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 June 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
Delaware 57-0858504
(State or other jurisdiction of (IRS Employer
incorporation or organization)Identification Number)
1705 Whiskey Road, Aiken, South Carolina 29801
(Address of Principal Executive Office) (Zip code)
(803) 641-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practical date.
Class Outstanding Shares at
Common Stock June 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 3-4
Consolidated Statements of Comprehensive Income 4
Consolidated Statement of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis
Financial Condition and Results of Operations 12-15
PART II. OTHER INFORMATION
Other Information 16
Signatures 17
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)
JUNE 30, 1998 MARCH 31, 1998
------------- --------------
ASSETS
Cash and cash equivalents $ 6,066,754 $ 4,658,681
Investment and mortgage-backed securities:
Available for sale: (Amortized cost of 61,067,688 54,597,270
$60,957,050 at June 30, 1998 and
$54,475,231 at March 31, 1998)
Held to maturity: (Fair value of 8,050,196 8,215,833
$8,138,302 at June 30, 1998 and
$8,297,204 at March 31, 1998)
Loans receivable net:
Held for sale 1,079,267 1,232,181
Held for investment: (Net of 136,187,153 136,492,252
allowance of $1,555,598 at June 30, ------------ ------------
1998 and $1,512,038 at March 31, 1998)
$137,266,420 $137,724,433
------------ ------------
Accrued interest receivable:
Loans 679,360 736,201
Mortgage-backed securities 54,302 35,694
Investments 774,533 761,405
Premises and equipment, net 3,802,824 3,827,760
Federal Home Loan Bank stock, at cost 1,348,600 1,348,600
Real estate acquired in settlement of loans 179,901 165,170
Real estate held for development and sale 503,194 623,779
Other assets 3,301,255 2,817,090
------------ ------------
TOTAL ASSETS 223,095,027 215,511,916
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $183,190,768 $181,785,948
Advances from Federal Home Loan Bank 17,543,000 12,126,000
Other borrowed money 115,919 128,933
Advance payments by borrowers
for taxes and insurance 271,925 266,128
Other liabilities 3,489,778 3,128,866
------------ ------------
TOTAL LIABILITIES 204,611,390 197,435,875
------------ ------------
STOCKHOLDERS' EQUITY:
Serial preferred stock, $.01 par
value; authorized shares - 200,000
issued and outstanding, none Common
stock, $.01 par value; authorized
shares 1,000,000 issued and out-
standing shares, 421,060 at June 30,
1998 and 421,060 at March 31, 1998 4,211 4,211
Additional paid-in capital 3,997,943 3,997,943
Unrealized net gain on securities 53,175 75,713
available for sale, net of income taxes
Retained earnings, substantially
restricted 14,428,308 13,998,174
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 18,483,637 18,076,041
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $223,095,027 $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
JUNE 30,
--------
1998 1997
---- ----
Interest income:
Loans $ 3,031,855 $ 3,224,504
Mortgage-backed securities 102,843 84,497
Investment securities 1,081,186 636,371
Other 27,852 18,543
--------------- -------------
Total interest income 4,243,736 3,963,915
--------------- -------------
Interest expense:
NOW and money market accounts 442,565 205,325
Passbook accounts 74,616 75,992
Certificate accounts 1,279,967 1,244,575
Advances and other borrowed money 278,856 254,865
--------------- -------------
Total interest expense 2,076,004 1,780,757
--------------- -------------
Net interest income 2,167,732 2,183,158
Provision for loan losses 150,000 150,000
--------------- -------------
Net interest income after provision for
Loan losses 2,017,732 2,033,158
--------------- -------------
Other income:
Gain on sale of loans 98,463 30,130
Loan servicing fees 82,442 83,347
Service fees on deposit accounts 202,475 196,296
Income from real estate operations 67,078 30,040
Other 144,278 80,717
--------------- -------------
Total other income 594,736 420,530
--------------- -------------
General and administrative expenses:
Salaries and employee benefits 975,136 896,826
Occupancy 117,361 112,386
Advertising 100,494 78,771
Depreciation and maintenance of equipment 193,510 157,580
FDIC insurance premiums 19,662 19,434
Amortization of intangibles 116,310 116,310
Other 393,711 411,406
--------------- -------------
Total general and administrative expenses 1,916,184 1,792,713
--------------- -------------
(Continued)
3
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
--------
1998 1997
---- ----
Income before income taxes 696,284 660,975
Provision for income taxes 240,886 239,547
--------------- -------------
Net income $ 455,398 $ 421,428
=============== =============
Basic net income per common share $ 1.08 $ 1.01
=============== =============
Diluted net income per common share $ 1.08 $ 1.00
=============== =============
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 422,493 420,320
=============== =============
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
--------
1998 1997
---- ----
Net Income $ 455,398 $ 421,428
Other comprehensive Income, net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
during the period (25,264) 119,836
-------------- -------------
Net Comprehensive Income $ 430,134 $ 541,264
============== =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
UNREALIZED
NET GAIN
ADDI- (LOSS) ON
TIONAL 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 ----- ----- ----- 455,398 455,398
Cash dividend ----- ----- ----- (25,264) (25,264)
Exercise of stock ----- ----- ----- ----- -----
options
Decrease in unrealized ----- ----- (22,538) ----- (22,538)
net gain on securities
available for sale, net
of tax -------------------------------------------------------
Ending balance
June 30, 1998 $ 4,211 $3,997,943 $ 53,175 $14,428,308 $18,483,637
=======================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
-------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 455,398 $ 421,428
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation expense 153,131 135,376
Amortization of purchase accounting adjustments 116,310 116,310
Discount accretion and premium amortization (12,531) 310
Provisions for losses on loans and real estate 150,000 150,000
Gain on sale of investments 0 0
Gain on sale of loans (98,463) (30,130)
Gain on sale of real estate (83,991) (30,040)
Amortization of deferred fees on loans (65,374) (24,275)
Proceeds from sale of loans held for sale 5,346,772 1,207,520
Origination of loans for sale (5,095,395) (1,480,210)
(Increase) decrease in accrued interest
receivable:
Loans 56,841 2,733
Mortgage-backed securities (18,608) 1,164
Investments (13,128) (127,935)
Increase (decrease) in advance payments by
borrowers 5,797 47,035
Other, net (225,773) 217,407
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 670,986 $ 606,693
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal repayments on mortgage-backed securities
held to maturity 169,711 96,289
Principal repayments on mortgage-backed securities
available for sale 67,105 0
Purchase of investment securities available for
sale (7,999,375) (7,420,157)
Purchase of mortgage-backed securities available
for sale (4,201,289) 0
Maturities of investment securities available for
sale 5,635,270 2,000,000
Maturities of investment securities held to
maturity 0 1,500,000
Purchase of FHLB Stock 0 (156,600)
Decrease in loans to customers 40,572 1,567,967
Investment in real estate held for development (168,647) (61,408)
Proceeds from sale of real estate held for
development 356,310 189,906
Proceeds from sale of real estate acquired through
foreclosure 182,083 22,033
Purchase of premises and equipment (128,195) (155,770)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES $(6,046,455) $(2,417,740)
----------- -----------
(Continued)
6
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SECURITY FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
THREE MONTHS ENDED
JUNE 30,
-------
1998 1997
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposit accounts $ 1,404,820 $(2,895,414)
Proceeds from FHLB advances 25,650,000 13,570,000
Repayment of FHLB advances (20,233,000) (9,638,000)
Repayment of other borrowings (13,014) (18,452)
Dividends to shareholders (25,264) (25,027)
------------ -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES $ 6,783,542 $ 993,107
------------ -----------
Net increase(decrease) in cash and cash
equivalents 1,408,073 (817,940)
Cash and cash equivalents at beginning of period 4,658,681 7,903,637
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,066,754 $ 7,085,697
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for :
Interest $ 1,882,941 $ 1,538,426
Income taxes $ 16,936 $ 95,000
Additions to real estate acquired through
foreclosure $ 179,901 $ 67,236
Increase(decrease) in unrealized net gain
on securities available for sale, net of
taxes $ (25,264) $ 119,836
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
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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 opinionof
management, reflect all adjustments, all of which are of a normal recurring
nature, necessary for a fair presentation of results for the selected interim
periods. Users of financial information produced for interim periods are
encouraged to refer to the footnotes contained in the Annual Report to
Stockholders when reviewing interim financial statements. The results of
operations for the three month period ended June 30, 1998 are not necessarily
indicative of the results, which may be expected for the entire fiscal year.
2. PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include the
accounts of Security Federal Corporation (the "Company") and its wholly owned
subsidiary, Security Federal Bank (the "Bank"), and its wholly owned
subsidiary Security Financial Services Corporation ("SFSC"). SFSC engages
primarily in investment brokerage services. Also included in consolidation 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 June 30, 1998 and March 31, 1998, consisted of the
following:
Loans held for sale were $1,079,267 and $1,232,181 at June 30, 1998 and March
31, 1998 respectively.
Loans held for investment: June 30, 1998 March 31, 1998
------------- --------------
Residential real estate $ 47,223,650 $ 46,450,206
Consumer 44,847,685 46,499,200
Commercial real estate 3,840,886 3,955,462
Commercial business 45,149,198 44,500,079
------------- --------------
$ 141,061,419 $ 141,404,947
============= ==============
Less:
Allowance for possible loan loss $ 1,555,598 $ 1,512,038
Loans in process 3,142,163 3,175,684
Deferred loan fees 176,505 224,973
------------- --------------
4,874,266 4,912,695
------------- --------------
$ 136,187,153 $ 136,492,252
============= ==============
The following is a reconciliation of the allowance for possible loan losses
for the three months ending:
June 30, 1998 June 30, 1997
------------- -------------
Beginning balance $ 1,512,038 $ 1,767,483
Provision 150,000 150,000
Charge-offs (115,271) (59,683)
Recoveries 8,831 30,263
------------ ------------
Ending balance $ 1,555,598 $ 1,888,063
============ ============
8
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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:
JUNE 30, 1998
- -------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- --------- --------- -----------
US Government and agency
Obligations $ 3,867,909 $ 21,720 $ 1,780 $ 3,887,849
Mortgage-backed securities 4,182,287 68,603 437 4,250,453
----------- --------- --------- -----------
Total $ 8,050,196 $ 90,323 $ 2,217 $ 8,138,302
=========== ========= ========= ===========
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:
JUNE 30, 1998
- -------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- --------- --------- -----------
US Government and
agency Obligations $56,824,710 $ 204,748 $ 84,691 $56,944,767
Mortgage-backed securities 4,132,340 0 9,419 4,122,921
----------- --------- --------- -----------
Total $60,957,050 $ 204,748 $ 94,110 $61,067,688
=========== ========= ========= ===========
9
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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:
June 30, 1998 March 31, 1998
------------------- -------------------
Demand Accounts: Balance Rate Balance Rate
------- ---- ------- ----
Checking $ 48,687,955 1.17% $ 47,414,160 1.09%
Money Market 28,622,649 4.62% 27,902,091 4.67%
Regular Savings 11,976,665 2.46% 12,328,146 2.44%
------------ ---- ------------ ----
Total demand accounts $ 89,287,269 2.74% $ 87,644,397 2.42%
------------ ---- ------------ ----
Certificate Accounts:
0 - 4.99% $ 2,996,711 $ 3,086,511
5.00 - 6.99% 90,824,060 90,919,998
7.00 - 8.99% 82,728 135,042
------------ ------------
Total certificate accounts 93,903,499 5.50% 94,141,551 5.50%
------------ ---- ------------ ----
Total deposit accounts $183,190,768 4.15% $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:
Fiscal Year Due June 30, 1998 March 31, 1998
- --------------- ------------------- -------------------
Balance Rate Balance Rate
------- ---- ------- ----
1999 $ 5,925,000 6.04% $ 5,490,000 6.06%
2000 528,000 8.70% 528,000 8.70%
2001 5,856,000 5.99% 856,000 8.75%
2002 0 0% 0 0%
thereafter 5,234,000 5.79% 5,252,000 5.80%
------------ ---- ------------ ----
$ 17,543,000 6.03% $ 12,126,000 6.25%
============ ---- ============ ----
10
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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)
June 30, 1998 March 31, 1998
------------- ---------------
Bank's Stockholders' Equity $ 17,712 $ 17,294
Unrealized loss (gain) on available for
sale securities, net of tax (53) (76)
Reduction for goodwill and other
intangibles (1,930) (2,046)
---------- -----------
Tangible capital 15,729 15,172
Qualifying core deposits and
intangible assets 757 789
---------- -----------
Core capital 16,486 15,961
Supplemental capital 1,556 1,512
---------- -----------
Risk-based capital $ 18,042 $ 17,473
========== ===========
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at June 30, 1998. (Dollars in thousands)
Amount Percent Actual Excess
Required Required Amount Percent Excess Percent
-------- -------- ------ ------- ------ -------
Tangible capital $ 4,412 2.0% $15,729 7.13% $11,317 5.13%
Tier 1 Leverage 8,854 4.0% 16,486 7.45% 7,632 3.45%
(Core) capital
Total Risk-based 11,134 8.0% 18,042 12.96% 6,908 4.96%
capital
Tier 1 Risk-based 5,567 4.0% 16,486 11.85% 10,919 7.85%
(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)
June 30, 1998
Tier 1 Risk-based Core
Capital $16,486 11.9% $5,567 4.0% $8,351 6.0%
Risk-based Capital 18,042 13.0 11,134 8.0 13,918 10.0
(to risk weighted
assets)
Core Capital 16,486 7.5 8,854 4.0 11,068 5.0
(to adjusted tangible
assets)
Tangible Capital 15,729 7.1 4,412 2.0 11,030 5.0
(to tangible assets)
11
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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 $7.6 million or 3.5% during the three
months ended June 30, 1998, primarily due to an increase of $6.3 million in
investment securities and a $1.4 million increase in cash and cash equivalents
offset partially by a $458,000 decrease in total net loans receivable.
Real estate acquired in settlement of loans (REO) increased slightly by
$15,000 while real estate acquired for development decreased $121,000 during
the three-month period due to sales of real estate.
Deposits increased $1.4 million or 0.8% during the three months ended of June
1998 as Federal Home Loan Bank (FHLB) advances grew $5.4 million to fund the
Company's 3.5% growth in assets.
The Board of Directors declared the thirtieth consecutive quarterly dividend
of $.06 per share in May 1998, which totaled $25,000. Unrealized net gains on
securities available for sale decreased $23,000 during the three months ended
June 30, 1998. Net income for the quarter was $455,000 for the Company. These
items combined to increase the stockholders' equity by $408,000 or 2.3% during
the three months ended June 30, 1998 and raised book value per share to $43.90
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%, which was recently lowered from 5.0%,
of the combined total of deposits and certain borrowings must be maintained in
the form of cash or eligible investments. A short-term liquidity requirement
was recently eliminated and the types of assets eligible to be counted as
liquid assets were also liberalized. 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 three months ended June 30, 1998, loan repayments exceeded loan
disbursements resulting in a $ 458,000 or 0.3% decrease in total net loan
receivable.
Deposits and other borrowings are also an important source of funds for the
Bank. During the three months ended June 30, 1998, deposits increased $1.4
million while FHLB advances increased $5.4 million. At June 30, 1998, Security
Federal had $66.4 million of certificates of deposit maturing within one year.
Based on previous experience, a major portion of these certificates are
expected to be renewed.
Liquidity resources at June 30, 1998 are sufficient to meet outstanding
mortgage loan commitments of $1.2 million and unused lines of credit of $20.9
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 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 adoption of this standard did not
have a material effect on the Company.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Enterprises are required to classify items of "other
comprehensive income" by their nature in the financial statement and display
the balance of other comprehensive income separately in the equity section of
a statement of financial position. Statement 130 is effective for both interim
and annual periods beginning after December 15, 1997. Earlier application is
permitted. Comparative financial statements provided for earlier periods are
required to be reclassified to reflect the provisions of this statement. The
Company adopted Statement 130 effective June 30, 1998 in the Company's Form
10-QSB.
12
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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. It is not anticipated that
this standard will 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 will 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.
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.
13
<PAGE>
<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 to be completed in the latter part of
calendar year 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.
RESULTS OF OPERATIONS
- ---------------------
NET INCOME
Security Federal Corporation's net income increased $34,000 or 8.1%, to
$455,000 for the three months ended June 30, 1998, compared to the same period
in 1997 primarily due to an increase in gain on sale of loans and other
income, offset partially by an increase in general and administrative
expenses.
NET INTEREST INCOME
Net interest income decreased $15,000 or 0.8% during the three months ended
June 30, 1998, compared to the same period in 1997 due primarily to an
increase in total interest expense offset partially by an increase in interest
income on investments.
Interest income on loans decreased $193,000 or 6.0% during the quarter due to
lower average total outstanding loan balances. Investment, mortgage-backed,
and other securities interest income increased $472,000 during the three
months ended June 30, 1998, compared to the same period one year ago due to
higher average investment balances and a higher yield on the overall
investment portfolio. Total interest income increased $280,000 or 7.1% during
the quarter.
Total interest expense increased $295,000 or 16.6% during the three month
period. Interest expense on deposits increased $271,000 or 17.8% due to a
higher cost of funds on deposits and a higher overall average deposit balance
during the quarter ended June 30, 1998. Advances and other borrowings'
interest expense increased $24,000 during the three months ended June 30,
1998, compared to the same period in 1997 due to a slightly higher total
average outstanding borrowings. The cost of advances and other borrowings has
been relatively stable during the past twelve months.
PROVISION FOR LOAN LOSSES
Security Federal's provision for loan losses remained the same at $150,000 for
both three month periods ended June 30 in 1998 and 1997. During the three
months ended June 30, 1998, net charge-offs were $106,000 compared to $29,000
for the three months ended June 30, 1997. The Bank ceases to accrue interest
on any loan 90 days or more delinquent. Non-accrual loans at June 30, 1998
were $2.0 million and also $2.0 million at March 31, 1998. The allowance for
loan losses as a percentage of total loans was 1.12% at June 30, 1998 and
1.09% at March 31, 1998. Future additions to the Bank's allowance for loan
losses are dependent on, among other things, the performance of the Bank's
loan portfolio, changes in real estate values, interest rates, and the
economy.
14
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OTHER INCOME
Total other income increased $174,000 or 41.4% during the three ended June 30,
1998 compared to the same period one year earlier. Gain on sale of loans
increased $68,000 while loan servicing fees decreased $1,000 during the
period. Service fees on deposit accounts increased $6,000 or 3.2%. Income from
real estate operations increased $37,000due to increased sales of real estate
during the three months ended June 30, 1998 compared to the 1997 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, increased $64,000 due to increased activity in Security
Financial during the June 1998 three month period.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $123,000 or 6.9% due mainly to
increases in compensation and benefits, advertising, and depreciation and
maintenance of equipment expenses.
Compensation and employee benefits increased $78,000 or 8.7% due to normal
annual salary increases and the addition of four new positions created by the
Bank to handle increased retail activity, assist with marketing, and to
improve operating efficiencies, add technical expertise, and provide Year 2000
compliance. Occupancy expense increased $5,000 during the June 1998 quarter.
Advertising increased $22,000 during the three months ended June 30,1998 due
to increased media advertising to promote the Bank's money market account.
Depreciation and maintenance of equipment expense increased $36,000 during the
quarter as a result of bringing data processing back in-house. FDIC insurance
premiums remained nearly the same at $20,000 in 1998 and $19,000 in 1997
period. Amortization of intangibles arising due to branch acquisitions in
October 1993, were $116,000 in both the December 1996 and 1997 quarters. Other
expenses, encompassing legal, professional and consulting expense, stationary
and office supplies, and other miscellaneous expenses decreased $18,000 during
the three months ended June 30, 1998 compared to the same period one year ago.
15
<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
---------------------------------------------------
None
Item 5 Other Information
-----------------
None
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
No reports on Form 8-K were filed during the period under report.
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 **
27 Financial Data Schedule
* 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
** 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.
16
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: August 10, 1998 By: /s/ Roy G. Lindburg
---------------------- --------------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
17
<PAGE>
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