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 SEPTEMBER 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 (IRS
jurisdiction of Employer
incorporation or Identification)
organization)
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: $0.01 PAR VALUE:
----------------- ------------------------- ----------------
Common Stock September 30, 1999 838,524
<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 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis -Results of
Operations and Financial Condition 11
==============================================================================
PART II. OTHER INFORMATION
Other Information 16
Signatures 18
==============================================================================
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.
i
<PAGE>
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets
September 30, 1999 March 31, 1999
------------------ --------------
Assets: (Unaudited) (Audited)
Cash and Cash Equivalents $ 6,601,621 $ 6,951,347
Investment And Mortgage-Backed
Securities:
Available For Sale: (Amortized cost
of $90,893,655
at September 30,
1999 and $82,240,153
at March 31, 1999) 89,101,084 82,035,772
Held To Maturity: (Fair value of
$2,893,811 at
September 30, 1999 and
$3,579,500 at March
31, 1999) 2,918,972 3,532,863
Loans Receivable Net:
Held For Sale 571,683 1,604,300
Held For Investment:(Net of allowance of
$1,903,635 at
September 30, 1999 and
$1,715,068 at March
31, 1999) 169,577,395 150,381,301
------------------ --------------
$ 170,149,078 $ 151,985,601
------------------ --------------
Accrued Interest Receivable:
Loans 861,028 657,153
Mortgage-Backed Securities 189,351 146,739
Investments 851,802 803,696
Premises And Equipment, Net 4,030,664 4,198,774
Federal Home Loan Bank Stock,
At Cost 1,460,700 1,245,000
Real Estate Acquired In Settlement
Of Loans 154,143 154,143
Real Estate Held For Development
And Sale 469,117 552,111
Other Assets 2,937,390 2,454,724
------------------ --------------
Total Assets $ 279,724,950 $ 254,717,923
================== ==============
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $ 223,381,339 $ 216,532,683
Advances From Federal Home Loan Bank 31,532,000 14,600,000
Other Borrowed Money 1,508,699 869,270
Advance Payments By Borrowers For
Taxes and Insurance 517,127 274,067
Other Liabilities 3,472,725 2,881,461
------------------ --------------
Total Liabilities $ 260,411,890 $ 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 - 838,524
At September 30, 1999 And 842,120 At
March 31, 1999 $ 8,421 $ 4,211
Additional Paid-In Capital 3,993,733 3,997,943
Indirect Guarantee of Employee Stock
Ownership Trust (180,000) 0
Debt
Accumulated Other Comprehensive Loss (1,112,112) (127,738)
Retained Earnings, Substantially
Restricted 16,603,018 15,686,026
------------------ --------------
Total Shareholders' Equity $ 19,313,060 $ 19,560,442
------------------ --------------
Total Liabilities And Shareholders'
Equity $ 279,724,950 $ 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 September 30,
-------------------------------
1999 1998
--------------- ---------------
Interest Income:
Loans $ 3,369,395 $ 3,278,212
Mortgage-Backed Securities 455,674 143,162
Investment Securities 913,608 845,295
Other 13,180 17,910
--------------- ---------------
Total Interest Income $ 4,751,857 $ 4,284,579
--------------- ---------------
Interest Expense:
NOW And Money Market Accounts 706,813 504,877
Passbook Accounts 82,463 73,749
Certificate Accounts 1,309,665 1,280,175
Advances And Other Borrowed Money 370,348 266,103
--------------- ---------------
Total Interest Expense $ 2,469,289 $ 2,124,904
--------------- ---------------
Net Interest Income 2,282,568 2,159,675
Provision For Loan Losses 150,000 150,000
--------------- ---------------
Net Interest Income After
Provision For Loan Losses $ 2,132,568 $ 2,009,675
--------------- ---------------
Other Income:
Net Gain On Sale Of Investments 3,022 0
Gain On Sale Of Loans 71,432 189,521
Loan Servicing Fees 72,052 79,475
Service Fees On Deposit Accounts 266,160 210,373
Income From Real Estate Operations 69,856 5,090
Other 155,641 140,681
--------------- ---------------
Total Other Income $ 638,163 $ 625,140
--------------- ---------------
General And Administrative Expenses:
Salaries And Employee Benefits 1,076,096 1,018,180
Occupancy 131,758 127,735
Advertising 35,646 139,483
Depreciation And Maintenance Of
Equipment 233,049 201,836
FDIC Insurance Premiums 22,442 19,879
Amortization Of Intangibles 116,310 116,310
Other 375,440 443,255
--------------- ---------------
Total General And Administrative
Expenses $ 1,990,741 $ 2,066,678
--------------- ---------------
Income Before Income Taxes 779,990 568,137
Provision For Income Taxes 270,969 192,848
-------------- --------------
Net Income $ 509,021 $ 375,289
============== ==============
Basic Net Income Per Common Share $ 0.61 $ 0.45
============== ==============
Diluted Net Income Per Common Share $ 0.60 $ 0.44
============== ==============
Cash Dividend Per Share On Common Stock $ 0.04 $ 0.03
============== ==============
Basic Weighted Average Shares
Outstanding 838,524 842,120
============== ==============
Diluted Weighted Average Shares
Outstanding 846,103 845,354
============== ==============
See accompanying notes to consolidated financial statements.
2
<PAGE>
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Six Months Ended September 30,
-------------------------------
1999 1998
--------------- ---------------
Interest Income:
Loans $ 6,588,770 $ 6,310,067
Mortgage-Backed Securities 938,473 246,005
Investment Securities 1,751,267 1,926,481
Other 38,746 45,762
--------------- ---------------
Total Interest Income $ 9,317,256 $ 8,528,315
--------------- ---------------
Interest Expense:
NOW And Money Market Accounts 1,402,534 947,442
Passbook Accounts 160,038 148,365
Certificate Accounts 2,611,672 2,560,142
Advances And Other Borrowed Money 629,208 544,959
--------------- ---------------
Total Interest Expense $ 4,803,452 $ 4,200,908
--------------- ---------------
Net Interest Income 4,513,804 4,327,407
Provision For Loan Losses 300,000 300,000
--------------- ---------------
Net Interest Income After Provision
For Loan Losses $ 4,213,804 $ 4,027,407
--------------- ---------------
Other Income:
Net Gain On Sale Of Investments 3,022 0
Gain On Sale Of Loans 184,936 287,984
Loan Servicing Fees 145,068 161,917
Service Fees On Deposit Accounts 504,606 412,848
Income From Real Estate Operations 104,699 72,168
Other 263,889 284,959
--------------- ---------------
Total Other Income $ 1,206,220 $ 1,219,876
--------------- ---------------
General And Administrative Expenses:
Salaries And Employee Benefits 2,103,398 1,993,316
Occupancy 257,098 245,096
Advertising 68,106 239,977
Depreciation And Maintenance Of
Equipment 442,799 395,346
FDIC Insurance Premiums 43,613 39,541
Amortization Of Intangibles 232,620 232,620
Other 771,430 836,966
--------------- ---------------
Total General And Administrative
Expenses $ 3,919,064 $ 3,982,862
--------------- ---------------
Income Before Income Taxes 1,500,960 1,264,421
Provision For Income Taxes 516,598 433,734
--------------- ---------------
Net Income $ 984,362 $ 830,687
=============== ===============
Basic Net Income Per Common Share $ 1.17 $ 0.99
=============== ===============
Diluted Net Income Per Common Share $ 1.16 $ 0.98
=============== ===============
Cash Dividend Per Share On Common
Stock $ 0.08 $ 0.06
=============== ===============
Basic Weighted Average Shares
Outstanding 840,322 842,120
=============== ===============
Diluted Weighted Average Shares
Outstanding 846,103 845,354
============== ===============
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
Security Federal Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity (Unaudited)
Accumu-
lated
Other
Indirect Compre-
Additional Guarantee hensive
Common Paid-In of Income Retained
Stock Capital ESOP Debt (Loss) Earnings Total
-------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Beginning Balance At $ 4,211 $ 3,997,94 $ 0 75,713 $ 13,998,174 $ 18,076,041
March 31, 1998
Net Income 0 0 0 0 830,687 830,687
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Losses On Securities
Available For Sale 0 0 0 212,711 0 212,711
------------
Comprehensive Income 1,043,398
Cash Dividends 0 0 0 0 (50,527) (50,527)
-------- ---------- ---------- ---------- ------------ ------------
Balance At
September 30, 1998 $ 4,211 $ 3,997,94 $ 0 288,424 $ 14,778,334 $ 19,068,912
======== ========== ========== ========== ============ ============
Beginning Balance At $ 8,421 $ 3,993,73 $ 0 (127,738) $ 15,686,026 $ 19,560,442
March 31, 1999
Net Income 0 0 0 0 984,362 984,362
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Losses On Securities
Available For Sale 0 0 0 (984,374) 0 (984,374)
-----------
Comprehensive Income (12)
Increase in Indirect
Guarantee of ESOP Debt (180,000) (180,000)
Cash Dividends 0 0 0 0 (67,370) (67,370)
-------- ---------- ---------- ---------- ------------ -----------
Balance at
September 30, 1999 $ 8,421 $ 3,993,73 $ (180,000) (1,112,112) $ 16,603,018 $ 19,313,060
======== ========== ========== ========== ============ ============
See accompanying notes to consolidated financial statements.
4
</TABLE>
<PAGE>
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended September 30,
-------------------------------
1999 1998
--------------- ---------------
Cash Flows From Operating Activities:
Net Income $ 984,362 $ 830,687
Adjustments To Reconcile Net Income
To Net Cash Provided By Operating
Activities:
Depreciation Expense $ 384,068 $ 311,722
Amortization Of Intangibles 232,620 232,620
Discount Accretion And Premium
Amortization 25,628 (13,175)
Provisions For Losses On Loans And
Real Estate 300,000 300,000
Gain On Sale Of Securities
Available For Sale (3,022) 0
Gain On Sale Of Loans (184,936) (287,984)
Gain On Sale Of Real Estate (104,699) (126,543)
Amortization Of Deferred Fees On
Loans (18,236) (123,502)
Proceeds From Sale Of Loans Held
For Sale 10,716,676 13,455,549
Origination Of Loans For Sale (9,499,123) (13,669,487)
(Increase) Decrease In Accrued
Interest Receivable:
Loans (194,649) 38,189
Mortgage-Backed Securities (42,612) (20,777)
Investments (57,332) (17,761)
Increase In Advance Payments By
Borrowers 243,060 122,040
Loss On Disposition Of Premises
And Equipment 6,738 0
Other, Net 299,794 203,345
--------------- ---------------
Net Cash Provided By Operating
Activities $ 3,088,337 $ 1,234,923
--------------- ---------------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-
Backed Securities $ 542,172 $ 473,623
Held To Maturity
Principal Repayments On Mortgage-
Backed Securities Available
For Sale 3,784,081 274,926
Purchase Of Investment Securities
Available For Sale (9,953,938) (14,999,375)
Purchase Of Mortgage-Backed
Securities Available For Sale (11,130,040) (7,261,743)
Maturities Of Investment Securities
Available For Sale 7,121,971 14,162,829
Maturities Of Investment Securities
Held To Maturity 71,115 1,878,049
Proceeds From Sale of Securities
Available For Sale 1,502,422 0
Purchase Of FHLB Stock (1,483,500) 0
Redemption Of FHLB Stock 1,267,800 89,400
Increase In Loans To Customers (19,498,858) (5,640,563)
Investment In Real Estate Held For
Development (380,727) (272,214)
Proceeds From Sale Of Real Estate
Held For Development 568,420 377,620
Proceeds From Sale Of Real Estate
Acquired Through Foreclosure 21,000 329,545
Purchase And Improvement Of Premises
And Equipment (232,671) (505,990)
Proceeds From Sale Of Premises And
Equipment 9,975 7,000
--------------- ---------------
Net Cash Used By Investing Activities $ (27,790,778) $ (11,086,893)
--------------- ---------------
Cash Flows From Financing Activities:
Increase In Deposit Accounts $ 6,848,656 $ 6,827,709
Proceeds From FHLB Advances 77,750,000 56,725,000
Repayment Of FHLB Advances (60,818,000) (52,893,000)
Proceeds Of Other Borrowings 674,194 135,436
Repayment Of Other Borrowings (34,765) (39,430)
Dividends To Shareholders (67,370) (50,527)
--------------- ---------------
Net Cash Provided By Financing
Activities $ 24,352,715 $ 10,705,188
--------------- ---------------
(Continued)
5
<PAGE>
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended September 30,
-------------------------------
1999 1998
--------------- ---------------
Net Increase (Decrease) In Cash
And Cash Equivalents $ (349,726) $ 853,218
Cash And Cash Equivalents At
Beginning Of Period 6,951,347 4,658,681
--------------- ---------------
Cash And Cash Equivalents At End
Of Period $ 6,601,621 $ 5,511,899
=============== ===============
Supplemental Disclosure Of Cash Flows
Information:
Cash Paid During The Period For
Interest $ 4,655,810 $ 3,845,891
Cash Paid During The Period For
Income Taxes $ 641,350 $ 16,936
Additions To Real Estate Acquired
Through Foreclosure $ 21,000 $ 457,335
Increase In Unrealized Net Loss
On Securities Available For Sales,
Net Of Taxes $ 984,374 $ 212,711
See accompanying notes to consolidated financial statements.
6
<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 six-month period ended September 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 the consolidation
is a real estate partnership.
3. Loans Receivable, Net
Loans Receivable, Net, at September 30, 1999 and March 31, 1999 consisted of
the following:
Loans held for sale were $571,683 and $1,604,300 at September 30, 1999 and
March 31, 1999 respectively.
September 30, 1999 March 31, 1999
Loans Held For Investment: ------------------ ----------------
Residential Real Estate $ 85,909,039 $ 65,489,233
Consumer 41,570,536 41,631,602
Commercial Business & Real Estate 55,606,619 52,325,690
------------------ ----------------
$ 183,086,194 $ 159,446,525
------------------ ----------------
Less:
Allowance For Possible Loan Loss 1,903,635 1,715,068
Loans In Process 11,323,850 7,150,607
Deferred Loan Fees 281,314 199,549
------------------ ----------------
$ 13,508,799 $ 9,065,224
------------------ ----------------
$ 169,577,395 $ 150,381,301
================== ================
The following is a reconciliation of the allowance for loan losses for the
six months ending:
September 30, 1999 September 30, 1999
------------------ ------------------
Beginning Balance $ 1,715,068 $ 1,512,038
Provision 300,000 300,000
Charge-offs (127,547) (251,789)
Recoveries 16,114 17,312
------------------ ----------------
Ending Balance $ 1,903,635 $ 1,577,561
================== ================
7
<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
September 30, 1999 Amortized Unrealized Unrealized
- ------------------ Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
US Government and Agency $ 265,707 $ 4,589 $ 0 $ 270,296
Obligations
Mortgage-Backed Securities 2,653,265 10,354 40,104 2,623,515
---------- ---------- ---------- ----------
Total $2,918,972 $ 14,943 $ 40,104 $2,893,811
========== ========== ========== ==========
March 31, 1999
- --------------
US Government and Agency $ 336,822 $ 542 $ 0 $ 337,364
Obligations
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
September 30, 1999 Amortized Unrealized Unrealized
- ------------------ Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
US Government and Agency $58,789,537 $ 23,776 $1,178,380 $57,634,933
Obligations
Mortgage-Backed Securities 32,104,118 3,967 641,934 31,466,151
----------- ---------- ---------- -----------
Total $90,893,655 $ 27,743 $1,820,314 $89,101,084
=========== ========== ========== ===========
March 31, 1999
- --------------
US Government and Agency $57,459,009 $ 165,373 $ 264,488 $57,359,894
Obligations
Mortgage-Backed Securities 24,781,144 23,850 129,116 24,675,878
----------- ---------- ---------- -----------
Total $82,240,153 $ 189,223 $ 393,604 $82,035,772
=========== ========== ========== ===========
8
<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:
September 30, 1999 March 31, 1999
-------------------- --------------------
Demand Accounts: Balance Rate Balance Rate
-------------------- --------------------
Checking $ 51,914,283 0.84% $ 53,435,702 0.84%
Money Market 53,359,796 4.59% 49,369,915 4.70%
Regular Savings 13,131,719 2.49% 11,847,962 2.47%
------------ ------------
Total Demand Accounts $118,405,798 2.71% $114,653,579 2.67%
============ ============
Certificate Accounts:
0 - 4.99% $ 42,124,059 $ 31,100,943
5.00 - 6.99% 62,713,670 70,640,349
7.00 - 8.99% 137,812 137,812
------------ ------------
Total Certificate Accounts $104,975,541 5.06% $101,879,104 5.18%
============ ============
Total Deposit Accounts $223,381,339 3.81% $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:
September 30, 1999 March 31, 1999
-------------------- --------------------
Balance Rate Balance Rate
Fiscal Year Due: -------------------- --------------------
2000 $ 12,478,000 5.40% $ 528,000 8.70%
2001 13,856,000 5.56% 856,000 8.75%
2002 5,000,000 5.71% 0 0%
2003 0 0 5,000,000 5.69%
Thereafter 198,000 7.97% 8,216,000 5.42%
------------ ------------
Total Advances $ 31,532,000 5.54% $ 14,600,000 5.82%
============ ============
7. Regulatory Matters
The following table reconciles the Bank's Shareholders' equity to its various
regulatory capital positions:
September 30, 1999 March 31, 1999
(Dollars in Thousands)
------------------------------------
Bank's Shareholders' Equity $ 18,861 $ 18,879
Unrealized Loss On Available For
Sale Of Securities, Net of Tax 1,112 128
Reduction For Goodwill And Other
Intangibles (1,348) (1,581)
------------------ ---------------
Tangible Capital 18,625 17,426
Qualifying Core Deposits And
Intangible Assets 611 664
------------------ --------------
Core Capital 19,236 18,090
Supplemental Capital 1,903 1,715
------------------ --------------
Risk-Based Capital $ 21,139 $ 19,805
================== ==============
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at September 30, 1999.
(Dollars in Thousands)
-------------------------------------------------------
Amt. % Actual Actual Excess Excess
Required Required Amt. % Amt. %
-------------------------------------------------------
Tangible Capital $ 5,581 2.0% $18,625 6.67% $13,044 4.67%
Tier 1 Leverage (Core) 11,187 4.0% 19,236 6.88% 8,049 2.88%
Capital
Total Risk-Based
Capital 12,790 8.0% 21,139 13.22% 8,349 5.22%
Tier 1 Risk-Based
(Core) Capital 6,395 4.0% 19,236 12.03% 12,841 8.03%
9
<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 September 30, 1999 are
as follows:
To Be
Well Capitalized
For Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
-------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------
Tier I Risk-Based
Core Capital $19,236 12.0% $ 6,395 4.0% $ 9,592 6.0%
Risk-Based Capital
(To Risk Weighted
Assets) 21,139 13.2% 12,790 8.0% 15,987 10.0%
Core Capital (To
Adjusted Tangible
Assets) 19,236 6.9% 11,187 4.0% 13,984 5.0%
Tangible Capital
(To Tangible
Assets) 18,625 6.7% 5,581 2.0% 13,954 5.0%
10
<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 $25.0 million during the six months
ended September 30, 1999, due primarily to increases of $18.2 million or 12.0%
in total net loans receivable and $6.5 million or 7.5% in investment
securities.
Residential real estate loans, net of loans in process, increased $15.1
million or 25.3% during the period while other loans increased $3.2 million or
3.4%. 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) remained constant at
$154,000 while real estate acquired for development decreased $83,000 during
the six-month period.
Deposits increased $6.8 million or 3.2% during the six months ended September
30, 1999 and Federal Home Loan Bank (FHLB) advances grew $16.9 million to fund
the Company's 9.8% growth in assets.
The Board of Directors declared the 34th and 35th consecutive quarterly
dividend of $.04 per share in May and August 1999, which totaled $67,000. The
employee stock ownership trust of the Company borrowed $180,000 to purchase
stock for the plan during the six month period. Unrealized losses on
securities available for sale increased $984,000 during the six months ended
September 30, 1999 due to the recent rise in U.S. Treasury and agency yields.
Net income for the six months was $984,000 for the Company. These items
combined to decrease shareholders' equity by $247,000 or 1.3% during the six
months ended September 30, 1999. Book value per share was $23.03 at September
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 six months ended
September 30, 1999 was approximately 37%. 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 six months ended September 30, 1999, loan disbursements exceeded
loan repayments resulting in a $18.2 million or 12.0% increase in total net
loans receivable.
Deposits and other borrowings are also an important source of funds for the
Company. During the six months ended September 30, 1999, deposits increased
$6.8 million while FHLB advances increased $16.9 million. At September 30,
1999, the Bank had $88.9 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 September 30, 1999 are sufficient to meet outstanding
mortgage loan commitments of $583,000 and unused lines of credit of $22.5
million. Management believes that the Company's liquidity needs will continue
to be supported by the Company's deposit base and borrowing capacity.
11
<PAGE>
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Accounting and Reporting Changes.
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. This statement's
effective date is delayed by the issuance of SFAS 137 (Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date
of FASB Statement No. 133-an amendment of the FASB Statement No. 133) and is
effective for fiscal years and quarters beginning after June 15, 2000. Because
the Company has limited use of derivative transactions at this time;
management does not expect this standard to 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 has no effect on the financial statements of the Company.
In February 1999, the FASB issued SFAS 135, Rescission of FASB Statement No.
75 and Technical Corrections. The SFAS provides technical corrections for
previously issued statements and rescinds SFAS 75, which provides guidance
related to pension plans of state and local governmental units. SFAS 135 is
effective for fiscal years ending after February 15, 1999. This statement will
not have a material effect on the financial statements of the Company.
In June 1999, the FASB issued SFAS 136, Transfers of Assets to a Not-for-
Profit Organization or Charitable Trust that Raises or Holds Contributions for
Others. This statement establishes standards for transactions in which an
entity makes a contribution by transferring assets to a not-for-profit
organization or a charitable trust and then requires these contributions to be
used in a specified manner. This statement is not expected to have a material
impact 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.
12
<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. Further expenditures for Y2K compliance are estimated to
be $50,000 through the end of the calendar year. 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 SEPTEMBER 30, 1999
- -------------------------------------------------------------------
Net Income
Net income was $509,000 for the three months ended September 30, 1999,
representing an increase in earnings of $134,000 or 35.6% compared to the same
period in 1998.
Net Interest Income
Net interest income increased $123,000 or 5.7% during the three months ended
September 30, 1999 due to an increase in total interest income offset in part
by an increase in interest expense.
Interest income on loans increased $91,000 or 2.8% 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 $376,000 or 37.4% due to an increase in the average
balance in the investment portfolio despite a 20 basis points decline in the
average yield in the portfolio. Total interest income rose $467,000 or 10.9%
compared to the same period in 1998.
Total interest expense increased $344,000 or 16.2% during the three months
ended September 30, 1999 compared to the same period one-year earlier.
Interest expense on deposits increased $240,000 or 12.9% during the period as
deposits grew significantly compared to the average balance in 1998. Interest
expense on advances and other borrowings increased $104,000 as the average
amount of debt outstanding increased during the 1999 period compared to 1998
although the average cost of the borrowings decreased in the 1999 period.
Provision for Loan Losses
The Bank's provision for loan losses was $150,000 during both the three months
ended September 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 $1.8 million at
September 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 1.11% at September
30, 1999 compared to 1.12% at March 31, 1999.
13
<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 SEPTEMBER 30, 1999, CONTINUED
- ------------------------------------------------------------------------------
Other Income
Total other income increased $13,000 or 2.1% during the three months ended
September 30, 1999 compared to the same period one-year earlier. Gain on sale
of loans decreased $118,000 during the period due to more mortgage customers
opting for adjustable rate loans as fixed loan rates increased. Loan servicing
fees decreased $7,000 as the portfolio of loans serviced for others decreased.
Service fees on deposit accounts grew $56,000 as the number of commercial and
personal demand deposit accounts increased. Income from real estate operations
stemming from the Willow Woods partnership increased $65,000 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 increased $15,000 during the three months ended September
30, 1999.
General and Administrative Expenses
General and administrative expenses decreased $76,000 or 3.7% during the three
months ended September 30, 1999 compared to the same period in 1998.
Salaries and employee benefits expense grew $58,000 or 5.7% due to an increase
in staff in customer service positions to handle increased business and due to
normal annual salary increases. Occupancy expense increased $4,000 or 3.2%
during the period. Advertising expense decreased $104,000 while the
depreciation and maintenance of equipment expense increased $32,000 during the
quarterly period. FDIC insurance premiums rose $3,000 as deposit account
balances increased. Amortization of intangible expense was $116,000 during the
three months ended September 30 in fiscal 1999 and 1998. Other miscellaneous
expense, consisting of legal, professional, and consulting expenses,
stationery and office supplies, and other sundry expenses, decreased $68,000
or 15.3% for the three months ended September 30, 1999 compared to the three
months ended September 30, 1998 due primarily to a decrease in repossessed
assets expense.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999
- -----------------------------------------------------------------
Net Income
Net income was $984,000 for the six months ended September 30, 1999,
representing an increase in earnings of $154,000 or 18.5% compared to the same
period in 1998.
Net Interest Income
Net interest income increased $186,000 or 4.3% during the six months ended
September 30, 1999 due to an increase in total interest income offset in part
by an increase in interest expense.
Interest income on loans increased $279,000 or 4.4% during the six months in
1999 as a result of total net loans increasing although the average yield in
the loan portfolio decreased. Investment, mortgage-backed, and other
securities interest income increased $510,000 or 23.0% due to an increase in
the average balance in the investment portfolio despite a 21 basis points
decline in the average yield in the portfolio. Total interest income rose
$789,000 or 9.3% during the six months compared to the same period in 1998.
Total interest expense increased $603,000 or 14.3% during the six months ended
September 30, 1999 compared to the same period one-year earlier. Interest
expense on deposits increased $518,000 or 14.2% 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 six month period. Interest expense on
advances and other borrowings increased $84,000 as the average amount of debt
outstanding increased during the 1999 period compared to 1998.
14
<PAGE>
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999, CONTINUED
- ----------------------------------------------------------------------------
Provision for Loan Losses
The Bank's provision for loan losses was $300,000 during the six 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 $1.8 million at
September 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 1.11% at September
30, 1999 compared to 1.12% at March 31, 1999. Net charge-offs were $111,000
during the six months ended September 30, 1999 compared to $234,000 during the
same period in 1998.
Other Income
Total other income decreased $14,000 or 1.1% during the six months ended
September 30, 1999 compared to the same period one-year earlier. Gain on sale
of loans decreased $103,000 as more mortgage loan customers chose an
adjustable rate loan as opposed to a fixed rate loan which are generally sold,
due to the rise in mortgage rates. Loan-servicing fees decreased $17,000 as
the portfolio of loans serviced for others decreased. Service fees on deposit
accounts grew $92,000 as the number of commercial and personal demand deposit
accounts increased. Income from real estate operations originating from the
Willow Woods partnership increased $33,000 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
$21,000 during the six months ended September 30, 1999.
General and Administrative Expenses
General and administrative expenses decreased $64,000 or 1.6% during the six
months ended September 30, 1999 compared to the same period in 1998.
Salaries and employee benefits expense increased $110,000 or 5.5% due to an
increase in staff in customer service positions to handle increased business
and due to normal annual salary increases. Occupancy expense grew by $12,000
or 4.9% during the period. Advertising expense decreased $172,000 while the
depreciation and maintenance of equipment expense increased $47,000 during the
six-month period. FDIC insurance premiums rose $4,000 as total deposits
increased. Amortization of intangible expense was $233,000 during the six
months ended September 30 in fiscal 1999 and 1998. Other miscellaneous
expense, consisting of legal, professional, and consulting expenses,
stationery and office supplies, and other sundry expenses, decreased $66,000
or 7.8% for the six months ended September 30, 1999 compared to the six months
ended September 30, 1998.
15
<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
---------------------------------------------------
The election of directors was presented for vote to shareholders at
the Annual Meeting on July 20, 1999. Votes for Robert E. Alexander
were as follows: 620,970 votes for, 27,780 votes withheld. Votes for
William Clyburn were as follows: 620,370 votes for, 28,380 votes
withheld. Votes for Harry O. Weeks, Jr. were as follows: 620,570
votes for, 28,180 votes withheld.
The votes for the approval of the Security Federal Corporation 1999
Stock Option Plan were as follows: 610,970 votes for, 33,880 votes
against, 3,900 votes abstained.
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.
16
<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: November 10, 1999 By: /s/ Roy G. Lindburg
-------------------- -----------------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
<PAGE>
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