SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-16120
SECURITY FEDERAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 57-08580504
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1705 Whiskey Road South, Aiken, South Carolina 29803
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 641-3000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES x NO
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Indicate by check mark whether disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or other
information statements incorporated by reference in Part III of this Form
10-KSB or any amendments to this Form 10-KSB. [x]
The registrant's revenues for the fiscal year ended March 31, 1997 were
$17,501,464
As of June 13, 1997, there were issued and outstanding 417,122 shares of
the registrant's Common Stock. The aggregate market value of the voting stock
held by non-affiliates of the registrant, computed by reference to the average
of the bid and asked price of such stock as of June 13, 1997, was $15.6
million. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the registrant that
such person is an affiliate of the registrant).
DOCUMENT INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended March
31, 1997. (Parts I and II)
2. Portions of Proxy Statement for the 1997 Annual Meeting of Stockholders.
(Part III)
Transitional Small Business Disclosure Format (check one) Yes No X
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PART I
Item 1. Business
Security Federal Corporation
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Security Federal Corporation (the "Company") was incorporated under the
laws of the State of Delaware in July 1987 by authorization of the Board of
Directors of Security Federal Savings Bank of South Carolina ("Security
Federal" or the "Bank") for the purpose of becoming a savings and loan holding
company that acquired all of the outstanding stock of Security Federal issued
upon the conversion of Security Federal from the mutual to the stock form (the
"Conversion").
As a Delaware corporation, the Company is authorized to engage in any
activity permitted by Delaware General Corporation Law. The Company is a
unitary savings and loan holding company. Through the unitary holding company
structure, it is possible to expand the size and scope of the financial
services offered beyond those currently offered by the Bank. The holding
company structure also provides the Company with greater flexibility than the
Bank would have to diversify its business activities, through existing or
newly formed subsidiaries, or through acquisitions or mergers of stock thrift
institutions as well as other companies. There are no current arrangements,
understandings or agreements regarding any such acquisition. Future
activities of the Company, other than the continuing operations of Security
Federal, will be funded through dividends from Security Federal and through
borrowings from third parties. See "Regulation -- Savings and Loan Holding
Company Regulation" and "Taxation." Activities of the Company may also be
funded through sales of additional securities or income generated by other
activities of the Company. At this time, there are no plans regarding such
sales of additional securities or such activities.
At March 31, 1997, the Company had assets of approximately $201.6
million, deposits of approximately $168.1 million and shareholders' equity of
approximately $16.2 million.
The executive office of the Company is located at 1705 Whiskey Road South,
Aiken, South Carolina 29803, telephone (803) 641-3000.
Security Federal Bank
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General. Security Federal, a federally chartered stock savings bank, is
headquartered in Aiken, South Carolina. Security Federal, which has ten branch
offices in Aiken and Bamberg counties, was originally chartered under the name
Aiken Building and Loan Association on March 27, 1922. The association
received its federal charter and changed its name to Security Federal Savings
and Loan Association of Aiken on March 7, 1962, and later changed its name to
Security Federal Savings Bank of South Carolina, on November 11, 1986.
Effective April 8, 1996, the Bank changed its name to Security Federal Bank.
The Bank converted from the mutual to the stock form of organization on
October 30, 1987. Security Federal increased its branch network to nine in
October 1993 with the completion of its acquisition of four former NationsBank
of South Carolina, N.A. branches located in Aiken County. In February 1996,
Security Federal opened a new branch office in the Aiken Walmart Superstore,
which became the Bank's tenth location.
The principal business of Security Federal is the acceptance of savings
deposits from the general public and the origination of mortgage loans to
enable borrowers to purchase or refinance one- to four-family residential real
estate. The Bank also makes loans secured by multi-family residential and
commercial real estate and consumer and commercial loans. In addition, the
Bank originates construction loans on single family residences, multi-family
dwellings and projects, commercial real estate, and loans for the acquisition,
development and construction of residential subdivisions and commercial
projects.
Security Federal's income is derived primarily from interest and fees
earned in connection with its lending activities, and its principal expenses
are interest paid on savings deposits and borrowings and operating expenses.
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Through two real estate partnerships, Currytowne and Willow Woods
Associates, the Company is involved in real estate development.
The Aiken area's largest employer, the Savannah River Nuclear Site, had
significant downsizing of personnel which creates some uncertainty regarding
the local economy. In addition, real estate sales have been slower than in
past years. Management continues to monitor the Bank's allowance for loan
losses for the impact of local economic changes. See "-- Loan Delinquencies
and Defaults."
Branch Acquisitions. On October 21, 1993, the Bank acquired certain
assets and certain deposits and other liabilities of four branch offices of
NationsBank of South Carolina, N.A. The branches are located in Langley,
Graniteville, Clearwater, and Wagener, all in Aiken County, South Carolina.
As consideration for the purchase price of the offices, the Company paid
a premium of approximately $4.4 million or 7.17% of the deposit liabilities,
and paid net book value including accrued interest for the loans, face value
of the coin and currency, and a set amount for the buildings and equipment for
the respective locations. The deposit premium, after adjusting for the costs
associated with the transaction was allocated to core deposit intangible (CDI)
($1.9 million) and goodwill ($2.0 million).
This transaction was an important strategic move for the Bank, providing
access to a strong and loyal customer base, expanding the Bank's branch
network in Aiken County which management believes will better enable the Bank
to serve its customer base, and providing opportunity for future growth. Most
of the cash provided by this transaction was used to purchase U.S. Treasury,
U.S. Government agencies and other securities with varying maturities.
Selected Consolidated Financial Information
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This information is incorporated by reference to page 3 of the 1997
Annual Report to Stockholders ("Annual Report").
Yields Earned and Rates Paid
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This information is incorporated by reference to page 12 of the Annual
Report.
Rate/Volume Analysis
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This information is incorporated by reference to page 11 of the Annual
Report.
Lending Activities
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General. The primary source of revenue for the Bank is interest and fee
income from lending activities. The principal lending activity of the Bank is
making conventional first mortgage real estate loans to enable borrowers to
purchase or refinance one- to four-family residential real property. The Bank
also makes loans secured by multi-family residential and commercial real
estate and consumer and commercial loans. The Bank continues to emphasize the
origination of adjustable rate residential mortgage loans, subject to market
conditions, for retention in its portfolio. In addition, the Bank originates
construction loans on single family residences, multi-family dwellings and
projects, commercial real estate, and loans for the acquisition, development
and construction of residential subdivisions and commercial projects.
Adjustable rate mortgage loans ("ARMs") have been offered on all types of
properties since 1980 and, at March 31, 1997, constituted approximately 27.0%
of the Bank's total outstanding loan portfolio.
The loan-to-value ratio, maturity and other provisions of loans made by
the Bank reflect its policy of making the maximum loan permissible consistent
with applicable regulations, established lending policies and market
conditions. The Bank requires title insurance (or acceptable legal opinions on
smaller loans secured by real estate) and fire insurance, and flood insurance
where applicable, on loans secured by improved real estate.
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<TABLE>
Loan Portfolio Composition. The following table sets forth information concerning the composition of
the Bank's loan portfolio in dollar amounts in percentages, by type of loan and by type of security, and
presents a reconciliation of total loans receivable before net items.
At March 31,
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN:
- ------------
Fixed Rate Loans
- ----------------
Real Estate:
Residential(1) $ 14,835 9.9% $ 11,846 7.6% $ 15,998 10.4% $ 16,467 12.3% $ 28,286 25.1%
Commercial(2) 1,916 1.2 2,280 1.6 2,580 1.7 6,032 4.5 5,822 5.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real
estate loans 16,751 11.1 14,126 9.2 18,578 12.1 22,499 16.8 34,108 30.3
Commercial business 20,970 14.0 15,804 10.2 11,986 7.8 7,258 5.4 1,641 1.5
Consumer(3) 24,180 16.1 22,635 14.6 20,450 13.3 18,347 13.7 9,506 8.4
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total fixed
rate loans 61,901 41.2 52,565 34.0 51,014 33.2 48,104 35.9 45,255 40.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Adjustable rate loans
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Real Estate:
Residential(1) 35,910 23.9 48,718 31.5 51,004 33.1 32,704 24.4 26,355 23.4
Commercial(2) 4,612 3.1 8,350 5.4 10,428 6.8 15,425 11.5 14,087 12.5
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real
estate loans 40,522 27.0 57,068 36.9 61,432 39.9 48,129 35.9 40,442 35.9
Commercial business 25,078 16.7 22,960 14.8 17,732 11.5 13,757 10.3 10,425 9.2
Consumer(3) 22,714 15.1 22,175 14.3 23,639 15.4 23,958 17.9 16,567 14.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total adjustable
rate loans 88,314 58.8 102,203 66.0 102,803 66.8 85,844 64.1 67,434 59.8
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans 150,215 100.0% 154,768 100.0% 153,817 100.0% 133,948 100.0% 112,689 100.0%
===== ===== ===== ===== =====
Less
Loans in process 1,375 474 2,419 6,628 4,356
Deferred fees
and discounts 303 395 466 237 269
Allowance for
loan losses 1,768 1,759 1,955 1,735 1,191
-------- -------- -------- -------- --------
Total loans
receivable $146,769 $152,140 $148,977 $125,348 $106,873
======== ======== ======== ======== ========
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(1) Includes $1.6 million, $2.5 million, $2.5 million, $750,477 and $378,193 in multi-family dwellings for
fiscal years ended March 31, 1997, 1996, 1995, 1994 and 1993, respectively. Includes residential
construction loans.
(2) Includes acquisition, development and commercial construction loans.
(3) Includes home improvement loans.
</TABLE>
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<TABLE>
At March 31,
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1997 1996 1995 1994 1993
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF SECURITY:
- ----------------
Real Estate Loans:
Residential(1) $ 46,782 31.1% $ 59,613 38.5% $ 60,528 39.3% $ 38,703 28.9% $ 52,444 46.5%
Commercial 6,528 4.4 9,977 6.5 11,203 7.3 15,310 11.4 13,052 11.7
Construction 3,963 2.6 1,604 1.0 8,279 5.4 16,615 12.4 9,054 8.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real
estate loans 57,273 38.1 71,194 46.0 80,010 52.0 70,628 52.7 74,550 66.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Commercial business 46,048 30.7 38,764 25.1 29,718 19.3 21,015 15.7 12,066 10.7
Consumer loans:
Deposit account 1,299 0.9 1,299 0.8 1,145 0.8 1,565 1.2 618 0.5
Home equity 21,446 14.3 14,767 9.6 16,029 10.4 16,735 12.5 15,621 13.9
Home improvement 13,299 8.8 18,154 11.7 16,283 10.6 13,796 10.3 4,658 4.1
Other 10,850 7.2 10,590 6.8 10,632 6.9 10,209 7.6 5,176 4.6
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total consumer
loans 46,894 31.2 44,810 28.9 44,089 28.7 42,305 31.6 26,073 23.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans 150,215 100.0% 154,768 100.0% 153,817 100.0% 133,948 100.0% 112,689 100.0%
===== ===== ===== ===== =====
Less:
Loans in process 1,375 474 2,419 6,628 4,356
Deferred fees and
discounts 303 395 466 237 269
Allowance for loan
losses 1,768 1,759 1,955 1,735 1,191
-------- -------- -------- -------- --------
Total loans
receivable $146,769 $152,140 $148,977 $125,348 $106,873
======== ======== ======== ======== ========
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(1) Includes $1.6 million, $2.5 million, $2.5 million, $750,477 and $378,193 in multi-family dwellings for
fiscal years ended March 31, 1997, 1996, 1995, 1994 and 1993, respectively.
</TABLE>
4
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The following schedule illustrates the interest rate sensitivity of
Security Federal's loan portfolio at March 31, 1997. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
when the contract is due. This schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
At March 31, 1997
------------------------------------------------------
Real Estate
------------------------- Commercial
Residential(1) Commercial Consumer(2) Business Total
--------------- ---------- ----------- -------- -----
(Dollars in Thousands)
Six months or less(3) $ 2,092 $ 348 $ 5,495 $12,546 $20,481
Over six months to
one year 1,159 386 7,066 10,179 18,790
Over one year to three
years 2,786 665 19,647 15,067 38,165
Three to five years 4,205 1,011 9,007 3,996 18,219
Over five to ten years 3,736 1,852 2,686 4,003 12,277
Over ten to twenty
years 18,828 2,204 2,896 257 24,185
More than twenty years 16,564 62 97 -- 16,723
------- ------ ------- ------- --------
Total(4) $49,370 $6,528 $46,894 $46,048 $148,840
======= ====== ======= ======= ========
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(1) Includes multi-family dwellings.
(2) Includes home improvement loans and equity line of credit loans.
(3) Includes demand loans, loans having no stated maturity and overdraft
loans.
(4) Loan amounts are net of undisbursed funds for loans in process of $1.4
million.
The total amount of loans due after March 31, 1998, which have
predetermined or fixed interest rates is $33.8 million, while the total amount
of loans due after such date which have floating or adjustable interest rates
is $76.1 million.
Loan Originations, Purchases and Sales. The following table shows the
loan origination, purchase, sale and repayment activities of the Bank for the
periods indicated.
Year Ended March 31,
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
Originated(1):
Real estate:
Adjustable rate
- residential $ 8,046 $ 3,684 $28,608 $ 9,485 $ 1,229
Adjustable rate
- commercial -- -- 187 5,145 3,821
------- ------- ------- ------- -------
Total adjustable
rate 8,046 3,684 28,795 14,630 5,050
Fixed rate
- residential 5,636 5,332 4,729 49,966 55,188
Fixed rate
- commercial 14 -- -- -- 1,209
------- ------- ------- ------- -------
Total fixed rate 5,650 5,332 4,729 49,966 56,397
Non-real estate:
Consumer 18,574 16,994 18,362 6,205 6,199
Commercial business 20,576 27,465 25,529 10,626 7,290
Total non-real
estate 39,150 44,459 43,891 16,381 13,489
------- ------- ------- ------- -------
Total loans
originated $52,846 $53,475 $77,415 $81,427 $74,936
======= ======= ======= ======= =======
(table continued on following page)
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Year Ended March 31,
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
Purchased -- -- -- -- --
Loans acquired in
acquisition(2):
Non-real estate:
Consumer $ -- $ -- $ -- $13,507 $ --
Commercial business -- -- -- 2,717 --
------- ------- ------- ------- -------
Total loans
acquired $ -- $ -- $ -- $16,224 $ --
======= ======= ======= ======= =======
Sold(1):
Fixed rate:
Real estate
- residential $ 5,810 $ 5,496 $ 3,090 $47,651 $ 50,439
Adjustable rate:
Real estate
- residential -- -- 4,450 -- --
Principal
repayments(3) 51,589 47,028 50,006 28,741 32,362
(Increase) decrease
in other items, net (818) 2,212 3,760 (2,784) (1,300)
Net increase
(decrease) $(5,371) $3,163 $23,629 $18,475 $(9,165)
- -----------------
(1) Does not include loans in the amount of $6.4 million, $6.9 million, $8.4
million, $17.4 million and $12.4 million that were originated with prior
commitments to be purchased by institutional investors and sold during
the fiscal years ended March 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
(2) Loans acquired in the year ended March 31, 1994 were acquired in the
acquisition of branch offices from NationsBank of South Carolina, N.A.
(3) Includes securizations of fixed rate residential loans in the amount of
$2.8 million and $1.1 million for the fiscal years ended March 31, 1997
and 1996, respectively.
In addition to interest earned on loans, the Bank receives loan
origination fees or "points" for originating loans. Loan points are a
percentage of the principal amount of the mortgage loan which are charged to
the borrower for the creation of the loan.
The Bank's loan origination fees generally range from 1% to 2% on
conventional residential mortgages, commercial real estate loans and
commercial business loans. The total fee income (including amounts amortized
to income as yield adjustments) for the fiscal year ended March 31, 1997 was
$281,576.
Loan origination and commitment fees are volatile sources of income.
Such fees vary with the volume and type of loans and commitments made and
purchased and with competitive conditions in mortgage markets, which in turn
are governed by the demand for and availability of money.
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The following table shows deferred loan origination fees recognized as
income by the Bank expressed as a percentage of the dollar amount of total
mortgage loans originated (and retained in the Bank's portfolio) and purchased
during the periods indicated and the dollar amount of deferred loan
origination fees at the end of each respective period.
At or for the Year Ended March 31,
--------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Deferred loan origination
fees/expense earned during
the period(1) $119,818 $102,906 $126,815
Mortgage loan origination fees
earned as a percentage of total
loans originated during the
period 0.9% 1.1% 0.4%
Deferred loan origination fees/
expense in loan portfolio at
end of period $303,199 $394,768 $466,250
- -----------
(1) Includes amounts amortized to interest income as yield adjustments.
Does not include fees earned on loans sold.
The Bank also receives other fees and charges related to existing loans,
conversion fees, assumption fees, late charges, and other fees collected in
connection with a change in borrower or other loan modifications.
Security Federal currently sells substantially all conforming fixed-rate
loans with terms of 15 years or greater in the secondary mortgage market.
These loans are sold in order to provide a source of funds and as one of the
strategies available to close the gap between the maturities of its
interest-earning assets and interest-bearing liabilities. Currently, most
fixed-rate, long-term mortgage loans are being originated based on Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") underwriting standards.
Secondary market sales have been made primarily to the FHLMC or FNMA and,
to a lesser extent, other savings and loan associations, banks, and other
investors. The FHLMC and FNMA are quasi-governmental agencies that purchase
residential mortgage loans from federally insured financial institutions and
certain other lenders. All loans sold were sold without recourse to Security
Federal. Security Federal ordinarily retains the servicing of the loans
(i.e., collection of principal and interest payments sold to the FHLMC or
FNMA), for which it generally recognizes a fee of 1/4 to 1/2 of one percent
per annum of the unpaid principal balance of each loan. At March 31, 1997,
Security Federal serviced approximately $138.8 million in mortgage loans,
including approximately $88.3 million which the Bank serviced for others.
Loans sold to other investors are generally sold with servicing released.
Most of the Bank's fixed-rate mortgage loans are underwritten according
to standards that would allow them to be sold into the secondary market. The
Bank currently sells in the secondary market substantially all of its
fixed-rate loans with terms to maturity of 15 years or greater. For the
fiscal year ended March 31, 1997, $6.4 million in loans were originated with
prior commitments to purchase such loans by other institutional investors at a
fixed price. These loans were carried in the Bank's "loans held for sale"
portfolio. In addition, during fiscal 1997, $5.6 million in loans were
originated and sold to FHLMC and FNMA. At March 31, 1997, fixed-rate,
residential mortgage loans totalled $14.8 million, or 9.9% of the Bank's loan
portfolio. The Bank's fixed-rate single-family residential loans normally
have remained outstanding for significantly shorter periods because the
borrowers have prepaid the loans in full upon sale of the security property,
due to the due-on-sale clauses generally contained in the Bank's first
mortgages, or upon the refinancing of the original loan.
At March 31, 1997, the Bank held $211,212 of loans for sale. All of such
loans were originated for other financial institutions based upon prior
commitments to purchase the loans at a set price. As a result, these loans
present no market risk to Security Federal. These loans are normally
delivered and paid for within 30 days after the date of closing.
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Loan Solicitation and Processing. The Bank actively solicits mortgage
loan applications from existing customers, real estate agents, builders, real
estate developers and others. The Bank also receives mortgage loan
applications as a result of customer referrals and from walk-in customers.
Detailed loan applications are obtained to determine the borrower's
creditworthiness and ability to repay, and the more significant items on these
applications are verified through the use of credit reports, financial
statements and confirmations. After analysis of the loan application and
property or collateral involved, including an appraisal of the property
(residential appraisals are obtained through independent fee appraisers), the
lending decision is made in accordance with the underwriting guidelines of the
Bank. These guidelines are generally consistent with FHLMC and FNMA
guidelines for residential real estate loans. With respect to commercial real
estate loans, the Bank also reviews the capital adequacy of the business, the
income potential of the property, the ability of the borrower to repay the
loan and honor its other obligations, and general economic and industry
conditions.
Upon receipt of a loan application and all required related information
from a prospective borrower, the loan application is submitted for approval or
rejection. The residential mortgage loan underwriter approves loans which meet
FHLMC and FNMA underwriting requirements, not to exceed $214,600 per loan, and
the government loan direct endorser approves FHA loans not to exceed $156,700
and VA loans not to exceed $203,000. However, the Bank does submit some FHA
and VA loans to the Department of Housing and Urban Development for approval.
The Chairman, Chief Executive Officer, Senior Mortgage Officer or Senior
Consumer/Commercial Loan Officer approve loans of $200,000 or less, except as
set forth above. Loans in excess of $200,000 require approval of one of the
above and the Chairman of the Board and any loan in an amount in excess of
$300,000 must be approved by the Bank's Executive Committee, which operates as
the Bank's Loan Committee. The loan approval limits shown are the aggregate
of all loans to any one borrower or entity.
It is the general policy of Security Federal to issue loan commitments to
qualified borrowers for a specified time period. These commitments are
generally for a period of 45 days or less. With management approval,
commitments may be extended for a longer period. The total outstanding amount
of mortgage loan commitments issued by Security Federal as of March 31, 1997,
was approximately $262,000 (excluding undisbursed portions of construction
loans in process). Security Federal also had outstanding commitments
available on retail lines of credit (including home equity and other consumer
loans) totalling $20.7 million as of March 31, 1997. See Note 13 of Notes to
Consolidated Financial Statements.
Permanent Residential Mortgage Lending. Residential real estate mortgage
loans constituted approximately 33.7% of the Bank's total outstanding loan
portfolio at March 31, 1997.
Security Federal offers a variety of ARMs which offer adjustable rates of
interest, payments, loan balances or terms to maturity which vary according to
specified indices. The Bank's ARMs generally have a loan term of 15 to 30
years with rate adjustments every one to three years during the term of the
loan. Most of the Bank's ARMs contain a 100 or 200 basis point limit as to
the maximum amount of change in the interest rate at any adjustment period and
a 500 or 600 basis point limit over the life of the loan. The Bank generally
originates ARMs to hold in its portfolio. Such loans are generally made
consistent with FHLMC and FNMA guidelines. At March 31, 1997, residential
ARMs totalled $35.9 million, or 23.9% of the Bank's loan portfolio. For the
year ended March 31, 1997, the Bank originated $13.7 million in residential
real estate loans, 58.8% of which had adjustable rates of interest.
There are unquantifiable risks resulting from possible increased costs to
the borrower as a result of periodic repricing. Despite the benefits of ARMs
to the Bank's asset/liability management program, such loans also pose
potential additional risks, primarily because as interest rates rise, the
underlying payment by the borrower rises, increasing the potential for
default. At the same time, marketability of the underlying property may be
adversely affected by higher interest rates.
When making a one- to four-family residential mortgage loan, the Bank
evaluates both the borrower's creditworthiness and his or her general ability
to make principal and interest payments and the value of the property
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that will secure the loan. The Bank generally makes loans on one- to
four-family residential properties in amounts of 95% or less of the appraised
value thereof. Where loans are made in amounts which exceed 80% of the
appraised value of the underlying real estate, the Bank's general policy is to
require private mortgage insurance on a portion of the loan. In general, the
Bank restricts its residential lending to South Carolina and the nearby
Augusta, Georgia market.
The Bank also provides construction financing for single family dwellings
both to owner-occupants and to builders for resale. Construction loans are
generally made for periods of six months to one year. Typically, interest
rates on interim construction loans are made on a fixed-rate basis. At March
31, 1997, residential construction loans on one- to four-family dwellings
totalled $4.0 million, or 2.6% of the Bank's loan portfolio. In addition to
the factors mentioned above concerning the creditworthiness of the borrower,
on loans of this type the Bank seeks to evaluate the financial condition and
prior performance of the builder.
Commercial Real Estate Loans. The commercial real estate and other
non-residential loans ("commercial real estate loans") originated by the Bank
are primarily secured by business properties, churches, income property
developments, and undeveloped land. At March 31, 1997, the Bank had
approximately $6.5 million, or 4.4% of the Bank's total loan portfolio, in
commercial real estate loans.
Commercial real estate lending entails significant additional credit risk
when compared to residential lending. Commercial real estate loans typically
involve large loan balances to single borrowers or groups of related
borrowers. The payment experience of such loans is typically dependent upon
the successful operation of the business or real estate project. These risks
can be significantly affected by supply and demand conditions in the market
for office and retail space and for condominiums and apartments and, as such,
may be subject, to a greater extent than residential loans, to adverse
conditions in the local economy.
At March 31, 1997, approximately $2.1 million, or 32.9% of the Bank's
commercial real estate loans, were secured by real estate located out of the
State of South Carolina. The real estate securing these loans is primarily
located in Georgia and North Carolina.
Properties securing commercial loans originated by the Bank are appraised
at the time of the loan by appraisers designated by the Bank. Although the
Bank is permitted to invest in loans up to 100% of the appraised value of a
property on commercial real estate loans, the Bank currently seeks to invest
in loans in amounts of 80% or less of the appraised value of the underlying
collateral. In underwriting these loans, it is the policy of the Bank to
consider, among other things, the terms of the loan, the creditworthiness and
experience of the borrower, the location and quality of the collateral,
competition in the market, the debt service coverage ratio and the past
performance of the project or business.
At March 31, 1997, the Bank did not have any commercial real estate
loans with principal balances in excess of $1.0 million. Federal law
restricts the Bank's permissible lending limits to one borrower to the greater
of $500,000 or 15% of unimpaired capital and surplus. The Bank has not
typically made loans to one borrower equal to the amount federal law allows or
approximately $2.4 million at March 31, 1997.
Permanent commercial real estate loans are generally offered with
payments based on a 15- to 30-year amortization schedule but with adjustments
in the interest rate every one to three years. Such interest rate adjustments
are generally based on the rate for one year U.S. Treasury Securities, or the
prime rate of interest, plus a margin and may not exceed 200 basis points at
any adjustment period or 17% over the life of the loan.
The Bank has from time to time made commercial real estate loans to
affiliates. These loans are made in the ordinary course of business on
substantially the same terms, rates and collateral as those of comparable
transactions prevailing at the time, and do not involve more than the normal
risk of collectibility or present other unfavorable features. In addition,
all loans made by the Bank to its affiliates comply with Office of Thrift
Supervision ("OTS") regulations restricting loans and other transactions with
affiliated persons of the Bank.
9
<PAGE>
<PAGE>
Commercial Business Loans. The Bank originates commercial business loans
for the purpose of financing inventory, furniture, fixtures and equipment. In
addition, secured and unsecured credit lines are made available. Commercial
business loans are normally short-term with a maturity from three to sixty
months. Commercial business loans are made on both a fixed and adjustable
rate basis. Adjustable rate loans adjust monthly or annually based on
movements of the prime rate of interest as quoted in The Wall Street Journal.
The underwriting standards employed by the Bank for commercial business
loans include a determination of the borrower's current financial condition,
ability to pay, past earnings and payment history. In addition, the current
financial condition and payment history of all principals are reviewed.
Normally, the Bank requires the principal or owners of a business to guarantee
all loans made to their business by the Bank. Although the creditworthiness
of the business and its principals is of primary consideration, the
underwriting process also includes a comparison of the value of the security,
if any, in relation to the proposed loan amount.
At March 31, 1997, commercial business loans totalled $46.0 million, or
30.7% of the Bank's loan portfolio. Although commercial business loans, like
consumer loans, involve a higher level of risk than one-to four-family
residential mortgage loans, they generally carry higher yields and have
shorter terms to maturity than such residential mortgage loans.
Consumer Loans. The Bank originates consumer loans for any personal,
family or household purpose, including but not limited to the financing of
home improvements, automobiles, boats, mobile homes, recreational vehicles and
education. In addition, the Bank has expanded its home equity lending
program. Home equity loans are secured by mortgage lines on the borrower's
principal or second residence. At March 31, 1997, the Bank had $15.0 million
of home equity lines of credit outstanding and $19.2 million of additional
commitments of such lines of credit. The Bank also makes secured and
unsecured lines of credit available. Although consumer loans involve a higher
level of risk than one- to four-family residential mortgage loans, they
generally carry higher yields and have shorter terms to maturity than such
loans. The Bank has increased its origination of consumer loans during the
past several years and at March 31, 1997, the Bank had total consumer loans of
$46.9 million, or 31.2% of the Bank's loan portfolio.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and
an assessment of ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income is determined
by verification of gross monthly income from primary employment, and
additionally from any verifiable secondary income. Although credit-worthiness
of the applicant is of primary consideration, the underwriting process also
includes a comparison of the value of the security, if any, in relation to the
proposed loan amount.
The Bank has a separate consumer/commercial loan department to develop
products and to expand its existing consumer and commercial business loan
products. A full-time manager supervises this department, and presently has
authority to approve consumer and commercial business loans up to $200,000, of
which no more than $100,000 may be unsecured. The President has authority to
approve consumer and commercial business loans up to $200,000 and the Chairman
may approve loans up to $200,000. The Chairman and President or Consumer/
Commercial loan manager can approve loans up to $300,000 and consumer and
commercial business loans in excess of this amount must be approved by the
Bank's Executive Committee, which operates as the Bank's Loan Committee.
The Bank also has a credit card program. As of March 31, 1997, 927 Visa
credit cards had been issued by the Bank with total approved credit lines of
$1.5 million, of which $573,855 was outstanding.
10
<PAGE>
<PAGE>
Loan Delinquencies and Defaults
- -------------------------------
General. The Bank's collection procedures provide that when a real
estate loan is approximately 20 days past due, the borrower is contacted by
mail and payment is requested. If the delinquency continues, subsequent
efforts are made to contact the delinquent borrower and establish a program to
bring the loan current. In certain instances, the Bank may modify the loan or
grant a limited moratorium on loan payments to enable the borrower to
reorganize his financial affairs. If the loan continues in a delinquent
status for 60 days or more, the Bank generally initiates foreclosures
proceedings after the customer has been notified by certified mail. At March
31, 1997, the Bank had property acquired as the result of foreclosures,
in-substance foreclosure or by deed in lieu of foreclosure and classified as
"real estate owned" valued at $52,009.
Delinquent Loans. The following table sets forth information
concerning delinquent mortgage and other loans at March 31, 1997. The amounts
presented represent the total remaining principal balances of the related
loans (before specific reserves for losses), rather than the actual payment
amounts which are overdue.
Real Estate Non-Real Estate
------------------------------ ------------------------------
Commercial
Residential Commercial Consumer Business
-------------- -------------- -------------- --------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
Loans delin-
quent for:
30 - 59 days -- $ -- -- $ -- 77 $ 633 16 $ 742
60 - 89 days -- -- -- -- 19 284 7 136
90 days and
over 2 161 -- -- 28 451 10 336
--- ----- --- ----- --- ------ --- ------
Total delin-
quent loans 2 $ 161 -- $ -- 124 $1,541 33 $1,214
=== ===== === ===== === ====== === ======
Classified Assets. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered to be of
lesser quality as "substandard," "doubtful" or "loss" assets. The regulation
requires savings associations to classify their own assets and to establish
prudent general allowances for loan losses for assets classified "substandard"
or "doubtful". For the portion of assets classified as "loss", an institution
is required to either establish specific allowances of 100% of the amount
classified or charge off such amount. In addition, the OTS may require the
establishment of a general allowance for losses based on assets classified as
"substandard" and "doubtful" or based on the general quality of the asset
portfolio of an association. Assets which do not currently expose the savings
association to sufficient risk to warrant classification in one of the
aforementioned categories but possess potential weaknesses are designated
"special mention" by management.
At March 31, 1997, approximately $615,220, $1,926,311 (including $1.9
million of loans and $52,009 in real estate acquired through foreclosure) and
$21,399 of the Bank's assets were classified "special mention," "substandard"
and "doubtful," respectively. On such date, the Bank had $22,171 of loans
classified as "loss." As of March 31, 1997, there were loans totalling
$829,437 which were troubled debt restructuring within the meaning of FASB No.
15 of which $88,733 was classified substandard. The Bank's classification of
assets is consistent with OTS regulatory classifications.
For additional information regarding the treatment of impaired loans, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Accounting and Reporting Changes."
Non-performing Assets. Loans are placed on non-accrual status when the
collection of principal and/or interest becomes doubtful. In addition, all
loans are placed on non-accrual status when the loan becomes 60 days or more
contractually delinquent. All consumer loans more than 90 days delinquent are
charged against the consumer loan allowance for loan losses unless there is
adequate collateral which is in the process of being repossessed or foreclosed
on. Except for loans restructured during fiscal 1995 contained in the table
below, the Bank has had no troubled debt restructuring which involve forgiving
a portion of interest or principal on any loans or making loans
11
<PAGE>
<PAGE>
at a rate materially less than that of market rates. Other loans of concern
are those loans (not delinquent more than 60 days) that management has
determined need to be closely monitored as the potential exists for increased
risk on these loans in the future. Nonperforming loans are reviewed monthly
on a loan by loan basis. Specific reserves associated with these loans will
vary based on estimates of recovery for each loan.
The following table sets forth the amounts and categories of risk
elements in the Bank's loan portfolio.
March 31,
----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-Accruing Loans
Delinquent 60 to
90 Days:
Residential $ 56 $ 452 $ 148 $ -- $ --
Commercial real
estate -- -- 172 -- --
Consumer 289 226 47 121 101
Commercial business 142 490 9 438 --
------- ------ ------ ------ ------
Total $ 487 $1,168 $ 376 $ 559 $ 101
======= ====== ====== ====== ======
Total as a percen-
tage of total
assets .24% .54% 0.18% 0.28% 0.07%
Non-Accruing Loans
Delinquent More than
90 Days:
Residential $ 105 $ 453 $ 264 $ 573 $ 398
Commercial real
estate -- 542 -- 298 --
Consumer 446 154 122 120 86
Commercial business 330 255 50 -- --
------- ------ ------ ------ ------
Total $ 881 $1,404 $ 436 $ 991 $ 484
======= ====== ====== ====== ======
Total as a percentage
of total assets .44% .65% .21% .50% .25%
Troubled debt
restructuring $ 829(2) $ 487(1) $ 780 $ -- $ --
Real estate owned $ 52 $ 719 $1,521 $1,684 $ 721
Allowance for loan
losses $1,768 $1,759 $1,955 $1,735 $1,191
________________
(1) Included in non-accruing loan totals.
(2) $89,000 of troubled debt restructuring is included in non-accruing
loans.
For the fiscal year ended March 31, 1997, the interest income which would
have been recognized with respect to non-accruing loans, had such loans been
current in accordance with their original terms and with respect to troubled
debt restructurings, had such loans been current in accordance with their
original terms, totalled $75,029.
At March 31, 1997, non-accrual loans totalled $1,368,072 compared to
$2,572,000 at March 31, 1996. During the past five years, the Bank has
classified all loans as non-accrual when they were 60 days or more delinquent.
Included in non-accruing loans at March 31, 1997 were two one- to four-family
real estate mortgage loans totalling $161,000 and 17 commercial loans
totalling and 47 consumer loans totalling $735,000. Of the $735,000 in
consumer loans on non-accrual status at fiscal year end, no loan exceeded
$150,000 at fiscal year end. Both of these loans are well secured and no loss
is anticipated at this time. Of the $472,000 in non-accruing commercial
business loans at March 31, 1997, no loan exceeded $90,000.
The Bank had three loans totaling $829,000 at fiscal year end which were
troubled debt restructurings compared to $487,000 at March 31, 1996, which
were also on non-accrual status. Of the three troubled debt restructurings at
March 31, 1997, only one loan of $89,000 was on non-accrual status. This loan
is secured by a principal residence. The other two loans consisted of a
$140,000 loan secured by a principal residence and a
12
<PAGE>
<PAGE>
$600,000 commercial business loan secured by commercial real estate. All
three loans are considered well secured and no loss is anticipated at this
time. All troubled debt restructurings are also considered impaired. At March
31, 1997, the Bank held $1,241,000 in impaired loans compared to $1,786,000 at
March 31, 1996.
At March 31, 1997, real estate acquired through foreclosure had an
outstanding book value of $52,009 and consisted of two properties.
Provision for Losses on Loans and Real Estate Owned. Security Federal
recognizes that credit losses will be experienced during the course of making
loans and that the risk of loss will vary with, among other things, the type
of loan being made, the creditworthiness of the borrower over the term of the
loan and, in the case of a secured loan, the quality of the underlying
security for the loan.
The Bank seeks to establish and maintain sufficient reserves for
estimated losses on specifically identified loans and real estate where such
losses can be estimated. Additionally, general reserves for estimated
possible losses are established on specified portions of the Bank's portfolio
such as consumer loans and higher risk residential construction mortgage loans
based on management's estimate of the potential loss for loans which normally
can be classified as higher risk. Specific and general reserves are based on,
among other criteria (1) the risk characteristics on the loan portfolio, (2)
current economic conditions on a local as well as a statewide basis, (3)
actual losses experienced historically, and (4) the level of reserves for
possible losses in the future. Additionally, a reserve is maintained for
uncollected interest on loans over 60 days past due.
At March 31, 1997, total reserves relating to loans were $1.8 million.
In determining the adequacy of the reserve for loan losses, management reviews
past experience of loan charge-offs, the level of past due and non-accrual
loans, the size and mix of the portfolio, general economic conditions in the
market area, and individual loans to identify potential credit problems.
Commercial business and consumer loans have increased to $92.9 million or
61.9% of the Bank's total loan portfolio, at March 31, 1997, and it is
anticipated there will be a continued emphasis on this type of credit.
Although commercial business and consumer loans carry a higher level of credit
risk than conventional residential mortgage loans, the level of reserves
reflects management's continuing evaluation of this risk based on upon the
Bank's past loss experience. At fiscal year end, the Bank's ratio of loans
delinquent more than 60 days to total assets was .68%. These delinquent loans
are considered to be well secured and are in the process of collection.
Management believes that reserves for loan losses are at a level adequate to
provide for inherent loan losses. Although management believes that it has
considered all relevant factors in its estimation of future losses, future
adjustments to reserves may be necessary if conditions change substantially
from the assumptions used in making the original estimations. Regulators will
from time to time evaluate the allowance for loan losses which are subject to
adjustments based upon the information available to the regulators at the time
of their examinations.
At March 31, 1997, the Bank had no allowance for losses on real estate
owned.
13
<PAGE>
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
March 31,
----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of year $1,759 $1,955 $1,735 $1,191 $ 819
Provision charged to
operations 300 230 300 335 463
Allowance on acquired loans -- -- -- 324 --
Charge-offs:
Residential real estate 64 5 -- 25 10
Commercial real estate -- -- 3 61 --
Commercial business 59 330 -- -- --
Consumer 198 137 102 39 121
------ ------ ------ ------ ------
Total charge-offs 321 472 105 125 131
------ ------ ------ ------ ------
Recoveries:
Residential real estate -- -- -- -- --
Consumer 30 46 25 10 40
------ ------ ------ ------ ------
Total recoveries 30 46 25 10 40
------ ------ ------ ------ ------
Balance at end of year $1,768 $1,759 $1,955 $1,735 $1,191
====== ====== ====== ====== ======
Ratio of net charge-offs during
the year to average loans
outstanding during the year 0.19% 0.28% 0.06% 0.10% 0.08%
==== ==== ==== ==== ====
14
<PAGE>
<PAGE>
<TABLE>
The distribution of the Bank's allowance for loan losses at the dates indicated is summarized as
follows:
At March 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- --------------- -------------- --------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ------- ------ -------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1Residential $ 81 33.7% $ 460 39.1% $ 460 43.4% $ 312 36.8% $ 395 48.5%
Commercial real
estate 42 4.4 131 6.9 96 8.5 128 16.0 146 17.7
Consumer 734 31.2 568 28.9 800 28.7 792 31.5 442 23.1
Commercial business 911 30.7 600 25.1 599 19.4 503 15.7 208 10.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $1,768 100.0% $1,759 100.0% $1,955 100.0% $1,735 100.0% $1,191 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
15
<PAGE>
<PAGE>
Service Corporation
- -------------------
As a federally chartered savings bank, Security Federal is permitted by
OTS regulations to invest up to 2% of its assets in the stock of, or loans to,
service corporation subsidiaries, and may invest an additional 1% of its
assets in service corporations where such additional funds are used for
inner-city or community development purposes. At March 31, 1997, Security
Federal's net investment in its service corporations (including loans to
service corporations) totaled $741,149. In addition to investments in service
corporations, federal institutions are permitted to invest an unlimited amount
in operating subsidiaries engaged solely in activities which a federal savings
bank may engage in directly.
Security Financial Services Corporation. SFSC was incorporated in 1975
as a wholly owned subsidiary of the Bank. Its primary activity is investment
brokerage services.
Real Estate Partnership. The Company also develops real estate through
two real estate partnerships which it purchased from SFSC at market value in
December 1995. Each project is designed primarily to develop and sell
residential lots in and around the Bank's primary lending area. Total
investment of the Company in both projects at March 31, 1997, was
approximately $350,336. The Company has no plans for additional real estate
ventures.
During fiscal 1988, SFSC completed construction on the first phase of
Currytowne, a joint venture development of single-family residential lots
located in Edgefield County, South Carolina near North Augusta. This phase
contains 84 lots. By fiscal 1997 year end, all lots had been sold. The
partnership's only investment at March 31, 1997, is a $60,000 mortgage loan
secured by lots.
During fiscal 1990, SFSC entered into a joint venture agreement, known as
Willow Woods, to develop 97.2 acres of land in Aiken County into approximately
150 single family residential lots. SFSC is a 50% partner in the joint
venture. The first phase of this development containing 51 lots was completed
in May of 1991, and as of March 31, 1997, 49 lots have been sold.
Construction on the second phase of Willow Woods was completed in May 1994 and
contains 40 single family residential lots, of which 20 had been sold as of
March 31, 1997.
Investment Activities
- ---------------------
Investment securities. Federal thrift institutions have authority to
invest in various types of liquid assets, including U.S. Treasury obligations
and securities of various federal agencies, certificates of deposit at insured
institutions, bankers' acceptances and federal funds.
Federal thrift institutions may also invest a portion of their assets in
certain commercial paper and corporate debt securities. Federal thrift
institutions are also authorized to invest in mutual funds whose assets
conform to the investments that a federal thrift institution is authorized to
make directly. There are various restrictions on the foregoing investments.
For example, the commercial paper must be appropriately rated by at least two
nationally recognized investment rating services and the corporate debt
securities must be appropriately rated by at least one such service. In
addition, the average maturity of an institution's portfolio of corporate debt
securities may not, at any one time, exceed six years, and the commercial
paper must mature within nine months of issuance. Moreover, an institution's
total investment in the commercial paper and corporate debt securities of any
one issuer may not exceed 1% of the institution's assets except that an
institution may invest 5% of its assets in the shares of any appropriate
mutual fund. See "Regulation -- Federal Regulation of Savings Associations."
As a member of the Federal Home Loan Bank ("FHLB") System, Security
Federal must maintain minimum levels of investments that are liquid assets as
defined in Federal regulations. See "Regulation -- Federal Regulation of
Savings Associations -- Federal Home Loan Bank System." Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans.
16
<PAGE>
<PAGE>
Historically, the Bank has maintained its liquid assets above the minimum
requirements imposed by the OTS regulations and at a level believed adequate
to meet requirements of normal daily activities, repayment of maturing debt
and potential deposit outflows. Cash flow projections are regularly reviewed
and updated to assure that adequate liquidity is provided. As of March 31,
1997, the Bank's liquidity ratio (liquid assets as a percentage of net
withdrawable savings and current borrowings) was approximately 16%.
The following table sets forth the composition of the Company's portfolio
of securities and other investments, not including mortgage-backed securities.
At March 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
Book Value Book Value Book Value
---------- ---------- ----------
(Dollars in Thousands)
Interest-bearing deposits
with banks $ -- $ -- $ --
Other interest earning assets 2,713 2,858 1,014
---------- --------- ---------
Total $ 2,713 $ 2,858 $ 1,014
========== ========= =========
Securities:
Available for sale:
U.S. Treasury and agency
obligations $ 23,717 $ 30,972 $ 3,931
Federal Farm Credit Bank
securities 499 -- --
---------- --------- ---------
Total securities available
for sale 24,216 30,972 3,931
---------- --------- ---------
Held to Maturity:
U.S. Government and agency
obligations 6,478 5,492 34,367
FNMA securities 500 1,006 2,018
Federal Farm Credit Bank
securities -- -- 500
FHLMC bonds 1,000 1,000 --
---------- --------- ---------
Total securities held to
maturity 7,978 7,498 36,885
---------- --------- ---------
Total securities. 32,194 38,471 40,816
FHLB stock 786 1,233 1,415
---------- --------- ---------
Total securities and FHLB
stock (1) $32,980 $39,704 $42,231
========== ========= =========
- -------------
(1) Does not include mortgage-backed securities.
At March 31, 1997, the Company did not have any investment securities
(exclusive of obligations of the U.S. Government and federal agencies) issued
by any one entity with a total book value in excess of 10% of stockholders'
equity.
17
PAGE
<PAGE>
<TABLE>
The following table sets forth the maturities or repricing of investment securities and FHLB stock at
March 31, 1997, and the weighted average yields of such securities and FHLB stock (calculated on the basis
of the cost and effective yields weighted for the scheduled maturity of each security). Callable securities
are shown at their likely call dates based on current interest rates.
Maturing or Repricing
---------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
--------------- ----------------- ---------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
other agency obligations $19,844 5.75% $12,350 5.76% $ -- --% $ -- --%
FHLB stock -- -- 786 7.25 -- -- -- --
------- ---- ------- ---- ----- --- ----- ---
Total $19,844 5.75% $13,136 5.85% $ -- --% $ -- --%
======= ==== ======= ==== ===== === ===== ===
</TABLE>
<PAGE>
For information regarding the market value of the Bank's securities
portfolios, see Notes 2 and 3 of Notes to Consolidated Financial Statements.
The Bank has sold securities under an agreement to repurchase when it is
cost effective to acquire funds from this source. The Bank did not engage in
such transactions during fiscal 1997. See "-- Borrowings."
Mortgage-backed securities. Security Federal has a portfolio of
mortgage-backed securities which it holds for investment. Such mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as
a source of liquidity. Under the Bank's risk-based capital requirement,
mortgage-backed securities have a risk weight of 20% (or 0% in the case of
Government National Mortgage Association securities) in contrast to the 50%
risk weight carried by residential loans. See "Regulation."
The Bank had $4.8 million, $2.5 million and $1.7 million of
mortgage-backed securities issued by the FHLMC at March 31, 1997, 1996 and
1995, respectively. The Bank held no other mortgage-backed securities at such
dates.
The following table sets forth the composition of the mortgage-backed
securities portfolio at the dates indicated. There were no mortgage-backed
securities classified as available for sale at the dates indicated.
At March 31,
---------------------------------------------
1997 1996 1995
Book Value Book Value Book Value
---------- ---------- ----------
(Dollars in Thousands)
Held to Maturity:
FHLMC $4,777 $2,542 $1,711
====== ====== ======
At March 31, 1997, the Company did not have any mortgage-backed
securities (exclusive of obligations of agencies of the U.S. Government)
issued by any one entity with a total book value in excess of 10% of
stockholders equity.
For information regarding the market values of Security Federal's
mortgage-backed securities portfolio, see Note 3 of the Notes to Consolidated
Financial Statements.
18
PAGE
<PAGE>
<TABLE>
The following table sets for the maturities and the weighted average yields of the mortgage-backed
securities at March 31, 1997. Not considered in the preparation of the table below is the effect of
prepayments.
Due in
------------------------------------------------------------ March 31, 1997
Less than 1 1 to 5 5 to 10 Over 10 Balance
Year Years Years Years Outstanding
--------------- ------------- ------------- ------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FHLMC $173 7.57% $1,052 7.12% $695 7.32% $2,857 7.08% $4,777 7.13%
</TABLE>
19
<PAGE>
<PAGE>
Sources of Funds
- ----------------
Deposit accounts have traditionally been a principal source of the Bank's
funds for use in lending and for other general business purposes. In addition
to deposits, the Bank derives funds from loan repayments, cash flows generated
from operations (including interest credited to deposit accounts), FHLB of
Atlanta advances, the sale of securities under agreements to repurchase, and
loan sales. Scheduled loan payments are a relatively stable source of funds
while deposit inflows and outflows and the related cost of such funds have
varied widely. FHLB of Atlanta advances and the sale of securities under
agreements to repurchase may be used on a short-term basis to compensate for
seasonal reductions in deposits or deposit inflows at less than projected
levels and may be used on a longer term basis in support of expanded lending
activities. The availability of funds from loan sales is influenced by general
interest rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in the Annual Report.
Occasionally, Security Federal sells its 15 and 30-year fixed rate loans
in the secondary market. The decline in the amount of fixed rate loans sold
during fiscal 1997 was the result of a increase in interest rates and an
increase in demand for adjustable rate mortgage loans.
In addition, the Bank originates loans for other financial institutions
with their prior commitment to purchase the loan at a set price. The amount
of these loans originated and sold depends primarily on loan demand. During
fiscal 1997, the Bank originated $6.4 million of such loans for other
financial institutions. See "-- Loan Originations, Purchases and Sales."
Deposits. The Bank attracts both short-term and long-term deposits from
the general public by offering a wide assortment of accounts and rates. In
recent years, market conditions have required the Bank to rely increasingly on
short-term accounts and other deposit alternatives that are more responsive to
market interest rates than the passbook accounts and regulated fixed interest
rate, fixed-term certificates that were the Bank's primary source of deposits
before 1978. The Bank offers regular passbook accounts, checking accounts,
various money market accounts, fixed interest rate certificates with varying
maturities, negotiated rate $100,000 or above jumbo certificates of deposit
("Jumbo Cds") and individual retirement accounts.
At March 31, 1997, the Bank had no brokered deposits. In addition, the
Bank believes that, based on its experience over the past several years, its
passbook and transaction accounts are stable sources of deposits.
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The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs for the periods indicated.
At March 31,
----------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Interest Rate Range:
- -------------------
Passbook accounts
2.00 % - 3.00% $13,451 8.0% $13,615 7.9% $14,492 8.7%
NOW and other transaction
accounts 0% - 2.00% 43,602 26.0 42,252 24.5 41,212 24.8
Money market funds
2.50% - 3.50% 11,641 6.9 13,770 8.0 16,776 10.1
-------- ----- -------- ----- -------- -----
Total non-
certificates 68,694 40.9% 69,637 40.4% 72,480 43.6%
-------- ----- -------- ----- -------- -----
Certificates:
- ------------
0.00-5.99% 92,597 5.51% 73,946 42.9% 70,537 42.4%
6.00-7.99% 6,770 4.0 28,792 16.7 23,238 14.0
8.00-9.99% -- -- -- -- 20 0.0
10.00-12.99% -- -- -- -- -- --
-------- ----- -------- ----- -------- -----
Total
certificates 99,367 59.1 102,738 59.6 93,795 56.4
-------- ----- -------- ----- -------- -----
Total deposits $168,061 100.0% $172,375 100.0% $166,275 100.0%
======== ===== ======== ===== ======== =====
The Bank relies to a limited extent upon locally obtained Jumbo Cds to
maintain its deposit levels. At March 31, 1997, Jumbo Cds constituted 9.4% of
the Bank's total deposits. Security Federal has not relied heavily on Jumbo
Cds to manage interest rate sensitivity. Security Federal has, however,
exhibited an ability to attract and maintain such deposits to desired levels
during recent periods.
The following table sets forth the deposit flows at the Bank during the
periods indicated.
Years Ended March 31,
-------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Opening balance $172,375 $166,275 $173,433
Deposits 785,065 734,010 686,287
Withdrawals 796,353 734,018 698,942
Interest credited 6,974 6,108 5,497
Ending balance 168,061 172,375 166,275
-------- -------- --------
Net increase (decrease) $(4,314) $ 6,100 $ (7,158)
======= ======== ========
Percent increase (decrease) 2.5% 3.7% (4.1)%
=== === =====
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The following table shows rate and maturity information for the Bank's
certificates of deposit as of March 31, 1997.
4.00- 5.00- 6.00- 7.00-
4.99% 5.99% 6.99% 7.99% Total
----- ----- ----- ----- -----
(Dollars in Thousands)
Certificate accounts
maturing in quarter
ending(1):
June 30, 1997 $3,936 $25,367 $2,041 53 $31,397
September 30, 1997 -- 21,121 1,495 26 22,642
December 31, 1997 -- 14,833 1,107 -- 15,940
March 31, 1998 -- 13,529 491 -- 14,020
June 30, 1998 -- 4,960 374 -- 5,334
September 30, 1998 -- 3,401 313 -- 3,714
December 31, 1998 -- 1,602 182 -- 1,784
March 31, 1999 -- 1,131 237 -- 1,368
June 30, 1999 -- 543 84 -- 627
September 30, 1999 -- 301 96 -- 397
December 31, 1999 -- 133 72 -- 205
March 31, 2000 -- 61 36 19 116
Thereafter -- 1,679 45 99 1,823
------ ------- ------ ---- -------
Total $3,936 $88,661 $6,573 $197 $99,367
====== ======= ====== ==== =======
___________________
(1) Certain adjustable-rate certificates are shown as maturing at the
earlier of repricing or maturity date.
The following table indicates the amount of the Bank's deposits of
$100,000 or more by time remaining until maturity at March 31, 1997.
Passbook, NOW and
Certificates of Deposit Money Market Accounts
----------------------- ---------------------
(Dollars in Thousands)
Maturity Period
- ---------------
Three months or less $ 2,840 $4,818
Over three through six months 5,091 --
Over six through twelve month 5,430 --
Over twelve months 2,376 --
------- ------
Total $15,737 $4,818
======= ======
Borrowings
- ----------
As a member of the FHLB of Atlanta, the Bank is required to own capital
stock in the FHLB of Atlanta and is authorized to apply for advances from the
FHLB of Atlanta. Each FHLB credit program has its own interest rate, which
may be fixed or variable, and range of maturities. The FHLB of Atlanta may
prescribe the acceptable uses to which these advances may be put, as well as
limitations on the size of the advances and repayment provisions. See Note 9
of Notes to Consolidated Statements for disclosure regarding the maturities
and rate structure of the Bank's FHLB advances. Federal law contains certain
collateral requirements for FHLB advances. See "Regulation - - Federal
Regulation of Savings Associations -- - Federal Home Loan Bank System."
Occasionally, the Bank has used the sale of securities under agreements
to repurchase as a source of funds. The securities sold pursuant to these
agreements consist of mortgage loans which have been convened to FHLMC
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participation certificates. The Bank has sold securities under agreements to
repurchase to both FHLMC and Wachovia Bank and Trust Company. These funds are
used whenever its costs are favorable compared to alternative sources of
funds. At March 31, 1997, the Bank had no repurchase agreements outstanding.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances at the dates indicated.
Years Ended March 31,
------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Maximum Balance:
FHLB advances $23,921 $31,370 $30,076
Average Balance:
FHLB advances $20,157 $27,569 $22,621
The following table sets forth information as to the Bank's borrowings
and the weighted average interest rates thereon at the dates indicated.
Years Ended March 31,
------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Balance:
FHLB advances $14,114 $22,864 $26,033
Weighted Average Interest Rate:
At Fiscal Year End:
FHLB advances 6.30% 6.29% 6.65%
During Fiscal Year:
FHLB advances 5.79% 6.39% 5.86%
Competition
- -----------
The Bank serves the counties of Aiken and Bamberg, South Carolina through
its ten branch offices located in Aiken, Denmark, North Augusta, Graniteville,
Langley, Clearwater and Wagener, South Carolina. On October 21, 1993 the Bank
expanded its market area through the acquisition of four branch offices of
NationsBank of South Carolina, N.A. The branches are located in Langley,
Graniteville, Clearwater and Wagener, Aiken County, South Carolina.
Security Federal faces strong competition both in originating loans and
in attracting deposits. Competition in originating loans comes primarily from
other thrift institutions, commercial banks, mortgage bankers and credit
unions who also make loans in the Bank's market area. The Bank competes for
loans principally on the basis of the interest rates and loan fees it charges,
the types of loans it makes and the quality of services it provides to
borrowers.
The Bank faces substantial competition in attracting deposits from other
thrift institutions, commercial banks, money market and mutual funds, credit
unions and other investment vehicles. The ability of the Bank to attract and
retain deposits depends on its ability to provide an investment opportunity
that satisfies the requirements of investors as to rate of return, liquidity,
risk and other factors. The Bank attracts a significant amount of deposits
through its branch offices primarily from the communities in which those
branch offices are located. Therefore, competition for those deposits is
principally from other thrift institutions and commercial banks located in the
same communities.
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The Bank competes for these deposits by offering a variety of deposit accounts
at competitive rates, convenient business hours, and convenient branch
locations with interbranch deposit and withdrawal privileges at each.
The authority to offer money market deposits, and expanded lending and
other powers authorized for thrift institutions by federal law, have resulted
in increased competition for both deposits and loans between thrift
institutions and other financial institutions such as commercial banks and
credit unions.
REGULATION
General
- -------
The Bank is subject to extensive regulation, examination and supervision
by the OTS as its chartering agency, and the FDIC, as the insurer of its
deposits. The activities of federal savings institutions are governed by the
Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS
and the FDIC to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal savings
associations may engage. Lending activities and other investments must comply
with various statutory and regulatory capital requirements. In addition, the
Bank's relationship with its depositors and borrowers is also regulated to a
great extent, especially in such matters as the ownership of deposit accounts
and the form and content of the Bank's mortgage documents. The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to
review the Bank's compliance with various regulatory requirements. The
regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such policies, whether by the OTS, the FDIC or
Congress, could have a material adverse impact on the Company, the Bank and
their operations. The Company, as a savings and loan holding company, is also
required to file certain reports with, and otherwise comply with the rules and
regulations of, the OTS.
Federal Regulation of Savings Associations
- ------------------------------------------
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner.
The Bank, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB of Atlanta. The Bank is in compliance with this requirement with an
investment in FHLB of Atlanta stock of $785,700 at March 31, 1997.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB of Atlanta.
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Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. In 1989 the FDIC also became the insurer,
up to the prescribed limits, of the deposit accounts held at federally insured
savings associations and established two separate insurance funds: the Bank
Insurance Fund ("BIF") and the SAIF. As insurer of deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
The Bank's deposit accounts are insured by the FDIC under the SAIF to the
maximum extent permitted by law. The Bank pays deposit insurance premiums to
the FDIC based on a risk-based assessment system established by the FDIC for
all SAIF-member institutions. Under applicable regulations, institutions are
assigned to one of three capital groups that are based solely on the level of
an institution's capital ("well capitalized," "adequately capitalized" or
"undercapitalized"), which are defined in the same manner as the regulations
establishing the prompt corrective action system under the FDIA as discussed
below. The matrix so created results in nine assessment risk classifications,
with rates that until September 30, 1996 ranged from 0.23% for well
capitalized, financially sound institutions with only a few minor weaknesses
to 0.31% for undercapitalized institutions that pose a substantial risk of
loss to the SAIF unless effective corrective action is taken. The Bank's
regular assessments expensed for the year ended March 31, 1997 equaled
$229,689.
Pursuant to the Deposit Insurance Fund Act ("DIF Act"), which was enacted
on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable deposits which resulted in the
SAIF achieving its designated reserve ratio. The amount assessed to the Bank,
which was expensed in September 1996, was $705,000. In connection therewith,
the FDIC reduced the assessment schedule for SAIF members, effective January
1, 1997, to a range of 0% to 0.27%, with most institutions, including the
Bank, paying 0%. This assessment schedule is the same as that for the BIF,
which reached its designated reserve ratio in 1995. In addition, since
January 1, 1997, SAIF members are charged an assessment of 0.065% of
SAIF-assessable deposits for the purpose of paying interest on the obligations
issued by the Financing Corporation ("FICO") in the 1980s to help fund the
thrift industry cleanup. BIF-assessable deposits will be charged an
assessment to help pay interest on the FICO bonds at a rate of approximately
.013% until the earlier of December 31, 1999 or the date upon which the last
savings association ceases to exist, after which time the assessment will be
the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates
the development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter
may take and what effect, if any, the adoption of a new charter would have on
the operation of the Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances which could
result in termination of the deposit insurance of the Bank.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 5.0%) of its net withdrawable accounts plus short-term
borrowings. OTS regulations also require each savings institution to maintain
an average daily balance of short-term liquid assets at a specified percentage
(currently 1.0%) of the total of its net withdrawable savings accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet liquidity requirements. See
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" contained in the Annual Report.
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency is required to implement a system of prompt corrective
action for institutions which it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of
prompt corrective action. Under the regulations, an institution shall be
deemed to be (i) "well capitalized" if it has a total risk-based capital ratio
of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a
leverage ratio of 5.0% or more and is not subject to specified requirements to
meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a leverage ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized;" (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a leverage ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has
a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a leverage ratio that is less than
3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity. The
OTS may not, however, reclassify a significantly undercapitalized institution
as critically undercapitalized.
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At March 31, 1997, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and
(vi) compensation, fees and benefits. The federal banking agencies recently
adopted final regulations and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("Guidelines"). The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. If the OTS determines that the Bank fails to meet any standard
prescribed by the Guidelines, the agency may require the Bank to submit to the
agency an acceptable plan to achieve compliance with the standard. OTS
regulations establish deadlines for the submission and review of such safety
and soundness compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either become a national bank or be subject to the following
restrictions on its operations: (i) the association may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the association may not establish any new branch office where a
national bank located in the savings institution's home state would not be
able to establish a branch office; (iii) the association shall be ineligible
to obtain new advances from any FHLB; and (iv) the payment of dividends by the
association shall be subject to the rules regarding the
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statutory and regulatory dividend restrictions applicable to national banks.
Also, beginning three years after the date on which the savings institution
ceases to be a QTL, the savings institution would be prohibited from retaining
any investment or engaging in any activity not permissible for a national bank
and would be required to repay any outstanding advances to any FHLB. In
addition, within one year of the date on which a savings association
controlled by a company ceases to be a QTL, the company must register as a
bank holding company and become subject to the rules applicable to such
companies. A savings institution may requalify as a QTL if it thereafter
complies with the QTL test.
Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Code or that 65% of an
institution's "portfolio assets" (as defined) consist of certain housing and
consumer-related assets on a monthly average basis in nine out of every 12
months. Assets that qualify without limit for inclusion as part of the 65%
requirement are loans made to purchase, refinance, construct, improve or
repair domestic residential housing and manufactured housing; home equity
loans; mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an
overall limit of 20% of the savings institution's portfolio assets: 50% of
residential mortgage loans originated and sold within 90 days of origination;
100% of consumer loans; and stock issued by Federal Home Loan Mortgage
Corporation or FNMA. Portfolio assets consist of total assets minus the sum
of (i) goodwill and other intangible assets, (ii) property used by the savings
institution to conduct its business, and (iii) liquid assets up to 20% of the
institution's total assets. At March 31, 1997, the qualified thrift
investments of the Bank were approximately 71.2% of its portfolio assets.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Company is not subject to
any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from capital and to account appropriately for the
investments in and assets of both includable and nonincludable subsidiaries.
An institution that fails to meet the core capital requirement would be
required to file with the OTS a capital plan that details the steps they will
take to reach compliance. In addition, the OTS's prompt corrective action
regulation provides that a savings institution that has a leverage ratio of
less than 4% (3% for institutions receiving the highest CAMEL examination
rating) will be deemed to be "undercapitalized" and may be subject to certain
restrictions. See "-- Federal Regulation of Savings Associations -- Prompt
Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations
rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will be required
to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement. No assurance can
be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to the Bank.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Bank's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage servicing rights.
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Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt, and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated
debt, intermediate-term preferred stock and mandatory convertible subordinated
debt, subject to an amortization schedule, and (iii) general valuation loan
and lease loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and residential
construction loans are assigned a 100% risk weight, as are nonqualifying
residential mortgage loans and that portion of land loans and nonresidential
construction loans which do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighing factor (from 0%
to 100%) assigned to that category. These products are then totalled to
arrive at total risk-weighted assets. Off-balance sheet items are included in
risk- weighted assets by converting them to an approximate balance sheet
"credit equivalent amount" based on a conversion schedule. These credit
equivalent amounts are then assigned to risk categories in the same manner as
balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate risk component in calculating
its total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted
from an association's total capital in calculating compliance with its risk-
based capital requirement. Under the rule, there is a two quarter lag between
the reporting date of an institution's financial data and the effective date
for the new capital requirement based on that data. A savings association
with assets of less than $300 million and risk-based capital ratios in excess
of 12% is not subject to the interest rate risk component, unless the OTS
determines otherwise. The rule also provides that the Director of the OTS may
waive or defer an association's interest rate risk component on a case-by-case
basis. Under certain circumstances, a savings association may request an
adjustment to its interest rate risk component if it believes that the
OTS-calculated interest rate risk component overstates its interest rate risk
exposure. In addition, certain "well-capitalized" institutions may obtain
authorization to use their own interest rate risk model to calculate their
interest rate risk component in lieu of the OTS-calculated amount. The OTS
has postponed the date that the component will first be deducted from an
institution's total capital.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Regulatory Capital" contained in the Annual Report
for a table that sets forth in terms of dollars and percentages the OTS
tangible, core and risk-based capital requirements, the Bank's historical
amounts and percentages at March 31, 1997, and pro forma amounts and
percentages based upon the assumptions stated therein.
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Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Bank to give the OTS 30
days' advance notice of any proposed declaration of dividends, and the OTS has
the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
A Tier 1 savings association may make (without application but upon prior
notice to, and no objection made by, the OTS) capital distributions during a
calendar year up to 100% of its net income to date during the calendar year
plus one-half its surplus capital ratio (i.e., the amount of capital in excess
of its fully phased-in requirement) at the beginning of the calendar year or
the amount authorized for a Tier 2 association. Capital distributions in
excess of such amount require advance notice to the OTS. A Tier 2 savings
association has capital equal to or in excess of its minimum capital
requirement but below its fully phased-in capital requirement (both before and
after the proposed capital distribution). Such an association may make
(without application) capital distributions up to an amount equal to 75% of
its net income during the previous four quarters depending on how close the
association is to meeting its fully phased-in capital requirement. Capital
distributions exceeding this amount require prior OTS approval. A Tier 3
savings association has capital below the minimum capital requirement (either
before or after the proposed capital distribution). A Tier 3 savings
association may not make any capital distributions without prior approval from
the OTS.
The Bank currently meets the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of
the calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Bank's unimpaired capital and surplus,
plus an additional 10% of unimpaired capital and surplus, if such loan is
secured by readily-marketable collateral, which is defined to include certain
financial instruments and bullion. The OTS by regulation has amended the
loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At March 31, 1997, the Bank's
limit on loans to one borrower was $2.4 million. At March 31, 1997, the
Bank's largest aggregate amount of loans to one borrower was $2.0 million.
Activities of Thrift Institutions and Their Subsidiaries. When a savings
association establishes or a subsidiary or elects to conduct any new activity
through a subsidiary that the association controls, the savings association
must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings associations
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company,
29
<PAGE>
<PAGE>
its subsidiaries and any other company under common control are considered
affiliates of the subsidiary savings association under the HOLA. Generally,
Sections 23A and 23B: (i) limit the extent to which the insured association
or its subsidiaries may engage in certain covered transactions with an
affiliate to an amount equal to 10% of such institution's capital and surplus
and place an aggregate limit on all such transactions with affiliates to an
amount equal to 20% of such capital and surplus, and (ii) require that all
such transactions be on terms substantially the same, or at least as favorable
to the institution or subsidiary, as those provided to a non-affiliate. The
term "covered transaction" includes the making of loans, the purchase of
assets, the issuance of a guaranty and similar types of transactions. Any
loan or extension of credit by the Bank to an affiliate must be secured by
collateral in accordance with Section 23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may
be granted only by the Federal Reserve Board, as is currently the case with
respect to all FDIC-insured banks. The Bank has not been significantly
affected by the rules regarding transactions with affiliates.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders, as well as entities controlled by such persons, is
governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and
Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk
of repayment. Generally, Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to such persons based, in
part, on the Bank's capital position, and requires certain board approval
procedures to be followed. The OTS regulations, with certain minor variances,
apply Regulation O to savings institutions.
Community Reinvestment Act. Under the federal CRA, all federally-insured
financial institutions have a continuing and affirmative obligation consistent
with safe and sound operations to help meet all the credit needs of its
delineated community. The CRA does not establish specific lending
requirements or programs nor does it limit an institution's discretion to
develop the types of products and services that it believes are best suited to
meet all the credit needs of its delineated community. The CRA requires the
federal banking agencies, in connection with regulatory examinations, to
assess an institution's record of meeting the credit needs of its delineated
community and to take such record into account in evaluating regulatory
applications to establish a new branch office that will accept deposits,
relocate an existing office, or merge or consolidate with, or acquire the
assets or assume the liabilities of, a federally regulated financial
institution, among others. The CRA requires public disclosure of an
institution's CRA rating. The Bank received an "outstanding" rating as a
result of its latest evaluation.
Savings and Loan Holding Company Regulation
- -------------------------------------------
Acquisitions. The HOLA and OTS regulations issued thereunder generally
prohibit a savings and loan holding company, without prior OTS approval, from
acquiring more than 5% of the voting stock of any other savings association or
savings and loan holding company or controlling the assets thereof. They also
prohibit, among other things, any director or officer of a savings and loan
holding company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any savings
association not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS.
Activities. As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions under the HOLA. If the
Company acquires control of another savings association as a separate
subsidiary other than in a supervisory acquisition, it would become a multiple
savings and loan holding company. There generally are more restrictions on
the activities of a multiple savings and loan holding company than on those of
a
30
<PAGE>
<PAGE>
unitary savings and loan holding company. The HOLA provides that, among other
things, no multiple savings and loan holding company or subsidiary thereof
which is not an insured association shall commence or continue for more than
two years after becoming a multiple savings and loan association holding
company or subsidiary thereof, any business activity other than: (i)
furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a
subsidiary insured institution, (iv) holding or managing properties used or
occupied by a subsidiary insured institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies
or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS
prior to being engaged in by a multiple holding company.
Qualified Thrift Lender Test. The HOLA requires any savings and loan
holding company that controls a savings association that fails the QTL test,
as explained under "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations.
TAXATION
Federal Taxation
- ----------------
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income. The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on
the Bank's actual loss experience, or a percentage equal to 8% of the Bank's
taxable income, computed with certain modifications and reduced by the amount
of any permitted additions to the non-qualifying reserve. Due to the Bank's
loss experience, the Bank generally recognized a bad debt deduction equal to
8% of taxable income.
The provisions repealing the current thrift bad debt rules were passed by
Congress as part of "The Small Business Job Protection Act of 1996." The new
rules eliminate the 8% of taxable income method for deducting additions to the
tax bad debt reserves for all thrifts for tax years beginning after December
31, 1995. These rules also require that all institutions recapture all or a
portion of their bad debt reserves added since the base year (last taxable
year beginning before January 1, 1988). The Bank has previously recorded a
deferred tax liability equal to the bad debt recapture and as such the new
rules will have no effect on the net income or federal income tax expense.
For taxable years beginning after December 31, 1995, the Bank's bad debt
deduction will be determined under the experience method using a formula based
on actual bad debt experience over a period of years or, if the Bank is a
"large" association (assets in excess of $500 million) on the basis of net
charge-offs during the taxable year. The new rules allow an institution to
suspend bad debt reserve recapture for the 1996 and 1997 tax years if the
institution's lending activity for those years is equal to or greater than the
institutions average mortgage lending activity for the six taxable years
preceding 1996 adjusted for inflation. For this purpose, only home purchase
or home improvement loans are included and the institution can elect to have
the tax years with the highest and lowest lending activity removed from the
average calculation. If an institution is permitted to postpone the reserve
recapture, it must begin its six year recapture no later than the 1998 tax
year. The unrecaptured base year reserves will not be subject to recapture as
long as the institution continues to carry on the business of banking. In
addition,
31
<PAGE>
<PAGE>
the balance of the pre-1988 bad debt reserves continue to be subject to
provisions of present law referred to below that require recapture in the case
of certain excess distributions to shareholders.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Bank's loan portfolio decreased since December
31, 1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserve. The amount of additional taxable income created from an
Excess Distribution is an amount that, when reduced by the tax attributable to
the income, is equal to the amount of the distribution. Thus, if the Bank
makes a "nondividend distribution," then approximately one and one-half times
the Excess Distribution would be includable in gross income for federal income
tax purposes, assuming a 34% corporate income tax rate (exclusive of state and
local taxes). See "Regulation" for limits on the payment of dividends by the
Bank. The Bank does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryforwards. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of .12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Bank, whether or
not an Alternative Minimum Tax ("AMT") is paid.
Dividends-Received Deduction. The Company may exclude from its income
100% of dividends received from the Bank as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
Audits. The Company, the Bank and its consolidated subsidiary have been
audited or their books closed without audit by the IRS with respect to
consolidated federal income tax returns through March 31, 1993. See Note 10
of Notes to Consolidated Financial Statements for additional information
regarding income taxes of the Bank.
State Taxation
- --------------
South Carolina. South Carolina has adopted the Code as it relates to
savings banks, effective for taxable years beginning after December 31, 1986.
The Bank is subject to South Carolina income tax at the rate of 6%. The Bank
has not been audited by the State of South Carolina during the past five
years.
Delaware. As a Delaware holding company not earning income in Delaware,
the Company is exempted from Delaware corporate income tax, but is required to
file an annual report with and pay an annual franchise tax to the State of
Delaware.
Item 2. Properties
----------
At March 31, 1997, Security Federal owned the buildings and land for its
main office, five of its branch offices, including the operations center,
leased the land and owned the improvements thereon for one of its offices,
32
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<PAGE>
and leased the remaining four offices. The property related to the offices
owned by Security Federal had a depreciated cost (including land) of
approximately $1.9 million at March 31, 1997. At March 31, 1997, the
aggregate net book value of leasehold improvements (excluding furniture and
equipment) associated with leased premises was $242,968. See Note 5 of Notes
to Consolidated Financial Statements.
The following table sets forth the net book value of the offices owned
(including land) and leasehold improvements on properties leased by Security
Federal at March 31, 1997.
Date
Lease Facility Gross
Owned or Expiration Opened/ Square Net Book
Location Leased Date Acquired Footage Value
- --------------------- -------- -------- -------- ------- -------
Main Office:
1705 Whiskey Road S. Owned N/A 1980 10,000 $523,438
Aiken, South Carolina
Full Service Branch
Offices:
149 E. Baruch Street Owned N/A 1984 2,258 208,784
Denmark, South Carolina
100 Laurens Street,
N.W. Leased 1998 1959 4,500 686
Aiken, South Carolina
313 East Martintowne
Road Owned(1) N/A 1973 4,356 43,526
North Augusta, South
Carolina
1665 Richland Avenue,
W. Owned N/A 1984 1,942 235,821
Aiken, South Carolina
Montgomery & Canal
Streets Leased 1997 1993(2) 1,600 34,523
Masonic Shopping Center
Graniteville,
South Carolina
2812 Augusta Road Owned N/A 1993(2) 2,509 211,039
Langley, South
Carolina
Highway 125 and
Highways 1 and 78 Leased 1998 1993(2) 2,287 3,948
Midland Valley
Shopping Center
Clearwater,
South Carolina
118 Main Street North Owned 2000 1993(2) 3,600 290,364
Wagener, South Carolina
(table continued on following page)
33
<PAGE>
<PAGE>
Date
Lease Facility Gross
Owned or Expiration Opened/ Square Net Book
Location Leased Date Acquired Footage Value
- --------------------- -------- -------- -------- ------- -------
Walmart Superstore
2035 Whiskey Road Leased 2001 1996 517 $203,811
Aiken, South Carolina
Operations Center:
871 East Pine Log Road Owned N/A 1988 5,000 379,042
Aiken, South Carolina
- ------------
(1) Security Federal has a lease on the land for this office which expires in
2003.
(2) Represents acquisition date.
Item 3. Legal Proceedings
-----------------
The Company is involved as plaintiff or defendant in various legal actions
arising in the course of its business. It is the opinion of management, after
consultation with counsel, that the resolution of these legal actions will not
have a material adverse effect on the Company's financial condition and
results of operations.
Item 4. Submission of Matter to Vote or Security Holders
------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended March 31, 1997.
PART II
Item 5. Market for the Issuer's Common Stock and Related Security Holder
Matters
----------------------------------------------------------------
The information contained in the section captioned "Stockholders
Information -- Price Range of Common Stock" and "-- Dividends" in the Annual
Report is incorporated herein by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report is incorporated herein by reference.
Item 7. Financial Statements
--------------------
Independent Auditors' Report*
Consolidated Balance Sheets, March 31, 1997 and 1996*
Consolidated Statements of Income For the Years Ended March 31, 1997,
1996 and 1995*
Consolidated Statements of Changes in Shareholders' Equity For the Years
Ended March 31, 1997, 1996 and 1995*
Consolidated Statements of Cash Flows For the Years Ended March 31, 1997,
1996 and 1995*
Notes to Consolidated Financial Statements*
34
<PAGE>
<PAGE>
* Contained in the Annual Report filed as an exhibit hereto and
incorporated herein by reference. All schedules have been omitted as
the required information is either inapplicable or contained in the
Consolidated Financial Statements or related Notes contained in the
Annual Report.
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
------------------------------------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
----------------------------------------------------------
The information contained under the section captioned "Election of
Directors" in the Proxy Statement is incorporated herein by reference. The
information contained under the section captioned "Compliance With Section
16(a) of the Exchange Act" in the Proxy Statement is incorporated herein by
reference.
Item 10. Executive Compensation
----------------------
The information contained in the section captioned "Election of Directors
- -- Compensation of Executive Officers" in the Proxy Statement is incorporated
herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The information contained in the section captioned "Voting Securities and
Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
The information contained in the section captioned "Certain Transactions"
in the Proxy Statement is incorporated herein by reference.
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a) Exhibits:
- -------------
3.1 Articles of Incorporation and amendments thereto**
3.2 Bylaws**
4 Instruments defining the rights of security holders, including
indentures*
10 Executive Compensation Plans and Arrangements:
Salary Continuation Agreements**
Amendment One to Salary Continuation Agreements***
Stock Option Plan**
Incentive Compensation Plan**
13 Annual Report to Stockholders
21 Subsidiaries of Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
(footnotes on following page)
35
<PAGE>
<PAGE>
* Filed on August 12, 1987, as an exhibit to the Company's Form 8-A
registration statement pursuant to Section 12(g) of the Securities
Exchange Act of 1934 or as a part of reports filed pursuant to Section 13
of such Act. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
** Filed on June 28, 1993, as an exhibit to the Company's Annual Report on
Form 10-KSB pursuant to Section 12(g) of the Securities Exchange Act of
1934. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-B.
*** Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1993 pursuant to Section 12(g) of the
Securities Exchange Act of 1934. All of such previously filed documents
are hereby incorporated herein by reference in accordance with Item 601
of Regulation S-B.
(b) Reports on Form 8-K.
-------------------------
No current reports on Form 8-K were filed by the Company during the three
months ended March 31, 1997.
36
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: June 27, 1997 By: /s/ Timothy W. Simmons
----------------------
Timothy W. Simmons
President and Chief
Executive Officer (Duly
Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Timothy W. Simmons June 27, 1997
--------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Roy G. Lindburg June 27, 1997
--------------------------------------
Roy G. Lindburg, Treasurer and Chief
Financial Accounting Officer (Principal
Financial and Accounting Officer)
By: /s/ T. Clifton Weeks June 27, 1997
--------------------------------------
T. Clifton Weeks
Chairman of the Board and Director
By: /s/ Gasper L. Toole, III June 27, 1997
--------------------------------------
Gasper L. Toole, II
Director
By: /s/ Robert E. Johnson June 27, 1997
--------------------------------------
Robert E. Johnson
Director
By: /s/ Harry O. Weeks, Jr. June 27, 1997
--------------------------------------
Harry O. Weeks, Jr.
Director
By: /s/ Robert E. Alexander June 27, 1997
--------------------------------------
Robert E. Alexander
Director
By: /s/ Thomas L. Moore June 27, 1997
--------------------------------------
Thomas L. Moore
Director
By: /s/ William Clyburn June 27, 1997
--------------------------------------
William Clyburn
Director
<PAGE>
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule<PAGE>
Exhibit 13
Annual Report to Stockholders<PAGE>
[Logo]
Security Federal Corporation
Annual Report
March 31, 1997
<PAGE>
TABLE OF CONTENTS
Financial Highlights.....................................1
Letter to Shareholders...................................2
Selected Consolidated Financial, and Other Data..........3
Management's Discussion and Analysis of Financial
Condition and Results of Operation.....................4
Report of KPMG Peat Marwick, Independent Auditors.......20
Consolidated Balance Sheets.............................21
Consolidated Statements of Income.......................22
Consolidated Statements of Shareholders' Equity.........23
Consolidated Statements of Cash Flows...................24
Notes to Consolidated Financial Statements..............25
Stockholders' Information...............................45
Directors and Management................................46
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATIONS AND SUBSIDIARY
FINANCIAL HIGHLIGHTS
Year ended March 31,
--------------------
1997 1996
----------- -----------
Operating Income $ 1,272,000 $ 1,059,574
Net Income 835,207 1,059,574
Earnings per share 2.01 2.58
Book value per share 38.79 37.35
Total interest income 15,842,413 15,822,294
Total interest expense 7,907,619 8,622,541
Net interest income before
provision for loan losses 7,934,794 7,199,753
Provision for loan losses 300,000 230,000
Net income after provision for
loan losses 7,634,754 6,969,753
Net interest margin 4.09% 3.62%
Total loans originated 59,230,909 60,382,204
Adjustable rate loans as a
percentage of total gross loans 58.80% 66.00%
Operating Income Earnings Per Share
[bar graph] [bar graph]
1993 $1,156 1993 $2.94
1994 $ 570 1994 $1.44
1995 $1,002 1995 $2.48
1996 $1,060 1996 $2.58
1997 $1,272 1997 $2.01
Return on Equity Assets Growth
[bar graph] [bar graph]
1993 9.41% 1993 $138
1994 4.22% 1994 $200
1995 7.16% 1995 $210
1996 7.13% 1996 $215
1997 5.28% 1997 $202
Book Value Per Share Allowance for Loan Losses(1)
[bar graph] [bar graph]
1993 $32.81 1993 1.10%
1994 $33.98 1994 1.37%
1995 $35.41 1995 1.30%
1996 $37.35 1996 1.14%
1997 $38.79 1997 1.19%
(1) Allowance for losses as a percentage of total loans.<PAGE>
Fellow Shareholders:
We are very pleased to report record annual operating earnings of $1,272,000
for our most recent fiscal year which ended March 31, 1997. Because of a
one-time special assessment of all savings institutions by the Federal Deposit
Insurance Corporation in September 1996 to recapitalize the Savings
Associations Insurance Fund, after tax net income for our most recent fiscal
year, which ended March 31, 1997, was reduced to $835,000 or $2.01 per share.
This one time assessment will reduce future deposit insurance premiums.
In view of our record annual operating earnings, your Board of Directors
increased the quarterly dividend by 20% to $.06 per share which was paid on
June 16, 1997 to shareholders of record as of May 30, 1997.
During the year, the Bank significantly reduced its real estate held for
development and real estate acquired in settlement of loans. The Bank
installed Automated Teller Machines at several new locations including the
Bank's Whiskey Road location, the Student Activities Building at USCA, the BP
Gas Garden Convenience Store in Denmark and in the new drive-in facility which
was added to our Wagener Banking Center. Additional Automated Teller Machine
locations are planned.
Also, during the past year, the Bank changed all Company colors, adopted a new
logo and installed completely new exterior signage. One of the most
innovative initiatives was the introduction of the Looney Tunes Savings Club
which is designed to teach children between the ages of 5 and 12 the
importance of saving money. We also established a Looney Tunes Bank in the
Aiken Elementary School, which allows children to open savings accounts and
make deposits every Friday at their school.
To provide an even greater level of service for our customers and to increase
the overall efficiency of Bank operations, the Bank installed new banking
software, new computer hardware, a wide area network for our computer system
and a new voice response system.
This year makes Security Federal Bank's 75th Anniversary of Service to our
many loyal customers and to our market area. We would like to extend our most
sincere appreciation to you, our shareholders, for your confidence and support
over the years. To all present and past Associates and Directors of Security
Federal Bank, our most sincere thanks for your dedication, hard work and
commitment over the years.
Sincerely,
/s/T. Clifton Weeks /s/Timothy W. Simmons
T. Clifton Weeks Timothy W. Simmons
Chairman President & CEO
2
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Selected Consolidated Financial and Other Data
At or for the year ended March 31,
--------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance Sheet Data (Dollars in thousands, except per share data)
- ------------------
Total assets $ 201,646 214,816 209,949 199,584 137,976
Cash 7,904 9,824 5,697 8,632 7,434
Investment and
mortgage backed
securities 36,970 41,013 42,527 51,638 22,010
Loans receivable
- net (1) 146,769 152,140 148,977 125,348 106,873
Deposits 168,061 172,375 166,275 173,433 115,461
Advances from
Federal Home
Loan Bank 14,114 22,864 26,033 8,616 6,802
Total shareholders'
equity 16,182 15,434 14,489 13,381 12,919
Income Data
- -----------
Total interest income 15,843 15,822 14,402 10,990 11,133
Total interest expense 7,908 8,622 6,823 5,126 5,372
------ ------ ------ ------ ------
Net interest income 7,935 7,200 7,579 5,864 5,760
Provision for loan
losses 300 230 300 335 463
------ ------ ------ ------ ------
Net interest income
after provision
for loan losses 7,635 6,970 7,279 5,529 5,297
Other income 1,659 1,468 1,312 1,799 1,544
General and
administrative
expense 8,045 6,839 7,089 6,523 4,820
Income taxes 414 539 500 266 865
------ ------ ------ ------ ------
Income before
cumulative effect of
change in accounting
for income taxes 835 1,060 1,002 539 1,156
Cumulative effect of
change in accounting
for income taxes -- -- -- 30 --
------ ------ ------ ------ ------
Net income $ 835 1,060 1,002 569 1,156
====== ====== ====== ====== ======
Per common share data:
Net income per
common share $ 2.01 2.58 2.48 1.44 2.94
====== ====== ====== ====== ======
Cash dividends
declared $ .20 .20 .20 .20 .20
====== ====== ====== ====== ======
Other Data
- ----------
Interest rate spread
information:
Average during
period 3.82% 3.22% 3.80% 3.60% 4.19%
End of period 4.01 3.32 3.55 3.47 3.85
Net interest margin
(net interest income
/average earning
assets) 4.09 3.62 3.95 3.70 4.40
Average interest
-earning assets to
average interest-
bearing liabilities 106.40 106.88 104.24 103.60 105.10
Equity to total assets 8.03 7.21 6.90 6.73 9.35
Non-performing assets
to total assets (2) .70 1.53 1.49 1.62 .95
Return on assets
(ratio of net income
to average total
assets) .40 .50 .48 .33 .82
Return on equity (ratio
of net income to
average equity) 5.28 7.13 7.16 4.22 9.41
Equity to assets ratio
(ratio of average
equity to average
total assets) 7.55 6.95 6.68 7.92 8.74
Dividend payout ratio
on common shares 9.96 7.75 8.06 13.88 6.81
Number of full-service
offices 10 10 9 9 5
(1) Includes loans held for sale.
(2) Non-performing assets consist of non-accrual loans and
repossessed assets.
3
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
General
The following discussion is presented to provide the reader with an
understanding of the financial condition and results of operations of Security
Federal Corporation and its subsidiary. The investment and other activities
of the parent company, Security Federal Corporation (the Company), have had no
significant impact on the results of operations for the periods presented in
the financial statements. The comments presented in the following discussion
of financial results are indicative of the activities mainly of the Bank, a
wholly owned subsidiary of the Company. The Bank changed its name to Security
Federal Bank in April 1996.
The principal business of the Bank is the acceptance of savings deposits from
the general public and the origination of consumer and commercial business
loans and mortgage loans to enable borrowers to purchase or refinance
one-to-four family residential real estate. In addition, the Bank originates
construction loans on single family residences, multi-family dwellings and
projects, commercial real estate, and loans for the acquisition, development
and construction of residential subdivisions and commercial projects.
The Bank's net income is highly dependent on its interest rate spread, which
is the difference between the average yield earned on its loan and investment
portfolio and the average rate paid on its deposits and borrowings. The
spread is impacted by interest rates, deposit flows and loan demands. Levels
of non-interest income and operating expense are also significant factors in
earnings.
4
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Asset and Liability Management
The Bank maintains a program of asset and liability management that seeks to
limit its vulnerability to material and prolonged increases or decreases in
interest rates, or "interest rate risk." The principal determinant of the
exposure of the Bank's earnings to interest rate risk is the timing difference
(gap) between the repricing or maturity of the Bank's interest-earning assets
and the repricing or maturity of its interest-bearing liabilities. If the
maturities of the Bank's assets and liabilities were perfectly matched, and if
the interest rates borne by its assets and liabilities were equally flexible
and moved concurrently (neither of which is the case), the impact on net
interest income of any material and prolonged changes in interest rates would
be minimal.
The Bank's asset and liability policies are directed toward the objectives of
increasing the interest rate sensitivity of the Bank's assets by shortening
their maturities or periods to reprice while reducing the interest rate
sensitivity of the Bank's interest-bearing liabilities by extending their
maturities. The success of management's strategy is evidenced by the
composition of the loan portfolio which includes $88.3 million of adjustable
rate consumer, commercial, and mortgage loans or approximately 58.8% of total
gross loans at March 31, 1997. At March 31, 1997, the negative mismatch of
interest earning assets repricing or maturing within one year with interest
bearing liabilities repricing or maturing within one year was $23.2 million or
11.5% of total assets as compared to $24.2 million or 11.3% at March 31, 1996.
During the past year, the Bank originated approximately $8.0 million in
adjustable rate residential real estate loans which are generally held for
investment and not sold. Also, as part of the Bank's asset liability program,
Security Federal originated a total of $39.1 million in consumer and
commercial loans, which are usually short term in nature. During fiscal 1997,
89.3% of total loan originations were comprised of consumer, commercial, and
adjustable rate mortgage loans compared to 90.0% of total originations in
fiscal 1996. The Bank's portfolio of consumer and commercial loans was $92.9
million at March 31, 1997, an increase of $9.4 million from March 31, 1996,
and an increase of $19.1 million from March 31, 1995. Consumer and commercial
loans combined have increased from 48.0% of total loans at March 31, 1995 and
54.0% at March 31, 1996 to 61.9% at March 31, 1997.
Due to a decrease in real estate activity and refinancings in fiscal 1997,
1996, and 1995 the Bank originated only $5.6 million, $5.3 million, and $4.7
million in fixed rate residential loans in fiscal 1997, 1996, 1995
respectively, compared to $50.0 million in fiscal 1994. Thus, the bank only
sold $5.8 million in fiscal 1997, $5.5 million in fiscal 1996, and $3.1
million in fiscal 1995 to secondary market agencies, compared to $47.7 million
in fiscal year 1994. Other fixed rate residential loans passed directly on to
other investors, other than Freddie Mac or Fannie Mae, totaled $6.4 million in
fiscal 1997, $6.9 million in fiscal 1996, and $8.4 million in fiscal 1995. At
March 31, 1997, fixed rate residential loans, some of which are short term
construction loans, amounted to $14.8 million or 9.9% of the total loan
portfolio, compared to $11.8 million or 7.6% at the end of the previous year.
5
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Certificates of deposit in excess of $100,000 (jumbo certificates) are
normally considered to be highly interest rate sensitive. Many financial
institutions have used jumbo certificates to manage interest rate sensitivity
and liquidity. The Bank has not relied on jumbo certificates for liquidity or
asset liability management. As of March 31, 1997, the Bank had $15.7 million
outstanding in jumbo certificates as compared to $9.8 million at March 31,
1996.
The following table sets forth the maturity schedule of certificates of
deposit with balances of $100,000 or greater at March 31, 1997.
(In Thousands)
--------------
Within 3 months $2,840
After 3, within 6 months 5,091
After 6, within 12 months 5,430
After 12 months 2,376
-----------
$ 15,737
===========
A negative gap position is expected to have an adverse effect on net interest
income during periods of rising interest rates. A negative one-year gap
position occurs when the dollar amount of rate sensitive liabilities maturing
or repricing within one year exceeds the dollar amount of rate-sensitive
assets maturing or repricing during that same time period. As a result,
during periods of rising interest rates, the interest paid on interest bearing
liabilities will increase faster than interest received from earning assets,
thus, reducing net interest income. In periods of falling interest rates, the
reverse is true, resulting in an expected increase in net interest income.
The table at the top of page seven sets forth the Bank's interest bearing
liabilities and interest-earning assets repricing or maturing within one year.
The table on page eight presents all the Bank's interest bearing liabilities
and interest earning assets into repricing or maturity time periods. Both
tables present adjustable rate loans in the periods they are scheduled to
reprice, not mature. They also assume investments reprice at the earlier of
maturity, the likely call date, if any, based on current interest rates, or
the next scheduled interest rate change, if any. NOW accounts, money market
accounts, and regular savings accounts are assumed to reprice in the less than
three-month category.
6
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
At March 31,
-------------------------
1997 1996
---- ----
(Dollars in Thousands)
Loans (1) $ 111,882 109,503
Mortgage-backed securities 173 119
Investments:
Held-to-maturity 4,998 3,006
Available-for-sale 14,846 23,538
Other interest-earning assets 2,713 2,858
-------- -------
Total interest rate sensitive
assets repricing within one year 134,612 139,024
-------- -------
Deposits 145,867 145,805
FHLB advances and other borrowed
money 11,952 17,389
Total interest rate sensitive -------- -------
liabilities repricing within
one year 157,819 163,194
-------- -------
Gap $ (23,207) (24,170)
======== =======
Interest rate sensitive
assets/interest rate sensitive
liabilities 85.30% 85.19%
Gap as a percent of total assets (11.5)% (11.3)%
(1) Loans are net of undisbursed funds and loans in process.
7
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
<TABLE>
The following table sets forth the interest sensitivity of the Bank's assets and liabilities at March 31,
1997, on the basis of the factors and assumptions set forth in the table on the top of page 7.
Remaining Time Before Asset/Liability Matures or Can be Repriced
---------------------------------------------------------------------------------
More More More Than More More Than
Than Three Than One Three Than Five Ten Years More
Three Months Year Thru Years Years Thru Than
Months or Thru One Three Thru Five Thru Ten Twenty Twenty
Less Year Years Years Years Years Years Total
---- ---- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Interest
Earnings
Assets
- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (1) $ 43,711 68,171 20,790 6,983 3,863 4,416 906 148,840
Mortgage-backed
securities
held-to-maturity,
at cost 41 132 638 414 695 2,044 813 4,777
Investment
securities (2):
Held-to-maturity,
at cost 2,498 2,500 2,980 -- -- -- -- 7,978
Available-
for-sale,
at fair value 2,003 12,843 7,895 1,475 -- -- -- 24,216
Interest bearing
deposits
with banks 2,713 -- -- -- -- -- -- 2,713
FHLB stock,
at cost -- -- 786 -- -- -- -- 786
-------- ------- ------ ------- ------- ------- ------ -------
Total financial
assets $ 50,966 83,646 33,089 8,872 4,558 6,460 1,719 189,310
======== ======= ======= ======= ====== ======= ====== ========
Interest
Bearing
Liabilities
Deposits:
Certificates
of deposits 31,397 52,602 13,545 1,823 -- -- -- 99,367
NOW 36,776 -- -- -- -- -- -- 36,776
Money market
deposit
accounts 11,641 -- -- -- -- -- -- 11,641
Passbook
accounts 13,451 -- -- -- -- -- -- 13,451
Borrowings 8,500 3,452 694 1,384 288 -- -- 14,318
-------- ------- ------- ------- ------- ------- ------ -------
Total interest
bearing
liabilities $101,765 56,054 14,239 3,207 288 -- -- 175,553
======== ======= ======== ======= ======= ======= ====== ========
Current
period gap $(50,799) 27,592 18,850 5,665 4,270 6,460 1,719 13,757
Cumulative gap (50,799) (23,207) (4,357) 1,310 5,580 12,040 13,757 13,757
Cumulative
gap as a
percent of
total assets (25.2)% (11.5)% (2.2)% .6% 2.8% 6.0% 6.8% 6.8%
</TABLE>
(1) Loans are net of undisbursed funds and loans in process.
(2) Callable securities are shown at their likely call dates based on
management's estimates at March 31, 1997.
8
PAGE
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
In evaluating the Bank's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing tables must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates. Additionally, the interest rates
of certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates. Loan repayment rates and withdrawals of deposits
likely will differ substantially from the assumed rates previously set forth
in the event of significant changes in interest rates due to the option of
borrowers to prepay their loans and the ability of depositors to withdraw
funds prior to maturity. Further, certain assets such as adjustable rate
mortgages, have features which restrict changes in interest rates on a
short-term basis as well as over the life of the asset.
Financial Condition
Total assets at March 31, 1997 were $201.6 million, a $13.2 million decrease
from March 31, 1996. This decrease was primarily a result of a decrease in
net loans receivable and a decrease in investments, mortgage-backed securities
and cash and cash equivalents.
Total net loans receivable were $146.8 million at March 31, 1997, a decrease
of $5.4 million or 3.5% from the prior year. Residential real estate loans
decreased $9.4 million or 15.7% to $50.5 million at March 31, 1997. Commercial
real estate loan balances decreased to $6.5 million at fiscal year end from
$10.6 million at March 31, 1996, a decrease of $4.1 million or 38.6%.
Consumer loans increased to $46.9 million at March 31, 1997 from $44.8 million
at the commencement of the year, an increase of $2.1 million or 4.7%.
Commercial loans increased $7.3 million or 18.8%, to $46.0 million at
year-end. Management continues to emphasize origination of consumer and
commercial loans to increase yields and improve interest rate risk. Consumer
and commercial loans are generally considered to involve greater degrees of
collateral and credit risks than residential mortgage loans.
Real estate acquired in settlement of loans (REO) decreased to $52,000 at
March 31, 1997 from $719,000 at fiscal year end 1996. Real estate acquired
for development decreased by $549,000 due primarily to the sale of the
remaining lots in Currytowne, one of the Company's real estate partnerships.
Non-accrual loans totaled $1.4 million at March 31, 1997 compared to $2.6
million a year earlier. The Bank classifies all loans as non-accrual when
they become 60 or more days delinquent. The Bank had three loans totaling
$829,000 at fiscal year end which were troubled debt restructurings compared
to $780,000 at March 31, 1996, which were also on non-accrual status. Of the
three troubled debt restructurings at March 31, 1997, only one loan of $89,000
was on non-accrual status. This loan is secured by a principal residence.
The other two loans consisted of a $140,000 loan secured by a principal
residence and a $600,000 commercial business loan secured by commercial real
estate. All three loans are considered well secured and no loss is
anticipated at this time. All troubled debt restructurings are also
considered impaired. At March 31, 1997, the Bank held $1,241,000 in impaired
loans compared to $1,786,000 at March 31, 1996.
The Bank reviews its loan portfolio and loan loss allowance on a monthly
basis. Future additions to the Bank's allowance for loan losses are dependent
on, among other things, the performance of the Bank's loan portfolio, the
economy, changes in real estate values, and interest rates. There can be no
assurance that additions to the allowance will not be required in future
periods. Management continues to monitor its loan portfolio for the impact of
local economic changes.
A major employer in the Aiken area which has a significant impact on the local
economy, the Savannah River Site, has experienced several major downsizings of
personnel in the past few years. More layoffs at the site are expected in the
coming year, which will have some impact on the local economy. For further
information, see Note 4 in the Notes to Consolidated Financial Statements.
9
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Deposits at the Bank decreased $4.3 million or 2.5% to $168.1 million at March
31, 1997 from $172.4 million at March 31, 1996. Advances from the Federal
Home Loan Bank (FHLB), decreased to $14.1 million at March 31, 1997, down from
$22.9 million a year earlier, a decrease of $8.8 million. The decrease in
deposits and advances occurred due to the Bank's shrinkage in its loan and
investment portfolios.
Total shareholders' equity totaled $16.2 million at March 31, 1997, an
increase of $748,000 or 4.9%, compared to $15.4 million a year earlier. The
increase was attributable to net income of $835,000 and an increase in paid in
capital of $39,000 due to the exercise of stock options, partially offset by
$83,000 in dividends paid and a $44,000 increase in unrealized net loss on
securities available for sale.
10
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Results of Operations
The following table presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
higher or lower outstanding balances and the changes due to the volatility of
interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in rate (i.e., changes in rate multiplied by old volume) and
(ii) changes in volume (i.e., changes in volume multiplied by old rate.) For
purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately to the change due to
volume and the change due to rate.
1997 Compared to 1996 1996 Compared to 1995
----------------------- -----------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(Dollars in Thousands)
Interest-earning
assets:
Loans (1):
Real estate loans $ (992) 358 (634) 156 (232) (76)
Other loans 982 (366) 616 1,002 665 1,667
------- --- --- --- ----- -----
Total loans (10) (8) (18) 1,158 433 1,591
Mortgage-backed
securities 226 5 231 (25) -- (25)
Investments (2) (271) 99 (172) (261) 108 (153)
Other interest-
earning assets (22) 2 (20) (2) 9 7
------- --- --- --- ----- -----
Total interest-
earning assets $ (77) 98 21 870 550 1,420
======= === === === ==== ====
Interest-bearing
liabilities:
Deposits:
Certificate
accounts 171 (246) (75) 252 1,320 1,572
NOW accounts 40 (37) 3 (33) (2) (35)
Money Market
accounts (44) (6) (50) (128) (2) (130)
Passbook accounts (13) -- (13) (53) 2 (51)
------- --- --- --- ----- -----
Total deposits 154 (289) (135) 38 1,318 1,356
Borrowings (426) (153) (579) 313 130 443
------- --- --- --- ----- -----
Total interest
-bearing
liabilities (272) (442) (714) 351 1,448 1,799
------- --- --- --- ----- -----
Effect on net
income $ 195 540 735 519 (898) (379)
======= === === === ==== ====
(1) Interest on non-accrual loans are not included in income,
although their loan balances are included in average loans
outstanding.
(2) Securities available for sale are computed using their
historical cost.
11
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
<TABLE>
The following table presents, for the periods indicated, the total dollar amount of interest income from
average interest-earning assets and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances which are representative of daily average balances.
At
March 31, Years Ended March 31,
1997 1997 1996 1995
---- -----------------------------------------------------------------------------
Yield/ Average Yield/ Average Yield/ Average Yield/
Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
---- ------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-
earning
assets:
Mortgage
loans 7.80% $ 62,477 $ 5,018 8.03% $ 75,083 $ 5,652 7.53% $ 73,037 $ 5,728 7.84%
Other loans 9.70 88,822 8,459 9.52 78,641 7,843 9.97 68,148 6,176 9.06
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total
loans(1) 9.01 151,299 13,477 8.91 153,724 13,495 8.78 141,185 11,904 8.43
Mortgage-
backed
securities 7.13 4,630 341 7.33 1,549 110 7.10 1,908 135 7.08
Invest-
ments(2) 5.79 36,797 1,951 5.30 41,999 2,123 5.06 47,197 2,276 4.82
Other
interest-
earning
assets 5.40 1,350 74 5.48 1,764 94 5.33 1,809 87 4.81
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total
interest-
earning
assets 8.29% $194,076 $15,843 8.16% $199,036 $15,822 7.95% $192,099 $14,402 7.50%
==== ======== ======= ==== ======== ======= ==== ======== ======= ====
Interest
-bearing
liabilities:
Certificate
accounts 5.40% $100,225 $ 5,454 5.44% $ 97,173 $ 5,529 5.69% $ 91,716 $ 3,957 4.31%
NOW accounts 1.61 35,167 563 1.60 32,729 560 1.71 34,659 595 1.72
Money Market
accounts 2.80 13,094 366 2.80 14,655 416 2.84 19,171 546 2.85
Passbook
accounts 2.49 13,483 335 2.49 14,003 348 2.49 16,120 399 2.48
---- -------- ------- ---- -------- ------- ---- -------- ------- -----
Total
interest-
bearing
deposits 4.11 161,969 6,718 4.15 158,560 6,853 4.32 161,666 5,497 3.40
Other
Borrowings 5.90 281 23 8.19 87 7 8.00 -- -- --
FHLB advances 6.30 20,157 1,167 5.79 27,569 1,762 6.39 22,621 1,326 5.86
---- -------- ------- ---- -------- ------- ---- -------- ------- -----
Total
interest-
bearing
liabilities 4.28% $182,407 $ 7,908 4.34% $186,216 $ 8,622 4.73% $184,287 $ 6,823 3.70%
==== ======== ======= ==== ======== ======= ==== ======== ======= ====
Effect on net
interest
income $ 7,935 7,200 $ 7,579
======= ===== =======
Interest rate
spread 4.01% 3.82% 3.22% 3.80%
==== ==== ==== ====
Net yield
on earning
assets 4.09% 3.62% 3.95%
==== ==== ====
(1) Interest on non-accrual loans are not included in income, although their loan
balances are included in average loans outstanding.
(2) Securities available for sale are computed using their historical cost.
</TABLE>
12
PAGE
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Comparison of the Years Ended March 31, 1997 and 1996
General
The Company earned net income of $835,000 for the year ended March 31, 1997, a
$225,000 decrease over net income of $1,060,000 for fiscal 1996. The reason
for the decrease is a one-time assessment to all savings institutions by the
Federal Deposit Insurance Corporation (FDIC) to recapitalize the Savings
Associations Insurance Fund (SAIF) in September 1996. The assessment, which
will significantly reduce future deposit insurance premiums, lowered after-tax
net income by $437,000 for fiscal 1997. Without the one-time charge, net
income would have been $1,272,000 which is record operating earnings for the
Company. The reason for the increase in operating earnings was due primarily
to an increase in net interest income offset partially by an increase in
general and administrative expenses.
Net interest income
Net interest income was $7.9 million for fiscal 1997 compared to $7.2 million
fiscal 1996, an increase of $735,000. The primary reason for the increase was
the Bank's strategy of increasing its holdings of consumer and commercial
loans relative to single family residential loans and using maturing, lower
yielding investments to pay off Federal Home Loan Bank (FHLB) advances. The
Bank also reinvested some maturing securities at higher yields.
Interest income on loans decreased slightly by $18,000 in fiscal 1997 due to
lower average balances in residential and commercial real estate loans despite
a 13 basis point increase in the overall loan portfolio yield. Interest
income on investment, mortgage-backed, and overnight securities increased by
$38,000 due to a 39 basis point increase in yield in fiscal 1997 compared to
fiscal 1996, even though average balances in those investments decreased by
$2.4 million.
Interest expense on deposits decreased to $6.7 million, a $135,000 reduction
from fiscal 1996. The decrease in deposit interest expense is due to a lower
average rate on the certificate of deposit accounts and an increase in the
Bank's demand account deposits, which pay a lower interest rate than other
types of deposit accounts. Interest on borrowings decreased $580,000 to $1.2
million because of both lower average outstanding debt and a lower cost of
borrowing during the year ended March 31, 1997 compared to the year ended
March 31, 1996.
Provision for Loan Losses
The provision for loan losses during fiscal 1997 was $300,000 compared to
$230,000 for 1996. The increase is due to the higher percentage of consumer
and commercial loans in the Bank's portfolio, which are generally considered
higher risk than residential mortgage loans. Net charge-offs were $291,000 in
fiscal 1997 compared to $426,000 in fiscal 1996. The ratio of the allowance
for loan losses to total loans at March 31, 1997 was 1.19% compared to 1.14% a
year earlier. Based on its monthly reviews of the loan portfolio, management
believes the allowance for loan losses is adequate based on its estimate of
losses inherent in the loan portfolio, although there can be no guarantee as
to these estimates. In addition, bank regulatory agencies, as part of their
examination process, may require additions to the allowance for loan losses
based on their judgements and estimates.
Other Income
Other income increased $191,000 or 13.0% in fiscal 1997 compared to fiscal
1996. The Bank had no gains or losses on sales of investment securities in
both fiscal 1997 and 1996. Gain on sale of loans increased $74,000 while
loan servicing fees increased $21,000. Service fees on deposit accounts
increased $302,000 due to an increase in the number of personal and commercial
checking accounts during the year ended March 31, 1997 compared to the prior
year.
The Company is a partner in two real estate joint ventures, Willow Woods
Associates, located near Aiken and Currytowne Associates located in Edgefield
County, South Carolina. Lot sales have been slower than expected, due to the
sluggish real estate economy. During the quarter ended March 31, 1997,
Currytowne Associates sold its remaining lots leaving as its only investment a
$60,000 secured note due within one year. During fiscal 1997, due to the
efforts to liquidate lots, income from real estate operations decreased
$117,000.
13
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Other miscellaneous income, which consists of net gain on real estate acquired
in settlement of loans (REO), insurance commissions, and miscellaneous fees,
decreased by $89,000 to $323,000 in the year ended March 31, 1997 compared to
the same period in 1996, due to a reversal of a $100,000 allowance for losses
on REO which occurred during the year ended March 31, 1996.
General and Administrative Expenses
General and administrative expenses increased by $1.2 million during fiscal
1997 due mainly to the $705,000 one-time assessment by the Federal Deposit
Insurance Corporation to recapitalize the Savings Associations Insurance Fund.
This one-time charge will significantly reduce future deposit insurance
premiums. Without the one-time FDIC assessment, general and administrative
expenses would have increased $500,000 or 7.3%. Salaries and employee
benefits expense increased 4.5% due to normal annual increases and extra labor
costs during a computer software and hardware conversion, which occurred in
January 1997. Occupancy expense increased $34,000 in fiscal 1997, due to a
full year of rent expense at the Aiken Wal*Mart branch which opened in
February 1996, and the addition of a drive-through at the Bank's Wagener
Banking Center. Advertising expense and also amortization of intangibles
remained virtually the same compared to fiscal 1996, while deprecation and
maintenance of equipment increased only $10,000 in fiscal 1997. Other
expenses consisting of legal, real estate owned expense, data processing, and
other miscellaneous expenses increased by $468,000 in fiscal 1997, due mainly
to increases in outsourcing data processing during the year and the costs of
the previously mentioned computer conversion. The Bank decided to bring data
processing back in-house due to the costs per account and inflationary
increases built into outsourcing contracts. The Bank also installed a wide
area personal computer network in fiscal 1997.
Income Taxes
Income taxes 125,000 to $414,000 in the year ended March 31, 1997 compared to
$539,000 expensed in fiscal 1996 as a result of a decrease in taxable income.
The effective tax rate was 33% and 34%, respectively.
14
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Comparison of the Years Ended March 31, 1996 and 1995
General
The Company earned net income of $1,060,000 for the year ended March 31, 1996,
a $58,000 increase over net income of $1,002,000 for fiscal 1995. This
increase was due primarily to an increase in other income and a decrease in
general and administrative expenses, offset partially by a decrease in net
interest income.
Net interest income
Net interest income was $7.2 million for fiscal 1996 compared to $7.6 million
in 1995, a decrease of $379,000. The primary reason for the decrease was that
a higher percentage of interest bearing liabilities repriced compared to
interest earning assets. Total interest bearing assets increased in yield by
an average of 45 basis points while interest bearing liabilities increased by
an average cost of 103 basis points during fiscal 1996.
Interest on loans increased by $1.6 million to $13.5 million from $11.9
million in 1995 primarily due to average loans increasing by $12.5 million in
1996. Interest on mortgage-backed securities dropped to $110,000 from
$135,000 due to a lower average balance outstanding in 1996. Investment
interest decreased to $2.1 million from $2.3 million in fiscal 1996 compared
to 1995 because of a decrease in average outstanding investments. Other
interest income increased $6,500 in 1996 due to slightly higher yields on
overnight investments. Total interest income increased by $1.4 million in
1996 up to $15.8 million from $14.4 million in 1995.
Interest on deposits increased to $6.8 million in 1996 compared to $5.5
million in 1995, due to the cost of interest bearing deposits rising in 1996.
Interest on borrowings increased to $1.8 million in fiscal 1996 from $1.3
million in fiscal 1995 due to an increase in average borrowings and an
increase in the average rate on borrowings. Total interest expense increased
to $8.6 million in 1996 compared to $6.8 million in 1995, an increase of $1.8
million.
Provision for Loan Losses
The provision for loan losses during fiscal 1996 was $230,000 as compared to
$300,000 for 1995. Net charge-offs increased by $346,000 in fiscal 1996 of
which 81.0% of this total consisted of one commercial loan. The ratio of the
allowance for loan losses to total loans at March 31, 1996 was 1.14% as
compared to 1.30% a year earlier. Based on its monthly reviews of the loan
portfolio, management believes the allowance for loan losses is adequate based
on its estimate of losses inherent in the loan portfolio, although there can
be no guarantee as to these estimates.
Other Income
Other income increased $156,000 in fiscal 1996 compared to 1995. The Bank had
no gains on sale of investments in fiscal 1996 compared to a $2,500 loss in
fiscal 1995. Gain on sale of loans which is a volatile source of income
decreased by $37,000 in 1996. Loan servicing fees decreased by $6,000 while
service fees on deposit accounts increased by $75,000. The increase in
deposit account fees was attributable to an increase in demand accounts
through efforts to attract commercial deposits and a special consumer checking
account package which commenced in August 1995.
Due to the sluggish real estate market, lot sales in the Company's two real
estate joint ventures, Willow Wood Associates located near Aiken, and
Currytowne Associates located in Edgefield County, South Carolina, have been
slower than anticipated. Income from real estate operations decreased by
$135,000 in fiscal 1996 compared to fiscal 1995. A provision for real estate
losses of $45,000 was charged to real estate operations for fiscal 1996 while
no provision for real estate operations was expensed in fiscal 1995.
15
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Other income, which consists of net gain on real estate acquired in settlement
of loans (REO), insurance commissions, and miscellaneous fees, increased by
$256,000 in fiscal 1996 mainly due to an increase in net gain on sale of REO
of $113,000 and a reversal of a $100,000 allowance for losses on REO in fiscal
1996 that was no longer necessary.
General and Administrative Expenses
General and administrative expenses decreased by $250,000 in fiscal 1996 due
mainly to a $264,000 decrease in salaries and employee benefits, as a result
of employee attrition and a restructuring in officer positions. Occupancy
expense remained almost constant with a slight $4,800 decrease. Advertising
expense increased by $67,000 in fiscal 1996 in order to promote new checking
account products, certificates of deposit and the new Wal*Mart branch that
opened in February 1996. Depreciation and maintenance of equipment expense
decreased by $54,000. Amortization of intangibles remained the same in fiscal
1996 and 1995 at $465,000. Federal insurance premiums expense decreased by
$31,000 in fiscal 1996. Other expenses consisting of legal, real estate owned
expense, data processing and miscellaneous expenses rose by $38,000 in fiscal
1996.
Income Taxes
Income taxes increased by $39,000 to $539,000 in fiscal 1996 compared to
$500,000 expensed in 1995 as a result of an increase in taxable income. The
effective tax rate was approximately 34% and 33%, respectively.
16
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Regulatory Capital
The following table reconciles the Bank's stockholders' equity to its various
regulatory capital positions:
March 31
--------------------
1997 1996
---- ----
(in thousands)
Stockholders' equity (1) (2) $ 15,529 15,131
Reduction for nonqualifying assets -- --
Reduction for goodwill and other
intangibles 2,511 2,916
--------- -------
Tangible capital 13,018 12,215
--------- -------
Qualifying core deposit intangible 938 1,120
Core capital 13,956 13,335
--------- -------
Supplemental capital 1,627 1,757
--------- -------
Risk-based capital $ 15,583 15,092
========= =======
(1) For 1997 and 1996, includes unrealized losses of $167,000
and $123,000 respectively on certain available for sale
securities.
(2) For 1997 and 1996, excludes equity of Security Federal
Corporation, the Parent.
The following table compares the Bank's capital levels relative to regulatory
requirements at March 31, 1997.
Amount Percent Actual Actual Excess Excess
Required Required Amount Percent Amount Percent
-------- -------- ------ ------- ------ -------
(dollars in thousands)
Tangible
capital $ 2,987 1.50% $13,018 6.54% $10,031 5.04%
Core capital 6,003 3.00 13,956 6.98 7,953 3.98
Risk-based
capital 10,414 8.00 15,583 11.97 5,169 3.97
Liquidity and Capital Resources
Liquidity refers to the ability of the Bank to generate sufficient cash flows
to fund current loan demand, to repay maturing borrowings, to fund maturing
deposit withdrawals and to meet operating expenses. The Bank's primary
sources of funds include loan repayments, loan sales, increased deposits,
advances from the FHLB, the use of securities sold under agreements to
repurchase and cash flow generated from operations. The need for funds varies
among periods depending on funding needs as well as the rate of amortization
and prepayment on loans. The use of FHLB advances and securities sold under
agreements to repurchase vary depending on their relative costs. Advances
from the FHLB decreased $8.8 million in fiscal 1997 and $3.2 million in fiscal
1996. Deposits decreased $4.3 million in fiscal 1997. The decrease in
advances in deposits occurred due to the Bank's shrinkage of both its loan and
investment portfolios in fiscal 1997.
The principal use of the Bank's funds is the origination of mortgages and
other loans. Total demand in the Bank's primary market areas decreased
slightly during fiscal 1997 compared to fiscal 1996 and fiscal 1995
respectively, due to an increase in interest rates, the slow real estate
market, and higher refinancing volume in fiscal 1995. This resulted in loan
originations of $52.8 million in fiscal 1997 as compared to $53.5 million in
fiscal 1996 and $77.4 million in fiscal 1995.
17
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Outstanding loan commitments for which the Bank has not obtained prior
commitments to purchase from other institutional investors amounted to
$262,000 at March 31, 1997 compared to $604,000 at March 31, 1996. In
addition, unused lines of credit on home equity loans, credit cards and other
loans amounted to $20.7 million at March 31, 1997. Management does not
anticipate that the percentage of funds drawn on unused lines of credit will
increase substantially over amounts currently utilized. Funding of
undisbursed loans in process of $1,375,000 at March 31, 1997, and commitments
to originate loans and future advances on lines of credit are expected to be
provided from loan amortizations and prepayments, deposit inflows and
short-term borrowing capacity.
The Bank is required under applicable federal regulations to maintain a
liquidity ratio at specified levels which are subject to change. Currently, a
minimum of 5.0% of the combined total of deposits and certain borrowings must
be maintained in the form of cash or eligible investments. At March 31, 1997,
the Bank's liquidity ratio was approximately 16%. Management believes that
liquidity during fiscal 1998 can be met through the Bank's deposit base and
borrowing ability, and from maturing investments. See "Consolidated
Statements of Cash Flows" in the consolidated financial statements.
Accounting and Reporting Changes
In May, 1995, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 122, "Accounting for Mortgage Servicing Rights, an amendment of
FASB Statement No. 65." The Statement requires that rights to service
mortgage loans for others be recognized as a separate asset, however those
rights are acquired. The Statement also requires that an entity assess its
capitalized mortgage servicing rights for impairment based on the fair value
of those rights. The Statement applies prospectively in the Bank's fiscal
year ended March 31, 1997 to transactions in which an enterprise sells or
securitizes mortgage loans with servicing rights retained and to impairment
evaluations of all amounts capitalized as mortgage servicing rights, including
those purchased prior to adoption of the Statement. Based on the Bank's
current mortgage banking activities, this Statement did not have a material
impact on the Bank.
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. The statement became effective for
transactions occurring after December 31, 1996. 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. This statement contains special provisions that deal with
servicing assets and liabilities, which supersede SFAS No. 122, but this
statement retains the impairment and amortization approaches contained in SFAS
No. 122. The adoption of the standard did not have a material effect on the
Company.
In December 1996, the FASB issued SFAS No. 127, Deferral of the Effective Date
of Certain Provisions of SFAS No. 125, and amendment of SFAS No. 125, which
was effective December 31, 1996. This statement delays the effective date of
certain provisions of SFAS No. 125 until after 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 adoption of
this statement is not expected to have a material effect of the Company.
In February 1997, the FASB issued 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.
18
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
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.
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.
19
<PAGE>
<PAGE>
Independent Auditors' Report
The Board of Directors
Security Federal Corporation:
We have audited the consolidated balance sheets of Security Federal
Corporation and Subsidiary (the "Company") as of March 31, 1997 and 1996 and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended March 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company at March 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the years in the three-year period ended March 31, 1997
in conformity with generally accepted accounting principles.
/s/KPMG PEAT MARWICK LLP
- ------------------------
KPMG PEAT MARWICK LLP
Greenville, South Carolina
May 9, 1997
20
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
March 31, 1997 and 1996
Assets 1997 1996
------ ---- ----
Cash and cash equivalents $ 7,903,637 9,823,664
Investment and mortgage-backed
securities:
Available for sale
(amortized cost of
$24,484,644 and
$31,170,866 in 1997
and 1996, respectively) 24,215,667 30,972,406
Held to maturity (market
value of $12,598,186,
and $9,913,951 in 1997
and 1996, respectively) 12,754,769 10,040,724
------------ -----------
36,970,436 41,013,130
------------ -----------
Loans receivable, net:
Held for sale 211,212 612,919
Held for investment (net
of allowance of $1,767,483
and $1,758,688 in 1997
and 1996, respectively) 146,558,261 151,526,807
------------ -----------
146,769,473 152,139,726
------------ -----------
Accrued interest receivable:
Loans 820,730 882,274
Mortgage-backed securities 38,909 23,799
Investments 363,109 450,952
------------ -----------
1,222,748 1,357,025
------------ -----------
Premises and equipment, net 3,952,149 3,187,185
Federal Home Loan Bank stock,
at cost 785,700 1,233,200
Real estate acquired in
settlement of loans 52,009 718,763
Real estate held for development
and sale 840,813 1,389,579
Other assets 3,148,980 3,953,859
------------ -----------
Total assets $201,645,945 214,816,131
============ ===========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Deposits 168,060,858 172,374,727
Advances from Federal
Home Loan Bank 14,114,000 22,864,000
Other borrowings 204,397 350,000
Advance payments by
borrowers for taxes
and insurance 244,449 385,708
Other liabilities 2,840,212 3,407,478
------------ -----------
Total liabilities 185,463,916 199,381,913
------------ -----------
Commitments and contingencies
Shareholders' equity:
Serial preferred stock,
$.01 par value; authorized
200,000 shares; issued
and outstanding shares,
none -- --
Common stock, $.01 par value;
authorized 1,000,000 shares;
issued and outstanding shares,
417,122 in 1997 and 413,184
in 1996 4,171 4,132
Additional paid-in capital 3,958,603 3,919,262
Unrealized net loss on
securities available for
sale, net of income taxes (166,872) (123,125)
Retained earnings,
substantially restricted 12,386,127 11,633,949
------------ -----------
Total shareholders'
equity 16,182,029 15,434,218
------------ -----------
Total liabilities and
shareholders'
equity $201,645,945 214,816,131
============ ===========
See accompanying notes to consolidated financial statements.
21
PAGE
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
For the years ended March 31, 1997, 1996 and 1995
1997 1996 1995
Interest income: ---- ---- ----
Loans $13,476,697 13,494,840 11,903,824
Mortgage-backed
securities 340,845 109,998 134,901
Investment securities 1,950,450 2,123,667 2,276,122
Other 74,421 93,789 87,295
----------- ---------- ----------
Total interest
income 15,842,413 15,822,294 14,402,142
----------- ---------- ----------
Interest expense:
NOW and money market 928,628 976,423 1,141,084
Passbook 335,023 347,937 398,600
Certificates of deposit 5,454,427 5,529,003 3,957,123
Advances and other
borrowed money 1,189,541 1,769,178 1,326,248
----------- ---------- ----------
Total interest
expense 7,907,619 8,622,541 6,823,055
----------- ---------- ----------
Net interest income 7,934,794 7,199,753 7,579,087
Provision for loan losses 300,000 230,000 300,000
----------- ---------- ----------
Net interest income
after provision
for loan losses 7,634,794 6,969,753 7,279,087
----------- ---------- ----------
Other income:
Gain (loss) on sales of
investment securities -- -- (2,504)
Gain on sales of loans 199,062 124,677 161,922
Loan servicing fees 334,006 312,653 318,695
Service fees on deposits 886,272 584,420 509,181
Income (loss) from real
estate operations (83,418) 34,068 168,795
Other 323,129 412,244 156,254
----------- ---------- ----------
Total other income 1,659,051 1,468,062 1,312,343
----------- ---------- ----------
General and administrative
expenses:
Compensation and
employee benefits 3,326,083 3,181,844 3,446,231
Occupancy 403,225 368,731 373,519
Advertising 198,469 197,575 130,748
Depreciation and
maintenance of
equipment 661,896 651,676 705,787
Amortization of
intangibles 465,240 465,240 465,240
Federal insurance
premiums 229,689 387,722 419,040
FDIC SAIF assessment 705,489 -- --
Other 2,054,602 1,586,756 1,548,982
----------- ---------- ----------
Total general and
administrative
expenses 8,044,693 6,839,544 7,089,547
----------- ---------- ----------
Income before income taxes 1,249,152 1,598,271 1,501,883
Income taxes 413,945 538,697 499,729
----------- ---------- ----------
Net income $ 835,207 1,059,574 1,002,154
=========== ========== ==========
Net income per common
share $ 2.01 2.58 2.48
=========== ========== ==========
Cash dividends per common
share $ .20 .20 .20
=========== ========== ==========
Weighted average shares
outstanding 414,835 410,937 404,750
=========== ========== ==========
See accompanying notes to consolidated financial statements.
22
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
For the years ended March 31, 1997, 1996 and 1995
Unrealized
Net Loss
Additional on Securities
Common Paid-in Available for Retained
Stock Capital Sale Earnings Total
----- ------- ---- -------- -----
Balance at
March 31, 1994 $ 3,938 3,685,436 (44,116) 9,735,337 13,380,595
Exercise of
stock options 154 194,486 -- -- 194,640
Net income 1,002,154 1,002,154
Cash dividends -- -- -- (80,880) (80,880)
Increase in
unrealized
net loss
on securities
available for
sale, net of tax -- -- (7,039) -- (7,039)
------- --------- ------- ----------- ----------
Balance at
March 31, 1995 4,092 3,879,922 (51,155) 10,656,611 14,489,470
Exercise of
stock options 40 39,340 -- -- 39,380
Net income -- -- -- 1,059,574 1,059,574
Cash dividends -- -- -- (82,236) (82,236)
Increase in
unrealized
net loss on
securities
available
for sale,
net of tax -- -- (71,970) -- (71,970)
------- --------- ------- ----------- ----------
Balance at
March 31, 1996 4,132 3,919,262 (123,125) 11,633,949 15,434,218
======= ========= ======= =========== ==========
Exercise of
stock options 39 39,341 -- -- 39,380
Net income -- -- -- 835,207 835,207
Cash dividends -- -- -- (83,029) (83,029)
Increase in
unrealized net
loss on
securities
available
for sale,
net of tax -- -- (43,747) -- (43,747)
------- --------- ------- ----------- ----------
Balance at
March 31,
1997 $ 4,171 3,958,603 (166,872) 12,386,127 16,182,029
======= ========= ======= =========== ==========
See accompanying notes to consolidated financial statements.
23
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended March 31, 1997, 1996 and 1995
1997 1996 1995
Cash flows from operating ---- ---- ----
activities:
Net income $ 835,207 1,059,574 1,002,154
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation 608,022 596,677 588,825
Amortization of purchase
accounting adjustments 465,240 465,240 465,240
Discount accretion and
premium amortization 151,334 210,445 230,459
Provisions for losses on
loans and real estate 154,773 175,000 300,000
Gain on sale of loans (199,062) (124,677) (161,922)
(Gain) loss on sale of
investments -- -- 2,504
(Gain) loss on sale
of real estate 294,147 (180,030) (155,342)
FHLB stock dividends -- -- --
Amortization of
deferred fees on loans (112,015) (115,867) (110,274)
Loss on disposition
of premises and
equipment 29,637 -- 5,455
Proceeds from sale of
loans held for sale 12,621,196 12,527,406 16,219,422
Origination of loans
for sale (12,020,427) (12,239,017) (12,979,526)
(Increase) decrease in
accrued interest
receivable:
Loans 61,544 (127,009) 459,596
Mortgage-backed
securities (15,110) (1,471) (3,453)
Investments 87,843 13,277 70,180
Increase (decrease)
in advance payments
by borrowers (141,259) (56,748) 87,610
Other, net (258,528) (419,255) (962,180)
--------- --------- ---------
Net cash provided
by operating
activities 2,562,542 1,783,545 5,058,748
--------- --------- ---------
Cash flows from investing
activities:
Principal repayments
on mortgage-backed
securities 558,205 221,819 561,015
Purchase of investment
securities available
for sale (17,968,095) (487,656) --
Maturities of
investment securities
available for sale 24,500,000 1,000,000 4,000,000
Purchase of investment
securities held to
maturity (3,473,204) (1,492,344) (500,000)
Maturities of investment
securities held to
maturity 3,000,000 3,000,000 3,205,155
Proceeds from sales of
investment securities -- -- 1,500,000
Purchase of FHLB stock (151,400) (389,600) (1,053,900)
Redemption of FHLB stock 598,900 571,500 750,000
(Increase) decrease in
loans receivable 1,744,689 (4,598,956) (27,558,549)
Investment in real
estate held for
development (612,234) (262,968) (355,155)
Proceeds from sale of
real estate held for
development 1,077,582 350,180 625,674
Proceeds from sale of
real estate acquired
through foreclosure 898,732 1,725,210 804,714
Increase (decrease) in
interest-bearing
deposits with banks -- -- (95,000)
Purchase of premises
and equipment (1,402,623) (532,691) (252,355)
Proceeds from sales
of premises and
equipment -- -- 2,522
--------- --------- ---------
Net cash provided
(used) by
investing
activities 8,770,552 (895,506) (18,365,879)
--------- --------- ----------
(Continued)
24
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended March 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from financing
activities:
Increase (decrease)
in deposit accounts $ (4,313,869) 6,100,090 (7,158,055)
Proceeds from FHLB
advances 94,600,000 100,904,000 153,775,000
Repayment of FHLB
advances (103,350,000)(104,073,000) (136,358,000)
Proceeds from other
borrowings 234,552 350,000 --
Repayment of other
borrowings (380,155) -- --
Dividends to
shareholders (83,029) (82,236) (80,880)
Proceeds from exercise of
stock options 39,380 39,380 194,640
----------- --------- ----------
Net cash provided
(used) by
financing
activities (13,253,121) 3,238,234 10,372,705
----------- --------- ----------
Net increase (decrease) in
cash and cash equivalents (1,920,027) 4,126,273 (2,934,426)
Cash and cash equivalents
at beginning of year 9,823,664 5,697,391 8,631,817
----------- --------- ----------
Cash and cash equivalents
at end of year $ 7,903,637 9,823,664 5,697,391
=========== ========= ==========
Supplemental disclosure of
cash flow information:
Cash paid during the
period for:
Interest $ 7,910,716 8,402,928 5,398,792
Income taxes $ 534,000 424,000 545,242
Supplemental schedule of
non cash transactions:
Additions to real estate
acquired through
foreclosure, net $ 57,670 711,760 661,650
Transfer of securities
held to maturity to
available for sale -- 27,867,170 --
Increase in unrealized
net loss on securities
available for sale,
net of taxes (43,747) (71,970) (7,039)
Securitization of loans
held for investment
to investments held
to maturity 2,796,062 1,054,529 --
See accompanying notes to consolidated financial statements.
25
<PAGE>
<PAGE>
Notes to Consolidated Financial Statements
(1) Significant Accounting Policies
-------------------------------
The following is a description of the more significant accounting and
reporting policies used in the preparation and presentation of the
accompanying consolidated financial statements. All significant intercompany
transactions have been eliminated in consolidation.
(a) Basis of Consolidation
----------------------
The accompanying consolidated financial statements include the accounts of
Security Federal Corporation (the "Company") and its wholly owned subsidiary,
Security Federal Bank (the "Bank") and its wholly subsidiary, Security
Financial Services Corporation ("SFSC"). SFSC consists primarily of
investment brokerage services. Also included in consolidation are two real
estate partnerships, which the Company purchased from SFSC in December 1995 at
fair market value.
(b) Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, interest-bearing balances in other banks, and federal
funds sold. Cash equivalents have maturities of three months or less.
(c) Investment and Mortgage-Backed Securities
-----------------------------------------
In May 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 115 (Statement 115), "Accounting for Certain
Investments in Debt and Equity Securities". Under Statement 115 investment
securities, including mortgage-backed securities, are classified into one of
three categories, held to maturity, available for sale or trading. Management
determines the appropriate classification of debt securities at the time of
purchase.
Investment securities are classified as held to maturity when the Company has
the positive intent and ability to hold the securities to maturity. These
securities are recorded at cost, adjusted for amortization of premiums and
accretion of discounts over the estimated life of the security using a method
that approximates a level yield. Prepayment assumptions on mortgage-backed
securities are anticipated.
Management classifies investment securities not considered as held to maturity
as available for sale, which are stated at fair value, with unrealized gains
and losses, net of tax, reported in a separate component of shareholders'
equity. Gains and losses from sales of investment and mortgage-backed
securities available for sale are determined using the specific identification
method. The Company has no trading securities. As permitted by Statement
115, the Company initially adopted the statement as of March 31, 1994, the
effect of which was to decrease shareholders' equity by $44,116.
In November 1995, the FASB issued a guide to implementation of Statement 115
on accounting for certain investments in debt and equity securities which
allows for the one-time transfer of certain investments classified as held to
maturity to available for sale. In December 1995, the Bank transferred
securities with a carrying value of approximately $27.9 million and a market
value of $27.7 million to available for sale. The transfer decreased
shareholders' equity by approximately $108,000.
At March 31, 1997, the Bank maintained liquid assets in excess of the amount
required by regulations. The required amount is 5% of the average daily
balances of deposits and short-term borrowings. Liquid assets consist
primarily of cash, including time deposits and investment securities with
remaining maturities of less than five years.
26
<PAGE>
<PAGE>
(1) Significant Accounting Policies, Continued
------------------------------------------
(d) Allowance for Loan Losses
-------------------------
The Company provides for loan losses on the allowance method. Accordingly,
all loan losses are charged to the related allowance and all recoveries are
credited to the allowance for loan losses. Additions to the allowance for
loan losses are provided by charges to operations based on various factors
which, in management's judgment deserve current recognition in estimating
possible losses. Such factors considered by management include the market
value of the underlying collateral, stated guarantees by the borrower if
applicable, the borrower's ability to repay from other economic resources,
growth and composition of the loan portfolios, the relationship of the
allowance for loan losses to outstanding loans, loss experience, delinquency
trends, and general economic conditions. Management evaluates the carrying
value of the loans periodically and the allowance is adjusted accordingly.
While management uses the best information available to make evaluations,
future adjustment to the allowance may be necessary if economic conditions
differ substantially from the assumptions used in making the evaluations.
Allowances for loan losses are subject to periodic evaluations by various
regulatory authorities and may be subject to adjustments based upon the
information that is available to them at the time of their examinations.
On April 1, 1995, the Bank adopted the provisions of SFAS No. 114 "Accounting
by Creditors for Impairment of a Loan," and SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
SFAS No. 114 requires creditors to evaluate loans for impairment and value
those loans for which it is probable that the creditor will be unable to
collect all amounts due according to the terms of the loan agreement at the
present value of expected cash flows, market price of the loan, if available,
or value of the underlying collateral. Expected cash flows are required to be
discounted at the loan's effective interest rate. SFAS No. 118 amends SFAS
No. 114 to allow a creditor to use existing methods for recognizing interest
income on an impaired loan, and requires disclosure of income recognition
methods used. The adoption of this standard required no increase to the
allowance for loan losses and had no impact on net income for fiscal year
1996.
(e) Loans Held for Sale
-------------------
Loans originated and intended for sale in the secondary market are carried at
the lower of cost or estimated market value in the aggregate. Net unrealized
losses are provided for in a valuation allowance by charges to operations.
(f) Real Estate Acquired in Settlement of Loans
-------------------------------------------
Real estate acquired in settlement of loans represents real estate acquired
through foreclosure and is initially recorded at the lower of cost (principal
balance of the former mortgage loan less any specific valuation allowances) or
estimated fair value less costs to sell. Subsequent improvements are
capitalized. Costs of holding real estate, such as property taxes, insurance,
general maintenance and interest expense, are expensed as a period cost. Fair
values are reviewed regularly and allowances for possible losses are
established when the carrying value of the real estate owned exceeds the fair
value less estimated costs to sell. Fair values are generally determined by
reference to an outside appraisal.
(g) Real Estate Held for Development and Sale
-----------------------------------------
Real estate purchased for development and sale and investments in real estate
partnerships are stated at the lower of cost or estimated net realizable
value. Costs directly related to such real estate are capitalized until
construction required to bring these properties to a saleable condition is
completed. Capitalized costs include direct costs incurred during the
improvement period.
Gains on the sale of real estate purchased for development and sale are
recorded at the time of sale provided certain criteria relating to property
type, cash down payment, loan terms, and other factors are met. If these
criteria are not met at the date of sale, the gain is deferred and recognized
using the installment or cost recovery method until they are satisfied, at
which time the remaining deferred gain is recorded as income.
Market values of real estate purchased for development and sale are reviewed
regularly and allowances for losses are established when the carrying value
exceeds the estimated net realizable value. In determining the estimated net
realizable value, the Company deducts from the estimated selling price the
projected cost to complete and dispose of the property and the estimated cost
to hold the property to an expected date of sale.
27
<PAGE>
<PAGE>
(1) Significant Accounting Policies, Continued
-----------------------------------------
(h) Premises and Equipment
----------------------
Premises and equipment are carried at cost, net of accumulated depreciation.
Depreciation of premises and equipment is provided principally on a
straight-line method over the estimated useful life of the related asset.
Estimated lives are seven to thirty years for buildings and improvements and
generally five to ten years for furniture, fixtures and equipment.
(i) Income Taxes
------------
The Bank adopted SFAS No. 109 "Accounting for Income Taxes" effective April 1,
1993. Under SFAS No. 109 deferred tax expense or benefit is recognized for
the net change during the year in the deferred tax liability or asset. That
amount together with income taxes currently payable is the total amount of
income tax expense or benefit for the year. Upon adoption of SFAS No. 109 the
Bank realized an addition to net income of $30,000. Deferred taxes are
provided for differences in financial reporting bases for assets and
liabilities as compared with their tax bases. Basically, a current tax
liability or asset is established for taxes presently payable or refundable
and a deferred tax liability or asset is established for future tax items. A
valuation allowance, if applicable, is established for deferred tax assets
that may not be realized. Tax bad debt reserves in excess of the base year
amount (established as taxable years ending March 31, 1988 or later), would
create a deferred tax liability. Deferred income taxes are provided for
differences between the provision for loan losses for financial statement
purposes and those allowed for income tax purposes.
(j) Loan Fees and Costs Associated with Originating Loans
-----------------------------------------------------
The net of loan fees received and direct incremental costs of originating
loans are deferred and amortized over the contractual life of the related
loan. The net fees are recognized as yield adjustments by applying the
interest method. Prepayments are not anticipated.
(k) Intangible Assets
-----------------
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through projected
undiscounted future results. The amount of goodwill impairment, if any, is
measured based on projected discounted future results using a discount rate
reflecting the Company's average cost of funds.
Deposit based premiums, representing the cost of acquiring deposits from other
financial institutions, are being amortized by charges to operations over the
expected periods to be benefited. The effective amortization period for
intangible assets is approximately 10 years.
(l) Interest Income
---------------
Interest on loans is accrued and credited to income monthly based on the
principal balance outstanding and the contractual rate on the loan. The
Company places loans on non-accrual status when they become greater than sixty
days delinquent or when in the opinion of management, full collection of
principal or interest is unlikely. The Company provides an allowance for
uncollectible accrued interest on loans which are sixty days delinquent for
all interest accrued prior to the loan being placed on non-accrual status.
The loans are returned to an accrual status when full collection of principal
and interest appears likely.
28
<PAGE>
<PAGE>
(1) Significant Accounting Policies, Continued
------------------------------------------
(m) Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107 "Disclosures about Fair Value of Financial Instruments" requires
disclosure in the financial statements regarding the fair value of on and
off-balance sheet financial instruments for which it is practicable to do so.
Fair values are based on quoted market prices where available and on estimates
of present value or other valuation techniques. These estimates are made at a
specific point in time and are subjective in nature involving uncertainties
and significant judgment. In addition, SFAS No. 107 excludes all
non-financial instruments and certain financial instruments from its
disclosure requirements. Accordingly, the aggregate fair values presented do
not represent the underlying fair value of the Bank.
Fair values for consolidated financial statement reporting purposes are
estimated for loans with similar financial characteristics. These loans are
segregated by type of loan, considering credit risk, interest rate and
prepayment characteristics. Each loan category is further segmented into
fixed and adjustable rate categories.
The fair value of performing loans is calculated by discounting scheduled cash
flows through estimated maturity dates. Expected cash flows are discounted
using the Bank's current rates that reflect the credit and interest rate risks
inherent in each category of loans. A prepayment assumption is used as an
estimate of the portion of loans that will be repaid prior to their scheduled
maturity.
(n) Earnings Per Share
------------------
Net income per share is computed by dividing consolidated net income by the
weighted average number of shares of common stock equivalents outstanding
during the period. Common share equivalents include, if applicable, dilutive
stock option share equivalents determined by using the treasury stock method.
(o) Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of income and expenses during the reporting periods.
Actual results could differ from those estimates.
(p) Reclassifications
-----------------
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform with current year classifications.
29
<PAGE>
<PAGE>
(2) Investment and Mortgage-Backed Securities, Available for
Sale
--------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses and market
value of investment and mortgage-backed securities available for sale are as
follows:
March 31, 1997
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury
notes $ 13,011,225 -- 125,272 12,885,953
FHLB Securities 10,974,509 -- 143,705 10,830,804
Federal Farm
Credit
Securities 498,910 -- -- 498,910
------------ ----- --------- ----------
$ 24,484,644 -- 268,977 24,215,667
============ ===== ========= ==========
March 31, 1996
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury
notes $ 31,170,866 1,782 200,242 30,972,406
============ ====== ======== ===========
The amortized cost and market value of investment securities available for
sale at March 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers have the
right to prepay obligations with or without call or prepayment penalties.
Amortized Market
Cost Value
---- -----
In one year or less $ 4,511,021 4,493,510
After one year through
five years 19,973,623 19,722,157
------------- -----------
$ 24,484,644 24,215,667
============= ===========
At March 31, 1997 investment securities available for sale of $4,150,000 were
pledged as collateral for certain deposit accounts and Federal Home Loan Bank
of Atlanta borrowings.
The Bank sold no securities in fiscal 1997 or 1996. The Bank received
$1,498,000 proceeds from sales of securities in the year ending March 31,
1995, with approximately $1,500 recorded in gross gains and $4,000 in gross
losses.
30
<PAGE>
<PAGE>
(3) Investment and Mortgage-Backed Securities, Held to Maturity
The amortized cost, gross unrealized gains, gross unrealized losses and market
values of investment securities held to maturity are as follows:
March 31, 1997
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
FNMA securities $ 500,000 11,025 -- 511,025
FHLB securities 6,478,201 3,772 148,579 6,333,394
FHLMC bond 1,000,000 15,220 984,780
Mortgage-backed
securities 4,776,568 15,976 23,557 4,768,987
----------- ------- -------- -----------
$12,754,769 30,773 187,356 12,598,186
=========== ======= ======== ===========
March 31, 1997
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
FNMA securities $ 1,006,250 7,030 2,016 1,011,264
FHLB securities 5,492,366 -- 138,422 5,353,944
FHLMC bond 1,000,000 -- 10,900 989,100
Mortgage-backed
securities 2,542,108 32,651 15,116 2,559,643
----------- ------- ------- -----------
$10,040,724 39,681 166,454 9,913,951
=========== ======= ======= ===========
The amortized cost and market value of investments securities held to maturity
at March 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities due to call features on
certain investments.
Amortized Market
Cost Value
---- -----
In one year or less $ 498,528 995,340
After one year through
five years 6,979,673 6,322,834
More than five years 500,000 511,025
Mortgage-backed securities 4,776,568 4,768,987
------------- -----------
$ 12,754,769 12,598,186
============= ===========
31
<PAGE>
<PAGE>
(4) Loans Receivable, Net
---------------------
Loans receivable, net at March 31, consisted of the following:
1997 1996
---- ----
Residential real estate $ 50,534,682 59,951,018
Consumer 46,894,063 44,810,133
Commercial real estate 6,527,692 10,629,652
Commercial business 46,047,825 38,764,035
Loans held for sale 211,212 612,919
------------ ------------
150,215,474 154,767,757
Less: ------------ ------------
Allowance for loan losses 1,767,483 1,758,688
Loans in process 1,375,319 474,575
Deferred loan fees 303,199 394,768
------------ ------------
3,446,001 2,628,031
------------ ------------
$146,769,473 $152,139,726
============ ============
Changes in the allowance for loan losses for the years ended March 31, are
summarized as follows:
1997 1996 1995
---- ---- ----
Balance at beginning of
year $ 1,758,688 1,955,119 1,735,073
Provision for loan
losses 300,000 230,000 300,000
Charge-offs (320,643) (471,938) (105,073)
Recoveries 29,438 45,507 25,119
----------- ---------- ----------
Balance at end of year $ 1,767,483 1,758,688 1,955,119
=========== ========== ==========
The following table sets forth the amount of the Company's non-accrual loans
and the status of the related interest income at March 31:
1997 1996
---- ----
Non-accrual loans $ 1,368,072 2,572,000
Interest income which would have
been recognized under original
terms 75,029 82,670
Loans serviced for others at March 31, 1997, 1996 and 1995, were $88,295,000,
$93,310,000, and $97,637,000, respectively.
At March 31, 1997, impaired loans amounted to $1,241,000. These loans are
well secured and no loss is estimated at this time. For the year ended March
31, 1997, the average recorded investment in impaired loans was $1,786,000.
The Bank originates residential and commercial real estate loans throughout
its primary market area located in the south and central regions of South
Carolina. Although this region has a diverse economy, much of the area is
dependent on the nearby Savannah River Site. Employment at the Savannah
River Site is expected to decline in the future. The future impact on the
local economy and real estate market could affect the financial status of the
Bank's customers. The degree of impact will be affected by the timing and
terms associated with the Savannah River Site employment reduction, growth of
other sectors of the local economy, etc. Future additions to the Bank's
allowance for loan losses are dependent on the performance of the Bank's loan
portfolio, the economy, changes in real estate values, and interest rates.
There can be no assurance that additions to the allowance will not be required
in future periods. Management continues to monitor its loan portfolio for the
impact of local economic changes.
32
<PAGE>
<PAGE>
(5) Premises and Equipment, Net
---------------------------
Premises and equipment, net at March 31, are summarized as follows:
1997 1996
---- ----
Land $ 452,283 440,323
Buildings and improvement 3,119,014 2,998,995
Furniture and equipment 3,997,350 2,936,904
----------- -----------
7,568,647 6,376,222
Less accumulated depreciation (3,616,498) (3,189,037)
----------- -----------
$ 3,952,149 3,187,185
=========== ===========
Depreciation expense for the years ended March 31, 1997, 1996, and 1995, was
approximately $608,000, $597,000, and $589,000, respectively.
The Bank has entered into noncancelable operating leases related to buildings
and land. At March 31, 1997, future minimum payments under noncancelable
operating leases with initial or remaining terms of one year or more are as
follows (by fiscal year):
1998 $ 62,584
1999 35,039
2000 30,165
2001 26,158
2002 6,000
Thereafter 5,000
------------
$ 164,946
============
Total rental expense amounted to $61,000, $54,000, and $65,000 for the years
ended March 31, 1997, 1996 and 1995, respectively. Five lease agreements
with monthly expenses of $2,030, $2,014, $500, $407 and $350 have renewal
options of 7, 10, 60, 20 and 10 years, respectively.
(6) FHLB Stock
----------
Investment in the stock of the Federal Home Loan Bank is required by law for
every Federally insured savings institution. No ready market exists for this
stock and it has no quoted market value. However, because redemption of this
stock has been at par it is carried at cost.
The Bank, as a member of the FHLB of Atlanta, is required to acquire and hold
shares of capital stock in the FHLB of Atlanta in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB of Atlanta. The Bank is in compliance with this requirement with an
investment in FHLB of Atlanta stock of $785,700 as of March 31, 1997.
33
<PAGE>
<PAGE>
(7) Real Estate Operations
----------------------
The Company participates in two real estate joint ventures. The Company owns
50 and 62.5 percent of the joint ventures which have been consolidated into
the Company's financial statements, since the Company has voting control in
both partnerships. The Company had $350,000 invested in the two partnerships
at March 31, 1997. Income from real estate operations was as follows:
1997 1996 1995
---- ---- ----
Real estate acquired for
development and sale:
Sales $ 1,077,582 350,180 625,674
Cost of sales 1,306,227 (296,508) (460,299)
---------- -------- ---------
Gross profit (228,645) 53,672 165,375
Amortization (deferral)
of gain on sale of
real estate -- 25,396 3,420
Provision expense
(reversal) for real
estate losses (145,227) 45,000 --
---------- -------- ---------
Income from
real estate
operations (83,418) 34,068 168,795
Other expenses, net 108,553 38,535 115,236
---------- -------- ---------
Net income
(loss) $ (191,971) (4,467) 53,559
========== ======== =========
The following is a summary of the allowance for estimated losses on real
estate:
1997 1996 1995
---- ---- ----
Balance at beginning of
year $ 195,227 150,227 150,227
Provision (reversal)
for real estate losses (145,227) 45,000 --
----------- -------- --------
Balance at end of year $ 50,000 195,227 150,227
=========== ======== ========
Condensed combined financial information for the joint ventures as of March 31
is as follows:
1997 1996
---- ----
Real estate held for development,
net $ 840,813 1,389,579
Other assets 111,730 71,129
------------ ----------
Total assets 952,543 1,460,708
Liabilities (principally a loan
payable to the Company) 213,527 277,339
------------ ----------
Partners equity $ 739,016 1,183,369
============ ==========
34
<PAGE>
<PAGE>
(8) Deposits
--------
Deposits outstanding by type of account at March 31 are summarized as follows:
1997 1996
---------------------- -----------------------
Weighted Weighted
Amount Rate Range Amount Rate Range
------ ---- ----- ------ ---- -----
Checking $43,601,652 1.36% 0-1.75% $42,251,949 1.35% 0-1.75%
Money Market 11,640,884 2.80 2.75-3.00 13,769,693 2.81 2.75-3.00
Passbook
accounts 13,451,308 2.49 0-3.00 13,615,436 2.50 0-3.00
----------- ---- --------- ----------- ---- ---------
68,693,844 1.83 0-3.00 69,637,078 1.86 0-3.00
----------- ---- --------- ----------- ---- ---------
Certificate
accounts:
0-4.99% 3,935,588 5,116,366
5.00-6.99% 95,234,017 97,046,823
7.00-8.99% 197,409 574,460
9.00-12.99% -- --
----------- ---- --------- ----------- ---- ---------
Total
certificates
of deposit 99,367,014 5.40 4.70-7.75 102,737,649 5.65 3.30-7.75
------------ ---- --------- ----------- ---- ---------
$168,060,858 3.94% 0-7.75% $172,374,727 4.12% 0-7.75%
============ ==== ========= ============ ==== =========
The aggregate amount of short-term certificates of deposit with a minimum
denomination of $100,000 was $15,737,000 and $9,847,000 at March 31, 1997 and
1996, respectively. The amounts and scheduled maturities of certificates of
deposit at March 31, are as follows:
1997 1996
---- ----
Within 1 year $ 83,998,768 83,523,749
After 1 but within 2 years 12,199,870 16,010,769
After 2 but within 3 years 1,344,995 1,659,385
After 3 but within 4 years 1,177,613 1,237,789
After 4 but within 5 years 645,768 305,957
Thereafter -- --
------------- -----------
$ 99,367,014 102,737,649
============= ===========
35
<PAGE>
<PAGE>
(9) Advances From Federal Home Loan Bank
------------------------------------
Advances from the Federal Home Loan Bank at March 31 are summarized by year of
maturity and weighted average interest rate below:
1997 1996
-------------------- ---------------------
Weighted Weighted
Amount Rate Amount Rate
------ ---- ------ ----
1997 $ -- -- $ 17,214,000 5.94%
1998 11,952,000 5.88% 3,452,000 6.60
1999 490,000 8.65 490,000 8.65
2000 528,000 8.70 528,000 8.70
2001 856,000 8.75 856,000 8.75
Thereafter 288,000 7.97 324,000 7.97
------------ ---- ------------ ----
$ 14,114,000 6.30% $ 22,864,000 6.29%
============ ==== ============ ====
These advances are secured by a blanket collateral agreement with the FHLB
pledging the Bank's portfolio of residential first mortgage loans. Advances
are subject to prepayment penalties.
(10) Income Taxes
------------
Income tax expense for the years ended March 31, is comprised of the
following:
1997 1996 1995
Current: ---- ---- ----
Federal $ 579,589 $ 571,810 660,413
State -- -- --
------------ ------------ ---------
579,589 571,810 660,413
------------ ------------ ---------
Deferred:
Federal (139,141) (27,879) (122,537)
State (26,503) (5,234) (38,147)
------------ ------------ ---------
(165,644) (33,113) (160,684)
------------ ------------ ---------
$ 413,945 538,697 499,729
============ ============ =========
36
<PAGE>
<PAGE>
(10) Income Taxes, Continued
-----------------------
The Company's income taxes differ from those computed at the statutory federal
income tax rate, as follows:
1997 1996 1995
---- ---- ----
Tax at statutory income
tax rate $ 424,712 543,412 510,640
State income tax expense
(benefit), net (17,492) (3,454) (25,177)
Other 6,725 (1,261) 14,266
---------- -------- --------
$ 413,945 538,697 499,729
========== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31
are presented below.
1997 1996
Deferred tax assets: ---- ----
Provision for loan losses $486,789 500,572
Net fees deferred for
financial reporting 80,716 35,712
Unrealized loss on securities
available for sale 102,105 75,325
Other real estate basis for
tax purposes over financial
statement basis 18,980 74,022
Other 205,964 106,378
-------- --------
Total gross deferred
tax assets 894,554 792,009
-------- --------
Deferred tax liabilities:
FHLB stock basis over tax basis 126,566 178,999
Depreciation 201,156 193,791
Other -- 44,811
-------- --------
Total gross deferred
tax liability 327,722 417,601
-------- --------
Net deferred tax asset $566,832 374,408
======== ========
A portion of the change in the net deferred tax asset relates to unrealized
gains and losses on securities available for sale. The related current period
deferred tax benefit of $26,780 has been recorded directly to shareholder's
equity. The balance of the change in the net deferred tax asset results from
the current period deferred tax benefit of $165,644. The net deferred tax
asset is included in other assets in the accompanying consolidated balance
sheets.
No valuation allowance for deferred tax assets was required at April 1, 1996,
and for the years ended March 31, 1996 and 1997. The realization of net
deferred tax assets may be based on utilization of carrybacks to prior taxable
periods, anticipation of future taxable income in certain periods, and the
utilization of tax planning strategies. Management has determined that it is
more likely than not that the net deferred tax asset can be supported based
upon these criteria.
Retained earnings at March 31, 1997 includes tax bad debt reserves of
approximately $2.2 million, for which no provision for federal income tax has
been made. If, in the future, these amounts are used for any purpose other
than to absorb bad debt losses, including dividends, stock redemptions, or
distributions in liquidation, or the Company ceases to be qualified as a bank,
they may be subject to federal income tax at the then prevailing corporate tax
rate.
37
<PAGE>
<PAGE>
(11) Regulatory Matters
------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and discretionary actions by regulators that,
if undertaken, could have a material adverse effect on the Company. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgements by the regulators about components, risk weightings and other
factors.
As of March 31, 1997, the FDIC categorized the Bank as "well capitalized"
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain risk-based, core and
tangible capital ratios of 10.0%, 6.0% and 5.0%, respectively. There are no
conditions or events since that notification that management believes have
changed the Bank's classification.
The Bank's regulatory capital amounts and ratios are as follows 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
- -----------------------------------------------------------------------
(in thousands)
March 31, 1997
Risk-based
Capital (to risk
weighted assets) $15,583 12.0% $10,414 8.0% $13,017 10.0%
Core Capital
(to adjusted
tangible assets) 13,956 7.0 6,003 3.0 12,006 6.0
Tangible
Capital (to
tangible assets) 13,018 6.5 2,987 1.5 9,958 5.0
March 31, 1996
Risk-based
Capital (to risk
weighted assets) $15,092 10.6% $11,425 8.0% $14,281 10.0%
Core Capital
(to adjusted
tangible assets) 13,335 6.3 6,332 3.0 12,663 6.0
Tangible
Capital (to
tangible assets) 12,215 5.8 3,149 1.5 10,497 5.0
- -----------------------------------------------------------------------
The payment of dividends by the Bank to the Company is subject to substantial
restrictions and would require prior notice to and approval of the OTS.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a
special one-time assessment on Savings Association Insurance Fund ("SAIF")
member institution, including the Bank, to recapitalize the SAIF. As required
by the Funds Act, the FDIC imposed a special assessment of 65.7 basis points
on SAIF assessable deposits as of March 31, 1995, payable on November 27,
1996. The special assessment was recognized in the second quarter of fiscal
1997 and is tax deductible. The Bank took a charge of $705,000 ($437,000
after-tax) as a result of the special assessment.
38
<PAGE>
<PAGE>
(11) Regulatory Matters, Continued
-----------------------------
The Funds Act also spreads the obligations for payment of the Financing
Corporation ("FICO") bonds across all SAIF and Bank Insurance Fund ("BIF")
members. As of January 1, 1997, BIF deposits are assessed for FICO payments
at a rate of 20% of the rate assessed on SAIF deposits. Based on current
estimates by the FDIC, BIF deposits will be assessed a FICO payment of 1.3
basis points, while SAIF deposits will pay an estimated 6.4 basis points on
the FICO bonds. Full pro rata sharing of the FICO payments between BIF and
SAIF members will occur on the earlier of January 1, 2000 or the date BIF and
SAIF are merged. The Funds Act specifies that BIF and SAIF will be merged on
January 1, 1999 provided no savings associations remain at that time.
As a result of the Funds Act, the FDIC lowered SAIF assessments to 0 to 27
basis points effective January 1, 1997, a range comparable to that of BIF
members. SAIF members will continue to make the higher FICO payments
described above. Management cannot predict the level of FDIC insurance
assessments on an-on-going basis, whether the savings charter will be
eliminated or whether the BIF and SAIF will eventually be merged.
39
<PAGE>
<PAGE>
(12) Employee Benefit Plans
----------------------
The Company participates in a multi-employer defined benefit plan. The plan
provides defined benefits to substantially all full-time employees of the
Company with one or more years of service. Separate actuarial valuations are
not available for each participating employer, nor are plan assets segregated.
The Company was required to contribute $67,000 to the plan in the year ended
March 31, 1997. There were no contributions to the plan required for the
years ended March 31, 1996, 1995 and 1994.
The Company participates in a multiple employer defined contribution employee
benefit plan covering substantially all employees with one or more years of
service. The Company matches a portion of employees contributions, and the
related expenses were $55,861, $47,116, and $96,905 for the years ended March
31, 1997, 1996 and 1995, respectively.
The Company established an Employee Stock Ownership Plan ("ESOP") to acquire
shares of the Company's common stock for the exclusive benefit of the employee
participants. The ESOP borrowed $196,880 from a savings institution and
purchased 19,688 shares of the Company's common stock. These shares were
pledged as collateral for the ESOP debt which was paid in full in fiscal 1994.
For the year ended March 31, 1995 the Company recorded expenses related to the
ESOP trust of $70,931. Since the plan currently has no unallocated stock,
there was no contribution for the year ended March 31, 1997.
Certain officers of the Company participate in an incentive stock option plan.
Options are granted at exercise prices not less than the fair market value of
the Company's common stock on the date of the grant. There were 4,489 shares
granted during fiscal 1997 and no shares were granted in 1996. At March 31,
1997, there were a total of 8,427 shares granted and outstanding, with 4,489
shares being unexercisable on that date. At March 31, 1997, the Company had
the following options outstanding:
Outstanding Option Earliest Date Expiration
Grant Date Options Price Exercisable Date
---------- ------- ----- ----------- ----
3/8/88 3,938 $10.00 10/29/96 10/29/97
1/7/97 898 32.00 1/1/02 12/31/02
1/7/97 898 32.00 1/1/03 12/31/03
1/7/97 898 32.00 1/1/04 12/31/04
1/7/97 898 32.00 1/1/05 12/31/05
1/7/97 897 32.00 1/1/06 12/31/06
There were no further options available at March 31, 1997.
The Company has elected the disclosure-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost
has been recognized for the stock option plan. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the
grant date for awards in fiscal 1997, consistent with the provisions of SFAS
No. 123, the Company's net income and earnings per share amounts would have
been reduced to the pro forms amounts indicated.
1997
----
Net income- as reported $835,207
Net income- pro forma $803,529
Earnings per share- as reported $2.01
Earnings per share- pro forma $1.94
40
<PAGE>
<PAGE>
(13) Commitments
-----------
In conjunction with its lending activities, the Bank enters into various
commitments to extend credit and issue letters of credit. Loan commitments
(unfunded loans and unused lines of credit) and letters of credit are issued
to accommodate the financing needs of the Bank's customers. Loan commitments
are agreements by the Bank to lend at a future date, so long as there are no
violations of any conditions established in the agreement. Letters of credit
commit the Bank to make payments on behalf of customers when certain specified
events occur.
Financial instruments where the contract amount represents the Bank's credit
risk include commitments under pre-approved but unused lines of credit of
$19,814,000 and $16,700,000 and letters of credit of $668,000 and $129,000
at March 31, 1997 and 1996, respectively.
These loan and letter of credit commitments are subject to the same credit
policies and reviews as loans on the balance sheet. Collateral, both the
amount and nature, is obtained based upon management's assessment of the
credit risk. Since many of the extensions of credit are expected to expire
without being drawn, the total commitment amounts do not necessarily represent
future cash requirements. In addition to these loan commitments noted above,
the Bank had unused credit card loan commitments of $924,000 and $885,000 at
March 31, 1997 and 1996, respectively.
Outstanding commitments on mortgage loans not yet closed amounted to $262,000
at March 31, 1997. Such commitments, which are funded subject to certain
limitations, extend over varying periods of time with the majority being
funded within 90 days. At March 31, 1997, the Bank had outstanding
commitments to sell approximately $211,000 of loans.
(14) Related Party Transactions
--------------------------
At March 31, 1997, the total aggregate indebtedness to the Bank by executive
officers and directors of the Bank whose individual indebtedness exceeded
$60,000 at any time over the period since April 1, 1995 was $426,000. There
were $11,000 additions to loans to executive officers over $60,000 during
fiscal 1997. Repayments on these loans totaled approximately $25,000. Loans
to all employees, officers and directors of the Bank, in the aggregate,
constituted approximately 5.36% of the total shareholders' equity of the Bank
at March 31, 1997.
The Company paid insurance premiums to an insurance agency in which three
directors of the Company are also officers, directors and shareholders. The
Company incurred expense in the amount of $79,208, for the year ended March
31, 1995, which represented insurance and bond premiums for insurance coverage
written for the Company. Of this amount, $8,062, was the actual commissions
earned by the agency. Also, the Bank paid $875, during the year ended March
31, 1995 to the agency out of escrow accounts maintained for customers of the
Bank. The Company paid approximately $2,000 in premiums in fiscal 1996.
The Company rents office space from a company in which a director and an
officer of the Company and the Bank have an ownership interest. The Bank
incurred expenses of $24,000, $24,000, and $23,000 respectively, for rent for
the years ended March 31, 1997, 1996 and 1995.
Management is of the opinion that the transactions with respect to insurance
coverage and office rent are made on terms that are comparable to those which
would be made with unaffiliated persons.
41
<PAGE>
<PAGE>
(15) Security Federal Corporation Condensed Financial Statements
(Parent Company Only)
-----------------------------------------------------------
The following is condensed financial information of Security Federal
Corporation (parent company only); the primary asset of which is its
investment in the bank subsidiary, and the principal source of income for the
Company is equity in undistributed earnings from the Bank.
Condensed Balance Sheet Data
March 31, 1997 and 1996
1997 1996
---- ----
Assets
Cash $ 214,514 71,795
Investment in Security Federal Bank 15,362,473 15,007,910
Investment in Real Estate
Partnerships 350,336 567,726
Furniture and equipment, net 0 0
Income tax receivable from Bank 68,707 39,654
Other assets 200,984 97,133
----------- -----------
Total assets $16,197,014 15,784,218
=========== ===========
Liabilities and Shareholders' Equity
Loans Payable -- 350,000
Accounts payable 14,985 --
Shareholders' equity 16,182,029 15,434,218
----------- -----------
Total liabilities and
shareholders' equity $16,197,014 15,784,218
=========== ===========
Condensed Statements of Income Data
For the years ended March 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Income:
Equity in undistributed
earnings of Security
Federal Bank $ 898,309 1,098,307 1,038,428
Equity in undistributed
earnings of Real Estate
Partnerships (213,094) 889 --
Miscellaneous income 18,908 927 10
(Provision) Reversal of
allowance for loss for
real estate partnerships 145,227 -- --
--------- --------- ---------
849,350 1,100,123 1,038,438
Expenses:
Miscellaneous 14,143 40,549 36,284
--------- --------- ---------
Net income $ 835,207 1,059,574 1,002,154
========= ========= =========
42
<PAGE>
<PAGE>
(15) Security Federal Corporation Condensed Financial Statements
(Parent Company Only) Continued
--------------------- ---------
Condensed Statements of Cash Flow Data
For the years ended March 31, 1997, 1996 and 1995
1997 1996 1995
Operating activities: ---- ---- ----
Net income $ 835,207 1,059,574 1,002,154
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation -- 290 348
Equity in undistributed
earnings of Security
Federal Bank (898,309) (1,098,307) (1,038,428)
Equity in undistributed
earnings (loss) of real
estate partnership 213,094 (889) --
Provision (Reversal) of
allowance on Real Estate
Partnerships (145,227) -- --
(Increase) decrease in
income taxes receivable
and other assets (132,937) (118,096) (3,896)
Increase (decrease)
in accounts payable 14,988 (1,230) (14,160)
--------- -------- --------
Net cash used in
operating activities (113,184) (158,658) (53,982)
--------- -------- --------
Investing activities:
Purchase of Real Estate
Partnerships from Bank -- (561,000) --
(Investment) Return of
capital in Real Estate
Partnership 149,552 (5,838) --
Dividend received from
Security Federal Bank 500,000 -- --
--------- -------- --------
Net cash provided
by (used in)
investing activities 649,552 (566,838) --
--------- -------- --------
Financing activities:
Proceeds of loan -- 350,000 --
Repayment of loan (350,000)
Dividends paid (83,029) (82,236) (80,880)
Exercise of stock
options 39,380 39,380 194,640
--------- -------- --------
Net cash provided by
(used in) financing
activities (393,649) 307,144 113,760
--------- -------- --------
Net increase (decrease)
in cash and cash equivalents 142,719 (418,352) 59,778
Cash and cash equivalents
at beginning of year 71,795 490,147 430,369
--------- -------- --------
Cash and cash equivalents
at end of year $ 214,514 71,795 490,147
========= ======== ========
43
<PAGE>
<PAGE>
(16) Carrying Amounts and Fair Value of Financial Instruments
--------------------------------------------------------
The carrying amounts and fair value of financial instruments as of March 31,
are summarized below:
(In Thousands)
1997
Carrying Estimated
Amount Fair Value
------ ----------
Financial Assets
----------------
Cash and cash equivalents $ 7,904 $ 7,904
Investment and mortgage
backed securities 36,970 36,814
Loans receivable, net 146,769 146,960
Federal Home Loan Bank Stock 786 786
Financial Liabilities
---------------------
Deposits:
Checking, Savings, and MMDA
accounts $ 68,694 $ 68,694
Certificate accounts 99,367 99,394
Advances from Federal
Home Loan Bank 14,114 14,147
Other borrowed money 204 198
The Bank had, at March 31, 1997 $21.0 million of off-balance sheet financial
commitments. These commitments are to originate loans and unused consumer
lines of credit and credit card lines. Since these obligations are based on
current market rates, if funded, the original principal is considered to be a
reasonable estimate of fair market value.
Fair value estimates are made at a specific point in time, based on relevant
market data and information about the financial instrument. These estimates
do not reflect any premium or discount that could result from offering for
sale the Bank's entire holdings of a particular financial instrument. Because
no active market exists for a significant portion of the Bank's financial
instruments fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, current interest rates
and prepayment trends, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in any of these assumptions used in
calculating fair value would also significantly affect the estimates.
Further, the fair value estimates were calculated as of March 31, 1997.
Fair value estimates are based on existing on and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. For example, the Bank has significant assets and
liabilities that are not considered financial assets or liabilities including
deposit franchise value, loan servicing portfolio, deferred tax liabilities,
and premises and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in any of these
estimates.
44
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
STOCKHOLDERS INFORMATION
ANNUAL MEETING
The annual meeting of stockholders will be held at 2:00 p.m., Tuesday, July
16, 1997 at the University of South Carolina-Aiken, Business and Educational
Building, Room 116, 171 University Parkway, Aiken, SC.
STOCK LISTING
The Bank converted from mutual to stock concurrently with the formation of a
Holding Company effective October 30, 1987, The Holding Company stock is
traded over the counter and is only sporadically traded.
PRICE RANGE OF COMMON STOCK
The table below shows the range of high and low bid prices as reported by the
Robinson-Humphrey Company, Inc., located in Aiken, South Carolina. Those
prices represent actual transactions and do not include retail markups,
markdowns or commissions. The Robinson-Humphrey Company makes a market for
the stock.
Quarter Ending High Low
-------------- ---- ---
6-30-95 21.875 21.875
9-31-95 24.75 24.75
12-31-95 26.50 24.50
3-31-96 27.25 26.25
6-30-96 27.75 27.75
9-30-96 29.00 29.00
12-31-96 30.00 28.50
3-31-97 31.00 29.00
As of March 31, 1997, the Company had approximately 288 stockholders and
417,122 outstanding shares of common stock.
DIVIDENDS
The first quarterly dividend on the stock was paid to stockholders on March
15, 1991. Dividends will be paid upon the determination of the Board of
Directors that such payment is consistent with the long-term interest of the
Company. The factors affecting this determination include the Company's
current and projected earnings, operating results, financial condition,
regulatory restrictions, future growth plans and other relevant factors. The
Company declared and paid quarterly dividends of $0.05 per share during each
of the fiscal years ended March 31, 1996 and 1997.
The Bank may not declare or pay a cash dividend on its stock or repurchase
shares of its stock if the offset thereof would be to cause its regulatory
capital to be reduced below the amount required for the liquidation account or
to meet applicable regulatory capital requirements. Pursuant to OTS
regulations, Tier 1 associations, which are associations that before and after
the proposed distribution meet or exceed their fully phased-in capital
requirements, may make capital distributions during any calendar year equal to
100% of net income for the year-to-date plus 50% of the amount by which the
associations total capital its fully phased-in capital requirement, as
measured at the beginning of the capital year. However, a Tier 1 association
deemed to be in need of more than normal supervision by the OTS may be
downgraded to a Tier 2 or Tier 3 association as a result of such a
determination. The Bank is also required to give the OTS 30 days notice prior
to the declaration of a dividend. Unlike the Bank, there is no regulatory
restriction on the payment of dividends by the Company. However it is subject
to the requirements of Delaware law which generally limit dividends to an
amount equal to the excess of the corporation's net assets over paid-in
capital; or if there is no such excess, to its net profits for the current and
immediately proceeding fiscal year.
ANNUAL AND OTHER REPORTS
The Company is required to file an annual report on form 10-KSB for its fiscal
year ended March 31, 1997, with the Securities and Exchange Commission.
Copies of the Form 10-KSB, annual report and the Holding Company's quarterly
reports may be obtained without charge by contacting:
Mrs. Ruth Vance
Security Federal Corporation SPECIAL COUNSEL
1705 Whiskey Road, South Breyer & Aguggia
Post Office Box 810 1300 I Street, NW
Aiken, South Carolina 29802-0810 Suite 470 East
803-641-3000 Washington, DC 20005
STOCKHOLDERS AND GENERAL
TRANSFER AGENT INQUIRIES
Security Federal Corporation Mrs. Ruth Vance
1705 Whiskey Road South Security Federal Corporation
Post Office Box 810 1705 Whiskey Road, South
Aiken, South Carolina 29802-0810 Aiken, South Carolina
29802-0810
803-641-3000
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
1 Insignia Plaza
Suite 600
Greenville, South Carolina 29603
SECURITY FEDERAL CORPORATION
45
PAGE
<PAGE>
<TABLE>
BOARD OF DIRECTORS*
- -------------------------------------------------------------------------------------------
<S> <C> <C>
T. Clifton Weeks Senator Thomas L. Moore (Directors Emeriti)
Chairman Owner, Boiler Efficiency Walter E. Brooker, Sr.
Security Federal Corporation Clearwater, SC President, Brooker's Inc. (Retail)
Aiken, SC Denmark, SC
Dr. Robert E. Alexander Timothy W. Simmons
Chancellor President/Chief Executive Robert E. Johnson
University of South Carolina Officer Corporate Secretary
at Aiken Security Federal Corporation Attorney (Retired)
Aiken, SC Aiken, SC Aiken, SC
William Clyburn G. L. Toole, III Dr. Wallace McNair, Jr.
Advisor for Community Alliances Attorney Retired Physician
Westinghouse Savannah River Aiken, SC Aiken, SC
Company
Aiken, SC
Harry O. Weeks, Jr. Harold A. Rudnick
Hutson-Etherredge Retired Retailer
Companies Aiken, SC
Aiken, SC
</TABLE>
<TABLE>
DENMARK ADVISORY BOARD**
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Walter E. Brooker, Sr. David Crum Jim Harrison Claude E. McCain Rev. Isaiah Odom
President Attorney Owner President Owner
Brookers's Inc. Crum, Crum and Jim Harrison Art H.C. McCain Agency Odom's Auto Sure Auto
Denmark, SC Crum Gallery Insurance Parts
Denmark, SC Denmark, SC Denmark, SC Denmark, SC
</TABLE>
<TABLE>
NORTH AUGUSTA ADVISORY BOARD**
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard Borden G.L. Brightharp Helen Butler Senator Thomas L. Moore John Potter
Owner G.L. Brightharp & Retired Banker President Director of Finance
Borden Pest Control Sons Mortuary North Augusta, SC Boiler Efficiency, Inc. City of North
North Augusta, SC North Augusta, SC Clearwater, SC Augusta
North Augusta, SC
</TABLE>
<TABLE>
WAGENER ADVISORY BOARD**
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
M. Judson Busbee Kent G. Ingram Mary Lybrand Joy J. Shealy Richard H. Sumpter Allison H. Tyler, Jr.
Owner Owner & President Retired Banker Principal Retired Educator Owner
Busbee Hardware Garvin Oil Company Wagener, SC Busbee Wagener, SC Tyler Brothers
Wagener, SC Wagener, SC Elementary Department Store
School Wagener, SC
Wagener, SC
</TABLE>
<TABLE>
MIDLAND VALLEY ADVISORY BOARD**
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Charles Hilton Rev. Nathaniel Gloria Bush Senator Thomas Rev. Dennis Carlton Shealy
General Manager Irvin, Sr. Johnson L. Moore Phillips Owner
Breezy Hill Pastor Consultant President Pastor C. Shealy Realty
Water & Sewer Old Storm Branch Aiken, SC Boiler Effici- Christian Builders &
Graniteville, SC Baptist Church ency, Inc. Heritage Chruch Developers
Clearwater, SC Clearwater, SC Graniteville, SC North Augusta, SC
</TABLE>
<TABLE>
SECURITY FEDERAL BANK MANAGEMENT
- ------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
T. Clifton Weeks Chairman Frank M. Thomas Vice President/Branch Coordinator
Timothy W. Simmons President and Chief Executive Ruth Vance Assistant Secretary/Assistant Vice
Officer President
G.L. Toole, III Vice President Al McKay*** Vice President/Financial Advisor
Robert E. Johnson Corporate Secretary Marianne Harden Assistant Vice President/Mortgage Loan
Processing
Roy G. Lindburg Treasurer & Chief Financial Carolyn Anderson Assistant Vice President/Proof and
Officer Transit
Thomas Clark Senior Vice/President/Loan Teresa Teuton Assistant Vice President/Loan Services
Administration
Richard Garcia Senior Vice President/ Ann Johnson Assistant Vice President/Purchasing
Mortgage Lending/Marketing
Sandy Bartlett Vice President/Human Resources Gabriele Dukes Assistant Vice President/Credit
Counseling
Kathi Carr Vice President/Mortgage Loan Ronnie Gordon Assistant Vice President/Consumer-
Operations Commercial Lending
Harley Henkes Internal Auditor/Compliance Margaret Hurt Manager/Accounting
and Security Officer
Joseph Taylor Manager/Deposit/Network Services
</TABLE>
<TABLE>
WHISKEY ROAD OFFICE DENMARK OFFICE NORTH AUGUSTA OFFICE
- ------------------- -------------- --------------------
<C> <C> <C>
Matt Fry Manager Lee Hutto Manager Rodney Ingle AVP/Manager
</TABLE>
<TABLE>
LAURENS STREET OFFICE CLEARWATER OFFICE WAGENER OFFICE
- --------------------- ----------------- --------------
<C> <C> <C>
Patricia Moseley AVP/Manager Gail Dotson AVP/Manager Connie Jeffcoat Manager
</TABLE>
<TABLE>
RICHLAND AVENUE OFFICE LANGLEY OFFICE WAL*MART OFFICE
- ---------------------- -------------- ---------------
<C> <C> <C>
Rhonda Morris Manager Pat Guglieri AVP/Manager David Carter Manager
</TABLE>
<TABLE>
GRANITEVILLE OFFICE
- -------------------
<C> <C>
Elsie Dicks AVP/Manager * Security Federal Corporation, Security Federal Bank and Security Financial
Services Corporation
** Security Federal Bank
*** Security Financial Services
Corporation
</TABLE>
46
<PAGE>
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
State of Percentage
Parent Subsidiary Incorporation of Ownership
- ------ ---------- ------------- ------------
Security Federal
Corporation Security Federal Bank United States 100%
Security Federal
Bank Security Financial
Services Corporation South Carolina 100%
<PAGE>
<PAGE>
Exhibit 23
Consent of KPMG Peat Marwick LLP<PAGE>
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Security Federal Corporation:
We consent to incorporation by reference in the Registration Statement No.
33-80008 on Form S-8 of our report dated May 19, 1997, relating to the
consolidated balance sheets of Security Federal Corporation and subsidiary
(the "Company") as of March 31, 1997 and 1996 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the years
in the three-year period ended March 31, 1997, which report appears in the
March 31, 1997 annual report on Form 10-KSB of the Company.
/s/KPMG Peat Marwick LLP
- ------------------------
KPMG Peat Marwick LLP
Greenville, South Carolina
June 27, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 7903637
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24215667
<INVESTMENTS-CARRYING> 12754769
<INVESTMENTS-MARKET> 12598186
<LOANS> 146769473
<ALLOWANCE> 1767483
<TOTAL-ASSETS> 201645945
<DEPOSITS> 168060858
<SHORT-TERM> 11952000
<LIABILITIES-OTHER> 3084661
<LONG-TERM> 2366897
0
0
<COMMON> 3962774
<OTHER-SE> 12219255
<TOTAL-LIABILITIES-AND-EQUITY> 201645945
<INTEREST-LOAN> 13476697
<INTEREST-INVEST> 2291295
<INTEREST-OTHER> 74421
<INTEREST-TOTAL> 15842413
<INTEREST-DEPOSIT> 6718078
<INTEREST-EXPENSE> 7907619
<INTEREST-INCOME-NET> 7934794
<LOAN-LOSSES> 300000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8044693
<INCOME-PRETAX> 1249152
<INCOME-PRE-EXTRAORDINARY> 835207
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 835207
<EPS-PRIMARY> 2.01
<EPS-DILUTED> 2.01
<YIELD-ACTUAL> 8.16
<LOANS-NON> 1368072
<LOANS-PAST> 0
<LOANS-TROUBLED> 829000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1758688
<CHARGE-OFFS> 320643
<RECOVERIES> 29438
<ALLOWANCE-CLOSE> 1767483
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1767483
</TABLE>
