10-Q 1 l84690ae10-q.txt SECURITY BANC CORPORATION FORM 10-Q 1 FORM 10-Q -- QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (As last amended in Rel. No. 34-26589, eff. 4/12/89) United States Securities and Exchange Commission FORM 10-Q (MARK ONE) [X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934. For the period ended September 30, 2000 ------------------ [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934. For the transition period from to Commission File ------------- ------------- Number: 0-13655 ------- Security Banc Corporation -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 31-1133284 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 40 South Limestone Street, Springfield, OH 45502 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (937) 324-6920 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed 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 such 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. X Yes No ----- ----- Indicate the number of shares outstanding of each of the registrant's classes of common stock. Class Outstanding at October 23, 2000 -------------------------------- ------------------------------- Common Stock, $1.5625 Par Value 11,785,700 Page 1 2 SECURITY BANC CORPORATION AND SUBSIDIARIES INDEX

Page 2 3 PART I ITEM 1 - FINANCIAL STATEMENTS SECURITY BANC CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

See notes to Consolidated Condensed Financial Statements. Page 3 4 PART 1 ITEM 1 - FINANCIAL STATEMENTS SECURITY BANC CORPORATION CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)

See notes to Consolidated Condensed Financial Statements. Page 4 5 PART 1 ITEM 1 - FINANCIAL STATEMENTS SECURITY BANC CORPORATION CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)

See notes to Consolidated Condensed Financial Statements. Page 5 6 PART 1 ITEM 1 - FINANCIAL STATEMENTS SECURITY BANC CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

See Notes to Consolidated Financial Statements. Page 6 7 SECURITY BANC CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED)

See Notes to Consolidated Condensed Financial Statements. Page 7 8 SECURITY BANC CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - Preparation In the opinion of management, the accompanying unaudited financial statements contain all adjustments consisting of normal re-occurring items necessary to present fairly the financial condition of the company as of September 30, 2000 and the results of operations and cash flows for the nine month periods ended September 30, 2000 and September 30, 1999. NOTE B - TAXES The effective tax rate of 33% is lower than the statutory 35% because of investments made in tax exempt municipal securities. The subsidiaries of Security Banc Corporation have approximately $26,520,000 invested in tax exempt municipal securities. NOTE C - EARNINGS PER COMMON SHARE The computation of earnings per Common Share is as follows:

Page 8 9 SECURITY BANC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors which have affected the Registrant's financial condition and results of operations during the periods included in the consolidated financial statements enclosed with this filing. From time to time, the Corporation may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, new banking and financial service products and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, Corporation notes that a variety of factors could cause its actual results and experiences to differ materially from the anticipated results or other expectations expressed in its forward-looking statements. These risks and uncertainties include, with limitation, changes in interest rates, developments in the economies served by the Corporation, changes in anticipated credit quality trends and changes in accounting, tax or regulatory practices or requirements. ECONOMIC OUTLOOK During the third quarter, the economy began to show the affects of the Federal Reserve's monetary policy over the last eighteen months. Since June of 1999, the Fed has raised rates on five occasions in an attempt to slow economic growth. Based on statistical data recently released, it appears the slowdown and soft landing is occurring. Two primary factors that have fueled the economy are consumer spending and employment growth. Spending, while still growing, slowed to a more moderate level over the summer months. Sales of vehicles and homes are on track for increased growth but at a lower level than previously thought. The slowdown in spending is tied not only to higher rates but also lenders' desire to tighten credit standards. The use of credit has spurred the spending spree and debt levels and debt service burdens are high, overall the consumers' ability to borrow is shrinking. Employment growth is also moderating as businesses begin to adjust their capacity to match the slowing economy and tight labor pool. Reduced employment growth will also affect future consumer spending. By all indications, the economy is still performing well. GDP through the second quarter was up 5.6% on an annualized basis, third quarter results are expected to be lower but still good. Core inflation remains in the 2.5% range but upward pressure is building. Health care and energy costs are currently showing large increases and are projected to continue upward into the foreseeable future. Unemployment remains near 4% and should remain low even with less jobs being created. On a local level there appears to be a general softening in terms of sales and narrowing of profit margins. Overall, the attitude remains positive and the slowing economy is being taken in stride. The local labor pool continues to be low in terms of qualified workers; however, the situation is being addressed throughout the community. RESULTS OF OPERATIONS Net income was $12,913,000 for the first nine months of 2000 compared to $12,682,000 for the same period of 1999. Basic earnings per share were $1.08 for the first nine months, a 4% increase over last year's $1.04. Diluted earnings per share were $1.08 for the first nine months, a 4% increase over last year's $1.04. Total assets were $986,529,000 at September 30, 2000 compared to 1999's assets of $957,892,000. For the first nine months of 2000, return on average equity was 14.45% and return on average assets was 1.76%. Interest and fees on loans increased to $43,765,000 for the nine months ended September 30, 2000 compared to $40,490,000 for the nine months ending September 30, 1999. Average loans were $667,035,000 and $630,469,000 at September 30, 2000 and 1999 respectively, a 6% increase. Loans are up 1% from the previous quarter but are up 4% for the year. The bulk of the growth remains in the business portfolio, which is up $30 million since 12/31/99. Consumer loans are down slightly and stand at $75 million, portfolio mix remains unchanged. The real estate portfolio is relatively unchanged over the course of the year due to reduced first mortgage lending, while home equity lines have rebounded. Page 9 10 Income from securities increased to $10,035,000 from $9,835,000 for the nine months ended September 30, 2000 and 1999 respectively. The average outstanding for securities were $211,659,000 and $214,877,000 at September 30, 2000 and 1999 respectively, a 1% decrease. Interest income from Fed Funds sold and other interest bearing assets increased to $905,000 at September 30, 2000 compared to $803,000 for the nine months ended September 30, 1999. The average outstanding for Fed Funds and interest bearing deposits were $18,770,000 and $21,183,000 at September 30, 2000 and 1999 respectively, a 11% decrease. Interest bearing liabilities average outstanding at September 30, 2000 were $849,379,000 compared to $821,272,000 at September 30, 1999. Interest expense increased to $23,438,000 at September 30, 2000 from $20,345,000 at September 30, 1999 a 15% increase. Net interest income on a fully taxable equivalent basis for the first nine months of 2000 was $31,798,000 compared to the $31,316,000 realized in the same period of 1999. The net interest margin has decreased for the first nine months, 4.73% in 2000 compared to 4.82% in 1999. The rates on loans have increased to 8.77% from 8.59%, while the rates on interest bearing liabilities have increased to 4.33% from 3.92% for 2000 and 1999 respectively. Market value per share was $18.50 at September 30, 2000 as compared to $27.00 at September 30, 1999. Book value per share was $10.39 at September 30, 2000 and $9.85 at September 30, 1999. The Corporation purchased 66,200 shares of treasury stock during the third quarter of 2000. The efficiency ratio was 45% and 45% respectively for September 30, 2000 and September 30, 1999. Page 10 11 PART 1 ITEM 2 (CONT'D.) ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

According to FASB No. 114, the allowance for credit losses related to loans that are identified for evaluation in accordance with Statement 114 is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. The following table presents data concerning loans at risk at the end of each period. (000s).

Total other operating income was $6,485,000 and $6,097,000 during the first nine months of 2000 and 1999 respectively. Trust income increased 9%. There was a 1% decrease in service charges on deposits, and a 13% increase in other charges, rents and fees. Total securities gains for the first nine months of 2000 were $0. Total securities gains for the same period of 1999 were $114,000 or $74,000 after tax. Page 11 12 PART 1 ITEM 2 - CONTINUED SECURITY BANC CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Total operating expenses increased $191,000 during the first nine months, 1% over the similar period of 1999. Salaries, wages and employee benefits increased 1% over 1999. Equipment and net occupancy expenses during the first nine months were $1,967,000 and $2,012,000 for 2000 and 1999 respectively, which reflects a 2% decrease. Other operating expenses increased $165,000 compared to 1999. The Corporation continues to look for opportunities to maximize Other Income and reduce Other Expense, thus enhancing the efficiency ratio. CAPITAL RESOURCES The table below illustrates the Company's subsidiary banks regulatory capital ratios at September 30, 2000. Tier 1 Capital $116,467 Tier 2 Capital 6,462 -------- TOTAL QUALIFYING CAPITAL $122,929 -------- Risk Adjusted Total Assets (including off balance exposures) $671,003 ======== Tier 1 Risk-Based Capital Ratio 17.36% Total Risk-Based Capital Ratio 18.32% Tier 1 Leverage Ratio 11.87%

Page 12 13 PART 1 ITEM 2 - CONTINUED INTEREST RATE RISK INTEREST RATE RISK MANAGEMENT The Corporation seeks to achieve consistent growth in net interest income and net income while managing volatility arising from shifts in interest rates. Interest rate risk management is a dynamic process, encompassing both the business flows onto the balance sheet and the changing market and business environment. Interest rate risk by definition is the risk of decreased net interest income whenever there are movements in market interest rates. Effective management of interest rate risk begins with loans, investments, and funding sources. Measurement and monitoring of interest rate risk is an ongoing process. A key element in this process is the Corporation's estimation of the amount that net interest income will change over a twelve to twenty-four month period given a directional shift in interest rates. The income simulation model used by the Corporation captures all assets and liabilities, accounting for significant variables, which are believed to be affected by interest rates. These include prepayment speeds on real estate mortgages and consumer installment loans, principal amortization and maturities on other financial instruments. The model captures interest rate caps/floors or call options, and accounts for changes in rate relationships, as various rate indices lead or lag changes in market rates. While these assumptions are inherently uncertain, management utilizes probabilities and, therefore, believes that the model provides an accurate estimate of the interest rate risk exposure. The results of the Corporation's most recent interest sensitivity analysis indicated that net interest income would be relatively unchanged by a 200 basis points increase or decrease in rate (assuming the change occurs evenly over the next year and that corresponding changes in other market rates occur as forecasted). A positive cumulative gap indicates interest sensitive assets are maturing at a faster rate than interest sensitive liabilities, therefore, in an increasing interest rate environment, the net interest income should increase. Whereas, a negative cumulative gap indicates interest sensitive liabilities are maturing at a faster rate than interest sensitive assets, therefore, in an increasing interest rate environment, the net interest income should decrease. The table discloses the cumulative gap at the twelve month interval for the Corporation.

Page 13 14 SECURITY BANC CORPORATION PART II - OTHER INFORMATION ITEM 1 Legal Proceedings Inapplicable ITEM 2 Changes in Securities Inapplicable ITEM 3 Defaults upon Senior Securities Inapplicable ITEM 4 Submission of Matters to a Vote Inapplicable of Security Holders ITEM 5 Other Information Inapplicable ITEM 6 Exhibits and Reports on Form 8-K Financial Data Schedule as required under Article 9 of Regulation S-X Page 14 15 SECURITY BANC CORPORATION SIGNATURE 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 BANC CORPORATION By /s/ Thomas L. Miller ----------------------------- Thomas L. Miller Vice President/Controller By /s/ J. William Stapleton ----------------------------- J. William Stapleton Executive Vice President/CFO November 13, 2000 Page 15

SECURITY BANC CORP 10-Q