2
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 December 31, 1996
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 December 31, 1996
$0.01 Par Value
417,164
<PAGE>
INDEX
SECURITY FEDERAL CORPORATION
PART I - FINANCIAL INFORMATION (UNAUDITED) PAGE
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at
December 31, 1996 and March 31, 1996 2
Consolidated Statements of Income for the
Three months ended December 31, 1996 and 1995 3-4
Nine months ended December 31, 1996 and 1995
5-6
Consolidated Statement of Shareholders' Equity 7
Consolidated Statements of Cash Flows 8-9
Notes to Consolidated Financial Statements 10-13
Item 2. Management's Discussion and Analysis
Financial Condition and Results of Operations 14-18
PART II. OTHER INFORMATION
Other Information 19
Signatures 20
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.
<PAGE>
<TABLE>
<CAPTION>
Security Federal Corporation and Subsidiary
Consolidated Balance Sheets (Unaudited)
December 31, 1996March 31, 1996
Assets <S> <C>
<C>
Cash and cash equivalents $ 7,513,95 $ 9,823,66
4 4
Investments and mortgage-backed securities:
Available for sale: (Amortized cost of 21,959,8 30,972,4
$22,014,096 at December 31, 1996 and 80 06
$31,170,866 at March 31, 1996)
Held to maturity: (Fair market value of 12,414,7 10,040,7
$12,259,183 at December 31, 1996 and 02 24
$9,913,951
at March 31, 1996)
Loans receivable net:
Held for sale 303,926 612,919
Held for investment: (Net of allowance 148,246, 151,526,
of $1,744,362 at December 31, 1996 298 807
and
$1,758,688 at March 31, 1996)
148,550, 152,139,
224 726
Accrued interest receivable:
Loans 923,620 882,274
Mortgage-backed securities 40,477 23,799
Investments 414,231 450,952
Premises and equipment, net 3,479,43 3,187,18
2 5
Federal Home Loan Bank stock, at cost 1,172,70 1,233,20
0 0
Real estate acquired through foreclosure 328,407 718,763
Real estate held for development and sale 1,011,98 1,389,57
5 9
Other assets 3,928,41 3,953,85
3 9
Total Assets 201,738, 214,816,
025 131
Liabilities and Stockholders' Equity
Liabilities:
Deposit accounts $ 166,692, $ 172,374,
747 727
Advances from Federal Home Loan Bank 15,928,0 22,864,0
00 00
Other borrowed money 0 350,000
Advance payments by borrowers
for taxes and insurance 117,904 385,708
Other liabilities 2,940,19 3,407,47
7 8
Total liabilities 185,678, 199,381,
848 913
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, 417164 at
December 31, 1996 and 413,184 4,171 4,132
at March 31, 1996
Additional paid-in capital 3,958,60 3,919,26
3 2
Unrealized net loss on securities (33,636) (123,125
available for sale, net of income taxes )
Retained earnings, substantially 12,130,0 11,633,9
restricted 39 49
Total stockholders' equity 16,059,1 15,434,2
77 18
Total liabilities and stockholders' equity $ 201,738, $ 214,816,
025 131
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Security Federal Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
Three Months Ended
December 31,
1996 1995
<S> <C> <C>
Interest income:
Loans $ 3,417,262 $ 3,459,221
Mortgage-backed securities 34,106 27,098
Investment securities 509,594 522,411
Other 19,558 22,421
Total interest income 3,980,520 4,031,151
Interest expense:
NOW and money market accounts 232,417 247,780
Passbook accounts 80,150 82,071
Certificate accounts 1,319,242 1,391,830
Advances and other borrowed money 276,129 473,489
Total interest expense 1,907,938 2,195,170
Net interest income 2,072,582 1,835,981
Provision for loan losses 75,000 30,000
Net interest income after provision
for
loan losses 1,997,582 1,805,981
Other income:
Gain (loss) on sale of REO 18,308 (14,551)
Gain on sale of loans 86,711 37,743
Loan servicing fees 83,275 78,519
Service fees on deposit accounts 218,299 161,912
Income (loss) from real estate 29,344 (57,980)
operations
Other 53,208 75,958
Total other income 489,145 281,601
General and administrative expenses:
Salaries and employee benefits 790,850 824,617
Occupancy 102,467 90,680
Advertising 56,644 69,367
Depreciation and maintenance of 154,727 159,286
equipment
FDIC insurance premiums 65,558 89,007
FDIC SAIF Assessment 0 0
Amortization of intangibles 116,310 116,310
Other 489,366 372,709
Total general and 1,775,922 1,721,976
administrative expenses
</TABLE>
<TABLE>
Security Federal Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
(Continued)
Three Months Ended
December 31
1996 1995
<S> <C> <C>
Income before income taxes 710,805 365,606
Provision for income taxes 253,907 120,740
Net income $ 456,898 $ 244,866
Net income per common share $ 1.10 $ 0.59
Cash dividend on common stock $ 0.05 $ 0.05
Weighted average shares outstanding $ 415,910 $ 412,071
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Security Federal Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
Nine Months Ended
December 31,
1996 1995
<S> <C> <C>
Interest income:
Loans $ 10,198,326 $ 10,098,787
Mortgage-backed securities 72,236 83,942
Investment securities 1,691,475 1,583,454
Other 56,530 64,174
Total interest income 12,018,567 11,830,357
Interest expense:
NOW and money market accounts 701,856 837,743
Passbook accounts 255,961 273,816
Certificate accounts 4,096,186 3,976,831
Advances and other borrowed money 941,985 1,369,048
Total interest expense 5,995,988 6,457,438
Net interest income 6,022,579 5,372,919
Provision for loan losses 225,000 180,000
Net interest income after provision
for
loan losses 5,797,579 5,192,919
Other income:
Gain (loss) on sale of REO (19,863) (6,119)
Gain on sale of loans 161,923 82,590
Loan servicing fees 251,348 232,898
Service fees on deposit accounts 608,547 422,494
Income (loss) from real estate (14,296) 23,010
operations
Other 155,216 141,673
Total other income 1,142,875 902,665
General and administrative expenses:
Salaries and employee benefits 2,421,701 2,567,144
Occupancy 302,071 276,552
Advertising 147,163 151,051
Depreciation and maintenance of 482,426 491,550
equipment
FDIC insurance premiums 223,902 295,611
FDIC SAIF Assessment 705,489 0
Amortization of intangibles 348,930 348,930
Other 1,476,231 1,141,031
Total general and 6,107,913 5,271,869
administrative expenses
</TABLE>
Security Federal Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
(Continued)
Nine Months Ended
December 31,
1996 1995
[S] [C] [C]
Income before income taxes 832,541 823,715
Provision for income taxes 274,278 262,175
Net income $ 558,263 $ 561,540
Net income per common share $ 1.35 $ 1.37
Cash dividend on common stock $ 0.15 $ 0.15
Weighted average shares outstanding $ 414,099 $ 410,184
[/TABLE]
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Security Federal Corporation and Subsidiary
Consolidated Statement of Shareholders' Equity
For the nine months ended December 31 1996
(Unaudited)
<S> <C> <C>
<C> <C> <C>
Unrealiz
ed
Net Loss
Addition on
al Securiti
es
Common Paid-In Availabl Retained
e
Stock Capital for Sale Earnings Total
Beginning balance
March 31, 1996 $ $ $ $ $
4,132 3,919,26 (123,125 11,633,94 15,434,21
2 ) 9 8
Net income ----- ----- ----- 558,263 558,263
Cash dividend ----- ----- ----- (62,173) (62,173)
Exercise of stock 39 39,341 ----- ----- 39,380
options
Change in unrealized ----- ----- 89,489 ----- 89,489
net loss on
securities available
for sale
Ending balance
December 31, 1996 $ $ $ $ $
4,171 3,958,60 (33,636) 12,130,03 16,059,17
3 9 7
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Security Federal Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months
Ended
December 31,
1996 1995
<S> <C>
<C>
Cash flows from operating activities:
Net Income $ 558,263 $ 561,540
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense 448,337 446,827
Amortization of purchase accounting 348,930 348,930
adjustments
Discount accretion and premium 130,043 157,737
amortization
Provisions for losses on loans and real 325,000 225,000
estate
Gain on sale of loans (161,923) (82,590)
Gain on sale of real estate (36,497) (36,722)
Amortization of deferred fees on loans (87,512) (134,400)
Proceeds from sale of loans held for 10,657,31 7,090,322
sale 3
Origination of loans for sale (10,186,3 (7,421,85
97) 0)
(Increase) decrease in accrued interest
receivable:
Loans (41,346) (173,517)
Mortgage-backed securities (16,678) 489
Investments 36,721 (62,745)
(Decrease) in advance payments by (267,804) (29,512)
borrowers
Other, net (858,110) 704,651
Net cash (used) provided by operating $ 848,340 $ 1,594,160
activities
Cash flows from investing activities
Principal repayments on mortgage-backed 394,006 136,476
securities
Purchase of investment securities available (2,973,20 0
for sale 3)
Purchase of investment securities held to (6,471,99 0
maturity 2)
Proceeds from maturities of investment 15,500,00 0
securities available for sale 0
Proceeds from maturities of investment 3,000,000 500,000
securities held to maturity
Purchase of FHLB Stock (11,500) (299,600)
Redemption of FHLB Stock 72,000 142,700
(Increase) decrease in loans to customers 113,423 (4,032,34
7)
Investment in real estate held for (478,018) (196,091)
development
Proceeds from sale of real estate held for 811,972 293,240
development
Proceeds from sale of real estate acquired 616,619 1,172,974
through foreclosure
Purchase of premises and equipment (740,584) (72,684)
Net cash (used) provided by investing $ 9,832,723 $ (2,355,33
activities 2)
</TABLE>
(Continued)
<PAGE>
<TABLE>
<CAPTION>
Security Federal Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
Nine Months Ended
December 31,
1996 1995
<S> <C>
<C>
Cash flows from financing activities:
Increase (decrease) in deposit accounts $ (5,681,98 $ 1,910,180
0)
Proceeds from FHLB advances 72,650,00 93,255,00
0 0
Proceeds of other borrowings $ 0 $ 350,000
Repayment of FHLB advances (79,586,0 (91,498,0
00) 00)
Repayment of other borrowings $ (350,000) 0
Dividends to share holders $ (62,173) (61,577)
Exercise of stock options 39,380 39,380
Net cash provided (used) by financing $ (12,990,7 $ 3,994,983
activities 73)
Net increase (decrease) in cash and cash (2,309,71 3,233,811
equivalents 0)
Cash and cash equivalents at beginning of 9,823,664 5,697,391
period
Cash and cash equivalents at end of period $ 7,513,954 $ 8,931,202
Supplemental disclosure of cash flow
information:
Cash paid during the period for :
Interest $ 6,268,267 $ 6,573,644
Income taxes $ 306,000 $ 209,000
Additions to real estate acquired $ 246,126 $ 623,970
through foreclosure
(Increase) decrease in unrealized net
loss on securities available for sale,
net of taxes $ 89,489 $ (64,011)
Securitization of loans receivable $ 2,796,062 $ 1,054,529
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
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 and nine month periods ended December
31, 1996 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 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. Securities
In November 1995, the Financial Accounting Standards Board (FASB)
issued a Special Report, "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity
Securities," which allowed entities a one-time reclassification
of their investment securities without tainting their portfolio.
This was to be done before December 31, 1995. In accordance with
this Special Report, the Company reclassified $27,900,000 of its
held to maturity portfolio to its available for sale portfolio in
December 1995.
Investments 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:
December 31, 1996
<S> <C><C>
<C> <C>
Gross Gross
Amortize Unrealize Unreali Market
d Cost d Gains zed Value
Losses
US Government and
agency $ 7,471,69 $ 29,047 $ 65,242 $ 7,435,5
obligations 9 04
Mortgage-backed 4,943,00 34,009 153,333 4,823,6
securities 3 79
Total $ 12,414,7 $ 63,056 $ 218,575 $ 12,259,
02 183
Security Federal Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
Investment and Mortgage-backed Securities, Held to Maturity
(continued)
March 31, 1996
<S> <C> <C>
<C> <C>
Gross Gross
Amortize Unreal Unreali Market
d ized zed Value
Cost Gains Losses
US Government and
agency $ $ $ $
obligations 7,498,61 7,030 151,338 7,354,3
6 08
Mortgage-backed
securities 2,542,10 32,651 15,116 2,559,6
8 43
Total $ $ $ $
10,040,7 39,681 166,454 9,913,9
24 51
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:
December 31, 1996
<S> <C><C>
<C> <C>
Gross Gross
Amortize Unreal Unreali Market
d ized zed Value
Cost Gains Losses
US Government and
agency $ 22,014, $ 22,69 $ 76,91 $ 21,959
obligations 096 5 1 ,880
Mortgage-backed
securities 0 0 0 0
Total $ $ $ $
22,014, 22,695 76,911 21,959
096 ,880
March 31, 1996
<S> <C> <C>
<C> <C>
Gross Gross
Amortize Unreal Unreali Market
d ized zed Value
Cost Gains Losses
US Government and
agency $ $ $ $
obligations 31,170,8 1,782 200,242 30,972,
66 406
Mortgage-backed
securities 0 0 0 0
Total $ $ $ $
31,170,8 1,782 200,242 30,972,
66 406
</TABLE>
Security Federal Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. Loans Receivable, Net
Loans receivable, net at December 31, 1996, consisted of the
following:
Loans held for sale:
Loans held for sale were $303,926 and $612,919 at December 31,
1996 and March 31, 1996 respectively.
[S]
[C] [C]
Loans held for investment December 31, 1996
March 31, 1996
Residential real estate $ 53,134,391 $
59,951,018
Consumer 45,971,559
44,810,133
Commercial real estate 9,738,642
10,629,652
Commercial business 43,077,853
38,764,035
$151,922,445 $
154,154,838
Less:
Allowance for possible loan loss $ 1,744,362 $
1,758,688
Loans in process 1,603,554
474,575
Deferred loan fees 328,231
394,768
3,676,147
2,628,031
$148,246,298 $
151,526,807
The following is a reconciliation of the allowance for possible
loan losses:
[S] [C] [C]
December 31, 1996 December
31, 1995
Beginning balance $ 1,758,688 $
1,955,119
Provision 225,000
180,000
Charge-offs (258,404)
(95,821)
Recoveries 19,078
13,161
Ending balance $ 1,744,362 $
2,052,459
5. Deposits
A summary of deposit accounts by type with weighted average rates
are as follows:
[S] [C]
[C]
December 31, 1996
March 31, 1996
Demand Accounts: Balance Rate Balance
Rate
Checking $ 42,827,5821.36% $ 42,251,949
1.35%
Money Market 12,984,616 2.80% 13,769,693
2.81%
Regular Savings 12,496,.325 2.48% 13,615,436
2.50%
Total demand accounts $ 68,308,5231.84% $ 69,637,078
1.86%
Certificate Accounts:
0 - 4.99% $ 5,459,150 $ 5,116,366
5.00 - 6.99% 92,610,398 97,046,823
7.00 - 8.99% 314,676 574,460
Total certificate accounts98,384,2245.34% 102,737,649
5.65%
Total deposit accounts $ 166,692,7473.91% $ 172,374,727
4.12%
[/TABLE]
<PAGE>
<TABLE>
<CAPTION>
Security Federal Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
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:
<S> <C>
<C>
Fiscal Year Due December 31, 1996
March 31, 1996
Balance Rate Balance
Rate
1997 $ 414,0008.45% $ 17,214,000
5.94%
1998 13,352,000 5.74% 3,452,000
6.60%
1999 490,0008.65% 490,000
8.65%
2000 528,0008.70% 528,000
8.70%
thereafter 1,144,000 8.55% 1,180,000
8.53%
$15,928,0006.20% $ 22,864,000
6.29%
7. Regulatory Matters
The following table reconciles the Bank's Stockholders' equity to
its various regulatory capital positions:
(Dollars in thousands)
December 31, 1996 March 31,
1996
<S> <C> <C>
Bank's Stockholders' Equity$ 15,241 $15,008
Unrealized loss on available for sale
securities, net of tax 34 123
Reduction for goodwill and other
intangibles (2,571) (2,916)
Tangible capital 12,704 12,215
Qualifying core deposits and
intangible assets 983 1,120
Core capital 13,687
13,335
Supplemental capital 1,652 1,757
Risk-based capital $ 15,339 $
15,092
The following table compares the Bank's capital levels relative
to the applicable regulatory requirements
at December 31, 1996. (Dollars in thousands)
<S> <C> <C> <C>
<C> <C> <C>
Amount Percen Actual Exces
Requir t Amount Percen Exces s
ed Requir t s Perce
ed nt
Tangible $ $ $ 4.89%
capital 2,981 1.5% 12,704 6.39% 9,72
3
Core capital 3.85%
5,992 3.0% 13,687 6.85% 7,695
Risk-based 3.60%
capital 10,575 8.0% 15,339 11.60% 4,764
</TABLE>
<PAGE>
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 decreased $13.1 million or 6.1%
during the nine months ended December 31, 1996, primarily due to
a decrease of $3.6 million in total net loans receivable, a $6.6
million decrease in investments and mortgage-backed securities,
and a $2.3 million decrease in cash and cash equivalents during
the nine month period. Real estate acquired through foreclosure
decreased $390,356 due to sales of real estate and real estate
acquired for development decreased $377,594 during the period
also due to sales of real estate and a $100,000 increase to the
valuation allowance on real estate acquired for development due
to slower than expected lot sales in two real estate
partnerships.
Deposits decreased $5.7 million during the nine months ended
December 31, 1996, due to jumbo certificates maturing and not
renewing, while Federal Home Loan Bank advances decreased $6.9
million or 30.3%. Maturing investments have been used to payoff
maturing advances. Other borrowings decreased $350,000 due to
the payoff of a loan owed by the Holding Company to a commercial
bank, while advance payments by borrowers decreased $267,804 and
other liabilities decreased $467,281.
The Board of Directors declared the twenty-second, twenty-third,
and twenty-fourth consecutive quarterly dividend of $.05 per
share in May, August and November 1996, which totaled $62,173.
Unrealized net losses on securities available for sale decreased
by $89,489 during the nine months ended December 31, 1996. Net
income for the nine month period was $558,263. These items
combined to increase the Company's stockholders' equity by
$624,959 or 4.1% during the nine months ended December 31, 1996.
Book value per share stood at $38.50 at December 31, 1996
compared to $37.35 at March 31, 1996.
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. During
the nine months ended December 31, 1996, the Bank maintained an
average liquidity of 6.31% compared to 6.25% for the same period
in 1995. The Bank's current liquidity level is in line with
management's objectives and 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 to the Bank, whereas loan disbursements are a
primary use of the Bank's funds. During the nine months ended
December 31, 1996, loan repayments and securitizations exceeded
loan disbursements resulting in a $3.6 million or 2.4% decrease
in total net loans receivable due mainly to a $2.8 million
securitization of single family mortgage loans in April 1996..
<PAGE>
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 nine month period ended December
31, 1996, deposits decreased $5.7 million while Federal Home Loan
Bank advances decreased $6.9 million. At December 31, 1996,
Security Federal had $86.4 million of certificates of deposit
coming due within one year. Based on previous experience, a
major portion of these certificates will be redeposited.
Capital resources at December 31, 1996 are sufficient to meet
outstanding mortgage loan commitments of $321,000 and unused
lines of credit of $21.1 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 March, 1995 the FASB issued SFAS 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 did not 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 the Bank sells or securitized 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, the adoption of this Statement did not have a
material impact on the Bank.
In October 1995, the FASB issued SFAS No. 123 "Accounting for
Stock Based Compensation". This statement is effective for
financial statements issued for fiscal years beginning after
December 15, 1995. SFAS No. 123 provides guidance on the
valuation of fixed and performance stock compensation plans. The
statement encourages, but does not require entities to account
for stock compensation awards based on the estimated fair value
of the award at the date of the grant. The statement permits
continuation of current accounting practices which generally do
not result in charges to expense for Stock Options. However,
footnote disclosure of the effects on the financial statements as
if the options had been expensed is required. The statement will
have no material impact on future operating results.
In June, 1996, the FASB issued SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities. The statement will become effective January 1,
1997. The statement uses a "financial components" approach that
focuses on control to determine the proper accounting for
financial asset transfers. Under that approach, after financial
assets are transferred, an entity would recognize on the balance
sheet all assets it controls and liabilities it has incurred. It
would remove from the balance sheet those assets it no longer
controls and liabilities it has satisfied. The Bank does not
anticipate that adoption of this standard will have a material
effect on the Bank's financial statements in fiscal 1997.
In December 1996, the FASB issued SFAS No. 127, Deferral of the
Effective Date of Certain Provisions of SFAS No. 125, an
amendment to SFAS No. 125, which is effective December 31, 1996.
This statement delays the effective date of certain provisions of
SFAS No. 125 until December 31, 1997. The amended provisions
include those related to the transfers of financial assets and
secured borrowings. The provisions in SFAS No. 125 related to
servicing assets and liabilities are not delayed by this
amendment. The Company does not anticipate that adoption of this
standard will have a material effect on the Company's financial
statements.
<PAGE>
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
Net income increased $212,032 for the three months ended December
31, 1995 compared to the same period one year ago. For the nine
months ended December 31, 1996, net income decreased $3,277
compared to the same period in 1995 due to a one time charge
taken in the September 1996 quarter of $705,489 pre-tax as
result of legislation enacting a special assessment to
recapitalize the Federal Deposit Insurance Corporation's Savings
Association Insurance Fund (SAIF). The special assessment will
reduce SAIF deposit insurance premiums significantly in future
periods. Without the one time charge, net income would have
risen by $434,000 or 77% for the nine months ended December 31,
1996. These increases in operating income are attributable
primarily to increases in net interest income.
Net Interest Income
Net interest income increased by $236,601 or 12.9% and $649,660
or 12.1% during the three and nine months ended December 31,
1996, compared to the same periods in 1995 due primarily to
slightly lower rates paid on deposit accounts and decreases in
volume and rates on Federal Home Loan Bank advances, combined
with increased yields on investments and net loans outstanding.
The increase in yields in the investment portfolio is due to
investments maturing that were purchased in 1993 which were
yielding 4.5% to 5.5%. The loan portfolio has increased its mix
of consumer and commercial loans that typically have a higher
yield than residential mortgage loans. Total interest income
decreased $50,631 or 1.3% for the three months ended December 31,
1996 compared to the same period in 1995 due to decreases of
$41,959 or 1.2% in interest income on loans and a $8,672 decrease
in interest income on investment, mortgage -backed , and other
securities during the December 1996 quarter. Those decreases are
due to lower average balances in those assets during the period.
For the nine months ended December 31, 1996 compared to the same
period last year , total interest income increased $188,210 or
1.6%. Interest income on loans increased $95,539 or 1.0% while
interest on investments, mortgage-backed, and other securities
increased $88,671 during the nine months ended December 31, 1996
compared to the same periods in 1995.
Total interest expense decreased $287,232 or 13.1% and $461,450
or 7.2% during the three and nine month period ended December 31,
1996, respectively. Interest expense on deposit accounts
decreased by $89,872 during the December 1996 quarter while
interest expense on deposit accounts decreased $34,387 during the
nine months ended December 31, 1996. Interest expense on Federal
Home Loan Bank advances and other borrowed money decreased by
$197,360 and $427,063 respectively in each period due to a
decrease in advance balances and a decrease in interest rates
paid on advances.
<PAGE>
Security Federal Corporation and Subsidiary
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Provision for Loan Losses
Security Federal's provision for loan losses for the three
month period ended December 31, 1996 compared to the 1995 period
increased by $45,000 to a total $75,000. The provision for loan
loss expense also increased $45,000 to $225,000 for the nine
months ended December 31, 1996 compared to the same period one
year ago. During the nine months ended December 31, 1996, the
Bank had net charge-offs of $239,326 compared to $82,660 for the
nine months ended December 31, 1995. The increase in net charge-
offs occurred due to a partial charge-off on a residential
construction loan and the national trend of increases in
bankruptcies affecting personal and small business loans. The
Bank stops accruing interest on any loan that is 60 or more days
delinquent. Non-accrual loans at December 31, 1996 and March 31,
1996 were $2.6 million. The allowance for loan losses as a
percentage of total loans was 1.16% at December 31, 1996 and
1.14% at March 31, 1996. The Aiken area's largest employer, the
Savannah River Site, had a significant downsizing of its work
force which has led to some uncertainties for the local economy
and slower real estate sales. More downsizing at the Savannah
River Site is expected. 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.
Other Income
Total other income increased $207,544 or 73.7% and $240,210 or
26.6% in the nine months ended December 31, 1996 compared to the
same periods in 1995 primarily due to an increase in service fees
on deposit accounts.
During the three and nine months periods, the Bank's gain on sale
of loans increased to $48,968 and $79,333. A net gain on sale of
real estate acquired in foreclosure (REO) of $18,308 was recorded
during the December 1996 quarter compared to a net loss on sale
of REO of $14,551 during the three months ended December 31,
1995, a $32,859 increase for the 1996 period. For the nine
months ended December 31 for both 1996 and 1995 a net loss on
sale of REO was recorded of $19,863 and $6,119 for both periods
respectively. Service fees on deposit accounts increased by
$56,387 or 34.8% and $186,053 or 44.0% during the three and nine
months ended December 31, 1996 compared to the same periods last
year. This increase is due to an increase in the number of
commercial demand deposits and the introduction of a new consumer
checking account package in August 1995. Loans servicing income
increased $4,756 and $18,450 during the three and nine months
ended December 31,1996 compared to the same periods one year
ago. Income from real estate operations increased $87,324 during
the three months ended December 31, 1996. Income from real
estate operations during the nine months ended December 31, 1996
decreased $37,306 due to slower lot sales and $100,000 provision
expense on the value of real estate acquired for development
taken during the September 1996 quarter. Other income, which
encompasses commissions on credit life insurance, safe deposit
box rental income, and miscellaneous fees, decreased by $22,750
in the three month period and increased $13,543 in the nine
months ended December 31, 1996 compared to the same periods in
1995..
General and Administrative Expenses
General and administrative expenses increased $53,946 for the
three months ended December 31, 1996 compared to the same period
in 1995. General and administrative expenses for the nine month
ended December 31, 1996 increased $836,044 due mainly to the one
time pre-tax charge of $705,489 for the FDIC SAIF special
assessment. Otherwise , general and administrative expenses
would have increased only $130,555 or 2.5% during the nine month
periods ended December 31, 1996 compared to the same period last
year.
<PAGE>
Security Federal Corporation and Subsidiary
Management's Discussion and Analysis of
Results of Operations and Financial Condition
General and Administrative Expenses (Continued)
Compensation and employee benefits decreased $33,767 or 4.1% and
$145,443 or 5.7% during the respective periods due to employee
attrition and a restructuring of officer positions in September
1995. Occupancy expense increased $11,787 or 13.0% and $25,519
or 9.2% during the three and nine month periods ended December
31, 1996 due to the rent on a new branch opened in February 1996
in the Wal*Mart superstore in Aiken. Advertising expense
decreased $12,723 and $3,888 during the periods. Depreciation
and maintenance of equipment decreased $4,559 during the December
1996 quarter compared to 1995, and decreased by $9,124 for the
nine month period. FDIC premiums, excluding the $705,489 SAIF
special assessment, decreased $23,449 and $71,709 for the three
and nine months ended December 31, 1996 compared to the same
periods in 1995 due to lower premium rates and lower deposit
balances. The premiums on SAIF deposits will decline from a
current annual charge of 23 cents per $100 of SAIF deposits to
approximately 6.4 cents per $100 of SAIF deposits in subsequent
periods. The amortization of intangibles arising from the
October 1993 branch acquisitions were $116,310 in the three
months ended December 31, 1995 and 1996 and $348,930 for both
the nine months ended December 31, 1995 and 1996. Other
expenses, which include legal, professional and consulting
expense, data processing expense, and stationary and office
supplies expense increased by $116,657 and $335,200 for the three
and nine months ended December 31, 1996 compared to 1995 periods.
<PAGE>
Security Federal Corporation and Subsidiary
Other Information
Item 1 Legal Proceedings
Neither the Corporation nor the Bank 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
<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:_________________________ By:
______________________
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10QSB FOR THE FISCAL QUARTER ENDED DECEMBER 31,
1996 AND IS QUAILIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,513,954
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,959,880
<INVESTMENTS-CARRYING> 12,414,702
<INVESTMENTS-MARKET> 0
<LOANS> 148,550,224
<ALLOWANCE> 0
<TOTAL-ASSETS> 201,738,025
<DEPOSITS> 166,692,747
<SHORT-TERM> 15,928,000
<LIABILITIES-OTHER> 2,940,197
<LONG-TERM> 0
<COMMON> 4,171,000
0
0
<OTHER-SE> 11,888,177
<TOTAL-LIABILITIES-AND-EQUITY> 201,738,025
<INTEREST-LOAN> 10,198,326
<INTEREST-INVEST> 1,763,711
<INTEREST-OTHER> 56,530
<INTEREST-TOTAL> 12,018,567
<INTEREST-DEPOSIT> 5,054,003
<INTEREST-EXPENSE> 941,985
<INTEREST-INCOME-NET> 6,022,579
<LOAN-LOSSES> 225,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,107,913
<INCOME-PRETAX> 832,541
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 558,263
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 2,600,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,758,688
<CHARGE-OFFS> 258,404
<RECOVERIES> 19,078
<ALLOWANCE-CLOSE> 1,744,362
<ALLOWANCE-DOMESTIC> 1,744,362
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
