20
<PAGE>
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, 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 September 30, 1996
$0.01 Par Value
413,184
<PAGE>
INDEX
SECURITY FEDERAL CORPORATION
PART I - FINANCIAL INFORMATION (UNAUDITED) PAGE
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at
September 30, 1996 and March 31, 1996 2
Consolidated Statements of Income for the
Three months ended September 30, 1996 and 1995 3-4
Six months ended September 30, 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 financial statements and
related notes.
<PAGE>
<TABLE>
<CAPTION>
Security Federal Corporation and Subsidiary
Consolidated Balance Sheets (Unaudited)
September 30,1996March 31, 1996
<S> <C>
<C>
Assets
Cash and cash equivalents $ 9,198,25 $ 9,823,66
5 4
Investments and mortgage-backed securities:
Available for sale: (Amortized cost of 25,904,0 30,972,4
$26,062,821 at September 30,1996 and 12 06
$31,170,866 at March 31, 1996)
Held to maturity: (Fair market value of 14,457,6 10,040,7
$14,230,914 at September 30, 1996 and 02 24
$9,913,951
at March 31, 1996)
Loans receivable net:
Held for sale 338,739 612,919
Held for investment: (Net of allowance 149,933, 151,526,
of $1,748,524 at September 30, 1996 146 807
and
$1,758,688 at March 31, 1996)
150,271, 152,139,
885 726
Accrued interest receivable:
Loans 985,203 882,274
Mortgage-backed securities 38,130 23,799
Investments 468,267 450,952
Premises and equipment, net 3,163,22 3,187,18
1 5
Federal Home Loan Bank stock, at cost 1,161,20 1,233,20
0 0
Real estate acquired through foreclosure 355,058 718,763
Real estate held for development and sale 1,206,83 1,389,57
0 9
Other assets 3,677,59 3,953,85
1 9
Total Assets 210,887, 214,816,
254 131
Liabilities and Stockholders' Equity
Liabilities:
Deposit accounts $ 170,226, $ 172,374,
276 727
Advances from Federal Home Loan Bank 19,846,0 22,864,0
00 00
Other borrowed money 350,000 350,000
Advance payments by borrowers
for taxes and insurance 385,701 385,708
Other liabilities 4,560,41 3,407,47
2 8
Total liabilities 195,368, 199,381,
389 913
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, 413,184
at March 31, 1996 and 4,132 4,132
September 30, 1996
Additional paid-in capital 3,919,26 3,919,26
2 2
Unrealized net loss on securities (98,525) (123,125
available for sale, net of income taxes )
Retained earnings, substantially 11,693,9 11,633,9
restricted 96 49
Total stockholders' equity 15,518,8 15,434,2
65 18
Total liabilities and stockholders' equity $ 210,887, $ 214,816,
254 131
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Security Federal Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
Three Months Ended
September 30,
1996 1995
<S> <C> <C>
Interest income:
Loans $ 3,405,577 $ 3,380,877
Mortgage-backed securities 13,041 28,334
Investment securities 598,145 528,054
Other 16,640 21,515
Total interest income 4,033,403 3,958,780
Interest expense:
NOW and money market accounts 237,337 253,377
Passbook accounts 88,132 97,103
Certificate accounts 1,373,492 1,371,658
Advances and other borrowed money 317,729 457,894
Total interest expense 2,016,690 2,180,032
Net interest income 2,016,713 1,778,748
Provision for loan losses 75,000 75,000
Net interest income after provision
for
loan losses 1,941,713 1,703,748
Other income:
Gain (Loss) on sale of REO (38,171) 0
Gain on sale of loans 45,121 27,440
Loan servicing fees 84,947 76,687
Service fees on deposit accounts 204,611 134,332
Income (loss) from real estate (69,545) 29,565
operations
Other 65,368 15,315
Total other income 292,331 283,339
General and administrative expenses:
Salaries and employee benefits 808,184 849,377
Occupancy 103,588 90,666
Advertising 55,700 53,956
Depreciation and maintenance of 167,333 166,585
equipment
FDIC insurance premiums 65,502 97,575
FDIC SAIF Assessment 725,000 0
Amortization of intangibles 116,310 116,310
Other 487,842 346,224
Total general and 2,529,459 1,720,693
administrative expenses
Income before income taxes (295,415) 266,394
Provision (benefit) for income taxes (118,280) 86,567
Net income (loss) $ (177,135) $ 179,827
Net income (loss) per common share $ (0.43) $ 0.44
Cash dividend on common stock $ 0.05 $ 0.05
Weighted average shares outstanding $ 413,184 $ 409,246
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Security Federal Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
Six Months Ended
September 30,
1996 1995
<S> <C> <C>
Interest income:
Loans $ 6,781,064 $ 6,639,566
Mortgage-backed securities 38,130 56,844
Investment securities 1,181,881 1,061,043
Other 36,972 41,753
Total interest income 8,038,047 7,799,206
Interest expense:
NOW and money market accounts 469,439 529,045
Passbook accounts 175,811 191,766
Certificate accounts 2,776,944 2,645,898
Advances and other borrowed money 665,856 895,559
Total interest expense 4,088,050 4,262,268
Net interest income 3,949,997 3,536,938
Provision for loan losses 150,000 150,000
Net interest income after provision
for
loan losses 3,799,997 3,386,938
Other income:
Gain (Loss) on sale of REO (38,171) 0
Gain on sale of loans 75,212 44,847
Loan servicing fees 168,073 154,379
Service fees on deposit accounts 390,248 260,582
Income (loss) from real estate (43,640) 80,990
operations
Other 102,008 80,266
Total other income 653,730 621,064
General and administrative expenses:
Salaries and employee benefits 1,630,851 1,742,527
Occupancy 199,604 185,872
Advertising 90,519 81,684
Depreciation and maintenance of 327,699 332,264
equipment
FDIC insurance premiums 158,344 206,604
FDIC SAIF Assessment 725,000 0
Amortization of intangibles 232,620 232,620
Other 967,354 768,322
Total general and 4,331,991 3,549,893
administrative expenses
Income before income taxes 121,736 458,109
Provision (benefit) for income taxes 20,371 141,435
Net income (loss) $ 101,365 $ 316,674
Net income per common share $ 0.25 $ 0.77
Cash dividend on common stock $ 0.10 $ 0.10
Weighted average shares outstanding $ 413,184 $ 409,246
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Security Federal Corporation and Subsidiary
Consolidated Statement of Shareholders' Equity
For the six months ended September 30, 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 ----- ----- ----- 101,365 101,365
Cash dividend ----- ----- ----- (41,318) (41,318)
Exercise of stock ----- ----- ----- ----- -----
options
Change in unrealized
net loss on 24,600 24,600
securities available
for sale
Ending balance
September 30, 1996 $ $ $ $ $
4,132 3,919,26 (98,525) 11,693,99 15,518,86
2 6 5
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Security Federal Corporation and Subsidiary
Consolidated Statement of Cash Flows
(Unaudited)
Six Months
Ended
September 30,
1996 1995
<S> <C>
<C>
Cash flows from operating activities:
Net Income $ 101,365 $ 316,674
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense 305,148 302,658
Amortization of purchase accounting 232,620 232,620
adjustments
Discount accretion and premium 95,228 103,348
amortization
Provisions for losses on loans and real 250,000 150,000
estate
Gain on sale of loans (75,212) (44,847)
Gain on sale of real estate (18,189) (45,917)
Amortization of deferred fees on loans (63,715) (41,731)
Proceeds from sale of loans held for 8,929,732 3,875,089
sale
Origination of loans for sale (8,580,34 (3,478,44
0) 4)
Increase in accrued interest
receivable:
Loans (102,929) (107,553)
Mortgage-backed securities (14,331) 890
Investments (17,315) 5,882
Increase (decrease) in advance payments (7) 231,115
by borrowers
Other, net 1,170,541 1,086,595
Net cash provided by operating activities $ 2,212,596 $ 2,586,379
Cash flows from investing activities
Principal repayments on mortgage-backed 347,665 104,549
securities
Purchase of investment securities available (2,973,20 0
for sale 3)
Purchase of investment securities held to (3,482,46 0
maturity 1)
Proceeds from maturities of investment 8,500,000 0
securities available for sale
Proceeds from maturities of investment 1,000,000 500,000
securities held to maturity
Purchase of FHLB Stock 0 (135,300)
Redemption of FHLB Stock 72,000 78,700
(Increase) decrease in loans to customers (1,366,28 (4,092,70
6) 8)
Investment in real estate held for (242,979) (82,358)
development
Proceeds from sale of real estate held for 382,088 274,430
development
Proceeds from sale of real estate acquired 414,124 782,234
through foreclosure
Purchase of premises and equipment (281,184) (62,536)
Net cash used by investing activities $ 2,369,764 $ (2,632,98
9)
Cash flows from financing activities:
Decrease in deposit accounts $ (2,148,45 $ (1,951,54
1) 1)
Proceeds from FHLB advances 37,925,00 61,200,00
0 0
Repayment of FHLB advances (40,943,0 (58,518,0
00) 00)
Dividends to share holders (41,318) (40,918)
Exercise of stock options 0 0
Net cash provided by financing activities $ (5,207,76 $ 689,541
9)
Net increase (decrease) in cash and cash (625,409) 642,931
equivalents
Cash and cash equivalents at beginning of 9,823,664 5,697,391
period
Cash and cash equivalents at end of period $ 9,198,255 $ 6,340,322
Supplemental disclosure of cash flow
information:
Cash paid during the period for :
Interest $ 3,570,152 $ 3,280,682
Income taxes $ 306,000 $ 36,249
Additions to real estate acquired $ 88,590 $ 529,713
through foreclosure
Decrease in unrealized net loss on
securities available for sale,
net of taxes $ 24,600 $ 35,540
Securitization of loans receivable $ 2,796,062 $ 0
See accompanying notes to consolidated financial statements.
</TABLE>
<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 six month periods ended September
30, 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:
September 30, 1996
<S> <C><C>
<C> <C>
Gross Gross
Amortize Unrealize Unreali Market
d Cost d Gains zed Value
Losses
US Government and
agency $ 9,467,55 $ $ 106,879 $ 9,376,6
obligations 5 15,989 65
Mortgage-backed 4,990,04 28,655 164,453
securities 7 4,854,2
49
Total $ 14,457,6 $ 44,644 $ 271,332 $ 14,230,
02 914
Security Federal Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
Investments 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
Investments 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:
September 30, 1996
<S> <C><C>
<C> <C>
Gross Gross
Amortize Unreal Unreali Market
d ized zed Value
Cost Gains Losses
US Government and
agency $ $ $ $
obligations 26,062,8 1,937 160,746 25,904,
21 012
Mortgage-backed
securities 0 0 0 0
Total $ $ $ $
26,062,8 1,937 160,746 25,904,
21 012
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
Security Federal Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. Loans Receivable, Net
Loans receivable, net at September 30, 1996, consisted of the
following:
Loans held for sale:
Loans held for sale were $338,739 and $612,919 at September 30,
1996 and March 31, 1996 respectively.
<S> <C>
<C>
Loans held for investment September 30, 1996
March 31, 1996
Residential real estate$ 54,050,375 $
59,951,018
Consumer 45,822,467
44,810,133
Commercial real estate 10,336,500
10,629,652
Commercial business 43,219,874
38,764,035
$ 153,429,216 $
154,154,838
Less:
Allowance for possible loan loss $ 1,748,524 $
1,758,688
Loans in process 1,404,391
474,575
Deferred loan fees 343,155
394,768
3,496,070
2,628,031
$ 149,933,146 $
151,526,807
The following is a reconciliation of the allowance for possible
loan losses:
<S> <C> <C>
September 30, 1996 September
30, 1995
Beginning balance
$ 1,758,688$ 1,955,119
Provision 150,000
150,000
Charge-offs (170,075)
(28,754)
Recoveries 9,911
9,007
Ending balance
$ 1,748,524 $ 2,085,372
5. Deposits
A summary of deposit accounts by type with weighted average rates
are as follows:
September 30, 1996
March 31, 199
Demand Accounts: Balance Rate Balance
Rate
<S> <C> <C> <C>
<C>
Checking $ 41,812,8301.32% $ 42,251,949
1.35%
Money Market 13,006,539 2.81% 13,769,693
2.81%
Regular Savings 14,219,148 2.51% 13,615,436
2.50%
Total demand accounts $ 69,038,5171.86% $ 69,637,078
1.86%
Certificate Accounts:
0 - 4.99% $ 5,226,027 $ 5,116,366
5.00 - 6.99% 95,653,242 97,046,823
7.00 - 8.99% 308,490 574,460
Total certificate accounts101,187,7595.40% 102,737,649
5.65%
Total deposit accounts $ 170,226,2763.96% $ 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:
Fiscal Year Due September 30, 1996
March 31, 1996
Balance Rate Balance
Rate
<S> <C> <C>
<C> <C>
1997 $10,414,0005.79% $ 17,214,000
5.94%
1998 7,252,000 6.03% 3,452,000
6.60%
1999 490,0008.65% 490,000
8.65%
2000 528,0008.70% 528,000
8.70%
thereafter 1,162,000 8.55% 1,180,000
8.53%
$19,846,0006.18% $ 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)
September 30, 1996 March 31,
1996
<S> <C> <C>
Bank's Stockholders' Equity$ 15,216 $15,008
Unrealized loss on available for sale
securities, net of tax 98 123
Reduction for goodwill and other
intangibles (2,686) (2,916)
Tangible capital 12,628 12,215
Qualifying core deposits and
intangible assets 1,029 1,120
Core capital 13,657
13,335
Supplemental capital 1,684 1,757
Risk-based capital $ 15,341 $
15,092
The following table compares the Bank's capital levels relative
to the applicable regulatory requirements
at September 30, 1996. (Dollars in thousands)
Amount Percen Actual Exces
Requir t Amount Percen Exces s
ed Requir t s Perce
ed nt
<S> <C> <C> <C> <C> <C> <C>
Tangible $ $ $ 4.58%
capital 3,117 1.5% 12,628 6.08% 9,51
1
Core capital 3.54%
6,264 3.0% 13,657 6.54% 7,393
Risk-based 3.39%
capital 10,776 8.0% 15,341 11.39% 4,565
</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 $3.9 million or 1.8%
during the six months ended September 30, 1996, primarily due to
an decrease of $1.9 million in total net loans receivable and a
$651,516 decrease in investments and mortgage-backed securities.
Cash and cash equivalents decreased $625,409 during the six month
period. Real estate acquired through foreclosure decreased
$363,705 due to sales of real estate and real estate acquired for
development decreased $182,749 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 $2.1 million during the six months ended
September 30, 1996, while Federal Home Loan Bank advances
decreased $3.0 million or 13.2%. Other liabilities grew $1.2
million mainly due to an increase in accrued interest payable.
The Board of Directors declared the twenty-second and twenty-
third consecutive quarterly dividend of $.05 per share in May and
August 1996, which totaled $41,318. Unrealized net losses on
securities available for sale decreased by $24,600 during the six
months ended September 30, 1996. Net income for the six month
period was $101,365. These items combined to increase the
Company's stockholders' equity by $84,647 or 0.6% during the six
months ended September 30, 1996. Book value per share stood at
$37.56 at September 30, 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 six months ended September 30, 1996, the Bank maintained an
average liquidity of 6.30% compared to 6.26% 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 six months ended
September 30, 1996, loan repayments and securitizations exceeded
loan disbursements resulting in a $1.9 million or 1.2% decrease
in total net loans receivable.
<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 six month period ended September
30, 1996, deposits decreased $2.1 million while Federal Home Loan
Bank advances decreased $3.0 million. At September 30, 1996,
Security Federal had $73.8 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 September 30, 1996 are sufficient to meet
outstanding mortgage loan commitments of $323,000 and unused
lines of credit of $22.4 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 is 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 statement in 1997.
<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 decreased $356,962 and $215,309 for the three and six
months ended September 30, 1996, compared to the same period in
1995 due primarily to a one time charge taken in the September
1996 quarter of $725,000, 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 $92,538 or 51%
and $234,191 or 74% for the three and six months ended September
30, 1996. These increases are attributable primarily to
increases in net interest income.
Net Interest Income
Net interest income increased by $237,965 or 13.4% and $413,059
or 11.7% during the three and six months ended September 30,
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, and possess greater risk, than residential mortgage loans.
Total interest income increased $74,623 or 1.9% and $238,841 or
3.1% during the three and six months ended September 30, 1996.
Interest income on loans increased $24,700 or 0.7% and 141,498 or
2.1% during the three and six month period while interest income
on investment, mortgage-backed, and other securities increased
$49,923 and $97,343 during the three and six months ended
September 30, 1996 compared to the same periods on 1995.
Total interest expense decreased $163,342 or 7.5% and $174,218 or
4.1% during the three and six month period ended September 30,
1996. Interest expense on deposit accounts decreased by $23,177
during the September 1996 quarter while interest expense on
deposit accounts increased $55,485 during the six months ended
September 30, 1996. Interest expense on Federal Home Loan Bank
advances and other borrowed money decreased by $140,165 and
$229,703 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 remained the same
for both the three month and six month periods ended September
30, 1996 compared to 1995 periods at $75,000 and $150,000
respectively. During the six months ended September 30, 1996,
the Bank had net charge-offs of $160,164 compared to $28,754 for
the six months ended September 30, 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 September 30, 1996 were $2.5
million while they were $2.6 million at March 31, 1996. The
allowance for loan losses as a percentage of total loans was
1.15% at September 30, 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.
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 $8,992 or 3.2% and $32,666 or 5.3%
in the six months ended September 30, 1996 compared to the same
periods in 1995 primarily due to an increase in service fees on
deposit accounts offset primarily by losses from real estate
operations.
During the three and six months periods, the Bank's gain on sale
of loans increased to $17,681 and $30,365. A loss on sales of
real estate acquired in foreclosure (REO) of $38,171 was recorded
for both the three and six months ended September 30, 1996, as a
result of two sales of residential REO. Service fees on deposit
accounts increased by $70,279 or 52.3% and $129,666 or 49.8%
during the three and six months ended September 30, 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 $8,260 and $13,694 during
the three and six months ended September 30,1996 compared to the
same periods on year ago. Income from real estate operations
decreased $99,110 and $124,630 during the three and six month
periods respectively 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, increased
by $50,053 and $21,742 in the three and six months ended
September 30, 1996.
General and Administrative Expenses
General and administrative expenses increased $808,766 and
$782,098 due mainly to the one time pre-tax charge of $725,000
for the FDIC SAIF special assessment. Otherwise , general and
administrative expenses would have increased only $83,766 or 4.9%
and $57,098 or 1.6% during the three and six month periods ended
September 30, 1996 compared to the same periods 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 $41,193 or 4.9% and
$111,676 or 6.4% during the respective periods due to employee
attrition and a restructuring of officer positions in September
1995. Occupancy expense increased $12,922 or 14.3% and $13,732
or 7.4% during the three and six month periods ended September
30, 1996 due to the rent on a new branch opened in February 1996
in the Wal*Mart superstore in Aiken. Advertising expense
increased $1,744 and $8,835 during the period. Depreciation and
maintenance of equipment increased $748 during the September 1996
quarter compared to 1995, but decreases by $4,565 for the six
month period. FDIC premiums, excluding the $725,000 SAIF special
assessment, decreased $32,073 and $48,260 for the three and six
months ended September 30, 1996 compared to the same periods in
1995. The premiums on SAIF deposits will decline from a current
annual charge of 23 cents per $100 of SAIF deposits approximately
6.4 cents per $100 in subsequent periods. The amortization of
intangibles arising from the October 1993 branch acquisitions
were $116,310 in the three months ended September 30, 1995 and
1996 and $232,620 for both the six months ended September 30,
1995 and 1996. Other expenses, which include legal expense,
data processing expense, and stationary and office supplies
expense increased by $141,618 and $199,032 for the three and six
months ended September 30, 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 SEPTEMBER 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 9,198,255
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25,904,012
<INVESTMENTS-CARRYING> 14,457,602
<INVESTMENTS-MARKET> 0
<LOANS> 150,271,885
<ALLOWANCE> 0
<TOTAL-ASSETS> 210,887,254
<DEPOSITS> 170,226,276
<SHORT-TERM> 19,846,000
<LIABILITIES-OTHER> 4,560,412
<LONG-TERM> 5,650,000
<COMMON> 4,132,000
0
0
<OTHER-SE> 15,518,565
<TOTAL-LIABILITIES-AND-EQUITY> 210,887,254
<INTEREST-LOAN> 6,781,064
<INTEREST-INVEST> 1,220,011
<INTEREST-OTHER> 36,972
<INTEREST-TOTAL> 8,038,047
<INTEREST-DEPOSIT> 3,422,194
<INTEREST-EXPENSE> 665,856
<INTEREST-INCOME-NET> 3,949,997
<LOAN-LOSSES> 150,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,331,991
<INCOME-PRETAX> 121,736
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 101,365
<EPS-PRIMARY> .25
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 2,500,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,758,688
<CHARGE-OFFS> 170,075
<RECOVERIES> 9,911
<ALLOWANCE-CLOSE> 1,748,524
<ALLOWANCE-DOMESTIC> 1,748,524
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
