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 September 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 September 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
September 30, 1997 and March 31, 1997 2
Consolidated Statements of Income for the
Three months ended September 30, 1997 and 1996 3-4
Six months ended September 30, 1997 and 1996 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 14-17
PART II. OTHER INFORMATION
-----------------
Other Information 18
Signatures 19
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.
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, MARCH 31,
1997 1997
ASSETS --------- ---------
Cash and cash equivalents $ 6,686,743 $ 7,903,637
Investment and mortgage-backed securities:
Available for sale: (Amortized cost of $45,861,400 45,913,577 24,215,667
at September 30, 1997 and $24,484,644 at March
31, 1997)
Held to maturity: (Fair market value of 10,107,208 12,754,769
$10,143,932 at September 30, 1997 and
$12,598,186 at March 31, 1997)
Loans receivable net:
Held for sale 867,242 211,212
Held for investment: (Net of allowance of 143,607,954 146,558,261
$2,034,079 at September 30, 1997 and $1,767,483
at March 31, 1997) ----------- -----------
144,475,196 146,769,473
----------- -----------
Accrued interest receivable:
Loans 850,782 820,730
Mortgage-backed securities 37,793 38,909
Investments 526,001 363,109
Premises and equipment, net 3,867,836 3,952,149
Federal Home Loan Bank stock, at cost 785,700 1,210,300
Real estate acquired in settlement of loans 44,535 52,009
Real estate held for development and sale 736,747 840,813
Other assets 2,863,831 3,148,980
----------- -----------
TOTAL ASSETS 217,320,549 201,645,945
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $173,498,802 $168,060,858
Advances from Federal Home Loan Bank 22,578,000 14,114,000
Other borrowed money 167,342 204,397
Advance payments by borrowers for taxes and insurance 409,698 244,449
Other liabilities 3,480,425 2,840,212
----------- -----------
TOTAL LIABILITIES 200,134,267 185,463,916
----------- -----------
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
September 30, 1997 and March 31, 1997 4,171 4,171
Additional paid-in capital 3,958,603 3,958,603
Unrealized net gain (loss) on securities available 32,371 (166,872)
for sale, net of income taxes
Retained earnings, substantially restricted 13,191,137 12,386,127
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 17,186,282 16,182,029
=========== ===========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $217,320,549 $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
SEPTEMBER 30,
1997 1996
Interest income: --------- ---------
Loans $ 3,354,200 $ 3,405,577
Mortgage-backed securities 83,509 84,511
Investment securities 645,433 526,675
Other 19,534 16,640
--------------- -------------
Total interest income 4,102,676 4,033,403
--------------- -------------
Interest expense:
NOW and money market accounts 288,254 237,337
Passbook accounts 75,831 88,132
Certificate accounts 1,287,136 1,373,492
Advances and other borrowed money 275,015 317,729
--------------- -------------
Total interest expense 1,926,236 2,016,690
--------------- -------------
Net interest income 2,176,440 2,016,713
Provision for loan losses 240,000 75,000
--------------- -------------
Net interest income after provision for
Loan losses 1,936,440 1,941,713
--------------- -------------
Other income:
Gain on sale of loans 45,121 71,955
Loan servicing fees 90,053 84,947
Service fees on deposit accounts 238,475 204,611
Income (loss) from real estate operations 16,875 (69,545)
Other 164,203 27,197
--------------- -------------
Total other income 581,561 292,331
--------------- -------------
General and administrative expenses:
Salaries and employee benefits 833,961 808,184
Occupancy 124,686 103,588
Advertising 107,227 55,700
Depreciation and maintenance of equipment 218,885 167,333
FDIC insurance premiums 19,158 65,502
FDIC SAIF Assessment 0 705,489
Amortization of intangibles 116,310 116,310
Other 435,702 507,353
--------------- -------------
Total general and administrative expenses 1,855,929 2,529,459
--------------- -------------
(Continued)
3
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
1997 1996
--------------- -------------
Income (loss) before income taxes 662,072 (295,415)
Provision (benefit) for income taxes 228,436 (118,280)
--------------- -------------
Net income (loss) $ 433,636 $ (177,135)
=============== =============
Net income (loss) per common share $ 1.04 $ (0.43)
============== =============
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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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
1997 1996
--------------- -------------
Interest income:
Loans $ 6,663,201 $ 6,781,064
Mortgage-backed securities 168,006 178,897
Investment securities 1,197,307 1,041,114
Other 38,077 36,972
--------------- -------------
Total interest income 8,066,591 8,038,047
--------------- -------------
Interest expense:
NOW and money market accounts 493,579 469,439
Passbook accounts 151,823 175,811
Certificate accounts 2,531,711 2,776,944
Advances and other borrowed money 529,880 665,856
--------------- -------------
Total interest expense 3,706,993 4,088,050
--------------- -------------
Net interest income 4,359,598 3,949,997
Provision for loan losses 390,000 150,000
--------------- -------------
Net interest income after provision for
Loan losses 3,969,598 3,799,997
--------------- -------------
Other income:
Gain on sale of loans 75,212 102,085
Loan servicing fees 173,400 168,073
Service fees on deposit accounts 434,771 390,248
Income (loss) from real estate operations 46,915 (43,640)
Other 244,920 63,837
--------------- -------------
Total other income 1,002,091 653,730
--------------- -------------
General and administrative expenses:
Salaries and employee benefits 1,730,787 1,630,851
Occupancy 237,072 199,604
Advertising 185,998 90,519
Depreciation and maintenance of equipment 376,465 327,699
FDIC insurance premiums 38,592 158,344
FDIC SAIF Assessment 0 705,489
Amortization of intangibles 232,620 232,620
Other 847,108 986,865
--------------- -------------
Total general and administrative expenses 3,648,642 4,331,991
--------------- -------------
(Continued)
5
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30
1997 1996
--------------- -------------
Income before income taxes 1,323,047 121,736
Provision for income taxes 467,983 20,371
--------------- -------------
Net income $ 855,064 $ 101,365
=============== =============
Net income per common share $ 2.05 $ 0.25
============== =============
Cash dividend on common stock $ 0.12 $ 0.10
============== =============
Weighted average shares outstanding $ 417,122 $ 413,184
============== =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
UNREALIZED
NET LOSS ON
ADDITIONAL
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 ----- ----- ----- 855,064 855,064
Cash dividend ----- ----- ----- (50,054) (50,054)
Exercise of stock options ----- -----
Decrease in unrealized ----- ----- 199,243 ----- 199,243
net loss/increase in
unrealized net gain on
securities available for
sale, net of tax
------ ------- --------- -------- ---------
Ending balance,
September 30, 1997 4,171 3,958,603 32,371 13,191,137 17,186,282
====== ========= ========= ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES: -------- --------
Net Income $ 855,064 $ 101,365
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation expense 322,415 305,148
Amortization of purchase accounting adjustments 232,620 232,620
Discount accretion and premium amortization (15,084) 95,228
Provisions for losses on loans and real estate 390,000 250,000
Gain on sale of loans (102,085) (75,212)
Gain on sale of real estate (89,677) (18,189)
Amortization of deferred fees on loans (45,307) (63,715)
Proceeds from sale of loans held for sale 5,176,055 8,929,732
Origination of loans for sale (5,730,000) (8,580,340)
(Increase) decrease in accrued interest receivable:
Loans (30,052) (102,929)
Mortgage-backed securities 1,116 (14,331)
Investments (162,892) (17,315)
Increase (decrease) in advance payments by 165,249 (7)
borrowers
Other, net 580,155 1,170,541
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,547,577 $ 2,212,596
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal repayments on mortgage-backed securities 148,436 347,665
Purchase of investment securities available for sale (26,862,547) (2,973,203)
Maturities of investment securities available for sale 5,500,000 8,500,000
Purchase of investment securities held to maturity 0 (3,482,461)
Maturities of investment securities held to maturity 2,500,000 1,000,000
Purchase of FHLB Stock (424,600) 0
Redemption of FHLB Stock 0 72,000
(Increase) decrease in loans to customers 2,462,377 (1,366,286)
Investment in real estate held for development (105,939) (242,979)
Proceeds from sale of real estate held for development 253,920 382,088
Proceeds from sale of real estate acquired through 218,184 414,124
foreclosure
Purchase of premises and equipment (269,137) (281,184)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES $(16,579,306) $2,369,764
------------ ------------
(Continued)
8
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
SIX MONTHS ENDED
SEPTEMBER, 30
1997 1996
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposit accounts $ 5,437,944 $(2,148,451)
Proceeds from FHLB advances 59,900,000 37,925,000
Repayment of FHLB advances (51,436,000) (40,943,000)
Repayment of other borrowings $ (37,055) 0
Dividends to shareholders $ (50,054) (41,318)
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES $13,814,835 $(5,207,769)
------------ ------------
Net decrease in cash and cash equivalents (1,216,894) (625,409)
Cash and cash equivalents at beginning of period 7,903,637 9,823,664
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,686,743 $ 9,198,255
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for :
Interest $ 3,321,574 $ 3,570,152
Income taxes $ 316,500 $ 306,000
Additions to real estate acquired through $ 164,948 $ 88,590
foreclosure
Decrease in unrealized net loss/ increase in
unrealized net gain on securities available for
sale, net of taxes $ 199,243 $ 24,600
Securitization of loans receivable $ 0 $ 2,796,062
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
9
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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 September 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 September 30, 1997 and March 31, 1997, consisted of the
following:
Loans held for sale were $867,242 and $211,212 at September 30, 1997 and March
31, 1997 respectively.
Loans held for investment: September 30, 1997 March 31, 1997
----------- -----------
Residential real estate $45,825,997 $50,534,682
Consumer 46,544,468 46,894,063
Commercial real estate 5,023,970 6,527,692
Commercial business 50,516,069 46,047,825
----------- -----------
$147,910,504 $150,004,262
Less:
Allowance for possible loan loss $ 2,034,079 $ 1,767,483
Loans in process 2,001,694 1,375,319
Deferred loan fees 266,777 303,199
----------- -----------
4,302,550 3,446,001
----------- -----------
$143,607,954 $144,804,959
============ ============
The following is a reconciliation of the allowance for possible loan losses:
September 30, 1997 September 30,1996
----------- -----------
Beginning balance $ 1,767,483 $ 1,758,688
Provision 390,000 150,000
Charge-offs (157,189) (170,075)
Recoveries 33,785 9,911
----------- -----------
Ending balance $ 2,034,079 $ 1,748,524
=========== ===========
10
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SECURITIES
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 held to maturity are as
follows:
SEPTEMBER 30, 1997
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
US Government and agency Obligations $45,861,400 $126,418 $74,241 $45,913,577
Mortgage-backed securities 0 0 0 0
--------- ---------- ---------- --------
Total $45,861,400 $126,418 $74,241 $45,913,577
=========== ======== ======== ===========
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
========== ========== ========= ==========
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 available for sale are as
follows:
SEPTEMBER 30, 1997
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- --------- ---------
US Government and agency Obligations 5,479,564 28,026 21,840 5,485,750
Mortgage-backed securities 4,627,644 50,406 19,868 4,658,182
--------- ---------- --------- ---------
Total 10,107,208 78,432 41,708 10,143,932
11
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
INVESTMENT AND MORTGAGE-BACKED SECURITIES, HELD TO MATURITY (CONTINUED)
- -----------------------------------------------------------
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
========== ========== ========= ==========
5. DEPOSITS
A summary of deposit accounts by type with weighted average rates are as
follows:
September 30, 1997 March 31, 1997
Demand Accounts: Balance Rate Balance Rate
------- ---- ------- ----
Checking $43,880,031 1.33% $43,601,652 1.36%
Money Market 23,599,471 4.43% 11,640,884 2.80%
Regular Savings 12,472,042 2.47% 13,451,308 2.49%
---------- ---- ---------- ----
Total demand accounts $79,951,544 2.42% $68,693,844 1.83%
Certificate Accounts:
0 - 4.99% $ 175,701 $ 3,935,588
5.00 - 6.99% 93,239,591 95,234,017
7.00 - 8.99% 131,966 197,409
----------- -----------
Total certificate accounts 93,547,258 5.42% 99,367,014 5.40%
----------- ----- ----------- -----
Total deposit accounts $173,498,802 4.04% $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 September 30, 1997 March 31, 1997
- --------------- ------------------ --------------
Balance Rate Balance Rate
------- ---- ------- ----
1998 $10,452,000 5.98% $11,952,000 5.88%
1999 5, 490,000 6.06% 490,000 8.65%
2000 528,000 8.70% 528,000 8.70%
2001 856,000 8.75% 856,000 8.75%
thereafter 5, 270,000 5.81% 288,000 7.97%
---------- ---- --------- ----
$22,596,000 6.13% $14,114,000 6.30%
========== ==========
12
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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)
September 30, 1997 March 31, 1997
------------------ ---------------
Bank's Stockholders' Equity $ 16,400 $ 15,362
Unrealized loss (gain) on available for sale
securities, net of tax (32) 167
Reduction for goodwill and other intangibles (2,279) (2,511)
------- -------
Tangible capital 14,089 13,018
Qualifying core deposits and intangible assets 863 938
------- -------
Core capital 14,952 13,956
Supplemental capital 1,733 1,627
------ ------
Risk-based capital $ 16,685 $ 15,583
====== ======
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at September 30, 1997.
(Dollars in thousands)
Amount Percent Actual Actual Excess
Required Required Amount Percent Excess Percent
-------- -------- ------ ------- ------ -------
Tangible capital $ 3,216 1.5% $14,089 6.57% $10,873 5.07%
Core capital 6,459 3.0% 14,952 6.95% 8,493 3.95%
Risk-based capital 11,088 8.0% 16,685 12.04% 5,597 4.04%
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)
September 30, 1997
Risk-based Capital $16,685 12.0% $11,088 8.0% $13,860 10.0%
(to risk weighted assets)
Core Capital 14,952 7.0 6,459 3.0 12,917 6.0
(to adjusted tangible assets)
Tangible Capital 14,089 6.6 3,216 1.5 10,721 5.0
(to tangible assets)
September 30, 1996
Risk-based Capital $15,342 11.4% $10,776 8.0% $13,470 10.0%
(to risk weighted assets)
Core Capital $13,657 6.5 6,264 3.0 12,529 6.0
(to adjusted tangible assets)
Tangible Capital 12,628 6.1 3,117 1.5 10,389 5.0
(to tangible assets)
13
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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 $15.7 million or 7.8% during the six
months ended September 30, 1997, primarily due to an increase of $19.1 million
in investment securities offset partially by an $2.3 million decrease in total
net loans receivable. Commercial business loans increased $ 4.5 million since
the beginning of the fiscal year, while residential real estate loans decreased
$ 4.0 million. The decrease in residential loans is due to the relatively low
interest rate environment, where most borrowers elect a fixed rate loan, which
the Bank immediately sells on the secondary market, as opposed to an adjustable
rate loan, which the Bank retains in its portfolio. The increase in commercial
business loans is part management's strategy of increasing small business loans.
Commercial business loans generally improve the Bank's yield in its portfolio
and reprice typically in one year or less, but also inherently carry more credit
risk than typical residential real estate loans. The increase in investment
during the period is part of the Bank's asset liability strategy to use leverage
and earn a spread of investments yields over cost of borrowings and deposits.
Deposits increased $5.4 million or 3.2% during the six months ended of September
30, 1997, while Federal Home Loan Bank advances increased $8.5 million to fund
the Bank's growth in assets. Money market deposit accounts increased $12.0
million since March 31, 1997 due to the Bank's more aggressive pricing and
marketing strategy to attract those deposits. Certificates of deposit decreased
$5.8 million as many accounts transferred to the money market account.
The Board of Directors declared the twenty-sixth and twenty-seventh consecutive
quarterly dividend of $.06 per share in May and August 1997, which totaled
$50,000. Unrealized net losses on securities available for sale decreased by
$199,000 to a net gain of $32,000 during the six months ended September 30,
1997. Net income for the six-month period was $855,064. These items combined to
increase the Company's stockholders' equity by $1.0 million or 6.2% during the
six months ended September 30, 1997. Book value per share stood at $41.20 at
September 30, 1997 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. During the six months ended September 30, 1997, the Bank maintained
an average liquidity of 27.34% compared to 20.83% for the same period in 1996.
The Bank's current liquidity level is in line with management's objectives and
deemed adequate to meet requirements of normal operations, potential deposits
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 six months ended September 30, 1997, loan repayments and
securitizations exceeded loan disbursements resulting in a $2.3 million of 1.6%
decrease in total net loan receivable.
Deposits and other borrowings are also an important source of funds for the
Bank. During the six month period ended September 30, 1997, deposits increased
$5.4 million while FHLB advances increased $8.5 million. At September 30, 1997,
Security Federal had $82.2 million of certificates of deposit coming due within
one year. Based on previous experience, a major portion of these certificates
will be re-deposited.
Capital resources at September 30, 1997 are sufficient to meet outstanding
mortgage loan commitments of $171,000 and unused lines of credit of $20.7
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.
14
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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.
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
15
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
YEAR 2000 CONSIDERATIONS
The Bank has begun to take steps to ensure that its core operating software and
hardware along with ancillary software packages are year 2000 compliant. Letters
have been sent to several vendors to ensure they are ready for the year 2000.
The Bank's main processing software and hardware vendors have replied that they
are year 2000 compliance in all materials respects. Other vendors are either
compliant or say they will be complaint by the year 2000. The Bank will continue
to study this issue to ensure that all software will be complaint in a timely
manner. The Bank does not anticipate any expenditures on the year 2000 issue
will be material.
RESULTS OF OPERATIONS
- ---------------------
NET INCOME
Security Federal Corporation's net income was $434,000 and $855,000 or $1.04 and
$2.05 per share for the three and six months ended September 30, 1997,
respectively. These earnings are increases of $611,000 and $754,000 for the
three and six months ended September 30, 1997, compared to the same periods in
1996 due primarily to a one-time charge taken in the September 1996 quarter of $
705,000 pre-tax, as a result of legislation enacting a special assessment to
recapitalize the Federal Deposit Insurance Corporation's Savings Association
Insurance Fund (SAIF). Without the one-time charge, net income would have risen
by $ 173,000 or 67% and $316,000 or 59% for the three months ended September 30,
1997. These increases are attributable to increases in net interest income and
other income.
NET INTEREST INCOME
Net interest income increased by $160,000 or 7.9% and $410,000 or 10.4% for the
three and six months ended September 30, 1997 compared to the same periods in
1996 due mainly to decreases in interest expense on both deposits and borrowings
and increases in investment interest income offset partially by decreases in
interest income on loans receivable.
Interest income on loans decreased $51,000 or 1.5% and $118,000 or 1.7% for the
three and six month periods due to lower average total outstanding loan balances
in the 1997 periods compared to 1996. Investment, mortgage-backed, and other
securities interest income increased $121,000 or 19.2% and $146,407 or 11.6% for
the three and six months ended September 30, 1997 in comparison to the same
periods one year earlier due to the larger average investment balances and a
higher average yield in the overall investment portfolio in the 1997 periods.
Total interest income increased $69,000 or 1.7% and $29,000 or 0.4% during the
three and six month ended September 30, 1997, respectively.
Total interest expense decreased $90,000 or 4.5% and $381,000 or 9.3% during the
three and six month periods due to lower average balances in both deposit
balances and advances and other borrowings and a slightly lower average cost of
funds. Interest expense on deposits decreased $48,000 or 2.8% and $245,081 or
7.2% during the three and six months ended September 30, 1997 compared to the
1996 periods. Interest expense on advances and other borrowings decreased
$43,000 or 13.4% and $136,000 or 20.4% during those periods.
PROVISION FOR LOAN LOSSES
Security Federal's provision for loan losses increased $165,000 to $240,000 for
the quarter ended September 30, 1997, compared to the September 1996 quarter.
For the six months ended September 30, 1997 compared to the same period one year
ago, the provision for loan losses increased $240,000 to $390,000. The increases
in the provision expense are a result of management's continual analysis of the
loan portfolio and the Bank's increasing percentage of commercial loans, which
are inherently riskier than single family mortgage loans, in the Bank's loan
portfolio. During the six months ended September 30, 1997, net charge-offs were
$123,000 compared to $160,000 for the six months ended September 30, 1996.
Non-accrual loans at September 30, 1997 were $3.6 million compared to $1.4
million at March 31, 1997.
16
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS
The growth in non-accrual loans occurred due to one $600,000 commercial loan
secured by real estate and several smaller consumer and commercial loans
becoming 60 days or more past due. The Bank designates all loans 60 or more days
past due as non-accrual, while most institutions only consider loans of 90 days
or more delinquent as non-accrual. The allowances for loan losses as a
percentage of total loans were 1.40% at September 30, 1997 and 1.19% at March
31, 1997. Further 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
possible in the coming year, which could have some impact on the local economy.
Bridgestone-Firestone has begun construction of a tire manufacturing plant in
the Aiken area, which is projected to generate approximately 800 jobs in the
next few years. Management continues to monitor its loan portfolio for the
impact of local economic changes.
OTHER INCOME
Total other income increased $289,000 and $348,000 for the three and six months
ended September 30, 1997 as compared to the same periods one year ago. Gain on
sale of loans increased $ 27,000 in both the three and six month periods. Loan
servicing fees increased $5,000 in both periods. Service fees on deposit
accounts increased $34,000 in the three months and $46,000 in the six months
ended September 30, 1997. Income from real estate operations increased $86,000
and $91,000 respectively. The increases in the 1997 periods are attributable to
a $100,000 provision expense on the value of real estate acquired for
development booked in the September 1996 quarter. Other income, which
encompasses credit life insurance commissions, safe deposit rental income, gain
on sale of repossessed assets, annuity and stock brokerage commissions through
Security Financial Services and other miscellaneous fees, increased $137,000
during the three months and $140,000 during the six months ended September 30,
1997. These increases in income are attributable primarily to an increase in
customer's usage of Security Financial Services and gains on the sale of
repossessed real estate.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased $674,000 and $ 683,000 during the
three and six months ended September 30, 1997 due to the $ 705,000 one-time
pre-tax charge of $ 705,000 for the FDIC SAIF special assessment in September
1996. Without this charge, general and administrative expenses would have
increased $32,000 or 1.8% during the three month period and $22,000 or 0.6%
during the six month period.
Compensation and employee benefits increased $26,000 or 3.2% and $100,000 or
6.1% during the three and six months ended September 30, 1997, due to normal
annual salary increases and addition of a few additional employees to operate
the bank's in-house computer system which was installed in late January 1997.
The Bank previously outsourced its data processing to a contract provider, which
charged approximately $ 30,000 per month. Data processing expense was
categorized in other expenses, which decreased $72,000 in the three months, and
$140,000 during the six months ended September 30, 1997 due mainly to bringing
data processing in-house. Other expenses in the other expense category consist
of legal expense, professional and consulting expense, stationary and office
supplies, real estate owned expenses, and other miscellaneous expenses.
Occupancy expense increased $21,000 and $27,000 respectively in both periods due
to some building remodeling which occurred in October 1996. Depreciation and
maintenance of equipment increased $52,000 and $49,000 respectively due to the
above mentioned computer conversion, the addition of a wide area computer
network in November 1996, and the purchase of newer personal computers for back
office utilization in fiscal 1998. FDIC insurance premiums dropped $46,000 and
$120,000 during the three and six month periods ended September 30, 1997
compared to the same periods in 1996, due to the previously mentioned FDIC SAIF
recapitalization. Amortization of intangible expense remained constant at $
116,000 for the three months and $233, 000 for the six months ended in September
1997 and 1996.
17
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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
---------------------------------------------------
The election of directors was presented for vote to shareholders at the Annual
Meeting on July 15, 1997. Votes for Timothy W. Simmons were as follows:
355,040 votes for, 50 votes withheld. Votes for T. Clifton Weeks were as
follows: 355,090 votes for, no votes withheld. Continuing as directors were Dr.
Robert E. Alexander, William Clyburn, Senator Thomas L. Moore, G. L. Toole III,
and Harry O. Weeks Jr.
Item 5 Other Information
-----------------
None
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
Exhibit 27 Financial Data Schedule
No reports on Form 8-K were filed during the period under report.
18
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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: November 13, 1997 By: /s/ROY G. LINDBURG
----------------- ------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
19
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<PAGE>
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