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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to to
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Commission File Number 0-21212.
SECURITY FIRST CORP.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 34-1724675
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State or Other Jurisdiction of (I.R.S. Employee
Incorporation or Organization) Identification Number)
1413 Golden Gate Boulevard
Mayfield Heights, Ohio 44124
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(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code: (216) 449-3700
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $ .01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of June 13, 1997, there were issued and outstanding 5,048,793 shares
of the Registrant's Common Stock.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the average of the bid and asked
price of such stock as of June 13, 1997, was $85.0 million. (The exclusion from
such amounts of the market value of the shares owned by any person shall not be
deemed an admission by the Registrant that such person is an affiliate of the
Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
PART II and III of Form 10-K - Proxy Statement for the 1997 Annual
Meeting of Shareholders.
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PART I
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ITEM 1. BUSINESS
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GENERAL
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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"). On April 10, 1996, Security First acquired First Kent Financial
Corporation ("First Kent"), the holding company for First Federal. The
acquisition 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 Kent. See "-
Lending Activities." Security First is also the parent company of SF Development
Co. See "Subsidiary Activities." Unless the context otherwise requires, Security
First, the Associations, SF Development Co. and their subsidiaries are
hereinafter collectively referred to as the "Company". See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
General" set forth in the Proxy Statement attached to this Form 10-K as Exhibit
99 ("Proxy Statement").
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. At March 31,
1997, the Company had $634.8 million of assets, deposits of $445.2 million and
shareholders' equity of $59.4 million.
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" set forth in the
Proxy Statement.
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.
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FORWARD-LOOKING STATEMENTS
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When used in this Form 10-K or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," "believe" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors including regional
and national economic conditions, changes in levels of market interest rates,
credit risks of lending activities, and competitive and regulatory factors could
affect the Company's financial performance and could cause the Company's actual
results for future periods to differ materially from those anticipated or
projected.
The Company does not undertake and specifically disclaims any
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
LENDING ACTIVITIES
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GENERAL. In order to diversify its loan portfolio, to manage the
interest rate sensitivity of the loan portfolio to changes in the Company's cost
of funds and to increase interest income, the Company emphasizes permanent and
construction loans secured by one- to four-family residential property,
multi-family and commercial real estate, permanent loans secured by consumer
products and commercial business loans. Substantially all of the Company's loans
are originated within their Northeastern Ohio market area.
Residential loan originations come primarily from referrals from real
estate brokers, builders and walk-in customers. Commercial real estate loan
originations are obtained through direct solicitation of developers and
continued business from customers. All completed loan applications are reviewed
by salaried loan officers. The quality of loans is analyzed based on historical
experience and on the Company's guidelines with respect to credit underwriting
as well as the guidelines issued by the Federal Home Loan Mortgage Corporation
(the "FHLMC"), the Federal National Mortgage Association (the "FNMA") and other
purchasers of loans, depending on the type of loan involved. Most one- to
four-family residential properties, multi-family and commercial real estate are
appraised by independent fee appraisers.
The Company generally charges origination fees from 1% to 2% of the
loan amount, depending on the type of loan. The interest rate charged is
normally the prevailing market rate at the time the loan commitment is made.
Loan commitments are approved at different levels, depending on the
size and type of the loan being sought. Loans exceeding the Committee's approval
authority are referred to the Board of Directors. Regardless of the individual
loan approval authority, the Board of Directors generally reviews all mortgage
loans.
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LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of the Company's total loan portfolio in dollars and percentages as
of the dates indicated. As of March 31, 1997, there were no concentrations of
loans in any types of industry which exceeded 10% of the Company's total loans
that are not included as a loan category in the table below.
March 31,
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1997 1996 1995
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Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Real estate loans:
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Permanent:
One- to four-family .............. $235,959 37.60% $225,573 43.34% $213,894 46.20%
Multi-family ..................... 53,628 8.55 38,057 7.31 33,992 7.34
Commercial ....................... 115,882 18.47 94,880 18.23 79,304 17.13
Construction:
One- to four-family .............. 80,498 12.83 56,754 10.91 53,571 11.57
Multi-family ..................... 1,051 .17 5,002 0.96 3,838 0.83
Commercial ....................... 23,881 3.80 3,101 0.60 2,354 0.51
Residential development land ....... 50,432 8.03 43,387 8.34 33,708 7.28
Lines of credit - secured by one- to
four-family residences ........... 17,756 2.82 15,667 3.01 14,701 3.17
-------- -------- -------- -------- -------- --------
Total real estate loans ........ 579,087 92.27 482,421 92.70 435,362 94.03
-------- -------- -------- -------- -------- --------
Other loans:
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Commercial business ................ 6,165 .98 2,571 0.49 2,002 0.43
Consumer:
Loans on deposits ................ 2,191 .35 1,529 0.29 1,463 0.31
Home improvement and other secured 38,338 6.11 31,524 6.06 21,803 4.71
Other ............................ 1,792 .29 2,369 0.46 2,377 0.52
-------- -------- -------- -------- -------- --------
Total other loans .............. 48,486 7.73 37,993 7.30 27,645 5.97
-------- -------- -------- -------- -------- --------
Total loans .................... 627,573 100.00% 520,414 100.00% 463,007 100.00%
====== ====== ======
Less:
- ----
Undisbursed portion of loans in
process........................... (50,332) (36,251) (23,905)
Allowance for loan losses........... (4,968) (4,572) (4,283)
Deferred loan fees and discounts.... (4,298) (3,960) (3,913)
------- ------- -------
Loans - net......................... $567,975 $475,631 $430,906
========= ======== ========
March 31,
----------------------------------------
1994 1993
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Amount Percent Amount Percent
-------- -------- -------- --------
(Dollars in Thousands)
Real estate loans:
- -----------------
Permanent:
One- to four-family .............. $203,046 46.98% $197,469 46.85%
Multi-family ..................... 32,198 7.45 29,028 6.89
Commercial ....................... 73,095 16.91 70,718 16.78
Construction:
One- to four-family .............. 48,834 11.30 49,533 11.75
Multi-family ..................... 2,939 0.68 6,388 1.51
Commercial ....................... 3,233 0.75 4,729 1.12
Residential development land ....... 32,869 7.61 30,040 7.13
Lines of credit - secured by one- to
four-family residences ........... 16,345 3.78 15,553 3.69
-------- -------- -------- --------
Total real estate loans ........ 412,559 95.46 403,458 95.72
-------- -------- -------- --------
Other loans:
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Commercial business ................ 2,318 0.54 2,005 0.48
Consumer:
Loans on deposits ................ 1,638 0.38 1,871 0.44
Home improvement and other secured 13,657 3.16 12,362 2.93
Other ............................ 2,001 0.46 1,805 0.43
-------- -------- -------- --------
Total other loans .............. 19,614 4.54 18,043 4.28
-------- -------- -------- --------
Total loans .................... 432,173 100.00% 421,501 100.00%
====== ======
Less:
- ----
Undisbursed portion of loans in
process........................... (27,005) (27,937)
Allowance for loan losses........... (3,973) (3,649)
Deferred loan fees and discounts.... (3,772) (3,424)
------- -------
Loans - net......................... $397,423 $386,491
======== ========
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The following table shows the composition of the Company's fixed and
adjustable rate loan portfolio at the dates indicated. Included in adjustable
rate one- to four-family construction loans are fixed rate, prime-based,
construction loans with original maturities of one year or less. The gross
balances (before loans in process) on such loans at March 31, 1997, 1996, 1995,
1994 and 1993 were $20.4 million, $24.4 million, $23.3 million, $27.7 million
and $30.9 million, respectively.
March 31,
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1997 1996 1995
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Amount Percent Amount Percent Amount Percent
-------- ------- -------- ----- -------- -------
(Dollars In Thousands)
Adjustable rate loans:
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Real estate mortgage loans:
Permanent:
One- to four-family .......... $181,245 28.88% $154,755 29.74% $132,636 28.65%
Multi-family ................. 43,096 6.87 29,728 5.71 30191 6.52
Commercial ................... 104,110 16.59 85,173 16.37 73,175 15.8
Construction:
One- to four-family .......... 72,352 11.53 56,084 10.78 53,114 11.47
Multi-family ................. 1,051 .17 5,002 0.96 3,838 0.83
Commercial ................... 23,881 3.81 3,101 0.59 2,354 0.51
Residential development land ... 49,264 7.84 43,346 8.33 33,662 7.27
Line of credit - secured by one-
to-four family residence ...... 17,441 2.78 15,667 3.01 14,701 3.18
Commercial business loans ...... 1,909 .30 1,408 0.27 720 0.15
Consumer loans ................. 9,056 1.44 7,587 1.46 6,538 1.41
-------- -------- -------- -------- -------- --------
Total adjustable rate loans .. 503,405 80.21 401,851 77.22 350,929 75.79
Fixed rate loans:
- ----------------
Real estate mortgage loans:
Permanent:
One- to four-family .......... 54,714 8.72 70,818 13.61 81,258 17.55
Multi-family ................. 10,532 1.68 8,329 1.60 3,801 0.82
Commercial ................... 11,772 1.87 9,707 1.86 6,129 1.32
Construction:
One- to four-family .......... 8,146 1.30 670 0.13 457 0.10
Land ......................... 1,168 .19 41 0.01 46 0.01
Line of Credit - secured by one-
to-four family residence .......... 315 .05 -- -- -- --
Commercial business loans ......... 4,256 .68 1,163 0.22 1,282 0.28
Consumer loans .................... 33,265 5.30 27,835 5.35 19,105 4.13
-------- -------- -------- -------- -------- --------
Total fixed rate loans ........ 124,168 19.79 118,563 22.78 112,078 24.21
-------- -------- -------- -------- -------- --------
Total loans ................... 627,573 100.00% 520,414 100.00% 463,007 100.00%
======== ======== ========
Less other items:
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Undisbursed portion of loans in
process......................... (50,332) (36,251) (23,905)
Allowance for loan losses......... (4,968) (4,572) (4,283)
Deferred loan fees and discounts.. (4,298) (3,960) (3,913)
------- ---------- ----------
Loans - net..................... $567,975 $475,631 $430,906
======== ======== ========
March 31,
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1994 1993
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Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in Thousands)
Adjustable rate loans:
- ---------------------
Real estate mortgage loans:
Permanent:
One- to four-family .......... $124,150 28.73% $121,051 28.71%
Multi-family ................. 28,069 6.49 24,083 5.71
Commercial ................... 68,531 15.86 64,094 15.21
Construction:
One- to four-family .......... 48,342 11.19 49,533 11.75
Multi-family ................. 2,939 0.68 6,388 1.52
Commercial ................... 3,233 0.75 4,729 1.12
Residential development land ... 32,751 7.58 29,676 7.04
Line of credit - secured by one-
to-four family residence ...... 16,345 3.78 15,553 3.69
Commercial business loans ...... 1,029 0.24 241 0.06
Consumer loans ................. 5,419 1.25 5,479 1.30
-------- -------- -------- --------
Total adjustable rate loans .. 330,808 76.55 320,827 76.12
Fixed rate loans:
- ----------------
Real estate mortgage loans:
Permanent:
One- to four-family .......... 78,896 18.26 76,418 18.13
Multi-family ................. 4,129 0.95 4,945 1.17
Commercial ................... 4,564 1.05 6,624 1.57
Construction:
One- to four-family .......... 492 0.11 -- --
Land ......................... 118 0.03 364 0.09
Line of Credit - secured by one-
to-four family residence .......... -- -- -- --
Commercial business loans ......... 1,289 0.30 1,764 0.42
Consumer loans .................... 11,877 2.75 10,559 2.50
-------- -------- -------- --------
Total fixed rate loans ........ 101,365 23.45 100,674 23.88
-------- -------- -------- --------
Total loans ................... 432,173 100.00% 421,501 100.00%
======== ========
Less other items:
- ----------------
Undisbursed portion of loans in
process......................... (27,005) (27,937)
Allowance for loan losses......... (3,973) (3,649)
Deferred loan fees and discounts.. (3,772) (3,424)
-------- --------
Loans - net..................... $397,423 $386,491
======== ========
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LOAN CONTRACTUAL MATURITIES. The following table sets forth the estimated
contractual amortization of the Company's gross loan portfolio, assuming no
prepayments as of March 31, 1997. Loans which have adjustable rates or a prime
based rate are shown as maturing in the period during which the contract is due.
This schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses.
Real Estate
---------------------------------------------------
Construction and
Residential(1) Commercial Land(2)
----------------------- ----------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
---------- ------ ---------- --------- ----------- --------
(Dollars in Thousands)
For Year Ended
March 31,
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1998(3)........................ $ 17,031 8.83% $ 11,704 9.07% $ 109,577 9.17%
1999 to 2002................... 49,609 8.24 28,194 8.73 44,109 9.63
2003 and following............. 240,703 7.60 75,984 8.56 2,176 8.58
----------- ---- ---------- ---- --------- ----
Total Loans............... $ 307,343 7.77% $ 115,882 8.65% $ 155,862 9.29%
========== ===== ========== ==== ========= ====
Less:
Loans in process.............
Deferred fees and
discounts..................
Allowance for losses.........
Total loans net................
Business and Consumer
Loans Total
---------------------- ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------- -------- ---------- --------
For Year Ended
March 31,
- --------------
1998(3)........................ $ 9,357 9.22% $ 147,669 9.13%
1999 to 2002................... 18,471 8.95 140,383 8.87
2003 and following............. 20,658 8.48 339,521 7.87
---------- ---- --------- ----
Total Loans............... $ 48,486 8.80% $ 627,573 8.39%
========== ==== --------- ====
Less:
Loans in process............. (50,332)
Deferred fees and
discounts.................. (4,298)
Allowance for losses......... (4,968)
----------
Total loans net................ $ 567,975
==========
<FN>
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(1) Includes one- to four-family, multi-family, and lines of credit secured by
one- to four-family residences.
(2) Includes one- to four-family, multi-family, and commercial construction.
(3) Includes demand loans, and loans having no stated maturity.
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The gross amount of loans due after March 31, 1998 which have fixed
interest rates is $111.8 million, while the gross amount of loans due after such
date which have floating or adjustable interest rates is $368.1 million.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LENDING. The Company's primary
lending program is the origination of loans secured by one- to four-family
residences, substantially all of which are located in Northeast Ohio. Although
federal law permits the Company to make loans in amounts of up to 100% of the
appraised value of the underlying real estate, the Company generally makes one-
to four-family residential property loans up to 90% of the appraised value
thereof. Loans which are made in amounts which exceed 80% of the appraised value
of the underlying real estate generally require private mortgage guarantee
insurance on the excess.
In order to reduce its exposure to changes in interest rates, the Company
originates fixed-rate one- to four-family residential mortgage loans with terms
no greater than 20 years. Substantially all loans originated are held for
investment, however, the Company currently underwrites and documents its 20-year
fixed rate loans to permit sale in the secondary market. See "-- Loan
Originations, Purchases and Sales." At March 31, 1997, $54.7 million, or 23% of
the Company's one- to four-family permanent residential mortgage loan portfolio
consisted of fixed-rate one- to four-family loans, the majority of which were
15-year loans. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Asset/Liability Management" set forth in the Proxy
Statement.
The majority of the Company's current one- to four-family residential
adjustable rate mortgages ("ARMs") have interest rates that adjust every one,
three, or five years in accordance with the quarterly average cost of funds for
OTS-regulated, SAIF-insured institutions. The Company's ARMs generally limit
interest rate increases to 2% each rate adjustment period and have an
established ceiling rate at the time the loans are made, of up to 6% over the
original interest rate. To compete with other lenders in its market area, the
Company originates ARMs at interest rates which, for the first year, are below
the fully indexed rate which would have been applied to these loans. Borrowers
are qualified, however, at the fully indexed rates. At March 31, 1997, ARM loans
totaled $181.2 million, or 77%, of the Company's one- to four-family residential
mortgage loan portfolio.
Most one- to four-family real estate mortgage loans originated by the
Company contain a "due-on-sale" clause providing that the Company may declare
the unpaid principal balance due and payable upon the sale of the mortgaged
property. It is the Company's policy to enforce these due-on-sale clauses
concerning fixed-rate loans and to permit assumptions of ARMs, for a fee, to
qualified borrowers.
In underwriting one- to four-family residential real estate loans, the
Company evaluates the borrower's ability to make monthly payments, credit
history and the value of the property securing the loan. The Company requires,
in connection with the origination of residential real estate loans, title
insurance and fire and casualty insurance coverage, as well as flood insurance
where appropriate, to protect the Company's interest. The cost of this insurance
coverage is paid by the borrower.
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The Company also originates lines of credit loans. Lines of credit loans
are home equity loans which are typically secured by a second mortgage lien on
the borrower's principal residence. Substantially all of such loans have
adjustable interest rates. The underwriting standards and risks associated with
home equity lines of credit are similar to those of one- to four-family lending.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Company's loan
portfolio includes a significant percentage of permanent real estate loans
secured by multi-family and commercial real estate. At March 31, 1997, the
outstanding permanent loan balances secured by multi-family and commercial real
estate were $53.6 million and $115.9 million, respectively, totaling 8.55% and
18.47% of the entire gross loan portfolio, respectively.
Substantially all of the Company's multi-family real estate loans are
secured by first liens on apartments and condominiums located in Northeast Ohio.
The Company's commercial real estate loans are secured by first liens mainly on
office and industrial buildings, warehouses, and retail shopping centers located
in Northeast Ohio. As a general rule, the Company does not originate loans on
recreational, time share, or special purpose properties.
At March 31, 1997, approximately $147.2 million, or 87% of the Company's
multi-family and commercial real estate loans had adjustable interest rates and
all had terms not exceeding 25 years. Interest rates adjust over one, three or
five year periods (with most loans adjusting every three or five years) based on
the quarterly average cost of funds for OTS-regulated, SAIF-insured
institutions.
In its underwriting of multi-family and commercial real estate loans,
loan-to-value ratios on such properties are generally 65% to 75% of the lesser
of the appraised value of the security property or the contract price. The
Company's underwriting criteria on these loans require an examination of debt
service coverage ratios, the borrower's creditworthiness and prior credit
history and reputation, and the Company generally requires the personal
guarantees of borrowers. The Company also carefully considers the location of
the security property. In addition, appraisals by a member of the Appraisal
Institute ("MAI") designated appraisers (the highest designation for real estate
appraisers) are required on all loans exceeding $1 Million.
Multi-family and commercial real estate lending is generally considered to
involve a higher level of risk than one- to four-family residential lending due
to the concentration of principal in a limited number of loans and borrowers and
the effects of general economic conditions on real estate development. In
addition, the nature of these loans is such that they are generally less
predictable and more difficult to evaluate and monitor. The Company's risk of
loss is that the borrowers may experience cash flow from such properties which
is inadequate to service the loan payments. The Company attempts to mitigate the
risks associated with this type of lending through its underwriting policies and
by careful monitoring of the properties, substantially all of which are located
in its market area.
The Company's multi-family and commercial real estate loans typically have
individual loan balances less than $1.0 million. At March 31, 1997, the Company
had 14 multi-family and 31 commercial real estate loans with individual balances
greater than $1.0 million, the largest being
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$2.7 million and $4.3 million, respectively. All of the multi-family loans are
permanent loans secured by apartment buildings with an average loan balance of
$1.5 million. The 31 commercial real estate loans individually exceeding $1.0
million have an average balance of $1.8 million and are secured by seven retail
shopping centers, seven industrial type properties, nine office buildings, five
golf courses, one by a restaurant party center, and one by a hotel, and one by
light manufacturing.
The Company intends to continue to originate loans secured by multi-family
and commercial real estate in the Northeast Ohio area because the adjustable
interest rates on these loans allow the Company to better meet its
asset/liability management goals and provide an attractive yield. Federal law
limits the Company's permissible level of investment in loans secured by
non-residential real property (i.e., commercial real estate lending, other than
certain multi-family residences) to four times its total capital. This maximum
limitation, which at March 31, 1997 was $233.9 million, is not expected to
materially affect the Company's operations. The Company has not experienced
significant losses in connection with its multi-family or commercial real estate
portfolio. See "Allowance for Losses on Loans and Real Estate."
CONSTRUCTION AND RESIDENTIAL DEVELOPMENT LAND LENDING. The Company provides
construction financing, including construction lines of credit, and loans for
the acquisition and development of land for residential properties. Most of the
Company's construction loans finance the building of single-family residences
($80.5 million at March 31, 1997), although at March 31, 1997, there was also
approximately $24.9 million in construction loans for multi-family and
commercial properties. These loans generally have adjustable interest rates and
terms of two years or less and are primarily with builders and developers with
whom the Company has long-standing relationships.
The construction loan agreements generally provide that principal payments
are required as individual condominium units or single family houses are built
and sold to third parties in order that the relationship between the remaining
loan balance and the amount of the remaining security remains approximately
constant over the life of the loan. Loan proceeds are disbursed in increments as
construction progresses. Site inspection by an independent building professional
is required before each significant disbursement on a construction loan.
The Company's policy generally is to limit the loan-to-value ratio of its
construction loans to a maximum of 80% of the combined appraised value of the
land and the building at the time of initial appraisal, with the loan amount not
to exceed in any event the cost of the project. Construction loans are typically
made with a takeout obligation (i.e., a commitment to provide permanent
financing) by a third party.
The Company's risk of loss on construction, rehabilitation or development
loans is dependent largely upon the accuracy of the initial estimate of the
individual property's value upon completion of the project and the estimated
cost (including interest) of the project. If the cost estimate proves to be
inaccurate, the Company may be required to advance funds beyond the amount
originally committed to permit completion of the project. See "Non-Performing
Assets, Classified Assets, Loan Delinquencies and Defaults."
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Residential development land loans, which include acquisition and
development of land as well as vacant land and developed lots, are made to
various builders and developers with whom the Company has had long-standing
relationships. All of such loans are secured by land zoned for residential
developments and are located within the Company's market area of Northeast Ohio.
Disbursements related to acquisition and development land loans are typically
based on the construction cost estimate of an independent architect or engineer
who inspects the project in connection with significant disbursement requests;
in addition, all disbursements on such projects are approved by the city or
county engineer who also makes periodic inspections.
Land lending generally affords the Company an opportunity to receive
interest at rates higher than those obtainable from residential lending. In
addition, land loans are limited to a maximum 75% loan-to-value and are made
with adjustable rates of interest and for relatively short terms. Nevertheless,
land lending is generally considered to involve a higher level of credit risk
similar to those discussed above under "Multi-family and Commercial Real Estate
Lending."
CONSUMER LENDING. The Company makes consumer loans for personal, family or
household purposes, which includes the financing of home improvements, debt
consolidations, automobiles, boats and other recreational type vehicles. The
Company originates substantially all of its consumer loans in Northeast Ohio.
The majority of consumer loans outstanding at March 31, 1997 were fixed rate
loans with maturities of six months to ten years.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income from primary employment, and additionally
from any verifiable secondary income. Although creditworthiness of the applicant
is of primary consideration, the underwriting process also includes a comparison
of the value of the security in relation to the proposed loan amount.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered on such loans. Such loans may
also give rise to claims and defenses by a consumer loan borrower against an
assignee of such loans (such as the Company), and a borrower may be able to
assert against such assignee claims and defenses which it has against the seller
of the underlying collateral.
Consumer loan delinquencies often increase over time as the loans age.
Accordingly, although the level of delinquencies in the Company's consumer loan
portfolio has generally been
10
11
low, there can be no assurance that delinquencies will not increase in the
future. See "-- Non-Performing Assets, Classified Assets, Loan Delinquencies
and Defaults."
COMMERCIAL BUSINESS LENDING. The Company engages in commercial business
lending activities including loans to finance leases and accounts receivable,
inventory and equipment as well as business lines of credit. All of the
Company's commercial business loans have been to borrowers in its market area.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from employment and other income and
which are secured by real property, the value of which tends to be more easily
ascertainable, business loans are of higher risk and typically are made on the
basis of the borrower's ability to make repayment from the cash flow of the
business, and are generally secured by business assets.
LOAN ORIGINATIONS, PURCHASES AND SALES. At March 31, 1997, substantially
all of the loans originated by the Company were secured by real estate or
consumer products located in the Company's Northeast Ohio market area.
In times of rising interest rates and economic uncertainty, the Company's
ability to originate large dollar volumes of real estate loans may be
substantially reduced or restricted, with the resultant decrease in related loan
origination fees, other fee income and operating earnings.
Occasionally the Company purchases real estate loans and loan
participations from selected sellers for purchase prices equal to the unpaid
principal amount of the loans or participations, with yields to the Company
based upon current market rates. Since 1985, the Company has purchased only
adjustable rate mortgage loans. The Company carefully reviews and underwrites
all loans to be purchased to insure that they meet the Company's underwriting
standards. The seller typically continues to service these purchased loans.
During fiscal 1997, the Company purchased mortgage loans, aggregating $6.1
million.
The Company currently originates loans primarily for retention in its loan
portfolio. Security Federal, from time to time, sells small amounts of loan
participations to others in order to comply with loans-to-one borrower and other
regulations. During fiscal 1997, Security Federal sold $3.3 million of loan
participations. During fiscal 1997, the Company sold $25.4 million of seasoned
fixed-rate mortgage loans, and invested the proceeds therefrom in assets with
shorter maturities and higher rates in an effort to reduce its exposure to
interest-rate risk. As of March 31, 1997, the Company serviced for others
(primarily FHLMC and FNMA) approximately $37.3 million of mortgage loans. The
Company has not typically sold loans with servicing fees materially in excess of
normal servicing fees and, therefore, did not require an adjustment to the
selling price pursuant to SFAS No. 65.
11
12
The following table shows loan originations, purchases, sales and
repayments for the periods indicated.
Year Ended March 31,
---------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
(In Thousands)
Loan origination by type:
- ------------------------
Real estate construction, land & development loans:
One- to four-family................................ $ 80,061 $ 60,505 $ 70,792 $ 68,563 $ 69,732
Residential development land........................ 31,857 28,216 26,584 24,828 24,351
Multi-family ....................................... 1,019 4,882 1,742 1,000 350
Commercial.......................................... 28,110 4,770 3,510 2,064 4,721
------------ ---------- ---------- ----------- ----------
Total construction, land and development loans.... 141,047 98,373 102,628 96,455 99,154
------------ ---------- ---------- ----------- ----------
Real estate permanent loans:
One- to four-family dwelling units.................. 63,459 39,083 41,206 54,416 60,208
Multi-family ....................................... 15,192 9,491 3,940 4,958 9,600
Commercial ......................................... 34,039 18,748 13,417 11,614 6,765
------------ ---------- ---------- ----------- ----------
Total permanent loans............................. 112,690 67,322 58,563 70,988 76,573
------------ ---------- ---------- ----------- ----------
Commercial business................................... 6,519 1,079 845 2,467 1,160
Consumer.............................................. 20,446 23,943 16,412 9,259 10,241
------------ ---------- ---------- ----------- ----------
Total loans originated................................ 280,702 190,717 178,448 179,169 187,128
------------ ---------- ---------- ----------- ----------
Loans purchased:
- ---------------
Real estate loans and loan participations........... 6,139 7,976 4,670 5,413 1,090
Loan sales:
- ----------
Real estate loans and loan participations........... (28,711) (1,283) (1,378) (3,248) (1,670)
Other:
- -----
Principal repayments................................ (150,700) (139,788) (149,835) (170,120) (145,983)
Decrease in other items, net........................ (271) (215) (1,071) (542) (654)
------------ ---------- ---------- ----------- ----------
Increase in gross loans............................. $ 107,159 $ 57,407 $ 30,834 $ 10,672 $ 39,911
============ ========== =========== ============ ===========
Outstanding loan commitments amounted to approximately $19.6 million
for one- to four-family residential real estate loans, including construction
loans and land loans, and $4.4 million for multi-family and commercial real
estate loans at March 31, 1997. See Note 4 of Notes to Consolidated Financial
Statements set forth in the proxy statement.
NON-PERFORMING ASSETS, CLASSIFIED ASSETS, LOAN DELINQUENCIES AND
DEFAULTS. When a borrower fails to make a required payment on a loan, the
Company attempts to cause the delinquency to be cured by contacting the
borrower. A notice is mailed to the borrower after a payment is 15 days past due
and again when the loan is 30 days past due. For most loans, if the delinquency
is not cured within 75 days the Company issues a notice of intent to foreclose
on the property and if the delinquency is not cured within 90 days, the Company
may institute foreclosure action. In the event of a foreclosure, the real
property is sold at a public sale and may be purchased by the Company.
The following table sets forth information concerning delinquent loans
at March 31, 1997. The amounts presented represent the total remaining principal
balances of the related loans before
12
13
specific reserves for losses and the percentage represented of each respective
type of gross loan portfolio.
One- to Four-Family
Permanent and Multi-Family and
Construction & Residential Commercial Real Estate Consumer and Business
---------------------------- --------------------------- ----------------------------
Percent of
Percent of Percent of Total
Total(1) One- Total Multi- Consumer
to Four- Family and and
Amount Family Amount Commercial Amount Commercial
Contractually Residential Contractually Real Estate Contractually Business
Delinquent Loans Delinquent Loans Delinquent Loans
--------- ------- ---------- ------ --------- -----------
(Dollars in Thousands)
Loans delinquent for:
30 - 59 days............... $ 1,944 .51% $ 4,778(2) 2.46% $ 124 .26%
60 - 89 days............... 1,011 .26 1,225 .63 116 .24
90 days or more............ 1,475 .38 136 .07 32 .06
--------- ------- ---------- ------ ------- -----
Total delinquent loans... $ 4,430 1.15% $ 6,139 3.16% $ 272 .56%
========= ======= ========== ====== ======= =====
(1) Including home equity loans and land loans.
(2) Included in this total is a $4.3 million commercial loan to a seasonal
business experiencing a cash flow shortage at March 31, 1997. As of June 15,
1997, this loan was current.
13
14
The table below sets forth the amounts and categories of gross
non-performing assets in the Company's loan portfolio. Loans generally are
placed on non-accrual status when the collection of principal and/or interest
becomes delinquent over 90 days, or when the collection of principal and/or
interest becomes doubtful. Repossessed assets include assets acquired in
settlement of loans.
March 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ----- -----
(Dollars in Thousands)
Non-accruing loans:
One- to four-family permanent residential.......... $ 1,097 $ 343 $ 792 $ 2,083 $1,839
Multi-family and commercial real estate............ 136 1,354 2,010 853 2,191
Construction or development:
One- to four-family.............................. 378 294 206 373 386
Multi-family and commercial real estate.......... --- --- --- --- ---
Consumer and commercial business................... 32 15 42 92 249
--------- --------- ---------- --------- --------
Total........................................... 1,643 2,006 3,050 3,401 4,665
-------- -------- -------- -------- --------
Accruing loans delinquent 90 days or more............ --- 522 278 284 83
Repossessed assets:
One- to four-family permanent residential......... 5 39 41 44 237
Multi-family and commercial real estate............ --- --- 200 212 350
Construction or development:
One- to four-family............................. --- --- --- --- ---
Multi-family and commercial real estate.......... --- --- --- --- ---
Consumer and commercial business................... --- --- --- --- ---
--------- ---------- ---------- ---------- ----------
Total......................................... 5 39 241 256 587
--------- --------- -------- -------- --------
Total non-performing assets........................ $1,648 $2,567 $3,569 $3,941 $5,335
======== ====== ====== ====== ======
Non-performing assets to total assets................ 0.26% 0.47% 0.70% 0.83% 1.18%
======== ====== ====== ====== ======
Non-accrual loans to total loans(1).................. 0.29% 0.53% 0.76% 0.92% 1.22%
======== ====== ====== ====== ======
Allowance for loan losses to non-accrual loans. ..... 302.37% 180.85% 128.70% 107.82% 76.85%
======== ====== ====== ====== ======
- --------------------------
(1) Total loans equal total loans-net plus the allowance for loan
losses.
For the year ended March 31, 1997 gross interest income of
approximately $198,000 would have been recorded had the non-accruing loans been
current in accordance with their original terms. However, partial payments of
approximately $68,000 (included in interest income) have been received on some
of the non-accruing loans. In addition, approximately $243,000 in delinquent
interest income related to prior periods was received as a result of the
resolution of several past-due loans.
The Company's non-accruing loans at March 31, 1997 were composed of 17
one-to-four-family real estate mortgage loans having an aggregate outstanding
principal balance of $923,000; two commercial real estate loans with an
aggregate outstanding principal balance of $136,000; one land loan and one
construction loan with aggregate outstanding principal balances of $223,000 and
$156,000, respectively; and 18 consumer loans having an aggregate outstanding
principal balance of $205,000.
14
15
Real estate acquired in settlement of loans at March 31, 1997,
consisted of one single-family property sold on land contract with a remaining
balance of $5,000.
For a further discussion of the Company's loan policy and also
non-performing assets and potential problem loans, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Asset Quality"
and Notes 1 and 4 of the Notes to Consolidated Financial Statements set forth in
the Proxy Statement.
Federal regulations provide for the classification of loans, debt,
equity securities and other assets considered to be of lesser quality as
"substandard," "doubtful" or "loss" assets. The regulation requires insured
institutions to classify their own assets and to establish conservative general
allowances for losses for assets classified "substandard" or "doubtful." For the
portion of assets classified as "loss," an institution is required to either
establish specific allowances of 100% of the amount classified or charge such
amount off its books. Assets which do not currently expose the insured
institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess potential weaknesses are required to be
designated "special mention" by management. In addition, the OTS may require the
establishment of a general allowance for losses based on assets classified as
"substandard" and "doubtful" or based on the general quality of the asset
portfolio of an institution. On the basis of management's review of its assets,
at March 31, 1997, the Company had classified $2 million of its assets (loan and
real estate owned) as substandard, $151,000 of its assets as loss and none as
doubtful. Substantially all of the assets of the Company that have been
classified during the year ended March 31, 1997, are included in the table above
of non-performing assets and in the discussion of assets for which repayment by
the borrower may be in doubt.
ALLOWANCE FOR LOSSES ON LOANS. 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 302.37% 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. See Note 4 of the
Notes to Consolidated Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset Quality" set
forth in the Proxy Statement.
15
16
The following table sets forth an analysis of the Company's allowance
for loan losses.
Year Ended March 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
(Dollars in Thousands)
Allowance at beginning of period..................... $4,572 $4,283 $3,973 $3,649 $3,002
Provision charged to expense......................... 323 377 582 695 918
------ ------ ------ ------ ------
4,895 4,660 4,555 4,344 3,920
------ ------ ------ ------ ------
Charge-offs:
One- to four-family permanent residential.......... (15) (172) (107) (163) (201)
One- to four-family construction residential....... --- --- (3) (32) (114)
Multi-family and commercial permanent.............. --- (25) (254) (193) (59)
Consumer and commercial business.................. (18) (46) (48) (93) (26)
------ ------ ------ ------ ------
Total charge-offs.................................. (33) (243) (412) (481) (400)
------ ------ ------ ------ ------
Recoveries:
One- to four-family permanent residential.......... 95 135 83 64 117
One-to four- family construction residential....... --- --- 26 16 ---
Multi-family and commercial permanent.............. 4 --- 17 6 4
Multi-family and commercial construction........... --- 5 --- --- ---
Consumer and commercial business................... 7 15 14 24 8
------ ------ ------ ------ ------
Total recoveries................................... 106 155 140 110 129
------ ------ ------ ------ ------
Net (charge-offs)/recoveries......................... 73 (88) (272) (371) (271)
------ ------ ------ ------ ------
Allowance at end of period........................... $4,968 $4,572 $4,283 $3,973 $3,649
====== ====== ====== ====== ======
Net charge-offs/(recoveries) during the period to
average loans outstanding during the period........ (0.01)% 0.02% 0.07% 0.09% 0.07%
====== ====== ====== ====== ======
Total allowance for loan losses to total loans(1).... 0.87% 0.95% 0.98% 0.99% 0.94%
====== ====== ====== ====== ======
(1) Total loans equal total loans-net plus the allowance for loan losses.
16
17
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
March 31,
-----------------------------------------------------------------------
1997 1996 1995
--------------------- ------------------- ---------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Amount of Category Amount of Category Amount of Category
Loan Loss to Total Loan Loss to Total Loan Loss to Total
Allowance Loans Allowance Loans Allowance Loans
------ ------ ------ ------ ------ ------
(Dollars in Thousands)
One- to four-family
permanent residential
and equity lines of
credit .............. $1,205 40.43% $1,064 46.36% $1,105 49.37%
Multi-family and
commercial real
estate .............. 1,227 27.01 1,118 25.54 1,022 24.47
Construction or
development ......... 1,258 24.84 859 20.80 774 20.19
Consumer ............. 297 6.74 242 6.81 190 5.54
Commercial business .. 110 0.98 37 0.49 37 0.43
Unallocated .......... 871 -- 1,252 -- 1,155 --
------ ------ ------ ------ ------ ------
Total .......... $4,968 100.00% $4,572 100.00% $4,283 100.00%
====== ====== ====== ====== ====== ======
March 31,
---------------------------------------------
1994 1993
------------------- ---------------------
Percent Percent
of Loans of Loans
in Each in Each
Amount of Category Amount of Category
Loan Loss to Total Loan Loss to Total
Allowance Loans Allowance Loans
------ ------ ------ ------
One- to four-family
permanent residential
and equity lines of
credit .............. $1,169 50.76% $ 789 50.54%
Multi-family and
commercial real
estate .............. 1,035 24.37 1,098 23.66
Construction or
development ......... 704 20.33 710 21.52
Consumer ............. 168 4.00 129 3.79
Commercial business .. 43 0.54 38 0.49
Unallocated .......... 854 -- 885 --
------ ------ ------ ------
Total .......... $3,973 100.00% $3,649 100.00%
====== ====== ====== ======
INVESTMENT ACTIVITIES
- ---------------------
INVESTMENT SECURITIES. Federal thrift institutions have authority to invest
in various types of liquid assets, including U.S. Treasury obligations and
securities of various federal agencies, certificates of deposit at insured
institutions, bankers' acceptances and federal funds. At March 31, 1997, $24.6
million of the Company's investment securities were classified as
available-for-sale, while $7.0 million were classified as held to maturity. For
a summary of the Company's investment policy and investment securities see Notes
1 and 2 of the Notes to Consolidated Financial Statements set forth in the Proxy
Statement.
Federal thrift institutions may also invest a portion of their assets in
certain commercial paper and corporate debt securities. Federal thrift
institutions are also authorized to invest in mutual funds whose assets conform
to the investments that a federal thrift institution is authorized to make
directly. There are various restrictions on the foregoing investments. For
example, the commercial paper must be appropriately rated by at least two
nationally recognized investment rating services and the corporate debt
securities must be appropriately rated by at least one such service. In
addition, the average maturity of an institution's portfolio of corporate debt
securities may not, at any one time, exceed six years, and the commercial paper
must mature within nine months of issuance. Moreover, an institution's total
investment in the commercial paper and corporate debt securities of
17
18
any one issuer may not exceed 1% of the institution's assets except that an
institution may invest 5% of its assets in the shares of any appropriate mutual
fund. As members of the FHLB System, the Associations must maintain minimum
levels of investments that are liquid assets as specified by the OTS. See
"Regulation -- Federal Home Loan Bank System." Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans.
Historically, the Company has maintained its liquid assets above the minimum
requirements imposed by federal regulations and at a level believed adequate to
meet requirements of normal daily activities, repayment of maturing debt and
potential deposit outflows. Cash flow projections are regularly reviewed and
updated to assure that adequate liquidity is provided. As of March 31, 1997, the
liquidity ratio (liquid assets as a percentage of net withdrawable savings and
short-term borrowings) was 6.81% for Security Federal and 10.76% for First
Federal. The cash management policies of the Company are designed to keep
liquidity levels within the federal regulations, but at reasonable levels in
order to maximize interest income by investing in loans, mortgage backed
securities, and other investments or minimize interest expense by repaying
short-term, higher cost borrowings.
18
19
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated.
March 31,
------------------------------------------------------------------------
1997 1996 1995
------ ------ -----
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
---------- ----- ------- ----- ------- -----
(Dollars in Thousands)
Investment Securities:
Available for sale:
U.S. government and agency obligations ............. $24,048 57.32% $23,664 53.00% $21,845 45.36%
Federal National Mortgage Association
("FNMA") preferred stock ........................... 516 1.23 504 1.13 -- --
Municipal bonds .................................... 12 .03 21 0.05 29 0.06
------- ------- ------- ------- ------- -------
Subtotal ........................................ 24,576 58.58 24,189 54.18 21,874 45.43
Held to maturity:
U.S. government and agency obligations ............. 7,000 16.69 7,000 15.68 9,000 18.69
FHLB stock ............................................. 6,400 15.25 3,864 8.65 2,909 6.04
------- ------- ------- ------- ------- -------
Total investment securities and FHLB
stock ............................................ 37,976 90.52 35,053 78.51 33,783 70.16
------- ------- ------- ------- ------- -------
Other Interest-Earning Assets:
Interest-bearing deposits with banks ................. 1,826 4.35 5,334 11.95 9,760 20.27
Federal funds sold and overnight
investments ........................................ 403 0.96 1,669 3.74 3,821 7.93
Other short-term investments. . . . . . . . . . . . . 1,750 4.17 2,590 5.80 790 1.64
------- ------- ------- ------- ------- -------
Total ............................................. $41,955 100.00% $44,646 100.00% $48,154 100.00%
======= ======= ======= ======= ======= =======
Average remaining life or term to repricing of
investment securities and other interest-
earning assets, excluding FNMA preferred
stock and FHLB stock.......................... 2.37 years 2.47 years 1.85 years
The composition and maturities (without consideration of issuers' call
options) of the debt investment securities portfolio, excluding FNMA preferred
stock and FHLB stock, are indicated in the following table.
March 31, 1997
-----------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over 10 Total Debt
1 Year Years Years Years Investment Securities
--------- ------- ------- ------- ---------------------------
Carrying Value Amortized Cost Fair Value
---------------------------------------------- --------------- -----------
(Dollars in Thousands)
U.S. government and
agency obligations................. $10,995 $20,462 $ --- $ --- $31,457 $31,034
Municipal bond...................... --- 12 --- --- 12 12
------- ------- -------- -------- ------- -------
Total debt investment securities.... $10,995 $20,474 $ --- $ --- $31,469 $31,046
======= ======= ======== ======== ======= =======
Weighted average yield.............. 6.10% 6.37% ---% ---% 6.27%
19
20
The Company's investment securities portfolio at March 31, 1997 contained no
securities of any issuer with an aggregate book or market value in excess of 10%
of the Company's stockholders' equity, excluding those issued by the United
States Government, or its agencies.
MORTGAGE-BACKED SECURITIES. At March 31, 1997, 1996 and 1995, the Company
had mortgage-backed securities issued by FHLMC securitized by pools of 30-year,
fixed rate mortgage loans with a fair value of $2.5 million, $3.3 million and
$4.2 million, respectively. For more information on the Company's
mortgage-backed securities, see Notes 1 and 3 of the Notes to Consolidated
Financial Statements set forth in the proxy statement.
The following table sets forth the contractual maturities of the Company's
mortgage-backed securities at March 31, 1997. Due to prepayments, management
anticipates actual maturities to be shorter than contractual maturities.
5 to 10 10 to 20 Over 20
Years Years Years Total
----- ----- ----- -----
(Dollars in thousands)
FHLMC participation certificates..................... $642 $1,827 $--- $2,469
As of March 31, 1997, mortgage-backed securities with a current value of
$1,507,000 are pledged against $1,250,000 in public funds.
Sources of Funds
- ----------------
GENERAL. Deposit accounts have traditionally been a principal source of the
Company's funds for use in lending and for other general business purposes. In
addition to deposits, the company derives funds from loan repayments, cash flows
generated from operations, which include interest credited to deposit accounts,
repurchase agreements entered into with investment banking firms and FHLB of
Cincinnati advances and convertible subordinated debentures. Contractual loan
payments are a relatively stable source of funds, while deposit inflows and
outflows and the related cost of such funds have varied widely. Borrowings may
be used on a short-term basis to compensate for reductions in deposits or
deposit inflows at less than projected levels and may be used on a longer term
basis to support expanded lending activities.
DEPOSITS. The Company attracts both short-term and long-term deposits from
the general public by offering a wide assortment of accounts and rates. The
Company offers regular passbook accounts, checking accounts, money market
accounts, fixed interest rate certificates with varying maturities, negotiated
rate $100,000 or above jumbo certificates of deposit ("Jumbo CDs") and
individual retirement accounts.
The composition of the Company's deposits at the end of recent periods is
set forth in Note 7 of the Notes to Consolidated Financial Statements set forth
in the Proxy Statement. The Company does not knowingly accept brokered deposits
and, to the best of its knowledge, did not have any at March 31, 1997, although
it may consider the use of such deposits in the future.
20
21
Management believes that the variety of deposit accounts offered by the
Company has allowed it to be competitive in obtaining funds and has allowed it
to respond with flexibility (by paying rates of interest more closely
approximating market rates of interest) to reduce, although not eliminate, the
threat of disintermediation (the flow of funds away from depository institutions
such as thrift institutions into direct investment vehicles such as government
and corporate securities and mutual funds). In addition, the Company has become
much more subject to short-term fluctuations in deposit flows, as customers have
become more interest rate conscious. Therefore, the ability of the Company to
attract and maintain deposits, and its cost of funds, has been, and will
continue to be, significantly affected by money market conditions.
The following table sets forth the deposit flows at the Company during the
periods indicated.
Year Ended March 31,
------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Opening balance............................. $ 410,737 $ 393,314 $ 387,776
Net cash increase (decrease) in
deposits before interest credit............ 19,414 2,472 (6,830)
Interest credit............................. 15,031 14,951 12,368
---------- ---------- ---------
Ending balance.......................... $ 445,182 $ 410,737 $ 393,314
========= ======== =========
Net increase................................ $ 34,445 $ 17,423 $ 5,538
========= ========= =========
Percent increase............................ 8.39% 4.43% 1.43%
==== ==== ====
The following table presents, as of March 31, 1997, the outstanding amount
of certificates of deposit in amounts of $100,000 or more by time remaining
until maturity.
March 31, 1997
--------------
(Dollars in Thousands)
Three months or less................................. $26,495
Over three through six months........................ 12,687
Over six through twelve months....................... 21,710
Over twelve months................................... 9,166
-------
$70,058
=======
BORROWINGS. As a member of the FHLB of Cincinnati, the Company is
required to own capital stock in the FHLB of Cincinnati and is authorized to
apply for advances from the FHLB of Cincinnati. Each FHLB credit program has its
own interest rate, which may be fixed or variable, and range of maturities. The
FHLB of Cincinnati may prescribe the acceptable uses to which these advances may
be put, as well as limitations on the size of the advances and repayment
provisions.
The Company's borrowings may, from time to time also include securities sold
under agreements to repurchase, pledging mortgage-backed securities or other
securities as collateral.
21
22
During the years ended March 31, 1997, 1996 and 1995, the Company did not have
any securities sold under agreements to repurchase outstanding.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances at the dates indicated.
Year Ended March 31,
---------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Maximum Balance:
- ----------------
FHLB advances............................... $116,146 $68,084 $50,543
Average Balance:
- ---------------
FHLB advances............................... $ 98,980 $57,105 $39,309
Weighted average interest
rate of FHLB advances...................... 5.85% 6.04% 5.59%
The following table sets forth information as to the rates and balances of
the Company's borrowings at the dates indicated.
March 31,
1997 1996 1995
-------------------------- ---------
(Dollars in Thousands)
FHLB advances............................... $115,221 $68,084 $50,543
Weighted average interest rate
of FHLB advances........................... 5.95% 5.75% 6.16%
In May 1993, the Company issued $9,775,000 of 6 1/4% convertible
subordinated debentures due May 1, 2008. The payment of principal and interest
on the debentures is subordinated at all times to any indebtedness of the
Company outstanding or incurred after the date of issuance. At March 31, 1997,
the Company had no indebtedness senior to the debentures. However, certain
obligations of the Company, including deposit liabilities and FHLB advances,
have first claim on the assets of the Company. Cost incurred in the transaction
totaled approximately $812,000 and will be amortized over the life of the
debentures resulting in an effective interest rate of 7.2%. The debentures are
convertible at any time prior to maturity into common stock of the Company at a
conversion rate of 85.62 shares of common stock (as adjusted for the September
1993 two-for-one stock split) for each $1,000 principal amount of debentures. On
May 20, 1997, the Board of Directors of Security First 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 post-split conversion rate of the
debentures will be 128.37 shares of common stock for each $1,000 principal
amount of
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debentures. During the year ended March 31, 1997, $295,000 of such debentures
were converted into 25,253 shares of common stock.
The debentures became callable at the option of the Company on May 1, 1996
and are redeemable during the 12-month period beginning May 1, 1997 at 102.5% of
the principal amount, and thereafter at 100% of their principal amount. At this
time, the Company has not exercised its right to call the debentures. In the
indenture of the debentures, the Company is restricted as to the amounts of
additional indebtedness it may incur and the amount of dividends and other
distributions it may pay to its stockholders, depending on the Company's
regulatory capital.
SUBSIDIARY ACTIVITIES
- ---------------------
At March 31, 1997, Security Federal's net remaining investment in its
service corporation, Security Financial Corporation ("SFC"), was $1,000. The
service corporation, which in the past had been engaged in several joint
ventures for residential land development, has been inactive during the current
fiscal year.
During March 1994 the Company formed SF Development Co., a wholly owned
subsidiary of Security First, for the purpose of entering into joint ventures to
develop land for residential properties. During fiscal 1995, SF Development
entered into a joint venture with a local developer to purchase land for the
development of 81 residential lots located in Richmond Heights, Ohio, and during
fiscal 1996 entered into a second joint venture with the same developer to
develop land into 63 residential lots, also in Richmond Heights, Ohio.
Additionally, during fiscal 1997, SF Development entered into a joint venture
with a second developer to develop land and build 56 condominium units in
Medina, Ohio. See Note 18 of the Notes to Consolidated Financial Statements set
forth in the Proxy Statement.
COMPETITION
- -----------
The Company faces strong competition both in originating real estate loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from other thrift institutions, commercial banks and mortgage bankers
who also make loans secured by real estate located in the Company's market area.
The Company competes for real estate loans principally on the basis of the
interest rates and loan fees it charges, the types of loans it originates and
the quality of services it provides to borrowers.
The Company faces substantial competition in attracting deposits from other
thrift institutions, commercial banks, money market and mutual funds, credit
unions and other investment vehicles. The ability of the Company to attract and
retain deposits depends on its ability to provide an investment opportunity that
satisfies the requirements of investors as to rate of return, liquidity, risk
and other factors. The Company attracts a significant amount of deposits through
its branch offices primarily from the communities in which those branch offices
are located. Therefore, competition for those deposits is principally from other
thrift institutions and commercial banks located in the same communities. The
Company competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours, and convenient branch locations
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with interbranch deposit and withdrawal privileges at each. The Company also has
automated teller machines, which provide 24-hour cash availability to its
customers.
The authority to offer money market deposits, and expanded lending and other
powers authorized for thrift institutions by federal legislation, have resulted
in increased competition for both deposits and loans between thrift institutions
and other financial institutions such as commercial banks.
The Company considers its primary market area for savings and mortgage loans
to consist of Ashtabula, Cuyahoga, Geauga, Lake, and Medina and Portage counties
in Northeastern Ohio. At March 31, 1997, there were 17 thrift institutions and
14 commercial banks with offices in the Company's primary market area. The
Company estimates that its market share of savings deposits and mortgage loans
in this area is less than 5%.
REGULATION
- ----------
GENERAL. The Associations are federally chartered savings and loan
associations, the deposits of which are federally insured and backed by the full
faith and credit of the United States Government. Accordingly, the Associations
are subject to broad federal regulation and oversight extending to all their
operations. The Associations are members of the FHLB of Cincinnati and are
subject to certain limited regulation by the Board of Governors of the Federal
Reserve System ("Federal Reserve Board"). As the savings and loan holding
company of the Associations, Security First also is subject to federal
regulation and oversight. The purpose of the regulation of Security First and
other holding companies is to protect subsidiary savings associations.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. The OTS has extensive authority
over the operations of savings associations. As part of this authority, the
Associations are required to file periodic reports with the OTS and are subject
to periodic examinations by the OTS and the FDIC.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Associations and
Security First. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
Security Federal's and First Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At March 31, 1997, Security Federal's lending
limit under
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this restriction was $7 million and First Federal's was $1.6 million. The
Associations are in compliance with the loans-to-one-borrower limitation.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Associations are
members of the Savings Association Insurance Fund("SAIF"), which is administered
by the FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. Deposit insurance premiums are assessed based upon the
institution's risk classification, which is a function of its capital level and
supervisory rating. It also may prohibit any FDIC-insured institution from
engaging in any activity the FDIC determines by regulation or order to pose a
serious risk to the SAIF or the BIF. The FDIC also has the authority to initiate
enforcement actions against savings associations, after giving the OTS an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged in unsafe or unsound practices, or
is in an unsafe or unsound condition.
The FDIC is authorized to increase assessment rates on deposits, on a
semiannual basis, if it determines that the reserve ratio of the SAIF will be
less than the designated reserve ratio of 1.25% of SAIF insured deposits. In
setting these increased assessments, the FDIC must seek to restore the reserve
ratio to that designated reserve level, or such higher reserve ratio as
established by the FDIC. The FDIC may also impose special assessments on SAIF
members to repay amounts borrowed from the United States Treasury or for any
other reason deemed necessary by the FDIC.
For the first six months of 1995, the assessment schedule for Bank
Insurance Fund ("BIF") members and SAIF members ranged from .23% to .31% of
deposits. As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits.
As a result of the BIF reaching its statutory reserve ratio, the FDIC revised
the premium schedule for BIF-insured institutions to provide a range of .04% to
.31% of deposits. The revisions became effective in the third quarter of 1995.
In addition, the BIF rates were further revised, effective January 1996, to
provide a range of 0% to .27%. The SAIF rates, however, were not adjusted. At
the time that the FDIC revised the BIF premium schedule, it noted that, absent
legislative action (as discussed below), the SAIF would not attain its
designated reserve ratio until the year 2002. As a result, SAIF insured members
would continue to be generally subject to higher deposit insurance premiums than
BIF until, all things being equal, the SAIF attained its insured institutions
required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF-member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provided for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provided for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate was
established at .657% of deposits (as of March 31, 1995) by the FDIC and the
resulting assessments of $2.2 million for Security Federal and $386,000 for
First Federal were paid in November 1996. This special assessment significantly
increased
25
26
noninterest expense and adversely affected the Associations', and therefore the
Company's, results of operations for the year ended March 31, 1997. As a result
of the special assessment, Security Federal's and First Federal's deposit
insurance premiums were reduced to zero, based upon its current risk
classification and the new assessment schedule for SAIF insured institutions.
These premiums are subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF assessment
imposed on savings associations was used to repay obligations issued by a
federally chartered corporation to provide financing ("FICO") for resolving the
thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF-assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF-member institutions such as the Associations. Thereafter,
however, assessments on BIF-member institutions will be made on the same basis
as SAIF-member institutions. The rates established by the FDIC to implement this
requirement for all FDIC-insured institutions are 6.3 basis points assessment on
SAIF deposits and 1.3 basis points on BIF deposits until BIF-insured
institutions participate fully in the assessment. The current semi-annual FICO
assessment for Security Federal and First Federal is $252,000 and $48,000,
respectively. These rates may be subject to change in future periods based upon
the level of SAIF and BIF deposits.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings associations,
such as the Associations, are required to maintain a minimum level of regulatory
capital. The OTS has established capital standards, including a tangible capital
requirement, a leverage ratio (or core capital) requirement and a risk-based
capital requirement applicable to such savings associations. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis. See Note 13 of the Notes to Consolidated Financial
Statements set forth in the Proxy Statement.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions, that are applicable to significantly undercapitalized
associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
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Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association.
An association that becomes "critically undercapitalized" (i.e., a tangible
capital ratio of 2% or less) is subject to further mandatory restrictions on its
activities in addition to those applicable to significantly undercapitalized
associations. In addition, the OTS must appoint a receiver (or conservator with
the concurrence of the FDIC) for a savings association, with certain limited
exceptions, within 90 days after it becomes critically undercapitalized.
Any undercapitalized association is also subject to the general enforcement
authority of the OTS and the FDIC, including the appointment of a conservator or
a receiver. The OTS is also generally authorized to reclassify an association
into a lower capital category and impose the restrictions applicable to such
category if the institution is engaged in unsafe or unsound practices or is in
an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Company may have a substantial adverse effect on the Company's operations and
profitability and the value of its Common Stock. The Company shareholders do not
have preemptive rights, and therefore, if the Company is directed by the OTS or
the FDIC to issue additional shares of Common Stock, such issuance may result in
the dilution in the percentage of ownership of the Company.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. OTS regulations
impose various restrictions on savings associations with respect to their
ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with its mutual to stock conversion. See "-Regulatory Capital
Requirements."
QUALIFIED THRIFT LENDER TEST. All savings associations, including the
Company, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At March 31, 1997, each of
the Associations met the test and has always met the test since its
effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC
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permits it to transfer to the BIF. If such association has not yet requalified
or converted to a national bank, its new investments and activities are limited
to those permissible for both a savings association and a national bank, and it
is limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act ("CRA"),
every FDIC insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
the examination of the Association, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications, such as a merger or the establishment
of a branch, by the Association. An unsatisfactory rating may be used as the
basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years, the Associations may be required to devote additional funds for
investment and lending in their local community. Security Federal was examined
for CRA compliance in 1995 and received a rating of "satisfactory." First
Federal was examined for CRA compliance in 1996 and received a rating of
"satisfactory."
TRANSACTIONS WITH AFFILIATES. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the
Associations include Security First and any company which is under common
control with the Associations. In addition, a savings association may not lend
to any affiliate engaged in activities not permissible for a bank holding
company or acquire the securities of most affiliates. The Associations'
subsidiaries are not deemed affiliates; however, the OTS has the discretion to
treat subsidiaries of savings associations as affiliates on a case by case
basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
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HOLDING COMPANY REGULATION. As of March 31, 1997, Security First was a
multiple savings and loan holding company subject to regulatory oversight by the
OTS. As such, Security First is required to register and file reports with the
OTS and is subject to regulation and examination by the OTS. In addition, the
OTS has enforcement authority over Security First and its non-savings
association subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
As a multiple savings and loan holding company, the activities of Security
First are generally limited to those approved by the OTS and those permissible
for bank holding companies. These activities include financial services related
activities, real estate development and certain insurance agency activities.
If either Security Federal or First Federal fails the QTL test, Security
First must obtain the approval of the OTS prior to continuing after such
failure, directly or through its other subsidiaries, any business activity other
than those approved for multiple savings and loan holding companies or their
subsidiaries. In addition, within one year of such failure Security First must
register as, and will become subject to, the restrictions applicable to bank
holding companies. The activities authorized for a bank holding company are more
limited than are the activities authorized for a multiple savings and loan
holding company. See "--Qualified Thrift Lender Test."
FEDERAL AND STATE TAXATION
- --------------------------
FEDERAL TAXATION. Prior to 1996, savings associations such as the
Associations that met certain definitional tests relating to the composition of
assets and other conditions prescribed by the Internal Revenue Code of 1986, as
amended (the "Code"), had been permitted to establish reserves for bad debts and
to make annual additions thereto which were allowed, within specified formula
limits, to be taken as a deduction in computing taxable income for federal
income tax purposes. The amount of the bad debt reserve deduction for
"non-qualifying loans" was computed under the experience method. The amount of
the bad debt reserve deduction for "qualifying real property loans" (generally
one-to-four family home loans secured by improved real estate) was computed
under the greater of the experience method or the percentage of taxable income
method.
Under the experience method, the bad debt reserve deduction was an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
The percentage of specially computed taxable income that was used to compute
a savings association's bad debt reserve deduction under the percentage of
taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. Prior to
1988, the availability of the percentage of taxable income method permits
qualifying savings associations to be taxed at a lower effective federal income
tax rate than that applicable to corporations generally (approximately 31.3%
assuming the maximum percentage bad debt deduction).
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If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally had
to include existing reserves in income over a four year period.
In August 1996, legislation was enacted that repeals the reserve method of
accounting (including the percentage of taxable income method) used by many
thrifts, including the Associations, to calculate their bad debt reserve for
federal income tax purposes. As a result, thrifts such as the Associations must
recapture that portion of the reserve that exceeds the amount that could have
been taken under the specific charge-off method for post-1987 tax years. The
legislation also requires thrifts to account for bad debts for federal income
tax purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995. The recapture will occur over a six-year period, the
commencement of which will be delayed until the first taxable year beginning
after December 31, 1997, provided the institution meets certain residential
lending requirements. The management of the Company does not believe that the
legislation will have a material impact on the Associations.
In addition to the regular income tax, corporations, including savings
associations such as the Associations, generally are subject to a minimum tax.
An alternative minimum tax is imposed at a minimum tax rate of 20% on
alternative minimum taxable income, which is the sum of a corporation's regular
taxable income (with certain adjustments) and tax preference items, less any
available exemption. The alternative minimum tax is imposed to the extent it
exceeds the corporation's regular income tax and net operating losses can offset
no more than 90% of alternative minimum taxable income. For taxable years
beginning after 1986 and before 1996, corporations, including savings
associations such as the Associations, are also subject to an environmental tax
equal to 0.12% of the excess of alternative minimum taxable income for the
taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of March 31, 1997, Security Federal's and First Federal's Excess for
tax purposes totaled approximately $3.9 million and $1.6 million, respectively.
The Company and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. Savings
associations, such as the Association, that file federal income tax returns as
part of a consolidated group are required by applicable Treasury regulations to
reduce their taxable income for purposes of computing the percentage bad debt
deduction for losses attributable to activities of the non-savings association
members of the consolidated group that are functionally related to the
activities of the savings association member.
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The Company has been audited by the IRS with respect to its consolidated
federal income tax returns through March 31, 1990. With respect to years
examined by the IRS, either all deficiencies have been satisfied or sufficient
reserves have been established to satisfy asserted deficiencies. In the opinion
of management, any examination of still open returns (including returns of
subsidiaries and predecessors of, or entities merged into, the Company) would
not result in a deficiency which could have a material adverse effect on the
financial condition of the Company and its consolidated subsidiaries.
DELAWARE TAXATION. As a Delaware holding company, the Company is exempted
from Delaware corporate income tax but is required to file an annual report with
and pay an annual fee to the State of Delaware. The Company is also subject to
an annual franchise tax imposed by the State of Delaware.
OHIO TAXATION. Security First and the Associations conduct their business in
Ohio and consequently are subject to the Ohio corporate franchise tax. A
financial institution subject to the Ohio corporate franchise tax levied in Ohio
Revised Code pays a tax equal to 15 mills (.015) times its apportioned net
worth. The apportionment factor consists of a business done factor, determined
by reference to the total receipts of the financial institution from all
sources, and a property factor, determined by reference to the net book value of
all property owned by the financial institution. The financial institution may
claim a credit equal to the annual assessment paid to the State pursuant to the
Ohio Revised Code.
EMPLOYEES
- ---------
At March 31, 1997, the Company had a total of 169 employees, including 29
part-time employees. None of the Company's employees are represented by any
collective bargaining group. Management considers its employee relations to be
good.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
The following table sets forth the names, ages and positions of each of the
executive officers of the Company. There are no arrangements or understandings
between the persons named and any other person pursuant to which such officers
were selected.
Year
Name Age Position Appointed
- ----------------------- ---- ---------------------------------------------------- ---------
Charles F. Valentine 57 Chairman of the Board and Chief Executive Officer 1985
Austin J. Mulhern 55 President, Chief Operating Officer and Director 1985
Jeffrey J. Calabrese 45 Vice President and Secretary 1976
Mary H. Crotty 56 Chief Financial Officer, Vice President and Treasurer 1995
Thomas J. Deighton 46 Vice President 1994
Thomas F. Sullivan 44 Assistant Vice President and Controller 1996
The business experience of each of the executive officers is as
follows:
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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, serving as Chairman and Chief Executive Officer
since 1985.
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.
JEFFREY J. CALABRESE. Mr. Calabrese is Vice President and Secretary of
Security Federal. He is responsible for marketing, savings and branch
operations. He joined Security Federal in 1974.
MARY H. CROTTY. Mrs. Crotty was appointed Chief Financial Officer
effective February 1, 1995. Prior to that time, she was Assistant Vice President
and Controller of Security Federal and joined Security Federal in March 1990.
Mrs. Crotty is a certified public accountant in Ohio.
THOMAS J. DEIGHTON. Mr. Deighton is Vice President-Senior Loan Officer
of Security Federal and joined the Security Federal in January 1989. He is
responsible for the Security Federal's lending operations. Mr. Deighton was
named an executive officer of the Company in May 1994.
THOMAS F. SULLIVAN. Mr. Sullivan is Assistant Vice President and
Controller of Security Federal and joined Security Federal in August 1996. He
was Controller of Metropolitan Savings Bank from 1993 to 1996 and Accounting
Systems Officer of Ohio Savings Bank from 1992 to 1993.
ITEM 2. PROPERTIES
- -------------------
The Company conducts its business at its main office headquartered in
Mayfield Heights, Ohio and its 14 branch office locations in its market area in
northeast Ohio. The Company owns eight of its offices, and leases six. The total
net book value of the Company's premises and equipment (including land, building
and leasehold improvements and furniture, fixtures and equipment) at March 31,
1997, was $8.9 million. See Note 9 of Notes to Consolidated Financial Statements
set forth in the Proxy Statement.
The Company believes that its current facilities are adequate to meet
the present and foreseeable needs of the Company.
The Company's accounting and record keeping activities are maintained
on an on-line basis with an independent service bureau. The net book value of
the Company's computer equipment at March 31, 1997 was approximately $1.2
million.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is a party to a legal proceeding titled U.S. Die Casting
& Development Company, an Ohio Corporation v. Security First Corp., Charles F.
Valentine, Austin J. Mulhern, Robert L. Anderson, Fred J. Ball, Nicholas E.
Rinaldi, D.D.S., Donald E. Snow and Paul V. Voinovich which was filed on June 6,
1996, in the Court of Chancery of the State of Delaware in
32
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and for New Castle County. The plaintiff, on behalf of itself and as a
shareholder derivative action, is alleging that the Company improperly
terminated the merger agreement with Mid Am, Inc. in 1994. The plaintiff is
seeking unspecified damages as well as reasonable attorney's fees, costs and
expenses. The ultimate resolution of this proceeding and its potential effect on
the consolidated financial position and results of operations of the Company
cannot be determined at this time.
The Company is also involved in routine litigation arising from its
operations. Management also believes that the outcome of such routine
litigation, individually and in the aggregate, will not have a material effect
on the Company's consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- --------------------------------------------------------------------------
MATTERS
- -------
Information concerning the Market for the Registrant's Common Equity
and Related Stockholder Matters is incorporated herein by reference from the
Company's definitive proxy statement for the Annual Meeting of Shareholders to
be held in July, 1997, except for the information contained under the heading
"Compensation Committee Report" and "Stockholder Return Performance
Presentation," a copy of which is attached hereto as Exhibit 99.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
Information concerning the Selected Financial Data is incorporated
herein by reference from the Company's definitive proxy statement for the Annual
Meeting of Shareholders to be held in July, 1997, except for the information
contained under the heading "Compensation Committee Report" and "Stockholder
Return Performance Presentation," a copy of which is attached hereto as Exhibit
99.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Information concerning Management's Discussion and Analysis of
Financial Condition and Results of Operations is incorporated herein by
reference from the Company's definitive proxy statement for the Annual Meeting
of Shareholders to be held in July, 1997, except for the information contained
under the heading "Compensation Committee Report" and "Stockholder Return
Performance Presentation," a copy of which is attached hereto as Exhibit 99.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Information concerning the Financial Statements and Supplemental Data
is incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of
33
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Shareholders to be held in July, 1997, except for the information contained
under the heading "Compensation Committee Report" and "Stockholder Return
Performance Presentation," a copy of which is attached hereto as Exhibit 99.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change in
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
Information concerning Directors of the Registrant is incorporated
herein by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held in July 1997, except for the information
contained under the heading "Compensation Committee Report" and "Stockholder
Return Performance Presentation," a copy of which is attached hereto as Exhibit
99.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
Information concerning executive compensation is incorporated herein
by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held in July 1997, except for the information
contained under the heading "Compensation Committee Report" and "Stockholder
Return Performance Presentation," a copy of which is attached hereto as Exhibit
99.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held in July 1997,
except for the information contained under the heading "Compensation Committee
Report" and "Stockholder Return Performance Presentation," a copy of which is
attached hereto as Exhibit 99.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held in July 1997, except for the
information contained under the heading "Compensation Committee Report" and
"Stockholder Return Performance Presentation," a copy of which is attached
hereto as Exhibit 99.
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PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(A) (1) FINANCIAL STATEMENTS:
------------------------------
The following financial statements are included under Part II, Item 8
of this Form 10-K:
1. Report of Independent Auditors.
2. Consolidated Statements of Balance Sheet at March 31, 1997 and 1996.
3. Consolidated Statements of Income for the fiscal years ended March 31,
1997, 1996 and 1995.
4. Consolidated Statements of Changes in Shareholders' Equity for the fiscal
years ended March 31, 1997, 1996 and 1995.
5. Consolidated Statements of Cash Flows for the fiscal years ended March 31,
1997, 1996 and 1995.
6. Notes to Consolidated Financial Statements
7. Security First Quarterly Financial Data
(A) (2) FINANCIAL STATEMENT SCHEDULES:
---------------------------------------
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(A) (3) EXHIBITS:
-----------------
See Exhibit Index.
(B) REPORTS ON FORM 8-K:
-------------------------
There were no reports on Form 8-K filed during the quarter ended March
31, 1997.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SECURITY FIRST CORP.
By: /s/Austin J. Mulhern Date: June 26, 1997
-------------------------------------- -------------
Austin J. Mulhern
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/Charles F. Valentine Date: June 26, 1997
------------------------------------------------- -------------
Charles F. Valentine,
Chairman of the Board and
Chief Executive Officer
By: /s/Austin J. Mulhern Date: June 26, 1997
------------------------------------------------- -------------
Austin J. Mulhern, President
Chief Operating Officer
and Director
By: /s/Robert L. Anderson Date: June 26, 1997
------------------------------------------------- -------------
Robert L. Anderson, Director
By: /s/James P. Myers Date: June 26, 1997
------------------------------------------------- -------------
James P. Myers, Director
By: /s/Nicholas E. Rinaldi Date: June 26, 1997
------------------------------------------------- -------------
Nicholas E. Rinaldi, Director
37
By: /s/Larry E. Rogers Date: June 26, 1997
------------------------------------------------- -------------
Larry E. Rogers, Director
By: /s/Donald E. Snow Date: June 26, 1997
------------------------------------------------- -------------
Donald E. Snow, Director
By: /s/Louis J. Sorboro Date: June 26, 1997
------------------------------------------------- -------------
Louis J. Sorboro, Director
By: /s/Paul V. Voinovich Date: June 26, 1997
------------------------------------------------- -------------
Paul V. Voinovich, Director
By: /s/Mary H. Crotty Date: June 26, 1997
------------------------------------------------- -------------
Mary H. Crotty, Vice President
Treasurer, and Chief
Financial Officer
38
EXHIBIT INDEX
Exhibit
Number Document
--------- -------------------------------------------------------------
3 The Articles of Incorporation and Bylaws, filed on December
11, 1992 as exhibits to Registrant's Registration Statement
on Form S-4 (File No. 33-55674), are incorporated herein by
reference.
4.1 Registrant's Specimen Stock Certificate, filed on December 11,
1992 as an exhibit to Registrant's Registration Statement on
Form S-4 (File No. 33-55674), is incorporated herein by
reference.
4.2 Indenture, dated as of May 5, 1993, with respect to the
Registrant's 6 1/4% Convertible Subordinated Debentures, due
May 1, 2008, filed on March 18, 1993, filed as an exhibit to
Registrant's Registration Statement on Form S-2 (File No.
33-59830), is incorporated herein by reference.
10.1 Registrant's 1987 Stock Option and Incentive Plan, filed as an
exhibit to Registrant's Report on Form 8-K dated May 12, 1993
(File No. 0-21212), is incorporated herein by reference.
10.2 Employment Contracts with Charles V. Valentine (dated April
10, 1996), Austin J. Mulhern (dated April 10, 1996), Jeffrey
J. Calabrese (dated April 10, 1996), Mary H. Crotty (dated
April 10, 1996), Geoffrey Lant (dated April 10, 1996) and
Louis J. Sorboro (dated April 10, 1996), filed as exhibits to
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1996 (File No. 0-21212), are incorporated herein by
reference.
10.3 Registrant's Management Incentive Compensation Plan, filed as
an exhibit to Registrant's Report on Form 10-K for the fiscal
year ended March 31, 1993 (File No. 0-21212), is incorporated
herein by reference.
10.4 Registrant's 401(k) Plan, filed as an exhibit to Registrant's
Report on Form 10-K for the fiscal year ended March 31, 1993
(File No. 0-21212), is incorporated herein by reference.
10.5 Registrant's 1996 Stock Option and Incentive Plan, filed as
Appendix A to Registrant's Proxy Statement on Schedule 14A for
the annual meeting of shareholders held on July 25, 1996, is
incorporated herein by reference.
11 Statement re computation of per share earnings
12 Statement re computation of ratios
21 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Crowe, Chizek and Company LLP
23.3 Consent of Brott Mardis & Co.
27 Financial Data Schedule
99 Proxy Statement