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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-16120
SECURITY FEDERAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 57-08580504
(State or other jurisdiction of (I.R.S. Employer incorporation
or organization) Identification No.)
1705 Whiskey Road South, Aiken, South Carolina 29803
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 641-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [x] NO [ ]
Indicate by check mark whether disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B is not contained herein, and will not
be contained, to the best of the Registrant's knowledge, in definitive proxy
or other information statements incorporated by reference in Part III of this
Form 10-KSB or any amendments to this Form 10-KSB. [X]
The registrant's revenues for the fiscal year ended March 31, 1996
were $17,290,356.
As of June 14, 1996, there were issued and outstanding 413,184 shares
of the registrant's Common Stock. The aggregate market value of the voting
stock held by non-affiliates of the registrant, computed by reference to the
average of the bid and asked price of such stock as of June 14, 1996, was $8.3
million. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the registrant that
such person is an affiliate of the registrant).
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-KSB - Proxy Statement for 1996 Annual Meeting of
Shareholders.
Transitional Small Business Disclosure Format (check one) Yes No X
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PART I
Item 1. Business
Security Federal Corporation
Security Federal Corporation (the "Company") was incorporated under the
laws of the State of Delaware in July 1987 by authorization of the Board of
Directors of Security Federal Savings Bank of South Carolina ("Security
Federal" or the "Bank") for the purpose of becoming a savings and loan holding
company that acquired all of the outstanding stock of Security Federal issued
upon the conversion of Security Federal from the mutual to the stock form (the
"Conversion"). Effective April 8, 1996, the Bank changed its name to Security
Federal Bank.
As a Delaware corporation, the Company is authorized to engage in any
activity permitted by Delaware General Corporation Law. The Company is a
unitary savings and loan holding company. Through the unitary holding company
structure, it is possible to expand the size and scope of the financial
services offered beyond those currently offered by the Bank. The holding
company structure also provides the Company with greater flexibility than the
Bank would have to diversify its business activities, through existing or
newly formed subsidiaries, or through acquisitions or mergers of stock thrift
institutions as well as other companies. Although there are no current
arrangements, understandings or agreements regarding any such acquisition, the
Company is in a position to take advantage of any favorable acquisition
opportunities that may arise. Future activities of the Company, other than
the continuing operations of Security Federal, will be funded through
dividends from Security Federal and through borrowings from third parties.
See "Regulation -- Savings and Loan Holding Company Regulation" and
"Taxation." Activities of the Company may also be funded through sales of
additional securities or income generated by other activities of the Company.
At this time, there are no plans regarding such activities.
At March 31, 1996, the Company had assets of approximately $214.8
million, deposits of approximately $172.4 million and shareholders' equity of
approximately $15.4 million.
The executive office of the Company is located at 1705 Whiskey Road
South, Aiken, South Carolina 29803, telephone (803) 641-3000.
Security Federal Bank
General. Security Federal, a federally chartered stock savings bank, is
headquartered in Aiken, South Carolina. Security Federal, which has ten branch
offices in Aiken and Bamberg counties, was originally chartered under the name
Aiken Building and Loan Association on March 27, 1922. The association
received its federal charter and changed its name to Security Federal Savings
and Loan Association of Aiken on March 7, 1962, and later changed its name to
Security Federal Savings Bank of South Carolina, on November 11, 1986. The
Bank converted from the mutual to the stock form of organization on October
30, 1987. Security Federal increased its branch network to nine in October
1993 with the completion of its acquisition of four former NationsBank of
South Carolina, N.A. branches located in Aiken County. In February 1996,
Security Federal opened a new branch office in the Aiken Walmart Superstore,
which became the Bank's tenth location.
The principal business of Security Federal is the acceptance of savings
deposits from the general public and the origination of mortgage loans to
enable borrowers to purchase or refinance one- to four-family residential real
estate. The Bank also makes loans secured by multi-family residential and
commercial real estate and consumer and commercial loans. In addition, the
Bank originates construction loans on single family residences, multi-family
dwellings and projects, commercial real estate, and loans for the acquisition,
development and construction of residential subdivisions and commercial
projects.
Security Federal's income is derived primarily from interest and fees
earned in connection with its lending activities, and its principal expenses
are interest paid on savings deposits and borrowings and operating expenses.
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Through its wholly owned subsidiary, Security Financial Services
Corporation ("SFSC"), Security Federal has been and is involved in real estate
development activity.
The Aiken area's largest employer, the Savannah River Site, had
significant downsizing of personnel which creates some uncertainty regarding
the local economy. In addition, real estate sales have been slower than in
past years. Management continues to monitor the Bank's allowance for loan
losses for the impact of local economic changes. See "-- Loan Delinquencies
and Defaults."
Lending Activities
General. The primary source of revenue for the Bank is interest and fee
income from lending activities. The principal lending activity of the Bank is
making conventional first mortgage real estate loans to enable borrowers to
purchase or refinance one- to four-family residential real property. The Bank
also makes loans secured by multi-family residential and commercial real
estate and consumer and commercial loans. The Bank continues to emphasize the
origination of adjustable rate residential mortgage loans, subject to market
conditions, for retention in its portfolio. In addition, the Bank originates
construction loans on single family residences, multi-family dwellings and
projects, commercial real estate, and loans for the acquisition, development
and construction of residential subdivisions and commercial projects.
Adjustable rate mortgage loans ("ARMs") have been offered on all types
of properties since 1980 and, at March 31, 1996, constituted approximately
36.9% of the Bank's total outstanding loan portfolio.
The loan-to-value ratio, maturity and other provisions of loans made by
the Bank reflect its policy of making the maximum loan permissible consistent
with applicable regulations, established lending policies and market
conditions. The Bank requires title insurance (or acceptable legal opinions on
smaller loans secured by real estate) and fire insurance, and flood insurance
where applicable, on loans secured by improved real estate.
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Loan Portfolio Composition. The following table sets forth information concerning the composition of
the Bank's loan portfolio in dollar amounts in percentages, by type of loan and by type of security, and
presents a reconciliation of total loans receivable before net items.
At March 31,
1996 1995 1994 1993 1992
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
TYPE OF LOAN:
Fixed Rate Loans
Real Estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential(1).. $ 11,846 7.6% $ 15,998 10.4% $ 16,467 12.3% $ 28,286 25.1% $ 34,968 29.0%
Commercial(2). . 2,280 1.6 2,580 1.7 6,032 4.5 5,822 5.2 4,563 3.8
Total real
estate loans . 14,126 9.2 18,578 12.1 22,499 16.8 34,108 30.3 39,531 32.8
Commercial
business. . . . 15,804 10.2 11,986 7.8 7,258 5.4 1,641 1.5 922 0.8
Consumer(3). . . 22,635 14.6 20,450 13.3 18,347 13.7 9,506 8.4 9,058 7.5
Total fixed
rate loans. . . 52,565 34.0 51,014 33.2 48,104 35.9 45,255 40.2 49,511 41.1
Adjustable rate loans
Real Estate:
Residential(1). . 48,718 31.5 51,004 33.1 32,704 24.4 26,355 23.4 38,350 31.8
Commercial(2) . . 8,350 5.4 10,428 6.8 15,425 11.5 14,087 12.5 9,588 8.0
Total real
estate loans . 57,068 36.9 61,432 39.9 48,129 35.9 40,442 35.9 47,938 39.8
Commercial
business. . . . . 22,960 14.8 17,732 11.5 13,757 10.3 10,425 9.2 7,622 6.3
Consumer(3). . . . 22,175 14.3 23,639 15.4 23,958 17.9 16,567 14.7 15,482 12.8
Total adjustable
rate loans . . . 102,203 66.0 102,803 66.8 85,844 64.1 67,434 59.8 71,042 58.9
Total loans . . 154,768 100.0% 153,817 100.0% 133,948 100.0% 112,689 100.0% 120,553 100.0%
Less
Loans in process . 474 2,419 6,628 4,356 3,461
Deferred fees
and discounts . . 395 466 237 269 236
Allowance for
loan losses . . . 1,759 1,955 1,735 1,191 819
Total loans
receivable . . .$152,140 $148,977 $125,348 $106,873 $116,037
(1) Includes $2.5 million, $2.5 million, $750,477, $378,193 and $1.0
million in multi-family dwellings for fiscal years ended March 31,
1996, 1995, 1994, 1993 and 1992, respectively. Includes residential
construction loans.
(2) Includes acquisition, development and commercial construction loans.
(3) Includes home improvement loans.
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At March 31,
1996 1995 1994 1993 1992
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
TYPE OF SECURITY:
Real Estate Loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential(1). . $ 59,613 38.5% $ 60,528 39.3% $ 38,703 28.9% $ 52,444 46.5% $ 61,816 51.3%
Commercial. . . . 9,977 6.5 11,203 7.3 15,310 11.4 13,052 11.7 11,997 10.0
Construction or
development(2). . 1,604 1.0 8,279 5.4 16,615 12.4 9,054 8.0 13,656 11.3
Total real
estate loans . . 71,194 46.0 80,010 52.0 70,628 52.7 74,550 66.2 87,469 72.6
Commercial
business. . . . . 38,764 25.1 29,718 19.3 21,015 15.7 12,066 10.7 8,544 7.0
Consumer loans:
Deposit account . 1,299 0.8 1,145 0.8 1,565 1.2 618 0.5 1,015 0.9
Home equity . . . 14,767 9.6 16,029 10.4 16,735 12.5 15,621 13.9 14,638 12.1
Home improvement. 18,154 11.7 16,283 10.6 13,796 10.3 4,658 4.1 2,755 2.3
Other . . . . . . 10,590 6.8 10,632 6.9 10,209 7.6 5,176 4.6 6,132 5.1
Total consumer
loans. . . . . 44,810 28.9 44,089 28.7 42,305 31.6 26,073 23.1 24,540 20.4
Total loans . 154,768 100.0% 153,817 100.0% 133,948 100.0% 112,689 100.0% 120,553 100.0%
Less:
Loans in process . 474 2,419 6,628 4,356 3,461
Deferred fees
and discounts. . 395 466 237 269 236
Allowance for
loan losses. . . 1,759 1,955 1,735 1,191 819
Total loans
receivable . . $152,140 $148,977 $125,348 $106,873 $116,037
(1) Includes $2.5 million, $2.5 million, $750,477, $378,193 and $1.0 million in multi-family dwellings
for fiscal years ended March 31, 1996, 1995, 1994, 1993 and 1992, respectively.
(2) Includes residential and commercial real estate construction and development loans.
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The following schedule illustrates the interest rate sensitivity of
Security Federal's loan portfolio at March 31, 1996. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
when the contract is due. This schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
At March 31, 1996
Real Estate
Commercial
Residential(1) Commercial Consumer(2) Business Total
(Dollars in Thousands)
Six months or
less(3). . . . . . $ 1,356 $ 678 $ 4,246 $ 4,925 $11,205
Over six months
to one year. . . . 1,459 717 3,475 8,872 14,524
Over one year
to three years . . 1,831 1,022 11,318 11,411 25,582
Three to five
years. . . . . . . 2,117 2,192 11,828 7,996 24,133
Over five to ten
years . . . . . . 5,861 3,369 7,352 5,299 21,881
Over ten to
twenty years . . . 24,088 2,652 6,591 260 33,591
More than twenty
years . . . . . . 23,378 -- -- -- 23,738
Total(4). . . . $60,090 $10,630 $44,810 $38,764 $154,294
(1) Includes multi-family dwellings.
(2) Includes home improvement loans and equity line of credit loans.
(3) Includes demand loans, loans having no stated maturity and overdraft
loans
(4) Loan amounts are net of undisbursed funds for loans in process of
$474,000.
The total amount of loans due after March 31, 1997, which have
predetermined interest rates is $38.5 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $90.0
million.
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Loan Originations, Purchases and Sales. The following table shows the
loan origination, purchase, sale and repayment activities of the Bank for the
periods indicated.
Year Ended March 31,
1996 1995 1994 1993 1992
(In Thousands)
Originated(1):
Real estate:
Adjustable rate - residential. . $ 3,684 $28,608 $ 9,485 $ 1,229 $4,863
Adjustable rate - commercial . . -- 187 5,145 3,821 6,123
Total adjustable rate. . . . . 3,684 28,795 14,630 5,050 10,986
Fixed rate - residential . . . . 5,332 4,729 49,966 55,188 28,206
Fixed rate - commercial. . . . . -- -- -- 1,209 250
Total fixed rate . . . . . . . 5,332 4,729 49,966 56,397 28,456
Non-real estate:
Consumer . . . . . . . . . . . . $16,994 $18,362 6,205 6,199 7,610
Commercial business. . . . . . . 27,465 25,529 10,626 7,290 6,660
Total non-real estate . . . . 44,459 43,891 16,381 13,489 14,270
Total loans originated. $53,475 $77,415 $81,427 $74,936 $53,712
Loans acquired in acquisition:
Non-real estate:
Consumer . . . . . . . . . . . . $ -- $ -- $13,507 $ -- $ --
Commercial business. . . . . . . -- -- 2,717 -- --
Total loans acquired. . . . . $ -- $ -- $16,224 $ -- $ --
Sold(1):
Fixed rate:
Real estate - residential. . . . $ 5,496 $ 3,090 $47,651 $50,439 $20,047
Adjustable rate:
Real estate - residential. . . -- 4,450 -- -- --
Principal repayments . . . . . . 42,604 42,396 34,309 34,962 30,543
Increase (decrease) in other
items, net. . . . . . . . . . (2,212) (3,760) 2,784 1,300 541
Net increase (decrease). . . . . 3,163 $23,629 $18,475 $(9,165) $3,663
(1) Does not include loans in the amount of $6.9 million, $8.4 million,
$17.4 million, $12.4 million and $17.7 million that were originated with prior
commitments to be purchased by institutional investors and sold during the
fiscal years ended March 31, 1996, 1995, 1994, 1993 and 1992, respectively.
In addition to interest earned on loans, the Bank receives loan
origination fees or "points" for originating loans. Loan points are a
percentage of the principal amount of the mortgage loan which are charged to
the borrower for the creation of the loan.
The Bank's loan origination fees generally range from 1% to 2% on
conventional residential mortgages, commercial real estate loans and
commercial business loans. The total fee income (including amounts amortized
to income as yield adjustments) for the fiscal year ended March 31, 1996 was
$304,575.
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Loan origination and commitment fees are volatile sources of income.
Such fees vary with the volume and type of loans and commitments made and
purchased and with competitive conditions in mortgage markets, which in turn
are governed by the demand for and availability of money.
The following table shows deferred loan origination fees recognized as
income by the Bank expressed as a percentage of the dollar amount of total
mortgage loans originated (and retained in the Bank's portfolio) and purchased
during the periods indicated and the dollar amount of deferred loan
origination fees at the end of each respective period.
At or for the Year Ended March 31,
1996 1995 1994
(Dollars in Thousands)
Deferred loan origination fees/expense
earned during the period(1) . . . . $102,906 $126,815 $317,502
Mortgage loan origination fees earned
as a percentage of total
loans originated during the period. . 1.1% 0.4% 0.5%
Deferred loan origination fees/expense
in loan portfolio at end
of period . . . . . . . . . . . . . . $394,768 $466,250 $236,649
(1) Includes amounts amortized to interest income as yield adjustments.
Does not include fees earned on loans sold.
The Bank also receives other fees and charges related to existing loans,
conversion fees, assumption fees, late charges, and other fees collected in
connection with a change in borrower or other loan modifications.
Security Federal currently sells substantially all conforming fixed-rate
loans with terms of 15 years or greater in the secondary mortgage market.
These loans are sold in order to provide a source of funds and as one of the
strategies available to close the gap between the maturities of its
interest-earning assets and interest-bearing liabilities. Currently, most
fixed-rate, long-term mortgage loans are being originated based on Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") underwriting standards.
Secondary market sales have been made primarily to the FHLMC or FNMA
and, to a lesser extent, other savings and loan associations, banks, and other
investors. The FHLMC and FNMA are quasi-governmental agencies that purchase
residential mortgage loans from federally insured financial institutions and
certain other lenders. All loans sold were sold without recourse to Security
Federal. Security Federal ordinarily retains the servicing of the loans
(i.e., collection of principal and interest payments), for which it generally
recognizes a fee of 1/4 to 1/2 of one percent per annum of the unpaid
principal balance of each loan. At March 31, 1996, Security Federal serviced
approximately $153.3 million in mortgage loans, including approximately $93.3
million which the Bank serviced for others.
At March 31, 1996, the Bank held $612,919 of loans for sale. All of
such loans were originated for other financial institutions based upon prior
commitments to purchase the loans at a set price. As a result, these loans
present no market risk to Security Federal. These loans are normally
delivered and paid for within 30 days after the date of closing.
The Bank actively solicits mortgage loan applications from existing
customers, real estate agents, builders, real estate developers and others.
The Bank also receives mortgage loan applications as a result of customer
referrals and from walk-in customers.
Detailed loan applications are obtained to determine the borrower's
creditworthiness and ability to repay, and the more significant items on these
applications are verified through the use of credit reports, financial
statements
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and confirmations. After analysis of the loan application and property or
collateral involved, including an appraisal of the property (residential
appraisals are obtained through independent fee appraisers), the lending
decision is made in accordance with the underwriting guidelines of the Bank.
These guidelines are generally consistent with FHLMC and FNMA guidelines for
residential real estate loans. With respect to commercial real estate loans,
the Bank also reviews the capital adequacy of the business, the income
potential of the property, the ability of the borrower to repay the loan and
honor its other obligations, and general economic and industry conditions.
Upon receipt of a loan application and all required related information
from a prospective borrower, the loan application is submitted for approval or
rejection. The residential mortgage loan underwriter approves loans which meet
FHLMC and FNMA underwriting requirements, not to exceed $203,150 per loan, and
the government loan direct endorser approves FHA loans not to exceed $97,350
and VA loans not to exceed $203,000. However, the Bank does submit some FHA
and VA loans to the Department of Housing and Urban Development for approval.
The Chairman, Chief Executive Officer, Senior Mortgage Officer or Senior
Consumer/Commercial Loan Officer approve loans of $200,000 or less, except as
set forth above. Loans in excess of $200,000 require approval of one of the
above and the Chairman of the Board and any loan in an amount in excess of
$300,000 must be approved by the Bank's Executive Committee, which operates as
the Bank's Loan Committee. The loan approval limits shown are the aggregate
of all loans to any one borrower or entity.
It is the general policy of Security Federal to issue loan commitments
to qualified borrowers for a specified time period. These commitments are
generally for a period of 45 days or less. With management approval,
commitments may be extended for a longer period. The total outstanding amount
of mortgage loan commitments issued by Security Federal as of March 31, 1996,
was approximately $603,745 (excluding undisbursed portions of construction
loans in process). Security Federal also had outstanding commitments
available on retail lines of credit (including home equity and other consumer
loans) totalling $16.7 million as of March 31, 1996. See Note 13 of Notes to
Consolidated Financial Statements.
Relationships With Mortgage Brokers and Other Financial Institutions
(Correspondents). Commencing in 1984, the Bank established relationships with
various South Carolina and Georgia mortgage brokers and other financial
institutions ("correspondents") which originate loans for Security Federal
using the Bank's existing loan programs. In such instances, the
correspondent handles all the loan processing and credit reports. All loans
closed under this lending program must be approved by Security Federal prior
to closing and must meet Security Federal's underwriting standards. Loans are
typically closed in the name of Security Federal. Both Security Federal and
the correspondent receive fees in connection with the origination of the
loans. Typically, Security Federal receives a fee of from 1% to 2% on each
residential and commercial mortgage loan closed through this program. The
Bank performs the servicing on correspondent-originated loans after the
closing. During the fiscal year ended March 31, 1996, the Bank did not
originate any residential mortgage loans through this lending program. The
Bank intends to continue to utilize this program to supplement direct
originations, although the ultimate success (and existence) of the program is
subject to market conditions and other factors beyond the Bank's control.
Most real estate loans originated by the Bank contain a "due-on-sale"
clause providing that the Bank may declare the unpaid principal balance due
and payable upon the disposition of the mortgaged property. The Bank enforces
these due-on-sale clauses to the extent permitted by law, taking into
consideration other business factors.
Permanent Residential Mortgage lending. Residential real estate
mortgage loans constituted approximately 38.5% of the Bank's total outstanding
loan portfolio at March 31, 1996. Prior to 1980, the Bank generally made
residential real estate mortgage loans on a long-term fixed-rate basis to be
held in its own portfolio. In accordance with then applicable federal
regulations, the Bank's single-family residential mortgage loans historically
provided for fixed rates of interest and for repayment of principal for terms
of up to 30 years. However, the Bank's fixed- single-family residential loans
normally have remained outstanding for significantly shorter periods because
theborrowers have prepaid the loans in full upon sale of the security
property, due to the due-on-sale clauses generallycontained in the Bank's
first mortgages, or upon the refinancing of the original loan.
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Most of the Bank's fixed-rate mortgage loans are underwritten according
to standards that would allow them to be sold into the secondary market. The
Bank currently sells in the secondary market substantially all of its
fixed-rate loans with terms to maturity of 15 years or greater. For the
fiscal year ended March 31, 1996, $6.9 million in loans were originated with
prior commitments to purchase such loans by other institutional investors at a
fixed price. These loans were carried in the Bank's "loans held for sale"
portfolio. In addition, during fiscal 1996, $5.5 million in loans were
originated and sold to FHLMC and FNMA. At March 31, 1996, fixed-rate,
residential mortgage loans totalled $11.8 million, or 7.6% of the Bank's loan
portfolio.
Since 1980, Security Federal has also offered a variety of ARMs which
offer adjustable rates of interest, payments, loan balances or terms to
maturity which vary according to specified indices. The Bank's ARMs generally
have a loan term of 15 to 30 years with rate adjustments every one to three
years during the term of the loan. Most of the Bank's ARMs contain a 100 or
200 basis point limit as to the maximum amount of change in the interest rate
at any adjustment period and a 500 or 600 basis point limit over the life of
the loan. The Bank generally originates ARMs to hold in its portfolio. Such
loans are generally made consistent with FHLMC and FNMA guidelines. At March
31, 1996, residential ARMs totalled $48.7 million, or 31.5% of the Bank's loan
portfolio. For the year ended March 31, 1996, the Bank originated $9.0
million in residential real estate loans, 40.9% of which had adjustable rates
of interest.
There are unquantifiable risks resulting from possible increased costs
to the borrower as a result of periodic repricing. Despite the benefits of
ARMs to the Bank's asset/liability management program, such loans also pose
potential additional risks, primarily because as interest rates rise, the
underlying payment by the borrower rises, increasing the potential for
default. At the same time, marketability of the underlying property may be
adversely affected by higher interest rates.
When making a one- to four-family residential mortgage loan, the Bank
evaluates both the borrower's creditworthiness and his or her general ability
to make principal and interest payments and the value of the property that
will secure the loan. The Bank generally makes loans on one- to four-family
residential properties in amounts of 95% or less of the appraised value
thereof. Where loans are made in amounts which exceed 80% of the appraised
value of the underlying real estate, the Bank's general policy is to require
private mortgage insurance on a portion of the loan. In general, the Bank
restricts its residential lending to South Carolina and the nearby Augusta,
Georgia market.
During fiscal 1988, the Bank began to use loan originators who are
employed on a commission basis solely to originate mortgage loans and opened a
loan production office in 1988. Due to lower than expected loan demand, in
December 1994, the Bank closed its Columbia, South Carolina loan production
office.
The Bank also provides construction financing for single family
dwellings both to owner-occupants and to builders for resale. Construction
loans are generally made for periods of six months to one year. Typically,
interest rates on interim construction loans are made on a fixed-rate basis.
At March 31, 1996, residential construction loans on one- to four-family
dwellings totalled $951,000, or 0.6% of the Bank's loan portfolio. In
addition to the factors mentioned above concerning the creditworthiness of the
borrower, on loans of this type the Bank seeks to evaluate the financial
condition and prior performance of the builder.
Commercial Real Estate Loans. The commercial real estate and other
non-residential loans ("commercial real estate loans") originated by the Bank
are primarily secured by business properties, churches, income property
developments, and undeveloped land. At March 31, 1996, the Bank had
approximately $10.6 million, or 7.0% of the Bank's total loan portfolio, in
commercial real estate loans.
Commercial real estate lending entails significant additional credit
risk when compared to residential lending. Commercial real estate loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience of such loans is typically dependent upon
the successful operation of the business or real estate project. These risks
can be significantly affected by supply and demand conditions in the market
for office
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and retail space and for condominiums and apartments and, as such, may be
subject, to a greater extent than residential loans, to adverse conditions in
the local economy.
At March 31, 1996, approximately $2.5 million, or 23.4% of the Bank's
commercial real estate loans, were secured by real estate located out of the
State of South Carolina. The real estate securing these loans is primarily
located in Georgia and North Carolina.
Properties securing commercial loans originated by the Bank are
appraised at the time of the loan by appraisers designated by the Bank.
Although the Bank is permitted to invest in loans up to 100% of the appraised
value of a property on commercial real estate loans, the Bank currently seeks
to invest in loans in amounts of 80% or less of the appraised value of the
underlying collateral. In underwriting these loans, it is the policy of the
Bank to consider, among other things, the terms of the loan, the
creditworthiness and experience of the borrower, the location and quality of
the collateral, competition in the market, the debt service coverage ratio and
the past performance of the project or business.
Of the Bank's commercial real estate loans at March 31, 1996, only three
had principal balances in excess of $1.0 million. At March 31, 1996, all of
these commercial real estate loans were performing in accordance with their
terms. Federal law restricts the Bank's permissible lending limits to one
borrower to the greater of $500,000 or 15% of unimpaired capital and surplus.
The Bank has not typically made loans to one borrower equal to the amount
federal law allows or approximately $2.3 million at March 31, 1996.
Permanent commercial real estate loans are generally offered with
payments based on a 15- to 30-year amortization schedule but with adjustments
in the interest rate every one to three years. Such interest rate adjustments
are generally based on the rate for one year U.S. Treasury Securities, or the
prime rate of interest, plus a margin and may not exceed 200 basis points at
any adjustment period or 17% over the life of the loan.
The Bank has from time to time made commercial real estate loans to
affiliates. These loans are made in the ordinary course of business on
substantially the same terms, rates and collateral as those of comparable
transactions prevailing at the time, and do not involve more than the normal
risk of collectibility or present other unfavorable features. In addition,
all loans made by the Bank to its affiliates comply with Office of Thrift
Supervision ("OTS") regulations restricting loans and other transactions with
affiliated persons of the Bank.
Acquisition, Development and Construction Loans. To a lesser extent,
the Bank also originates loans for land acquisition, development and/or
construction ("ADC Loans") on properties intended for single-family residences
and for commercial projects such as apartments, office buildings, business
properties, shopping centers, hotels and motels. All of the properties
securing the Bank's ADC loan portfolio are located within the State of South
Carolina. Residential ADC Loans are generally made for periods of up to three
years while commercial ADC Loans are generally made for periods of up to
eighteen months. ADC Loans are made generally on an interest-only payment
basis at either a fixed-rate or at an indexed rate. Typically loans with a
term over one year will be tied to an indexed rate and are adjustable monthly
or annually during the term of the loan.
The Bank generally does not require a developer to obtain a completion
bond guaranteeing the completion of the financed project in the event that the
developer, for any reason, is unable to perform. However, the Bank generally
requires a personal guarantee of the developer in any instance in which it has
not obtained a completion bond. In such cases, the Bank endeavors to
ascertain the enforceability of such guaranty by making inquiry, among other
things, into the underwriting criteria discussed below. In addition,
supporting documentation is obtained including personal financial statements,
copies of tax returns for the previous three years, credit reports and bank
references. A direct check is made on all creditor references.
At March 31, 1996, the Bank had outstanding ADC Loans, none of which had
any profit participation features, aggregating $653,000, or .4% of its total
loan portfolio. This number does not, however, include ADC Loans to one of the
Company's real estate partnerships, Willow Woods, since generally accepted
accounting principles treat
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<PAGE>
such loans as either intercompany transactions or investments in joint
ventures, respectively. At March 31, 1996, Security Federal had ADC Loans to
Willow Woods aggregating $75,120, and an available line of credit of $47,973.
As with commercial real estate loans, ADC Loan financing is generally
considered to involve a higher degree of credit risk than long-term financing
of residential or commercial properties. The Bank's risk of loss on an ADC
Loan is dependent largely upon the accuracy of the initial estimate of the
property's value at completion of construction or development and the
estimated cost (including interest) of construction. The Bank generally makes
ADC Loans in amounts up to 75% of the lesser of the appraised value or actual
cost of the underlying collateral. If the estimate of construction costs and
the salability of the property upon completion of the project proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the development.
The Bank's underwriting criteria are designed to evaluate and minimize
the risks of each ADC Loan. Among other factors, the Bank considers evidence
of the availability of permanent financing or a takeout commitment to the
borrower, the reputation of the borrower and his or her financial condition,
the amount of the borrower's equity in the project, an independent or in-house
appraisal and review of cost estimates, preconstruction sale and leasing
information and cash flow and holding period projections of the borrowers.
For a discussion of the Bank's policy with respect to loans to
affiliates see "-- Commercial Real Estate Loans." Except for two loans to the
Bank's subsidiary discussed above, there were no acquisition, development, and
construction loans to affiliates of the Bank outstanding at March 31, 1996.
See "Subsidiary Activities."
Commercial Business Loans. During fiscal 1989, the Bank began to
originate commercial business loans. The Bank originates commercial business
loans for the purpose of financing inventory, furniture, fixtures and
equipment. In addition, secured and unsecured credit lines are made
available. Commercial business loans are normally short-term with a maturity
from three to sixty months. Commercial business loans are made on both a
fixed and adjustable rate basis. Adjustable rate loans adjust monthly or
annually based on movements of the prime rate of interest as quoted in The
Wall Street Journal.
The underwriting standards employed by the Bank for commercial business
loans include a determination of the borrower's current financial condition,
ability to pay, past earnings and payment history. In addition, the current
financial condition and payment history of all principals are reviewed.
Normally, the Bank requires the principal or owners of a business to guarantee
all loans made to their business by the Bank. Although the creditworthiness
of the business and its principals is of primary consideration, the
underwriting process also includes a comparison of the value of the security,
if any, in relation to the proposed loan amount.
At March 31, 1996, commercial business loans totalled $38.8 million, or
25.1% of the Bank's loan portfolio. Although commercial business loans, like
consumer loans, involve a higher level of risk than one-to four-family
residential mortgage loans, they generally carry higher yields and have
shorter terms to maturity than such residential mortgage loans.
Consumer Loans. The Bank originates consumer loans for any personal,
family or household purpose, including but not limited to the financing of
home improvements, automobiles, boats, mobile homes, recreational vehicles and
education. In addition, the Bank has expanded its home equity lending
program. Home equity loans are secured by mortgage lines on the borrower's
principal or second residence. At March 31, 1996, the Bank had $14.8 million
of home equity lines of credit outstanding and $16.7 million of additional
commitments of such lines of credit. The Bank also makes secured and
unsecured lines of credit available. Although consumer loans involve a higher
level of risk than one- to four-family residential mortgage loans, they
generally carry higher yields and have shorter terms to maturity than such
loans. The Bank has increased its origination of consumer loans during the
past several years and at March 31, 1996, the Bank had total consumer loans of
$44.8 million, or 28.9% of the Bank's loan portfolio.
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The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and
an assessment of ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income is determined
by verification of gross monthly income from primary employment, and
additionally from any verifiable secondary income. Although credit-worthiness
of the applicant is of primary consideration, the underwriting process also
includes a comparison of the value of the security, if any, in relation to the
proposed loan amount.
During fiscal 1988, the Bank established a separate consumer/commercial
loan department to develop products and to expand its existing consumer and
commercial business loan products. A full-time manager was hired to supervise
this department, and presently has authority to approve consumer and
commercial business loans up to $200,000, of which no more than $100,000 may
be unsecured. The President has authority to approve consumer and commercial
business loans up to $200,000 and the Chairman may approve loans up to
$200,000. The Chairman and President or Consumer/Commercial loan manager can
approve loans up to $300,000 and consumer and commercial business loans in
excess of this amount must be approved by the Bank's Executive Committee,
which operates as the Bank's Loan Committee. Commencing in fiscal 1989, the
Bank developed a credit card program. As of March 31, 1996, 905 Visa credit
cards had been issued by the Bank with total approved credit lines of $1.5
million, of which $614,847 was outstanding.
Loan Delinquencies and Defaults
General. The Bank's collection procedures provide that when a real
estate loan is approximately 20 days past due, the borrower is contacted by
mail and payment is requested. If the delinquency continues, subsequent
efforts are made to contact the delinquent borrower and establish a program to
bring the loan current. In certain instances, the Bank may modify the loan or
grant a limited moratorium on loan payments to enable the borrower to
reorganize his financial affairs. If the loan continues in a delinquent
status for 60 days or more, the Bank generally initiates foreclosures
proceedings after the customer has been notified by certified mail. At March
31, 1996, the Bank had property acquired as the result of foreclosures,
in-substance foreclosure or by deed in lieu of foreclosure and classified as
"real estate owned" valued at $718,763.
Delinquent Loans. The following table sets forth information concerning
delinquent mortgage and other loans at March 31, 1996. The amounts presented
represent the total remaining principal balances of the related loans (before
specific reserves for losses), rather than the actual payment amounts which
are overdue.
Real Estate Non-Real Estate
Commercial
Residential Commercial Consumer Business
Number Amount Number Amount Number Amount Number Amount
(Dollars in Thousands)
Loans
delinquent for:
30 - 59 days . . 5 $ 306 -- $ -- 41 $512 4 $ 94
60 - 89 days . . 9 452 -- -- 20 226 2 490
90 days and
over . . . . . 6 453 2 542 12 154 7 255
Total delinquent
loans . . . . . 20 $1,211 2 $542 73 $892 13 $839
Classified Assets. Federal regulations provide for the classification
of
loans and other assets such as debt and equity securities considered to be of
lesser quality as "substandard," "doubtful" or "loss" assets. The regulation
requires savings associations to classify their own assets and to establish
prudent general allowances for loan losses for assets classified "substandard"
or "doubtful". For the portion of assets classified as "loss", an institution
is required to either establish specific allowances of 100% of the amount
classified or charge off such amount. In addition, the OTS may require the
establishment of a general allowance for losses based on assets classified as
"substandard" and "doubtful" or based on the general quality of the asset
portfolio of an association. Assets which
<PAGE> <PAGE>
do not currently expose the savings association to sufficient risk to warrant
classification in one of the aforementioned categories but possess potential
weaknesses are designated "special mention" by management.
At March 31, 1996, approximately $191,357, $3,658,111 (including $2.9
million of loans and $718,763 in real estate acquired through foreclosure) and
$17,119 of the Bank's assets were classified "special mention", "substandard"
and "doubtful", respectively. On such date, the Bank had $1,808 loans
classified as "loss." As of March 31, 1996, there were loans totalling
$486,712 which were troubled debt restructuring within the meaning of FASB No.
15 of which $911 was classified substandard. In addition, the OTS may require
the establishment of a general allowance for losses based on assets classified
as "substandard" and "doubtful" or based on the general quality of the asset
portfolio of an association. The Bank's classification of assets is
consistent with OTS examination classifications.
For additional information regarding the treatment of impaired loans,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Accounting and Reporting Changes."
Non-performing Assets. The following table sets forth the amounts and
categories of risk elements in the Bank's loan portfolio. Loans are placed on
non-accrual status when the collection of principal and/or interest becomes
doubtful. In addition, all loans are placed on non-accrual status when the
loan becomes 60 days or more contractually delinquent. All consumer loans
more than 90 days delinquent are charged against the consumer loan allowance
for loan losses unless there is adequate collateral which is in the process of
being repossessed or foreclosed on. Except for loans restructured during
fiscal 1995 contained in the table below, the Bank has had no troubled debt
restructuring which involve forgiving a portion of interest or principal on
any loans or making loans at a rate materially less than that of market rates.
Other loans of concern are those loans (not delinquent more than 60 days) that
management has determined need to be closely monitored as the potential exists
for increased risk on these loans in the future. Nonperforming loans are
reviewed on a loan by loan basis. Specific reserves associated with these
loans will vary based on estimates of recovery for each loan.
March 31,
1996 1995 1994 1993 1992
(Dollars in Thousands)
Non-Accruing Loans Delinquent
60 to 90 Days:
Residential . . . . . . . . . $ 452 $ 148 $ -- $ -- $ 823
Commercial real estate. . . . -- 172 -- -- 147
Consumer. . . . . . . . . . . 226 47 121 101 99
Commercial business . . . . . 490 9 438 -- --
Total . . . . . . . . . . . $1,168 $ 376 $ 559 $ 101 $1,069
Total as a percentage of
total assets . . . . . . .54% 0.18% 0.28% 0.07% 0.75%
Non-Accruing Loans Delinquent
More than 90 Days:
Residential . . . . . . . . . $ 453 $ 264 $ 573 $ 398 $ 281
Commercial real estate. . . . 542 -- 298 -- 76
Consumer. . . . . . . . . . . 154 122 120 86 382
Commercial business . . . . . 255 50 -- -- --
Total . . . . . . . . . . . $1,404 $ 436 $ 991 $ 484 $ 739
Total as a percentage of
total assets . . . . . . .65% .21% .50% .25% .52%
Troubled debt restructuring. $ 487 $ 780 $ -- $ -- $ --
Real estate owned. . . . . . $ 719 $1,521 $1,684 $ 721 $ 989
Allowance for loan losses. . $1,759 $1,955 $1,735 $1,191 $ 819
___________
Included in non-accrusing loan totals.
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<PAGE>
For the fiscal year ended March 31, 1996, the interest income which
would have been recognized with respect to non-accruing loans, had such loans
been current in accordance with their original terms, totalled $82,670.
At March 31, 1996, non-accrual loans, which were also considered
impaired, totalled $2,572,000 compared to $812,000 at March 31, 1995. During
the past five years, the Bank has classified all loans as non-accrual when
they were 60 days or more delinquent. Included in non-accruing loans at March
31, 1996 were 15 one- to four-family real estate mortgage loans totalling
$905,000 and 32 consumer loans totalling $380,000. Of the $380,000 in
consumer loans on non-accrual status at fiscal year end, no loan exceeded
$80,000 at fiscal year end. The principal component of the $745,000 in
commercial business loans on non-accrual status at fiscal year end was a loan
totalling $487,000 to a leasing company, which is also classified as a
troubled debt restructuring. There is no loss anticipated on this loan at
this time. The $542,000 in non-accruing commercial real estate loans consist
of two loans. One loan for $356,000 is secured by an office building, and the
other loan for $186,000 is secured by residential building lots. Both of these
loans are well secured and no loss is anticipated at this time.
At March 31, 1996, real estate acquired through foreclosure had an
outstanding book value of $718,763 and consisted of six properties. Of the
$718,763 in real estate owned at March 31, 1996, $439,005 relates to a
commercial property which is located in Little River Township, South Carolina
consisting of 22 residential lots with infrastructure. On May 13, 1994, the
Bank entered into an agreement with the borrower to accept a deed-in-lieu of
foreclosure on such property. Under the terms of the agreement, Security
Federal granted the borrower a right of reconveyance on all developed lots,
undeveloped lots and undeveloped raw land remaining after retirement of all
debts, including direct and indirect project costs. At March 31, 1996, the
Bank had sold 56 lots and two model homes for an aggregate sales price of
approximately $1,950,000.
Provision for Losses on Loans and Real Estate. Security Federal
recognizes that credit losses will be experienced during the course of making
loans and that the risk of loss will vary with, among other things, the type
of loan being made, the creditworthiness of the borrower over the term of the
loan and, in the case of a secured loan, the quality of the underlying
security for the loan.
The Bank seeks to establish and maintain sufficient reserves for
estimated losses on specifically identified loans and real estate where such
losses can be estimated. Additionally, general reserves for estimated
possible losses are established on specified portions of the Bank's portfolio
such as consumer loans and higher risk residential construction mortgage loans
based on management's estimate of the potential loss for loans which normally
can be classified as higher risk. Specific and general reserves are based on,
among other criteria (1) the risk characteristics on the loan portfolio, (2)
current economic conditions on a local as well as a statewide basis, (3)
actual losses experienced historically, and (4) the level of reserves for
possible losses in the future. Additionally, a reserve is maintained for
uncollected interest on loans over 60 days past due.
At March 31, 1996, total reserves relating to loans were $1.8 million.
In determining the adequacy in the reserve for loan losses, management reviews
past experience of loan charge-offs, the level of past due and non-accrual
loans, the size and mix of the portfolio, general economic conditions in the
market area, and individual loans to identify potential credit problems.
Commercial business and consumer loans have increased to $83.6 million or
54.0% of the Bank's total loan portfolio, at March 31, 1996, and it is
anticipated there will be a continued emphasis on this type of credit.
Although commercial business and consumer loans carry a higher level of credit
risk than conventional residential mortgage loans, the level of reserves
reflects management's continuing evaluation of this risk based on upon the
Bank's past loss experience. At fiscal year end, the Bank's ratio of loans
delinquent more than 60 days to total assets was 1.20%. These delinquent
loans are considered to be well secured and are in the process of collection.
Management believes that reserves for loan losses are at a level adequate to
provide for potential loan losses. Although management believes that
it has considered all relevant factors in its estimation of future losses,
future adjustments to reserves may be necessary if conditions change
substantially from the assumptions used in making the original estimations.
The fiscal 1995 allowance was increased in anticipation of a charge-off on a
non-performing loan which was ultimately realized in fiscal 1996. Regulators
will from time to time evaluate the
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<PAGE>
allowance for loan losses which are subject to adjustments based upon the
information available to the regulators at the time of their examinations.
The following table sets forth an analysis of the Bank's allowance for
loan losses.
March 31,
1996 1995 1994 1993 1992
(Dollars in Thousands)
Balance at beginning
of year . . . . . . . . $1,955 $1,735 $1,191 $ 819 $862
Provision charged to
operations. . . . . . . 230 300 335 463 25
Allowance on acquired
loans. . . . . . . . .. -- -- 324 -- --
Charge-offs:
Residential real estate . 5 -- 25 10 --
Commercial real estate. . -- 3 61 -- --
Commercial business . . . 330 -- -- -- --
Consumer. . . . . . . . . 137 102 39 121 84
Total charge-offs . . . 472 105 125 131 84
Recoveries:
Residential real estate . -- -- -- -- --
Consumer. . . . . . . . . 46 25 10 40 16
Total recoveries. . . . 46 25 10 40 16
Balance at end of year . . $1,759 $1,955 $1,735 $1,191 $819
Ratio of net charge-offs
during the year to average
loans outstanding
during the year . . . . 0.28% 0.06% 0.10% 0.08% 0.06%
PAGE
<PAGE>
The distribution of the Bank's allowance for loan losses at the dates
indicated is summarized as follows:
At March 31,
1996 1995 1994
1993 1992
Percent Percent Percent
Percent Percent
of Loans of Loans of Loans
of Loans of Loans
in Each in Each in Each
in Each in Each
Category Category Category
Category Category
to Total to Total to Total
to Total to Total
Amount Loans Amount Loans Amount Loans
Amount Loans Amount Loans
(Dollars in Thousands)
Residential . . . . $ 460 26.2% $ 460 43.4% $ 312 36.8% $
395 48.5% $332 60.8%
Commercial real
estate. . . . . . 131 7.4 96 8.5 128 16.0
146 17.7 63 11.8
Consumer. . . . . . 568 32.3 800 28.7 792 31.5
442 23.1 315 20.4
Commercial
business . . . .. 600 34.1 599 19.4 503 15.7
208 10.7 109 7.0
Total. . . . . . $1,759 100.0% $1,955 100.0% $1,735 100.0%
$1,191 100.0% $819 100.0%
PAGE
<PAGE>
Service Corporation
As a federally chartered savings bank, Security Federal is permitted by
OTS regulations to invest up to 2% of its assets in the stock of, or loans to,
service corporation subsidiaries, and may invest an additional 1% of its
assets in service corporations where such additional funds are used for
inner-city or community development purposes. At March 31, 1996, Security
Federal's net investment in its service corporations (including loans to
service corporations) totaled $669,218. In addition to investments in service
corporations, federal institutions are permitted to invest an unlimited amount
in operating subsidiaries engaged solely in activities which a federal savings
bank may engage in directly.
Security Financial Services Corporation. SFSC was incorporated in 1975
by the Bank. The service corporation's primary activity is investment
brokerage services.
Real Estate Partnership. The Company also develops real estate through
two real estate partnerships which it purchased from SFSC at market value in
December 1995. Each project is designed primarily to develop and sell
residential lots in and around the Bank's primary lending area. Total
investment of the Company (excluding loans totalling $75,120 to Willow Woods)
in both projects at March 31, 1996, was approximately $567,726. The Company
has no plans for additional real estate ventures.
During fiscal 1988, SFSC completed construction on the first phase of
Currytowne, a joint venture development of single-family residential lots
located in Edgefield County, South Carolina near North Augusta. This phase
contains 84 lots. By fiscal 1996 year end, 39 lots had been sold.
During fiscal 1990, SFSC entered into a joint venture agreement, known
as Willow Woods, to develop 97.2 acres of land in Aiken County into
approximately 150 single family residential lots. SFSC is a 50% partner in
the joint venture. The first phase of this development containing 51 lots was
completed in May of 1991, and as of March 31, 1996, 49 lots have been sold.
Construction on the second phase of Willow Woods was completed in May 1994 and
contains 40 single family residential lots, of which eight had been sold as of
March 31, 1996.
Investment Activities
Investment securities. Federal thrift institutions have authority to
invest in various types of liquid assets, including U.S. Treasury obligations
and securities of various federal agencies, certificates of deposit at insured
institutions, bankers' acceptances and federal funds.
Federal thrift institutions may also invest a portion of their assets in
certain commercial paper and corporate debt securities. Federal thrift
institutions are also authorized to invest in mutual funds whose assets
conform to the investments that a federal thrift institution is authorized to
make directly. There are various restrictions on the foregoing investments.
For example, the commercial paper must be appropriately rated by at least two
nationally recognized investment rating services and the corporate debt
securities must be appropriately rated by at least one such service. In
addition, the average maturity of an institution's portfolio of corporate debt
securities may not, at any one time, exceed six years, and the commercial
paper must mature within nine months of issuance. Moreover, an institution's
total investment in the commercial paper and corporate debt securities of any
one issuer may not exceed 1% of the institution's assets except that an
institution may invest 5% of its assets in the shares of any appropriate
mutual fund. See "Regulation -- Federal Regulation of Savings Associations."
As a member of the Federal Home Loan Bank ("FHLB") System, Security
Federal must maintain minimum levels of investments that are liquid assets as
defined in Federal regulations. See "Regulation -- Federal Regulation of
Savings Associations -- Federal Home Loan Bank System." Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans.
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<PAGE>
Historically, the Bank has maintained its liquid assets above the
minimum requirements imposed by the OTS regulations and at a level believed
adequate to meet requirements of normal daily activities, repayment of
maturing debt and potential deposit outflows. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is provided.
As of March 31, 1996, the Bank's liquidity ratio (liquid assets as a
percentage of net withdrawable savings and current borrowings) was 8.73%.
The following table sets forth the composition of the Company's
portfolio of securities and other investments, not including mortgage-backed
securities.
At March 31,
1996 1995 1994
Book Value Book Value Book Value
(Dollars in Thousands)
Interest-bearing deposits
with banks . . . . . . . . . . . $ -- $ -- $ 95
Other interest earning assets. . . 2,858 1,014 1,502
Total. . . . . . . . . . . . . $ 2,858 $ 1,014 $ 1,597
Securities:
Available for sale:
U.S. Treasury and agency
obligations. . . . . . . . . .. 30,972 $ 3,931 $ 8,794
SLMA securities . . . . . . . . . -- -- 750
Total securities available
for sale. . . . . . . . . . . 30,972 3,931 9,544
Held to Maturity:
U.S. Government and agency
obligations. . . . . . . . . . . 5,492 34,367 35,559
FNMA securities . . . . . . . . . 1,006 2,018 2,029
FFCB securities . . . . . . . . . -- 500 1,201
FHLMC bonds . . . . . . . . . . . 1,000 -- --
Total securities held to
maturity. . . . . . . . . . . 7,498 36,885 38,789
Total securities . . . . . . . . . 38,471 40,816 48,333
FHLB stock . . . . . . . . . . . . 1,233 1,415 1,111
Total securities and FHLB
stock (1). . . . . . . . . . . . $39,704 $42,231 $49,444
(1) Does not include mortgage-backed securities.
At March 31, 1996, the Company did not have any investment securities
(exclusive of obligations of the U.S. Government and federal agencies) issued
by any one entity with a total book value in excess of 10% of stockholders'
equity.
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The following table sets forth the maturities or repricing of investment
securities and FHLB stock at March 31, 1996, and the weighted average yields
of such securities and FHLB stock (calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security).
Maturing or Repricing
After After
One But Five But
Within Within Within After
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
(In Thousands)
U.S. Government
and other
agency
obligations . $26,544 4.75% $11,927 5.18% $ -- -- $ -- --
FHLB stock . . -- -- 1,233 8.25 -- -- -- --
Total. . . . $26,544 4.75% $13,160 5.37% $ -- -- $ -- --
For information regarding the market value of the Bank's securities
portfolios, see Notes 3 and 4 of Notes to Consolidated Financial Statements.
The Bank has sold securities under an agreement to repurchase when it is
cost effective to acquire funds from this source. The Bank did not engage in
such transactions during fiscal 1996.
Mortgage-backed securities. Security Federal has a portfolio of
mortgage-backed securities which it holds for investment. Such mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as
a source of liquidity. Under the Bank's risk-based capital requirement,
mortgage-backed securities have a risk weight of 20% (or 0% in the case of
GNMA securities) in contrast to the 50% risk weight carried by residential
loans. See "Regulation."
The Bank had $2.5 million, $1.7 million and $3.3 million of
mortgage-backed securities issued by the FHLMC at March 31, 1996, 1995 and
1994, respectively. The Bank held no other mortgage-backed securities at such
dates.
The following table sets forth the composition of the mortgage-backed
securities portfolio at the dates indicated. There were no mortgage-backed
securities classified as available for sale at the dates indicated.
At March 31,
1996 1995 1994
Book Value Book Value Book Value
(Dollars in Thousands)
Held to Maturity:
FHLMC . . . . . . . . . $2,542 $1,711 $3,276
At March 31, 1996, the Company did not have any mortgage-backed
securities (exclusive of obligations of agencies of the U.S. Government)
issued by any one entity with a total book value in excess of 10% of
stockholders equity.
For information regarding the market values of Security Federal's
mortgage-backed securities portfolio, see Notes 3 and 4 of the Notes to
Consolidated Financial Statements.
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<TABLE>
The following table sets for the maturities and the weighted average yields of the mortgage-backed
securities at March 31, 1996. Not considered in the preparation of the table below is the effect of
prepayments.
Due in
_________________________________________________________________ March 31, 1996
Less than 1 to 5 5 to 10 Over 10 Balance
Year Years Years Years Outstanding
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in Thousands)
Federal Home Loan
Mortgage
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Corporation. . . $119 8.14% $854 7.25% $471 8.32% $1,098 7.71% $2,542 7.69%
</TABLE>
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Sources of Funds
Deposit accounts have traditionally been a principal source of the
Bank's funds for use in lending and for other general business purposes. In
addition to deposits, the Bank derives funds from loan repayments, cash flows
generated from operations (including interest credited to deposit accounts),
FHLB of Atlanta advances, the sale of securities under agreements to
repurchase, and loan sales. Scheduled loan payments are a relatively stable
source of funds while deposit inflows and outflows and the related cost of
such funds have varied widely. FHLB of Atlanta advances and the sale of
securities under agreements to repurchase may be used on a short-term basis to
compensate for seasonal reductions in deposits or deposit inflows at less than
projected levels and may be used on a longer term basis in support of expanded
lending activities. The availability of funds from loan sales is influenced by
general interest rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In the past, Security Federal has engaged in selling its 15 and 30-year
fixed rate loans in the secondary market. The decline in the amount of fixed
rate loans sold during fiscal 1996 was the result of a increase in interest
rates and an increase in demand for adjustable rate mortgage loans.
In addition, the Bank originates loans for other financial institutions
with their prior commitment to purchase the loan at a set price. The amount
of these loans originated and sold depends primarily on loan demand. During
fiscal 1996, the Bank originated $6.9 million of such loans for other
financial institutions. See "-- Loan Originations, Purchases and Sales."
Deposits. The Bank attracts both short-term and long-term deposits from
the general public by offering a wide assortment of accounts and rates. In
recent years, market conditions have required the Bank to rely increasingly on
short-term accounts and other deposit alternatives that are more responsive to
market interest rates than the passbook accounts and regulated fixed interest
rate, fixed-term certificates that were the Bank's primary source of deposits
before 1978. The Bank offers regular passbook accounts, checking accounts,
various money market accounts, fixed interest rate certificates with varying
maturities, negotiated rate $100,000 or above jumbo certificates of deposit
("Jumbo CDs") and individual retirement accounts.
At March 31, 1996, the Bank had no brokered deposits. In addition, the
Bank believes that, based on its experience over the past several years, its
passbook and transaction accounts are stable sources of deposits.
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The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs for the periods indicated.
At March 31,
1996 1995 1994
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
(Dollars in Thousands)
Interest Rate Range:
Passbook accounts
2.50% - 3.00% . . . . $13,615 7.9% $14,492 8.7% $16,101 9.3%
NOW and other
transaction
accounts 0% - 2.00% . 42,252 24.5 41,212 24.8 43,559 25.1
Money market funds
2.50% - 3.50% . . . . 13,770 8.0 16,776 10.1 19,204 11.1
Total non-
certificates. . . . 69,637 40.4 72,480 43.6 78,864 45.5
Certificates:
0.00-5.99% . . . . . . 73,946 42.9 70,537 42.4 84,828 48.9
6.00-7.99% . . . . . . 28,792 16.7 23,238 14.0 8,608 5.0
8.00-9.99% . . . . . . -- -- 20 0.0 312 0.1
10.00-12.99% . . . . . -- -- -- -- 821 0.5
Total
certificates. . . . 102,738 59.6 93,795 56.4 94,569 54.5
Total deposits. . . .$172,375 100.0% $166,275 100.0% $173,433 100.0%
In particular, the Bank relies to a limited extent upon locally obtained
Jumbo CDs to maintain its deposit levels. At March 31, 1996, Jumbo CDs
constituted 5.7% of the Bank's total deposits. Security Federal has not
relied heavily on Jumbo CDs to manage interest rate sensitivity. Security
Federal has, however, exhibited an ability to attract and maintain such
deposits to desired levels during recent periods.
The following table sets forth the deposit flows at the Bank during the
periods indicated.
Years Ended March 31,
1996 1995 1994
(Dollars in Thousands)
Opening balance. . . . . . $166,275 $173,433 $115,461
Deposits acquired in
branch acquisition. . . . -- -- 61,124
Deposits . . . . . . . . . 734,010 686,287 458,705
Withdrawals. . . . . . . . 734,018 698,942 466,416
Interest credited. . . . . 6,108 5,497 4,559
Ending balance . . . . . . 172,375 166,275 173,433
Net increase (decrease). . $ 6,100 $ (7,158) $ 57,972
Percent increase
(decrease). . . . . . . . 3.7% (4.1)% 50.2%
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The following table shows rate and maturity information for the Bank's
certificates of deposit as of March 31, 1996.
0.00- 4.00- 5.00- 6.00- 7.00- Percent
3.99% 4.99% 5.99% 6.99% 7.99% Total of Total
(Dollars in Thousands)
Certificate accounts
maturing in quarter
ending(1):
June 30, 1996. . . . $1,444 $3,866 $14,101 $13,865 $ 12 $ 31,988 31.14%
September 30, 1996 . 118 182 16,503 6,817 255 23,875 23.24
December 31, 1996. . -- 587 12,790 1,872 -- 15,249 14.84
March 31, 1997 . . . -- 44 11,178 1,090 100 12,412 12.08
June 30, 1997. . . . -- -- 6,696 1,853 53 8,602 8.37
September 30, 1997 . -- 10 2,807 316 26 3,159 3.08
December 31, 1997. . -- 26 1,450 145 -- 1,621 1.58
March 31, 1998 . . . -- 75 968 1,586 -- 2,629 2.56
June 30, 1998. . . . -- 57 730 51 -- 838 0.82
September 30, 1998 . -- 6 262 23 -- 291 0.28
December 31, 1998. . -- 1 345 20 -- 366 .035
March 31, 1999 . . . -- -- 98 66 -- 164 0.16
Thereafter . . . . . -- -- 902 513 129 1,544 1.50
Total. . . . . . . $ 262 $4,854 $68,830 $28,217 $575 $102,738 100.00%
___________________
(1) Certain adjustable-rate certificates are shown as maturing at the
earlier of repricing or maturity date.
The following table indicates the amount of the Bank's deposits of
$100,000 or more by time remaining until maturity at March 31, 1996.
Passbook, NOW and
Certificates of Deposit Money Market
Accounts
(Dollars in Thousands)
Maturity Period
Three months or less . . . $2,548 $8,301
Over three through
six months. . . . . . . . 2,792 --
Over six through twelve
month. . . . . . . . . . 2,299 --
Over twelve months . . . . 2,208 --
Total . . . . . . . . . $9,847 $8,301
Borrowings
As a member of the FHLB of Atlanta, the Bank is required to own capital
stock in the FHLB of Atlanta and is authorized to apply for advances from the
FHLB of Atlanta. Each FHLB credit program has its own interest rate, which
may be fixed or variable, and range of maturities. The FHLB of Atlanta may
prescribe the acceptable uses to which these advances may be put, as well as
limitations on the size of the advances and repayment provisions. See Note 10
of Notes to Consolidated Statements for disclosure regarding the maturities
and rate structure of the Bank's FHLB advances. Federal law contains certain
collateral requirements for FHLB advances. See "Regulation -- Federal
Regulation of Savings Associations -- Federal Home Loan Bank System."
In the past, the Bank has used the sale of securities under agreements
to repurchase as a source of funds. The securities sold pursuant to these
agreements consist of mortgage loans which have been convened to FHLMC
participation certificates. The Bank has sold securities under agreements to
repurchase to both FHLMC and Wachovia Bank and Trust Company. These funds are
used whenever its costs are favorable compared to alternative sources of
funds.
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The following table sets forth the maximum month-end balance and average
balance of FHLB advances at the dates indicated.
Years Ended March 31,
1996 1995 1994
(In Thousands)
Maximum Balance:
FHLB advances. . . . . . . $31,370 $30,076 $8,616
Average Balance:
FHLB advances. . . . . . . $27,569 $22,621 $7,167
The following table sets forth information as to the Bank's borrowings
and the weighted average interest rates thereon at the dates indicated.
March 31,
1996 1995 1994
(Dollars in Thousands)
Balance:
FHLB advances. . . . . . $22,864 $26,033 $8,616
Weighted Average
Interest Rate:
At Fiscal Year End
FHLB advances . . . . . 6.29% 6.65% 6.48%
During Fiscal Year
FHLB advances . . . . . 6.39% 5.86% 7.27%
Competition
The Bank serves the counties of Aiken and Bamberg, South Carolina
through its ten branch offices located in Aiken, Denmark, North Augusta,
Graniteville, Langley, Clearwater and Wagener, South Carolina. On October 21,
1993 the Bank expanded its market area through the acquisition of four branch
offices of NationsBank of South Carolina, N.A. The branches are located in
Langley, Graniteville, Clearwater and Wagener, Aiken County, South Carolina.
Security Federal faces strong competition both in originating loans and
in attracting deposits. Competition in originating loans comes primarily from
other thrift institutions, commercial banks, mortgage bankers and credit
unions who also make loans in the Bank's market area. The Bank competes for
loans principally on the basis of the interest rates and loan fees it charges,
the types of loans it makes and the quality of services it provides to
borrowers.
The Bank faces substantial competition in attracting deposits from other
thrift institutions, commercial banks, money market and mutual funds, credit
unions and other investment vehicles. The ability of the Bank to attract and
retain deposits depends on its ability to provide an investment opportunity
that satisfies the requirements of investors as to rate of return, liquidity,
risk and other factors. The Bank attracts a significant amount of deposits
through its branch offices primarily from the communities in which those
branch offices are located. Therefore, competition for those deposits is
principally from other thrift institutions and commercial banks located in the
same communities. The Bank competes for these deposits by offering a variety
of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges
at each.
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The authority to offer money market deposits, and expanded lending and
other powers authorized for thrift institutions by federal law, have resulted
in increased competition for both deposits and loans between thrift
institutions and other financial institutions such as commercial banks and
credit unions.
REGULATION
General
The Bank is subject to extensive regulation, examination and supervision
by the OTS as its chartering agency, and the FDIC, as the insurer of its
deposits. The activities of federal savings institutions are governed by the
Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS
and the FDIC to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal savings
associations may engage. Lending activities and other investments must comply
with various statutory and regulatory capital requirements. In addition, the
Bank's relationship with its depositors and borrowers is also regulated to a
great extent, especially in such matters as the ownership of deposit accounts
and the form and content of the Bank's mortgage documents. The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to
review the Bank's compliance with various regulatory requirements. The
regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such policies, whether by the OTS, the FDIC or
Congress, could have a material adverse impact on the Company, the Bank and
their operations. The Company, as a savings and loan holding company, is also
required to file certain reports with, and otherwise comply with the rules and
regulations of, the OTS.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner.
The Bank, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB of Atlanta. The Bank is in compliance with this requirement with an
investment in FHLB of Atlanta stock of $1.2 million at March 31, 1996.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB of Atlanta.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. In 1989 the FDIC also became the insurer,
up to the prescribed limits, of the deposit accounts held at federally insured
savings associations and established two separate insurance funds: the BIF and
the SAIF. As insurer of deposits, the FDIC has examination, supervisory and
enforcement authority over all savings associations.
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The Bank's accounts are insured by the SAIF. The FDIC insures deposits
at the Bank to the maximum extent permitted by law. The Bank currently pays
deposit insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups which
are based solely on the level of an institution's capital --"well
capitalized," "adequately capitalized," and "undercapitalized" -- which are
defined in the same manner as the regulations establishing the prompt
corrective action system under Section 38 of the FDIA, as discussed below.
These three groups are then divided into three subgroups which reflect varying
levels of supervisory concern, from those which are considered to be healthy
to those which are considered to be of substantial supervisory concern. The
matrix so created results in nine assessment risk classifications, with rates
currently ranging from 0.23% of insured deposits for well capitalized,
financially sound institutions with only a few minor weaknesses to 0.31% of
insured deposits for undercapitalized institutions that pose a substantial
risk of loss to the SAIF unless effective corrective action is taken. Until
the second half of 1995, the same amounts applied to BIF member institutions.
The FDIC is authorized to raise assessment rates in certain circumstances.
The Bank's assessments expensed for the year ended March 31, 1996, equaled
$387,722.
Effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed financial institutions
that are members of the BIF. Under the new assessment schedule, approximately
92% of BIF members pay the statutory minimum annual assessment of $2,000.
With respect to SAIF member institutions, the FDIC has retained the existing
rate schedule of 0.23% to 0.31% of insured deposits. The Bank is a member of
the SAIF rather than the BIF.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances which could
result in termination of the deposit insurance of the Bank.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 5.0%) of its net withdrawable accounts plus short-term
borrowings. OTS regulations also require each savings institution to maintain
an average daily balance of short-term liquid assets at a specified percentage
(currently 1.0%) of the total of its net withdrawable savings accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet liquidity requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency is required to implement a system of prompt corrective
action for institutions which it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of
prompt corrective action. Under the regulations, an institution shall be
deemed to be (i) "well capitalized" if it has a total risk-based capital ratio
of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a
leverage ratio of 5.0% or more and is not subject to specified requirements to
meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if
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it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a leverage ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well capitalized;"
(iii) "undercapitalized" if it has a total risk-based capital ratio that is
less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a
leverage ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio
that is less than 6.0%, a Tier I risk-based capital ratio that is less than
3.0% or a leverage ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
Section 38 of the FDIA and the implementing regulations also provide
that a federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity.
(The OTS may not, however, reclassify a significantly undercapitalized
institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At March 31, 1996, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and
(vi) compensation, fees and benefits. The federal banking agencies recently
adopted final regulations and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("Guidelines") to implement safety and soundness
standards required by the FDIA. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The agencies also proposed asset quality and earnings standards
which, if adopted in final, would be added to the Guidelines. Under the final
regulations, if the OTS determines that the Bank fails to meet any standard
prescribed by the Guidelines, the agency may require the Bank to submit to the
agency an acceptable plan to achieve compliance with the standard, as required
by the FDIA. The final regulations establish deadlines for the submission and
review of such safety and soundness compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test set forth in Section 10(m) of the
HOLA and regulations of the OTS thereunder to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either become a national bank or be subject to the following
restrictions on its operations: (i) the association may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the association may not establish any new branch office where a
national bank located in the savings institution's home state would not be
able to establish a branch office; (iii) the association shall be ineligible
to obtain new advances from any FHLB; and (iv) the payment of dividends by the
association shall be subject to the rules regarding the statutory and
regulatory dividend restrictions applicable to national banks. Also,
beginning three years after the date on which the savings institution ceases
to be a QTL, the savings institution would be prohibited from retaining any
investment or engaging in any activity not permissible for a national bank and
would be required to repay any outstanding advances to any FHLB. In addition,
within one year of the date on which a savings association controlled by a
company ceases to be a QTL,
PAGE
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the company must register as a bank holding company and become subject to the
rules applicable to such companies. A savings institution may requalify as a
QTL if it thereafter complies with the QTL test.
Currently, the QTL test requires that 65% of an institution's "portfolio
assets" (as defined) consist of certain housing and consumer-related assets on
a monthly average basis in nine out of every 12 months. Assets that qualify
without limit for inclusion as part of the 65% requirement are loans made to
purchase, refinance, construct, improve or repair domestic residential housing
and manufactured housing; home equity loans; mortgage-backed securities (where
the mortgages are secured by domestic residential housing or manufactured
housing); FHLB stock; and direct or indirect obligations of the FDIC. In
addition, the following assets, among others, may be included in meeting the
test subject to an overall limit of 20% of the savings institution's portfolio
assets: 50% of residential mortgage loans originated and sold within 90 days
of origination; 100% of consumer and educational loans (limited to 10% of
total portfolio assets); and stock issued by the FHLMC or the FNMA. Portfolio
assets consist of total assets minus the sum of (i) goodwill and other
intangible assets, (ii) property used by the savings institution to conduct
its business, and (iii) liquid assets up to 20% of the institution's total
assets. At March 31, 1996, the qualified thrift investments of the Bank were
approximately 69% of its portfolio assets.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Company is not subject to
any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from capital and to account appropriately for the
investments in and assets of both includable and nonincludable subsidiaries.
Institutions that fail to meet the core capital requirement would be required
to file with the OTS a capital plan that details the steps they will take to
reach compliance. In addition, the OTS's prompt corrective action regulation
provides that a savings institution that has a leverage ratio of less than 4%
(3% for institutions receiving the highest CAMEL examination rating) will be
deemed to be "undercapitalized" and may be subject to certain restrictions.
See "-- Federal Regulation of Savings Associations -- Prompt Corrective
Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations
rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will be required
to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement. No assurance can
be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to the Bank.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Bank's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt, and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated
debt, intermediate-term preferred stock and mandatory
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convertible subordinated debt, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and residential
construction loans are assigned a 100% risk weight, as are nonqualifying
residential mortgage loans and that portion of land loans and nonresidential
construction loans which do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighing factor (from 0%
to 100%) assigned to that category. These products are then totalled to
arrive at total risk-weighted assets. Off-balance sheet items are included in
risk-weighted assets by converting them to an approximate balance sheet
"credit equivalent amount" based on a conversion schedule. These credit
equivalent amounts are then assigned to risk categories in the same manner as
balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate risk component in calculating
its total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted
from an association's total capital in calculating compliance with its
risk-based capital requirement. Under the rule, there is a two quarter lag
between the reporting date of an institution's financial data and the
effective date for the new capital requirement based on that data. The ule
also provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis. Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure. In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in
lieu of the OTS-calculated amount. The OTS has postponed the date that the
component will first be deducted from an institution's total capital until
savings associations become familiar with the process for requesting an
adjustment to its interest rate risk component.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Regulatory Capital" for a table that sets forth in
terms of dollars and percentages the OTS tangible, core and risk-based capital
requirements, the Bank's historical amounts and percentages at March 31, 1996,
and pro forma amounts and percentages based upon the assumptions stated
therein.
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Bank to give the OTS 30
days' advance notice of any proposed declaration of dividends, and the OTS has
the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
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A Tier 1 savings association has capital in excess of its fully
phased-in capital requirement (both before and after the proposed capital
distribution). A Tier 1 savings association may make (without application but
upon prior notice to, and no objection made by, the OTS) capital distributions
during a calendar year up to 100% of its net income to date during the
calendar year plus one-half its surplus capital ratio (i.e., the amount of
capital in excess of its fully phased-in requirement) at the beginning of the
calendar year or the amount authorized for a Tier 2 association. Capital
distributions in excess of such amount require advance notice to the OTS. A
Tier 2 savings association has capital equal to or in excess of its minimum
capital requirement but below its fully phased-in capital requirement (both
before and after the proposed capital distribution). Such an association may
make (without application) capital distributions up to an amount equal to 75%
of its net income during the previous four quarters depending on how close the
association is to meeting its fully phased-in capital requirement. Capital
distributions exceeding this amount require prior OTS approval. Tier 3
associations are savings associations with capital below the minimum capital
requirement (either before or after the proposed capital distribution). Tier
3 associations may not make any capital distributions without prior approval
from the OTS.
The Bank is currently meeting the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of
the calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Bank's unimpaired capital and surplus,
plus an additional 10% of unimpaired capital and surplus, if such loan is
secured by readily-marketable collateral, which is defined to include certain
financial instruments and bullion. The OTS by regulation has amended the
loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At March 31, 1996, the Bank's
limit on loans to one borrower was $2.3 million. At March 31, 1996, the
Bank's largest aggregate amount of loans to one borrower was $2.1 million.
Activities of Thrift Institutions and Their Subsidiaries. When a
savings association establishes or acquires a subsidiary or elects to conduct
any new activity through a subsidiary that the association controls, the
savings association must notify the FDIC and the OTS 30 days in advance and
provide the information each agency may, by regulation, require. Savings
associations also must conduct the activities of subsidiaries in accordance
with existing regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to
which the insured association or its subsidiaries may engage in certain
covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus and place an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered
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transaction" includes the making of loans, the purchase of assets, the
issuance of a guaranty and similar types of transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may
be granted only by the Federal Reserve Board, as is currently the case with
respect to all FDIC-insured banks. The Bank has not been significantly
affected by the rules regarding transactions with affiliates.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders, as well as entities controlled by such persons, is
currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and
Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk
of repayment. Regulation O also places individual and aggregate limits on the
amount of loans the Bank may make to such persons based, in part, on the
Bank's capital position, and requires certain board approval procedures to be
followed. The OTS regulations, with certain minor variances, apply Regulation
O to savings institutions.
Savings and Loan Holding Company Regulation
Company Acquisitions. The HOLA and OTS regulations issued thereunder
generally prohibit a savings and loan holding company, without prior OTS
approval, from acquiring more than 5% of the voting stock of any other savings
association or savings and loan holding company or controlling the assets
thereof. They also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or controls more
than 25% of the voting shares of such holding company, from acquiring control
of any savings association not a subsidiary of such savings and loan holding
company, unless the acquisition is approved by the OTS.
Company Activities. As a unitary savings and loan holding company, the
Company generally is not subject to activity restrictions. If the Company
acquires control of another savings association as a separate subsidiary other
than in a supervisory acquisition, it would become a multiple savings and loan
holding company. There generally are more restrictions on the activities of a
multiple savings and loan holding company than on those of a unitary savings
and loan holding company. The HOLA provides that, among other things, no
multiple savings and loan holding company or subsidiary thereof which is not
an insured association shall commence or continue for more than two years
after becoming a multiple savings and loan association holding company or
subsidiary thereof, any business activity other than: (i) furnishing or
performing management services for a subsidiary insured institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary insured institution,
(iv) holding or managing properties used or occupied by a subsidiary insured
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the
OTS by regulation, prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above also must be
approved by the OTS prior to being engaged in by a multiple holding company.
Qualified Thrift Lender Test. The HOLA requires any savings and loan
holding company that controls a savings association that fails the QTL test,
as explained under "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations.
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TAXATION
Federal Taxation
General. The Company and the Bank will report their income on a fiscal
year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company.
Tax Bad Debt Reserves. Savings institutions such as the Bank which meet
certain definitional tests primarily relating to their assets and the nature
of their business ("qualifying thrifts") are permitted to establish a reserve
for bad debts and to make annual additions thereto, which additions may,
within specified formula limits, be deducted in arriving at their taxable
income. The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, may be computed
using an amount based on the Bank's actual loss experience, or a percentage
equal to 8% of the Bank's taxable income, computed with certain modifications
and reduced by the amount of any permitted additions to the nonqualifying
reserve. The Bank's deduction with respect to nonqualifying loans must be
computed under the experience method which essentially allows a deduction
based on the Bank's actual loss experience over a period of several years.
Each year the Bank selects the most favorable way to calculate the deduction
attributable to an addition to the tax bad debt reserve. The Bank used the
experience method bad debt deduction for the years ended March 31, 1994, 1995
and 1996.
The Bank currently satisfies the qualifying thrift definitional tests.
If the Bank failed to satisfy such tests in any taxable year, it would be
unable to make additions to its bad debt reserve calculated as a percentage of
taxable income. Instead, the Bank would be required to deduct bad debts as
they occur and would additionally be required to recapture its bad debt
reserve deductions ratably over a multi-year period. Among other things, the
qualifying thrift definitional tests require the Bank to hold at least 60% of
its assets as "qualifying assets." Qualifying assets generally include cash,
obligations of the United States or any agency or instrumentality thereof,
certain obligations of a state or political subdivision thereof, loans secured
by interests in improved residential real property or by savings accounts,
student loans and property used by the Bank in the conduct of its banking
business. The Bank's ratio of qualifying assets to total assets exceeded 60%
through March 31, 1996. Although there can be no assurance that the Bank will
continue to satisfy the 60% test, management believes that this level of
qualifying assets can be maintained by the Bank.
The amount of the addition to the reserve for losses on qualifying real
property loans under the percentage-of-taxable-income method cannot exceed the
amount necessary to increase the balance of the reserve for losses on
qualifying real property loans at the close of the taxable year to 6% of the
balance of the qualifying real property loans outstanding. Also, if the
qualifying thrift uses the percentage of taxable income method, then the
qualifying thrift's aggregate addition to its reserve for losses on qualifying
real property loans cannot, when added to the addition to the reserve for
losses on nonqualifying loans, exceed the amount by which: (i) 12% of the
amount that the total deposits or withdrawable accounts of depositors of the
qualifying thrift at the close of the taxable year exceeds (ii) the sum of the
qualifying thrift's surplus, undivided profits and reserves at the beginning
of such year. The Bank does not expect this overall limitation to restrict
the Bank's deduction for additions to its bad debt reserve for the year ending
March 31, 1997. At March 31, 1996, the Bank's total bad debt reserve for tax
purposes was approximately $2.2 million. Proposed legislation would eliminate
future bad debt deductions and would require thrifts to recapture into income
over a six-year period their post-1987 additions to their bad debt tax
reserves, thereby generating additional tax liability. The Bank does not have
any post-1987 additions to its bad debt tax reserve.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Company that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the
reserve for such losses exceeds the amount that would have been allowed under
the experience method; or (ii) from the supplemental reserve for losses on
loans ("Excess Distributions"), then an amount based on the amount distributed
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will be included in the Bank's taxable income. Nondividend distributions
include distributions in excess of the Bank's current and accumulated earnings
and profits, distributions in redemption of stock, and distributions in
partial or complete liquidation. However, dividends paid out of the Bank's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from the
Bank's bad debt reserve. Thus, any dividends to the Company that would reduce
amounts appropriated to the Bank's bad debt reserve and deducted for federal
income tax purposes would create a tax liability for the Bank. The amount of
additional taxable income attributable to an Excess Distribution is an amount
that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Bank makes a "nondividend
distribution," then approximately one and one-half times the amount so used
would be includable in gross income for federal income tax purposes, assuming
a 35% corporate income tax rate (exclusive of state and local taxes). See
"Regulation" for limits on the payment of dividends by the Bank. The Bank
does not intend to pay dividends that would result in a recapture of any
portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of
the tax bad debt reserve deduction using the percentage of taxable income
method over the deduction that would have been allowable under the experience
method is treated as a preference item for purposes of computing the AMTI. In
addition, only 90% of AMTI can be offset by net operating loss carryforwards.
AMTI is increased by an amount equal to 75% of the amount by which the Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of .12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Bank, whether or
not an Alternative Minimum Tax ("AMT") is paid.
Dividends-Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the
same affiliated group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company or the Bank owns more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted.
The Company, the Bank and its consolidated subsidiary have been audited
or their books closed without audit by the IRS with respect to consolidated
federal income tax returns through March 31, 1992. See Note 11 of Notes to
Consolidated Financial Statements for additional information regarding income
taxes of the Bank.
State Taxation
South Carolina. South Carolina has adopted the Code as it relates to
savings banks, effective for taxable years beginning after December 31, 1986.
The Bank is subject to South Carolina income tax at the rate of 6%.
Delaware. As a Delaware holding company not earning income in Delaware,
the Company is exempted from Delaware corporate income tax, but is required to
file an annual report with and pay an annual franchise tax to the State of
Delaware.
Item 2. Properties
At March 31, 1996, Security Federal owned the buildings and land for its
main office, four of its branch offices, including the operations center,
leased the land and owned the improvements thereon for one of its offices,
owned part and leased part of one branch office and leased the remaining three
offices. The property related to the offices owned by Security Federal had a
depreciated cost (including land) of approximately $1.8 million at March 31,
1996. At March 31, 1996, the aggregate net book value of leasehold
improvements (excluding furniture and equipment) associated with leased
premises was $262,357. See Note 6 of Notes to Consolidated Financial
Statements.
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The following table sets forth the net book value of the offices owned
(including land) and leasehold improvements on properties leased by Security
Federal at March 31, 1996.
Date
Lease Facility Gross
Owned or Expiration Opened/ Square Net Book
Location Leased Date Acquired Footage Value
Main Office:
1705 Whiskey Road S. Owned N/A 1980 10,000 $544,872
Aiken, South Carolina
Full Service Branch
Offices:
149 E. Baruch Street Owned N/A 1984 2,258 217,063
Denmark, South Carolina
100 Laurens Street, N.W. Leased 1998 1959 4,500 --
Aiken, South Carolina
313 East Martintowne Road Owned(1) N/A 1973 4,356 52,751
North Augusta, South
Carolina
1665 Richland Avenue, W. Owned N/A 1984 1,942 241,378
Aiken, South Carolina
Montgomery & Canal Leased 1997 1993(2) 1,600 39,733
Streets
Masonic Shopping Center
Graniteville, South
Carolina
2812 Augusta Road Owned N/A 1993(2) 2,509 222,827
Langley, South Carolina
Highway 125 and Highways
1 and 78 Leased 1998 1993(2) 2,287 4,912
Midland Valley Shopping
Center
Clearwater, South Carolina
118 Main Street North Owned 2000 1993(2) 3,600 164,966
Wagener, South Carolina
Walmart Superstore
2035 Whiskey Road Leased 2001 1996 517 217,712
Aiken, South Carolina
Operations Center:
871 East Pine Log Road Owned N/A 1988 5,000 404,682
Aiken, South Carolina
(1) Security Federal has a lease on the land for this office which expires
in 2003.
(2) Represents acquisition date.
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Item 3. Legal Proceedings
The Company is involved as plaintiff or defendant in various legal
actions arising in the course of its business. It is the opinion of
management, after consultation with counsel, that the resolution of these
legal actions will not have a material adverse effect on the Company's
financial condition and results of operations.
Item 4. Submission of Matter to Vote or Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended March 31, 1996.
PART II
Item 5. Market for the Issuer's Common Stock and Related Security Holder
Matters
Price Range of Common Stock
The table below shows the range of high and low bid prices as reported
by the Robinson-Humphrey Company, Inc. located in Aiken, South Carolina, which
makes a market in the Company's stock. Those prices represent actual
transactions and do not include retail markups, markdowns or commissions.
Quarter Ending HIGH LOW
03/31/94 $20.25 $20.25
06/30/94 20.6875 20.375
09/30/94 21.1875 21.5625
12/31/94 21.50 21.00
03/31/95 21.875 21.75
06/30/95 21.875 21.875
09/30/95 24.75 24.75
12/31/95 26.50 24.50
03/31/96 27.25 26.25
As of March 31, 1996, the Company had approximately 288 stockholders of
record.
Dividends
Dividends will be paid upon the determination of the Board of Directors
that such payment is consistent with the long-term interests of the Company.
The factors affecting this determination include the Company's current and
projected earnings, operating results, financial condition, regulatory
restrictions, future growth plans and other relevant factors. The Company
declared and paid quarterly dividends of $0.05 per share during each of the
fiscal years ended March 31, 1995 and 1996.
The Company's ability to pay dividends is dependent upon its receipt of
dividends from the Bank. The Bank may not declare or pay a cash dividend on
its stock or repurchase shares of its stock if the result thereof would be to
cause its regulatory capital to be reduced below the amount required for the
liquidation account or fail to meet applicable regulatory capital
requirements. Pursuant to OTS regulations, Tier 1 associations, which are
associations that before and after the proposed distribution meet or exceed
their fully phased-in capital requirements, may make capital distributions
during any calendar year equal to 100% of net income for the year to date plus
50% of the amount by which the association's total capital exceeds its fully
phased-in capital requirement, as measured at the beginning of the calendar
year. However, a Tier 1 association deemed to be in need of more than normal
supervision by the OTS and may be downgraded to a Tier 2 or Tier 3 association
as a result of such a determination. The Bank
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meets the requirements for a Tier 1 association and has not been notified by
the OTS of a need for more than normal supervision. The Bank is also required
to give the OTS 30 days' notice prior the declaration of a dividend of the
Company.
Unlike the Bank, there is no regulatory restriction on the payment of
dividends by the Company. However, it is subject to the requirements of
Delaware law which generally limit dividends to an amount equal to the excess
of a corporation's net assets over paid-in capital; or if there is no such
excess, to its net profits for the current and immediately preceding fiscal
year.
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Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The investment and other activities of the parent company, Security
Federal Corporation (the Company), have had no significant impact on the
results of operations for the periods presented in the financial statements.
In December, 1995, the Company bought the interests of Security Federal Bank
(the Bank) in two real estate development partnerships, Currytowne and Willow
Woods, at fair market value. This transaction took place because regulations
had required the Bank to deduct its interest in the partnerships from
regulatory capital. The comments presented in the following discussion of
financial results are indicative of the activities mainly of the Bank, a
wholly-owned subsidiary of the Company. The Bank changed its name to Security
Federal Bank in April 1996.
The principal business of the Bank is the acceptance of savings deposits
from the general public and the origination of mortgage loans to enable
borrowers to purchase or refinance one-to-four family residential real estate.
The Bank also makes loans secured by multi-family residential and commercial
real estate and consumer and commercial loans. In addition, the Bank
originates construction loans on single family residences, multi-family
dwellings and projects, commercial real estate, and loans for the acquisition,
development and construction of residential subdivisions and commercial
projects.
The Bank's net income is highly dependent on its interest rate spread,
which is the difference between the average yield earned on its loan and
investment portfolio and the average rate paid on its deposits and borrowings.
The spread is impacted by interest rates, deposit flows and loan demands.
Levels of non-interest income and operating expense are also significant
factors in earnings.
Branch Acquisitions
On October 21, 1993, the Bank acquired certain assets and certain
deposits and other liabilities of four branch offices of NationsBank of South
Carolina, N.A. The branches are located in Langley, Graniteville, Clearwater,
and Wagener, all of Aiken County, South Carolina.
As consideration for the purchase price of the offices, the Company paid
a premium of approximately $4.4 million or 7.17% of the deposit liabilities,
and paid net book value including accrued interest for the loans, face value
of the coin and currency, and a set amount for the buildings and equipment for
the respective locations. The deposit premium, after adjusting for the costs
associated with the transaction was allocated to core deposit intangible (CDI)
($1.9 million) and goodwill ($2.0 million). See note 2 of the Notes to
Consolidated Financial Statements for additional information regarding this
transaction.
This transaction was an important strategic move for the Bank, providing
access to a strong and loyal customer base, expanding the Bank's branch
network in Aiken County which management believes will better enable the Bank
to serve it's customer base, and providing opportunity for future growth.
Most of the cash provided by this transaction was used to purchase U.S.
Treasury, U.S. Government agencies and other securities with varying
maturities.
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Asset and Liability Management
The Bank maintains a program of asset and liability management that seeks
to limit its vulnerability to material and prolonged increases or decreases in
interest rates, or "interest rate risk." The principal determinant of the
exposure of the Bank's earnings to interest rate risk is the timing difference
(gap) between the repricing or maturity of the Bank's interest-earning assets
and the repricing or maturity of its interest-bearing liabilities. If the
maturities of the Bank's assets and liabilities were perfectly matched, and if
the interest rates borne by its assets and liabilities were equally flexible
and moved concurrently (neither of which is the case), the impact on net
interest income of any material and prolonged changes in interest rates would
be minimal.
The Bank's asset and liability policies are directed toward the
objectives of increasing the interest rate sensitivity of the Bank's assets by
shortening their maturities or periods to reprice while reducing the interest
rate sensitivity of the Bank's interest-bearing liabilities by extending their
maturities. Management believes it has reduced the Bank's vulnerability to
increases in interest rates through its current emphasis on originating
adjustable rate mortgage loans and shorter term consumer and commercial loans
compared to the early 1980's. The success of management's strategy is
evidenced by the composition of the loan portfolio which includes $102.2
million of adjustable rate consumer, commercial, and mortgage loans or
approximately 66.0% of total gross loans at March 31, 1996. At March 31,
1996, the negative mismatch of interest earning assets repricing or maturing
within one year with interest bearing liabilities repricing or maturing within
one year decreased to $24.2 million or 11.3% of total assets as compared to
$34.5 million or 16.4% at March 31, 1995. This improvement in the one year
gap was the result of increased originations of consumer and commercial loans
the past two years. Another reason for improvement was the shortening of
maturities in the Bank's investment portfolio.
During the past year, the Bank originated approximately $3.7 million in
adjustable rate residential and commercial real estate loans which are
generally not sold, but held for investment. Also, as part of the Bank's
asset liability program, Security Federal originated a total of $44.4 million
in consumer and commercial loans, which are usually short term in nature.
During fiscal 1996, 90.0% of total loan originations were comprised of
consumer, commercial, and adjustable rate mortgage loans compared to 93.5% of
total originations in fiscal 1995. The Bank's portfolio of consumer and
commercial loans was $83.6 million at March 31, 1996, an increase of $9.8
million from March 31, 1995, and an increase of $45.4 million from March 31,
1994. Consumer and commercial loans combined have increased from 47.3% of
total loans at March 31, 1994 and 48.0% at March 31, 1995 to 54% at March 31,
1996.
Due to a decrease in real estate activity and refinancings in fiscal
1996, the Bank originated only $5.3 million and $4.7 million in fixed rate
residential loans in fiscal 1996 and 1995 respectively, compared to $50.0
million in fiscal 1994. Thus, the bank only sold $5.5 million in fiscal 1996
and $3.1 million in fiscal 1995 to secondary market agencies, compared to
$47.7 million and $50.0 million in fiscal years 1994, and 1993, respectively.
Other fixed rate residential loans passed directly on to other investors,
other than Freddie Mac or Fannie Mae, totaled $6.9 million in fiscal 1996, and
$8.4 million in fiscal 1995, and $17.4 million in fiscal 1994. At March 31,
1996, fixed rate residential loans amounted to $11.8 million or 7.6% of the
total loan portfolio, compared to $16.0 million or 10.4% at the end of the
previous year.
Certificates of deposit in excess of $100,000 (jumbo certificates) are
normally considered to be highly interest rate sensitive because of their
relatively short maturities. Many financial institutions have used jumbo
certificates to manage interest rate sensitivity and liquidity. The Bank has
not relied on jumbo certificates for liquidity or asset liability management.
As of March 31, 1996, the Bank had $9.8 million outstanding in jumbo
certificates as compared to $13.7 million at March 31, 1995.
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The following table sets forth the maturity schedule of certificates of
deposit with balances of $100,000 or greater at March 31, 1996.
(In Thousands)
Within 3 months $ 2,548
After 3, within 6 months 2,792
After 6, within 12 months 2,299
After 12 months 2,208
$ 9,847
A negative gap position is expected to have an adverse effect on net
interest income during periods of rising interest rates. A negative one-year
gap position occurs when the dollar amount of rate sensitive liabilities
maturing or repricing within one year exceeds the dollar amount of
rate-sensitive assets maturing or repricing during that same time period. As
a result, during periods of rising interest rates, the interest paid on
interest bearing liabilities will increase faster than interest received from
earning assets, thus, reducing net interest income. In periods of falling
interest rates, the reverse is true, resulting in an expected increase in net
interest income.
The following table sets forth the Bank's interest-bearing liabilities
and interest-earning assets repricing or maturing within one year. The table
at the top of page 40 sets forth the Bank's interest bearing liabilities and
interest-earning assets repricing or maturing within one year. The table on
page eight presents all the Bank's interest bearing liabilities and interest
earning assets into repricing or maturity time periods. Both tables present
adjustable rate loans in the periods they are scheduled to reprice, not
mature. They also assume investments reprice at the earlier of maturity or
the next scheduled interest rate change, if any. NOW accounts, money market
accounts, and regular savings accounts are assumed to reprice in the less than
three month category, although other banks may assume slower repricing with
assumed decay rates.
At March 31,
1996 1995
(Dollars in Thousands)
Loans (1) $109,503 106,542
Mortgage-backed securities 119 105
Investments:
Held-to-maturity 3,006 7,001
Available-for-sale 23,538 987
Other interest-earning assets 2,858 1,014
Total interest rate sensitive
assets repricing within one year 139,024 115,649
Deposits 145,805 130,162
FHLB advances and other borrowed money 17,389 19,951
Total interest rate sensitive liabilities
repricing within one year 163,194 150,113
Gap $(24,170) (34,464)
Interest rate sensitive assets/interest
rate sensitive liabilities 85.19% 77.04%
Gap as a percent of total assets (11.3) (16.4)
(1) Loans are net of undisbursed funds and loans in process
<PAGE>
<PAGE>
The OTS uses a Net Portfolio Value ("NPV") approach to the quantification
of interest rate risk. In essence, this approach calculates the difference
between the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The difference is the present value of equity.
It includes the value of core deposits, and loan servicing in the base net
value of the Bank. Management believes that the Bank's level of interest rate
risk is acceptable under this approach as well.
Net Portfolio Value NPV as % of PV of
Assets
Change Dollar Dollar Percent NPV
in Rates Amount Change Change Ratio Change
400 bp* 16,314 (2,707) (14)% 7.77% (99) bp
300 bp 17,321 (1,700) (9)% 8.17% (59) bp
200 bp 18,178 (843) (4)% 8.49% (26) bp
100 bp 18,790 (231) (1)% 8.71% (5) bp
0 bp 19,021 -- -- 8.76% --
(100) bp 18,840 (181) (1)% 8.63% (13) bp
(200) bp 18,331 (690) (4)% 8.37% (39) bp
(300) bp 18,223 (798) (4)% 8.27% (49) bp
(400) bp 18,823 (198) (1)% 8.46% (29) bp
*bp = basis points
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<PAGE>
The following table sets forth the interest sensitivity of the Bank's
assets and liabilities at March 31, 1996, on the basis of the factors and
assumptions set forth in the table on the top of page 38.
Remaining Time Before Asset/Liability Matures or Can be Repriced
More More More More More
Than Than Than Than Than
Three One Three Five Ten
Three Months Year Years Years Years More
Months Thru Thru Thru Thru Thru Than
or One Three Five Ten Twenty Twenty
Less Year Years Years Years Years Years Total
(Dollars in Thousands)
Interest Earnings
Assets
Loans (1). . . $48,003 $61,500 $25,386 $5,531 $4,888 $5,338 $ 3,648
$154,294
Mortgage-backed
securities held
-to- maturity,
at cost . . . 29 90 562 292 471 562 536
2,542
Investment securities:
Held-to-maturity,
at cost . . 1,500 1,506 2,992 1,500 -- -- --
7,498
Available-for-
sale, at fair
value . . . 2,997 20,541 7,434 -- -- -- --
30,972
Interest-bearing
deposits with
banks . . . . 2,858 -- -- -- -- -- --
2,858
FHLB stock, at
cost . . . . -- -- 1,233 -- -- -- --
1,233
Total financial
assets . . . $55,387 $83,637 $37,607 $7,323 $5,359 $5,900 $4,184
$199,397
Interest Bearing
Liabilities
Deposits:
Certificates of
deposit. . . 31,988 51,536 17,670 1,544 -- -- --
102,738
NOW . . . . . 34,896 -- -- -- -- -- --
34,896
Money market
deposit
accounts . . 13,770 -- -- -- -- -- --
13,770
Passbook
accounts . . 13,615 -- -- -- -- -- --
13,615
Borrowings . . 6,800 10,589 4,117 1,384 324 -- --
23,214
Total interest
bearing
liabilities . $101,069 $62,125 $21,787 $2,928 $ 324 $ -- $ --
$188,233
Current period
gap . . . . . (45,682) 21,512 15,820 4,395 5,035 5,900 4,184
11,164
Cumulative
gap . . . . . (45,682) (24,170) (8,350) (3,955) 1,080 6,980 11,164
11,164
Cumulative gap
as a percent
of total
assets . . . (21.3%) (11.3%) (3.9%) (1.8%) .5% 3.2% 5.2%
5.2%
(1) Loans are net of undisbursed funds and loans in process
In evaluating the Bank's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing
tables must be considered. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may
react in different degrees to changes in market interest rates. Additionally,
the interest rates of certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates. Loan repayment rates and
withdrawals of deposit likely will differ substantially from the assumed rates
previously set forth in the event of significant changes in interest rates due
to the option of borrowers to prepay their mortgage loans and the ability of
depositors to withdraw funds prior to maturity. Further, certain assets such
as adjustable rate mortgages, have features which restrict changes in interest
rates on a short-term basis as well as over the life of the asset.
Financial Condition
Total assets at March 31, 1996 were $214.8 million, a $4.9 million
increase from March 31, 1995. This increase was primarily a result of an
increase in net loans receivable during the year and an increase in cash and
cash equivalents at year end.
<PAGE>
<PAGE>
Total net loans receivable were at $152.1 million at March 31, 1996, an
increase of $3.2 million or 2.1% from the prior year. Residential real estate
loans decreased $6.3 million or 9.5% to $60.0 million at March 31, 1996.
Commercial real estate loan balances decreased to $10.6 million at fiscal year
end from $13.0 million at March 31, 1995, a decrease of $2.4 million or 18.3%.
Consumer loans increased to $44.8 million at March 31, 1996 from $44.1 million
at the commencement of the year, an increase of $721,000 or 1.6%. Commercial
loans increased $9.0 million or 30.4%, to $38.8 million at year end.
Management continues to emphasize origination of consumer and commercial loans
to increase yields and improve interest rate risk. Consumer loans are
generally considered to involve greater degrees of collateral and credit risks
than residential mortgage loans.
Non-accrual loans totaled $2.6 million at March 31, 1996 compared to
$812,000 a year earlier. Although this is a significant increase from last
year, the majority of these loans are well secured and are in the process of
collection. The Bank classifies all loans as non-accrual when they become 60
or more days delinquent. The Bank had $487,000 of troubled debt restructuring
at year end, comprised of one loan which was also on non-accrual status and is
considered impaired. The loan is secured and no loss is estimated at this
time. At March 31, 1995, the Bank had $780,000 of troubled debt
restructurings none of which were classified as non-accrual. Real estate
acquired in settlement of loans (REO) amounted to $719,500 at March 31, 1996
compared to $1.5 million at fiscal year end 1995.
The Aiken area's largest employer, the Savannah River Site, had a
significant downsizing of personnel which leads to some uncertainties for the
local economy. In addition, area real estate sales have been slower in the
area than in past years. Future additions to the Bank's allowance for loan
losses are dependent on, among other things, the performance of the Bank's
loan portfolio, the economy, changes in real estate values, and interest
rates. There can be no assurance that additions to the allowance will not be
required in future periods. Management continues to monitor its loan
portfolio for the impact of local economic changes.
Deposits at the Bank increased by $6.1 million or 3.7% to $172.4 million
at March 31, 1996 from $166.3 million at March 31, 1995. Advances from the
Federal Home Loan Bank (FHLB), decreased to $22.9 million at March 31, 1996,
down from $26.0 million a year earlier, a decrease of $3.1 million.
Total shareholders' equity totaled $15.4 million at March 31, 1996, an
increase of $945,000 or 6.5%, compared to $14.5 million a year earlier. The
increase was attributable to net income of $1.1 million and an increase in
paid in capital of $39,380 due to the exercise of stock options, partially
offset by $82,236 in dividends paid and a $71,970 increase in unrealized net
loss on securities available for sale.
Results of Operations
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets
and interest-bearing liabilities. It distinguishes between the changes
related to higher or lower outstanding balances and the changes due to the
volatility of interest rates. For each category of interest-earning assets
and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in rate (i.e., changes in rate multiplied by old
volume) and (ii) changes in volume (i.e., changes in volume multiplied by old
rate.) For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately to the
change due to volume and the change due to rate.
<PAGE>
<PAGE>
1996 Compared to 1995 1995 Compared to 1994
Volume Rate Net Volume Rate Net
(Dollars in Thousands)
Interest-earning assets:
Loans:
Real estate loans $ 156 (232) (76) 498 -- 498
Other loans 1,002 665 1,667 1,669 499 2,168
Total loans 1,158 433 1,591 2,167 499 2,666
Mortgage-backed
securities (25) -- (25) (96) (34) (130)
Investments (261) 108 (153) 660 326 986
Other interest-
earning assets (2) 9 7 (191) 81 (110)
Total interest-
earning assets $ 870 550 1,420 2,540 872 3,412
Interest-bearing
liabilities:
Deposits:
Certificate
accounts 252 1,320 1,572 304 257 561
NOW accounts (33) (2) (35) 35 110 145
Money Market
accounts (128) (2) (130) 12 53 65
Passbook
accounts (53) 2 (51) 133 (12) 121
Total deposits 38 1,318 1,356 484 408 892
Borrowings 313 130 443 924 (119) 805
Total interest-
bearing liabilities 351 1,448 1,799 1,408 289 1,697
Effect on net
income $ 519 (898) (379) 1,132 583 1,715
<PAGE>
<PAGE>
The following table presents, for the periods indicated, the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances which are representative of
daily average balances.
At
March 31, Years Ended March 31,
1996 1996 1995 1994
Yield/ Average Yield/ Average Yield/ Average Yield/
Rate Balance Int. Rate Balance Int. Rate Balance Int. Rate
(Dollars in Thousands)
Interest-
earning
assets:
Mortgage
loans 7.37% $ 75,083 $ 5,652 7.53% $ 73,037 $ 5,728 7.84% $66,670 5,230 7.84%
Other
loans 9.69 78,641 7,843 9.97 68,148 6,176 9.06 49,294 4,008 8.13
Total
loans 8.63 153,724 13,495 8.78 141,185 11,904 8.43 115,964 9,238 7.97
Mortgage-
backed
securi-
ties 7.69 1,549 110 7.10 1,908 135 7.08 3,201 265 8.28
Ivest-
ments 4.96 41,999 2,123 5.06 47,197 2,276 4.82 32,621 1,290 3.95
Other
interest-
earning
assets 5.35 1,764 94 5.33 1,809 87 4.81 6,605 197 2.98
Total
interest-
earning
assets 7.88% $199,036$15,822 7.95% $192,099 $14,402 7.50%$158,391$10,990 6.94%
Interest-
bearing
liabilities:
Certificate
ac-
counts 5.65% $ 97,173 $ 5,529 5.69% $ 91,716 $ 3,957 4.31% $84,538 $3,396 4.02%
NOW
ac-
counts 1.63 32,729 560 1.71 34,659 595 1.72 32,280 450 1.39
Money
Market
ac-
counts 2.81 14,655 416 2.84 19,171 546 2.85 18,709 481 2.57
Passbook
ac-
counts 2.50 14,003 348 2.49 16,120 399 2.48 10,763 278 2.58
Total
interest-
bearing
de-
posits 4.30 158,560 6,853 4.32 161,666 5,497 3.40 146,290 4,605 3.15
Other
Borrow-
ings 8.00 87 7 8.00 -- -- -- -- -- --
FHLB
ad-
vances 6.29 27,569 1,762 6.39 22,621 1,326 5.86 7,167 521 7.27
Total
interest-
bearing
liabili-
ties 4.56% $186,216 $8,622 4.73% $184,287 $6,823 3.70%$153,457 $5,126 3.34%
Effect on
net
interest
income $7,200 $7,579 $5,864
Interest
rate
spread 3.32% 3.22% 3.80% 3.60%
Net yield
on earning
assets 3.62% 3.95% 3.70%
Comparison of the Years Ended March 31, 1996 and 1995
General. The Company earned net income of $1,059,574 for the year ended
March 31, 1996, a $57,420 increase over net income of $1,002,154 for fiscal
1995. This increase was due primarily to an increase in other income and a
decrease in general and administrative expenses, offset partially by a decrease
in net interest income.
Net interest income. Net interest income was $7.2 million for fiscal 1996
compared to $7.6 million in 1995, a decrease of $379,000. The primary reason
for the decrease was that a higher percentage of interest bearing liabilities
repriced compared to interest earning assets. Total interest bearing assets
increased in yield by an average of 45 basis points while interest bearing
liabilities increased by an average cost of 103 basis points during fiscal 1996.
<PAGE>
<PAGE>
Interest on loans increased by $1.6 million to $13.5 million from $11.9
million in 1995 primarily due to average loans increasing by $12.5 million in
1996. Interest on mortgage-backed securities dropped to $110,000 from
$135,000 due to a lower average balance outstanding in 1996. Investment
interest decreased to $2.1 million from $2.3 million in fiscal 1996 compared
to 1995 because of a decrease in average outstanding investments. Other
interest income increased $6,500 in 1996 due to slightly higher yields on
overnight investments. Total interest income increased by $1.4 million in
1996 up to $15.8 million from $14.4 million in 1995.
Interest on deposits increased to $6.8 million in 1996 compared to $5.5
million in 1995, due to the cost of interest bearing deposits rising in 1996.
Interest on borrowings increased to $1.8 million in fiscal 1996 from $1.3
million in fiscal 1995 due to an increase in average borrowings and an
increase in the average rate on borrowings. Total interest expense increased
to $8.6 million in 1996 compared to $6.8 million in 1995, an increase of $1.8
million.
Provision for Loan Losses. The provision for loan losses during fiscal
1996 was $230,000 as compared to $300,000 for 1995. Net charge-offs increased
by $346,000 in fiscal 1996 of which 81.0% of this total consisted of one
commercial loan. The ratio of the allowance for loan losses to total loans at
March 31, 1996 was 1.14% as compared to 1.30% a year earlier. Based on its
monthly reviews of the loan portfolio, management believes the allowance for
loan losses is adequate based on its estimate of losses inherent in the loan
portfolio, although there can be no guarantee as to these estimates.
Other Income. Other income increased $156,000 in fiscal 1996 compared to
1995. The Bank had no gains on sale of investments in fiscal 1996 compared to
a $2,500 loss in fiscal 1995. Gain on sale of loans which is a volatile
source of income decreased by $37,000 in 1996. Loan servicing fees decreased
by $6,000 while service fees on deposit accounts increased by $75,000. The
increase in deposit account fees was attributable to an increase in demand
accounts through efforts to attract commercial deposits and a special consumer
checking account package which commenced in August 1995.
As discussed earlier, the Company, is a partner in two real estate joint
ventures, Willow Woods Associates, near Aiken, and Currytowne Associates in
Edgefield County, South Carolina. Due to the sluggish real estate market, lot
sales have been slower than anticipated. Income from real estate operations
decreased by $135,000 in fiscal 1996 compared to fiscal 1995. A provision for
real estate losses of $45,000 was charged for fiscal 1996 to real estate
operations while no provision for real estate operations was expensed in
fiscal 1995.
Other income, which consists of net gain on real estate acquired in
settlement of loans (REO), insurance commissions, and miscellaneous fees,
increased by $256,000 in fiscal 1996 mainly due to an increase in net gain on
sale of REO of $113,000 and a reversal of a $100,000 allowance for losses on
REO in fiscal 1996 that was no longer necessary.
General and Administrative Expenses. General and administrative expenses
decreased by $250,000 in fiscal 1996 due mainly to a $264,000 decrease in
salaries and employee benefits, as a result of employee attrition and a
restructuring in officer positions. Occupancy expense remained almost
constant with a slight $4,800 decrease. Advertising expense increased by
$67,000 in fiscal 1996 in order to promote new checking account products,
certificates of deposit and the new Wal*Mart branch that opened in February
1996. Depreciation and maintenance of equipment expense decreased by $54,000.
Amortization of intangibles remained the same in fiscal 1996 and 1995 at
$465,000. Federal insurance premiums expense decreased by $31,000 in fiscal
1996. Other expenses consisting of legal, real estate owned expense, data
processing and miscellaneous expenses rose by $38,000 in fiscal 1996.
Income Taxes. Income taxes increased by $39,000 to $539,000 in fiscal
1996 compared to $500,000 expensed in 1995 as a result of an increase in
taxable income. The effective tax rate was approximately 34% and 33%,
respectively.
<PAGE>
<PAGE>
Comparison of the Years Ended March 31, 1995 and 1994
General. The Company earned net income of $1,002,154 for the year ended
March 31, 1995, a $433,261 increase over net income of $568,893 for fiscal
1994. This increase was due primarily to an increase in net interest income,
offset partially by a decrease in other income and an increase in general and
administrative expense.
Net interest income. Net interest income was $7.6 million for fiscal
1995 compared to $5.9 million in 1994, an increase of $1.7 million. The
primary reason for the increase was that 1995 was the first full year of
operations following the four branches being acquired in October, 1993.
Average interest earning assets increased $33.7 million from 1994 to 1995
primarily due to the assets acquired as a result of the branch acquisitions.
Interest on loans increased by $2.7 million to $11.9 million from $9.2
million in 1994 primarily due to average loans increasing by $25.2 million in
1995. Interest on mortgage-backed securities dropped to $134,901 from
$265,534 due to principal paydowns with no new investments. Investment
interest increased to $2.3 million from $1.3 million in fiscal 1995 compared
to 1994 because of an increase in average outstanding investments. Other
interest income decreased $109,878 in 1995 due to lower average balances in
lower-earning overnight funds. Total interest income increased by $3.4
million in 1995 up to $14.4 million from $11.0 million in 1994.
Interest on deposits increased to $5.5 million in 1995 compared to $4.6
million in 1994. Average interest bearing deposits increased $15.4 million
while the average cost of interest-bearing deposits increased to 3.40% from
3.15% in 1994. Interest on borrowings increased to $1.3 million in fiscal
1995 from $521,107 in fiscal 1994 due to an increase in average borrowings.
Total interest expense increased to $6.8 million in 1995 compared to $5.1
million in 1994, an increase of $1.7 million.
Provision for Loan Losses. The provision for loan losses during fiscal
1995 was $300,000 as compared to $335,000 for 1994. The ratio of the
allowance for loan losses to total loans at March 31, 1995 was 1.30% as
compared to 1.37% a year earlier. Based on its monthly reviews of the loan
portfolio, management believes the allowance for loan losses is adequate,
although there can be no guarantee as to these estimates.
Other Income. Other income decreased $487,039 in fiscal 1995 compared to
1994. Net gain on sale of investments decreased by $64,279. Gain on sale of
loans decreased by $464,038 in 1995 due to a decrease in the origination of
fixed rate loans which are generally sold. With mortgage interest rates
rising during fiscal 1995, originations of adjustable rate loans increased,
which are generally retained for portfolio. Loan servicing fees increased by
$27,845 while service fees on deposit accounts increased by $124,268. The
increase in deposit account fees was attributable to the increase in demand
accounts acquired in the branch acquisitions.
The Bank, through its subsidiary Security Financial Services Corporation
(SFSC), is a partner in two real estate joint ventures, Willow Woods
Associates, near Aiken, and Currytowne Associates in Edgefield County, South
Carolina. Due to the sluggish real estate market, lot sales have been slower
than anticipated. However, income from real estate operations increased by
$44,854 in fiscal 1995 compared to fiscal 1994. A provision for real estate
losses of $60,000 was charged for 1994 to real estate operations while no
provision for real estate operations was expensed in fiscal 1995. This was
partially offset by decreased sales income due to a lower volume of lot sales.
Other income, which consists of net gain on real estate acquired in settlement
of loans (REO), insurance commissions, and miscellaneous fees, decreased by
$155,689 in fiscal 1995 mainly due to a decrease in net gain on sale of REO of
$103,000.
General and Administrative Expenses. General and administrative expenses
increased by $566,442 in fiscal 1995 primarily due to the increased costs
associated with a full year of operations of the acquired branches.
Compensation and employee benefits increased by $367,159 due to an increase in
average number of employees from the increased number of branches. FDIC
insurance premiums increased by $186,643 in fiscal 1995 compared to fiscal
1994 due to an increase in average deposits. Amortization of intangibles
which consist of goodwill and a core deposit value created by the branch
acquisitions increased by $163,082 due to a full year of amortization. Other
PAGE
<PAGE>
expenses decreased by $102,523 due to disposal of obsolete equipment in 1994
whereas no equipment was disposed of in fiscal 1995.
Income Taxes. Income taxes increased by $233,823 to $499,729 in fiscal
1995 compared to $265,906 expensed in 1994 as a result of an increase in
taxable income. The effective tax rate remained constant at 33% over both
years.
Regulatory Capital
The following table reconciles the Bank's stockholders' equity to its
various regulatory capital positions:
March 31
1996 1995
(in thousands)
Stockholders' equity (1) (2) $ 15,131 14,032
Reduction for nonqualifying assets -- (1,119)
Reduction for goodwill and other intangibles 2,916 (3,376)
Tangible capital 12,215 9,537
Qualifying core deposit intangible 1,120 1,361
Core capital 13,335 10,898
Supplemental capital 1,757 1,756
Risk-based capital $ 15,092 12,654
(1) For 1996 and 1995, includes unrealized losses of $123,000 and $51,000
respectively on certain available for sale securities.
(2) For 1996 and 1995, excludes equity of Security Federal Corporation, the
Parent.
The following table compares the Bank's capital levels relative to
regulatory requirements at March 31, 1996.
Amount Percent Actual Actual Excess Excess
Required Required Amount Percent Amount Percent
(dollars in thousands)
Tangible
capital $ 3,149 1.50% $ 12,215 5.82% $ 9,066 4.32%
Core
capital 6,332 3.00 13,335 6.32 7,003 3.32
Risk-based
capital 11,425 8.00 15,092 10.57 3,667 2.57
Liquidity and Capital Resources
Liquidity refers to the ability of the Bank to generate sufficient cash
flows to fund current loan demand, to repay maturing borrowings, to fund
maturing deposit withdrawals and to meet operating expenses. The Bank's
primary sources of funds include loan repayments, loan sales, increased
deposits, advances from the FHLB, the use of securities sold under agreements
to repurchase and cash flow generated from operations. The need for funds
varies among periods depending on funding needs as well as the rate of
amortization and prepayment on loans. The use of FHLB advances and securities
sold under agreements to repurchase vary depending on their relative costs.
Advances from the FHLB decreased $3.2 million in fiscal 1996, while they
increased $17.4 million in fiscal 1995.
<PAGE>
<PAGE>
Management views advances as a relatively inexpensive source of funds given
that, unlike deposits, there are no FDIC premiums associated with FHLB
advances and advances are less labor intensive than deposits. Deposits grew
$6.0 million in fiscal 1996 due to increases in certificates of deposit and
market efforts to attract demand deposits.
The principal use of the Bank's funds is the origination of mortgages and
other loans. Total demand in the Bank's primary market areas decreased
slightly during fiscal 1996 compared to fiscal 1995 and fiscal 1994
respectively, due to an increase in interest rates, the slow real estate
market, and high refinancing volume in fiscal 1994. This resulted in loan
originations of $53.5 million in fiscal 1996 as compared to $77.4 million in
fiscal 1995, while they were $81.4 million in fiscal 1994.
Outstanding loan commitments for which the Bank has not obtained prior
commitments to purchase from other institutional investors amounted to
$603,745 at March 31, 1996 compared to $349,000 at March 31, 1995. In
addition, unused lines of credit on home equity loans, credit cards and other
loans amounted to $17.6 million at March 31, 1996. Management does not
anticipate that the percentage of funds drawn on unused lines of credit will
increase substantially over amounts currently utilized. Funding of
undisbursed loans in process of $474,575 at March 31, 1996, and commitments to
originate loans and future advances on lines of credit are expected to be
provided from loan amortizations and prepayments, deposit inflows and
short-term borrowing capacity.
The Bank is required under applicable federal regulations to maintain a
liquidity ratio at specified levels which are subject to change. Currently, a
minimum of 5.0% of the combined total of deposits and certain borrowings must
be maintained in the form of cash or eligible investments. At March 31, 1996,
the Bank's liquidity ratio was 8.73% which is in line with management's goal
to keep a high percentage of earning assets in higher yielding assets such as
loans. Management believes that liquidity during fiscal 1997 can be met
through the Bank's deposit base and borrowing ability, and then in the next
few years, will be bolstered from maturing investments. See "Consolidated
Statements of Cash Flows" in the consolidated financial statements.
Accounting and Reporting Changes
Financial Accounting Standards Board (FASB) Statement 107, "Disclosures
about Fair Value of Financial Instruments" became effective for the Bank for
the fiscal year ended March 31, 1996. FASB No. 107 requires the Bank to
disclose the fair value of all financial instruments. In May 1993, the FASB
issued Statement 114 "Accounting by Creditors for Impairment of a Loan" which
became effective for the Bank beginning April 1, 1995. This statement
requires a lender to consider a loan to be impaired if the lender believes it
is probable that it will be unable to collect all principal and interest due
according to the contractual terms of the loan. If a loan is impaired, the
lender will be required to record a loan valuation allowance equal to the
present value of the estimated future cash flows discounted at the loan's
effective rate. This accounting change will significantly change the troubled
debt restructuring accounting by lenders presently allowed under FASB
Statement 15. Adoption of this statement did not have a material adverse
effect on the financial condition or results of operation of the Bank.
In May 1993, the FASB issued Statement 115 "Accounting for Certain
Investments in Debt and Equity Securities." The statement expands the
required use of fair value accounting for investments in debt and equity
securities, and allows debt securities to be classified as "held to maturity"
and reported in financial statements at amortized cost only if the reporting
entity has the positive intent and ability to hold those securities to
maturity. Furthermore, the statement makes clear that securities which might
be sold in response to changes in market interest rates, changes in the
security's prepayment risk, increase in loan demand, or other similar factors
cannot be classified as "held to maturity." Adoption of this statement on
March 31, 1994 did not have a material adverse effect on the financial
condition or results of operation of the Bank. In November 1995, the FASB
issued a guide to the implementation of SFAS No. 115 which allows for the
one-time transfer of certain investments classified as held to maturity to
available for sale. The Bank transferred $27.9 million of investment
securities to available for sale as of December 31, 1995. The change in
market value on these securities is reflected in equity as an unrealized gain
or loss on securities available for sale, net of applicable income taxes.
PAGE
<PAGE>
In October 1994, the FASB issued SFAS No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments."
The statement requires disclosures about amounts, nature, and terms of
derivative financial instruments. The statement amends SFAS No. 105
"Disclosure of Information about Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments." The statement is effective for the Bank for
the fiscal year ending March 31, 1996. In light of the Bank's current
portfolio, the adoption of this statement did not have a significant impact on
the Bank.
In March, 1995 the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of."
This statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Statement is effective for the Bank
in fiscal year ending March 31, 1997. Based on the Bank's present assets,
this Statement is not expected to have a significant impact on the Bank.
In May, 1995, the FASB issued Statement 122, "Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65." The Statement
requires that rights to service mortgage loans for others be recognized as a
separate asset, however those rights are acquired. The Statement also
requires that an entity assess its capitalized mortgage servicing rights for
impairment based on the fair value of those rights. The Statement applies
prospectively in the Bank's fiscal year ended March 31, 1997 to transactions
in which an enterprise sells or securitizes mortgage loans with servicing
rights retained and to impairment evaluations of all amounts capitalized as
mortgage servicing rights, including those purchased prior to adoption of the
Statement. Based on the Bank's current mortgage banking activities, this
Statement is not expected to have a material impact on the Bank.
Other Matters
The United States Congress is currently proposing a plan under which the
Bank Insurance Fund (BIF), which is the primary deposit insurance fund for
commercial banks, would be merged with the Savings Association Insurance Fund
(SAIF), which is the primary insurance fund for thrifts and savings banks. In
connection with this merger, all members of the SAIF fund would be required to
pay a one-time assessment of between 80 and 90 basis points per every $100 of
SAIF insured deposit balances as of March 31, 1995. Based on the Bank's
deposit balances as of March 31, 1995, the one-time assessment would be
approximately $950,000 before tax and approximately $600,000 after tax, if
that expense would be tax deductible. In exchange for this one-time
assessment, qualifying members of the SAIF fund would receive a reduction in
their annual premiums. The measure has not yet passed Congress, and the final
provisions and payment date are as yet unknown.
Impact of Inflation and Changing Prices
The consolidated financial statements, related notes, and other financial
information presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
Item 7. Financial Statements
The audited financial statements of the Company and its subsidiary and
the independent auditor's report thereon are set forth on the following pages.
<PAGE>
<PAGE>
Independent Auditors' Report
The Board of Directors
Security Federal Corporation:
We have audited the consolidated balance sheets of Security Federal
Corporation and Subsidiary (the "Company") as of March 31, 1996 and 1995 and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended March 31, 1996.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company at March 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the years in the three-year period ended March 31, 1996
in conformity with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," on April 1, 1993 and adopted the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" on March 31, 1994.
Greenville, South Carolina
May 9, 1996
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
March 31, 1996 and 1995
Assets 1996 1995
Cash and cash equivalents $ 9,823,664 5,697,391
Investment and mortgage-backed securities:
Available for sale (amortized cost of
$31,170,866 and $4,013,080 in 1996
and 1995, respectively) 30,972,406 3,930,626
Held to maturity (market value of
$9,913,951, and $37,080,638 in 1996
and 1995, respectively) 10,040,724 38,596,245
41,013,130 42,526,871
Loans receivable, net:
Held for sale 612,919 776,631
Held for investment (net of allowance
of $1,758,688 and $1,955,119 in 1996
and 1995, respectively) 151,526,807 148,200,563
152,139,726 148,977,194
Accrued interest receivable:
Loans 882,274 755,265
Mortgage-backed securities 23,799 22,328
Investments 450,952 464,229
1,357,025 1,241,822
Premises and equipment, net 3,187,185 3,251,171
Federal Home Loan Bank stock, at cost 1,233,200 1,415,100
Real estate acquired in settlement of loans 718,763 1,531,251
Real estate held for development and sale 1,389,579 1,442,723
Other assets 3,953,859 3,865,211
Total assets $214,816,131 209,948,734
Liabilities and Shareholders' Equity
Liabilities:
Deposits 172,374,727 166,274,637
Advances from Federal Home Loan Bank 22,864,000 26,033,000
Other borrowings 350,000 --
Advance payments by borrowers for taxes
and insurance 385,708 442,456
Other liabilities 3,407,478 2,709,171
Total liabilities 199,381,913 195,459,264
Commitments and contingencies
Shareholders' equity:
Serial preferred stock, $.01 par value;
authorized 200,000 shares; issued and
outstanding shares, none -- --
Common stock, $.01 par value; authorized
1,000,000 shares; issued and outstanding
shares, 413,184 in 1996 and 409,246
in 1995 4,132 4,092
Additional paid-in capital 3,919,262 3,879,922
Unrealized net loss on securities
available for sale, net of income taxes (123,125) (51,155)
Retained earnings, substantially
restricted 11,633,949 10,656,611
Total shareholders' equity 15,434,218 14,489,470
Total liabilities and shareholders'
equity $214,816,131 209,948,734
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
For the years ended March 31, 1996, 1995 and 1994
1996 1995 1994
Interest income:
Loans $ 13,494,840 11,903,824 9,237,564
Mortgage-backed securities 109,998 134,901 265,534
Investment securities 2,123,667 2,276,122 1,289,521
Other 93,789 87,295 197,173
Total interest income 15,822,294 14,402,142 10,989,792
Interest expense:
NOW and money market 976,423 1,141,084 931,426
Passbook 347,937 398,600 277,841
Certificates of deposit 5,529,003 3,957,123 3,395,896
Advances and other borrowed money 1,769,178 1,326,248 521,107
Total interest expense 8,622,541 6,823,055 5,126,270
Net interest income 7,199,753 7,579,087 5,863,522
Provision for loan losses (230,000) (300,000) (335,000)
Net interest income after
provision for loan losses 6,969,753 7,279,087 5,528,522
Other income:
Gain (loss) on sales of
investment securities -- (2,504) 61,775
Gain on sales of loans 124,677 161,922 625,960
Loan servicing fees 312,653 318,695 290,850
Service fees on deposits 584,420 509,181 384,913
Income from real estate operations 34,068 168,795 123,941
Other 412,244 156,254 311,943
Total other income 1,468,062 1,312,343 1,799,382
General and administrative expenses:
Compensation and employee benefits 3,181,844 3,446,231 3,079,072
Occupancy 368,731 373,519 379,209
Advertising 197,575 130,748 154,820
Depreciation and maintenance
of equipment 651,676 705,787 723,944
Amortization of intangibles 465,240 465,240 302,158
Federal insurance premiums 387,722 419,040 232,397
Other 1,586,756 1,548,982 1,651,505
Total general and adminis-
trative expenses 6,839,544 7,089,547 6,523,105
Income before income taxes and
cumulative effect of change in
accounting for income taxes 1,598,271 1,501,883 804,799
Income taxes 538,697 499,729 265,906
Income before cumulative effect
of change in accounting for
income taxes 1,059,574 1,002,154 538,893
Cumulative effect of change in
accounting for income taxes -- -- 30,000
Net income $ 1,059,574 1,002,154 568,893
Net income per common share:
Before cumulative effect of
change in accounting for
income taxes $ 2.58 2.48 1.36
Cumulative effect of change in
accounting for income taxes -- -- .08
Net income per common share $ 2.58 2.48 1.44
Cash dividend per common share $ .20 .20 .20
Weighted average shares
outstanding 410,937 404,750 393,772
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
For the years ended March 31, 1996, 1995 and 1994
Indirect
Guarantee of Unrealized
Employee Net Loss
Additional Stock on Securities
Common Paid-in Ownership Available Retained
Stock Capital Trust Debt for Sale Earnings Total
Balance at
March 31,
1993 $ 3,938 3,685,436 (15,779) -- 9,245,198 12,918,793
Principal
repayment
of ESOP
note -- -- 15,779 -- -- 15,779
Net income -- -- -- -- 568,893 568,893
Cash dividend -- -- -- -- (78,754) (78,754)
Unrealized net
loss on
securities
available for
sale, net of
tax -- -- -- (44,116) -- (44,116)
Balance at
March
31, 1994 3,938 3,685,436 -- (44,116) 9,735,337 13,380,595
Exercise of
stock
options 154 194,486 -- -- -- 194,640
Net income -- -- -- -- 1,002,154 1,002,154
Cash dividend -- -- -- -- (80,880) (80,880)
Change in un-
realized net
loss on
securities
available for
sale, net of
tax -- -- -- (7,039) -- (7,039)
Balance at
March
31, 1995 4,092 3,879,922 -- (51,155) 10,656,611 14,489,470
Exercise of
stock options 40 39,340 -- -- -- 39,380
Net income -- -- -- -- 1,059,574 1,059,574
Cash dividend -- -- -- -- (82,236) (82,236)
Change in unreal-
ized net loss
on securities
available for
sale, net of
tax -- -- -- (71,970) -- (71,970)
Balance at
March 31,
1996 $ 4,132 3,919,262 -- (123,125) 11,633,949 15,434,218
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended March 31, 1996, 1995 and 1994
1996 1995 1994
Cash flows from operating activities:
Net income $ 1,059,574 1,002,154 568,893
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Depreciation 596,677 588,825 526,764
Amortization of purchase
accounting adjustments 465,240 465,240 224,290
Discount accretion and
premium amortization 210,445 235,467 (93,265)
Provisions for losses on loans and
real estate 175,000 300,000 395,000
Gain on sale of loans (124,677) (161,922) (625,960)
Gain on sale of mortgage-
backed securities -- -- (158,433)
(Gain) loss on sale of investments -- (2,504) 96,658
(Gain) loss on sale of real estate (180,030) (155,342) (299,211)
FHLB stock dividends -- -- (43,300)
Amortization of deferred fees
on loans (115,867) 110,274 (498,631)
Loss on disposition of premises
and equipment -- 5,452 89,859
Proceeds from sale of loans held
for sale 12,527,406 16,219,422 64,776,520
Origination of loans for sale (12,239,017) (12,979,526) (61,604,678)
(Increase) decrease in accrued
interest receivable:
Loans (127,009) 459,596 (67,744)
Mortgage-backed securities (1,471) (3,453) 117,449
Investments 13,277 70,180 (461,745)
Increase (decrease) in advance
payments by borrowers (56,748) 87,610 14,312
Other, net (419,255) (1,152,180) 3,137,425
Net cash provided (used) by
operating activities 1,783,545 5,089,296 6,294,203
Cash flows from investing activities:
Increase in cash from branch
acquisitions -- -- 39,117,870
Principal repayments on mortgage-
backed securities 221,819 561,015 2,265,351
Purchase of investment securities (3,034,529) (500,000) (69,878,442)
Proceeds from sales of investment
securities -- 1,500,000 7,406,875
Proceeds from sale of mortgage-backed
securities -- -- 2,997,318
Proceeds from maturities of investment
securities 4,000,000 7,205,155 21,508,342
Purchase of FHLB stock (389,600) (1,053,900) --
Redemption of FHLB stock 571,500 750,000 --
(Increase) decrease in loans to
customers (3,544,427) (27,779,097) (6,164,053)
Investment in real estate held
for development (262,968) (355,155) (242,744)
Proceeds from sale of real estate
held for development 350,180 625,674 464,035
Proceeds from sale of real estate
acquired through foreclosure 1,725,210 804,714 385,717
Increase (decrease) in interest-
bearing deposits with banks -- 95,000 --
Proceeds from sales of premises
and equipment -- 2,522 --
Net cash provided (used) by
investing activities (895,506) (18,396,427) (3,847,670)
(Continued)
PAGE
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended March 31, 1996, 1995 and 1994
1996 1995 1994
Cash flows from financing
activities:
Increase (decrease) in deposit
accounts $6,100,090 (7,158,055) (2,984,047)
Proceeds from FHLB advances 100,904,000 153,775,000 17,000,000
Repayment of FHLB advances (104,073,000) (136,358,000) (15,186,000)
Proceeds from other borrowings 350,000 -- --
Dividends to shareholders (82,236) (80,880) (78,754)
Proceeds from exercise of
stock options 39,380 194,640 --
Net cash provided (used) by
financing activities 3,238,234 10,372,705 (1,248,801)
Net increase (decrease) in cash
and cash equivalents 4,126,273 (2,934,426) 1,197,732
Cash and cash equivalents at
beginning of period 5,697,391 8,631,817 7,434,085
Cash and cash equivalents at
end of period $ 9,823,664 5,697,391 8,631,817
Supplemental disclosure of
cash flow information:
Cash paid during the period for:
Interest $ 8,402,928 5,398,792 4,559,022
Income taxes $ 424,000 545,242 881,240
Supplemental schedule of non
cash transactions:
Additions to real estate acquired
through foreclosure, net $ 711,760 661,650 1,255,720
Transfer of securities held
to maturity to available
for sale $ 27,867,170 -- 9,543,589
Change in unrealized net
loss on securities
available for sale $ 71,970 7,039 44,116
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE>
Notes to Consolidated Financial Statements
(1) Significant Accounting Policies
The following is a description of the more significant accounting and
reporting policies used in the preparation and presentation of the
accompanying consolidated financial statements. All significant intercompany
transactions have been eliminated in consolidation.
(a) Basis of Consolidation
The accompanying consolidated financial statements include the
accounts of Security Federal Corporation (the "Company") and its wholly owned
subsidiary, Security Federal Bank (the "Bank") and its wholly subsidiary,
Security Financial Services Corporation ("SFSC"). SFSC consists primarily of
investment brokerage services. Also included in consolidation are two real
estate partnerships, which the Company purchased from SFSC in December 1995 at
fair market value.
(b) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks, interest-bearing balances in other banks, and
federal funds sold. Cash equivalents have maturities of three months or less.
(c) Investment and Mortgage-Backed Securities
In May 1993 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 115 (Statement 115),
"Accounting for Certain Investments in Debt and Equity Securities". Under
Statement 115 investment securities, including mortgage-backed securities, are
classified into one of three categories, held to maturity, available for sale
or trading. Management determines the appropriate classification of debt
securities at the time of purchase.
Investment securities are classified as held to maturity when the
Company has the positive intent and ability to hold the securities to
maturity. These securities are recorded at cost, adjusted for amortization of
premiums and accretion of discounts over the estimated life of the security
using a method that approximates a level yield. Prepayment assumptions on
mortgage-backed securities are anticipated.
Management classifies investment securities not considered as held
to maturity as available for sale, which are stated at fair value, with
unrealized gains and losses, net of tax, reported in a separate component of
shareholders' equity. Gains and losses from sales of investments and
mortgage-backed securities available for sale are determined using the
specific identification method. The Company has no trading securities. As
permitted by Statement 115, the Company initially adopted the statement as of
March 31, 1994, the effect of which was to decrease shareholders' equity by
$44,116.
In November 1995, the FASB issued a guide to implementation of
SFAS No. 115 on accounting for certain investments in debt and equity
securities which allows for the one-time transfer of certain investments
classified as held to maturity to available for sale. The Bank transferred
$27.9 million of investments to available for sale.
At March 31, 1995, the Bank maintained liquid assets in excess of
the amount required by regulations. The required amount is 5% of the average
daily balances of deposits and short-term borrowings. Liquid assets consist
primarily of cash, including time deposits and investment securities with
remaining maturities of less than five years.
<PAGE>
<PAGE>
(1) Significant Accounting Policies, Continued
(d) Allowance for Loan Losses
The Company provides for loan losses on the allowance method.
Accordingly, all loan losses are charged to the related allowance and all
recoveries are credited to the allowance for loan losses. Additions to the
allowance for loan losses are provided by charges to operations based on
various factors which, in management's judgment deserve current recognition in
estimating possible losses. Such factors considered by management include the
market value of the underlying collateral, stated guarantees by the borrower
if applicable, the borrower's ability to repay from other economic resources,
growth and composition of the loan portfolios, the relationship of the
allowance for loan losses to outstanding loans, loss experience, delinquency
trends, and general economic conditions. Management evaluates the carrying
value of the loans periodically and the allowance is adjusted accordingly.
While management uses the best information available to make evaluations,
future adjustment to the allowance may be necessary if economic conditions
differ substantially from the assumptions used in making the evaluations.
Allowances for loan losses are subject to periodic evaluations by various
regulatory authorities and may be subject to adjustments based upon the
information that is available to them at the time of their examinations.
On April 1, 1995, the Bank adopted the provisions of SFAS No. 114
Accounting by Creditors for Impairment of a Loan, and SFAS No. 118 Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures.
SFAS No. 114 requires creditors to evaluate loans for impairment and value
those loans for which it is probable that the creditor will be unable to
collect all amounts due according to the terms of the loan agreement at the
present value of expected cash flows, market price of the loan, if available,
or value of the underlying collateral. Expected cash flows are required to be
discounted at the loan's effective interest rate. SFAS No. 118 amends SFAS
No. 114 to allow a creditor to use existing methods for recognizing interest
income on an impaired loan, and requires disclosure of income recognition
methods used. The adoption of this standard required no increase to the
allowance for loan losses and had no impact on net income for fiscal year
1996.
(e) Loans Held for Sale
Loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are provided for in a valuation allowance by charges to
operations.
(f) Real Estate Acquired in Settlement of Loans
Real estate acquired in settlement of loans represents real estate
acquired through foreclosure and is initially recorded at the lower of cost
(principal balance of the former mortgage loan less any specific valuation
allowances) or estimated fair value less costs to sell. Subsequent
improvements are capitalized. Costs of holding real estate, such as property
taxes, insurance, general maintenance and interest expense, are expensed as a
period cost. Fair values are reviewed regularly and allowances for possible
losses are established when the carrying value of the real estate owned
exceeds the fair value less estimated costs to sell. Fair values are
generally determined by reference to an outside appraisal.
(g) Real Estate Held for Development and Sale
Real estate purchased for development and sale and investments in
real estate partnerships are stated at the lower of cost or estimated net
realizable value. Costs directly related to such real estate are capitalized
until construction required to bring these properties to a saleable condition
is completed. Capitalized costs include direct costs incurred during the
improvement period.
<PAGE>
<PAGE>
(1) Significant Accounting Policies, Continued
Gains on the sale of real estate purchased for development and
sale are recorded at the time of sale provided certain criteria relating to
property type, cash down payment, loan terms, and other factors are met. If
these criteria are not met at the date of sale, the gain is deferred and
recognized using the installment or cost recovery method until they are
satisfied, at which time the remaining deferred gain is recorded as income.
Market values of real estate purchased for development and sale
are reviewed regularly and allowances for losses are established when the
carrying value exceeds the estimated net realizable value. In determining the
estimated net realizable value, the Company deducts from the estimated selling
price the projected cost to complete and dispose of the property and the
estimated cost to hold the property to an expected date of sale.
(h) Premises and Equipment
Premises and equipment are carried at cost, net of accumulated
depreciation. Depreciation of premises and equipment is provided principally
on a straight-line method over the estimated useful life of the related asset.
Estimated lives are seven to thirty years for buildings and improvements and
generally five to ten years for furniture, fixtures and equipment.
(i) Income Taxes
The Bank adopted SFAS No. 109 "Accounting for Income Taxes
effective April 1, 1993." Under SFAS No. 109 deferred tax expense or benefit
is recognized for the net change during the year in the deferred tax liability
or asset. That amount together with income taxes currently payable is the
total amount of income tax expense or benefit for the year. Upon adoption of
SFAS No. 109 the Bank realized an addition to net income of $30,000. Deferred
taxes are provided for differences in financial reporting bases for assets and
liabilities as compared with their tax bases. Basically, a current tax
liability or asset is established for taxes presently payable or refundable
and a deferred tax liability or asset is established for future tax items. A
valuation allowance, if applicable, is established for deferred tax assets
that may not be realized. Tax bad debt reserves in excess of the base year
amount (established as taxable years ending March 31, 1988 or later), would
create a deferred tax liability. Deferred income taxes are provided for
differences between the provision for loan losses for financial statement
purposes and those allowed for income tax purposes.
Effective April 1, 1993, the Company adopted Statement 109 and has
reported the cumulative effect of that change in the method of accounting for
income taxes in the 1994 consolidated statement of income.
(j) Loan Fees and Costs Associated with Originating Loans The net of
loan fees received and direct incremental costs of originating loans are
deferred and amortized over the contractual life of the related loan. The net
fees are recognized as yield adjustments by applying the interest method.
Prepayments are not anticipated.
<PAGE>
<PAGE>
(1) Significant Accounting Policies, Continued
(k) Intangible Assets
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited. The Company assesses the recoverability of
this intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through projected
undiscounted future results. The amount of goodwill impairment, if any, is
measured based on projected discounted future results using a discount rate
reflecting the Company's average cost of funds.
Deposit based premiums, representing the cost of acquiring
deposits from other financial institutions, are being amortized by charges to
operations over the expected periods to be benefited. The effective
amortization period for intangible assets is approximately 10 years.
(l) Interest Income
Interest on loans is accrued and credited to income monthly based
on the principal balance outstanding and the contractual rate on the loan.
The Company places loans on non-accrual status when they become greater than
sixty days delinquent or when in the opinion of management, full collection of
principal or interest is unlikely. The Company provides an allowance for
uncollectible accrued interest on loans which are sixty days delinquent for
all interest accrued prior to the loan being placed on non-accrual status.
The loans are returned to an accrual status when full collection of principal
and interest appears likely.
(m) Fair Value of Financial Instruments
SFAS No. 107 "Disclosures about Fair Value of Financial
Instruments" requires disclosure in the financial statements regarding the
fair value of on and off-balance sheet financial instruments for which it is
practicable to do so. Fair values are based on quoted market prices where
available and on estimates of present value or other valuation techniques.
These estimates are made at a specific point in time and are subjective in
nature involving uncertainties and significant judgment. In addition, SFAS
No. 107 excludes all non-financial instruments and certain financial
instruments from its disclosure requirements. Accordingly, the aggregate fair
values presented do not represent the underlying fair value of the Bank.
Fair values for consolidated financial statement reporting
purposes are estimated for loans with similar financial characteristics.
These loans are segregated by type of loan, considering credit risk, interest
rate and prepayment characteristics. Each loan category is further segmented
into fixed and adjustable rate categories.
The fair value of performing loans is calculated by discounting
scheduled cash flows through estimated maturity dates. Expected cash flows
are discounted using the Bank's current rates that reflect the credit and
interest rate risks inherent in each category of loans. A prepayment
assumption is used as an estimate of the portion of loans that will be repaid
prior to their scheduled maturity.
(n) Earnings Per Share
Net income per share is computed by dividing consolidated net
income by the weighted average number of shares of common stock equivalents
outstanding during the period. Common share equivalents include, if
applicable, dilutive stock option share equivalents determined by using the
treasury stock method.
<PAGE>
<PAGE>
(o) Reclassifications
Certain amounts in prior years' consolidated financial statements
have been reclassified to conform with current year classifications.
(2) Branch Acquisition
On October 21, 1993 the Bank acquired certain assets and certain
deposits and other liabilities of four branch offices of NationsBank of South
Carolina, N.A. (the "branches"). In connection with the purchase, the Bank
paid a deposit premium of approximately $4.4 million. The Company accounted
for the acquisition under the purchase method of accounting. The application
of the purchase method of accounting resulted in the adjustment of the assets
and liabilities acquired based upon their fair market values on the date of
acquisition. The Company's consolidated statements of income include the
operating results of the acquired branches after October 21, 1993.
The assets acquired and liabilities assumed (after purchase accounting
adjustments) of the branches at the acquisition date are summarized as
follows:
Assets acquired:
Loans receivable, net $ 15,969,139
Building and equipment 916,155
Premium on deposits and goodwill 3,926,792
Other assets 1,203,799
Total assets $ 22,015,885
Liabilities assumed:
Deposit accounts 61,123,824
Other liabilities 9,931
Total liabilities 61,133,755
Cash received $ 39,117,870
At March 31, 1996, the Bank's remaining balances in goodwill and core
deposit intangible were $1,693,074 and $1,119,641, respectively.
<PAGE>
<PAGE>
(3) Investment and Mortgage-Backed Securities, Held to Maturity
The amortized cost, gross unrealized gains, gross unrealized losses and
market values of investment securities held to maturity are as follows:
March 31, 1996
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
FNMA securities $ 1,006,250 7,030 2,016 1,011,264
FHLB securities 5,492,366 -- 138,422 5,353,944
FHLMC bond 1,000,000 -- 10,900 989,100
Mortgage-backed
securities 2,542,108 32,651 15,116 2,559,643
$10,040,724 39,681 166,454 9,913,951
March 31, 1995
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasury
obligations $27,867,170 -- 992,492 26,874,678
FNMA securities 2,017,770 -- 77,676 1,940,094
FHLB securities 5,500,700 -- 376,029 5,124,671
FFCB securities 500,000 -- 650 499,350
FHLMC bond 1,000,000 -- 69,560 930,440
Mortgage-backed
securities 1,710,605 18,979 18,179 1,711,405
$38,596,245 18,979 1,534,586 37,080,638
The amortized cost and market value of investments securities held to
maturity at March 31, 1996, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
have the right to prepay obligations with or without call or prepayment
penalties.
Amortized Fair
Cost Value
In one year or less $ 506,250 504,234
After one year through five years 6,992,366 6,850,074
Mortgage-backed securities 2,542,108 2,559,643
$ 10,040,724 9,913,951
At March 31, 1996 investment securities of $4,852,500 were pledged as
collateral for certain deposit accounts and Federal Home Loan Bank of Atlanta
borrowings.
<PAGE>
<PAGE>
(4) Investment and Mortgage-Backed Securities, Available for Sale
The amortized cost, gross unrealized gains, gross unrealized losses and
market value of investment and mortgage-backed securities available for sale
are as follows:
March 31, 1996
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasury
notes $31,170,866 1,782 200,242 30,972,406
March 31, 1995
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasury
notes $ 4,013,080 -- 82,454 3,930,626
The amortized cost and market value of investment securities available
for sale at March 31, 1996, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
have the right to prepay obligations with or without call or prepayment
penalties.
Amortized Fair
Cost Value
In one year or less $ 23,617,943 23,537,490
After one year through five years 7,552,923 7,434,916
$ 31,170,866 30,972,406
<PAGE>
<PAGE>
(4) Investment and Mortgage-Backed Securities, Available for Sale,
Continued
Proceeds from the sales of investment and mortgage-backed securities
during the years ended March 31, 1996, 1995 and 1994, as well as the gross
gains and losses realized are summarized as follows:
1996 1995 1994
Investments:
Proceeds from sales $ -- 1,498,085 7,406,875
Gross gains $ -- 1,523 --
Gross losses $ -- 4,027 96,658
Mortgage-backed securities:
Proceeds from sales $ -- -- 2,997,318
Gross gains $ -- -- 158,433
Gross losses $ -- -- --
(5) Loans Receivable, Net
Loans receivable, net at March 31, consisted of the following:
1996 1995
Residential real estate $ 59,951,018 66,226,289
Consumer 44,810,133 44,089,104
Commercial real estate 10,629,652 13,007,516
Commercial business 38,764,035 29,718,456
Loans held for sale 612,919 776,631
154,767,757 153,817,996
Less:
Allowance for loan losses 1,758,688 1,955,119
Loans in process 474,575 2,419,433
Deferred loan fees 394,768 466,250
2,628,031 4,840,802
$152,139,726 148,977,194
<PAGE>
<PAGE>
(5) Loans Receivable, Net, Continued
Changes in the allowance for loan losses for the years ended March 31,
are summarized as follows:
1996 1995 1994
Balance at beginning of year $ 1,955,119 1,735,073 1,190,793
Provision for loan losses 230,000 300,000 335,000
Allowance on acquired loans -- -- 324,479
Charge-offs (471,938) (105,073) (124,689)
Recoveries 45,507 25,119 9,490
Balance at end of year $ 1,758,688 1,955,119 1,735,073
The following table sets forth the amount of the Company's non-accrual
loans and the status of the related interest income at March 31:
1996 1995
Non-accrual loans $ 2,572,000 812,000
Interest income which would have
been recognized under original terms 82,670 55,308
Interest income actually recognized 54,200 10,303
Loans serviced for others at March 31, 1996, 1995, and 1994, were
$93,309,923, $97,636,672, and $100,284,182 respectively.
At March 31, 1996, impaired loans amounted to $2,572,000. These loans
are well secured and no loss is estimated at this time. For the year ended
March 31, 1996, the average recorded investment in impaired loans was
$1,879,000 and $54,200 of interest income was recognized on loans while they
were impaired. All of this income was recognized using the accrual method of
accounting.
The Bank originates residential and commercial real estate loans
throughout its primary market area located in the south and central regions of
South Carolina. Although this region has a diverse economy, much of the area
is dependent on the nearby Savannah River Site. Employment at the Savannah
River Site is expected to decline in the future. The future impact on the
local economy and real estate market could affect the financial status of the
Bank's customers. The degree of impact will be affected by the timing and
terms associated with the Savannah River Site employment reduction, growth of
other sectors of the local economy, etc. Future additions to the Bank's
allowance for loan losses are dependent on the performance of the Bank's loan
portfolio, the economy, changes in real estate values, and interest rates.
There can be no assurance that additions to the allowance will not be required
in future periods. Management continues to monitor its loan portfolio for the
impact of local economic changes.
<PAGE>
<PAGE>
(6) Premises and Equipment, Net
Premises and equipment, net at March 31, are summarized as follows:
1996 1995
Land $ 440,323 371,313
Buildings and improvement 2,998,995 2,711,637
Furniture and equipment 2,936,904 3,337,682
6,376,222 6,420,632
Less accumulated depreciation (3,189,037) (3,169,461)
$ 3,187,185 3,251,171
Depreciation expense for the years ended March 31, 1996, 1995, and
1994, was $596,677, $588,825, and $526,764, respectively.
The Bank has entered into noncancelable operating leases related to
buildings and land. At March 31, 1996, future minimum payments under
noncancelable operating leases with initial or remaining terms of one year or
more are as follows (by fiscal year):
1997 $ 62,980
1998 61,390
1999 48,777
2000 30,165
2001 26,138
Thereafter 6,500
$ 235,950
Total rental expense amounted to $53,778, $65,127 and $57,081 for the
years ended March 31, 1996, 1995 and 1994, respectively. Rental expense has
been reduced by sublease revenue of $4,349 in 1994. Five lease agreements
with monthly expenses of $1,978, $2,014, $500, $407 and $350 have renewal
options of 10, 10, 60, 20 and 10 years, respectively.
(7) FHLB Stock
Investment in the stock of the Federal Home Loan Bank is required by
law for every Federally insured savings institution. No ready market exists
for this stock and it has no quoted market value. However, because
redemption of this stock has been at par it is carried at cost.
The Bank, as a member of the FHLB of Atlanta, is required to acquire
and hold shares of capital stock in the FHLB of Atlanta in an amount equal to
the greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB of Atlanta. The Bank is in compliance with this requirement with an
investment in FHLB of Atlanta stock of $1,233,200 as of March 31, 1996.
<PAGE>
<PAGE>
(8) Real Estate Operations
The Company participates in two real estate joint ventures. The
Company owns 50 percent (in 1994 SFSC sold 10 percent of its interest in the
operations but retained the controlling interest) and 62.5 percent of the
joint ventures which have been consolidated into the Company's financial
statements. Income from real estate operations was as follows:
1996 1995 1994
Real estate acquired for
development and sale:
Sales $ 350,180 625,674 1,280,480
Cost of sales (296,508) (460,299) (1,105,515)
Gross profit 53,672 165,375 174,965
Amortization (deferral)
of gain on sale of
real estate 25,396 3,420 8,976
Provision for real
estate losses (45,000) -- (60,000)
Income from real estate
operations 34,068 168,795 123,941
Other expenses, net 38,535 115,236 37,590
Net income $ (4,467) 53,559 86,351
The following is a summary of the allowance for estimated losses on
real estate:
1996 1995 1994
Balance at beginning of year $150,000 150,000 90,000
Provision for real estate
losses 45,000 -- 60,000
Balance at end of year $195,000 150,000 150,000
Condensed combined financial information for the joint ventures as of
March 31 is as follows:
1996 1995
Real estate held for development, net $ 1,389,579 1,442,723
Other assets 71,129 240,400
Total assets 1,460,708 1,683,123
Liabilities (principally a loan
payable to the Bank 277,339 479,394
Partners equity $ 1,183,369 1,203,729
<PAGE>
<PAGE>
(9) Deposits
Deposits outstanding by type of account at March 31 are summarized as
follows:
1996 1995
Weighted Weighted
Amount Rate Range Amount Rate Range
Checking $42,251,949 1.35% 0 - 1.75% 41,211,492 1.40% 0 - 1.88%
Money Market 13,769,693 2.81% 2.75 - 3.00% 16,776,207 3.27 2.20 - 3.44
Passbook
accounts 13,615,436 2.50% 0 - 3.00% 14,491,809 2.61 0 - 2.62
69,637,078 1.86% 0 - 3.00% 72,479,508 2.07% 0 - 3.44%
Certificate
accounts:
0 - 4.99% 5,116,366 44,023,933
5.00 - 6.99% 97,046,823 48,182,486
7.00 - 8.99% 574,460 1,588,710
9.00 - 12.99% -- --
Total
certificates
of deposit 102,737,649 5.65% 3.30 - 7.75% 93,795,129 5.17 3.45 - 8.10%
$172,374,727 4.12% 0 - 7.75% 166,274,637 3.82% 0 - 8.10%
The aggregate amount of short-term certificates of deposit with a
minimum denomination of $100,000 was $9,846,903 and $13,704,756 at March 31,
1996 and 1995, respectively.
The amounts and scheduled maturities of certificates of deposit at
March 31, are as follows:
1996 1995
Within 1 year $ 83,523,749 65,839,088
After 1 but within 2 years 16,010,769 19,407,870
After 2 but within 3 years 1,659,385 6,548,849
After 3 but within 4 years 1,237,789 1,253,421
After 4 but within 5 years 305,957 745,901
Thereafter -- --
$102,737,649 93,795,129
<PAGE>
<PAGE>
(10) Advances From Federal Home Loan Bank
Advances from the Federal Home Loan Bank at March 31 are summarized by
year of maturity and weighted average interest rate below:
1996 1995
Weighted Weighted
Amount Rate Amount Rate
1996 $ - --% 19,969,000 6.40%
1997 17,214,000 5.94 414,000 8.45
1998 3,452,000 6.60 3,452,000 6.60
1999 490,000 8.65 490,000 8.65
2000 528,000 8.70 528,000 8.70
Thereafter 1,180,000 8.53 1,180,000 8.53
$ 22,864,000 6.29% 26,033,000 6.65%
Pursuant to collateral agreements with the FHLB, the Company has
pledged all of its stock in the FHLB and qualifying first mortgage loans as
collateral for these advances. Advances are subject to prepayment penalties.
(11) Income Taxes
Income tax expense for the years ended March 31, is comprised of the
following:
1996 1995 1994
Current:
Federal $ 571,810 660,413 440,568
State -- -- 16,417
571,810 660,413 456,985
Deferred:
Federal (27,879) (122,537) (163,892)
State (5,234) (38,147) (27,187)
(33,113) (160,684) (191,079)
$ 538,697 499,729 265,906
<PAGE>
<PAGE>
(11) Income Taxes, Continued
The Company's income taxes differ from those computed at the statutory
federal income tax rate, as follows:
1996 1995 1994
Tax at statutory income tax rate $ 543,412 510,640 273,632
State income tax expense
(benefit),net (3,454) (25,177) (7,108)
Other (1,261) 14,266 (618)
$ 538,697 499,729 265,906
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31
are presented below.
1996 1995
Deferred tax assets:
Provision for loan losses $ 500,572 474,150
Net fees deferred for
financial reporting 35,712 176,989
Unrealized loss on securities
available for sale 44,036 31,299
Other real estate basis for
tax purposes over
financial statement basis 74,022 56,940
Other 137,667 79,125
Total gross deferred tax assets 792,009 818,503
Deferred tax liabilities:
FHLB stock basis over tax basis 178,999 178,999
Depreciation 193,791 296,960
Other 44,811 13,986
Total gross deferred tax liability 417,601 489,945
Net deferred tax asset $ 374,408 328,558
A portion of the change in the net deferred tax asset relates to
unrealized gains and losses on securities available for sale. The related
current period deferred tax benefit of $12,737 has been recorded directly to
shareholder's equity. The balance of the change in the net deferred tax asset
results from the current period deferred tax benefit of $33,113. The net
deferred tax asset is included in other assets in the accompanying
consolidated balance sheets.
No valuation allowance for deferred tax assets was required at April 1,
1995, and for the years ended March 31, 1995 and 1996. The realization of net
deferred tax assets may be based on utilization of carrybacks to prior taxable
periods, anticipation of future taxable income in certain periods, and the
utilization of tax planning strategies. Management has determined that it is
more likely than not that the net deferred tax asset can be supported based
upon these criteria.
<PAGE>
<PAGE>
(11) Income Taxes, Continued
Retained earnings at March 31, 1996 includes tax bad debt reserves of
approximately $2.2 million, for which no provision for federal income tax has
been made. If, in the future, these amounts are used for any purpose other
than to absorb bad debt losses, including dividends, stock redemptions, or
distributions in liquidation, or the Company ceases to be qualified as a
savings and loan, they may be subject to federal income tax at the then
prevailing corporate tax rate.
(12) Employee Benefit Plans
The Company participates in a multi-employer defined benefit plan. The
plan provides defined benefits to substantially all full-time employees of the
Company with one or more years of service. Separate actuarial valuations are
not available for each participating employer, nor are plan assets segregated.
There were no contributions to the plan required for the years ended March 31,
1996, 1995 and 1994. Plan assets exceed the present value of accumulated plan
benefits at June 30, 1995, the latest actuarial valuation date.
The Company participates in a multiple employer defined contribution
employee benefit plan covering substantially all employees with one or more
years of service. The Company matches a portion of employees contributions,
and the related expenses were $47,116, $96,905, and $77,666 for the years
ended March 31, 1996, 1995 and 1994, respectively. The annual contribution is
determined at the discretion of the Company's Board of Directors.
The Company established an Employee Stock Ownership Plan ("ESOP") to
acquire shares of the Company's common stock for the exclusive benefit of the
employee participants. The ESOP borrowed $196,880 from a savings institution
and purchased 19,688 shares of the Company's common stock. These shares were
pledged as collateral for the ESOP debt which was paid in full in fiscal 1994.
For the years ended March 31, 1995, 1994 and 1993 the Company recorded
expenses related to the ESOP trust of $70,931, $51,291 and $68,472,
respectively; of these amounts $518 and $3,190, was for interest on the ESOP
note in 1994 and 1993, respectively. During the years ended March 31, 1994
and 1993 the plan repaid $15,779 and $91,138, respectively, of the note
payable.
Since the plan currently has no unallocated stock, there was no
contribution for the year ended March 31, 1996.
<PAGE>
<PAGE>
(12) Employee Benefit Plans, Continued
Certain officers of the Company participate in an incentive stock
option plan. Options are granted at exercise prices not less than the fair
market value of the Company's common stock on the date of grant. No new
options were granted during 1996. A total of 39,377 shares have been granted,
exercisable over a period from one to ten years from the date of grant at
$10.00 per share. During fiscal 1996, 3,938 options were exercised at $10.00
per share. There were 3,938 options granted but unexercisable at March
31,1996.
(13) Commitments
In conjunction with its lending activities, the Bank enters into
various commitments to extend credit and issue letters of credit. Loan
commitments (unfunded loans and unused lines of credit) and letters of credit
are issued to accommodate the financing needs of the Bank's customers. Loan
commitments are agreements by the Bank to lend at a future date, so long as
there are no violations of any conditions established in the agreement.
Letters of credit commit the Bank to make payments on behalf of customers when
certain specified events occur.
Financial instruments where the contract amount represents the Bank's
credit risk include commitments under pre-approved but unused lines of credit
of $16,700,000, and $23,129,798 and letters of credit of $129,000 and $124,000
at March 31, 1996 and 1995, respectively.
These loan and letter of credit commitments are subject to the same
credit policies and reviews as loans on the balance sheet. Collateral, both
the amount and nature, is obtained based upon management's assessment of the
credit risk. Since many of the extensions of credit are expected to expire
without being drawn, the total commitment amounts do not necessarily represent
future cash requirements. In addition to these loan commitments noted above,
the Bank had unused credit card loan commitments of $885,000 and $963,497 at
March 31, 1996 and 1995, respectively.
Outstanding commitments on mortgage loans not yet closed amounted to
$603,745 at March 31, 1996. Such commitments, which are funded subject to
certain limitations, extend over varying periods of time with the majority
being funded within 90 days. At March 31, 1996, the Bank had outstanding
commitments to sell approximately $613,000 of loans.
<PAGE>
<PAGE>
(14) Regulatory Matters
Federal regulations require savings institutions to have a minimum
regulatory tangible capital equal to 1.5% of adjusted total assets, a minimum
core capital ratio equal to 3.0% of adjusted total assets, and risk-based
capital equal to 8.0% of risk-weighted assets. As of March 31, 1996, the Bank
had regulatory tangible capital equal to 5.82% of total adjusted assets,
regulatory core capital equal to 6.32% of total adjusted assets, and
risk-based capital equal to 10.57% of risk-weighted assets. As a result, the
Bank meets all three of the aforementioned capital requirements. OTS
regulations impose various restrictions or requirements on institutions with
respect to their ability to pay dividends or make other distributions of
capital.
(15) Related Party Transactions
At March 31, 1996, the total aggregate indebtedness to the Bank by
executive officers and directors of the Bank whose individual indebtedness
exceeded $60,000 at any time over the period since April 1, 1994 was $440,017.
There were no additions to loans to executive officers over $60,000 during
fiscal 1996. Repayments on these loans totaled approximately $11,600. Loans
to all employees, officers and directors of the Bank, in the aggregate,
constituted approximately 8.2% of the total shareholders' equity of the Bank
at March 31, 1996.
The Company paid insurance premiums to an insurance agency in which
three directors of the Company are also officers, directors and shareholders.
The Company incurred expense in the amount of $79,208, and $90,877 for the
years ended March 31, 1995 and 1994, respectively, which represented insurance
and bond premiums for insurance coverage written for the Company. Of these
amounts, $8,062, and $10,874 were the actual commissions earned by the agency.
Also, the Bank paid $875, and $1,412 during these years to the agency out of
escrow accounts maintained for customers of the Bank. The Company paid
approximately $2,000 in premiums in fiscal 1996.
The Company rents office space from a company in which a director and
an officer of the Company and the Bank have an ownership interest. The Bank
incurred expenses of $23,625, $22,995 and $25,511 respectively, for rent and
taxes for the years ended March 31, 1996, 1995 and 1994.
Management is of the opinion that the transactions with respect to
insurance coverage and office rent are made on terms that are comparable to
those which would be made with unaffiliated persons.
<PAGE>
<PAGE>
(16) Security Federal Corporation Condensed Financial Statements (Parent
Company Only)
The following is condensed financial information of Security Federal
Corporation (parent company only); the primary asset of which is its
investment in the bank subsidiary, and the principal source of income for the
Company is equity in undistributed earnings from the Bank.
Condensed Balance Sheet Data
March 31, 1996 and 1995
1996 1995
Assets
Cash $ 71,795 490,147
Investment in Security Federal Bank 5,007,910 13,981,572
Investment in Real Estate Partnerships 567,726 --
Furniture and equipment, net 0 290
Income tax receivable from Bank 39,654 18,691
Other assets 97,133 --
Total assets $15,784,218 14,490,700
Liabilities and Shareholders' Equity
Loans Payable 350,000 --
Accounts payable -- 1,230
Shareholders' equity 15,434,218 14,489,470
Total liabilities and
shareholders' equity $15,784,218 14,490,700
Condensed Statements of Income Data
For the years ended March 31, 1996, 1995 and 1994
1996 1995 1994
Income:
Equity in undistributed earnings
of Security Federal Bank $ 1,098,307 1,038,428 545,022
Equity in undistributed earnings
of Real Estate Partnerships 889 -- --
Dividend income -- -- 50,000
Miscellaneous income 927 10 2,595
1,100,123 1,038,438 597,617
Expenses:
Miscellaneous 40,549 36,284 28,724
Net income $ 1,059,574 1,002,154 568,893
<PAGE>
<PAGE>
(16) Security Federal Corporation Condensed Financial Statements (Parent
Company Only) Continued
Condensed Statements of Cash Flow Data
For the years ended March 31, 1996, 1995 and 1994
1996 1995 1994
Operating activities:
Net income $ 1,059,574 1,002,154 568,893
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 290 348 348
Equity in undistributed earnings
of Security Federal Bank (1,098,307) (1,038,428) (545,022)
Equity in undistributed earnings
of real estate partnership (889) -- --
(Increase) decrease in income
taxes receivable and other
assets (118,096) (3,896) 1,408
Increase (decrease) in
accounts payable (1,230) (14,160) (9,394)
Net cash provided by
operating activities (158,658) (53,982) 16,233
Investing activities:
Purchase of Real Estate
Partnerships from Bank (561,000) -- --
Investment in Real Estate (5,838) -- --
Net cash used in
investing activities (566,838) -- --
Financing activities:
Proceeds of loan 350,000 -- --
Dividends paid (82,236) (80,880) (78,754)
Exercise of stock options 39,380 194,640 --
Net cash used in
financing activities 307,144 113,760 (78,754)
Net increase (decrease)
in cash and cash equivalents (418,352) 59,778 (62,521)
Cash and cash equivalents
at beginning of year 490,147 430,369 492,890
Cash and cash equivalents
at end of year $ 71,795 490,147 430,369
<PAGE>
<PAGE>
(17) Carrying Amounts and Fair Value of Financial Instruments
The carrying amounts and fair value of financial instruments as of
March 31, are summarized below:
(In Thousands)
1996
Carrying Estimated
Amount Fair Value
Financial Assets
Cash and cash equivalents $ 9,824 $ 9,824
Investment and mortgage
backed securities 41,013 40,886
Loans receivable, net 152,140 152,537
Federal Home Loan Bank Stock 1,233 1,233
Financial Liabilities
Deposits:
Checking, Savings, and MMDA
accounts $ 69,637 69,637
Certificate accounts 102,738 103,091
Advances from Federal Home
Loan Bank 22,864 21,082
Other borrowed money 350 350
The Bank had, at March 31, 1996 $18.2 million of off-balance sheet
financial commitments. These commitments are to originate loans and unused
consumer lines of credit and credit card lines. Since these obligations are
based on current market rates, if funded, the original principal is considered
to be a reasonable estimate of fair market value.
Fair value estimates are made at a specific point in time, based on
relevant market data and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale the Bank's entire holdings of a particular financial
instrument. Because no active market exists for a significant portion of the
Bank's financial instruments fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions,
current interest rates and prepayment trends, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in any of these
assumptions used in calculating fair value would also significantly affect the
estimates. Further, the fair value estimates were calculated as of March 31,
1996.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. For example, the Bank has significant
assets and liabilities that are not considered financial assets or liabilities
including deposit franchise value, loan servicing portfolio, deferred tax
liabilities, and premises and equipment. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any
of these estimates.
<PAGE>
<PAGE>
(18) Contingencies
The United States Congress is currently proposing a plan under which the Bank
Insurance Fund (BIF), hich is the primary deposit insurance fund for
commercial banks, would be merged with the Savings Association Insurance Fund
("SAIF"), which is the primary insurance fund for thrifts and savings banks.
In connection with this merger, all members of the SAIF fund would be required
to pay a one-time assessment of between 80 and 90 basis points per every $100
of SAIF insured deposit balances as of March 31, 1995. Based on the Bank's
deposit balances as of March 31, 1995, the one-time assessment would be
approximately $950,000 before tax and approximately $600,000 after tax, if
that expense would be tax deductible. In exchange for this one-time
assessment, qualifying members of the SAIF fund would receive a reduction in
their annual premiums. The measure has not yet passed Congress, and the final
provisions and payment date are as yet unknown.
In the normal course of business, the Company and subsidiary are periodically
involved in litigation. In the opinion of the Company's management none of
these cases should have a material adverse effect on the consolidated
financial statements.
<PAGE>
<PAGE>
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
Information concerning Directors and Executive Officers of the Company
is incorporated herein by reference from the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders, a copy of which will be
filed not less than 120 days after the close of the fiscal year.
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of Company common stock and
other equity securities of the Company by the tenth of the month following a
change. Officers, directors and greater than 10% stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledged, based solely on a review of the copies of
such reports furnished to the Company and written representations that no
other reports were required, during the fiscal year ended March 31, 1996, all
Section 16(a) filing requirements beneficial owners were complied with.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders, a copy of which will be filed not less than 120 days after
the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's
definitive Proxy Statement for the Annual Meeting of Stockholders, a copy of
which will be filed not less than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders, a copy of which will be filed not less
than 120 days after the close of the fiscal year.
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits:
3.1 Articles of Incorporation and amendments thereto **
3.2 Bylaws **
<PAGE>
<PAGE>
4 Instruments defining the rights of security holders, *
including indentures
10 Executive Compensation Plans and Arrangements:
Salary Continuation Agreements **
Amendment One to Salary Continuation Agreements ***
Stock Option Plan **
Incentive Compensation Plan **
21 Subsidiaries of Registrant 21
23 Consent of KPMG Peat Marwick LLP 23
* Filed on August 12, 1987, as exhibits to the Company's Form 8-A
registration statement pursuant to Section 12(g) of the Securities Exchange
Act of 1934 or as a part of reports filed pursuant to Section 13 of such Act.
All of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-B.
** Filed on June 28, 1993, as exhibits to the Company's Annual Report on
Form 10-KSB pursuant to Section 12(g) of the Securities Exchange Act of 1934.
All of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-B.
*** Filed as exhibits to the Company's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1993 pursuant to Section 12(g) of the
Securities Exchange Act of 1934. All of such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
(b) Reports on Form 8-K.
No current reports on Form 8-K were filed by the Company during the
three months ended March 31, 1996.
<PAGE>
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 FEDERAL CORPORATION
Date: June 25, 1996 By: /s/ Timothy W. Simmons
______________________
Timothy W. Simmons
President and Chief
Executive Officer (Duly
Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
By: /s/ Timothy W. Simmons June 25, 1996
________________________________________
Timothy W. Simmons
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Roy G. Lindburg June 25, 1996
________________________________________
Roy G. Lindburg, Treasurer and Chief
Financial Accounting Officer (Principal
Financial and Accounting Officer)
By: /s/ T. Clifton Weeks June 25, 1996
_______________________________________
T. Clifton Weeks
Chairman of the Board and Director
By: /s/ Gasper L. Toole, III June 25, 1996
_______________________________________
Gasper L. Toole, II
Director
By: /s/ Robert E. Johnson June 25, 1996
_______________________________________
Robert E. Johnson
Director
By: /s/ Harry O. Weeks, Jr. June 25, 1996
______________________________________
Harry O. Weeks, Jr.
Director
By: /s/ Robert E. Alexander June 25, 1996
______________________________________
Robert E. Alexander
Director
By: /s/ Thomas L. Moore June 25, 1996
______________________________________
Thomas L. Moore
Director
By: /s/ William Clyburn June 25, 1996
______________________________________
William Clyburn
Director
PAGE
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
Exhibit 21
Subsidiaries of the Registrant
State of Percentage
Parent Subsidiary Incorporation of
Ownership
Security Federal Security Federal
Corporation Bank United States 100%
Security Federal Bank Security Financial
Services
Corporation South Carolina 100%
<PAGE>
<PAGE>
Exhibit 23
Consent of KPMG Peat Marwick LLP<PAGE>
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Security Federal Corporation:
We consent to incorporation by reference in the Registration Statement No.
33-80008 on Form S-8 of our report dated May 17, 1996, relating to the
consolidated balance sheets of Security Federal Corporation and subsidiary
(the "Company") as of March 31, 1996 and 1995 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the
years in the three-year period ended March 31, 1996, which report appears in
the March 31, 1996 annual report on Form 10-KSB of the Company. Our report
dated May 17, 1996, refers to the fact that the Company adopted the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," on April 1, 1993 and adopted the provisions of SFAS No.
115, "Accounting for Certain Investment in Debt and Equity Securities" on
March 31, 1994.
/s/KPMG Peat Marwick LLP
__________________________
KPMG Peat Marwick LLP
<PAGE>
<PAGE>
Greenville, South Carolina
June 25, 1996
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