<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
Security First Corp.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
[SECURITY FIRST CORP. LETTERHEAD]
June 27, 1997
Dear Fellow Shareholders:
On behalf of the Board of Directors and management of Security First
Corp., we cordially invite you to attend the 1997 Annual Meeting of
Shareholders. The meeting will be held at 2:00 p.m., Thursday, July 31, 1997 at
Landerhaven, 6111 Landerhaven Drive, Mayfield Heights, Ohio.
The matters expected to be acted upon at the meeting are described in
the enclosed Proxy Statement. In addition, we will report on Security First's
financial and operating performance as well as the Company's progress during the
past fiscal year.
We encourage you to attend the meeting in person. Whether or not you
attend, we hope you read the Proxy Statement and then complete, sign and date
the proxy card and return it in the enclosed postage-paid envelope. This will
save the Company additional expense in soliciting proxies and will ensure that
your shares are represented at the meeting. Please note that you may vote in
person at the meeting even if you have previously returned the proxy.
Thank you for your attention to this important matter.
Sincerely,
/s/ Charles F. Valentine
CHARLES F. VALENTINE
Chairman and Chief Executive Officer
/s/ Austin J. Mulhern
AUSTIN J. MULHERN
President and Chief Operating Officer
<PAGE> 3
SECURITY FIRST CORP.
1413 Golden Gate Boulevard
Mayfield Heights, Ohio 44124
(216) 449-3700
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be Held on July 31, 1997
Notice is hereby given that the Annual Meeting of Shareholders (the
"Meeting") of Security First Corp. ("Security First" or the "Company") will be
held at Landerhaven, 6111 Landerhaven Drive, Mayfield Heights, Ohio, on July 31,
1997 at 2:00 P.M.
A Proxy Card and a Proxy Statement for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
1. The election of three directors of the Company;
2. Approval of an amendment to Article Fourth of Security First's
Certificate of Incorporation to increase the total number of
shares of common stock, par value $.01 per share, which the
Company shall have the authority to issue from ten million
(10,000,000) to twenty million (20,000,000);
3. The ratification of the appointment of Deloitte & Touche LLP
as auditors for the Company for the fiscal year ending March
31, 1998; and
such other matters as may properly come before the Meeting, or any adjournments
thereof. The Board of Directors is not aware of any other business to come
before the Meeting.
Any action may be taken on any of the foregoing proposals at the
Meeting on the date specified above, or on any date or dates to which the
Meeting may be adjourned. Shareholders of record at the close of business on
June 13, 1997 are the shareholders entitled to vote at the Meeting, and any
adjournments thereof.
You are requested to fill in and sign the enclosed Form of Proxy which
is solicited on behalf of the Board of Directors, and to mail it promptly in the
enclosed envelope. The Proxy will not be used if you attend and vote at the
Meeting in person.
By Order of the Board of Directors
/s/ Charles F. Valentine
Charles F. Valentine
Chairman of the Board and
Chief Executive Officer
Mayfield Heights, Ohio
June 27, 1997
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IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES TO ENSURE A QUORUM AT THE MEETING. A SELF-
ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF
MAILED WITHIN THE UNITED STATES.
- --------------------------------------------------------------------------------
<PAGE> 4
PROXY STATEMENT
SECURITY FIRST CORP.
1413 GOLDEN GATE BOULEVARD
MAYFIELD HEIGHTS, OHIO 44124
(216) 449-3700
ANNUAL MEETING OF SHAREHOLDERS
JULY 31, 1997
This Proxy Statement is furnished in connection with the solicitation
on behalf of the Board of Directors of Security First Corp. ("Security First" or
the "Company") of proxies to be used at the Annual Meeting of Shareholders of
the Company (the "Meeting") which will be held at Landerhaven, located at 6111
Landerhaven Drive, Mayfield Heights, Ohio on July 31, 1997, at 2:00 P.M.
Mayfield Heights, Ohio time, and all adjournments of the Meeting. The
accompanying Notice of Annual Meeting of Shareholders and this Proxy Statement
and Form of Proxy are first being mailed to shareholders on or about June 27,
1997. Certain of the information provided herein relates to Security Federal
Savings and Loan Association of Cleveland ("Security Federal") and First Federal
Saving Bank of Kent ("First Federal"), wholly-owned, first-tier subsidiaries of
the Company. Security Federal and First Federal are referred to herein
collectively as the "Associations". Unless otherwise noted, references to
Security First or the Company include the Associations.
At the Meeting, the shareholders of Security First are being asked to
consider and vote upon (i) the election of three directors of the Company, (ii)
the approval of an amendment to Article Fourth of Security First's Certificate
of Incorporation to increase the total number of shares of common stock, par
value $.01 per share, which the Company shall have the authority to issue from
ten million (10,000,000) to twenty million (20,000,000); and (iii) the
ratification of the appointment of Deloitte & Touche LLP as auditors for the
Company for the fiscal year ending March 31, 1998.
PROXIES AND PROXY SOLICITATION
If a shareholder properly executes the enclosed proxy distributed by
Security First, the proxies named will vote the shares represented by that proxy
at the Meeting. Where a shareholder specifies a choice, the proxy will be voted
in accordance with the shareholder's instructions. If no specific direction is
given, the proxies will vote the shares "FOR" the election of management's
nominees for directors of the Company, "FOR" approval of the amendment to
Article Fourth of the Company's Certificate of Incorporation, and "FOR" the
appointment of Deloitte & Touche LLP as auditors for the fiscal year ending
March 31, 1998. If other matters are presented at the Meeting, the shares for
which proxies have been received will be voted in accordance with the discretion
of the proxies.
Any proxy given pursuant to this solicitation or otherwise may be
revoked by the shareholder giving it at any time before it is voted by
delivering to the Secretary of the Company at the above address, on or before
the taking of the vote at the Meeting, a written notice of revocation bearing a
later date than the proxy or a later dated proxy relating to the same shares of
common stock, par value $.01 per share, of Security First (the "Common Stock"),
or by attending the Meeting and voting in person. Attendance at the Meeting will
not in itself constitute the revocation of a proxy.
The cost of solicitation of proxies will be borne by the Company. The
Company will reimburse brokerage firms and other custodians, nominees and
fiduciaries for reasonable expenses incurred by them in sending proxy materials
to the beneficial owners of Security First Common Stock. In addition, Security
First has engaged Corporate Investors Communications ("CIC") to assist the
Company in distributing proxy materials and contacting record and beneficial
owners of Security First Common Stock. The Company has agreed to pay CIC
approximately $1,000 plus out-of-pocket expenses for its services to be rendered
on behalf of the Company. In addition to solicitation by mail, directors and
officers of the Company and employees of the Associations may solicit proxies
personally or by telegraph or telephone, without additional compensation.
<PAGE> 5
VOTING RIGHTS; VOTE REQUIRED
Shareholders of record as of the close of business on June 13, 1997
(the "Voting Record Date"), will be entitled to one vote on each matter
presented for a vote at the Meeting for each share of Security First Common
Stock then held. Such vote may be exercised in person or by a properly executed
proxy as discussed above. Directors shall be elected by a plurality of the
shares present in person or represented by proxy at the Meeting and entitled to
vote on the election of directors. Approval of the proposal to amend the
Company's Certificate of Incorporation requires the affirmative vote of the
holders of at least a majority of the shares entitled to be voted at the
Meeting. The appointment of Deloitte and Touche LLP as auditors for the year
ending March 31, 1998 requires the affirmative vote of the majority of shares
present in person or represented by proxy at the Meeting and entitled to vote on
the matter.
With regard to the election of directors, votes may be cast in favor of
or withheld from each nominee; votes that are withheld will be excluded entirely
from the vote and will have no effect. Abstentions may be specified on all
proposals except the election of directors and will be counted as present for
purposes of the item on which the abstention is noted. Since the amendment to
the Company's Certificate of Incorporation requires the approval of a majority
of the outstanding shares, abstentions will have the effect of a negative vote.
Abstentions on the proposal to ratify Deloitte and Touche LLP as the Company's
auditors will also have the effect of a negative vote because it requires the
affirmative vote of a majority of the shares present in person or by proxy and
entitled to vote at the Meeting. Under applicable Delaware law, a broker
non-vote will have the same effect as a vote against the proposed amendment to
the Company's Certificate of Incorporation, and will have no effect on the
outcome of the election of directors or ratification of auditors.
BENEFICIAL OWNERSHIP
The following table sets forth information, as of the Voting Record
Date, regarding beneficial share ownership of executive officers (who are not
directors of the Company) for which disclosure is required to be provided under
the "Summary Compensation Table" herein and all directors and executive officers
of the Company as a group. See "Proposal I -- Election of Directors" for
information on the beneficial share ownership of the Company's Directors and
Chief Executive Officer. The address of the executive officers named in the
table is the same as the Company's address. As of the Voting Record Date, the
Company had 5,048,793 shares of Common Stock issued and outstanding. No persons
or entities were known by management to beneficially own more than 5% of the
outstanding shares of Company Common Stock as of the Voting Record Date.
<TABLE>
<CAPTION>
BENEFICIAL OWNER SHARES BENEFICIALLY OWNED PERCENT OF CLASS
- ----------------------------------- ------------------------- ----------------
<S> <C> <C>
Jeffrey A. Calabrese 39,242(1) .77%
Mary H. Crotty 19,412(2) .38%
All directors and executive officers of 1,074,172(3) 20.35%
the Company as a group (13 persons)
</TABLE>
- ---------------------
(1) Mr. Calabrese has reported sole voting and investment power with
respect to all shares reported as beneficially owned in the table
above, except with respect to 11,664 shares as to which he reported
shared beneficial ownership. Included in the shares beneficially owned
by Mr. Calabrese are 1,712 shares subject to conversion rights with
respect to 20 of the Company's Convertible Subordinated Debentures and
options to purchase 20,120 shares of Common Stock.
(2) Ms. Crotty has reported sole voting and investment power with respect
to all shares reported as beneficially owned in the table above.
Included in the shares beneficially owned by Ms. Crotty are 428 shares
subject to conversion rights with respect to 5 of the Company's
Convertible Subordinated Debentures and options to purchase 14,655
shares of Common Stock.
(3) Includes shares held directly, 49,743 shares subject to conversion
rights with respect to 581 of the Company's Convertible Subordinated
Debentures, 181,005 shares subject to options granted by the Company
and shares held by controlled corporations and family members, with
respect to which shares the listed individuals or group members may be
deemed to have sole voting and investment power. The amounts exclude
shares held by family members that do not live in the same household as
such officers and directors and with respect to which beneficial
ownership is expressly disclaimed.
<PAGE> 6
PROPOSAL I -- ELECTION OF DIRECTORS
The Company's Board of Directors is currently composed of nine members.
Directors are generally elected to serve for three year terms or until their
respective successors are elected and qualified. The directors are divided into
three classes, with one-third of the directors elected annually.
The following table sets forth certain information regarding the
composition of the Company's Board of Directors, including terms of office and
share ownership as of the Voting Record Date. It is intended that the proxies
solicited on behalf of the Board of Directors (other than proxies in which the
vote is withheld as to the nominees) will be voted at the Meeting for the
election of the following nominees. If any nominee is unable to serve, the
shares represented by all valid proxies will be voted "For" the election of such
substitute as the Board of Directors may recommend. At this time, the Board of
Directors knows of no reason why any nominee might be unable to serve if
elected. Except as set forth herein, there are no arrangements or understandings
between any director or nominee and any other person pursuant to which such
director or nominee was selected.
<TABLE>
<CAPTION>
PERCENT
DIRECTOR TERM TO OWNERSHIP OF
NAME AGE POSITIONS SINCE EXPIRE BENEFICIAL(1) CLASS
- ------ --- ----------- ------- -------- --------------- -------
NOMINEES
--------
<S> <C> <C> <C> <C> <C> <C>
Charles F. Valentine 57 Chairman of the Board and 1981 2000 216,860 4.26%
Chief Executive Officer
Robert L. Anderson 55 Director 1987 2000 184,331 3.64%
Donald E. Snow 72 Director 1987 2000 33,892(2) .67%
DIRECTORS REMAINING IN OFFICE
-----------------------------
Nicholas E. Rinaldi, D.D.S 56 Director 1992 1999 68,922 1.36%
Louis J. Sorboro 58 Director 1996 1999 112,766 2.22%
Paul V. Voinovich 54 Director 1987 1999 74,531 1.48%
Austin J. Mulhern 55 Director and President 1985 1998 169,827(3) 3.34%
James P. Myers 65 Director 1996 1998 52,313 1.03%
Larry E. Rogers 58 Director 1995 1998 85,372 1.68%
</TABLE>
- --------------------
(1) The nature of beneficial ownership for shares reported in this column
is sole voting and investment power, except as otherwise set forth in
these footnotes. Included in the shares beneficially owned by the named
individuals are options to purchase shares of Common Stock as follows:
Mr. Valentine - 46,795; Mr. Anderson - 1,000; Mr. Snow - 1,000; Dr.
Rinaldi - 4,000; Mr. Sorboro - 35,185; Mr. Voinovich - 1,000; Mr.
Mulhern - 33,400; Mr. Myers - 7,295; and Mr. Rogers - 1,000.
(2) Includes 31,180 shares in which Mr. Snow has reported shared ownership.
(3) Includes 50,940 shares in which Mr. Mulhern has reported shared
ownership.
The principal occupation of each Director of the Company is set forth
below. All Directors have held their present position for at least five years
unless otherwise indicated.
CHARLES F. VALENTINE. Mr. Valentine is Chairman of the Board and Chief
Executive Officer of Security Federal. He has been with Security Federal since
1980 in various capacities. Mr. Valentine has been Chairman of the Board and
Chief Executive Officer of the Company since its formation in December 1992. In
April 1996, Mr. Valentine was appointed to the Board of Directors of First
Federal.
ROBERT L. ANDERSON. Mr. Anderson is Chairman of the Board and Chief
Executive Officer of Wiseco Piston, Inc., a piston manufacturing company.
DONALD E. SNOW. Mr. Snow retired in 1987, after 19 years as District
Manager of the Ohio Edison Co., an electric utility company in Medina, Ohio.
3
<PAGE> 7
NICHOLAS E. RINALDI, D.D.S. Dr. Rinaldi is practicing dentistry with
the organization of Drs. Rhodes, Rinaldi and Associates, Inc. which operates
five offices in the Cleveland area. Dr. Rinaldi has been a practicing dentist
since 1967.
LOUIS J. SORBORO. Mr. Sorboro has served as President and Chief
Executive Officer of First Federal since 1976, and its holding company from
March 1994 until its acquisition by Security First in April 1996.
PAUL V. VOINOVICH. Mr. Voinovich is President and Secretary of
Voinovich Companies, a planning, construction and development company based in
Cleveland, Ohio.
AUSTIN J. MULHERN. Mr. Mulhern is President and Chief Operating Officer
of Security Federal, positions he has held since 1985. From 1985 to May, 1988,
he was also Chief Financial Officer of Security Federal. Mr. Mulhern has been
President and Chief Operating Officer of the Company since the formation of the
Company in December 1992. In April 1996, Mr. Mulhern was appointed to the Board
of Directors of First Federal.
JAMES P. MYERS. Mr. Myers served on the Board of Directors of First
Kent from March 1994 until its acquisition by Security First in April 1996. He
has also served on the Board of Directors of First Federal since 1972 and as
First Federal's Treasurer from 1975 to 1994. Mr. Myers has been a pharmacist at
Hale B. Thompson, Inc., a retail drug store located in Kent, Ohio since 1958. In
1989, he was appointed President of Hale B. Thompson, Inc.
LARRY E. ROGERS. Mr. Rogers is President and Chief Executive Officer of
the PIE Mutual Insurance Company, a Cleveland-based medical professional
liability insurer and has been associated with them since 1981.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
Meetings of the Company's Board of Directors are generally held at
least monthly. The Board of Directors met 12 times during fiscal 1997. During
fiscal 1997, no incumbent director attended fewer than 75% of the aggregate of
the total number of meetings of the Board of Directors and the total number of
meetings held by committees on which he served, except for Director Rogers.
The principal committee of the Company is the Audit Committee. The
Audit Committee was composed of outside Directors Anderson, Myers, Rinaldi,
Rogers, Snow and Voinovich during fiscal 1997. The Audit Committee reviews audit
reports and related matters of the Company and the Associations to ensure
effective compliance with regulatory and internal policies and procedures. The
Audit Committee met twice during fiscal 1997.
The Company also has a Stock Option Committee which is responsible for
determining awards under the Company's 1996 Stock Option and Incentive Plan (the
"Stock Option Plan"). Directors Anderson, Rinaldi, Snow and Voinovich currently
serve on this committee. The Stock Option Committee met once during fiscal 1997.
The Company does not have standing compensation or nominating
committees. The full Board of Directors of the Company acts as a nominating
committee for the annual selection of its nominees for election as directors.
While the Board of Directors will consider nominees recommended by others, it
has neither actively solicited recommendations for nominees nor established any
procedures for this purpose.
The Company has not paid any compensation to its executive officers
since its formation and does not presently anticipate paying any compensation to
such persons until the Company becomes actively involved in the operation or
acquisition of businesses other than the Associations. Security Federal,
however, has a standing compensation committee which is responsible for making
recommendations of the salaries, bonuses and incentives for all officers of
Security Federal. Directors Anderson, Myers, Rinaldi, Rogers, Snow and
Voinovich, all of whom are also directors of the Company, were the members of
the compensation committee for Security Federal during fiscal 1997. During
fiscal 1997, Security Federal's compensation committee met three times.
First Federal's entire Board of Directors, four of whom are also
directors of the Company, act as the compensation committee for First Federal.
Directors of First Federal who are also employees of First Federal do not
participate in compensation discussions relating to themselves. During fiscal
1997, First Federal's Board of Directors met twice to discuss compensation
matters.
4
<PAGE> 8
COMPENSATION OF DIRECTORS
Directors of the Company who are not employees of the Company or the
Associations ("Non-Employee Directors") are paid a fee of $150 per regular,
special or committee meeting of the Board of Directors attended. Certain
directors of the Company also serve on the Boards of one or both of the
Associations. At March 31, 1997, Directors Valentine and Mulhern, both of whom
are employees of the Company and/or the Associations ("Employee Directors"),
served on the Boards of both Security Federal and First Federal. Directors
Anderson, Myers, Rinaldi, Rogers, Snow and Voinovich, all of whom are
Non-Employee Directors, served on the Board of Security Federal and Directors
Sorboro, an Employee Director, and Myers, a Non-Employee director, served on the
Boards of both Security Federal and First Federal. Director Rogers, a
Non-Employee Director, resigned from the Board of Security Federal in April 1997
due to his excessive travel schedule which hindered his ability to attend
meetings.
During fiscal 1997, Non-Employee Directors of Security Federal received
an annual fee of $3,600 plus $700 per meeting of the Board of Directors of
Security Federal attended. Non-Employee Directors of Security Federal also
receive fees of $250 per committee meeting attended. During fiscal 1997, First
Federal paid each of its Non-Employee Directors an annual fee of $8,700 for
services rendered.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth for the three years ended March 31,
1997, information as to the compensation of the Company's Chief Executive
Officer and the other most highly compensated executive officers of the Company
or the Associations whose salary and bonus exceeded $100,000 during fiscal 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------------
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
- ----------------------------------------------------------------------------------- --------------------
Restricted
Other Annual Stock All Other
Name and Principal Position Fiscal Salary Bonus Compensation Awards Options Compensation
Year ($) ($) ($)(1) ($) (#) ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles F. Valentine
Chairman of the Board and 1997 $198,125 $124,100 --- --- 9,765 $28,809(2)
CEO of the Company and 1996 188,225 81,225 --- --- 10,500 28,587
Security Federal 1995 178,400 85,500 --- --- 3,500 30,834
Austin J. Mulhern
President and COO of the 1997 $159,250 $ 99,800 --- --- 8,370 $31,198(3)
Company and Security 1996 151,275 65,250 --- --- 9,000 30,198
Federal 1995 143,363 68,700 --- --- 3,000 13,005
Jeffrey J. Calabrese
Vice President and Secretary 1997 $ 78,675 $ 35,000 $12,429 --- 4,650 $18,323(4)
of the Company and Security 1996 74,925 25,600 $10,657 --- 5,000 17,096
Federal 1995 71,000 27,000 --- --- 1,500 7,787
Mary H. Crotty
Vice President, Treasurer and 1997 $ 81,000 $ 35,000 --- --- 4,185 $ 8,813(5)
Chief Financial Officer of the 1996 74,000 22,800 --- --- 4,500 7,296
Company and Security Federal 1995 60,029 24,000 --- --- 1,000 6,514
Louis J. Sorboro
President of First Federal 1997 $112,074 $ 31,400 --- --- --- $ 8,597(6)
1996 107,168 28,590 --- --- --- 7,146
1995 102,234 15,911 --- 127,745(7) 30,215 5,081
</TABLE>
5
<PAGE> 9
- -------------------------------------
(1) The named executive officers in the table did not receive any
additional benefits or perquisites which, in the aggregate, exceeded
the lesser of 10% of their salary and bonus or $50,000, except for Mr.
Calabrese who received benefits in fiscal 1997 and 1996 of $8,154 and
$6,408, respectively, in connection with the use of a Company car,
$3,803 and $3,793, respectively, paid on behalf of Mr. Calabrese for
club dues and $472 and $456, respectively paid on behalf of Mr.
Calabrese for disability insurance.
(2) Includes annual premiums for a split dollar life insurance policy equal
to $16,600 (including certain amounts reimbursable to the Company for
its prior payments of premiums upon termination of the arrangement) and
contributions made by Security Federal to a 401(k) plan on behalf of
Mr. Valentine equal to $12,209 for fiscal 1997.
(3) Includes annual premiums for a split dollar life insurance policy equal
to $19,000 (including certain amounts reimbursable to the Company for
its prior payments of premiums upon termination of the arrangement) and
contributions made by Security Federal to a 401(k) plan on behalf of
Mr. Mulhern equal to $12,198 for fiscal 1997.
(4) Includes annual premiums for a split dollar life insurance policy equal
to $9,500 (including certain amounts reimbursable to the Company for
its prior payments of premiums upon termination of the arrangement) and
contributions made by Security Federal to a 401(k) plan on behalf of
Mr. Calabrese equal to $8,823 for fiscal 1997.
(5) Includes contributions made by Security Federal to a 401(k) plan on
behalf of Ms. Crotty for fiscal 1997.
(6) Includes life insurance premiums of $643 and contributions of $7,954
made to a 401(k) plan by First Federal on behalf of Mr. Sorboro during
fiscal 1997.
(7) Represents the dollar value at the time of the grant of 12,590 shares
(adjusted pursuant to the acquisition of First Federal by the Company)
of restricted common stock granted to Mr. Sorboro in connection with
First Federal's mutual to stock conversion. At March 31, 1997, the
value of such shares of restricted stock was $232,915, based upon the
average of the closing bid and asked price of the Common Stock of
$18.50 per share, as reported on The Nasdaq Stock Market as of such
date.
The following table sets forth certain information concerning grants of
stock options pursuant to the Company's Stock Option Plan to the named officers
during the fiscal year ended March 31, 1997. No stock appreciation rights or
limited stock appreciation rights have been granted to date.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
- --------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS(1) FOR OPTION TERM(2)
- --------------------------------------------------------------------------------- -------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES PRICE EXPIRATION
NAME GRANTED(#) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles F. Valentine 9,765 21% $12.25 05-21-06 $75,361 $190,125
Austin J. Mulhern 8,370 18% $12.25 05-21-06 $64,616 $162,964
Jeffrey J. Calabrese 4,650 10% $12.25 05-21-06 $35,898 $ 90,536
Mary H. Crotty 4,185 9% $12.25 05-21-06 $32,308 $ 81,482
</TABLE>
(1) These options are all immediately exercisable.
(2) Represents the potential realizable value of the option grant assuming
that the market price of the underlying security appreciates in value
from the date of grant to the end of the option term (10 years) at the
annualized rates as set forth in the table above.
6
<PAGE> 10
The following table sets forth certain information concerning the
number and value of in-the-money (when the fair market value of the common stock
exceeds the exercise price of the option) stock options at March 31, 1997 held
by the named executive officers and stock options exercised during fiscal 1997.
<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
- ------------------------------------------------------------------------------------------------------------------------------------
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END(#) FY-END($)(1)
------------------------------ -----------------------------
SHARES
ACQUIRED VALUE
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles F. Valentine --- --- 54,225 --- $582,858 ---
Austin J. Mulhern 40,225 $676,970 28,370 --- $218,883 ---
Jeffrey J. Calabrese --- --- 15,150 --- $114,848 ---
Mary H. Crotty 3,000 $ 37,860 9,685 --- $ 55,526 ---
Louis J. Sorboro --- --- 12,086 18,129 $101,039 $151,558
</TABLE>
- ----------------
(1) The value of options held is based upon the average of the bid and
asked price of the Company's common stock of $18.50 per share as quoted
on the Nasdaq National Stock Market on March 31, 1997, less the
respective exercise prices.
EMPLOYMENT AGREEMENTS
Security Federal maintains employment agreements with Messrs.
Valentine, Mulhern, Calabrese and Ms. Crotty. First Federal maintains an
employment agreement with Mr. Sorboro. The employment agreements provide for
initial annual base salaries in amounts not less than their current salaries.
Each of the agreements is for a term of three years which may be extended for an
additional one year in addition to the then-remaining term if Security Federal's
or First Federal's Board of Directors, as the case may be, reviews and approves
the extension. The agreements provide for termination upon the employee's death,
for cause or in certain events specified by regulations or by the Board of
Directors at any time, but without prejudice to the employee's right to
compensation or benefits under the employment agreements. The employment
agreements are terminable by the employees upon 90 days written notice to
Security Federal or First Federal, as applicable. Each of the employment
agreements provides for payment to the employee of 299% of base amount of
compensation as defined by the Internal Revenue Code in the event there is a
change in control of Security Federal or First Federal, as appropriate, where
employment terminates involuntarily in connection with such change in control or
within 12 months thereafter. If an event triggering the change in control
provision under such agreements occurred at March 31, 1997, the amounts payable
to Messrs. Valentine, Mulhern, Calabrese and Sorboro and Ms. Crotty would have
been approximately $807,000, $648,000, $288,000, $358,000 and $260,000,
respectively. The agreements also provide, among other things, for participation
in an equitable manner in employee benefits applicable to executive personnel.
The respective committees for the Associations determined that each of Messrs.
Valentine, Mulhern, Calabrese and Sorboro and Ms. Crotty had met the
requirements and standards of the Associations relative to executive officer
performance and as such the employment agreement of each was renewed for one
additional year.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
General. The Company has not paid any cash compensation to its
executive officers since its formation. All executive officers of the Company
also currently hold positions with Security Federal, the Company's lead bank
subsidiary, and receive cash compensation from Security Federal. The function of
administering the executive compensation policies of Security Federal is
currently performed by the Compensation Committee of the Board of Directors of
Security Federal. Messrs. Valentine and Mulhern are excluded from discussion and
board deliberations
7
<PAGE> 11
regarding compensation paid to them as executive officers. For compensation of
executive officers other than themselves, Messrs. Valentine and Mulhern make
recommendations to the Compensation Committee for the compensation of all
executive officers of Security Federal. In this process, the officers are
evaluated as to their performance during the year and compared to Security
Federal's performance, thrift industry compensation surveys and comparable
positions at other thrift institutions. The Compensation Committee generally
follows management's recommendations. The Compensation Committee, all of whom
are independent board members, determines the compensation for Messrs. Valentine
and Mulhern.
Base salaries and annual adjustments are determined by evaluating the
responsibilities of the position held and the experience of the individual.
Reference is also made to the competitive marketplace for management talent,
including a comparison of base salaries for comparable positions within the
thrift and banking industry to ensure that base salaries approximate the average
of comparable salary ranges. Adjustments also reflect the performance of
Security Federal, the performance of the executive and any increased
responsibilities assumed by the executive.
Compensation of Executive Officers. Adopted in 1992 as a formal
incentive compensation program for executive officers of Security Federal, the
Management Incentive Compensation Plan focuses on return on assets and return on
shareholders' equity as specific annual corporate goals that should lead to the
enhancement of shareholder value. The plan provides for a bonus pool in an
amount that is based on Security Federal's pretax return on assets for the plan
year, as adjusted for nonrecurring items and extraordinary gains or losses not
related to operations. Incentive compensation awards under the plan are based on
Security Federal's achievement of predetermined goals relating to return on
average equity, return on average assets and overall corporate performance and
on the participants' achievement of goals relating to their individual
contributions to Security Federal. Threshold, target and maximum goals for
corporate performance are generally established at the beginning of each fiscal
year. Participants, depending on their salary grade levels, can receive
incentive compensation awards that vary between a maximum of 25% and 65% of a
participant's aggregate base salary. For fiscal 1997 bonuses were paid in an
aggregate amount of $570,800 or 68.9% of the maximum bonus pool allowable based
on Security Federal's adjusted pretax return on assets for the year.
Effective April 10, 1996, the Company acquired First Federal Savings
Bank of Kent ("First Federal"). First Federal's Management Incentive
Compensation Plan was established January 1995. Because First Federal had a much
different capital structure than Security Federal, First Federal's Management
Incentive Compensation Plan was designed to focus solely on First Federal's
return on assets. Participants, depending on their salary grade levels, can
receive incentive compensation awards that vary between a maximum of 14% and 27%
of a participant's aggregate base salary. For fiscal 1997, First Federal
employees received bonuses in an aggregate amount of $66,700 or 94.6% of the
maximum bonus pool allowable based on First Federal's adjusted pretax return on
assets for the year. The function of administering the executive compensation
policies of First Federal is currently performed by First Federal's Board of
Directors. Mr. Sorboro is excluded from discussion and board deliberations
regarding compensation paid to him as an executive officer. For compensation of
executive officers other than himself, Mr. Sorboro makes recommendations to
First Federal's Board of Directors for the compensation of all executive
officers of First Federal. First Federal's compensation practices follow a
methodology similar to Security Federal.
The Company recently engaged the services of a nationally recognized
compensation consulting firm to provide a comprehensive compensation study
concerning the executive compensation practices for the Company's two thrift
subsidiaries. The comprehensive compensation study, when delivered to the
Company, may result in amendment or consolidation of the Management Incentive
Compensation Plans maintained by Security Federal and First Federal, as well as
revision of other elements of executive compensation.
Because the Compensation Committee views Messrs. Valentine and Mulhern
as having the greatest impact on corporate performance the independent Board
members have established a compensation philosophy of providing base pay and
incentive compensation for Security Federal's top two executive officers
reflective of Security Federal's superior financial performance relative to
comparably situated thrifts. Compensation Committee members also expressed their
philosophy that base salary and incentive compensation for Messrs. Valentine and
Mulhern at levels near the top percentiles in thrift industry compensation
surveys were contingent on satisfactory regulatory examinations relative to (i)
safety and soundness, (ii) Community Reinvestment Act compliance and (iii)
regulatory compliance. For other than Messrs. Valentine and Mulhern, the
Compensation Committee seeks to establish executive officer base
8
<PAGE> 12
salaries at a level commensurate with the thrift subsidiary's corporate
performance, peer group competitors, and the individual officer's performance.
Stock options have been included as key elements in the total executive
officer compensation package for many years. Equity-based compensation provides
a long-term link between the results achieved for shareholders and the rewards
provided to key executive officers. As a result of Security First exceeding
targeted performance objectives for fiscal 1997, the Stock Option Committee
granted options on May 20, 1997 representing the right to purchase 73,500 shares
of Common Stock. Directors and executive officers named in the Summary
Compensation Table received options to purchase Common Stock as follows: Mr.
Valentine - 12,000 shares; Mr. Mulhern - 10,000 shares; Mr. Calabrese - 5,000
shares; Ms. Crotty - 5,000 shares; Mr. Sorboro - 5,500 shares; and Directors
Anderson, Myers, Rinaldi, Rogers, Snow and Voinovich - 1,000 shares each.
Certain of the options granted to Messrs. Valentine, Mulhern, Calabrese, Sorboro
and Ms. Crotty are subject to future vesting requirements. The remaining 30,000
options were granted to other officers and employees of the Company and the
Associations.
Through the programs described above, a significant portion of the
executive compensation program is linked directly to individual and corporate
performance and long-term stock price appreciation. The Compensation Committee
continues to review all elements of executive compensation to insure that the
total compensation program, and each element therein, meets the business
objectives and philosophy of the Company's two thrift subsidiaries, as discussed
above.
In 1993, Section 162(m) was added to the Internal Revenue Code, the
effect of which is to eliminate the deductibility of compensation over $1
million, with certain exclusions, paid to certain highly compensated executive
officers of publicly held corporations, such as, in the Company's case, those
executive officers identified in the "Summary Compensation Table." Section
162(m) applies to all remuneration (both cash and non-cash) that would otherwise
be deductible for tax years beginning on or after January 1, 1994, unless
expressly excluded. While the current compensation of each of the Company's
executive officers is well below the $1 million threshold, if certain executives
exercise sufficient stock options, it could be possible for the executive's
compensation to exceed $1 million.
As a general rule, it will be the Stock Option Committee's policy to
take into account tax and financial accounting considerations in connection with
the granting of options or other forms of grants and awards under the Company's
Stock Option and Incentive Plan. The Board of Directors through its Stock Option
Committee (in the case of stock option grants and other awards to executive
officers) does not expect that grants or awards will be made which would exceed
the limit on deductibility.
Compensation of Chief Executive Officer. The base salary of Mr.
Valentine as the Chief Executive Officer was increased in fiscal 1997 by 6.0% as
a result of Security Federal exceeding targeted performance objectives.
Like other executive officers, Mr. Valentine participated in the
Management Incentive Compensation Plan. Mr. Valentine, as well as President
Mulhern, is eligible to receive up to 65% of base salary in short-term incentive
compensation. Because Security Federal's core pretax earnings increased 20% on
an annualized basis, the Compensation Committee authorized a 1997 incentive
compensation award to Mr. Valentine in the amount of 60% of current base salary.
The 1997 incentive compensation award represents an amount approximately 50%
greater than 1996's incentive compensation award. In contrast, 1996 overall
financial performance decreased from 1995's results and accordingly incentive
compensation awards during 1996 were determined to correlate with Security
First's diminished profitability.
9
<PAGE> 13
In reviewing Mr. Valentine's performance as Chief Executive Officer and
the justification for Security Federal to renew his employment agreement for an
additional year, the Compensation Committee favorably considered Mr. Valentine's
performance relative to the following factors (without, however, assigning any
such factor a specific weight): corporate performance (return on assets and
return on equity), the Company's stock price performance, the Company's growth
in loan volume and the compliance posture of Security Federal.
Compensation Committee of Security Federal
Robert L. Anderson
James P. Myers
Nicholas E. Rinaldi, D.D.S.
Larry E. Rogers
Donald E. Snow
Paul V. Voinovich
Board of Directors of First Federal
Richard E. Dunn Louis J. Sorboro
Joseph Giulitto Charles F. Valentine
Austin J. Mulhern Richard C. Wiland
James P. Myers John A. Williams
STOCK PERFORMANCE GRAPH
The following graph shows the performance of Security First's stock
(based on an assumed $100 investment) since April 1, 1992 in comparison to the
Nasdaq Market Index and the Media General Savings and Loan Index.
<TABLE>
<CAPTION>
03/31/92 03/31/93 03/31/94 03/31/95 03/31/96 03/31/97
-------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Security First Corp. ..... $ 100.00 $ 200.50 $ 230.58 $ 295.84 $ 275.86 $ 438.54
Selected Thrift Index .... 100.00 143.33 147.54 167.18 236.49 329.24
Nasdaq Market Index ...... 100.00 111.91 129.33 137.21 184.56 206.47
</TABLE>
10
<PAGE> 14
PROPOSAL II - AMENDMENT TO SECURITY FIRST'S CERTIFICATE OF INCORPORATION
On May 20, 1997, the Board of Directors unanimously approved and
recommended that the shareholders of Security First consider and approve an
amendment to Article FOURTH of the Company's Certificate of Incorporation (the
"Certificate") that would increase the number of authorized shares of the
Company's Common Stock from ten million (10,000,000) shares to twenty million
(20,000,000) shares. The increase in the number of authorized shares is for
general corporate purposes. The Company currently has no plans to issue these
additional shares. To be adopted, this proposal requires the affirmative vote of
the holders of a majority of all of the outstanding shares of Common Stock of
the Company entitled to vote thereon at the Meeting. The Board of Directors
believes that this proposed amendment is in the best interests of the Company
and its shareholders.
Article FOURTH, paragraph A. of the Certificate, as amended by
the proposed amendment, is set forth below:
FOURTH: A. The total number of shares of all classes of stock
which the Company shall have the authority to issue is twenty-one
million (21,000,000) consisting of:
(a) one million (1,000,000) shares of preferred stock, par
value one cent ($.01) per share (the "Preferred Stock"); and
(b) twenty million (20,000,000) shares of common stock, par
value one cent ($.01) per share (the "Common Stock").
The Board of Directors considers the proposed increase in the number of
authorized shares of Common Stock desirable because it would give the Board the
necessary flexibility to issue Common Stock in connection with stock dividends
and stock splits, acquisitions, financings and employee benefits and for other
general corporate purposes without the expense and delay incidental to obtaining
shareholder approval of an amendment to the Certificate increasing the number of
authorized shares at the time of such action, except as may be required for a
particular issuance by Delaware law or the rules of any stock exchange on which
the Company's securities may then be listed. For example, The Nasdaq Stock
Market currently requires shareholder approval as a prerequisite to listing
shares in several instances, including in connection with acquisition
transactions where the present or potential issuance of shares could result in
an increase in the number of shares of common stock outstanding by 20 percent or
more.
As of the Voting Record Date, no shares of Preferred Stock and
5,048,793 shares of Common Stock were issued and outstanding. The issuance of
Common Stock by the Company in connection with its acquisition of First Kent
Financial Corporation in April 1996 and three previous stock splits (paid in the
form of stock dividends) in 1994, 1993 and 1990 has reduced the number of
authorized but unissued shares substantially. Moreover, on May 20, 1997, the
Board of Directors declared a 3-for-2 stock split (to be paid in the form of a
stock dividend) payable on July 31, 1997 to holders of record of Security First
Common Stock on July 15, 1997. Approximately 2,524,396 additional shares of
Common Stock will be issued pursuant to the 3-for-2 stock split. Further, as of
the Voting Record Date, approximately 1,799,392 shares (adjusted for the 3-for-2
stock split discussed above) of Common Stock may be issued in the aggregate
pursuant to the Company's Stock Option Plan and in connection with the
conversion rights with respect to the Company's Convertible Subordinated
Debentures. This leaves a balance of approximately 627,419 authorized shares of
Common Stock available for future use.
The additional shares of Common Stock for which authorization is being
sought would be identical to the shares of Common Stock of the Company now
authorized. Holders of Common Stock do not have preemptive rights to subscribe
to additional securities which may be issued by the Company. In this regard, the
issuance of additional shares of Common Stock may have a dilutive effect on
earnings per share and on the equity and voting power of existing holders of
Common Stock. The Company may consider repurchasing its shares in the future in
order to minimize or avoid any such dilutive effects.
11
<PAGE> 15
The issuance of additional shares of Common Stock by the Company may
potentially have an antitakeover effect by making it more difficult to obtain
shareholder approval of various actions, such as a merger or removal of
management. The issuance of authorized shares of Preferred Stock could also make
it more difficult to obtain shareholder approval of such actions, particularly
in light of the power of the Board of Director to specify certain rights and
preferences of the Preferred Stock, such as voting rights, without shareholder
approval. Under the Certificate, the Board has the authority to issue authorized
shares of Preferred Stock in series and to fix the number, designation, relative
rights, preferences and limitations of the shares of each series of Preferred
Stock, subject to Delaware law and the Certificate. The authority of the Board
includes the right to fix for each series the dividend rate, redemption price,
liquidation rights, sinking fund provisions, conversion rights and voting
rights. Until the Board determines the specific rights, preferences and
limitations of any shares of Preferred Stock to be issued, the actual effect on
the holders of Common Stock of the issuance of such shares cannot be
ascertained. However, such effects might include restriction on dividends of
Common Stock if dividends on Preferred Stock are in arrears, dilution of the
voting power of the Common Stock to the extent that any series of Preferred
Stock has voting rights, and reduction of amounts available on liquidation as a
result of any liquidation preference granted to any series of Preferred Stock.
The Company is neither seeking to increase the authorized shares of Preferred
Stock available under the Certificate nor does it currently have any plans to
issue any Preferred Stock.
The Company has in place certain other provisions which have an
antitakeover effect. The Company's Certificate includes provisions which
provide, among other things, limited voting rights of beneficial owners of more
than 10% of the Common Stock, staggered terms for directors (see "Election of
Directors"), noncumulative voting for directors, limits on the calling of
special meetings, and a fair price/supermajority vote requirement for certain
business combinations. In addition, the Company's bylaws contain a provision
requiring any shareholder who wishes to make a nomination for director at an
annual shareholder's meeting to give written notice to the Company at least 60
days in advance of the meeting. Additionally, certain executive officers of the
Company have employment agreements with the Associations containing severance
provisions which could be triggered in the event of termination of employment
following an change of control of the Associations or the Company, therefore
making an acquisition more costly to the acquiror. See "Executive Compensation -
Employment Agreements."
The increase in the authorized shares of Common Stock has not been
proposed for an antitakeover-related purpose and the Board of Directors and
management have no knowledge of any current efforts to obtain control of the
Company or to effect a large accumulation of its Common Stock.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
AMENDMENT TO THE CERTIFICATE OF INCORPORATION.
PROPOSAL III -- RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has renewed the Company's arrangement for
Deloitte & Touche LLP to be its auditors for the 1998 fiscal year, subject to
the ratification of the appointment by the Company's shareholders. A
representative of Deloitte & Touche LLP is expected to attend the Meeting to
respond to appropriate questions and will have an opportunity to make a
statement if he or she so desires.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE COMPANY'S
AUDITORS FOR THE FISCAL YEAR ENDING MARCH 31, 1998.
SHAREHOLDER PROPOSALS
In order to be eligible for inclusion in the Company's proxy materials
for next year's Annual Meeting of Shareholders, any shareholder proposal to take
action at such meeting must be received at the Company's main office, 1413
Golden Gate Boulevard, Mayfield Heights, Ohio 44124 no later than March 2, 1998.
Any such proposal shall be subject to the requirements of the proxy rules
adopted under the Securities Exchange Act of 1934, as amended.
12
<PAGE> 16
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
Meeting other than those matters described above in this Proxy Statement.
However, if any other matter should properly come before the Meeting, it is
intended that holders of the proxies will act in accordance with their best
judgment.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Charles F. Valentine
Charles F. Valentine
Chairman of the Board and
Chief Executive Officer
Mayfield Heights, Ohio
June 27, 1997
13
<PAGE> 17
APPENDIX A
SECURITY FIRST CORP.
INDEX
Page
----
Description of the Company's Business ................................ A-2
Five Year Summary Selected Consolidated Financial Information ........ A-3
Management's Discussion and Analysis of Financial Condition
and Results of Operations .......................................... A-5
Independent Auditors' Report ......................................... A-15
Consolidated Financial Statements .................................... A-16
Notes to Consolidated Financial Statements ........................... A-20
Market Price and Dividend Information ................................ A-43
Independent Auditors ................................................. A-43
Board of Directors and Executive Officers ............................ A-44
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED MARCH 31, 1997 IS AVAILABLE TO SHAREHOLDERS FREE OF CHARGE. REQUESTS
SHOULD BE DIRECTED TO MARY H. CROTTY, VICE PRESIDENT, SECURITY FIRST CORP., 1413
GOLDEN GATE BOULEVARD, MAYFIELD HEIGHTS, OHIO 44124.
A-1
<PAGE> 18
DESCRIPTION OF THE BUSINESS
Security First Corp. ("Security First") is a Delaware corporation
organized in 1992, the principal assets of which are Security Federal Savings
and Loan Association of Cleveland ("Security Federal") and First Federal Savings
Bank of Kent ("First Federal" and together with Security Federal, the
"Associations"). Security First is also the parent company of SF Development Co.
The Company's primary business, through the Associations, consists of attracting
deposits from the general public and originating real estate loans and other
types of investments. Security Federal conducts its operations through its main
office located in Mayfield Heights, Ohio and 11 other full-service branch
offices located in Medina, Chardon, Cleveland, Painesville, Geneva, Madison,
Parma Heights, Broadview Heights, Strongsville and Willoughby, Ohio. First
Federal conducts its operations through its main office located in Kent, Ohio
and its full service branch office located in Ravenna, Ohio.
Like all thrift institutions, the Associations' (and therefore the
Company's) operations are materially affected by general economic conditions,
the monetary and fiscal policies of the federal government and the policies of
the various regulatory authorities, including the Office of Thrift Supervision
(the"OTS") and the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"). Its results of operations are largely dependent upon its net
interest income, which is the difference between (i) the interest it receives on
its loan portfolio and its investment securities portfolio and (ii) the interest
it pays on its deposit accounts and borrowings.
The Company's main office is located at 1413 Golden Gate Boulevard,
Mayfield Heights, Ohio 44124. The Company's telephone number at this address is
(216) 449-3700.
A-2
<PAGE> 19
SECURITY FIRST CORP.
FIVE YEAR SUMMARY
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS Year Ended March 31,(1)
- ----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income............................ $ 49,178 $ 43,593 $ 39,410 $ 38,578 $ 39,024
Interest expense........................... 25,563 22,608 18,123 18,000 20,539
-------- -------- -------- -------- --------
Net interest income...................... 23,615 20,985 21,287 20,578 18,485
Provision for loan losses.................. 323 377 582 695 918
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses............................ 23,292 20,608 20,705 19,883 17,567
Other income............................... 1,698 1,699 1,418 1,518 1,567
Merger expenses............................ --- (737) --- --- ---
Terminated merger costs.................... --- --- (504) --- ---
Amortization of goodwill................... (107) (111) (112) (111) (101)
SAIF assessment............................ (2,567) --- --- --- ---
Other expenses............................. (12,535) (12,519) (11,393) (11,275) (10,151)
Federal income tax......................... (3,371) (3,334) (3,414) (3,433) (3,199)
-------- -------- -------- -------- --------
Income before extraordinary charge and
cumulative effect of accounting change... 6,410 5,606 6,700 6,582 5,683
Extraordinary charge for prepayment of
debt, net of federal income tax benefit.. --- --- --- --- (1,896)
Cumulative effect of accounting change
for income taxes......................... --- --- --- 1,168 ---
-------- -------- -------- -------- --------
Net income................................. $ 6,410 $ 5,606 $ 6,700 $ 7,750 $ 3,787
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF FINANCIAL CONDITION At March 31,(1)
- ----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Cash and deposits with banks............... $ 4,685 $ 6,314 $ 7,513 $ 8,067 $ 7,207
Investments, interest-bearing deposits,
federal funds sold, and short-term
investments.............................. 35,555 40,782 45,245 46,786 33,995
Loans receivable and mortgage-backed
securities............................... 570,498 478,906 435,119 402,926 394,895
Goodwill................................... 1,028 1,135 1,246 1,358 1,398
Other assets............................... 22,995 20,090 18,628 17,773 14,718
-------- -------- -------- -------- --------
Total assets........................... $634,761 $547,227 $507,751 $476,910 $452,213
======== ======== ======== ======== ========
Deposits................................... $445,182 $410,737 $393,314 $387,776 $373,875
Borrowings................................. 123,700 76,858 59,347 47,513 44,900
Other liabilities.......................... 6,444 5,251 4,881 4,920 4,087
Shareholders' equity....................... 59,435 54,381 50,209 36,701 29,351
-------- -------- -------- -------- --------
Total liabilities and equity........... $634,761 $547,227 $507,751 $476,910 $452,213
======== ======== ======== ======== ========
</TABLE>
- --------------
(1) On April 10, 1996 Security First Corp. acquired First Kent Financial
Corporation, the holding company for First Federal Savings Bank of
Kent. The acquisition was accounted for as a pooling of interest and,
accordingly, the financial statements for the Company for all periods
presented have been restated to reflect the acquisition.
A-3
<PAGE> 20
<TABLE>
<CAPTION>
OTHER STATISTICAL AND OPERATING DATA Year Ended March 31,
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Return on average assets .................. 1.07% 1.07% 1.37% 1.64% 0.86%
Excluding non-recurring items (1) ....... 1.36% 1.21% 1.44% 1.40% 1.30%
Return on average equity .................. 11.33% 10.64% 14.58% 23.23% 13.39%
Excluding non-recurring items (1) ....... 14.33% 12.04% 15.30% 19.73% 20.10%
Equity to assets:
Average for the year .................... 9.47% 10.02% 9.42% 7.08% 6.45%
At year end ............................. 9.36% 9.94% 9.89% 7.70% 6.49%
Net interest income to other
expenses ................................ 188.39% 167.63% 186.84% 182.51% 182.10%
Efficiency ratio (2) ...................... 49.52% 55.19% 50.18% 51.03% 50.62%
Net yield on average interest-earning
assets (3) .............................. 4.12% 4.16% 4.57% 4.56% 4.39%
Interest rate spread during period (4) 3.78% 3.80% 4.30% 4.39% 4.20%
Per share information (5):
Earnings per share (8) .................. $ 1.17 $ 1.06 $ 1.24(10) $ 1.73(10) $ 0.87(10)
Core earnings per share (6)(8) .......... $ 1.46 $ 1.19 $ 1.29(10) $ 1.45(10) $ 1.42(10)
Dividends paid per share (9) ............ $ 0.44 $ 0.40 $ 0.31 $ 0.18 $ 0.12
Dividend payout ratio (8) ............... 37.61% 37.74% 25.00% 10.40% 13.79%
Book value per share .................... $ 11.88 $ 11.03 $ 10.35 $ 11.00 $ 8.92
Tangible book value per share (7) ....... $ 11.67 $ 10.80 $ 10.09 $ 10.59 $ 8.50
Weighted average shares
outstanding (5):
Common shares............................ 4,956,594 4,779,760 4,675,361(10) 3,315,886(10) 3,289,582(10)
Common and common stock
equivalent shares...................... 5,826,619 5,677,885 5,618,910(10) 4,250,407(10) 3,478,586(10)
</TABLE>
- ---------------
(1) The non-recurring items are SAIF assessment in the current period, and
merger expenses, terminated merger costs, extraordinary charge for
prepayment of debt, and cumulative effect of an accounting change in
the prior periods.
(2) Non-interest expense less goodwill divided by the sum of net interest
income and other income, not including one-time gains or non-recurring
expenses.
(3) Net interest income divided by average interest-earning assets.
(4) Average yield earned on interest-earning assets less average rates paid
on interest-bearing liabilities.
(5) All share and per share information has been adjusted for the stock
splits in fiscal 1994 and 1993.
(6) Represents earnings excluding gains (losses) on sale of assets and
before nonrecurring or extraordinary items.
(7) Represents shareholders' equity less goodwill divided by common shares
outstanding.
(8) Represents or utilizes fully diluted earnings, shares, and amounts, as
appropriate.
(9) The amounts herein are historical per share amounts declared and paid
by the Company, as adjusted for stock splits. No adjustment has been
made for the acquisition of First Kent Financial Corporation, which was
accounted for as a pooling of interests.
(10) Primary and fully diluted earnings per share of First Kent Financial
Corporation, former parent of First Federal, subsequent to First
Federal's mutual to stock conversion in June 1994 are calculated based
on net income subsequent to the stock conversion divided by the
weighted average shares outstanding subsequent to the stock conversion.
Primary and fully diluted earnings per share for the fiscal years ended
March 31, 1994 and 1993 (prior to First Federal's mutual to stock
conversion) do not include the results of First Federal.
A-4
<PAGE> 21
SECURITY FIRST CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Security First Corp. ("Security First" or the "Company"), a savings and
loan holding company, is the parent corporation to Security Federal Savings and
Loan Association of Cleveland ("Security Federal"), First Federal Savings Bank
of Kent ("First Federal") and SF Development Co. Security Federal has 12
branches in a five-county area in Northeast Ohio. Security Federal has one
wholly-owned subsidiary, Security Financial Corporation ("Security Financial")
which is largely inactive. First Federal was acquired on April 10, 1996 in a
transaction that was accounted for as a pooling of interests and, accordingly,
the financial statements for the Company for all periods presented prior to the
acquisition have been restated to include the results of First Federal and its
former parent Company, First Kent Financial Corporation. First Federal, which
has two branches in Portage County, Ohio, operates as a separate subsidiary of
Security First. SF Development Co. was established in March 1994 for the purpose
of entering into joint ventures to purchase and develop land for residential
properties.
The Company's earnings depend primarily on its net interest income,
which is the difference between the amount it receives from interest earned on
its loans and investments and the amount it pays on its savings deposits and
borrowings. The Company's interest income and interest expense are significantly
impacted by general economic conditions, particularly changes in market interest
rates, government policies, and regulations. The operations of the Company can
also be affected by the economic conditions in its market area, Northeast Ohio.
Certain statements in this report that relate to Security First's
plans, objectives, or future performance may be deemed to be forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements are based on Management's current expectations. Actual
strategies and results in future periods may differ materially from those
currently expected because of various risks and uncertainties. Additional
discussion of factors affecting Security First's business and prospects is
contained in the Company's periodic filings with the Securities and Exchange
Commission.
OVERVIEW OF FINANCIAL CONDITION
Total assets of nearly $635 million at year-end 1997 reflect an
increase of approximately 16% from $547 million at March 31, 1996. The Company's
16% growth in assets during the year ended March 31, 1997 was the result of a
$92.3 million increase in the Company's loan portfolio, which increase was
funded by increases in both retail savings deposits and Federal Home Loan Bank
borrowings. The level of liquid assets, including cash, deposits with banks,
federal funds sold, and qualifying investment securities, averaged 6.94% for
Security Federal and 11.86% for First Federal for the year ended March 31, 1997
as compared to 7.37% and 17.75%, respectively, for fiscal 1996.
The Company increased shareholders' equity in each of the years 1997,
1996 and 1995 through the retention of net earnings, after the payment of cash
dividends to shareholders. Both Security Federal and First Federal are
categorized as well-capitalized institutions by the Office of Thrift Supervision
("OTS") based on their regulatory capital ratios. See Note 13 of the Notes to
Consolidated Financial Statements.
A-5
<PAGE> 22
LENDING ACTIVITIES.
The following table shows the composition of the Company's loan
portfolio as of the dates indicated
<TABLE>
<CAPTION>
March 31,
----------------------------------
1997 1996 1995
-------- -------- --------
(In millions)
<S> <C> <C> <C>
Real Estate Loans:
Permanent - one-to four-family $ 236.0 $ 225.6 $ 213.9
Permanent - multi-family and commercial 169.5 132.9 113.3
Construction 105.5 64.8 59.8
Residential development 50.5 43.4 33.7
Lines of credit 17.7 15.7 14.7
Other loans 48.4 38.0 27.6
Less: net items (59.6) (44.8) (32.1)
-------- -------- --------
Total $ 568.0 $ 475.6 $ 430.9
======== ======== ========
</TABLE>
One- to four-family permanent real estate mortgage loans are generally
considered to have a lower level of credit risk because the collateral is
generally more liquid than multi-family and commercial real estate and not
subject to significant fluctuations in the near-term.
Multi-family and commercial real estate lending is generally considered
to involve a higher level of risk than does one- to four-family residential
lending due to the concentration of principal in a limited number of loans and
borrowers and the effects that general economic conditions have on real estate
development. In addition, the nature of these loans is such that the collateral
is less liquid than one- to four-family properties, and such loans are generally
less predictable and more difficult to evaluate and monitor. A significant
potential risk of loss is that the cash flows from the properties may be
inadequate to service the loan payments. The Company attempts to mitigate the
risks associated with this type of lending through its underwriting policies and
its monitoring of the properties, substantially all of which are located in its
market area.
The Company's construction loans often are larger individually, and
also generally involve a greater degree of risk, than its single-family mortgage
loans secured by existing homes. Repayment of construction loans usually is
dependent on both the successful completion of construction within the estimated
time and budget, and the successful marketing of the units. If loan defaults
resulting in foreclosure occur before construction is completed, the Company
would be required either to arrange for the completion of construction or the
disposition of the unfinished units. In either case, the Company may incur
substantial additional costs in the administration of the loans. If loan
defaults resulting in foreclosure occur after construction is completed, the
Company may incur additional costs in marketing and selling the completed units.
The Company attempts to minimize these risks by making construction loans to
established builders in its market area, by monitoring the quality, progress,
and cost of construction and originating loans mainly on single-family, pre-sold
residences.
At March 31, 1997, $80.5 million of Security First's construction loan
portfolio consisted of loans on single-family residences, the majority of which
were pre-sold, i.e. the structure was not built on a speculative basis and the
contract purchaser had a commitment for permanent financing (generally not from
the Company) prior to the commencement of construction.
The Company, through its subsidiary SF Development Co., makes land
acquisition and development loans for single-family residential projects,
usually to developers that have pre-sold some of the lots. All of these
residential development loans are located in the Company's market area.
Residential development lending generally is considered to involve risks similar
to those discussed above regarding multi-family and commercial real estate
lending.
A-6
<PAGE> 23
ASSET QUALITY
General. The Company's goal is to maintain the asset quality level of
its loan portfolio through the use of conservative lending policies and
underwriting standards. The majority of loan delinquencies that do arise are
generally remedied within 90 days as a result of the Company's collection
efforts. At March 31, 1997, the Company's percentage of non-performing assets to
total assets was .26%.
Systematic detailed reviews of the Company's multi-family and
commercial loan portfolios are performed regularly in order to evaluate any
potential credit losses. For loan balances that are significant in total but not
individually significant and are well collateralized, the portfolios are
reviewed in total. These reviews consider, among other factors, economic
conditions, delinquency patterns, and historical loss experiences in the loan
portfolio in order to assess potential credit losses.
Management is of the opinion that the allowance for loan losses at
March 31, 1997, which represents 302% of total nonperforming loans, is adequate
to meet potential losses in the portfolio. It must be understood, however, that
there are inherent risks and uncertainties related to the operation of a
financial institution. By necessity, the Company's consolidated financial
statements are dependent upon estimates, appraisals, and evaluations of loans.
Therefore, the possibility exists that abrupt changes in such estimates,
appraisals, and evaluations might be required because of changing economic
conditions and the economic prospects of borrowers.
Non-performing Assets. Generally, it is the Company's policy to
discontinue the accrual of interest on all loans which are 90 days or more past
due or when collectibility of the loan is in doubt. The following table
summarizes non-performing assets at the end of the three most recent years.
<TABLE>
<CAPTION>
March 31,
----------------------------------
1997 1996 1995
----------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
NON-PERFORMING ASSETS:
NON-ACCRUING LOANS $ 1,643 $ 2,006 $ 3,050
ACCRUING LOANS PAST DUE 90 DAYS --- 522 278
------- ------- -------
TOTAL NON-PERFORMING LOANS 1,643 2,528 3,328
REAL ESTATE OWNED 5 39 241
------- ------- -------
TOTAL NON-PERFORMING ASSETS $ 1,648 $ 2,567 $ 3,569
======= ======= =======
ALLOWANCE FOR LOAN LOSSES $ 4,968 $ 4,572 $ 4,283
======= ======= =======
RATIOS:
NON-PERFORMING ASSETS TO TOTAL ASSETS 0.26% 0.47% 0.70%
NON-PERFORMING LOANS TO TOTAL LOANS (BEFORE ALLOWANCE FOR 0.29% 0.53% 0.76%
LOAN LOSSES)
ALLOWANCE FOR LOAN LOSSES TO NON-PERFORMING LOANS 302.37% 180.85% 128.70%
NET CHARGE-OFFS (RECOVERIES) TO AVERAGE LOANS FOR THE YEAR (0.01)% 0.02% 0.07%
</TABLE>
Potential Problem Loans. As of March 31, 1997, there were three
commercial loans totaling $1.4 million which are not reflected in the above
table where known information about possible credit problems of the borrower
caused management to have doubts as to the ability of the borrower to comply
with present loan repayment terms and which may result in disclosure of such
loans in the future.
Although management believes that these loans are adequately secured
and no material loss is expected, certain circumstances may cause the borrower
to be unable to comply with the present loan repayment terms at some future
date. The Company is closely monitoring the status of these loans.
A-7
<PAGE> 24
Allowance for Loan Losses. The Company's provision for loan losses was
$323,000 for the fiscal year ended March 31, 1997 compared to $377,000 and
$582,000 for the previous two years. Although management believes that the
procedures used to evaluate potential losses in the loan portfolio have resulted
in an adequate allowance for loan losses in accordance with generally accepted
accounting principles, recovery of the carrying value of such loans is dependent
to a great extent on economic, operating, and other conditions that may be
beyond the Company's control and, therefore, future adjustments to the allowance
for loan losses may be necessary.
CAPITAL AND DIVIDENDS
The OTS, has implemented a statutory framework for capital requirements
which establishes five categories of capital strength, ranging from "well
capitalized" to "critically undercapitalized." An institution's category depends
upon its capital level in relation to relevant capital measures, including two
risk-based capital measures, a leverage capital measure, and certain other
factors. At fiscal year-end 1997, both Security Federal and First Federal
exceeded the level required to meet the definition of a well-capitalized
institution. See Note 13 of the Notes to Consolidated Financial Statements for a
further analysis of both Security Federal's and First Federal's regulatory
capital.
The Company has paid regular cash dividends each quarter since June
1988. During the current fiscal year, a total of $2.2 million ($.44 per share)
in dividends was declared and paid. The dividend payout rate as a percentage of
earnings per share (fully diluted) was 37.61%, 37.74%, and 25.00% for the fiscal
years ended March 31, 1997, 1996 and 1995, respectively.
Cash dividend payout levels are continually reviewed by management and
the Board of Directors. The Company intends to continue its policy of paying
quarterly dividends; however, such payment will depend on a number of factors,
including capital requirements, regulatory limitations, the Company's financial
condition and results of operations, and Security Federal's and First Federal's
ability to pay dividends to the Company. At present, the Company has no
significant source of income other than dividends from the Security Federal and
First Federal; therefore, the Company depends upon such dividends to accumulate
earnings for payment of cash dividends to its shareholders. See Note 12 of the
Notes to Consolidated Financial Statements for additional restrictions on
dividend payments.
LIQUIDITY
The term "liquidity" refers to the ability of the Company to generate
adequate amounts of cash to meet its needs. The Company's liquidity is a measure
of its ability to fund loans and meet withdrawals of deposits and other cash
outflows in a cost effective manner. The principal sources of funds for the
Company's operations are cash flows generated from earnings, savings deposits,
scheduled amortization and prepayment of loans and mortgage-backed securities,
maturities of investment securities, and borrowings from the Federal Home Loan
Bank ("FHLB") of Cincinnati. Because a significant portion of the Company's loan
originations consists of relatively short-term construction and development
loans, the funding source for new loan originations is frequently derived from
maturities and prepayments of other construction loans.
While loan and mortgage-backed securities payments and maturing
investments are relatively stable sources of funds, deposit flows and loan
prepayments are greatly influenced by prevailing interest rates, economic
conditions and competition.
Management regularly reviews the Company's need for cash to fund its
operations and believes, as in the past, that the aforementioned resources are
adequate for its projected requirements. Federal regulations require that
Security Federal and First Federal maintain an average daily balance of liquid
assets of at least 4% of the sum of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. The
average liquid assets ratio for the month of March 1997 was 6.81% and 10.76% for
Security Federal and First Federal, respectively. The Company invests excess
cash in federal funds and short-term investments and also receives interest on
excess funds held in its FHLB demand account. The cash management policies of
the Company are designed to keep liquidity levels within the Federal regulatory
requirements.
A-8
<PAGE> 25
The Company has a relatively stable retail deposit base and, therefore,
management believes that significant additional borrowings will not be necessary
to maintain its current liquidity position. Certificates of deposit scheduled to
mature in one year or less at March 31, 1997 totaled approximately $232 million.
Management believes that a significant portion of the amounts maturing during
fiscal 1998 will be reinvested with the Company because they are retail deposits
and historically such deposits have remained with the Company; however, no
assurances can be made that this will occur.
As of March 31, 1997, the Company had commitments to originate loans
and commitments on unfunded lines of credit (typically secured by single-family
residences) totaling $54.3 million. There were no commitments to purchase or
sell loans at March 31, 1997. The Company anticipates that it will have
sufficient funds available during fiscal 1998 from loan and mortgage-backed
security repayments and investment maturities to meet current and future loan
commitments.
ASSET AND LIABILITY MANAGEMENT
Security Federal and First Federal each have an Asset and Liability
Committee to monitor the level and relative mix of their respective
interest-sensitive assets and liabilities. The Asset and Liability Committees of
Security Federal and First Federal includes senior management representatives of
the respective institutions.
The asset and liability management programs of Security Federal and
First Federal are designed to minimize the impact of significant changes in
interest rates on net interest income. The key components of successful interest
rate and credit risk management include the monitoring and management of rate
sensitivity and repricing characteristics of the balance sheet components, as
well as the creditworthiness of borrowers and the quality of assets.
Both Security Federal and First Federal, like other financial
institutions, are subject to interest rate risk to the extent that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. The OTS provides a Net Portfolio Value ("NPV") approach
to the quantification of interest rate risk. This approach calculates the
difference between the present value of expected cash flows from assets and the
present value of expected cash flows from liabilities, as well as cash flows
from off-balance sheet contracts.
Thrift institutions with greater than "normal" interest rate exposure
must take a deduction from their total capital available to meet their
risk-based capital requirement. The amount of the deduction is one-half of the
difference between (a) the institution's actual calculated exposure to a 200
basis point interest rate increase or decrease (whichever results in the greater
pro forma decrease in NPV) and (b) its "normal" level of exposure which is
defined as 2% of the present value of its assets. The regulation, however, will
not become effective until the OTS evaluates the process by which savings
associations may appeal an interest rate risk deduction determination. It is
uncertain as to when this evaluation may be completed.
Presented below, as of March 31, 1997, is an analysis of Security
Federal and First Federal's interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, up and down 400 basis points. This analysis was prepared by an
independent third party analysis service. As illustrated in the table, NPV is
generally more sensitive to rising rates than declining rates. This occurs
principally because, as rates rise, the market value of fixed-rate loans
declines due to both the rate increase and slowing prepayments. When rates
decline, Security Federal and First Federal do not experience a significant rise
in market value for these loans because borrowers prepay at relatively high
rates. The value of the banks' deposits and borrowing change in approximately
the same proportion in rising or falling rate scenarios.
A-9
<PAGE> 26
SECURITY FEDERAL AND FIRST FEDERAL
<TABLE>
<CAPTION>
Market Value of Portfolio Equity
--------------------------------------------
Change in Interest Rate Estimated $ %
(Basis Points) NPV Change Change
----------------------- -------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C>
+400 $43,362 $(9,697) (18.28)%
+300 48,793 (4,266) (8.04)
+200 53,222 163 0.31
+100 53,458 399 0.75
--- 53,059 --- ---
-100 51,343 (1,716) (3.23)
-200 50,184 (2,875) (5.42)
-300 52,360 (699) (1.32)
-400 55,991 2,932 5.53
</TABLE>
In addition to monitoring selected measures on NPV, management also
monitors effects of net interest income resulting from increases or decreases in
rates. This measure is used in conjunction with NPV measures to assess interest
rate risk.
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, prepayments and early withdrawal levels would likely deviate
significantly from those assumed in calculating the tables. Finally, the ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase.
RESULTS OF OPERATIONS
General. Security First's consolidated net income was $6.4 million or
$1.17 per share (fully diluted) for the year ended March 31, 1997 compared to
$5.6 million or $1.06 per share (fully diluted) for the year ended March 31,
1996 and $6.7 million or $1.24 per share (fully diluted) for the year ended
March 31, 1995. Net income for the current year as well as the prior two fiscal
years was affected by non-recurring items. During fiscal 1997, net income was
reduced by $2.6 million ($1.7 million after tax) due to a special one-time
Savings Association Insurance Fund Assessment ("SAIF") assessment for the
recapitalization of the FDIC insurance fund, which provides government insurance
on deposits at savings and loan institutions. As a result of the assessment, the
deposit insurance premiums paid by Security Federal and First Federal were
reduced from 23 basis points to zero, based upon their current risk
classifications and the new assessment schedule for SAIF insured institutions.
These premiums are subject to change in future periods. Net income for fiscal
1996 was impacted by merger costs of $737,000 related to the successful
acquisition of First Kent Financial Corporation. Net income for the year ended
March 31, 1995, was decreased by $333,000 after-tax cost related to the
termination of the proposed merger with Mid Am, Inc. Excluding the
aforementioned non-recurring items, net income for fiscal years 1997, 1996 and
1995 would have been $8.1 million, $6.3 million and $7.0 million, or $1.46,
$1.19 and $1.29 per share (fully diluted), respectively.
Interest Income. Total interest income for the year ended March 31,
1997 was $49.2 million compared to $43.6 million and $39.4 million for the years
ended March 31, 1996 and 1995, respectively, largely as a result of increased
lending activity. Average loans outstanding during fiscal 1997 were $525.7
million compared with $453.5 million and $410.2 million for 1996 and 1995,
respectively. The average yield on the loan portfolio decreased slightly to
8.78% from 8.90% during 1996. The average yield on loans during fiscal 1995 was
8.82%.
A-10
<PAGE> 27
Additionally, interest income included amortization of net deferred
loan fees of $1.6 million, $1.7 million, and $2.0 million for the years ended
March 31, 1997, 1996, and 1995, respectively. Origination fees received on
loans, net of certain direct origination costs, are deferred and amortized to
interest income over the contractual life of the loans.
Interest income on total investments during 1997 was $2.8 million which
was comparable to 1996 and 1995. As noted in the table below, the average
balance outstanding of investment securities and short-term investments was
slightly lower during the current fiscal year compared with 1996 and 1995 but
was offset by somewhat higher rates on such investments.
Interest income on mortgage-backed securities was $224,000 in fiscal
1997 compared with $301,000 and $377,000 in 1996 and 1995, respectively. The
annual decreases were principally due to a decline in the average balance
outstanding as a result of scheduled amortization and prepayments of the
underlying loans.
Interest Expense. Total interest expense for the year ended March 31,
1997 was $25.6 million compared to $22.6 million and $18.1 million for the years
ended March 31, 1996 and 1995, respectively, as a result of higher volume on
both deposits and borrowings to support lending activity offset slightly by a
lower interest rate environment. Average deposits outstanding during fiscal 1997
were $425.1 million at an average cost of 4.51% compared with $401.4 million
outstanding at an average cost of 4.63% for 1996 and $388.0 million outstanding
at 3.95 % for 1995.
Interest expense on total FHLB advances for the year ended March 31,
1997 increased by $2.3 million from the prior year and by $3.6 million compared
with fiscal 1995. This increase was due to greater short-term borrowings in the
current year offset slightly by somewhat lower rates on short-term FHLB advances
compared with the previous year. The average rate paid on short-term advances
was 5.82% in the current year compared with 6.07% last year and 6.02% in fiscal
1995. The amount of long-term borrowings remained relatively constant, although
rates paid on such borrowings were slightly higher during fiscal 1997 and 1996
compared to fiscal 1995.
A-11
<PAGE> 28
The following table presents the total dollar amounts of interest
income and interest expense on the indicated amounts of average interest-earning
assets or interest-bearing liabilities for the years ended March 31, 1997, 1996,
and 1995. Average balance calculations were based on daily and monthly balances.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED For the Year Ended For the Year Ended
MARCH 31, 1997 March 31, 1996 March 31, 1995
---------------------------- --------------------------- -----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------ -------- -------- ------ ------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNINGS ASSETS:
Loans(1)........................ $525,678 $ 46,165 8.78% $453,491 $40,374 8.90% $410,185 $36,173 8.82%
Mortgage-backed securities...... 2,783 224 8.05% 3,705 301 8.12% 4,681 377 8.05%
Investment securities........... 36,837 2,353 6.39% 37,900 2,409 6.36% 42,733 2,455 5.74%
Short-term investments.......... 8,156 436 5.35% 9,504 509 5.36% 8,693 405 4.66%
-------- -------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning assets 573,454 49,178 8.58% 504,600 43,593 8.64% 466,292 39,410 8.45%
Non-interest-earning assets..... 24,031 21,255 21,509
-------- -------- --------
Total Assets................. $597,485 $525,855 $487,801
======== ======== ========
INTEREST-BEARING LIABILITIES:
Passbook accounts............... $ 58,751 $ 1,587 2.70% $ 62,787 $ 1,606 2.56% $ 69,143 $ 1,685 2.44%
Money market/NOW Accounts....... 82,364 1,456 1.77% 76,476 1,537 2.01% 79,757 1,763 2.21%
Certificate of deposit
accounts...................... 283,989 16,148 5.69% 262,156 15,426 5.88% 239,091 11,859 4.96%
-------- -------- ------ -------- ------- ------ -------- ------- ------
Total deposits............... 425,104 19,191 4.51% 401,419 18,569 4.63% 387,991 15,307 3.95%
-------- -------- ------ -------- ------- ------ -------- ------- ------
Short-term FHLB advances........ 75,547 4,394 5.82% 35,723 2,170 6.07% 18,881 1,137 6.02%
Long-term FHLB advances......... 23,433 1,392 5.94% 21,382 1,279 5.98% 20,428 1,059 5.18%
-------- -------- ------ -------- ------- ------ -------- ------- ------
Total advances............... 98,980 5,786 5.85% 57,105 3,449 6.04% 39,309 2,196 5.59%
-------- -------- ------ -------- ------- ------ -------- ------- ------
Convertible subordinated
debentures.................... 8,742 586 6.70% 8,789 590 6.71% 9,307 620 6.66%
-------- -------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities................... 532,826 25,563 4.80% 467,313 22,608 4.84% 436,607 18,123 4.15%
Non-interest-bearing
liabilities................... 8,089 5,855 5,233
-------- -------- --------
Total Liabilities............ 540,915 473,168 441,840
Shareholders' equity............ 56,570 52,687 45,961
-------- -------- --------
Total Liabilities and
Shareholders' Equity.......... $597,485 $525,855 $487,801
======== ======== ========
NET INTEREST INCOME/ INTEREST
RATE SPREAD..................... $ 23,615 3.78% $20,985 3.80% $21,287 4.30%
======== ====== ======= ====== ======= ======
NET INTEREST EARNING ASSETS/NET
YIELD ON INTEREST-EARNING
ASSETS.......................... $ 40,628 4.12% $ 37,287 4.16% $ 29,685 4.57%
======== ====== ======== ====== ======== ======
PERCENTAGE OF INTEREST-EARNING
ASSETS TO INTEREST-BEARING
LIABILITIES..................... 107.63% 107.98% 106.80%
====== ====== ======
</TABLE>
- ---------------
(1) Average balances include non-accrual loans, and interest income includes
deferred loan fee amortization of $1,579,000, $1,683,000 and $1,980,000
for the years ended March 31, 1997, 1996, and 1995, respectively.
A-12
<PAGE> 29
The changes in net interest income compared to the prior period for the
years ended March 31, 1997, and 1996 are analyzed in the following table. The
table shows the changes by major component, distinguishing between changes
related to volume as opposed to changes in interest rates and the net effect of
both. Changes not solely attributable to volume or rate changes have been
allocated in proportion to the changes due to volume and rate.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------------------
1997 VS. 1996 1996 vs. 1995
-------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
------------------- Increase -------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------- ----- ---------- ------ ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans ................................ $ 6,331 $(540) $ 5,791 $ 3,852 $ 349 $ 4,201
Mortgage-backed securities ........... (74) (3) (77) (79) 3 (76)
Investment securities ................ (68) 12 (56) (776) 730 (46)
Short- term investments .............. (72) (1) (73) 40 64 104
------- ----- ------- ------- ------ -------
Total interest-earning assets .... $ 6,117 $(532) 5,585 $ 3,037 $1,146 4,183
======= ===== ------- ======= ====== -------
INTEREST-BEARING LIABILITIES
Deposits ............................. $ 1,210 $(588) 622 $ 975 $2,287 3,262
Short-term FHLB advances ............. 2,312 (88) 2,224 1,023 10 1,033
Long-term FHLB advances .............. 122 (9) 113 51 169 220
Convertible subordinated debentures .. (3) (1) (4) (30) 0 (30)
------- ----- ------- ------- ------ -------
Total interest-bearing liabilities $ 3,641 $(686) 2,955 $ 2,019 $2,466 4,485
======= ===== ------- ======= ====== -------
Changes in Net Interest Income..... $ 2,630 $ (302)
======= =======
</TABLE>
OTHER INCOME. Other income was $1.7 million for 1997 and 1996 and $1.4
million in fiscal 1995. The increase in other income during fiscal 1997 and 1996
over fiscal 1995 was the result of higher service fee income as well as
approximately $89,000 in equity income received from joint ventures in real
estate development activities by SF Development Co.
OTHER EXPENSE. Other operating expenses for fiscal 1997 were $15.2
million compared to $13.4 million and $12.0 million for the prior two fiscal
years. The increase in operating expenses was largely due to data processing
expense and costs related to the opening of a Security Federal branch office in
Willoughby, Ohio. These increases in expenses were somewhat offset by a decrease
in the Federal Deposit Insurance premium after the one time special assessment
incurred in September 1996.
FEDERAL INCOME TAXES. The Company's Federal income taxes for the year
ended March 31, 1997 were $3.4 million compared with $3.3 million and $3.4
million for 1996 and 1995, respectively. The effective Federal tax rate was
higher in fiscal 1996 because of the tax effect of non-deductible merger
expenses.
A-13
<PAGE> 30
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and the related
data presented herein have been prepared in accordance with generally accepted
accounting principles, which require measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially 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 the effects of 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.
ACCOUNTING AND REPORTING DEVELOPMENTS
See Note 1 to the Notes to Consolidated Financial Statements for a
discussion of accounting and reporting developments affecting the Company and
newly promulgated FASB Statements that have not yet been adopted by the Company.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for the
years ended March 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income $11,614 $12,106 $12,584 $12,874
Interest expense 5,822 6,266 6,680 6,795
Net interest income 5,792 5,840 5,904 6,079
Provision for loan losses 96 84 84 59
Net income 1,934 286(1) 2,040 2,150
Net income per common share 0.39 0.06(1) 0.40 0.42
Dividends per common share 0.11 0.11 0.11 0.11
Return on average assets 1.38% .19%(1) 1.33% 1.37%
Return on average equity 14.08% 2.04%(1) 14.39% 14.70%
Interest rate spread 3.98% 3.80% 3.67% 3.68%
</TABLE>
<TABLE>
<CAPTION>
1996 FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income $10,561 $10,895 $11,166 $10,971
Interest expense 5,424 5,679 5,832 5,673
Net interest income 5,137 5,216 5,334 5,298
Provision for loan losses 84 84 84 125
Net income 1,608 1,648 1,693 657(2)
Net income per common share 0.33 0.34 0.34 0.13(2)
Dividends per common share 0.10 0.10 0.10 0.10
Return on average assets 1.26% 1.27% 1.26% 0.49%(2)
Return on average equity 12.67% 12.67% 12.67% 4.82%(2)
Interest rate spread 3.85% 3.81% 3.78% 3.77%
</TABLE>
- ---------------
(1) The decrease in the second quarter is due to the one time special SAIF
Assessment of $2.6 million ($1.7 million after tax).
(2) The decrease reflects the impact of non-deductible merger expenses of
$417,000.
A-14
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Security First Corp.
We have audited the accompanying consolidated statements of financial condition
of Security First Corp. and subsidiaries as of March 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended March 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits. The consolidated financial statements give retroactive effect to the
merger of Security First Corp. and First Kent Financial Corporation, which has
been accounted for as a pooling of interests as described in Note 19 to the
consolidated financial statements. We did not audit the consolidated financial
statements of First Kent Financial Corporation and subsidiary for the year ended
September 30, 1995 and the six months ended September 30, 1994, which statements
reflect total assets of $77,876,500, $77,564,000, respectively, and net income
of $813,700 and $571,000 for the year ended September 30, 1995 and the six
months ended September 30, 1994, respectively. Those financial statements were
audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for First Kent Financial
Corporation and subsidiary for such periods, is based solely on the reports of
such other auditors. As described in Note 19 to the consolidated financial
statements, subsequent to the issuance of the reports of the other auditors, the
consolidated financial statements of First Kent Financial Corporation were
restated to conform to the fiscal year of Security First Corp. for the years
ended March 31, 1996 and 1995.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial condition of Security First Corp. and
subsidiaries as of March 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1997 in conformity with generally accepted accounting principles.
We also audited the adjustments described in Note 19 that were applied to
restate the September 30, 1995 and 1994 consolidated financial statements of
First Kent Financial Corporation. In our opinion, such adjustments are
appropriate and have been properly applied.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Cleveland, Ohio
April 25, 1997 (May 20, 1997 as to Note 20)
A-15
<PAGE> 32
SECURITY FIRST CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31,
---------------------------
1997 1996
-------- ---------
(Dollars in thousands, except
per share data)
<S> <C> <C>
ASSETS
Cash and deposits with banks................................................ $ 4,685 $ 6,314
Interest-bearing deposits with banks........................................ 1,826 5,334
Federal funds sold and short-term investments............................... 2,153 4,259
-------- ---------
Total cash and cash equivalents........................................... 8,664 15,907
-------- --------
Investment securities - available for sale (amortized cost of $24,969 at
March 31, 1997 and $24,379 at March 31, 1996)............................. 24,576 24,189
Investment securities - held to maturity (market value of $6,986 at
March 31, 1997 and $7,014 at March 31, 1996).............................. 7,000 7,000
Mortgage-backed securities-available for sale (amortized cost of $2,469
at March 31, 1997 and $3,173 at March 31, 1996)........................... 2,523 3,275
Loans - net (including allowance for loan losses of $4,968 at March 31,
1997 and $4,572 at March 31, 1996).......................................... 567,975 475,631
Accrued interest receivable................................................. 4,032 3,466
Federal Home Loan Bank stock - at cost...................................... 6,400 3,864
Premises and equipment - net................................................ 8,853 8,451
Cost in excess of fair value of net assets acquired ("goodwill")............ 1,028 1,135
Prepaid expenses and other assets........................................... 3,710 4,309
-------- --------
TOTAL ASSETS............................................................ $634,761 $547,227
======== ========
LIABILITIES:
Deposits.................................................................... $445,182 $410,737
Advances from Federal Home Loan Bank........................................ 115,221 68,084
Convertible subordinated debentures......................................... 8,479 8,774
Advance payments by borrowers for taxes and insurance ("escrow")............ 1,498 1,345
Accrued interest payable.................................................... 2,058 1,473
Accounts payable and other accrued expenses................................. 2,888 2,433
-------- --------
Total liabilities 575,326 492,846
------- --------
SHAREHOLDERS' EQUITY:
Preferred stock (1,000,000 shares authorized, none issued).................. --- ---
Common stock, par value $.01 per share; 10,000,000
shares authorized; 5,003,099 shares issued and outstanding at March 31,
1997 and 4,928,968 at March 31, 1996...................................... 50 49
Capital in excess of par value.............................................. 14,915 14,453
Net unrealized loss on investments and mortgage-backed securities, net
of tax benefit of $111 at March 31, 1997 and $30 at March 31, 1996........ (224) (59)
Unearned compensation....................................................... (216) (293)
Unearned ESOP shares........................................................ --- (447)
Retained earnings (substantially restricted)................................ 44,910 40,678
-------- --------
Total shareholders' equity................................................ 59,435 54,381
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................. $634,761 $547,227
======== ========
</TABLE>
See notes to consolidated financial statements.
A-16
<PAGE> 33
SECURITY FIRST CORP.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended March 31,
----------------------------------------------
1997 1996 1995
--------- --------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest Income:
Loans................................................... $46,165 $40,374 $36,173
Mortgage-backed securities.............................. 224 301 377
Investment securities................................... 2,353 2,409 2,455
Short-term investments.................................. 436 509 405
------- ------- ---------
Total interest income................................. 49,178 43,593 39,410
------- ------- ---------
Interest Expense:
Deposits................................................ 19,191 18,569 15,307
Short-term FHLB advances................................ 4,394 2,170 1,137
Long-term FHLB advances................................. 1,392 1,279 1,059
Convertible subordinated debentures..................... 586 590 620
------- ------- -------
Total interest expense................................ 25,563 22,608 18,123
------- ------- -------
Net interest income....................................... 23,615 20,985 21,287
Provision for loan losses................................. 323 377 582
------- ------- -------
Net interest income after provision for loan losses....... 23,292 20,608 20,705
------- ------- -------
Other income.............................................. 1,698 1,699 1,418
Other expenses:
SAIF special assessment................................. 2,567 --- ---
Amortization of goodwill................................ 107 111 112
Merger expenses......................................... --- 737 ---
Terminated merger costs................................. --- --- 504
Other................................................... 12,535 12,519 11,393
------- ------- -------
Total other expenses.................................. 15,209 13,367 12,009
------- ------- -------
Income before federal income taxes........................ 9,781 8,940 10,114
Federal income taxes...................................... 3,371 3,334 3,414
------- ------- -------
Net income............................................ $ 6,410 $ 5,606 $ 6,700
======= ======= =======
Earnings per share:
Primary................................................. $ 1.27 $ 1.14 $ 1.36
======= ======= =======
Fully diluted........................................... $ 1.17 $ 1.06 $ 1.24
======= ======= =======
Cash dividends per share.................................. $ 0.44 $ 0.40 $ 0.31
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
A-17
<PAGE> 34
SECURITY FIRST CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended March 31,
1997 1996 1995
------------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income..................................................... $ 6,410 $ 5,606 $ 6,700
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses...................................... 323 377 582
Accretion of discounts, amortization of premiums, and other
deferred yield items......................................... 540 45 150
Depreciation and amortization.................................. 782 708 598
Amortization of goodwill....................................... 107 111 112
Effect of change in accrued interest receivable and payable.... 19 71 (58)
Equity income from joint ventures.............................. (89) (83) ---
FHLB stock dividends........................................... (376) (231) (212)
Deferred federal income taxes.................................. 239 424 (37)
Amortization of unearned compensation.......................... 77 298 90
Net change in accounts payable, accrued expenses,
and other assets............................................. 1,020 747 (902)
Other.......................................................... 2 (200) 212
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................... 9,054 7,873 7,235
---------- ---------- ----------
INVESTING ACTIVITIES:
Loans originated............................................... $(280,702) $(190,717) $(178,448)
Increase (decrease) in loans in process........................ 14,080 12,346 (3,108)
Loan principal repayments and maturities....................... 150,700 139,761 149,672
Proceeds from:
Sales of:
Loans and loan participations............................... 28,711 1,283 1,378
Real estate owned........................................... 151 324 813
Investment securities....................................... --- 500 3,025
Mortgage-backed security principal repayments
and maturities............................................. 704 1,040 1,290
Investment security maturities............................... 4,407 30,574 10,261
Purchases of:
Loans....................................................... (6,139) (7,976) (4,670)
Investment securities....................................... (4,993) (24,788) (15,271)
Premises and equipment...................................... (1,193) (1,323) (637)
FHLB stock.................................................. (2,160) (725) (19)
---------- ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES.......................... (96,434) (39,701) (35,714)
---------- ---------- -----------
FINANCING ACTIVITIES:
Net increase in savings deposits............................... $ 34,445 $ 17,424 $ 5,538
Proceeds from additional FHLB advances......................... 328,300 132,400 73,750
Payment of FHLB advances....................................... (281,164) (114,859) (60,945)
Proceeds from termination of employee stock ownership plan..... 457 --- ---
Net increase (decrease) in mortgage escrow funds............... 153 (552) 291
Payment of dividends on common stock........................... (2,186) (1,915) (1,286)
Proceeds from exercise of stock options........................ 132 128 64
Net proceeds from issuance of common stock..................... --- --- 6,976
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES...................... 80,137 32,626 24,388
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... (7,243) 798 (4,091)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............... 15,907 15,109 19,200
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................... $ 8,664 $ 15,907 $ 15,109
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings.......................... $ 24,978 $ 22,297 $ 17,896
Income taxes................................................. 3,254 3,286 4,210
Noncash investing and financing activities:
Transfer from loans to real estate acquired
through foreclosure....................................... 124 128 899
Effect of conversion of convertible subordinated
debentures................................................. 295 30 971
Issuance of shares to the employee stock ownership plan...... --- --- 592
Shares issued with respect to the recognition
and retention plan......................................... --- --- 383
</TABLE>
See notes to consolidated financial statements.
A-18
<PAGE> 35
SECURITY FIRST CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Loss on
Capital in Securities
Common Excess of Par Retained Available for Unearned
Stock Value Earnings Sale ESOP shares
------- ------- ---------- ------ -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1994.......... $33 $ 5,095 $31,573 $ --- $ ---
Sale of 1,259,020 shares of common
stock, net of conversion costs.. 13 6,963
Issuance of 100,721 shares of
common stock to Employee Stock
Option Plan (ESOP).............. 1 591 (592)
Issuance of 37,767 shares
with respect to Recognition and
Retention Plan.................. 383
Issuance of 83,136 shares of common
stock in connection
with conversions of subordinated
debentures...................... 2 893
Issuance of 33,184 shares of common
stock in connection with
exercise of stock options....... 64
Dividends paid $.31 Per Share..... (1,286)
Net income for the year ended
March 31, 1995.................. 6,700
Other............................. 98 42
--- ------- ------- ---- -----
Balance at March 31, 1995......... 49 14,087 36,987 --- (550)
Issuance of 75,500 shares of
common stock in connection with
exercise of stock options....... 128
Issuance of 2,568 shares of common
stock in connection with conversions
of subordinated debentures...... 28
Dividends paid - $.40 Per Share... (1,392)
Net Income for the year ended
March 31, 1996.................. 5,606
Net unrealized loss on securities
available for sale.............. (59)
Other............................. 210 (523) 103
--- ------- ------- ---- -----
Balance at March 31, 1996......... 49 14,453 40,678 (59) (447)
Issuance of 48,878 shares of common
stock in connection with
exercise of stock options....... 132
Issuance of 25,253 shares in
connection with conversions of
subordinated debentures......... 1 275
Effect of termination of ESOP..... 25 8 424
Dividends paid - $.44 Per Share... (2,186)
Net income for the year ended
March 31, 1997.................. 6,410
Net unrealized loss on securities
available for sale.............. (165)
Other............................. 30 23
--- ------- ------- ---- -----
Balance as of March 31, 1997...... $50 $14,915 $44,910 $(224) ---
=== ======= ======= ===== =====
</TABLE>
<TABLE>
<CAPTION>
Total
Unearned Shareholders'
Compensation Equity
------------ -------
(Dollars in thousands,
except per share data)
<S> <C> <C>
Balance at April 1, 1994.......... $ --- $36,701
Sale of 1,259,020 shares of common
stock, net of conversion costs.. 6,976
Issuance of 100,721 shares of
common stock to Employee Stock
Option Plan (ESOP).............. ---
Issuance of 37,767 shares with respect
to Recognition and Retention Plan (383) ---
Issuance of 83,136 shares of common
stock in connection with conversions
of subordinated debentures...... 895
Issuance of 33,184 shares of common
stock in connection with exercise of
stock options................... 64
Dividends paid $.31 Per Share..... (1,286)
Net income for the year ended
March 31, 1995.................. 6,700
Other............................. 19 159
----- -------
Balance at March 31, 1995......... (364) 50,209
Issuance of 75,500 shares of common
stock in connection with exercise of
stock options................... 128
Issuance of 2,568 shares of common
stock in connection with conversions
of subordinated debentures...... 28
Dividends paid - $.40 Per Share... (1,392)
Net Income for the year ended 5,606
March 31, 1996..................
Net unrealized loss on securities
available for sale.............. (59)
Other............................. 71 (139)
----- -------
Balance at March 31, 1996......... (293) 54,381
Issuance of 48,878 shares of common
stock in connection with exercise of
stock options................... 132
Issuance of 25,253 shares in
connection with conversions of
subordinated debentures......... 276
Effect of termination of ESOP..... 457
Dividends paid - $.44 Per Share... (2,186)
Net income for the year ended
March 31, 1997.................. 6,410
Net unrealized loss on securities
available for sale.............. (165)
Other............................. 77 130
----- -------
Balance as of March 31, 1997...... $(216) $59,435
===== =======
</TABLE>
See notes to consolidated financial statements.
A-19
<PAGE> 36
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Security First Corp. ("the Company" or "Security
First"), conform to generally accepted accounting principles and prevailing
practices within the banking and thrift industry. A summary of the more
significant policies follows:
NATURE OF OPERATIONS - Security First is a multiple savings and loan
holding company whose wholly owned subsidiaries are Security Federal Savings and
Loan Association of Cleveland, (the "Association" or "Security Federal"), First
Federal Savings Bank of Kent, ("First Federal"), acquired on April 10, 1996, and
SF Development Corp. The Company is principally engaged in the business of
attracting deposits from the general public and using such deposits, together
with borrowings and other funds, to make loans secured by real estate, various
types of consumer loans and commercial loans primarily in its market area. The
Company's principal market area consists of a six county area in Northeast Ohio,
and the Company's business is conducted through its corporate office located in
Mayfield Heights, Ohio, 12 Security Federal branch offices and two First Federal
offices. Loans and deposits are primarily generated from the areas where its
banking offices are located. The Company's income is derived predominately from
interest on loans and investments and, to a lesser extent, other income. The
Company's principal expenses are interest paid on deposits and borrowings, and
normal operating costs. The Company's operations are principally in the savings
industry, which constitutes a single industry segment. The Company also engages
in real estate development activities which are discussed in Note 18.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and all subsidiaries. All significant intercompany
transactions and balances have been eliminated. Investments in affiliates that
are not majority-owned or controlled are accounted for using the equity method.
INVESTMENT AND MORTGAGE-BACKED SECURITIES - In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," investments and mortgage-backed
securities are classified as trading, available for sale, or held to maturity
upon their acquisition. Securities classified as trading are carried at
estimated market value with the unrealized gain or loss recorded in the
statement of income. Securities classified as available for sale are carried at
estimated market value with the unrealized gain or loss reflected as a component
of shareholders' equity. Securities classified as held to maturity are carried
at amortized cost unless there is an other than temporary impairment in value.
Premiums and discounts are recognized in interest income over the period to
maturity.
LOANS - Loans are stated at the principal amount outstanding, adjusted for
amortization of premiums and accretion of discounts using the interest method.
Interest is accrued as earned. An allowance for uncollected interest is provided
separately from the allowance for loan losses when payments are 90 days or more
past due or when collectibility of a loan is in doubt. The allowance is
established by a charge to interest income equal to all accrued interest. Income
is subsequently recognized only to the extent that cash payments are received
until the loan is current and, in management's judgment, the borrower has the
ability and intent to make periodic interest and principal payments, at which
time the loan is returned to accrual status.
A-20
<PAGE> 37
On April 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures" which impose
certain requirements on the measurement of impaired loans. The Company had
previously measured such loans in accordance with methods that approximated the
result of using SFAS No.114. Consequently, no additional loss provisions were
required by the adoption of these statements. SFAS No. 114 also requires that
impaired loans for which foreclosure is probable should be accounted for as
loans. The adoption of SFAS No. 114 and SFAS No. 118 did not have a material
effect on the Company's financial position or results of operations, and prior
period amounts have not been restated.
A loan is considered to be impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In general, the
Company considers a loan on income-producing properties to be impaired when the
debt service ratio is less than 1.0. Loans on non-income producing properties
are considered impaired whenever fair value is less than book value. The Company
performs reviews of all loans over $500,000 to determine if the impairment
criteria have been met. If the impairment criteria have been met, a reserve is
calculated according to the provisions of SFAS No. 114. For loans which are
individually not significant and represent a homogeneous population, the Company
evaluates impairment based on the level and extent of delinquencies in the
portfolio and the Company's prior charge-off experience with those
delinquencies. Such loans include all mortgage loans secured by one-to-four
family residential property, all consumer loans, and certain multi-family real
estate loans, non-residential real estate loans, business loans, and leases. The
Company charges off principal at the earlier of (1) when a total loss of
principal has been deemed to have occurred as a result of book value exceeding
the fair value or net realizable value or (2) when collection efforts have
ceased.
PROVISION FOR LOAN LOSSES - The Company provides valuation reserves for
estimated losses on loans when any significant and permanent decline in value is
identified. Such provisions are based on management's estimate of the net
realizable value or fair value of the collateral, as applicable, considering
current and currently anticipated future operating or sales conditions, thereby
causing these estimates to be particularly susceptible to changes that could
result in a material adjustment to results of operations. In estimating possible
losses on loans, management considers the remaining principal balance and
estimated market value of the property collateralizing the loan, less estimated
selling expenses and holding costs. Recovery of the carrying value of such loans
and real estate is dependent to a great extent on economic, operating, and other
conditions which may be beyond the Company's control. Management also provides
valuation reserves based on the Company's past loan loss experience, known and
inherent risks in the portfolio and current economic conditions. Management
believes that the allowance for loan losses has been recorded in accordance with
generally accepted accounting principles.
LOAN FEES - Loan origination fees, net of certain direct origination costs,
are deferred and amortized to interest income over the contractual life of the
loan using the level-yield method. Fees received for loan commitments that are
expected to be drawn are deferred and amortized over the life of the loan using
the level-yield method. Unamortized net fees are recognized upon early repayment
of loans. Fees for other loan commitments are deferred and amortized over the
loan commitment period on a straight-line basis. Unamortized deferred loan fees
related to loans repaid are included in income.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are amortized on a straight-line basis over the lease
term or useful life, whichever is shorter. For tax purposes, depreciation on
certain assets is computed using accelerated methods.
REAL ESTATE OWNED - Real estate owned, which consists of property acquired
in settlement of foreclosed loans, is recorded at the lower of cost or estimated
fair value less estimated selling costs at the date of acquisition. Costs
relating to the development or improvement of real estate owned are capitalized,
whereas those relating to holding and maintaining the property are charged to
expense.
A-21
<PAGE> 38
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED - Cost in excess of
fair value of net assets acquired ("goodwill") is stated net of accumulated
amortization. Goodwill is being charged to operations over the estimated
remaining life of the long-term interest-bearing assets acquired using the
level-yield method. The amortization period for all intangible assets is
monitored to determine if events and circumstances require such period to be
reduced.
FEDERAL INCOME TAXES - The Company and its wholly owned subsidiaries file a
consolidated income tax return. In accordance with generally accepted accounting
principles, deferred tax assets and liabilities are computed annually for
differences between financial statement and tax bases of assets and liabilities
that will result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to periods in which the differences are expected
to affect taxable income. Valuation allowances are established, if necessary, to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the amount of tax payable or refundable for the period adjusted for
the change during the period in deferred tax assets and liabilities.
EARNINGS PER SHARE - Primary earnings per share of common stock was
calculated using the weighted average number of shares of common stock and
common stock equivalents outstanding during each year.
Fully diluted earnings per share was computed giving appropriate
consideration to the dilutive effect of stock options and shares issuable upon
conversion of the 6.25% Convertible Subordinated Debentures. In computing fully
diluted net income per share, net income has been adjusted to eliminate interest
expense associated with the debentures, net of estimated income taxes.
Primary and fully diluted earning per share of First Kent Financial
Corporation, former parent of First Federal, subsequent to First Federal's
mutual to stock conversion in June 1994, are calculated based on net income
subsequent to the stock conversion divided by the weighted average shares
outstanding subsequent to the stock conversion.
STATEMENT OF CASH FLOWS - For purposes of the Statement of Cash Flows, the
Company considers as cash equivalents all short-term, highly liquid investments
which are readily convertible to known amounts of cash and which have an
original maturity of three months or less. Such investments include all cash,
deposits with banks, federal funds sold and other short-term investments.
NEW ACCOUNTING STANDARDS - On April 1, 1996, the Company adopted Statement
of Financial Accounting Standards ("SFAS') No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
This statement requires that long-lived assets and certain identified
intangibles held and used by an entity, along with goodwill related to those
assets, be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss must be recognized if the estimate of the future cash flows
(undiscounted and without interest charges) resulting from the use of the asset
and its eventual disposition is less than the carrying amount of the asset. The
impact of adopting this statement on the Company's financial condition and
results of operations was not significant.
On April 1, 1996, the Company adopted SFAS No. 122, "Accounting For
Mortgage Servicing Rights." This statement requires, among other things, that,
for lenders who sell originated loans, the recognition as separate assets of the
rights to service mortgage loans for others. It also requires that capitalized
mortgage servicing rights be assessed for impairment based on the fair value of
those rights. The impact of adopting this statement on the Company's financial
condition and results of operations was not significant.
On April 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." The new standard defines a fair value method of
accounting for stock options and similar equity instruments. Under the fair
value method, compensation cost is measured at the grant date based on the fair
value of the award and is recognized over the service period, which is usually
the vesting period. Pursuant to the new standard, companies are encouraged, but
not required, to adopt the fair value method of accounting for stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," but would be required to disclose in
a note to the financial statements pro forma net income and, if presented,
earnings per share as if the company had applied the new method of accounting.
The accounting requirements of the new method are effective for all employee
awards granted after the beginning of
A-22
<PAGE> 39
the fiscal year of adoption. Management has elected to continue using the APB
No. 25 method of accounting for stock-based compensation and to include pro
forma disclosures. See Note 14.
On January 1, 1997, the Company adopted SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. "
SFAS No. 125 amends portions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," amends and extends to all servicing
assets and liabilities the accounting standards for mortgage servicing rights
now in SFAS No. 65 , and supersedes SFAS No. 122. SFAS No. 125 provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. Those standards are based upon
consistent application of a financial components approach that focuses on
control. The statement also defines accounting treatment for servicing assets
and other retained interests in the assets that are transferred. SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and is to be applied
prospectively. The impact of adopting this statement on the Company's financial
condition and results of operations was not significant.
The Financial Accounting Standard Board ("FASB") has also issued SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125,"
that defers the effective date of certain provisions of SFAS No. 125 related to
secured borrowings and collateral, repurchase agreements, dollar rolls,
securities lending, and similar transactions until December 31, 1997. Management
has not completed the process of evaluating this statement and therefore has not
determined the impact, if any, that adopting this statement will have on the
financial position and results of operations.
In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share." This
Statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock. This statement
simplifies the standards for computing EPS previously found in APB Opinion No.
15 "Earnings Per Share," and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures.
This Statement is effective for financial statements for both interim and annual
periods ending after December 15, 1997.
In February 1997, the FASB issued SFAS No. 129 "Disclosure of Information
about Capital Structure." This Statement establishes standards for disclosing
information about an entity's capital structure. It supersedes specific
disclosure requirements of APB Opinions No. 10 "Omnibus Opinion-1966" and No. 15
"Earnings Per Share" and SFAS No. 47 "Disclosure of Long-Term Obligations" and
consolidates them in this Statement for ease of retrieval and for greater
visibility to nonpublic entities. This Statement is effective for financial
statements for periods ending after December 15, 1997. It contains no changes in
disclosure requirements for entities that were previously subject to APB
Opinions No. 10 and No. 15 and SFAS No. 47 and, therefore, is not expected to
have a significant impact on the financial condition or results of operations of
the Company.
RECLASSIFICATION - Certain items in the consolidated financial statements
for 1996 and 1995 have been reclassified to conform with the 1997 presentation.
A-23
<PAGE> 40
2. INVESTMENT SECURITIES
Investment securities classified as available for sale at March 31, 1997,
are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1997
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ----- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations.................... $22,456 $14 ($410) $22,060
Federal National Mortgage Association preferred stock..... 500 16 --- 516
Federal National Mortgage Association bonds............... 2,001 --- (13) 1,988
Municipal bond............................................ 12 --- --- 12
--------- ----- ------ ----------
Total................................................. $ 24,969 $ 30 $ (423) $ 24,576
========= ===== ====== ==========
</TABLE>
Investment securities classified as held to maturity at March 31, 1997,
are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1997
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
------ --------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations.................... $7,000 --- $(14) $6,986
====== === ==== ======
</TABLE>
Investment securities classified as available for sale at March 31, 1996,
are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1996
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ----- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations.................... $21,856 64 ($247) $21,673
Federal National Mortgage Association
preferred stock......................................... 500 4 --- 504
Federal National Mortgage Association bonds............... 2,002 3 (14) 1,991
Municipal bond............................................ 21 --- --- 21
--------- ----- ------ ----------
Total................................................. $ 24,379 $ 71 $ (261) $ 24,189
========= ===== ====== ==========
</TABLE>
Investment securities classified as held to maturity at March 31, 1996,
are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1996
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ----- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations.................... $7,000 $25 $(11) $7,014
====== === ==== ======
</TABLE>
A-24
<PAGE> 41
The maturity distribution of debt investment securities at March 31, 1997,
is as follows:
<TABLE>
<CAPTION>
Weighted
Amortized Fair Average
Cost Value Yield
---------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Government and agency obligations - due in one
year or less............................................ $ 3,996 $ 3,992 5.98%
U.S. Government and agency obligations - due after
one year through five years............................. 18,460 18,068 6.29
Federal National Mortgage Association bond - due in
one year or less........................................ 1,000 1,000 6.05
Federal Mortgage Association bonds - due after one
year through five years................................. 1,001 988 5.37
Municipal bond - due after one year through five years 12 12 6.60
---------- ---------- ----
Total debt investment securities...................... $ 24,469 $ 24,060 6.19%
========== ========== ====
</TABLE>
3. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities classified as available for sale at March 31,
1997, are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1997
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation participation
certificates............................................ $2,469 $54 --- $2,523
====== === === ======
</TABLE>
Mortgage-backed securities classified as available for sale at March 31,
1996, are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1996
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation participation
certificates............................................ $3,173 $102 --- $3,275
====== ==== === ======
</TABLE>
As of March 31, 1997, mortgage-backed securities with a current value of $
1,507,000 were pledged against $ 1,250,000 in public funds. At March 31, 1996,
there were no mortgage-backed securities pledged as collateral against public
deposits.
A-25
<PAGE> 42
4. LOANS
Loans consist of the following:
<TABLE>
<CAPTION>
March 31,
------------------------------------
1997 1996
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Real estate mortgage loans:
Permanent:
One-to-four family............................................. $235,959 $225,573
Multi-family................................................... 53,628 38,057
Commercial..................................................... 115,882 94,880
Construction:
One-to-four family............................................. 80,498 56,754
Multi-family................................................... 1,051 5,002
Commercial..................................................... 23,881 3,101
Residential development land..................................... 50,432 43,387
Lines of credit - secured by one-to-four family residences....... 17,756 15,667
---------- ----------
Total mortgage loans......................................... 579,087 482,421
Business loans................................................... 6,165 2,571
Consumer loans................................................... 42,321 35,422
---------- ----------
Total loans.................................................. 627,573 520,414
Less:
Undisbursed portion of loans in process.......................... (50,332) (36,251)
Allowance for loan losses........................................ (4,968) (4,572)
Deferred loan fees and discounts................................. (4,298) (3,960)
--------- ---------
Loans - net.................................................. $567,975 $475,631
======== ========
</TABLE>
Loans with adjustable rates, included above, totaled $503 million
(approximately 80% of total loans) and $402 million (approximately 77%) at March
31, 1997 and 1996, respectively. Adjustable rate loans include loans which
reprice based on the prime rate, as well as loans ("ARMs") which have interest
rate adjustments of one, three, or five years based on the quarterly national
average of federally insured thrift institutions' cost of funds. The Company's
ARMs generally limit interest rate increases to 2% each rate adjustment period
and have an established ceiling rate of 6% over the original interest rate on
such loans.
Commitments to borrowers to originate loans and for unfunded lines of
credit (typically secured by single-family residences) are summarized below:
<TABLE>
<CAPTION>
March 31,
---------------------------------
1997 1996
------- -------
(Dollars in thousands)
<S> <C> <C>
Commitments to originate:
Fixed-rate loans............................................... $ 2,435 $ 4,398
Adjustable-rate loans.......................................... 21,533 25,424
Unfunded lines of credit......................................... 30,323 25,772
</TABLE>
As of March 31, 1997, 1996, and 1995, the Association was servicing loans
for others (on a non-recourse basis) totaling approximately $37,300,000,
$14,167,000, and $18,003,000, respectively. Custodial escrow balances maintained
in connection with the foregoing loan servicing were approximately $241,000, and
$213,000 at March 31, 1997 and 1996, respectively.
A-26
<PAGE> 43
The Company's primary lending area is within the six county area in
Northeast Ohio wherein its branches are located. At March 31, 1997 and 1996,
substantially all of the Company's loans were to borrowers located in Northeast
Ohio. Although, the Company has a diversified loan portfolio, its borrowers'
ability to honor their contracts is substantially dependent upon general
economic conditions of the region.
The Company originates commercial real estate loans, both permanent and
construction. Such loans are generally higher risk than single-family
residential real estate loans due to the dependency on income production or
future development of real estate for the repayment of the loan.
The following table summarizes the Company's commercial real estate and
commercial construction loan portfolios by type of collateral.
<TABLE>
<CAPTION>
March 31,
------------------------------------------------------------
% of % of
Collateral 1997 Total 1996 Total
- ----------------------------------------------- ----- ------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Industrial/warehouses.................. $38,284 27.4% $29,659 30.3%
Strip shopping centers/retail.......... 31,925 22.9 23,971 24.4
Office buildings....................... 34,766 24.9 19,957 20.4
Golf courses........................... 14,290 10.2 9,725 9.9
Churches............................... 2,853 2.0 2,820 2.9
Other.................................. 17,645 12.6 11,849 12.1
------ ---- ------ ----
$139,763 100.0% $97,981 100.0%
======== ===== ======= =====
</TABLE>
The Company's commercial real estate loan portfolio is comprised of loans,
typically less than $1 million individually, which are collateralized by
property located within its six county market area. Of the $139.8 million in
commercial real estate loans at March 31, 1997, 31 loans were individually
greater than $1 million; seven of such loans were collateralized by retail
shopping centers, seven by industrial properties, nine by office buildings, five
by golf courses, one by a restaurant party center, one by a hotel, and one by
light manufacturing. The average loan balance of those loans exceeding $1
million was $1.8 million. Of the commercial real estate loans under $1 million,
the average loan balance at March 31, 1997, was approximately $190,000.
Residential development land consists of loans secured by land which is
zoned for residential development and located within the Company's market area
of Northeast Ohio. These loans are made to various builders and developers with
whom the Company has generally had long-standing lending relationships.
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------
1997 1996 1995
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Balance, beginning of period................ $4,572 $4,283 $3,973
Provision charged to expense................ 323 377 582
Charge-offs................................. (33) (243) (412)
Recoveries.................................. 106 155 140
------ ------ ------
Balance, end of period...................... $4,968 $4,572 $4,283
====== ====== ======
</TABLE>
For fiscal year ending March 31, 1997 and as of March 31, 1997 there were
no loans that were considered to be impaired under SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan" adopted April 1995.
A-27
<PAGE> 44
Nonperforming loans totaled $1.7 million, $2.6 million, and $3.6 million at
March 31, 1997 , 1996, and 1995, respectively. Interest income that would have
been recorded under the original terms of the loans and the income actually
recognized for the years ended March 31, 1997, 1996, and 1995 are summarized
below.
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------
1997 1996 1995
----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C>
Interest income that would have been recorded
based on original terms.............................. $198 $215 $343
Interest income recognized............................. 312 179 192
----- ---- ----
Interest income foregone (received).................... $(114) $ 36 $151
===== ==== ====
</TABLE>
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
March 31,
----------------------------------
1997 1996
-------- --------
(Dollars in thousands)
<S> <C> <C>
Loans............................................................ $3,556 $2,953
Investments...................................................... 441 468
Mortgage-backed securities....................................... 35 45
------ ------
Total........................................................ $4,032 $3,466
====== ======
</TABLE>
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
March 31,
-----------------------------------
1997 1996
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Land............................................................. $ 1,640 $ 1,640
Buildings and improvements....................................... 8,685 8,407
Furniture, fixtures, and equipment............................... 3,398 4,422
------- -------
Total........................................................ 13,723 14,469
Less accumulated depreciation and amortization................... 4,870 6,018
------- -------
Premises and equipment - net................................. $ 8,853 $ 8,451
======= =======
</TABLE>
A-28
<PAGE> 45
7. DEPOSITS
Deposits by interest rate are summarized as follows:
<TABLE>
<CAPTION>
March 31,
---------------------------------------
1997 1996
------------------ ------------------
Type of Account and Interest Rate Amount Percent Amount Percent
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Passbook accounts : (2.50% to 4.00% at March 31, 1997
and 1996) ................................................ $ 58,009 13% $ 60,927 15%
NOW accounts:
Interest-bearing (1.79% to 2.00% at March 31, 1997 and 1996) 41,589 10 40,444 10
Non-interest-bearing ....................................... 14,755 3 12,674 3
-------- --- -------- ---
114,353 26 114,045 28
-------- --- -------- ---
Money market deposit accounts:
(variable - 2.52% to 3.00% at March 31, 1997 and 1996) ... 25,040 6 27,978 7
-------- --- -------- ---
Certificate of deposit accounts:
5.9% and less ............................................ 224,499 50 198,618 48
6.0% to 7.9% ............................................. 80,643 18 69,288 17
8.0% to 9.9% ............................................. 475 -- 642 --
10.0% to 11.9% ........................................... 72 -- 66 --
12.0% to 13.9% ........................................... 100 -- 100 --
-------- --- -------- ---
305,789 68 268,714 65
-------- --- -------- ---
Total .................................................. $445,182 100% $410,737 100%
======== === ======== ===
</TABLE>
Included in the above table at March 31, 1997 are $70.1 million in
certificates of deposit greater than $100,000, substantially all of which mature
within twelve months. At March 31, 1997 and 1996, the Company did not have any
brokered deposits.
A summary of certificates of deposit by maturity follows:
<TABLE>
<CAPTION>
March 31,
-----------------------------------
1997 1996
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Within 12 months................................................. $231,722 $194,542
12 months to 24 months........................................... 37,751 34,446
24 months to 36 months........................................... 21,175 17,903
36 months to 48 months........................................... 8,245 13,504
Over 48 months................................................... 6,896 8,319
-------- --------
Total........................................................ $305,789 $268,714
======== ========
</TABLE>
A-29
<PAGE> 46
The following is a summary of interest expense on deposits:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------
1997 1996 1995
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Passbook accounts...................................... $ 1,587 $ 1,604 $ 1,684
NOW accounts........................................... 689 677 715
Money market deposit accounts.......................... 767 860 1,047
Certificate of deposit accounts........................ 16,148 15,428 11,861
------- ------- -------
Total.............................................. $19,191 $18,569 $15,307
======= ======= =======
</TABLE>
8. BORROWINGS
FHLB ADVANCES:
Advances from the FHLB consist of the following:
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------
Rate Rate Type 1997 1996
- -------------------------------------------------- ------------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C>
5.01% to 6.00%.............................. Variable $ 21,449 $ 30,300
6.01% to 6.50%.............................. Variable 12,772 ---
-------- --------
Total variable rate advances............ 34,221 30,300
-------- --------
5.01% to 6.00%.............................. Fixed 47,000 24,212
6.01% to 7.00%.............................. Fixed 34,000 8,572
7.01% to 8.00%.............................. Fixed --- 5,000
-------- ---------
Total fixed rate advances............... 81,000 37,784
-------- --------
Total FHLB advances..................... $115,221 $ 68,084
======== ========
</TABLE>
Scheduled payments on FHLB advances at March 31, 1997 are as follows:
<TABLE>
<CAPTION>
Weighted
Years ending Principal Average Interest
March 31, Repayments Rate
- ---------------------- -------------- -----------------
<S> <C> <C>
1998 $ 84,504 5.85%
1999 24,717 6.17
2000 4,119 6.20
2001 1,139 6.50
2002 to 2005 742 5.50
-----------
$ 115,221 5.95%
===========
</TABLE>
CONVERTIBLE SUBORDINATED DEBENTURES
On May 5, 1993, the Company sold $9,775,000 of 15 year, 6.25% convertible
subordinated debentures in a public offering. The debentures are convertible by
the holders at any time prior to maturity, unless previously redeemed, into
common stock of the Company at a conversion rate of 85.62 shares of common stock
for each $1,000 principal amount of debentures (equivalent to a conversion price
of $11.68 per share), as adjusted for the two-for-one stock split in September
1993. The debentures are redeemable, in whole or in part, at the option of the
Company on and after May 1, 1996, and if redeemed during the 12-month periods
beginning May 1, 1996 and 1997, at 105% and 102.5% of the principal amount,
respectively, and thereafter at 100% of their principal amount. During fiscal
1997, $295,000 of the debentures were converted into 25,253 shares of common
stock.
A-30
<PAGE> 47
9. LEASE COMMITMENTS
At March 31, 1997, the Company was obligated under a number of
noncancellable leases for land and buildings. One of the branch leases is
accounted for as a capital lease and the others are accounted for as operating
leases. Rental expense under all leases aggregated $309,000, $270,000, and
$230,000 for the years ended March 31, 1997, 1996, and 1995, respectively.
The following is a schedule of future minimum annual lease commitments
as of March 31, 1997:
<TABLE>
<CAPTION>
Commitments Under
--------------------------------------------------------------------------------
Fiscal Year Capital Lease (Building) Operating Leases Total
----------- ------------------------ ---------------- -----
(Dollars in thousands)
<S> <C> <C> <C>
1998 $ 15 $ 299 $ 314
1999 16 300 316
2000 16 295 311
2001 17 250 267
2002 17 245 262
Thereafter 85 1,156 1,241
---- ------ ------
Total minimum payments $166 $2,545 $2,711
---- ====== ======
Less interest (55)
----
Capitalized lease obligation $111
====
</TABLE>
Additionally, the Company leases office space to tenants in office
buildings that it owns or rents. Rental income for the years ended March 31,
1997, 1996, and 1995 was $148,556, $148,571, and $151,167, respectively. The
minimum future rental income to be received under all such leases at March 31,
1997 is $124,977 in 1998, $27,904 in 1999, and $5,270 in 2000.
10. OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Other income consists of the following:
Service charges and other fees ............. $ 1,520 $ 1,513 $ 1,322
Equity income from joint ventures .......... 89 83 --
Other ...................................... 89 103 96
------- ------- -------
Total .................................. $ 1,698 $ 1,699 $ 1,418
======= ======= =======
Other expenses consist of the following:
Salaries and employee benefits ............. $ 5,690 $ 5,828 $ 5,257
Occupancy and equipment .................... 1,807 1,727 1,576
Federal insurance premium .................. 719 908 888
Professional fees .......................... 537 494 480
Other taxes ................................ 673 679 522
Data processing ............................ 548 459 405
Marketing .................................. 437 497 314
Printing and supplies ...................... 304 298 266
Supervisory assessment ..................... 133 124 123
Other ...................................... 1,687 1,505 1,562
------- ------- -------
Total .................................. $12,535 $12,519 $11,393
======= ======= =======
</TABLE>
A-31
<PAGE> 48
11. FEDERAL INCOME TAXES
The provision for federal income taxes consists of the following
components:
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Current ......... $3,132 $2,910 $ 3,491
Deferred ........ 239 424 (77)
------ ------ -------
Total ....... $3,371 $3,334 $ 3,414
====== ====== =======
</TABLE>
A reconciliation between the statutory federal income tax rate and the
effective consolidated federal income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------------------------------------
1997 1996 1995
--------------------- -------------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate ................ $3,423 35.0% $3,129 35.0% $3,540 35.0%
Benefit of graduated tax rates ....... (98) (1.0) (93) (1.0) (101) (1.0)
Purchase accounting .................. 24 .3 24 .3 25 .3
Other - net .......................... 22 .2 274 3.1 (50) --
------ ---- ------ ---- ------ ----
Effective income tax provision...... $3,371 34.5% $3,334 37.4% $3,414 34.3%
====== ==== ====== ==== ====== ====
</TABLE>
Significant components of the deferred tax assets and liabilities are
as follows (no valuation allowance was considered necessary):
<TABLE>
<CAPTION>
March 31,
--------------------------------------
1997 1996 1995
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Deferred tax assets:
Book allowance for loan losses ............. $1,692 $1,446 $1,379
Deferred loan fees ......................... 694 964 1,255
SFAS 106 health care expense ............... 236 191 131
Other ...................................... 151 126 139
------ ------ ------
Total deferred tax assets ................ $2,773 $2,727 $2,904
------ ------ ------
Deferred tax liabilities:
FHLB stock dividends ....................... 565 438 359
Tax bad debt reserves ...................... 582 445 258
Difference between book and tax depreciation 110 128 161
Other ...................................... 156 118 104
------ ------ ------
Total deferred tax liabilities ........... 1,413 1,129 882
------ ------ ------
Net deferred tax asset ................... $1,360 $1,598 $2,022
====== ====== ======
</TABLE>
During 1996, legislation was passed that repealed Section 593 of the
Internal Revenue Code of 1986, as amended (the "Code") for taxable years
beginning after December 31,1995. Section 593 allowed thrift institutions to use
the percentage-of-taxable income bad debt accounting method, if more favorable
than the specific charge-off method, for federal income tax purposes. The excess
reserve (deduction based on the percentage-of-taxable income less the deduction
based on the specific charge-off method) accumulated post-1987 are required to
be recaptured ratably over a six-year period beginning in 1996. The recapture
has no effect on the Company's statement of operations as taxes were provided
for in prior years in accordance with SFAS No. 109 "Accounting for Income
Taxes". The timing of this recapture may be delayed for a one or two-year period
to the extent that Security First originates more residential loans than the
average originations in the past six years. Security First will meet the
origination requirement for 1996 and,
A-32
<PAGE> 49
therefore, will delay the recapture at least until the six-year period beginning
in 1997. The recapture amount of $1.7 million will result in payments totaling
$582,000 which has been previously accrued. The pre-1988 reserve provisions are
subject only to recapture requirements in the case of certain excess
distributions to, and redemptions of shareholders or if the Bank no longer
qualifies as a "bank". Tax bad debt deductions accumulated prior to 1988 by the
Company are approximately $4,761,000. No deferred income taxes have been
provided on these bad debt deductions and no recapture of these amounts is
anticipated.
12. SHAREHOLDER'S EQUITY
During 1997, the Company's most significant source of income was
dividends from the Security Federal and First Federal. Consequently, the Company
depends upon such dividends from both Security Federal and First Federal to
accumulate earnings for payment of cash dividends to its shareholders. The
Company received $2,450,000 and $4,800,000 in cash dividends from Security
Federal and First Federal in the aggregate in fiscal 1997 and 1996,
respectively. At March 31, 1997, the dollar amount of Security Federal's and
First Federal's retained earnings available to pay dividends to the Company
without prior regulatory approval was $5.7 million.
During fiscal 1997, the Board of Directors of the Company announced its
intention to repurchase up to 200,000, or nearly 4 percent, of its outstanding
shares in the open market over a 12-month period. Commencing in January, 1997,
these shares will be purchased at the prevailing market prices from time to time
depending on market conditions.
13. REGULATORY CAPITAL REQUIREMENTS
Under current regulatory capital regulations at a minimum, the banking
subsidiaries of the Company must have: (a) core capital equal to 3% of adjusted
total assets, (b) tangible capital equal to 1.5% of adjusted total assets, and
(c) total capital equal to 8.0% of risk-weighted assets. Risk-weighted assets
are comprised of both on-and off-balance sheet items and are assigned a risk
weight ranging from 0-100% based on their relative risk.
As indicated in the following table, the Company exceeded all the
regulatory capital requirements at March 31, 1997 and has been categorized as a
well-capitalized institution by the OTS for prompt corrective action purposes.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------------------------ ----------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated.................................. $57,639 12.30% $37,491 8.0% $46,864 10.0%
Security Federal.............................. 46,668 11.39% 32,780 8.0% 40,975 10.0%
First Federal................................. 10,971 18.63% 4,711 8.0% 5,889 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated.................................. 52,823 11.27% 18,746 4.0% 28,119 6.0%
Security Federal.............................. 42,217 10.30% 16,390 4.0% 24,585 6.0%
First Federal................................. 10,606 18.01% 2,356 4.0% 3,534 6.0%
Tier 1 capital (to Adjusted Tangible
Assets):
Consolidated.................................. 52,823 8.53% 18,584 3.0% 30,974 5.0%
Security Federal.............................. 42,217 7.92% 15,991 3.0% 26,652 5.0%
First Federal................................. 10,606 12.27% 2,593 3.0% 4,322 5.0%
</TABLE>
A-33
<PAGE> 50
Management believes that under the current regulations, the banking
subsidiaries of the Company will continue to meet its minimum capital
requirements in the coming year. However, events beyond the Company's control,
such as fluctuations in interest rates or a downturn in the economy in areas in
which the Company's loans are concentrated, could adversely affect future
earnings and, consequently, the Company's ability to meet its future capital
requirements.
14. STOCK OPTION PLAN
Under the Company's stock option and incentive plan, shares of common
stock are reserved for issuance in connection with options granted by the Board
of Directors. Pursuant to the terms of the plan, options to purchase shares are
granted to directors, officers and employees at not less than the fair market
value of the shares at the date of the grant. The plan is administered by a
committee comprised of all of the outside directors. The following table
summarizes data concerning this plan:
<TABLE>
<CAPTION>
Option Price
Number of ----------------------------------
Options Outstanding Options Per Share Total
- ------------------- ------- --------- -----
<S> <C> <C> <C>
Balance at April 1, 1994............................... 201,468 $1.67 - $5.88 $517,984
Granted................................................ 93,335 $10.14 - $11.63 644,395
Exercised.............................................. (33,184) $1.67 - $4.25 (64,297)
------- ----------
Balance at March 31, 1995.............................. 261,619 $1.67 - $12.56 1,098,082
Granted................................................ 47,500 $13.50 641,250
Exercised.............................................. (75,500) $1.67 - $4.25 (127,138)
Forfeited.............................................. (500) $13.50 (6,750)
------- ----------
Balance at March 31, 1996.............................. 233,119 $1.67 - $13.50 1,605,444
Granted................................................ 46,035 $12.25 563,929
Exercised.............................................. (50,752) $1.67 - $13.50 (125,219)
Forfeited.............................................. (500) $13.50 (6,750)
------- ----------
Balance at March 31, 1997.............................. 227,902 $1.67 - $13.50 $2,037,404
======= ==========
</TABLE>
The expiration dates of the stock options outstanding at March 31, 1997
are October 29, 1997 for 14,460 of the options granted at $1.67; April 29, 2002
for the 30,000 granted at $5.88; September 23, 2003 for the 3,000 options at
$12.56; May 13, 2004 for the 11,500 options at $11.63; December 15, 2004 for the
79,317 options at $10.14; May 17, 2005 for the 45,500 options at $13.50; and May
21, 2006 for the 44,125 options at $12.25. The weighted average exercise price
of the outstanding options was $10.23, and the weighted average remaining
contractual life was 7.6 years at March 31, 1997.
On July 25, 1996, shareholders of Security First ratified the adoption
of the 1996 Stock Option and Incentive Plan whereby the Company increased the
number of shares available for future grant by 4.99% of the Company's
outstanding common shares as of March 31, 1996. At March 31, 1997, there were
options to purchase 311,415 shares of common stock available for future grants
to participants, including directors of the Company.
The fair value of each option grant was estimated on the date of the
grant using the Black-Scholes option pricing model with the following
assumptions made: risk-free interest rate of 6.40% and 6.31% for the options
granted in fiscal 1997 and 1996, respectively; dividend yield of 2.40%; expected
lives of 10 years for options; and volatility of 42%.
A-34
<PAGE> 51
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plan. Accordingly, no compensation expense has
been recognized. Had compensation expense been determined consistent with SFAS
No. 123, the Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1997 1997 1996 1996
-------- --------- -------- ---------
As As
Reported Pro Forma Reported Pro Forma
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net Income ..................... $ 6,410 $ 6,270 $ 5,606 $ 5,447
Primary earnings per share ..... 1.27 1.24 1.14 1.11
Fully diluted earnings per share 1.17 1.14 1.06 1.03
</TABLE>
15. EMPLOYEE BENEFITS
401(k) PLAN
The Company has a qualified, tax-exempt profit sharing plan with a
cash-or-deferred feature qualifying under Section 401(k) of the Code (the
"401(k) Plan"). With certain exceptions, all employees who have attained age 21
and have completed one year of employment, during which they worked at least
1,000 hours, are eligible to participate. Participants are permitted to make
contributions to the 401(k) Plan from one to ten percent of annual eligible
compensation on a pre-tax basis as established by the Company up to a current
maximum of $9,500 per year.
The Company's contributions to the 401(k) Plan are as follows:
1) The Company contributes a discretionary percentage (two percent in 1997
and 1996) of participants' eligible compensation as a base
contribution. The cost to the Company of the base contribution during
fiscal 1997 was approximately $47,000 compared with $40,000 for fiscal
1996.
2) In addition, participants' salary reduction contributions will be
matched by the Company in an amount equal to 50% of the amount of the
salary reduction elected by the participants up to five percent of the
participants' eligible compensation. The cost to the Company of
matching contributions was $63,000 for both fiscal 1997 and 1996.
3) Also, an additional profit-sharing contribution in a discretionary
amount as determined by the Board of Directors may be made by the
Company each year. For fiscal 1997, the discretionary contribution was
$129,000 compared with $82,000 in the prior year.
OTHER EMPLOYEE BENEFITS
The Association provides post-retirement medical insurance benefits to
all employees who retire at age 55 or more with at least five years of service
and whose combined age and years of full-time service equal at least 80 at the
time of retirement. Under this plan, retirees contribute a portion of their
monthly medical premiums.
As a result of the adoption of SFAS No. 106, "Employers' Accounting for
Post-Retirement Benefits Other than Pensions," in fiscal 1994, the Company
incurred a transition obligation (the initial unfunded and unrecognized
accumulated post-retirement benefit obligation) of $1.1 million, which will be
amortized over 20 years.
A-35
<PAGE> 52
The post-retirement benefit plan is unfunded. Net periodic
post-retirement benefit cost for fiscal years ended March 31, 1997, 1996 and
1995 included the following components:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the year...... $ 61 $ 72 $ 85
Interest cost - on accumulated post-retirement
benefit obligation ............................... 61 83 85
Amortization of transition obligation .............. 54 54 54
Amortization of gain ............................... (24) (10) --
----- ----- ----
Net period post-retirement benefit cost ........ $ 152 $ 199 $224
===== ===== ====
</TABLE>
The following table sets forth the amount recorded in the Company's
consolidated balance sheet at March 31, 1997 and 1996:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Accumulated post-retirement benefit obligation ("APBO"):
Retirees ............................................. $ 435 $ 403
Eligible active participants ......................... 66 60
Other active plan participants ....................... 495 425
----- -----
Total APBO ............................................. 996 888
Unrecognized transition obligation ..................... (856) (909)
Unrecognized gain ...................................... 553 584
----- -----
Accrued post-retirement benefit cost ............... $ 693 $ 563
===== =====
</TABLE>
The weighted average discount rate used in determining the accumulated
post-retirement benefit obligation was 7.00% for 1997 and 8.00% for 1996. For
fiscal 1997, the health care trend rate was projected to be 8.5% in the first
year, gradually decreasing to 5.5% in the year 2008 and thereafter. For fiscal
1996, the health care trend rate was projected to be 15% in the first year,
gradually decreasing to 5.5% in the year 2018 and thereafter. Increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the APBO and related costs by $221,000 and $216,000 as of March 31,
1997 and 1996, respectively, and would increase the aggregate of the service and
interest components of net periodic post-retirement benefit cost by $33,000 for
fiscal 1997 and $40,000 for fiscal 1996.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires the disclosure in the financial statements, or notes thereto, of fair
value information for financial instruments, as defined, whether or not
recognized in the balance sheet, for which it is practical to estimate fair
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts. In addition, SFAS No. 107 excludes all non-financial instruments
from disclosure requirements; therefore, the aggregate fair value amounts
presented do not represent, and should not be construed to represent, the full
underlying value of the Company.
A-36
<PAGE> 53
The fair value estimates presented herein are based on pertinent
information available to management as of March 31, 1997 and March 31, 1996, as
appropriate. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------------------------
1997 1996
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents ......... $ 8,664 $ 8,664 $ 15,907 $ 15,907
Investment securities ............. 31,576 31,562 31,189 31,203
Mortgage-backed securities ........ 2,523 2,523 3,275 3,275
Loans ............................. 567,975 571,942 475,631 484,241
FHLB stock ........................ 6,400 6,400 3,864 3,864
Financial Liabilities:
Demand deposits ................... $139,348 $139,348 $142,023 $142,023
Time deposits ..................... 305,834 306,875 268,714 268,265
Advances from the FHLB ............ 115,221 115,337 68,084 67,476
Convertible subordinated
debentures....................... 8,479 8,283 8,774 8,419
</TABLE>
CASH AND CASH EQUIVALENTS. For cash, deposits with banks, and federal
funds sold, the carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES. Estimated fair
values for investment securities and mortgage-backed securities are based on
quoted market prices.
LOANS. For variable rate loans that reprice based on the prime rate,
fair values are based on carrying values. The fair values of other loans are
estimated using discounted cash flow analyses and employ interest rates
currently being offered at the reporting date for loans with similar terms. The
fair value of loans is reduced by an estimate of losses inherent in the loan
portfolio.
FEDERAL HOME LOAN BANK STOCK. The fair value is estimated to be the
carrying value which is par. All transactions in the capital stock of the
Federal Home Loan Bank of Cincinnati are executed at par.
DEPOSITS. The fair value of demand deposits, which includes passbook
accounts, money market accounts, and NOW accounts, is the amount payable on
demand at the reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using discounted cash flows based on rates currently
offered at the reporting date for deposits of similar remaining maturities.
BORROWINGS. Rates currently available to the Company at the reporting
date for debt with similar terms and remaining maturities were used to estimate
the fair value of existing borrowings, including advances from the FHLB and
convertible subordinated debentures.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. The fair value of off-balance
sheet financial instruments, including commitments to originate loans, is
considered to be equivalent to the value of the current fees charged to enter
into such commitments. At March 31, 1997 and 1996, such fees were not considered
significant.
A-37
<PAGE> 54
17. SECURITY FIRST CORP. FINANCIAL INFORMATION
Following are the summarized financial statements of Security First
(parent company only) as of March 31, 1997 and 1996, and for the years ended
March 31, 1997, 1996, and 1995:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31,
---------------------------
1997 1996
-------- --------
(Dollars in thousands, except
per share data)
<S> <C> <C>
ASSETS
Cash and cash equivalents ............................................. $ 2,801 $ 6,201
Investments ........................................................... 5,962 4,006
Loans ................................................................. 4,861 2,917
Investment in First Federal Savings Bank .............................. 10,606 10,038
Investment in Security Federal Savings & Loan Association ............. 43,041 39,660
Prepaid expenses and other assets ..................................... 867 829
-------- --------
Total assets ...................................................... $ 68,138 $ 63,651
======== ========
Liabilities:
Convertible subordinated debentures ................................... $ 8,479 $ 8,774
Accounts payable and accrued expenses ................................. 225 496
-------- --------
Total liabilities ................................................. 8,703 9,270
-------- --------
Shareholders' Equity:
Preferred stock, (1,000,000 shares authorized; none issued) ........... -- --
Common stock, par value $.01 per share; 10,000,000 shares authorized;
5,003,099 shares issued and outstanding at March 31, 1997 and
4,928,968 at March 31, 1996 ......................................... 50 49
Unrealized gain on investments, net of tax benefit of $111 at March 31,
1997 and $30 at March 31, 1996 ...................................... (224) (59)
Additional paid-in capital ............................................ 14,915 14,453
Unearned Compensation ................................................. (216) (293)
Unearned ESOP shares .................................................. -- (447)
Retained earnings ..................................................... 44,910 40,678
-------- --------
Total shareholders' equity ........................................ 59,435 54,381
-------- --------
Total liabilities and shareholders' equity ........................ $ 68,138 $ 63,651
======== ========
</TABLE>
A-38
<PAGE> 55
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the year ended March 31,
------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Income:
Dividends from subsidiaries ..................... $2,450 $4,800 $2,200
Interest income ................................. 948 877 678
------ ------ ------
Total income .................................. 3,398 5,677 2,878
------ ------ ------
Expense:
Interest expense ................................ 590 592 620
Employee compensation and benefits .............. 284 417 217
Professional fees ............................... 224 207 120
Merger expenses ................................. -- 737 --
Terminated merger costs ......................... -- -- 504
Other expenses .................................. 142 192 193
------ ------ ------
Total expenses ................................ 1,240 2,145 1,654
------ ------ ------
Income before federal income taxes ................ 2,158 3,532 1,224
Federal income tax benefit ........................ 103 118 333
------ ------ ------
Income before equity in undistributed net income of
subsidiaries .................................... 2,261 3,650 1,557
Equity in undistributed net income
of subsidiaries.................................. 4,149 1,956 5,143
------ ------ ------
Net income .................................... $6,410 $5,606 $6,700
====== ====== ======
</TABLE>
A-39
<PAGE> 56
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Operating Activities:
Net Income .................................................. $ 6,410 $ 5,606 $ 6,700
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Equity in undistributed net earnings of subsidiary .......... (4,149) (2,756) (5,143)
Amortization of unearned compensation ....................... 76 72 19
ESOP expense ................................................ 27 213 72
Net change in accounts payable, accrued expenses, and
other assets .............................................. (223) 454 1
Other ....................................................... (8) 6 --
------- ------- --------
Net cash provided by operating activities ................... 2,133 3,595 1,649
------- ------- --------
Investing Activities:
Loans originated ............................................ (2,371) (1,540) (1,397)
Loan principal repayments ................................... 427 -- 1,505
Purchase of investment securities ........................... (3,993) (2,300) (5,980)
Sales of investment securities .............................. -- 500 --
Maturities of investment securities ......................... 2,000 4,800 --
Net change in note due from First Federal ................... -- 900 (900)
Investment in First Federal ................................. -- -- (3,488)
Additional investment in subsidiary ......................... -- -- (2,000)
------- ------- --------
Net cash provided by (used in) investing activities ......... (3,937) 2,360 (12,260)
------- ------- --------
Financing Activities:
Net cash provided by issuance of common stock for First
Kent ....................................................... -- -- 6,976
Payment of dividends on common stock ........................ (2,187) (1,916) (1,285)
Proceeds from ESOP termination .............................. 457 -- --
Proceeds from exercise of stock options ..................... 135 128 64
Cash paid for fractional shares from conversion of First Kent
common stock ............................................... (1) -- --
------- ------- --------
Net cash provided by (used in) financing activities ......... (1,596) (1,788) 5,755
------- ------- --------
Net increase (decrease) in cash and cash equivalents ........ (3,400) 4,167 (4,856)
Cash and cash equivalents at beginning of period ............ 6,201 2,034 6,890
------- ------- --------
Cash and cash equivalents at end of period .................. $ 2,801 $ 6,201 $ 2,034
======= ======= ========
Noncash financing activities:
Effect of conversion of subordinated debentures ............. $ 295 $ 30 $ 971
</TABLE>
A-40
<PAGE> 57
18. INVESTMENT IN REAL ESTATE JOINT VENTURES
The Company's wholly owned subsidiary , SF Development Corp., is
involved as a partner (50% interest) in two joint venture agreements, and (33
1/3% interest) in a third joint venture agreement with a real estate developer
to sell residential lots and condominium units to builders within the
Association's lending area. Profits and losses of the joint ventures are
allocated based upon contractual terms.
Combined condensed financial statements of the joint ventures are as
follows:
COMBINED CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31,
---------------------
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Assets:
Cash ................................. $ 102 $ 136
Notes receivable ..................... 1,686 646
Real estate .......................... 2,463 1,504
Other assets ......................... 719 400
------ ------
Total Assets .............. $4,970 $2,686
====== ======
Liabilities and Equity:
Loans payable ........................ $4,576 $2,400
Accounts payable and
accrued expenses.................... 50 120
Equity ............................... 344 166
------ ------
Total Liabilities
and Equity................ $4,970 $2,686
====== ======
</TABLE>
COMBINED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------
1997 1996
------- -------
(Dollars in thousands)
<S> <C> <C>
Sales ...................... $ 2,921 $ 1,350
Cost of sales .............. (2,378) (1,019)
------- -------
Gross profit ...... 543 331
Interest income ............ 40 62
Operating expenses ......... (406) (227)
------- -------
Net income ....... $ 177 $ 166
======= =======
SF Development Corp.'s
share..................... $ 89 $ 83
======= =======
</TABLE>
A-41
<PAGE> 58
19. BUSINESS COMBINATION
Effective April 10, 1996, the Company acquired 100% of the outstanding
shares of common stock of First Kent Financial Corporation ("First Kent") by
exchanging 1.70 shares of Security First Corp. stock for each share of First
Kent. The merger was accounted for as a pooling of interests and, accordingly,
the financial statements of the Company for all periods prior to the merger have
been restated to include the results of First Kent.
Total assets and shareholders' equity of First Kent as of March 31,
1996 were $77,571,000 and $13,480,000, respectively. First Kent paid dividends
of $524,000 and $225,000 for year ended March 31, 1996 and March 31, 1995,
respectively.
The following table shows the effect on results of operations for the
periods prior to the merger. Security First's fiscal year ends March 31, while
First Kent changed its fiscal year-end from March 31 to September 30 during
1994. Accordingly, First Kent's historical results as previously reported for
periods subsequent to September 30, 1994 have been restated to conform to
Security First's fiscal year.
<TABLE>
<CAPTION>
Total Income Net Income
--------------------------- --------------------------
Year Ended Year Ended Year Ended Year Ended
March 31, March 31, March 31, March 31,
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Security First Corp... $39,466 $35,296 $5,282 $5,714
First Kent ........... 5,826 5,532 324 986
------- ------- ------ ------
Total ........ $45,292 $40,828 $5,606 $6,700
======= ======= ====== ======
</TABLE>
Reconciliation of amounts previously reported by Security First and
First Kent to the amounts included in the restated statements of the Company for
1996 and 1995.
<TABLE>
<CAPTION>
Total Income Net Income
-------------------------- -----------------------------
Year Ended Year Ended Year Ended Year Ended
March 31, March 31, March 31, March 31,
1996 1995 1996 1995
---------- ----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
As reported by Security
First Corp. ............... $39,466 $35,296 $ 5,282 $5,714
As reported by First
Kent ...................... 5,736 2,707 814 571
Adjustment to conform fiscal
year-end ................. 90 2,825 (490) 415
------- ------- ------- ------
Total, as restated ... $45,292 $40,828 $ 5,606 $6,700
======= ======= ======= ======
</TABLE>
20. SUBSEQUENT EVENT
On May 20, 1997, the Board of Directors of the Company declared a
three-for-two stock split, in the form of a 50% stock dividend, payable July 31,
1997, to shareholders of record on July 15, 1997. The Board of Directors also
declared a cash dividend of $.12 per share on the pre-split shares ($.08 per
share post-stock split) which will be payable on June 30, 1997, to shareholders
of record on June 16, 1997.
A-42
<PAGE> 59
STOCK PRICE AND DIVIDEND INFORMATION
On March 31, 1997 there were 5,003,009 shares of Security First Common
Stock issued and outstanding, which were held of record by approximately 1,185
shareholders. This does not include the number of persons whose stock is in
nominee or "street name" accounts through brokers.
The following table sets forth, for the periods shown, the high and low
prices of the common stock and cash dividends per share declared. The prices
reflect inter-dealer quotations without retail mark-up, mark-down or
commissions, and do not necessarily represent actual transactions.
Dividend restrictions are described in the notes to consolidated
financial statements included in this report.
<TABLE>
<CAPTION>
CASH
DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
- ----------------------------------------------- ------ ------ ---------
<S> <C> <C> <C>
June 30, 1995.................................. $14.00 $12.50 $ .10
September 30, 1995............................. 15.75 13.25 .10
December 31, 1995.............................. 15.75 13.50 .10
March 31, 1996................................. 15.00 11.50 .10
June 30, 1996.................................. 14.25 11.50 .11
September 30, 1996............................. 14.50 13.25 .11
December 31, 1996.............................. 18.13 13.75 .11
March 31, 1997................................. 19.25 17.50 .11
</TABLE>
DEBENTURES
Security First Corp.'s 6.25% convertible subordinated debentures due
May 1, 2008, are traded by McDonald & Company Securities, Inc.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Cleveland, Ohio
A-43
<PAGE> 60
BOARD OF DIRECTORS
SECURITY FIRST CORP.
CHARLES F. VALENTINE
Chairman of the Board and
Chief Executive Officer
AUSTIN J. MULHERN
President and Chief Operating Officer
ROBERT L. ANDERSON
Chairman and Chief Executive Officer
Wiseco Piston, Inc.
JAMES P. MYERS
President
Hale B. Thompson, Inc.
NICHOLAS E. RINALDI, D.D.S.
Drs. Rhodes, Rinaldi and Associates, Inc.
LARRY E. ROGERS
President and Chief Executive Officer
The P.I.E. Mutual Insurance Co.
DONALD E. SNOW
Retired, Former District Manager
Ohio Edison Company
LOUIS J. SORBORO
President
First Federal Savings Bank of Kent
PAUL V. VOINOVICH
President
Voinovich Companies
EXECUTIVE OFFICERS OF
SECURITY FIRST CORP.
CHARLES F. VALENTINE
Chairman of the Board and
Chief Executive Officer
AUSTIN J. MULHERN
President and Chief Operating Officer
JEFFREY J. CALABRESE
Vice President and Secretary
MARY H. CROTTY
Vice President, Treasurer, and
Chief Financial Officer
THOMAS J. DEIGHTON
Vice President
THOMAS F. SULLIVAN
Assistant Vice President and Controller
A-44
<PAGE> 61
SECURITY FIRST CORP.
ANNUAL MEETING OF SHAREHOLDERS
JULY 31, 1997
R The undersigned hereby appoints the Board of Directors of Security
E First Corp., (the "Company") with full powers of substitution, to act as
V attorney and proxy for the undersigned to vote all shares of common stock
O of the Company which the undersigned is entitled to vote at the Annual
C Meeting of Shareholders, to be held on July 31, 1997, at 2:00 P.M., and
A at any and all adjournments thereof, as follows:
B
L 1. THE ELECTION AS DIRECTORS OF ALL NOMINEES LISTED BELOW FOR TERMS OF
E THREE YEARS:
P
R Charles F. Valentine Robert L. Anderson Donald E. Snow
O
X [ ] FOR [ ] VOTE WITHHELD
Y
(INSTRUCTION: TO WITHHOLD YOUR VOTE FOR AN INDIVIDUAL NOMINEE PLACE AN
"X" IN THE "FOR" BOX AND WRITE THE NOMINEE'S NAME WHO YOU
WISH TO WITHHOLD AUTHORITY TO VOTE ON THE LINE BELOW. TO
WITHHOLD AUTHORITY TO VOTE FOR ALL NOMINEES PLACE AN "X" IN
THE "VOTE WITHHELD" BOX.)
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2. ADOPTION OF AN AMENDMENT TO ARTICLE FOURTH OF COMPANY'S CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK WHICH
THE COMPANY SHALL HAVE AUTHORITY TO ISSUE.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS AUDITORS
FOR THE FISCAL YEAR ENDING MARCH 31, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, upon such other matters as may properly come before
the Meeting or any adjournment thereof.
The Board of Directors recommends a vote "FOR" the listed propositions.
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THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSITIONS STATED. IF ANY
OTHER BUSINESS IS PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY
THOSE NAMED IN THIS PROXY IN THEIR BEST JUDGMENT. AT THE PRESENT TIME,
THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE
MEETING.
-------------------------------------------------------------------------
(Continued, and to be signed, on the reverse side.)
(Continued from reverse side.)
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
This proxy may be revoked at any time before it is voted by: (i) filing with
the Secretary of the Company at or before the Meeting a written notice of
revocation bearing a later date than the proxy; (ii) duly executing a subsequent
proxy relating to the same shares and delivering it to the Secretary of the
Company at or before the Meeting; or (iii) attending the Meeting and voting in
person (although attendance at the Meeting will not be in and of itself
constitute revocation of a proxy).
The undersigned acknowledges receipt from the Company, prior to the execution
of this Proxy, of Notice of the Annual Meeting and Proxy Statement.
Dated , 1997
----------------------------
PRINT NAME OF SHAREHOLDER
----------------------------
SIGNATURE OF SHAREHOLDER
----------------------------
PRINT NAME OF SHAREHOLDER
----------------------------
SIGNATURE OF SHAREHOLDER
Please sign exactly as your
name appears above on this
card. When signing as
attorney, executor,
administrator, trustee or
guardian, please give your
full title. If shares are
held jointly, each holder
should sign.
IMPORTANT! PLEASE PROMPTLY
COMPLETE, DATE, SIGN AND
MAIL THIS PROXY IN THE
ENCLOSED POSTAGE-PAID
ENVELOPE.
