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 December 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 0-16120
SECURITY FEDERAL CORPORATION
South Carolina 57-0858504
(State or other jurisdiction of (IRS Employer
incorporation or organization)Identification Number)
1705 Whiskey Road, Aiken, South Carolina 29801
(Address of Principal Executive Office) (Zip code)
(803) 641-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practical date.
Class Outstanding Shares at
Common Stock December 31, 1998
$0.01 Par Value 842,120
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INDEX
SECURITY FEDERAL CORPORATION
PART I - FINANCIAL INFORMATION (UNAUDITED) PAGE
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets 2
Consolidated Statements of Income 3-6
Consolidated Statement of Shareholders' Equity 7
Consolidated Statements of Cash Flows 8-9
Notes to Consolidated Financial Statements 10-13
Item 2. Management's Discussion and Analysis
Financial Condition and Results of Operations 14-18
PART II. OTHER INFORMATION
Other Information 19
Signatures 20
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information is included in the consolidated financial statements and related
notes.
1
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Security Federal Corporation and Subsidiary
Consolidated Balance Sheets (Unaudited)
December 31, 1998 March 31, 1998
----------------- --------------
Assets
Cash and cash equivalents $ 6,942,370 $ 4,658,681
Investment and mortgage-backed securities:
Available for sale: (Amortized cost
of $75,133,825 at December 31, 1998 and
$54,475,231 at March 31, 1998) 75,352,090 54,597,270
Held to maturity: (Fair value of
$4,711,497 at December 31, 1998 and
$8,297,204 at March 31, 1998) 4,631,549 8,215,833
Loans receivable net:
Held for sale 2,293,949 1,232,181
Held for investment: (Net of
allowance of $1,696,274 at December 31,
1998 and $1,512,038 at March 31, 1998) 144,697,761 136,492,252
--------------- --------------
146,991,710 137,724,433
--------------- --------------
Accrued interest receivable:
Loans 730,087 736,201
Mortgage-backed securities 79,100 35,694
Investments 740,700 761,405
Premises and equipment, net 4,115,518 3,827,760
Federal Home Loan Bank stock, at cost 1,254,500 1,348,600
Real estate acquired in settlement of loans 358,120 165,170
Real estate held for development and sale 629,997 623,779
Other assets 2,656,767 2,817,090
--------------- --------------
Total Assets $ 244,482,508 $ 215,511,916
=============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Deposit accounts $ 200,780,281 $ 181,785,948
Advances from Federal Home Loan Bank 19,065,000 12,126,000
Other borrowed money 731,916 128,933
Advance payments by borrowers
for taxes and insurance 195,741 266,128
Other liabilities 4,347,989 3,128,866
--------------- --------------
Total liabilities 225,120,927 197,435,875
--------------- --------------
Stockholders' Equity:
Serial preferred stock, $.01 par
value; authorized shares -
200,000 issued and outstanding, none
Common stock, $.01 par value;
authorized shares 5,000,000 issued
and outstanding shares, 842,100 at
December 31, 1998 and 1,000,000
authorized and issued, 421,060
at March 31, 1998 8,421 4,211
Additional paid-in capital 3,993,733 3,997,943
Unrealized net gain on securities
available for sale, net of income taxes 135,373 75,713
Retained earnings, substantially
restricted 15,224,054 13,998,174
--------------- --------------
Total stockholders' equity 19,361,581 18,076,041
--------------- --------------
Total liabilities and stockholders'
equity $ 244,482,508 $ 215,511,916
=============== ==============
See accompanying notes to consolidated financial statements.
2
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Security Federal Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
Three Months Ended
December 31,
------------
1998 1997
---- ----
Interest income:
Loans $ 3,190,024 $ 3,345,475
Mortgage-backed securities 213,763 81,655
Investment securities 840,174 911,362
Other 62,063 16,645
------------ -------------
Total interest income 4,306,024 4,355,137
------------ -------------
Interest expense:
NOW and money market accounts 563,850 375,940
Passbook accounts 71,150 74,850
Certificate accounts 1,329,693 1,342,215
Advances and other borrowed money 242,526 393,073
------------ -------------
Total interest expense 2,207,219 2,186,078
------------ -------------
Net interest income 2,098,805 2,169,059
Provision for loan losses 150,000 240,000
------------ -------------
Net interest income after provision for
loan losses 1,948,805 1,929,059
Other income: ------------ -------------
Net gain on sale of investments 0 15,423
Gain on sale of loans 227,160 47,203
Loan servicing fees 80,446 86,139
Service fees on deposit accounts 227,174 224,681
Income from real estate operations 13,421 6,741
Other 145,577 93,347
------------ -------------
Total other income 693,778 473,534
------------ -------------
General and administrative expenses:
Salaries and employee benefits 1,001,818 866,318
Occupancy 128,068 116,832
Advertising 62,423 86,488
Depreciation and maintenance of equipment 210,290 171,781
FDIC insurance premiums 19,133 18,848
Amortization of intangibles 116,310 116,310
Other 377,320 316,510
------------ -------------
Total general and administrative expenses 1,915,362 1,693,087
------------ -------------
(Continued)
3
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Security Federal Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
Three Months Ended
December 31,
------------
1998 1997
---- ----
Income before income taxes 727,221 709,506
Provision for income taxes 247,816 240,622
------------ -------------
Net income $ 479,405 $ 468,884
============ =============
Basic net income per common share $ 0.57 $ 0.56
============ =============
Diluted net income per common share $ 0.57 $ 0.56
============ =============
Cash dividend per share on common stock $ 0.04 $ 0.03
============ =============
Basic weighted average shares outstanding 842,120 839,722
============ =============
Diluted weighted average shares outstanding 847,268 842,172
============ =============
Security Federal Corporation and Subsidiary
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended
December 31,
------------
1998 1997
---- ----
Net Income $ 479,405 $ 468,884
Other comprehensive Income, net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
During the period (153,051) 15,241
----------- -------------
Comprehensive Income $ 326,354 $ 484,125
============ =============
See accompanying notes to consolidated financial statements.
4
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Security Federal Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
Nine Months Ended
December 31,
------------
1998 1997
---- ----
Interest income:
Loans $ 9,500,091 $ 10,008,676
Mortgage-backed securities 459,768 249,661
Investment securities 2,766,655 2,108,669
Other 107,825 54,722
------------ -------------
Total interest income 12,834,339 12,421,728
------------ -------------
Interest expense:
NOW and money market accounts 1,511,292 869,519
Passbook accounts 219,515 226,673
Certificate accounts 3,889,835 3,873,926
Advances and other borrowed money 787,485 922,953
------------ -------------
Total interest expense 6,408,127 5,893,071
------------ -------------
Net interest income 6,426,212 6,528,657
Provision for loan losses 450,000 630,000
------------ -------------
Net interest income after provision for
Loan losses 5,976,212 5,898,657
Other income: ------------ -------------
Net gain on sale of investments 0 15,423
Gain on sale of loans 515,144 149,288
Loan servicing fees 242,363 259,539
Service fees on deposit accounts 640,022 659,452
Income from real estate operations 85,589 53,656
Other 430,536 338,267
------------ -------------
Total other income 1,913,654 1,475,625
------------ -------------
General and administrative expenses:
Salaries and employee benefits 2,995,134 2,597,105
Occupancy 373,164 353,904
Advertising 302,400 272,486
Depreciation and maintenance of equipment 605,636 548,246
FDIC insurance premiums 58,674 57,440
Amortization of intangibles 348,930 348,930
Other 1,214,286 1,163,618
------------ -------------
Total general and administrative expenses 5,898,224 5,341,729
------------ -------------
(Continued)
5
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Security Federal Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
Nine Months Ended
December 31,
------------
1998 1997
---- ----
Income before income taxes 1,991,642 2,032,553
Provision for income taxes 681,550 708,605
------------ -------------
Net income $ 1,310,092 $ 1,323,948
============ =============
Basic net income per common share $ 1.56 $ 1.58
============ =============
Diluted net income per common share $ 1.55 $ 1.58
============ =============
Cash dividends per share on common stock $ 0.10 $ 0.09
============ =============
Basic weighted average shares outstanding 842,120 836,076
============ =============
Diluted weighted average shares outstanding 847,268 838,526
============ =============
Security Federal Corporation and Subsidiary
Consolidated Statements of Comprehensive Income (Unaudited)
Nine Months Ended
December 31,
------------
1998 1997
---- ----
Net Income $ 1,310,092 $ 1,323,948
Other comprehensive Income, net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
during the period 59,660 214,484
------------ -------------
Comprehensive Income $ 1,369,752 $ 1,538,432
============ =============
See accompanying notes to consolidated financial statements.
6
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Security Federal Corporation and Subsidiary
Consolidated Statement of Shareholders' Equity
For the nine months ended December 31, 1998
(Unaudited)
Unrealized
Net
Gain On
Additional Securities
Common Paid-In Available Retained
Stock Capital For Sale Earnings Total
---------------------------------------------------------
Beginning 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
Cash dividend ---- ---- ---- (100,582) (100,582)
Exercise of stock
options 40 39,340 ---- ---- 39,380
Decrease in
unrealized net
loss on
securities
available for
sale, net of
tax ---- ---- 242,585 ---- 242,585
---------------------------------------------------------
Beginning Balance
at March 31, 1998 $ 4,211 $ 3,997,943 $ 75,713 $ 13,998,174 $ 18,076,041
Net income ---- ---- ---- 1,310,092 1,310,092
Cash dividend ---- ---- ---- (84,212) (84,212)
Effect of stock
split 4,210 (4,210) ---- ---- ----
Increase in
unrealized net
gain on
securities
available for
sale, net of
tax ---- ---- 59,660 ---- 59,660
---------------------------------------------------------
Ending balance
December 31, 1998 $ 8,421 $ 3,993,733 $ 135,373 $ 15,224,054 $ 19,361,581
=========================================================
See accompanying notes to consolidated financial statements.
7
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Security Federal Corporation and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
December 31,
------------
1998 1997
---- ----
Cash flows from operating activities:
Net Income $ 1,310,092 $ 1,323,948
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation expense 487,950 475,259
Amortization of purchase accounting
adjustments 348,930 348,930
Discount accretion and premium amortization 7,918 (21,808)
Provisions for losses on loans and real
estate 450,000 630,000
Gain on sale of investments 0 (15,423)
Gain on sale of loans (515,144) (149,288)
Gain on sale of real estate (174,740) (99,418)
Amortization of deferred fees on loans (161,746) (79,042)
Proceeds from sale of loans held for sale 19,874,230 8,042,373
Origination of loans for sale (20,420,854) (8,321,489)
(Increase) decrease in accrued interest
Receivable:
Loans 6,114 (1,301)
Mortgage-backed securities (43,406) 12,036
Investments 20,705 (504,460)
Decrease in advance payments by borrowers (70,387) (76,541)
Other, net 994,013 (774,163)
------------ -------------
Net cash provided by operating activities $ 2,113,675 $ 789,613
------------ -------------
Cash flows from investing activities
Principal repayments on mortgage-backed
securities held to maturity 625,586 275,692
Principal repayments on mortgage-backed
securities available for sale 1,326,457 0
Proceeds from sale of investment securities
available for sale 0 2,982,969
Purchase of investment securities
available for sale (26,984,906) (45,367,500)
Purchase of mortgage-backed securities
available for sale (20,607,698) 0
Maturities of investment securities
available for sale 25,592,610 9,500,000
Maturities of investment securities held
to maturity 2,965,660 3,000,000
Purchase of FHLB Stock 0 (695,200)
Redemption of FHLB Stock 94,100 0
(Increase) decrease in loans to customers (9,165,867) 6,012,303
Investment in real estate held for development (353,179) (159,442)
Proceeds from sale of real estate held
for development 432,550 274,720
Proceeds from sale of real estate acquired
through foreclosure 568,305 218,184
Purchase of premises and equipment (782,708) (454,189)
Proceeds from sales of premises and equipment 7,000 0
------------ -------------
Net cash used by investing activities $(26,282,090) $ (24,412,463)
------------ -------------
(Continued)
8
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Security Federal Corporation and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
(Continued)
Nine Months Ended
December 31,
------------
1998 1997
---- ----
Cash flows from financing activities:
Increase (decrease) in deposit accounts $ 18,994,333 $ 8,467,921
Proceeds from FHLB advances 66,000,000 97,940,000
Repayment of FHLB advances (59,061,000) (83,786,000)
Proceeds of other borrowings 662,568 0
Repayment of other borrowings (59,585) (49,814)
Exercise of stock options 0 39,380
Dividends to shareholders (84,212) (75,318)
------------ -------------
Net cash provided by financing activities $ 26,452,104 $ 22,536,169
------------ -------------
Net increase (decrease) in cash and
cash equivalents 2,283,689 (1,086,681)
Cash and cash equivalents at beginning
of period 4,658,681 7,903,637
------------ -------------
Cash and cash equivalents at end of period $ 6,942,370 $ 6,816,956
============ =============
Supplemental disclosure of cash flow information:
Cash paid during the period for :
Interest $ 6,202,346 $ 5,893,071
Income taxes $ 557,806 $ 816,500
Additions to real estate acquired
through foreclosure $ 672,104 $ 182,948
Increase in unrealized net gain on
securities available for sale,
net of taxes $ 59,660 $ 214,484
See accompanying notes to consolidated financial statements.
9
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Security Federal Corporation and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-QSB and therefore do not include all
disclosures necessary for a complete presentation of financial condition,
results of operations and cash flows in conformity with general accepted
accounting principles. Such statements are unaudited but, in the opinion of
management, reflect all adjustments, all of which are of a normal recurring
nature, necessary for a fair presentation of results for the selected interim
periods. Users of financial information produced for interim periods are
encouraged to refer to the footnotes contained in the Annual Report to
Stockholders when reviewing interim financial statements. The results of
operations for the three and nine month periods ended December 31, 1998 are
not necessarily indicative of the results, which may be expected for the
entire fiscal year. This Form 10-QSB contains certain forward-looking
statements with respect to the financial condition, results of operations, and
business. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially
from those anticipated by such forward-looking statements include, but are not
limited to changes in interest rates, changes in the regulatory environment,
changes in general economic conditions and inflation, changes in the
securities market and Year 2000 if not effectively corrected. Management
cautions readers of Form 10-QSB not to place undue reliance on forward-looking
statements contained therein.
2. Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Security Federal Corporation (the "Company") and its wholly owned
subsidiary, Security Federal Bank (the "Bank"), and its wholly owned
subsidiary Security Financial Services Corporation ("SFSC"). SFSC engages
primarily in investment brokerage services. Also included in consolidation is
a real estate partnership, which the Company purchased from SFSC in December
1995 at fair market value.
3. Loans Receivable, Net
Loans receivable, net, at December 31, 1998 and March 31, 1998, consisted of
the following:
Loans held for sale were $2,293,949 and $1,232,181 at December 31, 1998 and
March 31, 1998 respectively.
Loans held for investment: December 31, 1998 March 31, 1998
----------------- --------------
Residential real estate $ 57,719,510 $ 46,450,206
Consumer 43,952,317 46,499,200
Commercial real estate 3,220,201 3,955,462
Commercial business 48,387,202 44,500,079
----------------- -------------
$ 153,279,230 $ 141,404,947
----------------- -------------
Less:
Allowance for possible loan loss $ 1,696,274 $ 1,512,038
Loans in process 6,711,213 3,175,684
Deferred loan fees 173,982 224,973
----------------- -------------
8,581,469 4,912,695
----------------- -------------
$ 144,697,761 $ 136,492,252
================= =============
The following is a reconciliation of the allowance for loan losses for the
nine months ending:
December 31, 1998 December 31, 1997
----------------- -----------------
Beginning balance $ 1,512,038 $ 1,767,483
Provision 450,000 630,000
Charge-offs (291,537) (571,558)
Recoveries 25,773 96,017
----------------- -------------
Ending balance $ 1,696,274 $ 1,921,942
================= =============
10
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Security Federal Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. Securities
Investment and Mortgage-backed Securities, Held to Maturity
- -----------------------------------------------------------
The amortized cost, gross unrealized gains gross unrealized losses and fair
values of investment and mortgage-backed securities held to maturity are as
follows:
December 31, 1998
- -----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
US Government and Agency
Obligations $ 905,579 $ 11,802 $ 0 $ 917,381
Mortgage-backed securities 3,725,970 68,146 0 3,794,116
----------- -------- --------- ----------
Total $ 4,631,549 $ 79,948 $ 0 $4,711,497
=========== ======== ========= ==========
March 31, 1998
- --------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
US Government and Agency
Obligations $ 3,863,910 $ 20,664 $ 10,320 $3,874,254
Mortgage-backed securities 4,351,923 71,492 465 4,422,950
----------- -------- --------- ----------
Total $ 8,215,833 $ 92,156 $ 10,785 $8,297,204
=========== ======== ========= ==========
Investment and Mortgage-backed Securities, Available for Sale
- -------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses and fair
values of investment and mortgage-backed securities available for sale are as
follows:
December 31, 1998
- -----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
US Government and Agency
Obligations $55,889,518 $381,723 $ 117,259 $56,153,982
Mortgage-backed securities 19,244,307 12,971 59,170 19,198,108
----------- -------- --------- -----------
Total $75,133,825 $394,694 $ 176,429 $75,352,090
=========== ======== ========= ===========
11
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Security Federal Corporation and Subsidiary
Investment and Mortgage-backed Securities, Available for Sale (continued)
- -------------------------------------------------------------
March 31, 1998
- --------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
US Government and Agency
Obligations $54,475,231 $189,603 $ 67,564 $54,597,270
Mortgage-backed securities 0 0 0 0
----------- -------- --------- -----------
Total $54,475,231 $189,603 $ 67,564 $54,597,270
=========== ======== ========= ===========
5. Deposits
A summary of deposit accounts by type with weighted average rates are as
follows:
December 31, 1998 March 31, 1998
----------------- --------------
Demand Accounts: Balance Rate Balance Rate
------- ---- ------- ----
Checking $ 51,121,529 0.84% $ 47,414,160 1.09%
Money Market 38,811,601 4.85% 27,902,091 4.67%
Regular Savings 11,141,369 2.46% 12,328,146 2.44%
------------- ---- ------------- ----
Total demand accounts $ 101,074,499 2.56% $ 87,644,397 2.42%
------------- ---- ------------- ----
Certificate Accounts:
0 - 4.99% $ 15,928,013 $ 3,086,511
5.00 - 6.99% 83,639,957 90,919,998
7.00 - 8.99% 137,812 135,042
------------- -------------
Total certificate
accounts 99,705,782 5.38% 94,141,551 5.50%
------------- ---- ------------- ----
Total deposit
accounts $ 200,780,281 3.96% $ 181,785,948 4.02%
============= ==== ============= ====
6. Federal Home Loan Bank Advances
Federal Home Loan Bank Advances are summarized by year of maturity and
weighted average interest rate in the table below:
Fiscal Year Due December 31, 1998 March 31, 1998
- --------------- ----------------- --------------
Balance Rate Balance Rate
------- ---- ------- ----
1999 $ 490,000 8.65% $ 5,490,000 6.06%
2000 4,503,000 5.36% 528,000 8.70%
2001 856,000 8.75% 856,000 8.75%
2002 0 0% 0 0%
thereafter 13,216,000 5.52% 5,252,000 5.80%
------------- ---- ------------- ----
$ 19,065,000 5.71% $ 12,126,000 6.25%
============= ==== ============= ====
12
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Security Federal Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. Regulatory Matters
The following table reconciles the Bank's stockholders' equity to its various
regulatory capital positions:
(Dollars in thousands)
December 31, 1998 March 31, 1998
----------------- --------------
Bank's Stockholders' Equity $ 18,650 $ 17,294
Unrealized loss (gain) on
available for sale
securities, net of tax (135) (76)
Reduction for goodwill and other
intangibles (1,697) (2,046)
-------------- --------------
Tangible capital 16,818 15,172
Qualifying core deposits and
intangible assets 695 789
-------------- --------------
Core capital 17,513 15,961
Supplemental capital 1,513 1,512
-------------- --------------
Risk-based capital $ 19,026 $ 17,473
============== ==============
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at December 31, 1998.
(Dollars in thousands)
Amount Percent Actual Excess
Required Required Amount Percent Excess Percent
-------- -------- ------ ------- ------ -------
Tangible capital $ 4,855 2.0% $16,818 6.93% $11,963 4.93%
Tier 1 Leverage
(Core) capital 9,738 4.0% 17,513 7.19% 7,775 3.19%
Total Risk-based
capital 12,242 8.0% 19,026 12.43% 6,784 4.43%
Tier 1 Risk-based
(Core) capital 6,121 4.0% 17,513 11.44% 11,392 7.44%
The Bank's regulatory capital amounts and ratios are as follow as of the date
indicated:
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------
(Dollars in thousands)
December 31, 1998
Tier 1 Risk-
based Core Capital $17,513 11.4% $6,121 4.0% $9,182 6.0%
Risk-based Capital 19,026 12.4 12,242 8.0 15,303 10.0
(to risk weighted
assets)
Core Capital 17,513 7.2 9,738 4.0 12,172 5.0
(to adjusted
tangible assets)
Tangible Capital 16,818 6.9 4,855 2.0 12,138 5.0
(to tangible assets)
13
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Security Federal Corporation and Subsidiary
Management's Discussion and Analysis of Results of
Operations and Financial Condition
Changes in Financial Condition
Total assets of the Company increased $29.0 million during the nine months
ended December 31, 1998, primarily due to increases of $9.3 million in total
net loans receivable, $17.2 million in investment securities, and $2.3
million in cash and cash equivalents.
Funded residential real estate loans increased $8.8 million during the period
while other loans increased only $600,000. Combined with higher coupon loans
prepaying, this led to a decrease in the overall yield in the loan portfolio.
Real estate acquired in settlement of loans (REO) increased $193,000 while
real estate acquired for development increased $6,000 during the nine-month
period.
Deposits increased $19.0 million or 10.5% during the nine months ended
December 31, 1998 as Federal Home Loan Bank (FHLB) advances grew $6.9 million
to fund the Company's 13.4% growth in assets.
The Board of Directors declared the thirtieth, thirty-first, and thirty-second
consecutive quarterly dividend of $.03, $.03, and $.04 per share in May,
August, and November 1998, respectively, which totaled $84,000. Unrealized
net gains on securities available for sale increased $60,000 during the nine
months ended December 31, 1998. Net income for the nine months was $1.3
million for the Company. These items combined to increase the stockholders'
equity by $1.3 million or 7.1% during the nine months ended December 31, 1998
and raised book value per share to $22.99 compared to $21.46 at March 31,
1998.
At its October 1998 Board of Directors meeting, the board of the Company
declared a 2-for-1 stock split of the Company's common stock. The stock split
was accomplished through a 100 percent 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 regulations, the Bank is
required to maintain a liquidity ratio at specified levels, which are subject
to change. Currently, a minimum of 4.0% of the combined total of deposits and
certain borrowings must be maintained in the form of cash or eligible
investments. The Bank's average liquidity during the nine months ended
December 31, 1998 was approximately 34%. The Bank's current liquidity level
is deemed adequate to meet the requirements of normal operations, potential
deposit outflows, and loan demand while still allowing for optimal investment
of funds and return on assets.
Loan repayments and maturities of investments are a significant source of
funds, whereas loan disbursements are a primary use of the Bank's funds.
During the nine months ended December 31, 1998, loan disbursements exceeded
loan repayments resulting in a $9.3 million or 6.7% increase in total net loan
receivable.
Deposits and other borrowings are also an important source of funds for the
Bank. During the nine months ended December 31, 1998, deposits increased
$19.0 million while FHLB advances increased $6.9 million. At December 31,
1998, Security Federal had $74.0 million of certificates of deposit maturing
within one year. Based on previous experience, a major portion of these
certificates is anticipated to be renewed.
Liquidity resources at December 31, 1998 are sufficient to meet outstanding
mortgage loan commitments of $875,000 and unused lines of credit of $22.2
million. Management believes that the Bank's liquidity needs will continue to
be supported by the Bank's deposit base and borrowing capacity.
Accounting and Reporting Changes
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Enterprises are required to classify items of "other
comprehensive income" by their nature in the financial statement and display
the balance of other comprehensive income separately in the equity section of
a statement of financial position. Statement 130 is effective for both
interim and annual periods beginning after December 15, 1997. Earlier
application is permitted. Comparative financial statements provided for
earlier periods are required to be reclassified to reflect the provisions of
this statement. The Company adopted Statement 130 effective June 30, 1998.
14
<PAGE>
<PAGE>
Security Federal Corporation and Subsidiary
Management's Discussion and Analysis of Results of
Operations and Financial Condition
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement establishes standards for
the way public business companies are to report information about operating
segments in annual financial statements and requires those companies to report
selected information about operating segments in interim financial reports
issued to shareholders. Statement 131 is effective for financial statements
for periods beginning after December 15, 1997. Earlier application is
encouraged. In the initial year of application, comparative information for
earlier years is to be restated, unless it is impractical to do so. Statement
131 need not be applied to interim financial statements in the initial year of
its application, but comparative information for interim periods in the
initial year of application shall be reported in financial statements for
interim periods in the second year of application. This standard does not
materially effect the Company's current method of financial reporting.
In April 1998, the FASB issued SFAS 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits. The new Statement revises the required
disclosures for employee benefit plans, but it does not change the measurement
or recognition of such plans. While the new standard requires some additional
information about benefit plans, it helps preparers of financial statements by
eliminating certain disclosures and by standardizing the disclosures for
pensions and other postretirement benefits to the extent practicable. SFAS
132 supercedes the disclosure requirements in SFAS 87, Employers' Accounting
for Pensions, SFAS 88, Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits, and SFAS 106,
Employers' Accounting for Postretirement Benefits Other than Pensions. The
new disclosures are effective for fiscal years beginning after December 15,
1997. The adoption of SFAS 132 did not have an impact on the financial
statements of the Company due to the disclosure only requirements.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instrument
and Hedging Activities. All derivatives are to be measured at fair value and
recognized in the statement of financial position as assets or liabilities.
The statement is effective for fiscal years and quarters beginning after June
15, 1999. Because the Company has limited use of derivative transactions at
this time, management does not expect that this standard would have a
significant effect on the Company.
In March 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use (SOP 98-1), which provided
guidance as to when it is or is not appropriate to capitalize the cost of
software developed or obtained for internal uses. SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998 with
early adoption encouraged. The Company does not anticipate that adoption of
SOP 98-1 will have a material effect on its financial statements.
In October 1998, the FASB issued SFAS 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise. The new statement establishes accounting
and reporting standards for certain activities of mortgage banking
enterprises. The statement is effective for the first quarter beginning after
December 15, 1998. The statement will have no effect on the financial
statements of the Bank.
Impact of Inflation and Changing Prices
The consolidated financial statements, related notes, and other financial
information presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
15
<PAGE>
<PAGE>
Security Federal Corporation and Subsidiary
Management's Discussion and Analysis of Results of
Operations and Financial Condition
Year 2000 Considerations
The Bank recognizes that there is a business risk in computerized systems as
the calendar rolls over into the next century. If the computer systems
misinterpret the date, items such as interest calculations on loans and
deposits will be incorrect. This problem is commonly called the "Year 2000
Problem." A number of computer systems used by the Company in its day-to-day
operations will be affected by this problem. Management has established a
committee (the "Y2K Project Team") which has identified all affected systems
and is currently working to ensure that this event will not disrupt
operations. The Y2K Project Team reports regularly to the Bank's Board of
Directors. The Bank is also working closely with outside computer vendors to
ensure that all software corrections and warranty commitments are obtained and
to arrange mock conversion testing. Testing of the Bank's core processing
systems occurred in December 1998. The test is currently being evaluated but
is thought to have been successful. The Bank's contingency plan has been
completed and is in the process of being tested and evaluated. The Bank's
Year 2000 project costs are not expected to have a material impact on its
results of operations, liquidity or capital resources. The impact of Year
2000 noncompliance by all outside parties with whom the corporation may
transact business cannot be gauged fully at this time.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
- ------------------------------------------------------------------
NET INCOME
Net income was $479,000 for the three months ended December 31, 1998, which
represents an increase in earnings of $11,000 or 2.2% compared to the same
period in 1997.
Net Interest Income
Net interest income decreased $70,000 or 3.2% during the three months ended
December 31, 1998 due to a decrease in total interest income and a slight
increase in interest expense.
Interest income on loans decreased $155,000 or 4.7% during the quarter as the
overall yield in the loan portfolio decreased from the previous year's
quarter. Investment, mortgage-backed, and other securities interest income
increased $106,000 or 10.5% during the three months ended December 31, 1998
due to an increase in the average balance in the investment portfolio despite
a nine basis points decline in the average yield in the portfolio. Total
interest income fell $49,000 or 1.1% during the three months ended December
31, 1998 compared to the same period in 1997.
Total interest expense increased $21,000 or 13.0% during the three months
ended December 31, 1998 compared to the same period one-year earlier.
Interest expense on deposits increased $172,000 or 9.6% during the period as
deposits grew significantly compared to the average balance in 1997 despite
the overall cost of deposits declining nine basis points in the 1998 quarter.
Interest expense on advances and other borrowings decreased $151,000 during
the three-months ended December 31, 1998 as the average amount of debt
outstanding decreased in the 1998 period compared to 1997 as the overall cost
of debt also decreased during the period.
16
<PAGE>
<PAGE>
Security Federal Corporation and Subsidiary
Management's Discussion and Analysis of Results of
Operations and Financial Condition
Provision for Loan Losses
Security Federal's provision for loan losses decreased $90,000 during the
three months ended December 31, 1998 compared to the three months ended
December 31,1997 due to management's continual analysis of the loan portfolio.
Non-accrual loans, which are loans delinquent 90 days or more, were $1.2
million at December 31, 1998 compared to $2.0 million at March 31, 1998. The
ratio of allowance for loan losses to the Bank's total loans was 1.14% at
December 31, 1998 compared to 1.09% at March 31, 1998.
Other Income
Total other income increased $220,000 during the three months ended December
31, 1998 compared to the same period one year earlier. Gain on sale of loans
increased $180,000 during the period as the origination and sale of fixed rate
mortgages increased dramatically due to the relatively low interest rate
environment and an increase in the emphasis on the origination of mortgage
loans. The net gain on sale of investments decreased $15,000 during the
period while loan-servicing fees decreased $6,000 or 6.6% as the portfolio of
loans serviced for others decreased. Service fees on deposit accounts grew
$2,000 and income from real estate operations stemming from the Willow Woods
partnership increased $7,000. Other miscellaneous income including credit
life insurance commissions, gain on sale of repossessed assets, safe deposit
rental income, annuity and stock brokerage commissions through Security
Financial Services, and other miscellaneous fees increased $52,000 during the
three months ended December 31, 1998.
General and Administrative Expenses
General and administrative expenses increased $222,000 or 13.1% during the
three months ended December 31, 1998 compared to the same period in 1997 due
mainly to an increase in salaries and employee benefits.
Salaries and employee benefits expense grew $136,000 or 15.6% due to an
increase in staff in customer service positions and an increase in staffing to
handle the increase in volume of mortgage loans. Occupancy expense increased
$11,000 or 9.6% during the period. Advertising decreased $24,000 while the
depreciation and maintenance of equipment expense increased $38,000 during the
quarterly period. FDIC insurance premiums were virtually constant at $19,000
during both years as were the amortization of intangible expense of $116,000
during the three months December 31 in both 1998 and 1997. Other
miscellaneous expense, consisting of legal, professional, and consulting
expense, stationery and office supplies, and other sundry expenses, increased
$61,000 during the period due mainly to an increase in repossessed assets
expense.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1998
- -----------------------------------------------------------------
Net Income
Net income was $1,310,000 for the nine months ended December 31, 1998 that was
a $14,000 or 1.1% decrease in earnings compared to the same period in 1997.
The decrease was due to an increase in general and administrative expenses and
a decrease in net interest income, offset in part by an increase in other
income and a decrease in the provision for loan losses.
17
<PAGE>
<PAGE>
Security Federal Corporation and Subsidiary
Management's Discussion and Analysis of Results of
Operations and Financial Condition
Net Interest Income
Net interest income decreased $102,000 or 1.6% during the nine months ended
December 31, 1998 due primarily to a decrease in interest income on loans and
an increase in interest expense offset partially by an increase in interest
income on investments, mortgage-backed, and other securities during the
period.
Interest income on loans decreased $509,000 or 5.1% as the average balance and
the average yield of the loan portfolio both decreased. Investment,
mortgage-backed, and other investment securities interest income increased
$921,000 as the size of the investment portfolio increased as the average
overall yield in the portfolio was practically identical in both periods.
Total interest expense increased $515,000 or 8.7% during the nine months ended
December 31, 1998 compared to the same nine months in 1997. Interest expense
on deposits increased $651,000 or 13.1% due to significant deposit growth.
Interest expense on advances and other borrowings decreased $135,000 during
the period due to a decrease in borrowings and a slight decrease in the cost
of debt.
Provision for Loan Losses
The provision for loan losses decreased $180,000 during the nine months ended
December 31, 1998 due to management's analysis of the Bank's total loan
portfolio. Net charge-offs were $266,000 for the nine months ended December
31, 1998 compared to $476,000 for the same period in the prior fiscal year.
Future additions to the Bank's allowance for loan losses are dependent on,
among other things, the performance of the Bank's loan portfolio, changes in
real estate values, interest rates, and the economy.
Other Income
Total other income increased $438,000 or 29.7% during the nine months ended
December 31, 1998 due primarily to an increase in the gain on sale of loans.
Gain on sale of loans increased $366,000 during the period due to an increase
in the origination and sale of fixed rate mortgage loans. The net gain on
sale of investments decreased $15,000 while loan servicing fees decreased
$17,000 due to the shrinkage in loans serviced for others. The majority of
fixed rate loans sold during the period were sold with servicing released.
Service fees on deposit accounts dropped $19,000 or 3.0% while income from
real estate operations in the Willow Woods partnership increased $32,000 as
the number of lots sold increased during the period. Other miscellaneous
income increased $51,000 or 4.4% during the nine months ended December 31,
1998 compared to the nine months ended December 31, 1997.
General and Administrative Expenses
General and administrative expenses increased $556,000 or 10.4% primarily due
to an increase in salaries and employee benefits expense during the nine
months ended December 31, 1998.
Salaries and employee benefits expense increased $398,000 or 15.3% over the
same period in the previous fiscal year due to normal annual increases and an
increase in the number of customer contact associates and an increase in staff
in mortgage loans to handle the increase in loan volume. Occupancy expense
increased $19,000 or 5.4% while advertising expense increased $30,000 or
11.0%. Depreciation and maintenance of equipment increased $57,000 or 10.5%
during the period. FDIC insurance premiums increased $1,000 or 2.2% while the
amortization of intangibles expense was the same in both periods at $349,000.
Other miscellaneous expense increased $51,000 or 4.4% during the nine months
ended December 31, 1998 compared to the same period in 1997.
18
<PAGE>
<PAGE>
Security Federal Corporation and Subsidiary
Other Information
Item 1 Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material nature
at the present time. From time to time, the Bank is a party to legal
proceedings in the ordinary course of business wherein it enforces its
security interest in mortgage loans it has made.
Item 2 Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable.
Item 3 Defaults upon Senior Securities
-------------------------------
None
Item 4 Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5 Other Information
-----------------
None
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
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.
19
<PAGE>
<PAGE>
Security Federal Corporation and Subsidiary
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
Security Federal Corporation
Date: February 11, 1999 By: /s/ Roy G. Lindburg
----------------- ------------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
20
<PAGE>
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