in the market level of interest rates. This is
accomplished through the pricing and promotion of various loan and deposit
products as well as the active management of the Bank's portfolio of investment
securities available for sale.
Interest income for the first nine months of 2000 totaled $9,095,000 compared to
$9,128,000 during the same period in 1999, a decrease of $33,000. During the
same time period, interest expense increased $66,000 from $4,504,000 in 1999 to
$4,570,000 in 2000. Interest income for the three months ended September 30,
2000 decreased $60,000 or 2.0% during the same period in 1999. During the same
time period, interest expense decreased $22,000 to $1,500,000. The decrease in
interest income for the first nine months of 2000 is primarily the result of the
increase in the average balance and rate earned on federal funds compared to the
same period in 1999. The decrease in interest income for the three months ended
September 30, 2000 is a result of the decrease in the average balance on loans
and tax-exempt securities. The primary cause of the decrease in interest
expense, for both the nine and three month ended, was due to the decrease in the
average balance of deposits and FHLB advances.
The provision for loan losses for the nine months ended September 30, 2000 was
$25,000, compared to $820,000 for the nine months ended September 30, 1999. The
decrease in the provision is primarily related a lower level of net charge-offs
during the current year, including the recovery of $600,000 from the Company's
bond carrier as a result of losses suffered in the Bank's indirect auto loan
portfolio due to loans granted by a former officer on terms and conditions
outside the Bank's policy limits. The allowance for loan losses was 2.09% of
gross loans and 185.78% of non-performing loans at September 30, 2000.
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16.
<PAGE> 17
SECURITY FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
The adequacy of the allowance for loan losses is evaluated by management on an
ongoing basis. This review includes an assessment of problem loans and probable
unknown losses based on current economic conditions, the regulatory environment
and historical experience. The provision for loan losses represents charges to
operations necessary to maintain the allowance at a level which management
believes will be adequate to absorb losses. Management believes that the
allowance for possible loan losses is adequate. While management evaluates the
allowance for loan losses based upon available information, future additions to
the allowance may be necessary. Additionally, regulatory agencies review the
Company's allowance for loan losses as part of their examination process. Such
agencies may require the Company to recognize additions to the allowance based
on judgements which may be different from those of management.
Non-interest income, which is comprised principally of service charges on
deposit accounts, decreased 12.6% and 18.3%, or $79,000 and $39,000 from
$627,000 and $214,000 for the nine and three months ended June 30, 1999 to
$548,000 and $175,000 for the nine and three months ended September 30, 2000.
The decrease is due to the net loss realized on the sale of securities when
compared to the same period in 1999, a reduction in the gain on sale of loans
from 1999 to 2000 and a decrease in service charges on deposits.
Non-interest expense increased $443,000 and $93,000 or 11.3% and 7.3% to
$4,382,000 and $1,354,000 for the nine and three months ended September 30, 2000
from $3,939,000 and $1,261,000 for the nine and three months ended September 30,
1999. Of the increase, $197,000 and $50,000 related to increases in salaries and
benefits expenses during the nine and three months ended September 30, 2000 when
compared to the same period in 1999. Also, additional expenses were incurred due
to the outside consulting engagements due to the regulatory agreement and
proposed merger. The remaining amount of the increase in non-interest expense is
due to the general increase in other general operating expenses including
increases in professional fees, collection expense and FDIC insurance.
RISK ELEMENTS
Nonperforming Assets
The following schedule presents information concerning nonperforming assets
including nonaccrual loans, loans 90 days or more past due, and other real
estate owned at September 30, 2000 and December 31, 1999. A loan is classified
as nonaccural when, in the opinion of management, there are serious doubts about
collectibility of interest and principal. At the time the accrual of interest is
discontinued, future income is recognized only when cash is received.
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17.
<PAGE> 18
SECURITY FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(Dollars in Thousand)
<S> <C> <C>
Loans on nonaccrual basis $ 1,099 $ 1,041
Loans past due 90 days or more and still accruing 36 184
----------- -----------
Total non-performing loans 1,135 1,225
Other non-performing assets 25 22
----------- -----------
Total non-performing assets $ 1,160 $ 1,247
=========== ===========
Total non-performing loans to
total loans 1.12% 1.12%
Total non-performing loans to
total assets .71% .71%
Total non-performing assets to
total assets .73% .72%
</TABLE>
LIQUIDITY
Liquidity is a measure of the Company's ability to efficiently meet normal cash
flow requirements of both borrowers and depositors. To maintain proper
liquidity, the Company uses asset liability management policies along with its
investment policies to assure it can meet its financial obligations to
depositors, credit customers and shareholders. Liquidity is needed to meet
depositors' withdrawal demands, extend credit to meet borrowers' needs, provide
funds for normal operating expenses and cash dividends, and fund other capital
expenditures.
Liquidity management is influenced by cash generated by operating activities,
investing activities and financing activities. The most important source of
funds is the deposits which are primarily core deposits (deposits from customers
with other relationships). Short-term borrowings from the Federal Home Loan Bank
supplement the Company's availability of funds.
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18.
<PAGE> 19
SECURITY FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
REGULATORY ACTION
On March 17, 2000, the Board of Directors entered into a written regulatory
agreement between Security Dollar Bank and the Federal Reserve Bank of Cleveland
and the Ohio Division of Financial Institutions. The agreement remains
enforceable until terminated or suspended by the regulatory agencies and
requires prior regulatory approval before any dividends can be paid by the Bank.
In addition, the agreement requires specific actions be undertaken by management
and the Bank's Board of Directors which are intended to improve and strengthen
the Bank's operations, oversight, risk management and internal control. The
agreement establishes specific time frames for the completion of various action
items and requires written progress reports be furnished to the Bank's
regulators on a quarterly basis detailing the actions taken to secure compliance
with the agreement. Management anticipates that both Company management and the
Board of Directors will devote significant time and attention during 2000 to
complete the detailed requirements of the agreement. In addition, management
anticipates the Company will incur costs for outside consulting engagements
required under specific terms of the agreement.
MERGER
On May 26, 2000, the Company and Farmers National Banc Corp. (Farmers) entered
into an agreement to merge. The transaction is structured as a tax-free exchange
of stock and is expected to be accounted for using the pooling-of-interests
method of accounting. The merger is expected to be consummated in the fourth
quarter of 2000 and is subject to approvals by various regulatory authorities,
which approvals have been received, and by the shareholders of the Company and
Farmers. The Company will incur various costs, such as: fees to investment
banker; attorney fees and other miscellaneous costs, at the close of the merger.
All of these costs have not been determined at this time.
CAPITAL RESOURCES
Under regulations issued by federal banking agencies, banks and bank holding
companies are required to maintain certain minimum capital ratios known as the
risk-based capital ratio and the leverage ratio. At September 30, 2000, the
Company's Tier 1 Capital (to average assets), Tier 1 Capital (to risk-weighted
assets) and total risk-based capital ratios were 9.16%, 15.63% and 16.96%,
respectively, compared to 8.47%, 13.74% and 15.10% at December 31, 1999,
respectively. The Company has exceeded all required regulatory capital ratios
for each period presented and is considered "well capitalized" under all federal
banking agency regulations.
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19.
<PAGE> 20
SECURITY FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars, without
consideration for changes in the relative purchasing power of money over time
caused by inflation.
Unlike industrial companies, nearly all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services, since
such goods and services are affected by inflation. In the current interest rate
environment, liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board (the FASB) issued
Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
(SFAS 133), subsequently amended by SFAS No. 137 and 138, which the Company is
required to adopt effective January 1, 2001. SFAS 133 will require the Company
to record all derivatives on the balance sheet at fair value. Changes in
derivative fair values will either be recognized in earnings as offsets to the
changes in fair value of related hedged assets, liabilities and firm commitments
or, for forecasted transactions, deferred and recorded as a component of other
stockholders' equity until the hedged transactions occur and are recognized in
earnings. The ineffective portion of a hedging derivative's change in fair value
will be immediately recognized in earnings. The impact of SFAS 133 on the
Company's financial statements will depend on a variety of factors, including
future interpretative guidance from the FASB, the future level of forecasted and
actual foreign currency transactions, the extent of the company's hedging
activities, the types of hedging instruments used and the effectiveness of such
instruments. However, the company does not believe the effect of adopting SFAS
133 will be material to its financial position.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts are
forward looking statements that are subject to certain risks and uncertainties.
When used herein, the terms "anticipates," "plans," "expects," "believes," and
similar expressions as they relate to the Company or its management are intended
to identify such forward looking statements. The Company's actual results,
performance or achievements may materially differ from those expressed or
implied in the forward looking statement. Risks and uncertainties that could
cause or contribute to such material differences include, but are not limited
to, general economic conditions, interest rate environment, competitive
conditions in the financial services industry, changes in law, governmental
policies and regulations, and rapidly changing technology affecting financial
services.
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20.
<PAGE> 21
SECURITY FINANCIAL CORP.
FORM 10-QSB
Quarter ended September 30, 2000
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
Item 1 - Legal Proceedings.
In 1999, a bank customer initiated a lawsuit against the bank as a result of the
loss the customer sustained by the criminal forgery acts of the customer's
comptroller. The customer alleged damages in the amount of $3,500,000.00. The
litigation was dismissed by the Court on July 27, 2000, upon the bank's motion.
The customer did not appeal. This matter has been terminated.
In 1998, the bank initiated a civil action against a former bank officer and
other individuals previously engaged as finance and insurance managers with
automobile agencies. The action was based upon the allegation that the bank
officer violated the underwriting standards for indirect loans, which resulted
in a loss to the bank in its indirect loan portfolio. In addition to the
litigation, the bank asserted a claim against its fidelity bond carrier, Ohio
Casualty Company. Ohio Casualty entered into a settlement agreement with the
bank in the amount of $600,000.00. Recovery from the bonding company in
September, 2000 was accounted for as a recovery of charged off loans. As a
result of the settlement with the bonding company, the bank terminated its
litigation against the former officer; and is in the process of negotiating
termination with the other parties named by the bank in the Summit County
litigation.
Item 2 - Changes in rights of the Company's Security holders.
None.
Item 3 - Defaults upon senior securities.
None.
Item 4 - Submission of Matters to a Vote of Security Holders.
On November 9, 2000, the Company's shareholders approved the agreement and plan
of merger dated May 26, 2000 between Farmers National Banc Corp and the Company.
The results were the following:
FOR 278,120.070763
AGAINST 5,106.433292
ABSTAINED 2,488.854250
Item 5 - Other information.
None.
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21.
<PAGE> 22
SECURITY FINANCIAL CORP.
FORM 10-QSB
Quarter ended September 30, 2000
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
Item 6 - Exhibits and Reports on Form 8-K
(a.) Exhibit
Number Exhibit
------ -------
11.1 Statement Re Computation of Earnings per common Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares outstanding during the period, as restated for shares
issued in business combinations accounted for as pooling-of-interests, stock
splits and stock dividends. Diluted earnings per share is computed using the
weighted average number of shares determined for the basic computation plus the
number of shares of common stock that would be issued assuming all contingently
issuable shares having a dilutive effect on earnings per share were outstanding
for the period.
Earnings per share data have also been restated for the 3% stock dividend
declared and paid December 31, 1999.
The weighted average number of common shares outstanding for basic and diluted
earnings per share computations were as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income $ 518,094 $ 448,988 $ 416,381 $ 170,605
Denominator:
Weighted-average common
shares outstanding (basic) 362,066 348,154 362,646 349,217
Exercise of options 565 558 565 601
Weighted-average common
shares outstanding (diluted) 362,631 348,712 363,211 349,818
Earnings per share:
Basic $ 1.43 $ 1.29 $ 1.15 $ .49
Diluted $ 1.43 $ 1.29 $ 1.15 $ .49
</TABLE>
27 Financial Data Schedule for the nine months ended
September 30, 2000 (1)
(b.) Reports on Form 8-K - None
(1) Filed only in electronic format.
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22.
<PAGE> 23
SECURITY FINANCIAL CORP.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SECURITY FINANCIAL CORP.
------------------------
(Registrant)
Date: November 14, 2000 /s/C. James Bess
------------------------- ----------------
C. James Bess
President and Chief Executive Officer
Date: November 14, 2000 /s/Stephen K. Miller
------------------------- --------------------
Stephen K. Miller
Treasurer
--------------------------------------------------------------------------------
23.
