UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
or
[ ] 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: 000-50224
SECURITY CAPITAL CORPORATION
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(Exact Name of Registrant as specified in its Charter)
MISSISSIPPI 64-0681198
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
295 Highway 6 West/P. O. Box 690, Batesville, Mississippi 38606
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (662) 563-9311
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Securities registered under Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
None None
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Securities registered pursuant to section 12(g) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
Common Stock, $5 par value None
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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 periods 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
YES [ ] NO [X]
Based on the stockholders of record on December 31, 2004, the aggregate market value of the voting stock held by nonaffiliates of the Registrant was $69.6 million.
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
Class Outstanding at December 31, 2004
Common stock ($5.00 par value) 2,485,417 Shares
Portions of the following documents are incorporated by reference into Parts III of the Form 10-K report: Proxy Statement dated April 8, 2005.
CROSS REFERENCE INDEX
Page
PART I
Item 1 Business 2
Item 2 Properties 13
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 14
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters and
Issuer Purchases of Equity Securities 15
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations 18
Item 7A Quantitative and Qualitative Disclosures About Market Risk 39
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A Controls and Procedures
Item 9B Other Information
PART III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Management and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions
Item 14 Principal Accounting Fees and Services
Part IV
Item 15 Exhibits and Financial Statement Schedules
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* Information called for by Part III (Items 10 through 14) is incorporated by reference to the Registrant's Proxy
Statement dated April 8, 2005.
Security Capital Corporation is a one-bank holding company and has two subsidiaries, First Security Bank and Batesville Security Building Corporation.
As a bank holding company, Security Capital Corporation engages in the business of banking through its sole banking subsidiary and may engage in certain non-banking activities closely related to banking and may own certain other business corporations that are not banks, subject to applicable laws and regulations. Security Capital Corporation is not currently engaging in non-bank activities, and does not own any business corporations except for Batesville Security Building Corporation and has no current plans to engage in non-bank activities or own any other business corporations.
Security Capital Corporation was incorporated on September 16, 1982 for the purpose of acquiring First Security Bank and serving as a one-bank holding company.
First Security Bank was originally chartered under the laws of the State of Mississippi on October 25, 1951.
Batesville Security Building Corporation, the nonbank subsidiary, was chartered under the laws of the State of Mississippi on June 23, 1971, for the purpose of acquiring real estate; to hold, improve, develop, operate, manage, mortgage, sell, exchange and lease and to generally deal and manage real estate and personal property. Batesville Security Building Corporation is a wholly owned subsidiary of Security Capital Corporation which has been inactive in the past years but in 2004 reactivated its operations by investing in new leasehold improvements.
Security Capital Corporation’s home or principal office is located at 295 Highway 6 West, Batesville, Mississippi, 38606. The telephone of the home or principal office is (662) 563-9311. First Security Bank’s website is www.firstsecuritybk.com
Security Capital Corporation, through First Security Bank, engages in a wide range of banking activities, including accepting demand deposits, accepting savings and time deposit accounts, making secured and unsecured loans to corporations, individuals and others, issuing credit cards, issuing and processing ATM cards and debit cards, issuing commercial and standby letters of credit, originating mortgage loans, and providing personal and corporate trust services.
Security Capital Corporation’s lending services include commercial, real estate, installment, credit card loans, merchant accounts receivable loans, student loans, and agricultural loans. Revenues from Security Capital Corporation’s Lending activities constitute the largest component of Security Capital Corporation’s operating revenues.
At December 31, 2004, the loan portfolio totaled $234,403 constituting 67% of the earning assets of $349,276. Security Capital Corporation’s loan personnel have the authority to extend credit under guidelines established and approved by the Board of Directors. Any aggregate credit which exceeds the authority of the loan officer or a combination of several authority limits is forwarded to the Loan Committee for approval. The Loan Committee is comprised of various Bank Directors, including the Chairman.
Security Capital Corporation’s primary lending areas are the counties of Desoto, Panola, Quitman and Tunica in the State of Mississippi. Security Capital Corporation may extend credit to borrowers out of the primary lending area but on a limited basis in which the risk is low and/or a relationship may exist with the borrower and an industry or a development in the primary lending area.
The following tables provide demographic information for Desoto, Panola, Quitman and Tunica counties, and for the State of Mississippi:
POPULATION
2000 1990 1980 1970
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DeSoto 107,199 67,910 53,930 35,885
Panola 34,274 29,996 28,164 26,829
Quitman 10,117 10,490 12,636 15,888
Tunica 9,277 8,164 9,652 11,854
Mississippi 2,844,658 2,573,216 2,520,698 2,216,994
SOURCE: Center for Population Studies, University of Mississippi
PER CAPITA INCOME
2002 2001 2000 1999 1998
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DeSoto $27,261 $27,344 $26,074 $24,537 $23,970
Panola 18,510 18,233 17,188 16,242 15,805
Quitman 15,854 17,183 14,720 14,568 14,010
Tunica 17,763 18,966 17,328 17,335 16,395
Mississippi 22,550 21,967 21,007 20,053 19,545
SOURCE: United States Department of Commerce, Bureau of Economic Analysis
MEDIAN AGE
2000 1990
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DeSoto 33.7 31.5
Panola 33.0 30.1
Quitman 31.8 30.1
Tunica 30.6 25.3
SOURCE: Center for Population Studies, University of Mississippi
Panola County and Quitman County are rural areas, in which agriculture and industry play a big part in the economy. Desoto County and Tunica County have a different economic structure. The growth and composition of Desoto County has been dictated, primarily, by the outflow from Memphis, Tennessee, seeking residential living developments as well as locations for retail businesses and other commercial developments outside the Memphis city limits. Tunica County’s economy is dependent on the gaming industry to provide employment and to provide resources for the operation of the county. The numerous casinos in the Tunica area employ residents from the surrounding counties and residents from the States of Tennessee and Arkansas.
Security Capital Corporation has in the past and intends to continue to make most types of real estate loans including but not limited to single and multi-family housing, farm loans, residential and commercial construction loans and loans for commercial real estate.
Major classifications of loans were as follows:
December 31,
2004 2002
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(In thousands)
Commercial, financial and agricultural $28,077 $32,878
Real estate - construction and development 49,189 37,116
Real estate - mortgage 124,911 103,348
Installment loans to individuals 29,898 28,529
Other 2,328 2,553
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234,403 204,424
Less allowance for loan losses (3,598) (3,665)
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$230,805 $200,759
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The success of the loan portfolio is not dependent on a single borrower or group of borrowers. The large loans of the loan portfolio are defined as those loans with a balance of $337,000 and over. As of December 31, 2004, the loan portfolio totals $234.4 million of which the large lines total $65 million representing 68 borrowers.
Security Capital Corporation provides a wide range of personal and corporate trust and trust-related services which includes serving as executor of estates, as trustee under testamentary and inter vivos trusts and various pension and other employee benefit plans, as guardian of the estates of minors and incompetents, as escrow agent under various agreements, as transfer agent and paying agent of registered bond issues, and as custodian for assets invested. In addition, the Trust Department of First Security Bank offers a variety of investment tools which includes a money management and financial planning program that uses the skills and abilities of a Certified Financial Planner and a Certified Retirement Services Professional among other specialists who are within the employment of First Security Bank and the Trust Department.
In recent years, Security Capital Corporation has opened several new locations to expand the First Security Banking area. In October of 1998, First Security Banking locations at Como, Mississippi, and Crenshaw, Mississippi, were purchased from First Tennessee Bank. In July of 1999, Planters Bank in Tunica was purchased from First Tennessee Bank. In December of 1995, a loan production office opened in Desoto County in the city of Olive Branch with one employee. In June of 1997, a full service bank branch opened and continued First Security Bank’s operation in the Olive Branch area with four employees. In October of 2001, First Security Bank’s operation in Olive Branch moved to a newly constructed building with features of four drive-thru lanes and a total square footage of 7,000 to accommodate the projected growth in that area. The number of employees at Olive Branch in 2002 grew to twelve. In January 2001, a loan production office officially opened in Desoto County in the city of Hernando. On July 1, 2002, the operation in Hernando moved from a loan production facility to a newly constructed building, a sister to the Olive Branch building, providing full banking services. In August of 2003, a branch was opened in the town of Pope. In 2004, First Security Bank prepared to continue to expand in the Desoto County area with the construction of a new branch in Southaven with an anticipated 2005 opening. The Security Capital Corporation has offered ATM services for numerous years and began in 1995 “running” its own ATMs. Today, First Security Bank provides ATM services at twenty-two locations, fifteen of which are not located on bank property. First Security Bank, also, provides the customer with 24 hours a day, 7 days a week, access to their account balances and activity through a telephone banking product called First Line. Initiated in October of 2002, First Security Bank offered internet banking, called First Teller, to accommodate those customers desiring through technology to review their account’s activity and images of the activity, if applicable, and pay their bills from anywhere in the world.
On December 31, 2004, First Security Bank had 162 full-time equivalent employees.
Security Capital Corporation and First Security Bank are subject to state and federal banking laws and regulations which impose specific requirements or restrictions on and provide for general regulatory oversight with respect to virtually all aspects of operations. These laws and regulations are generally intended to protect depositors, not shareholders. To the extent that the following summary describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on the business and prospects of Security Capital Corporation. Beginning with the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) and following with Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) and the Gramm-Leach-Bliley Act of 1999 (the “Financial Services Modernization Act”), numerous additional regulatory requirements have been placed on the banking industry in the past several years, and additional changes have been proposed. The operations of Security Capital Corporation and First Security Bank may be affected by legislative changes and the policies of various regulatory authorities. Security Capital Corporation is unable to predict the nature or the extent of the effect on its business and earnings that fiscal or monetary policies, economic control, or new federal or state legislation may have in the future.
Security Capital Corporation is a bank holding company within the meaning of the federal Bank Holding Company Act of 1956 (the “BHCA”).
The BHCA. Under the BHCA, Security Capital Corporation is subject to periodic examination by the Federal Reserve and is required to file periodic reports of its operations and such additional information as the Federal Reserve may require. Security Capital Corporation’s and First Security Bank’ activities are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries, and engaging in other activities that the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
Investments, Control, and Activities. With certain limited exceptions, the BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before (i) acquiring substantially all the assets of any bank, (ii) acquiring direct or indirect ownership or control of any voting shares of any bank if after such acquisition it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares), or (iii) merging or consolidating with another bank holding company.
In addition, and subject to certain exceptions, the BHCA and the Change in Bank Control Act, together with regulations thereunder, require Federal Reserve approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring “control” of a bank holding company, such as Security Capital Corporation. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person acquires 10% or more but less than 25% of any class of voting securities and either Security Capital Corporation has registered securities under Section 12 of the Exchange Act or no other person owns a greater percentage of that class of voting securities immediately after the transaction. The regulations provide a procedure for challenge of the rebuttable control presumption.
Under the BHCA, a bank holding company is generally prohibited from engaging in, or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in nonbanking activities, unless the Federal Reserve Board, by order or regulation, has found those activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the Federal Reserve Board has determined by regulation to be proper incidents to the business of a bank holding company include making or servicing loans and certain types of leases, engaging in certain insurance and discount brokerage activities, performing certain data processing services, acting in certain circumstances as a fiduciary or investment or financial adviser, owning savings associations, and making investments in certain corporations or projects designed primarily to promote community welfare.
The Federal Reserve Board has imposed certain capital requirements on bank holding companies under the BHCA, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets. These requirements are described below under “Capital Regulations.” Subject to its capital requirements and certain other restrictions, Security Capital Corporation may borrow money to make a capital contribution to First Security Bank, and such loans may be repaid from dividends paid from First Security Bank to Security Capital Corporation (although the ability of First Security Bank to pay dividends is subject to regulatory restrictions as described below in “Dividends” under Item 5). Security Capital Corporation is also able to raise capital for contribution to First Security Bank by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve Board policy, Security Capital Corporation is expected to act as a source of financial strength to First Security Bank and to commit resources to support First Security Bank in circumstances in which Security Capital Corporation might not otherwise do so. Under the BHCA, the Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve Board’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.
State and FDIC Regulation. First Security Bank is subject to regulation and periodic examinations by the FDIC and the State of Mississippi Department of Banking and Consumer Finance. These regulatory authorities examine such areas as reserves, loan and investment quality, management policies, procedures and practices and other aspects of operations. These examinations are designed for the protection of the Banks’ depositors, rather than their stockholders. In addition to these regular examinations, the Company and the Banks must furnish periodic reports to their respective regulatory authorities containing a full and accurate statement of their affairs.
FDICIA. All insured institutions must undergo regular on-site examinations by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate agency against each institution or affiliate as it deems necessary or appropriate. Insured institutions are required to submit annual reports to the FDIC and the appropriate agency (and state supervisor when applicable). FDICIA also directs the FDIC to develop with other appropriate agencies a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition, or any other report of any insured depository institution. FDICIA also requires the federal banking regulatory agencies to prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating, among other things, to: (i) internal controls, information systems, and audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset quality.
FDICIA contains a “prompt corrective action” section intended to resolve problem institutions at the least possible long-term cost to the deposit insurance funds. Pursuant to this section, the federal banking agencies are required to prescribe a leverage limit and a risk-based capital requirement indicating levels at which institutions will be deemed to be “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” In the case of a depository institution that is “critically undercapitalized” (a term defined to include institutions which still have positive net worth), the federal banking regulators are generally required to appoint a conservator or receiver.
Deposit Insurance. The FDIC establishes rates for the payment of premiums by federally insured banks and thrifts for deposit insurance. A separate Bank Insurance Fund (“BIF”) and Savings Association Insurance Fund (“SAIF”) are maintained for commercial banks and thrifts, respectively, with insurance premiums from the industry used to offset losses from insurance payouts when banks and thrifts fail. Since 1993, insured depository institutions like First Security Bank have paid for deposit insurance under a risk-based premium system.
Transactions With Affiliates and Insiders. First Security Bank is subject to Section 23A of the Federal Reserve Act, which places limits on the amount of loans to, and certain other transactions with, affiliates, as well as on the amount of advances to third parties collateralized by the securities or obligations of affiliates. The aggregate of all covered transactions is limited in amount, as to any one affiliate, to 10% of the Bank’s capital and surplus and, as to all affiliates combined, to 20% of the Bank’s capital and surplus. Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements.
First Security Bank is also subject to Section 23B of the Federal Reserve Act, which prohibits an institution from engaging in certain transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution, as those prevailing at the time for comparable transactions with nonaffiliated companies. First Security Bank is subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests. Such extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features.
Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve, the FDIC, the OCC, or the Office of Thrift Supervision shall evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility.
The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"), which became law on July 30, 2002, added new legal requirements for all publicly-held companies affecting corporate governance, accounting and corporate reporting. The Securities and Exchange Commission has been delegated the task of enacting rules to implement various provisions, and the Company is required to comply with such rules to the extent they are applicable to the Company. In addition, each of the national stock exchanges has developed new corporate governance rules, including rules strengthening director independence requirements for boards, the adoption of corporate governance codes, and charters for the nominating and audit committees.
Other Regulations. Interest and certain other charges collected or contracted for by First Security Bank are subject to state usury laws and certain federal laws concerning interest rates. First Security Bank’s loan operations are subject to certain federal laws applicable to credit transactions, such as the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; the Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs community it serves; the Equal Credit Opportunity Act, prohibiting discrimination on the basis of creed or other prohibited factors in extending credit; the Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; the Fair Debt Collection Act, concerning the manner in which consumer debts may be collected by collection agencies; and the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. The deposit operations of First Security Bank also are subject to the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records, and the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that Act, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
Enforcement Powers. FIRREA expanded and increased civil and criminal penalties available for use by the federal regulatory agencies against depository institutions and certain “institution-affiliated parties” (primarily including management, employees, and agents of a financial institution, independent contractors such as attorneys and accountants, and others who participate in the conduct of the financial institution’s affairs). These practices can include the failure of an institution to timely file required reports; the filing of false or misleading information; or the submission of inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such violations. Criminal penalties for some financial institution crimes have been increased to twenty years. In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance. Furthermore, FIRREA expanded the appropriate banking agencies’ power to issue cease and desist orders that may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications, or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.
Effect of Governmental Monetary Policies. The earnings of First Security Bank are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Board’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board have major effects upon the levels of bank loans, investments, and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.
Financial Services Modernization Act. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (the “Financial Services Modernization Act”). The Financial Services Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms “engaged principally” in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person “primarily engaged” in specified securities activities. In addition, the Financial Services Modernization Act also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHCA framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a Financial Holding Company. “Financial activities” is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
Generally, the Financial Services Modernization Act:
o Repeals historical restrictions on, and eliminates many federal and state law barriers to,
affiliations among banks, securities firms, insurance companies, and other financial service
providers;
o Provides a uniform framework for the functional regulation of the activities of banks, savings
institutions, and their holding companies;
o Broadens the activities that may be conducted by national banks, banking subsidiaries of bank
holding companies, and their financial subsidiaries;
o Provides an enhanced framework for protecting the privacy of consumer information;
o Adopts a number of provisions related to the capitalization, membership, corporate governance,
and other measures designed to modernize the Federal Home Loan Bank system;
o Modifies the laws governing the implementation of the Community Reinvestment Act ("CRA"); and
o Addresses a variety of other legal and regulatory issues affecting both day-to-day operations
and long-term activities of financial institutions.
In order for a bank holding company to take advantage of the ability to affiliate with other financial services providers, that company must become a “Financial Holding Company” as permitted under an amendment to the BHCA. To become a Financial Holding Company, Security Capital Corporation would file a declaration with the Federal Reserve, electing to engage in activities permissible for Financial Holding Companies and certifying that it is eligible to do so because all of its insured depository institution subsidiaries are well-capitalized and well-managed. In addition, the Federal Reserve must also determine that each insured depository institution subsidiary of Security Capital Corporation has at least a “satisfactory” CRA rating.
The Financial Services Modernization Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in “activities as principal that would only be permissible” for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. In order to form a financial subsidiary, a state bank must be well-capitalized, and the state bank would be subject to the same capital deduction, risk management and affiliate transaction rules as applicable to national banks.
Security Capital Corporation and First Security Bank do not believe that the Financial Services Modernization Act will have a material adverse effect on operations in the near-term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that Security Capital Corporation and First Security Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than Security Capital Corporation and First Security Bank.
Capital. Security Capital Corporation and First Security Bank are required to comply with the capital adequacy standards established by the Federal Reserve Board and the FDIC. There are two basic measures of capital adequacy for bank holding companies and their banking subsidiaries: a risk-based measure and a leverage measure.
The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profile among depository institutions and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
The minimum guideline for the total capital to risk-weighted assets, including certain off-balance sheet items such as standby letters of credit (“total capital ratio”) is 8.0 percent. At least half of total capital must be composed of common equity, undivided profits, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets (“Tier 1 capital”). The remainder may consist of subordinated debt, other preferred stock, a limited amount of loan loss reserves, and unrealized gains on equity securities subject to limitations (“Tier 2 capital”).
The following table represents the capital ratios for Security Capital Corporation and First Security Bank as of December 31, 2004:
Corporation Bank
Risk-Based Capital Ratio Ratio Ratio Requirements
- ------------------------ ----- ----- ------------
Total Capital 15.80 15.20 8
Tier 1 Capital 14.60 13.90 4
Leverage Capital 10.40 9.90 3
Deposit Insurance Assessments. The deposits of First Security Bank are insured by the FDIC up to the limits set forth under applicable law. A majority of the deposits of First Security Bank are subject to the deposit insurance assessments of the Bank Insurance Fund (“BIF”) of the FDIC. However, a portion of First Security Bank’s deposits, relating to a savings association acquisition, are subject to assessments imposed by the Savings Association Insurance Fund (“SAIF”) of the FDIC. The FDIC equalized the assessment rates for BIF-insured and SAIF-insured deposits effective January 1, 1997. The assessments imposed on all FDIC deposits for deposit insurance have an effective rate ranging from 0 to 27 basis points per $100 of insured deposits, depending on the institution’s capital position and other supervisory factors. Legislation was enacted in 1996 requiring both SAIF-insured and BIF-insured deposits to pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation (“FICO”). Based on the assigned FICO debt service rates, the assessments paid by the Bank during 2004 ranged from 1.54 basis points to 1.46 basis points, per $100 of deposits. The assessments for the first quarter of 2005 will be paid based on an assigned FICO debt service rate of 1.44 basis points
The banking business is a highly competitive business. Security Capital Corporation’s market area consists principally of Panola, Quitman, Desoto and Tunica Counties in Mississippi. Security Capital Corporation competes with other financial institutions, as well as insurance companies and various other entities, for deposits and in providing financial services in these counties and the surrounding counties. Security Capital Corporation, as provided by the FDIC Market Share Report of June 30, 2004 (the latest Market Share Report), held 56.45% of the deposit market in Panola County. In Quitman County - an area with no growth and poor economy in the best of years - this same report reflects Security Capital Corporation holding 20.53 % of the deposit market. In Desoto County, an area filled with large regional banks and national banks, Security Capital Corporation occupies a growing share of 5.83% of the deposit market as of June 30, 2004. Management measures the success of the locations in this area, not only by the growth of the deposits, but by its ability to continue to be competitive and to grow in the loan production area. In Tunica County, Security Capital Corporation experienced growth as indicated by its 41.77% share of the deposit base.
Because of the Lack of an Established Trading Market and Restrictions on Transfer, Shareholders May Not be Able to Quickly and Easily Sell Their Common Stock.
There has been no established or liquid market for the Common Stock. Because of the substantial restrictions on transfer of the Common Stock, Security Capital Corporation does not anticipate that a reliable or liquid secondary trading market for the Common Stock will exist or develop in the foreseeable future.
Changes in Local Economic Conditions Could Reduce Our Income and Growth, and Could Lead to Higher Levels of Problem Loans and Charge-Offs.
Security Capital Corporation makes loans, and most of its assets are located in Panola, Quitman, Desoto, and Tunica Counties in Mississippi. Adverse changes in economic conditions in these areas could hurt Security Capital Corporation’s ability to collect loans, could reduce the demand for loans, and could negatively impact performance and financial condition.
Security Capital Corporation's Profitability Depends on Economic Policies and Factors Beyond Our Control.
Security Capital Corporation’s earnings depend to a great extent on “rate differentials,” which are the differences between interest income that Security Capital Corporation earns on loans and investments and the interest expense paid on deposits and other borrowings. These rates are highly sensitive to many factors which are beyond Security Capital Corporation’s control, including general economic conditions and the policies of various government and regulatory authorities. Changes in interest rate policy by the Board of Governors of the Federal Reserve System affect Security Capital Corporation’s interest income, interest expense and investment portfolio. Also, governmental policies such as the creation of a tax deduction for individual retirement accounts can increase savings and affect the cost of funds. A rapid increase or decrease in interest rates could have an adverse effect on the net interest margin and results of operations of Security Capital Corporation. The nature, timing and effect of any future changes in federal monetary and fiscal policies on Security Capital Corporation and its results of operations are not predictable.
There is No Assurance That Security Capital Corporation Will be Able to Successfully Compete with Others for Business.
The banking business is highly competitive, and the profitability of Security Capital Corporation depends principally upon its ability to compete in the market areas where its banking operations are located. Security Capital Corporation competes with other commercial banks, savings banks, savings and loan associations, credit unions, mortgage companies, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based non-bank lenders and certain other non-financial entities, including retail stores which may maintain their own credit programs and certain governmental organizations which may offer more favorable financing than Security Capital Corporation. Many of these competitors have greater financial and other resources than Security Capital Corporation, and certain larger competitors are recent entrants into Security Capital Corporation’s markets.
The Company maintains an internet website at www.firstsecuritybk.com. The Company, effective in 2004, provided on its website the quarterly reports on Form 10-Q as filed with the Securities and Exchange Commission and will in 2005 provide these reports as well as the annual reports on Form 10-K, current reports on Form 8-K, and amendments to those reports as filed with the Securities and Exchange Commission These reports will be available on the Company’s website as soon as reasonably practical after the reports are filed with the Commission. Information on the Company’s website is not incorporated into this Form 10-K or the Company’s other securities filings and is not a part of them. Electronic or paper copies of the reports will be provided, free of charge, upon request by mail, through our website or in person.
The statistical disclosures for the Company are contained in Tables 1 through 16.
Table 1 - Five Year Financial Summary Table 2 - Average Balances, Interest Earned and Interest Yields Table 3 - Net Interest Earning Assets Table 3A - Volume/Rate Analysis Table 4 - Non-Interest Income and Expense Table 5 - Loans by Type Table 6 - Loan Liquidity Table 7 - Allowance for Loan Losses Table 8 - Nonperforming Assets Table 8A - Allocation of the Allowance for Loan Losses Table 9 - Securities Table 10 - Securities Maturity and Repricing Schedule Table 11 - Securities Weighted Maturity and Tax Equivalent Yield by Classification Table 12 - Deposit Information Table 13 - Maturity Ranges of Time Deposits with Balances More Than $100,000 Table 14 - Funding Uses and Sources Table 15 - Liquidity; Interest Rate Sensitivity Table 15A - Changes in Net Interest Income Over One Year Horizon Table 16 - Capital Ratios
Security Capital Corporation through First Security Bank, currently operates from its main office in central Batesville and from 11 additional branches in Panola, Quitman, Desoto, and Tunica Counties - all located in Mississippi. Information about these branches is set forth in the table below:
Name of Office Location/Telephone Number Banking Services Offered
- -------------- ------------------------- ------------------------
Main Office 295 Highway 6 West; Loans, Deposits, Cash,
Batesville, Mississippi 38606; Safe Deposit Boxes, ATM,
662-563-9311 Trust, Drive-thru.
Express Branch 130 Highway 51 North Drive-thru, Cash.
Batesville, Mississippi 38606;
662-563-9311
Marks Branch Highway 3 South Loans, Deposits, Cash,
Marks, Mississippi 38646; Safe Deposit Boxes,
662-326-8053 Drive-thru.
Power Drive Branch 230 Power Drive Loans, Deposits, ATM
Batesville, Mississippi 38606; Safe Deposit Boxes,
662-563-9311 Cash, Drive-thru
Sardis Branch 201 South Main Loans, Deposits, Cash
Sardis, Mississippi 38666; Safe Deposit Boxes,
662-487-1661 Drive-thru.
Olive Branch Branch 6659 Highway 305 Loans, Deposits, Cash,
Olive Branch, Mississippi 38654; Safe Deposit Boxes, ATM,
662-895-1994 Drive-thru.
Como Branch 227 Main Street Loans, Deposits, Cash
Como, Mississippi 38619Safe Deposit Boxes,
662-526-5191 Drive-thru.
Crenshaw Branch 729 Broad Street Loans, Deposits, Cash,
Crenshaw, Mississippi Safe Deposit Boxes,
662-382-5215 Drive-thru.
Tunica Branch 1262 Edwards Street Loans, Deposits, Drive-
Tunica, Mississippi thru, Safe Deposit Boxes,
662-363-2311 ATM. Cash.
Robinsonville Branch 11490 Old Highway 61 Loans, Deposits, Drive-
Robinsonville, Mississippi thru, Cash, ATM.
662-363-5015
Name of Office Location/Telephone Number Banking Services Offered
- -------------- ------------------------- ------------------------
Hernando Branch 985 Commerce Street Loans, Deposits, Cash,
Hernando, Mississippi Safe Deposit Boxes,
662-449-4115 ATM, Drive-thru.
Pope Branch 7024 Highway 51 Deposits, Cash, ATM,
Pope, Mississippi Drive-thru.
662-578-5650
Trust and Financial Services 220 Power Drive Investment Planning &
Branch Batesville, Mississippi Management, Personal Trusts,
662-563-9311 Corporate Trusts, Pension &
Profit-Sharing Plans, IRAs,
Paying Agent Accounts.
First Security Bank owns its main office and all of its branch offices, except the Express Branch. The Express Branch is leased for an annual rent of $9,600 under a ground lease agreement that expires in 2007, with an option to renew. The main office facility, originally was occupied in 1973, is used solely by Security Capital Corporation and First Security Bank. This facility contains approximately 21,300 square feet and houses the executive offices and the operations department as well as providing the customer area for cash, deposit, safe deposit and loan transactions. The other branch buildings range in size from approximately 600 square feet for the Express Branch to 7,000 square feet for the Hernando and Olive Branch locations.
ITEM 3. LEGAL PROCEEDINGSFirst Security Bank is the defendant in a case styled Amy French, individually, and Austin Lenard, a minor, by and through His Next Friend and Mother, Amy French vs. First Security Bank and Joshua Hawkins, Cause No. 2002-327-BB, filed on December 17, 2002 in the Circuit Court of the Second Judicial District of Panola County, Mississippi. The case involves an accident that occurred when a First Security Bank employee traveling in his personal vehicle to service an ATM was involved in an automobile accident. The pregnant occupant of the other vehicle gave birth later that day. The claims in the lawsuit are that the mother and child are experiencing permanent and continuing injuries, and the plaintiffs ask for compensatory damages in the amount determined to be fair by the jury. Analysis by legal counsel anticipates possible awards to the claimants to be within the insurance coverage with no potential loss to the Bank and closure of the case is dependent on forthcoming medical documentation on status of claimants.
From time to time First Security Bank is a defendant in various other lawsuits arising out of the normal course of business. In the opinion of management, the ultimate resolution of this category of claims should not have a material adverse effect on Security Capital Corporation’s consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNo matters were submitted to a shareholder vote during the fourth quarter of 2004.
There is no public trading market for the Common Stock of Security Capital Corporation. The articles and bylaws of Security Capital Corporation give Security Capital Corporation a right of first refusal to acquire shares when a shareholder wishes to sell stock.
DividendsSecurity Capital Corporation paid an annual cash dividend of $1.00 per share in 2004 and $.90 per share (split adjusted) in 2003. The primary source of funds for dividends paid by Security Capital Corporation to its shareholders is the dividend income received from First Security Bank. There are certain restrictions on the payment of such dividends imposed by federal and state banking laws, regulations and authorities. Under Mississippi law, the payment of dividends by First Security Bank must be approved by the Mississippi Department of Banking and Consumer Finance. The FDIC also has the authority to regulate the payment of dividends and to prohibit a regulated depository institution from engaging in what in such agency’s opinion constitutes an unsafe or unsound practice for conducting business. Depending upon the financial condition of the depository institution, payment of dividends could be deemed to constitute such an unsafe or unsound practice. In addition, a depository institution may not pay a dividend or otherwise make a capital distribution if the payment thereof would cause such institution to fail to satisfy its capital requirements.
PurchasesDuring 2004, Security Capital Corporation, under a limited repurchase plan, purchased 255 shares from two stockholders at a price established by an annual stock appraisal and diluted by a subsequent stock dividend.
Number of HoldersAt December 31, 2004, there were 670 stockholders of record of the Company’s common stock.
The following table sets forth certain financial information for Security Capital Corporation on a consolidated historical basis. Such information should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and notes appearing elsewhere in this report.
Security Capital Corporation
Table 1 - Five Year Financial Summary
12/31/04 12/31/03 12/31/02 12/31/01 12/31/00
(in thousands except per share data and Other Financial Data)
Income Statement Data:
Interest Income 19,092 17,009 16,847 19,834 20,487
Interest Expense 4,139 3,955 4,760 7,744 8,966
Net Interest Income 14,953 13,054 12,087 12,090 11,521
Provision for Loan Losses 637 546 672 701 326
Net Interest Income After Provision 14,316 12,508 11,415 11,389 11,195
Noninterest Income 5,657 5,666 5,155 4,591 2,885
Noninterest Expenses 11,410 10,618 10,092 9,555 8,779
Income Before Income Taxes 8,563 7,556 6,478 6,425 5,301
Income Tax Expense 2,431 2,039 1,666 1,814 1,079
NET INCOME 6,132 5,517 4,812 4,611 4,222
Per Share Data:
Net Income* 2.46 2.23 1.94 1.86 1.70
Cash Dividends* 1.00 0.90 0.82 0.73 0.66
Book Value* 17.66 16.47 15.27 13.89 12.45
Other Ratios:
Return on Average Assets 1.65 1.66 1.60 1.62 1.52
Return on Equity 14.22 13.73 13.45 13.78 14.67
Loans to Deposits 70.29 70.87 70.60 72.33 77.84
Loans to Total Assets 60.06 60.08 59.42 61.08 63.26
Equity Capital to Total Assets 11.24 12.01 12.00 12.36 10.87
Average Equity to Average Assets 11.61 12.12 11.94 11.73 10.35
Dividend Payout Ratio 40.53 40.60 42.06 39.51 38.83
Other Financial Data:
Cash Dividends Declared 2,484,937 2,243,187 2,022,867 1,819,753 1,632,254
Weighted Average
Outstanding Common Shares 2,484,306 2,479,440 2,478,701 2,478,930 2,483,141
* The per share information is based upon the retroactive effect of the stock dividends for the period.
The per share data being reflected was derived using the weighted average number of outstanding shares at
December 31, 2004 as the denominator. (The weighted average number of outstanding shares at December 31,
2004 was 2,484,306.) For example, the cash dividends per share was determined by dividing the amount of
dividends by 2,484,306.
Balance Sheet Data:
Total Assets 390,274 340,253 315,596 278,512 284,579
Earning Assets 349,276 304,056 276,677 244,345 250,369
Investment Securities AFS 96,669 76,320 74,879 62,056 68,086
Investment Securites HTM 2,050 2,053 0 0 0
Other Securities 1,259 991 738 717 682
Loans - Net 230,805 200,759 184,060 167,079 177,115
Allowance for Loan Losses 3,598 3,665 3,455 3,039 2,920
Total Deposits 333,458 288,442 265,597 235,192 231,302
Savings Deposits 28,416 25,869 19,747 17,552 16,714
Time Deposits 116,064 110,914 121,093 112,032 105,051
Long Term Borrowings 8,634 4,738 5,113 3,678 2,423
Shareholders' Equity 43,870 40,848 37,857 34,429 30,920
Average Balances:
Total Assets 371,424 331,612 299,830 285,249 278,081
Earning Assets 333,561 296,651 268,860 257,788 251,152
Securities 97,514 87,954 69,521 67,788 75,395
Total Loans 221,309 197,814 179,295 178,263 167,795
Allowance for Loan Losses 3,850 3,667 3,232 3,006 2,807
Savings Deposits 26,663 23,006 18,340 16,277 16,764
Time Deposits 114,125 114,998 110,189 114,704 103,388
Long-Term Borrowings 7,695 3,197 4,852 3,539 2,460
Shareholder's Equity 43,110 40,183 35,790 33,470 28,775
Other Data:
Number of Employees 162 157 146 140 130
Release 33-8098 requires the company to disclose any accounting estimates based on highly uncertain data and any material impact from adopting an accounting statement or policy.
The primary area in which there is uncertainty is the potential losses in the loan portfolio. In this area, an estimate is derived from an analysis of the loan portfolio and the Allowance for Loan Losses of the loans and the loan types that pose a risk of being a future loss. To prepare for the potential loss, an increase will be made to the loan loss reserve, if needed, for the inclusion of the balances or a percentage of the balances of the identified risks in the loan portfolio. With the need to increase the Allowance for Loan Losses, an increase will occur in bad debt expense or the Provision for Loan Losses expense which ultimately lowers the net income which is reflected on the Income Statement. In addition, the building up of the Allowance for Loan Losses results in a decrease in the total assets reflected on the balance sheet by the decrease in the net loan portfolio. The amount expensed - which is a non-cash transaction - for the accounting period will be an adjustment on the Statement of Cash Flows. In 2004, the allocation to Allowance for Loan Losses increased expenses and lowered net income and net assets by $637 thousand. For future periods, the affect on the income statement and the balance sheet will be dependent on the amount of loan charge offs and the strength of the loan portfolio for the accounting period. If the charge offs decrease and the analysis of the loan portfolio and the Allowance for Loan Losses determine no additional provisions are required, the cease or decrease of the accrual estimate will boost income and net assets. See “Allowance and Provision for Loan Losses” for more details.
Management's Discussion and Analysis of Financial Condition and Results of Operations For the Years Ended December 31, 2004, 2003 and 2002Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of Security Capital Corporation’s balance sheets and statements of income. This section should be read in conjunction with Security Capital Corporation’s Consolidated Financial Statements and accompanying Notes and other detailed information appearing elsewhere in this report.
This discussion includes various forward-looking statements with respect to credit quality (including delinquency trends and the allowance for loan losses), corporate objectives and other financial and business matters. When used in this discussion the words “anticipate,” “project,” “expect,” “believe,” and similar expressions are intended to identify forward-looking statements. Security Capital Corporation cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, all of which may change over time. Actual results could differ materially from forward-looking statements.
In addition to factors disclosed by Security Capital Corporation elsewhere in this report, the following factors, among others, could cause actual results to differ materially from such forward-looking statements: exposure to local economic conditions, interest rate risk, credit quality, risks inherent in consumer and commercial lending, competition, and the extent and timing of legislative and regulatory actions and reforms.
Security Capital Corporation earned $6,132,173 or $2.46 per share for 2004, $5,517,464 or $2.23 per share for 2003, and $4,812,292 or $1.94 per share for 2002 representing an increase of $1,319,881 or $.52 per share for the period from year 2002 through year 2004. These changes are due primarily to an increase in service charges on deposits and a decline in interest rates on deposits, offset by increases in salaries and employee benefits.
Net Interest IncomeNet interest income is the most significant component of Security Capital Corporation’s earnings. Net interest income is the difference between interest and fees realized on earning assets, primarily loans and securities, and interest paid on deposits and other borrowed funds. The net interest income is determined by several factors, including the volume of earning assets and liabilities, the mix of earning assets and liabilities and interest rates. Although there are a certain number of these factors which can be controlled by management policies and actions, there are certain other factors, such as the general level of credit demand, the Federal Reserve Board monetary policy, and changes in tax law that are beyond the control of management.
The increase in net interest income in 2004 as compared to 2003 is due primarily to the increase in loans.
The following table sets forth the major components of interest earning assets and interest-bearing liabilities for three consecutive years ending December 31, 2004. In the table below, the loan interest includes loan fees and the interest on securities considers discount accretion and premium amortization.
Security Capital Corporation
Table 2 - Average Balances; Interest Earned and Interest Yields
(dollars in thousands)
Years ended December 31,
----------------------------------------------------------------------------------------
2004 2003 2002
---------------------------- ---------------------------- ----------------------------
Average Average Average Average Average Average
Balance Interest Yields Balance Interest Yields Balance Interest Yields
-------- -------- ------- --------- -------- ------- --------- -------- -------
Assets:
Interest-Earning Assets:
Securities 96,219 3,826 3.98 85,582 3,256 3.80 66,418 3,210 4.83
BV to MV 1,295 2,372 3,103
Total Securities 97,514 3,826 3.92 87,954 3,256 3.70 69,521 3,210 4.62
Loans
Commerical/Agricultural 150,633 8,951 5.94 138,228 8,409 6.08 124,815 8,241 6.60
Consumer/Installment 66,148 5,050 7.63 55,178 4,559 8.26 49,593 4,348 8.77
Mortgage 1,096 89 8.12 1,565 127 8.12 2,119 187 8.82
Other Personal Loans 3,432 952 27.74 2,843 489 17.20 2,768 399 14.41
Total Loans 221,309 15,042 6.80 197,814 13,584 6.87 179,295 13,175 7.35
Other Investments
CDs with Other Banks 529 19 3.59 677 28 4.14 2,742 167 6.09
Federal Funds Sold 4,488 58 1.29 5,412 64 1.18 5,908 98 1.66
FHLB Account/Bank
Accounts/Other 9,721 147 1.51 4,794 77 1.61 11,394 197 1.73
Total Other 14,738 224 1.52 10,883 169 1.55 20,044 462 2.30
Total Earning Assets 333,561 19,092 5.72 296,651 17,009 5.73 268,860 16,847 6.27
Noninterest Earning Assets:
Allowance for Loan Losses -3,850 -3,667 -3,232
Fixed Assets 12,612 11,277 11,077
Other Assets 14,951 14,808 12,075
Cash and Due Froms 14,150 12,543 11,050
Total Noninterest Earning
Assets 37,863 34,961 30,970
Total Assets 371,424 331,612 299,830
Liabilities & Shareholder Equity
Interest-Bearing Liabilities
Deposits:
Interest-Bearing DDA 123,215 1,280 1.04 93,409 932 1.00 79,950 1,063 1.33
Savings Deposits 26,663 280 1.05 22,780 258 1.13 18,127 289 1.59
Time Deposits 114,125 2,230 1.95 114,998 2,421 2.11 110,189 2,939 2.67
Total Interest-Bearing
Deposits 264,003 3,790 1.44 231,187 3,611 1.56 208,266 4,291 2.06
Borrowed Funds
Short-Term Borrowings 1,032 15 1.45 860 10 1.16 625 10 1.60
FHLB Advances-Short/Long-Term 7,695 334 4.34 7,985 334 4.18 9,809 459 4.68
Total Borrowed Funds 8,727 349 4.00 8,845 344 3.89 10,434 469 4.49
Total Interest-Bearing
Liabilities 272,730 4,139 1.52 240,032 3,955 1.65 218,700 4,760 2.18
Non-Interest-Bearing Liabilities
Non-Interest-Bearing Deposits 51,798 47,260 41,765
Other Liabilities 3,786 4,137 3,575
Shareholders' Equity 43,110 40,183 35,790
Total Liabilities & SH Equity 371,424 331,612 299,830
Net Interest Income &
Interest Rate Spread 14,953 4.21 13,054 4.09 12,087 4.09
Net Interest Margin 4.48 4.40 4.50
The following table sets forth net interest earning assets and liabilities for 2004, 2003 and 2002.
Table 3 - Net Interest Earning Assets
(in thousands)
2004 2003 2002
Average Interest
Earning Assets 333,561 296,651 268,860
Average Interest
Bearing Liabilities 272,730 240,032 218,700
Net 60,831 56,619 50,160
Table 3A - Volume/Rate Analysis depicts the dollar effect of volume and rate changes from 2002 to 2004. Variances which were not specifically attributable to volume or rate were allocated proportionately between rate and volume using the absolute values of each for a basis for the allocation. Non-accruing loans were included in the average loan balances used in determining the yields.
Table 3A - Volume/Rate Analysis
(in thousands)
2004 Change from 2003 2003 Change from 2002
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
INTEREST INCOME: (1)
Loans 1,518 -475 1,458 1,241 -983 258
Investment Securities 375 176 570 686 -644 42
Other 59 26 55 -117 -186 -303
Total Interest Income 1,952 -273 2,083 1,810 -1,813 -3
INTEREST EXPENSE: (2)
Interest Bearing
Demand Deposit Accounts 310 37 358 135 -276 -141
Savings Deposits 43 -21 22 53 -84 -31
Time Deposits -17 -184 -201 101 -619 -518
Borrowed Funds -5 11 5 -62 -63 -125
Total Interest Expense 331 -157 184 227 -1,042 -815
NET INTEREST INCOME 1,621 -116 1,899 1,583 -771 812
Non-interest expense increased by 5.21% from 2002 to 2003 and increased by 7.46 % from 2003 to 2004, primarily because of increases in salaries and employee benefits. Increases in non-interest expense signifies Security Capital Corporation’s preparation for a move into a new market area in Desoto County that required expenditures for banking facilities as well as training employees to perform the operational procedures. Security Capital Corporation has provided its Desoto County locations with new state of the art buildings to address the needs of its staff and the increase in business as well as to present an attractive banking establishment for its customers. With the establishment of a new facility, other costs are involved such as the purchase of new equipment and the increase in the maintenance costs of the equipment. In addition to the increase in employees, salaries and employee benefits normally increase in a range from 3% to 7% depending the profits and the attainment of performance goals.
Non-interest income decreased by $9 thousand from 2003 to 2004. Included in the 2004 non-interest income is an insurance settlement payment of $350,000 for loss of the original branch buildingin 2002 due to fire. This payment was partially offset by loss of $123,000 on disposal of obsolete fixed assets.
The following table provides details on non-interest income and expense for the Years ended December 31, 2002 through 2004.
Table 4 - Non-Interest Income and Expense
(in thousands)
2004 2003 2002
Non-Interest Income:
Trust Department Income 911 876 734
Service Charges: Deposits 3,876 3,758 3,671
Other Operating Income 870 1,032 750
Total Non-Interest Income 5,657 5,666 5,155
Non-Interest Expense:
Salaries & Employee Benefits 7,607 6,649 6,145
Occupancy Expense 1,236 1,311 1,277
Other Operating Expense 2,567 2,658 2,670
Total Non-Interest Expense 11,410 10,618 10,092
Income Taxes
Security Capital Corporation records a provision for income taxes currently payable, along with a provision for those taxes in the future. Such deferred taxes arise from differences in timing of certain items for financial statement reporting rather than income tax reporting. Security Capital Corporation benefits in its computation of income taxes due from having tax-exempt securities and loans.
The loan portfolio constitutes the major earning asset of Security Capital Corporation and in the opinion of management offers the best alternative for maximizing interest spread above the cost of funds. The continuing loan growth is primarily due to Security Capital Corporation’s move to a market area that is experiencing rapid growth in the building of residential and commercial structures. Real Estate Loans and Commercial Loans comprise the largest segment of the loan portfolio. Commercial loans which bear a higher degree of risk comprise 6.54% of the loan portfolio at December 31, 2004. Agricultural loans, another type of loan that carries a higher degree of risk, are only 1.36% of the loan portfolio at December 31, 2004.
Authorization of LoansThe Board of Directors of the Corporation has approved guidelines and policies specific for each type loan. These guidelines are followed under the direction of the President and the Senior Loan Officer. All loans made above $25,000 will be presented by the officer originating the loan to a committee of loan officers for a review of the maker(s), the repayment ability, source of repayment, type and sufficiency of collateral and length of repayment. The loans reviewed will be compiled into a report certifying that the loans have been made in accordance with the Board approved policies and principles. This periodic report is submitted to the Directors Loan Committee for review and then ratified at the next scheduled meeting. Each loan officer has an individual lending limit (not to exceed the legal limit of $250,000) which is awarded based on his or her lending experience and length of service. Any loan in excess of the loan officer’s limit must be approved prior to consummation by the Senior Loan Officer or the President or the Board of Directors or by a combined lending authority with another loan officer. All loans or lines of credit over $250,000 must be pre-approved by the Directors Loan Committee.
Collateral and Documentation RequirementsAll loans must have an ample margin of safety between the loan advance and the current fair value of the collateral. The benchmark, under normal circumstances, is loan advances for all types of loans should not to exceed 80% of the current fair value of the collateral. However, decisions of judgement are needed in special circumstances and this percentage may be reduced by the abnormality/unusual nature of the collateral. Documentation of the collateral is properly collected before the loan transaction is completed and will meet the requirements (to name a few) of the Mississippi Uniform Commercial Code, the Loan Policy, and all pertinent regulations. In an effort to secure and to protect the liens of the First Security Bank, a staff provides loan management with periodic reports highlighting loan accounts requiring additional documentation. In addition, the compliance and loan review officer along with the internal audit staff monitor the procedures on an ongoing basis with reports for management of any deficiencies.
Characteristics, Criteria and Risks of TypesThe composition of the loan portfolio consists chiefly of real estate, agricultural, consumer and commercial loans. Real estate loans, in addition to the general collateral and documentation requirements, require the performance of an appraisal or evaluation before the credit decision is made. An appraisal is required for all new real estate loans where the loan amount is $250,000 or greater. All appraisals must be prepared by a certified appraiser. However, on 1-4 family residential real estate loans less than $1,000,000, the appraisal may be prepared by a licensed appraiser. For small loans (less than $250,000), the appraisals may be performed by a certified or licenced in-house appraiser. Real estate loans are normally considered a low risk due to the required strength in collateral. Agricultural loans mandate an extensive review of the customer’s farming tract record, financial statements, cash flow statements, projected income and collateral. The depth of these reviews should determine the honesty, integrity, the debt status, the repayment ability and the collateral strength of the farmer. To combat this high risk area, the bank’s policy is for production loans to be completely secured with tangible assets and not to exceed 60% of the projected cash repayment ability. Consumer loans is another area of high risk due to the type and location of the collateral and the volatility of the economy which may affect the payback ability of the customer. The consumer loans normally require the pledging of collateral. However, up to $10,000 may be extended without the pledging of the collateral but must be based on the creditworthiness of the loan applicant. Credit card loans (a very high risk area) - in the consumer group - require a financial statement submitted in order for a credit limit of $5,000 and over to be granted. Commercial loans require a review of the purpose and the assessment of the future benefit of the operation, the financial statements, and the collateral on the onset to determine the strength of the potential loan asset. The degree of risks associated with the commercial lending is dependent on the completeness of the initial loan evaluation process.
The bank monitors its loans in a manner that the loan portfolio will not represent an excessive risk due to concentrations of credit from a large volume of economically related assets advanced to one individual, related groups of borrowers or industry. Loans to one individual or corporation shall not exceed the limits set by state law. Mississippi state law states that the limit of lending to one individual or entity shall not exceed 20% of unimpaired capital and reserves. To keep abreast of the loan concentrations, a tracking of individual borrowers, related groups of borrowers and industry groups as well as geographical locations is compiled in a quarterly report that is presented to the Directors Loan Committee.
The following table reflects outstanding balances by loan types for the past five years.
Table 5 - Loans by Type
(in thousands)
2004 2003 2002 2001 2000
Commercial, Financial & Agricultural 28,077 32,878 38,229 34,459 43,539
Real Estate - Construction & Development 49,189 37,116 27,165 21,183 21,792
Real Estate - Mortgage 124,911 103,348 96,737 88,074 82,927
Installment Loans to Individuals 29,898 28,529 22,602 23,893 28,192
Other 2,328 2,553 2,782 2,509 3,585
Total Loans 234,403 204,424 187,515 170,118 180,035
The following table reflects the maturity schedule or repricing frequency of all loans that will reprice or mature within one year.
Table 6 - Loan Liquidity
(in thousands)
Within 1 thr 5 Over
Loans That Will Reprice or Will Mature: 1 Year Years 5 Years Total
------- ------- ------- -------
Commercial, financial and agriculture loans 15,457 12,465 155 28,077
Construction and development 41,020 8,169 49,189
Fixed Rate 16,619 9,673 28 26,320
Variable Rate 39,858 10,961 127 50,946
Total 56,477 20,634 155 77,266
Percent of Total 73.09% 26.71% 0.20% 100.00%
The provision for loan losses represent charges made to earnings to maintain an adequate allowance for loan losses. The allowance is maintained at an amount believed by management to be sufficient to absorb losses inherent in the credit portfolio. Factors considered in establishing an appropriate allowance include: a careful assessment of the financial condition of the borrower; a realistic determination for the value and adequacy of underlying collateral; the condition of the local economy and the condition of the specific industry of the borrower; a comprehensive analysis of the levels and trends of loan categories; and review of delinquent and classified loans.
Security Capital Corporation maintains a comprehensive loan review program to evaluate loan administration, credit quality, and loan documentation. This program includes a regular review of problem loans, delinquencies, and charge-offs. The adequacy of the allowance for loan losses is evaluated on a quarterly basis. This evaluation focuses on specific loan reviews, changes in the type and volume of the loan portfolio given the current and forecasted economic conditions, and historical loss experience. Any one of the following conditions may necessitate a review of a specific loan: a question of whether the customer’s cash flow or net worth may not be sufficient to repay the loan; the loan has been criticized in a regulatory examination; the accrual of interest has been suspended; serious delinquency; or other reasons where either the ultimate collectibility of the loan is in question or the loan has other special or unusual characteristics which require special monitoring.
Activity in the allowance for loan losses is reflected in Table 7 - Analysis of Allowance for Loan Losses. The recorded values of loans and leases actually removed from the consolidated balance sheets are referred to as charge-offs and, after netting out recoveries on previously charged-off assets, become net charge-offs. Security Capital Corporation’s policy is to charge-off loans, when, in management’s opinion, the loan is deemed uncollectible, although concerted efforts are made to maximize recovery.
Security Capital Corporation
Table 7 - Allowance for Loan Losses
(in thousands)
2004 2003 2002 2001 2000
Balance at Beginning of Year 3,665 3,455 3,039 2,920 2,716
Loans Charged-Off
Commercial, Financial & Agricultural 242 146 75 58 252
Real Estate - Construction & Development 6 4 0
Real Estate - Mortgage 225 69 75 121
Installment Loans to Individuals 655 167 584 666 116
Other 324 4 21 15
Total Charge-Offs 1,128 710 738 866 383
Charge-Off Recovered
Commercial, Financial & Agricultural 2 36 8 18 69
Real Estate - Construction & Development 26 6 2
Real Estate - Mortgage 24 39 6 6
Installment Loans to Individuals 398 104 423 254 185
Other 208 6 4 1
Total Recoveries 424 374 482 284 261
Net Charge-Offs 704 336 256 582 122
Current Year Provision 637 546 672 701 326
Adjustment (1)
Balance at EOY 3,598 3,665 3,455 3,039 2,920
Loans at EOY 230,805 200,759 187,515 170,118 180,035
Ratio: Allowance to Loans 1.56% 1.83% 1.84% 1.79% 1.62%
Average Loans 221,309 197,814 179,295 178,263 167,795
Ratio:Allow. To Avg Loans 1.63% 1.85% 1.93% 1.70% 1.74%
Ratio: Net Charge Offs to Average Loans 0.32% 0.17% 0.14% 0.33% 0.07%
(1) Reserves were obtained with the
acquisition of a branch.
Nonperforming assets and relative percentages to loan balances are presented in Table 8 - Nonperforming Assets. The level of nonperforming loans and leases is an important element in assessing asset quality and the relevant risk in the credit portfolio. Nonperforming loans include non-accrual loans, restructured loans, and loans delinquent 90 days or more. Loans are classified as non-accrual when management believes that collection of interest is doubtful, typically when payments are past due over 90 days, unless well secured and in the process of collection. Another element associated with asset quality is other real estate owned (OREO), which represents properties acquired by Security Capital Corporation through loan defaults by customers.
Table 8 - Nonperforming Assets
(in thousands)
2004 2003 2002 2001 2000
Loans:
Non-accrual 172 78 590 495 306
90 Days+ Past-Due 724 629 307 333 162
Total Nonperforming Loans 896 707 828 828 468
As % of Total Loans 0.38% 0.35% 0.44% 0.49% 0.26%
Other Real Estate 165 129 234 228 214
As % of Total Loans 0.07% 0.06% 0.12% 0.13% 0.12%
Loan Loss Reserve 3,598 3,665 3,455 2,959 2,839
Loan Charge-Offs 1128 710 738 865 384
Total Loans 234,403 204,424 187,515 170,118 180,034
The consolidated reserve for loan losses reflected in Table 7 are the balances remaining after the charge offs for the year.
The loan portfolio contained an aggregate of $172 thousand in non-accrual loans and an aggregate of $724 thousand of 90 days past due and over as of December 31, 2004. If the non-accrual loans had been performing loans during the 2004 period, interest income would have shown an addition of $12 thousand. The 90 days and over past due loans are not subject to a non-accrual status and interest is accrued and recognized daily as income. The interest income recognized in 2004 for the loans classified as 90 days and over past due at December 31, 2004 totaled $72 thousand.
Potential Problem LoansAs of December 31, 2004, one loan (not included in the non-accrual and the 90 day and over totals) totaling $426 thousand has been identified by loan management as being doubtful as to the ability of the borrowers to comply with the present loan repayment terms. Analysis of possible workout plans does not anticipate any deficiency. The actual deficiency depends on the market for the equipment and real estate at the time of disposal.
Management believes loans classified for regulatory purposes as loss, doubtful, or substandard that are not included in nonperforming or impaired loans do not represent or result from trends or uncertainties which will have a material impact on future operating results, liquidity, or capital resources. The most recent safety and soundness exam conducted by the FDIC as of December 31, 2003 identified $1,647,000 as Substandard loans and $44,000 as Loss loans. These loans have been watched by management.
In addition to loans classified for regulatory purposes, management, also, designates certain loans for internal monitoring purposes in a watch category. Loans may be placed on management’s watch list as a result of delinquent status, concern about the borrower’s financial condition or the value of the collateral securing the loan, substandard classification during regulatory examinations, or simply as a result of management’s desire to monitor more closely a borrower’s financial condition and performance. Watch category loans may include loans with loss potential that are still performing and accruing interest and may be current under the terms of the loan agreement; however, management may have a significant degree of concern about the borrowers’ ability to continue to perform according to the terms of the loan. Loss exposure on these loans is typically evaluated based primarily upon the estimated liquidation value of the collateral securing the loan. Also, watch category loans may include credits which, although adequately secured and performing, reflect a past delinquency problem or unfavorable financial trends exhibited by the borrower.
All watch list loans are subject to additional scrutiny and monitoring. Security Capital Corporation’s policies require loan officers to identify borrowers that should be monitored in this fashion and believe this process ultimately results in the identification of problem loans in a more timely fashion. At December 31, 2004, Security Capital Corporation in its Loan Loss Reserve Analysis classified $8,045,036 with a rating of Watch, $1,597,408 with a rating of Substandard, and $161,867 with a rating of Doubtful.
All other real estate is carried by Security Capital Corporation at the lower of cost or market value less costs to dispose. Any normal expense of holding the other real estate is expensed as occurred. Any expenses from the other real estate that is substantial or that extends the life of the asset is capitalized.
An analysis of the loan portfolio and the loan loss reserve or allowance is conducted on a quarterly basis by the President and loan administrators and approved by the Board of Directors to insure that the bank is well protected against any potential and/or unexpected loan losses. To arrive at the proper grades or classifications needed in the loan loss reserve analysis, each loan officer reviews each loan in his or her portfolio. The review process will include consideration of the payment history of the customer, bankruptcy status, and stimuli in the economy or in the area that may affect the future cash flow of the customer. The loan officer and/or the senior loan administrator will grade the loan as exceptional, satisfactory, watch, substandard or doubtful. This quarterly review and grading process is conducted on an ongoing basis to identify the loans that are non-performing as well as loans that no longer require an allocation in the loan loss reserve. The required reserve will fluctuate from quarter to quarter due to the loan portfolio performance being monitored.
The composition of the allowance or reserve for loan losses is based on the risk elements in the loan portfolio. Loans with the highest risk are graded doubtful. These would be loans that have been restructured due to poor payment performance, insufficient collateral to support the loan balance, non-accrual loans and loans that have been modified due to a change in the financial condition of the borrower to such an extent that a loss would most normally be expected. Loans with the second highest risk are graded substandard. These loans normally portray extremely weak credit with a potential for either partial or total loss which must be recognized. With these loans, legal action is anticipated with the debt not being retired through liquidation of the collateral. The next risk level is the loans that are considered to be on the “watch” list. These loan customers display inadequate financial strength or credit to provide loan management with the assurance that they will meet the scheduled repayment plan. Loan customers who have filed bankruptcy present a high risk due to likelihood of the payment plan may not be re-affirmed. Due to the type of collateral or lack of collateral, consumer loans without real estate are considered another area of risk requiring more reserves. Agricultural loans, by the nature of the purpose and the unforeseen elements in the farming process, completes the loans identified as having more than the normal risks.
Table 8A - Allocation of the Allowance for Loan Losses
(Dollars in thousands)
At December 31,
-------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------------------------------------------------------------------------------------------
Amount Percent Balance Percent Balance Percent Amount Percent Amount Percent
-------------------------------------------------------------------------------------------------
Commercial, Financial
& Agricultural $ 538 14.95% $ 856 23.36% $ 1,006 29.12% $ 679 22.34% $ 1,116 38.22%
Real Estate - Construction
& Development 522 14.51% 461 12.58% 298 8.63% 227 7.47% 230 7.88%
Real Estate - Mortgage 1,735 48.22% 1,533 41.83% 1,246 36.06% 1,040 34.22% 968 33.15%
Installment Loans
to Individuals 780 21.68% 732 19.97% 816 23.62% 859 28.27% 538 18.42%
Other Loans 23 0.64% 26 0.71% 28 0.81% 25 0.82% 36 1.23%
Unallocated 0 0 57 1.56% 61 1.77% 209 6.88% 32 1.10%
Total Loans $ 3,598 100.00% $ 3,665 100.00% $ 3,455 100.00% $ 3,039 100.00% $ 2,920 100.00%
Note: Percent in the above table represents the amount represented by the loan type in the loan portfolio.
The loan loss reserve at December 31, 2000 showed a small increase of $204 thousand from the previous year, which can be justified by the increase in the loan portfolio. The loan loss reserve at December 31, 2000
was represented by 15% of the substandard loans ($101 thousand), 50% of the doubtful loans ($43 thousand), 20% of the bankruptcy loans ($210 thousand), 5% of the credit card loans ($40 thousand), 4% of the agricultural loans ($732 thousand), 2% of the consumer loans without real estate collateral ($257 thousand), 2% of the watch loans ($96 thousand) and 1% for the remainder of the adjusted loan portfolio ($1,409 thousand). The primary reasons for major changes in the allocation from the previous year were: substandard loans decreased from $996 thousand to $676 thousand; consumer loans without real estate collateral dropped from $14.4 million to $12.8 million; and the risk factor (%) for credit card loans decreased from 10% to 5%. This decrease in the risk factor for credit card loans was due to the current analysis of the potential problem accounts along with the bank’s historical loss experience factor.
At December 31, 2001, the loan loss reserve grew approximately $119 thousand from December 31, 2000. The allocation for substandard loans increased from $101 thousand to $169 thousand due to the increase in the loans in this risk category from $676 thousand to $1.1 million. Bankruptcy loans increased by approximately $800 and caused an increase in its loan loss reserve allocation of $156 thousand. The loans classified as agricultural loans decreased by approximately $1.6 million. This decrease with a decrease in the risk factor of 1.25% created a decrease in the agricultural loans allocation by $274 thousand. The allocation for consumer loans without real estate collateral increased by $204 thousand due to the increase from $12.8 million in 2000 to $23 million in 2001. Other variables in the loan loss reserve allocation remained constant. The allocation for December 31, 2001 is as follows: 15% of substandard loans, $169 thousand; 50% of doubtful loans, $39 thousand; 20% of bankruptcy loans, $367 thousand; 5% of credit card loans, $38 thousand; $2.75% of agricultural loans, $458 thousand; 2% of consumer loans without real estate collateral, $461 thousand; 2% of watch loans, $83 thousand and 1% of the remainder of the adjusted loan portfolio, $1,215 thousand.
At December 31, 2002, the loan portfolio analysis required an increase in the loan loss reserve. The major stimulus for the increase was the growth in the loan portfolio from $170 million to $187.5 million. In addition, increases were made to the risk factors for the following categories: agricultural loans, 1.25% and consumer loans without real estate collateral, 1%. These risk factor increases were the result of a continuing study of the loan quality and the bank’s experience record in these categories. A decrease in the amount allocated for doubtful loans from $38 thousand to $7 thousand was attributed to a decrease in the balance of loans with this grade. The loan loss reserve at December 31, 2002 was allocated as follows: 15% of substandard loans, $201 thousand; 50% of doubtful loans, $7 thousand; 20% of bankruptcy loans, $350 thousand; 5% of credit card loans, $39 thousand; 4% of agricultural loans, $742 thousand; 3% of consumer loans without real estate collateral, $645 thousand; 2% of watch loans, $133 thousand; and 1% of the remainder of the adjusted loan portfolio, $1,277 thousand.
Due to the growth in the loan portfolio from $187.5 million to $204.4 million during 2003, the loan portfolio analysis required an increase in the loan loss reserve. Another stimuli for the growth in the reserve was the increase of 4% in the risk factor for the category of watch loans. The assigned risk factors are the result of a continuing study of the loan quality and the bank’s experience record in these categories. The allocation for doubtful loans reflected an increase of $17 thousand primarily due to using a specific allocation instead of the 50% of the loan balance as used in previous periods. A specific allocation is a deficiency when the balance of the loans exceeds the market value of the collateral. The loan loss reserve at December 31, 2003 was allocated as follows: 15% of substandard loans, $166 thousand; specific allocation of doubtful loans, $25 thousand; 20% of bankruptcy loans, $439 thousand; 5% of credit card loans, $38 thousand; 4% of agricultural loans, $575 thousand; 2% of consumer loans without real estate collateral, $540 thousand; 6% of watch loans, $260 thousand; and 1% of the remainder of the adjusted loan portfolio, $1,622 thousand.
At December 31, 2004, the loan loss reserve reflected a small decrease of $67 thousand from the previous year. This decrease was due to an intensive evaluation of the loan quality and an aggressive recognition of loan loss. The growth of the loan portfolio spurred an increase in the potential risk areas. The loan loss reserve at December 31, 2004 was composed of the following: 10% of substandard loans, $160 thousand; an allocation for deemed uncollectible doubtful loans, $113 thousand; 16% of bankruptcy loans, $448 thousand; 6% of credit card loans, $49 thousand; 3% of agricultural loans, $288 thousand; 2% of consumer loans without real estate collateral, $558 thousand; 3% of watch loans, $202 thousand; and 1% of the remainder of the adjusted loan portfolio, $780 thousand. Changes were made in the risk factor (%) due to the ongoing analysis of the potential loss elements within the actual loan categories. The additional risk were allocated with increases in the following categories at December 31, 2004: 1% for credit card loans and 26% for deposit overdrafts. Lower risk factors were allocated with decreases in the following categories at December 31, 2004: 5% for substandard loans; 4% for bankruptcy loans; 1% for agricultural loans; 3% for watch loans.
Loan charge offs in 2003 and 2004 were $710 and $1,128 thousand, respectively, reflecting a significant increase over the average loan charge offs of $662 thousand for the prior three years. This increase in loan charge offs mandated the need to maintain the increase in provisions for the Allowance for Loan Losses for 2003 and 2004, respectively, $546 thousand and $637 thousand. The regulatory exam as of December 31, 2003, however, classified $1.6 million of loans as substandard, down from $3.1 million as reflected in the regulatory exam as of December 31, 2001which was a consideration in the analysis of needed loan provisions. Recoveries reflected an increase in 2004 from $374 thousand to $424 thousand as a result of the diligent efforts by loan and deposit personnel to regain principal from the classified loan activity. The ratio of the Allowance for Loan Losses to Loan for the other years presented shows a small increase with each year.
Securities are identified as either Available for Sale, Held to Maturity or Other Securities. Securities held to maturity are those securities which Security Capital Corporation has both the intent and the ability to hold to maturity and are reported at the amortized cost. Securities available for sale are those securities which Security Capital Corporation may decide to sell if needed for liquidity, asset/liability management or other reasons. Securities that are available for sale are reported at market value with the unrealized gains or losses included as a separate component of equity, net of tax. Other securities are carried at cost and are investments in FHLB, First National Banker’s Bankshares and Federal Agricultural Mortgage Corporation.
Table 9 - Securities
(in thousands)
2004 2003 2002 2001 2000
Securities Available for Sale
U. S. Treasuries - 702 713 1,007 1,506
U. S. Agencies 23,316 28,560 15,026 1,032 4,017
Mortgage Backed 22,419 9,611 17,158 14,045 14,664
State, Municipals & Other 50,934 37,447 41,982 45,972 47,899
Total Securities AFS 96,669 76,320 74,879 62,056 68,086
Securities Held to Maturity
U. S. Treasuries 0 0 0 0 0
U. S. Agencies 0 0 0 0 0
Mortgage Backed 0 0 0 0 0
State, Municipals & Other 2,050 2,053 0 0 0
Total Securities HTM 2,050 2,053 0 0 0
Other Securities 1,259 991 738 717 682
Total Securities 99,978 79,364 75,617 62,773 68,768
The security portfolio is composed of U. S. Treasury securities, U. S. Agency securities, State and Municipal securities - both tax-exempt and taxable, equities, and mortgage-backed securities.
Table 10
Securities Maturity & Repricing Schedule
For 12/31/2004
(in thousands)
1 Year After 1 Year 5 to 10 Over
and Less Thru 5 Years Years 10 Years
Agencies
Fair Value 1,985 1,499 6,017 13,815
Book Yield 2.547 3.170 4.410 4.350
Taxable Municipals
Fair Value 912 1,125 171 44
Book Yield 6.189 5.725 4.640 4.910
Municipals
Fair Value 7,300 17,621 10,994 14,820
Book Yield 3.920 3.339 4.090 4.820
Equity-FHLB 0 0 0 1,005
Book Yield 2.440
Other Securities 0 0 0 254
MBS
Fair Value 0 0 0 22,419
Book Yield 5.014
Total Fair Values 10,197 20,245 17,182 52,357
Weigh Bk Yields 3.816 3.527 4.198 4.765
Table 11 - Securities Weighted Maturity and Tax Equivalent Yield by Classification
December 31, 2004
Weighted
Weighted Tax-Equivalent
Maturity Yield
U. S. Agencies 10.22 Yrs 4.060%
Mortgage Backed 3.28 Yrs 4.780%
Taxable Municipals 2.25 Yrs 5.830%
Tax-Exempt Municipals 6.79 Yrs 5.890%
Total Securities Portfolio 7.54 Yrs 5.048%
The weighted tax-equivalent yields reflected in the table above were calculated using amortized costs and a tax rate of 34%.
The securities portfolio carries varying degrees of risk. Investments in U. S. Treasury and U. S. Agency securities have little or no credit risk. Mortgage-backed securities are substantially issues of federal agencies. Obligations of states and political subdivisions are the areas of highest potential credit exposure in the portfolio. This risk is minimized through the purchase of high quality investments. When purchased, obligations of states and political subdivisions and corporate bonds must have a credit rating by Moody’s or Standard and Poor’s of “A” or better. The risk of non-rated municipal bonds is minimized by limiting the amounts invested in local issues. Management believes the non-rated securities are of high equality. No securities of an individual issuer exceeded 10% of Security Capital Corporation’s shareholders’ equity as of December 31, 2004. Security Capital Corporation does not use off-balance sheet derivative financial instruments as defined in Statement of Financial Accounting Standards No. 119, “Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments.”
Though earning assets increased from 2000 through 2002, the security portfolio balances were not reciprocal as when securities matured the proceeds during those years funded the increase in the loan portfolio. In 2003 and 2004, the securities investment was increased by approximately $21 million as investment decisions favored securities investments when adequate loan funding was maintained.
DepositsSecurity Capital Corporation offers a wide variety of deposit services to individual and commercial customers, such as non-interest-bearing and interest-bearing checking accounts, savings accounts, money market deposit accounts, and time deposit. The deposit base provides the major funding source for earning assets. Total average deposits have shown steady growth over the past few years. Time deposits continue to be the largest single source of Security Capital Corporation’s deposit base.
A five year schedule of average balances of deposits by type is presented in Table 12. Also, the maturities of time deposits greater than $100,000 is presented in Table 13.
Table 12 - Deposit Information
(in thousands)
2004 2003 2002 2001 2000
Average Avg Average Avg Average Avg Average Avg Average Avg
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
Noninterest- Bearing
Demand 51,557 47,034 41,552 38,736 42,321
Savings 241 226 213 181 205
Interest-bearing
Demand 123,215 1.04 93,409 1.00 79,950 1.34 70,591 2.39 73,049 3.14
Savings 26,663 1.05 22,780 1.13 18,127 1.58 16,097 2.01 16,560 2.03
------- ------- ------- ------- -------
Time Deposits 114,125 1.95 114,998 2.11 110,189 2.67 114,704 4.73 103,388 5.52
------- ------- ------- ------- -------
315,801 278,447 250,031 240,309 235,523
======= ======= ======= ======= =======
Table 13 - Maturity Ranges of Time Deposits
With Balances More Than $100,000
As of December 31, 2004
(in thousands)
3 Months or Less $22,198
Over 3 Months thru 6 Months 7,271
Over 6 Months thru 12 Months 10,501
Over 12 Months 8,714
-------
48,684
=======
Security Capital Corporation in its normal course of business will acquire large certificates of deposit (time deposits), generally from public entities that exhibit a variety of maturities. These funds are acquired on a bid basis and are considered to be part of the deposit base of Security Capital Corporation.
BorrowingsAside from the core deposit base and large denomination certificates of deposit mentioned above, the remaining funding sources include short-term and long-term borrowings. As of December 31, 2004, Security Capital Corporation’s short-term borrowings consisted of $1,497,000 of the Treasury Tax and Loan open-end note and $8,634,000 borrowed from the Federal Home Loan Bank. As of December 31, 2003, Security Capital Corporation’s short-term borrowings consisted only of $930,000 in the Treasury, Tax and Loan open-end note and $8,237,000 borrowed from the Federal Home Loan Bank. As of December 31, 2002, Security Capital Corporation had $9,613,000 in borrowings from the Federal Home Loan Bank and $316,000 in Treasury, Tax and Loan open-end note. Security Capital Corporation foresees short-term borrowings to be a continued source of liquidity and will continue to use these borrowings as a method to fund short-term needs.
Security Capital Corporation at the end of 2004 had long-term debt in the amount of $8,634,272 with scheduled principal payments of $370,787 due to the Federal Home Loan Bank in 2005. The rates on the debt with Federal Home Loan Bank as of December 31, 2004 ranged from 2.335% to 6.575% with the maturities ranging to 2024. The maximum month-end balance during 2004 with Federal Home Loan Bank occurred at the end of the year with the balance of $8,634,272. For 2004, the average outstanding long-term balance was $7,694,000 for debt with Federal Home Loan Bank.
Liquidity management is the process by which Security Capital Corporation ensures that adequate liquid funds are available to meet financial commitments on a timely basis. These commitments including honoring withdrawals by depositors, funding credit obligations to borrowers, servicing long-term obligations, making shareholder dividend payments, paying operating expenses, funding capital expenditures and maintaining reserve requirements. Interest rate risk is the exposure to Corporation earnings and capital from changes in future interest rates. All financial institutions assume interest rate risk as an integral part of normal operations. Managing and measuring the interest rate risk is the process that ranges from reducing the exposure of Security Capital Corporation’s interest margin regarding swings in interest rates assuring that there are sufficient capital and liquidity to support future balance sheet growth.
Liquidity risk is the risk to a bank’s earnings and capital arising from its inability to meet obligations when they come due without incurring losses. Bank management must ensure that sufficient funds are available at a reasonable cost to meet potential demands from both funds providers and borrowers.
Security Capital Corporation addresses short–term liquidity from both an asset liquidity and a liability liquidity viewpoint. Short-term asset liquidity is provided by money market assets, the investment portfolio, and readily saleable bank assets. Short-term liability liquidity is measured by the liabilities considered to be more volatile in nature and more likely to be sensitive to changes in interest rates. Short-term liquidity is monitored thru the asset/liability reports in a measure of a coverage ratio and a crisis coverage ratio. These ratios measure the ability of the bank to raise cash quickly and how many times this cash will cover volatile liabilities. For December 31, 2004, the coverage ratio was 5.03X - - which was in compliance of the policy limit of 1X. Of this ratio, the calculated reserves or the source for cash was $85.7 million which would be needed to meet the demand of the identified volatile liabilities and unused loan commitments of $17 million and $12.6 million, respectively. The crisis ratio looks at the coverage of volatile liabilities under a scenario where cash is needed immediately. The crisis ratio for December 31, 2004 was 1.97X, adequately within the policy limit of .50X. The identified reserves for a crisis ratio totaled $67 million and the volatile liabilities and unused loan commitments totaled $55 million. Additionally, the bank monitors liquidity by looking at the ratio of cash and short-term investments versus non-core funding. The liquidity ratio for December 31, 2004 was in compliance with the policy limit of 15% with a ratio of 22.58%. This ratio measures the net cash and short-term marketable assets of $60 million to the net deposits and short-term liabilities of $266 million. The corporation’s dependency ratio complied with policy with a ratio of 1.97% at December 31, 2004. This ratio measures the net volatile liabilities to the earning assets less short-term investments.
Long-term liquidity is the ability of the bank to maintain its reputation in the market and to produce an acceptable return to its shareholders. Adverse effects of reputation deterioration could cause depositors and other funds providers as well as investors, to seek higher compensation and negatively impact the bank’s earnings and capital. If negative public opinion occurred, withdrawals of funding could become debilitating. The bank will take steps to minimize its reputation risk and the potential impact on liquidity. One step is to monitor its reliance on credit-sensitive funding. Another issue that is monitored is asset growth. Strategic consideration will be given to the development of new business. A significant component of reputation risk is the underlying credit underwriting process of the financial institution. Continued stringent underwriting standards for both existing and for new business will be employed. Additionally, concentrations of credit will be closely monitored.
At December 31, 2004, we had outstanding loan origination commitments and unused commercial and commercial and retail lines of credit of $41.9 million. Letters of credit commitments totaling $15.7 million consisted of financial standby letters of credit of $10.4 million, performance standby letters of credit of $768 thousand and commercial letters of credit of $4.5 million. We anticipate that we will have sufficient funds available to meet current origination and other lending commitments. As a contingency plan for significant funding needs, the Asset/Liability Management Committee may also consider the sale of securities, sale of loans and/or the temporary curtailment of lending activities. Certificates of deposit that are scheduled to mature within one year totaled approximately $82.9 million at December 31, 2004. We expect to retain a substantial majority of these certificates of deposit.
The asset/liability committee is responsible for managing liquidity issues and interest rate risk, among other matters. Various interest rate movements are factored into a simulation model to assist the asset/liability committee in assessing interest rate risk. The committee analyzes the results of the simulation model to formulate strategies to effectively manage the interest rate risk that may exist.
The liquidity of Security Capital Corporation is dependent on the receipt of dividends from First Security Bank. Management expects that in the aggregate, First Security Bank will continue to have the ability to provide adequate funds to Security Capital Corporation.
The Interest Rate Risk Management System is comprised of six different steps. They are: Board Oversight; Senior Management Oversight; Risk Limits and Controls; Risk Identification and Measurement; Risk Monitoring and Reporting; and Independent Review. A strategic plan highlighting risk tolerance levels is established and monitored by the Board. Senior management implements the strategic plan of goals, objectives and risk limits. Risk limits are set for Earnings at Risk, Gap Analysis, Economic Value and Value at Risk. The status of liquidity and rate sensitivity is forecasted in a quarterly report, Asset/Liability Performance Analysis which is provided by an independent outside organization. The resulting analysis report notifies Security Capital Corporation of compliance with the limitations/goals established by Security Capital Corporation and regulatory agencies as well as projecting a flat rate scenario where rates do not change from the starting point of the analysis, the scenario of rates increasing by 200 and 300 basis points and the scenario of rates decreasing by 200 or 300 basis points.
The areas of interest rate risk which Security Capital Corporation is susceptible are Repricing Risk, Option Risk and Yield Curve/Basis Risk. Repricing Risk is the difference in the timing of the assets and the liabilities due to either maturities or repricing within a certain time frame. Option Risk is the interest rate related options embedded in the bank’s assets and liabilities which change the cash flow characteristics of the assets and liabilities. Yield Curve/Basis Risk are the changes in the relationship between different interest rates with the same maturity or interest rates across a maturity spectrum which create compression or expansion of net interest margins.
Gap Analysis is the analytical tools that places maturing and repricing assets and liabilities into time buckets to measure the short and long term pricing imbalances for a given period. The broad guidelines set by Security Capital Corporation for this measure are set in time frames of three months, six months, and twelve months with a +/- cumulative gap position limit of 30%. Earnings at Risk (EAR), another analysis tool, is considered management’s best source of managing short-term interest rate risk (in a one-year time frame.) The EAR variance is the percentage change in net interest income over 12 months relative to the base case scenario (with rates being flat) for a +/- instantaneous parallel movement. The first limit or level is set at 10% of net interest income which will serve as a warning to management. The second level of 15% represents a risk earnings and is not acceptable to management. When this occurs, an explanation of the variance is reported to Asset/Liability Committee and to the Board of Directors with an action plan to decrease the variance. Among the possible actions are loan sales, use of FHLB borrowings and investment portfolio restructuring. Economic Value of Equity is the tool for measuring long-term interest rate risk. This tool measures the long-term safety and soundness of the institution being compromised for the sake of short-term results. The two limits of Economic Value of Equity are level I designated having a variance of 30-39% and level II designated having a variance of 40% or higher and uses the same concern or action level as for Earnings at Risk
The analysis performed using December 31, 2004 data projecting for the period ending December 31, 2005 reflected the net interest income at $16.3 million. There were no exceptions to policy for the 12 month period. Return on Assets and Return on Equity at 1.35% and 12.31%, respectively, compare to December 31, 2004 actuals at 1.65% and 14.22%, respectively. Historical comparison of the analysis show a third quarter (2004) of 1.65% Return on Assets and 13.45% Return on Equity. The model for December 31, 2004 shows asset sensitivity as rates ramp up. The net interest income increases 1.74% in the 200 ramp up and 3.42% in the up 300 ramp. Economic Value of Equity increased 10.12% in the up 200 ramp. The down 200 ramp results in a decrease to net interest income of 3.32% which is well within the policy limit of 10%. As rates move down 100 basis points we see a decrease in net interest income of 1.87% . The recommendations from the analysis is to move available funds from Fed Funds (a “waiting on the Fed” strategy) to a one time callable agency security to minimize the extension exposure.
First Security Bank’s source of funding is predominantly core deposits consisting of both commercial and individual deposits, maturities of securities, repayments of loan principal and interest, federal funds purchased, and long-term borrowings from the FHLB. With the deposit base being diversified between individual and commercial accounts, First Security Bank avoids dependence on large concentrations of funds. Security Capital Corporation does not solicit certificates of deposit from brokers. The primary sources of liquidity on the asset side of the balance sheet are federal funds sold and securities classified as available for sale. Most of the investment securities portfolio are classified in the available for sale category and are subject to be sold should liquidity needs arise.
Along with the cash provided by operations of $5.5 million in 2002, the cash available for use was provided by an increase of deposits of $30 million and a net increase of borrowings of $2.8 million. These funds were used to provide for an increase in loan demand of $17.6 million, the increase of an investment of $12.4 million in securities, the paying of a cash dividend of $2 million, the increase of $8.6 million in federal funds sold, the addition of buildings and equipment of $1.6 million and the purchase of bank owned life insurance of $3 million.
In 2003, funds available for use were basically provided by net income adjusted for non-cash transactions for a total of $6.9 million, maturities and calls of securities of $47 million, long-term debt advances of $3.3 million and withdrawal of certificates of deposits of $1.3 million. The major use of the funds provided were to invest $52.8 million in securities and $16.9 million in loans. Further funding was provided by the increase of deposits of $22.8 million. Other cash uses during 2003 were to fund the cash dividends paid on common stock ($2.2 million) and to retire debt of $4 million.
In 2004, the funds provided by operation activities totaled $6.4 million. The funds available from operations, maturities, calls and sales of securities of $36 million, and increases in deposits of $45 million were used to invest in securities of $59 million and in loans of $30 million. Other major uses of funds were cash dividends of $2.5 million and investment in buildings and locations of $2.9 million.
Table 14 - Funding Uses and Sources details the main components of cash flows for 2002 thru 2004.
Table 14 - Funding Uses and Sources
(in thousands)
2004 2003 2002
Increase Increase Increase
Average (Decrease) % Average (Decrease) % Average (Decrease) %
Balance Amount Change Balance Amount Change Balance Amount Change
Funding Uses
Loans 221,309 23,495 11.88 197,814 18,519 10.33 179,295 1,032 0.58
Securities* 96,219 10,637 12.43 85,582 19,164 28.85 66,418 15 0.02
Federal Funds Sold 4,488 -924 -17.07 5,412 -496 -8.40 5,908 1,153 24.25
322,016 33,208 11.50 288,808 37,187 14.78 251,621 2,200 0.88
Funding Sources
Noninterest Bearing Deposits
Demand Deposits 51,557 4,523 9.62 47,034 5,482 5482.00 41,552 2,816 7.27
Savings Deposits 241 15 6.64 226 13 6.10 213 32 17.68
Interest Bearing Deposits
Demand Deposits 123,215 29,806 31.91 93,409 13,459 16.83 79,950 9,359 13.26
Savings Deposits 26,663 3,883 17.05 22,780 4,653 25.67 18,127 2,030 12.61
Time Deposits 114,125 -873 -0.76 114,998 4,809 4.36 110,189 -4,515 -3.94
Borrowings 8,727 -118 -1.33 8,845 -1,589 -15.23 10,434 2,281 27.98
324,528 37,236 12.96 287,292 26,827 10.30 260,465 12,003 4.83
*Cost basis is used for
securities instead of
market values.
Table 15 - Liquidity and Interest Rate Sensitivity reflects interest earning assets and interest-bearing liabilities by maturity distribution. Product lines repricing in time periods predetermined by contractual agreements are included in the respective maturity categories.
Table 15 - Liquidity; Interest Rate Sensitivity
(in thousands)
As of December 31, 2004
Less Over 3 Mos Over 1 yr Over
3 Mos thru 1 Yr thru 3 Yrs 3 Yrs Total
Interest Earning Assets
Loans 120,892 28,504 39,388 45,619 234,403
Short-Term Investments 14,591 - - - 14,591
Investment Securities 24,432 25,530 18,404 31,612 99,978
Other - - - 3,902 3,902
Total Interest Earning Assets 159,915 54,034 57,792 81,133 352,874
Interest Bearing Liabilities
NOW 18,301 - 6,061 48,679 73,041
Money Market 23,725 - 4,271 34,439 62,435
Savings Deposits 10,798 - 1,989 15,629 28,416
Time Deposits 39,909 42,954 26,426 6,775 116,064
Short-Term Borrowings 1,497 - - - 1,497
Long-Term Borrowings 71 300 1,800 6,463 8,634
Total Interest Bearing Liabilities 94,301 43,254 40,547 111,985 217,046
Rate Sensitive Assets (RSA) 159,915 213,949 271,741 352,874 352,874
Rate Sensitive Liabilities (RSL) 94,301 137,555 178,102 290,087 290,087
Rate Sensitive Gap 65,614 10,780 17,245 -30,852 135,828
Rate Sensitive Cumulative Gap 65,614 76,394 93,639 62,787 135,828
Cumulative % of Earning Assets 18.59% 21.65% 26.54% 17.79% 38.49%
Cumulative % of Total Assets 19.28% 22.45% 27.52% 18.45% 39.92%
Interest rate risk can also be measured by analyzing the extent to which the repricing of assets and liabilities are mismatched to create an interest sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time period. The interest rate sensitivity gap is defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, therefore, a negative gap would tend to adversely affect the net interest income. Conversely, during a period of falling interest rates, a negative gap position would tend to result in an increase in net interest income.
As of December 31, 2004, Security Capital Corporation had a positive gap of 14.60% in a 12 month time frame in a rate ramp of 200, well within the policy of a +/- 35.
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates. Additionally, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Therefore, we do not rely solely on a gap analysis to manage our interest rate risk, but rather we use what we believe to be the more reliable simulation model - relating to changes in net interest income.
Based on simulation modeling at December 31, 2004 and December 31, 2003, our net interest income would change over a one-year time period due to changes in interest rates as follows:
Table 15A - Change in Net Interest Income Over One Year Horizon
(Dollars in Thousands)
at December 31, 2004 at December 31, 2003
----------------------------------------------------
Dollar % Dollar %
Changes in Levels of Interest Rates Change Change Change Change
----------------------------------------------------
Increase 2.00% $285 1.74% $418 3.15%
Increase 1.00% 185 1.13% 195 1.47%
Decrease 1.00% -306 -1.87% -243 -1.83%
Decrease 2.00% -542 -3.32% -439 -3.31%
Analysis of the simulation presented indicates as of December 31, 2003 there is little short term interest rate risk as the projected decrease in net interest income would be limited to 3.31% in a down 200 basis point rate ramp. As of December 31, 2004, the asset sensitivity is evident as reflected in the projected 1.74% increase in the up 200 ramp. The down 200 ramp as of December 31, 2004 results in a decrease to net interest income of 3.32%, well within the policy limit of (10%).
Capital AdequacySecurity Capital Corporation and First Security Bank are subject to various regulatory capital guidelines as required by federal and state banking agencies, as discussed in greater detail under Item 1 hereof. These guidelines define the various components of core capital and assign risk weights to various categories of assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires federal regulatory agencies to define capital tiers. These are: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under these regulations, a “well-capitalized” institution must achieve a Tier I risk-based capital ration of at least 6.00%, and a total capital ratio of at least 10.00%, and a leverage ratio of at least 5.00% and not be under a capital directive order. Failure to meet capital requirements can initiate regulatory action that could have a direct material effect on Security Capital Corporation’s financial statements. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions, asset growth and expansion is limited, in addition to the institution being required to submit a capital restoration plan.
Management believes Security Capital Corporation and First Security Bank meet all the capital requirements as of December 31, 2004, as noted below in Table 16 - Capital Ratios, and is well-capitalized under the guidelines established by the banking regulators. To be well-capitalized, Security Capital Corporation and First Security Bank must maintain the prompt corrective action capital guidelines described above.
Security Capital Corporation increased the amount of dividends paid to $2,484,937 in 2004 compared to $2,243,187 in 2003, an increase of $241,750 or 10.78%.
Table 16 - Capital Ratios
(Dollars in thousands)
As of December 31,
2004 2003 2002
Tier 1 Capital
Total Tier 1 Capital 39,486 35,690 32,496
Total Capital
Tier 1 Capital 39,486 35,690 32,496
Allowable Allowance for Loan Losses 3,373 2,940 2,738
Total Capital 42,859 38,630 35,234
Risk Weighted Assets
Net Average Assets 378,931 334,653 313,327
Total Risk Weighted Assets 271,296 234,441 218,436
Risk Based Ratios
Tier 1 Leverage Ratio 10.42 10.79 10.50
Tier 1 Risk Based Capital Ratio 14.55 15.22 14.88
Total Risk Based Capital Ratio 15.80 16.48 16.13
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements existing at December 31, 2004.
Tabular Disclosure of Contractual Obligations
(in thousands) Payment due by period
- --------------------------------- ------------------------------------------------------------------------------
Contractual Obligations Less than 1-3 years 3-5 years More than
Total 1 year 1-3 years 3-5 years 5 years
- --------------------------------- ------------------------------------------------------------------------------
Long-Term Debt Obligations 8,634 371 1,800 2,883 3,580
Capital Lease Obligations 0 0 0 0 0
Operating Lease Obligations 29 10 19 0 0
Purchase Obligations 0 0 0 0 0
Other Long-Term Liabilities 0 0 0 0 0
Reflected on the Registrant's
Balance Sheet under GAAP
Total 8,663 381 1,819 2,883 3,580
Market risk is the potential of loss arising from adverse changes in interest rates and prices. The Company is exposed to market risk as a consequence of the normal course of conducting its business activities. Financial products that expose the Company to market risk include investment securities, loans, deposits and debt. The Company’s market risk management process involves measuring, monitoring, controlling and managing risks that can significantly impact the Company’s financial position and operating results. In this management process, market risks are balanced with expected returns in an effort to enhance earnings performance and shareholder value, while limiting the volatility of each.. Normal business transactions expose the Company’s balance sheet profile to varying degrees of market risk. The Company’s primary market risk exposure is interest rate risk. A key element in the process of managing market risk involves oversight by senior management and the Board of Directors as to the level of such risk assumed by the Company in its balance sheet. The Board of Directors reviews and approves risk management policies, including risk limits and guidelines and delegates oversight functions to the Asset Liability Management Committee (“ALCO”). The ALCO, consisting of senior business and finance officers, monitors the Company’s market risk exposure and as market conditions dictate, modifies balance sheet positions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA(To be imported)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENot Applicable
ITEM 9A. CONTROLS AND PROCEDURESAs defined by the Securities and Exchange Commission in Exchange Act Rules 13a-15(e), a company’s “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.
As of December 31, 2004 (the “Evaluation Date”), the Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in the Exchange Act Rules. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are sufficiently effective to ensure that material information relating to the Company and required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.
Changes in Internal ControlsSubsequent to the Evaluation Date, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls.
ITEM 9B. OTHER INFORMATIONNot Applicable
Included under the heading “Information Concerning Nominees and Directors” in the Company’s Proxy Statement dated April 8, 2005 and incorporated by reference herein.
The Company’s Board of Directors has adopted a Code of Ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions. A copy of this Code of Ethics can be found at the Company’s internet website at www.firstsecuritybk.com. The Company intends to disclose any amendments to its Code of Ethics, and any waiver from a provision of the Code of Ethics granted to the Company’s principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions, on the Company’s internet website within five business days following such amendment or waiver. The information contained on or connected to the Company’s internet website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we file with or furnish to the SEC.
ITEM 11. EXECUTIVE COMPENSATIONIncluded under the heading “Executive Compensation” in the Company’s Proxy Statement dated April 8, 2005 and incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND RELATED STOCKHOLDER MATTERSIncluded under the heading “Security Ownership of Certain Beneficial Owners and Management” in the Company’s Proxy Statement dated April 8, 2005 and incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSIncluded under the heading “Certain Relationship and Related Transactions” in the Company’s Proxy Statement dated April 8, 2005 and incorporated by reference herein.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESIncluded under the heading “Independent Public Accountants and Fees” in the Company’s Proxy Statement dated April 8, 2005 and incorporated by reference herein.
PART IVThe following financial statements included under the heading “Financial Statements and Supplementary Data” are included in this report:
(a) Independent Auditors' Report
Reports on Form 8-KNone.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Security Capital Corporation
Date: March 30, 2005 By /s/ Frank West
-------------------------------------------
Frank West, Chief Executive Officer
Date: March 30, 2005 By /s/ Connie Hawkins
-------------------------------------------
Connie Hawkins, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated:
DATE: March 30, 2005
-----------------------
/s/ Larry Pratt , Director
DATE: March 30, 2005
-----------------------
/s/ Frank West , Director
DATE: March 30, 2005
-----------------------
/s/ John Mothershed , Director
DATE: March 30, 2005
-----------------------
/s/ Joe Brown , Director
DATE: March 30, 2005
-----------------------
/s/ Ben Smith , Director
DATE: March 30, 2005
-----------------------
/s/ G. E. McKittrick , Director
DATE: March 30, 2005
-----------------------
/s/ Will Hays , Director
DATE: March 30, 2005
-----------------------
/s/ Steve Ballard , Director
DATE: March 30, 2005
-----------------------
/s/ Tony Jones , Director
EXHIBIT INDEX
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Financial Statements and Schedules
The following Consolidated Financial Statements of Security Capital Corporation are included in Item 8
of this report:
Consolidated Statements of Income--Years ended December 31, 2004, 2003, and 2002
Consolidated Balance Sheets--December 31, 2004 and 2003
Consolidated Statements of Shareholders' Equity--Years ended December 31, 2004, 2003, and 20021
Consolidated Statements of Cash Flows--Years ended December 31, 2004, 2003, and 2002
Notes to Consolidated Financial Statements
All other schedules to the Consolidated Financial Statements stipulated by Article 9 of Regulation S-X and all
other schedules to the financial statements of the registrant required by Article 5 of Regulation S-X are not
required under the related instructions or are inapplicable and, therefore, have been omitted.
31.1 Certification of Annual Report on Form 10-K pursuant to Rule 13a-14(a) by Chief Executive Officer
and President
31.2 Certification of Annual Report on Form 10-K pursuant to Rule 13a-14(a) by Chief
Financial Officer, Cashier and Executive Vice-President.
32.0 Certification of Annual Report on Form 10-K pursuant to 18 U. S. C. Section 1350 and Rule 13a-14(b)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Security Capital Corporation
We have audited the accompanying consolidated balance sheets of Security Capital Corporation and subsidiaries as
of December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in all material respects, the
consolidated financial position of Security Capital Corporation and subsidiaries as of December 31, 2004 and
2003, and the consolidated results of their operations and their cash flows for each of the three years in the
period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States
of America.
/s/ T. E. LOTT & COMPANY
Columbus, Mississippi
January 19, 2005