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 JUNE 30, 1998
[ ] 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
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(Address of principal executive offices) (Zip Code)
(440) 449-3700
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(Registrant's telephone number, including area code)
Not Applicable
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(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 7,887,238
----------------------------- ----------
(Class) (Outstanding at August 7, 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 June 30, 1998,
March 31, 1998 and June 30, 1997............................................................... 3
Consolidated Statements of Income for the three months
ended June 30, 1998 and 1997 .................................................................. 4
Consolidated Statements of Cash Flows for the
three months ended June 30, 1998 and 1997 ................................................... 5-6
Notes to Consolidated Financial Statements................................................... 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................... 9-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk .................................... 16
PART II. OTHER INFORMATION ............................................................................ 17
SIGNATURES ............................................................................................ 18
EXHIBITS .............................................................................................. 19
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Part I. - Financial Information
SECURITY FIRST CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, MARCH 31, JUNE 30,
1998 1998 1997
(Unaudited) (Unaudited)
-----------------------------------
ASSETS:
Cash and deposits with banks $ 11,965 $ 10,003 $ 8,933
Interest bearing deposits with banks 3 696 1,050
Federal funds sold and short term investments 7,500 2,700 2,100
-----------------------------------
Total cash and cash equivalents 19,468 13,399 12,083
-----------------------------------
Investment securities - held to maturity (market values of
$4,999, $4,009, and $7,001 at June 30, 1998, March 31,
1998, and June 30, 1997, respectively) 4,998 4,000 7,000
Investment securities - available for sale (amortized cost of
$15,576, $13,905, and $24,927 at June 30, 1998, March 31,
1998, and June 30, 1997, respectively) 15,606 13,922 24,773
Mortgage-backed securities - available for sale (amortized cost of
$1,628 at June 30, 1998, $1,786 at March 31, 1998 and
$2,258 at June 30, 1997) 1,683 1,843 2,324
Loans held for sale 623 624 --
Loans - net (including allowance for loan losses of
$5,287 at June 30, 1998, $5,189 at March 31, 1998
and $5,018 at June 30, 1997) 629,799 626,836 583,772
Accrued interest receivable 4,484 4,274 4,222
Federal Home Loan Bank stock - at cost 7,214 7,085 6,649
Premises and equipment - net 8,355 8,534 8,702
Cost in excess of fair value of net
assets acquired (goodwill) 899 924 1,001
Prepaid expenses and other assets 3,333 4,041 2,700
-----------------------------------
TOTAL ASSETS $ 696,462 $ 685,482 $ 653,226
===================================
LIABILITIES:
Deposits $ 511,183 $ 508,157 $ 464,976
Advances from Federal Home Loan Bank-at cost 104,738 98,267 112,189
Convertible subordinated debentures 4,457 6,840 7,911
Advance payments by borrowers for taxes
and insurance (escrow) 2,532 1,653 2,376
Accrued interest payable 2,133 2,625 1,952
Accounts payable and other accrued expenses 2,476 3,261 2,281
-----------------------------------
Total liabilities 627,519 620,803 591,685
-----------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock (1,000,000 shares authorized,
none issued) -- -- --
Common stock, par value $.01 per share; 20,000,000
shares authorized; 7,863,587 shares outstanding
at June 30, 1998, 7,555,044 at March 31, 1998
and 7,577,594 at June 30, 1997 (a) 79 76 76
Capital in excess of par value 17,614 16,021 15,547
Net unrealized gain (loss) on investments and mortgage-backed
securities, (net of tax of $29 at June 30, 1998,
$26 at March 31, 1998, and $(29) at June 30, 1997) 57 48 (57)
Unearned compensation (120) (139) (197)
Treasury stock (88,324 shares at March 31, 1998 and
3,120 shares at June 30, 1997) at cost -- (1,671) (38)
Retained earnings (substantially restricted) 51,313 50,344 46,210
-----------------------------------
Total shareholders' equity 68,943 64,679 61,541
-----------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 696,462 $ 685,482 $ 653,226
===================================
(a) Shares outstanding at June 30, 1997 were 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)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED JUNE 30,
-----------------------------------
1998 1997
------- -------
Interest Income:
Loans $13,805 $12,641
Mortgage-backed securities 34 46
Investment securities 438 625
Short-term investments 167 103
------- -------
Total interest income 14,444 13,415
------- -------
Interest Expense:
Deposits 5,893 5,220
Short-term FHLB advances 616 1,135
Long-term FHLB advances 889 640
Convertible subordinated debentures 77 138
------- -------
Total interest expense 7,475 7,133
------- -------
Net interest income 6,969 6,282
Provision for loan losses 84 59
------- -------
Net interest income after provision for loan losses 6,885 6,223
------- -------
Other Income:
Service charges and other fees 469 397
Other 82 45
------- -------
Other income 551 442
------- -------
Other Expenses:
Salaries and employee benefits 1,702 1,618
Occupancy and equipment 483 468
Federal deposit insurance 78 74
Marketing 53 122
Professional fees 137 127
Data processing 121 125
Printing and supplies 73 81
Amortization of goodwill 25 26
Supervisory assessment 40 33
Other 663 638
------- -------
Other expenses 3,375 3,312
------- -------
Income before federal income taxes 4,061 3,353
Federal income taxes 1,409 1,164
------- -------
Net Income $ 2,652 $ 2,189
======= =======
Earnings Per Share:(a)
Basic $ 0.34 $ 0.29
======= =======
Diluted $ 0.31 $ 0.26
======= =======
Cash Dividends Per Share (a) $ 0.09 $ 0.08
======= =======
(a) Earnings per share and cash dividends per share for the three months ended
June 30, 1997 were restated to reflect the three-for-two stock split
distributed on July 31, 1997 and the implementation of SFAS No. 128.
See notes to consolidated financial statements.
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Part I. - Financial Information
SECURITY FIRST CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
FOR THE THREE MONTHS ENDED JUNE 30,
--------------------------------------------------
1998 1997
--------------------- ---------------------
OPERATING ACTIVITIES:
- ---------------------
Net Income $2,652 $2,189
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 84 59
Accretion of discounts, amortization of
premiums, and other deferred yield items (31) 31
Depreciation and amortization 225 218
Amortization of goodwill 25 26
Effect of change in accrued interest
receivable and payable (702) (296)
Equity income from joint ventures (22) (27)
FHLB stock dividends (128) (117)
Amortization of unearned compensation 19 19
Net change in accounts payable, accrued expenses,
and other assets (216) 402
Other 23 -
--------------------- ---------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,929 2,504
--------------------- ---------------------
INVESTING ACTIVITIES:
- ---------------------
Loans originated (77,372) (62,859)
Increase (decrease) in loans in process 5,090 2,836
Loan principal repayments and maturities 66,038 43,690
Proceeds from:
Sales of:
Loans and loan participations 3,226 453
Mortgage-backed security principal
repayments and maturities 158 213
Investment security maturities 3,332 1,047
Purchases of:
Investment securities (5,996) (1,000)
Premises and equipment (42) (70)
FHLB stock - (132)
--------------------- ---------------------
NET CASH USED IN INVESTING ACTIVITIES (5,566) (15,822)
--------------------- ---------------------
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Part I. - Financial Information
SECURITY FIRST CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - Continued
(Dollars in thousands)
Three Months Ended June 30,
--------------------------------------------------
1998 1997
--------------------- ---------------------
FINANCING ACTIVITIES:
- --------------------
Net increase in savings deposits $ 3,026 $ 19,794
Proceeds from additional FHLB advances 28,000 50,600
Payment of FHLB advances (21,529) (53,632)
Net increase in mortgage escrow funds 879 878
Payment of dividends on common stock (708) (606)
Proceeds from exercise of stock options 38 68
Purchase of treasury stock - (365)
--------------------- ---------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,706 16,737
--------------------- ---------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,069 3,419
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,399 8,664
--------------------- ---------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,468 $ 12,083
===================== =====================
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest on deposits and borrowings $ 7,967 $ 7,027
Income taxes 771 455
Noncash investing and financing activities:
Effect of conversion of convertible subordinated
debentures 2,383 568
See notes to consolidated financial statements.
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Item 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 months ended June 30, 1998 and 1997; (b)
the financial condition at June 30, 1998, March 31, 1998 and June 30, 1997; and
(c) the statement of cash flows for the three month periods ended June 30, 1998
and 1997. The results of operations for the three month period ended June 30,
1998 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 dividend for the
three months ended June 30, 1997 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 earnings 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
become treasury shares and 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, 233,975 shares were
repurchased during the twelve months ended March 31, 1998, for an aggregate
price of $4.1 million. 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. During the three months ended June
30, 1998, no shares were repurchased, all of the treasury shares were reissued
in connection with stock option exercises and/or subordinated debenture
conversions, and the repurchase program was terminated.
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4. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", was issued in June 1997 and became effective for the
Company's fiscal year beginning on April 1, 1998. This statement requires
companies to report all items that are recognized as components of comprehensive
income under accounting standards. The Company's comprehensive income for the
three months ended June 30, 1998 and 1997 is as follows:
Three Months Ended June 30,
---------------------------
1998 1997
------- ------
(In thousands)
Net income $2,652 $2,189
Unrealized holding gains arising during the period, net
of tax effect of $3 and $82, respectively 9 167
------- ------
Comprehensive income $2,661 $2,356
======= ======
5. NEW ACCOUNTING STANDARD
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments of an Enterprise and Related Information",
on April 1, 1998. This statement provides accounting and reporting standards for
the way public enterprises are to report information about operating segments in
annual financial statements, and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Management has
determined that the adoption of SFAS No. 131 will not result in increased
reporting and disclosure requirements.
6. PENDING MERGER
On April 5, 1998 the Company entered into a definitive agreement for
the acquisition of Security First by FirstMerit Corporation ("FirstMerit"), a
multi-bank holding company headquartered in Akron, Ohio. The agreement
specifies, among other things, that FirstMerit will exchange .8855 of its shares
for each share of the Company in an exchange that is expected to be tax-free for
income tax purposes. The transaction, which has received the approval of federal
banking regulators and Security First shareholders, is expected to close in
October 1998.
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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 $2,652,000 for the first quarter ended
June 30, 1998, an increase of 21% over the $2,189,000 earned in the comparable
period last year. The Company's total assets increased from $685.5 million at
fiscal year-end March 31, 1998, to $696.5 million at June 30, 1998, due to net
increases in loans and investments of $3.0 million and $7.5 million,
respectively. The asset growth was funded primarily by net increases in savings
deposits and FHLB borrowings of $3.0 million and $6.5 million, respectively.
Shareholders' equity (capital) at June 30, 1998 increased $4.3 million
since March 31, 1998 as a result of $2.7 million in net income and $2.3 million
of paid-in-capital from bond conversions and the exercise of stock options,
offset by the payment of $708,000 in cash dividends.
As noted in the "Capital" section, both Security Federal's and First
Federal's regulatory capital ratios at June 30, 1998 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 for the first
quarter ended June 30, 1998, compared with $59,000 for the same period last
year. The allowance for loan losses of $5,287,000 at June 30, 1998 increased
1.9% from $5,189,000 at March 31, 1998. Nonperforming loans increased from
$2,907,000 at March 31, 1998 to $4,320,000 at June 30, 1998. This increase is
attributable mainly to one residential loan for $302,000 and two commercial real
estate loans totaling $1,094,000, which were 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 historical loss experience in the loan
portfolio in order to assess potential credit losses.
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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
JUNE 30, 1998 MARCH 31, 1998 JUNE 30, 1997
------------- -------------- -------------
Non-accrual loans $4,320 $2,907 $1,828
Real estate owned 1 1 4
------ ------ ------
Total non-performing assets $4,321 $2,908 $1,832
====== ====== ======
Allowance for loan losses $5,287 $5,189 $5,018
====== ====== ======
RATIOS:
Non-performing assets to total assets 0.62% 0.42% 0.28%
Non-performing loans to total loans (before 0.68% 0.46% 0.31%
allowance for loan losses)
Allowance for loan losses to non-performing 122% 178% 275%
loans
Allowance for loan losses to total loans .83% .82% 0.85%
(before allowance for loan losses)
Net charge-offs to average loans - 0.01% 0.01%
POTENTIAL PROBLEM LOANS:
As of June 30, 1998, there were six commercial loans totaling $2.5
million which are not reflected in the above table, 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. Although
management believes that these loans are adequately secured and no material loss
is expected, certain circumstances may cause the borrower to be unable to comply
with the present loan repayment terms at some future date.
Management is of the opinion that the allowance for loan losses at June
30, 1998, which represents 122% 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
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construction loans. In addition, Security Federal and First Federal also have
the ability to borrow against their eligible collateral, or an additional $24.6
million and $17.2 million, respectively, (as of June 30, 1998) 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 the quarters ended June 30, 1998 and
1997, Security Federal's average liquidity ratios were 7.15% and 6.59%,
respectively. First Federal's liquidity ratios were 9.69% and 11.18% for the
quarters ended June 30, 1998 and 1997, respectively.
CAPITAL
Regulatory capital for Security Federal and First Federal at June 30,
1998 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 Core Tier 1 Risk- Total Risk- Tangible
Leverage capital Based Capital Based Capital Capital
---------------- ------------- ------------- -------
Capital amount - actual $44,772 $44,772 $49,424 $44,772
Well-capitalized level 29,304 27,733 46,221 29,304
------ ------ ------ ------
Excess $15,468 $17,040 $ 3,204 $15,468
======= ======= ======== =======
Capital ratio - actual 7.64% 9.69% 10.69% 7.64%
Capital ratio - required 3.00 4.00 8.00 1.50
----- ----- ----- -----
Excess 4.64% 5.69% 2.69% 6.14%
===== ===== ===== =====
Capital ratio - actual 7.64% 9.69% 10.69%
Well-capitalized level 5.00 6.00 10.00
----- ----- -----
Excess 2.64% 3.69% 0.69%
===== ===== =====
FIRST FEDERAL
Tier 1 Core Tier 1 Risk- Total Risk- Tangible
Leverage capital Based Capital Based Capital Capital
---------------- ------------- ------------- -------
Capital amount - actual $ 6,495 $ 6,495 $ 6,905 $ 6,495
Well-capitalized level 4,750 4,448 6,514 1,425
----- ----- ----- -----
Excess $ 1,745 $ 2,047 $ 391 $ 5,070
======== ======== ========= ========
Capital ratio - actual 6.84% 8.76% 10.60% 6.84%
Capital ratio - required 3.00 4.00 8.00 1.50
----- ----- ----- -----
Excess 3.84% 4.76% 2.60% 5.34%
===== ===== ===== =====
Capital ratio - actual 6.84% 8.76% 10.60%
Well-capitalized level 5.00 6.00 10.00
----- ----- -----
Excess 1.84% 2.76% 0.60%
===== ===== =====
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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 June 30, 1998 and 1997. Average balance
calculations were based on daily and monthly balances.
(Dollars in thousands)
For the Three Months For the Three Months
Ended June 30, 1998 Ended June 30, 1997
-----------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------------------------------- -----------------------------------
Interest-earning assets:
Loans $627,655 $13,805 8.80% $576,944 $12,641 8.76%
Mortgage-backed
securities 1,713 34 7.94% 2,322 46 7.92%
Investment securities 27,116 438 6.46% 37,689 625 6.63%
Short-term investments 12,127 167 5.51% 7,716 103 5.34%
---------- --------- ---------- ---------
Total interest-
earning assets 668,611 14,444 8.64% 624,671 13,415 8.59%
--------- ---------
Noninterest-earning
assets 29,774 25,099
---------- ----------
Total assets $698,385 $649,770
========== ==========
Interest-bearing liabilities:
Passbook accounts $57,119 $ 389 2.72% $ 57,554 $391 2.72%
Money market/NOW accounts 96,574 384 1.59% 83,712 353 1.69%
Certificates of deposit 355,895 5,120 5.75% 312,503 4,476 5.73%
---------- --------- ---------- ---------
Total deposits 509,588 5,893 4.63% 453,769 5,220 4.60%
Short-term FHLB advances 40,515 616 6.08% 77,735 1,135 5.84%
Long-term FHLB advances 64,801 889 5.49% 40,649 640 6.30%
---------- --------- ---------- ---------
Total advances 105,316 1,505 5.72% 118,384 1,775 6.00%
Convertible subordinated
debentures 5,279 77 5.83% 8,197 138 6.73%
---------- --------- ---------- ---------
Total interest-
bearing liabilities 620,183 7,475 4.82% 580,350 7,133 4.92%
--------- ---------
Noninterest-bearing
liabilities 11,137 9,099
---------- ----------
Total liabilities 631,320 589,449
Shareholders' equity 67,065 60,321
---------- ----------
Total liabilities and
shareholders' equity $698,385 $649,770
========== ==========
NET INTEREST INCOME/
INTEREST RATE SPREAD $ 6,969 3.82% $6,282 3.67%
========= ========= ========= ========
NET INTEREST-EARNING
ASSETS/NET YIELD ON
INTEREST-EARNING ASSETS $48,428 4.17% $44,321 4.02%
========== ========= ========== ========
RATIO OF INTEREST-EARNING
ASSETS TO INTEREST-BEARING
LIABILITIES 107.81% 107.64%
========= ========
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SECURITY FIRST CORP.
RATE/VOLUME ANALYSIS
The changes in net interest income for the three months ended June 30, 1998, 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 June 30, 1998 vs. 1997
------------------------------------------------------------------
Increase (Decrease) Due to
---------------------------------------
Total Increase
Volume Rate (Decrease)
--------------- ---------------- -------------------
INTEREST-EARNING ASSETS:
Loans $1,115 $49 $1,164
Mortgage-backed securities (12) - (12)
Investment securities (171) (16) (187)
Short-term investments 61 3 64
--------------- ---------------- -------------------
Total interest-earning
assets $993 $36 $1,029
=============== ================ ===================
INTEREST-BEARING LIABILITIES:
Passbook accounts ($3) $1 ($2)
Money market/NOW 49 (18) 31
Certificates of Deposit 624 20 644
--------------- ---------------- -------------------
Total deposits 670 3 673
Short-term FHLB advances (568) 49 (519)
Long-term FHLB advances 318 (69) 249
--------------- ---------------- -------------------
Total advances (250) (20) (270)
Convertible subordinated
debentures (44) (17) (61)
--------------- ---------------- -------------------
Total interest-bearing
liabilities $376 ($34) $342
=============== ================ ===================
CHANGE IN NET INTEREST INCOME $687
===================
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RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income increased to $7.0 million for the three months
ended June 30, 1998 from $6.3 million for the comparable period last year,
mainly as a result of greater average loan balances as compared to the prior
year's quarter. The Company's interest rate spread (which represents the
difference between the rate earned on assets and the rate paid on liabilities)
was 3.82% for the current quarter ended June 30, 1998, compared to 3.67% for the
same period in the prior year. The Company's interest rate spread has improved
as a result of lower costs on FHLB borrowings in the current year combined with
the decreased expense related to convertible subordinated debentures as a result
of conversions, offset somewhat by slightly higher rates paid on certificates of
deposit.
Total interest income increased $1.0 million for the current quarter
compared to the same period in 1997. This increase was related almost
exclusively to increased volume in the loan portfolio. Average loans outstanding
were $627.7 million for the three month period ended June 30, 1998, compared to
$576.9 million for the same period in 1997. The majority of the increase in
loans outstanding was in mortgage loans, with smaller increases in construction
loans, consumer loans and business loans. The overall average yield on
interest-earning assets increased to 8.64% for the current quarter, compared to
8.59% for the quarter ended June 30, 1997.
The decrease in interest income on mortgage-backed securities during
the current period 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 ended June 30, 1998, interest income on
investment securities decreased to $438,000 from $625,000 in the prior year's
first quarter, due to a combination of lower average balances outstanding and
lower average market rates in the current period. Interest income on short-term
investments, which included interest-earning deposits and Federal funds sold,
increased to $167,000 from $103,000 in the prior period, due to a combination of
higher average balances outstanding and higher average market rates in the
current period.
Total interest expense increased $342,000 in the current quarter over
the same period last year; this increase was related to the higher average
balance of savings deposits, which was partially offset by decreases in the
average balance and average market rate on FHLB advances. The average balances
of deposits outstanding for the three months ended June 30, 1998, increased
$55.8 million compared to the same period in 1997. Interest expense related to
FHLB advances decreased $270,000 for the quarter ended June 30, 1998 compared to
the same period in 1997 as a result of a $13.1 million decrease in the average
balance of outstanding advances, combined with a 28 basis-point decrease in the
average rate paid on advances.
For the three months ended June 30, 1998 the effective rate on the
Company's convertible subordinated debentures was 5.83%, compared to 6.73% for
the same period last year. The cost was lower this year largely due to the fact
that no interest was paid on approximately $1.5 million in debentures which were
converted to common stock after May 1, 1998. 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 June 30, 1998 increased to
$551,000, compared to $442,000 for the same period in 1997, due primarily to
increases in service charges and other fees.
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OTHER EXPENSES
Other operating expenses for the current quarter were $3.4 million
compared to $3.3 million for the same period in 1997. Operating expenses were
slightly higher in 1998, mainly due to normal increases in employee
compensation, partially offset by a decrease in marketing expenditures.
SELECTED OPERATING RATIOS
THREE MONTHS ENDED
JUNE 30,
1998 1997
------- -------
Return on average assets - annualized 1.52% 1.35%
Return on average equity - annualized 15.82% 14.52%
Yield on average interest-earning assets 8.64% 8.59%
Cost of average interest-bearing liabilities 4.82% 4.92%
Interest rate spread during period 3.82% 3.67%
Net yield on interest-earning assets 4.17% 4.02%
Efficiency ratio (a) 44.6% 48.9%
(a) Calculated as other operating expenses (excluding amortization of goodwill)
divided by the sum of net interest income and other income, not including
non-recurring items and securities gains and losses.
FEDERAL INCOME TAX
The Company's provision for Federal income taxes for the three months
ended June 30, 1998 increased to $1.4 million, compared to $1.2 million for the
same period in 1997, 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.
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YEAR 2000
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 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 assurances can be given as to
the adequacy of such plans or to the timeliness of their implementation.
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.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
A comprehensive quantitative and qualitative analysis regarding market risk was
disclosed in the Company's March 31, 1998 Form 10-K. No material changes in the
assumptions used or results obtained from the model have occurred.
16
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SECURITY FIRST CORP.
PART II. OTHER INFORMATION
Item 1-3 are not applicable
Item 4 - Submission of Matters to a
Vote of Security Holders
ANNUAL MEETING - The Annual Meeting of Shareholders of the Company was
held on July 30, 1998 for the purpose of considering and acting upon a
proposal to adopt the Merger Agreement between the Company and
FirstMerit Corporation, the election of two directors of the Company
and the ratification of the appointment of Deloitte & Touche LLP as
auditors for the Company for the fiscal year ending March 31, 1999.
MERGER AGREEMENT - The proposal to adopt the Agreement of Affiliation
and Plan of Merger dated April 5, 1998 by and between FirstMerit
Corporation and Security First was approved in a vote cast 5,683,880
shares for, 78,283 shares against, 17,129 shares abstaining and
2,084,295 shares not voted.
ELECTION OF DIRECTORS - Messrs. Austin J. Mulhern and James P. Myers
were elected to the Board of Directors with terms to expire in 2001.
The results of the votes were recorded as follows:
Director Shares For Shares Against Shares Abstaining Shares Not Voted
----------------- ---------- -------------- ----------------- ----------------
Austin J. Mulhern 7,107,238 0 57,907 698,442
James P. Myers 7,108,851 0 56,294 698,442
Continuing as Directors with terms to expire in 2000 are Messrs.
Charles F. Valentine, Robert L. Anderson and Donald E. Snow. Continuing
as Directors with terms to expire in 1999 are Messrs. Nicholas E.
Rinaldi, D.D.S., Louis J. Sorboro and Paul V. Voinovich.
APPOINTMENT OF AUDITORS The appointment of Deloitte & Touche LLP as
auditors for Security First for the fiscal year ending March 31, 1999
was approved in a vote cast 7,114,425 shares for, 10,703 shares
against, 40,019 shares abstaining and 698,440 shares not voted.
Item 5 is not applicable
Item 6 - Exhibits and reports on
Form 8-K
a. Part 1. Exhibits
Exhibit
Number Description
------ -----------
11 Statement regarding computation of earnings per share
27 Financial Data Schedule - EDGAR only
b. On April 7, 1998, the Registrant filed a current report Form 8-K
regarding the announcement of an agreement for the acquisition of
Security First Corp. by FirstMerit Corporation.
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SECURITY FIRST CORP.
SIGNATURES
Pursuant to the requirements 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.
Dated: August 7, 1998 /s/ Charles F. Valentine
----------------------------------------
Charles F. Valentine, Chairman of the Board and
Chief Executive Officer
Dated: August 7, 1998 /s/ Austin J. Mulhern
----------------------------------------
Austin J. Mulhern, President and
Chief Operating Officer
Dated: August 7, 1998 /s/ Mary H. Crotty
----------------------------------------
Mary H. Crotty, Vice President and
Chief Financial Officer
18