SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD:
FROM: TO:
-------------------- ------------------
COMMISSION FILE NUMBER: 0-16120
SECURITY FEDERAL CORPORATION
South Carolina 57-0858504
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification)
1705 WHISKEY ROAD, AIKEN, SOUTH CAROLINA 29801
(Address of Principal Executive Office) (Zip code)
(803) 641-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES NO
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practical date.
CLASS: OUTSTANDING SHARES AT: $0.01 PAR VALUE:
- ----------------- ---------------------- ----------------
Common Stock June 30, 1999 $842,120
<PAGE>
INDEX
Security Federal Corporation and Subsidiaries
==============================================================================
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statement of Shareholders' Equity 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis Results of
Operations and Financial Condition 10
==============================================================================
PART II. OTHER INFORMATION
Other Information 14
Signatures 16
==============================================================================
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information is included in the consolidated financial statements and related
notes.
<PAGE>
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
June 30, 1999 March 31, 1999
----------------- ------------------
Assets:
Cash and Cash Equivalents $ 6,232,870 $ 6,951,347
Investment And Mortgage-Backed
Securities:
Available For Sale: (Amortized cost
of $91,584,256 at June 30, 1999 and
$82,240,153 at March 31, 1999) 90,051,287 82,035,772
Held To Maturity: (Fair value of
$3,125,640 at June 30, 1999 and
$3,579,500 at March 31, 1999) 3,138,182 3,532,863
Loans Receivable Net:
Held For Sale 1,521,810 1,604,300
Held For Investment: (Net of allowance
of $1,809,435 at June 30, 1999 and
$1,715,068 at March 31, 1999) 155,833,552 150,381,301
----------------- ------------------
$ 157,355,362 $ 151,985,601
----------------- ------------------
Accrued Interest Receivable:
Loans 719,984 657,153
Mortgage-Backed Securities 185,864 146,739
Investments 700,326 803,696
Premises And Equipment, Net 4,102,741 4,198,774
Federal Home Loan Bank Stock, At Cost 1,121,600 1,245,000
Real Estate Acquired In Settlement
Of Loans 175,143 154,143
Real Estate Held For Development
And Sale 546,791 552,111
Other Assets 2,821,577 2,454,724
----------------- ------------------
Total Assets $ 267,151,727 $ 254,717,923
================= ==================
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $ 221,099,798 $ 216,532,683
Advances From Federal Home Loan Bank 21,782,000 14,600,000
Other Borrowed Money 1,328,995 869,270
Advance Payments By Borrowers For
Taxes and Insurance 373,421 274,067
Other Liabilities 3,388,731 2,881,461
----------------- ------------------
Total Liabilities $ 247,972,945 $ 235,157,481
----------------- ------------------
Shareholders' Equity:
Serial Preferred Stock, $.01 Par
Value; Authorized Shares - 200,000
Issued; Outstanding Shares - None
Common Stock, $.01 Par Value;
Authorized Shares - 5,000,000 Issued;
Outstanding Shares - 842,120 At June
30, 1999 And March 31, 1999 $ 8,421 $ 4,211
Additional Paid-In Capital 3,993,733 3,997,943
Accumulated Other Comprehensive Loss (951,054) (127,738)
Retained Earnings, Substantially
Restricted 16,127,682 15,686,026
----------------- ------------------
Total Shareholders' Equity $ 19,178,782 $ 19,560,442
----------------- ------------------
Total Liabilities And Shareholders'
Equity $ 267,151,727 $ 254,717,923
================= ==================
See accompanying notes to consolidated financial statements.
1
<PAGE>
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended June 30,
---------------------------------
1999 1998
--------------- ----------------
Interest Income:
Loans $ 3,219,375 $ 3,031,855
Mortgage-Backed Securities 482,799 102,843
Investment Securities 837,659 1,081,186
Other 25,566 27,852
--------------- ----------------
Total Interest Income $ 4,565,399 $ 4,243,736
--------------- ----------------
Interest Expense:
NOW And Money Market Accounts 695,721 442,565
Passbook Accounts 77,575 74,616
Certificate Accounts 1,302,007 1,279,967
Advances And Other Borrowed Money 258,860 278,856
--------------- ----------------
Total Interest Expense $ 2,334,163 $ 2,076,004
--------------- ----------------
Net Interest Income 2,231,236 2,167,732
Provision For Loan Losses 150,000 150,000
Net Interest Income After Provision --------------- ----------------
For Loan Losses $ 2,081,236 $ 2,017,732
--------------- ----------------
Other Income:
Net Gain On Sale Of Investments 0 0
Gain On Sale Of Loans 113,504 98,463
Loan Servicing Fees 73,016 82,442
Service Fees On Deposit Accounts 238,446 202,475
Income From Real Estate Operations 34,843 67,078
Other 108,248 144,278
--------------- ----------------
Total Other Income $ 568,057 $ 594,736
--------------- ----------------
General And Administrative Expenses:
Salaries And Employee Benefits 1,027,302 975,136
Occupancy 125,340 117,361
Advertising 32,460 100,494
Depreciation And Maintenance Of Equipment 209,750 193,510
FDIC Insurance Premiums 21,171 19,662
Amortization Of Intangibles 116,310 116,310
Other 395,990 393,711
--------------- ----------------
Total General And Administrative Expenses $ 1,928,323 $ 1,916,184
--------------- ----------------
Income Before Income Taxes 720,970 696,284
Provision For Income Taxes 245,629 240,886
--------------- ----------------
Net Income $ 475,341 $ 455,398
=============== ================
Basic Net Income Per Common Share $ 0.56 $ 0.54
=============== ================
Diluted Net Income Per Common Share $ 0.56 $ 0.54
=============== ================
Cash Dividend Per Share On Common Stock $ 0.04 $ 0.03
=============== ================
Basic Weighted Average Shares Outstanding 842,120 842,120
=============== ================
Diluted Weighted Average Shares Outstanding 846,052 844,986
=============== ================
See accompanying notes to consolidated financial statements.
2
<PAGE>
Security Federal Corporation and Subsidiaries
Consolidated Statement of Shareholders' Equity (Unaudited)
Accumulated
Other
Additional Comprehensive
Common Paid-In Income Retained
Stock Capital (Loss) Earnings Total
Beginning 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 Comprehen-
sive 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
====== ========== ========= =========== ===========
Beginning Balance
At March 31,
1999 $8,421 $3,993,733 $(127,738) $15,686,026 $19,560,442
Net Income ----- ----- ----- 475,341 475,341
Other Comprehen-
sive Income,
Net Of Tax:
Unrealized
Holding Losses
On Securities
Available
For Sale ----- ----- (823,316) ----- (823,316)
Reclassification
Adjustment For
Gains Included
In Net Income ----- ----- ----- ----- -----
Comprehensive
Income (347,975)
Cash Dividends ----- ----- ----- (33,685) (33,685)
Balance at June
30, 1999 $8,421 $3,993,733 $(951,054) $16,127,682 $19,178,782
====== ========== ========= =========== ===========
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
<PAGE>
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended June 30,
---------------------------------
1999 1998
--------------- ----------------
Cash Flows From Operating Activities:
Net Income $ 475,341 $ 455,398
Adjustments To Reconcile Net Income To
Net Cash Provided By Operating Activities:
Depreciation Expense $ 186,582 $ 153,131
Amortization Of Intangibles 116,310 116,310
Discount Accretion And Premium Amortization 28,329 (12,531)
Provisions For Losses On Loans And Real Estate 150,000 150,000
Gain On Sale Of Investments 0 0
Gain On Sale Of Loans (113,504) (98,463)
Gain On Sale Of Real Estate (34,843) (83,991)
Amortization Of Deferred Fees On Loans (38,159) (65,374)
Proceeds From Sale Of Loans Held For Sale 6,688,586 5,346,772
Origination Of Loans For Sale (6,492,592) (5,095,395)
(Increase) Decrease In Accrued Interest
Receivable:
Loans (62,831) 56,841
Mortgage-Backed Securities (39,125) (18,608)
Investments 103,370 (13,128)
Increase (Decrease) In Advance Payments By
Borrowers 99,354 5,797
Loss On Disposition Of Premises And Equipment 7,131 0
Other, Net 529,379 (225,773)
--------------- ----------------
Net Cash Provided By Operating Activities $ 1,603,328 $ 670,986
--------------- ----------------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Held To Maturity $ 334,749 $ 169,711
Principal Repayments On Mortgage-Backed
Securities Available For Sale 2,069,903 67,105
Purchase Of Investment Securities Available
For Sale (7,998,438) (7,999,375)
Purchase Of Mortgage-Backed Securities
Available For Sale (8,650,117) (4,201,289)
Maturities Of Investment Securities
Available For Sale 5,210,003 5,635,270
Maturities Of Investment Securities Held
To Maturity 56,149 0
Purchase Of FHLB Stock (475,900) 0
Redemption Of FHLB Stock 599,300 0
(Increase) Decrease In Loans To Customers (5,585,092) 40,572
Investment In Real Estate Held For
Development (129,637) (168,647)
Proceeds From Sale Of Real Estate Held For
Development 169,800 356,310
Proceeds From Sale Of Real Estate Acquired
Through Foreclosure 0 182,083
Purchase Of Premises And Equipment (107,655) (128,195)
Proceeds From Sale Of Premises And Equipment 9,975 0
--------------- ----------------
Net Cash Used By Investing Activities $ (14,496,960) $ (6,046,455)
--------------- ----------------
Cash Flows From Financing Activities:
Increase In Deposit Accounts $ 4,567,115 $ 1,404,820
Proceeds From FHLB Advances 27,675,000 25,650,000
Repayment Of FHLB Advances (20,493,000) (20,233,000)
Proceeds Of Other Borrowings 473,529 0
Repayment Of Other Borrowings (13,804) (13,014)
Exercise Of Stock Options 0 0
Dividends To Shareholders (33,685) (25,264)
--------------- ----------------
Net Cash Provided By Financing Activities $ 12,175,155 $ 6,783,542
--------------- ----------------
(Continued)
4
<PAGE>
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended June 30,
---------------------------------
1999 1998
--------------- ----------------
Net Increase (Decrease) In Cash And
Cash Equivalents $ (718,477) $ 1,408,073
Cash And Cash Equivalents At Beginning
Of Period 6,951,347 4,658,681
--------------- ----------------
Cash And Cash Equivalents At End Of Period $ 6,232,870 $ 6,066,754
=============== ================
Supplemental Disclosure Of Cash Flows
Information:
Cash Paid During The Period For Interest $ 2,253,561 $ 1,882,941
Cash Paid During The Period For Income
Taxes $ 350 $ 16,936
Additions To Real Estate Acquired
Through Foreclosure $ 21,000 $ 179,901
Increase In Unrealized Net Loss On Securities
Available For Sale, Net Of Taxes $ 823,316 $ 25,264
See accompanying notes to consolidated financial statements.
5
<PAGE>
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions from Form 10-QSB and generally accepted
accounting principles; therefore, they do not include all disclosures
necessary for a complete presentation of financial condition, results of
operations, and cash flows. Such statements are unaudited but, in the opinion
of management, reflect all adjustments, all of which are of a normal recurring
nature and necessary for a fair presentation of results for the selected
interim periods. Users of financial information produced for interim periods
are encouraged to refer to the footnotes contained in the Annual Report to
Shareholders when reviewing interim financial statements. The results of
operations for the three-month period ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the entire fiscal year.
This Form 10-QSB contains certain forward-looking statements with respect to
the financial condition, results of operations, and business. These
forward-looking statements involve certain risks and uncertainties. Factors
that may cause actual results to differ materially from those anticipated by
such forward-looking statements include, but are not limited to, changes in
interest rates, changes in the regulatory environment, changes in general
economic conditions and inflation, changes in the securities market, and Year
2000 if not effectively corrected. Management cautions readers of Form 10-QSB
not to place undue reliance on forward-looking statements contained herein.
2. Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Security Federal Corporation (the "Company") and its wholly owned
subsidiary, Security Federal Bank (the "Bank"), and the Bank's wholly owned
subsidiary Security Financial Services Corporation ("SFSC"). SFSC engages
primarily in investment brokerage services. Also included in consolidation is
a real estate partnership.
3. Loans Receivable, Net
Loans Receivable, Net, at June 30, 1999 and March 31, 1999 consisted of the
following:
Loans held for sale were $1,521,810 and $1,604,300 at June 30, 1999 and March
31, 1999 respectively.
Loans Held For Investment: June 30, 1999 March 31, 1999
---------------- ----------------
Residential Real Estate $ 74,161,794 $ 65,489,233
Consumer 41,473,061 41,631,602
Commercial Business & Real Estate 52,824,139 52,325,690
---------------- ----------------
$ 168,458,994 $ 159,446,525
---------------- ----------------
Less:
Allowance For Possible Loan Loss 1,809,435 1,715,068
Loans In Process 10,622,958 7,150,607
Deferred Loan Fees 193,049 199,549
---------------- ----------------
$ 12,625,442 $ 9,065,224
---------------- ----------------
$ 155,833,552 $ 150,381,301
================ ================
The following is a reconciliation of the allowance for loan losses for the
three months ending:
June 30, 1999 June 30, 1998
---------------- ----------------
Beginning Balance $ 1,715,068 $ 1,512,038
Provision 150,000 150,000
Charge-offs (64,261) (115,271)
Recoveries 8,628 8,831
---------------- ----------------
Ending Balance $ 1,809,435 $ 1,555,598
================ ================
6
<PAGE>
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
4. Securities
Investment and Mortgage-Backed Securities, Held to Maturity
- -----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities held to maturity are as
follows:
Gross Gross
June 30, 1999 Amortized Unrealized Unrealized
- ------------- Cost Gains Losses Fair Value
----------- -------- -------- -----------
US Government and
Agency Obligations $ 280,673 $ 3,952 $ 0 $ 284,625
Mortgage-Backed
Securities 2,857,509 14,402 30,896 2,841,015
----------- -------- -------- -----------
Total $ 3,138,182 $ 18,354 $ 30,896 $ 3,125,640
=========== ======== ======== ===========
March 31, 1999
- --------------
US Government and
Agency Obligations $ 336,822 $ 542 $ 0 $ 337,364
Mortgage-Backed
Securities 3,196,041 46,652 557 3,242,136
----------- -------- -------- -----------
Total $ 3,532,863 $ 47,194 $ 557 $ 3,579,500
=========== ======== ======== ===========
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:
Gross Gross
June 30, 1999 Amortized Unrealized Unrealized
- ------------- Cost Gains Losses Fair Value
----------- -------- ---------- -----------
US Government and
Agency Obligations $60,245,625 $ 56,145 $1,038,854 $59,262,916
Mortgage-Backed
Securities 31,338,631 14,690 564,950 30,788,371
----------- -------- ---------- -----------
Total $91,584,256 $ 70,835 $1,603,804 $90,051,287
=========== ======== ========== ===========
March 31, 1999
- --------------
US Government and
Agency Obligations $57,459,009 $165,373 $ 264,488 $57,359,894
Mortgage-Backed
Securities 24,781,144 23,850 129,116 24,675,878
----------- -------- ---------- -----------
Total $82,240,153 $189,223 $ 393,604 $82,035,772
=========== ======== ========== ===========
7
<PAGE>
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
5. Deposits
A summary of deposit accounts by type with weighted average rates is as
follows:
June 30, 1999 March 31, 1999
-------------------- ---------------------
Demand Accounts: Balance Rate Balance Rate
-------------------- ---------------------
Checking $ 53,038,168 0.79% $ 53,435,702 0.84%
Money Market 51,279,801 4.59% 49,369,915 4.70%
Regular Savings 13,238,080 2.49% 11,847,962 2.47%
------------ ------------
Total Demand Accounts $117,556,049 2.64% $114,653,579 2.67%
============ ============
Certificate Accounts:
0 - 4.99% $ 39,464,444 $ 31,100,943
5.00 - 6.99% 63,941,493 70,640,349
7.00 8.99% 137,812 137,812
------------ ------------
Total Certificate Accounts $103,543,749 5.08% $101,879,104 5.18%
============ ============
Total Deposit Accounts $221,099,798 3.78% $216,532,683 3.85%
============ ============
6. Federal Home Loan Bank Advances
Federal Home Loan Bank Advances are summarized by year of maturity and
weighted average interest rate in the table below:
June 30, 1999 March 31, 1999
-------------------- ---------------------
Fiscal Year Due: Balance Rate Balance Rate
-------------------- ---------------------
2000 $ 7,728,000 5.25% $ 528,000 8.70%
2001 3,856,000 5.88% 856,000 8.75%
2002 0 0% 0 0%
2003 5,000,000 5.69% 5,000,000 5.69%
Thereafter 5,198,000 5.61% 8,216,000 5.42%
------------ ------------
Total Advances $ 21,782,000 5.55% $ 14,600,000 5.82%
============ ============
7. Regulatory Matters
The following table reconciles the Company's Shareholders' equity to its
various regulatory capital positions:
June 30, 1999 March 31, 1999
(Dollars in Thousands)
---------------------------------------
Bank's Shareholders' Equity $ 18,526 $ 18,879
Unrealized Loss On Available For
Sale Of Securities, Net Of Tax 951 128
Reduction For Goodwill And Other
Intangibles (1,465) (1,581)
------------ -----------
Tangible Capital 18,012 17,426
Qualifying Core Deposits And
Intangible Assets 638 664
------------ -----------
Core Capital 18,650 18,090
Supplemental Capital 1,809 1,715
------------ -----------
Risk-Based Capital $ 20,459 $ 19,805
============ ===========
The following table compares the Company's capital levels relative to the
applicable regulatory requirements at June 30, 1999.
(Dollars in Thousands)
-------------------------------------------------------------
Amt. % Actual Actual Excess Excess
Required Required Amt. % Amt. %
-------------------------------------------------------------
Tangible Capital $ 5,322 2.0% $ 18,012 6.77% $ 12,690 4.77%
Tier 1 Leverage
(Core) Capital 10,670 4.0% 18,650 6.99% 7,980 2.99%
Total Risk-Based
Capital 12,548 8.0% 20,459 13.04% 7,911 5.04%
Tier 1 Risk-Based
(Core) Capital 6,274 4.0% 18,650 11.89% 12,376 7.89%
8
<PAGE>
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
7. Regulatory Matters, Continued
The Company's regulatory capital amounts and ratios at June 30, 1999 are as
follows:
(Dollars in Thousands) To Be
Well Capitalized
For Capital Under Prompt
Adequacy Corrective Action
Actual Purposes Provisions
--------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------
Tier I Risk-Based
Core Capital $ 18,650 11.9% $ 6,274 4.0% $ 9,411 6.0%
Risk-Based Capital
(To Risk Weighted
Assets) 20,459 13.0% 12,548 8.0% 15,684 10.0%
Core Capital (To
Adjusted Tangible
Assets) 18,650 7.0% 10,670 4.0% 13,338 5.0%
Tangible Capital (To
Tangible Assets) 18,012 6.8% 5,322 2.0% 13,306 5.0%
9
<PAGE>
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Changes in Financial Condition
Total assets of the Company increased $12.4 million during the three months
ended June 30, 1999, due primarily to increases of $5.4 million or 3.5% in
total net loans receivable and $7.6 million or 8.9% in investment securities.
Funded residential real estate loans increased $5.2 million or 8.9% during the
period while other loans increased only $340,000. Combined with higher coupon
loans prepaying, this led to a decrease in the overall yield of the loan
portfolio.
Real estate acquired in settlement of loans (REO) increased $39,000 while real
estate acquired for development decreased $5,000 during the three-month
period.
Deposits increased $4.6 million or 2.1% during the three months ended June 30,
1999 and Federal Home Loan Bank (FHLB) advances grew $7.2 million to fund the
Company's 4.9% growth in assets.
The Board of Directors declared the 34th consecutive quarterly dividend of
$.04 per share in May 1999, which totaled $34,000. Unrealized losses on
securities available for sale increased $823,000 during the three months ended
June 30, 1999 due to the recent rise in U.S. Treasury and agency yields. Net
income for the three months was $475,000 for the Company. These items
combined to decrease shareholders' equity by $382,000 or 2.0% during the three
months ended June 30, 1999. Book value per share was $22.77 at June 30, 1999
compared to $23.23 at March 31, 1999.
At its October 1998 Board of Directors meeting, the Board declared a 2-for-1
stock split of the Company's common stock. The stock split was accomplished
through a 100% stock dividend that was issued on or about December 15, 1998 to
shareholders of record as of November 30, 1998.
Liquidity and Capital Resources
In accordance with Office of Thrift Supervision (OTS) regulations, the Company
is required 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. The Company's average liquidity during the three months ended
June 30, 1999 was approximately 38%. The Company's current liquidity level is
deemed adequate to meet the requirements of normal operations, potential
deposit outflows, and loan demand while still allowing for optimal investment
of funds and return on assets.
Loan repayments and maturities of investments are a significant source of
funds, whereas loan disbursements are a primary use of the Company's funds.
During the three months ended June 30, 1999, loan disbursements exceeded loan
repayments resulting in a $5.4 million or 3.5% increase in total net loans
receivable.
Deposits and other borrowings are also an important source of funds for the
Company. During the three months ended June 30, 1999, deposits increased $4.6
million while FHLB advances increased $7.2 million. At June 30, 1999, the
Bank had $86.6 million of certificates of deposit maturing within one year.
Based on previous experience, the Bank anticipates a major portion of these
certificates will be renewed.
Liquidity resources at June 30, 1999 are sufficient to meet outstanding
mortgage loan commitments of $1.1 million and unused lines of credit of $22.9
million. Management believes that the Company's liquidity needs will continue
to be supported by the Company's deposit base and borrowing capacity.
10
<PAGE>
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Accounting and Reporting Changes.
In June 1997, the FASB issued 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 Post-retirement Benefits. The new statement revises the required
disclosures for employee benefit plans, but it does not change the measurement
or recognition of such plans. While the new standard requires some additional
information about benefit plans, it helps preparers of financial statements by
eliminating certain disclosures and by standardizing the disclosures for
pensions and other post-retirement benefits to the extent practicable. SFAS
132 supercedes the disclosure requirements in SFAS 87, Employers' Accounting
for Pensions, SFAS 88, Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits, and SFAS 106,
Employers' Accounting for Post-Retirement Benefits Other than Pensions. The
new disclosures are effective for fiscal years beginning after December 15,
1997. The adoption of SFAS 132 did not have an impact on the financial
statements of the Company due to the disclosure only requirements.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instrument
and Hedging Activities. All derivatives are to be measured at fair value and
recognized in the balance sheet as assets or liabilities. The statement is
effective for fiscal years and quarters beginning after June 15, 1999. The
Company has limited use of derivative transactions at this time; therefore,
this does not 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.
Impact of Inflation and Changing Prices
The consolidated financial statements, related notes, and other financial
information presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike 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 inflation.
11
<PAGE>
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Year 2000 Considerations
The Company recognizes that there is a business risk in computerized systems
as the calendar rolls over into the next century. If the computer systems
misinterpret the date, items such as interest calculations on loans and
deposits will be incorrect. This problem is commonly called the "Year 2000
Problem." A number of computer systems used by the Company in its day-to-day
operations will be affected by this problem. Management has established a
committee (the "Y2K Project Team") which has identified all affected systems
and is currently working to ensure that this event will not disrupt
operations. The Y2K Project Team reports regularly to the Company's Board of
Directors. The Company 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 Company's core
processing systems occurred in December 1998. The test was evaluated and
appears to have been successful. The Company's contingency plan has been
completed and tested and will be re-tested. The Company's Year 2000 project
costs are not expected to have a material impact on its results of operations,
liquidity or capital resources. The Company has funded approximately $350,000
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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------
Net Income
Net income was $475,000 for the three months ended June 30, 1999, representing
an increase in earnings of $20,000 or 4.4% compared to the same period in
1998.
Net Interest Income
Net interest income increased $64,000 or 2.9% during the three months ended
June 30, 1999 due to an increase in total interest income offset in part by an
increase in interest expense.
Interest income on loans increased $188,000 or 6.2% during the quarter as a
result of total net loans increasing as the average yield in the loan
portfolio decreased. Investment, mortgage-backed, and other securities
interest income increased $134,000 or 11.1% during the three months ended June
30, 1999 due to an increase in the average balance in the investment portfolio
despite a 22 basis points decline in the average yield in the portfolio.
Total interest income rose $322,000 or 7.6% during the three months ended June
30, 1999 compared to the same period in 1998.
Total interest expense increased $258,000 or 12.4% during the three months
ended June 30, 1999 compared to the same period one-year earlier. Interest
expense on deposits increased $278,000 or 15.5% during the period as deposits
grew significantly compared to the average balance in 1998 despite a decline
in the cost of deposits during the 1999 quarter. Interest expense on advances
and other borrowings decreased $20,000 during the three-months ended June 30,
1999 even though the average amount of debt outstanding increased slightly in
the 1999 period compared to 1998.
Provision for Loan Losses
The Bank's provision for loan losses was $150,000 during both the three months
ended June 30, 1999 and 1998. The amount of the provision is determined by
Management's on-going monthly analysis of the loan portfolio. Non-accrual
loans, which are loans delinquent 90 days or more, were $1.7 million at June
30, 1999 compared to $1.2 million at March 31, 1999. The ratio of allowance
for loan losses to the Company's total loans was 1.14% at June 30, 1999
compared to 1.12% at March 31, 1999. Net charge-offs were $56,000 during the
three months ended June 30, 1999 compared to $106,000 during the three-month
period in 1998.
12
<PAGE>
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999, Continued
- -------------------------------------------------------------------------
Other Income
Total other income decreased $27,000 or 4.5% during the three months ended
June 30, 1999 compared to the same period one-year earlier. Gain on sale of
loans increased $15,000 during the period while loan servicing fees decreased
$9,000 as the portfolio of loans serviced for others decreased. Service fees
on deposit accounts grew $36,000 as the number of commercial and personal
demand deposit accounts increased. Income from real estate operations
stemming from the Willow Woods partnership decreased $32,000 during the
period. Other miscellaneous income including credit life insurance
commissions, net gain on sale of repossessed assets, safe deposit rental
income, annuity and stock brokerage commissions through SFSC, and other
miscellaneous fees decreased $36,000 during the three months ended June 30,
1999.
General and Administrative Expenses
General and administrative expenses increased $12,000 or 0.6% during the three
months ended June 30, 1999 compared to the same period in 1998.
Salaries and employee benefits expense grew $52,000 or 5.4% due to an increase
in staff in customer service positions to handle increased business and due to
normal annual salary increases. Occupancy expense increased $8,000 or 6.8%
during the period. Advertising expense decreased $68,000 while the
depreciation and maintenance of equipment expense increased $16,000 during the
quarterly period. FDIC insurance premiums rose $2,000 as deposit account
balances increased. Amortization of intangible expense was $116,000 during
the three months ended June 30 in fiscal 1999 and 1998. Other miscellaneous
expense, consisting of legal, professional, and consulting expenses,
stationery and office supplies, and other sundry expenses, increased $2,000 or
0.6% for the three months ended June 30, 1999 compared to the three months
ended June 30, 1998.
13
<PAGE>
Security Federal Corporation and Subsidiaries
Other Information
Item 1 Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Company is a
party to legal proceedings in the ordinary course of business
wherein it enforces its security interest in mortgage loans it has
made.
Item 2 Changes In Securities And Use Of Proceeds
-----------------------------------------
Not applicable.
Item 3 Defaults Upon Senior Securities
-------------------------------
None
Item 4 Submission Of Matters To A Vote Of Security Holders
---------------------------------------------------
None
Item 5 Other Information
-----------------
None
Item 6 Exhibits And Reports On Form 8-K
--------------------------------
Exhibits:
3.1 Articles Of Incorporation*
3.2 Articles Of Amendment, Dated August 28, 1998, To Articles Of
Incorporation
3.3 Bylaws**
10 Executive Compensation Plans And Arrangements:
Salary Continuation Agreements***
Amendment One To Salary Continuation Agreements****
Stock Option Plan***
Incentive Compensation Plan***
27 Financial Data Schedule
* Filed as an exhibit to the Company's June 23, 1998 proxy statement and
incorporated herein by reference.
** Filed as an exhibit to the Company's Form 8-K dated August 31, 1998 and
incorporated herein by reference.
*** Filed on June 28, 1993, as an exhibit to the Company's Annual Report on
Form 10-KSB pursuant to Section 12(g) of the Securities Exchange Act of
1934. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-B.
**** Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1993 pursuant to Section 12(g) of the
Securities Exchange Act of 1934. All of such previously filed documents
are hereby incorporated herein by reference in accordance with Item 601
of Regulation S-B.
14
<PAGE>
Security Federal Corporation and Subsidiaries
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
Security Federal Corporation
Date: August 9, 1999 By: /s/ Roy G. Lindburg
-------------------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
16
<PAGE>
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