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, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-16120
SECURITY FEDERAL CORPORATION
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(Exact name of registrant as specified in its charter)
South Carolina 57-08580504
- ----------------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1705 Whiskey Road South, Aiken, South Carolina 29803
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 641-3000
----------------------
Securities registered pursuant to Section 12(b) None
of the Act: ----------------------
Securities registered pursuant to Section 12(g) Common Stock, par
of the Act: 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, 1999 were
$19,952,840.
As of June 21, 1999, there were issued and outstanding 842,120 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 21, 1999, was $30.3
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, 1999. (Parts I and II)
2. Portions of the Registrant's Proxy Statement for the 1999 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
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<PAGE>
PART I
Item 1. Business
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Security Federal Corporation
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Security Federal Corporation (the "Company") was incorporated under the
laws of the State of Delaware in July 1987 by authorization of the Board of
Directors of Security Federal Savings Bank of South Carolina ("Security
Federal" or the "Bank") for the purpose of becoming a savings and loan holding
company that acquired all of the outstanding stock of Security Federal issued
upon the conversion of Security Federal from the mutual to the stock form (the
"Conversion"). Effective August 17, 1998, the Company changed its state of
incorporation from Delaware to South Carolina.
As a South Carolina corporation, the Company is authorized to engage in
any activity permitted by South Carolina 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, 1999, the Company had assets of approximately $254.7
million, deposits of approximately $216.5 million and shareholders' equity of
approximately $19.6 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.
1
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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.
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 1999
Annual Report to Stockholders ("Annual Report").
Yields Earned and Rates Paid
- ----------------------------
This information is incorporated by reference to page 10 of the Annual
Report.
Rate/Volume Analysis
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This information is incorporated by reference to page 9 of the Annual
Report.
Lending Activities
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General. The primary source of revenue for the Bank is interest and fee
income from lending activities. The principal lending activity of the Bank is
making conventional first mortgage real estate loans to enable borrowers to
purchase or refinance one- to four-family residential real property. The Bank
also makes loans secured by multi-family residential and commercial real
estate and consumer and commercial loans. The Bank continues to emphasize the
origination of adjustable rate residential mortgage loans, subject to market
conditions, for retention in its portfolio. In addition, the Bank originates
construction loans on single family residences, multi-family dwellings and
projects, commercial real estate, and loans for the acquisition, development
and construction of residential subdivisions and commercial projects.
Adjustable rate mortgage loans ("ARMs") constituted approximately 38.8%
of the Bank's total outstanding loan portfolio at March 31, 1999.
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>
<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,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
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)......$ 7,586 4.7% $ 9,981 7.0% $ 14,835 9.9% $ 11,846 7.6% $ 15,998
10.4%
Commercial(2)....... -- -- -- -- 1,916 1.2 2,280 1.6 2,580 1.7
-------- ----- -------- ----- -------- ----- -------- ------ -------- -----
Total real estate
loans............. 7,586 4.7 9,981 7.0 16,751 11.1 14,126 9.2 18,578 12.1
Commercial business.. 27,812 17.3 21,863 15.3 20,970 14.0 15,804 10.2 11,986 7.8
Consumer(3).......... 28,492 17.7 29,257 20.5 24,180 16.1 22,635 14.6 20,450 13.3
-------- ----- -------- ----- -------- ----- -------- ------ -------- -----
Total fixed rate
loans............. 63,890 39.7 61,101 42.8 61,901 41.2 52,565 34.0 51,014 33.2
-------- ----- -------- ----- -------- ----- -------- ------ -------- -----
Adjustable rate loans
- ---------------------
Real Estate:
Residential(1)...... 59,507 36.9 37,701 26.4 35,910 23.9 48,718 31.5 51,004 33.1
Commercial(2)....... 2,984 1.9 3,956 2.8 4,612 3.1 8,350 5.4 10,428 6.8
-------- ----- -------- ----- -------- ----- -------- ------ -------- -----
Total real estate
loans............. 62,491 38.8 41,657 29.2 40,522 27.0 57,068 36.9 61,432 39.9
Commercial business.. 21,530 13.4 22,637 15.9 25,078 16.7 22,960 14.8 17,732 11.5
Consumer(3).......... 13,140 8.1 17,242 12.1 22,714 15.1 22,175 14.3 23,639 15.4
-------- ----- -------- ----- -------- ----- -------- ------ -------- -----
Total adjustable
rate loans........ 97,161 60.3 81,536 57.2 88,314 58.8 102,203 66.0 102,803 66.8
-------- ----- -------- ----- -------- ----- -------- ------ -------- -----
Total loans........ 161,051 100.0% 142,637 100.0% 150,215 100.0% 154,768 100.0% 153,817
100.0%
===== ===== ===== ===== =====
Less
- ----
Loans in process..... 7,151 3,176 1,375 474 2,419
Deferred fees and
discounts........... 199 225 303 395 466
Allowance for loan
losses.............. 1,715 1,512 1,768 1,759 1,955
-------- -------- -------- -------- --------
Total loans
receivable........$151,986 $137,724 $146,769 $152,140 $148,977
======== ======== ======== ======== ========
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(1) Includes $1.6 million, $1.8 million, $1.6 million, $2.5 million and $2.5 million in multi-family
dwellings at March 31, 1999, 1998, 1997 and 1996, 1995, respectively. Includes residential
construction loans.
(2) Includes acquisition, development and commercial construction loans.
(3) Includes home improvement loans.
3
</TABLE>
<PAGE>
<TABLE>
At March 31,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
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)..... $ 52,860 32.8% $ 44,232 31.0% $ 46,782 31.1% $ 59,613 38.5% $ 60,528
39.3%
Commercial......... 2,984 1.9 3,956 2.8 6,528 4.4 9,977 6.5 11,203 7.3
Construction....... 14,233 8.8 3,450 2.4 3,963 2.6 1,604 1.0 8,279 5.4
-------- ----- -------- ----- -------- ----- -------- ------ -------- -----
Total real estate
loans............ 70,077 43.5 51,638 36.2 57,273 38.1 71,194 46.0 80,010 52.0
-------- ----- -------- ----- -------- ----- -------- ------ -------- -----
Commercial business. 49,342 30.6 44,500 31.2 46,048 30.7 38,764 25.1 29,718 19.3
Consumer loans:
Deposit account.... 1,213 0.8 1,275 0.9 1,299 0.9 1,299 0.8 1,145 0.8
Home equity........ 15,818 9.8 20,202 14.1 21,446 14.3 14,767 9.6 16,029 10.4
Home improvement... 14,903 9.3 16,088 11.3 13,299 8.8 18,154 11.7 16,283 10.6
Other.............. 9,698 6.0 8,934 6.3 10,850 7.2 10,590 6.8 10,632 6.9
-------- ----- -------- ----- -------- ----- -------- ------ -------- -----
Total consumer
loans............ 41,632 25.9 46,499 32.6 46,894 31.2 44,810 28.9 44,089 28.7
-------- ----- -------- ----- -------- ----- -------- ------ -------- -----
Total loans..... 161,051 100.0% 142,637 100.0% 150,215 100.0% 154,768 100.0% 153,817
100.0%
===== ===== ===== ===== =====
Less:
Loans in process.... 7,151 3,176 1,375 474 2,419
Deferred fees and
discounts.......... 199 225 303 395 466
Allowance for loan
losses............. 1,715 1,512 1,768 1,759 1,955
-------- -------- -------- -------- --------
Total loans
receivable....... $151,986 $137,724 $146,769 $152,140 $148,977
======== ======== ======== ======== ========
---------------
(1) Includes $1.6 million, $1.8 million, $1.6 million, $2.5 million and $2.5 million in multi-family
dwellings for fiscal years ended March 31, 1999, 1998, 1997, 1996 and 1995, respectively.
4
</TABLE>
<PAGE>
The following schedule illustrates the interest rate sensitivity of
Security Federal's loan portfolio at March 31, 1999. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
when the contract is due. This schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
At March 31, 1999
--------------------------------------------------
Real Estate
-------------------
Resi- Com- Con- Commercial
dential(1) mercial sumer(2) Business Total
------- ------- ----- -------- -----
(In Thousands)
Six months or less(3)...$ 6,947 $ -- $ 2,591 $ 4,877 $ 14,415
Over six months to
one year.............. 1,500 -- 2,585 4,670 8,755
Over one year to
three years........... 1,479 -- 5,565 11,172 18,216
Three to five years..... 2,164 -- 7,506 14,211 23,881
Over five to ten years.. 3,710 2,273 10,577 8,602 25,162
Over ten to twenty
years................. 21,557 711 12,808 5,810 40,886
More than twenty years.. 22,585 -- -- -- 22,585
------ ------ ------- ------ --------
Total(4).............$59,942 $2,984 $41,632 $49,342 $153,900
======= ====== ======= ======= ========
- -------------
(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, 2000, which have
predetermined or fixed interest rates is $53.1 million, while the total amount
of loans due after such date which have floating or adjustable interest rates
is $77.6 million.
Loan Originations, Purchases and Sales. The following table shows the
loan origination, purchase, sale and repayment activities of the Bank for the
periods indicated.
Year Ended March 31,
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
Originated(1):
Real estate:
Adjustable rate - residential...$ 36,906 $12,080 $ 8,046 $ 3,684 $28,608
Adjustable rate - commercial.... 518 -- -- -- 187
-------- ------- ------- ------- -------
Total adjustable rate......... 37,424 12,080 8,046 3,684 28,795
Fixed rate - residential........ 6,020 3,444 5,636 5,332 4,729
Fixed rate - commercial......... -- -- 14 -- --
-------- ------- ------- ------- -------
Total fixed rate.............. 6,020 3,444 5,650 5,332 4,729
Non-real estate:
Consumer........................ 19,564 20,103 18,574 16,994 18,362
Commercial business............. 24,731 13,698 20,576 27,465 25,529
-------- ------- ------- ------- -------
Total non-real estate........ 44,295 33,801 39,150 44,459 43,891
-------- ------- ------- ------- -------
Total loans originated....$ 87,739 $49,325 $52,846 $53,475 $77,415
======== ======= ======= ======= =======
(table continued on following page)
5
<PAGE>
Year Ended March 31,
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
Purchased....................... -- -- -- -- --
Sold(1):
Fixed rate:
Real estate - residential..... $ 5,644 $ 3,396 $ 5,810 $ 5,496 $3,090
Adjustable rate:
Real estate - residential..... -- -- -- -- 4,450
Principal repayments(2)......... 63,680 53,507 51,589 47,028 50,006
(Increase) decrease in other
items, net.................... (4,153) (1,467) (818) 2,212 3,760
Net increase (decrease)......... 14,262 $(9,045) $(5,371) $3,163 $23,629
- -------------
(1) Does not include loans in the amount of $28.1 million, $7.9 million, $6.4
million, $6.9 million and $8.4 million that were originated with prior
commitments to be purchased by institutional investors and sold
during the fiscal years ended March 31, 1999, 1998, 1997, 1996 and 1995,
respectively.
(2) 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, 1999 was
$467,112.
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.
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,
----------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Net deferred loan origination fees
earned during the period(1)............ $198,065 $111,528 $119,818
Mortgage loan origination fees earned as
a percentage of total loans originated
during the period...................... 0.5% 0.7% 0.9%
Net deferred loan origination fees in
loan portfolio at end of period........ $199,549 $224,973 $303,199
- ------------
(1) Includes amounts amortized to interest income as yield adjustments.
Does not include fees earned on loans sold.
6
<PAGE>
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
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, 1999, Security Federal
serviced approximately $129.4 million in mortgage loans, including
approximately $64.0 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, 1999, $28.5 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 1999, $5.6 million in loans were
originated and sold to FHLMC and FNMA. At March 31, 1999, fixed-rate,
residential mortgage loans totaled $7.6 million, or 4.7% 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, 1999, the Bank held $1.6 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.
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 $240,000 per loan, and
the government loan direct endorser approves Federal Housing Administration
("FHA") loans not to exceed $115,200 and Veterans'
7
<PAGE>
Administration ("VA") loans not to exceed $204,000. 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, 1999,
was approximately $514,000 (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 $20.8 million as of March 31, 1999. See Note 13 of Notes to
Consolidated Financial Statements.
Permanent Residential Mortgage Lending. Residential real estate mortgage
loans constituted approximately 41.6% of the Bank's total outstanding loan
portfolio at March 31, 1999.
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, 1999, residential
ARMs totaled $59.5 million, or 36.9% of the Bank's loan portfolio. For the
year ended March 31, 1999, the Bank originated $43.4 million in residential
real estate loans, 86.1% of which had adjustable rates of interest.
There are unquantifiable risks resulting from possible increased costs to
the borrower as a result of periodic repricing. Despite the benefits of ARMs
to the Bank's asset/liability management program, such loans also pose
potential additional risks, primarily because as interest rates rise, the
underlying payment by the borrower rises, increasing the potential for
default. At the same time, marketability of the underlying property may be
adversely affected by higher interest rates.
When making a one- to four-family residential mortgage loan, the Bank
evaluates both the borrower's creditworthiness and his or her general ability
to make principal and interest payments and the value of the property 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, 1999, residential construction loans on one- to four-family dwellings
totaled $14.2 million, or 8.8% 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, 1999, the Bank had
approximately $3.0 million, or 1.9% of the Bank's total loan portfolio, in
commercial real estate loans.
8
<PAGE>
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, 1999, the Bank did not have any commercial real estate
loans with principal balances in excess of $2.0 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 only
infrequently made loans to one borrower equal to the amount federal law allows
or approximately $2.9 million at March 31, 1999.
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.
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.
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, 1999, commercial business loans totaled $49.3 million, or
30.6% 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
9
<PAGE>
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, 1999, the Bank had
$10.3 million of home equity lines of credit outstanding and $15.5 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,
1999, the Bank had total consumer loans of $41.6 million, or 25.9% 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, 1999, 946 Visa
credit cards had been issued by the Bank with total approved credit lines of
$2.0 million, of which $504,000 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 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, 1999, 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 $154,000.
Delinquent Loans. The following table sets forth information concerning
delinquent mortgage and other loans at March 31, 1999. 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.
<TABLE>
Real Estate Non-Real Estate
-------------------------------------- ------------------------------------
- -
Commercial
Residential Commercial Consumer Business
----------------- ----------------- ----------------- -----------
- ----
Number Amount Number Amount Number Amount Number
Amount
------ ------ ------ ------ ------ ------ ------ -----
- -
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days............. 4 $168,000 -- -- 57 $595,000 6
$151,000
60 - 89 days............. 3 226,000 -- -- 10 64,000 1
18,000
90 days and over......... 8 362,000 -- -- 27 307,000 2
513,000
---- -------- ---- ---- ---- -------- ---- ------
- --
Total delinquent loans... 15 $756,000 -- -- 94 $966,000 9
$682,000
==== ======== ==== ==== ==== ======== ====
========
</TABLE>
10
<PAGE>
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, 1999, approximately $24,000, $355,000 and $59,000 of the
Bank's assets were classified "special mention," "substandard" and "doubtful,"
respectively. On such date, the Bank had $8,000 of loans classified as
"loss." As of March 31, 1999, there were loans totaling $706,000 which were
troubled debt restructuring within the meaning of FASB No. 15 of which
$525,000 was classified substandard and $26,000 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 90 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 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.
11
<PAGE>
The following table sets forth the amounts and categories of risk
elements in the Bank's loan portfolio.
March 31,
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Loans Delinquent
60 to 89 Days:
Residential.................... $ 226 $ 79 $ 56 $ 452 $ 148
Commercial real estate......... -- -- -- -- 172
Consumer....................... 64 113 289 226 47
Commercial business............ 18 195 142 490 9
------ ------ ------ ------ -----
Total........................ $ 308 $ 387 $ 487 $1,168 $ 376
====== ====== ====== ====== =====
Total as a percentage of
total assets............... 0.12% 0.18% 0.24% 0.54% 0.18%
Non-Accruing Loans Delinquent
90 Days or More:
Residential.................... $ 362 $ 570 $ 105 $ 453 $ 264
Commercial real estate......... -- -- -- 542 --
Consumer....................... 307 432 446 154 122
Commercial business............ 513 1,032 330 255 50
------ ------ ------ ------ -----
Total........................ $1,182 $2,034 $ 881 $1,404 $ 436
====== ====== ====== ====== =====
Total as a percentage of
total assets............... 0.46% 0.94% 0.44% 0.65% 0.21%
Troubled debt restructurings.... $ 706 $ 763(3) $ 829(2) $ 487(1) $ 780
Real estate owned............... $ 154 $ 165 $ 52 $ 719 $1,521
Allowance for loan losses....... $1,715 $1,512 $1,768 $1,759 $1,955
________________
(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, 1999, 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 $110,000.
At March 31, 1999, non-accrual loans totaled $1.2 million compared to
$2.0 million at March 31, 1998. 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, 1999 were eight one- to four-family real
estate mortgage loans totaling $362,000 and two commercial loans totaling
$513,000 and 27 consumer loans totaling $307,000. Of the $307,000 in consumer
loans on non-accrual status at fiscal year end, no loan exceeded $60,000 at
fiscal year end. Of the $513,000 in non-accruing commercial business loans at
March 31, 1999, no loan exceeded $500,000.
The Bank had five loans totaling $706,000 at fiscal year end which were
troubled debt restructurings compared to four loans of $763,020 at March 31,
1998, of which one loan of $86,000 was also on non-accrual status. Of the
five troubled debt restructurings at March 31, 1999, no loans were on
non-accrual status. The five loans consisted of a $155,000 consumer loan
partially secured by a principal residence and four commercial business loans
totaling $551,000 secured by commercial real estate and business assets. All
five loans are considered well secured
12
<PAGE>
and no loss is anticipated at this time. All troubled debt restructurings are
also considered impaired. At March 31, 1999, the Bank held $880,000 in
impaired loans compared to $872,195 at March 31, 1998.
At March 31, 1999, real estate acquired through foreclosure had an
outstanding book value of $154,000 and consisted of two properties.
Provision for Losses on Loans and Real Estate Owned. Security Federal
recognizes that credit losses will be experienced during the course of making
loans and that the risk of loss will vary with, among other things, the type
of loan being made, the creditworthiness of the borrower over the term of the
loan and, in the case of a secured loan, the quality of the underlying
security for the loan.
The Bank seeks to establish and maintain sufficient reserves for
estimated losses on specifically identified loans and real estate where such
losses can be estimated. Additionally, general reserves for estimated
possible losses are established on specified portions of the Bank's portfolio
such as consumer loans and higher risk residential construction mortgage loans
based on management's estimate of the potential loss for loans which normally
can be classified as higher risk. Specific and general reserves are based on,
among other criteria (1) the risk characteristics on the loan portfolio, (2)
current economic conditions on a local as well as a statewide basis, (3)
actual losses experienced historically, and (4) the level of reserves for
possible losses in the future. Additionally, a reserve is maintained for
uncollected interest on loans 90 days or more past due.
At March 31, 1999, total reserves relating to loans were $1.7 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
56.5% of the Bank's total loan portfolio, at March 31, 1999, 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 0.58%. 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, 1999, the Bank had no allowance for losses on real estate
owned.
13
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
At March 31,
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of year..... $1,512 $1,768 $1,759 $1,955 $1,735
Provision charged to operations... 600 780 300 230 300
Charge-offs:
Residential real estate ......... 2 -- 64 5 --
Commercial real estate........... -- -- -- -- 3
Commercial business.............. 193 660 59 330 --
Consumer......................... 235 633 198 137 102
------ ------ ------ ------ ------
Total charge-offs.............. 430 1,293 321 472 105
------ ------ ------ ------ ------
Recoveries:
Residential real estate.......... -- -- -- -- --
Commercial business.............. 2 56 -- -- --
Consumer......................... 31 201 30 46 25
------ ------ ------ ------ ------
Total recoveries............... 33 257 30 46 25
------ ------ ------ ------ ------
Balance at end of year............$1,715 $1,512 $1,768 $1,759 $1,955
===== ====== ====== ====== ======
Ratio of net charge-offs during
the year to average loans out-
standing during the year......... 0.28% 0.72% 0.19% 0.28% 0.06%
==== ==== ==== ==== ====
14
<PAGE>
<TABLE>
The distribution of the Bank's allowance for loan losses at the dates indicated is summarized as
follows:
At March 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- --------------- --------------- ---------------- ---------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential...........$ 198 41.6% $ 140 33.4% $ 81 33.7% $ 460 39.1% $ 460
43.4%
Commercial real
estate ............. 42 1.9 42 2.8 42 4.4 131 6.9 96
8.5
Consumer ............. 647 25.9 551 32.6 734 31.2 568 28.9 800
28.7
Commercial business... 828 30.6 779 31.2 911 30.7 600 25.1 599
19.4
------ ----- ------ ----- ------ ----- ------ ----- ------ ----
- -
Total..............$1,715 100.0% $1,512 100.0% $1,768 100.0% $1,759 100.0% $1,955
100.0%
====== ===== ====== ===== ====== ===== ====== ===== ======
=====
</TABLE>
15
<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, 1999, Security
Federal's net investment in its service corporations (including loans to
service corporations) totaled $362,000. 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, 1999, was approximately $187,000. 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, 1999, 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 35 had been sold as of
March 31, 1999.
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>
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, 1999, the Bank's liquidity ratio (liquid assets as a
percentage of net withdrawable savings and current borrowings) was
approximately 37%.
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,
-------------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Interest-bearing deposits with banks... $ -- $ -- $ --
Other interest earning assets.......... 2,406 -- 2,713
------- ------- --------
Total.............................. $ 2,406 $ -- $ 2,713
======= ======= ========
Securities:
Available for sale:
U.S. Treasury obligations............. 5,054 50,083 $23,717
FHLB securities....................... 43,358
Federal Farm Credit Bank securities.... 7,985 -- --
FHLMC bonds........................... 963 4,514 499
------- ------- -------
Total securities available for sale.. 57,360 54,597 24,216
------- ------- -------
Held to Maturity:
FHLB securities....................... -- 2,364 6,478
FNMA securities....................... 337 500 500
Federal Farm Credit Bank securities... -- -- --
FHLMC bonds........................... -- 1,000 1,000
------- ------- -------
Total securities held to maturity.... 337 3,864 7,978
------- ------- -------
Total securities(1).................... 57,697 58,461 32,194
FHLB stock............................. 1,245 1,349 786
------- ------- -------
Total securities and FHLB stock (1).... $58,942 $59,810 $32,980
======= ======= =======
- ---------------
(1) Does not include mortgage-backed securities.
At March 31, 1999, 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>
The following table sets forth the maturities or repricing of investment
securities and FHLB stock at March 31, 1999, 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.... $23,830 5.97% $32,970 5.82% $ 996 5.22% $ -- --%
FHLB stock.... -- -- 1,245 7.50 -- -- -- --
------- ---- ------- ---- ------- ---- ------ ----
Total....... $23,830 5.97% $34,215 5.88% $ 996 5.22% $ -- --%
======= ==== ======= ==== ======= ==== ====== ====
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 1999. 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 ("GNMA") securities) in contrast to
the 50% risk weight carried by residential loans. See "Regulation."
The Bank had $9.4 million, $4.4 million and $4.8 million of
mortgage-backed securities issued by the FHLMC at March 31, 1999, 1998 and
1997, respectively. The Bank had $8.7 million in mortgage backed securities
issued by FNMA and $9.4 million issued by GNMA at March 31, 1999 and none at
March 1998 or 1997.
1999 1998 1997
---- ---- ----
(In Thousands)
Available for Sale:
FHLMC......................... $ 6,185 $ -- $ --
FNMA.......................... 8,664 -- --
GNMA.......................... 9,827 -- --
------- ------ ------
Total $24,676 $ -- $ --
======= ====== ======
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,
-----------------------------------------
1999 1998 1997
---------- ---------- ----------
Book Value Book Value Book Value
---------- ---------- ----------
(In Thousands)
Held to Maturity:
FHLMC.......................... $3,196 $4,352 $4,777
====== ====== ======
18
<PAGE>
At March 31, 1999, 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 Notes 2 and 3 of the Notes to
Consolidated Financial Statements.
The following table sets forth the maturities or repricings and the
weighted average yields of the mortgage-backed securities at March 31, 1999.
Not considered in the preparation of the table below is the effect of
prepayments.
Maturing or Repricing
----------------------------------------------------- March 31, 1999
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....$1,226 5.91% $5,534 5.86% $1,936 5.95% $ -- --% $ 8,696 5.89%
FHLMC.... 497 6.39 1,962 6.33 3,501 5.88 3,485 6.55 9,445 6.25
GNMA..... 7,319 5.68 310 6.12 509 6.10 1,698 5.98 9,836 5.77
------ ---- ------ ---- ------ ---- ------ ---- ------- ----
Total....$9,042 5.75% $7,806 5.99% $5,946 5.92% $5,183 6.36% $27,977 5.97%
====== ==== ====== ==== ====== ==== ====== ==== ======= ====
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 1999, the Bank originated $28.5 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, 1999, 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>
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,
-------------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Interest Rate Range:
- -------------------
Passbook accounts
0 % - 3.00% ........ $ 11,848 5.5% $12,328 6.8% $13,451 8.0%
NOW and other
transaction
accounts 0% - 1.09%. 53,436 24.7 47,414 26.1 43,602 26.0
Money market funds
2.20% - 5.13%....... 49,370 22.8 27,902 15.3 11,641 6.9
-------- ----- -------- ----- -------- -----
Total non-
certificates..... $114,654 52.9 87,644 48.2 68,694 40.9
-------- ----- -------- ----- -------- -----
Certificates:
0.00-4.99%........... 31,101 14.4 3,087 1.7 3,936 2.3
5.00-6.99%........... 70,640 32.6 90,920 50.0 95,234 56.7
7.00-8.99% .......... 138 0.1 135 0.1 197 0.1
-------- ----- -------- ----- -------- -----
Total certificates. 101,879 47.1 94,142 51.8 99,367 59.1
-------- ----- -------- ----- -------- -----
Total deposits..... $216,533 100.0% $181,786 100.0% $168,061 100.0%
======== ===== ======== ===== ======== =====
The Bank relies to a limited extent upon locally obtained Jumbo CDs to
maintain its deposit levels. At March 31, 1999, Jumbo CDs constituted 8.1% 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,
----------------------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
Opening balance.............. $181,786 $168,061 $172,375
Deposits..................... 997,726 812,539 785,065
Withdrawals.................. 970,599 805,566 796,353
Interest credited............ 7,620 6,752 6,974
-------- -------- --------
Ending balance .............. 216,533 181,786 168,061
-------- -------- --------
Net increase (decrease)...... $ 34,747 $ 13,725 $ (4,314)
======== ======== ========
Percent increase (decrease).. 19.1% 8.2% (2.5)%
==== === ====
20
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of March 31,1999.
4.00- 5.00- 6.00- 7.00-
4.99% 5.99% 6.99% 7.99% Total
----- ----- ----- ----- -----
(In Thousands)
Certificate accounts maturing
in quarter ending:
June 30, 1999.................. $11,221 $14,510 $ 864 $ -- $ 26,595
September 30, 1999............. 10,655 10,244 139 -- 21,038
December 31, 1999.............. 5,119 6,491 1,122 -- 12,732
March 31, 2000................. 3,084 14,774 1,538 138 19,534
June 30, 2000.................. 226 14,265 161 -- 14,652
September 30, 2000............. 298 962 2 -- 1,262
December 31, 2000.............. 1 448 -- -- 449
March 31, 2001................. 58 767 -- -- 825
June 30, 2001.................. 8 270 -- -- 278
September 30, 2001............. 197 157 -- -- 354
December 31, 2001.............. -- 262 6 -- 268
Thereafter .................... 234 934 2,724 -- 3,892
------- ------- ------ ------ --------
Total........................ $31,101 $64,084 $6,556 $ 138 $101,879
======= ======= ====== ====== ========
The following table indicates the amount of the Bank's deposits of
$100,000 or more by time remaining until maturity at March 31, 1999.
Certificates Passbook, NOW and
of Deposit Money Market Accounts
---------- ---------------------
(In Thousands)
Maturity Period
- ---------------
Three months or less ................... $ 4,116 $27,389
Over three through six months........... 3,529 --
Over six through twelve month........... 6,127 --
Over twelve months ..................... 3,812 --
------- -------
Total................................ $17,584 $27,389
======= =======
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 6
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
participation certificates. The Bank has sold securities under agreements to
repurchase to both FHLMC and Wachovia
21
<PAGE>
Bank and Trust Company. These funds are used whenever its costs are favorable
compared to alternative sources of funds. At March 31, 1999, 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,
--------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Maximum Balance:
FHLB advances............................. $21,658 $28,268 $23,921
Average Balance:
FHLB advances............................. $16,958 $20,252 $20,157
The following table sets forth information as to the Bank's borrowings and
the weighted average interest rates thereon at the dates indicated.
At March 31,
--------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Balance:
FHLB advances.............................$14,600 $12,126 $14,114
Weighted Average Interest Rate:
At Fiscal Year End:
FHLB advances ........................... 5.82% 6.25% 6.30%
During Fiscal Year:
FHLB advances ........................... 5.91% 6.12% 5.79%
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>
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 ("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 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 report 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, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
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 (i.e., borrowings)
from the FHLB of Atlanta. The Bank is in compliance with this requirement
with an investment in FHLB of Atlanta stock of $1.2 million at March 31, 1999.
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>
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. The FDIC maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. The Bank's deposit
accounts are insured by the FDIC under the SAIF to the maximum extent
permitted by law. As insurer of the Bank's deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
Under applicable regulations, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as
of the reporting period ending seven months before the assessment period.
The capital categories are: (i) well-capitalized, (ii) adequately capitalized,
or (iii) undercapitalized. An institution is also placed in one of three
supervisory subcategories within each capital group. The supervisory subgroup
to which an institution is assigned is based on a supervisory evaluation
provided to the FDIC by the institution's primary federal regulator and
information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned with the most well-capitalized, healthy
institutions receiving the lowest rates.
On September 30, 1996, the Deposit Insurance Funds Act ("DIF Act") was
enacted, which, among other things, imposed a special one-time assessment on
SAIF member institutions, including the Bank, to recapitalize the SAIF. As a
result of the DIF Act and the special one-time assessment, 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 are charged an assessment to help pay interest on the
FICO bonds at a rate of approximately .013%. Full pro rata sharing of the
FICO payments between BIF and SAIF members will occur until the earlier of
December 31, 1999, or the date the BIF and SAIF are merged.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the
past and may raise insurance premiums in the future. If such action is taken
by the FDIC, it could have an adverse effect on the earnings of the Bank.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or
the OTS. Management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
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,
mortgage-backed securities 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.
Prompt Corrective Action. The FDIA requires 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;"
24
<PAGE>
(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%.
The FDIA also provides that 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 is engaging in an unsafe or unsound practice. 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, 1999, 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 have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("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. Management is aware of no conditions relating
to these safety and soundness standards which would require submission of a
plan of compliance.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio asset (as defined by
regulation) in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. As an alternative, the savings
association may maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code ("Code"). Under either test,
such assets primarily consist of residential housing related loans and
investments. At March 31, 1999, the Bank met the test and its QTL percentage
was 85%.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and
is subject to national bank limits for payment of dividends. If such
association has not requalified or converted to a national bank within three
years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies.
25
<PAGE>
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.
Institutions that fail 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' prompt corrective action regulation
provides that a savings institution that has a leverage ratio of less than 4%
(3% for institutions receiving the highest CAMEL examination rating) will be
deemed to be "undercapitalized" and may be subject to certain restrictions.
See "-- Federal Regulation of Savings Associations -- Prompt Corrective
Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations
rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will be required
to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement. No assurance can
be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to the Bank.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Bank's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated
debt, intermediate-term preferred stock and mandatory convertible subordinated
debt, subject to an amortization schedule, and (iii) general valuation loan
and lease loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four 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 that do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighing factor (from 0%
to 100%) assigned to that category. These products are then totalled to
arrive at total risk-weighted assets. Off-balance sheet items are included in
risk-weighted assets by converting them to an approximate balance sheet
"credit equivalent amount" based on a conversion schedule. These credit
equivalent amounts are then assigned to risk categories in the same manner as
balance sheet assets and included as risk-weighted assets.
26
<PAGE>
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, 1999, 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.
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.
27
<PAGE>
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Bank's unimpaired capital and surplus,
plus an additional 10% of unimpaired capital and surplus, if such loan is
secured by readily-marketable collateral, which is defined to include certain
financial instruments and bullion. The OTS by regulation has amended the
loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At March 31, 1999, the Bank's
regulatory limit on loans to one borrower was $2.9 million. At March 31,
1999, the Bank's largest aggregate amount of loans to one borrower was $2.3
million.
Activities of Associations 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 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. 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
28
<PAGE>
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 Regulations
- --------------------------------------------
Acquisitions. The HOLA and OTS regulations issued thereunder generally
prohibit a savings and loan holding company, without prior OTS approval, from
acquiring more than 5% of the voting stock of any other savings association or
savings and loan holding company or controlling the assets thereof. They also
prohibit, among other things, any director or officer of a savings and loan
holding company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any savings
association not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS.
Activities. As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions under the HOLA. If the
Company acquires control of another savings association as a separate
subsidiary other than in a supervisory acquisition, it would become a multiple
savings and loan holding company. There generally are more restrictions on
the activities of a multiple savings and loan holding company than on those of
a 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 savings and loan holding company.
Qualified Thrift Lender Test. The HOLA provides that 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.
29
<PAGE>
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 thrift bad debt rules were revised by Congress in 1996. The new
rules eliminated 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 required 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 no post-1987
reserves subject to recapture. 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.
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, after the
Conversion, 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 carryovers. 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 0.12% of the excess
30
<PAGE>
of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Bank, whether or not an Alternative Minimum Tax 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 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.
The Corporation's income tax returns have not been audited by federal or
state authorities within the last five years. For additional information
regarding income taxes, see Note 10 of the Notes to Consolidated Financial
Statements.
Item 2. Properties
----------
At March 31, 1999, 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 $1.9 million at March 31, 1999. At March 31, 1999, the
aggregate net book value of leasehold improvements (excluding furniture and
equipment) associated with leased premises was $480,000. See Note __ 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, 1999.
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 $503,145
Aiken, South Carolina
Full Service Branch Offices:
149 E. Baruch Street Owned N/A 1984 2,258 203,487
Denmark, South Carolina
100 Laurens Street, N.W. Leased 2013 1959 4,500 21,088
Aiken, South Carolina
(table continued on following page)
31
<PAGE>
Date
Lease Facility Gross
Owned or Expiration Opened/ Square Net
Book
Location Leased Date Acquired Footage Value
- --------------------- ------ ------ -------- ------- ------
Full Service Branch Offices (continued):
313 East Martintowne Road Owned(1) N/A 1973 4,356 133,922
North Augusta, South Carolina
1665 Richland Avenue, W. Owned N/A 1984 1,942 241,706
Aiken, South Carolina
Montgomery & Canal
Streets Leased 2007 1993(2) 3,576 281,321
Masonic Shopping Center
Graniteville, South
Carolina
2812 Augusta Road Owned N/A 1993(2) 2,509 202,057
Langley, South Carolina
Highway 125 and Highways
1 and 78 Leased 2003 1993(2) 2,287 3,033
Midland Valley Shopping
Center
Clearwater, South Carolina
118 Main Street North Owned N/A 1993(2) 3,600 294,049
Wagener, South Carolina
Walmart Superstore Leased 2001 1996 517 174,112
2035 Whiskey Road
Aiken, South Carolina
Operations Center:
871 East Pine Log Road Owned N/A 1988 5,000 360,029
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, 1999.
32
<PAGE>
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, 1999 and 1998*
Consolidated Statements of Income For the Years Ended March 31, 1999,
1998 and 1997*
Consolidated Statements of Changes in Shareholders' Equity For the Years
Ended March 31, 1999, 1998 and 1997*
Consolidated Statements of Cash Flows For the Years Ended March 31,
1999, 1998 and 1997*
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.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
---------------------------------------------------------------
The information contained in the Company's Form 8-K filed on January 27,
1998, and subsequently amended on March 3, 1998 is incorporated herein by
reference. The Form 8-K was filed to report a change in the Company's
accountants.
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.
33
<PAGE>
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
- --------------
* 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.
- ------------------------
No current reports on Form 8-K were filed by the Company during the
three months ended March 31, 1999.
34
<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/ Robert E. Johnson June 29, 1998
-------------------------------------
Robert E. Johnson
Director Emeritus and Secretrary
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>
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
<PAGE>
Exhibit 13
Annual Report to Stockholders
<PAGE>
SECURITY FEDERAL CORPORATION
ANNUAL REPORT
MARCH 31, 1999
<PAGE>
TABLE OF CONTENTS
Letter to Shareholders ............................................... 1
Financial Highlights ................................................. 2
Selected Consolidated Financial and Other Data........................ 3
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................ 4
Report of Elliott, Davis & Company, Independent Auditors.............. 18
Consolidated Balance Sheets .......................................... 19
Consolidated Statements of Income..................................... 20
Consolidated Statements of Shareholders' Equity ...................... 21
Consolidated Statements of Cash Flows................................. 22
Notes to Consolidated Financial Statements............................ 24
Shareholders Information.............................................. 43
Security Federal Bank Management Team................................. 46
<PAGE>
Security Federal Corporation
- ---------------------------------------------------------------------- [Logo]
Fellow Shareholders:
We are pleased to report record net income of $1,806,000 or $2.14 per share
for our most recent fiscal year ending March 31, 1999. This represents an
increase of $93,000 or 5.4% over the previous year's net income of $1,713,000
or $2.04 per share.
In view of our record earnings, your Board of Directors approved a dividend of
$.04 per share that was paid on June 15, 1999 to shareholders of record as of
May 31, 1999. This represented the 34th consecutive quarterly dividend paid
since the Bank's conversion to a stock form of ownership in 1987.
During the year, the Bank's assets grew to an all time high of over $254
million. We added Visa check cards to our offering of products which gives our
checking account customers the convenience of buying products and services
without having to write a check. We also completed the much needed remodeling
of both our Graniteville and Clearwater Banking Centers during the past year.
Our ATM network continues to grow in popularity as the number of transactions
steadily increases each month.
Our Looney Tunes Saver's Club program has been highly successful in helping
to educate children under the age of 13 about the importance of saving money,
earning interest, and maintaining a bank account. We now have nine in-school
Looney Tunes banks and more are planned for the next school year.
We are looking forward to serving your financial needs into the next
millennium. Since developing our Year 2000 plan in 1997, we have tested our
computer hardware and software systems and will continue to monitor these
systems for any century date change problems. In addition, we have developed a
contingency plan to minimize disruptions should any unexpected problems occur.
The readers of Aiken County Magazine voted Security Federal Bank "Best Bank"
in Aiken County for 1997 and 1998. We would like to extend our appreciation to
our many loyal customers, associates, directors, and 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, Sincerely,
/s/T. Clifton Weeks /s/Timothy W. Simmons
T. Clifton Weeks Timothy W. Simmons
Chairman President & Chief Executive Officer
1
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
Year Ended March 31,
--------------------
1999 1998
----------- -----------
Net Income $ 1,805,749 $ 1,712,629
Earnings Per Share 2.14 2.04
Book Value Per Share 23.23 21.46
Total Interest Income 17,311,510 16,617,740
Total Interest Expense 8,637,822 8,000,972
Net Interest Income Before Provision For Loan
Losses 8,673,822 8,616,768
Provision For Loan Losses 600,000 780,000
Net Income After Provision For Loan Losses 8,073,688 7,836,768
Net Interest Margin 3.96% 4.33%
Total Loans Originated 115,820,919 58,202,293
Adjustable Rate Loans As A Percentage Of Total
Gross Loans 60.3% 57.2%
NET INCOME [Bar Graph] EARNINGS PER SHARE (Basic) [Bar Graph]
(In Thousands)
1995 $1,002 1995 $1.24
1996 $1,060 1996 $1.29
1997 $835 1997 $1.01
1998 $1,713 1998 $2.04
1999 $1,806 1999 $2.14
RETURN ON EQUITY [Bar Graph] TOTAL ASSETS (In Millions) [Bar Graph]
1995 7.16% 1995 $210
1996 7.13% 1996 $215
1997 5.28% 1997 $202
1998 9.96% 1998 $216
1999 9.56% 1999 $255
BOOK VALUE PER SHARE [Bar Graph] ALLOWANCE FOR LOAN LOSSES(1) [Bar Graph]
1995 $17.71 1995 1.30%
1996 $18.68 1996 1.14%
1997 $19.40 1997 1.19%
1998 $21.46 1998 1.09%
1999 $23.23 1999 1.12%
(1) ALLOWANCE FOR LOSSES AS A
PERCENTAGE OF TOTAL LOANS.
2
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Selected Consolidated Financial and Other Data
At Or For The Year Ended March 31,
---------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Balance Sheet Data (Dollars In Thousands, Except Per Share Data)
- ----------------------------
Total Assets $ 254,718 $215,512 $201,646 $214,816 $209,949
Cash And Cash Equivalents 6,951 4,659 7,904 9,824 5,697
Investment And Mortgage-
Backed Securities 85,569 62,813 36,970 41,013 42,527
Loans Receivable - Net (1) 151,986 137,724 146,769 152,140 148,977
Deposits 216,533 181,786 168,061 172,375 166,275
Advances From Federal Home
Loan Bank 14,600 12,126 14,114 22,864 26,033
Total Shareholders' Equity 19,560 18,076 16,182 15,434 14,489
Income Data
- -----------------------------
Total Interest Income 17,312 16,618 15,843 15,822 14,402
Total Interest Expense 8,638 8,001 7,908 8,622 6,823
------- ------- ------ ------- -------
Net Interest Income 8,674 8,617 7,935 7,200 7,579
Provision For Loan Losses 600 780 300 230 300
------- ------- ------ ------- -------
Net Interest Income After
Provision For Loan Losses 8,074 7,837 7,635 6,970 7,279
Other Income 2,641 2,004 1,659 1,468 1,312
General And Administrative
Expense 7,962 7,220 8,045 6,839 7,089
Income Taxes 947 908 414 539 500
------- ------- ------ ------- -------
Net Income $ 1,806 $ 1,713 $ 835 $ 1,060 $ 1,002
======= ======= ====== ======= =======
Per Common Share Data
- ------------------------------
Net Income Per Common Share
(Basic) $ 2.14 $ 2.04 $ 1.01 $ 1.29 $ 1.24
======= ======= ====== ======= =======
Cash Dividends Declared $ .14 $ .12 $ .10 $ .10 $ .10
======= ======= ====== ======= =======
Other Data
- ------------------------------
Interest Rate Spread
Information:
Average During Period 3.53% 4.00% 3.82% 3.22% 3.80%
End Of Period 3.15% 3.91% 4.01% 3.32% 3.55%
Net Interest Margin (Net
Interest Income/Average 3.96% 4.33% 4.09% 3.62% 3.95%
Earning Assets)
Average Interest-Earning
Assets To Average 110.85% 108.27% 106.40% 106.88% 104.24%
Interest-Bearing Liabilities
Equity To Total Assets 7.68% 8.39% 8.03% 7.21% 6.90%
Non-Performing Assets To Total
Assets (2) .52% 1.02% .70% 1.53% 1.49%
Return On Assets (Ratio Of Net
Income To Average Total
Assets) .77% .80% .40% .50% .48%
Return On Equity (Ratio Of Net
Income To Average Equity) 9.56% 9.96% 5.28% 7.13% 7.16%
Equity To Assets Ratio (Ratio
Of Average Equity To Average
Total Assets) 8.08% 8.05% 7.55% 6.95% 6.88%
Dividend Pay-Out Ratio On
Common Shares 6.53% 5.87% 9.94% 7.76% 8.07%
Number Of Full-Service Offices 10 10 10 10 9
(1) INCLUDES LOANS HELD FOR SALE
(2) NON-PERFORMING ASSETS CONSIST OF NON-ACCRUAL LOANS AND REPOSSESSED
REAL ESTATE.
3
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
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 subsidiaries. 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 is indicative of the activities of Security
Federal Bank (the Bank), a wholly owned subsidiary of the Company. The Bank is
a federally chartered thrift that was founded in 1922.
The principal business of the Bank is accepting deposits from the general
public and originating consumer and commercial business loans as well as
mortgage loans that enable borrowers to purchase or refinance one-to-four
family residential real estate. The Bank also 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 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.
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 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 that includes $97.2 million of adjustable
rate consumer loans, commercial loans, and mortgage loans or approximately
60.3% of total gross loans at March 31, 1999. At March 31, 1999, the negative
mismatch of interest-earning assets repricing or maturing within one
year with interest-bearing liabilities repricing or maturing within one year
was $54.4 million or 21.3% of total assets compared to $35.7 million or 16.6%
at March 31, 1998.
During the past year, the Bank originated approximately $36.9 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 $44.3 million in consumer and commercial loans,
which are usually short term in nature. During fiscal 1999, 93.1% of total
loan originations were comprised of consumer, commercial, and adjustable rate
mortgage loans compared to 93.0% of total originations in fiscal 1998. The
Bank's portfolio of consumer and commercial loans was $91.0 million at both
March 31, 1998 and 1999; a decrease of $1.9 million from March 31, 1997.
Consumer and commercial loans combined were 56.5% of total loans at March 31,
1999; 63.8% at March 31, 1998; and 54.0% at March 31, 1997.
4
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
ASSET AND LIABILITY MANAGEMENT, CONTINUED
The Bank originated $6.0 million, $3.4 million, $5.6 million, and $5.3 million
in fixed rate residential loans in fiscal 1999, 1998, 1997, and 1996,
respectively. The Bank sold $5.6 million fixed rate residential loans to
secondary market agencies in fiscal 1999, $3.4 million in fiscal 1998, $5.8
million in fiscal 1997, and $5.5 million in fiscal 1996. Other fixed rate
residential loans passed directly on to other investors, other than Freddie
Mac or Fannie Mae, and totaled $28.1 million in fiscal 1999, $7.9 million in
fiscal 1998, $6.4 million in fiscal 1997, and $6.9 million in fiscal 1996. At
March 31, 1999, fixed rate residential loans amounted to $7.6 million or 4.7%
of the total loan portfolio compared to $10.0 million or 7.0% at the end of
the previous fiscal year.
Certificates of deposit of $100,000 or more (Jumbo Certificates) are normally
considered to be 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,
1999, the Bank had $17.6 million outstanding in Jumbo Certificates compared to
$14.3 million at March 31, 1998.
The following table sets forth the maturity schedule of certificates of
deposit with balances of $100,000 or greater at March 31, 1999.
Within 3 Months $4,116,000
After 3, Within 6 Months 3,529,000
After 6, Within 12 Months 6,127,000
After 12 Months 3,812,000
-----------
$17,584,000
===========
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 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. The reverse is true in periods of declining
interest rates 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 being repriced or maturing within one
year. The table on Page 7 presents the entire 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. Both tables 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.
5
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
ASSET AND LIABILITY MANAGEMENT, CONTINUED
The following table sets forth the Bank's interest-bearing liabilities and
interest-earning assets repricing or maturing within one year.
At March 31
--------------------
1999 1998
---- ----
(Dollars in Thousands)
Loans (1) $ 88,585 $ 93,960
Mortgage-Backed Securities:
Held To Maturity 1,155 516
Available For Sale 13,038 -
Investments:
Held To Maturity 337 3,375
Available For Sale 23,524 24,223
Other Interest-Earning Assets 1,075 -
--------- ---------
Total Interest Rate Sensitive Assets
Repricing Within 1 Year $ 127,714 $ 122,074
--------- ---------
Deposits 180,678 152,239
FHLB Advances And Other Borrowed Money 1,397 5,570
--------- ---------
Total Interest Rate Sensitive Liabilities
Repricing Within 1 Year $ 182,075 $ 157,809
--------- ---------
Gap $ (54,361)$ (35,735)
========= =========
Interest Rate Sensitive Assets/Interest Rate
Sensitive Liabilities 70.14% 77.36%
Gap As A Percent Of Total Assets (21.3)% (16.6)%
(1) LOANS ARE NET OF UNDISBURSED FUNDS AND LOANS IN PROCESS.
6
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
ASSET AND LIABILITY MANAGEMENT, CONTINUED
The following table sets forth the interest sensitivity of the Bank's assets
and liabilities at March 31, 1999, on the basis of the factors and
assumptions set forth in the table on the previous page.
<TABLE>
Remaining Time Before Asset/Liability Matures Or Can Be Repriced
----------------------------------------------------------------
< Three 3 -12 1 - 3 3 - 5 5 - 10 10 - 20 > 20
Months Months Years Years Years Years Years
Total
------- ------- ------ ------ ------ ----- ----- ----
- -
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earnings Assets
------------------------
Loans (1) $ 48,166 $40,419 $33,715 $16,145 $12,826 $2,386 $ 243
$153,900
Mortgage-Backed Securities:
Held To Maturity, At Cost 307 848 1,198 165 520 158 -
3,196
Available For Sale, At Fair
Value 3,798 9,240 6,036 3,536 1,663 403 -
24,676
Investment Securities: (2)
Held To Maturity, At Cost 337 - - - - - -
337
Available For
Sale, At Fair Value 6,460 17,064 22,024 10,849 963 - -
57,360
FHLB Stock, At Cost - - 1,245 - - - -
1,245
Other Interest-Earning Assets 1,075 - - - - - -
1,075
-------- ------- ------- ------- ------- ------ ----- ------
- --
Total Financial Assets $ 60,143 $67,571 $64,218 $30,695 $15,972 $2,947 $ 243
$241,789
======== ======= ======= ======= ======= ====== =====
========
Interest-Bearing Liabilities
- -------------------------------
Deposits:
Certificates Accounts $ 26,595 $53,304 $18,206 $3,774 $ - $ - $ -
$101,879
NOW Accounts 39,561 - - - - - -
39,561
Money Market Accounts 49,370 - - - - - -
49,370
Passbook Accounts 11,848 - - - - - -
11,848
Borrowings 869 528 856 13,000 216 - -
15,469
-------- ------- ------- ------- ------- ------ ----- ------
- --
Total Interest-Bearing
Liabilities $128,243 $53,832 $19,062 $16,774 $ 216 $ - $ -
$218,127
======== ======= ======= ======= ======= ====== =====
======== Current Period Gap $(68,100) $13,739 $45,156 $13,921 $15,756 $2,947 $
243 $ 23,662
Cumulative Gap $(68,100) $(54,361) $(9,205) $4,716 $20,472 $23,419 $23,662 $
23,662
Cumulative Gap As
A Percent Of Total Assets (26.7)% (21.3)% (3.6)% 1.9% 8.0% 9.2% 9.3%
9.3%
(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,
1999.
7
</TABLE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
ASSET AND LIABILITY MANAGEMENT, CONTINUED
In evaluating the Bank's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing tables must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates. Additionally, the interest rates
of certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates. Loan repayment rates and withdrawals of deposits
will likely 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 that 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, 1999 were $254.7 million; an increase of $39.2
million or 18.2% from March 31, 1998. This increase was the result of an
increase in investment securities and, to a lesser extent, increases in net
loans receivable and cash and cash equivalents.
Total net loans receivable were $152.0 million at March 31, 1999; an increase
of $14.3 million or 10.4% from the prior year. Residential real estate loans
increased $19.0 million to $65.5 million at March 31, 1999 as two new mortgage
loan originators were added to the mortgage loan department. Consumer loans
decreased $4.9 million or 10.5% due to consumer loans that were paid off when
customers refinanced their mortgage loans. Commercial business loan balances
and commercial real estate loan balances increased to $52.3 million at fiscal
year end from $48.4 million at March 31, 1998; an increase of $3.9 million or
8.0%. Loans held for sale increased $372,000 at March 31, 1999 from one year
earlier.
Real estate acquired in settlement of loans (REO) decreased $11,000 at March
31, 1999 from $165,000 at fiscal year end 1998. REO at March 31, 1999
consisted primarily of single family homes. Real estate acquired for
development decreased by $72,000 or 11.5% as a result of the sale of lots in
Willow Woods, the Company's sole remaining real estate partnership investment.
Non-accrual loans totaled $1.2 million at March 31, 1999 compared to $2.0
million a year earlier. The Bank classifies all loans as non-accrual when they
become 90 days or more delinquent. The Bank had five loans totaling $706,000
at March 31, 1999 that were troubled debt restructurings compared to $763,000
at March 31, 1998. Of the five troubled debt restructurings at March 31, 1999,
only one loan of $25,000, a commercial business loan secured by inventory and
equipment, was 30 days delinquent. The other four loans consisted of a
$155,000 consumer loan partially secured by a principal residence, a $424,000
commercial business loan secured by commercial real estate, a $57,000
commercial business loan secured by commercial real estate, and a $45,000
commercial business loan secured by commercial vehicles. Those four loans were
all less than 30 days delinquent at March 31, 1999. All troubled debt
restructurings are also considered impaired. At March 31, 1999, the Bank held
$880,000 in impaired loans compared to $872,000 at March 31, 1998.
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.
8
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
FINANCIAL CONDITION, CONTINUED
Deposits at the Bank increased $34.7 million or 19.1% to $216.5 million at
March 31, 1999 from $181.8 million at March 31, 1998 due to an increase in
money market accounts that were promoted during the year. Advances from the
Federal Home Loan Bank (FHLB) increased to $14.6 million at March 31, 1999; up
from $12.1 million a year earlier, an increase of $2.5 million or 20.4%.
Total shareholders' equity was $19.6 million at March 31, 1999; an increase of
$1.5 million or 8.2% compared to $18.1 million a year earlier. The increase
was attributable to net income of $1.8 million, which was partially offset by
a $203,000 decrease in unrealized net gain on securities available for sale
and $118,000 in dividends paid.
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: 1) changes in rate; i.e., changes in rate multiplied by old volume; 2)
changes in volume; i.e., changes in volume multiplied by old rate; and 3) 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.
Fiscal Years 1999 Fiscal Years 1998
Compared To 1998 Compared To 1997
---------------------- ----------------------
Volume Rate Net Volume Rate Net
------ ----- --- ------ ---- ---
(Dollars in Thousands)
Interest-Earning Assets:
Loans: (1)
Real Estate Loans $ 507 $ (298) $ 209 $(1,025) $ 181 $(844)
Other Loans (683) 56 (627) 448 44 492
------ ------- ------ -------- ----- ------
Total Loans (176) (242) (418) (577) 225 (352)
Mortgage-Backed 600 (65) 535 (2) (10) (12)
Securities (2)
Investments (2) 611 (96) 515 740 404 1,144
Other Interest-Earning
Assets 60 2 62 (3) (2) (5)
------ ------- ------ -------- ----- ------
Total Interest-Earning
Assets $1,095 $ (401) $ 694 $ 158 $ 617 $ 775
====== ======= ====== ======== ===== ======
Interest-Bearing
Liabilities:
Deposits:
Certificate Accounts $ (32) $ 48 $ 16 $(172) $(91) $(263)
NOW Accounts 31 (102) (71) 4 6 10
Money Market Accounts 744 191 935 167 154 321
Passbook Accounts (19) 8 (11) (22) (13) (35)
------ ------- ------ -------- ----- ------
Total Deposits 724 145 869 (23) 56 33
Borrowings (170) (62) (232) (1) 61 60
------ ------- ------ -------- ----- ------
Total Interest-Bearing
Liabilities 554 83 637 (24) 117 93
------ ------- ------ -------- ----- ------
Effect On Net Income $ 541 $ (484) $ 57 $ 182 $ 500 $ 682
====== ======= ====== ======== ===== ======
(1) INTEREST ON NON-ACCRUAL LOANS IS 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.
9
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF OPERATIONS, CONTINUED
The following table presents the total dollar amount of interest income from
average interest-earning assets for the periods indicated 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 that are
representative of daily average balances.
<TABLE>
Averages for Fiscal Years Ended March 31,
----------------------------------------------------------------------------
Yield 1999 1998 1997
Rate at ------------------------- ------------------------- ------------------------
March 31, Average Yield/ Average Yield/ Average Yield/
1999 Balance Interest Rate Balance Interest Rate Balance Interest Rate
---- ------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning
Assets:
Mortgage Loans 7.04% $ 56,465 $ 4,383 7.76% $ 50,128 $ 4,174 8.33% $ 62,477 $ 5,018 8.03%
Other Loans 9.00% 86,426 8,324 9.63% 93,552 8,951 9.57% 88,822 8,459 9.52%
----- -------- ------- ----- -------- ------- ----- -------- ------- -----
Total Loans (1) 8.22% 142,891 12,707 8.89% 143,680 13,125 9.13% 151,299 13,477 8.91%
Mortgage-Backed
Securities (2) 5.97% 14,633 864 5.90% 4,599 329 7.15% 4,630 341 7.37%
Investments (2) 5.90% 59,235 3,610 6.09% 49,252 3,095 6.28% 36,797 1,951 5.30%
Other Interest-
Earning Assets 5.05% 2,406 131 5.43% 1,299 69 5.31% 1,350 74 5.48%
----- -------- ------- ----- -------- ------- ----- -------- ------- -----
Total Interest-
Earning Assets 7.37% $219,165 $17,312 7.90% $198,830 $16,618 8.36% $194,076 $15,843 8.16%
===== ======== ======= ===== ======== ======= ===== ======== ======= =====
Interest-Bearing
Liabilities:
Certificate
Accounts 5.18% $ 96,512 $ 5,207 5.40% $ 97,093 $ 5,191 5.35% $100,225 $ 5,454 5.44%
NOW Accounts 1.10% 37,402 502 1.34% 35,440 573 1.62% 35,167 563 1.60%
Money Market
Accounts 4.70% 34,696 1,622 4.68% 18,128 687 3.79% 13,094 366 2.80%
Passbook Accounts 2.47% 11,806 289 2.45% 12,562 300 2.39% 13,483 335 2.49%
----- -------- ------- ----- -------- ------- ----- -------- ------- -----
Total Interest-
Bearing Accounts 4.11% 180,416 7,620 4.22% 163,223 6,751 4.14% 161,969 6,718 4.15%
Other Borrowings 4.50% 369 15 4.07% 171 10 5.85% 281 23 8.19%
FHLB Advances 5.82% 16,958 1,003 5.91% 20,252 1,240 6.12% 20,157 1,167 5.79%
----- -------- ------- ----- -------- ------- ----- -------- ------- -----
Total Interest-
Bearing
Liabilities 4.22% $197,743 $8,638 4.37% $183,646 $8,001 4.36% $182,407 $ 7,908 4.34%
===== ======== ======= ===== ======== ======= ===== ======== ======= =====
Net Interest
Income $8,674 $8,617 $ 7,935
======= ======= =======
Interest Rate
Spread 3.15% 3.53% 4.00% 3.82%
===== ===== ===== =====
Net Yield On
Earning Assets 3.96% 4.33% 4.09%
===== ===== =====
(1) INTEREST ON NON-ACCRUAL LOANS IS 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.
10
</TABLE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Comparison of the Years Ended March 31, 1999 and 1998
GENERAL
The Company earned record net income of $1.8 million for the year ended March
31, 1999; an increase of $93,000 or 5.4% over earnings of $1.7 million for the
year ended March 31, 1998. This was the second consecutive year for record
earnings and the third consecutive year of record operating earnings. The
primary reasons for the increase in net income for 1999 are a decrease in the
provision for loan losses and an increase in the gain on sale of loans offset
in part by an increase in general and administrative expenses. The Company's
interest rate spread decreased during the year due to the falling interest
rate environment and the Company's increased investments as a percentage of
interest-earning assets over loans.
NET INTEREST INCOME
Net interest income increased $57,000 to $8.7 million in fiscal 1999 compared
to 1998 despite a 37 basis point decline in the net yield on interest-earning
assets. The increase was accomplished by an average increase in
interest-earning assets of $20.3 million while interest-bearing liabilities
increased on average only $14.1 million. The Bank has been successful in
attracting demand deposits and utilizing a strategy of attracting money market
accounts and arbitraging those funds into investments and mortgage-backed
securities.
Interest income on loans decreased $418,000 or 3.2% during fiscal 1999 because
of a 24 basis point decline in the average yield on loans during the year as
balances remained fairly constant on average. Interest income on investment
securities, mortgage-backed securities, and other securities increased $1.1
million to $4.6 million due to the previously mentioned arbitrage. The overall
average yield in the total investment portfolio decreased 29 basis points to
an average yield of 6.04% during fiscal 1999.
Interest expense on deposits increased $868,000 in the year ended March 31,
1999 compared to one year earlier. Interest-bearing deposits increased an
average of $17.2 million as money market accounts grew an average of $16.6
million during fiscal 1999. The average cost of interest-bearing deposits also
increased 8 basis points. Interest expense on FHLB advances and other
borrowings decreased $231,000 during the year as average borrowings declined
$3.1 million and the average cost of borrowings decreased 24 basis points.
PROVISION FOR LOAN LOSSES
The provision for loan losses during fiscal 1999 decreased $180,000 due to a
decline in net charge-offs in fiscal 1999 and Management's monthly reviews of
the loan portfolio. Net charge-offs were $397,000 in fiscal 1999 compared to
$1.0 million in fiscal 1998. The ratio of the allowance for loan losses to
total loans at March 31, 1999 was 1.14% compared to 1.09% at March 31, 1998.
Based on its reviews of the loan portfolio, Management believes the allowance
for loan losses is adequate based on Management's estimates of losses inherent
in the loan portfolio, although there can be no guarantee as to these
estimates. In addition, bank regulatory agencies may require additions to the
allowance for loan losses based on their judgments and estimates as part of
their examination process.
OTHER INCOME
Other income increased $637,000 or 31.8% to $2.6 million in fiscal 1999. Gain
on sale of loans increased $475,000 to $670,000 due to the hiring of two
additional mortgage loan originators and increased loan refinancing due to
lower mortgage rates. The Bank sells the majority of its fixed rate mortgages.
Loan servicing fees decreased $21,000 or 6.0% as the majority of new
production fixed rate loans are sold with servicing released. Service fees on
deposit accounts grew $16,000 or 1.9% due to the growth in the number of
demand deposits. Income from real estate operations increased $5,000 or 4.6%.
Other miscellaneous income consisting of net gains on sales of REO's, credit
life insurance commissions, discount brokerage and annuity sales commissions,
and other miscellaneous fees increased $177,000 during fiscal 1999 due to
increases in the gain on the sale of REO and on annuity sales commissions.
11
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Comparison of the Years Ended March 31, 1999 and 1998, Continued
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $742,000 or 10.3% during fiscal
1999 compared to 1998 due to increases in salaries and employee benefits and
depreciation and maintenance of equipment expenses. Salaries and employee
benefits expense grew $564,000 or 16.0% due to an increase of staff in
customer service positions and an increase in staffing to handle the increase
in the volume of mortgage loans. Occupancy expense increased $25,000 or 5.4%
as the Clearwater Banking Center was remodeled and new quarters for the
Auditing and Purchasing Departments were renovated and occupied during the
year. Advertising expense and amortization of intangible expenses were
virtually the same in both fiscal 1998 and 1999. Depreciation and maintenance
of equipment expense increased $83,000 or 11.4% as certain systems and
equipment were upgraded. Federal Deposit Insurance Corporation (FDIC)
insurance premiums increased $2,100 or 2.7% during the year. Other
miscellaneous expenses such as REO expense; legal, professional, and
consulting expenses; stationery and office supplies; and other sundry expenses
decreased $67,000 or 4.1% during the period.
INCOME TAXES
Income taxes increased $39,000 or 4.3% to $$947,000 in the year ended March
31, 1999 compared to $908,000 expensed in fiscal 1998 as a result of an
increase in taxable income. The effective tax rate was 34% for 1999 and 35%
for 1998.
12
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
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 charged
in September 1996. This assessment was levied against all savings institutions
by the FDIC to recapitalize the Savings Associations Insurance Fund (SAIF).
The assessment, which will significantly reduce deposit insurance premiums,
lowered after-tax net income by $437,000 for fiscal 1997. Without this
one-time assessment, net income would have been $1.3 million for fiscal 1997.
The increase in operating earnings was primarily the result of 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 $8.6 million in fiscal 1998 compared to $7.9 million
in fiscal 1997, an increase of $682,000. This increase was the result of the
Bank's strategy in attracting money market deposits and utilizing those funds
to increase earnings from increased holdings in investments. Additionally, the
increase in net interest income was the result of 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 an 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
as a result of consumer and commercial loans that typically earn higher yields
than residential loans to compensate for their higher risk profile, increasing
the yield as a percentage of total loans outstanding. Interest income on
investment, mortgage-backed securities, 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 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, and to Management's analysis of the Company's allowance for loan losses.
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 believed the allowance for loan losses was
adequate based on Management's estimates of losses inherent in the loan
portfolio, although there can be no guarantee of these estimates. In addition,
bank regulatory agencies may require additions to the allowance for loan
losses based on their judgments and estimates as part of their examination
process.
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 gain 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.
13
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Comparison of the Years Ended March 31, 1998 and 1997, Continued
OTHER INCOME, CONTINUED
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 consisting of net gains on sales of REO's, credit
life insurance commissions, discount brokerage and annuity sales commissions,
and other miscellaneous fees increased $162,000 during fiscal 1998.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased $824,000 as a direct result of
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 was attributable to
decreases in other miscellaneous expenses and FDIC insurance premiums and was
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 that were
more than offset by the savings from the elimination of the outsourcing
contract that had been classified as an "other expense." Salaries and employee
benefits increased 6.2% or $206,000 due to normal annual salary increases and
the addition of qualified personnel needed to operate an in-house computer
system. Occupancy expense increased $64,000 while depreciation and maintenance
of equipment increased $63,000 as a result of the computer conversion.
Advertising increased $136,000 in fiscal 1998 due to the promotion of money
market accounts and the Bank's 75th anniversary. FDIC insurance premiums
dropped $152,000 due to the 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 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>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
REGULATORY CAPITAL
The following table reconciles the Bank's shareholders' equity to its various
regulatory capital positions:
March 31,
---------------------
1999 1998
(Dollars in Thousands)
Shareholders' Equity (1)(2) $ 19,007 $ 17,218
Reduction For Goodwill 1,581 2,046
And Other Intangibles
--------- ----------
Tangible Capital 17,426 15,172
--------- ----------
Qualifying Core Deposit 664 789
Intangibles
Core Capital 18,090 15,961
--------- ----------
Supplemental Capital 1,715 1,512
--------- ----------
Total Risk-Based Capital $ 19,805 $ 17,473
========= ==========
(1) FOR 1999, INCLUDES UNREALIZED LOSSES OF $128,000 AND FOR 1998
EXCLUDES UNREALIZED GAINS OF $76,000 ON CERTAIN AVAILABLE FOR SALE
SECURITIES.
(2) FOR 1999 AND 1998, EXCLUDES EQUITY OF SECURITY FEDERAL CORPORATION,
THE PARENT.
The following table compares the Bank's capital levels relative to regulatory
requirements at March 31, 1999.
Amount Percent Actual Actual Excess Excess
Required Required Amount Percent Amount Percent
--------- ------- -------- ------- ------- -------
(Dollars in Thousands)
Tangible Capital $ 5,060 2.0% $ 17,426 6.9% $ 12,366 4.9%
Tier 1 Leverage
(Core) Capital 10,147 4.0% 18,090 7.1% 7,943 3.1%
Tier 1 Risk-Based
(Core) Capital 7,311 4.0% 18,090 9.9% 10,779 5.9%
Total Risk-Based
Capital $ 14,622 8.0% $ 19,805 10.8% $ 5,183 2.8%
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability of the Bank to generate sufficient cash flows
to fund current loan demand, repay maturing borrowings, fund maturing deposit
withdrawals, and 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 varies depending on their
relative costs. Advances from the FHLB increased $2.5 million in fiscal 1999
and decreased $2.0 million in fiscal 1998. Deposits increased $34.7 million in
fiscal 1999 and $13.7 million in fiscal 1998.
The principal use of the Bank's funds is the origination of mortgages and
other loans and the purchase of investments and mortgage-backed securities.
Loan originations were $87.7 million in fiscal 1999 compared to $49.3 million
in fiscal 1998 and $52.8 million in fiscal 1997. Purchases of investments and
mortgage-backed securities were $69.4 million in fiscal 1999 compared to $54.9
million in fiscal 1998 and $21.4 million in fiscal 1997.
15
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
Outstanding loan commitments for which the Bank has not obtained prior
commitments to purchase from other institutional investors amounted to
$514,000 at March 31, 1999 compared to $658,000 at March 31, 1998. In
addition, unused lines of credit on home equity loans, credit cards, and other
loans amounted to $20.8 million at March 31, 1999. 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 $7.2 million at March 31, 1999 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 that 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, 1999,
the Bank's liquidity ratio was approximately 37%. Management believes that
liquidity during fiscal 2000 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 June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way public business companies are to report information about operating
segments in annual financial statements and requires those companies to report
selected information about operating segments in interim financial reports
issued to shareholders. SFAS 131 is effective for financial statements for
periods beginning after December 15, 1997. Earlier application is encouraged.
In the initial year of application, comparative information for earlier years
is to be restated, unless it is impractical to do so. SFAS 131 need not be
applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial
year of application shall be reported in financial statements for interim
periods in the second year of application. This standard does not materially
effect the Company's current method of financial reporting.
In April 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The new statement revises the
required disclosures for employee benefit plans, but does not change the
measurement or recognition of such plans. While the new standard requires some
additional information about benefit plans, it helps preparers of financial
statements by eliminating certain disclosures and by standardizing the
disclosures for pensions and other postretirement benefits to the extent
practicable. SFAS 132 supercedes the disclosure requirements in SFAS 37,
"Employers' Accounting for Pensions;" SFAS 33, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits;" and SFAS 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions." The new disclosures are effective for fiscal
years beginning after December 15, 1997. The adoption of SFAS 132 did not have
impact on the financial statements of the Company due to the disclosure only
requirements.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." All derivatives are to be measured at fair value and
recognized in the balance sheet as assets or liabilities. The statement is
effective for fiscal years and quarters beginning after June 15, 1999. Because
the Company does not use derivative instruments or transactions at this time,
Management does not expect that this standard will have a significant effect
on the Company.
In October 1998, the FASB issued SFAS 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise." The new statement establishes accounting
and reporting standards for certain activities of mortgage banking
enterprises. The statement is effective for the first quarter beginning after
December 15, 1998. The statement will have no effect on the financial
statements of the Company.
16
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 (GAAP) that 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" or "Y2K Problem." A number of computer systems used by the Company in
its day-to-day operations could be affected by this problem. Management has
established a committee (the "Y2K Project Team") which has identified all
affected systems and is currently working to ensure that this event will not
disrupt operations. The Y2K Project Team reports regularly to the Bank's Board
of Directors. The Bank is also working closely with outside computer vendors
to ensure that all software corrections and warranty commitments are obtained
and to arrange mock conversion testing. Testing of the Bank's core processing
system occurred in December 1998. The test has been evaluated and appears to
have been successful. Even though the test is thought to have been successful,
there can be no guarantee that actual results will mirror the test. 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 Bank has funded
approximately $330,000 in preparing for Y2K. Future expenditures for Y2K
compliance are not known at this time. The impact of Year 2000 noncompliance
by all outside parties with whom the Company may transact business cannot be
fully gauged at this time.
17
<PAGE>
(Letterhead of Elliott, Davis & Company, LLP)
Report of Independent Certified Public Accountants
Shareholders and Board of Directors
Security Federal Corporation and Subsidiaries
Aiken, South Carolina
We have audited the accompanying consolidated balance sheets of
Security Federal Corporation and Subsidiaries as of March 31, 1999 and 1998,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended March 31, 1999.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. 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 consolidated financial
position of Security Federal Corporation and Subsidiaries as of March 31,
1999 and 1998 and the consolidated results of their operations and their
cash flows for each of the three years in the period ended March 31, 1999,
in conformity with generally accepted accounting principles.
/s/ Elliott, Davis & Company, LLP
Elliott, Davis & Company, L.L.P.
Greenville, South Carolina
April 30, 1999
18
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1999 and 1998
1999 1998
---- ----
ASSETS:
Cash And Cash Equivalents $ 6,951,347 $4,658,681
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized Cost Of
$82,240,153 And $54,475,231 At March 31, 1999
And 1998, Respectively) 82,035,772 54,597,270
Held To Maturity: (Market Value Of $3,579,500
And $8,297,204 At March 31, 1999 and 1998,
Respectively) 3,532,863 8,215,833
------------ ------------
Total Investment And Mortgage-Backed Securities 85,568,635 62,813,103
------------ ------------
Loans Receivable, Net:
Held For Sale 1,604,300 1,232,181
Held For Investment: (Net Of Allowance Of
$1,715,068 And $1,512,038 At March 31, 1999 And
1998, Respectively) 150,381,301 136,492,252
------------ ------------
Total Loans Receivable, Net 151,985,601 137,724,433
------------ ------------
Accrued Interest Receivable:
Loans 657,153 736,201
Mortgage-Backed Securities 146,739 35,694
Investments 803,696 761,405
------------ ------------
Total Accrued Interest Receivable 1,607,588 1,533,300
------------ ------------
Premises And Equipment, Net 4,198,774 3,827,760
Federal Home Loan Bank Stock, At Cost 1,245,000 1,348,600
Real Estate Acquired In Settlement Of Loans 154,143 165,170
Real Estate Held For Development And Sale 552,111 623,779
Other Assets 2,454,724 2,817,090
------------ ------------
TOTAL ASSETS $254,717,923 $215,511,916
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposit Accounts $216,532,683 $181,785,948
Advances From Federal Home Loan Bank 14,600,000 12,126,000
Other Borrowings 869,270 128,933
Advance Payments By Borrowers For Taxes And
Insurance 274,067 266,128
Other Liabilities 2,881,461 3,128,866
------------ ------------
Total Liabilities 235,157,481 197,435,875
------------ ------------
Shareholders' Equity:
Serial Preferred Stock, $.01 Par Value;
Authorized 200,000 Shares; Issued And
Outstanding, None - -
Common Stock, $.01 Par Value; Authorized
5,000,000 Shares, Issued And Outstanding Shares,
842,120 at March 31, 1999; Authorized 1,000,000
Shares, Issued And Outstanding Shares, 421,060
at March 31, 1998 8,421 4,211
Additional Paid-In Capital 3,993,733 3,997,943
Accumulated Other Comprehensive Income (Loss) (127,738) 75,713
Retained Earnings, Substantially Restricted 15,686,026 13,998,174
------------ ------------
Total Shareholders' Equity 19,560,442 18,076,041
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $254,717,923 $215,511,916
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended March 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Interest Income:
Loans $12,707,359 $ 13,125,227 $ 13,476,697
Mortgage-Backed Securities 863,443 328,948 340,845
Investment Securities 3,610,039 3,095,035 1,950,450
Other 130,669 68,530 74,421
---------- ----------- -----------
Total Interest Income 17,311,510 16,617,740 15,842,413
---------- ----------- -----------
Interest Expense:
NOW And Money Market Accounts 2,124,348 1,260,074 928,628
Passbook Accounts 288,950 300,461 335,023
Certificate Accounts 5,206,502 5,190,929 5,454,427
Advances And Other Borrowed Money 1,018,022 1,249,508 1,189,541
---------- ----------- -----------
Total Interest Expense 8,637,822 8,000,972 7,907,619
---------- ----------- -----------
Net Interest Income 8,673,688 8,616,768 7,934,794
Provision For Loan Losses 600,000 780,000 300,000
---------- ----------- -----------
Net Interest Income After Provision
For Loan Losses 8,073,688 7,836,768 7,634,794
---------- ----------- -----------
Other Income:
Gain On Sale Of Investment Securities - 15,423 -
Gain On Sale Of Loans 669,757 194,844 199,062
Loan Servicing Fees 326,424 347,098 334,006
Service Fees On Deposit Accounts 873,716 857,298 886,272
Income (Loss) From Real Estate
Operations 109,007 104,194 (83,418)
Other 662,426 485,611 323,129
---------- ----------- -----------
Total Other Income 2,641,330 2,004,468 1,659,051
---------- ----------- -----------
General And Administrative Expenses:
Compensation And Employee Benefits 4,096,201 3,532,201 3,326,083
Occupancy 492,863 467,415 403,225
Advertising 334,627 334,091 198,469
Depreciation And Maintenance Of
Equipment 807,042 724,434 661,896
Amortization Of Intangibles 465,240 465,240 465,240
FDIC Insurance Premiums 79,326 77,248 229,689
FDIC SAIF Assessment - - 705,489
Other 1,686,540 1,619,685 2,054,602
---------- ----------- -----------
Total General And Administrative
Expenses 7,961,839 7,220,314 8,044,693
---------- ----------- -----------
Income Before Income Taxes 2,753,179 2,620,922 1,249,152
Provision For Income Taxes 947,430 908,293 413,945
---------- ----------- -----------
Net Income 1,805,749 $ 1,712,629 $ 835,207
========== =========== ===========
Net Income Per Common Share (Basic) $ 2.14 $ 2.04 $ 1.01
========== =========== ===========
Net Income Per Common Share
(Diluted) $ 2.13 $ 2.04 $ 1.00
========== =========== ===========
Cash Dividend Per Share On Common
Stock $ .14 $ .12 $ .10
========== =========== ===========
Weighted Average Shares Outstanding
(Basic) 842,120 837,546 829,670
========== =========== ===========
Weighted Average Shares Outstanding
(Diluted) 845,844 839,996 836,308
========== =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years Ended March 31, 1999, 1998 and 1997
<TABLE>
- ---------------------------------------------------------------------------------------------------------
- --
Additional Accumulated Other
Common Paid -In Comprehensive Retained
Stock Capital Income (Loss) Earnings Total
----- ------- ------------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance At March 31, 1996 $ 4,132 $ 3,919,262 $ (123,125) $11,633,949
$15,434,218
Net Income - - - 835,207
835,207
Other Comprehensive Income, Net
Of Tax:
Unrealized Holding Losses On
Securities Available For Sale - - (43,747) -
(43,747)
Reclassification Adjustment For
Gains Included In Net Income - - - -
- -
----------
- -
Comprehensive Income - - - -
791,460
Exercise Of Stock Options 39 39,341 - -
39,380
Cash Dividends - - - (83,029)
(83,029)
-------- ----------- ------------ ----------- ----------
- -
Balance At March 31, 1997 $ 4,171 $ 3,958,603 $ (166,872) $12,386,127
$16,182,029
======== =========== ============ ===========
===========
</TABLE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------
- --
Additional Accumulated Other
Common Paid -In Comprehensive Retained
Stock Capital Income (Loss) Earnings Total
----- ------- ------------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance At March 31, 1997 $ 4,171 $ 3,958,603 $ (166,872) $12,386,127
$16,182,029
Net Income - - - 1,712,629
1,712,629
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Gains On
Securities Available For Sale - - 252,610 -
252,610
Reclassification Adjustment For
Gains Included In Net Income - - (10,025) -
(10,025)
----------
- -
Comprehensive Income - - - -
1,955,214
Exercise Of Stock Options 40 39,340 - -
39,380
Cash Dividends - - - (100,582)
(100,582)
-------- ----------- ------------ ----------- ----------
- -
Balance At March 31, 1998 $ 4,211 $ 3,997,943 $ 75,713 $13,998,174
$18,076,041
======== =========== ============ ===========
===========
</TABLE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------
- --
Additional Accumulated Other
Common Paid -In Comprehensive Retained
Stock Capital Income (Loss) Earnings Total
----- ------- ------------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance At March 31, 1998 $ 4,211 $ 3,997,943 $ 75,713 $13,998,174
$18,076,041
Net Income - - - 1,805,749
1,805,749
Other Comprehensive Income, Net
Of Tax:
Unrealized Holding Losses On
Securities Available For Sale - - (203,451) -
(203,451)
Reclassification Adjustment For
Gains Included In Net Income - - - -
- -
----------
- -
Comprehensive Income - - - -
1,602,298
2-For-1 Stock Split 4,210 (4,210) - -
- -
Cash Dividends - - - (117,897)
(117,897)
-------- ----------- ------------ ----------- ----------
- -
Balance At March 31, 1999 $ 8,421 $ 3,993,733 $ (127,738) $15,686,026
$19,560,442
======== =========== ============ ===========
===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
</TABLE>
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended March 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income $ 1,805,749 $ 1,712,629 $ 835,207
Adjustments To Reconcile Net
Income To Net Cash Provided By
Operating Activities:
Depreciation 658,035 633,347 608,022
Amortization Of Intangibles 465,240 465,240 465,240
Discount Accretion And Premium
Amortization 16,741 (48,562) 151,334
Provisions For Losses On Loans
And Real Estate 600,000 780,000 154,773
Gain On Sales Of Loans (669,757) (194,844) (199,062)
Gain On Sales Of Investment
Securities - (15,423) -
(Gain) Loss On Sale Of Real Estate (252,559) (203,394) 294,147
Amortization Of Deferred Fees On
Loans (198,055) (111,528) (112,015)
Loss On Disposition Of Premises
And Equipment 9,479 30,634 29,637
Proceeds From Sale Of Loans Held
For Sale 34,395,529 11,447,131 12,621,196
Origination Of Loans For Sale (34,097,891) (12,273,256) (12,020,427)
(Increase) Decrease In Accrued
Interest Receivable:
Loans 79,048 84,529 61,544
Mortgage-Backed Securities (111,045) 3,215 (15,110)
Investments (42,291) (398,296) 87,843
Increase (Decrease) In Advance
Payments By Borrowers 7,939 21,679 (141,259)
Other, Net (227,310) (14,838) (258,528)
------------- ------------- ------------
Net Cash Provided By Operating
Activities $ 2,438,852 $ 1,918,263 $ 2,562,542
------------- ------------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase Of Mortgage-Backed
Securities Available For Sale $(27,926,399) $ - $ -
Principal Repayments On
Mortage-Backed Securities
Available For Sale 3,080,957 - -
Principle Repayments On
Mortgage-Backed Securities Held
To Maturity 1,155,200 424,192 558,205
Purchase Of Investment Securities
Available For Sale (41,481,782) (54,916,778) (17,968,095)
Maturities Of Investment
Securities Available For Sale 38,532,104 22,000,000 24,500,000
Purchase Of Investment Securities
Held To Maturity - - (3,473,204)
Maturities Of Investment
Securities Held To Maturity 3,541,227 4,121,951 3,000,000
Proceeds From Sales Of Investment
Securities Available For Sale - 2,982,969 -
Purchase Of FHLB Stock - (695,200) (151,400)
Redemption Of FHLB Stock 103,600 132,300 598,900
(Increase) Decrease In Loans
Receivable (14,963,098) 9,038,131 1,744,689
Investment In Real Estate Held For
Development (425,675) (306,052) (612,234)
Proceeds From Sale Of Real Estate
Held For Development 606,350 627,280 1,077,582
Proceeds From Sale Of Real Estate
Acquired Through Foreclosure 826,683 367,156 898,732
Purchase And Improvement Of
Premises And Equipment (1,045,528) (539,592) (1,402,623)
Proceeds From Sale Of Land 7,000 - -
------------- ------------- ------------
Net Cash Provided (Used) By
Investing Activities $(37,989,361)$ (16,763,643) $ 8,770,552
------------- ------------- ------------
(Continued)
22
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the Years Ended March 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
CASH FLOWS FROM FINANCING
ACTIVITIES:
Increase (Decrease) In Deposit
Accounts $34,746,735 $ 13,725,090 $ (4,313,869)
Proceeds From FHLB Advances 78,600,000 133,785,000 94,600,000
Repayment Of FHLB Advances (76,126,000) (135,773,000) (103,350,000)
Proceeds From Other Borrowings 820,374 - 234,552
Repayment Of Other Borrowings (80,037) (75,464) (380,155)
Dividends To Shareholders (117,897) (100,582) (83,029)
Proceeds From Exercise Of Stock
Options - 39,380 39,380
----------- ------------ ------------
Net Cash Provided (Used) By
Financing Activities $37,843,175 $ 11,600,424 $(13,253,121)
----------- ------------ ------------
Net Increase (Decrease) In Cash
And Cash Equivalents 2,292,666 (3,244,956) (1,920,027)
Cash And Cash Equivalents At
Beginning Of Year 4,658,681 7,903,637 9,823,664
----------- ------------ ------------
Cash And Cash Equivalents At End
Of Year $ 6,951,347 $ 4,658,681 $ 7,903,637
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash Paid During The Period For:
Interest $ 8,657,187 $ 7,766,909 $ 7,910,716
=========== =========== ============
Income Taxes $ 1,067,586 $ 816,500 $ 534,000
=========== =========== ============
Supplemental Schedule Of Non Cash
Transactions:
Additions To Real Estate Acquired
Through Foreclosure, Net $ 672,104 $ 381,117 $ 57,670
=========== =========== ============
Increase (Decrease) In Unrealized
Net Gain (Loss) On Securities
Available For Sale, Net Of Taxes $ (203,451) $ 242,585 $ (43,747)
=========== =========== ============
Securitization Of Loans Held For
Investment To Investments Held
Maturity $ - $ - $ 2,796,062
=========== =========== ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
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 the Bank's 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 other loans to individuals and small businesses
for various personal and commercial purposes. SFSC consists primarily of
investment brokerage services. Also included in the consolidation is a real
estate partnership.
(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 in
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 and 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 that are not considered to be held
to maturity as available for sale. These type investments are stated at fair
value with unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity (accumulated other comprehensive income).
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, 1999, 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.
24
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
------------------------------------------
(d) ALLOWANCE FOR LOAN LOSSES
-------------------------
The Company provides for loan losses using 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 fair 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 these 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 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; the
market price of the loan, if available; or the 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 fair 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 (REO)
--------------------------------------------------
REO 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.
25
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
------------------------------------------
(g) REAL ESTATE HELD FOR DEVELOPMENT AND SALE
-----------------------------------------
Real estate held 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 held for development and sale are recorded at
the time of the 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.
Fair values of real estate held 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 the projected cost to complete and
dispose of the property from the estimated selling price and the estimated
cost to hold the property to an expected date of sale.
(h) PREMISES AND EQUIPMENT
----------------------
Premises and equipment are carried at cost, net of accumulated depreciation.
Depreciation of premises and equipment is amortized on a straight-line method
over the estimated useful life of the related asset. Estimated lives are 7-30
years for buildings and improvements and generally 5-10 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 in differences in financial
reporting bases for assets and liabilities 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 in 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.
26
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
------------------------------------------
(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 as "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 90
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 that are 90 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.
(m) FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The Company discloses the fair value of on- and off-balance sheet financial
instruments when it is practicable to do so. Fair values are based on quoted
market prices, where available; on estimates of present value; or on other
valuation techniques. These estimates are made at a specific point in time,
are subjective in nature, and involve 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 Company.
Fair values for consolidated financial statement reporting purposes are
estimated for loans with similar financial characteristics. These loans are
segregated by the type of loan and consider 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 Company'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 number of common shares. All per share data
has been restated to reflect the 2-for-1 stock split issued during the year
ended March 31, 1999.
27
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
------------------------------------------
(o) USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with Generally Accepted
Accounting Principles (GAAP) requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
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) COMPREHENSIVE INCOME
--------------------
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components in a full set of general purpose financial statements.
Under this statement, the Company is required to classify items of "other
comprehensive income" by their nature in the financial statements and display
the balance of comprehensive income separately in the equity section of a
balance sheet. SFAS 130 is effective for both interim and annual periods
beginning after December 15, 1997. Comparative financial statements provided
for earlier periods were required to be reclassified to reflect the provisions
of this statement. The adoption of SFAS 130 had no effect on the Company's net
income or shareholder's equity.
(q) RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
In June 1997, the FASB issued SFAS 131, "Disclosure 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 June 1998, the FASB issue SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." All derivatives are to be measured at fair value and
recognized in the balance sheet as assets or liabilities. The statement is
effective for fiscal years and quarters beginning after June 15, 1999. Because
the Company does not use derivative instruments or transactions at this time,
Management does not expect that this standard will have a significant effect
on financial statements of the Company.
(r) RECLASSIFICATIONS
-----------------
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to current year classifications.
28
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(2) INVESTMENT AND MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
-------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities available for sale are as
follows:
March 31, 1999
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses value
------------- ------------ ----------- ------------
U.S. Treasury Notes $ 5,003,025 $ 50,570 $ - $ 5,053,595
FHLB Securities 43,466,550 95,568 204,167 43,357,951
Federal Farm Credit
Securities 7,993,230 19,235 26,907 7,985,558
FHLMC Bond 996,204 - 33,414 962,790
Mortgage-Backed
Securities 24,781,144 23,850 129,116 24,675,878
------------ ----------- ---------- ------------
$ 82,240,153 $ 189,223 $ 393,604 $ 82,035,772
============ =========== ========== ============
March 31, 1998
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
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
============ =========== ========== ============
The amortized cost and fair value of investment and mortgage-backed securities
available for sale at March 31, 1999 are shown below by contractual maturity.
Expected maturities will differ from contractual maturities because borrowers
have the right to prepay obligations with
or without call or prepayment penalties.
Amortized
Cost Fair value
---- ----------
Less Than 1 Year $ 2,498,663 $ 2,512,965
1 - 5 Years 35,952,769 35,896,493
More Than 5 Years 19,007,577 18,950,436
Mortgage-Backed
Securities 24,781,144 24,675,878
------------ ------------
$ 82,240,153 $ 82,035,772
============ ============
At March 31, 1999, investment and mortgage-backed securities available for
sale of $9,392,000 were pledged as collateral for certain deposit accounts.
The Bank sold no securities in fiscal 1999 or 1997. 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.
29
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) INVESTMENT AND MORTGAGE-BACKED SECURITIES, HELD TO MATURITY
-----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities held to maturity are as
follows:
March 31, 1999
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses value
---- ----- ------ -----
FNMA Securities $ 336,822 $ 542 $ - $ 337,364
Mortgage-Backed
Securities 3,196,041 - - 3,196,041
---------- --------- --------- -----------
$3,532,863 $ 542 $ - $ 3,533,405
========== ========= ========= ===========
March 31, 1998
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
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 Bonds 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
========== ========= ======== ===========
The amortized cost and fair value of investment and mortgage-backed securities
held to maturity at March 31, 1999, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities due to call
features on certain investments.
Amortized
Cost Fair value
---- ----------
Less Than 1 Year $ - $ -
1 - 5 Years - -
More Than 5 Years 336,822 337,364
Mortgage-Backed
Securities 3,196,041 3,242,136
----------- -----------
$ 3,532,863 $ 3,579,500
=========== ===========
At March 31,1999, investment and mortgage-backed securities held to maturity
of $3,454,000 were pledged as collateral for certain deposit accounts.
30
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(4) LOANS RECEIVABLE, NET
---------------------
Loans Receivable, Net, at March 31 consisted of the following:
1999 1998
---- ----
Residential Real Estate
Loans $ 65,489,233 $ 46,450,206
Consumer Loans 41,631,602 46,499,200
Commercial Business And
Real Estate Loans 52,325,690 48,455,541
Loans Held For Sale 1,604,300 1,232,181
------------ ------------
$161,050,825 $142,637,128
------------ ------------
Less:
Allowance For Loan Losses 1,715,068 1,512,038
Loans In Process 7,150,607 3,175,684
Deferred Loan Fees 199,549 224,973
------------ ------------
9,065,224 4,912,695
============ ============
Total Loans Receivable, Net$ 151,985,601 $137,724,433
============ ============
Changes in the allowance for loan losses for the years ended March 31 are
summarized as follows:
1999 1998 1997
---- ---- ----
Balance At Beginning
Of Year $1,512,038 $1,767,483 $1,758,688
Provision For Loan
Losses 600,000 780,000 300,000
Charge Offs (430,116) (1,293,082) (320,643)
Recoveries 33,146 257,637 29,438
---------- ----------- ----------
Total Allowance For
Loan Losses $1,715,068 $1,512,038 $1,767,483
========== ========== ==========
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.
1999 1998
---- ----
Non-Accrual Loans $1,182,256 $ 2,034,000
========== ===========
Interest Income That Would
Have Been Recognized
Under Original Terms $ 110,403 $ 100,512
========== ===========
Loans serviced for others at March 31, 1999, 1998 and 1997, were approximately
$64.0 million, $79.3 million, and $88.3 million, respectively.
At March 31, 1998 and 1999, impaired loans amounted to $872,000 and $880,000,
respectively. Losses on impaired loans are accounted for in the allowance for
loan loss. For the years ended March 31, 1998 and 1999, the average recorded
investment in impaired loans was $1.2 million and $860,000, respectively.
31
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(5) PREMISES AND EQUIPMENT, NET
---------------------------
Premises and Equipment, Net, at March 31 are summarized as follows:
1999 1998
--------- ---------
Land $ 496,163 $ 503,163
Buildings And Improvements 3,531,942 3,312,791
Furniture And Equipment 4,222,168 3,866,947
---------- ----------
8,250,273 7,682,901
Less Accumulated
Depreciation (4,051,499) (3,855,141)
----------- ------------
Total Premises And
Equipment, Net $ 4,198,774 $ 3,827,760
=========== ============
Depreciation expense for the years ended March 31, 1999, 1998, and 1997
was approximately $658,000, $633,000, and $608,000, respectively. The Bank has
entered into non-cancelable operating leases related to buildings and land. At
March 31, 1999, future minimum payments under non-cancelable operating leases
with initial or remaining terms of one year or more are as follows (by fiscal
year):
2000 $ 69,624
2001 65,596
2002 45,456
2003 44,470
2004 35,470
Thereafter 237,524
--------
$498,140
========
Total rental expense amounted to $72,605, $71,254, and $61,000 for the years
ended March 31, 1999, 1998 and 1997, respectively. Five lease agreements with
monthly expenses of $2,188, $2,014, $493, $407 and $700 have renewal options
of 10, 10, 60, 5, and 20 years, respectively.
(6) FHLB STOCK
----------
By law, every federally insured savings institution is required to invest in
FHLB stock. No ready market exists for this stock and it has no quoted fair
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: 1) 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, 2) 1/20th 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 $1,245,000 as of March 31, 1999.
32
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(7) REAL ESTATE OPERATIONS
----------------------
The Company participated in two real estate joint ventures; Willow Woods and
Currytowne. The Company owns 50% of the Willow Woods partnership and owned
62.5% of the Currytowne partnership as joint ventures. These joint ventures
have been consolidated into the Company's financial statements since the
Company has voting control in both partnerships. In the latter part of fiscal
1998, the Company liquidated the remaining assets of the Currytowne venture.
The Company had $187,000 invested in the Willow Woods partnership at March 31,
1999. Income from real estate operations at March 31 is as follows:
1999 1998 1997
---- ---- ----
Real Estate Held For Development
And Sale:
Sales $606,350 $627,280 $1,077,582
Cost Of Sales 497,343 523,086 1,306,227
-------- -------- ----------
Gross Profit (Loss) 109,007 104,194 (228,645)
Provision (Reversal) For Real
Estate Losses - - (145,227)
-------- -------- ----------
Income (Loss) From Real Estate
Operations 109,007 104,194 (83,418)
Other Expenses, Net 73,849 64,392 108,553
-------- -------- ----------
Net Income (Loss) $ 35,158 $ 39,802 $(191,971)
======== ======== ==========
The following is a summary of the allowance for estimated losses on real
estate at March 31:
1999 1998 1997
---- ---- ----
Balance At Beginning Of Year $50,000 $50,000 $ 195,227
Provision (Reversal) For Real
Estate Losses - - (145,227)
-------- ------- ----------
Balance At End Of Year $50,000 $50,000 $ 50,000
======== ======= ==========
Condensed combined financial information for the joint ventures at March 31 is
as follows:
1999 1998
---- ----
Real Estate Held For Development, Net $552,111 $623,779
Other Assets 111,230 27,446
-------- --------
Total Assets 663,341 651,225
Liabilities (Principally A Loan Payable To
The Company) 239,701 121,865
-------- --------
Partners Equity $423,640 $529,360
======== ========
33
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(8) DEPOSITS
--------
Deposits outstanding by type of account are summarized as follows:
<TABLE>
At March 31, 1999 At March 31, 1998
------------------------------- -----------------------------------
Weighted Interest Rate Weighted Interest Rate
Amount Rate Range Amount Rate Range
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Checking Accounts $ 53,435,702 0.84% 0.00 - 1.09% $ 47,414,160 1.09% 0.00 - 1.50%
Money Market Accts. 49,369,915 4.70% 2.20 - 5.13% 27,902,091 4.67% 2.75 - 5.50%
Passbook Accounts 11,847,962 2.47% 0.00 - 3.00% 12,328,146 2.44% 0.00 - 3.00%
------------ ----- ------------ ------------ ----- ------------
Total $114,653,579 2.67% 0.00 - 5.13% $ 87,644,397 2.42% 0.00 - 5.50%
------------ ----- ------------ ------------ ----- ------------
Certificate Accounts:
0.00 - 4.99% $ 31,100,943 $ 3,086,511
5.00 - 6.99% 70,640,349 90,919,998
7.00 - 8.99% 137,812 135,042
------------ ------------
Total $101,879,104 5.18% 4.17 - 7.25% $ 94,141,551 5.50% 4.70 - 7.75%
------------ ----- ------------ ------------ ----- ------------
Total Deposits $216,532,683 3.85% 0.00 - 7.25% $181,785,948 4.02% 0.00 - 7.85%
============ ===== ============ ============ ===== ============
</TABLE>
The aggregate amount of short-term certificates of deposit with a minimum
denomination of $100,000 was $17,584,000 and $14,336,000 at March 31, 1999 and
1998, respectively. The amounts and scheduled maturities of certificates of
deposit at March 31 are as follows:
1999 1998
---- ----
Within 1 Year $ 79,899,216 $76,220,282
After 1 Year, Within 2 17,187,818 12,987,954
After 2 Years, Within 3 1,017,688 1,246,311
After 3 Years, Within 4 2,889,504 754,006
After 4 Years, Within 5 884,878 2,551,313
Thereafter - 381,685
------------ -----------
$101,879,10 $94,141,551
============ ===========
(9) ADVANCES FROM FEDERAL HOME LOAN BANK (FHLB)
-------------------------------------------
Advances from the FHLB at March 31 are summarized by year of maturity and
weighted average interest rate below:
1999 1998
------------------------ ------------------------
Weighted Weighted
Amount Rate Amount Rate
------ ---- ------ ----
1999 $ - - $ 5,490,000 6.06%
2000 528,000 8.70% 528,000 8.70%
2001 856,000 8.75% 856,000 8.75%
2002 - - - -
2003 5,000,000 5.69% 5,000,000 5.69%
Thereafter 8,216,000 5.42% 252,000 7.97%
----------- ----- ----------- -----
$14,600,000 5.82% $12,126,000 6.25%
=========== ===== =========== =====
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.
At March 31, 1999, the Bank had $25.4 million in unused line of credit at
the FHLB.
34
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(10) INCOME TAXES
------------
Income tax expense for the years ended March 31 is comprised of the following:
1999 1998 1997
---- ---- ----
Current:
Federal $997,347 $939,750 $ 579,589
State - - -
-------- -------- ---------
Total Current Tax
Expense 997,347 939,750 579,589
-------- -------- ---------
Deferred:
Federal (49,917) (26,424) (139,141)
State - (5,033) (26,503)
-------- -------- ---------
Total Deferred Tax
Expense (49,917) (31,457) (165,644)
-------- -------- ---------
Total Income Tax
Expense $947,430 $908,293 $ 413,945
========= ======== =========
The Company's income taxes differ from those computed at the statutory Federal
income tax rate, as follows:
1999 1998 1997
---- ---- ----
Tax At Statutory
Income Tax Rate $936,081 $ 891,113 $ 424,712
State Income Tax
Benefit, Net - (13,480) (17,492)
Other 11,349 30,660 6,725
-------- --------- ---------
Total Income Tax
Expense $947,430 $ 908,293 $ 413,945
======== ========= =========
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.
1999 1998
---- ----
Deferred Tax Assets:
Provision For Loan Losses $ 494,730 $ 535,074
Goodwill Tax Basis Over Financial Statement
Basis 291,474 219,795
Net Fees Deferred For Financial Reporting 80,902 88,790
Unrealized Loss On Securities Available For
Sale 76,642 -
Other Real Estate Basis For Tax Purposes Over
Financial Statement Basis 17,000 18,980
Other 51,370 12,309
---------- ---------
Total Gross Deferred Tax Assets 1,012,118 874,948
---------- ---------
Deferred Tax Liabilities:
FHLB Stock Basis Over Tax Basis 113,362 126,566
Depreciation 204,855 181,040
Unrealized Gain On Securities Available
For Sale - 46,326
---------- ---------
Total Gross Deferred Tax Liability 318,217 353,932
---------- ---------
Net Deferred Tax Asset $ 693,901 $ 521,016
========== =========
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 credit of $122,968 has been recorded directly to shareholders'
equity. The balance of the change in the net deferred tax asset results from
the current period deferred tax benefit of $49,917. 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, 1999
and 1998. 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 the net deferred tax asset can be
supported based upon these criteria.
35
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(10) INCOME TAXES, CONTINUED
-----------------------
Retained earnings at March 31, 1999 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,
then these amounts may be subject to federal income tax at the then prevailing
corporate tax rate.
(11) REGULATORY MATTERS
------------------
The Bank is subject to various regulatory capital requirements that are
administered by Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and discretionary actions by
regulators that 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 classifications are also subject to qualitative
judgements by regulators with regard to components, risk weightings, and other
factors.
As of March 31, 1999 and 1998, the Bank was categorized as "well capitalized"
under the regulatory framework for prompt corrective action. 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 that Management believes have
changed the Bank's classification.
The Bank's regulatory capital amounts and ratios are as follows as of the
dates indicated:
To Be Well
Capitalized
Under Prompt
Corrective
For Capital Action
Actual Adequacy Provisions
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
MARCH 31, 1999
Tier 1 Risk-Based
Core Capital
(To Risk Weighted
Assets) $ 18,090 9.9% $ 7,311 4.0% $ 10,966 6.0%
Total Risk-Based
Capital (To Risk
Weighted Assets) $ 19,805 10.8% $14,622 8.0% $ 18,277 10.0%
Tier 1 Leverage
(Core) Capital
(To Adjusted
Tangible Assets) $ 18,090 7.1% $10,147 4.0% $ 12,683 5.0%
Tangible Capital
(To Tangible Assets) $ 17,426 6.9% $ 5,060 2.0% $ 12,650 5.0%
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%
36
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(11) REGULATORY MATTERS, CONTINUED
-----------------------------
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 (OTS).
On September 30, 1996, the President of the United States signed into law the
Deposit Insurance Funds Act of 1996 (Funds Act) which, among other things,
imposed a special one-time assessment on SAIF member institutions, 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 that was payable on November 27, 1996. This 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.
The Funds Act also spreads the obligations for payment of 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.
As a result of the Funds Act, the FDIC lowered SAIF assessments from 27 basis
points to zero 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.
(12) EMPLOYEE BENEFIT PLANS
----------------------
The Company participated in a multiple 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 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 is participating 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 the employees'
contributions and has a discretionary profit sharing provision. The total
employer contributions were $120,000, $100,000, and $47,116 for the years
ended March 31, 1999, 1998 and 1997, respectively.
The Company has an Employee Stock Ownership Plan (ESOP) for the exclusive
benefit of employee participants. The discretionary contributions for the
years ended March 31, 1999, 1998 and 1997 were $61,000, $51,000, and $0,
respectively.
37
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(12) EMPLOYEE BENEFIT PLANS, CONTINUED
---------------------------------
Certain officers of the Company participate in an incentive stock option plan.
Options are granted at exercise prices not less than the fair value of the
Company's common stock on the date of the grant. There were no shares granted
in fiscal 1998 or fiscal 1999. At March 31, 1999, the Company had the
following options outstanding:
Earliest
Grant Date Outstanding Option Date Expiration
Grant Date Options Price Exercisable Date
---------- ----------- ----- ----------- ----------
01/07/97 1,156 $ 16.00 01/01/02 12/31/02
01/07/97 1,156 $ 16.00 01/01/03 12/31/03
01/07/97 1,156 $ 16.00 01/01/04 12/31/04
01/07/97 1,156 $ 16.00 01/01/05 12/31/05
01/07/97 1,154 $ 16.00 01/01/06 12/31/06
There were no further options available at March 31, 1999.
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 below.
1999 1998 1997
---- ---- ----
Net Income, As Reported $ 1,805,749 $1,712,629 $ 835,207
Net Income, Pro Forma $ 1,802,583 $1,709,455 $ 803,529
Net Income Per Common Share
(Basic), As Reported $ 2.14 $ 2.04 $ 1.01
Net Income Per Common Share
(Basic), Pro Forma $ 2.14 $ 2.04 $ 0.97
Net Income Per Common Share
(Diluted), As Reported $ 2.13 $ 2.04 $ 1.00
Net Income Per Common Share
(Diluted), Pro Forma $ 2.13 $ 2.04 $ 0.96
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 $.11 per share,
expected volatility of 20%, risk-free interest rate of 5.9%, and expected
lives of 6-10 years.
(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
$19,350,000 and $19,948,000 and letters of credit of $306,000 and $83,000 at
March 31, 1999 and 1998, respectively.
38
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(13) COMMITMENTS, CONTINUED
----------------------
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 $1,464,000 and $977,000 at
March 31, 1999 and 1998, respectively.
Outstanding commitments on mortgage loans not yet closed amounted to $514,000
at March 31, 1999. 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, 1999, the Bank had outstanding commitments
to sell approximately $1,604,000 of loans.
(14) RELATED PARTY TRANSACTIONS
--------------------------
At March 31, 1999, 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, 1997, was $514,000. There
were $41,000 additions to loans to executive officers whose individual
indebtedness exceeded $60,000 during fiscal 1999. Repayments on these loans
totaled approximately $312,000. Loans to all employees, officers, and
directors of the Company, in the aggregate constituted approximately 7.74% of
the total shareholders' equity of the Company at March 31, 1999.
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, $27,000, and $24,000 for rent for the years
ended March 31, 1999, 1998 and 1997, respectively. 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.
39
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(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 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
At March 31, 1999 and 1998
1999 1998
---- ----
Assets:
Cash $ 239,070 $ 385,170
Investment In Security Federal Bank 18,879,810 17,294,000
Investment In Real Estate
Partnerships 186,825 239,685
Income Tax Receivable From Bank 43,984 54,414
Other Assets 215,998 105,994
----------- -----------
Total Assets $19,565,687 $18,079,263
=========== ===========
Liability And Shareholders' Equity
Accounts Payable $ 5,245 $ 3,222
Shareholders' Equity 19,560,442 18,076,041
----------- -----------
Total Liabilities And Shareholders'
Equity $19,565,687 $18,079,263
=========== ===========
Condensed Statements of Income Data
For the Years Ended March 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Income:
Equity In Undistributed Earnings Of
Security Federal Bank $1,789,267 $1,688,952 $ 898,309
Equity In Undistributed (Earnings) Loss
Of Real Estate Partnerships 17,581 20,169 (213,094)
Miscellaneous Income 21,052 17,999 18,908
Reversal Of Allowance For Loss For Real
Estate Partnerships - - 145,227
---------- ---------- ----------
$1,827,900 $1,727,120 $ 849,350
Expenses:
Miscellaneous 22,151 14,491 14,143
---------- ---------- ----------
Net Income $1,805,749 $1,712,629 $ 835,207
========== ========== ==========
40
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(15) SECURITY FEDERAL CORPORATION CONDENSED FINANCIAL STATEMENTS (PARENT
COMPANY ONLY), CONTINUED
-------------------------------------------------------------------
Condensed Statements of Cash Flow Data
For the Years Ended March 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Operating Activities:
Net Income $ 1,805,749 $ 1,712,629 $835,207
Adjustments To Reconcile Net Income To Net
Cash Provided By (Used In) Operating
Activities:
Equity In Undistributed Earnings Of
Security Federal Bank (1,789,267) (1,688,952) (898,309)
Equity In Undistributed (Earnings) Loss Of
Real Estate Partnerships (17,581) (20,169) 213,094
Reversal Of Allowance On Real Estate
Partnerships - - (145,227)
(Increase) Decrease In Income Taxes
Receivable And Other Assets (99,570) 109,283 (132,937)
Increase (Decrease) In Accounts Payable 2,028 (11,763) 14,988
----------- ---------- ----------
Net Cash Provided By (Used In) Operating
Activities $ (98,641) $ 101,028 $(113,184)
----------- ---------- ----------
Investing Activities:
Return Of Capital From Real Estate
Partnerships 70,438 130,830 149,552
Dividend Received From Security Federal Bank - - 500,000
----------- ---------- ----------
Net Cash Provided By Investing Activities $ 70,438 $ 130,830 $ 649,552
----------- ---------- ----------
Financing Activities:
Repayment Of Loan - - (350,000)
Dividends Paid (117,897) (100,582) (83,029)
Exercise Of Stock Options - 39,380 39,380
----------- ---------- ----------
Net Cash Used In Financing Activities $ (117,897) $ (61,202) $(393,649)
----------- ---------- ----------
Net Increase (Decrease) In Cash (146,100) 170,656 142,719
Cash At Beginning Of Year 385,170 214,514 71,795
----------- ---------- ----------
Cash At End Of Year $ 239,070 $ 385,170 $ 214,514
=========== ========== ==========
(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:
1999 1998
------------------- -------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Dollars in Thousands)
Financial Assets:
Cash And Cash Equivalents $ 6,951 $ 6,951 $ 4,659 $ 4,659
Investment And Mortgage-Back
Securities $ 85,569 $ 85,615 $ 62,813 $ 62,894
Loans Receivable, Net $151,986 $151,210 $137,724 $137,107
Federal Home Loan Bank Stock $ 1,245 $ 1,245 $ 1,349 $ 1,349
Financial Liabilities:
Deposits:
Checking, Savings, and Money Market
Accounts $114,654 $115,001 $ 87,644 $ 88,045
Certificate Accounts $101,879 $102,330 $ 94,142 $ 94,277
Advances From Federal Home Loan Bank $ 14,600 $ 14,605 $ 12,126 $ 11,954
Other Borrowed Money $ 869 $ 849 $ 129 $ 127
41
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(16) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
-------------------------------------------------------------------
At March 31, 1999, 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 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.
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 values, loan servicing portfolios, 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.
42
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
SHAREHOLDERS INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held at 2:00 p.m., Tuesday, July
20, 1999 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, SC. These prices represent
actual transactions and do not include retail markups, markdowns or
commissions. The Robinson-Humphrey Company creates a market for the stock.
Quarter
Ending High Low
------ ---- ---
06-30-97 $ 18.63 $ 16.50
09-30-97 $ 22.00 $ 18.81
12-31-97 $ 22.00 $ 22.00
03-31-98 $ 22.00 $ 22.00
06-30-98 $ 22.00 $ 22.00
09-30-98 $ 22.00 $ 22.00
12-31-98 $ 37.50 $ 22.00
03-31-99 $ 45.00 $ 37.50
As of March 31, 1999, the Company had approximately 278 shareholders and
842,120 outstanding shares of common stock.
DIVIDENDS
The first quarterly dividend on the stock was paid to shareholders 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 $0.03 per share during the
fiscal year ended March 31, 1998. For each of the four quarters of fiscal year
ending March 31, 1999, the Company declared and paid quarterly dividends of
$0.03, $0.03, $0.04, and $0.04, respectively.
The ability of the Company to pay dividends depends primarily on the ability
of the Bank to pay dividends to the Company. The Bank may not declare or pay a
cash dividend on its stock or repurchase shares of its stock if the offset
thereof would be to cause its regulatory capital to be reduced below the
amount required for the liquidation account or to meet applicable regulatory
capital requirements. Pursuant to the OTS regulations, Tier 1 Associations
(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 association's total capital exceeds 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 South Carolina. South Carolina generally
prohibits the Company from paying dividends if, after giving effect to a
proposed dividend, 1) the Company would be unable to pay its debts as they
become due in the normal course of business, or 2) the Company's total assets
would be less than its total liabilities plus the sum that would be needed to
satisfy the preferential rights upon dissolution of shareholders whose
preferential rights are superior to those receiving the dividend. The ability
of the Company to pay dividends depends primarily on the ability of the Bank
to pay dividends to the Company.
43
<PAGE>
SHAREHOLDERS INFORMATION
ANNUAL AND OTHER REPORTS
The Company is required to file an annual report on Form 10-KSB for its fiscal
year ended March 31, 1999 with the Securities and Exchange Commission. Copies
of Form 10-KSB, Security Federal Corporation's annual report, and the
Company's quarterly reports may be obtained from any of the following
companies listed below. Additionally, shareholder and/or general inquiries may
be addressed to Mrs. Ruth Vance of Security Federal Corporation.
<TABLE>
<S> <C> <C> <C>
INDEPENDENT
GENERAL INQUIRIES: TRANSFER AGENT: SPECIAL COUNSEL: AUDITORS:
Mrs. Ruth Vance Security Federal Corporation Breyer & Associates PC Elliott, Davis &
Security Federal 1705 Whiskey Road S Suite 700 East Company, LLP
Corporation P.O. Box 810 1100 New York Ave., N.W. 870 S. Pleasantburg
Drive
1705 Whiskey Road, S Aiken, SC 29802-0810 Washington, DC 20005 Greenville, SC 29606
P.O. Box 810
Aiken, SC 29802-0810
Phone: 803-641-3000
</TABLE>
44
<PAGE>
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 Co.
Aiken, SC
Sen. Thomas L. Moore
Owner, Boiler Efficiency, Inc.
Clearwater, SC
Timothy W. Simmons
President/Chief Executive Officer
Security Federal Corporation
Aiken, SC
G. L. Toole, III
Attorney-At-Law
Aiken, SC
Harry O. Weeks, Jr.
Business Development Executive
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-At-Law (Retired)
Aiken, SC
DENMARK ADVISORY BOARD**
- -----------------------------------------------------------------------------
Walter E. Brooker, Sr.
President
Brookers's
Inc.
Denmark, SC
David Crum
Attorney-At-Law
Crum, Crum and Crum
Denmark, SC
Jim Harrison
Owner
Jim Harrison Art Gallery
Denmark, SC
Claude E. McCain
President
H.C. McCain Agency Insurance Agency
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
Owner
G.L. Brightharp &
Sons Mortuary
North Augusta, SC
Helen Butler
Retired Banker
North Augusta, SC
Sen. 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
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
Sen. 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
* Serves as Members of the Board for: Security Federal Corporation, Security
Federal Bank, and Security Financial Services Corporation
** Serves as Members of the Board for: Security Federal Bank
45
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
SECURITY FEDERAL BANK MANAGEMENT TEAM:
- -----------------------------------------------------------------------------
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 and Chief Financial Officer
Thomas Clark. . . . . .Senior Vice President-Commercial/Consumer Loan
Administration
Floyd Blackmon. . . . .Senior Vice President-Mortgage Loans
Frank Thomas . . . . .Senior Vice President-Mortgage Loans
Sandy Bartlett. . . . .Vice President-Human Resources
Kathryn Carr. . . . . .Vice President-Special Assets
Carol McCleskey . . . .Vice President and Banking Center Coordinator
Harley Henkes . . . . .Internal Auditor and Compliance/Security Officer
Margaret Hurt . . . . .Manager, Accounting
Rodney Ingle. . . . . .Vice President-Commercial/Consumer Loans
Ruth Vance. . . . . . .Assistant Secretary and Assistant Vice President
Al McKay. . . . . . . .Executive Vice President-Security Financial Services
Corp.
Greg Warfield . . . . .Vice President-Mortgage Loan Originator
Deborah Vermillion. . .Vice President-Single Family Mortgage Lending
Joseph Taylor . . . . .Manager, Information Services
Marianne Harden . . . .Assistant Vice President-Secondary Marketing
Carolyn Anderson. . . .Assistant Vice President-Operations
Teresa Teuton . . . . .Assistant Vice President-Loan Servicing
Ann Johnson . . . . . .Assistant Vice President-Purchasing and Equipment
Maintenance
Gabriele Dukes. . . . .Assistant Vice President-Financial Counseling
Dan Bullington. . . . .Assistant Vice President-Commercial/Consumer Loans
SECURITY FEDERAL BANK BANKING CENTERS:
- ------------------------------------------------------------------------------
Whiskey Road . . . . . . . . . .Kathy Williamson, Manager
North Augusta . . . . . . . . .Vicky Moseley, Manager
Denmark. . . . . . . . . . . . .Lee Hutto, Manager
Laurens Street . . . . . . . . .Patricia Moseley, Assistant Vice
President/Manager
Richland Avenue. . . . . . . . .Rhonda Morris, Manager
Wal-Mart . . . . . . . . . . . .Renee Williams, Manager
Graniteville . . . . . . . . . .Elsie Dicks, Assistant Vice
President/Manager
Langley. . . . . . . . . . . . .Pat Guglieri, Assistant Vice
President/Manager
Clearwater . . . . . . . . . . .Gail Dotson, Assistant Vice
President/Manager
Wagener. . . . . . . . . . . . .Todd Lucas, Manager
46
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
State of Percentage
Parent Subsidiary Incorporation of Ownership
- ------ ---------- -------------- ------------
Security Federal
Corporation Security Federal Bank United States 100%
Security Federal
Bank Security Financial South Carolina 100%
Services Corporation
<PAGE>
Exhibit 23
Consent of Elliott , Davis & Company, LLP
<PAGE>
[Elliott, Davis & Company, LLP Letterhead]
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 April 30, 1999, relating to the
consolidated balance sheet of Security Federal Corporation and subsidiary as
of March 31, 1999 and the related consolidated statements of income,
shareholders' equity and cash flows for the year then ended, which report
appears in the March 31, 1999 annual report on Form 10-KSB.
/s/Elliott Davis & Company, LLP
Elliott, Davis & Company, LLP
Greenville, South Carolina
June 23, 1999
<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, 1999 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, 1999 Item Description
9-03(1) 6,951 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) 82,036 Investment and mortgage backed
securities held for sale
9-03(6) 3,533 Investment and mortgage backed
securities held to maturity -
carrying value
9-03(6) 3,580 Investment and mortgage backed
securities held to maturity -
market value
9-03(7) 151,986 Loans
9-03(7)(2) 1,715 Allowance for losses
9-03(11) 254,718 Total assets
9-03(12) 216,533 Deposits
9-03(13) 1,397 Short-term borrowings
9-03(15) 3,156 Other liabilities
9-03(16) 13,203 Long-term debt
9-03(19) 0 Preferred stock - mandatory
redemption
9-03(20) 0 Preferred stock - no mandatory
redemption
9-03(21) 8 Common stocks
9-03(22) 19,552 Other stockholders' equity
9-03(23) 254,718 Total liabilities and stockholders'
equity
9-04(1) 12,707 Interest and fees on loans
9-04(2) 4,474 Interest and dividends on investments
9-04(4) 131 Other interest income
9-04(5) 17,312 Total interest income
9-04(6) 7,620 Interest on deposits
9-04(9) 8,638 Total interest expense
9-04(10) 8,674 Net interest income
9-04(11) 600 Provision for loan losses
9-04(13)(h) 0 Investment securities gains/(losses)
9-04(14) 7,962 Other expenses
9-04(15) 2,753 Income/loss before income tax
9-04(17) 2,753 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) 1,806 Net income or loss
9-04(21) 2.14 Earnings per share - primary
9-04(21) 2.13 Earnings per share - fully diluted
I.B.5 3.96 Net yield - interest earning assets -
actual
III.C.1.(a) 1,182 Loans on non-accrual
III.C.1.(b) 0 Accruing loans past due 90 days or
more
III.C.2.(c) 706 Troubled debt restructuring
III.C.2 880 Potential problem loans
IV.A.1 1,512 Allowance for loan loss - beginning
of period
IV.A.2 430 Total chargeoffs
IV.A.3 33 Total recoveries
IV.A.4 1,715 Allowance for loan loss - end of
period
IV.B.1 0 Loan loss allowance to allocated to
domestic loans
IV.B.2 0 Loan loss allowance to foreign loans
IV.B.3 1,715 Loan loss allowance - unallocated
<PAGE>
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<NAME> SECURITY FEDERAL CORPORATION
<MULTIPLIER> 1,000
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<PERIOD-END> MAR-31-1999
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<EXPENSE-OTHER> 7962
<INCOME-PRETAX> 2753
<INCOME-PRE-EXTRAORDINARY> 1806
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1806
<EPS-BASIC> 2.14
<EPS-DILUTED> 2.13
<YIELD-ACTUAL> 3.96
<LOANS-NON> 1182
<LOANS-PAST> 0
<LOANS-TROUBLED> 706
<LOANS-PROBLEM> 880
<ALLOWANCE-OPEN> 1512
<CHARGE-OFFS> 430
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<ALLOWANCE-CLOSE> 1715
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