SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10 - QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 0-16120
SECURITY FEDERAL CORPORATION
Delaware 57-0858504
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1705 Whiskey Road, Aiken, South Carolina 29801
(Address of Principal Executive Office) (Zip code)
(803) 641-3000
(Registrant's telephone number, including area code)
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 ( )
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practical date.
Class Outstanding Shares at
Common Stock June 30, 1997
$0.01 Par Value 417,122
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INDEX
SECURITY FEDERAL CORPORATION
PART I - FINANCIAL INFORMATION (UNAUDITED) PAGE
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at
June 30, 1997 and March 31, 1997 2
Consolidated Statements of Income for the
Three months ended June 30, 1997 and 1996 3-4
Consolidated Statement of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis
Financial Condition and Results of Operations 12-15
PART II. OTHER INFORMATION
Other Information 16
Signatures 17
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information is included in the consolidated financial statements and related
notes.
1
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, March 31,
1997 1997
-------- ---------
ASSETS
Cash and cash equivalents $ 7,085,697 $ 7,903,637
Investment and mortgage-backed securities:
Available for sale: (Amortized cost of $29,904,923
at June 30, 1997 and $24,484,644
at March 31, 1997) 29,828,475 24,215,667
Held to maturity: (Fair market value of $11,130,581
at June 30, 1997 and $12,598,186
at March 31, 1997) 11,158,680 12,754,769
Loans receivable net:
Held for sale 514,032 211,212
Held for investment: (Net of allowance of $1,888,063
at June 30, 1997 and $1,767,483
at March 31, 1997) 144,804,959 146,558,261
----------- -----------
145,318,991 146,769,473
----------- -----------
Accrued interest receivable:
Loans 817,997 820,730
Mortgage-backed securities 37,745 38,909
Investments 491,044 363,109
Premises and equipment, net 3,972,543 3,952,149
Federal Home Loan Bank stock, at cost 942,300 785,700
Real estate acquired in settlement of loans 97,212 52,009
Real estate held for development and sale 742,355 840,813
Other assets 2,981,345 3,148,980
----------- -----------
Total Assets 203,474,384 201,645,945
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposit accounts $165,165,444 $168,060,858
Advances from Federal Home Loan Bank 18,046,000 14,114,000
Other borrowed money 185,945 204,397
Advance payments by borrowers
for taxes and insurance 291,484 244,449
Other liabilities 3,087,245 2,840,212
----------- -----------
Total liabilities 186,776,118 185,463,916
----------- -----------
Stockholders' Equity:
Serial preferred stock, $.01 par value;
authorized shares - 200,000 issued
and outstanding, none
Common stock, $.01 par value; authorized
shares 1,000,000 issued and outstanding
shares, 417,122 at June 30, 1997 and
March 31, 1997 4,171 4,171
Additional paid-in capital 3,958,603 3,958,603
Unrealized net loss on securities available
for sale, net of income taxes (47,036) (166,872)
Retained earnings, substantially restricted 12,782,528 12,386,127
Total stockholders' equity 16,698,266 16,182,029
----------- -----------
Total liabilities and stockholders' equity $203,474,384 $201,645,945
=========== ===========
See accompanying notes to consolidated financial statements.
2
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended
June 30,
--------
1997 1996
---- ----
Interest income:
Loans $3,309,001 $3,375,487
Mortgage-backed securities 84,497 94,386
Investment securities 551,874 514,439
Other 18,543 20,332
--------- ---------
Total interest income 3,963,915 4,004,644
--------- ---------
Interest expense:
NOW and money market accounts 205,325 232,102
Passbook accounts 75,992 87,679
Certificate accounts 1,244,575 1,403,452
Advances and other borrowed money 254,865 348,127
--------- ---------
Total interest expense 1,780,757 2,071,360
--------- ---------
Net interest income 2,183,158 1,933,284
Provision for loan losses 150,000 75,000
--------- ---------
Net interest income after provision for
Loan losses 2,033,158 1,858,284
--------- ---------
Other income:
Gain on sale of loans 30,130 30,091
Loan servicing fees 83,347 83,126
Service fees on deposit accounts 196,296 185,637
Income from real estate operations 30,040 25,905
Other 80,717 36,640
--------- ---------
Total other income 420,530 361,399
--------- ---------
General and administrative expenses:
Salaries and employee benefits 896,826 822,667
Occupancy 112,386 96,016
Advertising 78,771 34,819
Depreciation and maintenance of equipment 157,580 160,366
FDIC insurance premiums 19,434 92,842
Amortization of intangibles 116,310 116,310
Other 411,406 479,512
--------- ---------
Total general and administrative expenses 1,792,713 1,802,532
--------- ---------
(Continued)
4
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended
June 30,
--------
1997 1996
---- ----
Income before income taxes 660,975 417,151
Provision for income taxes 239,547 138,651
---------- ----------
Net income $ 421,428 $ 278,500
========== ==========
Net income per common share $ 1.01 $ 0.67
========== ==========
Cash dividend on common stock $ 0.06 $ 0.05
========== ==========
Weighted average shares outstanding $ 417,122 $ 413,184
========== ==========
See accompanying notes to consolidated financial statements.
4
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Consolidated Statement of Shareholders' Equity
For the three months ended June 30 1997
(Unaudited)
Unrealized
Net Loss
Additional on Securities
Common Paid-In Available Retained
Stock Capital for Sale Earnings Total
----------------------------------------------------------
Beginning balance
March 31, 1997 $ 4,171 $ 3,958,603 $ (166,872) $12,386,127 $ 16,182,029
Net income ---- ---- ---- 421,428 421,428
Cash dividend ---- ---- ---- (25,027) (25,027)
Exercise of stock
options ---- ----
Decrease in
unrealized net
loss on
securities
available for
sale, net of tax ---- ---- 119,836 ---- 119,836
----------------------------------------------------------
Ending balance
June 30, 1997 $ 4,171 $ 3,958,603 $ (47,036) $12,782,528 $ 16,698,266
==========================================================
See accompanying notes to consolidated financial statements.
5
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
June 30,
--------
1997 1996
---- ----
Cash flows from operating activities:
Net Income $ 421,428 $ 278,500
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation expense 135,376 152,597
Amortization of purchase accounting adjustments 116,310 116,310
Discount accretion and premium amortization 310 50,974
Provisions for losses on loans and real estate 150,000 75,000
Gain on sale of loans (30,130) (30,091)
Gain on sale of real estate (30,040) (8,413)
Amortization of deferred fees on loans (24,275) (36,895)
Proceeds from sale of loans held for sale 1,207,520 4,327,113
Origination of loans for sale (1,480,210) (4,029,019)
(Increase) decrease in accrued interest
receivable:
Loans 2,733 (16,010)
Mortgage-backed securities 1,164 (14,880)
Investments (127,935) (70,534)
Increase (decrease) in advance payments
by borrowers 47,035 (13,371)
Other, net 217,407 1,141,427
------------ -----------
Net cash provided by operating activities $ 606,693 $ 1,922,708
------------ -----------
Cash flows from investing activities
Principal repayments on mortgage-backed
securities 96,289 185,010
Purchase of investment securities available
for sale (7,420,157) (2,483,399)
Maturities of investment securities available
for sale 2,000,000 3,000,000
Purchase of investment securities held to
maturity 0 (1,994,531)
Maturities of investment securities held
to maturity 1,500,000 0
Purchase of FHLB Stock (156,600) 0
Redemption of FHLB Stock 0 25,950
(Increase) decrease in loans to customers 1,567,967 (2,399,112)
Investment in real estate held for development (61,408) (51,429)
Proceeds from sale of real estate held
for development 189,906 211,188
Proceeds from sale of real estate acquired
through foreclosure 22,033 112,242
Purchase of premises and equipment (155,770) (36,526)
----------- -----------
Net cash used by investing activities $(2,417,740) $(3,430,607)
----------- -----------
(Continued)
6
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
Three Months Ended
June 30,
--------
1997 1996
---- ----
Cash flows from financing activities:
Decrease in deposit accounts $ (2,895,414) $ (1,473,342)
Proceeds from FHLB advances 13,570,000 20,725,000
Repayment of FHLB advances (9,638,000) (20,068,000)
Repayment of other borrowings $ (18,452) 0
Dividends of share holders $ (25,027) (20,658)
-------------- --------------
Net cash provided (used) by financing
activities $ 993,107 $ (837,000)
-------------- --------------
Net decrease in cash and cash equivalents (817,940) (2,344,899)
Cash and cash equivalents at beginning
of period 7,903,637 9,823,664
-------------- --------------
Cash and cash equivalents at end of period $ 7,085,697 $ 7,478,765
============== ==============
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $ 1,538,426 $ 1,862,350
Income Taxes $ 95,000 $ 58,281
Additions to real estate acquired
through foreclosure $ 67,236 $ 10,990
(Increase) decrease in unrealized net
loss on securities available for
sale, net of taxes $ 119,836 $ (28,437)
Securitization of loans receivable $ 0 2,796,062
See accompanying notes to consolidated financial statements.
7
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Security Federal Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-QSB and therefore do not include all
disclosures necessary for a complete presentation of financial condition,
results of operations and cash flows in conformity with general accepted
accounting principles. Such statements are unaudited but, in the opinion of
management, reflect all adjustments, all of which are of a normal recurring
nature, necessary for a fair presentation of results for the selected interim
periods. Users of financial information produced for interim periods are
encouraged to refer to the footnotes contained in The Annual Report to
Stockholders when reviewing interim financial statements. The results of
operations for the three month period ended June 30, 1997 are not necessarily
indicative of the results which may be expected for the entire fiscal year.
2. Principles of Consolidation
The accompanying unaudited 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 owned subsidiary
Security Financial Services Corporation ("SFSC"). SFSC engages primarily in
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.
3. Loans Receivable, Net
Loans receivable, net at June 30, 1997 and March 31, 1997, consisted of the
following:
Loans held for sale were $514,032 and $211,212 at June 30, 1997 and March 31,
1997 respectively.
Loans held for investment: June 30, 1997 March 31, 1997
------------- --------------
Residential real estate $ 47,429,149 $ 50,534,682
Consumer 46,234,109 46,894,063
Commercial real estate 5,233,045 6,527,692
Commercial business 49,624,999 46,047,825
------------- -------------
$ 148,521,302 $ 150,004,262
------------- -------------
Less:
Allowance for possible
loan loss $ 1,888,063 $ 1,767,483
Loans in process 1,543,907 1,375,319
Deferred loan fees 284,373 303,199
------------- --------------
3,716,343 3,446,001
------------- --------------
$ 144,804,959 $ 146,558,261
============= ==============
The following is a reconciliation of the allowance for possible loan losses:
June 30, 1997 June 30,1996
------------- ------------
Beginning balance $ 1,767,483 1,758,688
Provision 150,000 75,000
Charge-offs (59,683) (63,190)
Recoveries 30,263 3,135
------------- --------------
Ending balance $ 1,888,063 1,773,633
============= ==============
8
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Security Federal Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. Securities
Investment and Mortgage-backed Securities, Held to Maturity
- -----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses and market
values of investment and mortgage-backed securities held to maturity are as
follows:
June 30, 1997
- -------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ -----------
US Government and agency
Obligations $ 6,478,700 $ 26,457 $ 40,286 $ 6,464,871
Mortgage-backed
securities 4,679,980 34,778 49,048 4,665,710
----------- ------------ ------------ -----------
Total $ 11,158,680 $ 61,235 $ 89,334 $ 11,130,581
=========== ============ ============ ===========
March 31, 1997
- --------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ -----------
US Government and agency
Obligations $ 7,978,201 $ 14,797 $ 163,799 $ 7,829,199
Mortgage-backed
securities 4,776,568 15,976 23,557 4,768,987
----------- ------------ ------------ -----------
Total $ 12,754,769 $ 30,773 $ 187,356 $ 12,598,186
=========== ============ ============ ===========
Investment and Mortgage-backed Securities, Available for Sale
- -------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses and market
values of investment and mortgage-backed securities available for sale are as
follows:
June 30, 1997
- -------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ -----------
US Government and agency
Obligations $ 29,904,923 $ 37,576 $ 114,024 $ 29,828,475
Mortgage-backed
securities 0 0 0 0
----------- ------------ ------------ -----------
Total $ 29,904,923 $ 37,576 $ 114,024 $ 29,828,475
=========== ============ ============ ============
9
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Security Federal Corporation and Subsidiary
Investment and Mortgage-backed Securities, Available for Sale (continued)
- -------------------------------------------------------------
March 31, 1997
- --------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ -----------
US Government and agency
obligations $ 24,484,644 $ 0 $ 268,977 $ 24,215,667
Mortgage-backed
securities 0 0 0 0
----------- ------------ ------------ -----------
Total $ 24,484,644 $ 0 $ 268,977 $ 24,215,667
=========== ============ ============ ===========
5. Deposits
A summary of deposit accounts by type with weighted average rates are as
follows:
June 30, 1997 March 31, 1997
------------- --------------
Demand Accounts: Balance Rate Balance Rate
------- ---- ------- ----
Checking $ 43,765,629 1.36% $ 43,601,652 1.36%
Money Market 11,562,079 3.00% 11,640,884 2.80%
Regular Savings 13,198,216 2.47% 13,451,308 2.49%
---------- ----- ---------- -----
Total demand accounts $ 68,525,924 1.85% $ 68,693,844 1.83%
Certificate Accounts:
0 - 4.99% $ 3,476,456 $ 3,935,588
5.00 - 6.99% 92,965,655 95,234,017
7.00 - 8.99% 197,409 197,409
---------- ----------
Total certificate
accounts 96,639,520 5.37% 99,367,014 5.40%
----------- ----- ----------- -----
Total deposit accounts $ 165,165,444 3.91% $ 168,060,858 3.94%
=========== ----- =========== -----
6. Federal Home Loan Bank Advances
Federal Home Loan Bank Advances are summarized by year of maturity and weighted
average interest rate in the table below:
Fiscal Year Due June 30, 1997 March 31, 1997
- --------------- ------------- --------------
Balance Rate Balance Rate
------- ---- ------- ----
1998 $ 15,902,000 5.77% $ 11,952,000 5.88%
1999 490,000 8.65% 490,000 8.65%
2000 528,000 8.70% 528,000 8.70%
2001 856,000 8.75% 856,000 8.75%
thereafter 270,000 7.97% 288,000 7.97%
---------- ----- ---------- -----
$ 18,046,000 6.11% $ 14,114,000 6.30%
========== ----- ========== -----
10
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Security Federal Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. Regulatory Matters
The following table reconciles the Bank's stockholders' equity to its various
regulatory capital positions:
(Dollars in thousands)
June 30, 1997 March 31, 1997
------------- --------------
Bank's Stockholders' Equity $ 15,901 $ 15,362
Unrealized loss on available
for sale securities,
net of tax 47 167
Reduction for goodwill and other
intangibles (2,395) (2,511)
------- -------
Tangible capital 13,553 13,018
Qualifying core deposits and
intangible assets 901 938
------ ------
Core capital 14,454 13,956
Supplemental capital 1,683 1,627
------ ------
Risk-based capital $ 16,137 $ 15,583
====== ======
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at June 30, 1997.
(Dollars in thousands)
Amount Percent Actual Excess
Required Required Amount Percent Excess Percent
-------- -------- ------ ------- ------ -------
Tangible capital $ 3,006 1.5% $ 13,553 6.76% $10,547 5.26%
Core capital 6,040 3.0% 14,454 7.18% 8,414 4.18%
Risk-based capital 10,755 8.0% 16,137 12.00% 5,382 4.00%
The Bank's regulatory capital amounts and ratios are as follow as of the dates
indicated:
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------
(Dollars in thousands)
June 30, 1997
Risk-based Capital $16,137 12.0% $10,755 8.0% $13,444 10.0%
(to risk weighted assets)
Core Capital 14,454 7.2 6,040 3.0 12,079 6.0
(to adjusted tangible assets)
Tangible Capital 13,553 6.8 3,006 1.5 10,020 5.0
(to tangible assets)
June 30, 1996
Risk-based Capital $15,364 11.5% $10,708 8.0% $13,386 10.0%
(to risk weighted assets)
Core Capital $13,691 6.4 6,381 3.0 12,762 6.0
(to adjusted tangible assets)
Tangible Capital 12,617 6.0 3,174 1.5 10,581 5.0
(to tangible assets)
- -------------------------------------------------------------------------------
11
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Security Federal Corporation and Subsidiary
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Changes in Financial Condition
Total assets of the Company increased $1.8 million or 0.9% during the three
months ended June 30, 1997, primarily due to an increase of $4.0 million in
investments offset partially by an $818,000 decrease cash and cash equivalents
and a $1.5 million or 1.0% decrease in total net loans receivable.
Real estate acquired in settlement of loans (REO) increased slightly by $45,000
while real estate acquired for development decreased $96,000 during the three-
month period due to sales of real estate.
Deposits decreased $2.9 million or 1.7% during the three months ended of June
1997 as Federal Home Loan Bank (FHLB) advances grew $3.9 million to replace
those funds and fund the Company's 0.9% growth in assets.
The Board of Directors declared the twenty-sixth consecutive quarterly dividend
of $.06 per share in May 1997 which totaled $25,000. This represents a 20%
increase in dividends over the prior year. Unrealized net losses on securities
available for sale decreased by $120,000 during the three months ended June 30,
1997. Net income for the quarter was $421,000 for the Company. These items
combined to increase the Company's stockholders' equity by $516,000 or 3.2%
during the three months ended June 30, 1997 and raised book value per share to
$40.03 compared to $38.79 at March 31, 1997.
Liquidity and Capital Resources
In accordance with Office of Thrift Supervision regulations, the Bank is
required 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. For both the June 1996 and 1997 quarters, the Bank maintained an
average liquidity level of approximately 22%. This level of liquidity is
deemed adequate to meet requirements of normal operations, potential deposit
outflows and loan demand while still allowing for optimal investment of funds
and return on assets.
Loan repayments and maturities of investments are a significant source of
funds, whereas loan disbursements are a primary use of the Bank's funds.
During the three months ended June 30, 1997, loan repayments exceeded loan
disbursements resulting in a $1.5 million or 1.0% decrease in total net-loans
receivable.
12
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Security Federal Corporation and Subsidiary
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Liquidity and Capital Resources (Continued)
Deposits and other borrowings are also an important source of funds for the
Bank. During the three months ended June 30, 1997, deposits decreased $2.9
million while FHLB advances increased $3.9 million. At June 30, 1997, Security
Federal had $80.6 million of certificates of deposit maturing within one year.
Based on previous experience, a major portion of these certificates will be re-
deposited.
Capital resources at June 30, 1997 are sufficient to meet outstanding mortgage
loan commitments of $319,000 and unused lines of credit of $20.8 million.
Management believes that the Bank's short-term and long-term liquidity needs
will continue to be supported by the Bank's deposit base and borrowing
capacity.
Accounting and Reporting Changes
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 128, Earnings per Share,
which is effective for both interim and annual periods ending after December
15, 1997. This statement supersedes Accounting Principles Board Opinion No.
15, Earnings per Share. The purpose of this statement is to simplify current
reporting and make U.S. reporting comparable to international standards. The
statement requires dual presentation of basic and diluted EPS by entities with
complex capital structures (as defined by the statement). The Company
anticipates that adoption of this standard will not have a material affect on
EPS.
Also, in February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure, which is effective for financial statements for
periods ending after December 15, 1997. This statement applies to both public
and nonpublic entities. The new statement requires no change for entities
subject to the existing requirements. The Company anticipates that adoption of
the standard will not have a material affect on the Company.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. Enterprises are required to classify items of other comprehensive
income by their nature in the financial statement and display the balance of
other comprehensive income separately in the equity section of a statement of
financial position. Statement 130 is effective for both interim and annual
periods beginning after December 15, 1997. Earlier application is permitted.
Comparative financial statements provided for earlier periods are required to
be reclassified to reflect the provisions of this statement. The Company will
adopt Statement 130 effective March 31, 1998, and will provide the required
disclosures in the Company's Form 10QSB and Annual Report.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement establishes standards for
the way public business companies are to report information about operating
segments in annual financial statements and requires those companies to report
selected information about operating segments in interim financial reports
issued to shareholders. Statement 131 is effective for financial statements
for periods beginning after December 15, 1997. Earlier application is
encouraged. In the initial year of application, comparative information for
earlier years is to be restated, unless it is impractical to do so. Statement
131 need not be applied to interim financial statements in the initial year of
its application, but comparative information for interim periods in the initial
year of application shall be reported in financial statements for interim
periods in the second year of application. It is not anticipated that this
standard will materially effect the Company's current method of financial
reporting.
13
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Security Federal Corporation and Subsidiary
Management's Discussion and Analysis of
Results of Operations and Financial Condition
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.
RESULTS OF OPERATIONS
- ---------------------
NET INCOME
Security Federal Corporation's net income increased $142,000 or 51%, to
$421,000 for the three months ended June 30, 1997, compared to the same period
in 1996 primarily due to an increase in net interest income and other income,
combined with a slight decrease in general and administrative expenses.
Net Interest Income
Net interest income increased by $250,000 or 12.9% during the three months
ended June 30, 1997 compared to the same period in 1996 due primarily to a
decreases in interest expense on deposits and advances and an increase in
investment interest income offset partially by a decrease in interest income on
loans receivable.
Interest income on loans decreased $67,000 or 2.0% during the quarter due to
lower average total outstanding loan balances. Investment, mortgage-backed,
and other securities interest income increased $26,000 or 4.1% during the three
months ended June 30, 1997, compared to the same period one year ago due to
higher average investment balances and a higher yield on the overall investment
portfolio. Total interest income increased $41,000 or 1.0% during the quarter.
Total interest expense decreased $291,000 or 14.0% during the three-month
period. Interest expense on deposits decreased $198,000 or 11.5% due to a
lower cost of funds on deposits and a lower overall deposit balance during the
quarter ended June 30, 1997. Advances and other borrowings' interest expense
decreased $93,000 during the three months ended June 30, 1997, compared to the
same period in 1996 due to a lower total average outstanding borrowings. The
cost of advances and other borrowings has been relatively stable during the
past twelve months.
Provision for Loan Losses
Security Federal's provision for loan losses increased $75,000 to $150,000 for
the three months ended June 30, 1997, compared to the 1996 period due to
managements analysis of the loan portfolio and the increasing percentage of
commercial loans in the Bank's portfolio. Commercial loans are inherently
riskier than residential mortgage loans During the three months ended June 30,
1997, net charge-offs were $29,420 compared to $60,055 for the three months
ended June 30, 1996. The Bank ceases to accrue interest on any loan 60 days or
more delinquent. Non-accrual loans at June 30, 1997 were $2.1 million compared
to $1.4 million at March 31, 1997. The allowance for loan losses as a
percentage of total loans was 1.28% at June 30, 1997 and 1.19% at March 31,
1997. Future additions to the Bank's allowance for loan losses are dependent
on, among other things, the performance of the Bank's loan portfolio, changes
in real estate values, interest rates, and the economy. A major employer in
the Aiken area, the Savannah River Site, has experienced several major
downsizings of personnel the past few years. More layoffs at the site are
expected in the coming year, which will have some impact on the local economy.
Management continues to monitor its loan portfolio for the impact of local
economic changes.
14
<PAGE>
<PAGE>
Security Federal Corporation and Subsidiary
Managements Discussion and Analysis of
Results of Operations and Financial Condition
Other Income
Total other income increased $59,000 or 16.4% during the three months ended
June 30, 1997 compared to the same period one-year earlier. Gain on sale of
loans and loan servicing fees, which were $30,000 and $83,000 respectively in
the June 1997 quarter, were virtually the same amounts in the 1996 three-month
period. Service fees on deposit accounts increased $11,000 or 5.7%. Income
from real estate operations increased $4,000 due to increased sales of real
estate during the three months ended June 30, 1997 compared to the 1996 period.
Also contributing to higher other income levels were reduced expenses due to
the sale of the remaining lots in one of the two partnership's subdivisions,
Currytowne in Edgefield County, in February 1997. Other income, which consists
of credit life insurance commissions, safe deposit box rental income, annuity
and stock brokerage commissions through Security Financial Services and other
miscellaneous fees, increased $44,000 due to increased activity in Security
Financial during the June 1997 three month period.
General and Administrative Expenses
General and administrative expenses decreased $10,000 or 0.5% due mainly to
decreases in FDIC insurance premiums and other expenses offset in part by
increases in compensation, benefits, and advertising expense.
Compensation and employee benefits increased $74,000 or 9.0% due to normal
annual salary increases and overtime paid in working through a major computer
conversion that occurred late in the prior fiscal year. The computer
conversion also changed the Bank from an outsourcing of data processing
services arrangement to an in-house processing system which has the effect of
increasing compensation and equipment expenses slightly, but is more than
offset by a decrease in other expense. Occupancy increased $16,000 during the
June 1997 quarter due to an increase in building maintenance and repairs
expense. Advertising increased $44,000 to $79,000 during the three months
ended June 30, 1997 due to increased media advertising and billboards to
promote the Bank's 75th anniversary and the Bank's new logo and corporate
colors. Depreciation and maintenance of equipment expense decreased $2,800
during the quarter even as the Bank added approximately $600,000 in software
and equipment to its fixed assets, several other items of equipment became
fully depreciated. FDIC insurance premiums dropped $73,000 due to the decrease
in premium rates which occurred late in fiscal 1997 due to congressional
legislation to recapitalize the SAIF fund. Amortization of intangibles arising
due to branch acquisitions in October 1993, were $116,000 in both the June 1996
and 1997 quarters. Other expenses, encompassing legal, professional and
consulting expense, stationary and office supplies, and in the June 1996
quarter only, data processing outsourcing expense, decreased $68,000 or 14.2%
during the three months ended June 30, 1997. The primary reason for the
decrease is the above mentioned data processing conversion which brought the
Bank's data servicing back in-house for which the Bank was paying approximately
$30,000 per month to an outside provider.
15
<PAGE>
<PAGE>
Security Federal Corporation and Subsidiary
Other Information
Item 1 Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Bank is a party
to legal proceedings in the ordinary course of business wherein it
enforces its security interest in mortgage loans it has made.
Item 2 Changes in Securities
---------------------
Not applicable.
Item 3 Defaults upon Senior Securities
-------------------------------
None
Item 4 Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5 Other Information
-----------------
None
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
None
16
<PAGE>
<PAGE>
Security Federal Corporation and Subsidiary
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
Security Federal Corporation
Date: August 12, 1997 By:/s/ROY G. LINDBURG
--------------- ------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
17
<PAGE>
<PAGE>
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