1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-21212
-------
SECURITY FIRST CORP.
(Exact name of registrant as specified in its charter)
Delaware 34-1724675
-----------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1413 Golden Gate Boulevard
Mayfield Heights, Ohio 44124-1800
---------------------- ----------
(Address of principal executive (Zip Code)
offices)
(216) 449-3700
---- --------
(Registrant's telephone number, including area code)
Not Applicable
--- ----------
(Former name, former address and former fiscal year, if change
since last report)
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 12 months (or for shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $0.01 par value 7,528,290
- ------ ------------ --- ---- ---------
(Class) (Outstanding at February 9, 1998)
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SECURITY FIRST CORP.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition
as of December 31, 1997, March 31, 1997 and
December 31, 1996.............................. 3
Consolidated Statements of Income for the three
and nine months ended December 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
nine months ended December 31, 1997 and 1996... 5-6
Notes to Consolidated Financial Statements..... 7
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations. 9-19
PART II. OTHER INFORMATION.............................. 21
SIGNATURES................................................ 22
EXHIBITS.................................................. 23
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Part I. - Financial Information
SECURITY FIRST CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
DECEMBER 31, MARCH 31, DECEMBER 31,
1997 1997 1996
(Unaudited) (Unaudited)
-----------------------------------------------
ASSETS:
Cash and deposits with banks $ 7,142 $ 4,685 $ 6,970
Interest bearing deposits with banks 1,026 1,826 2,501
Federal funds sold and short term investments 3,075 2,153 5,815
-----------------------------------------------
Total cash and cash equivalents 11,243 8,664 15,286
----------------------------------------------
Investment securities - held to maturity (market values of
$6,001, $6,986, and $7,012 at December 31, 1997, March
31, 1997, and December 31, 1996, respectively) 6,000 7,000 7,000
Investment securities - available for sale (amortized cost of
$23,443, $24,969, and $24,968 at December 31, 1997, March 31,
1997, and December 31, 1996, respectively) 23,422 24,576 24,782
Mortgage-backed securities - available for sale (amortized cost of
$1,955 at December 31, 1997, $2,469 at March 31, 1997 and
$2,587 at December 31, 1996) 2,017 2,523 2,679
Loans held for sale 1,010 --- ---
Loans - net (including allowance for loan losses of
$5,179 at December 31, 1997, $4,968 at March 31, 1997
and $4,902 at December 31, 1996) 609,176 567,975 550,925
Accrued interest receivable 4,296 4,032 3,842
Federal Home Loan Bank stock - at cost 6,962 6,400 5,780
Premises and equipment - net 8,581 8,853 9,091
Cost in excess of fair value of net
assets acquired (goodwill) 949 1,028 1,054
Prepaid expenses and other assets 4,220 3,710 3,857
-----------------------------------------------
TOTAL ASSETS $ 677,876 $ 634,761 $ 624,296
===============================================
LIABILITIES:
Deposits $ 503,637 $ 445,182 $ 446,137
Advances from Federal Home Loan Bank-at cost 96,281 115,221 105,012
Convertible subordinated debentures 6,875 8,479 8,759
Advance payments by borrowers for taxes
and insurance (escrow) 2,863 1,498 2,533
Accrued interest payable 2,024 2,058 1,726
Accounts payable and other accrued expenses 2,742 2,888 2,458
-----------------------------------------------
Total liabilities 614,422 575,326 566,625
-----------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock (1,000,000 shares authorized,
none issued) --- --- ---
Common stock, par value $.01 per share; 20,000,000
shares authorized; 7,570,885 shares outstanding
at December 31, 1997, 7,504,649 at March 31, 1997
and 7,460,730 at December 31, 1996 (a) 77 50 50
Capital in excess of par value 16,013 14,915 14,541
Net unrealized gain (loss) on investments and mortgage-backed
securities, (net of tax of $15 at December 31, 1997,
($111) at March 31, 1997, and ($37) at December 31, 1996) 29 (224) (63)
Unearned compensation (158) (216) (235)
Treasury stock (72,483 shares at December 31, 1997), at cost (1,305) --- ---
Retained earnings (substantially restricted) 48,798 44,910 43,378
-----------------------------------------------
Total shareholders' equity 63,454 59,435 57,671
-----------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 677,876 $ 634,761 $ 624,296
===============================================
<FN>
(a) Adjusted to reflect the three-for-two stock split distributed on July 31, 1997
See notes to consolidated financial statements.
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Part I. - Financial Information
SECURITY FIRST CORP.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)
Three months ended Nine months ended
December 31, December 31,
1997 1996 1997 1996
------------------------- --------------------------
Interest Income:
Loans $ 13,345 $ 11,833 $ 38,999 $ 34,035
Mortgage-backed securities 41 54 132 174
Investment securities 623 592 1,895 1,752
Short-term investments 184 104 408 342
------------------------- --------------------------
Total interest income 14,193 12,583 41,434 36,303
------------------------- --------------------------
Interest Expense:
Deposits 5,786 4,965 16,615 14,200
Short-term FHLB advances 1,214 986 3,557 3,266
Long-term FHLB advances 481 582 1,559 860
Convertible subordinated debentures 118 147 388 442
------------------------- --------------------------
Total interest expense 7,599 6,680 22,119 18,768
------------------------- --------------------------
Net interest income 6,594 5,903 19,315 17,535
Provision for loan losses 84 84 226 264
------------------------- --------------------------
Net interest income after provision
for loan losses 6,510 5,819 19,089 17,271
Other Income:
Service charges and other fees 387 380 1,185 1,154
Gain (loss) on loan sales 41 (12) (10) 37
Other 34 91 141 142
------------------------- --------------------------
Other income 462 459 1,316 1,333
------------------------- --------------------------
Other Expenses:
Salaries and employee benefits 1,610 1,419 4,821 4,237
Occupancy and equipment 503 456 1,434 1,321
Federal deposit insurance 73 181 217 651
SAIF assessment -- -- -- 2,567
Marketing 123 119 323 332
Professional fees 103 143 349 371
Data processing 136 129 388 384
Printing and supplies 81 80 249 226
Amortization of goodwill 26 27 78 81
Supervisory assessment 37 33 107 99
Other 670 562 1,938 1,760
------------------------- --------------------------
Other expenses 3,362 3,149 9,904 12,029
------------------------- --------------------------
Income before federal income taxes 3,610 3,129 10,501 6,575
Federal income taxes 1,254 1,089 3,650 2,315
------------------------- --------------------------
Net Income $ 2,356 $ 2,040 $ 6,851 $ 4,260
========================= ==========================
Earnings Per Share:(a)
Basic $ 0.31 $ 0.27 $ 0.91 $ 0.57
========================= ==========================
Diluted $ 0.28 $ 0.25 $ 0.81 $ 0.52
========================= ==========================
Cash Dividends Per Share (a) $ 0.08 $ 0.07 $ 0.24 $ 0.21
========================= ==========================
<FN>
(a) Earnings per share and cash dividends per share calculations for both
periods in 1996 were restated to reflect the three-for-two stock split
distributed on July 31, 1997 and the implementation of SFAS 128.
See notes to consolidated financial statements.
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Part I. - Financial Information
SECURITY FIRST CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine Months Ended
December 31,
1997 1996
---------------------------------
OPERATING ACTIVITIES:
- -----------------------------
Net Income $ 6,851 $ 4,260
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 226 264
Accretion of discounts, amortization of
premiums, and other deferred yield items 1,292 1,219
Depreciation and amortization 663 577
Amortization of goodwill 78 81
Effect of change in accrued interest
receivable and payable (298) (123)
Equity income from joint ventures (20) (86)
FHLB stock dividends (363) (272)
Amortization of unearned compensation 57 58
Net change in accounts payable, accrued expenses,
and other assets (753) 443
Other 26 86
---------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,759 6,507
---------------------------------
INVESTING ACTIVITIES:
- -----------------------------
Loans originated (199,418) (230,011)
Increase (decrease) in loans in process (2,710) 19,471
Loan principal repayments and maturities 146,063 116,051
Proceeds from:
Sales of:
Loans and loan participations 14,722 29,189
Real estate owned 238 157
Mortgage-backed security principal
repayments and maturities 514 596
Investment security maturities 12,256 4,663
Purchases of:
Loans (2,663) (11,617)
Investment securities (9,711) (2,993)
Premises and equipment (397) (1,217)
FHLB stock (199) (1,644)
---------------------------------
NET CASH USED IN INVESTING ACTIVITIES (41,305) (77,355)
---------------------------------
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Part I. - Financial Information
SECURITY FIRST CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine Months Ended
December 31,
1997 1996
----------------------------
FINANCING ACTIVITIES:
- --------------------
Net increase in savings deposits $ 58,455 $ 35,400
Proceeds from additional FHLB advances 143,175 266,400
Payment of FHLB advances (162,115) (229,472)
Net increase in mortgage escrow funds 1,365 1,188
Payment of dividends on common stock (1,820) (1,627)
Proceeds from exercise of stock options 222 588
Purchase of treasury stock (3,157) ---
----------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 36,125 72,477
----------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,579 1,629
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,664 13,657
----------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,243 $ 15,286
============================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings $ 22,153 $ 19,021
Income taxes 3,450 2,054
Noncash investing and financing activities:
Transfers from loans to real estate acquired
through foreclosure 238 124
Effect of conversion of convertible subordinated
debentures 1,604 15
See notes to consolidated financial statements.
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1. Financial Statements
SECURITY FIRST CORP.
Notes to Consolidated Financial Statements (Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements of Security First Corp. ("Security
First" or "Company") include the accounts of the Company (a multiple savings &
loan holding company) and the accounts of its wholly owned subsidiaries,
Security Federal Savings and Loan Association ("Security Federal" or
"Association"), First Federal Savings Bank of Kent ("First Federal"), and SF
Development Corp. All significant inter-company transactions have been
eliminated. In the opinion of management, the accompanying unaudited financial
statements include all adjustments (consisting only of normal recurring
accruals) which the Company considers necessary for a fair presentation of (a)
the results of operations for the three and nine months ended December 31, 1997
and 1996; (b) the financial condition at December 31, 1997, March 31, 1997 and
December 31, 1996; and (c) the statement of cash flows for the nine month
periods ended December 31, 1997 and 1996. The results of operations for the nine
month period ended December 31, 1997 are not necessarily indicative of the
results that may be expected for a full year. Certain prior period amounts have
been reclassified to conform with the current year presentation.
2. EARNINGS PER SHARE
Earnings per share for each period presented is calculated using the
weighted average number of shares of common stock outstanding during the period.
(See calculation in Exhibit 11.) Earnings per share and cash dividends
calculations for the third quarter and nine months ended December 31, 1996, are
restated to reflect both the three-for-two stock split distributed on July 31,
1997, and the implementation of Statement of Financial Accounting Standards No.
128, "Earnings Per Share", which was effective for periods ending after December
15, 1997.
Diluted earnings per share is computed giving appropriate consideration to
the dilutive effect of stock options and shares issuable upon conversion of the
6.25% convertible subordinated debentures. In computing diluted net income per
share, net income has been adjusted to eliminate interest expense associated
with the debentures, net of estimated income taxes.
3. STOCK REPURCHASE PROGRAM
In December 1996, the Board of Directors of the Company authorized
management to repurchase up to 300,000 shares (as adjusted for the July 31, 1997
three-for-two stock split) of the Company's outstanding common stock. The
authorization provided that shares were to be purchased in the open market at
prevailing market prices from time to time over a 12-month period commencing in
January, 1997. A six month extension of the program, through June 30, 1998, was
approved by the Board of Directors on December 16, 1997. The repurchased shares
will become treasury shares and
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will be used for general corporate purposes, including the issuance of shares in
connection with grants and awards under the Company's stock-based benefit plans.
Under this authorization, 185,975 shares were repurchased during the nine months
ended December 31, 1997, for an aggregate price of $3,157,000. A portion of the
shares was reissued in connection with the exercise of stock options and the
conversion of convertible subordinated debentures. The difference between the
repurchase and reissuance prices was treated as a reduction of retained
earnings.
4. NEW ACCOUNTING STANDARD
The Securities and Exchange Commission has expanded the requirements
regarding disclosure of derivative financial instruments, other financial
instruments and derivative commodity instruments by requiring enhanced
disclosure of accounting policies for these financial instrument contracts in
the footnotes to financial statements. The Company has not typically entered
into financial instrument contracts that involve derivative financial and
commodity instruments. The Company has entered into fixed and variable interest
rate loan contracts for which its policy is to record these financial
instruments in the financial statements when they are funded or related fees are
incurred or received.
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ITEM 2.
SECURITY FIRST CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Security First's net income was $2.4 million and $6.9 million for the
third quarter and nine months ended December 31, 1997, respectively, as compared
with $2.0 million and $4.3 million for the same periods in 1996. The 1996 nine
month earnings figure reflects a one-time assessment for the recapitalization of
the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"); without this charge, net income for the nine months ended
December 31, 1996 would have been $6.0 million. The Company's total assets
increased 6.8%, from $634.8 million at fiscal year-end March 31, 1997, to $677.9
million at December 31, 1997, principally due to a $42.2 million net increase in
loans outstanding, which was funded by an increase in savings deposits,
including approximately $20 million in brokered certificates of deposit.
Shareholders' equity (capital) at December 31, 1997 increased $4.0 million
since March 31, 1997, mainly as a result of $6.9 million in net income and
increased paid-in-capital from bond conversions and tax benefits relating to the
exercise of stock options, offset by the payment of $1.8 million in cash
dividends and a net increase in treasury stock in the amount of $1.3 million.
As noted in the "Capital" section, both Security Federal's and First
Federal's regulatory capital ratios at December 31, 1997 exceeded all regulatory
capital requirements, and both institutions have been categorized as
"well-capitalized" by the Office of Thrift Supervision ("OTS"), their primary
regulator.
ASSET QUALITY
The Company's provision for loan losses was $84,000 and $226,000 for the
third quarter and nine months ended December 31, 1997, respectively, compared
with $84,000 and $264,000 for the same periods last year. The allowance for loan
losses of $5,179,000 at December 31, 1997 increased over 4.2% from $4,968,000 at
March 31, 1997. Nonperforming loans increased from $1,643,000 at March 31, 1997
to $2,929,000 at December 31, 1997. This increase is attributable mainly to a
$1,070,000 loan, secured by commercial real estate, which was placed on
non-accrual status during the current quarter.
The provision and allowance for loan losses are based on management's
ongoing assessment of the adequacy of the allowance for loan losses. 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 categories which are significant in total dollars but individual loan
amounts are not material and are well collateralized, the categories are
reviewed in total. These reviews consider, among other factors, economic
conditions, delinquency patterns and
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historical loss experience in the loan portfolio in order to assess potential
credit losses.
The following table provides information concerning non-performing assets
(non-accrual loans as well as those loans accruing but delinquent more than 90
days, and real estate owned) and the allowance for loan losses at the respective
dates (dollars in thousands):
NON-PERFORMING ASSETS:
AT OR FOR THE AT OR FOR THE AT OR FOR THE
QUARTER ENDED YEAR ENDED QUARTER ENDED
DECEMBER 31, MARCH 31, DECEMBER 31,
1997 1997 1996
---------- ---------- ---------
Non-accrual loans $2,929 $1,643 $1,430
Accruing loans past due
90 days --- --- 107
Real estate owned 2 5 6
------- ------- -------
Total non-performing
assets $2,931 $1,648 $1,543
======== ======= =======
Allowance for loan loss $5,179 $4,968 $4,902
======== ======= =======
RATIOS:
Non-performing assets
to total assets .43% 0.26% 0.25%
==== ===== =====
Non-performing loans
to total loans (before
allowance for loan losses) .48% 0.29% 0.28%
==== ===== =====
Allowance for loan losses
to non-performing loans 177% 302% 319%
====== ====== ======
Allowance for loan losses
to total loans (before
allowance for loan losses) 0.84% 0.87% 0.88%
===== ===== =====
Net recoveries
to average loans --- 0.01% 0.02%
===== ======= =====
POTENTIAL PROBLEM LOANS:
As of December 31, 1997, the Company had $1.2 million of potential
problem loans, where known information about possible credit problems of the
borrower caused management to have some doubts as to the ability of the borrower
to comply with present loan repayment terms and may result in disclosure of such
loans in the future. Presently these loans are current and, therefore, not
reflected in the above table. Management believes that these loans are
adequately secured and no material loss is expected; however, such loans are
subject to allowance for credit losses of approximately $100,000.
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Management is of the opinion that the allowance for loan losses at
December 31, 1997, which represents 177% of total non-performing loans, is
adequate to meet potential losses in the loan 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 presentation
of loans and real estate owned in the consolidated financial statements is
dependent upon estimates, appraisals and evaluations of loans. Therefore, the
possibility exists that abrupt changes in economic and other market
circumstances can change such estimates, appraisals, and evaluations and require
them to be revised.
LIQUIDITY
The term "liquidity" refers to the ability of the Company to generate
adequate amounts of cash to meet its needs, typically for the funding of loan
originations. The Company's liquidity is a measure of its ability to fund loans
and meet withdrawals of deposits and other cash outflows in a cost-effective
manner. The principal sources of funds for the Company's operations are cash
flows generated from earnings, savings deposits, scheduled amortization and
prepayments of loans and mortgage-backed securities, maturities of investment
securities and borrowings from the FHLB. Because a significant portion of the
Company's loan originations consist of relatively short-term construction and
development loans, the funding source for new loan originations is frequently
derived from maturities and prepayments of other construction loans. In
addition, Security Federal and First Federal also have the ability to borrow
against their eligible collateral, or an additional $28.9 million and $15.2
million, respectively, (as of December 31, 1997) from the FHLB, if the need
arises.
Management regularly reviews the Company's need for cash to fund its
operation and believes that the aforementioned sources of funds are adequate for
its projected requirements. Current federal regulations require that a savings
institution maintain an average daily balance of liquid assets of at least 4% of
the sum of its average balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For both quarters ended December 31,
1997 and 1996, Security Federal's average liquidity ratio was 7.00%. First
Federal's liquidity ratios were 11.68% and 11.95% for the quarters ended
December 31, 1997 and 1996, respectively.
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CAPITAL
Regulatory capital for Security Federal and First Federal at December 31,
1997 exceeded all the minimum capital requirements specified by federal
regulations. In addition, both subsidiaries exceeded the capital level required
by the OTS to be classified as a "well-capitalized" institution as demonstrated
in the following table (dollar amounts in thousands):
SECURITY FEDERAL
----------------
Tier 1 Tier 1 Total
Core Risk- Risk-
Leverage Based Based Tangible
Capital Capital Capital Capital
------- ------- ------- --------
Capital amount - actual $46,456 $46,456 $51,038 $46,456
well-capitalized level 28,446 27,017 45,028 8,533
------ ------ ------ ------
- excess $18,010 $19,439 $ 6,010 $37,923
====== ====== ====== ======
Capital ratio - actual 8.17% 10.32% 11.33% 8.17%
- required 3.00 4.00 8.00 1.50
----- ----- ----- -----
- excess 5.17% 6.32% 3.33% 6.67%
==== ==== ==== ====
Capital ratio - actual 8.17% 10.32% 11.33%
well-capitalized level 5.00 6.00 10.00
----- ----- -----
- excess 3.17% 4.32% 1.33%
===== ===== =====
FIRST FEDERAL
-------------
Tier 1 Tier 1 Total
Core Risk- Risk-
Leverage Based Based Tangible
Capital Capital Capital Capital
------- ------- ------- --------
Capital amount - actual $8,382 $8,382 $8,773 $8,382
well capitalized level 4,659 3,584 5,973 1,398
------ ------ ------ ------
- excess $3,723 $4,798 $2,800 $6,984
====== ====== ====== ======
Capital ratio - actual 9.00% 14.03% 14.69% 9.00%
- required 3.00 4.00 8.00 1.50
----- ----- ----- -----
- excess 6.00% 10.03% 6.69% 7.50%
===== ===== ===== =====
Capital ratio - actual 9.00% 14.03% 14.69%
well capitalized level 5.00 6.00 10.00
---- ---- -----
- excess 4.00% 8.03% 4.69%
===== ===== =====
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SECURITY FIRST CORP.
AVERAGE BALANCE SHEETS
The following table presents the total dollar amounts of interest income and
interest expense on the indicated amounts of average interest-earning assets or
interest-bearing liabilities together with the weighted average interest rates
for the three month periods ended December 31, 1997 and 1996. Average balance
calculations were based on daily and monthly balances.
(Dollars in thousands)
Three months ended December 31,
/---------1997----------\ /-----------1996----------\
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------------------------------- ----------------------------------------
Interest-earning assets:
Loans $ 604,541 $ 13,345 8.83% $ 540,878 $ 11,833 8.75%
Mortgage-backed
securities 2,097 41 7.80% 2,673 54 8.08%
Investment securities 39,257 623 6.35% 37,145 592 6.38%
Short-term investments 13,150 184 5.60% 7,823 104 5.32%
----------- ---------- ----------- ----------
Total interest-
earning assets 659,045 14,193 8.61% 588,519 12,583 8.55%
---------- ----------
Noninterest-earning
assets 26,353 25,290
----------- ---------
Total assets $ 685,398 $613,809
=========== ========
Interest-bearing liabilities:
Passbook accounts $ 57,136 $ 393 2.75% $ 58,031 $ 396 2.73%
Money market/NOW accounts 92,495 373 1.61% 84,192 364 1.73%
Certificates of deposit 344,280 5,020 5.83% 291,885 4,205 5.76%
----------- ---------- ----------- ----------
Total deposits 493,911 5,786 4.69% 434,108 4,965 4.57%
Short-term FHLB advances 80,448 1,214 6.04% 65,086 986 6.06%
Long-term FHLB advances 31,094 481 6.18% 39,372 582 5.91%
----------- ---------- ----------- ----------
Total advances 111,542 1,695 6.08% 104,458 1,568 6.00%
Convertible subordinated
debentures 7,202 118 6.53% 8,759 147 6.71%
----------- ---------- ----------- ----------
Total interest-
bearing liabilities 612,655 7,599 4.96% 547,325 6,680 4.88%
Noninterest-bearing ---------- ----------
liabilities 9,301 9,789
----------- -----------
Total liabilities 621,956 557,114
Shareholders' equity 63,442 56,695
----------- -----------
Total liabilities and
shareholders' equity $ 685,398 $ 613,809
=========== ===========
NET INTEREST INCOME/
INTEREST RATE SPREAD $ 6,594 3.65% $ 5,903 3.67%
========= ===== ========== ====
NET INTEREST-EARNING
ASSETS/NET YIELD ON
INTEREST-EARNING ASSETS $ 46,390 4.00% $ 41,194 4.01%
========== ==== ========== ====
RATIO OF INTEREST-EARNING
ASSETS TO INTEREST-BEARING
LIABILITIES 107.57% 107.53%
====== ======
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SECURITY FIRST CORP.
AVERAGE BALANCE SHEETS
The following table presents the total dollar amounts of interest income and
interest expense on the indicated amounts of average interest-earning assets or
interest-bearing liabilities together with the weighted average interest rates
for the nine month periods ended December 31, 1997 and 1996. Average balance
calculations were based on daily and monthly balances.
(Dollars in thousands)
Nine months ended December 31,
/-----------1997-----------\ /------------1996------------\
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------------------------------------- -------------------------------------
Interest-earning assets:
Loans $ 589,832 $ 38,999 8.82% $ 514,812 $ 34,035 8.81%
Mortgage-backed
securities 2,208 132 7.97% 2,862 174 8.11%
Investment securities 38,923 1,895 6.49% 36,675 1,752 6.37%
Short-term investments 9,905 408 5.49% 8,564 342 5.32%
---------- --------- ---------- ---------
Total interest-
earning assets 640,868 41,434 8.62% 562,913 36,303 8.60%
Noninterest-earning --------- ---------
assets 25,676 23,920
---------- ----------
Total assets $ 666,544 $ 586,833
=========== =========
Interest-bearing liabilities:
Passbook accounts $ 57,344 $ 1,180 2.74% $ 59,136 $ 1,202 2.71%
Money market/NOW accounts 87,651 1,085 1.65% 82,677 1,114 1.80%
Certificates of deposit 330,034 14,350 5.80% 278,053 11,884 5.70%
---------- --------- ---------- ---------
Total deposits 475,029 16,615 4.66% 419,866 14,200 4.51%
Short-term FHLB advances 79,602 3,557 5.96% 74,705 3,266 5.83%
Long-term FHLB advances 33,264 1,559 6.25% 19,552 860 5.86%
---------- --------- ---------- ---------
Total advances 112,866 5,116 6.04% 94,257 4,126 5.84%
Convertible subordinated
debentures 7,718 388 6.70% 8,767 442 6.72%
---------- --------- ---------- ---------
Total interest-
bearing liabilities 595,613 22,119 4.95% 522,890 18,768 4.79%
Noninterest-bearing --------- ---------
liabilities 8,984 8,017
---------- ----------
Total liabilities 604,597 530,907
Shareholders' equity 61,947 55,926
---------- ----------
Total liabilities and
shareholders' equity $ 666,544 $ 586,833
=========== =========
NET INTEREST INCOME/
INTEREST RATE SPREAD $ 19,315 3.67% $ 17,535 3.81%
========== ==== ========== ====
NET INTEREST-EARNING
ASSETS/NET YIELD ON
INTEREST-EARNING ASSETS $ 45,255 4.02% $ 40,023 4.15%
========== ==== ========== ====
RATIO OF INTEREST-EARNING
ASSETS TO INTEREST-BEARING
LIABILITIES 107.60% 107.65%
====== ======
14
15
SECURITY FIRST CORP.
RATE/VOLUME ANALYSIS
The changes in net interest income for the three months ended December 31, 1997,
as compared to the same period in the prior year, are analyzed in the following
table. The table shows the changes by major component, distinguishing between
changes related to volume as opposed to changes in interest rates and the net
effect of both. Changes not solely attributable to volume or rate changes have
been allocated in proportion to the changes due to volume and rate.
(Dollars in thousands)
For the Three Months Ended December 31,
---------------------------------------
1997 vs. 1996
---------------------------------------
Increase
(Decrease) Total
Due to Increase
Volume Rate (Decrease)
--------- ------- ---------
INTEREST-EARNING ASSETS:
Loans $ 1,404 $ 108 $ 1,512
Mortgage-backed securities (11) (2) (13)
Investment securities 34 (3) 31
Short-term investments 74 6 80
--------- ------- ---------
Total interest-earning
assets $ 1,501 $ 109 $ 1,610
========= ======= =========
INTEREST-BEARING LIABILITIES:
Passbook accounts ($ 6) $ 3 ($ 3)
Money market/NOW 28 (19) 9
Certificates of Deposit 763 52 815
--------- ------- ---------
Total deposits 785 36 821
Short-term FHLB advances 232 (4) 228
Long-term FHLB advances (130) 29 (101)
--------- ------- ---------
Total advances 102 25 127
Convertible subordinated
debentures (26) (3) (29)
--------- ------- ---------
Total interest-bearing
liabilities $ 861 $ 58 $ 919
======= ====== =======
CHANGE IN NET INTEREST INCOME $ 691
=======
15
16
SECURITY FIRST CORP.
RATE/VOLUME ANALYSIS
The changes in net interest income for the nine months ended December 31, 1997,
as compared to the same period in the prior year, are analyzed in the following
table. The table shows the changes by major component, distinguishing between
changes related to volume as opposed to changes in interest rates and the net
effect of both. Changes not solely attributable to volume or rate changes have
been allocated in proportion to the changes due to volume and rate.
(Dollars in thousands)
For the Nine Months Ended December 31,
--------------------------------------
1997 vs. 1996
--------------------------------------
Increase
(Decrease) Total
Due to Increase
Volume Rate (Decrease)
--------- ------ ---------
INTEREST-EARNING ASSETS:
Loans $ 4,959 $ 5 $ 4,964
Mortgage-backed securities (39) (3) (42)
Investment securities 109 34 143
Short-term investments 54 12 66
--------- ------ ---------
Total interest-earning
assets $ 5,083 $ 48 $ 5,131
========= ====== =========
INTEREST-BEARING LIABILITIES:
Passbook accounts ($ 37) $ 15 ($ 22)
Money market/NOW 83 (112) (29)
Certificates of Deposit 2,257 209 2,466
--------- ------ ---------
Total deposits 2,303 112 2,415
Short-term FHLB advances 218 73 291
Long-term FHLB advances 639 60 699
--------- ------ ---------
Total advances 857 133 990
Convertible subordinated
debentures (54) --- (54)
--------- ------ ---------
Total interest-bearing
liabilities $ 3,106 $ 245 $ 3,351
========= ====== =========
CHANGE IN NET INTEREST INCOME $ 1,780
=========
16
17
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income increased to $6.6 million and $19.3 million for the
three and nine months ended December 31, 1997, respectively, from $5.9 million
and $17.5 million for the comparable periods last year, as a result of greater
average loan balances as compared to the prior year's same periods. The
Company's interest rate spread (which represents the difference between the rate
earned on assets and the rate paid on liabilities) was 3.65% for the current
quarter and 3.67% for the nine months ended December 31, 1997, compared with
3.67% and 3.81%, respectively, for the same periods in the prior year. The
Company's interest rate spread has decreased as a result of increased costs on
interest-bearing liabilities due to higher market rates in the current year
combined with increased use of FHLB borrowings.
Total interest income increased $1.6 million for the current quarter and
$5.1 million for the current nine months compared to the same periods in 1996.
These increases were almost exclusively related to increased volume in the loan
portfolio. Average loans outstanding were $605 million and $590 million for the
three and nine month periods ended December 31, 1997, respectively, compared to
$541 million and $515 million for the same periods in 1996. The majority of the
increase in loans outstanding was in mortgage and construction loans, with
smaller increases in credit lines, consumer loans and business loans. The
overall average yield on interest-earning assets increased to 8.61% for the
current quarter, compared to 8.55% for the quarter ended December 31, 1996. The
overall average yield on interest-earning assets was 8.62% for the nine months
ended December 31, 1997, and 8.60% for the same period in 1996.
The decrease in interest income on mortgage-backed securities during the
current periods was due to the decline in the average balance outstanding
resulting from principal repayments and prepayments received on the underlying
mortgages.
During the three months and nine months ended December 31, 1997, interest
income on investment securities and short-term investments, which included
interest-earning deposits and Federal funds sold, increased to $807,000 and $2.3
million, respectively, from $696,000 and $2.1 million in the prior periods, due
to a combination of higher average market rates and higher average balances
outstanding in the current periods.
Total interest expense increased $919,000 in the current quarter and $3.4
million in the current nine months over the same periods last year; these
increases were related mainly to the greater volume of time deposits and FHLB
advances which were used to fund loan activity. The average balances of deposits
outstanding for the three months and nine months ended December 31, 1997,
increased $59.8 million and $55.2 million, respectively, compared to the same
periods in 1996. Interest expense related to FHLB advances increased $127,000
for the quarter ended December 31, 1997 compared to the same period in 1996,
mainly as a result of a $7.1 million increase in the average balance of
outstanding advances. For the nine months ended December 31, 1997, interest on
FHLB advances increased $990,000 compared to the same period last year, mainly
as a result of an $18.6 million increase in the average balance of advances
outstanding.
17
18
Interest expense on the Company's convertible subordinated debentures
decreased from the prior year due to the effect of conversions to common stock.
The debentures, which have a coupon interest rate of 6.25%, have a final
maturity of May 1, 2008. The effective cost of these funds is increased by the
amortization of related deferred issuance costs.
OTHER INCOME
Other income for the three months ended December 31, 1997 was virtually
unchanged from the same period in 1996. Other income for the nine months ended
December 31, 1997 decreased slightly, as increases in service charges and income
from subsidiaries were offset by losses on loan sales.
OTHER EXPENSES
Other operating expenses for the current quarter and the current nine
months were $3.4 million and $9.9 million, respectively, compared to $3.1
million and $12.0 million for the same periods in 1996. The expense figure for
the nine months ended December 31, 1996 includes $2.6 million for the special
one-time assessment charged to all federally insured savings institutions for
the recapitalization of the SAIF insurance fund. Excluding this one-time charge,
operating expenses were slightly higher in 1997, mainly due to normal increases
in employee compensation, offset by a decrease in federal deposit insurance
premiums.
SELECTED OPERATING RATIOS
Three months ended Nine months ended
December 31, December 31,
------------------------------------
1997 1996 1997 1996
------------------------------------
Return on average assets
(annualized) 1.37% 1.33% 1.37% 0.97%
without SAIF assessment 1.37% 1.33% 1.37% 1.35%
Return on average equity
(annualized) 14.85% 14.39% 14.75% 10.16%
without SAIF assessment 14.85% 14.39% 14.75% 14.19%
Yield on average interest-
earning assets 8.61% 8.55% 8.62% 8.60%
Cost of average interest-
bearing liabilities 4.96% 4.88% 4.95% 4.79%
Interest rate spread during
period 3.65% 3.67% 3.67% 3.81%
Net yield on interest-earning
assets 4.00% 4.01% 4.02% 4.15%
Efficiency ratio (a) 47.6% 49.0% 47.6% 49.8%
<FN>
(a) Calculated as other operating expenses (excluding amortization of goodwill
and one-time recapitalization SAIF assessment) divided by the sum of net
interest income and other income, not including non-recurring items and
securities gains and losses.
18
19
FEDERAL INCOME TAX
The Company's provision for Federal income taxes for the three months and
the nine months ended December 31, 1997 increased to $1.3 million and $3.7
million, respectively, compared to $1.1 million and $2.3 million for the same
periods in 1996, due to the increase in pre-tax income.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public 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 in future
periods to differ materially from those anticipated or projected.
The Company does not undertake -and specifically disclaims any
obligation- to publicly release the results 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.
OTHER
The Company is currently in the process of conducting a comprehensive
review of its computer systems to identify the systems that could be affected
by the "Year 2000" problem. The Year 2000 problem is the result of computer
programs being written using two digits rather than four digits to define the
applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations.
Management anticipates that the enhancements necessary to prepare its systems
for the year 2000 will be completed in a timely manner.
The Company is also aware of the risk to third parties, including vendors (and
to the extent appropriate, depositors and borrowers) and the potential adverse
impact on the Company resulting from failures by these parties to adequately
address the Year 2000 problem. The Company has been communicating with its
outside data processing service bureau, as well as other third party service
providers, to assess their progress in evaluating their systems and
implementing any corrective measures required by them to be prepared for the
year 2000. To date, the Company has not been advised by any of its primary
vendors that they do not have plans in place to address and correct the issues
associated with the Year 2000 problem; however, no assurance can be given as to
the adequacy of such plans or to the timeliness of their implementation.
19
20
The Company anticipates that it will incur internal staff costs as
well as consulting and other expenses related to the enhancements necessary to
prepare the systems for the year 2000. While management does not anticipate
that the cost of the Year 2000 project will have a material impact on the
financial condition of the Company, the total costs of this project are
currently uncertain.
20
21
SECURITY FIRST CORP.
Part II. Other Information
Item 1 - 5 are not applicable
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. Part 1. Exhibits
Exhibit
Number Description
-------- -----------------------------------
11 Statement regarding computation
of per share earnings
27 Financial Data Schedule - EDGAR only
b. On October 23, 1997, the Registrant filed a current report on Form
8-K regarding the issuance of a press release on October 21 to
announce second quarter earnings for fiscal 1998 and the favorable
settlement of its litigation with U.S. Die Casting and Development
Company.
21