SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10 - QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 0-16120
SECURITY FEDERAL CORPORATION
South Carolina 57-0858504
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1705 Whiskey Road, Aiken, South Carolina 29801
(Address of Principal Executive Office) (Zip code)
(803) 641-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practical date.
Class Outstanding Shares at
Common Stock September 30, 1998
$0.01 Par Value 421,060
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INDEX
SECURITY FEDERAL CORPORATION
PART I - FINANCIAL INFORMATION (UNAUDITED) PAGE
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets 2
Consolidated Statements of Income 3-6
Consolidated Statement of Shareholders' Equity 7
Consolidated Statements of Cash Flows 8-9
Notes to Consolidated Financial Statements 10-13
Item 2. Management's Discussion and Analysis
Financial Condition and Results of Operations 14-17
PART II. OTHER INFORMATION
Other Information 18-19
Signatures 20
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information is included in the consolidated financial statements and related
notes.
1
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 1998 MARCH 31, 1998
------------------ --------------
ASSETS
Cash and cash equivalents $ 5,511,899 $ 4,658,681
Investment and mortgage-backed
securities:
Available for sale: (Amortized cost
of $62,305,640 at September 30, 62,770,540 54,597,270
1998 and $54,475,231 at March 31,
1998)
Held to maturity: (Fair value of
$5,965,899 at September 30, 1998 and 5,870,290 8,215,833
$8,297,204 at March 31, 1998)
Loans receivable net:
Held for sale 1,734,103 1,232,181
Held for investment: (Net of allowance
of $1,577,561 at September 30, 1998 141,498,982 136,492,252
and $1,512,038 at March 31, 1998)
------------- -------------
$ 143,233,085 $ 137,724,433
------------- -------------
Accrued interest receivable:
Loans 698,012 736,201
Mortgage-backed securities 56,471 35,694
Investments 779,166 761,405
Premises and equipment, net 4,015,028 3,827,760
Federal Home Loan Bank stock, at cost 1,259,200 1,348,600
Real estate acquired in settlement of loans 347,335 165,170
Real estate held for development and sale 590,541 623,779
Other assets 3,176,832 2,817,090
------------- -------------
TOTAL ASSETS 228,308,399 215,511,916
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $ 188,613,657 $ 181,785,948
Advances from Federal Home Loan Bank 15,958,000 12,126,000
Other borrowed money 224,939 128,933
Advance payments by borrowers
for taxes and insurance 388,168 266,128
Other liabilities 4,054,723 3,128,866
------------- -------------
TOTAL LIABILITIES 209,239,487 197,435,875
------------- -------------
STOCKHOLDERS' EQUITY:
Serial preferred stock, $.01 par value;
authorized shares - 200,000 issued and
outstanding, none
Common stock, $.01 par value; authorized
shares 5,000,000 issued and outstanding
shares, 421,060 at September 30, 1998
and $1,000,000 authorized and issued, 4,211 4,211
421,060 at March 31, 1998
Additional paid-in capital 3,997,943 3,997,943
Unrealized net gain on securities
available for sale, net of income 288,424 75,713
taxes
Retained earnings, substantially
restricted 14,778,334 13,998,174
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 19,068,912 18,076,041
============= =============
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 228,308,399 $ 215,511,916
============= =============
See accompanying notes to consolidated financial statements.
2
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1997
---- ----
Interest income:
Loans $ 3,278,212 $ 3,354,200
Mortgage-backed securities 143,162 83,509
Investment securities 845,295 645,433
Other 17,910 19,534
------------- ------------
Total interest income 4,284,579 4,102,676
------------- ------------
Interest expense:
NOW and money market accounts 504,877 288,254
Passbook accounts 73,749 75,831
Certificate accounts 1,280,175 1,287,136
Advances and other borrowed money 266,103 275,015
------------- ------------
Total interest expense 2,124,904 1,926,236
------------- ------------
Net interest income 2,159,675 2,176,440
Provision for loan losses 150,000 240,000
------------- ------------
Net interest income after provision for
loan losses 2,009,675 1,936,440
------------- ------------
Other income:
Gain on sale of loans 189,521 71,955
Loan servicing fees 79,475 90,053
Service fees on deposit accounts 210,373 238,475
Income from real estate operations 5,090 16,875
Other 140,681 164,203
------------- ------------
Total other income 625,140 581,561
------------- ------------
General and administrative expenses:
Salaries and employee benefits 1,018,180 833,961
Occupancy 127,735 124,686
Advertising 139,483 107,227
Depreciation and maintenance of equipment 201,836 218,885
FDIC insurance premiums 19,879 19,158
Amortization of intangibles 116,310 116,310
Other 443,255 435,702
------------- ------------
Total general and administrative
expenses 2,066,678 1,855,929
------------- ------------
(Continued)
3
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1997
---- ----
Income before income taxes 568,137 662,072
Provision for income taxes 192,848 228,436
------------- -------------
Net income $ 375,289 $ 433,636
============= =============
Basic net income per common share $ .89 $ 1.04
============= =============
Diluted net income per common share $ .89 $ 1.03
============= =============
Cash dividend per share on common stock $ 0.06 $ 0.06
============= =============
Basic weighted average shares outstanding 421,060 417,122
============= =============
Diluted weighted average shares outstanding 422,677 420,187
============= =============
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1997
---- ----
Net Income $ 375,289 $ 433,636
Other comprehensive Income, net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
during the period 235,249 79,407
------------- ------------
Comprehensive Income $ 610,538 $ 513,043
============= ============
See accompanying notes to consolidated financial statements.
4
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1997
---- ----
Interest income:
Loans $ 6,310,067 $ 6,663,201
Mortgage-backed securities 246,005 168,006
Investment securities 1,926,481 1,197,307
Other 45,762 38,077
------------- ------------
Total interest income 8,528,315 8,066,591
------------- ------------
Interest expense:
NOW and money market accounts 947,442 493,579
Passbook accounts 148,365 151,823
Certificate accounts 2,560,142 2,531,711
Advances and other borrowed money 544,959 529,880
------------- ------------
Total interest expense 4,200,908 3,706,993
------------- ------------
Net interest income 4,327,407 4,359,598
Provision for loan losses 300,000 390,000
------------- ------------
Net interest income after provision for
Loan losses 4,027,407 3,969,598
------------- ------------
Other income:
Gain on sale of loans 287,984 102,085
Loan servicing fees 161,917 173,400
Service fees on deposit accounts 412,848 434,771
Income from real estate operations 72,168 46,915
Other 284,959 244,920
------------- ------------
Total other income 1,219,876 1,002,091
------------- ------------
General and administrative expenses:
Salaries and employee benefits 1,993,316 1,730,787
Occupancy 245,096 237,072
Advertising 239,977 185,998
Depreciation and maintenance of equipment 395,346 376,465
FDIC insurance premiums 39,541 38,592
Amortization of intangibles 232,620 232,620
Other 836,966 847,108
------------- ------------
Total general and administrative
expenses 3,982,862 3,648,642
------------- ------------
(Continued)
5
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1997
---- ----
Income before income taxes 1,264,421 1,323,047
Provision for income taxes 433,734 467,983
------------- -------------
Net income $ 830,687 $ 855,064
============= =============
Basic net income per common share $ 1.97 $ 2.05
============= =============
Diluted net income per common share $ 1.97 $ 2.03
============= =============
Cash dividend per share on common stock $ 0.12 $ 0.12
============= =============
Basic weighted average shares outstanding 421,060 417,122
============= =============
Diluted weighted average shares outstanding 422,677 420,658
============= =============
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1997
---- ----
Net Income $ 830,687 $ 855,064
Other comprehensive Income, net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
during the period 212,711 199,243
------------- ------------
Comprehensive Income $ 1,043,398 $ 1,054,307
============= ============
6
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
UNREALIZED
NET GAIN
ADDITIONAL (LOSS) ON
ADDITIONAL SECURITIES
COMMON PAID-IN AVAILABLE RETAINED
STOCK CAPITAL FOR SALE EARNINGS TOTAL
-----------------------------------------------------------
Beginning balance
March 31, 1998 $ 4,211 $ 3,997,943 $ 75,713 $ 13,998,174 $ 18,076,041
Net income ----- ----- ----- 830,687 830,687
Cash dividend ----- ----- ----- (50,527) (50,527)
Exercise of stock ----- ----- ----- ----- -----
options
Increase in ----- ----- 212,711 ----- 212,711
unrealized net
gain on securities
available for
sale, net of tax
-----------------------------------------------------------
Ending balance
September 30, 1998 $ 4,211 $ 3,997,943 $288,424 $ 14,778,334 $ 19,068,912
===========================================================
See accompanying notes to consolidated financial statements.
7
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 830,687 $ 855,064
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense 311,722 322,415
Amortization of purchase accounting adjustments 232,620 232,620
Discount accretion and premium amortization (13,175) (15,084)
Provisions for losses on loans and real estate 300,000 390,000
Gain on sale of investments 0 0
Gain on sale of loans (287,984) (102,085)
Gain on sale of real estate (126,543) (89,677)
Amortization of deferred fees on loans (123,502) (45,307)
Proceeds from sale of loans held for sale 13,455,549 5,176,055
Origination of loans for sale (13,669,487) (5,730,000)
(Increase) decrease in accrued interest
Receivable:
Loans 38,189 (30,052)
Mortgage-backed securities (20,777) 1,116
Investments (17,761) (162,892)
Increase (decrease) in advance payments by 122,040 165,249
borrowers
Other, net 203,345 580,155
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,234,923 $ 1,547,577
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal repayments on mortgage-backed
securities held to maturity 473,623 148,436
Principal repayments on mortgage-backed
securities 274,926 0
available for sale
Purchase of investment securities available
for sale (14,999,375) (26,862,547)
Purchase of mortgage-backed securities
available for sale (7,261,743) 0
Maturities of investment securities available
for sale 14,162,829 5,500,000
Maturities of investment securities held to
maturity 1,878,049 2,500,000
Purchase of FHLBB Stock 0 (424,600)
Redemption of FHLBB Stock 89,400 0
(Increase) decrease in loans to customers (5,640,563) 2,462,377
Investment in real estate held for development (272,214) (105,939)
Proceeds from sale of real estate held for
development 377,620 253,920
Proceeds from sale of real estate acquired
through foreclosure 329,545 218,184
Purchase of premises and equipment (505,990) (269,137)
Proceeds from sales of premises and equipment 7,000 0
------------- ------------
NET CASH USED BY INVESTING ACTIVITIES $ (11,086,893) $ (16,579,306)
------------- ------------
(Continued)
8
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
SIX MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1997
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposit accounts $ 6,827,709 $ 5,437,944
Proceeds from FHLBB advances 56,725,000 59,900,000
Repayment of FHLBB advances (52,893,000) (51,436,000)
Proceeds of other borrowings 135,436 0
Repayment of other borrowings (39,430) (37,055)
Dividends to shareholders (50,527) (50,054)
------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 10,705,188 $ 13,814,835
------------- ------------
Net increase (decrease) in cash and cash
equivalents 853,218 (1,216,894)
Cash and cash equivalents at beginning of
period 4,658,681 7,903,637
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,511,899 $ 6,686,743
============= ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 3,845,891 $ 3,321,574
Income taxes $ 16,436 $ 316,500
Additions to real estate acquired through
foreclosure $ 457,335 $ 164,948
Increase in unrealized net gain on securities
available for sale, net of taxes $ 212,711 $ 199,243
See accompanying notes to consolidated financial statements.
9
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-QSB and therefore do not include all
disclosures necessary for a complete presentation of financial condition,
results of operations and cash flows in conformity with general accepted
accounting principles. Such statements are unaudited but, in the opinion of
management, reflect all adjustments, all of which are of a normal recurring
nature, necessary for a fair presentation of results for the selected interim
periods. Users of financial information produced for interim periods are
encouraged to refer to the footnotes contained in the Annual Report to
Stockholders when reviewing interim financial statements. The results of
operations for the three and six month periods ended September 30, 1998 are
not necessarily indicative of the results, which may be expected for the
entire fiscal year. This Form 10-QSB contains certain forward-looking
statements with respect to the financial condition, results of operations, and
business. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially from
those anticipated by such forward-looking statements include, but are not
limited to changes in interest rates, changes in the regulatory environment,
changes in general economic conditions and inflation, changes in the
securities market and Year 2000 if not effectively corrected. Management
cautions readers of Form 10-QSB not to place undue reliance on forward-looking
statements contained therein.
2. PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include the
accounts of Security Federal Corporation (the "Company") and its wholly owned
subsidiary, Security Federal Bank (the "Bank"), and its wholly owned
subsidiary Security Financial Services Corporation ("SFSC"). SFSC engages
primarily in investment brokerage services. Also included in consolidation is
a real estate partnership, which the Company purchased from SFSC in December
1995 at fair market value.
3. LOANS RECEIVABLE, NET
Loans receivable, net, at September 30, 1998 and March 31, 1998, consisted of
the following:
Loans held for sale were $1,734,103 and $1,232,181 at September 30, 1998 and
March 31, 1998 respectively.
Loans held for investment: September 30, 1998 March 31, 1998
------------------ --------------
Residential real estate $ 55,467,637 $ 46,450,206
Consumer 45,123,957 46,499,200
Commercial real estate 4,093,370 3,955,462
Commercial business 44,829,182 44,500,079
-------------- -------------
$ 149,514,146 $ 141,404,947
-------------- -------------
Less:
Allowance for possible loan loss $ 1,577,561 $ 1,512,038
Loans in process 6,254,218 3,175,684
Deferred loan fees 183,385 224,973
-------------- -------------
8,015,164 4,912,695
-------------- -------------
$ 141,498,982 $ 136,492,252
============== =============
The following is a reconciliation of the allowance for loan losses for the six
months ending:
September 30, 1998 September 30, 1997
------------------ ------------------
Beginning balance $ 1,512,038 $ 1,767,483
Provision 300,000 390,000
Charge-offs (251,789) (157,189)
Recoveries 17,312 33,785
-------------- -------------
Ending balance $ 1,577,561 $ 2,034,079
============== =============
10
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SECURITIES
INVESTMENT AND MORTGAGE-BACKED SECURITIES, HELD TO MATURITY
The amortized cost, gross unrealized gains gross unrealized losses and fair
values of investment and mortgage-backed securities held to maturity are as
follows:
SEPTEMBER 30, 1998
- ------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
US Government and agency
obligations $ 1,994,232 $ 9,061 $ 0 $ 2,003,293
Mortgage-backed
securities 3,876,058 86,548 0 3,962,606
----------- -------- -------- -----------
Total $ 5,870,290 $ 95,609 $ 0 $ 5,965,899
=========== ======== ======== ===========
MARCH 31, 1998
- --------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
US Government and agency
obligations $ 3,863,910 $ 20,664 $ 10,320 $ 3,874,254
Mortgage-backed
securities 4,351,923 71,492 465 4,422,950
----------- -------- -------- -----------
Total $ 8,215,833 $ 92,156 $ 10,785 $ 8,297,204
=========== ======== ======== ===========
INVESTMENT AND MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
- -------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses and fair
values of investment and mortgage-backed securities available for sale are as
follows:
SEPTEMBER 30, 1998
- ------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
US Government and
agency obligations $55,326,390 $494,368 $ 28,991 $55,791,767
Mortgage-backed
securities 6,979,250 10,767 11,244 6,978,773
----------- -------- -------- -----------
Total $62,305,640 $505,135 $ 40,235 $62,770,540
=========== ======== ======== ===========
11
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
INVESTMENT AND MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE (CONTINUED)
MARCH 31, 1998
- --------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
US Government and agency
obligations $54,475,231 $189,603 $ 67,564 $54,597,270
Mortgage-backed
securities 0 0 0 0
----------- -------- -------- -----------
Total $54,475,231 $189,603 $ 67,564 $54,597,270
=========== ======== ======== ===========
5. DEPOSITS
A summary of deposit accounts by type with weighted average rates are as
follows:
September 30, 1998 March 31, 1998
------------------ --------------
Balance Rate Balance Rate
Demand Accounts: ------- ---- ------- ----
Checking $ 48,572,650 1.16% $ 47,414,160 1.09%
Money Market 33,805,373 4.80% 27,902,091 4.67%
Regular Savings 11,855,252 2.46% 12,328,146 2.44%
------------ ---- ------------ ----
Total demand accounts $ 94,233,275 2.63% $ 87,644,397 2.42%
------------ ---- ------------ ----
Certificate Accounts:
0 - 4.99% $ 3,709,430 $ 3,086,511
5.00 - 6.99% 90,544,879 90,919,998
7.00 - 8.99% 126,073 135,042
------------ ------------
Total certificate accounts 94,380,382 5.48% 94,141,551 5.50%
------------ ----- ------------ ----
Total deposit accounts $188,613,657 4.05% $181,785,948 4.02%
============ ==== ============ ====
6. FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank Advances are summarized by year of maturity and
weighted average interest rate in the table below:
September 30, 1998 March 31, 1998
------------------ --------------
Fiscal Year Due Balance Rate Balance Rate
- --------------- ------- ---- ------- ----
1999 $ 1,340,000 6.76%$ $ 5,490,000 6.06%
2000 528,000 8.70% 528,000 8.70%
2001 856,000 8.75% 856,000 8.75%
2002 0 0% 0 0%
thereafter 13,234,000 5.52% 5,252,000 5.80%
------------ ---- ------------ ----
$ 15,958,000 5.91% $ 12,126,000 6.25%
============ ==== ============ ====
12
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. REGULATORY MATTERS
The following table reconciles the Bank's stockholders' equity to its various
regulatory capital positions:
(Dollars in thousands)
September 30, 1998 March 31, 1998
------------------ --------------
Bank's Stockholders' Equity $ 18,323 $ 17,294
Unrealized loss (gain) on
available for sale
securities, net of tax (288) (76)
Reduction for goodwill and other
intangibles (1,815) (2,046)
---------- ---------
Tangible capital 16,220 15,172
Qualifying core deposits and
intangible assets 726 789
---------- ---------
Core capital 16,946 15,961
Supplemental capital 1,578 1,512
---------- ---------
Risk-based capital $ 18,524 $ 17,473
========== =========
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at September 30, 1998. (Dollars in
thousands)
Amount Percent Actual Excess
Required Required Amount Percent Excess Percent
-------- -------- ------ ------- ------ -------
Tangible capital $ 4,512 2.0% $16,220 7.19% $11,708 5.19%
Tier 1 Leverage 9,503 4.0% 16,946 7.49% 7,893 3.49%
(Core) capital
Total Risk-based 11,602 8.0% 18,524 12.77% 6,922 4.77%
capital
Tier 1 Risk-based 5,801 4.0% 16,946 11.69% 11,145 7.69%
(Core) capital
The Bank's regulatory capital amounts and ratios are as follow as of the date
indicated:
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------
(Dollars in thousands)
September 30, 1998
Tier 1 Risk-based
Core Capital $16,946 11.7% $5,801 4.0% $8,701 6.0%
Risk-based Capital 18,524 12.8 11,602 8.0 14,502 10.0
(to risk weighted assets)
Core Capital 16,946 7.5 9,053 4.0 11,317 5.0
(to adjusted tangible assets)
Tangible Capital 16,220 7.2 4,512 2.0 11,280 5.0
(to tangible assets)
13
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CHANGES IN FINANCIAL CONDITION
Total assets of the Company increased $12.8 million or 5.9% during the six
months ended September 30, 1998, primarily due to increases of $5.5 million in
total net loans receivable, $5.8 million in investment securities, and
$853,000 in cash and cash equivalents.
Real estate acquired in settlement of loans (REO) increased $182,000 while
real estate acquired for development decreased $33,000 during the six-month
period due to sales of real estate.
Deposits increased $6.8 million or 3.8% during the six months ended of
September 1998 as Federal Home Loan Bank (FHLBB) advances grew $3.8 million to
fund the Company's 5.9% growth in assets.
The Board of Directors declared the thirtieth and thirty-first consecutive
quarterly dividend of $.06 per share each in May and August 1998, which
totaled $51,000. Unrealized net gains on securities available for sale
increased $213,000 during the six months ended September 30, 1998. Net income
for the six months was $831,000 for the Company. These items combined to
increase the stockholders' equity by $993,000 or 5.5% during the six months
ended September 30, 1998 and raised book value per share to $45.29 compared to
$42.93 at March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
In accordance with Office of Thrift Supervision regulations, the Bank is
required to maintain a liquidity ratio at specified levels, which are subject
to change. Currently, a minimum of 4.0% of the combined total of deposits and
certain borrowings must be maintained in the form of cash or eligible
investments. The Bank's average liquidity during the six months ended
September 30,1998 was approximately 34%. The Bank's current liquidity level is
deemed adequate to meet the requirements of normal operations, potential
deposit outflows, and loan demand while still allowing for optimal investment
of funds and return on assets.
Loan repayments and maturities of investments are a significant source of
funds, whereas loan disbursements are a primary use of the Bank's funds.
During the six months ended September 30, 1998, loan disbursements exceeded
loan repayments resulting in a $5.5 million or 4.0% increase in total net loan
receivable.
Deposits and other borrowings are also an important source of funds for the
Bank. During the six months ended September 30, 1998, deposits increased $6.8
million while FHLBB advances increased $3.8 million. At September 30, 1998,
Security Federal had $75.1 million of certificates of deposit maturing within
one year. Based on previous experience, a major portion of these certificates
is expected to be renewed.
Liquidity resources at September 30, 1998 are sufficient to meet outstanding
mortgage loan commitments of $1.3 million and unused lines of credit of $21.1
million. Management believes that the Bank's liquidity needs will continue to
be supported by the Bank's deposit base and borrowing capacity.
ACCOUNTING AND REPORTING CHANGES
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Enterprises are required to classify items of "other
comprehensive income" by their nature in the financial statement and display
the balance of other comprehensive income separately in the equity section of
a statement of financial position. Statement 130 is effective for both interim
and annual periods beginning after December 15, 1997. Earlier application is
permitted. Comparative financial statements provided for earlier periods are
required to be reclassified to reflect the provisions of this statement. The
Company adopted Statement 130 effective June 30, 1998.
14
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<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement establishes standards for
the way public business companies are to report information about operating
segments in annual financial statements and requires those companies to report
selected information about operating segments in interim financial reports
issued to shareholders. Statement 131 is effective for financial statements
for periods beginning after December 15, 1997. Earlier application is
encouraged. In the initial year of application, comparative information for
earlier years is to be restated, unless it is impractical to do so. Statement
131 need not be applied to interim financial statements in the initial year of
its application, but comparative information for interim periods in the
initial year of application shall be reported in financial statements for
interim periods in the second year of application. This standard does not
materially effect the Company's current method of financial reporting.
In April 1998, the FASB issued SFAS 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits. The new Statement revises the required
disclosures for employee benefit plans, but it does not change the measurement
or recognition of such plans. While the new standard requires some additional
information about benefit plans, it helps preparers of financial statements by
eliminating certain disclosures and by standardizing the disclosures for
pensions and other postretirement benefits to the extent practicable. SFAS 132
supercedes the disclosure requirements in SFAS 87, Employers' Accounting for
Pensions, SFAS 88, Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits, and SFAS 106,
Employers' Accounting for Postretirement Benefits Other than Pensions. The new
disclosures are effective for fiscal years beginning after December 15, 1997.
The adoption of SFAS 132 did not have an impact on the financial statements of
the Company due to the disclosure only requirements.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instrument
and Hedging Activities. All derivatives are to be measured at fair value and
recognized in the statement of financial position as assets or liabilities.
The statement is effective for fiscal years and quarters beginning after June
15,1999. Because the Company has limited use of derivative transactions at
this time, management does not expect that this standard would have a
significant effect on the Company.
In March 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use (SOP 98-1), which provided
guidance as to when it is or is not appropriate to capitalize the cost of
software developed or obtained for internal uses. SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998 with
early adoption encouraged. The Company does not anticipate that adoption of
SOP 98-1 will have a material effect on its financial statements.
In October 1998, the FASB issued SFAS 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise. The new statement establishes accounting and
reporting standards for certain activities of mortgage banking enterprises.
The statement is effective for the first quarter beginning after December 15,
1998. The statement will have no effect on the financial statements of the
Bank.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements, related notes, and other financial
information presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
15
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<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
YEAR 2000 CONSIDERATIONS
The Bank recognizes that there is a business risk in computerized systems as
the calendar rolls over into the next century. If the computer systems
misinterpret the date, items such as interest calculations on loans and
deposits will be incorrect. This problem is commonly called the "Year 2000
Problem." A number of computer systems used by the Company in its day-to-day
operations will be affected by this problem. Management has established a
committee (the "Y2K Project Team") which has identified all affected systems
and is currently working to ensure that this event will not disrupt
operations. The Y2K Project Team reports regularly to the Bank's Board of
Directors. The Bank is also working closely with outside computer vendors to
ensure that all software corrections and warranty commitments are obtained and
to arrange mock conversion testing. Testing of the Bank's core processing
systems is scheduled for December 1998. The Bank's contingency plan will be
completed by calendar year end 1998. The Bank's Year 2000 project costs are
not expected to have a material impact on its results of operations, liquidity
or capital resources. The impact of Year 2000 noncompliance by all outside
parties with whom the corporation may transact business cannot be gauged fully
at this time.
SUBSEQUENT EVENTS
At its October 1998 Board of Directors meeting, the board of the Company
declared a 2-for-1 stock split of the Company's common stock. The stock split
will be accomplished through a 100 percent stock dividend to be issued on or
about December 15, 1998 to shareholders on record as of November 30, 1998.
RESULTS OF OPERATIONS
- ---------------------
NET INCOME
Net income was $375,000 and $831,000 for the three and six months ended
September 30, 1998, respectively. These are decreases of $58,000 for the
three-month period and $24,000 for the six-month period, compared to the same
periods in 1997. The reasons for the decreases are increases in general and
administrative expenses and decreases in net interest income, offset partially
by decreases in the provision for loan losses and increases in other income.
NET INTEREST INCOME
Net interest income decreased $17,000 or 0.8% and $32,000 or 0.08% for the
three and six month periods ended September 30, 1998 compared to the same
periods in 1997 due mainly to increases in total interest expense offset in
part by increases in total interest income.
Interest income on loans decreased $76,000 or 2.3% during the quarter and
$353,000 or 5.3% during the six months ended September 30, 1998 due to lower
average total outstanding loan balances and a lower overall yield in the loan
portfolio. Investment, mortgage-backed, and other securities interest income
increased $258,000 and $815,000 during the three and six month periods,
respectively, due primarily to increases in the average balances in the
investment portfolio and also a three basis points increase in yield during
the three month period and a seven basis points increase in yield during the
six months ended September 30, 1998. Total interest income increased $182,000
or 4.4% and $462,000 or 5.7% during the three and six months ended September
30, 1998, respectively.
16
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<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Total interest expense increased $199,000 or 10.3% during the three months
ended September 30, 1998 while interest expense increased $494,000 or 13.3%
during the six months ended September 30, 1998 compared to the same periods
one year earlier. Interest expense on deposits increased $208,000 and $479,000
during the three and six months ended September 30, 1998, respectively, as
average outstanding interest bearing deposits grew during the periods.
Interest expense on advances and other borrowings declined $9,000 during the
three-month period but grew $15,000 during the six-month period.
PROVISION FOR LOAN LOSSES
Security Federal's provision for loan losses decreased $90,000 for both the
three and six months ended September 30, 1998 compared to the same periods
ended September 30,1997 due to management's analysis of the loan portfolio.
Non-accrual loans, which are loans delinquent 90 days or more, were $2.3
million at September 30, 1998 compared to $2.0 million at March 31, 1998. The
ratio of allowance for loan losses to the Bank's total loans was 1.10% at
September 30, 1998 compared to 1.09% at March 31, 1998. Net charge-off's for
the six months ended September 30, 1998 compared to September 30, 1997 were
$234.000 and $123,000 respectively. Future additions to the Bank's allowance
for loan losses are dependant on, among other things, the performance of the
Bank's loan portfolio, changes in real estate values, interest rates, and the
economy.
OTHER INCOME
Total other income increased $44,000 or 7.5% and $218,000 or 21.7% during the
three and six months ended September 30, 1998 compared to the same periods one
year earlier. Gain on sale of loans increased $118,000 during the quarterly
period and $186,000 for the six months due to increased secondary market
activity. Loan servicing fees decreased $11,000 during both periods due to a
decline in the balance of loans serviced for others. Service fees on deposit
accounts declined $22,000 and $28,000. Income from real estate operations
decreased $12,000 for the September 1998 quarter but increased $25,000 for the
six months ended September 30, 1998 as real estate lot sales slowed during the
September 1998 three-month period. Other miscellaneous income, which consists
of credit life insurance commissions, gain on sale of repossessed assets, safe
deposit rental income, annuity and stock brokerage commissions through
Security Financial Services, and other miscellaneous fees decreased $24,000
during the three month period but increased $40,000 during the six months
ended September 30, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $211,000 or 11.4% and $334,000
or 9.2% during the three and six months ended September 30, 1998,
respectively, compared to the same periods in 1997 due mainly to increases in
salaries and employee benefits and advertising expenses.
Salaries and employee benefits expenses increased $184,000 or 22.1% and
$263,000 or 15.2% during the three and six month periods. The increases are
attributable to increases in staff in the mortgage loan department as a result
of the increased volume of refinancing in the current low interest rate
environment, an increase in the number of customer contact associates to
improve customer service and normal annual cost of living increases. Occupancy
expense increased $3,000 or 2.5% and $8,000 or 3.4% during the periods.
Advertising increased $32,000 and $54,000 during the three and six months
ending September 30, 1998 as money market accounts and Security Federal as a
local decision making community bank were promoted. Depreciation and
maintenance of equipment expense decreased $17,000 during the quarterly period
but increased $19,000 for the six months ended September 30, 1998. FDIC
insurance premiums increased slightly, by approximately $1,000 during both
periods. Amortization of intangible expense was $116,000 for the three months
in 1997 and 1998 and $233,000 in both six-month periods in 1997 and 1998.
Other miscellaneous expense, encompassing legal, professional, and consulting
expense, stationery and office supplies, and other sundry expenses, increased
$8,000 during the three months ended September 30, 1998 while decreasing
$10,000 during the six months ended September 30, 1998 compared to one year
earlier.
17
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
OTHER INFORMATION
Item 1 Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Bank is a party to
legal proceedings in the ordinary course of business wherein it
enforces its security interest in mortgage loans it has made.
Item 2 Changes in Securities and Use of Proceeds
----------------------------------------
Not applicable.
Item 3 Defaults upon Senior Securities
-------------------------------
None
Item 4 Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The election of directors was presented for vote to shareholders at the
Annual Meeting on July 21, 1998. Votes for Gasper L. Toole III were
as follows: 335,280 votes for, 14,225 votes withheld. Votes for
Thomas L. Moore were as follows: 335,080 votes for, 14,425 votes
withheld. Continuing as directors were Timothy W. Simmons, T. Clifton
Weeks, Dr. Robert E. Alexander, William Clyburn, and Harry O. Weeks Jr.
The votes for the approval of the change in the state of incorporation
of the Company from Delaware to South Carolina were as follows: 334,615
votes for, 13,690 votes against, 1,200 votes abstained. The votes for
the ratification of an amendment to the Company's corporate charter to
increase the number of authorized shares of common stock from $1
million to $5 million were as follows: 334,515 votes for, 13,790 votes
against, 1,200 votes abstained.
Item 5 Other Information
-----------------
None
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
On September 1, 1998, the Company filed a current report on Form 8-K to
report the consummation of its reincorporation form Delaware to South
Carolina.
Exhibits:
3.1 Articles of Incorporation*
3.2 Articles of Amendment, dated August 28, 1998, to Articles of
Incorporation
3.3 Bylaws**
10 Executive Compensation Plans and Arrangements:
Salary Continuation Agreements ***
Amendment One to Salary Continuation Agreements ****
Stock Option Plan ***
Incentive Compensation Plan ***
27 Financial Data Schedule
(Continued)
18
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
OTHER INFORMATION
(Continued)
* Filed as an exhibit to the Company's June 23, 1998 proxy statement and
incorporated herein by reference.
** Filed as an exhibit to the Company's Form 8-K dated August 31, 1998 and
incorporated herein by reference.
*** 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.
19
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
Security Federal Corporation
Date: November 13, 1998 By: /s/ Roy G. Lindburg
---------------------- ------------------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
20
<PAGE>
<PAGE>
Exhibit 3.2
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
ARTICLES OF AMENDMENT
Pursuant to Section 3-10-106 of the 1976 South Carolina Code, as amended, the
undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
1. The name of the corporation is Security Federal Corporation.
2. On July 21, 1998, the corporation adopted the following Amendment(s) to
the first sentence of the first paragraph of Article VI of the Articles of
Incorporation. The text of the amendment is as follows (the remainder of
Article VI of the Articles of Incorporation is unchanged):
"The aggregate number of shares of all classes of capital stock
which the Corporation has authority to issue is five million two
hundred thousand (5,200,000), of which five million (5,000,000)
shall be common stock, par value $.01 per share, amounting in the
aggregate to fifty thousand dollars ($50,000), and of which two
hundred thousand (200,000) shall be serial preferred stock, par
value $.01 per share, amounting in the aggregate to two thousand
dollars ($2,000)."
3. The manner, if not set forth in the amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the
Amendment shall be effected, is as follows: Not applicable.
4. Complete either a or b, whichever is applicable.
a. [X] Amendment(s) adopted by shareholder action
At the date of adoption of the Amendment(s), the number of
outstanding shares of each voting group entitled to vote separately
on the Amendment, and the vote of such shares was:
Voting group: Holders of Common Stock,
$0.01 par value per share
Number of shares outstanding: 421,060
Number of votes entitled to be cast: 421,060
Number of votes represented at meeting: 349,505
Number of undisputed shares voted: FOR - 334,515
AGAINST - 13,790
b. [ ] The amendment was duly adopted by the incorporators or board of
directors without shareholder approval pursuant to Section
33-6-102(d) and 33-10-105 of the 1976 South Carolina Code, as
amended, and shareholder action was not required.
5. Unless a delayed date is specified, the effective date of these Articles
of Amendment shall be the date of acceptance for filing by the Secretary of
State (see Section 33-1-230(b)): Not applicable.
* * *
1
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the undersigned, duly authorized, has executed this
instrument on this 28th day of August 1998.
SECURITY FEDERAL CORPORATION
/s/Timothy W. Simmons
------------------------------------------
Timothy W. Simmons
President
2
<PAGE>
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