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, 1998OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-16120
SECURITY FEDERAL CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 57-08580504
- ----------------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1705 Whiskey Road South, Aiken, South Carolina 29803
- ----------------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, (803) 641-3000
including area code: ----------------------------
Securities registered pursuant None
to Section 12(b) of the Act: ----------------------------
Securities registered pursuant
to Section 12(g) of the Act: Common Stock, par value
$0.01 per share
----------------------------
(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
--- ---
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. [ ]
The registrant's revenues for the fiscal year ended March 31, 1998 were
$18,622,208.
As of June 19, 1998, there were issued and outstanding 421,060 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 19, 1998, was $15.2
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).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the
Fiscal Year Ended March 31, 1998. (Parts I and II)
2. Portions of the Registrant's Proxy Statement for the 1998 Annual
Meeting of Stockholders. (Part III)
3. Registrant's Current Report Form 8-K dated January 27, 1998, as
amended. (Part II, Item 8)
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
PAGE
<PAGE>
PART I
Item 1. Business
--------
Security Federal Corporation
- ----------------------------
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, 1998, the Company had assets of approximately $215.5
million, deposits of approximately $181.8 million and shareholders' equity of
approximately $18.1 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
- ---------------------
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.
1
<PAGE>
<PAGE>
Through a real estate partnership and Willow Woods Associates, the
Company is involved in real estate development.
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
- -------------------------------------------
This information is incorporated by reference to page 3 of the 1998
Annual Report to Stockholders ("Annual Report").
Yields Earned and Rates Paid
- ----------------------------
This information is incorporated by reference to page 12 of the Annual
Report.
Rate/Volume Analysis
- --------------------
This information is incorporated by reference to page 11 of the Annual
Report.
Lending Activities
- ------------------
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") constituted approximately 29.2%
of the Bank's total outstanding loan portfolio at March 31, 1998.
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.
2
<PAGE>
<PAGE>
<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,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
TYPE OF LOAN:
- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans
- ----------------
Real Estate:
Residential(1)..... $ 9,981 7.0% $ 14,835 9.9% $ 11,846 7.6% $ 15,998 10.4% $ 16,467 12.3%
Commercial(2)...... -- -- 1,916 1.2 2,280 1.6 2,580 1.7 6,032 4.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate
loans............ 9,981 7.0 16,751 11.1 14,126 9.2 18,578 12.1 22,499 16.8
Commercial
business......... 21,863 15.3 20,970 14.0 15,804 10.2 11,986 7.8 7,258 5.4
Consumer(3)........ 29,257 20.5 24,180 16.1 22,635 14.6 20,450 13.3 18,347 13.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total fixed rate
loans............ 61,101 42.8 61,901 41.2 52,565 34.0 51,014 33.2 48,104 35.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Adjustable rate loans
- ---------------------
Real Estate:
Residential(1)...... 37,701 26.4 35,910 23.9 48,718 31.5 51,004 33.1 32,704 24.4
Commercial(2)...... 3,956 2.8 4,612 3.1 8,350 5.4 10,428 6.8 15,425 11.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate
loans............ 41,657 29.2 40,522 27.0 57,068 36.9 61,432 39.9 48,129 35.9
Commercial
business......... 22,637 15.9 25,078 16.7 22,960 14.8 17,732 11.5 13,757 10.3
Consumer(3)........ 17,242 12.1 22,714 15.1 22,175 14.3 23,639 15.4 23,958 17.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total adjustable
rate loans....... 81,536 57.2 88,314 58.8 102,203 66.0 102,803 66.8 85,844 64.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans....... 142,637 100.0% 150,215 100.0% 154,768 100.0% 153,817 100.0% 133,948 100.0%
===== ===== ===== ===== =====
Less
- ----
Loans in process.... 3,176 1,375 474 2,419 6,628
Deferred fees and
discounts.......... 225 303 395 466 237
Allowance for loan
losses............. 1,512 1,768 1,759 1,955 1,735
-------- -------- -------- -------- --------
Total loans
receivable........ $137,724 $146,769 $152,140 $148,977 $125,348
======== ======== ======== ======== ========
- ------------
(1) Includes $1.8 million, $1.6 million, $2.5 million, $2.5 million and $750,477 in multi-family
dwellings for fiscal years ended March 31, 1998, 1997, 1996 and 1995, 1994, respectively.
Includes residential construction loans.
(2) Includes acquisition, development and commercial construction loans.
(3) Includes home improvement loans.
3
</TABLE>
PAGE
<PAGE>
<TABLE>
At March 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
TYPE OF SECURITY:
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Residential(1)..... $ 44,232 31.0% $ 46,782 31.1% $ 59,613 38.5% $ 60,528 39.3% $ 38,703 28.9%
Commercial......... 3,956 2.8 6,528 4.4 9,977 6.5 11,203 7.3 15,310 11.4
Construction....... 3,450 2.4 3,963 2.6 1,604 1.0 8,279 5.4 16,615 12.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real
estate loans..... 51,638 36.2 57,273 38.1 71,194 46.0 80,010 52.0 70,628 52.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Commercial business. 44,500 31.2 46,048 30.7 38,764 25.1 29,718 19.3 21,015 15.7
Consumer loans:
Deposit account.... 1,275 0.9 1,299 0.9 1,299 0.8 1,145 0.8 1,565 1.2
Home equity........ 20,202 14.1 21,446 14.3 14,767 9.6 16,029 10.4 16,735 12.5
Home improvement... 16,088 11.3 13,299 8.8 18,154 11.7 16,283 10.6 13,796 10.3
Other.............. 8,934 6.3 10,850 7.2 10,590 6.8 10,632 6.9 10,209 7.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer
loans........... 46,499 32.6 46,894 31.2 44,810 28.9 44,089 28.7 42,305 31.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans...... 142,637 100.0% 150,215 100.0% 154,768 100.0% 153,817 100.0% 133,948 100.0%
===== ===== ===== ===== =====
Less:
Loans in process.... 3,176 1,375 474 2,419 6,628
Deferred fees and
discounts.......... 225 303 395 466 237
Allowance for loan
losses............. 1,512 1,768 1,759 1,955 1,735
-------- -------- -------- -------- --------
Total loans
receivable........ $137,724 $146,769 $152,140 $148,977 $125,348
======== ======== ======== ======== ========
- -----------
(1) Includes $1.8 million, $1.6 million, $2.5 million, $2.5 million and $750,477 in multi-family
dwellings for fiscal years ended March 31, 1998, 1997, 1996, 1995 and 1994, respectively.
4
</TABLE>
PAGE
<PAGE>
The following schedule illustrates the interest rate sensitivity of
Security Federal's loan portfolio at March 31, 1998. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
when the contract is due. This schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
At March 31, 1998
--------------------------------------------------------
Real Estate
------------------------- Commercial
Residential(1) Commercial Consumer(2) Business Total
-------------- ---------- ----------- -------- -----
(Dollars in Thousands)
Six months or less(3)...$ 2,404 $ 106 $ 5,898 $ 7,650 $ 16,058
Over six months to
one year............... 591 112 5,038 6,171 11,912
Over one year to
three years............ 1,659 501 9,529 11,687 23,376
Three to five years..... 2,457 585 9,316 8,684 21,042
Over five to ten
years.................. 10,222 1,288 10,655 7,431 29,596
Over ten to twenty
years.................. 16,078 1,363 6,063 2,840 26,344
More than twenty
years ................. 11,096 -- -- 37 11,133
-------- ------ ------- ------- --------
Total(4) $ 44,507 $3,955 $46,499 $44,500 $139,461
======== ====== ======= ======= ========
- ---------------
(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 $3.2
million.
The total amount of loans due after March 31, 1999, which have
predetermined or fixed interest rates is $40.2 million, while the total amount
of loans due after such date which have floating or adjustable interest rates
is $71.2 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,
------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Originated(1):
Real estate:
Adjustable rate - residential..$12,080 $ 8,046 $ 3,684 $28,608 $ 9,485
Adjustable rate - commercial... -- -- -- 187 5,145
------- ------- ------- ------- -------
Total adjustable rate......... 12,080 8,046 3,684 28,795 14,630
Fixed rate - residential....... 3,444 5,636 5,332 4,729 49,966
Fixed rate - commercial........ -- 14 -- -- --
------- ------- ------- ------- -------
Total fixed rate............... 3,444 5,650 5,332 4,729 49,966
Non-real estate: Consumer...... 20,103 18,574 16,994 18,362 6,205
Commercial business............ 13,698 20,576 27,465 25,529 10,626
------- ------- ------- ------- -------
Total non-real estate......... 33,801 39,150 44,459 43,891 16,381
------- ------- ------- ------- -------
Total loans originated.......$49,325 $52,846 $53,475 $77,415 $81,427
======= ======= ======= ======= =======
(table continued on following page)
5
<PAGE>
<PAGE>
Year Ended March 31,
------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars 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.... $ 3,396 $ 5,810 $ 5,496 $3,090 $47,651
Adjustable rate:
Real estate - residential.... -- -- -- 4,450 --
Principal repayments(3)....... 53,507 51,589 47,028 50,006 28,741
(Increase) decrease in other
items, net................... (1,467) (818) 2,212 3,760 (2,784)
Net increase (decrease)....... $(9,045) $(5,371) $3,163 $23,629 $18,475
- ---------------
(1) Does not include loans in the amount of $7.9 million, $6.4 million,
$6.9 million, $8.4 million and $17.4 million that were originated with
prior commitments to be purchased by institutional investors and sold
during the fiscal years ended March 31, 1998, 1997, 1996, 1995 and
1994, 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 for the fiscal year ended 1997.
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, 1998 was
$259,423.
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.
6
<PAGE>
<PAGE>
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,
----------------------------------
1998 1997 1996
---- ---- ----
Net deferred loan origination fees
earned during the period(1)................ $111,528 $119,818 $102,906
Mortgage loan origination fees earned as
a percentage of total loans originated
during the period.......................... 0.7% 0.9% 1.1%
Net deferred loan origination fees
in loan portfolio at end of period........ $224,973 $303,199 $394,768
- -----------
(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, 1998,
Security Federal serviced approximately $127.0 million in mortgage loans,
including approximately $79.3 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, 1998, $8.9 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 1998, $3.4 million in loans were
originated and sold to FHLMC and FNMA. At March 31, 1998, fixed-rate,
residential mortgage loans totaled $10.0 million, or 7.0% 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, 1998, the Bank held $1.2 million 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.
7
<PAGE>
<PAGE>
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 $227,150 per loan, and
the government loan direct endorser approves FHA loans not to exceed $165,908
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.
The general policy of Security Federal is 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, 1998,
was approximately $658,000 (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) totaling $20.9 million as of March 31, 1998. See Note 13 of Notes to
Consolidated Financial Statements.
Permanent Residential Mortgage Lending. Residential real estate mortgage
loans constituted approximately 33.4% of the Bank's total outstanding loan
portfolio at March 31, 1998.
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, 1998, residential
ARMs totaled $37.7 million, or 26.4% of the Bank's loan portfolio. For the
year ended March 31, 1998, the Bank originated $15.5 million in residential
real estate loans, 77.8% 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.
8
<PAGE>
<PAGE>
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 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, 1998, residential construction loans on one- to four-family dwellings
totaled $3.5 million, or 2.4% 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, 1998, the Bank had
approximately $4.0 million, or 2.8% 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.
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, 1998, 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 $2.6 million at March 31, 1998.
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 its
affiliates, such as officers, directors and employees. 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, 1998, commercial business loans totaled $44.5 million, or
31.2% 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 one- to four- family 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, 1998, the Bank had $12.5 million
of home equity lines of credit outstanding and $15.0 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 one- to
four-family residential mortgage loans. The Bank has increased its
origination of consumer loans during the past several years and at March 31,
1998, the Bank had total consumer loans of $46.5 million, or 32.6% 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, 1998, 866 Visa
credit cards had been issued by the Bank with total approved credit lines of
$1.5 million, of which $513,445 was outstanding.
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
10
<PAGE>
<PAGE>
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, 1998, 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
$165,170.
Delinquent Loans. The following table sets forth information concerning
delinquent mortgage and other loans at March 31, 1998. 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 delinquent
for:
30 - 59 days....... 12 $ 697 -- $ -- 54 $378 8 $ 343
60 - 89 days ...... 1 79 -- -- 13 113 5 195
90 days and over... 5 570 -- -- 24 432 6 1,032
--- ------ --- --- --- ---- --- ------
Total delinquent
loans ............ 18 $1,346 -- $ -- 91 $923 19 $1,570
=== ====== === === === ==== === ======
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, 1998, approximately $173,668, $2,366,825 and $469,922 of the
Bank's assets were classified "special mention," "substandard" and "doubtful,"
respectively. On such date, the Bank had $6,885 of loans classified as
"loss." As of March 31, 1998, there were loans totaling $763,020 which were
troubled debt restructuring within the meaning of FASB No. 15 of which
$225,817 was classified substandard and $395,588 was classified doubtful. 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" contained in the Annual
Report.
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 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
11
<PAGE>
<PAGE>
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,
----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-Accruing Loans Delinquent
60 to 90 Days:
Residential.................... $ 79 $ 56 $ 452 $ 148 $ --
Commercial real estate......... -- -- -- 172 --
Consumer....................... 113 289 226 47 121
Commercial business............ 195 142 490 9 438
------ ------ ------ ------ ------
Total......................... $ 387 $ 487 $1,168 $ 376 $ 559
====== ====== ====== ====== ======
Total as a percentage of
total assets................. 0.18% 0.24% 0.54% 0.18% 0.28%
Non-Accruing Loans Delinquent
More than 90 Days:
Residential.................... $ 570 $ 105 $ 453 $ 264 $ 573
Commercial real estate......... -- -- 542 -- 298
Consumer....................... 432 446 154 122 120
Commercial business............ 1,032 330 255 50 --
------ ------ ------ ------ ------
Total......................... $2,034 $ 881 $1,404 $ 436 $ 991
====== ====== ====== ====== ======
Total as a percentage of
total assets................. 0.94% 0.44% 0.65% 0.21% 0.50%
Troubled debt restructurings... 763(3) $ 829(2)$ 487(1)$ 780 $ --
Real estate owned.............. 165 $ 52 $ 719 $1,521 $1,684
Allowance for loan losses ..... $1,512 $1,768 $1,759 $1,955 $1,735
________________
(1) Included in non-accruing loan totals.
(2) $89,000 of troubled debt restructurings are included in non-accruing
loans.
(3) $86,000 of troubled debt restructurings are included in non-accruing
loans.
For the fiscal year ended March 31, 1998, 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, totaled $100,512.
At March 31, 1998, non-accrual loans totaled $2,034,000 compared to
$1,368,072 at March 31, 1997. Until March 31, 1998, the Bank had classified
all loans as non-accrual when they were 60 days or more delinquent. Beginning
March 31, 1998, the Bank has classified all loans as non-accrual when they are
90 days or more delinquent as is more common industry practice. Included in
non-accruing loans at March 31, 1998 were five one- to four-family real estate
mortgage loans totaling $570,000 and six commercial loans totaling $1,032,000
and 24 consumer loans totaling $432,000. Of the $432,000 in consumer loans on
non-accrual status at fiscal year end, no loan exceeded $90,000 at fiscal year
end. Both of these loans are well secured and no loss is anticipated at this
time. Of the $1.0 million in non-accruing commercial business loans at March
31, 1998, no loan exceeded $500,000.
The Bank had four loans totaling $763,020 at fiscal year end which were
troubled debt restructurings compared to three loans of $829,000 at March 31,
1997, of which one loan of $89,000 was also on non-accrual status. Of the
four troubled debt restructurings at March 31, 1998, only one loan of $86,485
was on non-accrual status. This loan is secured
12
<PAGE>
<PAGE>
by a principal residence. The other three loans consisted of a $141,615 loan
secured by a principal residence and two commercial business loans totaling
$534,920 secured by commercial real estate. All four loans are considered
well secured and no loss is anticipated at this time. All troubled debt
restructurings are also considered impaired. At March 31, 1998, the Bank
held $872,195 in impaired loans compared to $1,241,000 at March 31, 1997.
At March 31, 1998, real estate acquired through foreclosure had an
outstanding book value of $165,170 and consisted of four 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, 1998, total reserves relating to loans were $1.5 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 $91.0 million or
63.8% of the Bank's total loan portfolio, at March 31, 1998, 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 1.1%. 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, 1998, 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,
----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of year....... $1,768 $1,759 $1,955 $1,735 $1,191
Provision charged to operations.... 780 300 230 300 335
Allowance on acquired loans........ -- -- -- -- 324
Charge-offs:
Residential real estate............ -- 64 5 -- 25
Commercial real estate............. -- -- -- 3 61
Commercial business................ 660 59 330 -- --
Consumer .......................... 633 198 137 102 39
------ ------ ------ ------ ------
Total charge-offs ................ 1,293 321 472 105 125
------ ------ ------ ------ ------
Recoveries:
Residential real estate............ -- -- -- -- --
Commercial business ............... 56 -- -- -- --
Consumer .......................... 201 30 46 25 10
------ ------ ------ ------ ------
Total recoveries ................. 257 30 46 25 10
------ ------ ------ ------ ------
Balance at end of year............. $1,512 $1,768 $1,759 $1,955 $1,735
====== ====== ====== ====== ======
Ratio of net charge-offs during
the year to average loans
outstanding during the year....... 0.72% 0.19% 0.28% 0.06% 0.10%
==== ==== ==== ==== ====
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,
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- --------------- --------------- ---------------- ---------------
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>
Residential........... $ 140 33.4% $ 81 33.7% $ 460 39.1% $ 460 43.4% $ 312 36.8%
Commercial real
estate.............. 42 2.8 42 4.4 131 6.9 96 8.5 128 16.0
Consumer.............. 551 32.6 734 31.2 568 28.9 800 28.7 792 31.5
Commercial business... 779 31.2 911 30.7 600 25.1 599 19.4 503 15.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total................ $1,512 100.0% $1,768 100.0% $1,759 100.0% $1,955 100.0% $1,735 100.0%
====== ====== ====== ===== ====== ===== ====== ===== ====== =====
15
</TABLE>
<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, 1998, Security
Federal's net investment in its service corporations (including loans to
service corporations) totaled $292,890. 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 was designed primarily to develop and sell
residential lots in and around the Bank's primary lending area. One project
was completed during fiscal 1998. Total investment of the Company in the
remaining project at March 31, 1998, was approximately $239,685. 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 was completely liquidated in January 1998.
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, 1998, 50 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 27 had been sold as of
March 31, 1998.
Investment Activities
- ---------------------
Investment securities. The Bank has 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.
The Bank may also invest a portion of their assets in certain commercial
paper and corporate debt securities. The Bank is 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,
1998, the Bank's liquidity ratio (liquid assets as a percentage of net
withdrawable savings and current borrowings) was approximately 29.6%.
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,
----------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Interest-bearing deposits with banks. $ -- $ -- $ --
Other interest earning assets........ -- 2,713 2,858
------- ------- -------
Total............................... $ -- $ 2,713 $ 2,858
======= ======= =======
Securities:
Available for sale:
U.S. Treasury and agency obligations. 50,083 $23,717 $30,972
Federal Farm Credit Bank securities.. 4,514 499 --
------- ------- -------
Total securities available for sale. 54,597 24,216 30,972
------- ------- -------
Held to Maturity: U.S. Government
and agency obligations.............. 2,364 6,478 5,492
FNMA securities...................... 500 500 1,006
Federal Farm Credit Bank securities.. -- -- --
FHLMC bonds.......................... 1,000 1,000 1,000
------- ------- -------
Total securities held to maturity... 3,864 7,978 7,498
------- ------- -------
Total securities(1).................. 58,461 32,194 38,471
FHLB stock........................... 1,349 786 1,233
------- ------- -------
Total securities and FHLB stock (1).. $59,810 $32,980 $39,704
======= ======= =======
- ---------------
(1) Does not include mortgage-backed securities.
At March 31, 1998, 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>
The following table sets forth the maturities or repricing of investment
securities and FHLB stock at March 31, 1998, 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 After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
------------- ------------- ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
U.S.
Government
and other
agency ob-
ligations.... $27,614 5.85% $30,725 6.22% $ -- --% $ -- --%
FHLB stock.... -- -- 1,349 7.25 -- -- -- --
------- ---- ------- ---- ----- ---- ----- ----
Total....... $27,614 5.85% $32,074 6.26% $ -- --% $ -- --%
======= ==== ======= ==== ===== ==== ===== ====
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
a cost effective method to acquire funds. The Bank did not engage in such
transactions during fiscal 1998. 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 $4.4 million, $4.8 million and $2.5 million of
mortgage-backed securities issued by the FHLMC at March 31, 1998, 1997 and
1996, 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,
-----------------------------------------
1998 1997 1996
Book Value Book Value Book Value
---------- ---------- ----------
(Dollars in Thousands)
Held to Maturity:
FHLMC $4,352 $4,777 $2,542
====== ====== ======
At March 31, 1998, 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>
The following table sets forth the maturities and the weighted average
yields of the mortgage-backed securities at March 31, 1998. Not considered in
the preparation of the table below is the effect of prepayments.
Due in
----------------------------------------------------- March 31, 1998
Less Than 1 to 5 5 to 10 Over Balance
1 Year Years Years Ten Years Outstanding
------------ ------------ ------------ ------------ -------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
FHLMC.... $516 6.63% $1,123 7.60% $1,194 7.07% $1,519 6.96% $4,352 7.12%
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. 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 1998, the Bank originated $8.9 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, 1998, 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.
19
<PAGE>
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs for the periods indicated.
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,
-------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Interest Rate Range:
- -------------------
Passbook accounts
0 % - 3.00% ........ $12,328 6.8% $13,451 8.0% $13,615 7.9%
NOW and other
transaction accounts
0% - 1.75% ......... 47,414 26.1 43,602 26.0 42,252 24.5
Money market funds
2.50% - 5.50%....... 27,902 15.3 11,641 6.9 13,770 8.0
-------- ----- -------- ----- -------- -----
Total non-
certificates...... 87,644 48.2 68,694 40.9 69,637 40.4
-------- ----- -------- ----- -------- -----
Certificates:
- ------------
0.00-4.99% .......... 3,087 1.7 3,936 2.3 5,116 3.0
5.00-6.99%........... 90,920 50.0 95,234 56.7 97,047 56.3
7.00-8.99%........... 135 0.1 197 0.1 575 0.3
-------- ----- -------- ----- -------- -----
Total
certificates...... 94,142 51.8 99,367 59.1 102,73 59.6
-------- ----- -------- ----- -------- -----
Total deposits.....$181,786 100.0% $168,061 100.0% $172,375 100.0%
======== ===== ======== ===== ======== =====
The Bank relies to a limited extent upon locally obtained Jumbo CDs to
maintain its deposit levels. At March 31, 1998, Jumbo CDs constituted 7.9% 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,
-----------------------------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
Opening balance.............. $168,061 $172,375 $166,275
Deposits .................... 812,539 785,065 734,010
Withdrawals.................. 805,566 796,353 734,018
Interest credited............ 6,752 6,974 6,108
------- ------- --------
Ending balance............... 181,786 168,061 172,375
------- ------- --------
Net increase (decrease)...... $13,725 $(4,314) $ 6,100
======= ======= ========
Percent increase (decrease).. 8.2% (2.5)% 3.7%
=== === ===
20
<PAGE>
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of March 31, 1998.
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:
June 30, 1998 $1,817 $25,108 $1,196 $ -- $28,121
September 30, 1998 1,247 15,285 1,870 -- 18,402
December 31, 1998 23 12,235 1,309 -- 13,567
March 31, 1999 -- 13,517 2,613 -- 16,130
June 30, 1999 -- 5,532 634 -- 6,166
September 30, 1999 -- 1,804 -- -- 1,804
December 31, 1999 -- 1,140 1,130 -- 2,270
March 31, 2000 -- 1,231 1,382 135 2,748
June 30, 2000 -- 597 131 -- 728
September 30, 2000 -- 186 2 -- 188
December 31, 2000 -- 181 -- -- 181
March 31, 2001 -- 149 -- -- 149
Thereafter -- 1,351 2,337 -- 3,688
------ ------- ------- ---- -------
Total $3,087 $78,316 $12,604 $135 $94,142
====== ======= ======= ==== =======
The following table indicates the amount of the Bank's deposits of
$100,000 or more by time remaining until maturity at March 31, 1998.
Passbook, NOW and
Certificates of Deposit Money Market Accounts
----------------------- ---------------------
(Dollars in Thousands)
Maturity Period
- ---------------
Three months or less $ 1,394 $20,895
Over three through six months 4,368 --
Over six through twelve month 4,968 --
Over twelve months 3,606 --
------- -------
Total $14,336 $20,895
======= =======
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
21
<PAGE>
<PAGE>
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, 1998, 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,
--------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Maximum Balance:
FHLB advances.............................$28,268 $23,921 $31,370
Average Balance:
FHLB advances.............................$20,252 $20,157 $27,569
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,
--------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Balance:
FHLB advances.............................$12,126 $14,114 $22,864
Weighted Average Interest Rate:
At Fiscal Year End:
FHLB advances........................... 6.25% 6.30% 6.29%
During Fiscal Year:
FHLB advances........................... 6.12% 5.79% 6.39%
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. The
22
<PAGE>
<PAGE>
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 ("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 $1,348,600 at March 31, 1998.
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.
23
PAGE
<PAGE>
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, 1998 equaled
$77,248.
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. 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 4.0%) of its net withdrawable accounts plus short-term
borrowings. Monetary penalties may be imposed for failure to meet liquidity
requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources"
contained in the Annual Report.
24
<PAGE>
<PAGE>
Prompt Corrective Action. Each federal banking agency is required to
implement a system of prompt corrective action for institutions that 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, 1998, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies are required to prescribe regulatory 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 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,
25
<PAGE>
<PAGE>
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 FHLMC 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, 1998, the qualified thrift investments of the Bank were approximately
70.1% 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."
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.
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
26
<PAGE>
<PAGE>
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 risk 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 totaled 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, 1998, and pro forma amounts and
percentages based upon the assumptions stated therein.
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.
27
<PAGE>
<PAGE>
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. 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, 1998, the Bank's limit on loans to one borrower
was $2.6 million. At March 31, 1998, the Bank's largest aggregate amount of
loans to one borrower was $2.1 million.
Activities of Thrift Institutions and Their Subsidiaries. When a
savings association establishes or acquires 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, 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
28
<PAGE>
<PAGE>
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 Community Reinvestment Act
("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.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers or
directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $27,500 per
day, or $1.1 million per day in especially egregious cases. Under the FDIA,
the FDIC has the authority to recommend to the Director of the OTS that
enforcement action be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
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.
29
<PAGE>
<PAGE>
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 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. 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, 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.
30
<PAGE>
<PAGE>
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, 1994. 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, 1998, 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,
and leased the remaining four offices. The property related to the offices
owned by Security Federal had a depreciated cost (including land) of
approximately $2.0 million at March 31, 1998. At March 31, 1998, the
aggregate net book value
31
<PAGE>
<PAGE>
of leasehold improvements (excluding furniture and equipment) associated with
leased premises was $246,214. 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, 1998.
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 $586,111
Aiken, South Carolina
Full Service Branch Offices:
149 E. Baruch Street Owned N/A 1984 2,258 212,805
Denmark, South Carolina
100 Laurens Street, N.W. Leased 1998 1959 4,500 21,085
Aiken, South Carolina
313 East Martintowne Road Owned(1) N/A 1973 4,356 148,671
North Augusta, South
Carolina
1665 Richland Avenue, W. Owned N/A 1984 1,942 236,060
Aiken, South Carolina
Montgomery & Canal Leased 2007 1993(2) 1,600 32,045
Streets Masonic Shopping
Center Graniteville,
South Carolina
2812 Augusta Road Owned N/A 1993(2) 2,509 216,352
Langley, South Carolina
Highway 125 and Highways Leased 1998 1993(2) 2,287 4,123
1 and 78 Midland Valley
Shopping Center
Clearwater, South
Carolina
118 Main Street North Owned 2000 1993(2) 3,600 314,008
Wagener, South Carolina
Walmart Superstore
2035 Whiskey Road Leased 2001 1996 517 188,961
Aiken, South Carolina
(table continued on following page)
32
<PAGE>
<PAGE>
Date
Lease Facility Gross
Owned or Expiration Opened/ Square Net Book
Location Leased Date Acquired Footage Value
- --------------------- ------ ------ -------- ------- ------
Operations Center:
871 East Pine Log Road Owned N/A 1988 5,000 $334,903
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, 1998.
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, 1998 and 1997*
Consolidated Statements of Income For the Years Ended March 31, 1998,
1997 and 1996*
Consolidated Statements of Changes in Shareholders' Equity For the Years
Ended March 31, 1998, 1997 and 1996*
Consolidated Statements of Cash Flows For the Years Ended March 31, 1998,
1997 and 1996*
Notes to Consolidated Financial Statements*
* 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.
33
<PAGE>
<PAGE>
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
------------------------------------------------
The information contained in the Company's Current Report on Form 8-K
dated January 27, 1998, as amended on March 3, 1998, is incorporated herein by
reference.
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 Elliott, Davis & Company, LLP
27 Financial Data Schedule
99 Report of KPMG Peat Marwick LLP
(footnotes on following page)
34
<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.
** 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.
-------------------------
A Current Report on Form 8-K was filed by the Company on January 27,
1998, which was subsequently amended on March 3, 1998. The Form 8-K
was filed to report a change in the Company's accountants, as
indicated in Item 8 of this Form 10-KSB.
35
<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 29, 1998 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 29, 1998
-------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Roy G. Lindburg June 29, 1998
-------------------------------------
Roy G. Lindburg, Treasurer and Chief
Financial Accounting Officer (Principal
Financial and Accounting Officer)
By: /s/ T. Clifton Weeks June 29, 1998
-------------------------------------
T. Clifton Weeks
Chairman of the Board and Director
By: /s/ Gasper L. Toole, III June 29, 1998
-------------------------------------
Gasper L. Toole, II
Director
By: /s/ Harry O. Weeks, Jr. June 29, 1998
-------------------------------------
Harry O. Weeks, Jr.
Director
By: /s/ Robert E. Alexander June 29, 1998
-------------------------------------
Robert E. Alexander
Director
By: June __, 1998
-------------------------------------
Thomas L. Moore
Director
By: June __, 1998
-------------------------------------
William Clyburn
Director
<PAGE>
<PAGE>
INDEX TO EXHIBITS
Exhibit Number
- --------------
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Elliott, Davis & Company, LLP
27 Financial Data Schedule
99 Report of KPMG Peat Marwick LLP
PAGE
<PAGE>
Exhibit 13
Annual Report to Stockholders
PAGE
<PAGE>
[Logo]
Security Federal Corporation
Annual Report
March 31, 1998
<PAGE>
<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 Elliott Davis Independent Auditors..........................21
Consolidated Balance Sheets...........................................22
Consolidated Statements of Income.....................................23
Consolidated Statements of Shareholders' Equity.......................24
Consolidated Statements of Cash Flows.................................25
Notes to Consolidated Financial Statements............................27
Stockholders' Information.............................................46
Directors and Management..............................................47
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
FINANCIAL HIGHLIGHTS
Year ended March 31,
-------------------
1998 1997
----------- -----------
Net Income $ 1,712,629 $ 835,207
Earnings per share 4.09 2.01
Book value per share 42.93 38.79
Total interest income 16,617,740 15,842,413
Total interest expense 8,000,972 7,907,619
Net interest income before provision
for loan losses 8,616,768 7,934,794
Provision for loan losses 780,000 300,000
Net income after provision for loan losses 7,836,768 7,634,794
Net interest margin 4.33% 4.09%
Total loans originated 58,202,293 59,230,909
Adjustable rate loans as a percentage of
total gross loans 57.20% 58.80%
Bar graphs appear below table as follows:
NET INCOME EARNINGS PER SHARE (basic):
(in thousands)
1994: $570 1994: $1.44
1995: $1,002 1995: $2.48
1996: $1,060 1996: $2.58
1997: $835 1997: $2.01
1998: $1,713 1998: $4.09
RETURN ON EQUITY ASSETS GROWTH
(in millions)
1994: 4.22% 1994: $200
1995: 7.16% 1995: $210
1996: 7.13% 1996: $215
1997: 5.28% 1997: $202
1998: 9.96% 1998: $216
BOOK VALUE PER SHARE ALLOWANCE FOR LOAN LOSSES(1)
1994: $33.98 1994: 1.37%
1995: $35.41 1995: 1.30%
1996: $37.35 1996: 1.14%
1997: $38.79 1997: 1.19%
1998: $42.93 1998: 1.09%
(1) Allowance for losses as a percentage
of total loans.
1
<PAGE>
<PAGE>
Security Federal Corporation
- -----------------------------------------------------------------------[Logo]
Fellow Shareholders:
We are very pleased to report record annual operating earnings of $1,712,000
or $4.09 per share for our most recent fiscal year which ended March 31, 1998.
This, our second consecutive year of record earnings, represents an increase
of $ 877,000 over net income of $835,000 for the fiscal year ending March 31,
1997.
In view of our record annual operating earnings, your Board of Directors
approved a dividend of$.06 per share which was paid on June 15, 1998 to
shareholders of record as of May 29, 1998. This represented the thirtieth
consecutive quarterly dividend paid since the Bank's conversion to a stock
form of ownership in 1987.
During the year, we completed our computer conversion and brought to nine our
number of ATM locations by installing new ATMs adjacent to our North Augusta
Banking Center, at our Langley and Richland Avenue Banking Centers and in the
Student Activities Center at Aiken Technical College.
We also opened several new In-School Banking Centers and now offer our Looney
Tunes Saver's Club program to children in 9 schools in Aiken, Belvedere,
Clearwater, Denmark, North Augusta, Montmorenci-Windsor and Wagener. More
In-School Banking Centers are planned for the next school year.
It is with much regret that we note the passing of two of our past directors.
On August 9, 1997 Mr. Harold A. Rudnick passes away. Mr. Rudnick became a
member of our Board on August 29, 1958 and was named Director Emeritus on
October 31, 1988. On January 1st, 1998 Dr. Wallace D. McNair, Jr. passed
away. Dr. McNair also joined our Board on August 29, 1958 and was named
Director Emeritus on June 11, 1985. We can never adequately express our
appreciation for the wisdom, experience, guidance and insight of these two
fine gentlemen in helping us to build a solid foundation for a Bank which
would thrive for over 75 years.
We have been working hard to attract new customers and to increase both loans
and deposits. Your referrals are an important part of our success and we
appreciate your asking your friends, family, and associates to move their
accounts to "your bank", Security Federal.
This year Security Federal Bank was voted "Best Bank" in Aiken County for 1997
by the readers of Aiken County Magazine. We would like to extend our
appreciation to our many loyal customers, our associates, our directors and
our shareholders for making this recognition possible. Thank you for your
confidence and support over the years and for your continued confidence and
support in the years ahead.
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,
----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Balance Sheet Data (Dollars in thousands, except per share data)
- ------------------
Total assets $215,512 201,646 214,816 209,949 199,584
Cash 4,659 7,904 9,824 5,697 8,632
Investment and mortgage
backed securities 62,813 36,970 41,013 42,527 51,638
Loans receivable - net (1) 137,724 146,769 152,140 148,977 125,348
Deposits 181,786 168,061 172,375 166,275 173,433
Advances from Federal Home
Loan Bank 12,126 14,114 22,864 26,033 8,616
Total shareholders' equity 18,076 16,182 15,434 14,489 13,381
Income Data
- -----------
Total interest income 16,618 15,843 15,822 14,402 10,990
Total interest expense 8,001 7,908 8,622 6,823 5,126
-------- ------- ------- ------- -------
Net interest income 8,617 7,935 7,200 7,579 5,864
Provision for loan losses 780 300 230 300 335
-------- ------- ------- ------- -------
Net interest income after
provision for loan losses 7,837 7,635 6,970 7,279 5,529
Other income 2,004 1,659 1,468 1,312 1,799
General and administrative
expense 7,220 8,045 6,839 7,089 6,523
Income taxes 908 414 539 500 266
-------- ------- ------- ------- -------
Income before cumulative
effect of change in
accounting for income taxes 1,713 835 1,060 1,002 539
Cumulative effect of change
in accounting for income
taxes -- -- -- -- 30
-------- ------- ------- ------- -------
Net income $ 1,713 835 1,060 1,002 569
======== ======= ======= ======= =======
Per common share data:
Net income per common
share (Basic) $ 4.09 2.01 2.58 2.48 1.44
======== ======= ======= ======= =======
Cash dividends declared $ .24 .20 .20 .20 .20
======== ======= ======= ======= =======
Other Data
- ----------
Interest rate spread
information:
Average during period 4.00% 3.82% 3.22% 3.80% 3.60%
End of period 3.91 4.01 3.32 3.55 3.47
Net interest margin (net
interest income/average
earning assets) 4.33 4.09 3.62 3.95 3.70
Average interest-earning
assets to average interest-
bearing liabilities 108.27 106.40 106.88 104.24 103.60
Equity to total assets 8.39 8.03 7.21 6.90 6.73
Non-performing assets to total
assets (2) 1.02 .70 1.53 1.49 1.62
Return on assets (ratio of net
income to average total assets) .80 .40 .50 .48 .33
Return on equity (ratio of net
income to average equity) 9.96 5.28 7.13 7.16 4.22
Equity to assets ratio (ratio
of average equity to average
total assets) 8.05 7.55 6.95 6.68 7.92
Dividend payout ratio on common
shares 5.87 9.94 7.76 8.07 13.88
Number of full-service offices 10 10 10 9 9
(1) Includes loans held for sale.
(2) Non-performing assets consist of non-accrual loans and repossessed real
estate.
3
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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 information 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
from Security Federal Savings Bank of South Carolina 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
portfolios and the average rate paid on its deposits and borrowings. The
Bank's interest 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
Asset and Liability Management
The Bank's program of asset and liability management seeks to limit the Bank's
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 $81.5 million of adjustable
rate consumer, commercial, and mortgage loans or approximately 57.2% of total
gross loans at March 31, 1998. At March 31, 1998, the negative mismatch of
interest earning assets repricing or maturing within one year with interest
bearing liabilities repricing or maturing within one year was $35.7 million or
16.6% of total assets as compared to $23.2 million or 11.5% at March 31, 1997.
During the past year, the Bank originated approximately $12.1 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,
the Bank originated a total of $33.8 million in consumer and commercial loans,
which are usually short term in nature. During fiscal 1998, 93.0% of total
loan originations were comprised of consumer, commercial, and adjustable rate
mortgage loans compared to 89.3% of total originations in fiscal 1997. The
Bank's portfolio of consumer and commercial loans was $91.0 million at March
31, 1998, a decrease of $1.9 million from March 31, 1997, and an increase of
$7.4 million from March 31, 1996. Consumer and commercial loans, combined,
have increased from 54.0% of total loans at March 31, 1996 and 61.9% at March
31, 1997 to 63.8% at March 31, 1998.
The Bank originated $3.4 million, $5.6 million, $5.3 million, and $4.7 million
in fixed rate residential loans in fiscal 1998, 1997, 1996, and 1995,
respectively. The Bank sold $ 3.4 million in fiscal 1998, $5.8 million in
fiscal 1997, $5.5 million in fiscal 1996, and $3.1 million in fiscal 1995 to
secondary market agencies. Other fixed rate residential loans passed directly
on to other investors, other than Freddie Mac or Fannie Mae, totaled $7.9
million in fiscal 1998, $6.4 million in fiscal 1997, $6.9 million in fiscal
1996, and $8.4 million in fiscal 1995. At March 31, 1998, fixed rate
residential loans, some of which are short term construction loans, amounted
to $10.0 million or 7.0% of the total loan portfolio, compared to $14.8
million or 9.9% 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
Certificates of deposit of $100,000 or more (jumbo certificates) are normally
considered to be highly interest rate sensitive because of their relatively
short maturities. 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, 1998, the Bank had $14.3 million outstanding in jumbo certificates as
compared to $15.7 million at March 31, 1997.
The following table sets forth the maturity schedule of certificates of
deposit with balances of $100,000 or greater at March 31, 1998.
(In Thousands)
--------------
Within 3 months $1,394
After 3, within 6 months 4,368
After 6, within 12 months 4,968
After 12 months 3,606
-------
$14,336
=======
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 on the following page 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
At March 31,
----------------------
1998 1997
---- ----
(Dollars in Thousands)
Loans (1) $ 93,960 111,882
Mortgage-backed securities 516 173
Investments:
Held to maturity 3,375 4,998
Available for sale 24,223 14,846
Other interest-earning assets -- 2,713
Total interest rate sensitive assets --------- -------
repricing within one year 122,074 134,612
--------- -------
Deposits 152,239 145,867
FHLB advances and other borrowed money 5,570 11,952
Total interest rate sensitive liabilities --------- -------
repricing within one year 157,809 157,819
--------- -------
Gap $ (35,735) (23,207)
========= =======
Interest rate sensitive assets/interest
rate sensitive liabilities 77.36% 85.30%
Gap as a percent of total asset (16.6)% (11.5)%
(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
The following table sets forth the interest sensitivity of the Bank's assets
and liabilities at March 31, 1998, on the basis of the factors and assumptions
set forth in the table on the previous page.
<PAGE>
<TABLE>
Remaining Time Before Asset/Liability Matures or Can be Repriced
--------------------------------------------------------------------------------
More More More Than
Than More Than Than Ten
Three Than One Three Five 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earnings Assets
- ------------------------
Loans (1) $ 47,151 46,809 20,532 9,430 11,180 3,601 758 139,461
Mortgage-backed
securities held to
maturity, at cost 70 446 585 538 1,194 1,111 408 4,352
Investment securities (2):
Held to maturity, at
cost 500 2,875 489 -- -- -- -- 3,864
Available for sale,
at fair value 7,954 16,269 28,862 1,512 -- -- -- 54,597
FHLB stock, at cost -- -- 1,349 -- -- -- -- 1,349
-------- ------ ------ ------ ------ ------ ------ -------
Total financial assets $ 55,675 66,399 51,817 11,480 12,374 4,712 1,166 203,623
======== ====== ====== ====== ====== ====== ====== =======
Interest Bearing
Liabilities
- ----------------
Deposits:
Certificates of
deposits 28,121 48,099 14,234 3,306 382 -- -- 94,142
NOW 35,789 -- -- -- -- -- -- 35,789
Money market deposit
accounts 27,902 -- -- -- -- -- 27,902
Passbook accounts 12,328 -- -- -- -- -- -- 12,328
Borrowings 20 5,550 1,433 5,000 252 -- -- 12,255
-------- ------ ------ ------ ------ ------ ------ -------
Total interest bearing
liabilities $104,160 53,649 15,667 8,306 634 -- -- 182,416
======== ====== ====== ====== ====== ====== ====== =======
Current period gap $(48,485) 12,750 36,150 3,174 11,740 4,712 1,166 21,207
Cumulative gap (48,485) (35,735) 415 3,589 15,329 20,041 21,207 21,207
Cumulative gap as a
percent of total
assets (22.5)% (16.6)% .07% 1.7% 7.1% 9.3% 9.8% 9.8%
(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, 1998.
8
</TABLE>
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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, 1998 were $215.5 million, a $13.9 million increase
from March 31, 1997. This increase was primarily a result of an increase in
investment securities offset partially by a decrease in net loans receivable
and cash and cash equivalents.
Total net loans receivable were $137.7 million at March 31, 1998, a decrease
of $9.0 million or 6.2% from the prior year. Residential real estate loans
decreased $4.1 million or 8.1% to $46.5 million at March 31, 1998. Commercial
real estate loan balances decreased to $4.0 million at fiscal year end from
$6.5 million at March 31, 1997, a decrease of $2.5 million or 39.4%.
Consumer loans decreased to $46.5 million at March 31, 1998 from $46.9 million
at March 31, 1997, a decrease of $395,000 or 0.8%. Commercial loans decreased
$1.5 million or 3.4%, to $44.5 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) increased to $165,000 at
March 31, 1998 from $52,000 at fiscal year end 1997. REO at March 31, 1998
consisted primarily of single family homes. Real estate acquired for
development decreased by $217,000 due primarily to the sale of lots in Willow
Woods, the Company's sole remaining real estate partnership investment.
Non-accrual loans totaled $2.0 million at March 31, 1998 compared to $1.4
million a year earlier. The Bank classifies all loans as non-accrual when
they become 90 or more days delinquent. The Bank had four loans totaling
$763,000 at March 31, 1998 which were troubled debt restructurings compared to
$829,000 at March 31, 1997, of which $89,000 was also on non-accrual status.
Of the four troubled debt restructurings at March 31, 1998, only one loan of
$86,000 was on non-accrual status. This loan is secured by a principal
residence. The other three loans consisted of a $142,000 loan secured by a
principal residence, a $139,000 commercial business loan secured by commercial
real estate and a $396,000 commercial business loan secured by commercial real
estate. Management considers all four loans to be well secured and no loss is
anticipated at this time. All troubled debt restructurings are also
considered impaired. At March 31, 1998, the Bank held $872,000 in impaired
loans compared to $1,241,000 at March 31, 1997.
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 constantly monitors its loan portfolio for the impact of
local economic changes.
9
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Deposits at the Bank increased $13.7 million or 8.2% to $181.8 million at
March 31, 1998 from $168.1 million at March 31, 1997 due to an increase in
money market accounts, which were promoted during the year. Advances from the
Federal Home Loan Bank (FHLB), decreased to $12.1 million at March 31, 1998,
down from $14.1 million a year earlier, a decrease of $2.0 million.
Total shareholders' equity was $18.1 million at March 31, 1998, an increase
of $1.9 million or 11.7%, compared to $16.2 million a year earlier. The
increase was attributable to net income of $1.7 million, an increase in paid
in capital of $40,000 due to the exercise of stock options and a $243,000
increase in unrealized net gain on securities available for sale, partially
offset by $101,000 in dividends paid.
10
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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), (ii)
changes in volume (i.e. changes in volume multiplied by old rate) and (iii)
net change (i.e. the sum of the prior columns.) 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.
1998 Compared to 1997 1997 Compared to 1996
------------------------- -----------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(Dollars in Thousands)
Interest-earning assets:
Loans (1):
Real estate loans $(1,025) 181 (844) (992) 358 (634)
Other loans 448 44 492 982 (366) 616
------- ---- ------ ----- ---- ----
Total loans (577) 225 (352) (10) (8) (18)
Mortgage-backed securities (2) (10) (12) 226 5 231
Investments (2) 740 404 1,144 (271) 99 (172)
Other interest-earning
assets (3) (2) (5) (22) 2 (20)
------- ---- ------ ----- ---- ----
Total interest-earning
assets $ 158 617 775 (77) 98 21
======= ==== ====== ===== ==== ====
Interest-bearing liabilities:
Deposits:
Certificate accounts $ (172) (91) (263) 171 (246) (75)
NOW accounts 4 6 10 40 (37) 3
Money market accounts 167 154 321 (44) (6) (50)
Passbook accounts (22) (13) (35) (13) -- (13)
------- ---- ------ ----- ---- ----
Total deposits (23) 56 33 154 (289) (135)
Borrowings (1) 61 60 (426) (153) (579)
------- ---- ------ ----- ---- ----
Total interest-bearing
liabilities (24) 117 93 (272) (442) (714)
------- ---- ------ ----- ---- ----
Effect on net income $ 182 500 682 195 540 735
======= ==== ====== ===== ==== ====
(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
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.
<PAGE>
<TABLE>
At Years Ended March 31,
March 31,----------------------------------------------------------------------------
1998 1998 1997 1996
---- ------------------------- ------------------------- ------------------------
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 8.14% $ 50,128 $ 4,174 8.33% $ 62,477 $ 5,018 8.03% $ 75,083 $ 5,652 7.53%
Other loans 9.96 93,552 8,951 9.57 88,822 8,459 9.52 78,641 7,843 9.97
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total loans (1) 9.32 143,680 13,125 9.13 151,299 13,477 8.91 153,724 13,495 8.78
Mortgage-backed
securities 7.12 4,599 329 7.15 4,630 341 7.33 1,549 110 7.10
Investments (2) 6.05 49,252 3,095 6.28 36,797 1,951 5.30 41,999 2,123 5.06
Other interest-
earning assets 5.47 1,299 69 5.31 1,350 74 5.48 1,764 94 5.33
Total interest- ---- -------- ------- ---- -------- ------- ---- -------- ------- ----
earning assets 8.33% $198,830 $16,618 8.36% $194,076 $15,843 8.16% $199,036 $15,822 7.95%
==== ======== ======= ==== ======== ======= ==== ======== ======= ====
Interest-bearing
liabilities:
Certificate
accounts 5.50% $ 97,093 $ 5,191 5.35% $100,225 $ 5,454 5.44% $ 97,173 $ 5,529 5.69%
NOW accounts 1.44 35,440 573 1.62 35,167 563 1.60 32,729 560 1.71
Money Market
accounts 4.67 18,128 687 3.79 13,094 366 2.80 14,655 416 2.84
Passbook
accounts 2.44 12,562 300 2.39 13,483 335 2.49 14,003 348 2.49
Total interest- ---- -------- ------- ---- -------- ------- ---- -------- ------- ----
bearing deposits 4.29 163,223 6,751 4.14 161,969 6,718 4.15 158,560 6,853 4.32
Other Borrowings 5.75 171 10 5.85 281 23 8.19 87 7 8.00
FHLB advances 6.25 20,252 1,240 6.12 20,157 1,167 5.79 27,569 1,762 6.39
Total interest- ---- -------- ------- ---- -------- ------- ---- -------- ------- ----
bearing
liabilities 4.42% $183,646 $ 8,001 4.36% $182,407 $ 7,908 4.34% $186,216 $ 8,622 4.63%
==== ======== ======= ==== ======== ======= ==== ======== ======= ====
Net interest income $ 8,617 $ 7,935 $ 7,200
======= ======= =======
Interest rate
spread 3.91% 4.00% 3.82% 3.22%
==== ==== ==== ====
Net yield on earning
assets 4.33% 4.09% 3.62%
==== ==== ====
- -----------
(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.
12
</TABLE>
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of the Years Ended March 31, 1998 and 1997
General
The Company earned record net income of $1.7 million for the year ended March
31, 1998, an $878,000 increase over net income of $835,000 for fiscal 1997.
Fiscal 1997 net income was adversely affected by a one-time assessment on all
savings institutions levied by the Federal Deposit Insurance Corporation
(FDIC) to recapitalize the Savings Associations Insurance Fund (SAIF) charged
in September 1996. The assessment, which significantly reduced deposit
insurance premiums, lowered after-tax net income by $437,000 for fiscal 1997.
Without the one-time charge, net income would have been $1.3 million for
fiscal 1997. The reason for the increase in operating earnings was due
primarily to an increase in net interest and other income and a decrease in
general and administrative expenses offset partially by an increase in the
provision for loan losses.
Net Interest Income
Net interest income was $8.0 million in fiscal 1998 compared to $7.9 million
in fiscal 1997, an increase of $93,000. One reason for this increase was the
Bank's strategy in attracting money market deposits and utilizing those funds
to increase earnings from increased holdings in investments. The second
reason for increased net interest income was an 18 basis point increase in the
interest rate spread caused by a 22 basis point increase in the overall yield
of the loan portfolio and a 83 basis point climb in the yield of the overall
investment and mortgage backed securities portfolio.
Interest income on loans decreased $352,000 or 2.6% as the balance on average
total loans outstanding decreased. The yield of the loan portfolio increased
due to consumer and commercial loans, which typically earn higher yields than
residential loans to compensate for their higher risk profile, increasing as a
percentage of total loans outstanding. Interest income on investment,
mortgage-backed, and other securities increased $1.1 million due to an
increase in the total average portfolio balance and the increased yield in the
portfolio.
Interest expense on deposits increased $33,000 as the total average deposit
balance increased and the total average cost of interest bearing deposits
decreased slightly. Interest expense on Federal Home Loan Bank (FHLB)
advances and other borrowings increased $60,000 or 5.0% due to the average
weighted cost of debt increasing while the average borrowings outstanding
remained virtually constant.
Provision for Loan Losses
The provision for loan losses during fiscal 1998 increased $480,000 to
$780,000 for the year. This increase was attributable to an increase in net
charge-offs, which were $1.0 million in fiscal 1998 and $291,000 in fiscal
1997. The ratio of the allowance for loan losses to total loans at March 31,
1998 was 1.09% compared to 1.19% a year earlier. Based on its monthly reviews
of the loan portfolio, management believes the allowance for loan losses is
adequate based on its estimates 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 $345,000 or 20.8% in fiscal 1998 compared to 1997. In
1998, the Bank had $15,000 in net gains on sales of investments compared to
none in fiscal 1997. Gain on sales of loans decreased $4,000 in fiscal 1998
while loan servicing fees increased $13,000 and service fees on deposit
accounts decreased by $29,000. Income from real estate operations increased
$188,000 as the remaining lots in the Currytowne partnership were sold in
fiscal 1997 at a loss. The Currytowne partnership was liquidated in the
latter part of fiscal 1998. The Company retains an interest in one real
estate partnership, Willow Woods, which is located in Aiken County and has
experienced steady sales of residential lots. Other miscellaneous income,
which consists of net gains on sales of real estate acquired in settlement of
loans (REO), credit life insurance commissions, discount brokerage and annuity
sales commissions, and other miscellaneous fees, increased $162,000 during
fiscal 1998.
13
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
General and Administrative Expenses
General and administrative expenses decreased $824,000 due mainly to the
one-time assessment of $705,000 by the FDIC to recapitalize the SAIF fund in
fiscal 1997. Without that assessment, general and administrative expenses
would have decreased $119,000 or 1.6%. This decrease is attributable to
decreases in other miscellaneous expense and FDIC insurance premiums, offset
partially by increases in salaries and employee benefits, occupancy expense,
advertising, and depreciation and maintenance of equipment.
The Bank converted its core computer data processing system from an
outsourcing arrangement to an in-house system in late January 1997. This
conversion resulted in slightly higher personnel and equipment costs, which
were more than offset by the savings from the elimination of the outsourcing
contract, which had been classified as an "other expense." Salaries and
employee benefits increased 6.2% or $206,000 due to the addition of personnel
caused by operating an in-house computer system and normal annual salary
increases. Occupancy expense increased $64,000 while depreciation and
maintenance of equipment increased $63,000 due to the computer conversion.
Advertising increased $136,000 in fiscal 1998 due to the promotion of the
money market account and the Bank's 75th anniversary. FDIC insurance premiums
dropped $152,000 due to the previously mentioned SAIF assessment in fiscal
1997. The amortization of intangibles remained constant at $465,000 in both
fiscal 1998 and 1997. Other expenses decreased $435,000 due primarily to
decreases in REO expense and the elimination of the data processing contract
in January 1997.
Income Taxes
The provision for income tax expense increased $494,000 in the year ended
March 31, 1998 compared to 1997 due to an increase in taxable income. The
effective tax rate was approximately 35% for 1998 and 33% for 1997.
14
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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 $1.1 million for fiscal 1996. The reason
for the decrease was a one-time assessment levied on all savings institutions
by the Federal Deposit Insurance Corporation (FDIC) to recapitalize the
Savings Associations Insurance Fund (SAIF) in September 1996. The assessment
lowered after-tax net income by $437,000 for fiscal 1997. Without the
one-time charge, net income would have been $1.3 million. 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
in 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 in similar type securities, but
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 was 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 judgement and estimates.
15
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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 sale 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 by
$117,000.
Other miscellaneous income, which consists of net gains on sale of 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 to the $705,000 one-time assessment by the Federal Deposit Insurance
Corporation to recapitalize the SAIF. 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 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 depreciation 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 expense 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 decreased $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% for 1997 and 34% for 1996.
16
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Regulatory Capital
The following table reconciles the Bank's stockholders' equity to its various
regulatory capital positions:
March 31
--------------------
1998 1997
---- ----
(in thousands)
Stockholders' equity (1) (2) $ 17,218 15,529
Reduction for goodwill and other intangibles 2,046 2,511
--------- ------
Tangible capital 15,172 13,018
--------- ------
Qualifying core deposit intangible 789 938
Core capital 15,961 13,956
--------- ------
Supplemental capital 1,512 1,627
--------- ------
Risk-based capital $ 17,473 15,583
========= ======
(1) For 1997, includes unrealized losses of $167,000 and for 1998 excludes
unrealized gains of $76,000 on certain available for sale securities.
(2) For 1998 and 1997, excludes equity of Security Federal Corporation, the
Parent.
The following table compares the Bank's capital levels relative to regulatory
requirements at March 31, 1998.
Amount Percent Actual Actual Excess Excess
Required Required Amount Percent Amount Percent
-------- -------- ------ ------- ------ -------
(dollars in thousands)
Tangible capital $ 4,261 2.0% $ 15,172 7.1% $ 10,911 5.1%
Tier 1 Leverage 8,553 4.0 15,961 7.5 7,408 3.5
(Core) Capital
Tier 1 Risk-based 5,404 4.0 15,961 11.8 10,557 7.8
(Core) Capital
Total Risk-based
Capital 10,808 8.0 17,473 12.9 6,665 4.9
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 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 vary depending
on their relative costs. Advances from the FHLB decreased $2.0 million in
fiscal 1998 and $8.8 million in fiscal 1997. Deposits increased $13.7 million
in fiscal 1998.
The principal use of the Bank's funds is the origination of mortgages and
other loans. Loan originations were $49.3 million in fiscal 1998 as compared
to $52.8 million in fiscal 1997 and $53.5 million in fiscal 1996.
17
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Outstanding loan commitments for which the Bank has not obtained prior
commitments to purchase from other institutional investors amounted to
$658,000 at March 31, 1998 compared to $262,000 at March 31, 1997. In
addition, unused lines of credit on home equity loans, credit cards and other
loans amounted to $20.9 million at March 31, 1998. 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 $3.2 million at March 31, 1998, 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 4.0% of the combined total of deposits and certain borrowings must
be maintained in the form of cash or eligible investments. At March 31, 1998,
the Bank's liquidity ratio was approximately 30%. Management believes that
liquidity during fiscal 1999 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 December 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 did not have a material effect on the Company.
In June 1997, the FASB issued SFAS 130, Reporting Comprehensive Income. SFAS
130 requires that all items that are required to be recognized under
accounting standards as comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 requires that an enterprise classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of a statement
of financial position. The Company does not anticipate that the adoption of
SFAS 130 will have a material impact on its financial statements.
In June 1997, the FASB issued SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS 131 requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated regularly
by the chief operating decision maker in deciding how to allocate resources
and in assessing performance. SFAS 131 requires that a public enterprise
report a measure of segment profit or loss, certain specific revenue and
expense items, segment assets, information about the way that the operating
segments were determined and other items. The Statement is effective for
fiscal years beginning after December 15, 1997. The Company does not
anticipate that adoption of SFAS 131 will have a material effect on its
financial statements.
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 use. 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 June of 1996 the FASB issued an exposure draft of a proposed statement,
Accounting for Derivatives and Similar Financial Instruments and for Hedging
Activities. In August 1997 the FASB distributed a draft of the standards
section of the final statement, together with related implementation guidance
and examples to members of the
18
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Instruments Task Force and other identified parties for comment on
the draft's clarity and operationality. Under the proposed standard, all
derivatives would be measured at fair value and recognized in the statement of
financial position as assets or liabilities. Although the final standard has
not been issued, the FASB has expressed publicly that a final statement would
be effective for fiscal years beginning after December 15, 1998. Because the
Company has limited use of derivative transactions at this time, management
does not expect that this standard, if adopted in its present proposed form,
would have a significant effect 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.
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.
Change in Independent Auditors
On January 20, 1998, the Company's Board of Directors, at the recommendation
of its Audit Committee, terminated the engagement of KPMG Peat Marwick, LLP,
Greenville, South Carolina, as the Company's certifying accountants.
On January 20, 1998, the Company's Board of Directors, at the recommendation
of its Audit Committee, engaged Elliott, Davis & Company, LLP, Greenville,
South Carolina as the Company's certifying accountants. The Company has not
consulted with Elliott, Davis & Company, LLP during its two most recent fiscal
years nor during any subsequent interim period prior to its engagement
regarding the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on the Company's financial statements, or regarding the reportable
condition set forth below.
The report of KPMG Peat Marwick LLP on the Company's financial statements for
either of the last two fiscal years did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to uncertainty,
audit scope, or accounting principles.
During the Company's two most recent fiscal years and subsequent interim
periods preceding the date of termination of the engagement of KPMG Peat
Marwick LLP, the Company was not in disagreement with KPMG Peat Marwick LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of KPMG Peat Marwick LLP, would
19
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
have caused KPMG Peat Marwick LLP to make reference to the subject matter of
the disagreement in connection with its report.
KPMG Peat Marwick LLP issued a management letter, dated May 9, 1997, to the
Company's Board of Directors containing a reportable condition as a result of
their audit of the Company's financial statements at and for the fiscal year
ended March 31, 1997. The reportable condition involved certain unreconciled
general ledger accounts due to a data processing conversion to Jack Henry and
staff turnover. The reconciliations involved three different areas and were
addressed by KPMG Peat Marwick LLP as follows:
1. "First, we noted that as a result of the conversion, the loan and
deposit trial balances were not in agreement with the supporting
documentation as well as the final general ledger as of March 31,
1997. The accounting department has worked with Jack Henry to
improve the loan and deposit trial balance reconciliation process
and finally was able to reconcile these accounts at the end of
May."
2. "We noted that some reconciliations, such as the Flo Thru Account
and the FRB Clearing Account, were not being reconciled in a
timely manner. Delays in reconciling these accounts could result
in errors or misappropriations not being detected. In addition,
these accounts become more difficult and time consuming to
reconcile as time passes. Likewise, these accounts had many
stale items on the reconciliation. Once these accounts were
reconciled, we determined that the balances at year end were
materially correct."
3. "We also noted the [Security Federal Bank] had not properly
reconciled the Federal National Mortgage Association and Federal
Home Loan Mortgage Corporation custodial accounts which are
currently on deposit with Federal Home Loan Bank of Atlanta. It
is our understanding that the conversion caused both of these
accounts to become out of balance. It is also our understanding
that the accounting department reconciled these balances as of
the end of May without significant adjustments."
In a letter dated February 18, 1998, KPMG Peat Marwick LLP noted its agreement
with the Company's reported statements with respect to the change in auditors.
20
<PAGE>
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
The Board of Directors
Security Federal Corporation:
We have audited the accompanying consolidated balance sheet of Security
Federal Corporation and Subsidiary (the "Company") as of March 31, 1998 and
the related consolidated statement of income, shareholders' equity, and cash
flows for the year then ended. 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 audit. The
consolidated financial statements of the Company as of March 31, 1997 and for
each of the two years in the period then ended were audited by other auditors
whose report, dated May 9, 1997, expresses an unqualified opinion on those
statements.
We conducted our audit 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 audit provides 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, 1998, and the results of their operations and their cash
flows for the year then ended, in conformity with generally accepted
accounting principles.
June 5, 1998
/s/ Elliott, Davis & Company, LLP
21
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
March 31, 1998 and 1997
Assets 1998 1997
------ ---- ----
Cash and cash equivalents $ 4,658,681 7,903,637
Investment and mortgage-backed securities:
Available for sale (amortized cost of
$54,475,231 and $24,484,644 at March 31,
1998 and 1997, respectively) 54,597,270 24,215,667
Held to maturity (market value of
$8,297,204 and $12,598,186 at March 31,
1998 and 1997, respectively) 8,215,833 12,754,769
------------ -----------
62,813,103 36,970,436
Loans receivable, net: ------------ -----------
Held for sale 1,232,181 211,212
Held for investment (net of allowance of
$1,512,038 and $1,767,483 at March 31,
1998 and 1997, respectively) 136,492,252 146,558,261
------------ -----------
137,724,433 146,769,473
Accrued interest receivable: ------------ -----------
Loans 736,201 820,730
Mortgage-backed securities 35,694 38,909
Investments 761,405 363,109
------------ -----------
1,533,300 1,222,748
------------ -----------
Premises and equipment, net 3,827,760 3,952,149
Federal Home Loan Bank stock, at cost 1,348,600 785,700
Real estate acquired in settlement of loans 165,170 52,009
Real estate held for development and sale 623,779 840,813
Other assets 2,817,090 3,148,980
------------ -----------
Total assets $215,511,916 201,645,945
============ ===========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Deposits 181,785,948 168,060,858
Advances from Federal Home Loan Bank 12,126,000 14,114,000
Other borrowings 128,933 204,397
Advance payments by borrowers for taxes
and insurance 266,128 244,449
Other liabilities 3,128,866 2,840,212
------------ -----------
Total liabilities 197,435,875 185,463,916
------------ -----------
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, 421,060 in 1998 and 417,122 in 1997 4,211 4,171
Additional paid-in capital 3,997,943 3,958,603
Unrealized net gain (loss) on securities
available for sale, net of income taxes 75,713 (166,872)
Retained earnings, substantially restricted 13,998,174 12,386,127
------------ -----------
Total shareholders' equity 18,076,041 16,182,029
------------ -----------
Total liabilities and shareholders'
equity $215,511,916 201,645,945
============ ===========
See accompanying notes to consolidated financial statements.'
22
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
For the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
Interest income: ---- ---- ----
Loans $ 13,125,227 13,476,697 13,494,840
Mortgage-backed securities 328,948 340,845 109,998
Investment securities 3,095,035 1,950,450 2,123,667
Other 68,530 74,421 93,789
------------ ---------- ----------
Total interest income 16,617,740 15,842,413 15,822,294
------------ ---------- ----------
Interest expense:
NOW and money market 1,260,074 928,628 976,423
Passbook 300,461 335,023 347,937
Certificates of deposit 5,190,929 5,454,427 5,529,003
Advances and other borrowed money 1,249,508 1,189,541 1,769,178
------------ ---------- ----------
Total interest expense 8,000,972 7,907,619 8,622,541
------------ ---------- ----------
Net interest income 8,616,768 7,934,794 7,199,753
Provision for loan losses 780,000 300,000 230,000
Net interest income after ------------ ---------- ----------
provision for loan losses 7,836,768 7,634,794 6,969,753
------------ ---------- ----------
Other income:
Gain on sales of investment securities 15,423 -- --
Gain on sales of loans 194,844 199,062 124,677
Loan servicing fees 347,098 334,006 312,653
Service fees on deposits 857,298 886,272 584,420
Income (loss) from real estate
operations 104,194 (83,418) 34,068
Other 485,611 323,129 412,244
------------ ---------- ----------
Total other income 2,004,468 1,659,051 1,468,062
------------ ---------- ----------
General and administrative expenses:
Compensation and employee benefits 3,532,201 3,326,083 3,181,844
Occupancy 467,415 403,225 368,731
Advertising 334,091 198,469 197,575
Depreciation and maintenance of
equipment 724,434 661,896 651,676
Amortization of intangibles 465,240 465,240 465,240
Federal insurance premiums 77,248 229,689 387,722
FDIC SAIF assessment -- 705,489 --
Other 1,619,685 2,054,602 1,586,756
Total general and administrative ------------ ---------- ----------
expenses 7,220,314 8,044,693 6,839,544
------------ ---------- ----------
Income before income taxes 2,620,922 1,249,152 1,598,271
Income taxes 908,293 413,945 538,697
------------ ---------- ----------
Net income $ 1,712,629 835,207 1,059,574
============ ========== ==========
Net income per common share (basic) $ 4.09 2.01 2.58
============ ========== ==========
Net income per common share (diluted) $ 4.07 1.99 2.58
============ ========== ==========
Cash dividends per common share $ .24 .20 .20
============ ========== ==========
Weighted average shares outstanding
(basic) 418,773 414,835 410,937
Weighted average shares outstanding ============ ========== ==========
(diluted) 421,118 418,154 410,937
============ ========== ==========
See accompanying notes to consolidated financial statements.
23
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
For the years ended March 31, 1998, 1997 and 1996
Unrealized
Net Gain
Addi- (Loss) on
tional Securities
Common Paid-in Available Retained
Stock Capital for Sale Earnings Total
----- ------- -------- -------- -----
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
Exercise of stock
options 40 39,340 -- -- 39,380
Net income -- -- -- 1,712,629 1,712,629
Cash dividends -- -- -- (100,582) (100,582)
Decrease in unrealized
net loss on securities
available for sale,
net of tax -- -- 242,585 -- 242,585
------ --------- -------- ---------- ----------
Balance at March 31, 1998 $4,211 3,997,943 75,713 13,998,174 18,076,041
====== ========= ======== ========== ==========
See accompanying notes to consolidated financial statements.
24
PAGE
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income $ 1,712,629 835,207 1,059,574
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 633,347 608,022 596,677
Amortization of intangibles 465,240 465,240 465,240
Discount accretion and premium
amortization (48,562) 151,334 210,445
Provisions for losses on loans
and real estate 780,000 154,773 175,000
Gain on sales of loans (194,844) (199,062) (124,677)
Gain on sales of investment
securities (15,423) -- --
(Gain) loss on sale of real
estate (203,394) 294,147 (180,030)
Amortization of deferred fees
on loans (111,528) (112,015) (115,867)
Loss on disposition of premises
and equipment 30,634 29,637 --
Proceeds from sale of loans held
for sale 11,447,131 12,621,196 12,527,406
Origination of loans for sale (12,273,256) (12,020,427) (12,239,017)
(Increase) decrease in accrued
interest receivable:
Loans 84,529 61,544 (127,009)
Mortgage-backed securities 3,215 (15,110) (1,471)
Investments (398,296) 87,843 13,277
Increase (decrease) in advance
payments by borrowers 21,679 (141,259) (56,748)
Other, net (14,838) (258,528) (419,255)
------------- ----------- -----------
Net cash provided by
operating activities 1,918,263 2,562,542 1,783,545
------------- ----------- -----------
Cash flows from investing activities:
Principal repayments on mortgage-
backed securities 424,192 558,205 221,819
Purchase of investment securities
available for sale (54,916,778) (17,968,095) (487,656)
Maturities of investment
securities available for sale 22,000,000 24,500,000 1,000,000
Purchase of investment securities
held to maturity -- (3,473,204) (1,492,344)
Maturities of investment securities
held to maturity 4,121,951 3,000,000 3,000,000
Proceeds from sales of investment
securities available for sale 2,982,969 -- --
Purchase of FHLB stock (695,200) (151,400) (389,600)
Redemption of FHLB stock 132,300 598,900 571,500
(Increase) decrease in loans
receivable 9,038,131 1,744,689 (4,598,956)
Investment in real estate held
for development (306,052) (612,234) (262,968)
Proceeds from sale of real estate
held for development 627,280 1,077,582 350,180
Proceeds from sale of real estate
acquired through foreclosure 367,156 898,732 1,725,210
Purchase of premises and equipment (539,592) (1,402,623) (532,691)
------------- ----------- -----------
Net cash provided (used) by
investing activities (16,763,643) 8,770,552 (895,506)
------------- ----------- -----------
(Continued)
25
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
For the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash flows from financing activities:
Increase (decrease) in deposit
accounts $ 13,725,090 (4,313,869) 6,100,090
Proceeds from FHLB advances 133,785,000 94,600,000 100,904,000
Repayment of FHLB advances (135,773,000)(103,350,000)(104,073,000)
Proceeds from other borrowings -- 234,552 350,000
Repayment of other borrowings (75,464) (380,155) --
Dividends to shareholders (100,582) (83,029) (82,236)
Proceeds from exercise of stock
options 39,380 39,380 39,380
------------- ----------- -----------
Net cash provided (used) by
financing activities 11,600,424 (13,253,121) 3,238,234
------------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (3,244,956) (1,920,027) 4,126,273
Cash and cash equivalents at
beginning of year 7,903,637 9,823,664 5,697,391
------------- ----------- -----------
Cash and cash equivalents at end
of year $ 4,658,681 7,903,637 9,823,664
============= =========== ===========
Supplemental disclosure of cash
flow information:
Cash paid during the period for:
Interest $ 7,766,909 7,910,716 8,402,928
============= =========== ===========
Income taxes 816,500 534,000 424,000
============= =========== ===========
Supplemental schedule of non cash
transactions:
Additions to real estate acquired
through foreclosure, net 381,117 57,670 711,760
============= =========== ===========
Transfer of securities held to
maturity to available for sale -- -- 27,867,170
============= =========== ===========
Increase in unrealized net gain
(loss) on securities available
for sale, net of taxes 242,585 (43,747) (71,970)
============= =========== ===========
Securitization of loans held for
investment to investments held
to maturity -- 2,796,062 1,054,529
============= =========== ===========
See accompanying notes to consolidated financial statements.
26
<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 and Nature of Operations
-----------------------------------------------
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 owned subsidiary, Security
Financial Services Corporation ("SFSC"). The Bank is primarily engaged in the
business of accepting savings and demand deposits and originating mortgage
loans and loans to individuals and small businesses for various personal and
commercial purposes. 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
-----------------------------------------
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.
At March 31, 1998, the Bank maintained liquid assets in excess of the amount
required by regulations. The required amount is 4% of the average daily
balances of deposits and certain borrowings. Liquid assets consist primarily
of cash, time deposits and certain investment securities.
27
<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.
The Company values impaired loans at the loan's fair value if it is probable
that the Company 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. When the ultimate collectibility of an impaired loan's
principal is in doubt, wholly or partially, all cash receipts are applied to
principal. When this doubt does not exist, cash receipts are applied under
the contractual terms of the loan agreement first to interest then to
principal. Once the recorded principal balance has been reduced to zero,
future cash receipts are applied to interest income, to the extent that any
interest has been foregone. Further cash receipts are recorded as recoveries
of any amounts previously charged off.
(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.
28
<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
------------
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. 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 included in the balance sheet caption Other Assets
and 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
ninety 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 ninety 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.
29
<PAGE>
<PAGE>
(1) Significant Accounting Policies, Continued
------------------------------------------
(m) Fair Value of Financial Instruments
-----------------------------------
The Company discloses 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, the Company does not disclose the fair value of
non-financial instruments. 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 common shares outstanding during the period. The
treasury stock method is used to compute the dilutive effect of stock options
in the diluted weighted average shares number of common shares.
(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.
30
<PAGE>
<PAGE>
(2) Investment Securities, Available for Sale
-----------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses and market
values of investment securities available for sale are as follows:
March 31, 1998
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury notes $ 9,498,874 65,826 12,020 9,552,680
FHLB Securities 40,479,674 102,105 51,474 40,530,305
Federal Farm Credit Securities 4,496,683 21,672 4,070 4,514,285
------------ ------- ------ ----------
$ 54,475,231 189,603 67,564 54,597,270
============ ======= ====== ==========
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
============ ======= ======= ==========
The amortized cost and market value of investment securities available for
sale at March 31, 1998, 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 $ 4,486,197 4,480,367
After one year through five years 35,446,980 35,590,594
More than five years 14,542,054 14,526,309
----------- ----------
$54,475,231 54,597,270
=========== ==========
At March 31, 1998 investment securities available for sale of $9,392,000 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
$2,983,000 proceeds from sales of available for sale securities in the year
ending March 31, 1998, with approximately $15,423 recorded in gross gains and
no gross losses.
31
<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 and mortgage-backed securities held to maturity are as
follows:
March 31, 1998
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
FNMA securities $ 500,000 6,535 -- 506,535
FHLB securities 2,363,910 14,129 9,520 2,368,519
FHLMC bond 1,000,000 -- 800 999,200
Mortgage-backed
securities 4,351,923 71,492 465 4,422,950
------------ ------- ------- ----------
$ 8,215,833 92,156 10,785 8,297,204
============ ======= ======= ==========
March 31, 1997
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
FNMA securities $ 500,000 11,025 -- 511,025
FHLB securities 6,478,000 3,772 148,579 6,333,394
FHLMC bond 1,000,000 -- 15,220 984,780
Mortgage-backed
securities 4,776,769 15,976 23,557 4,768,987
------------ ------- ------- ----------
$ 12,754,769 30,773 187,356 12,598,186
============ ======= ======= ==========
The amortized cost and market value of investment and mortgage-backed
securities held to maturity at March 31, 1998, 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 $ 2,374,857 2,367,494
After one year through five years 989,053 1,000,225
More than five years 500,000 506,535
Mortgage-backed securities 4,351,923 4,422,950
----------- ----------
$ 8,215,833 8,297,204
=========== ==========
At March 31, 1998, investment and mortgage-backed securities held to maturity
of $3,454,000 were pledged as collateral for certain deposit accounts.
32
<PAGE>
<PAGE>
(4) Loans Receivable, Net
---------------------
Loans receivable, net, at March 31 consisted of the following:
1998 1997
---- ----
Residential real estate $ 46,450,206 50,534,682
Consumer 46,499,200 46,894,063
Commercial real estate 3,955,462 6,527,692
Commercial business 44,500,079 46,047,825
Loans held for sale 1,232,181 211,212
------------- -----------
142,637,128 150,215,474
------------- -----------
Less:
Allowance for loan losses 1,512,038 1,767,483
Loans in process 3,175,684 1,375,319
Deferred loan fees 224,973 303,199
------------- -----------
4,912,695 3,446,001
------------- -----------
$ 137,724,433 146,769,473
============= ===========
Changes in the allowance for loan losses for the years ended March 31, are
summarized as follows:
1998 1997 1996
---- ---- ----
Balance at beginning of year $ 1,767,483 1,758,688 1,955,119
Provision for loan losses 780,000 300,000 230,000
Charge-offs (1,293,082) (320,643) (471,938)
Recoveries 257,637 29,438 45,507
------------- --------- ---------
Balance at end of year $ 1,512,038 1,767,483 1,758,688
============= ========= =========
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:
1998 1997
---- ----
Non-accrual loans $ 2,034,000 1,368,072
Interest income which would ============= =========
have been recognized under
original terms $ 100,512 75,029
============= =========
Loans serviced for others at March 31, 1998, 1997 and 1996, were $79,306,000,
$88,295,000 and $93,310,000, respectively.
At March 31, 1998, impaired loans amounted to $872,000. Losses on impaired
loans are accounted for in the allowance for loan loss. For the year ended
March 31, 1998, the average recorded investment in impaired loans was
$1,206,000.
33
<PAGE>
<PAGE>
(5) Premises and Equipment, Net
---------------------------
Premises and equipment, net, at March 31 are summarized as follows:
1998 1997
---- ----
Land $ 503,163 452,283
Buildings and improvement 3,312,791 3,119,014
Furniture and equipment 3,866,947 3,997,350
------------ ----------
7,682,901 7,568,647
Less accumulated depreciation (3,855,141) (3,616,498)
------------ ----------
$ 3,827,760 3,952,149
============ ==========
Depreciation expense for the years ended March 31, 1998, 1997, and 1996, was
approximately $633,000, $608,000, and $597,000, respectively.
The Bank has entered into noncancelable operating leases related to buildings
and land. At March 31, 1998, future minimum payments under noncancelable
operating leases with initial or remaining terms of one year or more are as
follows (by fiscal year):
1999 $ 69,410
2000 69,621
2001 65,594
2002 45,456
2003 44,470
Thereafter 307,650
---------
$ 602,201
=========
Total rental expense amounted to $71,254, $61,000, and $54,000 for the years
ended March 31, 1998, 1997 and 1996, respectively. Five lease agreements with
monthly expenses of $2,188, $2,014, $493, $407 and $700 have renewal options
of 10, 10, 60, 10 and 20 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 $1,348,600 as of March 31, 1998.
34
<PAGE>
<PAGE>
(7) Real Estate Operations
----------------------
The Company participated 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 liquidated the remaining assets of the venture
in which it owned 62.5 percent in the latter part of fiscal 1998. The Company
had $240,000 invested in one partnership at March 31, 1998. Income from real
estate operations was as follows:
1998 1997 1996
---- ---- ----
Real estate acquired for development
and sale:
Sales $ 627,280 1,077,582 350,180
Cost of sales 523,086 1,306,227 296,508
--------- --------- -------
Gross profit (loss) 104,194 (228,645) 53,672
Amortization of gain on
sale of real estate -- -- 25,396
Provision expense (reversal) for real
estate losses -- (145,227) 45,000
--------- --------- -------
Income (loss) from real estate operations 104,194 (83,418) 34,068
Other expenses, net 64,392 108,553 38,535
--------- --------- -------
Net income (loss) $ 39,802 (191,971) (4,467)
========= ========= =======
The following is a summary of the allowance for estimated losses on real
estate:
1998 1997 1996
---- ---- ----
Balance at beginning of year $ 50,000 195,227 150,227
Provision (reversal) for real estate
losses -- (145,227) 45,000
--------- --------- -------
Balance at end of year $ 50,000 50,000 195,227
========= ========= =======
Condensed combined financial information for the joint ventures as of March 31
is as follows:
1998 1997
---- ----
Real estate held for development, net $ 623,779 840,813
Other assets
27,446 111,730
--------- -------
Total assets 651,225 952,543
Liabilities (principally a loan payable to the
Company) 121,865 213,527
--------- -------
Partners equity $ 529,360 739,016
========= =======
35
<PAGE>
<PAGE>
(8) Deposits
--------
Deposits outstanding by type of account at March 31 are summarized as follows:
1998 1997
------------------------------- ------------------------------
Interest Interest
Weighted Rate Weighted Rate
Amount Rate Range Amount Rate Range
------ ---- ----- ------ ---- -----
Checking $ 47,414,160 1.09% 0 - 1.50% $ 43,601,652 1.36% 0 - 1.75%
Money Market 27,902,091 4.67 2.75 - 5.50 11,640,884 2.80 2.75 - 3.00
Passbook
accounts 12,328,146 2.44 0 - 3.00 13,451,308 2.49 0 - 3.00
------------ ---- ----------- ------------ ---- -----------
87,644,397 2.42 0 - 5.50 68,693,844 1.83 0 - 3.00
------------ ---- ----------- ------------ ---- -----------
Certificate
accounts:
0 - 4.99% 3,086,511 3,935,588
5.00 - 6.99% 90,919,998 95,234,017
7.00 - 8.99 135,042 197,409
------------ ------------
Total
certificates
accounts 94,141,551 5.50 4.70 - 7.75 99,367,014 5.40 4.76 - 7.75
------------ ---- ----------- ------------ ---- -----------
$181,785,948 4.02% 0 - 7.75% $168,060,858 3.94% 0 - 7.75%
============ ==== =========== ============ ==== ===========
The aggregate amount of short-term certificates of deposit with a minimum
denomination of $100,000 was $14,336,000 and $15,737,000 at March 31, 1998 and
1997, respectively. The amounts and scheduled maturities of certificates of
deposit at March 31, are as follows:
1998 1997
---- ----
Within 1 year $ 76,220,282 83,998,768
After 1 but within 2 years 12,987,954 12,199,870
After 2 but within 3 years 1,246,311 1,344,995
After 3 but within 4 years 754,006 1,177,613
After 4 but within 5 years 2,551,313 645,768
Thereafter 381,685 --
------------ ----------
$ 94,141,551 99,367,014
============ ==========
36
<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:
1998 1997
------------------------ -----------------------
Weighted Weighted
Amount Rate Amount Rate
------ ---- ------ ----
1999 $ 5,490,000 6.06% $ 11,952,000 5.88%
2000 528,000 8.70 490,000 8.65
2001 856,000 8.75 528,000 8.70
2002 -- -- 856,000 8.75
Thereafter 5,252,000 5.80 288,000 7.97
------------ ---- ------------ ----
$ 12,126,000 6.25% $ 14,114,000 6.30%
============ ==== ============ ====
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:
1998 1997 1996
---- ---- ----
Current:
Federal $ 939,750 579,589 571,810
State -- -- --
---------- -------- -------
939,750 579,589 571,810
---------- -------- -------
Deferred:
Federal (26,424) (139,141) (27,879)
State (5,033) (26,503) (5,234)
---------- -------- -------
(31,457) (165,644) (33,113)
---------- -------- -------
$ 908,293 413,945 538,697
========== ======== =======
37
<PAGE>
<PAGE>
(10) Income Taxes, Continued
-----------------------
The Company's income taxes differ from those computed at the statutory federal
income tax rate, as follows:
1998 1997 1996
---- ---- ----
Tax at statutory income tax rate $ 891,113 424,712 543,412
State income tax benefit, net (13,480) (17,492) (3,454)
Other 30,660 6,725 (1,261)
---------- ------- -------
$ 908,293 413,945 538,697
========== ======= =======
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.
1998 1997
---- ----
Deferred tax assets:
Provision for loan losses $ 389,720 486,789
Net fees deferred for financial reporting 88,790 80,716
Unrealized loss on securities available
for sale -- 102,105
Other real estate basis for tax purposes over
financial statement basis 18,980 18,980
Other 243,386 205,964
--------- -------
Total gross deferred tax assets 740,876 894,554
--------- -------
Deferred tax liabilities:
FHLB stock basis over tax basis 126,566 126,566
Depreciation 181,040 201,156
Unrealized gain on securities available for
sale 46,326 --
--------- -------
Total gross deferred tax liability 353,932 327,722
--------- -------
Net deferred tax asset $ 386,944 566,832
========= =======
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 provision of $148,431 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 $31,457. 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 March 31, 1998
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, 1998 include 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.
38
<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, 1998 and 1997, the Bank was categorized as "well capitalized"
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized at March 31, 1997, the Bank had to maintain
risk- based, core and tangible capital ratios of 10.0%, 6.0% and 5.0%,
respectively. At March 31, 1998, to be categorized as well capitalized, the
Bank had to maintain total risk based capital, tier 1 risk based capital, and
tier 1 leverage ratios at 10%, 6%, and 5%, 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:
<PAGE>
<TABLE>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
March 31, 1998
Tier 1 Risk-based Core Capital
(to risk weighted assets) $15,961 11.8% $5,404 4.0% $8,106 6.0%
Total Risk-based Capital
(to risk weighted assets) 17,473 12.9 10,808 8.0 13,510 10.0
Tier 1 Leverage (Core) Capital
(to adjusted tangible assets) 15,961 7.5 8,553 4.0 10,691 5.0
Tangible Capital
(to tangible assets) 15,172 7.1 4,261 2.0 10,652 5.0
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
/TABLE
<PAGE>
The payment of dividends by the Company depends primarily on the ability of
the Bank to pay dividends to the Company. 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 Office of Thrift Supervision.
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. The Bank took a charge of $705,000 ($437,000 after-tax) as a result of
the special assessment.
39
<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 were 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 from 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.
40
<PAGE>
<PAGE>
(12) Employee Benefit Plans
----------------------
The Company participated in a multi-employer defined benefit plan until June
1, 1997 when it elected to withdraw from the plan in order to concentrate
benefits in the Company's other retirement plans. The plan provided defined
benefits to substantially all full-time employees of the Company with one or
more years of service. The Company was required to contribute $67,000 to the
plan in the year ended March 31, 1997 to fully fund the plan and eliminate any
liability on the Company's behalf for future contributions.
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 has a
discretionary profit sharing provision. The total employee contributions were
$100,000, $47,116, and $96,905 for the years ended March 31, 1998, 1997 and
1996, respectively.
The Company has an Employee Stock Ownership Plan ("ESOP") for the exclusive
benefit of the employee participants. The discretionary contributions for the
years ended March 31, 1998, 1997 and 1996 were $51,000, $0 and $0,
respectively.
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 granted in fiscal 1998. At March 31,
1998, the Company had the following options outstanding:
Outstanding Option Earliest Date Expiration
Grant Date Options Price Exercisable Date
---------- ------- ----- ----------- ----
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, 1998.
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 as of March
31 would have been reduced to the pro forma amounts indicated.
1998 1997 1996
---- ---- ----
Net income- as reported $ 1,712,629 835,207 1,059,574
Net income- pro forma 1,709,455 803,529 1,059,574
Net income per common
share (basis)-as reported 4.09 2.01 2.58
Net income per common
share (basic)-pro forma 4.08 1.94 2.58
Net income per common
share (diluted)-as reported 4.07 1.99 2.58
Net income per common
share (diluted)-pro forma 4.06 1.91 2.58
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for grants in fiscal 1997: dividend yield of $.22 per share,
expected volatility of 20 percent, risk-free interest rate of 5.9 percent and
expected lives of six to ten years.
41
<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
$19,948,000 and $19,814,000 and letters of credit of $83,000 and $668,000 at
March 31, 1998 and 1997, 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 $977,000 and $924,000 at
March 31, 1998 and 1997, respectively.
Outstanding commitments on mortgage loans not yet closed amounted to $658,000
at March 31, 1998. 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, 1998, the Bank had outstanding
commitments to sell approximately $1,232,000 of loans.
(14) Related Party Transactions
--------------------------
At March 31, 1998, 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, 1996 was $785,000. There
were $389,000 additions to loans to executive officers whose individual
indebtedness exceeded $60,000 during fiscal 1998. Repayments on these loans
totaled approximately $30,000. Loans to all employees, officers and directors
of the Company, in the aggregate, constituted approximately 10.44% of the
total shareholders' equity of the Company at March 31, 1998.
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 $27,000, $24,000, and $24,000 respectively, for rent for
the years ended March 31, 1998, 1997 and 1996. Management is of the opinion
that the transactions with respect to office rent are made on terms that are
comparable to those which would be made with unaffiliated persons.
42
<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, 1998 and 1997
1998 1997
Assets ---- ----
Cash $ 385,170 214,514
Investment in Security Federal Bank 17,294,000 15,362,473
Investment in real estate partnerships 239,685 350,336
Income tax receivable from Bank 54,414 68,707
Other assets 105,994 200,984
------------ ----------
Total assets $ 18,079,263 16,197,014
============ ==========
Liabilities and Shareholders' Equity
Accounts payable $ 3,222 14,985
Shareholders' equity 18,076,041 16,182,029
------------ ----------
Total liabilities and shareholders'
equity $ 18,079,263 16,197,014
============ ==========
Condensed Statements of Income Data
For the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
Income: ---- ---- ----
Equity in undistributed earnings of
Security Federal Bank $1,688,952 898,309 1,098,307
Equity in undistributed (earnings) loss
of real estate partnerships 20,169 (213,094) 889
Miscellaneous income 17,999 18,908 927
Reversal of allowance for loss
for real estate partnerships -- 145,227 --
---------- ------- ---------
1,727,120 849,350 1,100,123
Expenses:
Miscellaneous 14,491 14,143 40,549
---------- ------- ---------
Net income $1,712,629 835,207 1,059,574
========== ======= =========
43
<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, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Operating activities:
Net income $ 1,712,629 835,207 1,059,574
Adjustments to reconcile net
income to net cash provided by (used
in) operating activities:
Depreciation -- -- 290
Equity in undistributed earnings of
Security Federal Bank (1,688,952) (898,309) (1,098,307)
Equity in undistributed (earnings) loss
of real estate partnerships (20,169) 213,094 (889)
Reversal of allowance on
real estate partnerships -- (145,227) --
(Increase) decrease in income
taxes receivable and other assets 109,283 (132,937) (118,096)
Increase (decrease) in
accounts payable (11,763) 14,988 (1,230)
Net cash provided by (used in) ----------- --------- ----------
operating activities 101,028 (113,184) (158,658)
Investing activities: ----------- --------- ----------
Purchase of real estate partnerships
from Bank -- - (561,000)
(Investment) Return of capital in real
estate partnerships 130,830 149,552 (5,838)
Dividend received from Security Federal
Bank -- 500,000 --
Net cash provided by (used in) ----------- --------- ----------
investing activities 130,830 649,552 (566,838)
Financing activities: ----------- --------- ----------
Proceeds of loan -- -- 350,000
Repayment of loan -- (350,000) --
Dividends paid (100,582) (83,029) (82,236)
Exercise of stock options 39,380 39,380 39,380
Net cash provided by (used in) ----------- --------- ----------
financing activities (61,202) (393,649) 307,144
----------- --------- ----------
Net increase (decrease) in cash 170,656 142,719 (418,352)
Cash at beginning of year 214,514 71,795 490,147
----------- --------- ----------
Cash at end of year $ 385,170 214,514 71,795
=========== ========= ==========
44
<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)
1998 1997
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Financial Assets ------ ---------- ------ ----------
- ----------------
Cash and cash equivalents $ 4,659 4,659 7,904 7,904
Investment and mortgage-backed
securities 62,813 62,894 36,970 36,814
Loans receivable, net 137,724 137,107 146,769 146,960
Federal Home Loan Bank Stock 1,349 1,349 786 786
Financial Liabilities
- ---------------------
Deposits:
Checking, Savings, and MMDA
accounts $ 87,644 88,045 68,694 68,694
Certificate accounts 94,142 94,277 99,367 99,394
Advances from Federal Home
Loan Bank 12,126 11,954 14,114 14,147
Other borrowed money 129 127 204 198
At March 31, 1998, the Bank had $21.6 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, 1998.
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.
45
<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
21, 1998 at the University of South Carolina - Aiken, Business and Educational
Building, Room 116, 171 University Parkway, Aiken, SC.
STOCK LISTING
The Company's 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
-------------- ---- ---
6-30-96 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
6-30-97 37.25 33.00
9-30-97 44.01 37.62
12-31-97 44.01 44.01
3-31-98 44.01 44.01
As of March 31, 1998, the Company had approximately 277 stockholders and
421,060 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, 1997 and $0.06 per share each quarter in
the year ending March 31, 1998.
The ability of the Company to pay dividends depended primarily on the ability
of the Bank to pay dividends to the Company. The Bank may not declare or pay
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, 1998, with the Securities and Exchange Commission.
Copies of the Form 10-KSB, annual report and the Holding Company's quarterly
reports may be obtained by contacting:
Mrs. Ruth Vance
Security Federal Corporation STOCKHOLDERS AND GENERAL INQUIRIES
1705 Whiskey Road, South Mrs. Ruth Vance
Post Office Box 810 Security Federal Corporation
Aiken, South Carolina 29802-0810 1705 Whiskey Road, South
803-641-3000 Aiken, South Carolina 29802-0810
803-641-3000
TRANSFER AGENT
Security Federal Corporation
1705 Whiskey Road South
Post Office Box 810
Aiken, South Carolina 29802-0810
SPECIAL COUNSEL
Breyer & Aguggia
1300 I Street, NW
Suite 470 East
Washington, DC 20005
INDEPENDENT AUDITORS
Elliott, Davis & Company, LLP
870 S. Pleasantburg Drive
Post Office Box 6286
Greenville, South Carolina 29606
46
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION
BOARD OF DIRECTORS*
- -----------------------------------------------------------------------------
T. Clifton Weeks
Chairman
Security Federal Corporation
Aiken, SC
Dr. Robert E. Alexander
Chancellor
University of South Carolina at Aiken
Aiken, SC
William Clyburn
Advisor for Community Alliances
Westinghouse Savannah River Company
Aiken, SC
Senator Thomas L. Moore
Owner, Boiler Efficiency
Clearwater, SC
Timothy W. Simmons
President/Chief Executive Officer
Security Federal Corporation
Aiken, SC
G. L. Toole, III
Attorney
Aiken, SC
Harry O. Weeks, Jr.
Hutson-Etherredge Companies
Aiken, SC
(Directors Emeriti)
Walter E. Brooker, Sr.
President, Brooker's Inc. (Retail Store)
Denmark, SC
Robert E. Johnson
Corporate Secretary
Attorney (Retired)
Aiken, SC
DENMARK ADVISORY BOARD**
- -----------------------------------------------------------------------------
Walter E. Brooker, Sr.
President
Brookers's
Inc.
Denmark, SC
David Crum
Attorney
Crum, Crum and Crum
Denmark, SC
Jim Harrison
Owner
Jim Harrison Art Gallery
Denmark, SC
Claude E. McCain
President
H.C. McCain Agency Insurance
Denmark, SC
Rev. Isaiah Odom
Owner
Odom's Auto Sure Auto Parts
Denmark, SC
NORTH AUGUSTA ADVISORY BOARD**
- -----------------------------------------------------------------------------
Richard Borden
Owner
Borden Pest Control
North Augusta, SC
Rev. G.L. Brightharp
G.L. Brightharp &
Sons Mortuary
North Augusta, SC
Helen Butler
Retired Banker
North Augusta, SC
Senator Thomas L. Moore
President
Boiler Efficiency, Inc.
Clearwater, SC
John Potter
Director of Finance
City of North Augusta
North Augusta, SC
WAGENER ADVISORY BOARD**
- -----------------------------------------------------------------------------
M. Judson Busbee
Owner
Busbee Hardware
Wagener, SC
Kent G. Ingram
Owner & President
Garvin Oil Company
Wagener, SC
Mary Lybrand
Retired Banker
Wagener, SC
Joy T. Shealy
Asst Superintendent
Area 4 Schools
Wagener, SC
Richard H. Sumpter
Retired Educator
Wagener, SC
Allison H. Tyler, Jr.
Owner
Tyler Brothers Department Store
Wagener, SC
MIDLAND VALLEY ADVISORY BOARD**
- -----------------------------------------------------------------------------
Charles Hilton
General Manager
Breezy Hill Water
& Sewer
Graniteville, SC
Rev. Nathaniel Irvin, Sr.
Pastor
Old Storm Branch
Baptist Church
Clearwater, SC
Gloria Bush Johnson
Consultant
Aiken, SC
Senator Thomas L. Moore
President
Boiler Efficiency, Inc.
Clearwater, SC
Rev. Dennis Phillips
Pastor
Christian Heritage Church
Graniteville, SC
Glenda K. Napier
Co-Owner Napier Funeral Home
Graniteville, SC
Carlton Shealy
Owner
C. Shealy Realty
Builders & Developers
North Augusta, SC
47
<PAGE>
<PAGE>
SECURITY FEDERAL CORPORATION
SECURITY FEDERAL BANK MANAGEMENT
- -----------------------------------------------------------------------------
T. Clifton Weeks. . . .Chairman
Timothy W. Simmons. . .President and Chief Executive Officer
G.L. Toole, III . . . .Vice President
Robert E. Johnson . . .Corporate Secretary
Roy G. Lindburg . . . .Treasurer & Chief Financial Officer
Thomas Clark. . . . . .Senior Vice President/Loan Administration
Richard Garcia. . . . .Senior Vice President/Mtg Lending/Marketing
Floyd Blackmon. . . . .Vice President/Operations/Deposit Administration
Sandy Bartlett. . . . .Vice President/Human Resources
Kathi Carr. . . . . . .Vice President/Mortgage Loan Operations
Carol McCleskey . . . .Vice President/Banking Center Coordinator
Harley Henkes . . . . .Internal Auditor/Compliance and Security Officer
Margaret Hurt . . . . .Manager/Accounting
Frank M. Thomas . . . .Vice President/Bus. Development/Commercial Loans
Rodney Ingle. . . . . .Vice President/Bus. Development/Commercial Loans
Ruth Vance. . . . . . .Assistant Secretary/Assistant Vice President
Al McKay*** . . . . . .Vice President/Financial Advisor
Greg Warfield . . . . .Vice President/Mortgage Loan Originator
Deborah Vermillion. . .Vice President/Single Family Mortgage Lending
Joseph Taylor . . . . .Manager/Information Services
Marianne Harden . . . .Asst Vice President/Secondary Marketing/Prod Support
Carolyn Anderson. . . .Assistant Vice President/Operations
Teresa Teuton . . . . .Assistant Vice President/Loan Support
Ann Johnson . . . . . .Assistant Vice President/Purchasing/Equipment Maint.
Gabriele Dukes. . . . .Assistant Vice President/Credit Counseling
WHISKEY ROAD OFFICE
- -------------------
Kathy Williamson. . .Manager
DENMARK OFFICE
- ---------------
Lee Hutto. . .Manager
NORTH AUGUSTA OFFICE
- --------------------
Vicky Moseley. . .Manager
LAURENS STREET OFFICE
- ---------------------
Patricia Moseley. . .AVP/Manager
CLEARWATER OFFICE
- -----------------
Gail Dotson. . .AVP/Manager
WAGENER OFFICE
- --------------
Connie Jeffcoat. . .Manager
RICHLAND AVENUE OFFICE
- ----------------------
Rhonda Morris. . .Manager
LANGLEY OFFICE
- --------------
Pat Guglieri. . .AVP/Manager
WAL*MART OFFICE
- ---------------
Renee W. Williams. . .Manager
GRANITEVILLE OFFICE
- -------------------
Elsie Dicks. . .AVP/Manager
* Security Federal Corporation, Security Federal Bank and Security Financial
Services Corporation
** Security Federal Bank
*** Security Financial Services Corporation
48
<PAGE>
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
State of Percentage
Parent Subsidiary Incorporation of Ownership
- ------ ---------- ------------- ------------
Security Federal Corporation Security Federal United States 100%
Bank
Security Federal Bank Security South Carolina 100%
Financial
Services
Corporation
<PAGE>
<PAGE>
Exhibit 23
Consent of Elliott, Davis & Company, LLP
<PAGE>
<PAGE>
[Letterhead of Elliott, Davis & Company, LLP]
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 June 5, 1998, relating to the
consolidated balance sheet of Security Federal Corporation and subsidiary (the
"Company") as of March 31, 1998 and the related consolidated statements of
income, shareholders' equity and cash flows for the year then ended, which
report appears in the March 31, 1998 annual report on Form 10-KSB of the
Company.
/s/Elliott, Davis & Company, LLP
Elliott, Davis & Company, LLP
Greenville, South Carolina
June 26, 1998
<PAGE>
<PAGE>
Exhibit 27
Financial Data Schedule
This schedule contains financial information extracted from the
consolidated financial statements of Security Federal Corporation for the year
ended March 31, 1998 and is qualified in its entirety by reference to such
financial statements. (Dollars in Thousands, except for earnings per share.)
Financial Data
as of or for the year
Item Number ended March 31, 1998 Item Description
- ----------- -------------------- ----------------
9-03(1) 4,659 Cash and due from the Banks
9-03(2) 0 Interest-bearing deposits
9-03(3) 0 Federal funds sold - purchased
securities for resale
9-03(4) 0 Trading account assets
9-03(6) 54,597 Investment and mortgage backed
securities held for sale
9-03(6) 8,216 Investment and mortgage backed
securities held to
maturity - carrying value
9-03(6) 8,297 Investment and mortgage backed
securities held to
maturity - market value
9-03(7) 137,724 Loans
9-03(7)(2) 1,512 Allowance for losses
9-03(11) 215,512 Total assets
9-03(12) 181,786 Deposits
9-03(13) 5,570 Short-term borrowings
9-03(15) 3,395 Other liabilities
9-03(16) 6,685 Long-term debt
9-03(19) 0 Preferred stock - mandatory
redemption
9-03(20) 0 Preferred stock - no mandatory
redemption
9-03(21) 4,002 Common stocks
9-03(22) 14,074 Other stockholders' equity
9-03(23) 215,512 Total liabilities and stockholders'
equity
9-04(1) 13,125 Interest and fees on loans
9-04(2) 3,424 Interest and dividends on
investments
9-04(4) 69 Other interest income
9-04(5) 16,618 Total interest income
9-04(6) 6,751 Interest on deposits
9-04(9) 8,001 Total interest expense
9-04(10) 8,617 Net interest income
9-04(11) 780 Provision for loan losses
9-04(13)(h) 15 Investment securities gains/(losses)
9-04(14) 7,220 Other expenses
9-04(15) 2,621 Income/loss before income tax
9-04(17) 2,621 Income/loss before extraordinary
items
9-04(18) 0 Extraordinary items, less tax
9-04(19) 0 Cumulative change in accounting
principles
9-04(20) 1,713 Net income or loss
9-04(21) 4.09 Earnings per share - primary
9-04(21) 4.07 Earnings per share - fully diluted
I.B.5 836 Net yield - interest earning assets
- actual
III.C.1.(a) 2,034 Loans on non-accrual
<PAGE>
<PAGE>
III.C.1.(b) 0 Accruing loans past due 90 days or more
III.C.2.(c) 763 Troubled debt restructuring
III.C.2 109 Potential problem loans
IV.A.1 1,768 Allowance for loan loss - beginning of
period
IV.A.2 1,293 Total chargeoffs
IV.A.3 257 Total recoveries
IV.A.4 1,512 Allowance for loan loss - end of period
IV.B.1 1,512 Loan loss allowance to allocated to
domestic loans
IV.B.2 0 Loan loss allowance to foreign loans
IV.B.3 1,512 Loan loss allowance - unallocated
<PAGE>
<PAGE>
Exhibit 99
Report of KPMG Peat Marwick LLP
<PAGE>
<PAGE>
[Letterhead of KPMG Peat Marwick]
Independent Auditors' Report
The Board of Directors
Security Federal Corporation:
We have audited the consolidated balance sheet of Security Federal Corporation
and Subsidiary (the "Company") as of March 31, 1997 and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the years in the two-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 the results of its operations and its cash
flows for each of the years in the two-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
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 4659
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 54597
<INVESTMENTS-CARRYING> 8216
<INVESTMENTS-MARKET> 8297
<LOANS> 137724
<ALLOWANCE> 1512
<TOTAL-ASSETS> 215512
<DEPOSITS> 181786
<SHORT-TERM> 5570
<LIABILITIES-OTHER> 3395
<LONG-TERM> 6685
0
0
<COMMON> 4002
<OTHER-SE> 14074
<TOTAL-LIABILITIES-AND-EQUITY> 215512
<INTEREST-LOAN> 13125
<INTEREST-INVEST> 3424
<INTEREST-OTHER> 69
<INTEREST-TOTAL> 16618
<INTEREST-DEPOSIT> 6751
<INTEREST-EXPENSE> 8001
<INTEREST-INCOME-NET> 8617
<LOAN-LOSSES> 780
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 7220
<INCOME-PRETAX> 2621
<INCOME-PRE-EXTRAORDINARY> 2621
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1713
<EPS-PRIMARY> 4.09
<EPS-DILUTED> 4.07
<YIELD-ACTUAL> 836
<LOANS-NON> 2034
<LOANS-PAST> 0
<LOANS-TROUBLED> 763
<LOANS-PROBLEM> 109
<ALLOWANCE-OPEN> 1768
<CHARGE-OFFS> 1293
<RECOVERIES> 257
<ALLOWANCE-CLOSE> 1512
<ALLOWANCE-DOMESTIC> 1512
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1512
</TABLE>
